UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________________ to ________________
Commission File Number: 1-10726
WINSTAR COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3585278
- ---------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
230 Park Ave., Suite 2700, New York, NY 10169
----------------------------------------------
(Address of principal executive offices)
(212) 584-4000
------------------------------
(Registrant's telephone number)
----------------------------------
(Former name, former address and former fiscal year end
if changed since last report)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
State the number of shares outstanding of each of the issuer's classes of common
stock, as of November 1, 1997: 33,869,000
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
PART I Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets -
December 31, 1996 and September 30, 1997...................3
Unaudited Condensed Consolidated Statements of
Operations - three and nine months ended
September 30, 1996 and 1997................................4
Unaudited Condensed Consolidated Statements of Cash
Flows - nine months ended September 30, 1996 and 1997......5
Notes to Condensed Consolidated Financial Statements.......6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................12
PART II Other Information...............................................20
Item 2. Changes in Securities
Item 6. Reports on Form 8-K
Signatures..............................................................21
2
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December September
31, 1996 30, 1997
-------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents ............................ $ 95,490 $ 273,537
Short term investments ............................... 26,997 29,232
--------- ---------
Cash, cash equivalents and short term investments 122,487 302,769
Investments in equity securities ..................... 688 --
Accounts receivable, net of allowance for doubtful
accounts ........................................ 13,150 26,196
Inventories .......................................... 5,009 4,954
Prepaid expenses and other current assets ............ 15,969 19,683
Net assets of discontinued operations ................ 3,814 5,015
--------- ---------
Total current assets ............................ 161,117 358,617
Property and equipment, net ............................... 62,572 155,025
Licenses, net ............................................. 27,434 168,679
Intangible assets, net .................................... 12,955 14,998
Deferred financing costs .................................. 10,535 21,315
Other assets .............................................. 4,176 1,330
--------- ---------
Total assets .................................... $ 278,789 $ 719,964
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt .................... $ 19,901 $ 1,910
Accounts payable and accrued expenses ................ 29,442 46,961
Current portion of capitalized lease obligations ..... 3,110 6,667
--------- ---------
Total current liabilities ....................... 52,453 55,538
Capitalized lease obligations, less current portion ....... 10,846 25,172
Long-term debt, less current portion ...................... 265,161 650,819
Deferred income taxes ..................................... -- 26,500
--------- ---------
Total liabilities ............................... 328,460 758,029
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock ...................................... -- 42
Common stock, par value $.01; authorized 75,000 and
200,000 shares, issued and outstanding
28,989 and 33,493, respectively ................. 290 335
Additional paid-in-capital ........................... 75,436 252,647
Accumulated deficit .................................. (125,034) (291,089)
--------- ---------
(49,308) (38,065)
Unrealized loss on investments ....................... (363) --
--------- ---------
Total stockholders' equity (deficit) ...................... (49,671) (38,065)
--------- ---------
Total liabilities and stockholders' equity (deficit) ...... $ 278,789 $ 719,964
</TABLE>
========= =========
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------- --------------------
1996 1997 1996 1997
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services - commercial ... $ 1,876 $ 7,429 $ 2,234 $ 17,209
Telecommunications services - residential .. 5,508 1,740 25,723 6,701
Information services ....................... 4,056 11,017 7,479 25,693
-------- -------- -------- ---------
Total operating revenues ..................... 11,440 20,186 35,436 49,603
-------- -------- -------- ---------
Operating expenses
Cost of services and products .............. 9,250 19,621 25,103 48,488
Selling, general and administrative expenses 15,816 41,135 39,062 109,916
Depreciation and amortization .............. 1,158 7,077 2,329 15,474
-------- -------- -------- ---------
Total operating expenses ..................... 26,224 67,833 66,494 173,878
-------- -------- -------- ---------
Operating loss ............................... (14,784) (47,647) (31,058) (124,275)
Other (expense) income
Interest expense ........................... (9,045) (22,082) (26,695) (53,074)
Interest income ............................ 2,570 3,727 8,342 11,052
Other income ............................... -- 2,219 -- 2,219
-------- -------- -------- ---------
Net loss from continuing operations .......... (21,259) (63,783) (49,411) (164,078)
Income (loss) from discontinued operations ... 47 (1,500) (616) (1,977)
-------- -------- -------- ---------
Net loss ..................................... (21,212) (65,283) (50,027) (166,055)
Preferred stock dividends .................... -- (1,535) -- (3,881)
-------- -------- -------- ---------
Net loss applicable to common stockholders ... $(21,212) $(66,818) $(50,027) $(169,936)
======== ======== ======== =========
Net loss per share from continuing operations $ (0.76) $ (1.97) $ (1.79) $ (5.10)
Net income (loss) per share from discontinued
operations ................................. 0.01 (0.04) (0.02) (0.06)
-------- -------- -------- ---------
Net loss per share ........................... $ (0.75) $ (2.01) $ (1.81) $ (5.16)
======== ======== ======== =========
Weighted average shares outstanding .......... 28,133 33,188 27,691 32,923
======== ======== ======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
1996 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $ (50,027) $(166,055)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations ....... 616 1,977
Depreciation and amortization ............... 4,247 17,024
Provision for doubtful accounts ............. 1,067 1,533
Non cash interest expense ................... 24,630 35,825
(Increase) decrease in operating assets:
Accounts receivable ................... (1,585) (14,578)
Inventories ........................... (1,383) (3,875)
Prepaid expenses and other current assets (12,523) (4,565)
Other assets .......................... (995) 581
Increase in accounts
payable and accrued expenses ............ 11,603 19,628
Net cash used in discontinued operations .... (1,436) (3,178)
--------- ---------
Net cash used in operating activities ................... (25,786) (115,683)
--------- ---------
Cash flows from investing activities:
Increase in short-term investments, net ........... (28,468) (2,235)
Purchase of property and equipment, net ........... (29,618) (103,885)
Acquisitions ...................................... 96 (35,428)
Other, net ........................................ (1,355) (1,401)
--------- ---------
Net cash used in investing activities ................... (59,345) (142,949)
--------- ---------
Cash flows from financing activities:
(Repayments) of proceeds from long-term debt, net.. (2,687) 319,404
Net proceeds from equity transactions ............. 5,492 99,691
Proceeds from equipment lease financing ........... 967 20,504
Payment of capital lease obligations .............. (1,231) (2,620)
Other, net ........................................ (970) (300)
--------- ---------
Net cash provided by financing activities ............... 1,571 436,679
--------- ---------
Net (decrease) increase in cash and cash equivalents .... (83,560) 178,047
Cash and cash equivalents at beginning of period ........ 138,028 95,490
--------- ---------
Cash and cash equivalents at end of period .............. 54,468 273,537
Short-term investments at end of period ................. 108,510 29,232
--------- ---------
Cash, cash equivalents and short-term investments
at end of period .................................. $ 162,978 $ 302,769
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
1. Basis of Presentation
WinStar Communications, Inc. ("WinStar") is a facilities-based provider of
telecommunication and information services to small and medium-sized businesses
throughout the United States. It enables customers to connect with the nation's
telephone system through broadband wireless circuits which utilize digital
milliwave radio technology to carry voice, data and video traffic to the
Company's network of switches. The deregulation of the nation's local and long
distance industry, combined with rising demand for broadband services, is
creating opportunities for WinStar in the greater than $100 billion
telecommunications market. WinStar's Wireless FiberSM services are being
deployed in a phased manner to large metropolitan areas, and are scheduled to
reach 30 of the most important telecommunications markets by the end of 1999.
The Company currently serves local customers in 16 markets, and plans to have
switched telecommunications services available in 21 cities by the end of 1998.
WinStar is the largest holder of radio spectrum in the United States, and is
licensed by the Federal Communications Commission to utilize the 38 GHz
frequency. WinStar is uniquely positioned to provide broadband connectivity due
to the breadth of its spectrum holdings, which equate to 400 MHz to 700 MHz of
bandwidth in 41 of the top markets in the country. In total, WinStar's 38 GHz
licenses cover more than 125 cities with a population exceeding 100,000, and
represent more than 775 million channel pops (number of 100 MHz channels
multiplied by the population coverage).
WinStar's Wireless Fiber links function equivalently to optical fiber, but can
be deployed with far greater speed and at much lower cost. Local, long distance,
Internet and data services are being provided through these links, along with
specialized information content for business and education. WinStar also offers
a range of facilities-based broadband local access services ("Carrier Services")
to other telecommunications companies.
The condensed consolidated financial statements presented herein include the
accounts of WinStar and its subsidiaries, including its primary operating
subsidiaries, WinStar Telecommunications, Inc., WinStar Wireless, Inc., WinStar
New Media Company, Inc. and, as a discontinued operation, WinStar Global
Products, Inc. ("Global Products"), (and together with such other subsidiaries,
the "Company"). All material inter-company transactions and accounts have been
eliminated in consolidation. The accounts have been prepared by the Company
without audit.
However, the foregoing statements contain all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of the Company's
management, necessary to present fairly the financial position of the Company as
of September 30, 1997, the statements of operations for the three and nine
months ended September 30, 1996 and 1997, and the statements of cash flows for
the nine months ended September 30, 1996 and 1997.
**1
- ---------------------------------------------------------------------
Wireless Fiber(sm) is a servicemark of WinStar Communications, Inc.
6
<PAGE>
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1996, and the Company's quarterly reports on Form 10-Q
for the periods ended March 31, 1997 and June 30, 1997.
The unaudited financial statements and related footnotes for the three and nine
month periods ended September 30, 1996 reflect certain reclassifications such
that they conform to the current period presentation. The results of operations
for the three and nine months ended September 30, 1997 are not necessarily
indicative of the results of operations for the year ending December 31, 1997.
2. Dividends on Convertible Preferred Stock
Dividends on the 6% Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") since its issuance have been paid "in-kind" in additional
shares of the Series A Preferred Stock.
3. Net Loss Per Share
Net loss per share has been calculated by dividing the net loss, after
consideration of Preferred Stock dividends, by the weighted average number of
shares outstanding during each period.
4. US ONE Asset Acquisition
On October 17, 1997 (the "Closing Date"), WinStar Switch Acquisition Corp.
("WSAC"), a wholly owned subsidiary of WinStar Communications, Inc. ("WinStar",
and together with WSAC, the "WinStar Parties"), consummated a purchase ("Asset
Acquisition") of certain telecommunications assets (the "US ONE 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"), pursuant to the terms of an asset purchase
agreement. The Assets included 12 Lucent class 5 switching systems and other
non-switch assets. The Asset Acquisition required and received the approval of
the United States Bankruptcy Court, District of Delaware, 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 US ONE Assets was approximately $81.1
million, of which approximately $61.1 million was paid in cash at the closing
and $20 million is payable by the WinStar Parties in cash and/or shares of the
common stock of WinStar, at WinStar'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
Solomon Brothers Holding Company Inc. and Credit Suisse First Boston (together,
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 US ONE Assets and with proceeds obtained from certain
financings. The Loan is guaranteed by WinStar and is secured by the
telecommunications switches and related equipment, inventory and software
included in the US ONE Assets. Interest on the agreement is payable monthly at
variable rates ranging from prime plus 2% to LIBOR plus 3.5%.
7
<PAGE>
5. October 1997 Notes
In October 1997, the Company issued $100 million principal amount of unsecured,
senior subordinated indebtedness(the "October 1997 Notes") ranking pari passu in
right of payment with the Company's 14% Convertible Senior Subordinated Notes
due 2005 and 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.
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.
6. Condensed Financial Information of WinStar Equipment Corp. and WinStar
Equipment II Corp.
The Company's wholly-owned subsidiaries, WinStar Equipment Corp. and WinStar
Equipment II Corp. ("WEC" and "WEC II", respectively), each of which is a
special purpose corporations which was formed to facilitate the financing and
purchase of telecommunications equipment and related property ("designated
equipment"), received $200 million and $50 million in gross proceeds,
respectively, from the issuance and sale of 12.5% Guaranteed Senior Secured
Notes ("the WEC and WEC II Notes") in placements of debt in March and August of
1997, respectively. The use of the proceeds of the WEC and WEC II Notes are to
be used to purchase designated equipment and, if such equipment is not purchased
within a specified period, WEC and WEC II must apply unused proceeds thereof to
redeem the WEC and WEC II Notes, respectively. Both the interest and principal
of the WEC Notes are guaranteed by the Company.
WEC and WEC II have no independent operations other than to purchase designated
equipment and to lease same to the Company's other telecommunications
subsidiaries. Given this operating environment, it is unlikely, in the opinion
of management, that WEC or WEC II will generate sufficient income, after the
payment of interest on the WEC and WEC II Notes, to pay dividends or make other
distributions to the Company.
Summary financial information of WEC and WEC II, which are included in the
condensed consolidated financial statements of the Company, are as follows (in
thousands):
Balance sheet information at September 30, 1997:
WEC WEC II
----------- ------------
Current assets $159,367 $ 47,419
Long term assets $ 47,841 $ 2,660
Current liabilities $ 14,788 $ 869
Long term liabilities $200,000 $ 50,000
Statements of operations information for WEC for the three months ended
September 30, 1997 and from its inception through September 30, 1997, and for
WEC II for the period from its inception through September 30, 1997, are as
follows (in thousands):
8
<PAGE>
<TABLE>
<CAPTION>
WEC WEC II
---------------------------------- ------------------------
Period from
Three Months March 13, 1997 Period from August 8,
Ended (Inception) to 1997 (Inception) to
September 30, September 30, September 30,
1997 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
Gross revenues $ 740 $ 740 $ -
Interest expense (6,159) (12,609) (920)
Interest income 1,306 4,292 391
------- -------- ------
Net loss $(4,113) $ (7,577) $ (529)
======== ========= =======
</TABLE>
Separate financial statements concerning WEC or WEC II are not presented because
management of the Company has determined that such information would not provide
any material information that is not already presented in the condensed
consolidated financial statements of the Company.
7. Discontinued Operation - WinStar Global Products, Inc.
On May 13, 1997, a formal plan of disposal for the Company's consumer products
subsidiary, WinStar Global Products, Inc. ("Global Products"), was approved by
the Board of Directors and it is anticipated that the disposal will be completed
within the next twelve months. The Company does not expect to incur a loss on
the disposition of Global Products. The disposal of Global Products has been
accounted for as a discontinued operation and, accordingly, its net assets have
been segregated from continuing operations in the accompanying condensed
consolidated balance sheets, and its operating results are segregated and
reported as discontinued operations in the accompanying consolidated statements
of operations and cash flows. Information relating to the discontinued
operations of Global Products is as follows (in thousands of dollars):
9
<PAGE>
<TABLE>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues .............. $ 5,857 $ 3,635 $ 12,544 $ 9,910
------- ------- -------- --------
Cost of services and products ... 4,029 3,015 8,531 7,560
Selling, general & administrative
expenses .................... 1,482 1,576 3,748 4,124
Depreciation and amortization ... 57 58 188 174
------- ------- -------- --------
Total operating expenses ........ 5,568 4,649 12,467 11,858
------- ------- -------- --------
Operating income (loss) ......... 289 (1,014) 77 (1,948)
Interest expense ................ (242) (208) (693) (612)
------- ------- -------- --------
Net income (loss) ............... $ 47 $(1,222) $ (616) $ (2,560)
======= ======== ========= ========
</TABLE>
During the three months ended September 30, 1997, the Company recorded a reserve
of $1,500,000 with respect to the operations of Global Products.
Net assets of the discontinued operations of Global Products at December 31,
1996 and September 30, 1997 are composed of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Assets:
Accounts Receivable, net $ 4,499 $ 4,278
Inventories 8,606 10,601
Other Assets 2,143 2,596
------- --------
Total Assets 15,248 17,475
------ -------
Liabilities:
Current Liabilities 3,102 3,273
Other Liabilities 8,332 9,187
------- --------
Total Liabilities 11,434 12,460
------ -------
Net Assets $ 3,814 $ 5,015
======= =======
</TABLE>
10
<PAGE>
8. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and, if applicable,
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average common shares
outstanding and dilutive potential common shares such as stock options. The
adoption of this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Company Overview
The Company provides a full range of telecommunications services as a CLEC,
including local, long distance and Internet access services, to small and
medium-sized businesses in major metropolitan areas in the United States. By
exploiting its Wireless Fiber services and a switch-based infrastructure, the
Company distinguishes itself as a facilities-based, value-added provider of
high-capacity telecommunications services and an attractive alternative to
established providers, such as the RBOCs. The Company also utilizes its Wireless
Fiber capacity to provide its Carrier Services, consisting of a variety of
facilities-based broadband, high-capacity local access and digital network
services, to other telecommunications services providers. The Company acquires
rights to and distributes information services and entertainment content as a
complement to its telecommunications operations. The Company also operates a
nonstrategic consumer products company, which is treated as a discontinued
operation in this report.
During the third quarter of 1996, the Company launched its CLEC offering in New
York City and has since introduced its local telecommunications services in 15
additional markets. The Company intends, during the next several years, to
introduce its local exchange services in many of the other major metropolitan
areas where it is licensed to provide 38 GHz services.
The Company's wholesale Carrier Services business constructs the network that
will serve a significant portion of the local access and transport needs of the
Company's CLEC business, including the origination and termination of local
traffic for the Company's local exchange customers and backbone interconnections
of hub and main switch sites.
In connection with the Company's rollout of its local telecommunications
services, the Company also provides business information services to its CLEC
customers. These services are marketed directly to end users and through the
Company's direct sales force.
The Company significantly expanded its spectrum holdings ("Wireless Licenses")
during the past 12 months with the completion of several acquisitions and the
grant of a number of additional licenses by the FCC. The Company has entered
into agreements to purchase an aggregate of 88 additional licenses in the 38 GHz
spectrum, and, if granted, pursuant to pending applications, certain additional
such licenses, all subject to FCC consent. Currently, the Wireless Licenses
allow the Company to provide Wireless Fiber services in 49 of the 50 most
populated MSAs in the United States. The Wireless Licenses currently cover more
than 100 cities with populations exceeding 100,000 each, encompass an aggregate
population of approximately 175 million people and address more than 625 million
channels pops (population coverage multiplied by the number of 100 MHz
channels). Upon completion of all pending acquisitions, which are subject to FCC
consent, the Company's total population coverage will increase to approximately
185 million, its total channel pops will grow to more than 775 million and the
Wireless Licenses will allow the Company to provide services in each of the 50
most populated MSAs in the United States.
12
<PAGE>
Revenues
CLEC Services. CLEC revenues are driven primarily by the number of customer
lines installed and in service. Customers generally are billed a flat monthly
fee and/or a per-minute usage charge. Revenue growth depends on the addition of
new customers and the sale of bundled services, such as long distance, Internet
access and Internet-related services, and the introduction of such services in
new cities.
The Company intends to develop other anticipated sources of revenue including
resale agreements for CMRS, advanced data, broadband data transmission and video
conferencing services. The Company believes that as its local exchange services
business grows, such business will become the most significant component of the
Company's revenues. Revenues from this segment were approximately $6.5 million
in the quarter ended September 30, 1997, versus $4.0 million in the quarter
ended June 30, 1997 and $2.0 million the quarter ended March 31, 1997. The
Company has already installed and is operating its own switches in New York City
(which serves both New York City and Newark, New Jersey), Boston, Chicago,
Dallas/Fort Worth, Los Angeles, San Diego and Washington, DC, with installation
of additional switches in Atlanta, Baltimore, Houston, Philadelphia and Phoenix
scheduled to be completed by the end of March 1998. In addition, in October
1997, the Company purchased 12 additional recently installed Lucent class 5
switches from US ONE, seven of which are in the following new markets for the
Company: San Francisco, Denver, Seattle, Tampa, Minneapolis, Kansas City and
Columbus, Ohio.
Carrier Services. Carrier Services revenues are driven primarily by the number
and capacity (i.e., T-1s or DS-3s) of Wireless Fiber links in service. A key
measure of progress for the Company is its installed and available Wireless
Fiber capacity. The Company had approximately 156,000 voice-grade equivalent
circuits in place as of September 30, 1997, up from approximately 130,000 at
June 30, 1997. Carrier customers generally are billed at a fixed monthly rate
per unit of capacity. Another key measure of progress is the number of buildings
for which the Company has secured roof rights to install 38 GHz transceivers
("Roof Rights"). The Company's Roof Rights have been increasing in number and
declining in average cost. As of October 31, 1997, the Company had secured Roof
Rights on over 1,900 buildings.
Residential Long Distance Services. The Company is focusing on the sale of long
distance services to small and medium-sized business customers as part of its
CLEC business and is not generally marketing long distance services to
residential customers on an active basis. As a result, the Company is allowing
its revenues from residential long distance service to decline through
attrition, as it focuses on its core small to medium-sized business market.
Information and Content. Information and content revenues are generated
principally by: (i) sales of content and related services to traditional
customers, such as cable networks and radio stations; (ii) sales to new media
distribution channels, such as on-line services; (iii) advertising sales; and
(iv) the bundling of content with the Company's telecommunications services.
Revenues also are driven by the amount and quality of the Company's available
program rights during each quarter with some seasonality of sales, which affect
quarter-to-quarter comparability.
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
13
<PAGE>
Revenues of the Company's operating segments are as follows (in millions):
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
--------------------
1996 1997
---- ----
<S> <C> <C>
Telecommunications Services:
CLEC Services $ 84 $ 6,510
Carrier Services 1,792 919
Residential Long Distance 5,508 1,740
----- -------
7,384 9,169
Information Services 4,056 11,017
------- ------
Total Revenues $11,440 $20,186
======= =======
</TABLE>
Revenues increased by $8.8 million, or 76.5%, for the three months ended
September 30, 1997, to $20.2 million, from $11.4 million for the three months
ended September 30, 1996. These revenues exclude those from WinStar Global
Products, which has been reclassified as a discontinued operation. This increase
was attributable to increased revenues generated by the Company's CLEC and
information services businesses, partially offset by a decrease in carrier
services revenues, which were lower as a result of non-recurring construction
revenues recorded in the quarter ended September 30, 1996, and the expected
decrease in residential long distance revenues.
Revenues from CLEC services, which include all commercial end user customer
telecommunication revenues, were $6.5 million in the quarter ended September30,
1997, compared to $4.0 million in the quarter ended June 30, 1997 and $2.0
million in the quarter ended March 31, 1997. The CLEC business commenced
operations in the second quarter of 1996. The Company has since been rapidly
installing lines for small and medium-sized businesses, and, as of September 30,
1997, the CLEC business had installed over 51,000 lines, up from approximately
30,000 at June 30, 1997 and 13,000 at March 31, 1997. Customer line orders
reached 77,000 lines as of September 30, 1997, up 79.1% from 43,000 as of June
30, 1997. As of September 30, 1997, the annualized revenues from the CLEC
business were $33 million, up from $3 million annualized as of December 31,
1996.
Revenues from carrier services decreased $0.9 million to $0.9 million in the
quarter ended September 30, 1997, as compared to $1.8 million in the quarter
ended September 30, 1996. Recurring revenues for billed circuits continue to
grow, increasing 27.5% over the quarter ended June 30, 1997. The revenue
decrease, however, was the result of non-recurring installation revenue and
equipment sales related to contract services provided in the quarter ended
September 30, 1996.
WinStar's residential long distance revenues decreased $3.8 million to $1.7
million in the quarter ended September 30, 1997, compared to $5.5 million in the
quarter ended September 30, 1996. This decrease was the result of WinStar's
focus on its core business of selling communications services to business
customers and to other carriers.
14
<PAGE>
Revenues from information services increased by $6.9 million, or 171.6%, for the
three months ended September 30, 1997, to $11.0 million, from $4.1 million for
the three months ended September 30, 1996, due to continued internal growth and
acquisitions.
Cost of services and products increased by $10.4 million, or 113.0%, for the
three months ended September 30, 1997, to $19.7 million, from $9.3 million for
the three months ended September 30, 1996. As a percentage of sales, cost of
services and products in the quarter ended September 30, 1997 was 97.6%,
compared with 80.9% in the quarter ended September 30, 1996, as a result of
increasing network operating costs from the continued expansion of the Company's
local telecommunications business.
Selling, general and administrative expense increased by $25.2 million to $41.0
million for the three months ended September 30, 1997, from $15.8 million for
the three months ended September 30, 1996. The Company continued to hire sales,
marketing and related support personnel in connection with the accelerated roll
out of its CLEC operations, which had approximately 150 employees at September
30, 1996 and over 800 at September 30, 1997. In addition, the Company increased
spending on related advertising and marketing of its CLEC services.
Depreciation and amortization expense increased by $5.9 million for the three
months ended September 30, 1997, to $7.1 million, from $1.2 million for the
three months ended September 30, 1996 principally resulting from the Company's
acquisition and deployment of switches, radios and other equipment in connection
with its telecommunications network buildout.
For the reasons noted above, the operating loss for the three months ended
September 30, 1997, was $47.7 million, compared with an operating loss of $14.8
million for the three months ended September 30, 1996.
Interest expense increased by $13.1 million, or 144.1%, for the three months
ended September 30, 1997, to $22.1 million, from $9.0 million for the three
months ended September, 30, 1996. The increase was principally attributable to
the proceeds from the Company's issuances of debt in the first and third
quarters of 1997. $13.5 million of the $22.1 million interest expense for the
quarter is not payable in cash until after 1999.
Interest income increased by $1.1 million, or 45.0%, for the three months ended
September 30, 1997, to $3.7 million, from $2.6 million for the three months
ended September, 30, 1996. The increase resulted from the additional interest
income earned on the proceeds from the Company's preferred stock and debt
placements which were completed in the first and third quarters of 1997.
For the reasons noted above, the Company reported a net loss from continuing
operations of $63.8 million for the three months ended September 30, 1997,
compared to a net loss from continuing operations of $21.3 million for the three
months ended September 30, 1996.
15
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues of the Company's operating segments are as follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1996 1997
----- ----
<S> <C> <C>
Telecommunications Services:
CLEC Services $ 103 $12,498
Carrier Services 2,131 4,711
Residential Long Distance 25,723 6,701
-------- -------
27,957 23,910
Information Services 7,479 25,693
-------- -------
Total Revenues $ 35,436 $49,603
======== =======
</TABLE>
Revenues increased by $14.1 million, or 40.0%, for the nine months ended
September 30, 1997, to $49.6 million, from $35.4 million for the nine months
ended September 30, 1996. These revenues exclude those from WinStar Global
Products, which have been reclassified as a discontinued operation. This
increase was attributable to increased revenues generated by the Company's CLEC,
carrier services and information services businesses, partially offset by an
expected decrease in residential long distance revenues.
Revenues from CLEC services were $12.5 million in the nine months ended
September 30, 1997, and were minimal in the nine months ended September 30,
1996, as the CLEC business commenced operations in the second quarter of 1996.
Revenues from carrier services increased $2.6 million to $4.7 million in the
nine months ended September 30, 1997, as compared to $2.1 million in the nine
months ended September 30, 1996. The revenue increase is the result of the
growing number of billed circuits, along with installation revenue and equipment
sales related to contract services provided.
WinStar's residential long distance revenues decreased $19.0 million to $6.7
million in the nine months ended September 30, 1997, compared to $25.7 million
in the nine months ended September 30, 1996. This decrease was the result of
WinStar's focus on its core business of selling communications services to
business customers and to other carriers.
Revenues from information services increased by $18.2 million, or 243.5%, for
the nine months ended September 30, 1997, to $25.7 million, from $7.5 million
for the nine months ended September 30, 1996, due to continued internal growth
and acquisitions.
Cost of services and products increased by $23.5 million, or 93.5%, for the nine
months ended September 30, 1997, to $48.6 million, from $25.1 million for the
nine months ended September 30, 1996. As a percentage of sales, cost of services
and products in the nine months ended September 30, 1997 was 97.9% compared with
70.8% in the nine months ended September 30, 1996, as a result of increasing
network costs from the continued expansion of the Company's local
telecommunications business.
16
<PAGE>
Selling, general and administrative expense increased by $70.8 million to $109.9
million for the nine months ended September 30, 1997, from $39.1 million for the
nine months ended September 30, 1996. The Company continued to hire sales,
marketing and related support personnel in connection with the accelerated roll
out of its CLEC operations, which had only 150 employees at September 30, 1996
and over 800 at September 30, 1997. In addition, the Company increased spending
on related advertising and marketing of its CLEC services.
Depreciation and amortization expense increased by $13.2 million for the nine
months ended September 30, 1997, to $15.5 million, from $2.3 million for the
nine months ended September 30, 1996, principally resulting from the Company's
acquisition and deployment of switches, radios and other equipment in connection
with its telecommunications network buildout.
For the reasons noted above, the operating loss for the nine months ended
September 30, 1997, was $124.3 million, compared with an operating loss of $31.1
million for the nine months ended September 30, 1996.
Interest expense increased 98.8%, for the nine months ended September 30, 1997,
to $53.1 million, from $26.7 million for the nine months ended September 30,
1996. The increase was principally attributable to the proceeds from the
Company's issuance of debt in the first and third quarters of 1997. $35.9 of the
$53.1 million interest expense for the nine months is not payable in cash until
after 1999.
Interest income increased by $2.8 million, or 32.5%, for the nine months ended
September 30, 1997, to $11.1 million, from $8.3 million for the nine months
ended September 30, 1996. The increase resulted from the additional interest
income earned on the proceeds from the Company's preferred stock placement and
1997 debt placement in the first and third quarters of 1997.
For the reasons noted above, the Company reported a net loss from continuing
operations of $164.1 million for the nine months ended September 30, 1997,
compared to a net loss from continuing operations of $49.5 million for the nine
months ended September 30, 1996.
Liquidity and Capital Resources
In February 1997, the Company sold 4,000,000 shares of its 6% Series A
Cumulative Convertible Preferred Stock and warrants to purchase 1,600,000 shares
of Common Stock (the "Preferred Stock Placement"), pursuant to which the Company
and one of its subsidiaries realized net proceeds of approximately $96 million.
In March 1997, the Company and one of its subsidiaries, WEC, sold an aggregate
of $300 million principal amount of notes (the "1997 Debt Placement"), pursuant
to which they realized net proceeds of approximately $290.5 million. Pursuant to
a committed facility obtained by the Company from affiliates of Credit Suisse
First Boston Corporation and BT Securities Corporation, in August 1997, WEC II
issued the WEC II Equipment Notes, generating proceeds to WEC II of $50 million,
with Company paying fees of approximately $1.5 million and, in October 1997, the
Company issued $100 million of Senior subordinated Notes ("the October 1997 Debt
Placement"), realizing net proceeds of approximately $94 million.
17
<PAGE>
The $200 million proceeds of WEC Notes issued in the March 1997 Debt Placement
must be utilized for the purchase of designated equipment or for the redemption
of the WEC Notes by March 18, 1999, and the $50 million net proceeds of WEC II
Notes issued in August 1997 must be utilized for the purchase of designated
equipment or for the redemption of the WEC II Notes by August 8, 1999. See Note
6 of the Condensed Consolidated Financial Statements for a description of the
operations of WEC and WEC II and certain restrictions on distributions from
these subsidiaries to the Company.
In April 1997, the Company repaid certain indebtedness incurred in the
acquisition of the assets of Local Area Telecommunications, Inc., including
accrued interest thereon, aggregating approximately $17.8 million.
In October 1997, in connection with the US ONE Asset Acquisition, the Company
borrowed $62.25 million under a six month credit agreement secured by certain of
the US ONE Assets, realizing net proceeds of $61.25 million. The Company expects
to dispose of certain of the US ONE Assets (primarily switches located in
markets already covered by the Company's existing switches), and to repay a
portion of this borrowing with the proceeds thereof, and to refinance the
remainder of the loan by utilizing lease or other financing which the Company
believes to be readily available in the near term.
At September 30, 1997, exclusive of the $94 million net proceeds from the Senior
Subordinated Notes issued in October 1997, the Company had approximately $302.8
million in cash, cash equivalents and short term investments, approximately $200
million of which is to be used to finance equipment purchases in connection with
the Company's rollout of its telecommunications infrastructure.
The Company has incurred significant operating and net losses, due in large part
to the development of its telecommunications services business, and anticipates
that such losses will continue over the near term as the Company executes its
growth strategy. A significant portion of the Company's increased capital
requirements will result from the rollout of the Company's CLEC business. The
Company is building a direct sales force, having opened sales offices serving
the fifteen major cities in which it offers CLEC services, and is in the process
of expanding into other metropolitan areas. Additionally, the Company is in the
process of ordering and installing switching and other network equipment to be
placed in its key markets. Historically, the Company has funded its operating
losses and capital expenditures through public and private offerings of debt and
equity securities and from credit and lease facilities. Cash used to fund
negative EBITDA during the nine months ended September 30, 1997 was
approximately $108.8 million, and purchases of property and equipment during the
nine months ended September 30, 1997 was approximately $103.8 million. At
September 30, 1997, working capital was $247.2 million, including cash, cash
equivalents and short-term investments of $302.8 million, as compared to working
capital and cash, cash equivalents and short-term investments at December 31,
1996 of $108.7 million and $122.5 million, respectively.
The Company's current plans call for capital expenditures of up to $450 million
over 1997, 1998 and 1999 in connection with the execution of its business plan.
The amount of capital required to
18
<PAGE>
execute this plan is a function of the speed at which the plan is executed. The
Company believes that its existing cash, a limited amount of lease financing
that it believes is readily available and receivables financing will provide
sufficient capital to finance its planned capital expenditures and to fund its
operating capital needs until the Company is generating positive EBITDA, which
the Company expects to occur in 1999. In the event this proves to be inaccurate,
the Company may elect to slow the speed or narrow the focus of its plan or seek
to raise sufficient amounts of additional capital on acceptable terms to
implement the plan. In the event the Company's plans or assumptions change or
prove to be inaccurate, or if the Company consummates any acquisitions of
businesses or assets (including additional spectrum licenses, by auction or
otherwise), the Company may be required to seek additional sources of capital
sooner than currently anticipated.
The Company has commitments during the next 12 months as follows:
o To purchase $22.0 million of telecommunications capital equipment
o To pay $20 million in cash or common stock, at the Company's election, in
connection with the US ONE Asset Acquisition
o To pay $65.2 million in common stock, (or under certain circumstances, cash,
at the Company's election), in connection with the acquisition of additional
licenses
Forward-Looking Statements
When used in this and in future filings by the Company with the SEC, in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer of the Company, the words or phrases "will likely
result," "expects," "plans," "will continue," "is anticipated," "estimated,"
"project" or "outlook" or similar expressions (including confirmations by an
authorized executive officer of the Company of any such expressions made by a
third party with respect to the Company) are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which speak
only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. 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. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forwardlooking statements to reflect anticipated or unanticipated
events or circumstances.
19
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
The following table sets forth certain information with respect to grants by the
Company of stock options to its employees and others during the quarter ended
September 30, 1997, without registration of such securities under the Securities
Act:
<TABLE>
<CAPTION>
Consideration received
and description of
Number of underwriting or other If option, warrant or
options discounts to market Exemption from convertible security,
granted or price afforded to registration terms of exercise or
Date of sale Title of security shares issued purchasers claimed conversion
- ------------ ----------------- ------------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
7/97 -9/97 options to 505200 options granted - no Section 4(2) exercisable for periods
purchase consideration received of five years from grant
common stock by the Company until at exercise prices
granted to exercise ranging from $13.38 to
employees $17.88
9/26/97 common stock 148926 acquisition purchase Section 4(2) n/a
price - no discount to
market
</TABLE>
Item 6. Reports on Form 8-K
(1) Current Report on Form 8-K filed July 2, 1997.
(2) Current Report on Form 8-K filed September 11, 1997.
(3) Current Report on Form 8-K filed October 29, 1997.
(4) Current Report on Form 8-K filed October 31, 1997.
20
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
WinStar Communications, Inc.
Registrant
By: /s/Fredric E. von Stange
- --------------------------------------
Fredric E. von Stange
Executive Vice President, Chief Financial
Officer and Director Dated: November 14, 1997
By: /s/Joseph P. Dwyer
- -------------------------------------
Joseph P. Dwyer
Vice President, Finance
(Principal Accounting Officer) Dated: November 14, 1997
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 302,769,000
<SECURITIES> 0
<RECEIVABLES> 26,196,000
<ALLOWANCES> 0
<INVENTORY> 4,954,000
<CURRENT-ASSETS> 358,617,000
<PP&E> 155,025,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 719,964,000
<CURRENT-LIABILITIES> 55,538,000
<BONDS> 650,819,000
0
42,000
<COMMON> 335,000
<OTHER-SE> (38,442,000)
<TOTAL-LIABILITY-AND-EQUITY> 719,964,000
<SALES> 0
<TOTAL-REVENUES> 20,186,000
<CGS> 0
<TOTAL-COSTS> 19,621,000
<OTHER-EXPENSES> 42,266,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,082,000
<INCOME-PRETAX> (65,283,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (63,783,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (65,283,000)
<EPS-PRIMARY> (2.01)
<EPS-DILUTED> (2.01)
<FN>
(1) Accounts receivable are net of allowance for doubtful accounts
(2) PP&E are net of accumulated depreciation
</FN>
</TABLE>
