<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: (Date of earliest event reported): June 10, 1997
-------------
WINSTAR COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 1-10726 13-3585278
-------- ------- ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
230 Park Avenue, New York, New York 10169
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 584-4000
Not Applicable
--------------
(Former Name or Former Address, if Changed Since Last Report)
Exhibit Index -- Page 3
Page 1 of 47 Pages
<PAGE>
Item 5. Other Events.
This report is being filed by WinStar Communications, Inc. (the
"Company") for the following purposes:
(a) to include as Exhibit 99.1 hereto the Company's audited
consolidated financial statements as of December 31, 1995 and 1996
and audited consolidated financial statements and schedule for
the year ended February 28, 1995, the ten months ended
December 31, 1995 and the year ended December 31, 1996, which have
been reclassified to reflect the Company's consumer products
subsidiary, WinStar Global Products, Inc., as a discontinued
operation as a result of the approval by the Company's Board of
Directors on May 13, 1997, subsequent to the filing of its Annual
Report on Form 10-K for the year ended December 31, 1996, of a
formal plan of disposal for such subsidiary;
(b) to include as Exhibit 99.2 hereto, the audited financial
statements of Milliwave Limited Partnership ("Milliwave"), including
Balance Sheets as of December 31, 1996 and 1995, Statements of
Changes in Partners' Capital for the period April 25, 1995
(inception) through December 31, 1995 and the year ended
December 31, 1996 and statements of operations and cash flows for
the year ended December 31, 1996; and
(c) to include as Exhibit 99.3 hereto the Company's Unaudited Pro
Forma Condensed Consolidated Statements, including (A) the
Company's Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1996, which statement
reflects (i) the acquisition by a subsidiary of the Company of
Milliwave, (ii) the sale by the Company and a subsidiary of the
Company in February 1997 of an aggregate of 4 million shares of the
Company's 6% Series A Cumulative Convertible Preferred Stock and
Warrants to purchase 1.6 million shares of the Company's Common
Stock in an institutional private placement (the "Preferred Stock
Placement"), and (iii) the issuance by the Company and a subsidiary
of the Company in March 1997 of an aggregate of $300 million of
notes in an institutional private placement (the "1997 Debt
Placement"), as if each of such transactions had taken place at the
beginning of 1996, and (B) the Company's Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the three months
ended March 31, 1997, which statement reflects (i) the Preferred
Stock Placement and (ii) the 1997 Debt Placement, as if each of such
transactions had taken place at the beginning of the three months
ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: June 10, 1997
WINSTAR COMMUNICATIONS, INC.
(Registrant)
By: /s/ Timothy R. Graham
--------------------------
Timothy R. Graham
Executive Vice President
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------- -----------
99.1 Audited consolidated financial statements of the Company as
of December 31, 1995 and 1996 and audited financial
statements and financial statement schedule for the year ended
February 28, 1995, the ten months ended December 31, 1995 and
the year ended December 31, 1996.
99.2 Audited financial statements of Millwave, including Balance
Sheets as of December 31, 1996 and 1995, Statements of
Changes in Partners' Capital for the period April 25, 1995
(inception) through December 31, 1995 and the year ended
December 31, 1996 and Statements of Operations and Cash Flows
for the year ended December 31, 1996
99.3 Unaudited Pro Forma Condensed Consolidated Statements of
Operations of the Company (i) for the year ended
December 31, 1996 and (ii) For the three months ended
March 31, 1997
<PAGE>
WINSTAR COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE NUMBER
---------------
Winstar Communications, Inc. and Subsidiaries Consolidated Financial Statements
<S> <C>
Report of Independent Certified Public Accountants.................................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996........................................ F-3
Consolidated Statements of Operations, Year Ended February 28, 1995, Ten Months ended December 31,
1994 (unaudited), Ten Months ended December 31, 1995 and the Year Ended December 31, 1996......... F-4
Consolidated Statements of Stockholders' Equity (Deficit), Year Ended February 28, 1995, Ten Months
ended December 31, 1995 and the Year Ended December 31, 1996...................................... F-5
Consolidated Statements of Cash Flows, Year Ended February 28, 1995, Ten Months ended December 31,
1995 and the Year Ended December 31, 1996......................................................... F-8
Notes to Consolidated Financial Statements.......................................................... F-9
Report of Independent Certified Public Accountants on Schedules..................................... F-31
Schedule II--Valuation and Qualifying Accounts, Year Ended February 28, 1995, Ten Months Ended
December 31, 1995 and the Year Ended December 31, 1996............................................ F-32
Milliwave Limited Partnership Financial Statements
Report of Independent Certified Public Accounts.................................................... F-33
Balance Sheets as of December 31, 1995 and 1996.................................................... F-34
Statement of Operations, Year Ended December 31, 1996.............................................. F-35
Statement of Change in Partners' Capital, April 25, 1995 (inception) through December 31, 1995 and
the Year Ended December 31, 1996................................................................... F-36
Statement of Cash Flows, Year Ended December 31, 1996.............................................. F-37
Notes to Financial Statements...................................................................... F-38
Unaudited Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Financial Statements..................................... F-41
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Year Ended December 31, 1996.... F-42
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Three Months Ended
March 31, 1997...................................................................................... F-43
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............................ F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
WinStar Communications, Inc.
We have audited the accompanying consolidated balance sheets of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year ended February 28, 1995, the ten months ended
December 31, 1995 and the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the year ended February 28, 1995, the ten months ended December 31, 1995 and the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
January 24, 1997, except for the last paragraph of Note 19 as to which the
date is May 13, 1997
F-2
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
DECEMBER 31, -----------------------------
1995 HISTORICAL PRO FORMA
------------ --------- ------------------
<S> <C> <C> <C>
(UNAUDITED, NOTE
2)
ASSETS
Current assets
Cash and cash equivalents......................................... $ 138,007 $ 95,490 $ 60,573
Short-term investments............................................ 73,595 26,997 26,997
------------ --------- --------
Cash, cash equivalents and short-term investments............... 211,602 122,487 87,570
Investments in equity securities.................................. 6,515 688 688
Accounts receivable, net of allowance for doubtful accounts of
$684 and $852 respectively...................................... 5,836 13,150 13,156
Inventories....................................................... 1,941 5,009 5,009
Net assets of discontinued operations............................. 3,321 3,814 3,814
Prepaid expenses and other current assets......................... 3,315 15,969 10,969
------------ --------- --------
Total current assets............................................ 232,530 161,117 121,206
Property and equipment, net......................................... 15,063 62,572 63,963
Licenses, net....................................................... 12,556 27,434 167,569
Intangible assets, net.............................................. 2,495 12,955 12,955
Deferred financing costs............................................ 10,525 10,535 10,535
Other assets........................................................ 5,057 4,176 4,176
------------ --------- --------
Total assets................................................ $ 278,226 $ 278,789 $ 380,404
------------ --------- --------
------------ --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt................................. $ 3,950 $ 19,901 $ 19,901
Accounts payable and accrued expenses............................. 10,771 29,442 29,553
Current portion of capitalized lease obligations.................. 1,325 3,110 3,110
------------ --------- --------
Total current liabilities....................................... 16,046 52,453 52,564
Capitalized lease obligations, less current portion................. 6,054 10,846 10,846
Long-term debt, less current portion................................ 234,374 265,161 265,161
Deferred income taxes............................................... -- -- 26,500
------------ --------- --------
Total liabilities............................................... 256,474 328,460 355,071
------------ --------- --------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock................................................... 689 -- --
Common stock, par value $.01; authorized 75,000 shares, issued
29,708 and 28,989, outstanding 27,201 and 28,989, respectively,
and pro forma issued and outstanding 32,583 shares.............. 297 290 326
Additional paid-in capital........................................ 103,837 75,436 150,404
Accumulated deficit............................................... (41,311) (125,034) (125,034)
------------ --------- --------
63,512 (49,308) 25,696
Treasury stock.................................................... (39,678) -- --
Deferred compensation............................................. (1,100) -- --
Unrealized loss on marketable equity securities................... (982) (363) (363)
------------ --------- --------
Total stockholders' equity (deficit)............................ 21,752 (49,671) 25,333
------------ --------- --------
Total liabilities and stockholders' equity (deficit)........ $ 278,226 $ 278,789 $ 380,404
------------ --------- --------
------------ --------- --------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED FOR THE TEN MONTHS FOR THE
FEBRUARY ENDED DECEMBER 31, YEAR ENDED
28, ------------------------ DECEMBER 31,
1995 1994 1995 1996
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Operating revenues
Telecommunications services............................... $ 14,909 $ 13,420 $ 13,137 $ 33,969
Information services...................................... 473 193 2,648 14,650
----------- ------------ ---------- ------------
Total operating revenues.................................... 15,382 13,613 15,785 48,619
----------- ------------ ---------- ------------
Operating expenses
Cost of services and products............................. 12,113 9,398 12,073 38,233
Selling, general and administrative expenses.............. 9,137 7,945 13,617 62,365
Depreciation and amortization............................. 217 169 1,027 4,501
----------- ------------ ---------- ------------
Total operating expenses.................................... 21,467 17,512 26,717 105,099
----------- ------------ ---------- ------------
Operating loss.............................................. (6,085) (3,899) (10,932) (56,480)
Other income (expense)
Interest expense.......................................... (375) (300) (7,186) (36,748)
Interest income........................................... 343 255 2,890 10,515
Equity in loss of AGT..................................... (1,109) (766) (866) --
----------- ------------ ---------- ------------
Net loss from continuing operations......................... (7,226) (4,710) (16,094) (82,713)
Net income (loss)...........from discontinued operations.... (4) 92 237 (1,010)
----------- ------------ ---------- ------------
Net loss.................................................... $ (7,230) $ (4,618) $ (15,857) $ (83,723)
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
Net loss per share from continuing operations............... $ (0.42) $ (0.29) $ (0.71) $ (2.96)
Net income (loss) per share from discontinued operations.... (0.00) 0.01 0.01 (0.04)
----------- ------------ ---------- ------------
Net loss per share.......................................... $ (0.42) $ (0.28) $ (0.70) $ (3.00)
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
Weighted average shares outstanding......................... 17,122 16,609 22,770 27,911
----------- ------------ ---------- ------------
----------- ------------ ---------- ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------------------------------
B C D
---------------------- ------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 28, 1994........ 1.20 $ 1,204 0.17 $ 173 225 $ 900
Issuances of common stock............
Exercise of warrants.................
Conversion of preferred stock........ (0.53) (533) (0.17) (173) (225) (900)
Preferred stock dividend............. 0.06 62
Other, net...........................
Net loss.............................
----- --------- ----- ----- --- -----
BALANCES AT FEBRUARY 28, 1995........ 0.73 $ 733 -- $ -- -- $ --
----- --------- ----- ----- --- -----
----- --------- ----- ----- --- -----
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 28, 1994........ 9,843 $ 98 $ 20,290 $ (17,946) $ 4,719
Issuances of common stock............ 3,714 37 7,967 8,004
Exercise of warrants................. 6,105 61 12,738 12,799
Conversion of preferred stock........ 485 5 1,601 --
Preferred stock dividend............. (62) --
Other, net........................... (13) (13)
Net loss............................. (7,230) (7,230)
--------- ----- ----------- ----------- -----------
BALANCES AT FEBRUARY 28, 1995........ 20,147 $ 201 $ 42,583 $ (25,238) $ 18,279
--------- ----- ----------- ----------- ------------
--------- ----- ----------- ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------------------------
B E COMMON STOCK ADDITIONAL
---------------------- ------------------------ ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- ----------- ----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 28,
1995......................... 0.73 $ 733 -- $ -- 20,147 $ 201 $ 42,583 $ (25,238)
Issuances of common stock...... 4,447 45 10,639
Issuance of preferred stock.... 932 6,000 (360)
Conversions of preferred
stock........................ (0.15) (147) (932) (6,000) 684 7 6,140
Warrants and common stock
equivalents issued in
connection with long-term
debt and lease financing..... 981
Conversion of long-term debt... 539 5 3,410
Preferred stock dividends...... 0.11 103 (216)
Issuance of restricted stock... 150 2 1,236
Amortization of deferred
compensation.................
WinStar Private Exchange
Transaction.................. 3,741 37 39,641
Unrealized loss on investments
in marketable equity
securities...................
Other, net..................... (433)
Net loss....................... (15,857)
--------- ----------- ----------- ----------- --------- ----- ----------- ------------
BALANCES AT DECEMBER 31,
1995......................... 0.69 $ 689 -- $ -- 29,708 $ 297 $ 103,837 $ (41,311)
--------- ----------- ----------- ----------- --------- ----- ----------- ------------
--------- ----------- ----------- ----------- --------- ----- ----------- ------------
<CAPTION>
TREASURY STOCK
--------------------------------------------------
UNREALIZED LOSS
COMMON STOCK PREFERRED STOCK B ON INVESTMENTS
---------------------- -------------------------- DEFERRED IN MARKETABLE
SHARES AMOUNT SHARES AMOUNT COMPENSATION EQUITY SECURITIES
----------- --------- ------------- ----------- --------------- -------------------
<S> <C>
BALANCES AT FEBRUARY 28,
1995......................... -- $ -- -- $ -- $ -- $ --
Issuances of common stock......
Issuance of preferred stock....
Conversions of preferred
stock........................
Warrants and common stock
equivalents issued in
connection with long-term
debt and lease financing.....
Conversion of long-term debt...
Preferred stock dividends......
Issuance of restricted stock... (1,238)
Amortization of deferred
compensation................. 138
WinStar Private Exchange
Transaction.................. (2,507) (36,348) (0.69) (3,330)
Unrealized loss on investments
in marketable equity
securities................... (982)
Other, net.....................
Net loss.......................
----------- --------- ----- ----------- ------- -----
BALANCES AT DECEMBER 31,
1995......................... (2,507) $ (36,348) (0.69) $ (3,330) $ (1,100) $ (982)
----------- --------- ----- ----------- ------- -----
----------- --------- ----- ----------- ------- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
BALANCES AT FEBRUARY 28,
1995......................... $ 18,279
Issuances of common stock...... 10,684
Issuance of preferred stock.... 5,640
Conversions of preferred
stock........................ --
Warrants and common stock
equivalents issued in
connection with long-term
debt and lease financing..... 981
Conversion of long-term debt... 3,415
Preferred stock dividends...... (113)
Issuance of restricted stock... --
Amortization of deferred
compensation................. 138
WinStar Private Exchange
Transaction.................. --
Unrealized loss on investments
in marketable equity
securities................... (982)
Other, net..................... (433)
Net loss....................... (15,857)
-------------
BALANCES AT DECEMBER 31,
1995......................... $ 21,752
-------------
-------------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK B COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995......... 0.69 $ 689 29,708 $ 297 $ 103,837 $ (41,311)
Issuances of common stock............. 1,383 14 9,619
Acquisition of treasury shares........
Retirement of treasury shares......... (0.69) (689) (2,657) (27) (42,018)
Amortization of deferred
compensation........................
Conversion of long-term debt.......... 555 6 3,878
Fair value of stock options granted to
nonemployees and other, net......... 120
Unrealized gain on investments in
marketable equity securities........
Net loss.............................. (83,723)
--------- --------- --------- ----- ----------- ------------
BALANCES AT DECEMBER 31, 1996......... -- $ -- 28,989 $ 290 $ 75,436 $ (125,034)
--------- --------- --------- ----- ----------- ------------
--------- --------- --------- ----- ----------- ------------
<CAPTION>
TREASURY STOCK
----------------------------------------------- UNREALIZED
GAIN/ (LOSS)
COMMON STOCK PREFERRED STOCK B ON INVESTMENTS
--------------------- ---------------------- DEFERRED IN MARKETABLE
SHARES AMOUNT SHARES AMOUNT COMPENSATION EQUITY SECURITIES
--------- --------- ----------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995.......... (2,507) $ (36,348) (0.69) $ (3,330) $ (1,100) $ (982)
Issuances of common stock.............
Acquisition of treasury shares........ (150) (3,056)
Retirement of treasury shares......... 2,657 39,404 0.69 3,330
Amortization of deferred
compensation........................ 1,100
Conversion of long-term debt..........
Fair value of stock options granted to
nonemployees and other, net.........
Unrealized gain on investments in
marketable equity securities........ 619
Net loss..............................
--------- --------- ----- --------- ------------- -----
BALANCES AT DECEMBER 31, 1996......... -- $ -- -- $ -- $ -- $ (363)
--------- --------- ----- --------- ------------- -----
--------- --------- ----- --------- ------------- -----
<CAPTION>
TOTAL
STOCKHOLDERS
EQUITY
(DEFICIT)
------------
<S> <C>
BALANCES AT DECEMBER 31, 1995.......... $ 21,752
Issuances of common stock............. 9,633
Acquisition of treasury shares........ (3,056)
Retirement of treasury shares......... --
Amortization of deferred
compensation........................ 1,100
Conversion of long-term debt.......... 3,884
Fair value of stock options granted to
nonemployees and other, net......... 120
Unrealized gain on investments in
marketable equity securities........ 619
Net loss.............................. (83,723)
------------
BALANCES AT DECEMBER 31, 1996......... $ (49,671)
------------
------------
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31,
1995 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss............................................................. $ (7,230) $ (15,857) $ (83,723)
Adjustments to reconcile net loss to net cash used in operating
activities:
Net (income) loss from discontinued operations..................... 4 (237) 1,010
Depreciation and amortization...................................... 424 1,117 5,977
Provision for doubtful accounts.................................... 828 855 1,562
Equity in unconsolidated results of AGT............................ 1,109 866 --
Noncash interest expense........................................... -- 6,151 35,040
Increase in operating assets:
Accounts receivable.............................................. (431) (4,216) (3,838)
Inventories...................................................... (371) (991) (1,897)
Prepaid expenses and other current assets........................ (581) (2,342) (13,442)
Other assets..................................................... (547) (865) (1,940)
Increase in accounts payable and accrued expenses.................. 1,123 4,911 9,795
Net cash provided by (used in) discontinued operations............. 278 90 (1,481)
Other, net......................................................... 77 179 186
------------ ------------ ------------
Net cash used in operating activities.................................. (5,317) (10,339) (52,751)
------------ ------------ ------------
Cash flows from investing activities:
Investments in and advances to AGT................................... (7,129) (5,704) --
Decrease (increase) in short-term investments, net................... -- (73,594) 46,597
Decrease (increase) in other investments, net........................ -- (7,497) 6,447
Purchase of property and equipment, net.............................. (789) (8,138) (47,842)
Acquisitions, net.................................................... (679) -- (2,121)
Other, net........................................................... (1,923) (499) (1,619)
------------ ------------ ------------
Net cash provided by (used in) investing activities.................... (10,520) (95,432) 1,462
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from (repayment of) long-term debt, net..................... (431) 224,200 (2,778)
Payment of dividends................................................. -- (113) --
Net proceeds from equity transactions................................ 19,067 11,259 6,295
Proceeds from equipment lease financing.............................. -- 6,998 8,345
Payment of capital lease obligations................................. (220) (676) (2,080)
Other, net........................................................... (329) (785) (1,010)
------------ ------------ ------------
Net cash provided by financing activities.............................. 18,087 240,883 8,772
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents................... 2,250 135,112 (42,517)
Cash and cash equivalents at beginning of period....................... 645 2,895 138,007
------------ ------------ ------------
Cash and cash equivalents at end of period............................. 2,895 138,007 95,490
Short-term investments at end of period................................ -- 73,595 26,997
------------ ------------ ------------
Cash, cash equivalents and short-term investments at end of period..... $ 2,895 $ 211,602 $ 122,487
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of WinStar
Communications, Inc. ("WCI") and its subsidiaries (the "Company"). All material
intercompany transactions and accounts have been eliminated in consolidation.
NATURE OF BUSINESS
The Company is the holder of the largest amount of 38 GHz licenses in the
United States and utilizes this position to provide facilities-based
telecommunications services. The Company plans to offer a full range of
telecommunications services as a Competitive Local Exchange Carrier ("CLEC"),
including local, long distance and Internet access services, to small and
medium-sized businesses in major metropolitan areas in the United States. The
Company also offers a variety of broadband, high-capacity local access and
digital network services to telecommunications service providers on a
wholesale basis. As a complement to its telecommunications services
offerings, the Company produces and distributes information and entertainment
content. The Company also operates a nonstrategic consumer products company,
WinStar Global Products, ("Global Products") which has been treated as a
discontinued operation in these financial statements. The Company's
telecommunications services are subject to varying degrees of federal, state
and local regulation.
To capitalize on opportunities in the telecommunications industry, the
Company is pursuing a rapid expansion of its telecommunications services, which
will require significant amounts of capital to finance capital expenditures and
anticipated operating losses. The Company may elect to slow the speed or narrow
the scope of this expansion in the event that it is unable to raise sufficient
amounts of capital on acceptable terms.
FISCAL YEAR
The Company changed its fiscal year end from February 28 to December 31,
effective January 1, 1996. Accordingly, these financial statements present the
year ended February 28, 1995, the ten-month transition period ended December 31,
1995, and the year ended December 31, 1996.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market fund investments, short-term certificates of
deposit, and commercial paper. Exclusive of cash in banks, cash equivalents at
December 31, 1995 and 1996 were $137.4 million and $84.5 million, respectively,
and approximate fair value.
SHORT-TERM INVESTMENTS
Short-term investments are widely diversified and principally consist of
certificates of deposit and money market deposits, U.S. government or government
agency securities, commercial paper rated "A-1/P-1" or higher, and municipal
securities rated "A" or higher with an original maturity of greater than three
months and less than six months. Short-term investments are considered
held-to-maturity and are stated at amortized cost which approximates fair value.
As of December 31, 1995 and 1996, cash, cash equivalents and short-term
investments totaled $211.7 million and $122.5 million, respectively.
F-9
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories in the merchandising division are valued at the lower of cost or
market, principally using the first-in, first-out method.
Film inventories include direct and indirect production costs, which are
amortized to expense in the proportion that revenue recognized during the year
for each film bears to the estimated total revenue to be received from all
sources under the individual film forecast method. Management's estimate of
forecasted revenues exceeds the unamortized costs on an individual program
basis. Such forecasted revenue is subject to revision in future periods if
warranted by changing market conditions.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
generally computed using the straight-line method over the estimated useful
lives of the related assets.
CAPITALIZED INTEREST
The Company follows the policy of capitalizing interest expense as a
component of the cost of its telecommunications equipment constructed for its
own use.
LICENSES AND INTANGIBLE ASSETS
Licenses and intangible assets are being amortized by the straight-line
method over their estimated useful lives.
Goodwill represents the excess of cost over the fair value of assets
acquired. The Company's policy is to measure goodwill impairment by considering
a number of factors as of each balance sheet date including (i) current
operating results of the applicable business, (ii) projected future operating
results of the applicable business, (iii) the occurrence of any significant
regulatory changes which may have an impact on the continuity of the business,
and (iv) any other material factors that affect the continuity of the applicable
business. The amortization period for goodwill is determined on a case-by-case
basis for each acquisition from which goodwill arises based on a review of the
nature of the business acquired as well as the factors cited above (see Note 6).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Pursuant to SFAS 109, deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets and
liabilities, loss carryforwards and tax credit carryforwards for which income
tax benefits are expected to be realized in future years. A valuation allowance
is established to reduce deferred tax assets if it is more likely than not that
all, or some portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-10
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
In the telecommunications segment, revenues are recorded upon placing of
calls or rendering of other related services. In the information services
segment, revenues from film productions are recognized when a program is
accepted by the licensee and is available for broadcast. Revenues from the
licensing of film productions are recognized when the license period begins
and the film is available for broadcast. Revenues from advertising sales are
recognized when the related advertising is broadcast. In the merchandising
segment, revenues are recorded upon shipment of merchandise. The Company
provides for future estimated returns of merchandise at the time of sale.
NET LOSS PER COMMON SHARE
Net loss per common share is calculated by dividing the net loss by the
weighted average number of shares of common stock outstanding. Stock options,
warrants and other convertible securities have not been included in the
calculation as their inclusion would be antidilutive.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of trade receivables. Concentration of credit
risk with respect to these receivables is generally diversified due to the large
number of entities comprising the Company's customer base and their dispersion
across geographic areas. The Company routinely addresses the financial strength
of its customers and, as a consequence, believes that its receivable credit risk
exposure is limited.
The Company places its cash and investments with relatively few high credit
quality financial institutions with approximately $60 million at one
institution. As a result, substantially all of the cash, cash equivalents and
short-term investments at December 31, 1996 are uninsured.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated statement of operations for the ten months ended
December 31, 1994 is a condensed financial statement in accordance with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
the statement omits certain information included in complete financial
statements and should be read in conjunction with the information for the year
ended February 28, 1995, the ten months ended December 31, 1995 and the year
ended December 31, 1996. In the opinion of the Company, the accompanying
unaudited consolidated financial statement includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the results of
operations for the ten months ended December 31, 1994.
F-11
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2--ACQUISITIONS
ACQUISITION OF MILLIWAVE LIMITED PARTNERSHIP AND PRO FORMA BALANCE SHEET
On January 2, 1997, a subsidiary of the Company merged with the corporate
shareholders of Milliwave Limited Partnership ("Milliwave"), a large holder of
38 GHz licenses in the United States, covering 160 million people in more than
80 major markets. The merger consideration paid by the Company to the
shareholders of the corporate partners of Milliwave was $116 million ($40.7
million in cash and 3.6 million shares of the Company's common stock, which had
an aggregate market value of $75 million). Pursuant to a registration rights
agreement, the Company agreed to register such shares of common stock for resale
prior to January 1, 1998. The merger was treated as a "purchase" for accounting
purposes with the purchase price principally allocated to licenses. In addition,
approximately $26.5 million of deferred tax liabilities were recorded in
connection with the acquisition, with a corresponding allocation to licenses,
which will be amortized on a straight-line basis over 40 years. Milliwave had
minimal operations prior to its merger into the Company.
The unaudited pro forma balance sheet has been prepared as if the Milliwave
acquisition had been consummated at December 31, 1996. The pro forma financial
information should be read in conjunction with the related historical
information and is not necessarily indicative of the results that would have
been attained had the transaction actually taken place.
Unaudited pro forma results of operations, which reflect the combined
operations of the Company and Milliwave as if the merger occurred as of
January 1, 1996, is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Operating Revenues......................................................... $ 47,131
Net Loss................................................................... (91,898)
Net Loss Per Share......................................................... (2.92)
</TABLE>
ACQUISITION OF LOCAL AREA TELECOMMUNICATIONS, INC.
In October 1996, a subsidiary of the Company acquired certain assets of
Local Area Telecommunications, Inc. ("Locate"), comprising its business as a
competitive access provider of local digital microwave distribution services and
facilities to large corporations and to interexchange and other common carriers.
The assets acquired included multiple 38 GHz licenses in the New York
metropolitan area. The purchase price for such assets was $17.5 million, which
was paid in the form of promissory notes (see Note 7). The acquisition has been
accounted for as a "purchase" for accounting purposes, with the majority of the
purchase price allocated to licenses, which will be amortized on a straight-line
basis over 40 years. The accounts of Locate have been consolidated into the
Company's financial statements as of the date of the acquisition.
F-12
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITIONS (CONTINUED)
ACQUISITION OF AVANT-GARDE
Avant-Garde Telecommunications, Inc. ("Avant-Garde" or "AGT") was a
privately held company which held 38 GHz radio licenses granted by the FCC in
September 1993. Through July 17, 1995, the Company owned 49% of Avant-Garde,
which it acquired for $4.9 million, and accounted for its investment in
Avant-Garde under the equity method. For the period from March 1, 1995 to July
17, 1995, and the year ended February 28, 1995, Avant-Garde had net losses of
$1.8 million and $2.3 million, respectively. On July 17, 1995, pursuant to the
terms of a merger agreement, the Company exchanged 1,275,000 restricted shares
of its common stock valued at $5.1 million for the 51% of Avant-Garde that it
did not already own. The acquisition of Avant-Garde has been treated as a
"purchase" for accounting purposes, with $12.6 million allocated to the licenses
acquired, which are being amortized on a straight-line basis over 40 years. The
accounts of Avant-Garde have been consolidated into the Company's financial
statements as of the date of the acquisition.
OTHER ACQUISITIONS
During the year ended February 28, 1995, a subsidiary of the Company
purchased Non Fiction Films, Inc. ("NFF"), a producer of non-fiction programming
for cable television and other media, for $476,000, consisting of $200,000 in
cash and 28,572 restricted shares of the Company's common stock. The transaction
was treated as a "purchase" for accounting purposes, with the purchase price
allocated based on the fair value of the assets acquired and liabilities
assumed. The excess of the purchase price over the fair value of the net assets
acquired, aggregating $495,000, has been recorded as goodwill. The accounts of
NFF have been consolidated into the Company's financial statements as of the
date of the acquisition.
During 1996, a subsidiary of the Company acquired 100% ownership or a
controlling interest in a number of companies engaged in the production and
distribution of entertainment content. These acquisitions were treated as
"purchases" for accounting purposes. The aggregate consideration for the
acquisitions was approximately $6.4 million, consisting of $4.1 million in cash,
$800,000 in notes payable and 100,605 shares of the Company's common stock or
share equivalents, valued at $1.5 million. In connection with these purchases,
the Company has made commitments to provide, under certain conditions, up to
$2.0 million in working capital and is obligated to pay contingent
consideration, up to a maximum of $3.5 million, if certain earnings targets are
met over the five-year period subsequent to the acquisition. The accounts of the
acquired companies have been consolidated with the Company's financial
statements as of the date of acquisitions.
Unaudited results of operations for acquisitions other than Milliwave have
not been included because they are not material to the consolidated statement of
operations of the Company.
NOTE 3--INVESTMENTS IN MARKETABLE EQUITY SECURITIES
The Company treats its investments in marketable securities as available for
sale securities. As such, they are carried at market value, with the difference
between the historical cost (which is determined on a FIFO basis) and the market
value reflected in unrealized gains or losses on marketable equity securities, a
component of stockholders' equity. During the year ended December 31, 1996,
proceeds of $6.4 million were realized on the sale of marketable securities,
which were sold at carrying value. At December 31, 1995 and 1996, unrealized
losses of $982,000 and $363,000, respectively, were carried in stockholders'
equity. The unrealized loss at December 31, 1996 is considered temporary.
F-13
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INVENTORIES
Components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods................................................... $ 1,433 $ 1,514
Raw materials.................................................... 4,018 7,092
Film inventories................................................. 1,941 5,009
------ ------------
7,392 13,615
Less: Global Products - discontinued operation................... (5,451) (8,606)
------ ------------
$ 1,941 $ 5,009
------ ------------
------ ------------
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, ESTIMATED
1995 1996 USEFUL LIFE
------------ ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Telecommunications equipment and software....................... $ 15,355 $ 58,788 5 to 10 years
Furniture, fixtures and other................................... 1,581 4,577 4 to 5 years
Leasehold improvements.......................................... 540 4,979 Life of the lease
------------ ------------
17,476 68,344
Less accumulated depreciation and amortization.................. (1,578) (5,057)
------------ ------------
15,898 63,287
Less: Global Products - discontinued operation.................. (835) (715)
------------ ------------
$ 15,063 $ 62,572
------------ ------------
------------ ------------
</TABLE>
NOTE 6--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, ESTIMATED
1995 1996 USEFUL LIFE
------------- ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill............................................................ $ 2,953 $ 13,904 5 to 20 years
Covenants not to compete and other.................................. 708 708 5 to 10 years
------ ------------
3,661 14,612
Less accumulated amortization....................................... (627) (1,208)
------ ------------
3,034 13,404
Less: Global Products - discontinued operation...................... (539) (449)
------ ------------
$ 2,495 $ 12,955
------ ------------
------ ------------
</TABLE>
Licenses are amortized over a 40-year period, in accordance with industry
practice. As of December 31, 1995 and 1996, the value of licenses was $12.6
million and $27.4 million, net of accumulated amortization of $256,000 and
$820,000, respectively.
F-14
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Senior Notes Payable (a)......................................... $ 153,972 $ 176,328
Convertible Notes Payable (a).................................... 76,986 88,164
Other Notes Payable (b).......................................... 11,704 28,899
------------ ------------
Total............................................................ 242,662 293,391
Less Current Portion............................................. 3,950 19,901
------------ ------------
238,712 273,490
Less: Global Products - discontinued operation................... (4,338) (8,329)
------------ ------------
$ 234,374 $ 265,161
------------ ------------
------------ ------------
</TABLE>
a) In October 1995, the Company completed a $225 million private placement
of debt securities with institutional investors (the "Debt Placement"). The
transaction was structured as a units offering with two components, $150 million
of Senior Discount Notes due in 2005 (the "Senior Notes"), and $75 million of
Convertible Senior Subordinated Discount Notes due in 2005 (the "Convertible
Notes"), convertible at $20.625, a 10% premium over the closing price on October
18, 1995, the day of pricing. Both securities accrue interest at 14% per annum,
with no interest payable during the first five years, and principal payable only
at maturity in October 2005. After five years, both securities require the
payment of interest only, in cash, until maturity. In addition, the Convertible
Notes, including accretion thereon, will be automatically converted during the
initial five-year period if the market price of the Company's common stock
exceeds certain levels for thirty consecutive trading days, ranging from $37.50
per share in the first year to $44.00 per share in the fifth year.
Under the terms of the Debt Placement, the Company was obligated to
consummate an exchange offer with respect to the Senior Notes by April 23, 1996,
whereby these notes would be exchanged for new notes (the "New Notes") which
would be identical in every respect to the original Senior Notes except that the
New Notes would be registered under the Securities Act of 1933. Pursuant to such
obligation, the Company filed an offer to exchange the Senior Notes for the New
Notes on January 31, 1996, upon which all Senior Notes were subsequently
exchanged. The Company was also obligated to, and did, cause to be declared
effective a registration statement registering the issuance or resale of the
shares underlying the Convertible Notes (the "Conversion Shares") by October 23,
1996. The terms of the Debt Placement also place certain restrictions on the
ability of the Company to pay dividends or make other restricted payments, incur
additional indebtedness, issue guarantees, sell assets, or enter into certain
other specified transactions.
b) Two of the Company's subsidiaries have collateralized asset-based lending
agreements with separate financial institutions aggregating $17 million.
Borrowings are limited to varying percentages of accounts receivable and
inventory, as defined, and bear interest at rates of .75% to 3%, respectively,
in excess of the financial institutions' respective prime lending rates. The
terms of such agreements expire in 1999 and 1998, respectively. Such loans are
guaranteed by substantially all the assets of the respective subsidiaries, and
additionally contain certain limited guarantees of WCI aggregating $5.2 million.
At December 31, 1995 and 1996, the aggregate outstanding balances under these
agreements were $7.4 million and $9.8 million, respectively.
F-15
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--LONG-TERM DEBT (CONTINUED)
On October 8, 1996, in connection with the purchase of Locate (see Note 2),
the Company issued two promissory notes in the aggregate principal amount of
$17.5 million (the "Locate Notes") bearing interest at an annual rate of 8%.
Interest on the Locate Notes is payable on a quarterly basis. The Notes are due
on the earlier of April 8, 1997, or the day after the date on which the shares
into which the Notes may be converted have been registered pursuant to an
effective registration statement. The Company may convert the Locate Notes, in
whole but not in part, at its election, into that number of shares of the
Company's common stock equal to (a) the principal amount and all accrued and
unpaid interest on the Locate Notes divided by (b) the average of the closing
prices of the Company's common stock for the five days ending on the date on
which the Company gives written notice of its decision to convert the Locate
Notes. Locate has no rights of conversion. The Company has granted certain
registration rights to Locate with respect to such shares of its common stock in
the event that the Company elects such conversion. The Company may convert the
Locate Notes, and accordingly, in December 1996, the Company filed a
registration statement to register such underlying shares. At December 31, 1996,
the aggregate amount of the Locate Notes, including accrued interest thereon,
was $17.8 million.
In May 1995, a subsidiary of the Company issued $7.5 million of five year
collateralized convertible notes (the "Notes") bearing interest at a rate of 7%,
payable semiannually, with all principal due and payable on May 24, 2000. On
December 28, 1995, the note holders converted $3.75 million of the convertible
notes and accrued interest thereon into 539,255 shares of common stock of the
Company, and on November 24, 1996, converted the remaining outstanding Notes of
$3.75 million principal amount plus accrued interest thereon into 554,880 shares
of common stock of the Company.
Following are maturities of long-term debt for each of the next five years
ending December 31,
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
1997........................................................................... $ 19,901
1998........................................................................... 246
1999........................................................................... 8,561
2000........................................................................... 191
-------------
$ 28,899
-------------
-------------
</TABLE>
NOTE 8--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments classified as current
assets or liabilities, including cash and cash equivalents, short-term
investments, accounts and notes receivable, and accounts payable and accrued
expenses approximate carrying value, principally because of the short maturity
of these items. Marketable equity securities are stated at quoted market value.
The carrying amounts of the long-term debt payable to financial institutions
issued pursuant to two of the Company's subsidiaries' asset-based lending
agreements approximate fair value because the interest rates on these agreements
change with market interest rates.
The fair values of capitalized lease obligations approximate carrying value
based on their effective interest rates compared to current market rates.
F-16
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Estimated fair values of the Company's Senior Notes Payable and Convertible
Notes Payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
---------------- ---------- ---------------- ----------
(IN THOUSANDS)
Senior Notes Payable................................. $ 153,972 $ 153,972 $ 176,328 $ 179,455
Convertible Notes Payable............................ 76,986 76,986 88,164 94,141
</TABLE>
NOTE 9--CAPITAL LEASE OBLIGATIONS
The Company leases telecommunications and other equipment through various
equipment lease financing facilities. Such leases have been accounted for as
capital leases in accordance with Statement of Financial Accounting Standards
No. 13, "Accounting for Leases."
Future minimum lease payments on these capital leases are as follows:
<TABLE>
<CAPTION>
(IN
YEAR ENDING DECEMBER 31, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 4,727
1998........................................................................... 4,485
1999........................................................................... 4,074
2000........................................................................... 3,065
2001........................................................................... 1,203
-------------
17,554
Less amount representing interest.............................................. (3,570)
-------------
Present value of minimum lease payments........................................ 13,984
Less: Global Products - discontinued operation................................ (28)
-------------
$ 13,956
-------------
-------------
</TABLE>
The carrying value of assets under capital leases was $8.1 million and $15.9
million at December 31, 1995 and 1996, respectively, and is included in property
and equipment. Amortization of these assets is included in depreciation expense.
NOTE 10--COMMITMENTS AND CONTINGENCIES
A. OPERATING LEASES
The Company's offices, manufacturing and warehousing facilities, along with
various equipment and roof access rights, are leased under operating leases
expiring in 1997 through 2006. Certain leases contain escalation clauses based
upon increases in the consumer price index.
F-17
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments on noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
(IN
YEAR ENDING DECEMBER 31, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 6,405
1998........................................................................... 5,516
1999........................................................................... 5,201
2000........................................................................... 4,713
2001........................................................................... 4,128
Thereafter..................................................................... 34,903
-------------
$ 60,866
-------------
-------------
</TABLE>
Rent expense for the year ended February 28, 1995, the ten month period
ended December 31, 1995 and the year ended December 31, 1996 was $500,000, $1
million and $4.4 million, respectively.
B. EMPLOYMENT CONTRACTS
Amounts due under employment contracts are as follows:
<TABLE>
<CAPTION>
(IN
YEAR ENDING DECEMBER 31, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1997........................................................................... $ 3,135
1998........................................................................... 2,026
1999........................................................................... 1,430
2000........................................................................... 305
------
$ 6,896
------
------
</TABLE>
C. LITIGATION
The Company occasionally receives inquiries from state authorities arising
with respect to consumer complaints concerning the provision of
telecommunications services, including allegations of unauthorized switching of
long distance carriers and misleading marketing. The Company believes such
inquiries are common in the long distance industry and addresses such inquiries
in the ordinary course of business. In December 1996, the Federal Communications
Commission ("FCC") and WinStar Gateway Network, Inc. ("WGN") entered into a
consent decree which terminated an inquiry by the FCC into any alleged
violations of unauthorized carrier conversions through the use of contest
programs by certain of WGN's agents. The FCC commended WGN's efforts in
identifying the problems caused by these agents and cited its proactive response
in implementing self-directed remedial actions as a significant factor leading
to the consent decree.
In June 1996, the Company commenced an action for declaratory judgment
against a former officer of WGN, who had notified the Company of his belief that
he was entitled to the issuance of certain shares of common stock of the Company
(or payment of the cash value thereof) having an aggregate market value in
excess of $27 million under the terms of stock options granted to him during his
employment with WGN. He has based his beliefs on standard antidilution language
contained in his stock option agreement. Such language was designed and intended
to adjust the number of shares purchasable thereunder in the event of a merger,
capital restructuring or other similar event of the Company. As the Company has
never been subject to a merger or capital restructuring, the former officer was
immediately notified of the Company's
F-18
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
belief that his claim was without merit in law or fact. To expedite resolution
of these issues, the Company currently is seeking declaratory judgment that it
has no obligation to the former officer.
The Company is also involved in miscellaneous claims, inquiries and
litigation arising in the ordinary course of business. The Company believes that
these matters, taken individually or in the aggregate, would not have a material
adverse impact on the Company's financial position or results of operations.
D. OTHER
In connection with the purchase of telecommunications equipment including
switches and radios, the Company enters into agreements with the suppliers of
such equipment. As of December 31, 1996, the Company's noncancellable purchase
commitments under these agreements were approximately $26.4 million.
In connection with the purchase of three 38 GHz licenses, covering certain
geographic areas in the metropolitan areas which include Dallas, Baltimore and
Philadelphia, the Company has entered into commitments to pay $498,000 during
the year ended December 31, 1997, subject to approval by the FCC of the purchase
of the licenses.
NOTE 11--INCOME TAXES
SFAS No. 109 requires the use of the liability method in accounting for
income taxes. Temporary differences and carryforwards that give rise to deferred
tax assets and liabilities at are as follows:
<TABLE>
<CAPTION>
PRO FORMA
WITH
MILLIWAVE
(NOTE 2)
(UNAUDITED)
------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996
------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforward.................................... $ 14,700 $ 48,218 $ 48,218
Deferred Interest Expense.......................................... 1,562 10,417 10,417
Allowance for Doubtful Accounts.................................... 1,025 433 433
Other.............................................................. 1,015 961 961
------------ ------------- ------------
Gross Deferred Tax Assets.......................................... 18,302 60,029 60,029
Valuation Allowance................................................ (18,000) (58,586) (28,087)
------------ ------------- ------------
Deferred Tax Asset Net of Allowance................................ 302 1,443 31,942
------------ ------------- ------------
Deferred Tax Liabilities:
Depreciation....................................................... (302) (1,354) (1,354)
Amortization....................................................... -- (89) (57,088)
------------ ------------- ------------
Gross Deferred Tax Liabilities..................................... (302) (1,443) (58,442)
------------ ------------- ------------
Net Deferred Tax Liability........................................... $ -- $ -- ($ 26,500)
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
The federal net operating loss carryforward at December 31, 1996 is
approximately $127 million. If not utilized, the net operating loss carryforward
will expire in various amounts through the year 2011.
F-19
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES (CONTINUED)
Some, if not all, of these losses are subject to a utilization limitation under
Section 382 of the Internal Revenue Code. However, the Company believes that
substantially all of such losses will be available to offset future income.
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets may not be realized. The valuation allowance
at December 31, 1995 and December 31, 1996, primarily pertains to uncertainties
with respect to future utilization of net operating loss carryforwards.
The pro forma net deferred tax liability of $26.5 million was recorded in
connection with the acquisition of Milliwave (see Note 2). This deferred tax
liability results from the temporary difference between the book and tax basis
of the acquired licenses, and relates to the scheduled reversal of the temporary
differences through amortization in years 2018 through 2036 that cannot be
offset by deferred tax assets existing at January 2, 1997, the date of the
Milliwave acquisition.
NOTE 12--STOCKHOLDERS' EQUITY
COMMON STOCK
The authorized capital stock of WCI includes 75 million shares of common
stock, $.01 par value. The holders of common stock of WCI 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 its 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 WCI, holders
of its common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of preferred shares.
Holders of WCI's 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 of WCI.
PREFERRED STOCK
The authorized capital stock of the Company includes 15 million shares of
preferred stock, $.01 par value, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. As of
December 31, 1996, there are no shares of preferred stock outstanding. The Board
of Directors, without further approval of the stockholders, is authorized to fix
the 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.
In April 1995, the Company completed a private placement of 932,040 shares
of Series E Convertible Preferred Stock ("Preferred Stock E") at a price of
$6.4375 per share, for gross proceeds of $6 million. Preferred Stock E holders
were entitled to dividends at the rate of 9% per annum, payable quarterly
beginning on June 30, 1995. During the ten month period ended December 31, 1995,
the entire 932,040 shares of Preferred Stock E were converted into 634,228
shares of common stock.
F-20
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
TREASURY STOCK
Included in treasury stock at cost at December 31, 1995 were 2,506,763
shares of common stock and 689 shares of Preferred Stock B which were acquired
in the Private Exchange transaction and retired during 1996 (see Note 14).
NOTE 13--STOCK OPTIONS AND STOCK PURCHASE WARRANTS
In 1990, the Board of Directors adopted a non-qualified common stock
incentive plan, as amended, pursuant to which options to purchase an aggregate
of 150,000 shares of common stock may be granted to key employees of the Company
as selected by the Board of Directors. The exercise price for shares covered by
options granted pursuant to this plan will not be less than the fair market
value of the shares on the date of the grant. In 1992, the Board of Directors
adopted and stockholders approved the 1992 Performance Equity Plan ("1992
Plan"), which authorizes the granting of awards up to 1 million shares of common
stock to the Company's key employees, officers, directors and consultants. In
1996, the Board of Directors adopted and the stockholders approved an increase
in the number of shares available for grant under this plan to 1.5 million.
Awards consist of stock options (both non-qualified options and options intended
to qualify as "incentive" stock options under the Internal Revenue Code),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. The plan provides for automatic issuance of 10,000
stock options annually to each director on January 13, at the fair market value
at that date, subject to availability. In June 1995, the Board of Directors
adopted the 1995 Performance Equity Plan ("1995 Plan") which was approved by the
stockholders of the Company at the Annual Meeting of Stockholders in September
1995. The 1995 Plan authorizes the granting of awards of up to 1.5 million
shares of the Company's common stock to the Company's key employees, officers,
directors and consultants. The 1995 Plan is similar to the 1992 Plan, except
that the 1995 Plan does not allow for annual automatic annual director grants.
In 1996, the Board of Directors and the stockholders approved an increase in the
number of shares available for grant to 3.5 million. In addition to these three
plans, the Company has granted options to certain individuals not under any
plan. The options are exercisable over a period ranging from immediately to four
years, depending on option terms.
F-21
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STOCK OPTIONS AND STOCK PURCHASE WARRANTS (CONTINUED)
The following table summarizes option activity for the year ended December
31, 1996, the ten-month period ended December 31, 1995, and the year ended
February 28, 1995.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
------------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Balance, February 28, 1994.................................................. 5,018 $ 2.08
Granted................................................................... 2,851 5.76
Exercised................................................................. (1,390) 2.36
Canceled.................................................................. (330) 6.06
------
Balance, February 28, 1995.................................................. 6,149 3.85
Granted................................................................... 3,896 9.13
Exercised................................................................. (2,092) 2.35
Canceled.................................................................. (708) 3.21
------
Balance, December 31, 1995.................................................. 7,245 6.90
Granted................................................................... 4,057 18.55
Exercised................................................................. (921) 6.00
Canceled.................................................................. (669) 12.72
------
Balance, December 31, 1996.................................................. 9,712 $ 11.43
------
------
</TABLE>
As of December 31, 1996, options outstanding for 3.8 million shares were
exercisable at prices ranging from $1.50 to $31.13, and the weighted remaining
contractual life was 4.6 years.
The following table summarizes option data as of December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER WEIGHTED AVERAGE NUMBER AVERAGE
OUTSTANDING AS REMAINING WEIGHTED AVERAGE EXERCISEABLE AS EXERCISE
RANGE OF EXERCISE PRICES OF 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE OF 12/31/96 PRICE
- ------------------------------------------ --------------- --------------------- ----------------- --------------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$1.50 - $6.00............................. 3,260 3.5 $ 4.20 2,766 $ 3.97
$6.06 - $15.88............................ 3,255 4.5 10.59 1,031 9.21
$16.00 - $31.13........................... 3,197 5.4 19.66 466 18.69
----- -----
$1.50 - $31.13............................ 9,712 4.5 $ 11.43 4,263 $ 6.85
----- -----
----- -----
</TABLE>
Compensation cost charged to operations, which the Company records for
options granted to non-employees, was $150,000 and $0 in the year ended December
31, 1996 and the ten months ended December 31, 1995, respectively.
The Company measures compensation in accordance with the provisions of APB
Opinion No. 25 in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recorded for options granted to employees or
directors in the year ended December 31, 1996 or the ten months ended
F-22
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STOCK OPTIONS AND STOCK PURCHASE WARRANTS (CONTINUED)
December 31, 1995. The fair value of each option granted has been estimated on
the grant date using the Black-Scholes Option Valuation Model. The following
assumptions were made in estimating fair value:
<TABLE>
<S> <C>
Dividend Yield................................................... 0%
Risk-Free Interest Rate.......................................... 6.0%
Expected Life after Vesting Period
- Directors and Officers....................................... 2.0 Years
- Others....................................................... 0.5 Years
Expected Volatility.............................................. 66.88%
</TABLE>
Had compensation cost been determined under FASB Statement No. 123, net loss
and loss per share would have been increased as follows:
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
----------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net Loss
As reported............................................... $ (15,857) $ (83,723)
Pro forma for FASB No. 123................................ (21,795) (98,765)
Loss Per Share
As reported............................................... (0.70) (3.00)
Pro forma for FASB No. 123................................ $ (0.96) $ (3.54)
</TABLE>
The weighted average fair value of options granted during 1996 was $18.78
per share.
During the initial phase-in period of FASB Statement No. 123, such
compensation expense may not be representative of the future effects of applying
this statement.
F-23
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--STOCK OPTIONS AND STOCK PURCHASE WARRANTS (CONTINUED)
Warrants to purchase the Company's common stock were issued as follows
(warrants in thousands):
<TABLE>
<CAPTION>
YEAR ENDED 10 MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------- ------------------------------ ------------------------------
WARRANTS PRICE/SHARE WARRANTS PRICE/SHARE WARRANTS PRICE/SHARE
----------- ------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance....................... 5,836 $ 0.67-$3.75 -- -- 400 $ 12.00-$13.00
Warrants Issued......................... 1,041 $ 2.24-$3.75 400 $ 12.00-$13.00 -- --
Warrants Exercised...................... (6,568) $ 0.67-$3.75 -- -- -- --
Warrants Expired........................ (309) $ 3.00-$3.75 -- -- -- --
----------- --- ---
Ending Balance.......................... -- 400 $ 12.00-$13.00 400 $ 12.00-$13.00
----------- --- ---
----------- --- ---
</TABLE>
NOTE 14--RELATED PARTY TRANSACTIONS
SERVICES AGREEMENTS
In connection with the Company's merger with Milliwave, the Company entered
into a Services Agreement with Milliwave in June 1996. Under the Services
Agreement, a subsidiary of the Company installed radio links and managed
Milliwave's communications network. Total fees under the Services Agreement and
equipment sales paid by Milliwave to the Company were $1.5 million through
December 31, 1996.
In connection with the Company's purchase of certain assets of Locate, the
Company entered into a Services Agreement with Locate in April 1996. Under the
Agreement, the Company provided consulting services to Locate regarding the
operation of Locate's business. During the year ended December 31, 1996, Locate
paid the Company approximately $352,000 under the Services Agreement.
MANAGEMENT AGREEMENT
The Company and WinStar Services, a wholly owned subsidiary of WinStar
Companies, a corporation of which two of the Company's directors are principal
officers and stockholders, were parties to a five-year management agreement
which provided, as amended, that WinStar Services would render financial,
advisory and management services in connection with the capital, acquisition and
planning needs of the Company. During the year ended February 28, 1995, an
aggregate of $254,560 was paid to WinStar Services by the Company as management
fees and reimbursement of expenses. Additionally, the Company paid $481,039 in
cash and issued notes amounting to $481,038 in payment of contingent performance
fees to WinStar Services during the year ended February 28, 1995. These
contingent performance fees related to specific debt and equity financing and
investment transactions in excess of $33.6 million. During the year ended
February 28, 1995, all such notes were satisfied when they were used to pay for
the exercise of warrants and stock options held by WinStar Services and its
affiliates. See "Private Exchange Transaction" below.
The management agreement was terminated as of February 28, 1995.
F-24
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--RELATED PARTY TRANSACTIONS (CONTINUED)
PRIVATE EXCHANGE TRANSACTION
On November 29, 1995, the Company acquired, in exchange for the issuance of
3,741,224 shares of its common stock ("Private Exchange"), substantially all of
the assets of WinStar Companies, whose assets consisted of (i) all the
outstanding capital stock of WinStar Services and WinStar Venture, two wholly
owned subsidiaries of WinStar Companies, and (ii) 389,580 shares of the
Company's common stock owned by WinStar Companies. The sole assets of WinStar
Services and WinStar Venture were 2,117,183 shares of the Company's common stock
and other securities of the Company that were exercisable or convertible into
1,429,633 shares of the Company's common stock. Accordingly, the Company issued
3,741,224 shares of the Company's common stock and, in exchange, acquired
3,936,396 shares of common stock and common stock equivalents. All of the
Company's common stock and certain of the common stock equivalents received in
the Private Exchange were included in Treasury Stock at December 31, 1995 and
were retired in 1996. WinStar Companies, WinStar Services and WinStar Venture
had no liabilities at the time of the closing of the Private Exchange other than
a liability previously assumed by the Company or liabilities for which the
Company is being indemnified. No claims for any liabilities have been received
by the Company.
The new shares of the Company's common stock issued in the Private Exchange
represented that number of shares which had an aggregate market value based upon
the average of the closing sale price of the Company's common stock on the 30
trading days preceding November 15, 1995, the date as of which the exchange
agreement regarding the above-described transaction was executed, equal to the
market value of the Company's common stock (i) transferred by WinStar Companies
to the Company, (ii) owned by WinStar Services and WinStar Venture and (iii)
underlying certain other securities of the Company owned by WinStar Services and
WinStar Venture which were convertible into or exercisable for shares of the
Company's common stock, less the aggregate exercise price of such latter
securities.
The stockholders of WinStar Companies included several of the Company's
current executive officers and directors. Simultaneously with the Private
Exchange, WinStar Companies was dissolved and the new shares issued in the
Private Exchange were issued directly to the stockholders of WinStar Companies
in proportion to their equity ownership of WinStar Companies.
The Private Exchange was considered and approved by a special committee of
independent and disinterested directors of the Company and an opinion from an
independent investment banking firm that the Private Exchange was fair to the
Company and its stockholders was obtained in connection with the Private
Exchange.
SGC CONSULTING AGREEMENT
In November 1993 and as subsequently amended, the Company entered into a
consulting agreement with SGC Services ("SGC"), a telecommunications consulting
firm pursuant to which SGC received a monthly fee of $17,500 and options to
purchase 175,000 shares of the Company's common stock. The President and
Director of SGC is currently a Director and employee of the Company. Under this
consulting agreement, SGC was entitled to receive a cash fee equal to 5% of the
consideration paid in connection with certain transactions introduced to the
Company by SGC.
In connection with investments by the Company in Avant-Garde and The Winning
Line, Inc. ("TWL"), a producer of sports-related radio programming, both of
which businesses were introduced to the Company by SGC, SGC was paid fees by
Avant-Garde and by TWL. Additionally, in connection with
F-25
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--RELATED PARTY TRANSACTIONS (CONTINUED)
the Company's acquisition of its equity interest in Avant-Garde, such Director
was paid a fee by the principal of Avant-Garde equal to 4.0% of the total
consideration received by such principal from the Company in connection with the
acquisition. The Company paid no fees to SGC in connection with such
transactions, but the fees received by SGC and such Director from Avant-Garde
and TWL were credited against the monthly fees payable to SGC by the Company.
Fees and expenses paid to SGC during the year ended February 28, 1995 were
$119,000. The consulting agreement was terminated in January 1995 in connection
with the execution of such Director's employment agreement with the Company.
AGREEMENT WITH ITC GROUP, INC.
In May 1994, the Company, WinStar Wireless, Inc. ("WWI") and ITC Group, Inc.
("ITC"), a telecommunications consulting firm, entered into a two-year agreement
pursuant to which ITC advised the Company on the operations of its
telecommunications business. ITC, together with the management and employees of
WWI, developed and implemented a two-year operating plan for the Company's
wireless telecommunications business. Pursuant to the terms of the consulting
agreement, ITC made its consultants available to the Company and its
subsidiaries. The Company paid ITC an annual base consulting fee of $700,000 for
the services of a core management team, as well as supplemental fees at agreed
upon rates for additional consulting services rendered by ITC as necessary from
time to time. Under the terms of the agreement, ITC provided up to 12
consultants at any given time. During the year ended February 28, 1995 and
through September 1995, ITC was paid $1.5 million and $1 million, respectively,
in fees and expenses in connection with the consulting agreement, the Company
granted options to purchase an aggregate of 500,000 shares of its common stock
for $4.41 per share to certain consultants of ITC.
Effective September 5, 1995, ITC's President became President and Chief
Operating Officer of the Company and certain core management personnel
previously provided by ITC also became employees. Concurrently, ITC ceased
providing services to the Company under the consulting agreement, and the
Company's obligation to pay any future compensation to ITC under such agreement
was terminated.
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the year ended February 28, 1995, the ten
months ended December 31, 1995, and the year ended December 31, 1996 was
$621,000, $1.3 million and $2.1 million, respectively. During the year ended
December 31, 1996, the Company capitalized $300,000 of interest incurred in
connection with the buildout of its telecommunications network. No interest was
capitalized in the ten months ended December 31, 1995 or the year ended February
28, 1995.
During the year ended February 28, 1995, the Company completed the following
material noncash transactions: (i) the conversion of the Series D and Series E
Warrants through the assignment of notes payable and accrued interest; (ii) the
satisfaction of approximately $600,000 in notes payable through the exercise of
stock options; (iii) conversions of Preferred Stock Series B, C, and D; (iv) the
acquisition of approximately $740,000 in property and equipment through various
capitalized leases; and (v) the issuance of 28,572 shares of its common stock
valued at $200,000, in connection with an acquisition.
During the ten months ended December 31, 1995, the Company completed the
following material noncash transactions: (i) the conversion of $3.75 million of
convertible notes plus accrued interest thereon; (ii) the conversion of
Preferred Stock Series E; (iii) the acquisition of approximately $7.5 million in
F-26
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
property and equipment through various capitalized leases; (iv) the Private
Exchange transaction (see Note 14); (v) the settlement of the Company's
placement expenses from the gross proceeds of the Debt Placement; and (vi) the
acquisition of Avant-Garde.
During the year ended December 31, 1996, the Company completed the following
material noncash transactions: (i) the conversion of $3.75 million of
convertible notes plus accrued interest; (ii) the acquisition of $8.6 million in
property and equipment through various capitalized leases; (iii) the issuance of
100,605 shares and share equivalents, with a value of $1.5 million, and $800,000
in notes payable in connection with certain acquisitions (see Note 2); (iv) the
issuance of $17.5 million in notes payable for the acquisition of Locate; and
(v) the acceptance of 150,000 shares of the Company's common stock for payment
of stock options exercised. Depreciation and amortization includes amortization
of deferred compensation.
NOTE 16--ADVERTISING COSTS
Advertising costs are charged to operations when the advertising first takes
place. Advertising expense for the year ended February 28, 1995, the ten months
ended December 31, 1995, and the year ended December 31, 1996 was approximately
$200,000, $500,000 and $4.3 million, respectively.
F-27
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--BUSINESS SEGMENTS
The Company's continuing business segments are telecommunications and
information services. The following table is a summary of these segments for
the year ended February 28, 1995, the ten months ended December 31, 1995 and
the year ended December 31, 1996:
<TABLE>
<CAPTION> TOTAL
CONTINUING CONSOLIDATED DISCONTINUED
TELECOMMUNI- INFORMATION BUSINESS GENERAL CONTINUING OPERATION -
CATIONS SERVICES SEGMENTS CORPORATE OPERATIONS MERCHANDISING
------------- ----------- ------------- ---------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
For the year ended February 28, 1995
Net sales........................... $ 14,909 $ 473 $ 15,382 $ -- $ 15,382 $ 10,183
Operating income (loss)............. (4,984) (157) (5,141) (944) (6,085) 216
EBITDA.............................. (4,560) (150) (4,710) (930) (5,640) 461
Depreciation and amortization....... 392 7 399 14 413 245
Capital expenditures................ 1,329 4 1,333 196 1,529 287
Identifiable assets at February 28,
1995.............................. $ 14,594 $ 4,219 $ 18,813 $ 3,785 $ 22,598 $ 6,911
For the ten months ended December
31, 1995
Net sales........................... $ 13,137 $ 2,648 $ 15,785 $ -- $ 15,785 $ 13,986
Operating income (loss)............. (7,288) 217 (7,071) (3,861) (10,932) 681
EBITDA.............................. (6,358) 241 (6,117) (3,758) (9,875) 923
Depreciation and amortization....... 930 24 954 104 1,058 242
Capital expenditures................ 7,458 14 7,472 651 8,123 529
Identifiable assets at December 31,
1995.............................. $ 36,998 $ 20,195 $ 57,193 $ 217,711 $ 274,904 $ 10,459
For the year ended December 31, 1996
Net sales........................... $ 33,969 $ 14,650 $ 48,619 $ -- $ 48,619 $ 19,429
Operating loss...................... (43,698) (1,409) (45,107) (11,373) (56,480) (42)
EBITDA.............................. (39,206) (890) (40,096) (9,796) (49,892) 294
Depreciation and amortization....... 3,831 469 4,300 202 4,502 330
Capital expenditures................ 46,632 701 47,333 509 47,842 119
Identifiable assets at December 31,
1996.............................. $ 101,380 $ 30,133 $ 131,513 $ 143,462 $ 274,975 $ 15,248
</TABLE>
- ------------------------
EBITDA represents operating income (loss) plus interest, taxes, depreciation and
amortization.
F-28
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly financial data for 1996 for the Company is as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ ------------
(IN THOUSANDS)
Operating revenues
Telecommunications services................................ $ 10,217 $ 10,356 $ 7,384 $ 6,012
Information services....................................... 771 2,652 4,056 7,171
---------- ---------- ------------ ------------
Total operating revenues................................. 10,988 13,008 11,440 13,183
---------- ---------- ------------ ------------
Operating expenses
Cost of services and products.............................. 6,678 9,175 9,250 13,130
Selling, general and administrative expenses............... 8,845 14,401 15,816 23,303
Depreciation and amortization.............................. 492 679 1,158 2,172
---------- ---------- ------------ ------------
Total operating expenses................................. 16,015 24,255 26,244 38,605
---------- ---------- ------------ ------------
Operating loss............................................... (5,027) (11,247) (14,784) (25,422)
Other expense
Interest expense........................................... 8,643 9,007 9,045 10,053
Interest income............................................ (3,108) (2,664) (2,570) (2,173)
---------- ---------- ------------ ------------
Net loss from continuing operations.......................... (10,562) (17,590) (21,259) (33,302)
Discontinued operations...................................... (137) (526) 47 (394)
---------- ---------- ------------ ------------
Net loss..................................................... $ (10,699) $ (18,116) $ (21,212) $ (33,696)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Net loss per share from continuing operations................ $ (0.39) $ (0.63) $ (0.76) $ (1.17)
Net (loss) income per share from discontinued operations..... $ (0.00) $ (0.02) $ 0.01 S (0.01)
---------- ---------- ------------ ------------
Net loss per share........................................... $ (0.39) $ (0.65) $ (0.75) $ (1.18)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Weighted average shares outstanding.......................... 27,214 27,720 28,133 28,553
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
The financial data presented above reflects certain reclassifications from
the amounts presented in the Company's filings on form 10-Q for the periods
ending March 31, June 30 and September 30, 1996. The reclassifications
principally relate to the breakout of revenues by operating segment and the
reclassification of certain telecommunication network costs from the selling,
general and administrative caption to the cost of services and products caption.
NOTE 19--SUBSEQUENT EVENTS TO DECEMBER 31, 1996
AGREEMENT TO PURCHASE ADDITIONAL LICENSES (UNAUDITED)
On January 28, 1997, the Company executed agreements to acquire 47
additional 38 GHz licenses, subject to FCC approval. The total purchase price
for the licenses will be $16 million, payable in the Company's common stock,
which will be priced at the time of closing. The acquisitions are expected to
close within approximately one year. In addition, the Company agreed to purchase
additional 38 GHz licenses, subject to FCC approval, which may be granted with
respect to certain license applications currently on file with the FCC.
ISSUANCE OF CONVERTIBLE PREFERRED STOCK (UNAUDITED)
On February 11, 1997, the Company sold 4 million shares of 6% Series A
cumulative convertible preferred stock, par value $1.01, and 1.6 million
warrants to purchase common stock of the Company, par
F-29
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--SUBSEQUENT EVENTS TO DECEMBER 31, 1996 (CONTINUED)
value $1.01, for gross proceeds of $100 million. The preferred stock earns a 6%
annual dividend, payable quarterly in kind, and matures on February 11, 2002.
Two million shares of the preferred stock are convertible beginning on
August 11, 1997, at $25 per share or, if the average closing sale price of the
Company's common stock for the preceding twenty trading days is less than $25,
such average closing sale price, while the remainder becomes convertible on
February 11, 1998, at $25 per share or, if the average closing sale price of the
Company's common stock for the preceding twenty trading days is less than $25,
such average closing sale price. On February 11, 2002, any preferred stock still
outstanding will be automatically converted into shares of the Company's common
stock, unless the Company elects to pay, in lieu of conversion, the equivalent
value in cash.
The warrants are exerciseable at $25 per share, and expire on February 11,
2002. The Company has the right to call the warrants after February 11, 2001, if
the Company's common stock price has exceeded $40 on each of the previous twenty
trading days.
DEBT PLACEMENT (UNAUDITED)
On March 18, 1997, the Company and a wholly owned subsidiary of the Company
issued an aggregate of $300 million of notes in an institutional private
placement (the 1997 Debt Placement). In addition, the Company obtained a
commitment for an additional $150 million facility which may be drawn by the
Company beginning March 31, 1999, subject to certain operating and financial
criteria.
The 1997 Debt Placement consisted of (i) $100 million of the Company's 14.5%
Senior Deferred Interest Notes due 2005 (the "New Senior Notes"), ranking PARI
PASSU with the Company's Senior Discount Notes due 2005, and (ii) $200 million
of 12.5% Guaranteed Senior Secured Notes (the "Senior Secured Notes") which were
issued by a wholly owned subsidiary and are unconditionally guaranteed by the
Company. Interest on the New Senior Notes will accrue and compound semiannually
through October 15, 2000, but will not be payable in cash. Interest will be
payable on the New Senior Notes each April 15 and October 15 commencing April
15, 2001, through final maturity in 2005. Interest on the Senior Secured Notes
is payable semiannually through maturity.
Under the terms of the 1997 Debt Placement, the Company is obligated to
consummate an exchange offer with respect to the New Senior Notes and the Senior
Secured Notes whereby these notes will be exchanged for new notes (the "New
Notes") which will be identical in every respect to the original New Senior
Notes and Senior Secured Notes except that the New Notes will be registered
under the Securities Act of 1933. The terms of the 1997 Debt Placement also
place certain restrictions on the ability of the Company to pay dividends or
make other restricted payments, incur additional indebtedness, issue guarantees,
sell assets, or enter into certain other specified transactions.
DISCONTINUED OPERATION - WINSTAR GLOBAL PRODUCTS, INC.
On May 13, 1997, a formal plan of disposal for the Company's consumer
products subsidiary, Global Products was approved by the Board of Directors,
and it is anticipated that the disposal will be completed within the next 12
months. The Company does not expect to incur a loss on the disposition of
Global Products. The disposal of Global Products has been accounted for as a
discontinued operation and, accordingly, its net assets have been segregated
from continuing operations in the accompanying consolidated balance sheets,
and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows. Information relating to the discontinued operations of Global Products
is as follows (in thousands of dollars):
<TABLE>
For the Ten
For the Year Months Ended For the Year
Ended February 28, December 31, Ended December 31,
1995 1995 1996
------------------ ------------ ------------------
<S> <C> <C> <C>
Operating revenues.................. $10,183 $13,986 $19,429
------- ------- -------
Cost of services and products....... 7,024 8,833 13,903
Selling, general & administrative... 2,758 4,289 5,323
Depreciation and amortization....... 185 183 245
------- ------- -------
Total operating expenses............ 9,967 13,305 19,471
------- ------- -------
Operating income (loss)............. 216 681 (42)
Interest expense (net).............. (220) (444) (968)
------- ------- -------
Net (loss) income................... $ (4) $ 237 $(1,010)
------- ------- -------
------- ------- -------
</TABLE>
Net assets of the discontinued operations of Global Products at
December 31, 1995 and 1996 are composed of the following (in thousands of
dollars):
December 31, December 31,
1995 1996
------------ ------------
Assets:
Accounts Receivable, net.......... $ 2,848 $ 4,499
Inventories....................... 5,451 8,606
Other Assets...................... 2,159 2,143
------- -------
Total Assets.................... 10,458 15,248
------- -------
------- -------
Liabilities:
Current Liabilities............... 7,110 3,102
Other Liabilities................. 27 8,332
------- -------
Total Liabilities............... 7,137 11,434
------- -------
Net Assets...................... $ 3,321 $ 3,814
------- -------
------- -------
F-30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors
WinStar Communications, Inc.
In connection with our audit of the consolidated financial statements of
WinStar Communications, Inc. and Subsidiaries referred to in our report dated
January 24, 1997, which is included in this Annual Report on Form 10-K, we have
also audited Schedule II for the year ended February 28, 1995, the ten months
ended December 31, 1995 and the year ended December 31, 1996.
In our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
New York, New York
January 24, 1997, except for the last paragraph of Note 19 as to which the date
is May 13, 1997
F-31
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT ADDITIONS CHARGED
BEGINNING TO COSTS AND BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- --------------------------------------- ------------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Reserves deducted from assets to which
they apply:
Year ended February 28, 1995
Allowance for doubtful
accounts (a)....................... $ 343,584 $ 827,476 $ 430,371(b) $ 740,689
-------- ----------------- ------------ --------------
-------- ----------------- ------------ --------------
Ten months ended December 31, 1995
Allowance for doubtful
accounts (a)....................... $ 740,689 $ 855,119 $ 911,453(b) $ 684,355
-------- ----------------- ------------ --------------
-------- ----------------- ------------ --------------
Year ended December 31, 1996
Allowance for doubtful
accounts (a)....................... $ 684,355 $ 1,818,521 $ 1,651,364(b) $ 851,512
-------- ----------------- ------------ --------------
-------- ----------------- ------------ --------------
</TABLE>
- ------------------------
(a) Deducted from accounts receivable
(b) Uncollectible accounts receivable charged against allowance
F-32
<PAGE>
EXHIBIT 2. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
Milliwave Limited Partnership
We have audited the accompanying balance sheets of Milliwave Limited
Partnership (a Florida limited partnership) as of December 31, 1995 and 1996 and
the related statements of changes in partners' capital for the period April 25,
1995 (inception) through December 31, 1995 and the year ended December 31, 1996
and statements of operations and cash flows for the year ended December 31,
1996. These financial statements are the responsibility of the management of
Milliwave Limited Partnership. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Milliwave Limited
Partnership as of December 31, 1995 and 1996, the changes in partner's capital
for the period April 25 (inception) through December 31, 1995, and the year
ended December 31, 1996 and the results of its operations and its cash flows for
the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
New York, New York
January 9, 1997
F-33
<PAGE>
Milliwave Limited Partnership
BALANCE SHEETS
December 31,
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................................................................................. $ 11,222 $ 742,472
Other current assets.................................................................. -- 6,109
---------- ------------
Total current assets.............................................................. 11,222 748,581
Equipment, net of accumulated depreciation of $70,605................................. -- 1,391,106
Licenses, net of accumulated amortization of $0 and $130,422.......................... 317,581 1,321,949
---------- ------------
$ 328,803 $ 3,461,636
---------- ------------
---------- ------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued expenses................................................. $ 53,803 $ 111,496
Total current liabilities......................................................... 53,803 111,496
PARTNERS' CAPITAL....................................................................... 275,000 3,350,140
---------- ------------
$ 328,803 $ 3,461,636
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
Milliwave Limited Partnership
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<S> <C> <C>
Revenues.............................................................. $ 3,649
Operating expenses
Consulting and contracted services.................................. $ 556,915
Professional fees................................................... 649,478
Depreciation and amortization....................................... 201,026
Salaries and related charges........................................ 146,000
Travel and entertainment............................................ 91,214
Insurance........................................................... 48,964
Regulatory fees..................................................... 35,150
Occupancy costs..................................................... 57,126
Office and sundry................................................... 48,865
---------
1,834,738
----------
Net loss from operations...................................... (1,831,089)
Interest income....................................................... 93,234
Interest expense...................................................... (5,748)
----------
Net loss...................................................... $(1,743,603)
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
April 25, 1995 (inception) through December 31, 1995
and Year ended December 31, 1996
Cost of contributed license applications...................... $ 122,654
Cash contributed.............................................. 152,346
-----------
Partners' capital at December 31, 1995........................ 275,000
Cash contributed.............................................. 5,000,000
Syndication costs............................................. (181,257)
Net loss...................................................... (1,743,603)
-----------
Partners' capital at December 31, 1996........................ $3,350,140
-----------
-----------
The accompanying notes are an integral part of this statement.
F-36
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CASH FLOWS
for the year ended December 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities
Net loss...................................................................... $(1,743,603)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization............................................... 201,026
Increase in other current assets............................................ (6,109)
Increase in accounts payable and accrued expenses........................... 57,693
----------
Net cash used in operating activities..................................... (1,490,993)
-----------
Cash flows from investing activities
Purchases of equipment........................................................ (1,461,711)
Licenses...................................................................... (1,134,789)
-----------
Net cash used in investing activities..................................... (2,596,500)
-----------
Cash flows from financing activities
Capital contributions......................................................... 5,000,000
Syndication costs............................................................. (181,257)
-----------
Net cash provided by financing activities................................. 4,818,743
-----------
Net increase in cash...................................................... 731,250
Cash at beginning of period..................................................... 11,222
-----------
Cash at end of period........................................................... $ 742,472
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1996
NOTE I--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Milliwave Limited Partnership (a Florida limited partnership, hereinafter
referred to as the "Partnership") was formed on April 25, 1995 to apply for and
obtain licenses from the Federal Communications Commission ("FCC") and to
exploit such licenses for commercial purposes. As of October 1996, the
Partnership had met its minimum construction requirements for all of its
licensed service areas. From inception through December 31, 1995, the
Partnership had no operations, other than the application for licenses from the
FCC. The Partnership was dissolved through merger of its corporate shareholders
on January 2, 1997 (see Note 5).
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
1. Equipment
Equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful life of eight years of the
related assets.
2. Licenses and Other Assets
Licenses are being amortized over 40 years in accordance with industry
practice.
3. Income Taxes
No provision for Federal, state or local income taxes has been provided as
the Partnership is not a taxable entity and the partners are individually liable
for the taxes on their shares of the Partnership's income.
4. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, the Partnership is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
5. Concentration of Credit Risk
The Partnership maintains its cash in one financial institution. The balance
is insured by the Federal Deposit Insurance Corporation up to $100,000. At
December 31, 1996, amounts held at this financial institution total $1,054,000.
NOTE 2--NATURE OF BUSINESS AND LICENSES
The Partnership holds 88 licenses granted by the FCC. These licenses allow
the Partnership to deliver communication services over the 38 GHz band specified
in the licenses. The licenses were issued at various dates through March 15,
1996. Under the terms of the licenses, the Partnership had to construct a
minimum of one radio link per licensed service area within eighteen months of
the date of grant or risk revocation of the licenses by the FCC. As of October
1996, construction requirements have been completed on all licenses. At December
31, 1995 and 1996, the
F-38
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1996
NOTE 2--NATURE OF BUSINESS AND LICENSES (Continued)
Partnership has capitalized $317,581 and $1,452,371, respectively, of license
costs consisting of filing, application and legal fees relative to the
licenses.
NOTE 3--PARTNERS' CAPITAL
For the period from May 1994 through the formation of the Partnership in
April 1995, one of the partners incurred $122,654 in license application costs,
which were contributed to the Partnership at cost and included in the capital of
the Partnership.
The balance of the capital contributed during the period ended December 31,
1995 represented cash contributed of $152,346.
On May 30, 1996 the Partnership amended and restated its limited partnership
agreement to provide for Series A and Series B Limited Partners. Concurrent with
the amendment, the Partnership sold $5,000,000 of Series B Limited Partnership
interests. Syndication costs relating to the sale amounted to $181,257.
The general partner provides management services to the Partnership and
reimburses the Partnership for salary paid to the general partner. Management
fees and contra reimbursement for the year ended December 31, 1996 totaled
$152,509.
A limited partner served as a consultant to the Partnership for various
business and strategic issues. Fees paid for these services for the year ended
December 31, 1996 totaled $175,570.
NOTE 4--COMMITMENTS AND CONTINGENCIES
The Partnership entered into site license and service agreements with
WinStar Communications, Inc. ("WinStar") in conjunction with the installation
and operation of up to a total of seventy-eight 38 GHz radio links. For each
link, the agreements call for payment from the Partnership to WinStar of a
one-time fee of $8,500 for site identification, survey and equipment
installation; $14,400 for equipment at each site; a monthly fee of $150 for
monitoring and maintaining radio system equipment; and a monthly fee of $200 for
access to and use of radio system sites. As of December 31, 1996, the one-time
fees and equipment costs have been applied towards links and the monthly fees
have been expensed. In addition, WinStar makes monthly payments to the
Partnership for capacity leased under a two-year transmission path lease
agreement. Such amounts vary from $10-$75 per link.
Subsequent to December 31, 1995, the Partnership entered into purchase
orders to purchase radio links from P-Corn, Inc., amounting to approximately
$570,000. As of December 31, 1996, the purchase commitment has been satisfied.
On November 13, 1995, the FCC released an order freezing the acceptance for
filing of new applications for 38 GHz frequency licenses. On December 15, 1995,
the FCC announced the issuance of a notice of proposed rulemaking (NPRM),
pursuant to which it proposed to amend its current rules relating to 38 GHz,
including, among other items, the imposition of minimum construction
requirements and an auction procedure for issuance of licenses in the 37-40 GHz
band. In addition, the FCC ordered that those applications that are subject to
mutual exclusivity with other applicants or that were placed on public notice by
the FCC after September 13, 1995 would be held in abeyance and not processed by
the FCC pending the outcome of the proceeding initiated by the NPRM. Final rules
with respect to the
F-39
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1996
NOTE 4--COMMITMENTS AND CONTINGENCIES (Continued)
Milliwave Limited Partnership changes proposed by the NPRM have not been
adopted and the changes proposed by the NPRM have been, and are expected to
continue to be, the subject of numerous comments by members of the
telecommunications industry and others. Consequently, there can be no
assurance that the NPRM will result in the issuance of rules consistent with
the rules initially proposed in the NPRM. Until final rules are adopted, the
rules currently in existence remain in effect with respect to outstanding
licenses.
NOTE 5--WINSTAR COMMUNICATIONS, INC. AGREEMENT
In June 1996 WinStar and the Partnership entered into an agreement pursuant
to which WinStar would acquire through a merger with the Partnership's corporate
partners for a purchase price of $40 million cash and 3.4 million shares of
WinStar common stock. The number of shares issuable upon consummation of this
transaction was subject to adjustment, depending on WinStar's stock price on the
date of closing of the transaction. The acquisition was subject to FCC approval,
which was obtained in December 1996. WinStar and the Partnership also entered
into a (i) services agreement pursuant to which WinStar provides services to the
Partnership in connection with the build out of the Partnership's licensed areas
in consideration for payment of monthly site access and management and
installation fees and (ii) a two-year transmission path lease agreement
permitting use of up to 488 of WinStar's radio links in the Partnership's
licensed areas. On January 2, 1997, the merger was completed. WinStar paid an
aggregate of $40.7 million in cash and approximately 3.6 million shares of
common stock of WinStar, which had an aggregate market value of $75 million on
the date of Consummation. Pursuant to a registration rights agreement, WinStar
agreed to register such shares of common stock for resale prior to January 1,
1998.
F-40
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS
The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1996 gives effect to the Company's
acquisition of Milliwave Limited Partnership ("Milliwave") and the Preferred
Stock Placement as if they occurred as of the beginning of the year ended
December 31, 1996. The following unaudited pro forma "as adjusted" statement
of operations for the year ended December 31, 1996 gives effect to the
acquisition of Milliwave and the Preferred Stock Placement as well as the
issuance of Debt in the 1997 Debt Placement as if they occurred as of the
beginning of the year ended December 31, 1996. The revenues and results of
operations included in the following unaudited pro forma condensed
consolidated statements of operations are not indicative of anticipated
results of operations for periods subsequent to the acquisition of Milliwave
and the Preferred Stock Placement and the issuance of Debt in the 1997 Debt
Placement, nor are they considered necessarily to be indicative of the
results of operations for the year ended December 31, 1996 had the
acquisition of Milliwave and the Preferred Stock Placement and the issuance
of Debt in the 1997 Debt Placement actually been completed at the beginning
of the year ended December 31, 1996.
The following unaudited pro forma condensed consolidated statement of
operations for the three months ended March 31, 1997 gives effect to the
Preferred Stock Placement as if it occurred as of the beginning of the three
months ended March 31, 1997. The following unaudited pro forma "as adjusted"
statement of operations for the three months ended March 31, 1997 gives effect
to the Preferred Stock Placement as well as the issuance of Debt in the 1997
Debt Placement as if they occurred as of the beginning of the three month period
ended March 31, 1997. The revenues and results of operations included in the
following unaudited pro forma condensed consolidated statement of operations
are not indicative of anticipated results of operations for periods subsequent
to the Preferred Stock Placement and the issuance of Debt in the 1997 Debt
Placement, nor are they considered necessarily to be indicative of the results
of operations for the three months ended March 31, 1997 had the Preferred Stock
Placement and the issuance of Debt in the 1997 Debt Placement actually been
completed at the beginning of the three months ended March 31, 1997.
These financial statements should be read in conjunction with the notes
to the unaudited pro forma condensed consolidated financial statements, which
follow, the consolidated financial statements of the Company and the related
notes thereto, the condensed consolidated financial statements of the Company
for the three months ended March 31, 1997 and the related notes thereto and
the financial statements of Milliwave, and the related notes thereto.
F-41
<PAGE>
WINSTAR COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Pro Forma for the
Adjustments Adjustment Acquisition Pro Forma
Increase/ Increase/ of Adjustments
(Decrease) Pro Forma (Decrease) Milliwave Increase/
for the for the for and for (Decrease)
The Acquisition Acquisition Preferred Preferred for the Pro Forma
Company Milliwave LP, of of Stock Stock 1997 Debt As
Historical Historical Milliwave Milliwave Placement Placement Placement Adjusted
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues
Telecommunications
services.......... $ 33,969 $ 4 $(1,492)(a) $ 32,481 $ -- $ 32,481 $ -- $ 32,481
Information
services.......... 14,650 -- -- 14,650 -- 14,650 -- 14,650
---------- ------------ ----------- ----------- --------- --------- ----------- ---------
Total operating
revenues............ 48,619 4 (1,492) 47,131 -- 47,131 -- 47,131
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
Operating expenses....
Cost of services and
products.......... 38,233 -- (686)(a) 37,547 -- 37,547 -- 37,547
Selling, general and
administrative
expenses.......... 62,365 1,634 -- 63,999 -- 63,999 -- 63,999
Depreciation and
amortization...... 4,501 201 3,470(b) 8,172 -- 8,172 -- 8,172
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
Total operating
expenses............ 105,099 1,835 2,784 109,718 -- 109,718 -- 109,718
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
Operating loss...... (56,480) (1,831) (4,276) (62,587) -- (62,587) -- (62,587)
Other income (expense)
Interest expense.... (36,748) (6) -- (36,754) -- (36,754) (41,077)(f) (77,831)
Interest income..... 10,515 93 (2,155)(c) 8,453 -- 8,453 -- 8,453
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
Net loss from
continuing
operations.......... (82,713) (1,744) (6,431) (91,898) -- (90,888) (41,077) (131,965)
Net loss from
discontinued
operations.......... (1,010) -- -- (1,010) -- (1,010) -- (1,010)
---------- ------------- ------------ ----------- --------- --------- ----------- ---------
Net loss.............. $(83,723) $(1,744) $(6,431) $(91,898) $ -- $(91,898) $(41,077) $(132,975)
Less preferred stock
dividends........... -- -- -- -- (6,000)(e) (6,000) -- (6,000)
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
Net loss applicable to
common stock........ $(83,723) $(1,744) $(6,431) $(91,898) $(6,000) $(97,898) $(41,077) $(138,975)
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
---------- ------------- ----------- ----------- --------- --------- ----------- ---------
Net loss applicable to
common stock per
share from
continuing
operations.......... $ (2.96) $ (2.88) $ (3.07) $ (4.37)
Net loss per share
from discontinued
operations.......... (0.04) (0.04) (0.04) (0.04)
---------- ----------- --------- ---------
Net loss applicable to
Common Stock per
share............... $ (3.00) $ (2.92) $ (3.11) $ (4.41)
---------- ----------- --------- ---------
---------- ----------- --------- ---------
Weighted average
shares
outstanding......... 27,911 3,595(d) 31,506 31,506 31,506
---------- -------- ----------- --------- ---------
---------- -------- ----------- --------- ---------
</TABLE>
F-42
<PAGE>
WINSTAR COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro Forma
Increase/ Pro Forma for Adjustments
The (Decrease) for the Issuance Increase/(Decrease)
Company the Issuance of of Preferred for the 1997 Debt Pro Forma
Historical Preferred Stock Stock Placement As Adjusted
---------- --------------- -------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues
Telecommunications services................... $ 7,063 $ -- $ 7,063 $-- $ 7,063
Information services.......................... 6,014 -- 6,014 -- 6,014
---------- ------- -------------- ------- -----------
Total operating revenues........................ 13,077 -- 13,077 -- 13,077
---------- ------- -------------- ------- -----------
Operating expenses..............................
Cost of services and products................. 12,959 -- 12,959 -- 12,959
Selling, general and administrative
expenses.................................... 29,553 -- 29,553 -- 29,553
Depreciation and amortization................. 3,501 -- 3,501 -- 3,501
---------- ------- -------------- ------- -----------
Total operating expenses........................ 46,013 -- 46,013 -- 46,013
---------- ------- -------------- ------- -----------
Operating loss................................ (32,936) -- (32,936) -- (32,936)
Other income (expense)
Interest expense.............................. (10,798) -- (10,798) (8,507)(f) (19,305)
Interest income............................... 2,235 -- 2,235 -- 2,235
---------- ------- -------------- ------- -----------
Net loss from continuing operations............. (41,499) -- (41,499) (8,507) (50,006)
Net loss from discontinued operations........... (477) -- (477) -- (477)
---------- ------- -------------- ------- -----------
Net loss........................................ $(41,976) -- $(41,976) (8,507) (50,483)
-------
Less preferred stock dividends.................. -- (1,500)(e) (1,500) (1,500)
---------- ------- -------------- ------- -----------
Net loss applicable to common stock............. $(41,976) $(1,500) $(43,476) $(8,507) $(51,983)
---------- ------- -------------- ------- -----------
---------- ------- -------------- ------- -----------
Net loss applicable to common stock per share
from continuing operations.................... $ (1.27) $ (0.05) $ (1.32) $ (0.26) $ (1.58)
Net loss per share from discontinued
operations.................................... (0.02) -- (0.02) -- (0.02)
---------- ------- -------------- ------- -----------
Net loss applicable to Common Stock per share... $ (1.29) $ (0.05) $ (1.34) $ (0.26) $ (1.60)
---------- ------- -------------- ------- -----------
---------- ------- -------------- ------- -----------
Weighted average shares outstanding............. 32,610 32,610 32,610 32,610 32,610
---------- ------- -------------- ------- -----------
---------- ------- -------------- ------- -----------
</TABLE>
F-43
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The adjustments below were prepared based on data currently available and in
some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded my have an impact on the results of operations and
the balance sheet different from that reflected in the accompanying unaudited
pro forma condensed consolidated financial statements. It is therefore possible
that the entries presented below will not be the amounts that were actually
recorded.
Statement of Operations for the Year Ended December 31, 1996 and the Three
Months Ended March 31, 1997
a) To eliminate sales, management fees, and cost of sales recorded by the
Company pursuant to management and other agreements with Milliwave.
b) To record amortization on the licenses acquired in the acquisition of
Milliwave.
c) To eliminate interest income, at an assumed rate of 5.3% per annum, on $40.6
million cash, assuming such cash was paid at the beginning of the year in
connection with the acquisition of Milliwave.
d) To record 3,594,620 shares of the Company's Common Stock issued in
connection with the acquisition of Milliwave at $20.87 per share.
e) To record Preferred Stock dividends on the 4,000,000 shares of Preferred
Stock issued by the Company, at 6% of the stated value of $25.00 per share.
f) To record interest expense on the debt issued in the 1997 Debt Placement,
including amortization of debt offering costs and other related fees, as if
the debt were issued at the beginning of the respective period, but not to
include interest income earned on additional available cash.
F-44
