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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1997.
REGISTRATION NO. 333-18465
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
WINSTAR COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 4812 13-3585278
(State or other (Primary standard industrial (I.R.S. Employer
jurisdiction of classification code number) Identification Number)
incorporation or
organization)
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 687-7577
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
-------------------
WILLIAM J. ROUHANA, JR.
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
WINSTAR COMMUNICATIONS, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 687-7577
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
COPIES TO:
DAVID ALAN MILLER, ESQ.
GRAUBARD MOLLEN & MILLER
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 818-8800
FAX: (212) 818-8881
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box./ /
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================
TITLE OF SECURITY AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED AGGREGATE PRICE AGGREGATE REGISTRATION FEE
PER SHARE OFFERING PRICE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6% Series A Cumulative 4,000,000 $25.00(3) $100,000,000 $30,303.03
Convertible Preferred shares(1)(2)
Stock ("Series A
Preferred Stock")
- -----------------------------------------------------------------------------------------------------------
Warrants 1,600,000 (4) (4) --
Warrants
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value 5,860,806 $17.0625(6) $100,000,000 $30,303.03
$.01 per share underlying shares(5)(2)
Preferred Stock
- -----------------------------------------------------------------------------------------------------------
Common Stock underlying 1,600,000 $25.00(7) $40,000,000 $12,121.21
Warrants shares(2)
- -----------------------------------------------------------------------------------------------------------
Common Stock (underlying 265,000 $3.54(8) $938,100 $284.27
certain options) to be shares(2)
resold by certain persons
- -----------------------------------------------------------------------------------------------------------
Total $240,938,100 $73,011.54(9)
===========================================================================================================
</TABLE>
(1) Pursuant to Rule 416(b) promulgated under the Securities Act of 1933, as
amended (the "Act"), this Registration Statement also covers a presently
indeterminable number of additional shares of Series A Preferred Stock
which may be issued in lieu of cash dividends during the term of the
Series A Preferred Stock ("Dividend Shares").
(2) Includes one preferred stock purchase right for each share of Common
Stock. See "Description of Capital Stock" in the Prospectus that forms
part of this Registration Statement.
(3) Represents the per-share sales price ($25.00) of the Series A Preferred
Stock sold by the Registrant in an institutional private placement in
February 1997 ("Preferred Stock Placement"), each share having a stated
value of $25.00.
(4) As additional consideration to purchasers in the Preferred Stock
Placement, the Registrant also issued 0.4 Warrants for each share of
Series A Preferred Stock purchased. The Registrant attributed no portion
of the proceeds of the Preferred Stock Placement to the Warrants.
(5) Number of shares estimated based on the last sale price of a share of
Common Stock as reported by Nasdaq on July 30, 1997 ($17.0625) based on
Rules 457(c) and 457(i) promulgated under the Act. Pursuant to Rule
416(b), this Registration Statement also covers additional shares of
Common Stock issuable upon conversion of Dividend Shares. Pursuant to
Rule 416, this Registration Statement also covers a presently
indeterminable number of additional shares of Common Stock issuable by
the Company in the event the Series A Preferred Stock is converted in
connection with a change of control of the Company.
(6) Represents the last sale price ($17.0625) of a share of Common Stock
on July 30, 1997.
(7) Represents the exercise price of each Warrant ($25.00).
(8) Represents the average of the exercise prices of the options based on
the following: (i) 125,000 shares underlying options exercisable at
$4.50 per share, (ii) 50,000 shares underlying options exercisable at
$2.75 per share, (iii) 20,000 shares underlying options exercisable at
$4.41 per share and (iv) 70,000 shares underlying options exercisable at
$2.125 per share.
(9) $50,405.48 was previously paid to the Commission by the Registrant.
Accordingly, the balance of $22,606.06 is being paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
PRELIMINARY PROSPECTUS DATED AUGUST 5, 1997
SUBJECT TO COMPLETION
WINSTAR COMMUNICATIONS, INC.
_________________________
4,000,000 SHARES OF 6% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
_________________________
1,600,000 COMMON STOCK PURCHASE WARRANTS
_________________________
7,725,806 SHARES OF COMMON STOCK
_________________________
This Prospectus relates to offers which may occur from time to time for the
account of certain persons ("Selling Preferred Stockholders") of an aggregate of
4,000,000 shares of 6% Series A Cumulative Convertible Preferred Stock ("Series
A Preferred Stock") of WinStar Communications, Inc. ("Company"), together with
any and all additional shares of Series A Preferred Stock that may be issued as
dividends on such Series A Preferred Stock in lieu of cash during the term of
the Series A Preferred Stock.
This Prospectus also relates to offers which may occur from time to time
for the account of certain persons ("Selling Warrantholders" and, together with
the Selling Preferred Stockholders and the Selling Stockholders (defined below),
the "Selling Securityholders") of an aggregate of 1,600,000 common stock
purchase warrants ("Warrants"). Each Warrant entitles the holder thereof to
purchase one share of the Company's common stock, par value $.01 per share
("Common Stock), at any time commencing February 11, 1998 and ending February
11, 2002 for a purchase price of $25. The Company may accelerate the expiration
date of the Warrants at any time after February 11, 2000 if the last reported
sales price of the Common Stock is $40 or more per share for a period of 20
consecutive days.
This Prospectus also relates to the issuance by the Company of up to
1,600,000 shares of Common Stock ("Warrant Shares") upon exercise of the
Warrants.
This Prospectus also relates to the issuance by the Company of shares of
Common Stock ("Conversion Shares") to holders of Series A Preferred Stock upon
conversion of up to an aggregate of 4,000,000 shares of Series A Preferred Stock
and any additional shares of Series A Preferred Stock issued as dividends during
the term of such Series A Preferred Stock. Commencing August 11, 1997, each
share of Series A Preferred Stock is convertible into a number of shares of
Common Stock determined by dividing the stated value ($25 per share) of such
share of Series A Preferred Stock by the "Conversion Price" (as defined below);
provided, however, that from August 11, 1997 through November 10, 1997, only 50%
of the outstanding Series A Preferred Stock may be converted. Subject to
certain adjustments, the "Conversion Price" is: (i) with respect to any
conversion of Series A Preferred Stock occurring prior to February 11, 1998, the
lesser of (x) $25 and (y) the average of the closing bid prices for the
Company's common stock for the 20 consecutive trading days ("20-day Average Bid
Price") immediately preceding the date of conversion, and (ii) with respect to
any conversion of Series A Preferred Stock occurring on or after February 11,
1998, the lesser of (x) $25 and (y) the 20-day Average Bid Price immediately
preceding February 11, 1998. Notwithstanding the foregoing, if a holder of
Series A Preferred Stock requests conversion at a time when the Conversion Price
is less than $15.00, then the Company may elect (subject to certain notice
requirements and to contractual restrictions contained in certain of the
Company's debt instruments ("Indentures")), in lieu of converting such shares of
Series A Preferred Stock into Conversion Shares, to pay such holder or holders
in cash, an amount equal to 110% of the Liquidation Preference (as defined
below), for each share of Series A Preferred Stock requested to be converted.
It is the Company's current intention to pay cash in lieu of shares of Common
Stock if the conversion price at the time of any such conversion is less than
$15.00, assuming such cash payments would be allowable under then existing law
and the terms of all agreements to which the Company is then a party. On
February 11, 2002 ("Mandatory Conversion Date"), any shares of Series A
Preferred Stock still outstanding shall be automatically converted into
Conversion Shares, unless
<PAGE>
the Company determines to pay cash therefor, in an amount equal to the stated
value thereof, plus all accrued and unpaid dividends thereon (the "Liquidation
Preference"). With a Conversion Price of $17.0625 (the last sale price of a
share of Common Stock on July 30, 1997), the 4,000,000 shares of Series A
Preferred Stock (having an aggregate stated value of $25.4 million) would be
convertible into 5,860,806 Conversion Shares. Pursuant to Rule 416, this
Registration Statement also covers a presently indeterminable number of
additional shares of Common Stock issuable by the Company in the event the
Series A Preferred Stock is converted in connection with a change of control of
the Company.
This Prospectus also relates to offers which may occur from time to time
for the account of certain persons ("Selling Stockholders") of an aggregate of
265,000 shares of Common Stock ("Option Shares") issuable by the Company to them
upon exercise of options ("Options"). The Options were granted in consideration
of services rendered to the Company, but due to the type of services or nature
of the grantee, registration of the issuance or resale of the Option Shares was
not permitted on the Registration Statements on Form S-8 previously filed by the
Company.
There is no public market for the Series A Preferred Stock or Warrants and
such a market is not expected to develop. The Common Stock is traded on the
Nasdaq National Market under the symbol "WCII." The last sale price of the
Common Stock on the Nasdaq National Market on July 30, 1997 was $17.0625 per
share.
The Company will not receive any cash proceeds from the sale of the Series
A Preferred Stock, Warrants or Option Shares by the Selling Securityholders or
from its issuance of the Conversion Shares. The Company will receive aggregate
gross proceeds of $40,938,100 upon exercise of the Warrants and Options,
assuming all of the Warrants and Options are exercised. Such proceeds will be
used for working capital and general corporate purposes. All costs, expenses
and fees in connection with the registration of the securities offered by this
Prospectus will be borne by the Company. Such expenses are estimated to be
approximately $[125,000].
-----------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
The date of this Prospectus is August ____, 1997
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C>
Incorporation of Certain Documents by Description of Capital Stock..... 23
Reference......................... 4 Selling Securityholders and Plan
Prospectus Summary.................. 5 of 26
Risk Factors........................ 12 Distribution................... 28
Use of Proceeds..................... 22 Legal Matters.................... 28
Dividend Policy..................... 22 Experts.......................... 28
Available Information............
</TABLE>
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or information have been filed by the Company with
the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
incorporated herein by reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1996;
(2) Current Report on Form 8-K filed January 17, 1997;
(3) Current Report on Form 8-K filed February 14, 1997;
(4) Current Report on Form 8-K filed February 27, 1997;
(5) Current Report on Form 8-K filed March 27, 1997;
(6) Quarterly Report on Form 10-Q for the three-month period ended March
31, 1997, as amended on June 10, 1997;
(7) Proxy Statement, dated May 15, 1997;
(8) Current Report on Form 8-K filed June 10, 1997;
(9) Current Report on Form 8-K filed July 2, 1997; and
(10) The description of the Company's (i) Common Stock contained in the
Company's registration statement on Form 8-A under the Exchange Act
(File No. 1-10726) and (ii) Series B Preferred Stock Purchase Rights
contained in the Company's Registration Statement on Form 8-A, as
amended, under the Exchange Act (File No. 0-20876).
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed incorporated by reference into this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person to WinStar Communications, Inc., 230 Park Avenue, New
York, New York 10169 (telephone 212-584-4000), Attention: Investor Relations
(extension 4053), a copy of any and all of the documents referred to above
(other than exhibits to such documents) which have been incorporated by
reference in this Prospectus.
4
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO
THE "COMPANY" OR "WINSTAR" REFER TO WINSTAR COMMUNICATIONS, INC. AND, WHERE
APPROPRIATE, ITS SUBSIDIARIES. EFFECTIVE JANUARY 1, 1996, THE COMPANY CHANGED
ITS FISCAL YEAR END FROM THE LAST DAY IN FEBRUARY TO DECEMBER 31. WIRELESS
FIBERSM IS A SERVICE MARK AND WINSTAR-Registered Trademark- IS A TRADEMARK OF
WINSTAR COMMUNICATIONS, INC.
THE COMPANY
The Company provides a full range of telecommunications services, including
local, long distance and Internet access services, as a competitive local
exchange carrier ("CLEC"). By exploiting its fiber-quality digital capacity in
the 38 GHz portion of the radio spectrum ("Wireless Fiber") and a switch-based
infrastructure, the Company seeks to distinguish itself as a facilities-based,
value-added provider of high-capacity telecommunications services to small and
medium-sized businesses and an attractive alternative to established providers,
such as the regional Bell operating companies ("RBOCs"). The Company introduced
its switch-based local exchange services to end users in New York City in
October 1996, is currently also offering such switch-based local exchange
service in Boston, Chicago, Los Angeles and San Diego and offering local
exchange services on a resale basis in Atlanta, Newark, Philadelphia, San
Francisco and Washington, D.C. The Company's local exchange services include
the provision of PBX trunks, individual business lines and Centrex and Internet
access, and provide customers with full-feature services such as custom calling,
caller ID, conference calling and voice mail. During the next several years,
the Company intends to introduce its local exchange services in each of the
other major metropolitan areas where it is licensed to provide 38 GHz services
over four or more 100 MHz channels. Over time, the Company intends to carry a
substantial majority of its local telecommunications service traffic over
Wireless Fiber and its own switched networks, unlike most fiber-based CLECs,
which typically do not carry the majority of their customer traffic over their
own networks. The Company also offers a variety of facilities-based broadband,
high-capacity local access and digital network services ("Carrier Services") to
other telecommunications service providers on a wholesale basis. As of June 30,
1997, the Company had more than 40 carrier customers, including, among others,
Ameritech Cellular Services, MCI Communications, Pacific Bell and Teleport
Communications.
The Company is the holder of the largest amount of 38 GHz spectrum in the
United States and is utilizing this asset to build local telephone networks for
the transmission of voice, data and video traffic in the major metropolitan
areas covered by the Company's 38 GHz licenses (the "Wireless Licenses"). The
Company recently consummated an acquisition (the "Milliwave Acquisition") of
another 38 GHz license holder, increasing its 38 GHz spectrum asset base by 88
channels, each providing 100 MHz of bandwidth. The Wireless Licenses, including
those acquired in the Milliwave Acquisition, cover an aggregate of more than 100
cities with populations exceeding 100,000 each, and encompass an aggregate
population of approximately 172 million. Furthermore, the Wireless Licenses
allow the Company to provide Wireless Fiber services in 49 of the 50 most
populated Metropolitan Statistical Areas ("MSAs") in the United States. The
Company has agreed to acquire an aggregate of 62 additional 38 GHz licenses in
various transactions, subject to approval by the Federal Communications
Commission ("FCC"). Upon completion of these acquisitions, the Company's
Wireless Licenses will enable the Company to provide services in all 50 of the
most populated MSAs and will cover cities encompassing an aggregate population
of 180 million. Many of the Company's Wireless Licenses allow for the provision
of Wireless Fiber services over four or more channels in a single market. The
Company believes that the utilization of multiple 38 GHz channels in a single
licensed area provides it with advantages over 38 GHz service providers that
possess fewer channels, by allowing it to build out city-wide networks of
broadband capacity.
The 38 GHz portion of the radio spectrum has characteristics well suited
for the provision of local telecommunications services, including:
RAPID DEPLOYMENT OF ALTERNATIVE LOCAL INFRASTRUCTURE. 38 GHz technology
generally can be deployed considerably more rapidly than wireline (because of
permit procedures and construction time required for
5
<PAGE>
wireline buildout) and many other wireless technologies (because of their
infrastructure requirements and, in many instances, the need to follow FCC
frequency coordination procedures in connection with wireless facilities).
BROAD BANDWIDTH. The total amount of bandwidth for each 38 GHz channel is
100 MHz, which exceeds the bandwidth of any other present terrestrial wireless
channel allotment and supports full broadband capability. For example, one 38
GHz DS-3 channel at 45 Mbps can transfer data at a rate which is over 1,500
times the rate of the fastest dial-up modem currently in general use (28.8 Kbps)
and over 350 times the rate of the fastest ISDN line currently in general use
(128 Kbps). Data transfer rates of a 38 GHz DS-3 channel even exceed the data
transfer rates of cable modems (30 Mbps). The broadband capacity of 38 GHz
provides improved speed and quality in transmissions, as compared to
transmissions that are carried over copper wire. In addition to accommodating
standard voice and data requirements, 45 Mbps data transmission rates allow end
users to receive full-motion video and 3-D graphics and to use highly
interactive applications on the Internet and other networks.
EASE OF INSTALLATION. The equipment used for point-to-point applications
in 38 GHz (i.e., antennae, transceivers and digital interface units) is
typically smaller, less obtrusive and less expensive, and uses less power than
equipment used for similar applications at lower frequencies. These
characteristics make it relatively easier to obtain the roof rights ("Roof
Rights") required to install 38 GHz transceivers and less costly to initiate 38
GHz-based services as compared to most other wireless services.
EFFICIENT CHANNEL REUSE. Certain characteristics of 38 GHz, including the
small amount of dispersion (i.e., scattering) of the radio beam as compared to
the more dispersed radio beams produced at lower frequencies, allow for the
reuse of bandwidth capacity in a licensed area. The ability to reuse capacity
allows the 38 GHz license holder to densely deploy its 38 GHz services in a
given geographic area, provide services to multiple customers over the same 38
GHz channel, and conserve bandwidth capacity, thereby enhancing the types of
services that can be provided and increasing the number of customers to which
such services can be provided.
BUSINESS STRATEGY
The Company's objective is to become the full-service telecommunications
provider of choice to small and medium-sized business customers and a provider
of high-quality alternative and broadband facilities to its Carrier Services
customers. Key elements of the Company's strategy are to:
EXPAND NETWORK INFRASTRUCTURE. The Company is creating an infrastructure
on a city-by-city basis using its Wireless Fiber capabilities, switches acquired
by the Company from equipment vendors and facilities leased from other carriers
to originate and terminate traffic. Pursuant to its building-centric network
plan, the Company is identifying strategically located sites in each
metropolitan area to serve as hubs for its network. These hub sites will be
connected via Wireless Fiber links to end users. The Company believes that a
limited number of hub sites (generally less than a dozen) in each metropolitan
area will allow it to address more than 70% of its targeted customers' buildings
and to carry the majority of its customers' traffic on its own network instead
of the higher cost facilities of other carriers.
EXPLOIT FIRST-TO-MARKET ADVANTAGES. The Company seeks to capitalize on the
significant opportunities emerging in the industry as a result of the
Telecommunications Act of 1996 (the "Telecommunications Act") by exploiting a
"first-to-market" advantage as one of the few holders of 38 GHz licenses with an
established operating and management infrastructure. The Company believes that
its early entrance into its markets provides it with advantages over many
potential competitors by allowing it to: (i) establish a customer base prior to
widespread competition from other CLECs; (ii) develop a proven, reliable network
infrastructure using its own switching capacity ahead of many other CLECs;
(iii) develop pioneering expertise in the utilization of 38 GHz for the delivery
of telecommunications services and the design and management of 38 GHz-based
networks; and (iv) acquire Roof Rights to place its 38 GHz antennae on a large
number of buildings on favorable terms and in advance of other wireless service
providers.
6
<PAGE>
FOCUS ON SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS. The Company believes
there exists a substantial opportunity to attract a base of small and
medium-sized business customers by providing superior customer service and sales
support. The customer base initially targeted by the Company consists of
businesses typically located in buildings that have more than 100,000 square
feet of commercial space and which, in many instances, are not served by CLECs
or competitive access providers ("CAPs"). The Company estimates that there are
more than 8,000 buildings in this target group, populated by approximately 9.7
million workers using more than 2.1 million phone lines. Over time, the Company
intends to expand its target customer base to include the majority of small and
medium-sized businesses in the metropolitan areas covered by the Wireless
Licenses, which the Company estimates contain approximately 60% of all such
businesses in the United States and represent a market opportunity in excess of
$30 billion per year.
MARKET WIRELESS FIBER TO OTHER CARRIERS. The Company markets its Carrier
Services to other carriers such as the RBOCs and other local exchange carriers
("LECs"), interexchange carriers ("IXCs"), other CAPs and CLECs, providers of
personal communications services ("PCS") and cellular and specialized mobile
radio services ("CMRS") providers. The Company believes that its Carrier
Services present an attractive, economical method for telecommunications service
providers to add a high-capacity extension to their own networks and service
territories, especially as they seek to rapidly penetrate new markets opening as
a result of the Telecommunications Act. The Company's Carrier Services can also
provide cost-efficient route diversity where network reliability concerns
require multiple telecommunications paths.
Since the commercial introduction of the Company's Carrier Services in
October 1995, the number of carrier customers has increased significantly. Such
customers include Ameritech Cellular Services, AT&T Wireless, Bell
Atlantic/NYNEX Mobile, Brooks Fiber, Cellular One, PrimeCo Personal
Communications, Siemens Stromberg-Carlson, Teleport Communications and Western
Wireless. In addition, the Company has entered into multi-year master service
agreements with American Communications Services, Electric Lightwave, IntelCom,
MCI Communications and Pacific Bell. These agreements establish the framework
under which such companies may effect the integration of Wireless Fiber services
into their own telecommunications networks. The Company is in the process of
negotiating additional master service agreements with other large
telecommunications providers, including AT&T.
MARKET WIRELESS FIBER SERVICES AS A SOLUTION TO GROWING CAPACITY SHORTAGES.
The Company believes that demand for its Wireless Fiber-based CLEC and Carrier
Services will grow because of the expanding volume of data communications
traffic resulting from increasing Internet usage and other high-volume data
transmission requirements. This type of traffic increasingly requires
high-capacity, end-to-end networks that are often difficult to provide
economically with older RBOC and LEC infrastructure.
PROVIDE INFORMATION AND CONTENT SERVICES. The Company believes that the
ability to deliver information and other content will become an increasingly
important factor in the choice of a telecommunications provider by businesses as
competition increases and the markets covered by the Wireless Licenses mature.
Accordingly, the Company actively seeks opportunities to utilize its information
and content services to enhance the marketability of the Company's
telecommunications services.
DEVELOPMENT OF CORE ASSETS
The Company believes that in order to effectively compete with incumbent
LECs and other telecommunications service providers in its target markets, it
must develop a core group of assets, capabilities and resources. The Company has
made substantial progress in acquiring and developing these core assets, which
include:
TRANSMISSION AND SWITCHING FACILITIES. In October 1996, the Company
initiated local switched services in New York City, utilizing its first 5ESS
switch, purchased from Lucent Technologies, Inc. ("Lucent"), and facilities
leased from NYNEX. In April 1997, the Company initiated local switched services
in Chicago. During the next three years, the Company intends to install Lucent
switches to serve most of its major markets. As of the date of this Prospectus,
the Company has acquired the necessary Roof Rights to install its Wireless Fiber
transmission facilities on approximately 1,400 buildings.
7
<PAGE>
The Company also has developed monitoring and management systems that will
ensure the efficient use of its networks and provide network reliability and
transmission quality equivalent to that provided by fiber-optic networks. The
Company recently completed construction of a network operating center ("NOC"),
which is operating 24 hours a day, 7 days a week, and is currently building a
national field service force.
STATE AUTHORIZATIONS. As of the date of this Prospectus, the Company has
obtained authorization to operate as a CLEC in 24 states and the District of
Columbia and is in the process of seeking authorization to operate as a CLEC
in a number of additional jurisdictions. The Company is authorized to provide
its local access and other Carrier Services as a CAP in 35 states and has
applications pending for such authorizations in a number of additional
jurisdictions.
SALES AND CUSTOMER SUPPORT ORGANIZATIONS. As of the date of this
Prospectus, the Company is expending a significant amount of time and capital to
build a dedicated, responsive sales and customer support organization in order
to ensure that the people and systems necessary to achieve customer satisfaction
keep pace with a growing customer base. As of the date of this Prospectus, the
Company has a direct sales organization for its CLEC services, currently
consisting of more than 300 people located in 13 major cities, and a Carrier
Services sales group, currently consisting of more than 30 people.
INFORMATION SYSTEMS. The Company is investing significant capital
developing state-of-the-art information systems platforms directed toward the
accurate and flexible handling of the billing and customer satisfaction
requirements of a diverse customer base purchasing a variety of
telecommunications services. The Company believes that its information systems
allow it to provide customers with a level of service and responsiveness that
many other telecommunications service providers do not offer and that such level
of service will become a key factor in customers' choice of telecommunications
service providers as the market matures.
EXPERIENCED MANAGEMENT AND OPERATING PERSONNEL. The Company has assembled
a management team and hired operating personnel experienced in all areas of
telecommunications operations, including more than 200 former officers and
employees of MCI Communications and more than 50 former officers and employees
of Sprint Corporation, as well as officers and employees from other established
telecommunications companies. The Company plans to hire additional experienced
telecommunications marketing and operations personnel as appropriate.
OTHER BUSINESSES
The Company has historically generated a significant portion of its
revenues from the resale of long distance services to residential customers. As
part of its CLEC service offerings, the Company is focusing on the sale of long
distance services to small and medium-sized businesses and is not currently
marketing such services to residential customers on an active basis, except
through established affinity group and other targeted programs.
Prior to the Company's entry into the telecommunications industry, it
marketed and distributed consumer products, including personal care and bath and
beauty products, through a nonstrategic subsidiary. That subsidiary continues to
sell such products, primarily to large retailers, mass merchandisers, discount
stores, department stores, national and regional drug store chains and other
regional retail chains. The Company expects to divest itself of this subsidiary
during the next 9 to 12 months.
CORPORATE AND OTHER INFORMATION
The Company was incorporated under the laws of the State of Delaware in
September 1990 and its principal offices are located at 230 Park Avenue, New
York, New York 10169. Its phone number is (212) 584-4000.
8
<PAGE>
In July 1997, the Board of Directors adopted a stockholder rights plan in
which certain rights to purchase Series B Preferred Stock was distributed as a
dividend to holders of Common Stock as of the close of business on July 14,
1997. The rights are not currently exercisable and only become exercisable
under certain circumstances where certain persons or groups acquire beneficial
ownership of 10% or more of the Company's outstanding Common Stock or commence a
tender or exchange offer upon consummation of which such persons or groups would
beneficially own 10% or more of the Company's outstanding Common Stock. See
"Description of Capital Stock."
PRIVATE PLACEMENT OF SERIES A PREFERRED STOCK AND WARRANTS
On February 6, 1997, the Company and its wholly owned subsidiary WinStar
Credit Corp. ("WCC") entered into a securities purchase agreement ("Securities
Purchase Agreement") with certain purchasers, pursuant to which the Company and
WCC agreed to sell to such purchasers an aggregate of 4,000,000 shares of Series
A Preferred Stock and 1,600,000 Warrants for an aggregate purchase price of
$100.0 million. The sale of the Series A Preferred Stock and Warrants
(together, the "Securities") was consummated on February 11, 1997. The sale of
the Securities was conducted as an institutional private placement ("Preferred
Stock Placement") through Credit Suisse First Boston Corporation, which acted
as placement agent. The principal purpose of the Preferred Stock Placement was
to raise proceeds to fund the expansion of the Company's telecommunications and
other operations. See "Description of Capital Stock."
The Company and the purchasers also entered into a Registration Rights
Agreement, dated February 6, 1997, pursuant to which the Company is obligated to
file a registration statement under the Securities Act of 1933, as amended (the
"Act"), registering the (i) resale of the Series A Preferred Stock and Warrants
and (ii) the issuance by the Company of the Warrant Shares. Additionally, under
the Registration Rights Agreement, at any time after May 11, 1997, each holder
of the Preferred Shares may demand that the Company file and have declared
effective within 90 days of such demand a registration statement registering the
resale of the Common Shares. Such a demand was made effective as of May 11,
1997. The Registration Statement, of which this Prospectus forms a part, is
intended to satisfy the aforementioned registration obligations.
RISK FACTORS
See "Risk Factors" commencing on page 12 hereof for a discussion of certain
risks that should be considered in connection with an investment in the Common
Stock, including the risks related to historical and anticipated future
operating losses.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the sale of the Series
A Preferred Stock, Warrants or Option Shares by the Selling Securityholders or
from its issuance of the Conversion Shares. The Company will receive aggregate
gross proceeds of $40,938,100 from the exercise of the Warrants and Options,
assuming all such Warrants and Options are exercised, and will use such proceeds
for working capital and general corporate purposes. See "Use of Proceeds."
9
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data presented below for the year ended February 28, 1995,
the ten months ended December 31, 1995 and the year ended December 31, 1996 have
been derived from the Company's audited Consolidated Financial Statements
included in its Annual Report on Form 10-K for the year ended December 31, 1996,
reclassified to reflect the operations of WinStar Global Products, Inc. ("Global
Products"), the Company's merchandising subsidiary, as a discontinued operation.
The summary financial data for the three months ended March 31, 1996 and 1997
have been derived from the unaudited Consolidated Financial Statements included
in its Quarterly Report on Form 10-Q for the three months ended March 31, 1997.
In the opinion of management, the unaudited consolidated financial statements
have been prepared on the same basis as the audited Consolidated Financial
Statements and include all adjustments, which consist only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
the period.
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED 1996 ENDED MARCH 31, 1997
FEBRUARY 28, DECEMBER 31, DECEMBER 31, PRO ----------------------- PRO
1995 1995 1996 FORMA(1) 1996 1997 FORMA(1)
------------ ------------- ------------ -------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating revenues:
Telecommunications(2).... $14,909 $13,137 $33,969 $32,481 $10,217 $7,063 $7,063
Information services..... 473 2,648 14,650 14,650 771 6,014 6,014
------- ------- ------- ------- ------- ------- -------
Total net sales.... 15,382 15,785 48,619 47,131 10,988 13,077 13,077
Operating income (loss):
Telecommunications....... (4,984) (7,288) (43,698) (49,805) (3,105) (26,546) (26,546)
Information services..... (157) 217 (1,409) (1,409) (54) (1,105) (1,105)
General corporate........ (944) (3,861) (11,373) (11,373) (1,868) (5,285) (5,285)
------- ------- ------- ------- ------- ------- -------
Total operating loss (6,085) (10,932) (56,480) (62,587) (5,027) (32,936) (32,936)
Interest expense........... (375) (7,186) (36,748) (77,831) (8,643) (10,798 ) (19,305)
Interest income............ 343 2,890 10,515 8,453 3,108 2,235 2,235
Other expenses, net........ (1,109) (866) _ - - - -
------- ------- ------- ------- ------- ------- -------
Net loss from continuing
operations............... (7,226) (16,094) (82,713) (131,965) (10,562) (41,499) (50,006)
Net (loss) income from
discontinued operations(3) (4) 237 (1,010) (1,010) (137) (477) (477)
------- ------- ------- ------- ------- ------- -------
Net loss................... (7,230) (15,857) (83,723) (132,975) (10,699) (41,976) (50,483)
Series A Preferred Stock
dividends................ - - - (6,000) - (833) (1,500)
------- ------- ------- ------- ------- ------- -------
Net loss applicable to
common stock............. $(7,230) $(15,857) $(83,723) $(138,975) $(10,699) $(42,809) $(51,983)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net loss per share from
continuing operations.... $(0.42) $(0.71) $(2.96) $(4.37) $(0.39) $(1.27) $(1.58)
Net (loss) income per share
from discontinued
operations................ - 0.01 (0.04) (0.04) - (0.02) (0.02)
------- ------- ------- ------- ------- ------- -------
Net loss per common share
outstanding............. $(0.42) $(0.70) $(3.00) $(4.41) $(0.39) $(1.29) $(1.60)
Weighted average common
shares outstanding....... 17,122 22,770 27,911 31,506 27,214 32,610 32,610
Other Financial Data:
Ratio of earnings to
combined fixed
charges and Series A
Preferred Stock
dividends(4)............. - - - - - - -
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
1997
(in thousands)
ACTUAL
------
<S> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments.................. $413,474
Property and equipment, net........................................ 93,789
Total assets....................................................... 748,869
Current portion of long-term debt and capital lease obligations.... 23,095
Long-term debt and capital lease obligations, less current portion. 587,420
Common and Series A Preferred Stock and additional paid-in capital. 247,270
Stockholders' equity............................................... 79,585
</TABLE>
- -----------
(1) Gives effect to the Preferred Stock Placement and the institutional private
placement, in March 1997, of an aggregate of $300 million of debt by the
Company and WinStar Equipment Corp., its wholly-owned subsidiary, as if
they occurred as of the beginning of the respective periods. Interest
expense has been adjusted to include approximately $8.5 million and $41.1
million of interest on such debt and amortization of debt offering costs
and other related fees in the three months ended March 31, 1997 and the
year ended December 31, 1996, respectively, but not to include interest
income earned on additional available cash.
(2) The Company has generated minimal revenues from its Wireless Fiber
services.
(3) Such loss is from the operations of the Company's consumer products
subsidiary, Global Products. On May 13, 1997, a formal plan of disposition
for Global Products was approved by the Board of Directors, and it is
anticipated that the disposition will be completed within the next 9 to 12
months. The disposition of Global Products has been accounted for as a
discontinued operation and, accordingly, its net assets have been
segregated from continuing operations in the balance sheet data, and its
operating results are segregated and reported as discontinued operations in
the statements of operations data.
(4) For the years ended February 28, 1993, 1994 and 1995, the ten months ended
December 31, 1995, the year ended December 31, 1996 and the three months
ended March 31, 1996 and 1997, earnings from continuing operations were
insufficient to cover combined fixed charges and Series A Preferred Stock
dividends by $4,679,000, $8,622,000, $7,288,000, $16,310,000, $83,033,000,
$10,562,000 and $42,537,000, respectively. On a pro forma basis, giving
effect to the items described in footnote 1 above, earnings from continuing
operations were insufficient to cover combined fixed charges and Series A
Preferred Stock dividends by $51,711,000 and $138,285,000 for the three
months ended March 31, 1997 and the year ended December 31, 1996,
respectively. Fixed charges consist of interest charges and amortization
of debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rent expense that the Company
believes to be representative of interest.
11
<PAGE>
RISK FACTORS
AN INVESTMENT IN ANY OF THE SERIES A PREFERRED STOCK, WARRANTS, CONVERSION
SHARES, WARRANT SHARES AND OTHER SHARES OF COMMON STOCK INVOLVES A SIGNIFICANT
DEGREE OF RISK. IN DETERMINING WHETHER TO MAKE AN INVESTMENT IN ANY OF THE
SECURITIES, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY ALL OF THE
INFORMATION SET FORTH IN THIS PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING RISK
FACTORS.
HISTORICAL AND ANTICIPATED FUTURE NET AND OPERATING LOSSES
The Company has incurred significant operating and net losses attributable
in substantial part to the development of its telecommunications businesses. The
Company historically has had net losses, including net losses of approximately
$15.9 million for the ten months ended December 31, 1995, $83.7 million for the
year ended December 31, 1996 and $42.0 million for the three months ended March
31, 1997. The Company has been offering local access and other Carrier Services
only since December 1994, and local exchange services as a CLEC only since
April 1996, and has made and is making significant expenditures in the
development of its local telecommunications operations, including expenditures
associated with establishing an operating infrastructure and introducing and
marketing its telecommunications services. The Company expects to continue to
experience significant and increasing operating losses, net losses and total and
per share amounts of net loss, along with decreasing net current assets, while
it seeks to establish a sufficient revenue-generating customer base and build
the network infrastructure necessary to provide services over its own
facilities. As a result of increased expenses, principally relating to an
increase in the number of employees in connection with the rollout of CLEC
services and to the servicing of existing debt, there will continue to be
substantial increases in the Company's net loss and operating loss. There can
be no assurance that the Company will achieve or sustain profitability.
SUBSTANTIAL INDEBTEDNESS
The Company has significant indebtedness and interest expense. At March
31, 1997, the Company had, on a consolidated basis, approximately $619.2 million
of indebtedness, including capitalized lease obligations. The accrual of
interest and the accretion of original issue discount on existing indebtedness
will significantly increase the Company's liabilities. The level of the
Company's indebtedness could have important consequences, including the
following: (i) the ability of the Company to obtain any necessary financing in
the future for working capital, capital expenditures, debt service requirements
or other purposes may be limited; (ii) a substantial portion of the Company's
cash flow from operations, if any, must be dedicated to the payment of principal
and interest on its indebtedness and other obligations and will not be available
for use in the Company's business; (iii) the Company's level of indebtedness
could limit its flexibility in planning for, or reacting to changes in, its
business; (iv) the Company is more highly leveraged than many of its
competitors, which may place it at a competitive disadvantage; and (v) the
Company's high degree of indebtedness would make it more vulnerable in the event
of a downturn in its business or if operating cash flow does not significantly
increase.
RISKS RELATED TO CLEC STRATEGY; ANTICIPATED INITIAL NEGATIVE OPERATING MARGINS
IN CLEC BUSINESS
The Company is pursuing an accelerated strategy to enter the local exchange
services market as a CLEC in the metropolitan areas in which it has Wireless
Licenses and to develop and obtain the facilities necessary to provide its own
local exchange services. The Company has limited experience providing local
exchange services and there can be no assurance that the Company's CLEC strategy
will be successful. In addition, local exchange service providers have never
utilized 38 GHz wireless-based systems as a significant segment of their local
exchange services facilities and there can be no assurance that the Company will
be successful in implementing its Wireless Fiber-based system. The Company's
CLEC strategy is subject to risks relating to: the receipt of necessary
regulatory approvals; the negotiation and implementation of resale agreements
with other local service providers; the negotiation and implementation of
interconnection agreements with RBOCs and other incumbent LECs; the failure of
LECs and RBOCs to honor the letter and spirit of consummated interconnection
agreements; the ability of third-party equipment providers and installation and
maintenance contractors to meet the Company's rollout schedule; the ability of
the Company to obtain sufficient Roof Rights to successfully build out its
network; the recruitment of additional personnel
12
<PAGE>
in a timely manner, so as to be able to attract and service new customers but
not incur excessive personnel costs in advance of the rollout; the Company's
ability to attract and retain new customers through delivery of high-quality
services; the potential adverse reaction to the Company's services by the
Company's carrier customers, which may view the Company as a competitor; and the
Company's ability to manage the simultaneous implementation of its plan in
multiple markets. In addition, the Company is subject to the risk of unforeseen
problems inherent in being a new entrant in a rapidly evolving industry.
Historically, almost all of the Company's telecommunications revenues have
been derived from the resale of long distance services to residential customers.
As part of its CLEC strategy, the Company is marketing its long distance
services to small and medium-sized businesses and is no longer actively
marketing such services to residential customers, except through certain
established affinity and other target programs. As a result, revenues from the
provision of long distance services to residential customers can be expected to
substantially decline through attrition of the Company's long distance
residential customer base.
Although the Company's initial implementation of its CLEC strategy entails
the resale of the facilities and services of other service providers, which
itself is dependent on the negotiation and implementation of satisfactory resale
arrangements, the Company's CLEC strategy will require significant capital
investment related to the purchase and installation of numerous switches and the
interconnection of these facilities to customers' buildings and LEC and CLEC
local networks, including the installation of Wireless Fiber links and the
buildout of other facility infrastructure, in advance of generating material
revenues.
As the Company rolls out its CLEC operations, it will experience negative
operating margins while it develops its facilities. After initial rollout of its
CLEC services in a particular city, the Company expects operating margins for
such operations to improve only when and if: (i) sales efforts result in
sufficiently increased volumes of traffic; (ii) the Company has installed a
switch and a sufficient number of Wireless Fiber links so that a substantial
portion of the Company's traffic in that city can be originated and terminated
over the Company's Wireless Fiber facilities instead of LEC or other CLEC
facilities; and (iii) higher margin-enhanced services are sought by, provided to
and accepted by customers. While the Company believes that the unbundling and
resale of LEC services and the implementation of local telephone number
portability (which will permit customers to retain their telephone numbers when
switching carriers), which are mandated by the Telecommunications Act, will
reduce the Company's costs of providing local exchange services and facilitate
the marketing of such services, there can be no assurance that the Company's
CLEC operations will become profitable due to, among other factors, lack of
customer demand, competition from other CLECs and pricing pressure from the LECs
and other CLECs. The Company's failure to implement its CLEC strategy
successfully would have a material adverse effect on the operations of the
Company.
NEGATIVE OPERATING MARGINS IN THE INITIAL PROVISION OF WIRELESS FIBER-BASED
CARRIER SERVICES
The Company has experienced negative operating margins in connection with
the development and initial provision of its Wireless Fiber-based Carrier
Services and expects to continue to experience negative operating margins until
it develops a sufficient revenue-generating customer base for such services. In
order to demonstrate the efficacy of Wireless Fiber, the Company often provides
complimentary service on a trial basis for a limited period. The Company expects
to improve operating margins in the provision of its Carrier Services over time
by: (i) obtaining appropriate Roof Rights; (ii) acquiring and retaining an
adequate customer base; (iii) placing telecommunications traffic of new
customers and additional telecommunications traffic of existing customers across
installed Wireless Fiber links; and (iv) inducing providers of
telecommunications services to utilize and market the Company's Wireless Fiber
services as part of their own networks, systems and services, thereby reducing
the Company's related marketing costs. If the Company fails to accomplish any of
the foregoing, particularly acquiring and retaining an adequate customer base,
it will not be able to improve the operating margins of its Carrier Services
business. There can be no assurance that the Company will be able to achieve or
sustain positive operating margins. Failure to achieve positive operating
margins would have a material adverse effect on the operations of the Company.
13
<PAGE>
RISKS ASSOCIATED WITH RAPID EXPANSION AND ACQUISITIONS
The Company is pursuing a strategy of aggressive and rapid growth,
including the accelerated rollout of its CLEC services, acquisitions of
businesses and assets, including additional spectrum licenses, continued
aggressive marketing of its Carrier Services, and the hiring of additional
management, technical and marketing personnel, all of which will result in
significantly higher operating expenses. Rapid expansion of the Company's
operations may place a significant strain on the Company's management, financial
and other resources. The Company's ability to manage future growth, should it
occur, will depend upon its ability to monitor operations, control costs,
maintain effective quality controls and significantly expand the Company's
internal management, technical, information and accounting systems. Any failure
to expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the business,
financial condition and results of operations of the Company and the ability of
the Company and its subsidiaries to make principal and interest payments on
their outstanding debt. As part of its strategy, the Company may acquire
complementary assets or businesses. The pursuit of acquisition opportunities
could place significant demands on the time and attention of the Company's
senior management and involve considerable financial and other costs with
respect to identifying and investigating acquisition candidates, negotiating
acquisition agreements and integrating the acquired businesses with the
Company's existing operations. Employees and customers of acquired businesses
may sever their relationship with such businesses during or after the
acquisition. There can be no assurance that the Company will be able to
successfully consummate any acquisitions or integrate any business or assets
which it may acquire into its operations.
COMPETITION
The Company is subject to intense competition in each of the areas in which
it operates. Many of the Company's competitors have longer-standing
relationships with customers and suppliers in their respective industries,
greater name recognition and significantly greater financial, technical and
marketing resources than the Company. Further, sales of the Company's Carrier
Services are typically made to other telecommunications providers that compete
or may compete in the future with the Company.
LOCAL TELECOMMUNICATIONS MARKET. The local telecommunications market is
intensely competitive for new entrants and currently is dominated by the RBOCs
and other LECs. The LECs have long-standing relationships with their customers,
have the ability to subsidize competitive services with revenues from a variety
of other services and benefit from existing state and federal regulations that
currently favor the LECs over the Company in certain respects. In addition to
competition from the LECs, the Company also faces competition from a growing
number of new market entrants, such as other CLECs and CAPs. The Company also
may face competition in the provision of local telecommunications services from
cable companies, electric utilities, LECs operating outside their current local
service areas and IXCs. Moreover, the consolidation of telecommunications
companies and the formation of strategic alliances within the telecommunications
industry, which have accelerated as a result of the passage of the
Telecommunications Act, will give rise to significant new or stronger
competitors. The Company currently also faces or anticipates facing competition
from other entities which offer, or are licensed to offer, 38 GHz services and
could face competition in certain aspects of its existing and proposed
businesses from competitors providing wireless services in other portions of the
radio spectrum (including 2 GHz, 18 GHz and 28 GHz, among others). The Company's
Internet services also face significant competition from, among others, cable
television operators deploying cable modems that provide high-speed data
transmission over existing coaxial cable television networks. As competition
increases in the local telecommunications market, the Company anticipates that
general pricing competition and pressures will increase significantly. The
Company has not obtained significant market share in any of the areas where it
offers its services, nor does it expect to do so given the size of the local
telecommunications services market, the intense competition therein and the
diversity of customer requirements. There can be no assurance that the Company
will be able to compete effectively in any of its markets.
LONG DISTANCE MARKET. The long distance market has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high (and increasing) average churn rate as customers frequently
change long distance providers in response to the offering of lower rates or
promotional incentives by competitors. The Company competes for long distance
customers with major IXCs, as well as other national and regional long distance
carriers and resellers, many of whom own substantially all of their own
facilities and are able to provide services at costs lower than the Company's
current costs since the
14
<PAGE>
Company generally leases its access facilities. The Company believes that the
RBOCs and CLECs also will become significant competitors in the long distance
telecommunications industry. To maintain its competitive posture, the Company
believes that it must be in a position to reduce its prices in order to meet
reductions in rates, if any, by competitors. Any such reductions could adversely
affect the Company. In addition, LECs have been obtaining additional pricing and
regulatory flexibility. This may enable LECs to grant volume discounts to larger
long distance companies, which also could put the Company's long distance
business at a disadvantage in competing with larger providers.
Additionally, providers of long distance services, including the major
IXCs, as well as resellers, such as the Company, are coming under intensified
scrutiny for marketing activities by them or their agents which result in
alleged unauthorized switching of customers from one long distance provider to
another. The FCC and a number of state authorities are seeking to introduce more
stringent regulations to curtail the intentional or erroneous switching of
customers, which could include the imposition of fines, penalties and possible
operating restrictions on entities which engage in unauthorized switching
activities. In addition, the Telecommunications Act requires the FCC to
prescribe regulations imposing procedures for verifying the switching of
customers and additional remedies on behalf of carriers for unauthorized
switching of their customers. The effects, if any, the adoption of any such
proposed regulations would have on the long distance industry and the business
practices therein cannot be predicted. Statutes and regulations which are or may
become applicable to the Company as it expands could require the Company to
alter methods of operations, at costs which could be substantial, or otherwise
limit the types of services it offers.
NEW MEDIA BUSINESS. The industry in which the Company's new media
subsidiaries compete consists of a very large number of entities producing,
owning or controlling news, sports, entertainment, educational and informational
content and services, including telecommunications companies, television
broadcast companies, sports franchises, film and television studios, record
companies, newspaper and magazine publishing companies, universities and on-line
computer services. Competition is intense for timely and highly marketable or
usable information and entertainment content. Almost all of the entities with
which the Company's new media subsidiaries compete have significantly greater
presence in the various media markets and greater resources than the Company,
including existing content libraries, financial resources, personnel and
existing distribution channels. There can be no assurance that the Company will
be able to compete successfully in the emerging new media industry.
CONSUMER PRODUCTS BUSINESS. The consumer products industry is subject to
changes in styles and consumer tastes. An unanticipated change in consumer
preferences inconsistent with the Company's merchandise lines could have a
material adverse effect upon its operations. The Company's product lines are
subject to intense competition with numerous manufacturers and distributors of
hair, beauty and bath products. Mass merchandisers, drug store chains, and other
mass volume retailers typically utilize freestanding pegboard fixtures or
pegboard wall fixtures, as well as in-line shelving and end-cap displays, to
display their products. Competition for shelf and wall space for product
placement is intense, as many companies seek to have their products
strategically placed within the store. Competition also exists with respect to
product name recognition and pricing, since retailers and consumers often choose
products on the basis of name brand, cost and value. Many of the Company's
competitors have greater product and name recognition, as well as much larger
and more sophisticated sales forces, product development, marketing and
advertising programs and facilities. The Company generally competes by
attempting to offer retail customers quality, service and products at reasonable
prices. In May 1997, the Company decided to divest itself of its consumer
products subsidiary, is currently exploring sale opportunities and treats the
operations of such subsidiary as discontinued operations.
SIGNIFICANT CAPITAL REQUIREMENTS
The expansion of the Company's telecommunications operations and the
continued funding of operating expenses will require substantial capital
investment. Additionally, as part of its strategy, the Company may seek to
acquire complementary assets or businesses (including additional spectrum
licenses, by auction or otherwise), which also could require substantial
capital investment. The Company's decision to accelerate the development of
its CLEC operations in response to the Telecommunications Act has
substantially increased the Company's capital expenditure requirements.
Management anticipates, based on
15
<PAGE>
current plans and assumptions relating to its operations, that the Company's
existing financial resources and additional equipment financing arrangements
which the Company intends to seek, will be sufficient to fund the Company's
growth and operations for approximately 24 to 30 months from the date of this
Prospectus. In order to provide additional future liquidity to the Company,
the Company has obtained a commitment for a $150 million facility from
affiliates of the Initial Purchasers of the Notes in the 1997 Debt Placement,
which, subject to the Company satisfying various operating and financial
criteria, may be drawn by the Company on March 31, 1999. The commitment will
be reduced by the amount 50 funded or rejected. In the event the Company's
plans or assumptions change or prove to be inaccurate, or if the Company
consummates any acquisitions of businesses or assets (including additional
spectrum licenses, by auction or otherwise), or if the Company fails to
secure additional equipment financing arrangements, the Company may be
required to seek additional sources of capital sooner than currently
anticipated. Sources of additional capital may include public and private
equity and debt financing, sales of nonstrategic assets and other financing
arrangements. There can be no assurance that the Company will be able to
obtain additional financing or, if such financing is available, that the
Company will be able to obtain it on acceptable terms. Failure to obtain
additional financing, if needed, could result in the delay or abandonment of
some or all of the Company's development and expansion plans, which would
have a material adverse effect on the Company's business and could adversely
affect the ability of the Company and its subsidiaries to make principal and
interest payments on their outstanding debt, including the Notes.
GOVERNMENT REGULATION
The Company's telecommunications services are subject to varying degrees of
federal, state and local regulation. Generally, the FCC exercises jurisdiction
over all telecommunications services providers to the extent such services
involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect callers to long distance
carriers and the use of electromagnetic spectrum (I.E., wireless services). With
the passage of the Telecommunications Act, the FCC's jurisdiction has been
extended to include certain interconnection and related issues that
traditionally have been considered subject primarily to state regulation. The
state regulatory commissions retain nonexclusive jurisdiction over the provision
of telecommunications services to the extent such services involve the provision
of jurisdictionally intrastate telecommunications.
The Telecommunications Act is intended to remove the formal barriers
between the long distance and local telecommunications services markets,
allowing service providers from each market (as well as providers of cable
television and other services) to compete in all communications markets. The
Telecommunications Act will permit the RBOCs eventually to compete in the
provision of long distance services between local access transport areas
("LATAs"). Additionally, the FCC must promulgate new regulations over the next
several years to address mandates contained in the Telecommunications Act, which
will change the regulatory environment significantly. The Telecommunications Act
generally requires LECs to provide competitors with interconnection and
nondiscriminatory access to the LEC network on more favorable terms than have
been available in the past. However, such interconnection and the terms thereof
are subject to negotiations with each LEC, which may involve considerable delays
and may not necessarily be obtained on terms and conditions that are acceptable
to the Company. In such instances, although the Company may petition the proper
regulatory agency to arbitrate disputed issues, there can be no assurance that
the Company will be able to obtain acceptable interconnection agreements. In
addition, the Telecommunications Act requires the promulgation of regulations to
implement universal service reform, to revise the existing subsidy system which
is intended to provide support for the provision of ubiquitous telephone service
and to effect access charge reform to more closely align the access charges
required to be paid by the long distance carriers to the LECs to the actual cost
of providing service. The Company is unable to predict what effect the
Telecommunications Act will have on the telecommunications industry in general
and on the Company in particular. No assurance can be given that any regulation
will broaden the opportunities available to the Company or will not have a
material adverse effect on the Company and its operations. Further, there can be
no assurance that the Company will be able to comply with additional applicable
laws, regulations and licensing requirements or have sufficient resources to
take advantage of the opportunities which may arise from this dynamic regulatory
environment.
As required by the Telecommunications Act, the FCC adopted, in August 1996,
new rules implementing the interconnection and resale provisions of the
Telecommunications Act (the
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"Interconnection Order"). These rules constitute a pro-competitive, deregulatory
national policy framework designed to remove or minimize the regulatory,
economic and operational impediments to full competition for local services,
including switched local exchange service. There can be no assurance how the
Interconnection Order will be implemented or enforced or as to what effect such
implementation or enforcement will have on competition within the
telecommunications industry generally or on the competitive position of the
Company specifically. A number of LECs, the National Association of Regulatory
Utility Consumers and others have filed in Federal court seeking to appeal
aspects of the Interconnection Order. In July 1997, the United States Court of
Appeals for the Eighth Circuit invalidated certain provisions of the
Interconnection Order, including those provisions in which the FCC asserted
jurisdiction over the pricing of interconnection elements and the "pick and
choose" provisions for interconnectors to select discrete provisions of other
carriers' interconnection decisions. As has been the case since the
Interconnection Order was stayed by the Court in January 1997, many states
continue to set the prices for interconnection, resale and unbundled network
elements. The FCC has indicated its intention to appeal the Eighth Circuit's
ruling to the United States Supreme Court. The Company believes that the Eighth
Circuit's ruling will not adversely affect its CLEC operations and may, in
certain instances, positively affect the operations of its Carrier Services
business, although there can be no assurance of this.
FINITE INITIAL TERM OF WIRELESS LICENSES; POTENTIAL LICENSE RENEWAL COSTS;
FLUCTUATIONS IN THE VALUE OF WIRELESS LICENSES; TRANSFER OF CONTROL
The FCC's current policy is to align the expiration dates of all 38 GHz
licenses such that they mature concurrently and, upon expiration, to renew all
such licenses for ten years. The initial term of all currently outstanding 38
GHz licenses, including the Company's licenses, expires in February 2001. While
the Company believes that all of its Wireless Licenses will be renewed based
upon FCC custom and practice establishing a presumption in favor of licensees
that have complied with their regulatory obligations during the initial license
period, there can be no assurance that any Wireless License will be renewed upon
expiration of its initial term.
In a notice of proposed rulemaking ("NPRM"), the FCC proposed auctioning
licenses for currently unallocated 38 GHz channels. Given the current political
climate with respect to balancing the federal budget, there is a risk that the
FCC will require significant payments upon renewal of the Company's Wireless
Licenses. The FCC's failure to renew, or its imposition of significant charges
for renewal of, one or more Wireless Licenses could have a material adverse
effect on the Company and the ability of the Company and its subsidiaries to
make principal and interest payments on their outstanding debt, including the
Notes.
The Wireless Licenses are integral assets of the Company, the value of
which will depend significantly upon the success of the Company's wireless
telecommunications operations and the future direction of the wireless
telecommunications segment of the telecommunications industry. The value of
licenses to provide wireless services also may be affected by fluctuations in
the level of supply and demand for such licenses. Any assignment of a license or
transfer of control by an entity holding a license is subject to certain
limitations relating to the identity and qualifications of the transferee and
requires prior FCC approval (and in some instances state regulatory approval as
it relates to the provision of telecommunications services in that state),
thereby possibly diminishing the value of the Wireless Licenses.
The Company has entered into agreements to acquire a number of additional
38 GHz licenses. The transfer of licenses issued by the FCC, including 38 GHz
licenses (as well as a change of control of entities holding licenses), is
subject to the prior consent of the FCC, which consent generally turns on a
number of factors including the identity, background and the legal and financial
qualifications of the transferee and the satisfaction of certain other
regulatory requirements. In addition, the existence of proposed channel
limitations in the NPRM, which in at least one licensed area may result in the
Company exceeding the proposed maximum number of licenses for that area, may
result in the FCC denying consent for one or more license transfers. In light of
the foregoing, the newness of this service and the uncertainty of final
regulations to be issued in connection with the NPRM, there can be no assurance
that the FCC will approve all or any of the proposed acquisitions or, if
approved, that the FCC will not impose limitations on the ultimate number of
licenses held in any particular licensed area.
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CHANGES IN TECHNOLOGY, SERVICES AND INDUSTRY STANDARDS
The telecommunications industry has been characterized by rapid
technological change, changing end-user requirements, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate or adapt to such changes
and to offer, on a timely basis, services that meet these evolving industry
standards. The extent to which competitors using existing or currently
undeployed methods of delivery of local telecommunications services will compete
with the Company's Wireless Fiber services cannot be anticipated. There can be
no assurance that existing, proposed or as yet undeveloped technologies will not
become dominant in the future and render 38 GHz-based (and other spectrum-based)
systems less profitable or less viable. For example, there are several existing
technologies that may be able to allow the transmission of high bandwidth
traffic over existing copper lines. There can be no assurance that the Company
will have sufficient resources to make the investments necessary to acquire new
technologies or to introduce new services that could compete with future
technologies or that equipment held by the Company in inventory will not be
rendered obsolete, any of which would have an adverse effect on the operations
of the Company.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The indentures relating to certain of the Company's indebtedness impose
significant operating and financial restrictions on the Company, affecting, and
in certain cases limiting, among other activities, the ability of the Company to
incur additional indebtedness or create liens on its assets, pay dividends,
repurchase or redeem shares, sell assets, engage in mergers or acquisitions or
make investments. Failure to comply with any such restrictions could limit the
availability of borrowings or result in a default under the terms of any such
indebtedness, and there can be no assurance that the Company will be able to
comply with such restrictions. Moreover, these restrictions could limit the
Company's ability to engage in certain business transactions which the Company
may desire to consummate. The Company's inability to consummate any such
transaction could have an adverse effect on the Company's operations.
DEPENDENCE ON THIRD PARTIES FOR SERVICE AND MARKETING; POSSIBLE SERVICE
INTERRUPTIONS AND EQUIPMENT FAILURES
The Company's long distance resale business is dependent on utilizing the
facilities of major IXCs to carry its customers' long distance telephone calls
and, in many instances, especially during initial market penetrations, the
Company's CLEC business will be dependent on the facilities of the LECs and
other local exchange service providers to carry its customers' local telephone
calls. The Company has agreements with IXCs that provide it with access to such
carriers' networks and has entered or is entering into interconnect agreements
with various LECs, and other CLECs, to access their local exchange facilities.
Although the Company believes that it currently has sufficient access to long
distance networks and will be able to obtain sufficient access to local exchange
facilities, any increase in the rates or access fees charged by the owners of
such facilities or their unwillingness to provide access to such facilities to
the Company, as well as potential reticence of the LECs to honor appropriate
provisioning and service intervals with respect to interconnection arrangements,
could materially adversely affect the Company's operations. Failure to obtain
continuing access to such networks and facilities could require the Company to
significantly curtail or cease its operations and could have an adverse effect
on the ability of the Company and its subsidiaries to make principal and
interest payments on their outstanding debt, including the Notes. See
"Description of Certain Indebtedness and Preferred Stock." Further, the
Company's CLEC operations will rely to some extent upon network elements which
the LECs must provide pursuant to the Telecommunications Act and the
Interconnection Order. These facilities often use copper wire for "last mile"
access to end users. To the extent that the Company relies upon LEC facilities
that use copper wire, the Company may not be able to offer potential customers
the benefits of Wireless Fiber with respect to high transmission capacity and
quality. In addition, the Company's operations require that the networks leased
by it, and any facilities which may be developed by the Company, operate on a
continuous basis. It is not unusual for networks and switching facilities to
experience periodic service interruptions and equipment failures. It is
therefore possible that the networks and facilities utilized by the Company may
from time to time experience service interruptions or equipment failures
resulting in material delays which would adversely affect consumer confidence as
well as the Company's business operations and reputation.
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The Company utilizes, in certain cases, third parties for marketing its
Wireless Fiber services and maintaining its operational systems. The Company has
entered into master service agreements with other telecommunications providers
that allow those companies to utilize and resell the Company's Wireless Fiber
services to their own customers. The Company also has an agreement with Lucent
to provide field service for, and network monitoring of, the Company's Wireless
Fiber facilities and another agreement with Lucent for the purchase by the
Company of telecommunications switches and related equipment. The failure of any
of these third parties to perform under their respective agreements or the loss
of any of these agreements could have a material adverse effect on the Company's
results of operations and its ability to service its customers. The Company
plans to enter into master service agreements with other telecommunications
service providers, and the failure to do so could have an adverse effect on the
Company's development and results of operations.
RELIANCE ON EQUIPMENT SUPPLIERS
The Company currently purchases substantially all of its wireless
telecommunications equipment, including transceivers and network monitoring
equipment, from a single supplier and its switches and related equipment from a
single supplier even though, in each case, there are other manufacturers of such
equipment. Any reduction or interruption in supply from its suppliers could have
a material adverse effect on the Company until sufficient alternative supply
sources are established. The Company does not manufacture, nor does it have the
capability to manufacture, any of its telecommunications equipment. Although
there are other manufacturers who have, or are developing, equipment that would
satisfy the Company's needs, there can be no assurance that the Company would be
able to replace its current primary suppliers on commercially reasonable terms.
In addition, as no industry standard or uniform protocol currently exists for 38
GHz equipment, a single manufacturer's equipment must be used in establishing
each wireless link.
LINE OF SIGHT; DISTANCE LIMITATIONS IMPOSED BY RAINFALL CONDITIONS IN CERTAIN
GEOGRAPHIC AREAS;
ROOF RIGHTS
In order to provide quality transmission, Wireless Fiber services require
an unobstructed line of sight between two transceivers comprising a link, with a
maximum distance between any two corresponding transceivers of five miles (or
shorter distances in certain areas; weather conditions may necessitate distances
as short as 1.1 miles between transceivers to maintain desired transmission
quality). The areas in which such shorter distances are required are those where
rainfall intensity and the size of the raindrops adversely impact transmission
quality at longer distances. Other weather conditions, such as snow, electrical
storms and high winds, have not, in the Company's experience, affected the
quality or reliability of Wireless Fiber services. The establishment of Wireless
Fiber services may require additional transceivers to triangulate around
obstacles (such as buildings). Similarly, to establish Wireless Fiber services
covering a distance in excess of five miles, additional transceivers are
required to establish a chain with links no more than five miles apart or to
establish a system of interconnected hub sites. The cost of additional
transceivers where required by weather, physical obstacles or distance may
render Wireless Fiber uneconomical in certain instances. The Company must obtain
Roof Rights (or rights to access other locations where lines of sight are
available) in each building where a transceiver will be placed. The Company
seeks to prequalify and obtain Roof Rights at buildings targeted by potential
customers in its licensed areas in advance of anticipated orders. There can be
no assurance, however, that the Company will be successful in obtaining Roof
Rights necessary to establish its Wireless Fiber services in its potential
markets. The Company's prequalification activities often require the payment of
option fees to the owners of buildings that are being prequalified. There can be
no assurance that the Company will receive orders for Wireless Fiber services
which allow the Company to utilize Roof Rights it obtains.
UNCERTAINTY OF MARKET ACCEPTANCE OF WIRELESS FIBER SERVICES
The Company has been marketing its Wireless Fiber services since
December 1994. The Company has not obtained a significant market share in any
of the licensed areas where it offers Wireless Fiber services. The provision of
wireless local telecommunications services over 38 GHz represents an emerging
sector of the telecommunications industry and the demand for and acceptance of
Wireless Fiber services are subject to a high level of uncertainty. Despite the
Company's initial success in attracting customers, there can
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be no assurance that substantial markets will develop for wireless local
telecommunications services delivered over 38 GHz or that, even if such markets
develop, the Company will be able to succeed in positioning itself as a provider
of such services or provide such services profitably. The Company's success in
providing wireless broadband services is subject to a number of factors beyond
the Company's control. These factors include, without limitation, historical
perceptions of the unreliability and lack of security of previous microwave
radio technologies, changes in general and local economic conditions,
availability of equipment, changes in telecommunications service rates charged
by other service providers, changes in the supply and demand for wireless
broadband services, competition from wireline and wireless operators in the same
market area and changes in the federal and state regulatory schemes affecting
the operations of telecommunications service providers in general and wireless
broadband systems in particular (including the enactment of new statutes and the
promulgation of changes in the interpretation or enforcement of existing or new
rules and regulations). In addition, the extent of the potential demand for
wireless broadband services in the Company's target markets cannot be estimated
with certainty. There can be no assurance that one or more of these factors will
not have an adverse effect on the Company's financial condition and results of
operations.
RELIANCE ON KEY PERSONNEL
The efforts of a relatively small number of key management and operating
personnel will largely determine the Company's success. The loss of any of such
personnel could adversely affect the Company. The Company's success also depends
in part upon its ability to hire and retain highly skilled and qualified
operating, marketing, financial and technical personnel. The competition for
qualified personnel in the telecommunications industry is intense. Accordingly,
there can be no assurance that the Company will be able to hire or retain
necessary personnel.
LACK OF PUBLIC MARKET FOR SERIES A PREFERRED STOCK AND WARRANTS
There is currently no active trading market for the Series A Preferred
Stock or Warrants and no market is expected to develop, which will adversely
affect the liquidity of such Securities.
VOLATILITY OF MARKET PRICE OF COMMON STOCK
Since the Common Stock has been publicly traded, the market price of the
Common Stock has fluctuated over a wide range and may continue to do so in the
future. The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including, among other
things, the depth and liquidity of the trading market of the Common Stock,
variations in the Company's operating results, press reports, including with
respect to regulation and industry trends, and the difference between actual
results and the results expected by investors and analysts. In addition, the
stock market in recent years has experienced broad price and volume fluctuations
that have often been unrelated to the operating performance of companies,
particularly telecommunications companies. These broad market fluctuations also
may adversely affect the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of July 31, 1997, the Company had 33,127,097 shares of Common Stock
outstanding. Although a significant number of the outstanding shares of Common
Stock are "restricted securities," as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"), and may not be sold unless such sale is
registered under the Securities Act or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144, substantially all of such Restricted Shares either have been registered for
resale under the Securities Act or are currently, or will soon become, available
for sale pursuant to Rule 144. Sales or the expectation of sales of a
substantial number of shares of Common Stock in the public market could
adversely affect the prevailing market price of the Common Stock. See "Shares
Eligible for Future Sale."
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EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND OTHER CONVERTIBLE SECURITIES
As of July 31, 1997, there were outstanding options and warrants with
respect to an aggregate of approximately 10,812,000 shares of Common Stock at
per-share exercise prices ranging from $1.50 to $31.12. Substantially all of
the shares underlying such securities have been or will be registered for resale
under the Securities Act. The Company has two existing stock option plans under
which options to purchase up to an additional 3,685,000 shares of Common Stock
may be granted. The exercise of outstanding stock options, warrants and other
convertible securities will dilute the percentage ownership of the Company's
stockholders, and any sales in the public market of shares of Common Stock
issuable upon the exercise of such stock options, warrants and convertible
securities may adversely affect prevailing market prices for the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's corporate charter provides that directors serve staggered
three-year terms and authorizes the issuance of up to 15,000,000 shares of
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Company's Board of Directors. The
affirmative vote of the holders of at least two-thirds of the capital stock of
the Company is required to amend the provisions of the charter relating to the
classification of the Board. The staggered board provision could increase the
likelihood that, in the event of a possible takeover of the Company, incumbent
directors would retain their positions and, consequently, may have the effect of
discouraging, delaying or preventing a change in control or management of the
Company.
In July 1997, the Board of Directors adopted a stockholder rights plan in
which rights to purchase Series B Preferred Stock was distributed as a dividend
at the rate of one right for each share of Common Stock held as of the close of
business on July 14, 1997. The rights are not currently exercisable and only
become exercisable under certain circumstances where certain persons or groups
acquire beneficial ownership of 10% or more of the Company's outstanding Common
Stock or commence a tender or exchange offer upon consummation of which such
persons or groups would beneficially own 10% or more of the Company's
outstanding Common Stock. See "Description of Capital Stock."
While the Company has no commitments to issue any additional series of
preferred stock, the Board of Directors is empowered, without further
stockholder approval, to issue preferred shares with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of the Common Stock. In the event of issuance,
the preferred shares could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change of control of the Company.
Additionally, certain of the Company's indebtedness contains provisions which
would allow holders, at their election, to require prepayment in the event of a
change in control of the Company, which could also serve to delay or prevent
such a change in control from occurring. Moreover, the Company's By-Laws
provide that a stockholder entitled to vote for the election of directors at a
meeting may nominate a person or persons for election as director only if
written notice of such stockholder's intent to make such nomination is given to
the Company's Secretary not later than sixty days in advance of such meeting,
and the Company's stock option plans contain a provision which accelerates the
vesting of outstanding options in the event of certain changes in control of the
Company, both of which could serve to delay or prevent a change in control from
occurring. In addition, the Company is and, subject to certain conditions, will
continue to be, subject to the anti-takeover provisions of the Delaware General
Corporation Law, which could have the effect of delaying or preventing a change
of control of the Company. Furthermore, transfers of control and/or certain
assets of telecommunications entities, such as the Company, may require the
approval of the FCC and/or state regulatory commissions. With respect to 38 GHz
licenses such as the Company's Wireless Licenses, assignments of such licenses
and changes of control involving entities holding licenses require prior FCC and
state regulatory approval and are subject to restrictions and limitations on the
identity and status of the assignee or successor. See "Description of Capital
Stock."
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POTENTIAL ADVERSE EFFECTS OF ISSUANCE OF SENIOR PREFERRED STOCK
The Company is authorized to issue preferred stock in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors. In certain instances, subject to the approval of the holders of at
least two-thirds of the outstanding shares of the Series A Preferred Stock, such
series of preferred stock could include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights senior to the Series A Preferred
Stock, and in all instances, senior to the Common Stock. Accordingly, future
issuance of such preferred stock, depending upon the rights, preferences and
designations thereof, could effectively diminish or supercede the dividends and
liquidation preferences of the Series A Preferred Stock and adversely affect the
Common Stock and the rights of the holders thereof.
POTENTIAL ADVERSE EFFECT OF ACCELERATION OF WARRANTS
The Company may accelerate the expiration date of the Warrants at any time
after February 11, 2000 if the last sale price of the Common Stock is $40 per
share or more for a period of 20 consecutive days. Notice of acceleration of
the Warrants could force the holders to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so, to
sell the Warrants when they might otherwise wish to hold the Warrants, or to
accept the redemption price which would be substantially less than the value of
the Warrants at the time of redemption.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the sale of the
Preferred Stock, Warrants or Option Shares by the Selling Securityholders or
from its issuance of the Conversion Shares. The Company will receive aggregate
gross proceeds of $40,938,100 upon exercise of the Warrants and Options,
assuming all such Warrants and Options are exercised. Such proceeds will be
used for working capital for the Company's telecommunications and
non-telecommunications businesses and to make investments in, acquire, make
loans to, or otherwise enter into business arrangements with, companies which
may or may not be involved in the telecommunications business, and for general
corporate purposes.
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock.
Each share of Series A Preferred Stock has a stated value of $25 ("Stated
Value") and entitles the holder thereof to receive from the Company dividends at
a rate per annum equal to 6% of the Stated Value. Dividends accrue and are
cumulative from the date of issuance and are payable in arrears quarterly as of
March 31, June 30, September 30 and December 31 of each year to the record
holders of the Series A Preferred Stock as of March 15, June 15, September 15
and December 15, respectively, of each year. The Company may pay such dividends
in either cash or through the issuance of additional shares of Series A
Preferred Stock, at its election. The Company intends to retain future
earnings, if any, to finance the development and expansion of its business.
Accordingly, the Company anticipates that no dividends will be paid on the
Common Stock in the foreseeable future and that dividends with respect to the
Series A Preferred Stock will be paid by the issuance of additional shares of
Series A Preferred Stock. Further, certain covenants in the Indentures
currently effectively prohibit the Company from declaring or paying cash
dividends. The terms of the Series A Preferred Stock provide that the Series A
Preferred Stock ranks senior to the Common Stock with respect to the payment of
dividends. Accordingly, in the event the Company is no longer restricted from
declaring cash dividends under its Indentures and determines to do so, no
holders of Common Stock will receive any such dividend until such time as all
holders of the Series A Preferred Stock have received payment of the entire
dividend to which they are entitled under the terms of the Series A Preferred
Stock, and then only if, and to the extent that, there is sufficient cash
remaining to pay dividends to the holders of the Common Stock.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Company includes 75,000,000 shares of
Common Stock, $.01 par value. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Although the Company has no present intention of paying any
dividends, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation or dissolution of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preference of preferred shares, if
any.
Holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
The Company's Certificate of Incorporation, as amended, provides (i) for a
Board of Directors divided into three classes, each of which will generally
serve for a term of three years, with only one class of directors being elected
in each year; (ii) that directors may be removed with or without cause and only
by at least a majority in interest of the capital stock of the Company entitled
to vote thereon; and (iii) that an affirmative vote of the holders of at least
two-thirds of the capital stock of the Company entitled to vote thereon is
required to alter, amend or repeal the provisions relating to the classification
of, and the removal of members from, the Board of Directors. Nominations for the
Board of Directors may be made by the Board or by any stockholder entitled to
vote for the election of directors. A stockholder entitled to vote for the
election of directors at a meeting may nominate a person or persons for election
as director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting. The Company's Certificate of Incorporation and By-Laws
do not provide for cumulative voting rights which means that holders of more
than one-half of the outstanding voting rights, voting for the election of
directors, can elect all of the directors to be elected, if they so choose and,
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors. A special meeting of stockholders of the Company may
be called by the request of the holders of at least 10% of the outstanding
capital stock of the Company entitled to vote generally in all matters.
The registrar and transfer agent for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
SERIES A PREFERRED STOCK
SERIES A PREFERRED STOCK
The authorized capital stock of the Company includes 15,000,000 shares of
"blank check" preferred stock, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. The Board
of Directors, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges and restrictions applicable to each series of preferred stock. The
issuance of preferred stock (and the ability of the Board of Directors to do so
without stockholder approval), while providing flexibility in connection with
possible acquisitions and other corporate purposes could, among other things,
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to gain control
of the Company, discourage bids for the Common Stock at a premium or otherwise
adversely affect the market price of the Common Stock.
On February 6, 1997, the Company issued an aggregate of 4,000,000 shares of
Series A Preferred Stock in the Preferred Stock Placement. Each share of Series
A Preferred Stock has a stated value of $25 ("Stated Value") and entitles the
holder thereof to receive from the Company dividends at a rate per annum equal
to 6% of the Stated Value. Dividends accrue and are cumulative from the date of
issuance and are payable in arrears quarterly as of March 31, June 30,
September 30 and December 31 of each year. The
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Company may, at its election, pay such dividends in cash or through the issuance
of additional shares of Series A Preferred Stock. The Company intends to retain
future earnings, if any, to finance the development and expansion of its
business. Accordingly, the Company anticipates that no dividends will be paid on
the Common Stock in the foreseeable future and that dividends with respect to
the Series A Preferred Stock will be paid by the issuance of additional shares
of Series A Preferred Stock. Further, certain covenants in the Indentures
currently effectively prohibit the Company from declaring or paying cash
dividends. The terms of the Series A Preferred Stock provide that the Series A
Preferred Stock ranks senior to the Common Stock with respect to the payment of
dividends. Accordingly, in the event the Company is no longer restricted from
declaring cash dividends under its Indentures and determines to do so, no
holders of Common Stock will receive any such dividend until such time as all
holders of the Series A Preferred Stock have received payment of the entire
dividend to which they are entitled under the terms of the Series A Preferred
Stock, and then only if, and to the extent that, there is sufficient cash
remaining to pay dividends to the holders of the Common Stock.
Commencing August 11, 1997, each share of Series A Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing the
aggregate Stated Value of such share of Series A Preferred Stock by the
Conversion Price (as defined below); provided, however, that from August 11,
1997 through November 10, 1997, only 50% of the Series A Preferred Stock may be
converted. Subject to certain adjustments, the "Conversion Price" will be:
(i) with respect to any conversion of Series A Preferred Stock occurring prior
to February 11, 1998, the lesser of (x) $25 and (y) the average of the closing
bid prices for the Common Stock for the 20 consecutive trading days immediately
preceding the date of conversion and (ii) with respect to any conversion of the
Series A Preferred Stock occurring on or after February 11, 1998, the lesser of
(x) $25 and (y) the average of the closing bid prices for the 20 consecutive
trading days immediately preceding February 11, 1998. Notwithstanding the
foregoing, if a holder of Series A Preferred Stock requests conversion at a time
when the Conversion Price is less than $15, the Company may elect (subject to
certain notice requirements and to contractual restrictions contained in certain
of the Company's debt instruments), in lieu of converting such Series A
Preferred Stock into shares of Common Stock, to pay such holder or holders in
cash an amount equal to 110% of the Liquidation Preference (as defined below)
for each share of Series A Preferred Stock requested to be converted. It is the
Company's current intention to pay cash in lieu of shares of Common Stock if the
conversion price at the time of any such conversion is less than $15.00,
assuming such cash payments would be allowable under then existing law and the
terms of all agreements to which the Company is then a party. On February 11,
2002, any Series A Preferred Stock still outstanding shall be automatically
converted into shares of Common Stock, unless the Company elects to pay cash
therefor in an amount equal to the Stated Value plus all accrued and unpaid
dividends thereon (the "Liquidation Preference"). Unless paid for in cash, such
conversion will be effected by delivery of shares of Common Stock having a
value, based upon the closing bid prices for the Common Stock for the 20
consecutive trading days ending one trading day prior to such conversion date,
equal to the Liquidation Preference.
RIGHTS TO PURCHASE SERIES B PREFERRED STOCK
The following is a summary of the Rights Agreement dated as of July 2, 1997
(the "Rights Plan") between Company and Continental Stock Transfer & Trust
Company as Rights Agent, which was adopted by the Board of Directors of the
Company on July 2, 1997. This summary of the Rights Plan does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
Rights Plan.
Under the Rights Plan, holders of Common Stock of the Company received,
as a dividend, preferred stock purchase rights (the "Rights") at the rate of
one Right for each share of Common Stock held as of the close of business on
July 14, 1997. One Right will also attach to each share of Common Stock
issued thereafter (including shares issued pursuant to this Prospectus).
Currently the Rights are not exercisable and are not separate from the Common
Stock and will only become exercisable and separate from the Common Stock if
a person or group acquires 10% or more of the Company's outstanding Common
Stock (an "Acquiring Person") or launches a tender or exchange offer that
would result in ownership of 10% or more of the Company's outstanding Common
Stock. Each Right that is not owned by an Acquiring Person entitles the
holder of the Right to buy one one-thousandth of one share (a "Unit") of
Series B Preferred Stock which will be issued by the Company. If any person
becomes an Acquiring Person, or if an Acquiring Person engages in certain
transactions involving conflicts of interest or
24
<PAGE>
in a business combination in which the Company's Common Stock remains
outstanding, then the Rights Plan provides that each Right, other than any Right
held by the Acquiring Person, entitles the holder to purchase, for $70, Units
with a market value of $140. However, if the Company is involved in a business
combination in which the Company itself is not the survivor, or if the Company
sells 50% or more of its assets or earning power to another person, then the
Rights Plan provides that each Right entitles the holder to purchase, for $70,
shares of the common stock of the Acquiring Person's ultimate parent having a
market value of $140.
At any time until ten days following the date on which a person acquires
10% or more of the Company's Common Stock, the Company may redeem all (but not
less than all) of the Rights for $0.0001 per Right. The Rights expire in ten
years. The Series B Preferred Stock will be junior, with respect to dividends
and liquidation rights, to any other series of preferred stock of the Company.
The Series B Preferred Stock has dividend and liquidation preferences over the
Common Stock of the Company.
WARRANTS
The Warrants entitle the holders thereof to purchase an aggregate of
1,600,000 shares of Common Stock for $25 per share at any time commencing
February 11, 1998 and ending February 11, 2002. The Company may accelerate the
expiration date at any time after February 11, 2000 if Common Stock trades at
$40 or more for a period of 20 consecutive days.
STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless prior to
the date the stockholder became an interested stockholder the board approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder or unless one of the following
two exceptions to the prohibitions are satisfied: (i) upon consummation of the
transaction that resulted in such person becoming an interested stockholder, the
interested stockholder owned at least 85% of the Company's voting stock
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by certain directors
or certain employee stock plans) or (ii) on or after the date the stockholder
became an interested stockholder, the business combination is approved by the
board of directors and authorized by the affirmative vote (and not by written
consent) of at least two-thirds of the outstanding voting stock, excluding the
stock owned by the interested stockholder. A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who (other than
the corporation and any direct or indirect majority-owned subsidiary of the
corporation), together with affiliates and associates, owns (or, as an affiliate
or associate, within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. It is possible that these provisions may
have the effect of delaying, deterring or preventing a change in control of the
Company.
25
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
This Prospectus relates to the resale by the Selling Securityholders of
the securities listed below. All of the securities being registered under the
Registration Statement of which this Prospectus forms a part are being so
registered pursuant to certain registration rights granted by the Company to the
Selling Securityholders. None of the Selling Securityholders has had a material
relationship with the Company or any of its predecessors or affiliates within
the past three years, except as described in the footnotes below or otherwise in
this Prospectus.
<TABLE>
<CAPTION>
Number of
SERIES A PREFERRED STOCK AND WARRANTS Beneficial Ownership Shares of Series
of Series A Preferred A Preferred Beneficial Number of
Name of Stock as Stock Ownership of Warrants
Selling Securityholder of July 20, 1997 to be Sold (1) Warrants to be Sold
- ---------------------- --------------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Commonwealth Life Insurance Company 150,000 150,000 60,000 60,000
Teamsters-Camden Non-Enhanced
(Camden Asset Management LP)
Commonwealth Life Insurance Company 150,000 150,000 60,000 60,000
A/C Teamsters I
Credit Suisse First Boston Corporation 12,000 12,000 4,800 4,800
Cudd & Co. 44,000 44,000 17,600 17,600
Deep Rock & Co. 100,000 100,000 -- --
JMG Capital Partners LP 30,000 30,000 16,000 16,000
KA Management Ltd. 6,453 6,453 2,560 2,560
KA Trading Ltd. 13,714 13,714 5,440 5,440
Lehman Brothers 15,000 15,000 -- --
Lehman Brothers A/C Palladin 8,000 8,000 3,200 3,200
Omnibus A/C Glen Eagles Fund
Lehman Brothers A/C Palladin 8,000 8,000 3,200 3,200
Omnibus A/C Palladin Partners L.P.
List & Co. 131,000 131,0000 52,400 52,400
Mariner Atlantic Ltd.(2) 20,000 20,000 8,000 8,000
Och-Ziff Capital Management, L.P. 200,000 200,000 80,000 80,000
Proprietary Convertible Investment Group(3) 904,000 904,000 401,600 401,600
Prudential Securities Inc. A/C Oak 469,000 469,000 187,600 187,600
Tree Partners
Ramius Fund Ltd. 8,000 8,000 3,200 3,200
Republic New York Securities Act 8,000 8,000 3,200 3,200
A/C Palladin Partners A/C Colonial
Penn Insurance Company
Republic New York Securities Act 8,000 8,000 3,200 3,200
A/C Palladin Partners A/C Colonial
Life Insurance
SBC Warburg Inc. 600,000 600,000 240,000 240,000
Shepard Trading Ltd. 100,000 100,000 40,000 40,000
Stark International 100,000 100,000 40,000 40,000
State Street Bank & Trust Co. A/C 100,000 100,000 40,000 40,000
Presidents & Fellows of Harvard
College
Triton Capital Investment, Ltd. 14,833 14,833 8,000 8,000
(Triton Holdings)
Tridant Trust Company A/C HBK 80,000 80,000 32,000 32,000
Cayman LP
Tridant Trust Company A/C HBK 320,000 320,000 128,000 128,000
Offshore Fund, Ltd.
Ziff Asset Management, L.P.(4) 400,000 400,000 160,000 160,000
</TABLE>
- ----------------------
Footnotes begin on next page
26
<PAGE>
Number of Beneficial
Beneficial Ownership Shares of Ownership of
Name of of Common Stock as Common Stock Common Stock
Selling Securityholder of May 15, 1997 to be Sold After Sale
- ---------------------- -------------------- ------------ ------------
Steve G. Chrust (5) 533,669(6) 175,000(7) 358,669
ITC Group, Inc. (8) 20,000 20,000(9) 0
Stuart Rekant (10) 175,239(11) 35,000(12) 140,239
Shintex, Inc. (13) 35,000 35,000 0
- -----------
(1) All shares of Series A Preferred Stock and Warrants set forth above were
sold in the Preferred Stock Placement. The Selling Stockholders shall also
be entitled to sell, and the Registration Statement of which this
Prospectus forms a part also covers, any and all additional shares of
Series A Preferred Stock that may be issued as dividends on such Series A
Preferred Stock in lieu of cash during the term of the Series A Preferred
Stock.
(2) Mariner Investment Group, Inc. acts as investment manager for Mariner
Atlantic, Ltd.
(3) Credit Suisse First Boston Corporation, CSFP Capital, Inc. and Swiss
American Securities, Inc. are affiliates of Proprietary Convertible
Investment Group.
(4) PBK Holdings, Inc., is the managing general partner of Ziff Asset
Management, L.P. ("Ziff") and has the power to vote and dispose of all of
Ziff's securities. Additionally, Franklin Street Capital, LLC, the
investment general partner of Ziff has the power to vote and dispose of
such securities.
(5) Mr. Chrust is Vice Chairman and a director of the Company.
(6) Includes (i) 12,000 shares of Common Stock owned by the pension plan for
SGC Advisory Services, Inc., a money management firm specializing in the
telecommunications sector of which Mr. Chrust is President and owner, and
(ii) 368,333 shares of Common Stock issuable upon exercise of certain
options owned by Mr. Chrust or members of his family. Does not include (A)
360,000 shares of Common Stock issuable upon exercise of other options
which become exercisable in three equal annual installments commencing in
January 1998, (B) 33,335 shares of Common Stock issuable upon exercise of
other options which become exercisable in July 1998 or (C) 35,000 shares of
Common Stock issuable upon exercise of options which become exercisable in
five equal annual installments commencing in April 1998.
(7) Represents 125,000 shares of Common Stock issuable upon exercise of options
exercisable at $4.50 per share and 50,000 shares of Common Stock issuable
upon exercise of options exercisable at $2.75 per share, which were issued
to Mr. Chrust as consideration for financial consulting services rendered
to the Company prior to his employment with the Company.
(8) ITC Group, Inc. ("ITC") is an entity of which Nathan Kantor, President,
Chief Operating Officer and a director of the Company, is President and a
principal stockholder.
(9) Represents shares of Common Stock issuable upon exercise of options
exercisable at $4.41 per share issued to ITC as consideration for
consulting services rendered to the Company prior to Mr. Kantor's
employment with the Company.
(10)Stuart Rekant is the President and Chief Operating Officer of WinStar New
Media Company, Inc., a wholly-owned subsidiary of the Company.
(11)Includes 3,239 shares of Common Stock owned by Mr. Rekant's spouse and
170,000 shares of Common Stock issuable upon exercise of certain options.
Does not include 30,000 shares of Common Stock issuable upon exercise of
options which become exercisable in June 1998.
27
<PAGE>
(12)Represents shares of Common Stock issuable upon exercise of options
exercisable at $2.125 per share issued to Mr. Rekant in connection with
certain financing arrangements prior to his employment with the Company.
(13)Represents shares of Common Stock issuable upon exercise of options
exercisable at $2.125 per share issued to Shintex, Inc. in connection with
certain financing arrangements.
The shares of Series A Preferred Stock and Warrants may be offered and sold
from time to time by the Selling Securityholders or by their pledgees, donees,
transferees or other successors in interest, and the Warrant Shares and
Conversion Shares, if and when issued, may be offered and sold from time to time
by the holders thereof or by their pledgees, donees, transferees or other
successors in interest, as market conditions permit in the over-the-counter
market, including the Nasdaq National Market, in negotiated transactions or
otherwise, at prices and terms then prevailing or at prices related to the
then-current market price, or in negotiated transactions. The Securities may be
sold by one or more of the following methods, without limitation: (i) a block
trade in which a broker or dealer so engaged will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; (ii) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(iii) ordinary brokerage transactions and transactions in which the broker
solicits purchases; and (iv) transactions between sellers and purchasers without
a broker/dealer; and (v) underwritten offerings. In effecting sales, brokers or
dealers may arrange for other brokers or dealers to participate. Such brokers
or dealers may receive commissions or discounts from Selling Securityholders in
amounts to be negotiated. Such brokers and dealers and any other participating
brokers and dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales. Currently, there is no market
for the Series A Preferred Stock and Warrants, and none is expected to develop.
LEGAL MATTERS
The legality of the issuance of the Conversion Shares and Warrant Shares
will be passed upon for the Company by Graubard Mollen & Miller, New York, New
York. Certain partners and employees of Graubard Mollen & Miller own shares of
Common Stock.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for the years ended February 28, 1995, December 31, 1996 and
the ten months ended December 31, 1995 incorporated by reference into this
Prospectus and the financial statements of Milliwave Limited Partnership as of
December 31, 1995 and 1996 and for the period April 25, 1995 (inception) through
December 31, 1995 and for the year ended December 31, 1996 incorporated by
reference into this Prospectus have been audited by Grant Thornton LLP,
independent certified public accountants, to the extent and for the periods
indicated in their reports thereon.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at prescribed rates. In addition, all
reports filed by the Company via the Commission's Electronic Data
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<PAGE>
Gathering and Retrieval System (EDGAR) can be obtained from the Commission's
Internet web site located at http:\\www.sec.gov. The Common Stock of the
Company is traded on the Nasdaq National Market (Symbol: WCII), and such
reports, proxy statements and other information concerning the Company also can
be inspected at the offices of the Nasdaq National Market, 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement under
the Securities Act on Form S-3 (No. 333-18465) with respect to the securities
offered by the Company pursuant to this Prospectus. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
about the Company and the securities offered hereby, reference is made to the
Registration Statement and to the financial statements, exhibits and schedules
filed therewith. The statements contained in this Prospectus about the contents
of any contract or other document referred to are not necessarily complete, and
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statements, each such statement
being qualified in all respects by such reference. Copies of each such document
may be obtained from the Commission at its principal office in Washington, D.C.
upon payment of the charges prescribed by the Commission.
29
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock offered hereby, other than underwriting discounts and commissions:
SEC registration fee............................................... 73,011.54
Printing and engraving expenses.................................... 8,000.00
Legal fees and expenses............................................ 20,000.00
Accounting fees and expenses....................................... 15,000.00
Miscellaneous...................................................... 8,988.46
----------
Total......................................................... 125,000.00
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by the Company to the fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
"Section 145. Indemnification of officers, directors, employees and agents;
insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgement in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the
II-1
<PAGE>
performance of his duty to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under sections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suite or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer, to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries;
II-2
<PAGE>
and a person who acted in good faith an in a manner he reasonably believed to be
in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the corporation" as referred to in this section.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 16.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
5.1 Opinion of Graubard Mollen & Miller
12.1 Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
23.1 Consent of Grant Thornton LLP
23.2 Consent of Grant Thornton LLP
23.3 Consent of Graubard Mollen & Miller (included in its opinion filed as
Exhibit 5.1)
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment of this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
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<PAGE>
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration
statement is on Form S-3, Form S-8 or Form F-3, and the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on this
4th day of August, 1997.
WINSTAR COMMUNICATIONS, INC.
By: /s/ William J. Rouhana, Jr.
-----------------------------------
William J. Rouhana, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ William J. Rouhana, Jr.
- --------------------------- Chairman of the Board of August 4 1997
William J. Rouhana, Jr. Directors and Chief Executive
Officer (and principal
executive officer)
*
- --------------------------- President, Chief Operating August __ 1997
Nathan Kantor Officer and Director
*
- --------------------------- Vice Chairman of the Board August __ 1997
Steven G. Chrust of Directors
*
- --------------------------- Executive Vice President, August __ 1997
Fredric E. von Stange Chief Financial Officer
and Director (and principal
accounting officer)
*
- --------------------------- Director August __ 1997
Bert W. Wasserman
*
- --------------------------- Director August __ 1997
William J. vanden Heuvel
*
- --------------------------- Director August __ 1997
Steven B. Magyar
*
- --------------------------- Director August __ 1997
James I. Cash
*
- --------------------------- Director August __ 1997
Dennis Patrick
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
5.1 Opinion of Graubard Mollen & Miller
12.1 Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
23.1 Consent of Grant Thornton LLP
23.2 Consent of Grant Thornton LLP
23.3 Consent of Graubard Mollen & Miller (included in its opinion filed
as Exhibit 5.1)
II-6
<PAGE>
Exhibit 5.1
August 5, 1997
WinStar Communications, Inc.
230 Park Avenue
New York, New York
Gentlemen:
Reference is made to the proposed issuance by:
WinStar Communications, Inc. ("Company") of shares of common
stock of the Company ("Common Stock"), par value $.01 per share underlying 6%
Series A Cumulative Convertible Preferred Stock ("Conversion Shares"), common
stock underlying warrants of the Company ("Warrant Shares") and common stock
underlying certain options to be resold ("Option Shares"), pursuant to the
registration statement on Form S-3 ("Registration Statement"), filed with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended.
We have examined such documents and considered such legal matters
as we have deemed necessary and relevant as the basis for the opinion set
forth below. With respect to such examinations, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as reproduced or certified copies, and the authenticity of
the originals of those latter documents. As to questions of fact material to
this opinion, we have, to the extent deemed appropriate, relied upon certain
representations of certain officers and employees of the Company and its
subsidiaries.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized and existing under
the laws of the State of Delaware.
2. The Conversion Shares, Warrant Shares and Option Shares have
been duly and validly authorized by all necessary corporate action and will,
when issued be validly issued, nonassessible and fully paid.
<PAGE>
WinStar Communications, Inc.
August 5, 1997
Page 2
We hereby consent to the use of this opinion as Exhibit 5.1 to
the Registration Statement, to the use of our name as counsel to the Company,
and to all references made to us in the Registration Statement and the
Prospectus forming a part thereof. In giving this consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder.
Very truly yours,
GRAUBARD MOLLEN & MILLER
<PAGE>
EXHIBIT 12.1
<TABLE>
<CAPTION>
WinStar Communications, Inc
Ratio of earnings to combined fixed charges and preferred stock dividends
(in thousands)
Year ended
---------------------------------------------------------
December 31,
--------------------
February 28, 1996
---------------------------- --------------------
1993 1994 1995 Actual Pro forma
---- ---- ---- ------ ---------
EARNINGS:
<S> <C> <C> <C> <C> <C>
Net loss from continuing operations
before income taxes $(4,594) $(8,205) $(7,226) $(82,713) $(131,965)
Adjustments to Earnings:
Fixed Charges, as Detailed Below 674 915 900 38,520 79,603
Interest Capitalized - - - (320) (320)
Extraordinary item - (194) - - -
Minority interest in WinStar Gateway Network - (155) - - -
------- -------- ------- -------- ---------
Earnings as Adjusted $(3,920) $(7,639) $(6,326) $(44,513) $ (52,682)
------- -------- ------- -------- ---------
------- -------- ------- -------- ---------
FIXED CHARGES:
Interest Expense $ 567 $ 793 $ 733 $ 36,834 $ 77,917
Capitalized Interest - - - 320 320
Interest Portion of Rent Expense 107 122 167 1,366 1,366
------- -------- ------- -------- ---------
Total Fixed Charges 674 915 900 38,520 79,603
PREFERRED STOCK DIVIDENDS: 85 68 62 0 6,000
------- -------- ------- -------- ---------
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS: $ 759 $ 983 $ 962 $ 38,520 $ 85,603
------- -------- ------- -------- ---------
------- -------- ------- -------- ---------
DEFICIENCY IN EARNINGS TO COVER COMBINED
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS: $(4,679) $(8,622) $(7,288) $(83,033) $(138,285)
------- -------- ------- -------- ---------
------- -------- ------- -------- ---------
<CAPTION>
Ten months
ended
December 31, Three months ended March 31,
------------ -----------------------------
1997
1995 1996 1997 Pro Forma
---- ---- ---- ---------
EARNINGS:
<S> <C> <C> <C> <C>
Net loss from continuing operations
before income taxes $(16,094) $(10,562) $(41,499) $(50,006)
Adjustments to Earnings:
Fixed Charges, as Detailed Below 8,063 9,006 11,528 20,035
Interest Capitalized 0 (205) (205)
Extraordinary item -
Minority interest in WinStar Gateway Network -
--------- -------- ------- ---------
Earnings as Adjusted $ (8,031) $ (1,556) $(30,176) $(30,176)
--------- -------- ------- ---------
--------- -------- ------- ---------
FIXED CHARGES:
Interest Expense $ 7,715 $ 8,664 $ 10,819 $ 19,326
Capitalized Interest - - 205 205
Interest Portion of Rent Expense 348 342 504 504
--------- -------- ------- ---------
Total Fixed Charges 8,063 9,006 11,528 20,035
PREFERRED STOCK DIVIDENDS: 216 0 833 1,500
--------- -------- ------- ---------
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS: $ 8,279 $ 9,006 $ 12,361 $ 21,535
-------- -------- -------- ---------
--------- -------- ------- ---------
DEFICIENCY IN EARNINGS TO COVER COMBINED
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS: $(16,310) $(10,562) $(42,537) $ (51,711)
--------- -------- -------- ---------
--------- -------- -------- ---------
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our reports dated January 24, 1997 and January 24, 1997,
except for the last paragraph of Note 19 as to which the date is May 13,
1997, accompanying the consolidated financial statements and schedules
included in the Annual Report of WinStar Communications, Inc. and
Subsidiaries on Form 10-K for the year ended December 31, 1996 and in Form
8-K filed June 10, 1997, respectively, which are incorporated by reference in
the Registration Statement and Prospectus. We consent to the incorporation
by reference of the aforementioned reports in the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption
"Experts".
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
New York, New York
August 1, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated January 9, 1997, accompanying the
financial statements of Milliwave Limited Partnership included in Form 8-K
filed June 10, 1997, which is incorporated by reference in the Registration
Statement and Prospectus. We consent to the incorporation by reference of the
aforementioned report in the Registration Statement and Prospectus, and to
the use of our name as it appears under the caption "Experts".
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
New York, New York
August 1, 1997
