<PAGE>
Filed Pursuant to Rule 424(b)3. Prospectus relates to Registration Statement
on Form S-3 (No. 333-18465)
WINSTAR COMMUNICATIONS, INC.
_________________________
4,000,000 SHARES OF 6% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
_________________________
1,600,000 COMMON STOCK PURCHASE WARRANTS
_________________________
7,725,806 SHARES OF COMMON STOCK
_________________________
This Prospectus relates to offers which may occur from time to time for the
account of certain persons ("Selling Preferred Stockholders") of an aggregate of
4,000,000 shares of 6% Series A Cumulative Convertible Preferred Stock ("Series
A Preferred Stock") of WinStar Communications, Inc. ("Company"), together with
any and all additional shares of Series A Preferred Stock that may be issued as
dividends on such Series A Preferred Stock in lieu of cash during the term of
the Series A Preferred Stock.
This Prospectus also relates to offers which may occur from time to time
for the account of certain persons ("Selling Warrantholders" and, together with
the Selling Preferred Stockholders and the Selling Stockholders (defined below),
the "Selling Securityholders") of an aggregate of 1,600,000 common stock
purchase warrants ("Warrants"). Each Warrant entitles the holder thereof to
purchase one share of the Company's common stock, par value $.01 per share
("Common Stock), at any time commencing February 11, 1998 and ending February
11, 2002 for a purchase price of $25. The Company may accelerate the expiration
date of the Warrants at any time after February 11, 2000 if the last reported
sales price of the Common Stock is $40 or more per share for a period of 20
consecutive days.
This Prospectus also relates to the issuance by the Company of up to
1,600,000 shares of Common Stock ("Warrant Shares") upon exercise of the
Warrants.
This Prospectus also relates to the issuance by the Company of shares of
Common Stock ("Conversion Shares") to holders of Series A Preferred Stock
upon conversion of up to an aggregate of 4,000,000 shares of Series A
Preferred Stock and any additional shares of Series A Preferred Stock issued
as dividends during the term of such Series A Preferred Stock. Commencing
August 11, 1997, each share of Series A Preferred Stock is convertible into a
number of shares of Common Stock determined by dividing the stated value ($25
per share) of such share of Series A Preferred Stock by the "Conversion
Price" (as defined below); provided, however, that from August 11, 1997
through November 10, 1997, only 50% of the outstanding Series A Preferred
Stock may be converted. Subject to certain adjustments, the "Conversion
Price" is: (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 Company's common stock for the 20
consecutive trading days ("20-day Average Bid Price") immediately preceding
the date of conversion, and (ii) with respect to any conversion of Series A
Preferred Stock occurring on or after February 11, 1998, the lesser of (x)
$25 and (y) the 20-day Average Bid Price 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 $15.00,
then the Company may elect (subject to certain notice requirements and to
contractual restrictions contained in certain of the Company's debt
instruments ("Indentures")), in lieu of converting such shares of Series A
Preferred Stock into Conversion Shares, to pay such holder or holders 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.
It is the Company's current intention to pay cash in lieu of shares of Common
Stock if the conversion price at the time of any such conversion is less than
$15.00, assuming such cash payments would be allowable under then existing
law and the terms of all agreements to which the Company is then a party. On
February 11, 2002 ("Mandatory
<PAGE>
Conversion Date"), any shares of Series A Preferred Stock still outstanding
shall be automatically converted into Conversion Shares, unless the Company
determines to pay cash therefor, in an amount equal to the stated value
thereof, plus all accrued and unpaid dividends thereon (the "Liquidation
Preference"). With a Conversion Price of $17.0625 (the last sale price of a
share of Common Stock on July 30, 1997), the 4,000,000 shares of Series A
Preferred Stock (having an aggregate stated value of $25.4 million) would be
convertible into 5,860,806 Conversion Shares. Pursuant to Rule 416, this
Registration Statement also covers a presently indeterminable number of
additional shares of Common Stock issuable by the Company in the event the
Series A Preferred Stock is converted in connection with a change of control
of the Company.
This Prospectus also relates to offers which may occur from time to time
for the account of certain persons ("Selling Stockholders") of an aggregate of
265,000 shares of Common Stock ("Option Shares") issuable by the Company to them
upon exercise of options ("Options"). The Options were granted in consideration
of services rendered to the Company, but due to the type of services or nature
of the grantee, registration of the issuance or resale of the Option Shares was
not permitted on the Registration Statements on Form S-8 previously filed by the
Company.
There is no public market for the Series A Preferred Stock or Warrants and
such a market is not expected to develop. The Common Stock is traded on the
Nasdaq National Market under the symbol "WCII." The last sale price of the
Common Stock on the Nasdaq National Market on July 30, 1997 was $17.0625 per
share.
The Company will not receive any cash proceeds from the sale of the Series
A Preferred Stock, Warrants or Option Shares by the Selling Securityholders or
from its issuance of the Conversion Shares. The Company will receive aggregate
gross proceeds of $40,938,100 upon exercise of the Warrants and Options,
assuming all of the Warrants and Options are exercised. Such proceeds will be
used for working capital and general corporate purposes. All costs, expenses
and fees in connection with the registration of the securities offered by this
Prospectus will be borne by the Company. Such expenses are estimated to be
approximately $125,000.
-------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR 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 August 8, 1997
2
<PAGE>
TABLE OF CONTENTS
Page Page
---- ----
Incorporation of Certain Description of Capital Stock ... 23
Documents by Reference.......... 4 Selling Securityholders and
Prospectus Summary................ 5 Plan of Distribution.......... 26
Risk Factors...................... 12 Legal Matters................... 28
Use of Proceeds................... 22 Experts......................... 28
Dividend Policy................... 22 Available Information........... 28
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or information have been filed by the Company with
the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Exchange Act of 1934, as amended (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) Current Report on Form 8-K filed July 2, 1997; and
(10) The description of the Company's (i) Common Stock contained in the
Company's registration statement on Form 8-A under the Exchange Act
(File No. 1-10726) and (ii) Series B Preferred Stock Purchase Rights
contained in the Company's Registration Statement on Form 8-A, as
amended, under the Exchange Act (File No. 0-20876).
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, New
York, New York 10169 (telephone 212-584-4000), Attention: Investor Relations
(extension 4053), 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.
4
<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. Effective January 1, 1996, the Company changed
its fiscal year end from the last day in February to December 31. 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, is currently also offering
local exchange service on a switched basis and a resale basis in Boston,
Chicago, Los Angeles and San Diego and offering local exchange services on a
resale basis only in Atlanta, Dallas, Hartford, Milwaukee, Newark, Orange
County (California), Philadelphia, San Francisco, Stamford (Connecticut) and
Washington, D.C. 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 June 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 100 cities with populations
exceeding 100,000 each, and encompass an aggregate population of approximately
172 million. Furthermore, the Wireless Licenses allow the Company to provide
Wireless Fiber services in 49 of the 50 most populated Metropolitan Statistical
Areas ("MSAs") in the United States. The Company has agreed to acquire an
aggregate of 62 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 180 million. 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 market. 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 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
5
<PAGE>
many instances, the need to follow FCC frequency coordination procedures in
connection with wireless facilities).
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). 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, 45 Mbps data transmission
rates allow end users to receive full-motion video and 3-D graphics and to
use highly interactive applications on the Internet and other networks.
Ease of Installation. The equipment used for point-to-point applications
in 38 GHz (i.e., antennae, transceivers and digital interface units) is
typically smaller, less obtrusive, less expensive, and uses less power than
equipment used for similar applications at lower frequencies. These
characteristics make it relatively easier to obtain the roof rights ("Roof
Rights") required to install 38 GHz transceivers, and less costly to initiate 38
GHz-based services as compared to most other wireless services.
Efficient Channel Reuse. Certain characteristics of 38 GHz, including the
effective range of its radio signal and the small amount of dispersion (i.e.,
scattering) of the radio beam as compared to the more dispersed radio beams
produced at lower frequencies, allow for the reuse of bandwidth capacity in a
licensed area. The ability to reuse capacity allows the 38 GHz license holder to
densely deploy its 38 GHz services in a given geographic area, provide services
to multiple customers over the same 38 GHz channel, and conserve bandwidth
capacity, thereby enhancing the types of services that can be provided and
increasing the number of customers to which such services can be provided.
Business Strategy
The Company's objective is to become the full-service telecommunications
provider of choice to small and medium-sized business customers and a provider
of high-quality alternative and broadband facilities to its Carrier Services
customers. Key elements of the Company's strategy are to:
Expand Network Infrastructure. The Company is creating an infrastructure
on a city-by-city basis using its Wireless Fiber capabilities, switches and
other telecommunications equipment acquired by the Company from equipment
vendors and facilities leased from other carriers to originate and terminate
traffic. Pursuant to its building-centric network plan, the Company is
identifying strategically located sites in each metropolitan area where it
provides service to serve as hubs for its network in that metropolitan area.
These hub sites will be connected via Wireless Fiber links to end users. The
Company believes that a limited number of hub sites (generally less than a
dozen) in each metropolitan area will allow it to address more than 70% of its
targeted buildings and to carry the majority of its customers' traffic on its
own network instead of the higher cost facilities of other carriers.
Exploit First-to-Market Advantages. The Company seeks to capitalize on
the significant opportunities emerging in the industry as a result of the
Telecommunications Act of 1996 (the "Telecommunications Act") by exploiting a
"first-to-market" advantage as one of the few holders of 38 GHz licenses with
an established operating and management infrastructure. The Company believes
that its early entrance into its markets provides it with advantages over
many potential competitors by allowing it to: (i) establish a customer base
prior to widespread competition from other CLECs; (ii) develop a proven,
reliable network infrastructure using its own switching and transmission
capabilities ahead of many other CLECs; (iii) develop pioneering expertise in
the utilization of 38 GHz for the delivery of telecommunications and
multimedia services and the design and management of 38 GHz-based networks;
and (iv) acquire Roof Rights to place its 38 GHz antennae on a large number
of buildings on favorable terms and in advance of other wireless service
providers.
6
<PAGE>
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 that have more than 100,000
square feet of commercial space and which, in many instances, are not served
by fiber facilities provided by CLECs or competitive access providers
("CAPs"). The Company estimates that there are more than 8,000 buildings in
this target group, populated by approximately 9.7 million workers using more
than 2.1 million phone lines. Over time, the Company intends to expand its
target customer base to include the majority of small and medium-sized
businesses in the metropolitan areas covered by the Wireless Licenses, which
the Company estimates contain approximately 60% of all such businesses in the
United States and represent a market opportunity in excess of $30 billion per
year.
Market Wireless Fiber to Other Carriers. The Company markets its Carrier
Services to other carriers such as the RBOCs and other local exchange carriers
("LECs"), interexchange carriers ("IXCs"), other CAPs and CLECs, providers of
personal communications services ("PCS") and cellular and specialized mobile
radio services ("CMRS") providers. The Company believes that its Carrier
Services present an attractive, economical method for telecommunications service
providers to add a high-capacity extension to their own networks and service
territories, especially as they seek to rapidly penetrate new markets opening as
a result of the Telecommunications Act. The Company's Carrier Services can also
provide cost-efficient route diversity where network reliability concerns
require multiple telecommunications paths.
Since the commercial introduction of the Company's Carrier Services in
October 1995, the number of carrier customers has increased significantly.
Such customers include Ameritech Cellular Services, AT&T Wireless, Bell
Atlantic/NYNEX Mobile, Brooks Fiber, Cellular One, PrimeCo Personal
Communications, Siemens Stromberg-Carlson, Teleport Communications Group and
Western Wireless. In addition, the Company has entered into multi-year master
service agreements with American Communications Services, Electric Lightwave,
IntelCom, MCI Communications and Pacific Bell. These agreements establish the
framework under which such companies may effect the integration of Wireless
Fiber services into their own telecommunications networks. The Company is in
the process of negotiating additional master service agreements with other
large telecommunications providers and has offered to enter into co-exclusive
multi-region network usage agreements with one or more such providers.
Market Wireless Fiber Services as a Solution to Growing Capacity Shortages.
The Company believes that demand for its Wireless Fiber-based CLEC and Carrier
Services will grow because of the expanding volume of data communications
traffic resulting from increasing Internet usage and other high-volume data
transmission requirements. This type of traffic increasingly requires
high-capacity, end-to-end networks that are often difficult to provide
economically with older RBOC and LEC infrastructure.
Provide Information and Content Services. The Company believes that the
ability to deliver information and other content will become an increasingly
important factor in the choice of a telecommunications provider by businesses as
competition increases and the markets covered by the Wireless Licenses mature.
Accordingly, the Company actively seeks opportunities to utilize its information
and content assets and services to enhance the marketability of the Company's
telecommunications services.
Development of Core Assets
The Company believes that in order to effectively compete with incumbent
LECs and other telecommunications service providers in its target markets, it
must develop a core group of assets, capabilities and resources. The Company has
made substantial progress in acquiring and developing these core assets, which
include:
Transmission and Switching Facilities. In October 1996, the Company
initiated local switched services in New York City, utilizing its first 5ESS
switch, purchased from Lucent Technologies, Inc. ("Lucent"), and facilities
leased from NYNEX. Since that time, the Company has initiated local switched
services in Boston, Chicago, Los Angeles and San Diego. 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 approximately 1,400 buildings in
its licensed areas. The Company
7
<PAGE>
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.
State Authorizations. The Company has obtained authorization to operate as
a CLEC in 24 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 34 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 more than 285 people located in 15 major markets, and a
Carrier Services sales group, currently consisting of more than 70 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 service providers do not offer and that such level
of service will become a key factor in customers' choice of telecommunications
service 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.
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 and Other Information
The Company was incorporated under the laws of the State of Delaware in
September 1990 and its principal offices are located at 230 Park Avenue, New
York, New York 10169. Its phone number is (212) 584-4000.
In July 1997, the Board of Directors adopted a stockholder rights plan in
which certain rights to purchase Series B Preferred Stock was distributed as
a dividend to holders of Common Stock as of the close of business on July 14,
1997. The rights are not currently exercisable and only become exercisable
8
<PAGE>
under certain circumstances where certain persons or groups acquire
beneficial ownership of 10% or more of the Company's outstanding Common Stock
or commence a tender or exchange offer upon consummation of which such
persons or groups would beneficially own 10% or more of the Company's
outstanding Common Stock. See "Description of Capital Stock."
Private Placement of Series A Preferred Stock and Warrants
On February 6, 1997, the Company and its wholly owned subsidiary WinStar
Credit Corp. ("WCC") entered into a securities purchase agreement ("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 Preferred Stock and 1,600,000 Warrants for an aggregate purchase price of
$100.0 million. The sale of the Series A Preferred Stock and Warrants
(together, the "Securities") was consummated on February 11, 1997. The sale of
the Securities was conducted as an institutional private placement ("Preferred
Stock Placement") through Credit Suisse First Boston Corporation, which acted
as placement agent. The principal purpose of the Preferred Stock Placement was
to raise proceeds to fund the expansion of the Company's telecommunications and
other operations. See "Description of Capital Stock."
The Company and the purchasers also entered into a Registration Rights
Agreement, dated February 6, 1997, pursuant to which the Company is obligated to
file a registration statement under the Securities Act of 1933, as amended (the
"Act"), registering the (i) resale of the Series A Preferred Stock and Warrants
and (ii) the issuance by the Company of the Warrant Shares. Additionally, under
the Registration Rights Agreement, at any time after May 11, 1997, each holder
of the Preferred Shares may demand that the Company file and have declared
effective within 90 days of such demand a registration statement registering the
resale of the Common Shares. Such a demand was made effective as of May 11,
1997. The Registration Statement, of which this Prospectus forms a part, is
intended to satisfy the aforementioned registration obligations.
Risk Factors
See "Risk Factors" commencing on page 12 hereof for a discussion of certain
risks that should be considered in connection with an investment in the Common
Stock, including the risks related to historical and anticipated future
operating losses.
Use of Proceeds
The Company will not receive any cash proceeds from the sale of the Series
A Preferred Stock, Warrants or Option Shares by the Selling Securityholders or
from its issuance of the Conversion Shares. The Company will receive aggregate
gross proceeds of $40,938,100 from the exercise of the Warrants and Options,
assuming all such Warrants and Options are exercised, and will use such proceeds
for working capital and general corporate purposes. See "Use of Proceeds."
9
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SUMMARY FINANCIAL DATA
The summary financial data presented below for the year ended February 28,
1995, the ten months ended December 31, 1995 and the year ended December 31,
1996 have been derived from the Company's audited Consolidated Financial
Statements included in its Annual Report on Form 10-K for the year ended
December 31, 1996, reclassified to reflect the operations of WinStar Global
Products, Inc. ("Global Products"), the Company's merchandising subsidiary, as a
discontinued operation. The summary financial data for the three months ended
March 31, 1996 and 1997 have been derived from the unaudited Consolidated
Financial Statements included in its Quarterly Report on Form 10-Q for the three
months ended March 31, 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 TEN MONTHS THREE MONTHS
FEBRUARY ENDED YEAR ENDED 1996 ENDED MARCH 31, 1997
28, DECEMBER 31, DECEMBER 31, PRO ---------------------- PRO
1995 1995 1996 FORMA(1) 1996 1997 FORMA(1)
----------- ------------ ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Statement of Operations Data:
Operating revenues:
Telecommunications(2)........... $ 14,909 $ 13,137 $ 33,969 $ 32,481 $ 10,217 $ 7,063 $ 7,063
Information services............ 473 2,648 14,650 14,650 771 6,014 6,014
--------- ---------- ---------- ----------- ---------- ---------- ----------
Total net sales................ 15,382 15,785 48,619 47,131 10,988 13,077 13,077
Operating income (loss):
Telecommunications.............. (4,984) (7,288) (43,698) (49,805) (3,105) (26,546) (26,546)
Information services............ (157) 217 (1,409) (1,409) (54) (1,105) (1,105)
General corporate............... (944) (3,861) (11,373) (11,373) (1,868) (5,285) (5,285)
--------- ---------- ---------- ----------- ---------- ---------- ----------
Total operating loss........... (6,085) (10,932) (56,480) (62,587) (5,027) (32,936) (32,936)
Interest expense................. (375) (7,186) (36,748) (77,831) (8,643) (10,798) (19,305)
Interest income.................. 343 2,890 10,515 8,453 3,108 2,235 2,235
Other expenses, net.............. (1,109) (866) -- -- -- -- --
--------- ---------- ---------- ----------- ---------- ---------- ----------
Net loss from continuing
operations..................... (7,226) (16,094) (82,713) (131,965) (10,562) (41,499) (50,006)
Net (loss) income from
discontinued operations(3)..... (4) 237 (1,010) (1,010) (137) (477) (477)
--------- ---------- ---------- ----------- ---------- ---------- ----------
Net loss......................... (7,230) (15,857) (83,723) (132,975) (10,699) (41,976) (50,483)
Series A Preferred Stock
dividends....................... -- -- -- (6,000) -- (833) (1,500)
----------- ------------ ------------ ----------- ---------- ---------- ----------
Net loss applicable to common
stock.......................... $ (7,230) $ (15,857) $ (83,723) $ (138,975) $ (10,699) $ (42,809) $ (51,983)
----------- ------------ ------------ ----------- ---------- ---------- ----------
----------- ------------ ------------ ----------- ---------- ---------- ----------
Net loss per share from
continuing operations.......... $ (0.42) $ (0.71) $ (2.96) $ (4.37) $ (0.39) $ (1.27) $ (1.58)
Net (loss) income per share from
discontinued operations........ -- (0.01) 0 0 -- (0.02) 0
----------- ------------ ------------ ----------- ---------- ---------- ----------
Net loss per common share
outstanding.................... $ (0.42) $ (0.70) $ (3.00) $ (4.41) $ (0.39) $ (1.29) $ (1.60)
Weighted average common shares
outstanding.................... 17,122 22,770 27,911 31,506 27,214 32,610 32,610
Other Financial Data:
Ratio of earnings to combined
fixed charges and Series A
Preferred Stock dividends(4)... -- -- -- -- -- -- --
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
--------------------
(IN THOUSANDS)
ACTUAL
------
<S> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments............................................ $ 413,474
Property and equipment, net.................................................................. 93,789
Total assets................................................................................. 748,869
Current portion of long-term debt and capital lease obligations.............................. 23,095
Long-term debt and capital lease obligations, less current portion........................... 587,420
Common and Series A Preferred Stock and additional paid-in capital........................... 247,270
Stockholders' equity......................................................................... 79,585
</TABLE>
- ------------------------
(1) Gives effect to the Preferred Stock Placement and the institutional private
placement, in March 1997, of an aggregate of $300 million of debt by the
Company and WinStar Equipment Corp., its wholly-owned subsidiary, as if they
occurred as of the beginning of the respective periods. Interest expense has
been adjusted to include approximately $8.5 million and $41.1 million of
interest on such debt and amortization of debt offering costs and other
related fees in the three months ended March 31, 1997 and the year ended
December 31, 1996, respectively, but not to include interest income earned
on additional available cash.
(2) The Company has generated minimal revenues from its Wireless Fiber services.
(3) Such loss is from the operations of the Company's consumer products
subsidiary, Global Products. On May 13, 1997, a formal plan of disposition
for Global Products was approved by the Board of Directors, and it is
anticipated that the disposition will be completed within the next 9 to 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 are segregated and reported as discontinued operations in the
statements of operations data.
(4) For the years ended February 28, 1993, 1994 and 1995, the ten months ended
December 31, 1995, the year ended December 31, 1996 and the three months
ended March 31, 1996 and 1997, earnings from continuing operations were
insufficient to cover combined fixed charges and Series A Preferred Stock
dividends by $4,679,000, $8,622,000, $7,288,000, $16,310,000, $83,033,000,
$10,562,000 and $42,537,000, respectively. On a pro forma basis, giving
effect to the items described in footnote 1 above, earnings from continuing
operations were insufficient to cover combined fixed charges and Series A
Preferred Stock dividends by $51,711,000 and $138,285,000 for the three
months ended March 31, 1997 and the year ended December 31, 1996,
respectively. Fixed charges consist of interest charges and amortization of
debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rent expense (onethird) that
the Company believes to be representative of interest.
11
<PAGE>
RISK FACTORS
An investment in any of the Series A Preferred Stock, Warrants, Conversion
Shares, Warrant Shares and other Shares of Common Stock involves a significant
degree of risk. In determining whether to make an investment in any of the
Securities, prospective investors should consider carefully all of the
information set forth in this Prospectus and, in particular, the following risk
factors.
Historical and Anticipated Future Net and Operating Losses
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, including net losses of approximately
$15.9 million for the ten months ended December 31, 1995, $83.7 million for the
year ended December 31, 1996 and $42.0 million for the three months ended March
31, 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, while
it seeks to establish a sufficient revenue-generating customer base and build
the network infrastructure necessary to 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 to the servicing of existing debt, there will continue to be
substantial increases in the Company's net loss and operating loss. There can
be no assurance that the Company will achieve or sustain profitability.
Substantial Indebtedness
The Company has significant indebtedness and interest expense. At March
31, 1997, the Company had, on a consolidated basis, approximately $619.2
million of indebtedness, including capitalized lease obligations. The accrual
of interest and the accretion of original issue discount on existing
indebtedness will significantly increase the Company's liabilities. The
level of the Company's indebtedness could have important consequences,
including the following: (i) 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; (ii) 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;
(iii) the Company's level of indebtedness could limit its flexibility in
planning for, or reacting to changes in, its business; (iv) the Company is
more highly leveraged than many of its competitors, which may place it at
a competitive disadvantage; and (v) 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.
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
12
<PAGE>
third-party equipment providers and installation and maintenance contractors
to meet the Company's rollout schedule; the ability of the Company to obtain
sufficient Roof Rights to successfully build out its network; the recruitment
of additional personnel in a timely manner, so as to be able to attract and
service new customers but not incur excessive personnel costs in advance of
the rollout; the Company's ability to attract and retain new customers
through delivery of high-quality services; the potential adverse reaction to
the Company's services by the Company's carrier customers, which may view the
Company as a competitor; and the Company's ability to manage the simultaneous
implementation of its plan in multiple markets. In addition, the Company is
subject to the risk of unforeseen problems inherent in being a new entrant in
a rapidly evolving industry.
Historically, almost all of the Company's telecommunications revenues have
been derived from the resale of long distance services to residential customers.
As part of its CLEC strategy, the Company is marketing its long distance
services to small and medium-sized businesses and is no longer actively
marketing such services to residential customers. As a result, revenues from the
provision of long distance services to residential customers have begun and are
expected to continue to substantially decline through attrition of the
Company's long distance residential customer base.
Although the Company's initial implementation of its CLEC strategy entails
the resale of the facilities and services of other service providers, which
itself is dependent on the negotiation and implementation of satisfactory resale
arrangements, the Company's CLEC strategy will require significant capital
investment related to the purchase and installation of numerous switches and the
interconnection of these facilities to customers' buildings and LEC and CLEC
local networks, including the installation of Wireless Fiber links and the
buildout of other facility infrastructure, in advance of generating material
revenues.
As the Company rolls out its CLEC operations, it will experience negative
operating margins while it develops its facilities. After initial rollout of its
CLEC services in a particular city, the Company expects operating margins for
such operations to improve only when and if: (i) sales efforts result in
sufficiently increased volumes of traffic; (ii) the Company has installed a
switch and a sufficient number of Wireless Fiber links so that a substantial
portion of the Company's traffic in that city can be originated and terminated
over the Company's Wireless Fiber facilities instead of LEC or other CLEC
facilities; and (iii) higher margin-enhanced services are sought by, provided to
and accepted by customers. While the Company believes that the unbundling and
resale of LEC services and the implementation of local telephone number
portability (which will permit customers to retain their telephone numbers when
switching carriers), which are mandated by the Telecommunications Act, will
reduce the Company's costs of providing local exchange services and facilitate
the marketing of such services, there can be no assurance that the Company's
CLEC operations will become profitable due to, among other factors, lack of
customer demand, competition from other CLECs and pricing pressure from the LECs
and other CLECs. The Company's failure to implement its CLEC strategy
successfully would have a material adverse effect on the operations of the
Company.
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
13
<PAGE>
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.
Risks Associated with Rapid Expansion and Acquisitions
The Company is pursuing a strategy of aggressive and rapid growth,
including the accelerated rollout of its CLEC services, acquisitions of
businesses and assets, including additional spectrum licenses, continued
marketing of its Carrier Services, and the hiring of additional management,
technical and marketing personnel, all of which will result in significantly
higher operating expenses. Rapid expansion of the Company's operations may place
a significant strain on the Company's management, financial and other resources.
The Company's ability to manage future growth, should it occur, will depend upon
its ability to monitor operations, control costs, maintain effective quality
controls and significantly expand the Company's internal management, technical,
information and accounting systems. Any failure to expand these areas and to
implement and improve such systems, procedures and controls in an efficient
manner at a pace consistent with the growth of the Company's business could have
a material adverse effect on the business, financial condition and results of
operations of the Company and the ability of the Company and its subsidiaries to
make principal and interest payments on their outstanding debt. As part of its
strategy, the Company may acquire complementary assets or businesses. The
pursuit of acquisition opportunities could place significant demands on the time
and attention of the Company's senior management and involve considerable
financial and other costs with respect to identifying and investigating
acquisition candidates, negotiating acquisition agreements and integrating the
acquired businesses with the Company's existing operations. Employees and
customers of acquired businesses may sever their relationship with such
businesses during or after the acquisition. There can be no assurance that the
Company will be able to successfully consummate any acquisitions or integrate
any business or assets which it may acquire into its operations.
Competition
The Company is subject to intense competition in each of the areas in which
it operates. Many of the Company's competitors have longer-standing
relationships with customers and suppliers in their respective industries,
greater name recognition and significantly greater financial, technical and
marketing resources than the Company. Further, sales of the Company's Carrier
Services are typically made to other telecommunications providers that compete
or may compete in the future with the Company.
Local Telecommunications Market. The local telecommunications market is
intensely competitive for new entrants and currently is dominated by the
RBOCs and other LECs. The LECs have long-standing relationships with their
customers, have the ability to subsidize competitive services with revenues
from a variety of other services and benefit from existing state and federal
regulations that currently favor the LECs over the Company in certain
respects. In addition to competition from the LECs, the Company also faces
competition from a growing number of new market entrants, such as other CLECs
and CAPs. The Company also may face competition in the provision of local
telecommunications services from cable companies, electric utilities, LECs
operating outside their current local service areas and IXCs. Moreover, the
consolidation of telecommunications companies and the formation of strategic
alliances within the telecommunications industry, which have accelerated as a
result of the passage of the Telecommunications Act, will 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
14
<PAGE>
the local telecommunications services market, 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. 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
subsidiaries compete 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 subsidiaries compete 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 substantially increased the
Company's capital expenditure requirements. Management anticipates, based on
current plans and assumptions relating to its operations, that the Company's
existing financial resources and additional equipment financing arrangements
which the Company intends to seek, will be sufficient to fund the Company's
growth and operations for approximately 24 to 30 months from the date of this
Prospectus. In order to provide additional future liquidity to the Company, the
Company obtained a $150 million facility from affiliates of the Initial
Purchasers in March 1997. The Company continues to have available $100 million
of such facility (the issuance in August 1997 by WinStar Equipment II Corp., a
wholly owned subsidiary of the Company, of certain notes having reduced
availability by $50 million), 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.
In the event the Company's plans or assumptions change or prove to be
inaccurate, or if the Company consummates any acquisitions of businesses or
assets (including additional spectrum licenses, by auction or otherwise), or
if the Company fails to secure additional equipment financing arrangements,
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
15
<PAGE>
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.
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 services providers to the extent such services
involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect callers to long distance
carriers and the use of electromagnetic spectrum (i.e., wireless services). With
the passage of the Telecommunications Act, the FCC's jurisdiction has been
extended to include certain interconnection and related issues that
traditionally have been considered subject primarily to state regulation. 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, and retain
exclusive jurisdiction with respect to the pricing of unbundled elements.
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 over
the next several years to address mandates contained in the Telecommunications
Act, which will change the regulatory environment significantly. The
Telecommunications Act generally requires LECs to provide competitors with
interconnection and nondiscriminatory access to the LEC network on more
favorable terms than have been available in the past. However, such
interconnection and the terms thereof are subject to negotiations with each LEC,
which may involve considerable delays and may not necessarily be obtained on
terms and conditions that are acceptable to the Company. In such instances,
although the Company may petition the proper regulatory agency to arbitrate
disputed issues, there can be no assurance that the Company will be able to
obtain acceptable interconnection agreements.
As required by the Telecommunications Act, the FCC adopted, in August
1996, 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 service. In
July 1997, the United States Court of Appeals for the Eighth Circuit
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 select
provisions of other carriers' interconnection agreements. As has been the
case since the Interconnection Order was stayed by the Court in October 1996,
many states continue to set the prices for interconnection, resale and
unbundled network elements in a similar manner as proposed by the FCC in the
Interconnection Order. The FCC has indicated its intention to appeal the
Eighth Circuit's ruling to the United States Supreme Court. The Company
believes that the Eighth Circuit's ruling will not adversely affect its CLEC
operations and may, in certain instances, positively affect the operations of
its Carrier Services business, although there can be no assurance of this.
In addition, pursuant to the Telecommunications Act, the FCC recently
promulgated regulations to implement universal service reform to provide
support for the provision of ubiquitous national telephone service as well as
the provision of telecommunications services to schools (grades K through 12)
and to effect access charge reform to more explicitly align the access
charges required to be paid by the long distance carriers to incumbent LECs
to the actual cost of providing such services. Appeals from these orders have
been filed by a number of parties and these appeals have been consolidated in
the Fifth and Eighth Circuits, respectively. In light of the continued
litigation challenging the Telecommunications Act and the FCC's rules
thereunder, and other factors, 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
16
<PAGE>
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.
Additionally, providers of telecommunications services, including the
major IXCs, RBOCs, CLECs and others, are coming under intensified 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, cause
unfair impediment to customers wishing to switch providers. The FCC 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
The FCC's current policy is to align the expiration dates of all 38 GHz
licenses such that they mature concurrently and, upon expiration, to renew all
such licenses for ten years. The initial term of all currently outstanding 38
GHz licenses, including the Company's licenses, expires in February 2001. While
the Company believes that all of its Wireless Licenses will be renewed based
upon FCC custom and practice establishing a presumption in favor of licensees
that have complied with their regulatory obligations during the initial license
period, there can be no assurance that any Wireless License will be renewed upon
expiration of its initial term.
In a notice of proposed rulemaking ("NPRM"), the FCC proposed auctioning
licenses for currently unallocated 38 GHz channels. Given the current political
climate with respect to balancing the federal budget, there is a risk that the
FCC will require significant payments upon renewal of the Company's Wireless
Licenses or other changes on the use of spectrums. The FCC's failure to renew,
or its imposition of significant charges for renewal or use of, one or more
Wireless Licenses could have a material adverse effect on the Company and the
ability of the Company and its subsidiaries to make principal and interest
payments on their outstanding debt, including the Notes.
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. 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 addition, the existence of proposed channel
limitations in the NPRM, which in at least one licensed area may result in
the Company exceeding the proposed maximum number of licenses for that area,
may result in the FCC denying consent for one or more license transfers. In
light of the foregoing, the newness of this service and the uncertainty of
final regulations to be issued in connection with the NPRM, there can be no
assurance that
17
<PAGE>
the FCC will approve all or any of the proposed acquisitions or, if approved,
that the FCC will not impose limitations on the ultimate number of licenses
held in any particular licensed area.
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.
Certain Financial and Operating Restrictions
The indentures relating to certain of the Company's indebtedness 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,
repurchase or redeem shares, 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.
Dependence on Third Parties for Service and Marketing; Possible Service
Interruptions and Equipment Failures
The Company's long distance resale business is dependent on utilizing the
facilities of major IXCs to carry its customers' long distance telephone
calls and, in many instances, especially during initial market penetrations,
the Company's CLEC business will be dependent on the facilities of the LECs
and other local exchange service providers to carry its customers' local
telephone calls. The Company has an agreement with MCI that provide it with
access to such carrier's networks and has entered or is entering into
interconnect agreements with various LECs, and other CLECs, to access their
local exchange facilities. Although the Company believes that it currently
has sufficient access to long distance networks and will be able to obtain
sufficient access to local exchange facilities, any increase in the rates or
access fees charged by the owners of such facilities or their unwillingness
to provide access to such facilities to the Company, as well as potential
reticence of the LECs to honor appropriate provisioning and service intervals
with respect to interconnection arrangements, could materially adversely
affect the Company's operations. Failure to obtain continuing access to such
networks and facilities could require the Company to significantly curtail or
cease its operations and could have an adverse effect on the ability of the
Company and its subsidiaries to make principal and interest payments on their
outstanding debt, including the Notes. See "Description of Certain
Indebtedness and Preferred Stock." Further, the Company's CLEC operations
will rely to some extent upon network elements which the LECs must provide
pursuant to the Telecommunications Act and the Interconnection Order. These
facilities often use copper wire for "last mile" access to end users. To the
extent that the Company relies upon LEC facilities that use copper wire, the
Company may not be able to offer potential customers the benefits of Wireless
Fiber with respect to high transmission capacity and quality. In addition,
the Company's operations require that the networks
18
<PAGE>
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 substantially all of its wireless
telecommunications equipment, including transceivers and network monitoring
equipment, from a single supplier and its switches and related equipment from a
single supplier even though, in each case, there are other manufacturers of such
equipment. Any reduction or interruption in supply from its suppliers could have
a material adverse effect on the Company until sufficient alternative supply
sources are established. The Company does not manufacture, nor does it have the
capability to manufacture, any of its telecommunications equipment. Although
there are other manufacturers who have, or are developing, equipment that would
satisfy the Company's needs, there can be no assurance that the Company would be
able to replace its current primary suppliers on commercially reasonable terms.
In addition, as no industry standard or uniform protocol currently exists for 38
GHZ equipment, a single manufacturer's equipment must be used in establishing
each wireless link.
Line of Sight; Distance Limitations Imposed by Rainfall Conditions in Certain
Geographic Areas; Roof Rights
In order to provide quality transmission, Wireless Fiber services require
an unobstructed line of sight between two transceivers comprising a link,
with a maximum distance between any two corresponding transceivers of up to
five miles (or shorter distances in certain areas; weather conditions may
necessitate distances as short as 1.1 miles between transceivers to maintain
desired transmission quality). The areas in which such shorter distances are
required are those where rainfall intensity and the size of the raindrops
adversely impact transmission quality at longer distances. Other weather
conditions, such as snow, electrical storms and high winds, have not, in the
Company's experience, affected the quality or reliability of Wireless Fiber
services. The establishment of Wireless Fiber services may require additional
transceivers to triangulate around obstacles (such as buildings). Similarly,
to establish Wireless Fiber services covering a distance in excess of five
miles, additional transceivers are required to establish a chain with links
no more than five miles apart or to establish a system of interconnected hub
sites. The cost of additional transceivers where required by weather,
physical obstacles or distance may render Wireless Fiber uneconomical in
certain instances. The Company must obtain Roof Rights (or rights to access
other locations where lines of sight are available) in each building where a
transceiver will be placed. The Company seeks to prequalify and obtain Roof
Rights at buildings targeted by potential customers in its licensed areas in
advance of anticipated orders. There can be no assurance, however, that the
Company will be successful in obtaining Roof Rights necessary to establish
its Wireless Fiber
19
<PAGE>
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.
Reliance on Key Personnel
The efforts of a relatively small number of key management and operating
personnel will largely determine the Company's success. The loss of any of such
personnel could adversely affect the Company. The Company's success also depends
in part upon its ability to hire and retain highly skilled and qualified
operating, marketing, financial and technical personnel. The competition for
qualified personnel in the telecommunications industry is intense. Accordingly,
there can be no assurance that the Company will be able to hire or retain
necessary personnel.
Lack of Public Market for Series A Preferred Stock and Warrants
There is currently no active trading market for the Series A Preferred
Stock or Warrants and no market is expected to develop, which will adversely
affect the liquidity of such Securities.
Volatility of Market Price of Common Stock
Since the Common Stock has been publicly traded, the market price of the
Common Stock has fluctuated over a wide range and may continue to do so in the
future. The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including, among other
things, the depth and liquidity of the trading market of the Common Stock,
variations in the Company's operating results, press reports, including with
respect to regulation and industry trends, and the difference between actual
results and the results expected by investors and analysts. In addition, the
stock market in recent years has experienced broad price and volume fluctuations
that have often been unrelated to the operating performance of companies,
particularly telecommunications companies. These broad market fluctuations also
may adversely affect the market price of the Common Stock.
20
<PAGE>
Shares Eligible for Future Sale
As of July 31, 1997, the Company had 33,127,097 shares of Common Stock
outstanding. Although a significant number of the outstanding shares of Common
Stock are "restricted securities," as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"), and may not be sold unless such sale is
registered under the Securities Act or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144, substantially all of such Restricted Shares either have been registered for
resale under the Securities Act or are currently, or will soon become, available
for sale pursuant to Rule 144. Sales or the expectation of sales of a
substantial number of shares of Common Stock in the public market could
adversely affect the prevailing market price of the Common Stock. See "Shares
Eligible for Future Sale."
Effect of Outstanding Options, Warrants and Other Convertible Securities
As of July 31, 1997, there were outstanding options and warrants with
respect to an aggregate of approximately 10,812,000 shares of Common Stock at
per-share exercise prices ranging from $1.50 to $31.12. Substantially all of
the shares underlying such securities have been or will be registered for resale
under the Securities Act. The Company has two existing stock option plans under
which options to purchase up to an additional 3,685,000 shares of Common Stock
may be granted. The exercise of outstanding stock options, warrants and other
convertible securities will dilute the percentage ownership of the Company's
stockholders, and any sales in the public market of shares of Common Stock
issuable upon the exercise of such stock options, warrants and convertible
securities may adversely affect prevailing market prices for the Common Stock.
Anti-takeover Provisions
The Company's corporate charter provides that directors serve staggered
three-year terms and authorizes the issuance of up to 15,000,000 shares of
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Company's Board of Directors. The
affirmative vote of the holders of at least two-thirds of the capital stock of
the Company is required to amend the provisions of the charter relating to the
classification of the Board. The staggered board provision could increase the
likelihood that, in the event of a possible takeover of the Company, incumbent
directors would retain their positions and, consequently, may have the effect of
discouraging, delaying or preventing a change in control or management of the
Company.
In July 1997, the Board of Directors adopted a stockholder rights plan in
which rights to purchase Series B Preferred Stock was distributed as a dividend
at the rate of one right for each share of Common Stock held as of the close of
business on July 14, 1997. The rights are not currently exercisable and only
become exercisable under certain circumstances where certain persons or groups
acquire beneficial ownership of 10% or more of the Company's outstanding Common
Stock or commence a tender or exchange offer upon consummation of which such
persons or groups would beneficially own 10% or more of the Company's
outstanding Common Stock. See "Description of Capital Stock."
While the Company has no commitments to issue any additional series of
preferred stock, the Board of Directors is empowered, without further
stockholder approval, to issue preferred shares with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting
power or other rights of the holders of the Common Stock. In the event of
issuance, the preferred shares could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change
of control of the Company. Additionally, certain of the Company's
indebtedness contains provisions which would allow holders, at their
election, to require prepayment in the event of a change in control of the
Company, which could also serve to delay or prevent such a change in control
from occurring. Moreover, the Company's By-Laws provide that a stockholder
entitled to vote for the election of directors at a meeting may nominate a
person or persons for election as director only if written notice of such
stockholder's intent to make such nomination is given to the Company's
Secretary not later than sixty days in advance of such
21
<PAGE>
meeting, and the Company's stock option plans contain a provision which
accelerates the vesting of outstanding options in the event of certain
changes in control of the Company, both of which could serve to delay or
prevent a change in control from occurring. In addition, the Company is and,
subject to certain conditions, will continue to be, subject to the
anti-takeover provisions of the Delaware General Corporation Law, which could
have the effect of delaying or preventing a change of control of the Company.
Furthermore, transfers of control and/or certain assets of
telecommunications entities, such as the Company, may require the approval of
the FCC and/or state regulatory commissions. With respect to 38 GHZ licenses
such as the Company's Wireless Licenses, assignments of such licenses and
changes of control involving entities holding licenses require prior FCC and
state regulatory approval and are subject to restrictions and limitations on
the identity and status of the assignee or successor. See "Description of
Capital Stock."
Potential Adverse Effects of Issuance of Senior Preferred Stock
The Company is authorized to issue preferred stock in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors. In certain instances, subject to the approval of the holders of at
least two-thirds of the outstanding shares of the Series A Preferred Stock, such
series of preferred stock could include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights senior to the Series A Preferred
Stock, and in all instances, senior to the Common Stock. Accordingly, future
issuance of such preferred stock, depending upon the rights, preferences and
designations thereof, could effectively diminish or supercede the dividends and
liquidation preferences of the Series A Preferred Stock and adversely affect the
Common Stock and the rights of the holders thereof.
Potential Adverse Effect of Acceleration of Warrants
The Company may accelerate the expiration date of the Warrants at any time
after February 11, 2000 if the last sale price of the Common Stock is $40 per
share or more for a period of 20 consecutive days. Notice of acceleration of
the Warrants could force the holders to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so, to
sell the Warrants when they might otherwise wish to hold the Warrants, or to
accept the redemption price which would be substantially less than the value of
the Warrants at the time of redemption.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the sale of the
Preferred Stock, Warrants or Option Shares by the Selling Securityholders or
from its issuance of the Conversion Shares. The Company will receive aggregate
gross proceeds of $40,938,100 upon exercise of the Warrants and Options,
assuming all such Warrants and Options are exercised. Such proceeds will be
used for working capital for the Company's telecommunications and
non-telecommunications businesses and to make investments in, acquire, make
loans to, or otherwise enter into business arrangements with, companies which
may or may not be involved in the telecommunications business, and for general
corporate purposes.
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock.
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 to the
record holders of the Series A Preferred Stock as of March 15, June 15,
September 15 and December 15, respectively, of each year. The Company may
pay such dividends in either cash or through the issuance of additional
shares of Series
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<PAGE>
A Preferred Stock, at its election. The Company intends to retain future
earnings, if any, to finance the development and expansion of its business.
Accordingly, the Company anticipates that no dividends will be paid on the
Common Stock in the foreseeable future and that dividends with respect to the
Series A Preferred Stock will be paid by the issuance of additional shares of
Series A Preferred Stock. Further, certain covenants in the Indentures
currently effectively prohibit the Company from declaring or paying cash
dividends. The terms of the Series A Preferred Stock provide that the Series
A Preferred Stock ranks senior to the Common Stock with respect to the
payment of dividends. Accordingly, in the event the Company is no longer
restricted from declaring cash dividends under its Indentures and determines
to do so, no holders of Common Stock will receive any such dividend until
such time as all holders of the Series A Preferred Stock have received
payment of the entire dividend to which they are entitled under the terms of
the Series A Preferred Stock, and then only if, and to the extent that, there
is sufficient cash remaining to pay dividends to the holders of the Common
Stock.
DESCRIPTION OF CAPITAL STOCK
Common Stock
The authorized capital stock of the Company includes 75,000,000 shares of
Common Stock, $.01 par value. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Although the Company has no present intention of paying any
dividends, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation or dissolution of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preference of preferred shares, if
any.
Holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
The Company's Certificate of Incorporation, as amended, provides (i) for a
Board of Directors divided into three classes, each of which will generally
serve for a term of three years, with only one class of directors being elected
in each year; (ii) that directors may be removed with or without cause and only
by at least a majority in interest of the capital stock of the Company entitled
to vote thereon; and (iii) that an affirmative vote of the holders of at least
two-thirds of the capital stock of the Company entitled to vote thereon is
required to alter, amend or repeal the provisions relating to the classification
of, and the removal of members from, the Board of Directors. Nominations for the
Board of Directors may be made by the Board or by any stockholder entitled to
vote for the election of directors. A stockholder entitled to vote for the
election of directors at a meeting may nominate a person or persons for election
as director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting. The Company's Certificate of Incorporation and By-Laws
do not provide for cumulative voting rights which means that holders of more
than one-half of the outstanding voting rights, voting for the election of
directors, can elect all of the directors to be elected, if they so choose and,
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors. A special meeting of stockholders of the Company may
be called by the request of the holders of at least 10% of the outstanding
capital stock of the Company entitled to vote generally in all matters.
The registrar and transfer agent for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
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<PAGE>
Preferred Stock
Series A 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.
On February 6, 1997, the Company issued an aggregate of 4,000,000 shares of
Series A Preferred Stock in the Preferred Stock Placement. 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 Company intends to retain future earnings, if any, to
finance the development and expansion of its business. Accordingly, the Company
anticipates that no dividends will be paid on the Common Stock in the
foreseeable future and that dividends with respect to the Series A Preferred
Stock will be paid by the issuance of additional shares of Series A Preferred
Stock. Further, certain covenants in the Indentures currently effectively
prohibit the Company from declaring or paying cash dividends. The terms of the
Series A Preferred Stock provide that the Series A Preferred Stock ranks senior
to the Common Stock with respect to the payment of dividends. Accordingly, in
the event the Company is no longer restricted from declaring cash dividends
under its Indentures and determines to do so, no holders of Common Stock will
receive any such dividend until such time as all holders of the Series A
Preferred Stock have received payment of the entire dividend to which they are
entitled under the terms of the Series A Preferred Stock, and then only if, and
to the extent that, there is sufficient cash remaining to pay dividends to the
holders of the Common Stock.
Commencing August 11, 1997, each share of Series A Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing
the aggregate Stated Value of such share of Series A Preferred Stock by the
Conversion Price (as defined below); provided, however, that from August 11,
1997 through November 10, 1997, only 50% of the Series A Preferred Stock may
be converted. 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 elect (subject to certain notice requirements and to contractual
restrictions contained in certain of the Company's debt instruments), in lieu
of converting such Series A Preferred Stock into shares of Common Stock, to
pay such holder or holders 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. It is the Company's current intention to pay cash
in lieu of shares of Common Stock if the conversion price at the time of any
such conversion is less than $15.00, assuming such cash payments would be
allowable under then existing law and the terms of all agreements to which
the Company is then a party. 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
24
<PAGE>
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.
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 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 (including shares issued pursuant to this Prospectus). Currently the
Rights are not separate from the Common Stock and one not exercisable and 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 of the Company's outstanding Common Stock. Each Right that is
not owned by an Acquiring Person entitles the holder of the Right to buy one
one-thousandth of one share (a "Unit") of Series B Preferred Stock which will be
issued by the Company. If any person becomes an Acquiring Person, or if an
Acquiring Person engages in certain transactions involving conflicts of interest
or in a business combination in which the Company's Common Stock remains
outstanding, then the Rights Plan provides that each Right, other than any Right
held by the Acquiring Person, entitles the holder to purchase, for $70, Units
with a market value of $140. However, if the Company is involved in a business
combination in which the Company itself is not the survivor, or if the Company
sells 50% or more of its assets or earning power to another person, then the
Rights Plan provides that each Right entitles 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.
Warrants
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.
Statutory Provisions Affecting Stockholders
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless prior
to the date the stockholder became an interested stockholder the board
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder or unless one of the
following two exceptions to the prohibitions are satisfied: (i) upon
consummation of the transaction that resulted in such person becoming an
interested stockholder, the interested stockholder owned at least 85% of the
Company's voting stock outstanding at the time the transaction commenced
(excluding, for purposes of determining the number of shares outstanding,
shares owned by certain directors or certain employee stock plans) or (ii) on
or after the date the stockholder became an interested stockholder, the
business combination is approved by the
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<PAGE>
board of directors and authorized by the affirmative vote (and not by written
consent) of at least two-thirds of the outstanding voting stock, excluding
the stock owned by the interested stockholder. A "business combination"
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a
person who (other than the corporation and any direct or indirect
majority-owned subsidiary of the corporation), together with affiliates and
associates, owns (or, as an affiliate or associate, within three years prior,
did own) 15% or more of the corporation's outstanding voting stock. It is
possible that these provisions may have the effect of delaying, deterring or
preventing a change in control of the Company.
26
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
This Prospectus relates to the resale by the Selling Securityholders of
the securities listed below. All of the securities being registered under the
Registration Statement of which this Prospectus forms a part are being so
registered pursuant to certain registration rights granted by the Company to the
Selling Securityholders. None of the Selling Securityholders has had a material
relationship with the Company or any of its predecessors or affiliates within
the past three years, except as described in the footnotes below or otherwise in
this Prospectus.
27
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL NUMBER OF
OWNERSHIP SHARES OF
OF SERIES A SERIES A
SERIES A PREFERRED STOCK AND WARRANTS PREFERRED PREFERRED BENEFICIAL NUMBER OF
NAME OF STOCK AS STOCK ONERSHIP OF WARRANTS
SELLING SECURITYHOLDER OF JULY 20, 1997(1) TO BE SOLD(1) WARRANTS TO BE SOLD
- --------------------------------------------------- ------------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Commonwealth Life Insurance Company
Teamsters-Camden Non-Enhanced (Camden Asset
Management LP)................................... 150,000 150,000 60,000 60,000
Commonwealth Life Insurance Company A/C Teamsters
I................................................ 150,000 150,000 60,000 60,000
Credit Suisse First Boston Corporation............. 12,000 12,000 4,800 4,800
Cudd & Co.......................................... 44,000 44,000 17,600 17,600
Deep Rock & Co..................................... 100,000 100,000 -- --
JMG Capital Partners LP............................ 30,000 30,000 16,000 16,000
KA Management Ltd.................................. 6,453 6,453 2,560 2,560
KA Trading Ltd..................................... 13,714 13,714 5,440 5,440
Lehman Brothers.................................... 15,000 15,000 -- --
Lehman Brothers A/C Palladin Omnibus A/C Glen
Eagles Fund...................................... 8,000 8,000 3,200 3,200
Lehman Brothers A/C Palladin Omnibus A/C Palladin
Partners L.P..................................... 8,000 8,000 3,200 3,200
List & Co.......................................... 131,000 131,0000 52,400 52,400
Mariner Atlantic Ltd.(2)........................... 20,000 20,000 8,000 8,000
Och-Ziff Capital Management, L.P................... 200,000 200,000 80,000 80,000
Proprietary Convertible Investment Group(3)........ 904,000 904,000 401,600 401,600
Prudential Securities Inc. A/C Oak Partners........ 469,000 469,000 187,600 187,600
Ramius Fund Ltd.................................... 8,000 8,000 3,200 3,200
Republic New York Securities Act A/C Palladin
Partners A/C Colonial Penn Insurance Company..... 8,000 8,000 3,200 3,200
Republic New York Securities Act A/C Palladin
Partners A/C Colonial Life Insurance............. 8,000 8,000 3,200 3,200
SBC Warburg Inc.................................... 600,000 600,000 240,000 240,000
Shepard Trading Ltd................................ 100,000 100,000 40,000 40,000
Stark International................................ 100,000 100,000 40,000 40,000
State Street Bank & Trust Co. A/C Presidents &
Fellows of Harvard College....................... 100,000 100,000 40,000 40,000
Triton Capital Investment, Ltd. (Triton
Holdings)........................................ 14,833 14,833 8,000 8,000
Tridant Trust Company A/C HBK Cayman LP............ 80,000 80,000 32,000 32,000
Tridant Trust Company A/C HBK Offshore Fund,
Ltd.............................................. 320,000 320,000 128,000 128,000
Ziff Asset Management, L.P.(4)..................... 400,000 400,000 160,000 160,000
</TABLE>
FOOTNOTES BEGIN ON NEXT PAGE
COMMON STOCK
28
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<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP NUMBER OF BENEFICIAL
OF COMMON STOCK SHARES OF OWNERSHIP OF
NAME OF AS COMMON STOCK COMMON STOCK
SELLING SECURITYHOLDER OF MAY 15, 1997 TO BE SOLD AFTER SALE
- ---------------------- ------------------- -------------- ------------
<S> <C> <C> <C>
Steve G. Chrust (5)........................................... 533,669(6) 175,000(7) 358,669
ITC Group, Inc. (8)........................................... 20,000 20,000(9) 0
Stuart Rekant (10)............................................ 175,239(11) 35,000(12) 140,239
Shintex, Inc. (13)............................................ 35,000 35,000 0
</TABLE>
- ------------------------
(1) All shares of Series A Preferred Stock and Warrants set forth above were
sold in the Preferred Stock Placement. The Selling Stockholders shall also
be entitled to sell, and the Registration Statement of which this Prospectus
forms a part also covers, any and all additional shares of Series A
Preferred Stock that may be issued as dividends on such Series A Preferred
Stock in lieu of cash during the term of the Series A Preferred Stock.
(2) Mariner Investment Group, Inc. acts as investment manager for Mariner
Atlantic, Ltd.
(3) Credit Suisse First Boston Corporation, CSFP Capital, Inc. and Swiss
American Securities, Inc. are affiliates of Proprietary Convertible
Investment Group.
(4) PBK Holdings, Inc., is the managing general partner of Ziff Asset
Management, L.P. ("Ziff") and has the power to vote and dispose of all of
Ziff's securities. Additionally, Franklin Street Capital, LLC, the
investment general partner of Ziff has the power to vote and dispose of such
securities.
(5) Mr. Chrust is Vice Chairman and a director of the Company.
(6) Includes (i) 12,000 shares of Common Stock owned by the pension plan for SGC
Advisory Services, Inc., a money management firm specializing in the
telecommunications sector of which Mr. Chrust is President and owner, and
(ii) 368,333 shares of Common Stock issuable upon exercise of certain
options owned by Mr. Chrust or members of his family. Does not include (A)
360,000 shares of Common Stock issuable upon exercise of other options which
become exercisable in three equal annual installments commencing in January
1998, (B) 33,335 shares of Common Stock issuable upon exercise of other
options which become exercisable in July 1998 or (C) 35,000 shares of Common
Stock issuable upon exercise of options which become exercisable in five
equal annual installments commencing in April 1998.
(7) Represents 125,000 shares of Common Stock issuable upon exercise of options
exercisable at $4.50 per share and 50,000 shares of Common Stock issuable
upon exercise of options exercisable at $2.75 per share, which were issued
to Mr. Chrust as consideration for financial consulting services rendered to
the Company prior to his employment with the Company.
(8) ITC Group, Inc. ("ITC") is an entity of which Nathan Kantor, President,
Chief Operating Officer and a director of the Company, is President and a
principal stockholder.
(9) Represents shares of Common Stock issuable upon exercise of options
exercisable at $4.41 per share issued to ITC as consideration for consulting
services rendered to the Company prior to Mr. Kantor's employment with the
Company.
(10) Stuart Rekant is the President and Chief Operating Officer of WinStar New
Media Company, Inc., a wholly-owned subsidiary of the Company.
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<PAGE>
(11) Includes 3,239 shares of Common Stock owned by Mr. Rekant's spouse and
170,000 shares of Common Stock issuable upon exercise of certain options.
Does not include 30,000 shares of Common Stock issuable upon exercise of
options which become exercisable in June 1998.
(12) Represents shares of Common Stock issuable upon exercise of options
exercisable at $2.125 per share issued to Mr. Rekant in connection with
certain financing arrangements prior to his employment with the Company.
(13) Represents shares of Common Stock issuable upon exercise of options
exercisable at $2.125 per share issued to Shintex, Inc. in connection with
certain financing arrangements.
The shares of Series A Preferred Stock and Warrants may be offered and
sold from time to time by the Selling Securityholders or by their pledgees,
donees, transferees or other successors in interest, and the Warrant Shares
and Conversion Shares, if and when issued, may be offered and sold from time
to time by the holders thereof or by their pledgees, donees, transferees or
other successors in interest, as market conditions permit in the
over-the-counter market, including the Nasdaq National Market, in negotiated
transactions or otherwise, at prices and terms then prevailing or at prices
related to the then-current market price, or in negotiated transactions. The
Securities may be sold by one or more of the following methods, without
limitation: (i) a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (ii) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (iii) ordinary brokerage transactions
and transactions in which the broker solicits purchases; and (iv)
transactions between sellers and purchasers without a broker/dealer; and (v)
underwritten offerings. In effecting sales, brokers or dealers may arrange
for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from Selling Securityholders in amounts to
be negotiated. Such brokers and dealers and any other participating brokers
and dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales. Currently, there is no market
for the Series A Preferred Stock and Warrants, and none is expected to
develop.
LEGAL MATTERS
The legality of the issuance of the Conversion Shares and Warrant Shares
will be passed upon for the Company by Graubard Mollen & Miller, New York, New
York. Certain partners and employees of Graubard Mollen & Miller own shares of
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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference
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Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of the reports, proxy
statements and other information can be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549, at prescribed rates. In
addition, all reports filed by the Company via the Commission's Electronic
Data Gathering and Retrieval System (EDGAR) can be obtained from the
Commission's Internet web site located at http:\\www.sec.gov. The Common
Stock of the Company is traded on the Nasdaq National Market (Symbol: WCII),
and such reports, proxy statements and other information concerning the
Company also can be inspected at the offices of the Nasdaq National Market,
1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement under the
Securities Act on Form S-3 (No. 333-18465) with respect to the securities
offered by the Company pursuant to this Prospectus. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
about the Company and the securities offered hereby, reference is made to the
Registration Statement and to the financial statements, exhibits and schedules
filed therewith. The statements contained in this Prospectus about the contents
of any contract or other document referred to are not necessarily complete, and
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statements, each such statement
being qualified in all respects by such reference. Copies of each such document
may be obtained from the Commission at its principal office in Washington, D.C.
upon payment of the charges prescribed by the Commission.
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