<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registrant No. 333-35961
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 27, 1998,
UNLESS EXTENDED BY WINSTAR EQUIPMENT II CORP.
----------------
See "Risk Factors" beginning on Page 22 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 24, 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 WinStar Communications,
Inc., a Delaware corporation ("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 its
12 1/2% Guaranteed Senior Secured Exchange Notes Due 2004 ("New Equipment
Notes") for each $1,000 principal amount of its outstanding 12 1/2% Guaranteed
Senior Secured Notes Due 2004 ("Old Equipment Notes"). The Company, which has
guaranteed the Old Equipment Notes on a senior basis, has agreed to guarantee
the New Equipment Notes on a senior basis ("New Equipment Note Guarantee").
The Old Equipment Notes and the New Equipment Notes are referred to herein
collectively as the "Equipment Notes."
The New Equipment Notes (and the New Equipment Note Guarantee) will be
registered under the Securities Act of 1933, as amended ("Securities Act"),
pursuant to the registration statement on Form S-4 ("Registration Statement")
of which this Prospectus forms a part. As of the date hereof, $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 27,
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 $50.0 million to fund the
Acquisition Costs (as defined) of Designated Equipment (as defined), WinStar
Equipment is required to redeem New Equipment Notes in an aggregate principal
amount equal to such shortfall at a redemption price of 112.50% of such
principal
2
<PAGE>
(Cover page continued)
amount, plus accrued interest, if any, to the date of redemption. The term
"(as defined)" used after a 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 December 15, 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. There
has previously 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 24, 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
------
AVAILABLE INFORMATION....................................................5
INCORPORATION OF INFORMATION BY REFERENCE................................6
PROSPECTUS SUMMARY.......................................................7
RISK FACTORS............................................................22
THE EXCHANGE OFFER......................................................33
CAPITALIZATION..........................................................40
DESCRIPTION OF EQUIPMENT NOTES..........................................41
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................66
DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK.................70
PLAN OF DISTRIBUTION....................................................74
LEGAL MATTERS...........................................................75
EXPERTS.................................................................75
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 with the
Exchange Act, the Company files periodic reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and
copied (at prescribed rates) at the Commission's Washington Office, Chicago
Office and New York Office. In addition, reports, proxy statements and other
information concerning the Company can be inspected and copied at the offices
of The Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C.
20006. The Commission maintains a Web site that contains certain reports,
proxy and information statements and other information relating to the
Company, which the Company has filed via the Commission's electronic data
gathering and retrieval (EDGAR) system. The Web site can be reached 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
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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;
(14) Quarterly Report on Form 10-Q for the nine-month period ended
September 30, 1997; and
(15) Current Report on Form 8-K filed December 24, 1997.
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Prospectus and prior to the termination of the offering covered
by this Prospectus shall be deemed incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, upon the written or
oral request of such person to WinStar Communications, Inc., 230 Park Avenue,
Suite 2700, New York, New York 10169 (telephone 212-584-4000), Attention:
Investor Relations, a copy of any and all of the documents referred to above
(other than exhibits to such documents) which have been incorporated by
reference in this Prospectus. All such documents can also be retrieved from
the Commission's electronic data gathering and retrieval (EDGAR) system at
www.sec.gov.
6
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information
and financial statements and notes thereto appearing elsewhere or
incorporated by reference in this Prospectus. Unless otherwise indicated,
references herein to the "Company" or "WinStar" refer to WinStar
Communications, Inc. and, where appropriate, its subsidiaries. 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, Forth 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 certain 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 800 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).
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 OC-3 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 most 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
8
<PAGE>
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 rapidly
to 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.
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.
In October 1997, the Company purchased (the "US ONE Asset Acquisition
and Financing") from US ONE Communications Corp. and its subsidiaries,
entities in bankruptcy (collectively, "US ONE"), 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, 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
9
<PAGE>
assurance of this. See "Description of Certain Indebtedness" for a
description of the $62.25 million financing that was 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 other manufacturers 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 ("bandwidth on demand"). The Company anticipates initial test
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 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.
Recent Developments
On December 10, 1997, the Company entered into an agreement with
Telesoft Corp. ("Telesoft"), pursuant to which the Company will acquire (the
"GoodNet Acquisition") Telesoft's Internet services subsidiary, commercially
known as GoodNet ("GoodNet"), for a purchase price of approximately $22.0
million, consisting of $3.5 million cash and shares of common stock of the
Company ("Common Stock") having an aggregate market value of approximately
$18.5 million. GoodNet is a national provider of Internet services, offering
high-capacity data communication services to high-bandwidth users including
Internet service providers, universities and colleges, large landlords,
RBOCs, cable television operators and value-added resellers, and dial-up
Internet access to consumers. GoodNet possesses a national network of
multi-protocol asynchronous transfer mode (ATM) switches, with points of
presence in 27 cities and more than 130 peering arrangements with other U.S.
and foreign Internet service providers. During the nine months ended August
31, 1997 and 1996, GoodNet generated revenues of approximately $4.1 million
and $1.3 million, respectively. The GoodNet Acquisition is expected to close
during the first quarter of 1998, subject to the satisfaction of certain
closing conditions. There can be no assurance that the GoodNet Acquisition
will be consummated.
GoodNet will become part of the Company's new division, WinStar
Broadband Services ("WBS"), which was formed by the Company in December 1997
to facilitate the Company's expansion into the growing data communications
10
<PAGE>
market. WBS will develop the Company's presence in the areas of Internet
services and data transport; local area and wide area network professional
services; and network applications. The Company believes that GoodNet's and
WBS's other data communications service offerings will enhance the Company's
ability to win and retain business customers. The Company believes that by
utilizing its broadband local networks, WBS will be able to deliver broadband
networking applications and services to businesses that are currently unable
to receive such service offerings from their telecommunications providers.
On December 11, 1997, the Company entered into an agreement (as
subsequently amended and restated) with MIDCOM Communications Inc. and its
subsidiaries (collectively, "Midcom"), pursuant to which the Company will
acquire substantially all of Midcom's assets and business for a purchase
price of approximately $92.0 million, payable in cash (the "Midcom
Acquisition"). See "Risk Factors--Risks Associated with Rapid Expansion and
Acquisitions."
Midcom is a provider of long distance voice and data telecommunications
services primarily to small and medium-sized businesses at approximately
100,000 customer locations, most of which are in major metropolitan areas of
California, Florida, Illinois, New York, Ohio and Washington. Midcom's
services include basic "1 plus" and "800" long distance, frame relay data
transmission and dedicated private line. The Company believes that, if
consummated, the Midcom Acquisition will accelerate its expansion into the
growing data communications market, broaden its data transmission and long
distance service offerings, and significantly enhance its direct sales and
marketing capabilities to its primary market of small and medium-sized
businesses. As reflected in the reports filed by Midcom with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, during the
nine months ended September 30, 1997 and 1996, Midcom generated revenues of
approximately $74.3 million and $124.6 million, respectively.
Midcom filed for relief under Chapter 11 of the U.S. Bankruptcy Code
with the U.S. Bankruptcy Court for the Eastern District of Michigan (the
"Bankruptcy Court") in November 1997, and consummation of the Midcom
Acquisition is subject to the approval of the Bankruptcy Court. The
consummation of the Midcom Acquisition is also subject to various other
approvals and the possibility that other potential purchasers may bid more
for the assets to be acquired than the Company is willing to pay. There can
be no assurance that all required approvals will be obtained or that no other
purchaser may offer more for the assets to be acquired. The Company
anticipates that the Midcom Acquisition will close during the first quarter
of 1998. There can no assurance that the Midcom Acquisition will be
consummated.
In December 1997, the Company raised net proceeds of $168.3 million
through the sale and issuance of 175,000 shares of its Series C 14 1/4% Senior
Cumulative Exchangeable Preferred Stock ("Series C Preferred Stock") in an
institutional private placement ("December 1997 Preferred Stock Private
Placement"). The net proceeds of the December 1997 Preferred Stock Private
Placement are intended to be used to fund the purchase price of the Midcom
Acquisition or, if not used therefor, then for working capital and general
corporate purposes. Additionally, pursuant to the terms of the US ONE Asset
Acquisition and Financing, the Company repaid approximately $62 million of
indebtedness upon the consummation of the December 1997 Preferred Stock
Private Placement.
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.
In October 1997, counsel for the Company delivered to the Commission a
letter ("No-Action Request Letter") seeking confirmation from the Commission
that it would not raise any objection if the Company does not include
separate financial statements of WinStar Equipment but rather, provides
summarized financial information regarding WinStar Equipment in the Company's
periodic reports filed pursuant to the Exchange Act. In addition, the
No-Action 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
11
<PAGE>
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.
12
<PAGE>
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
institutional purchasers ("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,
13
<PAGE>
such broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This
Prospectus, as it may be amended or
supplemented from time to time, may be used
by such broker-dealer in connection with
resales of New 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
Commission and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with a secondary resale
transaction. Failure to comply with such
requirements in such instance may result in
such holder incurring liabilities under the
Securities Act for which the holder is not
indemnified by the 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 27,
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.
14
<PAGE>
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, and who wishes to tender in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial
owner must, prior to completing and executing
the Letter of Transmittal and delivering his
Old 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.
15
<PAGE>
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"), US
ONE Asset Acquisition and Financing and the
December 1997 Preferred Stock Private
Placement and the application of the net
proceeds thereof to repay certain
indebtedness, the Company had (on an
unconsolidated basis) approximately $890.7
million of indebtedness, $693.2 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 Company ("March 1997 Equipment Note
Guarantee") of WinStar
16
<PAGE>
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 (as defined), and the
Notes offered hereby, the "1997 Notes"),
the guarantee by the Company of WinStar
Equipment II Corp.'s Old Equipment Notes
("Old Equipment Note Guarantee," and
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 $255.8 million of which
would have been subordinated indebtedness
(consisting of the Company's outstanding 14%
Convertible Senior Subordinated Discount
Notes due 2005 (the "Convertible Notes" and,
together with the 1995 Senior Notes, the
"1995 Notes") and the October 1997 Notes.
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 US ONE Asset
Acquisition and Financing and the December
1997 Preferred Stock Private Placement, the
total liabilities of the Company's
subsidiaries was approximately $359.7
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 Notes 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 redemptions of capital
stock of the Company, the redemptions 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 will restrict 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
17
<PAGE>
Company to 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 22 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.
18
<PAGE>
Summary Financial Information
(In thousands of dollars, except per share data)
The summary financial data presented below for the year ended February
28, 1995, the ten months ended December 31, 1995 and the year ended December
31, 1996 have been derived from the Company's audited Consolidated Financial
Statements incorporated by referenced in this Prospectus from the Company's
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 in this
Prospectus from the Company's Quarterly Report on Form 10-Q for the nine
months ended September 30, 1997. In the opinion of management, the unaudited
Consolidated Financial Statements have been prepared on the same basis as the
audited Consolidated Financial Statements and include all adjustments, which
consist only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for the period.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
TEN MONTHS DECEMBER 31, 1996 SEPTEMBER 30,
YEAR ENDED ENDED ------------------------- ------------------------
FEBRUARY 28, DECEMBER 31, 1996 1997 1997
1995 1995 ACTUAL PRO FORMA(1) ACTUAL ACTUAL PRO 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) (101,619) (26,695) (53,074) (78,667)
Interest income............ 343 2,890 10,515 8,453 8,342 11,052 11,052
Other (expenses)
income, net.............. (1,109) (866) -- -- -- 2,219 2,219
-------- -------- -------- --------- -------- --------- ---------
Net loss from
continuing operations.... (7,226) (16,094) (82,713) (162,147) (49,411) (164,078) (196,444)
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) (163,157) (50,027) (166,055) (196,444)
Preferred stock dividends.. -- -- -- (31,826) -- (3,881) (23,682)
-------- -------- -------- --------- -------- --------- ---------
Net loss applicable
to common stock.......... $ (7,230) $(15,857) $(83,723) $(194,983) $(50,027) $(169,936) $(220,126)
-------- -------- -------- --------- -------- --------- ---------
-------- -------- -------- --------- -------- --------- ---------
Net loss per share from
continuing operations.... $ (0.42) $ (0.71) $ (2.96) $ (6.16) $ (1.79) $ (5.10) $ (6.63)
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) $ (6.19) $ (1.81) $ (5.16) $ (6.69)
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>
19
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BALANCE SHEET DATA:
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA(4)
---------- -------------
(IN THOUSANDS)
Cash, cash equivalents and short-term
investments.................................... $ 302,769 $ 502,870
Property and equipment, net...................... 155,025 206,177
Total assets..................................... 719,964 1,007,402
Current portion of long-term debt and
capital lease obligations....................... 8,577 8,577
Long-term debt and capital lease
obligations, less current portion............... 675,991 775,991
Redeemable Preferred Stock....................... -- 175,000
Common and preferred stock and
additional paid-in capital...................... 253,024 246,362
Stockholders' equity (deficit)................... (38,065) (45,802)
________________________________
(1) Gives effect to (a) the acquisition of Milliwave Limited Partnership
completed in January 1997, (b) an institutional private placement of
$100 million of units, consisting of 6% Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") and warrants
("Warrants"), completed in February 1997 ("February 1997 Preferred
Stock Placement"), (c) a private placement in March 1997 ("March 1997
Debt Placement") of $100 million 141/2 Senior Deferred Interest Notes
Due 2005 of the Company ("1997 Senior Notes") and $200 million 121/2%
Guaranteed Senior Secured Notes Due 2004 of WinStar Equipment Corp.
("WEC"), a wholly owned subsidiary of the Company ("WEC Notes"), (d) a
private placement in August 1997 ("August 1997 Debt Placement") by
WinStar Equipment II Corp., a wholly owned subsidiary of the Company
("WEC II), of $50 million aggregate principal amount of its 12%
Guaranteed Senior Secured Notes Due 2004 (the "WEC II Notes" and,
together with the 1997 Senior Notes, October 1997 Notes and WEC Notes,
the "1997 Notes"), (e) a private placement in October 1997 of $100
million October 1997 Notes, (f) the US ONE Asset Acquisition and
Financing and (g) the December 1997 Preferred Stock Private Placement
(including $19.1 million and $25.8 million of dividends on the Series
C Preferred Stock in the nine months ended September 30, 1997 and year
ended December 31, 1996, respectively) and the application of the net
proceeds therefrom to working capital, each as if they occurred as of
the beginning of the respective period. Interest expense has been (a)
increased 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 and (b) reduced by
approximately $5.4 million and $7.6 million for the nine months ended
September 30, 1997 and the year ended December 31, 1996, respectively
to reflect the repayment of approximately $62 million for the US ONE
Asset Acquisition and Financing. 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
"Description of Capital Stock--Series C 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 dividends on the
Company's Series A and Series C Preferred Stock by approximately $7.3
million, $16.3 million, $83.0 million, $49.4 million and $169.2
million, respectively. On a pro forma basis, giving effect to the
items described in footnotes (1), (2) and (3) above,
20
<PAGE>
earnings from continuing operations were insufficient to cover
combined fixed charges and dividends on preferred stock by $205.7
million, $210.6 million and $278.6 million, for the nine months ended
September 30, 1997 and the year ended December 31, 1996 by $176.1
million, $182.4 million and $280.2 million, respectively. Fixed
charges consist of interest charges and amortization of debt expense
and discount or premium related to indebtedness, whether expended 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 well as the consummation of the December
1997 Preferred Stock Private Placement and the application of a
portion of the net proceeds thereof to repay approximately $62 million
in indebtedness incurred in connection with the US ONE Asset
Acquisition and Financing.
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."
21
<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, or cash dividend payments on its outstanding
preferred stock or to redeem such preferred stock as required. Further,
the failure of the Company to achieve and sustain profitability would have
a material adverse effect on the Company and the value of the Common Stock.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
As of September 30, 1997, after giving effect to the consummation of
the October 1997 Debt Placement, the US ONE Asset Acquisition and Financing
and the December 1997 Preferred Stock Private Placement and the application
of a portion of the proceeds thereof to the payment of certain
indebtedness, the Company would have had, on a consolidated basis,
approximately $890.7 million of indebtedness, including capitalized lease
obligations. The accrual of interest on the 1997 Notes and the US ONE
Asset Acquisition and Financing and the accretion of original issue
discount on the Convertible Notes and the Company's outstanding 14% Senior
Discount Notes due 2005 (the "1995 Senior Notes" and, together with the
Convertible Notes, 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 1997
Notes and 1995 Notes (collectively, the "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 respective indentures
pursuant to which the 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 Notes and the US ONE Asset Acquisition and Financing
could make it more difficult for the Company to make payments on its
obligations; (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
22
<PAGE>
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. The Company
anticipates that earnings will be insufficient to cover fixed charges and
preferred stock dividends for the next several years. In order for the
Company to meet its debt service obligations, and its redemption
obligations with respect to its outstanding preferred stock, the Company
will need to substantially improve its operating results. There can be no
assurance that the Company's operating results will be sufficient to enable
the Company to meets its debt service obligations or its redemption
obligations with respect to its outstanding preferred stock. In the
absence of such operating results, the Company could face substantially
liquidity problems and might be required to raise additional financing
through the issuance of debt or equity securities, although there can be no
assurance that the Company would be successful in raising such financing.
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 $415.6 million of liabilities (excluding intercompany
payables to the Company and each other). See "Description of the Equipment
Notes."
The New Equipment Note Guarantee will be 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
had an aggregate of approximately $820.9 million of indebtedness, including
capitalized lease obligations, approximately $415.6 million of which was
secured by liens on assets of the Company and/or its subsidiaries
(including the Equipment Notes). In the event such secured indebtedness
goes into default and the holders thereof foreclose on the collateral, the
holders of secured indebtedness will be entitled to payment out of the
proceeds of their collateral prior to any holders of general unsecured
indebtedness, including the New Equipment Note Guarantee, notwithstanding
the existence of any event of default with respect to the Equipment Notes.
23
<PAGE>
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 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.
24
<PAGE>
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 and may require the Company to
refinance the 1995 Notes and the March 1997 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 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 declined 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. The Company
has recently accelerated its rollout by completing the US ONE Asset
Acquisition and Financing which will enable the Company to penetrate a
higher number of markets. This accelerated rollout will result in
increasing operating costs over the buildout. 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 is 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
25
<PAGE>
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 value of
the Common Stock.
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 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 value of the Common Stock.
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 value of the
Common Stock. As part of its strategy, the Company may acquire
complementary assets or businesses. The pursuit of acquisition
opportunities will place significant demands on the time and attention of
the Company's senior management and will involve considerable financial and
other costs with respect to identifying and investigating acquisition
candidates, negotiating acquisition agreements and integrating the acquired
businesses with the Company's existing operations. Employees and customers
of acquired businesses may sever their relationship with such businesses
during or after the acquisition. There can be no assurance that the
Company will be able to successfully consummate any other acquisitions or
integrate any business or assets which it may acquire into its operations.
Recently, the Company entered into an agreement to acquire
substantially all of the assets and business of Midcom. The Company has
also recently entered into an agreement to acquire substantially all of the
assets and business of GoodNet and has acquired US ONE, an entity in
bankruptcy. There can be no assurance that the Company will be able to
exploit the assets and businesses of Midcom and US ONE with more success
than their previous managements. The GoodNet Acquisition and Midcom
Acquisition are subject to customary conditions and certain regulatory
approvals and are not expected to close until the first quarter of 1998.
In addition, the Midcom Acquisition is subject to the approval of the
Bankruptcy Court. There can be no assurance that the approvals required to
consummate the GoodNet Acquisition or the Midcom Acquisition will be
obtained. Even if consummated, the Company cannot guarantee that the
businesses conducted by Midcom and GoodNet can be effectively integrated
into the Company's other operations or that the Company will realize the
benefits it expects to achieve through the Midcom Acquisition and GoodNet
Acquisition. Moreover, the Company expects that a portion of Midcom's
customers and independent sales agents may elect not to continue with the
Company. In addition, the conversion of Midcom customers
26
<PAGE>
and carrier identification codes to the Company's system is subject to
regulation by the Federal Communications Commission (the "FCC") and the
assignment of Midcom's existing letters of authorization to provide
interexchange services may be subject to approval by government regulators,
customers and competing IXCs. In the event that the FCC determines that
the Company engaged in improper practices in converting such customers and
codes, the FCC may impose substantial penalties on the Company. Moreover,
the Company is required to obtain prior approval from state PUCs prior to
consummation of the Midcom Acquisition. However, due to the nature of a
bankruptcy proceeding, the Company may consummate the Midcom Acquisition
prior to such approvals being obtained. The Company believes that, in view
of the exigent circumstances surrounding the bankruptcy, where continued
customer service is threatened, where a bankruptcy court order has been
issued mandating that the Company complete the Midcom Acquisition by a date
certain, and where the Company has made a good faith effort to file and
apply for the requisite state approvals, that all such states will grant
the necessary approvals even if the Company does not comply with the
requirement to obtain such approvals prior to the consummation of the
Midcom Acquisition.
The Company has incurred due diligence, legal and other expenses in
anticipation of the acquisition of Midcom. If the acquisition is not
consummated, these expenses will have to be written off as non-recurring
charges. In the event that the Company does not consummate the Midcom
Acquisition for any reason, the Company intends to use the proceeds of the
Offering to accelerate the rollout of its CLEC operations, which will cause
an increase in the Company's operating losses and a further decrease in the
Company's EBITDA.
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.
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
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both inside and outside their current geographic territories. 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 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 the value of the Common Stock.
GOVERNMENT REGULATION
The Company's telecommunications services are subject to varying
degrees of federal, state and local regulation. Generally, the FCC
exercises jurisdiction over all telecommunications service 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.
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
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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 of the markets
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 appealed 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.
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. 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 FCC'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.
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In the 38 GHz Order, the FCC also ruled that (i) it would impose no
limits on the accumulation of licenses in the 38GHz band, (ii) the 39.5 to
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 future 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 further 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 Order, 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 value of the Common Stock.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
Certain indebtedness of the Company and the Indentures, as well as the
Series C Preferred Stock, 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 value of the Common Stock.
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DEPENDENCE ON THIRD PARTIES FOR SERVICE AND MARKETING; POSSIBLE SERVICE
INTERRUPTIONS AND EQUIPMENT FAILURES
The Company's long distance resale business is dependent on utilizing
the facilities of major IXCs to carry its customers' long distance
telephone calls and, in many instances, especially during initial market
penetrations, the Company's CLEC business will be dependent on the
facilities of the LECs and other local exchange service providers to carry
its customers' local telephone calls. The Company has an agreement with MCI
that provide it with access to such carrier's networks and has entered or
is entering into interconnect agreements with various LECs, and other
CLECs, to access their local exchange facilities. Although the Company
believes that it currently has sufficient access to long distance networks
and will be able to obtain sufficient access to local exchange facilities,
any increase in the rates or access fees charged by the owners of such
facilities or their unwillingness to provide access to such facilities to
the Company, as well as potential reticence of the LECs to honor
appropriate provisioning and service intervals with respect to
interconnection arrangements, could materially adversely affect the
Company's operations. Failure to obtain continuing access to such networks
and facilities could require the Company to significantly curtail or cease
its operations and could have an adverse effect on the value of the Series
C 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 providers and is in various stages of
discussions with them.
RELIANCE ON EQUIPMENT SUPPLIERS
The Company currently purchases the great majority 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), although the Company typically
limits its link distances to less
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than two miles to ensure a high quality of transmission. 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 value of the Common Stock.
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
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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, is not an investment company within the
meaning of the 1940 Act. If the Company or WinStar Equipment is found to be
an investment company, it 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, it would become subject to
substantial regulation with respect to its capital structure, management,
operations, transactions with affiliated persons (as defined in the 1940
Act) and other matters. Application of the provisions of the 1940 Act to
the Company 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.
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
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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, as the case may be, 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.
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 24, 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 27, 1998 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
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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.
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
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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 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 reserve the
absolute right to waive any of the conditions of the Exchange Offer or any
defect or irregularity in the tender of any Old 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 pertained 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.
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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
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
their option, modify or otherwise amend the Exchange Offer, if either of
the following events occur:
(a) any statute, rule or regulation shall have been enacted, or
any action shall have been taken by any court or governmental
authority which, in the sole judgment of the Company, would prohibit,
restrict or otherwise render illegal the consummation of the Exchange
Offer, or
(b) there shall occur a change in the current interpretation by
the staff of the Commission which, in the Company's sole judgment,
might materially impair 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).
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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
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
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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 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 Equipment Notes
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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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, the US ONE Asset Acquisition and Financing and the December 1997
Preferred Stock Private Placement and the application of a portion of the
proceeds thereof to repay certain indebtedness.
SEPTEMBER 30, 1997
---------------------------------
HISTORICAL PRO FORMA
-------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash, cash equivalents and
short-term investments.................. $302,769 $ 502,870
-------- ---------
Liabilities and stockholders' equity:
Current portion of long-term debt and
capital lease obligations............... $ 8,577 $ 8,577
-------- ---------
Long-term debt and capital lease
obligations:
October 1997 Notes........................ -- 100,000
March 1997 Equipment Notes................ 200,000 200,000
August 1997 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
Series C 14 1/4% Senior Exchangeable
Preferred Stock Due 2007(1)............. -- 175,000
Stockholders' equity:
Preferred Stock, $0.01 par value, 15,000,000
shares authorized, 4,155,000 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(2)................. 335 335
Additional paid-in capital.................. 252,647 245,985
Accumulated deficit......................... (291,089) (292,164)
-------- ---------
Total stockholders' equity.................. (38,065) (45,802)
-------- ---------
Total capitalization..................... $646,503 $ 913,766
-------- ---------
-------- ---------
- -----------------
(1) The Series C Preferred Stock must be redeemed by the Company on or
before December 15, 2007 at a price equal to the aggregate Accumulated
Amount, plus accrued and unpaid dividends; thus, it is "mandatorily
redeemable" and not included in stockholders' equity.
(2) Does not include (i) an aggregate of 1,001,000 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 7,393,000 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) 5,030,000 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. Also does not include
certain shares issuable upon the 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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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 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 121/2% 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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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
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a security interest in: (i) all Designated Equipment acquired by WinStar
Equipment pursuant to the covenant described below under "--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,
ranks pari passu in right of payment with all existing and future senior
indebtedness of WCI, including the March 1997 Senior Notes, the March 1997
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 and to the October 1997 Debt
Placement, WCI would have had (on an unconsolidated basis) approximately
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$820.9 million of indebtedness (including the Equipment Note Guarantee), $551.0
million of which would have been senior 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 $415.6 million, including trade payables. Although the
Indentures, limit the incurrence of Indebtedness and the issuance of preferred
stock of certain of WCI's subsidiaries, such limitations are subject to a number
of significant qualifications. Moreover, the Indentures do not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness under the Indentures.
The Indenture specifically designates the Equipment Note Guarantee as
"Designated Senior Indebtedness" for purposes of the Convertible Notes Indenture
(as defined).
Equipment Notes
The indebtedness evidenced by the Equipment Notes are secured senior
obligations of WinStar Equipment. As of the Closing Date, there was no
indebtedness of WinStar Equipment other than the Equipment Notes. Under the
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 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 all of WinStar Equipment's 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
outstanding. 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 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 or WinStar
Equipment which might be outstanding at the time). The above covenant requiring
WCI or WinStar Equipment to repurchase the Equipment Notes will, unless the
consents referred to above are obtained, require WCI or WinStar Equipment to
repay all indebtedness then outstanding which by its terms would prohibit such
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 to, Incur any Indebtedness (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; 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
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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 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 Event of Default shall have
occurred and be continuing, (B) except with respect
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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 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
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longer outstanding (and repaid in full) if and when the Person in which such
Investment is made becomes a Restricted Subsidiary of WCI.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof), and the
Net Cash Proceeds from any issuance and sale of Capital Stock referred to in
clauses (iii) or (iv) shall be included in calculating whether the conditions of
clause (C) of the first paragraph of 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 "Limitation on Liens" covenant described below.
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
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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.
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.
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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 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
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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 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").
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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.
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-1s filed in
each state in the United States covering all Designated Equipment acquired by
WinStar Equipment pursuant to the August 1997 Debt Placement by filing such
UCC-3 continuation statements from time to time as may be necessary to continue
the effectiveness of such filings, and WinStar Equipment will not, and WCI will
not and will not permit any of its Subsidiaries to, grant to any Person (other
than the 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
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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 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; (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; (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 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
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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 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),
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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 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, 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,
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(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 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
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covenant described under "--Covenants--Covenants Relating to All the
Notes--Limitation on Restricted Payments" (and in such case, except to the
extent includable pursuant to clause (i) above), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is merged
into or consolidated with WCI or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by WCI
or any of its Restricted Subsidiaries; (iii) the net income of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the covenant described under
"--Covenants--Covenants Relating to All the Notes--Limitation on Restricted
Payments," any amount paid as, or accrued for, cash dividends on Preferred Stock
of WCI or any Restricted Subsidiary owned by Persons other than WCI and any of
its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary
losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of WCI and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of WCI and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than
licenses issued by the FCC), all as set forth on the quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries, prepared in
conformity with GAAP and most recently filed with the Commission pursuant to
"--SEC Reports and Reports to Holders;" provided, however, that the value of any
licenses issued by the FCC shall, in the event of an auction for similar
licenses, be equal to the fair market value ascribed thereto in good faith by
the Board of Directors and evidenced by a Board Resolution. As used in the
Indentures, references to financial statements of WCI and its Restricted
Subsidiaries shall be adjusted to exclude Unrestricted Subsidiaries if the
context requires.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by WCI or any of its Restricted
Subsidiaries in any other Person pursuant to which such Person shall become a
Restricted Subsidiary of WCI or shall be merged into or consolidated with WCI or
any of its Restricted Subsidiaries or (ii) an acquisition by WCI or any of its
Restricted Subsidiaries of the property and assets of any Person other than WCI
or any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transactions) in one transaction
or a series of related transactions by WCI or any of its Restricted Subsidiaries
to any Person other than WCI or any of its Restricted Subsidiaries of (i) all or
any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially
all of the property and assets of an operating unit or business of WCI or any of
its Restricted Subsidiaries or (iii) any other property or assets of WCI or any
of its Restricted Subsidiaries outside the ordinary course of business of WCI or
such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the relevant Indenture applicable to mergers, consolidations and
sales of assets of WCI; provided, however, that the following shall not be
included within the meaning of "Asset Sale": (A) sales or other dispositions of
inventory, receivables and other current assets; (B) sales or other dispositions
of equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of WCI or its Restricted
Subsidiaries; (C) a substantially simultaneous exchange of, or a sale or
disposition (other than 85% or more for cash or cash equivalents) by WCI or any
of its Restricted Subsidiaries of, licenses issued by the FCC or applications or
bids therefor; provided, however, that the consideration received by WCI or any
such Restricted Subsidiary in connection with such exchange, sale or disposition
shall be equal to the fair market value of licenses so exchanged, sold or
disposed of, as determined by the Board of Directors; and (D) except for
purposes of the definition of "Indebtedness to EBITDA Ratio," any sale or other
disposition of securities of an Unrestricted Subsidiary. The Equipment Notes
Indenture also
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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.
"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
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Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by WCI and its Restricted Subsidiaries during such period;
excluding, however, (i) any amount of such interest of any Restricted Subsidiary
if the net income of such Restricted Subsidiary is excluded in the calculation
of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees
and expenses (and any amortization thereof) payable in connection with the
offering of the Notes, all as determined on a consolidated basis (without taking
into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries (which shall
be as of a date not more than 90 days prior to the date of such computation, and
which shall not take into account Unrestricted Subsidiaries), less any amounts
attributable to Redeemable Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of the Capital Stock of
WCI or any of its Restricted Subsidiaries, each item to be determined in
conformity with GAAP (excluding the effects of foreign currency exchange
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Convertible Notes" means the 14% Convertible Senior Subordinated Discount
Notes of WCI due 2005.
"Convertible Notes Indenture" means the Indenture dated as of October 23,
1995, between WCI and United States Trust Company of New York pursuant to which
the Convertible Notes were issued.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Equipment" means (i) telecommunications switches and related
equipment and inventory; (ii) customer premise equipment; (iii) radios, antennae
and cabling; (iv) office and warehouse furniture, fixtures and equipment
(including, without limitation, computers and communications equipment);
(v) company service vehicles; and (vi) software related to each of the
foregoing, in each case used in the telecommunications business of WCI and its
Subsidiaries.
"Equipment Notes" means the 121/2% 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 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
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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 a Note is registered on the books
of the registrar for the applicable Notes.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including, with respect to the Company and its Restricted Subsidiaries, an
"incurrence" of Indebtedness by reason of a Person becoming a Restricted
Subsidiary of the Company; provided, however, that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or
non-negotiable), (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except trade
payables, (v) all obligations of such Person as lessee under Capitalized Leases,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided,
however, that the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such Person and
(viii) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations that are included in any of clauses (i) through
(viii) above, the maximum liability upon the occurrence of the contingency
giving rise to the obligation; provided, however, that (A) the amount
outstanding at any time of any Indebtedness issued with original issue discount
is (1) for purposes of determining the Indebtedness to EBITDA Ratio, the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP and (2) for all other purposes, the amount determined in
clause (1) on the date such Indebtedness is originally Incurred and
(B) Indebtedness shall not include any liability for federal, state, local or
other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of WCI and its Restricted
Subsidiaries on a consolidated basis ("Consolidated Indebtedness") as at the
date of determination (the "Transaction Date") to (ii) the Consolidated EBITDA
of WCI for the then most recent four full fiscal quarters for which reports have
been filed pursuant to "--SEC Reports and Reports to Holders" (such four full
fiscal quarter period being referred to herein as the "Four Quarter Period");
provided, however, that (x) pro forma effect shall be given to any Indebtedness
Incurred from the beginning of the Four Quarter Period through the Transaction
Date (including any Indebtedness Incurred on the Transaction Date), to the
extent outstanding on the Transaction Date, (y) if during the period commencing
on the first day of such Four Quarter Period through the Transaction Date (the
"Reference Period"), WCI or any of the Restricted Subsidiaries shall have
engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced
by an amount equal to the EBITDA (if positive), or increased by an amount equal
to the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if such
Asset Sale and related retirement of Indebtedness had occurred on the first day
of such Reference Period or (z) if during such Reference Period WCI or any of
the Restricted Subsidiaries shall have made any Asset Acquisition, Consolidated
EBITDA of WCI shall be calculated on a pro forma basis as if such Asset
Acquisition and any Incurrence of Indebtedness to finance such Asset Acquisition
had taken place on the first day of such Reference Period.
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"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--Covenants Relating to All the
Notes--Limitation on Restricted Payments," (i) "Investment" shall include the
fair market value of the assets (net of liabilities) of any Restricted
Subsidiary of WCI at the time that such Restricted Subsidiary of WCI is
designated an Unrestricted Subsidiary and shall exclude the fair market value
of the assets (net of liabilities) of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated a Restricted Subsidiary of
WCI and (ii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in
each case as determined by the Board of Directors in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof, any sale with
recourse against the seller or any Affiliate of the seller, or any agreement
to give any security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to WCI or any Restricted
Subsidiary of WCI) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of
counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are
payable) as a result of such Asset Sale without regard to the consolidated
results of operations of WCI and its Restricted Subsidiaries, taken as a
whole, (iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by a
Lien on the property or assets sold or (B) is required to be paid as a result
of such sale and (iv) appropriate amounts to be provided by WCI or any
Restricted Subsidiary of WCI as a reserve against any liabilities associated
with such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with
respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to
the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are
financed or sold with recourse to WCI or any Restricted Subsidiary of WCI)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such
issuance or sale and net of taxes paid or payable by WCI or any of its
subsidiaries as a result thereof.
"Offer to Purchase" means an offer to purchase Equipment Notes by WinStar
Equipment from the Holders that is required by the covenant described under
"--Repurchase of Notes upon a Change of Control" or "--Covenants--Covenants
Relating to All the Notes--Limitation on Asset Sales" and which is commenced
by mailing a notice to the 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
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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 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
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ordinary course of business (exclusive of obligations for the payment of
borrowed money) and a bank's unexercised right of set-off with respect to
deposits made in the ordinary course; (v) easements, rights-of-way, municipal
and zoning ordinances and similar charges, encumbrances, title defects or
other irregularities that do not materially interfere with the ordinary
course of business of WCI or any of its Restricted Subsidiaries; (vi) Liens
(including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided, however, that (a) such Lien is
created solely for the purpose of securing Indebtedness Incurred, in
accordance with the "Limitation on Indebtedness" covenant described above,
(1) to finance the cost (including the cost of improvement or construction)
of the item of property or assets subject thereto and such Lien is created
prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to
or cover any property or assets other than such item of property or assets
and any improvements on such item; (vii) leases or subleases granted to
others that do not materially interfere with the ordinary course of business
of WCI and its Restricted Subsidiaries, taken as a whole; (viii) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of WCI or its Restricted Subsidiaries relating
to such property or assets; (ix) any interest or title of a lessor in the
property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of stock or Indebtedness of,
any corporation existing at the time such corporation becomes, or becomes a
part of, any Restricted Subsidiary; provided, however, that such Liens do not
extend to or cover any property or assets of WCI or any Restricted Subsidiary
other than the property or assets acquired; (xii) Liens in favor of WCI or
any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against WCI or any Restricted Subsidiary of WCI that does
not give rise to an Event of Default; (xiv) Liens securing reimbursement
obligations with respect to letters of credit that encumber documents and
other property relating to such letters of credit and the products and
proceeds thereof; (xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the
general parameters customary in the industry and incurred in the ordinary
course of business, in each case, securing Indebtedness under Interest Rate
Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed to
protect WCI or any of its Restricted Subsidiaries from fluctuations in the
price of commodities; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by WCI or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of WCI and its Restricted
Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales of
receivables.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference stock, whether
now outstanding or issued after the Closing Date, including, without
limitation, all series and classes of such preferred or preference stock.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes (unless the redemption price is, at WCI's option,
without conditions precedent, payable solely in Common Stock (other than
Redeemable Stock) of WCI) or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having
a scheduled maturity prior to the Stated Maturity of the Notes; provided,
however, that any Capital Stock that would not constitute Redeemable Stock
but for provisions thereof giving holders thereof the right to require such
Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity of
the Notes shall not constitute Redeemable Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained
in "--Repurchase of Notes Upon a Change of Control" and
"--Covenants--Covenants Relating to All the Notes--Limitation on Asset Sales"
and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to WCI's
repurchase of such Notes as are required to be
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repurchased pursuant to "--Repurchase of Notes Upon a Change of Control" and
"--Covenants--Covenants Relating to All the Notes--Limitation on Asset
Sales."
"Restricted Subsidiary" means any Subsidiary of WCI other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission and any successor
agency.
"Security Agreement" means the Security Agreement dated as of 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.
"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,
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issued by a corporation (other than an Affiliate of WCI) organized and in
existence under the laws of the United States, any state thereof or any
foreign country recognized by the United States with a rating at the time as
of which any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard &
Poor's Ratings Group; and (v) securities with maturities of six months or
less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States, or
by any political subdivision or taxing authority thereof, and rated at least
"A" by Standard & Poor's Ratings Group or Moody's Investors Service, Inc.;
provided, however, that, notwithstanding the foregoing, the maturity of any
of the foregoing that is applied to provide security in favor of the
Indebtedness referred to in clause (v) of the second paragraph of the
"Limitation on Liens" covenant may occur as late as the earliest date that
such Indebtedness may be redeemed at the option of the obligor with respect
to such Indebtedness; provided further, however, that WCI shall cause such
Liens referred to in such clause (v) to be incurred no later than the first
anniversary of the Closing Date.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by WCI or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of WCI that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of WCI (including any newly acquired or newly formed Subsidiary of
WCI), other than a guarantor of the Notes, to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien
on any property of, WCI or any Restricted Subsidiary; provided, however, that
neither WCI nor its Restricted Subsidiaries has any Guarantee of any
Indebtedness of such Subsidiary outstanding at the time of such designation
and either (A) the Subsidiary to be so designated has total assets of $1,000
or less or (B) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the covenant described under
"--Covenants--Covenants Relating to All the Notes--Limitation on Restricted
Payments." Notwithstanding the foregoing, WinStar New Media Company Inc., Non
Fiction Films Inc. and WinStar Global Products, Inc. and their Subsidiaries
are Unrestricted Subsidiaries. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary of WCI; provided,
however, that immediately after giving effect to such designation (x) WCI
could Incur $1.00 of additional Indebtedness under the first paragraph of the
covenant described under "--Covenants--Covenants Relating to All the
Notes--Limitation on Indebtedness" and (y) no Default or Event of Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions. Anything to the contrary contained in the Indentures
notwithstanding, no Telecommunications Subsidiary may be designated an
Unrestricted Subsidiary.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof at any
time prior to the Stated Maturity of the Notes, and shall also include a
depositary receipt issued by a bank or trust company as custodian with
respect to any such U.S. Government Obligation or a specific payment of
interest on or principal of any such custodian for the account of the holder
of a depositary receipt; provided, however, that (except as required by law)
such custodian is not authorized to make any deduction from the amount
payable to the holder of such depositary receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific
payment of interest on or principal of the U.S. Government Obligation
evidenced by such depositary receipt.
"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
1997 Debt Placements
In March 1997, the Company and WEC issued an aggregate of $300 million of
notes in the March 1997 Debt Placement, consisting of (i) $100 million of the
1997 Senior Notes, ranking pari passu with the 1995 Senior Notes, and (ii)
$200 million of the WEC 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 involved in the March
1997 Debt Placement. In August 1997, WEC II issued, pursuant to the Facility,
$50.0 million of the WEC II 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 in the
October 1997 Debt Placement.
The obligations of WEC and WEC II under the WEC Notes and the WEC II
Notes are unconditionally guaranteed by the Company and are secured by a
security interest in the equipment and other property purchased by WEC and
WEC II, as the case may be, with the proceeds thereof.
The WEC Notes bear interest at a rate of 121/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC Notes will
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at
the option of the Company, in whole or in part, at the redemption prices set
forth herein. Additionally, in the event that by March 18, 1999, the Company
has not applied $200.0 million to fund the acquisition costs of Designated
Equipment (as defined in the Indentures relating to the WEC and WEC II
Notes), the Company is required to redeem the WEC 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 WEC II Notes bear interest at a rate of 121/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC II Notes
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at
the option of the Company, in whole or in part, at certain prices.
Additionally, in the event that by August 8, 1999, the Company has not
applied $50.0 million to fund the acquisition costs of Designated Equipment,
the Company is required to redeem WEC II 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 1997 Senior Notes are unsecured, senior indebtedness of the Company,
rank 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. The 1997
Senior Notes bear interest at a rate of 141/2% per annum. Until October 15,
2000, interest on the 1997 Senior Notes will accrue and compound
semiannually, but will not be payable in cash. Interest on the Accumulated
Amount (as defined in the Indenture relating to the 1997 Senior Notes) of the
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. The 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 obligations of
the Company, rank pari passu in right of payment with the Convertible Notes
and are junior in right of payment to all existing future senior indebtedness
of the Company. The October 1997 Notes bear interest at a rate of 15% per
annum, and are payable on March 1 and September 1, commencing September 1,
2002. Until March 1, 2002, interest on the Notes will accrue and be
compounded semiannually on each SemiAnnual Interest Accrual Date (as defined
in the Indenture relating to the October 1997 Notes), but will not be payable
in cash. Interest on the Accumulated Amount (as defined in the Indenture
relating to the October 1997 Notes) of the Notes as of March 1, 2002 will be
payable semiannually commencing September 1, 2002. The Notes will mature on
March 1, 2007 and are redeemable on or after March 1, 2002, at the option of
the Company, in whole or in part, at certain redemption prices.
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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 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 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
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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.
The Company's subsidiaries have entered into, and will continue to seek,
financing arrangements with respect to equipment, including
telecommunications switches, 38 GHz radios and other related equipment. The
Company's subsidiary, WinStar Telecommunications, Inc., consummated a $3.1
million sale/leaseback of its New York City switch in December 1996 and a
$3.8 million sale/leaseback of its Los Angeles switch in April 1997 and
borrowed approximately $3.3 million from a third party lender in connection
with its purchase of its Chicago switch in March 1997. In May 1997, the
Company's subsidiary, WinStar Wireless, Inc., consummated a $10 million
sale/leaseback of 38 GHz radios. The Company may enter into additional
financing arrangements for switches, radios and other equipment on similar
terms in the future.
Preferred Stock
The authorized capital stock of the Company includes 15,000,000 shares of
"blank check" preferred stock, which may be issued from time to time in one
or more series upon authorization by the Company's Board of Directors. The
Board of Directors, without further approval of the stockholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each series of
preferred stock. The issuance of preferred stock (and the ability of the
Board of Directors to do so without stockholder approval), while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, discourage bids
for the Common Stock at a premium or otherwise adversely affect the market
price of the Common 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 Series A Cumulative
Preferred Stock and Warrants to purchase 1,600,000 shares of Common Stock for
an aggregate purchase price of $100.0 million. The February 1997 Preferred
Stock Placement was consummated on February 11, 1997. The February 1997
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 February 1997 Preferred
Stock Placement was to raise proceeds to fund the expansion of the Company's
telecommunications and other operations.
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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.
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
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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.
Series C Preferred Stock
The Company has outstanding 175,000 shares of Series C 141/4% Senior
Cumulative Preferred Stock Due 2007 ("Series C Preferred Stock"). Dividends
on the Series C Preferred Stock accrue at the rate per share of 141/4% of the
Accumulated Amount (as defined in the applicable Certificate of Designations,
Rights and Preferences ("Certificate of Designations") filed with respect to
the Series C Preferred Stock) per annum, compounded semiannually on each of
June 15 and December 15, but are not payable in cash, except as set forth in
the next sentence. Commencing on the first June 15 or December 15 (each a
"Dividend Payment Date") which is at least six months after the later of
December 15, 2002, and the Specified Debt Satisfaction Date (as defined in
the Certificate of Designations, Rights and Preferences) (the "Cash Payment
Date"), dividends on the Series C Preferred Stock will be payable in cash at
a rate per annum equal to 141/4% of the Accumulated Amount as of the Dividend
Payment Date preceding such date. In the event that the Specified Debt
Satisfaction Date shall not have occurred before December 15, 2002, the rate
otherwise applicable to the Series C Preferred Stock shall be increased by
150 basis points from December 15, 2002, until the Dividend Payment Date
falling on or after the Specified Debt Satisfaction Date.
The Series C Preferred Stock ranks (i) senior to all existing and future
junior stock, including the Series A and Series B Preferred Stock, (ii) on a
parity with all future parity stock; and (iii) junior to all future Senior
Stock. In addition, as equity, the Series C Preferred Stock ranks junior in
right of payment to all indebtedness of the Company and its subsidiaries.
The Series C Preferred Stock is not redeemable prior to December 15,
2002. Thereafter, the Series C Preferred Stock is redeemable at the option of
the Company, in whole or in part, at certain redemption prices set forth in
the Certificate of Designations plus accumulated and unpaid dividends, if
any, to the date of redemption. On December 15, 2002, the Company will be
required to redeem the Series C Preferred Stock at a price equal to the
Accumulated Amount thereof plus accumulated and unpaid dividends, if any, out
of funds legally available therefor.
On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, the Company may, at its option, exchange all but not less
than all of the shares of the Series C Preferred Stock then outstanding for
debentures ("Exchange Debentures") in an aggregate Accumulated Amount equal
to the aggregate Accumulated Amount of the shares of Series C Preferred Stock
outstanding at the time of such exchange, plus accumulated and unpaid
dividends to the date of exchange.
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 July 27, 1998 all dealers effecting
transactions in the New Equipment Notes may be required to deliver a
prospectus.
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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.
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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