UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________________ to _____________________
Commission File Number: 1-10726
WINSTAR COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3585278
- ---------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
230 Park Ave., Suite 2700, New York, NY 10169
(Address of principal executive offices)
(212) 584-4000
(Registrant's telephone number)
-----------------------
(Former name, former address and former fiscal year end
if changed since last report)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
State the number of shares outstanding of each of the issuer's classes of common
stock, as of May 14, 1997: 32,969,538
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PART I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements PAGE
<S> <C>
Unaudited Condensed Consolidated Balance Sheets - December 31, 1996
and March 31, 1997..................................................................................3
Unaudited Condensed Consolidated Statements of Operations - three
months ended March 31, 1996 and 1997................................................................4
Unaudited Condensed Consolidated Statements of Cash Flows - three
months ended March 31, 1996 and 1997................................................................5
Notes to Condensed Consolidated Financial Statements................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................................10
PART II. Other Information...................................................................................18
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures........................................................................................................20
</TABLE>
2
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1996 1997
----- -----
(unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 95,490 $ 375,757
Short-term investments 26,997 37,717
------------- -------------
Cash, cash equivalents and short-term investments 122,487 413,474
Investment in equity securities 688 376
Accounts receivable, net of allowance for doubtful accounts 13,150 15,149
Inventories 5,009 6,361
Prepaid expenses and other current assets 15,969 11,804
Net assets of discontinued operations 3,814 3,953
-------------- --------------
Total current assets 161,117 451,117
Property and equipment, net 62,572 93,789
Licenses, net 27,434 166,024
Intangible assets, net 12,955 12,651
Deferred financing costs 10,535 20,539
Other assets 4,176 4,749
-------------- --------------
Total assets $ 278,789 $ 748,869
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt $ 19,901 $ 19,492
Accounts payable and accrued expenses 29,442 32,269
Current portion of capitalized lease obligations 3,110 3,603
-------------- --------------
Total current liabilities 52,453 55,364
Capitalized lease obligations, less current portion 10,846 12,991
Long-term debt, less current portion 265,161 574,429
Deferred income taxes -- 26,500
------------- -------------
Total liabilities 328,460 669,284
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock -- 40
Common stock, par value $.01; authorized 75,000 shares, issued
28,989 and 32,796, outstanding 28,989 and 32,796, respectively 290 328
Additional paid-in capital 75,436 246,902
Accumulated deficit (125,034) (167,010)
------------- ------------
(49,308) 80,260
Unrealized loss on investments (363) (675)
---------------- ----------------
Total stockholders' equity (deficit) (49,671) 79,585
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 278,789 $ 748,869
=========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
WINSTAR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1996 1997
------ ------
<S> <C> <C>
Operating revenues
Telecommunications services - commercial $ 74 $ 4,455
Telecommunications services - residential 10,143 2,608
Information services 771 6,014
-------------- -------------
Total operating revenues 10,988 13,077
------------ ------------
Operating expenses
Cost of services and products 6,678 12,959
Selling, general and administrative expenses 8,845 29,553
Depreciation and amortization 492 3,501
-------------- ------------
Total operating expenses 16,015 46,013
------------ -----------
Operating loss (5,027) (32,936)
Other expense
Interest expense (8,643) (10,798)
Interest income 3,108 2,235
------------- ------------
Net loss from continuing operations (10,562) (41,499)
Net loss from discontinued operations (137) (477)
-------------- -------------
Net loss (10,699) (41,976)
============ ===========
Net loss per share from continuing operations $ (0.39) $ (1.27)
Net loss per share from discontinued operations (0.00) (0.02)
-------------- -------------
Net loss per share $ (0.39) $ (1.29)
============= ============
Weighted average shares outstanding 27,214 32,610
============ ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
WINSTAR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1996 1997
------ ------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (10,699) $ (41,976)
Adjustments to reconcile net loss to net cash used in
operating activities:
Net loss from discontinued operations 137 477
Depreciation and amortization 951 3,791
Provision for doubtful accounts 381 699
Non cash interest expense 7,854 9,691
(Increase) decrease in operating assets:
Accounts receivable (1,516) (2,696)
Inventories 189 (1,352)
Prepaid expenses and other current assets 656 (306)
Other assets (125) (258)
Increase in accounts payable and accrued expenses (1,442) 2,794
Net cash used in discontinued operations (136) (617)
------------- --------------
Net cash used in operating activities (3,750) (29,753)
------------ ------------
Cash flows from investing activities:
Decrease (increase) in short-term investments, net 46,222 (10,720)
Purchase of property and equipment, net (2,471) (32,380)
Acquisitions -- (34,917)
Other, net (834) 40
-------------- ---------------
Net cash provided by (used in) investing activities 42,917 (77,977)
----------- ------------
Cash flows from financing activities:
(Repayments of) proceeds from long-term debt, net (657) 288,818
Net proceeds from equity transactions 124 96,644
Proceeds from equipment lease financing -- 3,347
Payment of capital lease obligations (309) (709)
Other, net (304) (103)
-------------- --------------
Net cash (used in) provided by financing activities (1,146) 387,997
------------- ----------
Net increase in cash and cash equivalents 38,021 280,267
Cash and cash equivalents at beginning of period 138,106 95,490
---------- -----------
Cash and cash equivalents at end of period 176,127 375,757
Short-term investments at end of period 27,373 37,717
----------- -----------
Cash, cash equivalents and short-term investments at end of period $ 203,500 $ 413,474
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
WINSTAR COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1997
(unaudited)
1. Basis of Presentation
WinStar Communications, Inc. ("WinStar") 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 FiberSM") and a switch-based infrastructure, WinStar 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"). WinStar also offers a variety of facilities-based
broadband, high-capacity local access and digital network services ("Carrier
Services") to other telecommunications services providers on a wholesale basis.
WinStar has three operating units conducting business primarily through the
following wholly owned subsidiaries:
o WinStar Telecommunications, Inc. ("WinStar Telecom") is a CLEC providing
competitive local, long distance telephone and Internet services as an
alternative to local telephone companies.
o WinStar Wireless, Inc. ("WinStar Wireless") markets the Company's Carrier
Services to long distance carriers, other competitive access providers
("CAPs"), mobile communications companies, local telephone companies, cable
television operators, Internet access providers, end users, and other
customers with broadband local telecommunications needs.
o WinStar New Media Company, Inc. ("WinStar New Media") acquires rights to
and distributes information services and entertainment content as a
complement to the Company's telecommunications activities.
The condensed consolidated financial statements presented herein include the
accounts of WinStar and its subsidiaries, including WinStar Telecom, WinStar
Wireless, WinStar New Media and, as a discontinued operation, WinStar Global
Products, Inc. ("Global Products"), (collectively, the "Company"). All material
inter-company transactions and accounts have been eliminated in consolidation.
The accounts have been prepared by the Company without audit.
- ------------------------------------------
Wireless Fiber SM is a service mark of WinStar Communications, Inc.
6
<PAGE>
WINSTAR COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1997
(unaudited)
However, the foregoing statements contain all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of the Company's
management, necessary to present fairly the financial position of the Company as
of March 31, 1997, the statements of operations for the three months ended March
31, 1996 and 1997, and the statements of cash flows for the three months ended
March 31, 1996 and 1997.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1996.
The unaudited financial statements for the three months ended March 31, 1996
reflect certain reclassifications such that they conform to the current period
presentation.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results of operations for the year ending December
31, 1997.
2. Acquisition of Milliwave Limited Partnership
On January 2, 1997, a subsidiary of the Company merged with the corporate
shareholders of Milliwave Limited Partnership ("Milliwave"), a large holder of
38 GHz licenses in the United States, covering 160 million people in more than
80 major markets. The merger consideration paid by the Company to the
shareholders of the corporate partners of Milliwave was $116 million ($40.7
million in cash and 3.6 million shares of the Company's common stock, which had
an aggregate market value of $75 million). Pursuant to a registration rights
agreement, the Company agreed to register such shares of common stock for resale
prior to January 1, 1998. The merger was treated as a "purchase" for accounting
purposes with the purchase price principally allocated to licenses. In addition,
approximately $26.5 million of deferred tax liabilities were recorded in
connection with the acquisition, with a corresponding allocation to licenses,
which will be amortized on a straight-line basis over 40 years. The accounts of
Milliwave have been consolidated into the Company's financial statements as of
the date of acquisition. Milliwave had minimal operations prior to its merger
into the Company, and therefore no pro forma information is presented.
3. Agreement to Purchase Additional Licenses
On January 28, 1997, the Company executed agreements to acquire 47 additional 38
GHz licenses, subject to FCC approval. The total purchase price for the licenses
will be approximately $16 million, payable in the Company's common stock, which
will be priced at the time of closing, or under certain circumstances, at the
Company's option, in cash. The acquisitions are expected to close within
approximately one year of the date of such agreements. In addition, the Company
agreed to purchase additional 38 GHz licenses, subject to FCC approval, which
may be granted with respect to certain license applications currently on file
with the FCC.
4. Issuance of Convertible Preferred Stock
On February 11, 1997, the Company sold 4 million shares of 6% Series A
cumulative convertible preferred stock, par value $0.01, and warrants to
purchase 1.6 million shares of common stock of the Company in a private
placement for gross aggregate proceeds of $100 million ("Preferred Stock
Placement"). The preferred stock earns a 6% annual dividend, payable quarterly
in cash or in kind, at the Company's option.
Beginning on August 11, 1997, 50% of the outstanding preferred stock becomes
convertible into common stock at the lesser of $25 and the average closing sale
price of the Company's common stock for the twenty trading days preceding
7
<PAGE>
WINSTAR COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1997
(unaudited)
conversion. The remainder of the preferred stock becomes convertible on February
11, 1998, at the lesser of $25 per share and the average closing sale price of
the Company's common stock for the twenty trading days preceding February 11,
1998. If such conversion price is less than $15 per share, the Company may, in
lieu of conversion, elect to pay 110% of the liquidation value in cash. On
February 11, 2002, any preferred stock still outstanding will be automatically
converted into shares of the Company's common stock, unless the Company elects
to pay, in lieu of conversion, the liquidation value in cash.
The warrants are exercisable at $25 per share, and expire on February 11, 2002.
The Company has the right to call the warrants after February 11, 2001, if the
Company's common stock price has exceeded $40 on each of the previous twenty
trading days.
The Company is required to use its best efforts to file, and have declared
effective by August 15, 1997, a registration statement covering the preferred
stock and related warrants. In addition, the Company is required to file a
registration statement covering the common stock underlying the convertible
preferred stock within 30 days after demand is made by a holder thereof and to
have such registration statement declared effective within 90 days after such
demand. Such a demand was made by a holder, as of May 11, 1997. The Company's
dividend obligation on the preferred stock at March 31, 1997 was paid in kind.
5. Debt Placement
On March 18, 1997, the Company and a wholly owned subsidiary of the Company
issued an aggregate of $300 million of notes in an institutional private
placement (the "1997 Debt Placement"). In addition, the Company obtained a
commitment for an additional $150 million facility which may be drawn by the
Company on March 31, 1999, subject to certain operating and financial criteria.
The 1997 Debt Placement consisted of (i) $100 million of the Company's 14.5%
Senior Deferred Interest Notes due 2005 (the "New Senior Notes"), ranking pari
passu with the Company's Senior Discount Notes due 2005, and (ii) $200 million
of 12.5% Guaranteed Senior Secured Notes (the "Senior Secured Notes") which were
issued by a wholly owned subsidiary and are unconditionally guaranteed by the
Company. Interest on the New Senior Notes will accrue and compound semiannually
through October 15, 2000, but will not be payable in cash. Interest will be
payable on the New Senior Notes each April 15 and October 15 commencing April
15, 2001, through final maturity in 2005. Interest on the Senior Secured Notes
is payable semiannually through maturity.
Under the terms of the 1997 Debt Placement, the Company is obligated to
consummate an exchange offer with respect to the New Senior Notes and the Senior
Secured Notes whereby these notes will be exchanged for new notes (the "New
Notes") which will be identical in every respect to the original New Senior
Notes and Senior Secured Notes except that the New Notes will be registered
under the Securities Act of 1933. The terms of the 1997 Debt Placement also
place certain restrictions on the ability of the Company to pay dividends or
make other restricted payments, incur additional indebtedness, issue guarantees,
sell assets, or enter into certain other specified transactions.
6. Discontinued Operation - WinStar Global Products, Inc.
On May 13, 1997, a formal plan of disposal for the Company's consumer products
subsidiary, Global Products, was approved by the Board of Directors, and it is
anticipated that the disposal will be completed within the next 12 months. The
Company does not expect to incur a loss on the disposition of Global Products.
The disposal of Global Products has been accounted for as a discontinued
operation and, accordingly, its net assets have been segregated from continuing
operations in the accompanying condensed consolidated balance sheets, and its
operating results are segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows. Information
relating to the discontinued operations of Global Products is as follows (in
thousands of dollars):
8
<PAGE>
WINSTAR COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
1996 1997
---- ----
<S> <C> <C>
Operating revenues $ 3,521 $ 3,692
------- -------
Cost of services and products 2,374 2,550
Selling, general & administrative 1,008 1,226
Depreciation and amortization 64 58
---------- -----------
Total operating expenses 3,446 3,874
------ ---------
Operating income (loss) 75 (182)
Interest Expense (212) (295)
------- ----------
Net Loss $ (137) $ (477)
======= ========
</TABLE>
9
<PAGE>
WINSTAR COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1997
(unaudited)
Net assets of the discontinued operations of Global Products at December 31,
1996 and March 31, 1997 are composed of the following (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------------- ------------
<S> <C> <C>
Assets:
Accounts Receivable, net $ 4,499 $ 3,619
Inventories 8,606 8,898
Other Assets 2,143 2,326
---------- ----------
Total Assets 15,248 14,843
========= =========
Liabilities:
Current Liabilities 3,102 2,193
Other Liabilities 8,332 8,697
--------- ----------
Total Liabilities 11,434 10,890
-------- ---------
Net Assets $ 3,814 $ 3,953
======== =========
</TABLE>
7. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and, if applicable,
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average common shares
outstanding and dilutive potential common shares such as stock options. The
adoption of this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company Overview
The Company provides a full range of telecommunications services as a CLEC,
including local, long distance and Internet access services, to small and
medium-sized businesses in major metropolitan areas in the United States. By
exploiting its Wireless Fiber services and a switch-based infrastructure, the
Company seeks to distinguish itself as a facilities-based, value-added provider
of high-capacity telecommunications services and an attractive alternative to
established providers, such as the RBOCs. The Company also utilizes its Wireless
Fiber capacity to provide its Carrier Services, consisting of a variety of
facilities-based broadband, high-capacity local access and digital network
services, to other telecommunications services providers. The Company acquires
rights to and distributes information services and entertainment content as a
complement to its telecommunications operations. The Company also operates a
nonstrategic consumer products company, which is treated as a discontinued
operation in this report.
During the third quarter of 1996, the Company launched its CLEC offering in New
York City and has since introduced its local telecommunications services in 12
additional markets. The Company intends, during the next several years, to
introduce its local exchange services in all of the other major metropolitan
areas where it is licensed to provide 38 GHz services over four or more 100 MHZ
channels.
The Company also provides wholesale Carrier Services that enable other carriers
to expand their networks or meet end user demand via the Company's digital
wireless capacity in the 38 GHz portion of the radio spectrum. The Company
currently markets these services in its licensed areas to RBOCs and other LECs,
IXCs, CAPs and CLECs, PCS and CMRS providers, cable companies, Internet service
providers, value-added resellers and systems integrators. Additionally, the
Company has signed multi-year master service agreements with a number of large
industry customers, including Pacific Bell and American Communications Services,
each of which has forecasted demand for several thousand circuits, including T-1
circuits (equivalent capacity of 24 voice-grade circuits) and DS-3 circuits
(equivalent capacity of 28 T-1 circuits). The Company's wholesale Carrier
Services business also will serve a significant portion of the local access
needs of the Company's CLEC business, including backbone interconnections of hub
and main switch sites, and the origination and termination of local traffic for
the Company's local exchange customers.
In connection with the Company's rollout of its local telecommunications
services, the Company intends to provide business information services to its
CLEC customers. It is currently anticipated that these services will be
delivered through the Company's direct sales force and will be structured as
tiered-channels of licensed and customized information, which will serve as a
one-stop, easy-to-use desktop information resource for the Company's business
customers.
11
<PAGE>
The Company significantly expanded its spectrum holdings ("Wireless Licenses")
during the past year with the completion of the acquisition of Milliwave and the
acquisition of Local Area Telecommunications, Inc. The Company also has entered
into certain agreements to purchase an aggregate of 47 licenses in the 38 GHz
spectrum, and, if granted, and subject to FCC consent, up to 53 additional such
licenses. Currently, the Wireless Licenses allow the Company to provide Wireless
Fiber services in 47 of the 50 most populated MSAs in the United States. The
Wireless Licenses currently cover more than 100 cities with populations
exceeding 100,000 each, encompass an aggregate population of approximately 172
million people and address approximately 600 million channels pops (population
coverage multiplied by the number of 100 MHZ channels). Upon completion of all
pending acquisitions, which are subject to FCC consent, the Company's total
population coverage will increase to approximately 180 million, its total
channel pops will grow to approximately 650 million and the Wireless Licenses
will allow the Company to provide services in 49 of the 50 most populated MSAs
in the United States.
Revenues
Revenues generated by the operations of the Company's telecommunications
businesses will represent an increasing percentage of the Company's consolidated
revenues as the Company expands into the local telecommunications services
market. Factors driving the mix of revenues are as follows:
CLEC Services. CLEC revenues are driven primarily by the number of customer
lines installed and in service. Customers generally are billed a flat monthly
fee and/or a per-minute usage charge or fraction thereof. Revenue growth depends
on the introduction of local exchange services in new cities, the purchase and
installation of switches to service those areas, the addition of new customers
and the sale of bundled services, such as long distance, Internet access and
Internet-related services.
The Company intends to develop other anticipated sources of revenue including
resale agreements for CMRS, advanced data, broadband data transmission and video
conferencing services. The Company believes that as its local exchange services
business grows, such business will become the most significant component of the
Company's revenues. Revenues from this segment were approximately $2.0 million
in the quarter ended March 31, 1997 versus $502,000 in the fourth quarter of
1996, and $84,000 in the third quarter of 1996. It has already installed its own
switches in New York, Chicago, Los Angeles and Boston, with San Diego scheduled
for June and Newark scheduled for switch service running off the New York switch
in July.
The Company will cover more than a dozen markets with switched services by the
end of 1997 and plans to cover all of the top 30 U.S. markets with switched
services in 1999.
Carrier Services. Carrier Services revenues are driven primarily by the number
and capacity (i.e., T-1s or DS-3s) of Wireless Fiber links in service. A key
measure of progress for the Company is its installed and available Wireless
Fiber capacity. The Company had more than 110,000 voice-grade equivalent
circuits in place as of March 31, 1997. Customers generally are billed at a
fixed monthly rate per unit of capacity. Another key measure of progress is the
number of buildings for which the Company has secured roof rights to install 38
GHz transceivers ("Roof Rights"). The Company's Roof Rights have been increasing
in number and declining in average cost. Currently, the Company has secured Roof
Rights on approximately 1,200 buildings.
Residential Long Distance Services. Residential long distance telecommunications
services revenues are driven principally by the size and type of the customer
base. Customers are billed on the basis of minutes or fractions thereof. The
Company is focusing on the sale of long distance services to small and
medium-sized business customers as part of its CLEC business and is not
generally marketing long distance services to residential customers on an active
basis. As a result, the Company is allowing its revenues from residential long
distance service to decline through attrition, as it focuses on its core small
to medium-sized business market.
Information and Content. Information and content revenues are generated
principally by: (i) sales of content and related
12
<PAGE>
services to traditional content customers, such as cable networks and radio
stations; (ii) sales of content to new media distribution channels, such as
on-line services; (iii) sales of advertising; and (iv) the bundling of content
with the Company's telecommunications services. Revenues also are driven by the
size and quality of the Company's programming rights and the release of new
programs, which affects quarter to quarter comparability.
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
Revenues of the Company's operating segments are as follows (in millions):
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1996 1997
----- -----
<S> <C> <C>
Telecommunications Services:
Carrier Services $ 0.1 $2.5
CLEC Services 2.0
Residential Long Distance 10.1 2.6
---- -----
10.2 7.1
Information Services 0.8 6.0
----- -----
Total Revenues $11.0 $13.1
==== ====
</TABLE>
Revenues increased by $2.1 million, or 19.1%, for the three months ended March
31, 1997, to $13.1 million, from $11.0 million for the three months ended March
31, 1996. These revenues exclude those from WinStar Global Products, which has
been reclassified as a discontinued operation. This increase was attributable to
increased revenues generated by the Company's CLEC and carrier services
business, as well as its information services, partially offset by an expected
decrease in residential long distance revenues.
Revenues from CLEC services were $2.0 million in the quarter ended March 31,
1997, compared to $502,000 in the quarter ended December 31, 1996. The CLEC
business commenced operations in the second quarter of 1996. At the end of the
first quarter of 1997, the CLEC business had installed over 13,000 lines, up
from 4,417 at the end of 1996. The rate of installation continues to grow and is
currently running at more than 5,000 per month. As of March 31, 1997, the
annualized revenues from the CLEC business were at $10.1 million.
Revenues from carrier services increased $2.4 million to $2.5 million in the
quarter ended March 31, 1997, as compared to $0.1 million in the quarter ended
March 31, 1996. The revenue increase is the result of the growing number of
billed circuits, along with installation revenue and equipment sales related to
contract services provided.
WinStar's residential long distance revenues decreased $7.5 million to $2.6
million in the quarter ended March 31, 1997, compared to $10.1 million in the
quarter ended March 31, 1996. This decrease was the result of WinStar's focus on
its core business of selling communications services to business customers and
to other carriers.
Revenues from information services increased by $5.2 million, or 650%, for the
three months ended March 31, 1997, to $6.0 million, from $0.8 million for the
three months ended March 31, 1996, due to continued internal growth of
production and distribution of entertainment content, increases in advertising
revenues and acquisitions.
Cost of services and products increased by $6.3 million, or 94.0%, for the three
months ended March 31, 1997, to $13.0 million, from $6.7 million for the three
months ended March 31, 1996. As a percentage of sales, cost of services and
products in the quarter ended March 31,1997 was 99.1%, compared with 60.7% in
the quarter ended March 31, 1996, resulting from increasing operating costs from
the
13
<PAGE>
continued expansion of the Company's local telecommunications network, in
addition to decreased margins in the Company's residential long distance
business.
Selling, general and administrative expense increased by $20.7 million to $29.6
million for the three months ended March 31, 1997, from $8.8 million for the
three months ended March 31, 1996. Selling, general and administrative expense
increased predominantly in the telecommunications segment as the Company
continued to hire sales, marketing and related support personnel in connection
with the accelerated roll out of its CLEC operations, which had no employees
last year and over 500 at March 31, 1997, and increased spending on related
advertising and marketing of services in new and existing cities where the
Company offered its services.
For the reasons noted above, the operating loss for the three months ended March
31, 1997, was $32.9 million, compared with an operating loss of $5.0 million for
the three months ended March 31, 1996.
Depreciation and amortization expense increased by $3.0 million for the three
months ended March 31, 1997, to $3.5 million, from $0.5 million for the three
months ended March 31, 1996 principally resulting from the Company's acquisition
of switches, radios and other equipment in connection with its
telecommunications network buildout.
Interest expense increased by $2.2 million, or 25.6%, for the three months ended
March 31, 1997, to $10.8 million, from $8.6 million for the three months ended
March 31, 1996. The increase was principally attributable to the debt issued in
the 1995 and 1997 Debt Placements. $9.3 million of the $10.8 million interest
expense for the quarter is not payable in cash until after 1999.
Interest income decreased by $0.9 million, or 29.0%, for the three months ended
March 31, 1997, to $2.2 million, from $3.1 million for the three months ended
March 31, 1996. Proceeds from the Company's Preferred Stock Placement and 1997
Debt Placement are expected to generate increased interest income in the near
term.
For the reasons noted above, the Company reported a net loss of $42.0 million
for the three months ended March 31, 1997, compared to a net loss of $10.7
million for the three months ended March 31, 1996.
Liquidity and Capital Resources
In February 1997, the Company sold 4,000,000 shares of its 6% Series A
Cumulative Preferred Stock and warrants to purchase 1,600,000 shares of Common
Stock in the Preferred Stock Placement, pursuant to which the Company and one of
its subsidiaries realized net proceeds of approximately $96 million. In
addition, in March 1997, the Company and one of its subsidiaries sold an
aggregate of $300 million principal amount of notes in the 1997 Debt Placement,
pursuant to which they realized net proceeds of approximately $290.5 million.
In connection with the 1997 Debt Placement, the Company also obtained a
commitment for a $150 million facility from affiliates of Credit Suisse First
Boston and Bankers Trust ("Facility"), which, subject to the Company satisfying
various operating and financial criteria, may be drawn by the Company on March
31, 1999. At March 31, 1997, the Company had approximately $413.5 million in
cash, cash equivalents and short term investments, exclusive of the $150 million
commitment, approximately $185 million of which is to finance equipment in
connection with the Company's rollout of its telecommunications infrastructure.
In April 1997, the Company repaid certain indebtedness incurred in the
acquisition of Local Area Telecommunications, Inc., including accrued interest
thereon, aggregating approximately $17.8 million.
The Company has incurred significant operating and net losses, due in large part
to the development of its telecommunications services business, and anticipates
that such losses will increase over the near term as the Company accelerates its
growth strategy. A significant portion of the Company's increased capital
requirements will result from the rollout of the Company's CLEC business. The
Company is building a direct sales force, having opened sales offices in
thirteen major cities, and is in the process of expanding into other
metropolitan areas. Additionally, the Company
14
<PAGE>
is in the process of ordering and installing switching and other network
equipment to be placed in its key markets. Historically, the Company has funded
its operating losses and capital expenditures through public and private
offerings of debt and equity securities and from credit and lease facilities.
Cash used to fund negative EBITDA during the three months ended March 31, 1997
was $29.4 million, and purchases of property and equipment were $32.4 million.
At March 31, 1997 working capital was $395.8 million, including cash, cash
equivalents and short-term investments of $413.5 million, as compared to working
capital and cash, cash equivalents and short-term investments at December 31,
1996 of $115.6 million and $122.5 million, respectively. As a result of the
acceleration of the development and expansion of the Company's
telecommunications business, the Company's current plans are for capital
expenditures of approximately $500 million over the next three years. The amount
of capital required to execute this plan is a function of the speed at which the
plan is executed. The Company believes that its existing cash, the Facility, a
limited amount of lease financing that it believes is readily available and
receivable financing will provide sufficient capital to finance its planned
capital expenditures and to reach EBITDA positive. In the event this is untrue,
the Company may elect to slow the speed or narrow the focus of this expansion or
seek to raise sufficient amounts of additional capital on acceptable terms to
implement its plan. In the event the Company's plans or assumptions change or
prove to be inaccurate, or if the Company consummates any acquisitions of
businesses or assets (including additional spectrum licenses, by auction or
otherwise), the Company may be required to seek additional sources of capital
sooner than currently anticipated.
The Company has commitments during the next 12 months to purchase $22.2 million
of telecommunications capital equipment.
Forward-Looking Statements
When used in this and in future filings by the Company with the SEC, in the
Company's press releases and in oral statements made with the approval of an
authorized executive officer of the Company, the words or phrases "will likely
result," expects," "plans," "will continue," "is anticipated," "estimated,"
"project" or "outlook" or similar expressions (including confirmations by an
authorized executive officer of the Company of any such expressions made by a
third party with respect to the Company) are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which speak
only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those
15
<PAGE>
presently anticipated or projected. Factors that may cause actual results to
differ materially from those contemplated by such forward-looking statements
include, among others, the following: (a) the Company's ability to service its
debt or to obtain financing for the buildout of its telecommunications network;
(b) the Company's ability to attract and retain a sufficient revenue-generating
customer base; (c) competitive pressures in the telecommunications industry; and
(d) general economic conditions. The Company has no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
16
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
(a) The following table sets forth certain information with respect to
sales of equity securities by the Company (other than stock options granted to
its employees and others) during the quarter ended March 31, 1997, without
registration of such sales under the Securities Act:
<TABLE>
<CAPTION>
Consideration received and
description of underwriting Exemption from
Number of or other discounts to market registration claimed
Date of sale Title of security securities sold price afforded to purchasers
- ------------ ----------------- ---------------- ---------------------------- ----------------------
<S> <C> <C> <C> <C>
2/11/97 6% Series A Cumulative 4,000,000 * Section 4(2) and
Convertible Preferred Stock Regulation D
("Series A Stock")
2/11/97 Warrants to purchase shares 1,600,000 * Section 4(2) and
of Common Stock Regulation D
("Warrants")
<FN>
* The Company issued 4 million shares of Series A Stock and 1,600,000 Warrants,
of which the Company sold 3,584,000 shares of Series A Stock and 1,433,600
Warrants and one of the Company's subsidiaries sold 416,000 shares of Series A
Stock and 166,400 Warrants, each to a limited number of institutional investors.
The Company and such subsidiary received aggregate net proceeds from the sale of
these securities of approximately $96 million. The placement agent in such
offering was paid aggregate fees and commissions of approximately $4 million.
The Series A Stock ranks senior to the Company's Common Stock with respect to
the payment of dividends and as to the distribution of assets upon liquidation ,
dissolution or winding up of the Company. See Note 4 (Issuance of Convertible
Preferred Stock) to the Company's Condensed Consolidated Financial Statements
included elsewhere in this Report for a more detailed description of the terms
of the Series A Stock.
</FN>
</TABLE>
(b) The following table sets forth certain information with respect to
grant by the Company of stock options to its employees and others during the
quarter ended March 31, 1997, without registration of such securities under the
Securities Act:
<TABLE>
<CAPTION>
Consideration received
and description of
underwriting or other If option, warrant or
Number of discounts to market Exemption from convertible security,
options price afforded to registration terms of exercise or
Date of sale Title of security granted purchasers claimed conversion
- ------------- ------------------ --------- ------------------------ -------------- ---------------------------
<S> <C> <C> <C> <C> <C>
1/97 - 3/97 options to 1,130,050 options granted - no Section 4(2) exercisable for periods
purchase consideration received of five or ten years from
common stock by the Company until grant at exercise prices
granted to exercise ranging from $10.94 to
employees and $21.00
directors
</TABLE>
17
<PAGE>
Item 5. Other Information
On May 13, 1997, a formal plan of disposal for the Company's consumer products
subsidiary, Global Products, was approved by the Board of Directors, and it is
anticipated that the disposal will be completed within the next 12 months. The
Company does not expect to incur a loss on the disposition of Global Products.
Item 6. Exhibits and Reports on Form 8-K
(1) Current Report on Form 8-K filed January 17, 1997.
(2) Current Report on Form 8-K filed February 14, 1997.
(3) Current Report on Form 8-K filed February 27, 1997.
(4) Current Report on Form 8-K filed March 27, 1997.
18
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
WinStar Communications, Inc.
Registrant
By: /s/William J. Rouhana, Jr.
- --------------------------------------
William J. Rouhana, Jr.
Chief Executive Officer, Director, and
Chairman of the Board of Directors Dated: May 15, 1997
By: /s/Fredric E. von Stange
- --------------------------------------
Fredric E. von Stange
Director, Executive Vice President, Chief
Financial Officer (and principal accounting
officer) Dated: May 15, 1997
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-31-1997
<CASH> 413,474,000
<SECURITIES> 376,000
<RECEIVABLES> 15,149,000
<ALLOWANCES> 0
<INVENTORY> 6,361,000
<CURRENT-ASSETS> 451,117,000
<PP&E> 93,789,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 748,869,000
<CURRENT-LIABILITIES> 55,364,000
<BONDS> 587,420,000
<COMMON> 328,000
0
40,000
<OTHER-SE> 79,217,000
<TOTAL-LIABILITY-AND-EQUITY> 748,869,000
<SALES> 0
<TOTAL-REVENUES> 15,312,000
<CGS> 0
<TOTAL-COSTS> 12,959,000
<OTHER-EXPENSES> 33,054,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,798,000
<INCOME-PRETAX> (41,499,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,499,000)
<DISCONTINUED> (477,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,976,000)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
<FN>
(1) Receivables are net of allowance for doubtful accounts
(2) PP&E are net of accumulated depreciation
(3) Discontinued reflects operations of WinStar Global Products
(4) Taxes reported on income statement are primarily based on capital, and are
included on the income-tax line
</FN>
<PAGE>
</TABLE>
