<PAGE>
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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to ________________
Commission File Number: 1-10726
WINSTAR COMMUNICATIONS, INC.
----------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3585278
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
230 Park Ave., Suite 2700, New York, NY 10169
----------------------------------------------
(Address of principal executive offices)
(212) 584-4000
--------------
(Registrant's telephone number)
_______________________
(Former name, former address and former fiscal year end
if changed since last report)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes / X / No / /
State the number of shares outstanding of each of the issuer's classes of common
stock, as of August 1, 1997: 33,063,705
1
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance
Sheets - December 31, 1996 and June 30, 1997 3
Unaudited Condensed Consolidated Statements
of Operations - three and six months ended
June 30, 1996 and 1997 4
Unaudited Condensed Consolidated Statements
of Cash Flows - six months ended
June 30, 1996 and 1997 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. Other Information 18
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures 20
2
<PAGE>
WINSTAR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ -----------
<S> <C> <C>
Cash and cash equivalents $ 95,490 $ 302,178
Short term investments 26,997 40,973
--------- ---------
Cash, cash equivalents and short term investments 122,487 343,151
Investments in equity securities 688 601
Accounts receivable, net of allowance for
doubtful accounts 13,150 19,517
Inventories 5,009 4,444
Prepaid expenses and other current assets 15,969 19,925
Net assets of discontinued operations 3,814 5,285
--------- ---------
Total current assets 161,117 392,923
Property and equipment, net 62,572 119,831
Licenses, net 27,434 165,904
Intangible assets, net 12,955 12,348
Deferred financing costs 10,535 20,152
Other assets 4,176 4,846
--------- ---------
Total assets $ 278,789 $ 716,004
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt $ 19,901 $ 1,316
Accounts payable and accrued expenses 29,442 45,271
Current portion of capitalized lease obligations 3,110 6,580
--------- ---------
Total current liabilities 52,453 53,167
Capitalized lease obligations, less current portion 10,846 25,984
Long-term debt, less current portion 265,161 587,519
Deferred income taxes - 26,500
--------- ---------
Total liabilities 328,460 693,170
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock - 41
Common stock, par value $.01; authorized 75,000 and
200,000 shares, issued 28,989 and 33,064,
outstanding 28,989 and 33,064, respectively 290 331
Additional paid-in-capital 75,436 248,298
Accumulated deficit (125,034) (225,806)
--------- ---------
(49,308) 22,864
Unrealized loss on investments (363) (30)
--------- ---------
Totoal stockholders' equity (deficit) (49,671) 22,834
--------- ---------
Total liabilities and stockholders' equit (deficit) $ 278,789 $ 716,004
--------- ---------
--------- ---------
</TABLE>
3
<PAGE>
WINSTAR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
--------------------------- ---------------------------
1996 1997 1996 1997
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services - commercial $ 284 $ 5,325 $ 358 $ 9,780
Telecommunications services - residential 10,072 2,353 20,215 4,961
Information services 2,652 8,662 3,423 14,676
----------- ------------ ----------- ------------
Total operating revenues 13,008 16,340 23,996 29,417
----------- ------------ ----------- ------------
Operating expenses
Cost of services and products 9,175 15,908 15,853 28,867
Selling, general and administrative expenses 14,401 39,228 23,246 68,781
Depreciation and amortization 679 4,896 1,171 8,397
----------- ------------ ----------- ------------
Total operating expenses 24,255 60,032 40,270 106,045
----------- ------------ ----------- ------------
Operating loss (11,247) (43,692) (16,274) (76,628)
Other expense
Interest expense (9,007) (20,194) (17,650) (30,992)
Interest income 2,664 5,090 5,772 7,325
----------- ------------ ----------- ------------
Net loss from continuing operations (17,590) (58,796) (28,152) (100,295)
Net loss from discontinued operations (526) - (663) (477)
----------- ------------ ----------- ------------
Net loss $ (18,116) $ (58,796) $ (28,815) $ (100,772)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Net loss applicable to common stockholders $ (18,116) $ (61,142) $ (28,815) $ (103,118)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Net loss per share from continuing operations $ (0.63) $ (1.85) $ (1.03) $ (3.13)
Net loss per share from discontinued operations (0.02) - (0.02) (0.01)
----------- ------------ ----------- ------------
Net loss per share $ (0.65) $ (1.85) $ (1.05) $ (3.14)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Weighted average shares outstanding 27,720 32,967 27,468 32,789
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
WINSTAR COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months ended
June 30,
1996 1997
----------- -----------
Cash flows from operating activities
Net loss $ (28,815) $ (100,770)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations 663 477
Depreciation and amortization 2,940 9,260
Provision for doubtful accounts 804 774
Non cash interest expense 16,156 22,475
(Increase) decrease in operating assets:
Accounts receivable (3,707) (7,142)
Inventories (642) 565
Prepaid expenses and other current assets (6,412) (6,859)
Other assets (578) (1,392)
Increase in accounts payable and accrued
expenses 2,924 15,799
Net cash used in discontinued operations (1,043) (1,947)
---------- -----------
Net cash used in operating activities (17,710) (68,760)
---------- -----------
Cash flows from investing activities:
Decrease (increase) in short-term investments, net (35,418) (13,976)
Purchase of property and equipment, net (10,329) (63,354)
Acquisitions - (34,917)
Other, net (790) 457
---------- -----------
Net cash used in investing activities (46,537) (111,790)
---------- -----------
Cash flows from financing activities:
(Repayments) of proceeds from long-term debt, net (1,314) 270,945
Payment of dividends - -
Net proceeds from equity transactions - 98,087
Proceeds from equipment lease financing 4,195 20,511
Payment of capital lease obligations (668) (1,903)
Other, net (393) (402)
---------- -----------
Net cash provided by financing activities 1,820 387,238
---------- -----------
Net increase in cash and cash equivalents (62,427) 206,688
Cash and cash equivalents at beginning of period 138,027 95,490
---------- -----------
Cash and cash equivalents at end of period 75,600 302,178
Short-term investments at end of period 115,460 40,973
---------- -----------
Cash, cash equivalents and short-term investments
at end of period $ 191,060 $ 343,151
---------- -----------
---------- -----------
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
1. BASIS OF PRESENTATION
WinStar Communications, Inc. ("WinStar") provides a full range of
telecommunications and information services, including, among others, 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 distinguishes 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. Additionally, WinStar 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
Telecommunications, Inc., WinStar Wireless, Inc., WinStar New Media Company,
Inc. and, as a discontinued operation, WinStar Global Products, Inc.
("Global Products"), the Company's consumer products subsidiary,
(and together with such other subsidiaries, the "Company"). All material
inter-company transactions and accounts have been eliminated in consolidation.
The accounts have been prepared by the Company without audit.
However, the foregoing statements contain all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of the Company's
management, necessary to present fairly the financial position of the Company as
of June 30, 1997, the statements of operations for the three and six months
ended June 30, 1996 and 1997, and the statements of cash flows for the six
months ended June 30, 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, and the Company's quarterly report on Form 10-Q
for the three months ended March 31, 1997.
The unaudited financial statements and related footnotes for the three and six
month periods ended June 30, 1996 reflect certain reclassifications such that
they conform to the current period presentation. The results of operations for
the three and six months ended June 30, 1997 are not necessarily indicative of
the results of operations for the year ending December 31, 1997.
- -------------------------------------
Wireless Fiber SM is a service mark of WinStar Communications, Inc.
6
<PAGE>
I. 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 year. 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):
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $ 3,166 $ 2,583 $ 6,687 $ 6,275
-------- -------- -------- --------
Cost of services and products 2,128 1,995 4,502 4,545
Selling, general & administrative
expenses 1,258 1,282 2,266 2,548
Depreciation and amortization 67 58 131 116
-------- -------- -------- --------
Total operating expenses 3,453 3,335 6,899 7,209
-------- -------- -------- --------
Operating (loss) (287) (752) (212) (934)
Interest expense (239) (109) (451) (404)
-------- -------- -------- --------
Net loss $(526) $(861) $(663) $(1,338)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
7
<PAGE>
Net assets of the discontinued operations of Global Products at December 31,
1996 and June 30, 1997 are composed of the following (in thousands of dollars):
December 31, June 30,
1996 1997
---- ----
Assets:
Accounts Receivable, net; $ 4,499 $ 3,018
Inventories 8,606 9,569
Other Assets 2,143 3,085
--------- ---------
Total Assets 15,248 15,672
--------- ---------
Liabilities:
Current Liabilities 3,102 2,143
Other Liabilities 8,332 8,244
--------- ---------
Total Liabilities 11,434 10,387
--------- ---------
Net Assets $ 3,814 $ 5,285
--------- ---------
--------- ---------
3. STOCK OPTION PLANS
On June 26, 1997, stockholders voted to approve an amendment to the Company's
1995 Performance Equity Plan to increase the number of shares available
thereunder for stock option grants by 4,000,000 shares, to a total of 7,500,000
shares.
4. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
Dividends on the 6% Series A Cumulative Convertible Preferred Stock since its
issuance have been paid "in-kind" in additional shares of the Series A
Preferred Stock.
5. NET LOSS PER SHARE
Net loss per share has been calculated by dividing the net loss, after
consideration of Preferred Stock dividends, by the weighted average number of
shares outstanding during each period.
6. CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP.
The Company's wholly-owned subsidiary, WinStar Equipment Corp. ("WEC"), a
special purpose corporation which was formed to facilitate the financing and
purchase of telecommunications equipment and inventory ("designated equipment"),
received $200 million in gross proceeds from the issuance and sale of its 12.5%
Guaranteed Senior Secured Notes in a placement of debt in the first quarter of
1997. WEC has no independent operations other than to function as a leasing
company serving the Company.
8
<PAGE>
Summary financial information of WEC, which is included in the condensed
consolidated financial statements of the Company, is as follows (in thousands):
Balance sheet information at June 30, 1997:
Current assets $181,831
Long term assets $ 23,282
Current liabilities $ 8,576
Long term liabilities $200,000
Statements of operations information for WEC for the three and six month periods
ended June 30, 1997, is as follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1997 1997
---- ----
Gross revenues $ 0 $ 0
Cost of sales 0 0
Interest expense (5,617) (6,450)
Interest income 2,595 2,986
--------- ---------
Net loss $ (3,022) $ (3,464)
--------- ---------
--------- ---------
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.
9
<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 also 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 14
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 MCI. The Company's wholesale
Carrier Services business constructs the network that will serve a significant
portion of the local access and transport needs of the Company's CLEC business,
including the origination and termination of local traffic for the Company's
local exchange customers and backbone interconnections of hub and main switch
sites.
In connection with the Company's rollout of its local telecommunications
services, the Company also will provide business information services to its
CLEC customers. These services will be marketed through the Company's direct
sales force.
10
<PAGE>
The Company significantly expanded its spectrum holdings ("Wireless
Licenses") during the past 12 months with the completion of the acquisitions
of Milliwave, Local Area Telecommunications, Inc., and Pinnacle Nine
Communications, Inc. The Company was also granted four additional licenses
by the FCC, which had been applied for before the FCC stopped accepting new
applications for licenses in late 1995. The Company also has entered into
certain agreements to purchase an aggregate of 62 licenses in the 38 GHz
spectrum, and, if granted, up to 67 additional such licenses, all subject to
FCC consent. Currently, the Wireless Licenses allow the Company to provide
Wireless Fiber services in 49 of the 50 most populated MSAs in the United
States. The Wireless Licenses currently cover more than 100 cities with
populations exceeding 100,000 each, encompass an aggregate population of
approximately 172 million people and address more than 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 more than 675
million and the Wireless Licenses will allow the Company to provide services
in each of the 50 most populated MSAs in the United States.
REVENUES
Revenues generated by the operations of the Company's telecommunications
businesses 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 addition of new customers and the sale of bundled services, such
as long distance, Internet access and Internet-related services, the purchase
and installation of switches to service those areas, and the introduction of
local exchange services in new cities.
The Company intends to develop other anticipated sources of revenue including
resale agreements for CMRS, advanced data, broadband data transmission and video
conferencing services. The Company believes that as its local exchange services
business grows, such business will become the most significant component of the
Company's revenues. Revenues from this segment were approximately $4.0 million
in the quarter ended June 30, 1997, versus $2.0 million in the quarter ended
March 31, 1997, and $502,000 in the fourth quarter of 1996. The Company has
already installed its own switches in New York City (which serves both New York
City and Newark, New Jersey), Chicago, Los Angeles, Boston and San Diego, with
installation of switches in Washington, DC and Dallas scheduled for August.
CARRIER SERVICES. Carrier Services revenues are driven primarily by the number
and capacity (i.e., T-1s or DS-3s) of Wireless Fiber links in service. A key
measure of progress for the Company is its installed and available Wireless
Fiber capacity. The Company had approximately 130,000 voice-grade equivalent
circuits in place as of June 30, 1997, up from approximately 110,000 at 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
11
<PAGE>
roof rights to install 38 GHz transceivers ("Roof Rights"). The Company's Roof
Rights have been increasing in number and declining in average cost. As of June
30, 1997, the Company had secured Roof Rights on over 1,400 buildings.
RESIDENTIAL LONG DISTANCE SERVICES. The Company is focusing on the sale of long
distance services to small and medium-sized business customers as part of its
CLEC business and is not generally marketing long distance services to
residential customers on an active basis. As a result, the Company is allowing
its revenues from residential long distance service to decline through
attrition, as it focuses on its core small to medium-sized business market.
INFORMATION AND CONTENT. Information and content revenues are generated
principally by: (i) sales of content and related services to traditional
customers, such as cable networks and radio stations; (ii) sales to new media
distribution channels, such as on-line services; (iii) advertising sales; and
(iv) the bundling of content with the Company's telecommunications services.
Revenues also are driven by the amount and quality of the Company's available
program rights during each quarter and some seasonality of sales, which affect
quarter-to-quarter comparability.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues of the Company's operating segments are as follows (in millions):
THREE MONTHS ENDED
JUNE 30,
--------
1996 1997
---- ----
Telecommunications Services:
Carrier Services $ 0.3 $ 1.3
CLEC Services -- 4.0
Residential Long Distance 10.1 2.3
------- -------
10.4 7.6
Information Services 2.6 8.7
------- -------
Total Revenues $ 13.0 $ 16.3
------- -------
------- -------
Revenues increased by $3.3 million, or 25.6%, for the three months ended June
30, 1997, to $16.3 million, from $13.0 million for the three months ended June
30, 1996. These revenues exclude those from WinStar Global Products, which has
been reclassified as a discontinued operation. This increase was attributable
to increased revenues generated by the Company's CLEC, carrier services and
information services businesses, partially offset by the expected decrease in
residential long distance revenues.
Revenues from CLEC services, which include all commercial end user customer
telecommunication revenues, were $4.0 million in the quarter ended June 30,
1997, compared to $2.0 million in the quarter ended March 31, 1997. The CLEC
business commenced operations in the second quarter of 1996. As of June 30,
1997, the CLEC business had installed over 30,000
12
<PAGE>
lines, up from approximately 13,000 at March 31, 1997 and 4,417 at December 31,
1996. The rate of installation continues to grow and is currently running at
more than 5,000 lines per month. As of June 30, 1997, the annualized revenues
from the CLEC business were $19.2 million.
Revenues from carrier services increased $1.0 million to $1.3 million in the
quarter ended June 30, 1997, as compared to $0.3 million in the quarter ended
June 30, 1996. The revenue increase is the result of the growing number of
billed circuits, along with installation revenue and equipment sales related to
contract services provided.
WinStar's residential long distance revenues decreased $7.8 million to $2.3
million in the quarter ended June 30, 1997, compared to $10.1 million in the
quarter ended June 30, 1996. This decrease was the result of WinStar's focus on
its core business of selling communications services to business customers and
to other carriers.
Revenues from information services increased by $6.1 million, or 227%, for the
three months ended June 30, 1997, to $8.7 million, from $2.6 million for the
three months ended June 30, 1996, due to continued internal growth and
acquisitions.
Cost of services and products increased by $6.7 million, or 73%, for the three
months ended June 30, 1997, to $15.9 million, from $9.2 million for the three
months ended June 30, 1996. As a percentage of sales, cost of services and
products in the quarter ended June 30, 1997 was
97.3%, compared with 70.5% in the quarter ended June 30, 1996, as a result of
increasing network costs from the continued expansion of the Company's local
telecommunications business.
Selling, general and administrative expense increased by $24.8 million to $39.2
million for the three months ended June 30, 1997, from $14.4 million for the
three months ended June 30, 1996. The Company continued to hire sales, marketing
and related support personnel in connection with the accelerated roll out of its
CLEC operations, which had only a few employees at June 30, 1996 and
approximately 750 at June 30, 1997. In addition, the Company increased spending
on related advertising and marketing of its CLEC services.
For the reasons noted above, the operating loss for the three months ended June
30, 1997, was $43.7 million, compared with an operating loss of $11.2 million
for the three months ended June 30, 1996.
Depreciation and amortization expense increased by $4.2 million for the three
months ended June 30, 1997, to $4.9 million, from $0.7 million for the three
months ended June 30, 1996 principally resulting from the Company's acquisition
and deployment of switches, radios and other equipment in connection with its
telecommunications network buildout.
Interest expense increased by $11.2 million, or 124%, for the three months ended
June 30, 1997, to $20.2 million, from $9.0 million for the three months ended
June 30, 1996. The increase was principally attributable to the proceeds from
the Company's issuance of debt in the first quarter of 1997. $13.1 million of
the $20.2 million interest expense for the quarter is not payable in cash until
after 1999.
13
<PAGE>
Interest income increased by $2.4 million, or 88.9%, for the three months ended
June 30, 1997, to $5.1 million, from $2.7 million for the three months ended
June 30, 1996. The increase resulted from the additional interest income earned
on the proceeds from the Company's preferred stock and debt placements which
were completed in the first quarter of 1997.
For the reasons noted above, the Company reported a net loss of $59.3 million
for the three months ended June 30, 1997, compared to a net loss of $18.1
million for the three months ended June 30, 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues of the Company's operating segments are as follows (in millions):
SIX MONTHS ENDED
JUNE 30,
--------
1996 1997
---- ----
Telecommunications Services:
Carrier Services $ 0.4 $ 3.8
CLEC Services -- 6.0
Residential Long Distance 20.2 4.9
------- -------
20.6 14.7
Information Services 3.4 14.7
------- -------
Total Revenues $ 24.0 $ 29.4
------- -------
------- -------
Revenues increased by $5.4 million, or 22.5%, for the six months ended June 30,
1997, to $29.4 million, from $24.0 million for the six months ended June 30,
1996. These revenues exclude those from WinStar Global Products, which have
been reclassified as a discontinued operation. This increase was attributable
to increased revenues generated by the Company's CLEC, carrier services and
information services businesses, partially offset by an expected decrease in
residential long distance revenues.
Revenues from CLEC services were $6.0 million in the six months ended June 30,
1997, and were minimal in the six months ended June 30, 1996, as the CLEC
business commenced operations in the second quarter of 1996.
Revenues from carrier services increased $3.4 million to $3.8 million in the six
months ended June 30, 1997, as compared to $0.4 million in the six months ended
June 30, 1996. The revenue increase is the result of the growing number of
billed circuits, along with installation revenue and equipment sales related to
contract services provided.
WinStar's residential long distance revenues decreased $15.3 million to $4.9
million in the six months ended June 30, 1997, compared to $20.2 million in the
six months ended June 30, 1996.
14
<PAGE>
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 $11.3 million, or 332.4%, for
the six months ended June 30, 1997, to $14.7 million, from $3.4 million for
the six months ended June 30, 1996, due to continued internal growth and
acquisitions.
Cost of services and products increased by $13.0 million, or 82%, for the six
months ended June 30, 1997, to $28.9 million, from $15.9 million for the six
months ended June 30, 1996. As a percentage of sales, cost of services and
products in the six months ended June 30, 1997 was 98% compared with 66% in the
six months ended June 30, 1996, as a result of increasing network costs from the
continued expansion of the Company's local telecommunications business.
Selling, general and administrative expense increased by $45.6 million to $68.8
million for the six months ended June 30, 1997, from $23.2 million for the six
months ended June 30, 1996. The Company continued to hire sales, marketing and
related support personnel in connection with the accelerated roll out of its
CLEC operations, which had only a few employees at June 30, 1996 and
approximately 750 at June 30, 1997. In addition, the Company increased spending
on related advertising and marketing of its CLEC services.
For the reasons noted above, the operating loss for the six months ended June
30, 1997, was $76.6 million, compared with an operating loss of $16.3 million
for the six months ended June 30, 1996.
Depreciation and amortization expense increased by $7.2 million for the six
months ended June 30, 1997, to $8.4 million, from $1.2 million for the six
months ended June 30, 1996 principally resulting from the Company's acquisition
and deployment of switches, radios and other equipment in connection with its
telecommunications network buildout.
Interest expense increased to $13.3 million, or 75.1%, for the six months ended
June 30, 1997, to $31.0 million, from $17.7 million for the six months ended
June 30, 1996. The increase was principally attributable to the proceeds from
the Company's issuance of debt in the first quarter of 1997. $22.5 of the
$31.0 million interest expense for the six months is not payable in cash until
after 1999.
Interest income increased by $1.5 million, or 26%, for the six months ended June
30, 1997, to $7.3 million, from $5.8 million for the six months ended June 30,
1996. The increase resulted from the additional interest income earned on the
proceeds from the Company's preferred stock placement and 1997 debt placement in
the first quarter of 1997.
For the reasons noted above, the Company reported a net loss from continuing
operations of $100.3 million for the six months ended June 30, 1997, compared to
a net loss from continuing operations of $28.2 million for the six months ended
June 30, 1996.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In February 1997, the Company sold 4,000,000 shares of its 6% Series A
Cumulative Convertible Preferred Stock and warrants to purchase 1,600,000 shares
of Common Stock (the "Preferred Stock Placement"), pursuant to which the
Company and one of its subsidiaries realized net proceeds of approximately $96
million. In addition, in March 1997, the Company and one of its subsidiaries
sold an aggregate of $300 million principal amount of notes (the "1997 Debt
Placement"), pursuant to which they realized net proceeds of approximately
$290.5 million.
In order to provide additional future liquidity to the Company, in connection
with the 1997 Debt Placement, the Company obtained a commitment for a $150
million facility from affiliates of Credit Suisse First Boston Corporation and
BT Securities Corporation ("Initial Purchasers"). The Company continues to have
available $100 million of such facility (the issuance of $50 million of
secured notes by the Company's subsidiary, WinStar Equipment II Corp., in
August 1997 reducing availability by such amount) which, subject to the
Company satisfying various operating and financial criteria, may be drawn by
the Company on March 31, 1999. The amount of the commitment may be further
reduced in certain circumstances, including as a result of the issuance of
additional securities by the Company prior to March 31, 1999.
At June 30, 1997, the Company had approximately $343.2 million in cash, cash
equivalents and short term investments, approximately $180 million of which
is committed 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 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 six months ended June 30, 1997 was
approximately $68.2 million, and purchases of property and equipment during
the six months ended June 30, 1997 was approximately $63.4 million. At June
30, 1997, working capital was $339.8 million, including cash, cash
equivalents and short-term investments of $343.2 million, as compared to
working capital and cash, cash equivalents and short-term investments at
December 31, 1996 of $108.7 million and $122.5 million, respectively.
The Company's current plans call for capital expenditures
16
<PAGE>
of approximately $450 million over the next 24 to 30 months in connection
with its business plan. 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 from affiliates of the Initial
Purchasers, a limited amount of lease financing that it believes is readily
available and receivables financing will provide sufficient capital to
finance its planned capital expenditures and to fund its operating capital
needs until the Company is generating positive EBITDA, which the Company
expects to occur in 1999. In the event this proves to be inaccurate, the
Company may elect to slow the speed or narrow the focus of its plan or seek
to raise sufficient amounts of additional capital on acceptable terms to
implement the plan. In the event the Company's plans or assumptions change
or prove to be inaccurate, or if the Company consummates any acquisitions of
businesses or assets (including additional spectrum licenses, by auction or
otherwise), the Company may be required to seek additional sources of capital
sooner than currently anticipated.
The Company has commitments during the next 12 months to purchase $17.5 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 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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
The following table sets forth certain information with respect to grants by the
Company of stock options to its employees and others during the quarter ended
June 30, 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>
4/97 - 6/97 options to 329,900 options granted - no Section 4(2) exercisable for periods
purchase consideration received of five years from grant
common stock by the Company until at exercise prices
granted to exercise ranging from $10.13 to
employees $14.63
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Stockholders (the "Meeting") held on June 26, 1997, the
Company submitted the following matters to a vote of its security holders, all
of which matters were approved:
1. Election of Directors.
Name of Director Votes For Votes Withheld
---------------- --------- --------------
William J. Rouhana, Jr. 28,734,127 413,204
William vanden Heuvel 28,746,247 401,084
Steven B. Magyar 28,746,547 400,764
The term of office of each of the following additional directors of the Company
continued after the Meeting: Steven G. Chrust, Nathan Kantor, Fredric E. von
Stange, Bert Wasserman, William Harvey*, Dennis R. Patrick and James I. Cash.
- -------------------
* Mr. Harvey resigned from the Company's Board of Directors on July 23, 1997.
18
<PAGE>
2. Amendment of WinStar Communications, Inc. 1995 Performance Equity Plan
increasing the number of shares available for issuance pursuant to grants
made thereunder from 3,500,000 to 7,500,000:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
13,132,944 4,884,369 156,243 10,973,775
3. Amendment of Certificate of Incorporation of WinStar Communications, Inc.
increasing the number of authorized shares of Common Stock from 75,000,000
to 200,000,000:
Votes For Votes Against Abstentions
--------- ------------- -----------
25,279,150 3,751,395 116,786
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Amendment to Restated Certificate of Incorporation increasing the
Company's authorized common stock from 75,000,000 to 200,000,000,
filed with the Secretary of State of Delaware on July 2, 1997.
(2) Certificate of Designation of Series B Preferred Stock of the Company,
filed with the Secretary of State of Delaware on July 28, 1997,
incorporated by reference to Exhibit C to Exhibit 4 to the Company's
Current Report on Form 8-K filed with the Commission on July 2, 1997.
(3) Current Report on Form 8-K filed June 10, 1997.
(4) Current Report on From 8-K filed July 2, 1997.
19
<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 and Chairman
of the Board of Directors Dated: August 14, 1997
By: /s/Fredric E. von Stange
- ---------------------------------------
Fredric E. von Stange
Executive Vice President, Chief Financial
Officer and Director (and principal
accounting officer) Dated: August 14, 1997
20
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
WINSTAR COMMUNICATIONS, INC.
---------------
WinStar Communications, Inc., a corporation organized and existing
under the laws of the State of Delaware, does hereby certify as follows:
1. The name of the corporation (hereinafter called the "Corporation") is
WinStar Communications, Inc.
2. The Restated Certificate of Incorporation of the Corporation is hereby
amended by striking out the first paragraph of Article FOURTH thereof
and by substituting in lieu of said paragraph the following:
"FOURTH: The total number of authorized shares of
stock of the Corporation is 215,000,000 which are divided
into two classes consisting of (1) 15,000,000 shares of
preferred stock, par value one cent ($.01) each ("Preferred
Stock"), issuable in series as hereinafter provided, and
(2) 200,000,000 shares of common stock, par value one cent
($.01) each ("Common Stock").
3. The amendment of the Restated Certificate of Incorporation herein
certified was duly adopted by the Corporation's Board of Directors and
thereafter was duly adopted by the affirmative vote of the holders of a
majority of the outstanding voting stock of the Corporation in
accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
Signed and attested to on June 27, 1997
WINSTAR COMMUNICATIONS, INC.
By: /s/ Timothy R. Graham
---------------------------
Timothy R. Graham
Executive Vice President
ATTEST:
By: /s/ Kenneth J. Zinghini
-----------------------------
Kenneth J. Zinghini
Assistant Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 343,151,000
<SECURITIES> 601,000
<RECEIVABLES> 19,517,000
<ALLOWANCES> 0
<INVENTORY> 4,444,000
<CURRENT-ASSETS> 392,923,000
<PP&E> 119,831,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 716,004,000
<CURRENT-LIABILITIES> 53,167,000
<BONDS> 587,519,000
0
41,000
<COMMON> 331,000
<OTHER-SE> 22,462,000
<TOTAL-LIABILITY-AND-EQUITY> 716,004,000
<SALES> 0
<TOTAL-REVENUES> 16,340,000
<CGS> 0
<TOTAL-COSTS> 15,908,000
<OTHER-EXPENSES> 39,034,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,194,000
<INCOME-PRETAX> (58,796,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (58,796,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,796,000)
<EPS-PRIMARY> (1.85)
<EPS-DILUTED> (1.85)<F1>
<FN>
<F1>(1) Receivables are net of allowance for doubtful accounts.
(2) PP&E are net of accumulated depreciation.
</FN>
</TABLE>
