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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1998
REGISTRATION NO. 333-45581
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO THE
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
ON
FORM S-4
------------------------
WINSTAR COMMUNICATIONS, INC.
(EXACT NAME OF EACH REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4812 13-3585278
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER
OF WINSTAR COMMUNICATIONS, INC.)
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230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 584-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF EACH REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM J. ROUHANA, JR.
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
WINSTAR COMMUNICATIONS, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 584-4000
(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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Series C 14 1/4% Senior Cumulative
Exchangeable Preferred Stock Due 2007
('New Preferred Stock')(1).............. 175,000 $1,000(2) $ 175,000,000 $53,030.30
Total................................... $ 175,000,000 $53,030.30(3)
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(1) The New Preferred Stock being registered hereby are being offered by WinStar
Communications, Inc. (the 'Company'), in exchange for certain outstanding
shares of Old Preferred Stock.
(2) Represents the liquidation amount of each of the shares of Old Preferred
Stock for which the New Preferred Stock will be exchanged.
(3) Filing fee previously paid.
------------------------
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.
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<PAGE>
SUBJECT TO COMPLETION, DATED MAY 11, 1998
PROSPECTUS
WINSTAR COMMUNICATIONS, INC.
------------------------
OFFER TO EXCHANGE SHARES OF ITS
SERIES C 14 1/4% SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING SHARES OF
SERIES C 14 1/4% SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK DUE 2007
WinStar Communications, Inc. ('Company') hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
letter of transmittal ('Letter of Transmittal') to exchange one share of its
Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock Due 2007 ('New
Preferred Stock') which has been registered under the Securities Act of 1933, as
amended ('Securities Act'), for each outstanding share of its Series C 14 1/4%
Senior Cumulative Exchangeable Preferred Stock Due 2007 ('Old Preferred Stock'
and, together with the New Preferred Stock, the 'Exchangeable Preferred Stock'),
of which 175,000 shares having an aggregate liquidation preference of
$175,000,000 are outstanding as of the date hereof. The terms of the New
Preferred Stock are substantially identical in all material respects (e.g.,
aggregate liquidation preference, dividend rate, mandatory redemption and
ranking) to the terms of the Old Preferred Stock, except that the New Preferred
Stock has been registered under the Securities Act and therefore will not be
subject to certain transfer restrictions applicable to the Old Preferred Stock.
See 'The Exchange Offer' and 'Description of the Exchangeable Preferred Stock.'
The Company will accept for exchange any and all shares of Old Preferred
Stock validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on June 15, 1998 (such time and date, as it may be extended, being referred to
herein as the 'Expiration Date'). Tenders of shares of Old Preferred Stock may
be withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum number of shares of Old Preferred Stock being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions. The Company will not receive any proceeds from the
Exchange Offer. See 'The Exchange Offer.'
The Exchange Offer is being made to satisfy certain obligations of the
Company under a registration rights agreement ('Registration Rights Agreement')
dated as of December 17, 1997 between the Company and the initial purchasers of
the Old Preferred Stock named therein (the 'Initial Purchasers'). Following the
completion of the Exchange Offer, holders of shares of the Old Preferred Stock
not tendered in the Exchange Offer will not have any further registration rights
(except that the Company may be required to file a Shelf Registration Statement
(as defined) in certain limited instances) and such shares will continue to be
subject to restrictions on transfer. Accordingly, the liquidity of the market
for a holder's shares of Old Preferred Stock could be adversely affected if the
holder does not participate in the Exchange Offer. See 'Risk
Factors--Consequences For Non-Tendering Holders of the Old Preferred Stock.'
The Old Preferred Stock was originally issued and sold on December 22, 1997
in a transaction exempt from registration under the Securities Act in reliance
upon the exemptions provided by Rule 144A and by Section 4(2) of the Securities
Act (the 'December 1997 Preferred Stock Placement'). Accordingly, the Old
Preferred Stock may not be reoffered, resold or otherwise pledged, hypothecated
or transferred in the United States unless so registered or unless an exemption
from the registration requirements of the Securities Act and applicable state
securities laws is available.
(Continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD PREFERRED STOCK ON MAY 13, 1998.
SEE 'RISK FACTORS' ON PAGE 21 OF THIS PROSPECTUS FOR INFORMATION THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
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 MAY 11, 1998.
<PAGE>
(Continuation of cover page)
Each share of Exchangeable Preferred Stock has a liquidation preference of
$1,000 ('Liquidation Preference'). Dividends on the Exchangeable Preferred Stock
accrue from December 22, 1997 at the rate per share of 14 1/4% of the
Accumulated Amount (as defined) per annum, compounded semiannually on each June
15 and December 15, but will not be payable in cash, except as set forth in the
next sentence. Commencing on the first June 15 or December 15 (each a 'Dividend
Payment Date') which is at least six months after the later of December 15,
2002, and the Specified Debt Satisfaction Date (as defined) (the 'Cash Payment
Date'), dividends on the Exchangeable Preferred Stock will be payable in cash at
a rate per annum equal to 14 1/4% of the Accumulated Amount as of the Dividend
Payment Date preceding such date. In the event that the Specified Debt
Satisfaction Date shall not have occurred before December 15, 2002, the rate
otherwise applicable to the Exchangeable Preferred Stock shall be increased by
150 basis points from December 15, 2002, until the Dividend Payment Date falling
on or after the Specified Debt Satisfaction Date.
The Exchangeable Preferred Stock is not redeemable prior to December 15,
2002. On or after December 15, 2002, the Exchangeable Preferred Stock is
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth herein plus accumulated and unpaid dividends, if any, to the
date of redemption. The Company is required to redeem the Exchangeable Preferred
Stock at the Liquidation Preference thereof, plus accumulated and unpaid
dividends, if any, on December 15, 2007, out of any funds legally available
therefor.
The Exchangeable Preferred Stock ranks (i) senior to all existing and
future Junior Stock, including the Series A Preferred Stock (as defined); (ii)
on a parity with all existing and future Parity Stock; and (iii) junior to all
future Senior Stock. In addition, as equity, the Exchangeable Preferred Stock
will rank junior in right of payment to all indebtedness of the Company and its
subsidiaries. See 'Description of the Exchangeable Preferred Stock.' As of
December 31, 1997, after giving effect to the Pro Forma Transactions (as
defined), the Company would have had, on a consolidated basis, approximately
$1,382.8 million of indebtedness (including approximately $373.2 million of
outstanding indebtedness and other liabilities, including trade payables, of the
Company's subsidiaries).
On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, the Company may, at its option, exchange all but not less
than all of the shares of Exchangeable Preferred Stock then outstanding for
14 1/4% Senior Subordinated Deferred Interest Notes Due 2007 ('Exchange
Debentures') in an aggregate Accumulated Amount equal to the aggregate
Accumulated Amount of the shares of Exchangeable Preferred Stock outstanding at
the time of such exchange, plus accumulated and unpaid dividends to the date of
exchange. The issuance of the Exchange Debentures upon each exchange is
registered under the Securities Act pursuant to the Registration Statement of
which this Prospectus is a part. Until the Cash Payment Date, interest on the
outstanding Exchange Debentures, if any, will accrue at a rate of 14 1/4% of the
Accumulated Amount per annum and will be compounded semiannually on each June 15
and December 15 (each an 'Interest Payment Date') but will not be payable in
cash except as set forth in the next sentence. Commencing on the first Interest
Payment Date following the later of the Exchange Date (as defined) or the Cash
Payment Date, interest will be payable in cash at a rate per annum equal to
14 1/4% of the Accumulated Amount as of the Exchange Date. The Exchange
Debentures, if issued, will be unsecured, senior subordinated obligations of the
Company, subordinated in right of payment to all Senior Indebtedness of the
Company and to all indebtedness and other liabilities (including trade payables)
of the Company's subsidiaries, and will rank pari passu with the Company's
existing 15% Senior Subordinated Deferred Interest Notes Due 2007 (the 'October
1997 Notes') and the Company's 14% Convertible Senior Subordinated Discount
Notes Due 2005 (the 'Convertible Notes'). As of December 31, 1997, after giving
effect to the Pro Forma Transactions, the Company would have had, approximately
$570.0 million of Senior Indebtedness, on an unconsolidated basis and the
Company's subsidiaries would have had, approximately $117.1 million of
outstanding liabilities (other than liabilities guaranteed by the Company). The
Exchange Debentures, if issued, will not be redeemable prior to December 15,
2002. On or after December 15, 2002, the Exchange Debentures will be redeemable
at the option of the Company, in whole or in part, at the redemption prices set
forth herein plus accrued and unpaid interest, if any, to the date of
redemption. See 'Description of the Exchange Debentures.'
Based on interpretations by the staff of the Securities and Exchange
Commission (the 'Commission') with respect to similar transactions set forth in
no-action letters issued to third parties unrelated to the Company, the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for resale, resold and otherwise transferred by
holders thereof who are not 'affiliates' of the Company (within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act; provided, however, that
the New Preferred Stock is
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acquired in the ordinary course of the holders' business, such holders have no
arrangement or understanding with any person to participate in any distribution
(within the meaning of the Securities Act) of the New Preferred Stock and
neither the holders nor any other person is engaging in or intends to engage in
a distribution of the New Preferred Stock. Each broker-dealer that receives New
Preferred Stock for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Preferred Stock. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an 'underwriter' within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Preferred Stock
received in exchange for Old Preferred Stock where such Old Preferred Stock was
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 90 days after
the Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale.
Prior to this Exchange Offer, there has been no public market for the
Exchangeable Preferred Stock. The Old Preferred Stock has traded on the Private
Offerings, Resale and Trading through Automated Linkages ('PORTAL') Market. If a
market for the New Preferred Stock should develop, the New Preferred Stock could
trade at prices higher or lower than their original offering price. The Company
does not currently intend to list the New Preferred Stock on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active public market for the New
Preferred Stock will develop. See 'Risk Factors--Absence of Public Market for
the Exchangeable Preferred Stock.'
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD PREFERRED STOCK IN ANY JURISDICTION
IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
3
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TABLE OF CONTENTS
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PAGE
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Available Information...................................................................................... 4
Incorporation of Information by Reference.................................................................. 5
Prospectus Summary......................................................................................... 6
Risk Factors............................................................................................... 21
The Exchange Offer......................................................................................... 31
Description of the Exchangeable Preferred Stock............................................................ 38
Description of the Exchange Debentures..................................................................... 52
Description of Other Capital Stock......................................................................... 81
Description of Certain Other Indebtedness.................................................................. 84
Certain U.S. Federal Income Tax Consequences............................................................... 86
Plan of Distribution....................................................................................... 91
Legal Matters.............................................................................................. 92
Experts.................................................................................................... 92
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the New Preferred Stock offered in
the Exchange Offer (and the Exchange Debentures issuable upon the exchange of
the Exchangeable Preferred Stock). For the purposes hereof, the term
'Registration Statement' means the original Registration Statement and any and
all amendments thereto. In accordance with the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth in
the Registration Statement and the schedules and exhibits thereto. Each
statement made in this Prospectus concerning a document filed as an exhibit to
the Registration Statement is qualified in its entirety by reference to such
exhibit for a complete statement of its provisions. For further information
pertaining to the Company and the New Preferred Stock offered in the Exchange
Offer, reference is made to such Registration Statement, including the exhibits
and schedules thereto and the financial statements, notes and schedules filed as
a part thereof. The Registration Statement (and the exhibits and schedules
thereto) may be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 ('Washington Office'), or
at its regional offices at Citicorp Center, 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661 ('Chicago Office'), and at Seven World Trade Center,
13th Floor, New York, New York 10048 ('New York Office'). Any interested party
may obtain copies of all or any portion of the Registration Statement and the
exhibits thereto at prescribed rates from the Public Reference Section of the
Commission at its Washington Office.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ('Exchange Act'), and in accordance with the Exchange Act,
the Company files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company with the Commission can be inspected and copied (at prescribed
rates) at the Commission's Washington Office, Chicago Office and New York
Office. In addition, reports, proxy statements and other information concerning
the Company can be inspected and copied at the offices of The Nasdaq Stock
Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Commission
maintains a Web site that contains certain reports, proxy and information
statements and other information relating to the Company, which the Company has
filed via the Commission's electronic data gathering and retrieval (EDGAR)
system. The Web site can be reached at http://www.sec.gov.
If the Company ceases to be subject to the informational reporting
requirements of the Exchange Act, the Company has agreed that, so long as any
Exchangeable Preferred Stock or Exchange Debentures are outstanding, it will
file with the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Exchange Act. The Company will supply Continental Stock Transfer & Trust
Company, as exchange agent ('Exchange Agent') and each holder of Exchangeable
Preferred Stock, or will supply to the Transfer Agent for forwarding to each
such holder, without cost to such holder, copies of such reports or other
information.
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INCORPORATION OF INFORMATION BY REFERENCE
The following documents or information have been filed by the Company with
the Commission pursuant to the Exchange Act and are incorporated herein by
reference:
(1) Annual Report on Form 10-K (as amended) for the year ended December 31,
1997;
(2) Current Report on Form 8-K/A filed January 30, 1998;
(3) Current Report on Form 8-K/A filed February 5, 1998;
(4) Current Report on Form 8-K filed March 12, 1998;
(5) Current Report on Form 8-K filed March 30, 1998; and
(6) Proxy Statement, filed May 6, 1998.
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, Suite
2700, New York, New York 10169 (telephone 212-584-4000), Attention: Investor
Relations, 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. All such documents can also be retrieved from the Commission's
electronic data gathering and retrieval (EDGAR) system at www.sec.gov.
5
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PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information and
financial statements (and notes thereto) incorporated by reference into or
appearing elsewhere in this Prospectus. Unless otherwise indicated, references
herein to the 'Company' or 'WinStar' refer to WinStar Communications, Inc. and,
where appropriate, its subsidiaries. Wireless Fiber(Service Mark) is a service
mark and WinStar(Registered) is a trademark of WinStar Communications, Inc.
THE COMPANY
GENERAL
WinStar provides facilities-based voice and data telecommunications
services to businesses and other customers in major metropolitan areas
throughout the United States. WinStar holds licenses ('Wireless Licenses') which
provide it with the largest amount of 38 GHz radio spectrum in the country,
covering more than 110 Metropolitan Statistical Areas ('MSAs') with a total
population of approximately 185 million, including the 50 largest MSAs. WinStar
is building a unique nationwide network using its fiber-quality digital capacity
in the 38 GHz band ('Wireless Fiber') in order to provide its customers with a
broad range of attractively priced services and an alternative to the incumbent
local exchange carriers ('ILECs'), other competitive local exchange carriers
('CLECs') and the interexchange carriers ('IXCs'). WinStar believes that its
ability to provide information content and services further differentiates it
from competitors. The annual business telecommunications market in the United
States is estimated at $110 billion, with local telephony and data services,
WinStar's target segment, accounting for approximately $47 billion.
WinStar is rapidly building a modern telecommunications infrastructure. It
currently provides telecommunications services on a switched basis in 24 major
metropolitan markets, including Atlanta, Boston, Chicago, Dallas, Los Angeles,
New York City, San Diego and Washington, D.C. WinStar expects to provide
telecommunications services using its own switches in 30 major metropolitan
markets by the end of 1998 and 40 major metropolitan markets by the end of 1999.
WinStar's network buildout has been accelerated through several recent strategic
acquisitions. In October 1997, WinStar purchased from US ONE Communications
Corp. ('US ONE') twelve Lucent 5ESS switches, seven of which are located in
markets that WinStar had targeted but had not yet entered. In January 1998,
WinStar purchased GoodNet, a Tier I Internet service provider ('ISP'), from
Telesoft Corp. ('Telesoft'). GoodNet maintains a national Asynchronous Transfer
Mode ('ATM') backbone, points of presence ('POPs') in 27 cities throughout the
United States and more than 130 peering arrangements with other ISPs. Also in
January 1998, as part of its acquisition of the assets of Midcom Communications
Inc. ('Midcom'), WinStar acquired PacNet, a data transmission services provider.
PacNet maintains a network of frame relay data switches, POPs in 20 cities
throughout the western United States and, through its membership in the Unispan
consortium, interconnection and cooperative service arrangements with other
frame relay providers with networks across the United States and
internationally.
NETWORK STRENGTHS
WinStar believes that its Wireless Fiber and switch-based infrastructure
provides it with significant competitive advantages, including:
Ability to Provide a Full Range of Voice and Data Telecommunications
Services. The large amount of bandwidth afforded by the Wireless Licenses,
together with WinStar's voice and data switching facilities, allow WinStar to
offer customers a full range of voice and data telecommunications services,
including (i) local dial tone, private branch exchange ('PBX') trunks,
individual business lines, Centrex and long distance, (ii) data services, such
as Internet access, Wide Area Network ('WAN') services utilizing frame relay,
Internet Protocol ('IP') and ATM data transport, and private network services
and (iii) facilities-based broadband local access and digital network services
('Carrier Services'). WinStar holds Wireless Licenses in each of the 50 largest
MSAs. Including certain additional licenses which WinStar has agreed to acquire,
the Wireless Licenses cover an average of approximately seven 100 MHz channels
in the 20 largest U.S. markets and four 100 MHz channels in the next 20 largest
U.S. markets. Each 100 MHz Wireless Fiber channel can support transmission
capacity of one DS-3 at 45 Mbps, which is over 750 times the rate of the fastest
dial-up modem in general use (56 Kbps) and
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over 350 times the rate of the fastest integrated services digital network line
in general use (128 Kbps). It is anticipated that the Company's commercial
deployment of multipoint facilities, planned to begin in late 1998, will allow a
single 100 MHz Wireless Fiber channel to support one OC-3 equivalent of capacity
at 155 Mbps.
Rapid and Cost-Effective Deployment of Infrastructure. Wireless Fiber
services generally can be deployed considerably more rapidly than wireline
services because of the construction time and permit procedures required for
wireline buildout. Further, the equipment used for 38 GHz transmission (e.g.,
antennae, transceivers and digital interface units) is small, unobtrusive and
relatively inexpensive.
Ability to Penetrate Target Markets. In implementing its network plan,
WinStar identifies strategically located sites to serve as hubs in each of its
metropolitan areas. These hub sites are connected via Wireless Fiber links to
customer buildings. Certain characteristics of the 38 GHz frequency, including
the effective range of its radio signal and the small amount of dispersion
(i.e., scattering) of the radio beam as compared to the more dispersed radio
beams produced at lower frequencies, allow for multiple hub sites using the same
channel in a licensed area. Further, WinStar's ability to use multiple 38 GHz
channels in its target markets provides it with advantages over other providers
of fixed wireless telecommunications services that possess fewer channels in
their respective portions of the radio spectrum. WinStar believes that its
multiple channels, together with the deployment of multipoint technology and its
hub-based network architecture, will allow it to address the needs of a
significant portion of the business customers in its target markets via its
Wireless Fiber services.
Scalable Capital Expenditures. Because of WinStar's Wireless Fiber
capacity and hub-based network architecture, a substantial portion of its
planned capital expenditures is variable and more directly tied to demand.
WinStar expects to be able to minimize non-revenue generating deployment of
infrastructure because (i) it does not need to fully build out its network in a
market before offering services in that market, (ii) bandwidth can be more
easily allocated as demanded and (iii) the small size and relatively low cost of
radio transceivers and other equipment allow for cost-efficient redeployment as
customer demands change.
Deployment of Multipoint Technology. WinStar expects that its planned
deployment of point-to-multipoint technology within its networks will allow it
to further reduce per-building installation and equipment costs, better leverage
existing and future investment in hub equipment, address a significantly greater
number of buildings in each market and provide customers with variable amounts
of bandwidth as their demands and needs change. WinStar believes that it will be
able to efficiently integrate point-to-multipoint technology into its
point-to-point network infrastructure, thereby enabling the Company to create
point-to-multipoint infrastructure in its markets rapidly and cost effectively.
Other Core Assets. WinStar has accumulated a group of core assets, in
addition to those described above, which it believes are necessary for it to
commercially deploy its telecommunications services. Among these assets are (i)
authorizations to operate as a CLEC in 30 states and the District of Columbia,
(ii) agreements that allow it to interconnect its facilities with those of other
carriers in 41 of the 50 most populated MSAs, (iii) roof rights to install its
radios on more than 2,200 buildings and (iv) state-of-the-art information
systems platforms to assure the accurate and flexible handling of the billing
and customer satisfaction requirements of a diverse customer base purchasing a
variety of telecommunications services. WinStar intends to acquire additional
core assets as it further rolls out its services and expands its network
coverage.
BUSINESS STRATEGY
The telecommunications industry is being reshaped by a number of factors,
including the deregulation of local telecommunications markets, growing demand
for high-speed, high-capacity digital telecommunications services and the rapid
advances in wireless technologies that enable service providers to address this
demand, as well as the increasing importance to customers of information
services. WinStar believes it is well-positioned to compete successfully in this
new telecommunications environment. Key elements of WinStar's strategy to
continue its growth as a national provider of telecommunications services are
to:
Continue to Expand Network Infrastructure. WinStar currently provides
switch-based telecommunications services in 24 major metropolitan markets and
expects to provide telecommunications services using its own switches in 30
major metropolitan markets by the end of 1998 and 40 major metropolitan markets
by the end of 1999. WinStar is continuing to deploy network infrastructure on a
city-by-city basis using its Wireless Fiber
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capabilities, its voice and data switches and, where appropriate, facilities
leased from other carriers. The Company believes that a limited number of hub
sites (generally less than 10) in each metropolitan area will allow it to
address more than 70% of its targeted buildings and ultimately to carry the
majority of its customers' traffic on its own network instead of the higher-cost
facilities of other carriers. WinStar also intends over time to interconnect all
of its local networks through intercity fiber optic facilities, creating a
single network capable of providing facilities-based voice and data
telecommunications services among the metropolitan areas in which the Company
has local networks. By building and utilizing its own network, WinStar reduces
its reliance on the facilities of other providers, such as the ILECs, enhances
service to its customers and reduces its cost of providing services. Unlike most
fiber-based CLECs, which typically use facilities leased from incumbent
providers to carry the majority of their telecommunications traffic, WinStar
anticipates enhancing its operating margins by routing a significant portion of
its traffic over its own network as this network and WinStar's presence in its
markets mature.
Exploit First-to-Market Advantage. WinStar seeks to exploit its
'first-to-market' advantage as the leading provider of fixed wireless local
switched and dedicated telecommunications services with an established operating
infrastructure and broad geographic license coverage. WinStar believes that
early entrance into its markets provides it with advantages over many potential
competitors by allowing it to (i) expand its customer base prior to widespread
competition from other CLECs, (ii) develop a proven, reliable and low-cost
network infrastructure using its own switching and transmission capabilities
ahead of many other CLECs, (iii) develop and implement the advanced information,
data and other systems necessary to integrate its fixed wireless infrastructure
into the existing global telecommunications network and (iv) acquire roof rights
for antennae placement on a large number of buildings on favorable terms and in
advance of other fixed wireless service providers.
Provide Integrated Voice and Data Telecommunications and Information
Services. WinStar has found that customers typically prefer to purchase their
voice and data telecommunications services as a single package. WinStar offers
its customers a broad range of telecommunications services, including basic
local dial tone and long distance and, with the acquisitions of GoodNet and
PacNet, high-speed switched and dedicated data and Internet access services.
WinStar believes that the ability to package information, entertainment and
other content and services with telecommunications services will become an
increasingly important factor in the business customer's decision to select or
retain a telecommunications provider. Accordingly, WinStar actively seeks
opportunities to expand its information and content assets and services and to
use them to enhance the marketability of its telecommunications services.
Focus on Business Customers. WinStar believes that a substantial
opportunity exists to attract a significant base of business customers by
rapidly penetrating local markets with high-bandwidth telecommunications
services. Initially, WinStar targeted small and medium-sized business customers
in buildings that have more than 100,000 square feet of commercial space and
which, in most instances, are not served by fiber facilities provided by CLECs.
The Company estimates that there are more than 8,000 buildings that meet the
criteria of this initial target group. WinStar believes that the growth of its
infrastructure and the planned deployment of point-to-multipoint technology will
make it cost-effective for the Company to target smaller buildings as well,
increasing the number of target buildings to more than 30,000. Furthermore,
WinStar's introduction of its data communications services and the expansion of
its sales and marketing capabilities now allows it to target larger business
customers.
Market Wireless Fiber to Other Carriers. WinStar offers its broadband
Carrier Services to other telecommunications providers, including providers of
personal communications, cellular and specialized mobile radio services. WinStar
believes that its Carrier Services present an attractive, economical method for
telecommunications providers to add a high-capacity extension to their own
networks, especially as they seek to rapidly penetrate new markets opening as a
result of the Telecommunications Act of 1996 (the 'Telecommunications Act').
WinStar's Carrier Services also can provide cost-efficient route diversity where
network reliability concerns require multiple telecommunications paths.
Offer High Quality Networks and Superior Customer Service. WinStar
believes that it offers cost and service quality advantages over ILECs and other
CLECs as a result of its Wireless Fiber technology, integrated service
offerings, customer support and network management and monitoring systems.
WinStar consults with its customers to develop competitively priced
telecommunications services that are tailored to meet their particular
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needs. WinStar's centrally-managed customer care and support operations are also
designed to facilitate the processing of orders for changes and upgrades in
services. WinStar believes that it provides greater attention and responsiveness
to its customers than do the ILECs.
Capitalize on Management Team Experience. WinStar has assembled a
management team and hired operating personnel experienced in all areas of
telecommunications and information services, including more than 250 former
officers and employees of MCI Communications Corp. and Sprint Corporation, as
well as numerous executives and other employees from Regional Bell Operating
Companies ('RBOCs') and other established telecommunications companies. WinStar
continues to hire additional experienced telecommunications and information
services personnel as appropriate.
RECENT ACQUISITIONS OF KEY STRATEGIC ASSETS
Three acquisitions consummated since October 1997 have provided WinStar
with various strategic assets, including additional customers, additions to its
sales force serving the medium to large-sized business segment, voice and data
switches and a data network with which to launch its data services business.
US ONE Asset Acquisition
In October 1997, WinStar purchased from US ONE and its subsidiaries (the
'US ONE Asset Acquisition'), 12 Lucent switches, leased fiber-optic capacity in
the New York metropolitan area and certain related assets for a purchase price
of approximately $81.3 million in cash. In order to finance the cash portion of
the purchase price of, and to pay certain expenses relating to, the US ONE Asset
Acquisition, WinStar borrowed $62.3 million from certain institutions, which
borrowings were repaid with proceeds obtained from the December 1997 Preferred
Stock Placement (as defined). The US ONE Asset Acquisition will allow WinStar to
accelerate the city-by-city buildout of its Wireless Fiber and switch-based
infrastructure.
GoodNet Acquisition
In January 1998, WinStar acquired GoodNet, a Tier I ISP, from Telesoft for
a purchase price of approximately $22.0 million, consisting of $3.5 million in
cash and 732,784 shares of Common Stock (the 'GoodNet Acquisition'). GoodNet is
a national provider of Internet access services, offering high-capacity data
services to high-bandwidth users, including Internet service providers,
universities and colleges, large landlords, RBOCs and cable television
operators, and dial-up Internet access to consumers.
Midcom Asset Acquisition
In January 1998, WinStar acquired substantially all of the assets and
business of Midcom (the 'Midcom Business') for a purchase price of approximately
$92.0 million in cash (the 'Midcom Asset Acquisition'). WinStar anticipates,
however, that its net costs for the Midcom Asset Acquisition will amount to less
than $70.0 million after the expected collection of accounts receivable acquired
in the transaction, the planned divestiture of two small business interests
acquired in the transaction and certain post-closing price adjustments. Midcom
is an entity in bankruptcy under Chapter 11.
The Midcom Business is providing long distance voice and data
telecommunications services. The Midcom Business includes basic '1 plus' and
'800' long distance provided primarily to small and medium-sized businesses,
most of which are in major metropolitan areas in California, Florida, Illinois,
New York, Ohio and Washington, and Midcom's PacNet operations, which provide
frame relay data transmission and dedicated private line services.
OTHER RECENT DEVELOPMENTS
Acquisition of 28 GHz Licenses
WinStar participated in the FCC's recently concluded auction of 28 GHz
local multipoint distribution services licenses ('LMDS Licenses'). At the close
of the auction, WinStar was the high bidder for the A-Block LMDS Licenses in
nine markets and the B-Block LMDS Licenses in six markets. Each LMDS License
covers a defined Basic Trading Area (BTA), with each A-Block LMDS License
consisting of 1150 MHz of spectrum and each B-Block LMDS License consisting of
150 MHz of spectrum. WinStar made aggregate bids for such LMDS
9
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Licenses of approximately $58 million. However, WinStar has claimed a 25%
bidding credit in the auction, making its total commitment to purchase LMDS
Licenses approximately $43.4 million. Prior to the auction, WinStar made a $13
million payment which will be offset against this amount, with the balance being
payable when the licenses are granted by the FCC, which WinStar anticipates will
take place in the second quarter of 1998.
Financings
In December 1997, the Company raised net proceeds of $168.1 million through
the sale and issuance of 175,000 shares of Old Preferred Stock in the December
1997 Preferred Stock Placement. The net proceeds of the December 1997 Preferred
Stock Placement were used to repay approximately $62 million of indebtedness
incurred in the US ONE Acquisition, as required pursuant to the terms of such
indebtedness and fund the purchase price of the Midcom Acquisition and for
working capital and general corporate purposes.
In March 1998, the Company and a wholly owned subsidiary sold an aggregate
of 4,000,000 shares ('Preferred Shares') of Series D Preferred Stock in an
institutional private placement ('1998 Preferred Stock Placement'). The sale
price per Preferred Share was $50.00. Also in March 1998, the Company sold $200
million principal amount of Old Cash-Pay Notes and $250 million principal amount
of Old Deferred Interest Notes in an institutional private placement ('1998 Debt
Placement'). The Company received net proceeds of approximately $629.6 million
from the 1998 Preferred Stock Placement and 1998 Debt Placement, which it
intends to use to fund the expansion of its telecommunications and other
operations.
OTHER BUSINESSES
The Company has historically generated a significant portion of its
revenues from the resale of long distance services to residential customers. As
part of its CLEC service offerings, the Company is focusing on the sale of long
distance services to small and medium-sized businesses and is not currently
marketing such services to residential customers on an active basis.
Prior to the Company's entry into the telecommunications industry, it
marketed and distributed consumer products, including personal care and bath and
beauty products, through a nonstrategic subsidiary. That subsidiary continues to
sell such products, primarily to large retailers, mass merchandisers, discount
stores, department stores, national and regional drug store chains and other
regional retail chains. The Company expects to divest itself of this subsidiary
in the near future.
CORPORATE INFORMATION
The Company was incorporated under the laws of the State of Delaware in
September 1990, its principal office is located at 230 Park Avenue, New York,
New York 10169 and its telephone number is (212) 584-4000.
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SUMMARY OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
General................................... The Company is offering to exchange one share of New Preferred Stock
for each outstanding share of Old Preferred Stock that was issued in
the December 1997 Preferred Stock Placement. The terms of the New
Preferred Stock are substantially identical in all material respects
(e.g., liquidation preference, dividend rate, redemption and ranking)
to the terms of the Old Preferred Stock, except that the New
Preferred Stock has been registered under the Securities Act and
therefore will not be subject to certain transfer restrictions
applicable to the Old Preferred Stock. The Exchange Offer satisfies
the registration obligations of the Company under the Registration
Rights Agreement. Holders that do not tender all of their Old
Preferred Stock will no longer have any registration rights under the
Registration Rights Agreement (except that the Company may be
required to file a Shelf Registration Statement in certain limited
instances). See 'The Exchange Offer' for a description of the
procedures for tendering Old Preferred Stock.
The Exchange Offer is not being made to, nor will be accepted from,
holders of Old Preferred Stock in any jurisdiction in which this
Exchange Offer or the acceptance thereof would not be in compliance
with the securities laws of such jurisdiction.
Resale.................................... Based on an interpretation by the staff of the Commission set forth
in no-action letters issued to third parties, the Company believes
that the New Preferred Stock issued pursuant to the Exchange Offer in
exchange for Old Preferred Stock may be offered for resale, resold
and otherwise transferred by any holder thereof (other than broker-
dealers, as set forth below) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided
that such New Preferred Stock is acquired in the ordinary course of
such holder's business and that such holder has no arrangement or
understanding with any person to participate in the distribution of
such New Preferred Stock. Each broker-dealer that receives New
Preferred Stock for its own account in exchange for Old Preferred
Stock that was acquired as a result of market-making or other trading
activity must acknowledge that it will deliver a prospectus in
connection with any resale of New Preferred Stock. The Letter of
Transmittal states that by so acknowledging and delivering a
prospectus, such broker-dealer will not be deemed to admit that it is
an 'underwriter' within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time,
may be used by such broker- dealer in connection with resales of New
Preferred Stock received in exchange for Old Preferred Stock where
such Old Preferred Stock was acquired by such broker-dealer as a
result of market-making activities or other trading activities.
Expiration Date........................... 5:00 p.m., New York City time, June 15, 1998, unless the Exchange
Offer is extended, in which case the term 'Expiration Date' means the
latest date and time to which the Exchange Offer is extended. Any
extension, if made, will be publicly announced through a release to
the Dow Jones News Service and as otherwise required by
</TABLE>
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<TABLE>
<S> <C>
applicable law or regulations. The Company may extend the Expiration
Date in its sole and absolute discretion.
Conditions to the
Exchange Offer.......................... The Exchange Offer is subject to customary conditions, certain of
which may be waived by the Company. It is not, however, conditioned
upon any minimum number of shares of Old Preferred Stock being
tendered. See 'The Exchange Offer--Conditions to the Exchange Offer.'
Procedures for Tendering
Old Preferred Stock..................... Each holder of Old Preferred Stock wishing to accept the Exchange
Offer must complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver the Letter of
Transmittal, or a facsimile thereof, together with the shares of Old
Preferred Stock to be exchanged and any other required documentation
to Continental Stock Transfer & Trust Company, as Exchange Agent, at
the address set forth herein and therein. By executing a Letter of
Transmittal, each holder will represent to the Company that, among
other things, the New Preferred Stock acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of business
of the person receiving such New Preferred Stock, whether or not such
person is the holder, and that neither the holder nor any such other
person has any arrangement or understanding with any person to
participate in the distribution of such New Preferred Stock.
Special Procedures for
Beneficial Owners....................... Any beneficial owner whose Old Preferred Stock is registered in the
name of a broker, commercial bank, trust company or other nominee,
and who wishes to tender in the Exchange Offer should contact such
registered holder promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such beneficial owner
wishes to tender on his own behalf, such beneficial owner must, prior
to completing and executing the Letter of Transmittal and delivering
his Old Preferred Stock, either make appropriate arrangements to
register ownership of the Old Preferred Stock in such owner's name or
obtain a properly completed bond power from the registered holder.
Beneficial owners should be aware that the transfer of registered
ownership may take considerable time and may not be able to be
completed prior to the Expiration Date.
Guaranteed Delivery
Procedures.............................. Any beneficial owner whose shares of Old Preferred Stock are not
immediately available or who cannot otherwise deliver his shares of
Old Preferred Stock and a properly completed Letter of Transmittal or
any other documents required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date may tender his Old
Preferred Stock according to the guaranteed delivery procedures set
forth in 'The Exchange Offer--Procedures for Tendering.'
Acceptance of Old Preferred Stock
and Delivery of New Preferred
Stock................................... Subject to certain conditions (as described more fully in 'The
Exchange Offer--Conditions to the Exchange Offer'), the
</TABLE>
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<TABLE>
<S> <C>
Company will accept for exchange any and all Old Preferred Stock
which are properly tendered in the Exchange Offer and not withdrawn,
prior to 5:00 p.m., New York City time, on the Expiration Date. The
New Preferred Stock issued pursuant to the Exchange Offer will be
delivered as promptly as practicable following the Expiration Date.
Withdrawal Rights......................... Subject to the conditions set forth herein, tenders of Old Preferred
Stock may be withdrawn at any time prior to 5:00 p.m., New York City
time on the Expiration Date. See 'The Exchange Offer-- Withdrawal of
Tenders.'
Certain Federal Income
Tax Considerations...................... The exchange pursuant to the Exchange Offer does not constitute a
taxable exchange for federal income tax purposes. Each share of New
Preferred Stock will be treated as having been originally issued at
the time the Old Preferred Stock exchanged therefor was originally
issued. However, holders should consult their own tax advisors. See
'Certain United States Federal Income Tax Considerations.'
Exchange Agent............................ Continental Stock Transfer & Trust Company, is serving as Exchange
Agent in connection with the Exchange Offer. For information with
respect to the Exchange Offer, the telephone number for the Exchange
Agent is (212) 509-4000.
Proceeds.................................. The Company will not derive any proceeds from the Exchange Offer.
</TABLE>
See 'The Exchange Offer,' below, for more detailed information
concerning the terms of the Exchange Offer.
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THE NEW PREFERRED STOCK
The Exchange Offer applies to all outstanding shares of Old Preferred
Stock. The form and terms of the New Preferred Stock will be the same as the
form and terms of the Old Preferred Stock, except that the New Preferred Stock
will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof. Upon consummation of the Exchange
Offer, the New Preferred Stock will be treated as a single class with any Old
Preferred Stock that remain outstanding. Upon consummation of the Exchange
Offer, the Old Preferred Stock will not be entitled to certain registration
rights under the Registration Agreement. See 'Description of the Exchangeable
Preferred Stock.'
<TABLE>
<S> <C>
General................................... One share of Series C 14 1/4% Senior Cumulative Preferred Stock Due
2007, registered for issuance under the Securities Act (i.e., the New
Preferred Stock), in exchange for one share of outstanding Series C
14 1/4% Senior Cumulative Preferred Stock (i.e., the Old Preferred
Stock).
Dividends................................. Dividends on the New Preferred Stock accrue from December 22, 1997 at
the rate per share of 14 1/4% of the Accumulated Amount (as defined)
per annum, compounded semiannually on each June 15 and December 15,
but will not be payable in cash, except as set forth in the next
sentence. Commencing on the first June 15 or December 15 (each a
'Dividend Payment Date') which is at least six months after the later
of December 15, 2002, and the Specified Debt Satisfaction Date (as
defined) (the 'Cash Payment Date'), dividends on the New Preferred
Stock will be payable in cash at a rate per annum equal to 14 1/4% of
the Accumulated Amount as of the Dividend Payment Date preceding such
date. In the event that the Specified Debt Satisfaction Date shall
not have occurred before December 15, 2002, the rate otherwise
applicable to the New Preferred Stock shall be increased by 150 basis
points from December 15, 2002, until the Dividend Payment Date
falling on or after the Specified Debt Satisfaction Date.
Initial Liquidation Preference............ $1,000 per share.
Ranking................................... The New Preferred Stock ranks (i) senior to all existing and future
Junior Stock, including the Series A Preferred Stock (as defined);
(ii) on a parity with all existing and future Parity Stock (including
any untendered shares of the Old Preferred Stock); and (iii) junior
to all future Senior Stock. In addition, as equity, the New Preferred
Stock will rank junior in right of payment to all indebtedness of the
Company and its subsidiaries. As of December 31, 1997, after giving
effect to the Pro Forma Transactions, the Company would have had, on
a consolidated basis, approximately $1,382.8 million of indebtedness
(including approximately $373.2 million of outstanding indebtedness
and other liabilities, including trade payables, of the Company's
subsidiaries). See 'Description of the Exchangeable Preferred
Stock--Ranking.'
Optional Redemption....................... The New Preferred Stock will not be redeemable prior to December 15,
2002. On or after December 15, 2002, the New Preferred Stock will be
redeemable at the option of the Company, in whole or in part, at the
redemption prices set forth herein plus accumulated and unpaid
dividends, if any, to the date of redemption. See 'Description of the
Exchangeable Preferred Stock--Optional Redemption.'
</TABLE>
14
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<TABLE>
<S> <C>
Mandatory Redemption...................... On December 15, 2007, the Company will be required to redeem the New
Preferred Stock at a price equal to the Accumulated Amount thereof
plus accumulated and unpaid dividends, if any, out of funds legally
available therefor.
Change of Control......................... In the event of a Change of Control, the Company shall offer to
purchase all of the New Preferred Stock at a purchase price equal to
101% of the aggregate Accumulated Amount thereof, plus accumulated
and unpaid dividends, if any, to the date of purchase.
Voting Rights............................. Holders of the New Preferred Stock will have limited voting rights,
including (i) those required by law and (ii) that holders of the
outstanding shares of New Preferred Stock voting together as a class
with the holders of any other series of preferred stock upon which
like rights have been conferred and are exercisable, upon the failure
of the Company (1) to pay dividends for six or more Dividend Periods
(as defined), whether or not consecutive, (2) to satisfy any
mandatory redemption obligation with respect to the New Preferred
Stock, (3) to comply with the covenants set forth in the Certificate
of Designation (as defined) or (4) to comply with certain covenants
or make certain payments on certain Indebtedness (as defined), will
be entitled to elect to the Board of Directors of the Company, the
lesser of (x) two additional members to the Board of Directors or (y)
that number of directors constituting at least 25% of the members of
the Board of Directors. See 'Description of the Exchangeable
Preferred Stock--Voting Rights.'
Covenants................................. The Certificate of Designation for the New Preferred Stock (the
'Certificate of Designation') limits: (i) the incurrence of
additional debt by the Company and certain of its subsidiaries, (ii)
the payment of dividends on capital stock of the Company and the
purchase, redemption or retirement of such capital stock, (iii)
certain investments, (iv) certain transactions with affiliates and
(v) certain consolidations, mergers and transfers of assets. The
Certificate of Designation also prohibits certain restrictions on
distributions from certain subsidiaries. All of these limitations and
prohibitions, however, are subject to a number of important
qualifications. See 'Description of the Exchangeable Preferred
Stock--Certain Covenants.'
Debt Restrictions......................... The Company's existing debt instruments contain provisions which
restrict, and if a default under any thereof exists, prohibit,
redemption or repurchase of the New Preferred Stock, including upon a
Change of Control or through the issuance of Exchange Debentures, and
the payment of cash dividends on the New Preferred Stock. See 'Risk
Factors' and 'Description of Certain Indebtedness.'
Exchange Feature.......................... On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, the Company may, at its option, exchange all but
not less than all of the shares of Exchangeable Preferred Stock then
outstanding for Exchange Debentures in an aggregate Accumulated
Amount equal to the aggregate Accumulated Amount of the shares of New
Preferred Stock outstanding at the time of such exchange, plus
accumulated and unpaid dividends to the date of exchange.
</TABLE>
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THE EXCHANGE DEBENTURES
<TABLE>
<S> <C>
General................................... 14 1/4% Senior Subordinated Deferred Interest Notes Due 2007 issuable
in exchange for the Exchangeable Preferred Stock in an aggregate
Accumulated Amount equal to the Accumulated Amount of the
Exchangeable Preferred Stock, plus accumulated and unpaid dividends
to the date of exchange.
Maturity.................................. December 15, 2007.
Interest.................................. Until the Cash Payment Date, interest on the Exchange Debentures will
accrue at a rate of 14 1/4% of the Accumulated Amount per annum and
will be compounded semiannually on each June 15 and December 15 (each
an 'Interest Payment Date') but will not be payable in cash except as
set forth in the next sentence. Commencing on the first Interest
Payment Date following the later of the Exchange Date (as defined) or
the Cash Payment Date, interest will be payable in cash at a rate per
annum equal to 14 1/4% of the Accumulated Amount as of the Exchange
Date.
Ranking................................... The Exchange Debentures, if issued, will be unsecured, senior
subordinated obligations of the Company, subordinated in right of
payment to all Senior Indebtedness of the Company and to all
indebtedness and other liabilities (including trade payables) of the
Company's subsidiaries, and will rank pari passu with the October
1997 Notes and the Convertible Notes. As of December 31, 1997, after
giving effect to the Pro Forma Transactions, the Company would have
had, on an unconsolidated basis, approximately $570.0 million of Senior
Indebtedness, and the Company's subsidiaries would have had
approximately $117.1 million of outstanding liabilities (other than
liabilities guaranteed by the Company). See 'Description of the
Exchange Debentures-- Ranking.'
Optional Redemption....................... The Exchange Debentures, if issued, will not be redeemable prior to
December 15, 2002. On or after December 15, 2002, the Exchange
Debentures are redeemable at the option of the Company, in whole or
in part, at the redemption prices set forth herein plus accrued and
unpaid interest, if any, to the date of redemption. See 'Description
of the Exchange Debentures--Optional Redemption.'
Change of Control......................... In the event of a Change of Control, the Company shall offer to
purchase all outstanding Exchange Debentures at a price equal to 101%
of the aggregate Accumulated Amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase. See 'Description of the
Exchange Debentures--Change of Control.'
Restrictive Covenants..................... The indenture under which the Exchange Debentures will be issued (the
'Exchange Indenture') will limit (i) the incurrence of additional
debt by the Company and certain of its subsidiaries, (ii) the payment
of dividends on capital stock of the Company and the purchase,
redemption or retirement of capital stock or indebtedness which ranks
junior to the Exchange Debentures, (iii) investments, (iv) certain
transactions with affiliates, (v) sales of assets, including capital
stock of subsidiaries and (vi) certain consolidations, mergers and
transfers of assets. The Exchange
</TABLE>
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<TABLE>
<S> <C>
Indenture will also prohibit certain restrictions on distributions
from certain subsidiaries. All of these limitations and prohibitions,
however, are subject to a number of important qualifications. See
'Description of the Exchange Debentures--Certain Covenants.'
Senior Debt Restrictions.................. The Company's debt instruments contain provisions which substantially
restrict the redemption or repurchase of the Exchange Debentures.
</TABLE>
RISK FACTORS
See 'Risk Factors' commencing on page 21 hereof for a discussion of certain
risks that should be considered in connection with an investment in the New
Preferred Stock.
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SUMMARY FINANCIAL INFORMATION
The summary financial historical data presented below for the ten months
ended December 31, 1995, and the years ended December 31, 1996 and 1997 have
been derived from the Company's audited Consolidated Financial Statements
incorporated by reference into this Prospectus from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, reclassified to reflect the
operations of WinStar Global Products, Inc. ('Global Products'), the Company's
merchandising subsidiary, as a discontinued operation. The summary pro forma
data presented below have been derived from the Unaudited Pro Forma Condensed
Consolidated Financial Statements included elsewhere in this Prospectus (the
'Pro Forma Financial Statements'). The pro forma adjustments are based upon
available information and certain assumptions that management believes are
reasonable. The Pro Forma Financial Statements do not purport to represent what
the Company's results of operations or financial condition would actually have
been had the Pro Forma Transactions (as defined) in fact occurred on such date
or to project the Company's results of operations or financial condition for any
future period or date.
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED YEAR ENDED DECEMBER 31, 1997
DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 ACTUAL PRO FORMA(A)
------------ ------------ --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Telecommunications..................................... $ 13,137 $ 33,969 $ 38,277 $ 136,560
Information services................................... 2,648 14,650 41,354 41,354
------------ ------------ --------- ------------
Total net sales..................................... 15,785 48,619 79,631 177,914
Operating income (loss):
Telecommunications..................................... (7,288) (43,698) (153,139) (241,054)
Information services................................... 217 (1,409) (4,092) (4,092)
General corporate...................................... (3,861) (11,373) (30,815) (30,815)
------------ ------------ --------- ------------
Total operating loss................................ (10,932) (56,480) (188,046) (275,961)
Interest expense......................................... (7,186) (36,748) (77,257) (152,752)
Interest income.......................................... 2,890 10,515 17,577 12,793
Other (expenses) income, net(b).......................... (866) -- 4,719 (481)
------------ ------------ --------- ------------
Loss from continuing operations.......................... (16,094) (82,713) (243,007) (416,401)
Loss income from discontinued operations................. 237 (1,010) (6,477) (6,477)
------------ ------------ --------- ------------
Net loss................................................. (15,857) (83,723) (249,484) (422,878)
Preferred stock dividends................................ -- -- (5,879) (45,806)
------------ ------------ --------- ------------
Net loss applicable to common stockholders............... $(15,857) $(83,723) $(255,363) $ (468,684)
------------ ------------ --------- ------------
------------ ------------ --------- ------------
Net loss per share from continuing operations.......... $ (0.71) $ (2.96) $ (7.49) $ (13.81)
Net (loss) income per share from discontinued
operations.......................................... 0.01 (0.04) (0.19) (0.19)
------------ ------------ --------- ------------
Net loss per common share outstanding.................. $ (0.70) $ (3.00) $ (7.68) $ (14.00)
------------ ------------ --------- ------------
------------ ------------ --------- ------------
Weighted average common shares outstanding............... 22,770 27,911 33,249 33,469
OTHER FINANCIAL DATA:
Ratio of earnings from continuing operations to combined
fixed charges and preferred stock dividends(c)......... -- -- -- --
Capital Expenditures(d).................................. $ 8,123 $ 47,842 $ 222,300 $ 222,300
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
ACTUAL PRO FORMA(E)
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................................... $ 419,262 $ 956,775
Property and equipment, net........................................................... 284,835 293,499
Total assets.......................................................................... 976,401 1,619,251
Current portion of long-term debt and capital lease obligations....................... 7,234 7,234
Long-term debt and capital lease obligations, less current portion.................... 790,292 1,240,292
Exchangeable Redeemable Preferred Stock............................................... 175,553 175,553
Convertible Redeemable Preferred Stock................................................ -- 200,000
Common and preferred stock and additional paid-in capital............................. 256,126 248,976
Stockholders' equity (deficit)........................................................ (118,392) (124,542)
</TABLE>
- ------------------
(a) Gives effect to (i) a private placement of $100.0 million of units,
consisting of 6% Series A Cumulative Convertible Preferred Stock ('Series A
Preferred Stock') and warrants ('Warrants'), completed in February 1997
('February 1997 Preferred Stock Placement'), (ii) a private placement in
March 1997 ('March 1997 Debt Placement') of $100.0 million 14 1/2% Senior
Deferred Interest Notes Due 2005 of the Company ('1997 Senior Notes') and
$200.0 million 12 1/2% Guaranteed Senior Secured Notes Due 2004 ('WEC
Notes') of WinStar Equipment Corp., a wholly owned subsidiary of the Company
('WEC'), (iii) a private placement in August 1997 ('August 1997 Debt
Placement') by WinStar Equipment II Corp., a wholly owned subsidiary of the
Company ('WEC II'), of $50.0 million aggregate principal amount of its
12 1/2% Guaranteed Senior Secured Notes Due 2004 (the 'WEC II Notes'), (iv)
a private placement in October 1997 ('October 1997 Debt Placement') of
$100.0 million 15% Senior Subordinated Deferred Interest Notes Due 2007 of
the Company ('1997 Senior Subordinated Notes' and, together with the 1997
Senior Notes, WEC Notes and WEC II Notes, the '1997 Notes'), (v) the US ONE
Asset Acquisition, (vi) the December 1997 Preferred Stock Placement of
$175.0 million Series C Preferred Stock, including $25.3 million of
dividends on the Series C Preferred Stock in the year ended December 31,
1997, (vii) the Midcom Asset Acquisition, (viii) the 1998 Debt Placement,
and (ix) the 1998 Preferred Stock Placement, each as if they occurred as of
January 1, 1997. The transactions set forth in clauses (i) through (ix) are
referred to herein collectively as the 'Pro Forma Transactions.' Interest
expense has been (A) increased to include approximately $81.3 million of
interest on such debt and amortization of debt offering costs and other
related fees in the year ended December 31, 1997, but not to include
interest income earned on additional available cash and (B) reduced by
approximately $5.8 million for the year ended December 31, 1997 to reflect
the repayment of approximately $62.3 million borrowed in connection with the
US ONE Asset Acquisition and repaid from the proceeds of the December 1997
Preferred Stock Placement. Depreciation expense has been adjusted to include
approximately $5.1 million for the year ended December 31, 1997 of
depreciation on certain of the assets acquired in the US ONE Asset
Acquisition, assuming straight line depreciation over the expected useful
lives of the assets which will ultimately be placed in service. Preferred
Stock dividends have been adjusted to include approximately $14.0 million of
dividends on the Series D Preferred Stock (assuming the dividends are paid
in Dividend Shares).
(b) The year ended December 31, 1997 includes a deferred income tax benefit of
$2.5 million.
(c) For the ten months ended December 31, 1995, and the years ended December 31,
1996 and 1997, earnings from continuing operations were insufficient to
cover combined fixed charges and dividends on the Company's Series A and
Series C Preferred Stock by approximately $16.3 million, $83.0 million and
$255.6 million, respectively. On a pro forma basis, giving effect to the Pro
Forma Transactions, earnings from continuing operations were insufficient to
cover combined fixed charges and dividends on preferred stock by $468.9
million for the year ended December 31, 1997. Fixed charges consist of
interest charges and amortization of debt expense and discount or premium
related to indebtedness, whether expended or capitalized, and that portion
of rent expense that the Company believes to be representative of interest.
(d) Excludes Midcom capital expenditures for the year ended December 31, 1997.
(e) Gives effect to the Pro Forma Transactions as if each had occurred on
December 31, 1997.
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FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference herein contain
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations and business of the Company. These forward-looking statements
involve certain risks and uncertainties. No assurance can be given that any of
such matters will be realized. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following: (a) the Company's ability to service its debt or to
obtain financing for the buildout of its telecommunications network; (b) the
Company's ability to attract and retain a sufficient revenue-generating customer
base; (c) competitive pressures in the telecommunications industry; and (d)
general economic conditions. For further information and other factors which
could affect the financial results of the Company and such forward-looking
statements, see 'Risk Factors.'
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RISK FACTORS
The New Preferred Stock offered hereby has the same terms and conditions as
the Old Preferred Stock and, accordingly, involves a high degree of risk. Each
prospective investor should carefully consider the following risk factors
relating to both the Old Preferred Stock and the New Preferred Stock.
HISTORICAL AND PROJECTED NET AND OPERATING LOSSES
The Company has historically incurred significant and growing operating
losses and net losses and significant negative EBITDA. EBITDA consists of loss
before interest, income taxes, depreciation and amortization and other income
and expense. The Company historically has had net losses and negative EBITDA,
including net losses and negative EBITDA of approximately $15.9 million and $9.9
million, respectively, for the ten months ended December 31, 1995, $83.7 million
and $52.0 million, respectively, for the year ended December 31, 1996 and $249.5
million and $158.3 million, respectively, for the year ended December 31, 1997.
After giving effect to the Pro Forma Transactions, the Company would have a net
loss and negative EBITDA of $422.9 million and $219.2 million, respectively, for
the year ended December 31, 1997.
As a result of increased expenses, principally relating to an increase in
the number of employees in connection with the rollout of the Company's
telecommunications services and expenses relating to the servicing of its debt,
there will continue to be substantial increases in the Company's net loss and
operating loss and the Company will continue to have significant negative
EBITDA. There can be no assurance that the Company will ever achieve (or if
achieved, maintain) operating income, profitability or positive EBITDA or that
the Company and its subsidiaries will have sufficient financial resources to
make principal and interest payments on their outstanding debt or to redeem the
Company's outstanding preferred stock or to make cash dividend payments thereon.
GOVERNMENT REGULATION
The telecommunications services business is highly regulated at the
federal, state and local levels. In addition, the regulatory environment is
subject to continual changes as a result of new legislation, the regulations
adopted from time to time by the applicable regulatory authorities and
litigation. The Company's competitive position is affected by this regulatory
environment directly in terms of the services it is able to offer, the rates,
terms and conditions of those services, and the rates, terms and conditions of
necessary underlying services it must secure from other telecommunications
providers. The Company's competitive position is also affected indirectly in
terms of such regulatory environment's effect on companies that offer competing
services. The Company is not able to predict the extent to which current laws
and regulations or any changes therein may affect its business. However, as in
any regulated industry, changes in law, regulations and interpretations could
have a significant adverse impact on the ability of the Company to operate and
achieve its business objectives.
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.
Telecommunications Markets. The voice and data telecommunications markets
(including the Internet access and frame relay data markets) are intensely
competitive and currently are dominated by the ILECs and the IXCs. These
entities 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
ILECs and IXCs over the Company in certain respects. In addition to competition
from the established carriers, the Company also faces competition from a growing
number of new market entrants, such as other CLECs and dedicated data
transmission service providers. Further, sales of the Company's Carrier Services
are typically made to other telecommunications providers that may compete with
the Company. The Company also may face competition in the provision of local
telecommunications services from cable companies, electric utilities and ILECs
operating outside their current local service areas. Moreover, the consolidation
of telecommunications companies and the formation of strategic alliances within
the telecommunications industry, which have accelerated, could give rise to
significant new or stronger competitors.
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The Company also faces 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, 4.6 GHz, 18
GHz, 24 GHz, 28 GHz, 31 GHz and 47 GHz), as well as from providers using
proposed global broadband satellite systems or unlicensed wireless services.
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 its telecommunications services markets, 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.
New Media Business. The industry in which the Company's new media
subsidiary competes 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 subsidiary competes have significantly greater
presence in the various media markets and greater resources than the Company,
including existing content libraries, financial resources, personnel and
existing production and distribution channels. There can be no assurance that
the Company will be able to compete successfully in the emerging new media
industry.
RISKS RELATED TO STRATEGY
The Company is pursuing an accelerated strategy to expand its presence in
the local telecommunications services market in the metropolitan areas in which
it has Wireless Licenses and to develop and obtain the facilities necessary to
provide its own switched services. The Company has limited experience providing
local telecommunications services, and there can be no assurance that the
Company's strategy will be successful. In addition, local telecommunications
service providers in the United States never have utilized 38 GHz wireless-based
systems as a significant segment of their service facilities, and there can be
no assurance that the Company will be successful in implementing its Wireless
Fiber-based system. The Company's 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 ILECs and other providers, the
failure of ILECs and other providers to honor interconnection agreements and
their FCC-mandated obligations, the ability of third-party equipment providers
and installation and maintenance contractors to meet the Company's buildout
schedule, the recruitment of additional personnel in a timely manner, so as to
be able to attract and service new customers but not incur excessive personnel
costs in advance of the rollout, the Company's ability to attract and retain new
customers through delivery of high-quality services, the potential adverse
reaction to the Company's services by the Company's carrier customers, which may
view the Company as a competitor, and the Company's ability to manage the
simultaneous implementation of its plan in multiple markets. In addition, the
Company is subject to the risk of unforeseen problems inherent in being a
relatively new entrant in a rapidly evolving industry.
Much of the Company's telecommunications revenues in prior years has been
derived from the resale of long distance services to residential customers. As
part of its strategy, the Company is marketing its long distance services to
businesses and is no longer actively marketing such services to residential
customers. As a result, revenues from the provision of long distance services to
residential customers have substantially declined and are expected to continue
to substantially decline through attrition of the Company's long distance
residential customer base.
The Company's strategy requires significant capital investment related to
the purchase and installation of numerous switches and the interconnection of
these facilities to customers' buildings and local networks of other providers,
including the installation of Wireless Fiber links and the buildout of other
facility infrastructure in advance of generating material revenues.
As the Company continues to build its telecommunications operations, it
will continue to experience negative operating margins while it develops its
facilities. After initial rollout of its CLEC services in a particular
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city, the Company expects operating margins for such operations to improve only
when and if: (i) sales efforts result in sufficient 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 ILEC 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 ILEC 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 telecommunications operations will become
profitable due to, among other factors, lack of customer demand, competition
from other CLECs and pricing pressure from the ILECs and other CLECs.
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 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. There can be no
assurance that substantial markets will develop for wireless local
telecommunications services delivered over 38 GHz or that, even if such markets
develop, the Company will be able to succeed in positioning itself as a provider
of such services or provide such services profitably. The Company's success in
providing wireless broadband services is subject to a number of factors beyond
the Company's control. These factors include, without limitation, historical
perceptions of the unreliability and lack of security of previous microwave
radio technologies, changes in general and local economic conditions,
availability of equipment, changes in telecommunications service rates charged
by other service providers, changes in the supply and demand for wireless
broadband services, competition from wireline and wireless operators in the same
market area and changes in the federal and state regulatory schemes affecting
the operations of telecommunications service providers in general and wireless
broadband systems in particular (including the enactment of new statutes and the
promulgation of changes in the interpretation or enforcement of existing or new
rules and regulations). In addition, the extent of the potential demand for
wireless broadband services in the Company's target markets cannot be estimated
with certainty. There can be no assurance that one or more of these factors will
not have an adverse effect on the Company's financial condition and results of
operations.
CHANGES IN TECHNOLOGY, SERVICES AND INDUSTRY STANDARDS
The telecommunications industry has been characterized by rapid
technological change, changing end-user requirements, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate or adapt to such changes
and to offer, on a timely basis, services that meet these evolving industry
standards. The extent to which competitors using existing or currently
undeployed methods of delivery of local telecommunications services will compete
with the Company's Wireless Fiber services cannot be anticipated. There can be
no assurance that existing, proposed or as yet undeveloped technologies will not
become dominant in the future and render 38 GHz-based (and other spectrum-based)
systems less profitable or less viable. For example, there are several existing
technologies that may be able to allow the transmission of high bandwidth
traffic over existing copper lines or unlicensed spectrum. There can be no
assurance that the Company will have sufficient resources to make the
Investments necessary to acquire new technologies or to introduce new services
that could compete with future technologies or that equipment held by the
Company in inventory will not be rendered obsolete, any of which would have an
adverse effect on the operations and financial condition of the Company.
ABILITY TO SERVICE SUBSTANTIAL INDEBTEDNESS AND TO COVER FIXED CHARGES;
REFINANCING RISK
At December 31, 1997, after giving effect to the Pro Forma Transactions,
the Company would have had, on a consolidated basis, approximately $1,382.8
million of indebtedness, including capitalized lease obligations and trade
payables. The Company also had outstanding, at December 31, 1997, $175.0 million
stated value of Series C Preferred Stock. The accrual of interest on the
Deferred Interest Notes and on the 1997 Notes, the
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accrual of dividends on the Series C Preferred Stock and the accretion of
original issue discount on the Convertible Notes and the Company's 14% Senior
Discount Notes due 2005 (the '1995 Senior Notes' and, together with the
Convertible Notes, the '1995 Notes') will significantly increase the Company's
liabilities and obligations (except to the extent that the Convertible Notes are
converted into Common Stock). The Company may also need to incur additional
indebtedness in the future. Although the Offering Indentures and the respective
Indentures pursuant to which the 1995 Notes and 1997 Notes were issued
(collectively, the 'Indentures') and the Certificate of Designations governing
the Series C Preferred Stock (the 'Series C Certificate of Designations') place
certain limitations on the incurrence of additional indebtedness by the Company
and its subsidiaries, under certain circumstances permitted by the Company's
debt instruments, such additional indebtedness could be substantial.
Additionally, the Indentures do not limit the amount of indebtedness that may be
incurred by the Company's new media and consumer products subsidiaries or other
Unrestricted Subsidiaries.
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 near-term capital expenditure requirements. Under its current
plans to expand to 40 markets by the end of 1999, the Company plans to spend
approximately $300.0 million in each of 1998 and 1999 for capital equipment,
which may require the Company to seek additional financing from financial
institutions or equipment vendors or in the financial markets. The Company
anticipates, based on current plans and assumptions relating to its operations,
that the estimated net proceeds from the Offerings, together with existing
financial resources and additional equipment and accounts receivable financing
arrangements that the Company intends to seek, will be sufficient to fund the
Company's operations and capital requirements for approximately 18 to 30 months
from the date on which the Offerings were consummated. In the event that the
Company's assumptions change or prove to be inaccurate, the Company consummates
any acquisitions of significant businesses or assets (including spectrum
licenses other than those won by the Company in the FCC's recently completed
auction of 28 GHz Local Multipoint Distribution Service licenses ('LMDS
Licenses')), the Company accelerates its plan and enters markets more rapidly,
or 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 additional financing will
be available or, if 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 the ability of the Company and its subsidiaries to make principal
and interest payments on their debt, and dividend payments on their Preferred
Stock, including the Exchangeable Preferred Stock.
RISKS ASSOCIATED WITH RAPID EXPANSION AND ACQUISITIONS
The Company is pursuing a strategy of aggressive and rapid growth,
including the accelerated rollout of its telecommunications services,
acquisitions of businesses and assets, including additional spectrum licenses,
and the hiring of additional management, technical and marketing personnel, all
of which will result in higher capital expenditures and 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, the value of the Company's securities, including the Exchangeable
Preferred Stock offered hereby, and the ability of the Company and its
subsidiaries to make principal and interest payments on their Preferred Stock,
and dividend payments on their outstanding equity, including the Exchangeable
Preferred Stock, as required. As part of its
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<PAGE>
strategy, the Company may acquire complementary assets or businesses. The
pursuit of acquisition opportunities will place significant demands on the time
and attention of the Company's senior management and will 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 other acquisitions or
integrate any business or assets which it may acquire into its operations.
Recently, the Company consummated the US ONE Asset Acquisition, the GoodNet
Acquisition and the Midcom Asset Acquisition. There can be no assurance that the
acquired assets can be effectively integrated into the Company's operations or
that the Company will realize the benefits it expects to achieve through these
acquisitions. Two of the sellers, Midcom and US ONE, were in bankruptcy at the
time of acquisition and there can be no assurance that the Company will be able
to exploit these assets with more success than previous managements. Moreover, a
portion of Midcom's customers and independent sales agents have elected not to
continue with the Company. In addition, the conversion of Midcom customers and
carrier identification codes to the Company's system is subject to regulation by
the FCC, and the assignment of Midcom's customers may be subject to approval by
government regulators. In the event that the FCC determines that, despite
specific bankruptcy court approval, the Company engaged in improper practices in
converting such customers and codes, the FCC may impose substantial penalties on
the Company.
ABILITY TO PAY DIVIDENDS ON AND REDEEM THE EXCHANGEABLE PREFERRED STOCK AND
ISSUE EXCHANGE DEBENTURES
The ability of the Company to pay any dividends is subject to applicable
provisions of state law, and its ability to pay cash dividends is subject to the
terms of the Indentures and any other indebtedness of the Company then
outstanding. The terms of the Indentures currently prohibit the Company from
paying cash dividends on any preferred stock, including the Exchangeable
Preferred Stock offered hereby and the Series A Preferred Stock. The ability of
the Company in the future to pay cash dividends on the Exchangeable Preferred
Stock or the Series A Preferred Stock will depend on its meeting certain
financial criteria, which in turn will require significant improvements in the
Company's EBITDA and consolidated net worth. There can be no assurance that the
Company will be able to meet such financial criteria in order to pay cash
dividends on the Exchangeable Preferred Stock or the Series A Preferred Stock.
See 'Description of Certain Indebtedness.' Further, the terms of the
Exchangeable Preferred Stock provide that cash payments on the Exchangeable
Preferred Stock will not be made by the the Company until all currently
outstanding indebtedness of the Company has been repaid. Moreover, under
Delaware law the Company is permitted to pay dividends on its capital stock,
including the Exchangeable Preferred Stock, only out of its surplus, or in the
event that it has no surplus, out of its net profits for the year in which a
dividend is declared or for the immediately preceding fiscal year. Surplus is
defined as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. In order to pay
dividends in cash, the Company must have surplus or net profits equal to the
full amount of the cash dividends at the time such dividend is declared. The
Company cannot predict what the value of its assets or the amount of its
liabilities will be in the future and, accordingly, there can be no assurance
that the Company will be able to pay cash dividends on the Exchangeable
Preferred Stock.
In addition, the terms of the Indentures restrict the ability of the
Company to redeem or repurchase the Exchangeable Preferred Stock, including
pursuant to the covenants described under 'Description of the Exchangeable
Preferred Stock--Repurchase of Exchangeable Preferred Stock Upon a Change of
Control' and '--Limitation on Asset Sales.' The ability of the Company to redeem
or repurchase the Exchangeable Preferred Stock will depend on its meeting
certain financial criteria, which in turn will require significant improvements
in the Company's EBITDA and consolidated net worth.
The terms of the Exchangeable Preferred Stock provide that the Company may
not issue the Exchange Debentures in exchange for the Exchangeable Preferred
Stock until the date on which all obligations under the Indentures have been
satisfied. The Company's obligations under the Indentures are not scheduled to
be fully satisfied until 2007. There can be no assurance that the Company will
be able to retire or refinance such obligations prior to 2007. Furthermore, the
ability of the Company to issue the Exchange Debentures is currently limited by
the terms of the Indentures.
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FINITE INITIAL TERM OF WIRELESS LICENSES; POTENTIAL LICENSE RENEWAL COSTS;
FLUCTUATIONS IN THE VALUE OF WIRELESS LICENSES; TRANSFER OF CONTROL
As described in the FCC's Report and Order and Second Notice of Proposed
Rulemaking, released on November 3, 1997 (the '38 GHz Order'), the FCC's policy
is to align the expiration dates of all 38 GHz licenses granted such that they
mature concurrently on February 1, 2001, and, upon expiration, to renew all such
licenses for ten years if the FCC's 'substantial service' buildout requirements
have been met. 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. The failure of the Company
to meet the buildout requirements and obtain a renewal of its Wireless Licenses
would have a material adverse effect on the Company.
In the 38 GHz Order, the FCC ruled, among other things and in addition to
the expiration and renewal policy described above, that (i) it would impose no
limits on the accumulation of licenses in the 38 GHz band, (ii) the 39.5-40.0
GHz portion of this band would not be reserved for use by satellite operations,
(iii) licensees should be permitted great flexibility in use of this spectrum,
including use for point-to-multipoint and mobile services (subject to the
development of inter-licensee and inter-services standards), and (iv) currently
unlicensed channels in the 38 GHz band will be auctioned.
The Company anticipates that the 38 GHz Order, or portions thereof, will be
contested by various parties and the outcome of such proceedings is uncertain.
Therefore, while the Company views the majority of the FCC's determinations in
the 38 GHz Order as favorable to its operations and business plan, there can be
no assurance that such rulings will not be repealed or altered as a result of
such proceedings. On March 9, 1998, several parties filed petitions for
reconsideration (the 'Petitions') of the 38 GHz Order alleging, among other
things, that the FCC's February 10, 1998 grants to WinStar of additional
channels in 11 markets were in violation of the FCC's processing rules. Such
Petitions were made available to the public on March 10, 1998. At least one of
these parties has stated its intent to file a separate pleading on this issue.
There can be no assurance that the Petitions will not result in such additional
channel grants being rescinded.
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 and by valuations placed on
such licenses in any current or future auction of spectrum, such as the FCC's
auction for spectrum in the 28 GHz spectrum which currently is taking place. 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, nationality, background and the legal
and financial qualifications of the transferee and the satisfaction of certain
other regulatory requirements. There can be no assurance that the FCC will
approve all or any of the proposed acquisitions.
LINE OF SIGHT; DISTANCE LIMITATIONS IMPOSED BY RAINFALL CONDITIONS IN CERTAIN
GEOGRAPHIC AREAS; ROOF RIGHTS
In order to provide quality transmission, Wireless Fiber services require
an unobstructed line of sight between two transceivers comprising a link, with a
maximum distance between any two corresponding transceivers of up to five miles
(although the Company generally maintains link distances of less than three
miles, or shorter distances in certain areas, to meet its internally established
performance standards). Weather conditions may necessitate even shorter
distances 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,
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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 required to
service 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 expand its Wireless Fiber services in its
potential markets or in obtaining any construction, zoning, franchises or other
governmental permits that may be necessary for the Company to provide Wireless
Fiber service to its customers in its markets at reasonable costs or on
favorable terms, or at all. The Company's prequalification activities may
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.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The Indentures and the Series C Certificate of Designations 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, 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. 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, the value of the Company's securities and the ability of the Company
and its subsidiaries to make principal and interest payments on their
outstanding debt, and dividend payments on their outstanding Preferred Stock,
including the Exchangeable Preferred Stock.
RANKING OF THE EXCHANGEABLE PREFERRED STOCK
The Company's obligations with respect to the Exchangeable Preferred Stock
do not constitute indebtedness for borrowed money and rank junior in right of
payment to all present and future indebtedness and other payment obligations of
the Company and its subsidiaries and all future Senior Stock. Further, the
claims of creditors of the Company's subsidiaries will be effectively senior to
all payments, including dividends and redemption, on the Exchangeable Preferred
Stock. As of December 31, 1997, after giving effect to the Pro Forma
Transactions, the Company would have had, on a consolidated basis, approximately
$1,382.8 million of indebtedness (including capitalized lease obligations and
approximately $373.2 million of outstanding indebtedness and other liabilities,
including trade payables, of the Company's subsidiaries), all of which would
have been senior in right of payment to the Exchangeable Preferred Stock. In the
event of bankruptcy, liquidation or reorganization of the Company, the assets of
the Company will be available to pay obligations on the Exchangeable Preferred
Stock only after all indebtedness of the Company and all Senior Stock, if any,
has been paid, and there may not be sufficient assets remaining to pay amounts
due on any or all of the Exchangeable Preferred Stock then outstanding. See
'Description of the Exchangeable Preferred Stock--Ranking.'
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SUBORDINATION OF THE EXCHANGE DEBENTURES
The payment of principal, premium, if any, and interest on or any other
amounts owing in respect of, the Exchange Debentures, if issued in exchange for
the Exchangeable Preferred Stock, will be subordinated to the prior payment in
full of all existing and future Senior Indebtedness, and will be effectively
subordinated to all indebtedness and other liabilities (including trade
payables) of the Company's subsidiaries. As of December 31, 1997, after giving
effect to the Pro Forma Transactions, the Company would have had, on an
unconsolidated basis, approximately $570.0 million of Senior Indebtedness, and
the Company's subsidiaries would have had approximately $117.1 million of
outstanding liabilities (other than liabilities guaranteed by the Company). The
Certificate of Designation and the Exchange Indenture permit the incurrence by
the Company and its subsidiaries of additional indebtedness. In addition, the
Company may not pay principal of, premium, if any, or interest on or any other
amounts owing in respect of, the Exchange Debentures, or purchase, redeem or
otherwise retire the Exchange Debentures, if (i) the obligations with respect to
Senior Indebtedness are not paid when due or (ii) other events of default have
occurred and the lenders elect to prohibit the Company from making payments with
respect to the Exchange Debentures. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Exchange Debentures only after all Senior Indebtedness
has been paid, and there may not be sufficient assets remaining to pay amounts
due on any or all of the Exchange Debentures then outstanding. See 'Description
of the Exchange Debentures-- Ranking.'
EFFECT OF SUBSTANTIAL ADDITIONAL INDEBTEDNESS ON THE COMPANY'S ABILITY TO MAKE
PAYMENTS ON THE EXCHANGEABLE PREFERRED STOCK
The Indentures and the Certificate of Designation limit, but do not
prohibit, the incurrence of additional indebtedness by the Company and its
subsidiaries, and the Company may incur substantial additional indebtedness
during the next few years to finance the buildout of its telecommunications
networks and operations. Further, the proceeds raised by the Company in the
December 1997 Preferred Stock Placement have, in certain instances, increased
the amount of indebtedness the Company may incur under the terms of the
Indentures. All additional indebtedness of the Company will rank senior in right
of payment to any payment obligations with respect to the Exchangeable Preferred
Stock. The debt service requirements of any additional
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indebtedness would make it more difficult for the Company to pay cash
obligations with respect to the Exchangeable Preferred Stock, including
obligations to redeem the Exchangeable Preferred Stock.
CERTAIN TAX CONSIDERATIONS
Distributions on the Exchangeable Preferred Stock will be taxable for U.S.
Federal income tax purposes as ordinary dividend income (and eligible for the
dividends-received deduction for certain U.S. corporate holders) only to the
extent paid out of current or accumulated earnings and profits of the Company as
determined for U.S. Federal income tax purposes and otherwise will be treated in
the manner described under 'Certain U.S. Federal Income Tax
Consequences--Exchangeable Preferred Stock and Exchange
Debentures--Distributions in General.' However, the Company does not currently
have any current or accumulated earnings and profits and cannot accurately
predict at what point it will have current or accumulated earnings and profits.
In the absence of current or accumulated earnings and profits of the Company, it
is anticipated that distributions on the Exchangeable Preferred Stock will
constitute tax-free returns of capital to the extent of the holder's tax basis
in the Exchangeable Preferred Stock and thereafter capital gain, and will not be
eligible for the dividends-received deduction. The exchange of Exchangeable
Preferred Stock for Exchange Debentures will be treated as a redemption giving
rise to a dividend in the amount of the issue price unless such exchange (i)
terminates such holder's equity interest in the Company (taking into account
stock that is actually or constructively owned by the holder); or (ii) is not
'essentially equivalent to a dividend.' To the extent that the exchange of
Exchangeable Preferred Stock for Exchange Debentures does not give rise to a
dividend, such exchange shall be treated as a sale or other taxable exchange of
the Exchangeable Preferred Stock, and such sale or exchange may be eligible for
installment sale treatment, unless either the Exchangeable Preferred Stock or
Exchange Debentures is readily tradeable in an established securities market.
See 'Certain U.S. Federal Income Tax Consequences.'
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGEABLE PREFERRED STOCK
The Exchangeable Preferred Stock is a new class of security for which there
is currently no market. The Company does not intend to apply for listing of the
Exchangeable Preferred Stock or, if issued, the Exchange Debentures issued in
exchange therefor pursuant to the Registration Statement on any securities
exchange or to seek approval for quotation through any automated quotation
system. The Exchangeable Preferred Stock is eligible for trading in the PORTAL
Market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Exchangeable Preferred Stock, they are
not obligated to do so and any such market-making may be discontinued at any
time without notice. In addition, such market-making activity may be limited
during the pendency of the Registration Statement or the Shelf Registration
Statement. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchangeable Preferred Stock or the Exchange
Debentures (collectively, the 'Securities'). If a market for and of the
Securities were to develop, such Securities may trade at prices that may be
higher or lower than the initial offering price of the Exchangeable Preferred
Stock depending upon many factors, including prevailing interest rates, the
Company's operating results and the markets for similar securities.
Historically, the market for securities such as the Securities has been subject
to disruptions that have caused substantial volatility in the prices of
securities similar to the Securities. There can be no assurance that, if a
market for any of the Securities were to develop, such a market would not be
subject to similar disruptions. Such disruptions may materially and adversely
affect such liquidity and trading independent of the financial performance of,
and prospects for, the Company.
CONSEQUENCES FOR NON-TENDERING HOLDERS OF THE OLD PREFERRED STOCK
After Exchange Offer is consummated, the Company will not be required to
register shares of the Old Preferred Stock not tendered and accepted in the
Exchange Offer. In such event, holders of any such shares of Old Preferred Stock
seeking liquidity in their investment would have to rely on exemptions to the
registration requirements under the securities laws, including the Securities
Act. Following the consummation of the Exchange Offer, holders of shares of Old
Preferred Stock not tendered in the Exchange Offer may not be entitled to the
contingent increase in interest rate provided for in the event of a failure to
consummate the Exchange Offer in accordance with the terms of the Registration
Rights Agreement.
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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 ILECs and
other local exchange service providers to carry its customers' local telephone
calls. The Company has agreements with MCI, Sprint and others that provide it
with access to such carriers' networks and has entered or is entering into
interconnect agreements with various ILECs, 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 ILECs 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 value of the Company's
securities, including the Exchangeable Preferred Stock, and the ability of the
Company and its subsidiaries to make principal and interest payments on their
outstanding debt, and dividend payments on their Preferred Stock, including the
Exchangeable Preferred Stock. Further, the Company's CLEC operations will rely
to some extent upon network elements which the ILECs 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 ILEC 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.
The Company utilizes, in certain cases, third parties for marketing its
Wireless Fiber services and maintaining its operational systems. The Company has
entered into master service agreements with other telecommunications providers
that allow those companies to utilize and resell the Company's Wireless Fiber
services to their own customers. The Company also has an agreement with Lucent
to provide field service for, and network monitoring of, the Company's Wireless
Fiber facilities and another agreement with Lucent for the purchase by the
Company of telecommunications switches and related equipment. The failure of any
of these third parties to perform under their respective agreements or the loss
of any of these agreements could have a material adverse effect on the Company's
results of operations and its ability to service its customers. The Company has
approached a number of major telecommunications service providers to solicit
interest in entering into a multi-year, multi-region network transaction in
which the Company would build and maintain a co-exclusive network utilizing
Wireless Fiber for providing access to their customer base. Although there can
be no assurance that such a transaction will be entered into, the Company
believes that such a transaction would be attractive to a number of these
providers and is in various stages of discussions with them.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Preferred Stock was sold by the Company in the December 1997
Preferred Stock Placement to the Initial Purchasers who, in turn, sold such Old
Preferred Stock to certain qualified institutional buyers in reliance on Rule
144A under the Securities Act. In connection with the December 1997 Preferred
Stock Placement, the Company entered into the Registration Rights Agreement,
pursuant to which the Company is obligated to use its best efforts to consummate
the Exchange Offer of the New Preferred Stock for the Old Preferred Stock
pursuant to an effective Registration Statement by June 15, 1998.
Pursuant to the Registration Rights Agreement, the Company is required to
file a shelf registration statement ('Shelf Registration Statement') for a
continuous offering pursuant to Rule 415 under the Securities Act in respect of
the Old Preferred Stock if: (i) because of any change in law or in currently
prevailing interpretations of the staff of the Commission, the Company is not
permitted to effect the Exchange Offer; (ii) the Exchange Offer is not
consummated by June 15, 1998; (iii) any Initial Purchaser so requests with
respect to the Old Preferred Stock not eligible to be exchanged for New
Preferred Stock in the Exchange Offer and held by it following consummation of
the Exchange Offer; or (iv) any holder of Old Preferred Stock (other than an
exchanging dealer) is not eligible to participate in the Exchange Offer or, in
the case of any holder of Old Preferred Stock (other than an exchanging dealer)
that participates in the Exchange Offer, such holder does not receive freely
tradeable New Preferred Stock on the date of the exchange. The Company is
required to use its best efforts
to keep the Shelf Registration Statement continuously effective for a period of
two years from the date
of its effectiveness or such shorter period that will terminate when all the Old
Preferred Stock covered by
the shelf registration statement has been sold pursuant thereto or is eligible
for sale under Rule 144(k) under the
Securities Act.
TERMS OF THE EXCHANGE OFFER
The Company offers to exchange, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, the same number and aggregate liquidation preference of New
Preferred Stock for the Old Preferred Stock tendered for exchange. The terms of
the New Preferred Stock are substantially identical in all material respects
(e.g., aggregate liquidation preference, dividend rate, mandatory redemption and
ranking) to the terms of the Old Preferred Stock, except that the New Preferred
Stock has been registered under the Securities Act and therefore will not be
subject to certain transfer restrictions applicable to the Old Preferred Stock.
The New Preferred Stock, like the Old Preferred Stock, is governed by the
Certificate of Designation. See 'Description of the Exchangeable Preferred
Stock.' The Exchange Offer is not conditioned upon any minimum number of shares
of Old Preferred Stock being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for sale, resold or otherwise transferred by any
holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that the New Preferred Stock issued pursuant to the Exchange Offer in
exchange for Old Preferred Stock may be offered for resale, resold and otherwise
transferred by any holder of such New Preferred Stock (except in the case of
broker-dealers, as set forth below) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Preferred Stock is acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Preferred Stock. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Preferred Stock may not rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Preferred Stock for its own
account in exchange for Old Preferred Stock, where such Old Preferred Stock was
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Stock.
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By tendering in the Exchange Offer, each holder of Old Preferred Stock will
represent to the Company, as the case may be, that, among other things: (i) the
New Preferred Stock acquired pursuant to the Exchange Offer is being obtained in
the ordinary course of business of the person receiving such New Preferred
Stock, whether or not such person is such holder; (ii) neither the holder of Old
Preferred Stock nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Preferred Stock;
and (iii) if the holder is not a broker-dealer, or is a broker-dealer but will
not receive New Preferred Stock for its own account in exchange for Old
Preferred Stock. Neither the holder nor any such other person is engaged in or
intends to participate in the distribution of such New Preferred Stock.
Following the consummation of the Exchange Offer, holders of shares of Old
Preferred Stock that have not been tendered will no longer have certain
registration rights and the Old Preferred Stock will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
the Old Preferred Stock could be adversely affected.
EXPIRATION DATE
The term 'Expiration Date' shall mean 5:00 p.m., New York City time, on
June 15, 1998 unless the Company in its sole discretion extends the Exchange
Offer, in which case the term 'Expiration Date' shall mean the latest date and
time to which the Exchange Offer is extended. Although the Company has no
current intention to extend the Exchange Offer, the Company reserves the right
to extend the Exchange Offer at any time and from time to time by giving oral or
written notice to the Exchange Agent and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Preferred Stock previously tendered pursuant to the
Exchange Offer and not withdrawn will remain subject to the Exchange Offer. The
date of the exchange of the New Preferred Stock for the Old Preferred Stock will
be the first New York Stock Exchange trading day following the Expiration Date.
The Company expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Old Preferred Stock if any of the events
set forth below under '--Conditions to the Exchange Offer' shall have occurred
and shall not have been waived by the Company and (ii) amend the terms of the
Exchange Offer in any manner which, in its good faith judgment, is advantageous
to the holders of the Old Preferred Stock, whether before or after any tender of
the Old Preferred Stock.
PROCEDURES FOR TENDERING
The Exchange Offer is subject to the terms and conditions set forth in this
Prospectus and the Letter of Transmittal.
Shares of Old Preferred Stock may be tendered by properly completing and
signing the Letter of Transmittal and delivering the Letter of Transmittal to
the Exchange Agent at its address set forth in this Prospectus on or prior to
the Expiration Date, together with: (i) the certificate or certificates
representing the shares of Old Preferred Stock being tendered and any required
signature guarantees; (ii) a timely confirmation of a book-entry transfer (a
'Book-Entry Confirmation') of the Old Preferred Stock, if such procedure is
available, into the Exchange Agent's account at the Depository pursuant to the
procedure for book-entry transfer described below; or (iii) the completion of
the procedures for guaranteed delivery set forth below. See 'Guaranteed Delivery
Procedures.'
If shares of the New Preferred Stock (and any untendered shares of Old
Preferred Stock) are to be issued in the name of the registered holder and the
registered holder has signed the Letter of Transmittal the holder's signature
need not be guaranteed. In any other case, the tendered shares of Old Preferred
Stock must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Exchange Agent and duly executed by the registered holder
and the signature on the endorsement or instrument of transfer must be
guaranteed by a commercial bank or trust company located or having an office or
correspondent in the United States, or by a member firm of a national securities
exchange or of the National Association of Securities Dealers, Inc. (an
'Eligible Institution'). If shares of the New Preferred Stock (and any
untendered shares of Old Preferred Stock) are to be delivered to an address
other than that of the registered holder appearing on the register for the Old
Preferred Stock, the signature on the Letter of Transmittal must be guaranteed
by an Eligible Institution. Each
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broker-dealer that receives shares of New Preferred Stock for its own account in
exchange for shares of Old Preferred Stock, where such shares of Old Preferred
Stock were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such shares of New Preferred Stock.
THE METHOD OF DELIVERY OF OLD PREFERRED STOCK, LETTERS OF TRANSMITTAL AND
ALL OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL,
IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED,
PROPER INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF
THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE, NO LETTERS OF TRANSMITTAL OR OLD PREFERRED STOCK SHOULD BE SENT
TO THE COMPANY.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal,
shares of the Old Preferred Stock or a Book-Entry Confirmation, and all other
required documents are received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Preferred Stock will
be determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of Issuer's
counsel, be unlawful. The Company also reserves the absolute right to waive any
of the conditions of the Exchange Offer or any defect or irregularity in the
tender of any shares of Old Preferred Stock. Neither the Company, the Exchange
Agent nor any other person will be under any duty to give notification of any
defects or irregularities in tenders or incur any liability for failure to give
any such notification. If any shares of Old Preferred Stock received by the
Exchange Agent are not validly tendered and as to which the defects or
irregularities have not been cured or waived, or if shares of Old Preferred
Stock are submitted in a amount greater than the number of shares of Old
Preferred Stock being tendered by such tendering holder, such unaccepted or
non-exchanged shares of Old Preferred Stock will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, to the
extent permitted (a) purchase or make offers for any shares of Old Preferred
Stock that remain outstanding subsequent to the Expiration Date and (b) to the
extent pertained by applicable law, purchase shares of Old Preferred Stock in
the open market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers will differ from the terms of the Exchange Offer.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Preferred Stock ('Transferor') exchanges, assigns
and transfers the Old Preferred Stock to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Preferred Stock to be assigned, transferred and exchanged. The
Transferor represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Preferred Stock and to acquire the
New Preferred Stock issuable upon the exchange of such tendered shares of Old
Preferred Stock, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered shares of Old Preferred
Stock, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The Transferor also warrants that it will,
upon request, execute and deliver any additional documents deemed by the Company
to be necessary or desirable to complete the exchange, assignment and transfer
of tendered Old Preferred Stock or transfer ownership of such Old Preferred
Stock on the account books maintained by DTC. All authority conferred by the
Transferor will survive the death, bankruptcy or incapacity of the Transferor
and every obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
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By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above in the third paragraph under the heading
'--Purpose and Effect of the Exchange Offer.'
WITHDRAWAL OF TENDERS
Tenders of Old Preferred Stock pursuant to the Exchange Offer are
irrevocable, except that Old Preferred Stock tendered pursuant to the Exchange
Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date.
To be effective, a written, telegraphic, or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at the address set
forth in the Letter of Transmittal prior to 5:00 p.m., New York City time on the
Expiration Date. Any such notice of withdrawal must specify the holder named in
the Letter of Transmittal as having tendered Old Preferred Stock to be
withdrawn, the certificate numbers and designation of Old Preferred Stock to be
withdrawn, the principal amount of Old Preferred Stock delivered for exchange, a
statement that such holder is withdrawing his election to have such Old
Preferred Stock exchanged, and the name of the registered holder of such Old
Preferred Stock, and must be signed by the holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to The Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Old Preferred Stock being withdrawn. The Exchange Agent will return the
properly withdrawn Old Preferred Stock promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at DTC to be credited with the withdrawn Old Preferred Stock or
otherwise comply with DTC procedure. All questions as to the validity of notices
of withdrawal, including time of receipt, will be determined by the Company and
such determination will be final and binding on all parties.
ACCEPTANCE OF OLD PREFERRED STOCK; DELIVERY OF NEW PREFERRED STOCK
Upon terms and subject to the conditions of the Exchange Offer, the Company
will accept for exchange any and all shares of Old Preferred Stock which are
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. For the purposes of the Exchange Offer, the Company shall
be deemed to have accepted for exchange validly tendered Old Preferred Stock
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old
Preferred Stock for the purpose of causing the Old Preferred Stock to be
assigned, transferred and exchanged for New Preferred Stock. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of New Preferred Stock
in exchange for Old Preferred Stock will be made by the Exchange Agent after
acceptance of the tendered Old Preferred Stock by the Company and promptly
following the Expiration Date. Any Old Preferred Stock not accepted for exchange
by the Company for any reason will be returned without expense to the tendering
holders (or, in the case of Old Preferred Stock tendered by book-entry transfer,
by crediting an account maintained with the Book-Entry Transfer Facility) as
promptly as practicable after the Expiration Date or, if the Company terminates
the Exchange Offer prior to the Expiration Date, promptly after the Exchange
Offer is terminated. See '-- Conditions to the Exchange Offer.'
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after the
date of this Prospectus, and any financial institution that is a participant in
the Book-Entry Transfer Facility's systems may make book-entry delivery of Old
Preferred Stock by causing the Book-Entry Transfer Facility to transfer the Old
Preferred Stock into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with the Book-Entry Transfer Facility's procedure for
transfer. The Letter of Transmittal with any required signature guarantees and
any other required documents, must be received by the Exchange Agent on or prior
to the Expiration Date for any book-entry transfers.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Preferred Stock and (i) whose Old
Preferred Stock is not immediately available or (ii) who cannot deliver their
Old Preferred Stock, the Letter of Transmittal or any other documents required
hereby to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date, must tender their Old Preferred Stock and follow the guaranteed
delivery procedures. Pursuant to such procedures: (i) such tender must be made
by or through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed notice of guaranteed delivery (a 'Notice of
Guaranteed Delivery') (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of the Old Preferred Stock, the
certificate number or numbers of such Old Preferred Stock and the aggregate
liquidation preference of the Old Preferred Stock tendered, stating that the
tender is being made thereby and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Old Preferred Stock (or a
confirmation of electronic delivery or book-entry delivery into the Exchange
Agent's account at the Depository) and any of the required documents will be
deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed Letter of Transmittal (or facsimile thereof), as
well as all other documents required by the Letter of Transmittal and the
certificate(s) representing all tendered Old Preferred Stock in proper form for
transfer (or a confirmation of electronic mail delivery or book-entry delivery
into the Exchange Agent's account at the Depository), must be received by the
Exchange Agent within five business days after the Expiration Date. Any holder
of Old Preferred Stock who wishes to tender its Old Preferred Stock pursuant to
the guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York
City time, on the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue New Preferred
Stock in exchange for any properly tendered Old Preferred Stock not theretofore
accepted and may terminate the Exchange Offer, or, at their option, modify or
otherwise amend the Exchange Offer, if either of the following events occur:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the sole judgment of the Company, would prohibit, restrict or otherwise
render illegal the consummation of the Exchange Offer, or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which, in the Company's sole judgment, might
materially impair The Company's ability to proceed with the Exchange Offer.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Preferred Stock upon the occurrence of
either of the foregoing conditions (which represent all of the material
conditions to the acceptance by the Company of properly tendered Old Preferred
Stock).
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company if it is legally permitted to do so, in whole or in part,
in its sole discretion. The foregoing conditions must be either satisfied or
waived prior to termination of the Exchange Offer. Any determination made by the
Company concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
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<PAGE>
EXCHANGE AGENT
U.S. Trust has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Mail (registered or certified mail recommended):
Continental Stock Transfer & Trust Company
2 Broadway 19th Floor
New York, New York 10004
By Overnight Courier:
Continental Stock Transfer & Trust Company
2 Broadway 19th Floor
New York, New York 10004
Attn: Corporate Trust Operations Department
By Hand Delivery:
Continental Stock Transfer & Trust Company
2 Broadway 19th Floor
New York, New York 10004
Attn: Corporate Trust Services
By Facsimile (for Eligible Institutions only):
(212) 420-6152
Confirm by telephone (800) 548-6565
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Preferred
Stock and in handling or forwarding tenders for exchange.
The expenses to be incurred by the Company in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Transfer Agent and
accounting and legal fees, will be paid by the Company. The Company will not,
however, pay the costs incurred by a holder in delivering its Old Preferred
Stock to the Exchange Agent, underwriting fees, or Commissions or transfer
taxes.
ACCOUNTING TREATMENT
The New Preferred Stock will be recorded at the same carrying value as the
Old Preferred Stock as reflected in the Company's accounting records on the date
of the exchange because the exchange of the Old Preferred Stock for the New
Preferred Stock is the completion of the selling process contemplated in the
issuance of the Old Preferred Stock. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer and the
unamortized expenses related to the issuance of the Old Preferred Stock will be
amortized over the term of the New Preferred Stock.
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<PAGE>
OTHER MATTERS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Preferred Stock are
urged to consult their financial and tax advisors in making their own decisions
on what action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by The Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or the Company since the dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Preferred Stock in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, The
Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Old Preferred Stock in such jurisdiction.
As a result of the making of the Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration Agreement. Holders of the Old
Preferred Stock who do not tender their Old Preferred Stock in the Exchange
Offer will continue to hold such Old Preferred Stock and will be entitled to all
the rights and limitations applicable thereto under the Indenture except for
certain rights under the Registration Agreement and except that certain of the
Old Preferred Stock may not be entitled to the contingent increase in interest
rate provided for in the Old Preferred Stock. All untendered Old Preferred Stock
will continue to be subject to the restrictions on transfer set forth in the
Indenture and the Old Preferred Stock. To the extent that Old Preferred Stock
are tendered and accepted in the Exchange Offer, the trading market, if any, for
untendered Old Preferred Stock could be adversely affected.
The Company will not receive any cash proceeds from the issuance of the New
Preferred Stock offered hereby. In consideration for issuing the New Preferred
Stock as contemplated in this Prospectus, the Company will receive in exchange
Old Preferred Stock, in like principal amount, the terms of which are identical
to the New Preferred Stock except that such New Preferred Stock will be
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. Old Preferred Stock surrendered in exchange
for New Preferred Stock will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Preferred Stock will not result in a change in
the indebtedness of the Company.
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<PAGE>
DESCRIPTION OF THE EXCHANGEABLE PREFERRED STOCK
The following is a summary of certain provisions of the Certificate of
Designation and the Exchangeable Preferred Stock (which encompasses both the New
Preferred Stock and Old Preferred Stock, as such securities have substantially
identical terms). A copy of the Certificate of Designation and the form of
Exchangeable Preferred Stock is available upon request to the Company at the
address set forth under 'Available Information.' The following summary of
certain provisions of the Certificate of Designation does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Certificate of Designation. The definitions of certain
capitalized terms used but not defined in the following summary are set forth
under 'Description of the Exchange Debentures--Certain Definitions.' Other
capitalized terms used but not defined herein and not otherwise defined under
'Description of the Exchange Debentures--Certain Definitions' are defined in the
Certificate of Designation.
GENERAL
The holders of the Exchangeable Preferred Stock have no preemptive or
preferential right to purchase or subscribe to stock, obligations, warrants or
other securities of the Company of any class. The Exchangeable Preferred Stock
is eligible for trading in the PORTAL Market. Subject to certain conditions, the
Exchangeable Preferred Stock will be exchangeable for the Exchange Debentures at
the option of the Company on any scheduled Dividend Payment Date on or after the
date all obligations under each of the Specified Indentures shall have been
satisfied in full (the 'Specified Debt Satisfaction Date'). When issued, the
Exchangeable Preferred Stock will be validly issued, fully paid and
nonassessable.
RANKING
The Exchangeable Preferred Stock, with respect to dividend rights and
rights on liquidation, winding-up and dissolution, ranks (i) senior to all
classes of common stock and to the Company's Series A Preferred Stock and to
each other class of Capital Stock or series of Preferred Stock established
hereafter by the Board of Directors the terms of which do not expressly provide
that it ranks senior to, or on a parity with, the Exchangeable Preferred Stock
as to dividend rights and rights on liquidation, winding-up and dissolution of
the Company (collectively referred to, together with all classes of common stock
of the Company, as 'Junior Stock'); (ii) subject to certain conditions, on a
parity with each class of Capital Stock or series of Preferred Stock established
hereafter by the Board of Directors, the terms of which expressly provide that
such class or series will rank on a parity with the Exchangeable Preferred Stock
as to dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as 'Parity Stock'); and (iii) subject to certain
conditions, junior to each class of Capital Stock or series of Preferred Stock
established hereafter by the Board of Directors, the terms of which expressly
provide that such class or series will rank senior to the Exchangeable Preferred
Stock as to dividend rights and rights upon liquidation, winding-up and
dissolution of the Company (collectively referred to as 'Senior Stock').
While any shares of Exchangeable Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any class
or series of stock (i) that ranks senior to the Exchangeable Preferred Stock
with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up, or (ii) that is on a parity with the Exchangeable
Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up and that has a mandatory redemption
earlier, or an average life less, than that of the Exchangeable Preferred Stock,
in each case without the consent of the holders of at least 66 2/3% of the
outstanding shares of Exchangeable Preferred Stock. However, without the consent
of any holder of Exchangeable Preferred Stock, the Company may create additional
classes of stock, increase the authorized number of shares of preferred stock or
issue series of a stock that ranks on a parity with, or junior to, the
Exchangeable Preferred Stock with respect, in each case, to the payment of
dividends and amounts upon liquidation, dissolution and winding up (subject, in
the case of Parity Stock, to the preceding sentence). See '--Voting Rights.'
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<PAGE>
DIVIDENDS
The Exchangeable Preferred Stock accumulates cumulative preferential
dividends from December 22, 1997, at the rate of 14 1/4% per annum on the
Accumulated Amount with respect to the Exchangeable Preferred Stock compounded
semi-annually on each SemiAnnual Dividend Accrual Date, but, except as described
in the second following sentence, dividends on the Exchangeable Preferred Stock
will not be payable in cash. Until such time as the Accumulated Amount becomes a
fixed and final amount pursuant to the first proviso to the definition of
'Accumulated Amount,' the dividends accruing on the Exchangeable Preferred Stock
will be deemed paid by the periodic adjustments provided for in such definition.
Commencing on the first June 15 or December 15 (each a 'Dividend Payment Date')
which is at least six months after the later of December 15, 2002 and the
Specified Debt Satisfaction Date (the 'Cash Payment Date'), dividends will be
payable in cash in respect of the Exchangeable Preferred Stock at a rate per
annum equal to 14 1/4% of the Accumulated Amount as of the Dividend Payment Date
preceding the Cash Payment Date. Thereafter, dividends on the Exchangeable
Preferred Stock will be payable semiannually in arrears on each Dividend Payment
Date or, if any such date is not a Business Day, on the next succeeding Business
Day, to the holders of record of the Exchangeable Preferred Stock as of the next
preceding June 1 and December 1. Dividends payable on the Exchangeable Preferred
Stock will be computed on a basis of a 360-day year consisting of twelve 30-day
months and will be deemed to accrue on a daily basis. For a discussion of
certain Federal income tax considerations relevant to the Exchangeable Preferred
Stock, see 'Certain U.S. Federal Income Tax Consequences.'
Notwithstanding anything herein to the contrary, if the Specified Debt
Satisfaction Date shall not have occurred before December 15, 2002, the rate
otherwise applicable to the Exchangeable Preferred Stock shall be increased by
150 basis points from December 15, 2002, until the Dividend Payment Date falling
on or after the Specified Debt Satisfaction Date.
Dividends on the Exchangeable Preferred Stock will accrue whether or not
the Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Certificate of
Designation will provide that the Company will, subject to the terms of any
indebtedness of the Company existing on the Issue Date, take all actions
required or permitted under the Delaware General Corporation Law (the 'DGCL') to
permit the payment of dividends on the Exchangeable Preferred Stock, including,
without limitation, through the revaluation of its assets in accordance with the
DGCL.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Exchangeable
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Exchangeable Preferred Stock.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock or (ii)
redeem, purchase or otherwise acquire for consideration any Junior Stock through
a sinking fund or otherwise, unless (A) all accrued and unpaid dividends with
respect to the Exchangeable Preferred Stock and any Parity Stock at the time
such dividends are payable have been paid or funds have been set apart for
payment of such dividends and (B) sufficient funds have been paid or set apart
for the payment of the dividend for the current dividend period with respect to
the Exchangeable Preferred Stock and any Parity Stock.
No dividend will be declared or paid on any Parity Stock unless full
cumulative dividends have been paid on the Exchangeable Preferred Stock for all
prior dividend periods; provided, however, if accrued dividends on the
Exchangeable Preferred Stock for all prior dividend periods have not been paid
in full then any dividend declared on the Exchangeable Preferred Stock for any
dividend period and on any Parity Stock will be declared ratably in proportion
to accrued and unpaid dividends on the Exchangeable Preferred Stock and such
Parity Stock.
Notwithstanding anything herein to the contrary, the Company may declare
and pay dividends on Parity Stock or Junior Stock which are payable solely in
additional shares of or by the increase in the liquidation value of Parity Stock
or Junior Stock, as applicable, or repurchase, redeem or otherwise acquire
Junior Stock in exchange for Junior Stock and Parity Stock in exchange for
Parity Stock or Junior Stock.
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<PAGE>
The Company's ability to pay dividends with respect to the Exchangeable
Preferred Stock is limited by the terms of the Company's outstanding
indebtedness. See 'Risk Factors--Ability to Pay Dividends on and Redeem the
Exchangeable Preferred Stock and Issue Exchange Debentures.'
OPTIONAL REDEMPTION
The Exchangeable Preferred Stock will not be redeemable at the option of
the Company prior to December 15, 2002. Thereafter, the Exchangeable Preferred
Stock will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed as percentages of the Accumulated Amount
thereof), plus accumulated and unpaid dividends, if any (including an amount in
cash equal to a prorated dividend for any partial dividend period), on such
Accumulated Amount if redeemed during the 12-month period commencing on December
15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------- ----------
<S> <C>
2002......................................................... 107.125%
2003......................................................... 105.344
2004......................................................... 103.563
2005......................................................... 101.781
2006 and thereafter.......................................... 100.000
</TABLE>
In the case of any partial optional redemption, selection of the
Exchangeable Preferred Stock for redemption will be made by the Company in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchangeable Preferred Stock is listed, or if the
Exchangeable Preferred Stock is not listed on a national securities exchange, on
a pro rata basis, by lot or such other method as the Company, in its sole
discretion, shall deem fair and appropriate; provided, however, that the Company
may redeem all of the shares held by holders of fewer than 100 shares (or all of
the shares held by holders who would hold less than 100 shares as a result of
such redemption) as may be determined by the Company.
The Company's ability to redeem the Exchangeable Preferred Stock at its
option is limited by the terms of the Company's outstanding indebtedness. The
Company may not be able to redeem the Exchangeable Preferred Stock at its option
unless it simultaneously redeems or repays such indebtedness. See 'Risk
Factors--Ability to Pay Dividends on and Redeem the Exchangeable Preferred Stock
and to Issue Exchange Debentures.'
MANDATORY REDEMPTION
On December 15, 2007, the Company will be required to redeem (subject to
the legal availability of funds therefor) all outstanding shares of Exchangeable
Preferred Stock at a price in cash equal to the Liquidation Preference thereof,
plus accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if any, to the date of
redemption. The Company will not be required to make sinking fund payments with
respect to the Exchangeable Preferred Stock. The Certificate of Designation will
provide that the Company will take all actions required or permitted under
Delaware law to permit such redemption.
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled Dividend Payment Date following the Specified Debt Satisfaction Date,
exchange the Exchangeable Preferred Stock, in whole, but not in part, for the
Exchange Debentures; provided, however, that (i) on the date of such exchange
(the 'Exchange Date') there are no accumulated and unpaid dividends on the
Exchangeable Preferred Stock (including the dividend payable on such date) or
other contractual impediments to such exchange; (ii) there shall be funds
legally available sufficient therefor; and (iii) the Company shall have
delivered to the Transfer Agent under the Exchange Indenture an opinion of
counsel with respect to the due authorization and issuance of the Exchange
Debentures.
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Upon any exchange pursuant to the preceding paragraph, holders of
outstanding shares of Exchangeable Preferred Stock will be entitled to receive,
subject to the second succeeding sentence, $1.00 Accumulated Amount of Exchange
Debentures for each $1.00 Accumulated Amount of Exchangeable Preferred Stock
held by them. The Exchange Debentures will be issued in registered form, without
coupons. Exchange Debentures issued in exchange for Exchangeable Preferred Stock
will be issued in principal amounts of $1,000 and integral multiples thereof to
the extent possible, and will also be issued in principal amounts less than
$1,000 so that each holder of Exchangeable Preferred Stock will receive
certificates representing the entire amount of Exchange Debentures to which such
holder's shares of Exchangeable Preferred Stock entitle such holder; provided,
however, that the Company may pay cash in lieu of issuing an Exchange Debenture
in a principal amount less than $1,000. The Company will send a written notice
of exchange by mail to each holder of record of shares of Exchangeable Preferred
Stock not fewer than 30 days nor more than 60 days before the date fixed for
such exchange. On and after the Exchange Date, dividends will cease to accrue on
the outstanding shares of Exchangeable Preferred Stock, and all rights of the
holders of Exchangeable Preferred Stock (except the right to receive the
Exchange Debentures and, if the Company so elects, cash in lieu of any Exchange
Debenture that is in a principal amount that is not an integral multiple of
$1,000) will terminate. The person entitled to receive the Exchange Debentures
issuable upon such exchange will be treated for all purposes as the registered
holder of such Exchange Debentures as of the Exchange Date. See 'Description of
the Exchange Debentures.'
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, each holder of Exchangeable Preferred Stock will be entitled to be
paid, out of the assets of the Company available for distribution to
stockholders, an amount equal to the Liquidation Preference per share of
Exchangeable Preferred Stock held by such holder, plus accumulated and unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding-up
before any distribution is made on any Junior Stock, including, without
limitation, common stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Exchangeable Preferred Stock and all other Parity Stock are not
paid in full, the holders of the Exchangeable Preferred Stock and the Parity
Stock will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference and accumulated and
unpaid dividends to which each is entitled. After payment of the full amount of
the Liquidation Preference and accumulated and unpaid dividends to which they
are entitled, the holders of shares of Exchangeable Preferred Stock will not be
entitled to any further participation in any distribution of assets of the
Company. However, neither the sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially all
of the property or assets of the Company nor the consolidation or merger of the
Company with one or more entities shall be deemed to be a liquidation,
dissolution or winding-up of the Company.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Exchangeable
Preferred Stock, although such Liquidation Preference will be substantially in
excess of the par value of such shares of Exchangeable Preferred Stock.
VOTING RIGHTS
The holders of Exchangeable Preferred Stock, except as otherwise required
under Delaware law or as provided in the Certificate of Designation, shall not
be entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Company.
The Certificate of Designation will provide that if (i) dividends on the
Exchangeable Preferred Stock are in arrears and unpaid for six or more Dividend
Periods (whether or not consecutive); (ii) the Company fails to redeem the
Exchangeable Preferred Stock on December 15, 2007, or fails to otherwise
discharge any redemption or repurchase obligation with respect to the
Exchangeable Preferred Stock; (iii) a breach or violation of any of the
provisions described under the caption '--Certain Covenants' occurs and the
breach or violation continues for a period of 30 days or more after the Company
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Exchangeable Preferred Stock then outstanding; or (iv) the
Company fails to pay at final maturity (giving effect to any applicable grace
period) the principal amount of any Indebtedness of the Company or any
Significant Subsidiary or the final maturity of any such Indebtedness is
accelerated because of a
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default and the total amount of such Indebtedness unpaid or accelerated exceeds
$25.0 million, then the holders of the outstanding shares of Exchangeable
Preferred Stock, voting together as a class with the holders of any other series
of Preferred Stock upon which like rights have been conferred and are
exercisable, will be entitled to elect to serve on the Board of Directors the
lesser of (x) two additional members to the Board of Directors or (y) that
number of directors constituting at least 25% of the members of the Board of
Directors, and the number of members of the Board of Directors will be
immediately and automatically increased by such number. Such voting rights of
the Exchangeable Preferred Stock will continue until such time as, in the case
of a dividend default, all dividends in arrears on the Exchangeable Preferred
Stock are paid in full in cash and, in all other cases, any failure, breach or
default giving rise to such voting rights is remedied or waived by the holders
of a majority of the shares of Exchangeable Preferred Stock then outstanding, at
which time the term of any directors elected pursuant to the provisions of this
paragraph (subject to the right of holders of any other preferred stock to elect
such directors) shall terminate. Each such event described in clauses (i)
through (iv) above is referred to herein as a 'Voting Rights Triggering Event.'
The Certificate of Designation will also provide that, except as expressly
set forth above under 'Ranking,' (a) the creation, authorization or issuance of
any shares of Junior Stock, Parity Stock or Senior Stock, including the
designation of a series thereof within the existing class of Exchangeable
Preferred Stock, or (b) the increase or decrease in the amount of authorized
Capital Stock of any class, including any preferred stock, shall not require the
consent of the holders of Exchangeable Preferred Stock and shall not be deemed
to affect adversely the rights, preferences, privileges or voting rights of
shares of Exchangeable Preferred Stock.
REPURCHASE OF EXCHANGEABLE PREFERRED STOCK UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all the Exchangeable Preferred
Stock then outstanding, at a purchase price equal to 101% of the Accumulated
Amount of the Exchangeable Preferred Stock on the date of purchase, plus accrued
and unpaid dividends (if any) on such Accumulated Amount to the date of
purchase. Prior to the mailing of the notice to holders of Exchangeable
Preferred Stock commencing such Offer to Purchase, but in any event within 30
days following any Change of Control, the Company covenants to (i) repay in full
all indebtedness of the Company that would prohibit the repurchase of the
Exchangeable Preferred Stock pursuant to such Offer to Purchase or (ii) obtain
any requisite consents under instruments governing any such indebtedness of the
Company to permit repurchase of the Exchangeable Preferred Stock. The Company
shall first comply with the covenant in the preceding sentence before it shall
repurchase Exchangeable Preferred Stock pursuant to the 'Repurchase of
Exchangeable Preferred Stock Upon a Change of Control' covenant.
The Certificate of Designation prohibits the Company from repurchasing any
Exchangeable Preferred Stock so long as any indebtedness of the Company
contractually prohibits such repurchase. However, if the Company is unable to
repay or cause repayment of all of its indebtedness that would prohibit a
repurchase of the Exchangeable Preferred Stock or is unable to obtain the
consents of the holders of indebtedness, if any, outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase of
Exchangeable Preferred Stock or otherwise fails to purchase any Exchangeable
Preferred Stock validly tendered, then the Company will have breached this
covenant. This breach will constitute a Voting Rights Triggering Event under the
Certificate of Designation if it continues for a period of 30 consecutive days
after written notice is given to the Company by the holders of at least 25% in
aggregate amount of the Exchangeable Preferred Stock outstanding. In addition,
the failure by the Company to repurchase Exchangeable Preferred Stock at the
conclusion of the Offer to Purchase will constitute a breach of this covenant
without any waiting period or notice requirements.
There can be no assurance that the Company, WEC and/or WEC II will have
sufficient funds available at the time of a Change of Control to make any
payment required by the foregoing covenant (as well as any similar covenant that
may be contained in other securities of the Company, WEC and WEC II which might
be outstanding at the time). The above covenant requiring the Company to
repurchase the Exchangeable Preferred Stock will, unless the consents referred
to above are obtained, require the Company, WEC and WEC II to repay all
indebtedness then outstanding which by its terms would prohibit such
Exchangeable Preferred Stock repurchase, either prior to or concurrently with
such Exchangeable Preferred Stock repurchase.
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<PAGE>
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into transactions,
including acquisitions, refinancings or recapitalizations, that would not
constitute a Change of Control, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness are contained in the
covenant described under '--Certain Covenants--Limitation on Indebtedness.' Such
restrictions can only be waived with the consent of the holders of a majority of
the outstanding shares of the Exchangeable Preferred Stock. Except for the
limitations contained in such covenants, however, the Certificate of Designation
will not contain any covenants or provisions that may afford holders of the
Exchangeable Preferred Stock protection in the event of a highly leveraged
transaction.
CERTAIN COVENANTS
Limitation on Indebtedness
The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than Indebtedness existing on the
Issue Date); provided, however, that the Company may Incur Indebtedness if,
after giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Indebtedness to EBITDA Ratio would be
greater than zero and less than 5:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company outstanding at any time in an aggregate principal
amount not to exceed $125 million, less any amount of Indebtedness Incurred
pursuant to this clause (i) and permanently repaid as provided under
'--Limitation on Asset Sales' below; (ii) Indebtedness (A) to the Company
evidenced by an unsubordinated promissory note or (B) to any of its Restricted
Subsidiaries; provided, however, that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness, other than Indebtedness Incurred under clause (i),
(ii), (v), (vi) or (viii) of this paragraph, and any refinancings thereof in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided, however, that Indebtedness the
proceeds of which are used to refinance or refund Indebtedness that would be
pari passu with, or subordinated in right of payment to, the Exchange Debentures
(when issued) shall only be permitted under this clause (iii) if (A) in case the
Indebtedness to be refinanced is pari passu with the Exchange Debentures, such
new Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the Exchange Debentures, (B)
in case the Indebtedness to be refinanced is subordinated in right of payment to
the Exchange Debentures, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made subordinate in right of payment to the Exchange
Debentures at least to the extent that the Indebtedness to be refinanced is
subordinated to the Exchange Debentures and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded;
provided further, however, that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary of the
Company pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; provided, however,
that such agreements do not increase the Indebtedness of the obligor outstanding
at any time other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and compensation
payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of the Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection
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with the disposition of any business, assets or Restricted Subsidiary of the
Company (other than Guarantees of Indebtedness Incurred by any Person acquiring
all or any portion of such business, assets or Restricted Subsidiary of the
Company for the purpose of financing such acquisition), in a principal amount
not to exceed the gross proceeds actually received by the Company or any
Restricted Subsidiary in connection with such disposition; (v) Indebtedness of
the Company not to exceed, at any one time outstanding, two times the Net Cash
Proceeds received by the Company from and after October 23, 1995, from the
issuance and sale of its Capital Stock (other than Redeemable Stock and
Preferred Stock that provides for the payment of dividends in cash), including
the Exchangeable Preferred Stock, provided, however, that such Indebtedness (x)
does not mature prior to the Stated Maturity of the Exchange Debentures and has
an Average Life longer than the Exchange Debentures and (y) is pari passu with
or subordinated to the Exchange Debentures; (vi) Indebtedness of any Restricted
Subsidiary Incurred pursuant to any credit agreement of such Restricted
Subsidiary in effect on the Issue Date (and refinancings thereof), up to the
amount of the commitment under such credit agreement on the Issue Date; (vii)
Indebtedness to the extent such Indebtedness is secured by Liens which are
purchase money or other Liens upon equipment or inventory acquired or held by
the Company or any of its Restricted Subsidiaries taken or obtained by (A) the
seller or lessor of such equipment or inventory to secure all or a part of the
purchase price or lease payments therefor or (B) the person who makes advances
or incurs obligations, thereby giving value to the Company to enable it to
purchase or acquire rights in such equipment or inventory, to secure the
repayment of all or a part of the advances so made or obligations so incurred;
provided, however, that such Liens do not extend to or cover any property or
assets of the Company or any Restricted Subsidiary other than the equipment or
inventory acquired; (viii) Indebtedness of any Restricted Subsidiary not to
exceed, at any one time outstanding, 80% of the accounts receivable net of
reserves and allowances for doubtful accounts, determined in accordance with
GAAP, of such Restricted Subsidiary and its Restricted Subsidiaries (without
duplication); provided, however, that such Indebtedness is not Guaranteed by the
Company or any of its Restricted Subsidiaries; (ix) Indebtedness of the Company,
to the extent the proceeds thereof are immediately used to purchase 1995 Notes
or 1997 Notes tendered in an offer to purchase made as a result of a Change of
Control; and (x) the Exchange Debentures.
For purposes of determining any particular amount of Indebtedness under
this 'Limitation on Indebtedness' covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this 'Limitation on Indebtedness' covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, the Company, in its
sole discretion, shall classify such item of Indebtedness and only be required
to include the amount and type of such Indebtedness in one of such clauses.
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Guarantee of Indebtedness of any Unrestricted Subsidiary.
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Indebtedness which restricts the Company's ability to pay cash
dividends on, or to redeem on December 15, 2007, the Exchangeable Preferred
Stock in accordance with its terms.
Limitation on Senior Subordinated Indebtedness
The Company will not (i) Incur any Indebtedness, other than the Exchange
Debentures, that is expressly made subordinated in right of payment to any
Senior Indebtedness of the Company unless such Indebtedness, by its terms and by
the terms of any agreement or instrument pursuant to which such Indebtedness is
outstanding is expressly made pari passu with, or subordinate in right of
payment to, the Exchange Debentures pursuant to provisions substantially similar
to those contained in Article Ten of the Exchange Indenture; provided, however,
that the foregoing limitation shall not apply to distinctions between categories
of Senior Indebtedness that exist by reason of any Liens or Guarantees arising
or created in respect of some but not all Senior Indebtedness or (ii) Incur any
Indebtedness secured by a Lien if such Indebtedness is not Senior Indebtedness,
unless contemporaneously therewith effective provision is made to secure the
Exchange Debentures equally and ratably with such secured Indebtedness for so
long as such secured Indebtedness is secured by a Lien.
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Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on its Capital Stock (other than (a) dividends or distributions in respect of
the Exchangeable Preferred Stock or (b) dividends or distributions payable
solely in shares of its or such Restricted Subsidiary's Capital Stock (other
than Redeemable Stock) held by such holders or in options, warrants or other
rights to acquire such shares of Capital Stock) other than such Capital Stock
held by the Company or any of its Restricted Subsidiaries (and other than pro
rata dividends or distributions on Common Stock of Restricted Subsidiaries);
(ii) repurchase, redeem, retire or otherwise acquire for value any shares of
Capital Stock (other than the Exchangeable Preferred Stock) of the Company
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by Persons other than any Wholly Owned Restricted Subsidiaries of
the Company; (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Exchange Debentures; or (iv) make any Investment, other
than a Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) being collectively 'Restricted Payments')
if, at the time of, and after giving effect to, the proposed Restricted Payment:
(A) a Default shall have occurred and be continuing, (B) except with respect to
any Investment (other than an Investment consisting of the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary), the Company could not
Incur at least $1.00 of Indebtedness under the first paragraph of the
'Limitation on Indebtedness' covenant, or (C) the aggregate amount expended for
all Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) after the Deemed Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of such amount) (determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted
Subsidiary) accrued on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter immediately
following the Deemed Closing Date and ending on the last day of the last fiscal
quarter preceding the Transaction Date for which reports have been filed
pursuant to '--SEC Reports and Reports to Holders' plus (2) the aggregate Net
Cash Proceeds received by the Company after the Deemed Closing Date from the
issuance and sale permitted by the Certificate of Designation of its Capital
Stock (other than Junior Stock or Redeemable Stock), including the Exchangeable
Preferred Stock, to a Person who is not a Subsidiary of the Company, or from the
issuance to a Person who is not a Subsidiary of the Company of any options,
warrants or other rights to acquire Capital Stock of the Company (in each case,
exclusive of any convertible Indebtedness, Redeemable Stock or any options,
warrants or other rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the 1997 Senior Notes,
1997 Senior Subordinated Notes and the Exchange Debentures), plus (3) an amount
equal to the net reduction in Investments (other than reductions in Permitted
Investments and other than reductions in Investments made pursuant to clauses
(vi) or (vii) of the second paragraph of this '--Limitation on Restricted
Payments' covenant) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary (except to the
extent any such payment is included in the calculation of Adjusted Consolidated
Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
'Investments'), not to exceed the amount of Investments previously made by the
Company and its Restricted Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the
Exchange Debentures, including premium, if any, and accrued and unpaid interest,
with the proceeds of, or in exchange for, Indebtedness Incurred under clause
(iii) of the second paragraph of the covenant described under '--Limitation on
Indebtedness'; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent sale of, shares of Capital Stock or options, warrants or other rights
to purchase such Capital Stock (in each case other than Redeemable Stock) of the
Company; (iv) the making of any other Restricted Payment made by exchange for,
or out of the proceeds of, a
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substantially concurrent sale of shares of the Capital Stock or options,
warrants or other rights to acquire such Capital Stock (in each case other than
Redeemable Stock) of the Company; (v) payments or distributions, in the nature
of satisfaction of dissenters' rights, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Certificate of Designation applicable to mergers, consolidations and
transfers of all or substantially all of the property and assets of the Company;
(vi) Investments, not to exceed $15.0 million at any one time outstanding; (vii)
Investments, not to exceed $15.0 million at any one time outstanding, in
entities, substantially all of the assets of which consist of Telecommunications
Assets; (viii) cash payments in lieu of the issuance of fractional shares of
Common Stock upon conversion (including mandatory conversion) of the Convertible
Notes as provided for in the Convertible Notes Indenture; (ix) cash payments in
lieu of the issuance of fractional shares of Common Stock of the Company upon
conversion of any class of Preferred Stock of the Company; provided, however,
that this exception shall not be available with respect to more than two such
conversions with respect to any such class of Preferred Stock by any given
Affiliate of the Company; and (x) Investments in entities that directly (or
indirectly through subsidiaries) own licenses granted by the FCC or any other
governmental entity with authority to grant telecommunications licenses;
provided, however, that, in each case the Company or a Restricted Subsidiary
shall, at the time of making such Investment, have an active role in the
management or operation of such entity and in the provision of
telecommunications services by such entity; provided, however, that, except in
the case of clauses (i) and (iii) of this paragraph, no Voting Rights Triggering
Event shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth herein. Any Investments made other than in cash
shall be valued, in good faith, by the Board of Directors. Any Investment made
pursuant to clause (vi) or (vii) of this paragraph shall be deemed to be no
longer outstanding (and repaid in full) if and when the Person in which such
Investment is made becomes a Restricted Subsidiary of the Company.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof)), and the
Net Cash Proceeds from any issuance and sale of Capital Stock referred to in
clauses (iii) or (iv) shall be included in calculating whether the conditions of
clause (C) of the first paragraph of this 'Limitation on Restricted Payments'
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of the Company are used
for the redemption, repurchase or other acquisition of Indebtedness that is pari
passu with the Exchange Debentures or Preferred Stock that is on a parity with
the Exchangeable Preferred Stock then the Net Cash Proceeds of such issuance
shall be included in clause (C) of the first paragraph of this 'Limitation on
Restricted Payments' covenant only to the extent such proceeds are not so used
for such redemption, repurchase or other acquisition.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary; (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary that owns, directly or
indirectly, any Capital Stock of such Restricted Subsidiary; (iii) make loans or
advances to the Company or any other Restricted Subsidiary that owns, directly
or indirectly, any Capital Stock of such Restricted Subsidiary; or (iv) transfer
any of its property or assets to the Company or any other Restricted Subsidiary
that owns, directly or indirectly, any Capital Stock of such Restricted
Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or
restrictions (i) existing on the Issue Date in the Certificate Designation or
any other agreement in effect on the Issue Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided, however,
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
holders of Exchangeable Preferred Stock than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced, renewed or
replaced; (ii) existing under or by reason of applicable law; (iii) existing
with respect to any Person or the property or assets of such Person acquired by
the Company or any Restricted Subsidiary, at the time of such acquisition and
not incurred in contemplation thereof, which encumbrances or restrictions are
not applicable to any Person or the property or assets of any Person other than
such Person or the property or assets of such Person so acquired; (iv) in the
case of clause (iv) of the first
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paragraph of this 'Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries' covenant, (A) that restrict in a customary
manner the subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Certificate of Designation
or (C) arising or agreed to in the ordinary course of business, not relating to
any Indebtedness, and that do not, individually or in the aggregate, detract
from the value of property or assets of the Company or any Restricted Subsidiary
in any manner material to the Company or any Restricted Subsidiary or; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this 'Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries' covenant shall prevent the Company or any
Restricted Subsidiary from (i) restricting the sale or other disposition of
property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries or (ii)
creating, incurring, assuming or suffering to exist any Liens otherwise
permitted under Section 4.09 of the 1997 Senior Notes Indenture as in effect on
the Deemed Closing Date.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances or sales to foreign nationals of shares of
Capital Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law; (iii) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary; or (iv) issuances or sales of Common Stock of Restricted
Subsidiaries, other than the Telecommunications Subsidiaries, if within six
months of each such issuance or sale, the Company or such Restricted Subsidiary
applies an amount not less than the Net Cash Proceeds thereof (if any) in
accordance with clause (A) or (B) of the first paragraph of the 'Limitation on
Asset Sales' covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ('Guaranteed
Indebtedness'), unless (i) such Restricted Subsidiary simultaneously executes
and delivers (a) a written agreement and (b) a supplemental indenture to the
Exchange Indenture providing for a Guarantee (a 'Subsidiary Guarantee') of
payment of the Exchangeable Preferred Stock and the Exchange Debentures,
respectively, by such Restricted Subsidiary and (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any other
rights against the Company or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided,
however, that this paragraph shall not be applicable to any Guarantee of any
Restricted Subsidiary that (x) existed at the time such Person became a
Restricted Subsidiary and (y) was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) pari passu with the Exchange Debentures then the
Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Exchange
Debentures then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the Exchange Debentures.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by this Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
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Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
obtains a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view; (ii) any transaction solely between
the Company and any of its Wholly Owned Restricted Subsidiaries or solely
between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable
fees to directors of the Company who are not employees of the Company; (iv) any
payments or other transactions pursuant to any tax-sharing agreement between the
Company and any other Person with which the Company files a consolidated tax
return or with which the Company is part of a consolidated group for tax
purposes; or (v) any Restricted Payments not prohibited under '--Limitation on
Restricted Payments' (other than pursuant to clause (iv) of the definition of
'Permitted Investment' or clause (vi) of the second paragraph of such covenant).
Notwithstanding the foregoing, any transaction covered by the first paragraph of
this 'Limitation on Transactions with Shareholders and Affiliates' covenant and
not covered by clauses (ii) through (iv) of this paragraph, the aggregate amount
of which exceeds $250,000 in value, must be approved or determined to be fair in
the manner provided for in clause (i)(A) or (B) above.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Deemed
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been prepared), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within six months after
the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net
Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay Indebtedness of the Company that is not subordinated to the
Exchange Debentures, or Indebtedness of any Restricted Subsidiary, in each case
owing to a Person other than the Company or any of its Restricted Subsidiaries
or (B) invest an equal amount, or the amount not so applied pursuant to clause
(A) (or enter into a definitive agreement committing to so invest within six
months after the date of such agreement), in property or assets of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the six-month period referred to in clause (i)) such excess Net Cash Proceeds
(to the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this 'Limitation on Asset Sales' covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such six-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute 'Excess Proceeds.'
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
'Limitation on Asset Sales' covenant totals at least $10.0 million, the Company
must commence, not later than the 15th Business Day after the first day of such
month, and consummate an Offer to Purchase from the holders of the Exchangeable
Preferred Stock on a pro rata
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basis a number of shares of Exchangeable Preferred Stock having an aggregate
Accumulated Amount equal to the Excess Proceeds on such date, at a purchase
price per share of Exchangeable Preferred Stock equal to 101% of such
Accumulated Amount on such date of purchase, plus accrued and unpaid dividends
(if any) on such Accumulated Amount to the date of purchase; provided, however,
that no Offer to Purchase shall be required to be commenced with respect to the
Exchangeable Preferred Stock until the Business Day following the payment date
with respect to the offer(s) to purchase any 1997 Notes and need not be
commenced if the Excess Proceeds remaining after application to the 1997 Notes
purchased in such Offer to Purchase applicable thereto are less than $10.0
million; provided further, however, that (i) no Exchangeable Preferred Stock may
be purchased under this 'Limitation on Asset Sales' covenant unless the Company
shall have purchased all 1997 Notes tendered pursuant to the offer(s) to
purchase applicable thereto and (ii) no Exchangeable Preferred Stock shall be
required to be purchased under this covenant to the extent, and for so long as,
such purchase is prohibited under any indebtedness of the Company. The Company's
existing indebtedness contains, and future indebtedness of the Company is likely
to contain, restrictions on the ability of the Company to make an Offer to
Purchase the Exchangeable Preferred Stock pursuant to this covenant. See 'Risk
Factors--Ability to Pay Dividends On and Redeem the Exchangeable Preferred Stock
and to Issue Exchange Debentures.'
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the SEC, if any
shares of Exchangeable Preferred Stock are outstanding, the Company shall file
with the SEC all such reports and other information as it would be required to
file with the SEC by Sections 13(a) or 15(d) under the Exchange Act. See
'Available Information.' The Company shall supply each Holder of Exchangeable
Preferred Stock, without cost to such Holders, copies of such reports or other
information.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Certificate of Designation, the Company shall not
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person (other than a consolidation or merger with or into
a Wholly Owned Restricted Subsidiary with a positive net worth; provided,
however, that, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the surviving Person or the Company)
shall be issued or distributed to the stockholders of the Company) or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume all of the obligations of the
Company on the Exchangeable Preferred Stock and under the Certificate of
Designation; (ii) immediately after giving effect to such transaction, no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis the Company, or any Person
becoming the successor obligor of the Exchangeable Preferred Stock, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction; (iv) immediately after giving
effect to such transaction on a pro forma basis the Company, or any Person
becoming the successor obligor of the Exchangeable Preferred Stock, could Incur
at least $1.00 of Indebtedness under the first paragraph of the covenant
described under '--Covenants--Limitation on Indebtedness;' and (v) the Company
delivers to each Holder of Exchangeable Preferred Stock an Officers' Certificate
(attaching the arithmetical computations to demonstrate compliance with clauses
(iii) and, if applicable, (iv)) and Opinion of Counsel, in each case stating
that such consolidation, merger or transfer complies with this provision and
that all conditions precedent provided for herein relating to such transaction
have been complied with; provided, however, that clauses (iii) and (iv) above do
not apply if, in the good faith determination of the Board of Directors of the
Company, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of incorporation of
the Company; provided further, however, that any such transaction shall not have
as one of its purposes the evasion of the foregoing limitations.
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<PAGE>
BOOK-ENTRY, DELIVERY AND FORM
The Exchangeable Preferred Stock sold will be issued in the form of a
Global Security. The Global Security will be deposited with, or on behalf of,
The Depository Trust Company (the 'Depositary') and registered in the name of
the Depositary or its nominee. Except as set forth below, the Global Security
may be transferred, in whole and not in part, only to the Depositary or another
nominee of the Depositary. Investors may hold their beneficial interests in the
Global Security directly through the Depositary if they have an account with the
Depositary or indirectly through organizations which have accounts with the
Depositary.
Shares of Exchangeable Preferred Stock that are issued as described below
under 'Certificated Exchangeable Preferred Stock' will be issued in definitive
form. Upon the transfer of Exchangeable Preferred Stock in definitive form, such
Exchangeable Preferred Stock will, unless the Global Security has previously
been exchanged for Exchangeable Preferred Stock in definitive form, be exchanged
for an interest in the Global Security representing the Liquidation Preference
of Exchangeable Preferred Stock being transferred.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a 'clearing corporation' within the
meaning of the New York Uniform Commercial Code, and 'a clearing agency'
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ('participants') and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depositary's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Security, the Depositary will credit, on
its book-entry registration and transfer system, the Liquidation Preference of
the Exchangeable Preferred Stock represented by such Global Security to the
accounts of participants. The accounts to be credited shall be designated by the
Initial Purchasers of such Exchangeable Preferred Stock. Ownership of beneficial
interests in the Global Security will be limited to participants or persons that
may hold interests through participants. Ownership of beneficial interests in
the Global Security will be shown on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depositary
(with respect to participants' interest) and such participants (with respect to
the owners of beneficial interests in the Global Security other than
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Security.
So long as the Depositary, or its nominee, is the registered holder and
owner of the Global Security, the Depositary or such nominee, as the case may
be, will be considered the sole legal owner and holder of the related
Exchangeable Preferred Stock for all purposes of such Exchangeable Preferred
Stock and the Certificate of Designation. Except as set forth below, owners of
beneficial interests in the Global Security will not be entitled to have the
Exchangeable Preferred Stock represented by the Global Security registered in
their names, will not receive or be entitled to receive physical delivery of
certificated Exchangeable Preferred Stock in definitive form and will not be
considered to be the owners or holders of any Exchangeable Preferred Stock under
the Global Security. The Company understands that under existing industry
practice, in the event an owner of a beneficial interest in the Global Security
desires to take any action that the Depositary, as the holder of the Global
Security, is entitled to take, the Depositary would authorize the participants
to take such action, and that the participants would authorize beneficial owners
owning through such participants to take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Payment in respect of dividends and redemption payments on Exchangeable
Preferred Stock represented by the Global Security registered in the name of and
held by the Depositary or its nominee will be made to the Depositary or its
nominee, as the case may be, as the registered owner and holder of the Global
Security.
The Company expects that the Depositary or its nominee, upon receipt of any
payment in respect of dividends and redemption payments on the Global Security,
will credit participants' accounts with payments in
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<PAGE>
amounts proportionate to their respective beneficial interests in the
liquidation preference of the Global Security as shown on the records of the
Depositary or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in the Global Security held
through such participants will be governed by standing instructions and
customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Security for any Exchangeable Preferred Stock or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship between the
Depositary and its participants or the relationship between such participants
and the owners of beneficial interests in the Global Security owning through
such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchangeable Preferred Stock in definitive form, the Global Security may not be
transferred except as a whole by the Depositary to a nominee of such Depositary
or by a nominee of such Depositary to such Depositary or another nominee of such
Depositary.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Security among participants of
the Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Transfer Agent nor the Company will have any responsibility for the performance
by the Depositary or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED EXCHANGEABLE PREFERRED STOCK
The Exchangeable Preferred Stock represented by the Global Security is
exchangeable for certificated Exchangeable Preferred Stock in definitive form of
like tenor as such Exchangeable Preferred Stock if (i) the Depositary notifies
the Company that it is unwilling or unable to continue as Depositary for the
Global Security and a successor is not promptly appointed or if at any time the
Depositary ceases to be a clearing agency registered under the Exchange Act,
(ii) the Company in its discretion at any time determines not to have all of the
Exchangeable Preferred Stock represented by the Global Security or (iii) any
Voting Rights Triggering Event occurs. Any Exchangeable Preferred Stock that is
exchangeable pursuant to the preceding sentence is exchangeable for certificated
Exchangeable Preferred Stock issuable in authorized denominations and registered
in such names as the Depositary shall direct. Subject to the foregoing, the
Global Security is not exchangeable, except for a Global Security of the same
aggregate denomination to be registered in the name of the Depositary or its
nominee. In addition, such certificates will bear the legend referred to under
'Notice to Investors' (unless the Company determines otherwise in accordance
with applicable law) subject, with respect to such Exchangeable Preferred Stock,
to the provisions of such legend.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under an indenture to be
entered into at the time of issuance of the Exchange Debentures (the 'Exchange
Indenture'), between WinStar Communications, Inc. (for purposes of this
Description of the Exchange Debentures, the 'Company') and such qualified trust
company as shall be selected by the Company, as Transfer Agent (in such
capacity, the 'Transfer Agent'). The following is a summary of certain
provisions of the Exchange Indenture and the Exchange Debentures. A copy of the
Exchange Indenture and the form of Exchange Debentures are available upon
request to the Company at the address set forth under 'Available Information.'
The following summary of certain provisions of the Exchange Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Exchange Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended. The terms of the Specified Indentures
limit the Company's ability to issue the Exchange Debentures. See 'Risk
Factors--Ability to Pay Dividends on and Redeem the Exchangeable Preferred Stock
and Issue Exchange Debentures.'
Although for United States federal income tax purposes a significant amount
of original issue discount, taxable as ordinary income, may be recognized by a
Holder of Exchange Debentures as such discount is amortized from the date of
issuance of the Exchange Debentures, Holders of Exchange Debentures will not
receive any cash payments on the Exchange Debentures until the Cash Payment
Date. For a description of certain tax matters related to an investment in the
Exchange Debentures, see 'Certain U.S. Federal Income Tax Consequences.'
The Exchange Debentures will be unsecured senior subordinated obligations
of the Company, limited in aggregate Accumulated Amount to the Accumulated
Amount of the Exchangeable Preferred Stock. The Exchange Debentures will be
issued only in fully registered form, without coupons, in denominations of
$1,000 and any integral multiple of $1,000 (other than as described in
'Description of the Exchangeable Preferred Stock--Exchange'). The Exchange
Debentures may be exchanged or transferred at the office or agency of the
Company in the Borough of Manhattan, The City of New York.
The Exchange Debentures will mature on December 15, 2007. Until the Cash
Payment Date, interest on the Exchange Debentures will accrue at a rate of
14 1/4% of the Accumulated Amount per annum and will be compounded semiannually
on each Interest Payment Date, but, except as described in the second following
sentence, interest on the Exchange Debentures, will not be payable in cash.
Until such time as the Accumulated Amount becomes a fixed and final amount
pursuant to the first proviso to the definition of 'Accumulated Amount,' the
interest accruing on the Exchange Debentures will be deemed paid by the periodic
adjustments provided for in such definition. Commencing on the first Interest
Payment Date following the later of the Exchange Date or the Cash Payment Date,
interest will be payable in cash at a rate per annum equal to 14 1/4% of the
Accumulated Amount as of the Exchange Date. Thereupon, cash interest will be
payable semiannually to Holders of record at the close of business on June 1 or
December 1 immediately preceding the interest payment date of June 15 and
December 15 of each year. Interest on the Exchange Debentures will be computed
on the basis of a 360-day year comprised of twelve 30-day months and the actual
number of days elapsed.
OPTIONAL REDEMPTION
The Exchange Debentures will not be redeemable at the option of the Company
prior to December 15, 2002. Thereafter, the Exchange Debentures will be
redeemable, at the Company's option, in whole or in part, at any time or from
time to time, upon not less than 30 nor more than 60 days' prior notice mailed
by first-class mail to each Holder's registered address, at the following
redemption prices (expressed in percentages of the Accumulated Amount of the
Exchange Debentures), plus accrued and unpaid interest, if any, on such
Accumulated Amount to the redemption date (subject to the right of Holders of
record on the relevant record date
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<PAGE>
to receive interest due on the relevant interest payment date), if redeemed
during the 12-month period commencing on December 15 of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------- ----------
<S> <C>
2002......................................................... 107.125%
2003......................................................... 105.344
2004......................................................... 103.563
2005......................................................... 101.781
2006 and thereafter.......................................... 100.000
</TABLE>
In the case of any partial optional redemption, selection of the Exchange
Debentures for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Exchange Debentures are listed, or if the Exchange Debentures are not listed on
a national securities exchange, on a pro rata basis, by lot or such other method
as the Trustee, in its sole discretion, shall deem fair and appropriate;
provided, however, that no Exchange Debenture of $1,000 in principal amount or
less shall be redeemed in part. If any Exchange Debenture is to be redeemed in
part only, the notice of redemption relating to such Exchange Debenture shall
state the portion of the principal amount thereof to be redeemed. A new Exchange
Debenture in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Exchange Debenture.
The Company's ability to redeem the Exchange Debentures at its option is
limited by the terms of the Company's outstanding indebtedness. The Company may
not be able to redeem the Exchange Debentures at its option unless it
simultaneously redeems or repays such other indebtedness. See 'Risk
Factors--Ability to Pay Dividends on and Redeem the Exchangeable Preferred Stock
and Issue Exchange Debentures.'
RANKING
The indebtedness evidenced by the Exchange Debentures will represent
unsecured senior subordinated obligations of the Company. The payment of the
Senior Subordinated Obligations will, to the extent set forth in the Exchange
Indenture, be subordinated in right of payment to the prior payment in full, in
cash or cash equivalents, of all Senior Indebtedness of the Company. As of the
Issue Date, there will be no indebtedness of the Company outstanding that would
rank pari passu with or junior to the Exchange Debentures, except for the
Convertible Notes and the 1997 Senior Subordinated Notes, which would rank pari
passu with the Exchange Debentures. See 'Risk Factors--Substantial Indebtedness;
Ability to Service Indebtedness and to Cover Fixed Charges' and '--Subordination
of the Exchange Debentures.'
'Senior Subordinated Obligations' is defined in the Exchange Indenture to
mean any principal of, premium, if any, or interest on the Exchange Debentures
payable pursuant to the terms of the Exchange Debentures or upon acceleration,
to the extent relating to the purchase of Exchange Debentures or amounts
corresponding to such principal, premium, if any, or interest on the Exchange
Debentures.
As of December 31, 1997, after giving effect to the Pro Forma Transactions,
the Company would have had outstanding, on a consolidated basis, approximately
$1,382.8 million of indebtedness, $570.0 million of which would have been Senior
Indebtedness (which would rank senior to the Exchange Debentures).
The Company is a holding company. Substantially all the operations of the
Company are conducted through its subsidiaries. Claims of creditors of such
subsidiaries, including trade creditors, secured creditors and creditors holding
indebtedness and guarantees issued by such subsidiaries, and claims of preferred
stockholders (if any) of such subsidiaries, generally will have priority with
respect to the assets and earnings of such subsidiaries over the claims of
creditors of the Company, including holders of the Exchange Debentures. The
Exchange Debentures, therefore, are effectively subordinated to creditors
(including trade creditors) and preferred stockholders (if any) of subsidiaries
of the Company. As of December 31, 1997, after giving effect to the Pro Forma
Transactions, the total liabilities of the Company's subsidiaries would have
been approximately $373.2 million, including trade payables. Although the
Certificate of Designation and the Exchange Indenture limit the incurrence of
Indebtedness and the issuance of preferred stock of certain of the Company's
subsidiaries, such limitations are subject to a number of significant
qualifications. Moreover, the Certificate of Designation and the Exchange
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<PAGE>
Indenture do not impose any limitation on the incurrence by such subsidiaries of
liabilities that are not considered Indebtedness under the Certificate of
Designation and the Exchange Indenture.
To the extent any payment of Senior Indebtedness of the Company (whether by
or on behalf of the Company, as proceeds of security or enforcement of any right
of setoff or otherwise) is declared to be fraudulent or preferential, set aside
or required to be paid to any receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then if such payment is
recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person, the Senior Indebtedness of the Company
or part thereof originally intended to be satisfied shall be deemed to be
reinstated and outstanding as if such payment had not occurred. To the extent
the obligation to repay any Senior Indebtedness of the Company is declared to be
fraudulent, invalid or otherwise set aside under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then the obligation so
declared fraudulent, invalid or otherwise set aside (and all other amounts that
would come due with respect thereto had such obligation not been so affected)
shall be deemed to be reinstated and outstanding as Senior Indebtedness of the
Company for all purposes of the Exchange Indenture as if such declaration,
invalidity or setting aside had not occurred. Upon any payment of distribution
of assets or securities of the Company of any kind or character, whether in
cash, property or securities, upon any dissolution or winding up or total or
partial liquidation or reorganization of the Company, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all
amounts due or to become due upon all Senior Indebtedness of the Company
(including any interest accruing subsequent to an event of bankruptcy, whether
or not such interest is an allowed claim enforceable against the debtor under
the Bankruptcy Code) shall first be paid in full, in cash or cash equivalents,
before the Holders of the Exchange Debentures or the Trustee, on behalf of the
Holders of the Exchange Debentures, shall be entitled to receive any payment by
the Company on account of Senior Subordinated Obligations, or any payment to
acquire any of the Exchange Debentures for cash, property or securities, or any
distribution with respect to the Exchange Debentures of any cash, property or
securities. Before any payment may be made by, or on behalf of, the Company of
any Exchange Debentures upon any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets or securities of the
Company of any kind or character, whether in cash, property or securities, to
which the Holders of the Exchange Debentures or the Trustee, on behalf of the
Holders of the Exchange Debentures, would be entitled, but for the subordination
provisions of the Exchange Indenture, shall be made by the Company or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other similar
Person making such payment or distribution or by the Holders of the Exchange
Debentures or the Trustee if received by them or it, directly to the holders of
the Senior Indebtedness of the Company (pro rata to such holders on the basis of
the respective amounts of Senior Indebtedness of the Company held by such
holders) or their representatives as their respective interests appear, to the
extent necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment, distribution or
provisions therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of the Company of Senior
Subordinated Obligations, whether pursuant to the terms of the Exchange
Debentures or upon acceleration or otherwise, shall be made if, at the time of
such payment, there exists a default in the payment of all or any portion of the
obligations on any Senior Indebtedness of the Company, and such default shall
not have been cured or waived or the benefits of this sentence waived by or on
behalf of the holders of such Senior Indebtedness. In addition, during the
continuance of any other event of default with respect to any Designated Senior
Indebtedness of the Company pursuant to which the maturity thereof may be
accelerated, upon receipt by the Trustee of written notice from the trustee or
other representative for the holders of such Designated Senior Indebtedness (or
the holders of at least a majority in principal amount of such Designated Senior
Indebtedness then outstanding), no payment of Senior Subordinated Obligations
may be made by or on behalf of the Company upon or in respect of the Exchange
Debentures for a period (a 'Payment Blockage Period') commencing on the date of
receipt of such notice and ending 159 days thereafter (unless, in each case,
such Payment Blockage Period shall be terminated by written notice to the Senior
Subordinated Exchange Debentures Trustee for such trustee of, or other
representative for, such holders). Not more than one Payment Blockage Period may
be commenced with respect to the Exchange Debentures during any period of 360
consecutive days. Notwithstanding anything in the Exchange Indenture to the
contrary, there must be 180 consecutive days in any 360-day period in which no
Payment Blockage Period is in effect. No event of default that existed or was
continuing (it being acknowledged that any subsequent action that would give
rise to any event of default pursuant to any provision under which an event of
default previously
54
<PAGE>
existed or was continuing shall constitute a new event of default for this
purpose) on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness of the Company initiating such
Payment Blockage Period shall be, or shall be made, the basis for the
commencement of a second Payment Blockage Period by the representative for, or
the holders of, such Designated Senior Indebtedness, whether or not within a
period of 360 consecutive days, unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors or the Company who are not holders of
Senior Indebtedness of the Company may recover less, ratably, than holders of
Senior Indebtedness of the Company and may recover more, ratably, than Holders
of Exchange Debentures.
'Senior Indebtedness' as defined under the Exchange Indenture means the
following obligations of the Company, whether outstanding on the Issue Date or
thereafter Incurred: (i) all Indebtedness and all other monetary obligations of
the Company under the 1995 Senior Exchange Debentures, the 1997 Senior Exchange
Debentures and the Equipment Note Guarantees, (ii) all other Indebtedness of the
Company (other than the 1997 Senior Subordinated Notes, Exchange Debentures and
the Convertible Notes), including principal and interest on such Indebtedness,
unless such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, is pari passu with, or
subordinated in right of payment to, the Exchange Debentures and (iii) all fees,
expenses and indemnities payable in connection with the 1995 Senior Notes, the
1997 Senior Notes and the Equipment Note Guarantees (including any agreements
pursuant to which the 1995 Senior Notes, the 1997 Senior Notes or the Equipment
Note Guarantees were issued); provided, however, that the term 'Senior
Indebtedness' as defined in the Exchange Indenture shall not include (a) any
Indebtedness of the Company that, when Incurred and without respect to any
election under Section 1111(b) of the Bankruptcy Code, was without recourse to
the Company, (b) any Indebtedness of the Company to a Subsidiary of the Company
or to a joint venture in which the Company has an interest, (c) any Indebtedness
of the Company, to the extent not permitted pursuant to the covenants described
under '--Covenants--Limitation on Indebtedness' or '--Covenants--Limitation on
Senior Subordinated Indebtedness,' (d) any repurchase, redemption or other
obligation in respect of Redeemable Stock, (e) any Indebtedness to any employee
of the Company or any of its Subsidiaries, (f) any liability for federal, state,
local or other taxes owed or owing by the Company or (g) any trade payables of
the Company. Senior Indebtedness of the Company will also include interest
accruing subsequent to events of bankruptcy of the Company and its Subsidiaries
at the rate provided for in the document governing such Senior Indebtedness,
whether or not such interest is an allowed claim enforceable against the debtor
in a bankruptcy case under federal bankruptcy law.
'Designated Senior Indebtedness' as defined under the Exchange Indenture
means the 1995 Senior Notes, the 1997 Senior Notes, the Equipment Note
Guarantees and any Indebtedness constituting Senior Indebtedness of the Company
that, at the date of determination, has an aggregate principal amount of at
least $25.0 million and that is specifically designated by the Company in the
instrument creating or evidencing such Senior Indebtedness as 'Designated Senior
Indebtedness.'
The Exchange Indenture will specifically provide that the Exchange
Debentures will rank pari passu with the Convertible Notes and the 1997 Senior
Subordinated Notes.
BOOK-ENTRY, DELIVERY AND FORM
If at the time the Exchange Debentures are issued, the Exchangeable
Preferred Stock is represented by a Global Security, the Exchange Debentures
will be issued in the form of a global note (the 'Global Note'). The Global Note
will be deposited with, or on behalf of, the Depositary and registered in the
name of the Depositary or its nominee. Except as set forth below, the Global
Note may be transferred, in whole and not in part, only to the Depositary or
another nominee of the Depositary. Investors may hold their beneficial interests
in the Global Note directly through the Depositary if they have an account with
the Depositary or indirectly through organizations which have accounts with the
Depositary.
Exchange Debentures that are issued as described below under 'Certificated
Exchange Debentures' will be issued in definitive form. Upon the transfer of an
Exchange Debenture in definitive form, such Exchange Debenture will, unless the
Global Note has previously been exchanged for Exchange Debentures in definitive
55
<PAGE>
form, be exchanged for an interest in the Global Note representing the principal
amount of Exchange Debentures being transferred.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a 'clearing corporation' within the
meaning of the New York Uniform Commercial Code, and 'a clearing agency'
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ('participants') and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depositary's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Note, the Depositary will credit, on its
book-entry registration and transfer system, the principal amount of the
Exchange Debentures represented by such Global Note to the accounts of
participants. Ownership of beneficial interests in the Global Note will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depositary (with respect to participants' interest) and such
participants (with respect to the owners of beneficial interests in the Global
Note other than participants). The laws of some jurisdictions may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Note.
So long as the Depositary, or its nominee, is the registered holder and
owner of the Global Note, the Depositary or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Exchange
Debentures for all purposes of such Exchange Debentures and the Exchange
Indenture. Except as set forth below, owners of beneficial interests in the
Global Note will not be entitled to have the Exchange Debentures represented by
the Global Note registered in their names, will not receive or be entitled to
receive physical delivery of certificated Exchange Debentures in definitive form
and will not be considered to be the owners or holders of any Exchange
Debentures under the Global Note. The Company understands that under existing
industry practice, in the event an owner of a beneficial interest in the Global
Note desires to take any action that the Depositary, as the holder of the Global
Note, is entitled to take, the Depositary would authorize the participants to
take such action, and that the participants would authorize beneficial owners
owning through such participants to take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Payment of principal of and interest on Exchange Debentures represented by
the Global Note registered in the name of and held by the Depositary or its
nominee will be made to the Depositary or its nominee, as the case may be, as
the registered owner and holder of the Global Note.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depositary or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Exchange Debenture or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depositary and
its participants or the relationship between such participants and the owners of
beneficial interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchange Debentures in definitive form, the Global Note may not be transferred
except as a whole by the Depositary to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary.
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Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depositary or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE DEBENTURES
The Exchange Debentures represented by the Global Note are exchangeable for
certificated Exchange Debentures in definitive form of like tenor as such
Exchange Debentures in denominations of U.S. $1,000 and integral multiples
thereof if (i) the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for the Global Note and a successor is not
promptly appointed, or if at any time the Depositary ceases to be a clearing
agency registered under the Exchange Act, (ii) the Company in its discretion at
any time determines not to have all of the Exchange Debentures represented by
the Global Note or (iii) a default entitling the holders of the Exchange
Debentures to accelerate the maturity thereof has occurred and is continuing.
Any Exchange Debenture that is exchangeable pursuant to the preceding sentence
is exchangeable for certificated Exchange Debentures issuable in authorized
denominations and registered in such names as the Depositary shall direct.
Subject to the foregoing, the Global Note is not exchangeable, except for a
Global Note of the same aggregate denomination to be registered in the name of
the Depositary or its nominee. In addition, such certificates will bear the
legend referred to under 'Transfer Restrictions' (unless the Company determines
otherwise in accordance with applicable law) subject, with respect to such
Exchange Debentures, to the provisions of such legend.
SAME-DAY PAYMENT
The Exchange Indenture will require that payments in respect of Exchange
Debentures (including principal, premium and interest) be made by wire transfer
of immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address.
REPURCHASE OF EXCHANGE DEBENTURES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all the Exchange Debentures
then outstanding, at a purchase price equal to 101% of the Accumulated Amount of
the Exchange Debentures, plus accrued and unpaid interest (if any) on such
Accumulated Amount to the date of purchase. Prior to the mailing of the notice
to Holders of Exchange Debentures commencing such Offer to Purchase, but in any
event within 30 days following any Change of Control, the Company covenants to
(i) repay in full all indebtedness of the Company that would prohibit the
repurchase of the Exchange Debentures pursuant to such Offer to Purchase or (ii)
obtain any requisite consents under instruments governing any such indebtedness
of the Company to permit repurchase of the Exchange Debentures. The Company
shall first comply with the covenant in the preceding sentence before it shall
repurchase Exchange Debentures pursuant to the 'Repurchase of Exchange
Debentures Upon a Change of Control' covenant.
Under the terms of the Exchange Indenture, the Company may not repurchase
any Exchange Debentures or any other subordinated obligations, including the
Convertible Notes and the 1997 Senior Subordinated Notes, pursuant to this
covenant until it has (i) repurchased all of the 1995 Senior Notes, the 1997
Senior Notes and (ii) caused each of WEC or WEC II to repurchase all Equipment
Notes and WEC II Equipment Notes, respectively, tendered pursuant to any offer
to purchase as a result of such Change of Control. However, if the Company is
unable to repay or cause repayment of all of its indebtedness that would
prohibit a repurchase of the Exchange Debentures or is unable to obtain the
consents of the holders of indebtedness, if any, outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase of
Exchange Debentures or otherwise fails to purchase any Exchange Debentures
validly tendered, then the Company will have breached such covenant. This breach
will constitute an Event of Default under the Exchange Indenture if it continues
for a period of 30 consecutive days after written notice is given to the Company
by the holders of at least 25% in aggregate amount of the Exchange Debentures
outstanding. In addition, the failure by the Company
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to repurchase Exchange Debentures at the conclusion of the Offer to Purchase
will constitute a breach of this covenant without any waiting period or notice
requirements.
There can be no assurance that the Company, WEC and WEC II have sufficient
funds available at the time of a Change of Control to make any payment required
by the foregoing covenant (as well as any similar covenant that may be contained
in other securities of the Company, WEC and WEC II which might be outstanding at
the time). The above covenant requiring the Company to repurchase the Exchange
Debentures will, unless the consents referred to above are obtained, require the
Company, WEC and WEC II to repay all indebtedness then outstanding which by its
terms would prohibit such Exchange Debentures repurchase, either prior to or
concurrently with such Exchange Debentures repurchase.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into transactions,
including acquisitions, refinancings or recapitalizations, that would not
constitute a Change of Control, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness are contained in the
covenant described under '--Certain Covenants--Limitation on Indebtedness.' Such
restrictions can only be waived with the consent of the holders of a majority of
the outstanding shares of the Exchange Debentures. Except for the limitations
contained in such covenants, however, the Exchange Indenture will not contain
any covenants or provisions that may afford Holders of the Exchange Debentures
protection in the event of a highly leveraged transaction.
CERTAIN COVENANTS
The Exchange Indenture will contain covenants including, among others, the
following:
Limitation on Indebtedness
The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than Indebtedness existing on the
Issue Date); provided, however, that the Company may Incur Indebtedness if,
after giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Indebtedness to EBITDA Ratio would be
greater than zero and less than 5:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company outstanding at any time in an aggregate principal
amount not to exceed $125 million, less any amount of Indebtedness Incurred
pursuant to this clause (i) and permanently repaid as provided under
'--Limitation on Asset Sales' below; (ii) Indebtedness (A) to the Company
evidenced by an unsubordinated promissory note or (B) to any of its Restricted
Subsidiaries; provided, however, that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness, other than Indebtedness Incurred under clause (i),
(ii), (v), (vi) or (viii) of this paragraph, and any refinancings thereof in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided, however, that Indebtedness the
proceeds of which are used to refinance or refund the Exchange Debentures or
Indebtedness that is pari passu with, or subordinated in right of payment to,
the Exchange Debentures shall only be permitted under this clause (iii) if (A)
in case the Exchange Debentures are refinanced in part or the Indebtedness to be
refinanced is pari passu with the Exchange Debentures, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which such
new Indebtedness is outstanding, is expressly made pari passu with, or
subordinate in right of payment to, the remaining Exchange Debentures, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Exchange Debentures, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made subordinate in right of payment to the Exchange
Debentures at least to the extent that the Indebtedness to be refinanced is
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subordinated to the Exchange Debentures and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded;
provided further, however, that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary of the
Company pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; provided, however,
that such agreements do not increase the Indebtedness of the obligor outstanding
at any time other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and compensation
payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of the Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary of the Company (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company not to exceed,
at any one time outstanding, two times the Net Cash Proceeds received by the
Company from and after October 23, 1995, from the issuance and sale of its
Capital Stock (other than Redeemable Stock and Preferred Stock that provides for
the payment of dividends in cash), including the Exchangeable Preferred Stock,
provided, however, that such Indebtedness (x) does not mature prior to the
Stated Maturity of the Exchange Debentures and has an Average Life longer than
the Exchange Debentures and (y) is pari passu with or subordinated to the
Exchange Debentures; (vi) Indebtedness of any Restricted Subsidiary Incurred
pursuant to any credit agreement of such Restricted Subsidiary in effect on the
Issue Date (and refinancings thereof), up to the amount of the commitment under
such credit agreement on the Issue Date; (vii) Indebtedness to the extent such
Indebtedness is secured by Liens which are purchase money or other Liens upon
equipment or inventory acquired or held by the Company or any of its Restricted
Subsidiaries taken or obtained by (A) the seller or lessor of such equipment or
inventory to secure all or a part of the purchase price or lease payments
therefor or (B) the person who makes advances or incurs obligations, thereby
giving value to the Company to enable it to purchase or acquire rights in such
equipment or inventory, to secure the repayment of all or a part of the advances
so made or obligations so incurred; provided, however, that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the equipment or inventory acquired; (viii) Indebtedness
of any Restricted Subsidiary not to exceed, at any one time outstanding, 80% of
the accounts receivable net of reserves and allowances for doubtful accounts,
determined in accordance with GAAP, of such Restricted Subsidiary and its
Restricted Subsidiaries (without duplication); provided, however, that such
Indebtedness is not Guaranteed by the Company or any of its Restricted
Subsidiaries; (ix) Indebtedness of the Company, to the extent the proceeds
thereof are immediately used to purchase 1995 Notes or 1997 Notes tendered in an
offer to purchase made as a result of a Change in Control; and (x) the Exchange
Debentures.
For purposes of determining any particular amount of Indebtedness under
this 'Limitation on Indebtedness' covenant, Guarantees, Liens or Obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this 'Limitation on Indebtedness' covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, the Company, in its
sole discretion, shall classify such item of Indebtedness and only be required
to include the amount and type of such Indebtedness in one of such clauses.
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Guarantee of Indebtedness of any Unrestricted Subsidiary.
Limitation on Senior Subordinated Indebtedness
The Company will not (i) Incur any Indebtedness, other than the Exchange
Debentures, that is expressly made subordinated in right of payment to any
Senior Indebtedness of the Company unless such Indebtedness, by its terms and by
the terms of any agreement or instrument pursuant to which such Indebtedness is
outstanding is
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expressly made pari passu with, or subordinate in right of payment to, the
Exchange Debentures pursuant to provisions substantially similar to those
contained in Article Ten of the Exchange Indenture; provided, however, that the
foregoing limitation shall not apply to distinctions between categories of
Senior Indebtedness that exist by reason of any Liens or Guarantees arising or
created in respect of some but not all Senior Indebtedness or (ii) Incur any
Indebtedness secured by a Lien if such Indebtedness is not Senior Indebtedness,
unless contemporaneously therewith effective provision is made to secure the
Exchange Debentures equally and ratably with such secured Indebtedness for so
long as such secured Indebtedness is secured by a Lien.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, make a Restricted Payment if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) except with respect to any
Investment (other than an Investment consisting of the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary), the Company could not
Incur at least $1.00 of Indebtedness under the first paragraph of the
'Limitation on Indebtedness' covenant, or (C) the aggregate amount expended for
all Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) after the Deemed Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of such amount) (determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted
Subsidiary) accrued on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter immediately
following the Deemed Closing Date and ending on the last day of the last fiscal
quarter preceding the Transaction Date for which reports have been filed
pursuant to '--SEC Reports and Reports to Holders' plus (2) the aggregate Net
Cash Proceeds received by the Company after the Deemed Closing Date from the
issuance and sale permitted by the Exchange Indenture of its Capital Stock
(other than Redeemable Stock), including the Exchangeable Preferred Stock, to a
Person who is not a Subsidiary of the Company, or from the issuance to a Person
who is not a Subsidiary of the Company of any options, warrants or other rights
to acquire Capital Stock of the Company (in each case, exclusive of any
convertible Indebtedness, Redeemable Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the 1997 Senior Notes, 1997 Senior
Subordinated Notes and the Exchange Debentures), plus (3) an amount equal to the
net reduction in Investments (other than reductions in Permitted Investments and
other than reductions in Investments made pursuant to clauses (vi) or (vii) of
the second paragraph of this '--Limitation on Restricted Payments' covenant) in
any Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary (except to the extent any such payment
is included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of 'Investments'), not to exceed the
amount of Investments previously made by the Company and its Restricted
Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance, or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the
Exchange Debentures, including premium, if any, and accrued and unpaid interest,
with the proceeds of, or in exchange for, Indebtedness Incurred, under clause
(iii) of the second paragraph of the covenant described under '--Limitation on
Indebtedness;' (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock in exchange for, or out of the proceeds of a substantially
concurrent sale of, shares of Capital Stock or options, warrants or other rights
to purchase such Capital Stock (in each case other than Redeemable Stock) of the
Company; (iv) the making of any other Restricted Payment made by exchange for,
or out of the proceeds of, a substantially concurrent sale of shares of the
Capital Stock or options, warrants or other rights to acquire such Capital Stock
(in each case other than Redeemable Stock) of the Company; (v) payments or
distributions, in the nature of satisfaction of dissenters' rights, pursuant to
or in connection with a consolidation, merger or transfer of assets that
complies with the provisions of the Certificate of Designation applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company;
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(vi) Investments, not to exceed $15.0 million at any one time outstanding; (vii)
Investments, not to exceed $15.0 million at any one time outstanding, in
entities, substantially all of the assets of which consist of Telecommunications
Assets; (viii) cash payments in lieu of the issuance of fractional shares of
Common Stock upon conversion (including mandatory conversion) of the Convertible
Notes as provided for in the Convertible Notes Indenture; (ix) cash payments in
lieu of the issuance of fractional shares of Common Stock of the Company upon
conversion of any class of Preferred Stock of the Company; provided, however,
that this exception shall not be available with respect to more than two such
conversions with respect to any such class of Preferred Stock by any given
Affiliate of the Company; and (x) Investments in entities that directly (or
indirectly through subsidiaries) own licenses granted by the FCC or any other
governmental entity with authority to grant telecommunications licenses;
provided, however, that, in each case the Company or a Restricted Subsidiary
shall, at the time of making such Investment, have an active role in the
management or operation of such entity and in the provision of
telecommunications services by such entity; provided, however, that, except in
the case of clauses (i) and (iii) of this paragraph, no Voting Rights Triggering
Event shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth herein. Any Investments made other than in cash
shall be valued, in good faith, by the Board of Directors. Any Investment made
pursuant to clause (vi) or (vii) of this paragraph shall be deemed to be no
longer outstanding (and repaid in full) if and when the Person in which such
Investment is made becomes a Restricted Subsidiary of the Company.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof), and the
Net Cash Proceeds from any issuance and sale of Capital Stock referred to in
clauses (iii) or (iv) shall be included in calculating whether the conditions of
clause (C) of the first paragraph of this 'Limitation on Restricted Payments'
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of the Company are used
for the redemption, repurchase or other acquisition of the Exchange Debentures
or Indebtedness that is pari passu with the Exchange Debentures then the Net
Cash Proceeds of such issuance shall be included in clause (C) of the first
paragraph of this 'Limitation on Restricted Payments' covenant only to the
extent such proceeds are not used for such redemption, repurchase or other
acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary; (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary that owns, directly or
indirectly, any Capital Stock of such Restricted Subsidiary; (iii) make loans or
advances to the Company or any other Restricted Subsidiary that owns, directly
or indirectly, any Capital Stock of such Restricted Subsidiary; or (iv) transfer
any of its property or assets to the Company or any other Restricted Subsidiary
that owns, directly or indirectly, any Capital Stock of such Restricted
Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or
restrictions (i) existing on the Issue Date in the Exchange Debenture or any
other agreement in effect on the Issue Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided, however, that the
encumbrances and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the Holders of
Exchange Debentures than those encumbrances or restrictions that are then in
effect and that are being extended, refinanced, renewed or replaced; (ii)
existing under or by reason of applicable law; (iii) existing with respect to
any Person or the property or assets of such Person acquired by the Company or
any Restricted Subsidiary, at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired; (iv) in the case of clause (iv)
of the first paragraph of this 'Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries' covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Exchange Indenture or (C)
arising or agreed to in the ordinary course
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of business, not relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets of the Company or
any Restricted Subsidiary in any manner material to the Company or any
Restricted Subsidiary or; (v) with respect to a Restricted Subsidiary and
imposed pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or property and
assets of, such Restricted Subsidiary. Nothing contained in this 'Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries'
covenant shall prevent the Company or any Restricted Subsidiary from (i)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries or (ii) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted under Section 4.09 of the 1997
Senior Notes Indenture as in effect on the Deemed Closing Date.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances or sales to foreign nationals of shares of
Capital Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law; (iii) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary; or (iv) issuances or sales of Common Stock of Restricted
Subsidiaries, other than the Telecommunications Subsidiaries, if within six
months of each such issuance or sale, the Company or such Restricted Subsidiary
applies an amount not less than the Net Cash Proceeds thereof (if any) in
accordance with clause (A) or (B) of the first paragraph of the 'Limitation on
Asset Sales' covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ('Guaranteed
Indebtedness'), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Exchange Indenture providing for a
Guarantee (a 'Subsidiary Guarantee') of payment of the Exchange Debentures by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee; provided, however,
that this paragraph shall not be applicable to any Guarantee of any Restricted
Subsidiary that (x) existed at the time such Person became a Restricted
Subsidiary and (y) was not Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is
(A) pari passu with the Exchange Debentures then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Exchange Debentures then the
Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Exchange Debentures.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by this Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except
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upon fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable fees to directors of the Company who are not employees of the
Company; (iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company files
a consolidated tax return or with which the Company is part of a consolidated
group for tax purposes; or (v) any Restricted Payments not prohibited under
'--Limitation on Restricted Payments' (other than pursuant to clause (iv) of the
definition of 'Permitted Investment' or clause (vi) of the second paragraph of
such covenant). Notwithstanding the foregoing, any transaction covered by the
first paragraph of this 'Limitation on Transactions with Shareholders and
Affiliates' covenant and not covered by clauses (ii) through (iv) of this
paragraph, the aggregate amount of which exceeds $250,000 in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Deemed
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been prepared), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within six months after
the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net
Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company, or Indebtedness of
any Restricted Subsidiary, in each case owing to a Person other than the Company
or any of its Restricted Subsidiaries or (B) invest an equal amount, or the
amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within six months after the date of such
agreement), in property or assets of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) apply (no later than the end of the six-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
'Limitation on Asset Sales' covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
six-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute 'Excess
Proceeds.'
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
'Limitation on Asset Sales' covenant totals at least $10.0 million, the Company
must commence, not later than the 15th Business Day after the first day of such
month, and consummate an Offer to Purchase from the holders of the Exchange
Debentures on a pro rata basis an aggregate principal amount of Exchange
Debentures equal to the Excess Proceeds on such date, at a purchase price equal
to 101% of the Accumulated Amount of such Exchange Debentures on such date of
purchase, plus accrued and unpaid interest (if any) on such Accumulated Amount
to the date of purchase; provided, however, that no Offer to Purchase shall be
required to be commenced with respect to the Accumulated Amount of such
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<PAGE>
Exchange Debentures until the Business Day following the payment date with
respect to the offer(s) to purchase any 1997 Notes and need not be commenced if
the Excess Proceeds remaining after application to the 1997 Notes purchased in
such Offer(s) to Purchase applicable thereto are less than $10.0 million
provided further, however, that no Exchange Debentures may be purchased under
this 'Limitation on Asset Sales' covenant unless the Company shall have
purchased all 1997 Notes tendered pursuant to the offer(s) to purchase
applicable thereto. Because of similar requirements in the Indentures governing
the 1995 Notes and the 1997 Notes, the Company may not have Excess Proceeds from
an Asset Sale to be able to comply with the foregoing requirements. In addition,
the terms of the Company's existing indebtedness, including the 1997 Notes,
restrict the ability of the Company to prepay or repurchase the Exchange
Debentures in accordance with this covenant. See 'Risk Factors--Ability to Pay
Dividends on and Redeem the Exchangeable Preferred Stock and to Issue Exchange
Debentures.'
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the SEC, if any
Exchange Debentures are outstanding, the Company shall file with the SEC, all
such reports and other information as it would be required to file with the SEC
by Sections 13(a) or 15(d) under the Exchange Act. See 'Available Information.'
The Company shall supply the Trustee and each Holder of Exchange Debentures,
without cost to the Trustee or such Holders, copies of such reports or other
information.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Exchange Indenture, the Company shall not
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person (other than a consolidation or merger with or into
a Wholly Owned Restricted Subsidiary with a positive net worth; provided,
however, that, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the surviving Person or the Company)
shall be issued or distributed to the stockholders of the Company) or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company on
the Exchange Debentures and under the Exchange Indenture; (ii) immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Exchange Debentures, shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Exchange Debentures, could Incur at least $1.00 of
Indebtedness under the first paragraph of the covenant described under
'--Covenants-- Limitation on Indebtedness;' and (v) the Company delivers to the
Trustee an Officers' Certificate (attaching the arithmetical computations to
demonstrate compliance with clauses (iii) and, if applicable, (iv)) and Opinion
of Counsel, in each case stating that such consolidation, merger or transfer
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with; provided, however,
that clauses (iii) and (iv) above do not apply if, in the good faith
determination of the Board of Directors of the Company, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of the Company; provided
further, however, that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations.
EVENTS OF DEFAULT
The following events will be defined as 'Events of Default' in the Exchange
Indenture: (i) default in the payment of the principal of (or premium, if any,
on) any Exchange Debenture when the same becomes due and payable, upon
acceleration, redemption or otherwise, whether or not such payment is prohibited
pursuant to the provisions described above under 'Ranking'; (ii) default in the
payment of interest on any Exchange Debenture
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<PAGE>
when the same becomes due and payable, and such default continues for a period
of 30 days, whether or not such payment is prohibited pursuant to the provisions
described above under 'Ranking'; (iii) the Company defaults in the performance
of or breaches any other covenant or agreement of the Company contained in the
Exchange Indenture or under the Exchange Debentures and such default or breach
continues for a period of 30 consecutive days after written notice to the
Company by the Trustee or the Holders of 25% or more in aggregate principal
amount of the Exchange Debentures; (iv) there occurs with respect to any issue
or issues of Indebtedness of the Company, or any Significant Subsidiary having
an outstanding principal amount of $25.0 million or more in the aggregate for
all such issues of all such Persons, whether such Indebtedness now exists or
shall hereafter be created, (a) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its Stated
Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (b) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (v) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $25.0 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
60 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $25.0 million during which
a stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (vi) a court having jurisdiction in
the premises enters a decree or order for (a) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (b)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (c) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 60 consecutive days;
or (vii) the Company or any Significant Subsidiary (a) commences a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (b) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (c) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than an Event of Default specified in clause
(vi) or (vii) above that occurs with respect to the Company) occurs and is
continuing under the Exchange Indenture, the Trustee or the Holders of at least
25% in aggregate principal amount of the Exchange Debentures, then outstanding,
by written notice to the Company (and to the Trustee if such notice is given by
the Holders), may, and the Trustee at the request of such Holders shall, declare
the principal of, premium, if any, and accrued interest on the Exchange
Debentures to be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (iv) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (iv) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (vi) or (vii) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Exchange Debentures then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of at least a majority in
principal amount of the outstanding Exchange Debentures, by written notice to
the Company and to the Trustee, may waive all past Defaults and rescind and
annul such declaration of acceleration and its consequences if (A) all existing
Events of Default, other than the nonpayment of the principal of, premium, if
any, and accrued interest on the Exchange Debentures that have become due solely
by such declaration of acceleration, have been cured or waived and (B) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction.
The Holders of at least a majority in aggregate principal amount of the
outstanding Exchange Debentures may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
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<PAGE>
exercising any trust or power conferred on the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with law or the Exchange
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to the rights of
Holders not joining in the giving of such direction and may take any other
action it deems proper that is not inconsistent with any directions received
from Holders of Exchange Debentures. A Holder may not pursue any remedy with
respect to the Exchange Indenture or the Exchange Debentures unless: (i) the
Holder given the Trustee written notice of a continuing Event of Default; (ii)
the Holders of at least 25% in aggregate principal amount of outstanding
Exchange Debentures make a written request to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity reasonably satisfactory to the
Trustee against any costs, liabilities or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a majority
in aggregate principal amount of the outstanding Exchange Debentures do not give
the Trustee a direction that is inconsistent with such written request. However,
such limitations do not apply to the right of any Holder of an Exchange
Debenture to receive payment of the principal of, premium, if any, or interest
on, such Exchange Debenture or to bring suit for the enforcement of any such
payment, on or after the due date expressed in the Exchange Debentures, which
right shall not be impaired or affected without the consent of the Holder.
The Exchange Indenture will require certain officers of the Company to
certify, on or before a date not more than 90 days after the end of each fiscal
year, that a review has been conducted of the activities of the Company and its
Restricted Subsidiaries' performance under the Exchange Indenture and that, to
the best knowledge of such officer, the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Exchange Indenture.
DEFEASANCE
Defeasance and Discharge. The Exchange Indenture will provide that the
Company will be deemed to have paid and will be discharged from any and all
obligations in respect of the Exchange Debentures on the 123rd day after the
deposit referred to below, and the provisions of the Exchange Indenture will no
longer be in effect with respect to the Exchange Debentures (except for, among
other matters, certain obligations to register the transfer or exchange of the
Exchange Debentures, to replace stolen, lost or mutilated Exchange Debentures,
to maintain paying agencies and to hold monies for payment in trust), if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Exchange Debentures on the Stated Maturity of such payments or
upon earlier redemption, in each case in accordance with the terms of the
Exchange Indenture and the Exchange Debentures, (B) the Company has delivered to
the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders of
Exchange Debentures will not recognize income, gain, or loss for federal income
tax purposes as a result of the Company's exercise of its option under this
'Defeasance' provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, which Opinion of
Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect or a change in applicable Federal
income tax law after the Issue Date or (y) a ruling directed to the Trustee
received from the Internal Revenue Serve to the same effect as the
aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect
that the creation of the defeasance trust does not violate the Investment
Company Act of 1940 and after the passage of 123 days following the deposit, the
trust fund will not be subject to the effect of Section 547 of the Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately
after giving effect to such deposit on a pro forma basis, no Event of Default,
or event that after the giving of notice or lapse of time or both would become
an Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company is a party or by which the Company is bound, and (D) if at such time the
Exchange Debentures are listed on a national securities exchange, the Company
has delivered to the Trustee an Opinion of
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Counsel to the effect that the Exchange Debentures will not be delisted as a
result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Exchange Indenture will further provide that its provisions will no longer be in
effect with respect to clauses (iii) and (iv) under 'Consolidation, Merger and
Sale of Assets' and all the covenants described herein under 'Covenants,' clause
(iii) under '--Events of Default' with respect to such covenants and clauses
(iii) and (iv) under 'Consolidation, Merger and Sale of Assets' and clauses (iv)
and (v) under '--Events of Default' shall be deemed not to be Events of Default,
the provisions described under '--Ranking' with respect to the assets held by
the Trustee referred to below shall not apply, upon, among other things, the
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the Exchange
Debentures on the Stated Maturity of such payments or upon earlier optional
redemption, in each case in accordance with the terms of the Exchange Indenture
and the Exchange Debentures, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the holders will not recognize income, gain or loss for Federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Exchange Indenture as described in the immediately preceding paragraph and
the Exchange Debentures are declared due and payable because of the occurrence
of an Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on the Exchange Debentures at the time of their Stated Maturity but
may not be sufficient to pay amounts due on the Exchange Debentures at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the 'defeasance trust') with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Exchange
Debentures to redemption or maturity, as the case may be, and must comply with
certain other conditions.
MODIFICATION AND WAIVER
Modifications and amendments of the Exchange Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Exchange Debentures;
provided, however, that no such modification or amendment may, without the
consent of each Holder affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Exchange Debenture, (ii)
reduce the principal amount of, or premium, if any, or interest on, any Exchange
Debentures, (iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Exchange Debentures, (iv) impair the right
to institute suit for the enforcement of any payment on or after the Stated
Maturity (or, in the case of a redemption, on or after the Redemption Date) of
any Exchange Debenture, (v) reduce the above-stated percentage of outstanding
Exchange Debentures the consent of whose Holders is necessary to modify or amend
the Exchange Indenture, (vi) waive a default in the payment of principal of,
premium, if any, or interest on the Exchange Debentures or (vii) reduce the
percentage or aggregate principal amount of outstanding Exchange Debentures the
consent of whose Holders is necessary for waiver of compliance with certain
provisions of the Exchange Indenture or for waiver of certain defaults.
Without the consent of any Holder of the Exchange Debentures, the Company
and the Trustee may modify or amend the Exchange Indenture to cure any
ambiguity, defect or inconsistency, to provide for the assumption by a successor
company of the Company's obligations under the Exchange Indenture, to comply
with the requirements of the Trust Indenture Act, to appoint a successor Trustee
or to make any change that, in the opinion of the Board of Directors of the
Company evidenced by a Board Resolution, does not materially and adversely
affect the rights of any Holder of the Exchange Debentures.
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NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Exchange Indenture will provide that no recourse for the payment of the
principal of, premium, if any, or interest on any of the Exchange Debentures or
for any claim based thereon or otherwise in respect thereof, and no recourse
under or upon any obligation, covenant or agreement of the Company in the
Exchange Indenture, or in any of the Exchange Debentures or because of the
creation of any Indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer, director, employee or controlling person of
the Company or of any successor Person thereof in such capacity. Each Holder, by
accepting the Exchange Debentures, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Exchange Indenture will provide that, except during the continuance of
a Default, the Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Exchange Indenture. If an Event of
Default has occurred and is continuing, the Trustee will use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Exchange Indenture and provisions of the Trust Indenture Act
incorporated by reference therein will contain limitations on the rights of the
Trustee, should it become a creditor of the Company to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if the Trustee acquires any
conflicting interest, it must eliminate such conflict or resign.
GOVERNING LAW
The Exchange Indenture will provide that it and the Exchange Debentures
will be governed by, and construed in accordance with, the laws of the State of
New York without giving effect to applicable principles of conflicts of law to
the extent that the application of the law of another jurisdiction would be
required thereby.
CERTAIN DEFINITIONS
The following definitions are applicable to the descriptions of both the
Exchangeable Preferred Stock and the Exchange Debentures.
'1995 Notes' means the 1995 Senior Notes and the Convertible Notes.
'1997 Notes' means the 1997 Senior Notes, the 1997 Senior Subordinated
Notes and the Equipment Notes.
'1995 Senior Notes' means the 14% Senior Discount Notes due 2005 of the
Company.
'1997 Senior Notes' means the 14 1/2% Senior Deferred Interest Notes Due
2005 of the Company.
'1997 Senior Subordinated Notes' means the 15% Senior Subordinated Deferred
Interest Notes Due 2007 of the Company.
'1997 Senior Subordinated Notes Indenture' means the Indenture dated as of
October 1, 1997, between the Company and the Trustee pursuant to which the 1997
Senior Subordinated Notes were issued.
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'Accumulated Amount' means, with respect to Exchangeable Preferred Stock,
as of any date (the 'Specified Date'), the amount provided below with respect to
each $1,000 Initial Liquidation Preference thereof.
(i) If the Specified Date occurs on one of the following dates (each,
a 'SemiAnnual Dividend Accrual Date'), the Accumulated Amount will equal
the amount set forth below for such SemiAnnual Dividend Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL DIVIDEND ACCRUAL DATE ACCUMULATED AMOUNT
- ---------------------------------------------------- ------------------
<S> <C>
June 15, 1998....................................... $1,068.387
December 15, 1998................................... 1,144.509
June 15, 1999....................................... 1,226.055
December 15, 1999................................... 1,313.412
June 15, 2000....................................... 1,406.992
December 15, 2000................................... 1,507.241
June 15, 2001....................................... 1,614.632
December 15, 2001................................... 1,729.674
June 15, 2002....................................... 1,852.913
December 15, 2002................................... 1,984.933
June 15, 2003....................................... 2,141.247
December 15, 2003................................... 2,309.870
June 15, 2004....................................... 2,491.772
December 15, 2004................................... 2,687.999
June 15, 2005....................................... 2,899.679
December 15, 2005................................... 3,128.029
June 15, 2006....................................... 3,374.361
December 15, 2006................................... 3,640.092
June 15, 2007....................................... 3,926.750
December 15, 2007................................... 4,235.981
</TABLE>
(ii) if the Specified Date occurs before the first SemiAnnual Dividend
Accrual Date, the Accumulated Amount will equal the sum of (A) the Initial
Liquidation Preference and (B) an amount equal to the product of (1) the
Accumulated Amount for the first SemiAnnual Dividend Accrual Date less the
Initial Liquidation Preference multiplied by (2) a fraction, the numerator
of which is the number of days elapsed from the Issue Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of
which is the number of days from the Issue Date to the first SemiAnnual
Dividend Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two SemiAnnual Dividend
Accrual Dates, the Accumulated Amount will equal the sum of (A) the
Accumulated Amount for the SemiAnnual Dividend Accrual Date immediately
preceding such Specified Date and (B) an amount equal to the product of (1)
the Accumulated Amount for the immediately following SemiAnnual Dividend
Accrual Date less the Accumulated Amount for the immediately preceding
SemiAnnual Dividend Accrual Date multiplied by (2) a fraction, the
numerator of which is the number of days elapsed from the immediately
preceding SemiAnnual Dividend Accrual Date to the Specified Date, using a
360-day year or twelve 30-day months, and the denominator of which is 180;
or
(iv) if the Specified Date occurs after the last SemiAnnual Dividend
Accrual Date, the Accumulated Amount will equal the Accumulated Amount as
of the last SemiAnnual Dividend Accrual Rate;
provided, however, that at all times on and after the Dividend Payment Date
immediately preceding the Cash Payment Date, the Accumulated Amount shall equal
the Accumulated Amount as of such Dividend Payment Date; and provided, further,
that if the rate applicable to the Exchangeable Preferred Stock shall have been
increased as a result of a Registration Default (as defined under 'Exchange
Offer; Registration Rights'), the Accumulated Amount shall be recalculated as if
dividends with respect to the Exchangeable Preferred Stock had been accruing at
a rate of 14 3/4% from the date of such Registration Default to but excluding
the date all Registration Defaults have been cured.
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'Accumulated Amount' means, with respect to Exchangeable Debentures, as of
any Specified Date, the amount provided below for each $1,000 principal amount
thereof.
(i) If the Specified Date occurs on one of the following dates (each,
a 'SemiAnnual Interest Accrual Date'), the Accumulated Amount will equal
the amount set forth below for such SemiAnnual Interest Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL DIVIDEND ACCRUAL DATE ACCUMULATED AMOUNT
- ---------------------------------------------------- ------------------
<S> <C>
June 15, 1998....................................... $1,068.387
December 15, 1998................................... 1,144.509
June 15, 1999....................................... 1,226.055
December 15, 1999................................... 1,313.412
June 15, 2000....................................... 1,406.992
December 15, 2000................................... 1,507.241
June 15, 2001....................................... 1,614.632
December 15, 2001................................... 1,729.674
June 15, 2002....................................... 1,852.913
December 15, 2002................................... 1,984.933
June 15, 2003....................................... 2,141.247
December 15, 2003................................... 2,309.870
June 15, 2004....................................... 2,491.772
December 15, 2004................................... 2,687.999
June 15, 2005....................................... 2,899.679
December 15, 2005................................... 3,128.029
June 15, 2006....................................... 3,374.361
December 15, 2006................................... 3,640.092
June 15, 2007....................................... 3,926.750
December 15, 2007................................... 4,235.981
</TABLE>
(ii) if the Specified Date occurs before the first SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal the sum of (A) the Initial
Liquidation Preference and (B) an amount equal to the product of (1) the
Accumulated Amount for the first SemiAnnual Interest Accrual Date less the
Initial Liquidation Preference multiplied by (2) a fraction, the numerator
of which is the number of days elapsed from the Issue Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of
which is the number of days from the Issue Date to the first SemiAnnual
Interest Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two SemiAnnual Interest
Accrual Dates, the Accumulated Amount will equal the sum of (A) the
Accumulated Amount for the SemiAnnual Interest Accrual Date immediately
preceding such Specified Date and (B) an amount equal to the product of (1)
the Accumulated Amount for the immediately following SemiAnnual Interest
Accrual Date less the Accumulated Amount for the immediately preceding
SemiAnnual Interest Accrual Date multiplied by (2) a fraction, the
numerator of which is the number of days elapsed from the immediately
preceding SemiAnnual Interest Accrual Date to the Specified Date, using a
360-day year or twelve 30-day months, and the denominator of which is 180;
or
(iv) if the Specified Date occurs after the last SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal the Accumulated Amount as
of the last SemiAnnual Interest Accrual Date;
provided, however, that at all times on and after the SemiAnnual Interest
Accrual Date immediately preceding the Cash Payment Date, the Accumulated Amount
shall equal the Accumulated Amount as of such SemiAnnual Interest Accrual Date
and provided, further, that if the rate applicable to the Exchange Preferred
Stock shall have been increased as a result of a Registration Default,
appropriate revisions shall be made so that the Accumulated Amount for the
Exchange Debentures shall be increased in the same fashion as that for the
Exchangeable Preferred Stock.
'Adjusted Consolidated Net Income' means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided,
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however, that the following items shall be excluded in computing Adjusted
Consolidated Net Income (without duplication): (i) the net income of any Person
(other than net income attributable to a Restricted Subsidiary) in which any
Person (other than the Company or any of its Restricted Subsidiaries) has a
joint interest and the net income of any Unrestricted Subsidiary, except to the
extent of the amount of dividends or other distributions actually paid to the
Company or any of its Restricted Subsidiaries by such other Person, including,
without limitation, an Unrestricted Subsidiary during such period; (ii) solely
for the purposes of calculating the amount of Restricted Payments that may be
made pursuant to clause (C) of the first paragraph of the covenant described
under '--Covenants--Limitation on Restricted Payments' (and in such case, except
to the extent includable pursuant to clause (i) above), the net income (or loss)
of any Person accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with the Company or any of its Restricted
Subsidiaries or all or substantially all of the property and assets of such
Person are acquired by the Company or any of its Restricted Subsidiaries; (iii)
the net income of any Restricted Subsidiary to the extent that the declaration
or payment of dividends or similar distributions by such Restricted Subsidiary
of such net income is not at the time permitted by the operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to such Restricted Subsidiary; (iv) any
gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except
for purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the covenant described under
'--Covenants--Limitation on Restricted Payments', any amount paid as, or accrued
for, cash dividends on Preferred Stock of the Company or any Restricted
Subsidiary owned by Persons other than the Company and any of its Restricted
Subsidiaries; and (vi) all extraordinary gains and extraordinary losses.
'Adjusted Consolidated Net Tangible Assets' means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles (other than licenses issued by the FCC), all as set forth on the
quarterly or annual consolidated balance sheet of the Company and its Restricted
Subsidiaries, prepared in conformity with GAAP and most recently filed with the
SEC pursuant to the covenant described under '--SEC Reports and Reports to
Holders'; provided, however, that the value of any licenses issued by the FCC
shall, in the event of an auction for similar licenses, be equal to the fair
market value ascribed thereto in good faith by the Board of Directors and
evidenced by a Board Resolution. As used in the Exchange Indenture, references
to financial statements of the Company and its Restricted Subsidiaries shall be
adjusted to exclude Unrestricted Subsidiaries if the context requires.
'Affiliate' means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling,' 'controlled by'
and 'under common control with'), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
'Asset Acquisition' means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary of the Company or shall be merged into or
consolidated with the Company or any of its Restricted Subsidiaries or (ii) an
acquisition by the Company or any of its Restricted Subsidiaries of the property
and assets of any Person other than the Company or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person.
'Asset Sale' means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transactions) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property or assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of the Exchange Indenture applicable to mergers, consolidations, and sales of
assets of the Company; provided, however, that the
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following shall not be included within the meaning of 'Asset Sale': (A) sales or
other dispositions of inventory, receivables and other current assets; (B) sales
or other dispositions of equipment that has become worn out, obsolete or damaged
or otherwise unsuitable for use in connection with the business of the Company
or its Restricted Subsidiaries and (C) a substantially simultaneous exchange of,
or a sale or disposition (other than 85% or more for cash or cash equivalents)
by the Company or any of its Restricted Subsidiaries of, licenses issued by the
FCC or applications or bids therefor; provided, however, that the consideration
received by the Company or any such Restricted Subsidiary in connection with
such exchange, sale or disposition shall be equal to the fair market value of
licenses so exchanged, sold or disposed of, as determined by the Board of
Directors; and (D) except for purposes of the definition of 'Indebtedness to
EBITDA Ratio,' any sale or other disposition of securities of an Unrestricted
Subsidiary.
'Average Life' means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
'Board of Directors' means the Board of Directors of the Company or any
committee of such Board of Directors duly authorized to act with respect to the
Exchange Indenture.
'Board Resolution' means a copy of a resolution, certified by the Secretary
or Assistant Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
'Business Day' means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the Corporate
Trust Office of the Trustee, are authorized by law to close.
'Capital Stock' means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Exchange Indenture, including, without limitation,
all Common Stock and Preferred Stock.
'Capitalized Lease' means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and 'Capitalized
Lease Obligations' means the discounted present value of the rental obligations
under such lease.
'Change of Control' means such time as (i) a 'person' or 'group' (within
the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the 'Exchange Act')), other than the Permitted Investor,
becomes the ultimate 'beneficial owner' (as defined in Rule 13d-3 under the
Exchange Act) of Voting Stock representing more than 50% of the total voting
power of the Voting Stock of the Company on a fully diluted basis or (ii)
individuals who on the Deemed Closing Date constituted the Board of Directors
(together with any new directors whose election by the Board of Directors or
whose nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds of the members of the Board of Directors then in
office who either were members of the Board of Directors on the Deemed Closing
Date or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the members of the Board of
Directors then in office.
'Common Stock' means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of the Exchange Indenture, including, without limitation,
all series and classes of such common stock.
'Consolidated EBITDA' means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
nonrecurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent
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such amount was deducted in calculating Adjusted Consolidated Net Income, and
(vi) all other noncash items reducing Adjusted Consolidated Net Income (other
than items that will require cash payments and for which an accrual or reserve
is, or is required by GAAP to be, made), less all noncash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis for
the Company and its Restricted Subsidiaries in conformity with GAAP; provided,
however, that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the quotient of (1) the number of shares of outstanding Common
Stock of such Restricted Subsidiary not owned on the last day of such period by
the Company or any of its Restricted Subsidiaries divided by (2) the total
number of shares of outstanding Common Stock of such Restricted Subsidiary on
the last day of such period.
'Consolidated Interest Expense' means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by the Company or any of its Restricted Subsidiaries) and all but the
principal component of rentals in respect of Capitalized Lease Obligations paid,
accrued or scheduled to be paid or to be accrued by the Company and its
Restricted Subsidiaries during such period; excluding, however, (i) any amount
of such interest of any Restricted Subsidiary if the net income of such
Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded from
the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Exchange
Debentures and the 1997 Senior Subordinated Notes and the 1997 Notes in the
March 1997 Debt Placement and the August 1997 Debt Placement and the Incurrence
of the WSAC Loan, all as determined on a consolidated basis (without taking into
account Unrestricted Subsidiaries) in conformity with GAAP.
'Consolidated Net Worth' means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
'Convertible Notes' means the 14% Convertible Senior Subordinated Discount
Notes due 2005 of the Company.
'Convertible Notes Indenture' means the Indenture dated as of October 23,
1995, between the Company and United States Trust Company of New York pursuant
to which the Convertible Notes were issued.
'Currency Agreement' means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Restricted Subsidiaries against fluctuations in currency
values to or under which the Company or any of its Restricted Subsidiaries is a
party or a beneficiary on the date of the Exchange Indenture or becomes a party
or a beneficiary thereafter.
'Deemed Closing Date' means March 18, 1997.
'Default' means any event that is, or after notice or passage of time or
both would be, in the case of Exchangeable Preferred Stock, a Voting Rights
Triggering Event and, in the case of the Exchange Debentures, an Event of
Default.
'Equipment Notes' means the $200.0 million of 12 1/2% Guaranteed Senior
Secured Notes Due 2004 of WEC and the $50.0 million of 12 1/2% Guaranteed Senior
Secured Notes Due 2004 of WEC II.
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'Equipment Note Guarantees' means the Company's Guarantees of the Equipment
Notes.
'fair market value' means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors (whose determination shall be conclusive)
and evidenced by a Board Resolution.
'FCC' means the United States Federal Communications Commission and any
state or local telecommunications authority, department, commission or agency
(and any successors thereto).
'GAAP' means generally accepted accounting principles in the United States
of America as in effect as of the date of the Exchange Indenture, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
contained in the Exchange Indenture shall be computed in conformity with GAAP
applied on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other provisions
of the Certificate of Designation and the Exchange Indenture shall be made
without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Exchange Debentures and the 1997 Senior
Subordinated Notes, the WSAC Loan and the 1997 Notes in the March 1997 Debt
Placement and the August 1997 Debt Placement and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
'Guarantee' means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term 'Guarantee' shall not
include endorsements for collection or deposit in the ordinary course of
business. The term 'Guarantee' used as a verb has a corresponding meaning.
'Holder' means the Person in whose name, in the case of the Exchangeable
Preferred Stock, a share of Exchangeable Preferred Stock is registered on the
Transfer Agent's books or, in the case of the Exchange Debentures, an Exchange
Debenture is registered on the books of the registrar for the Exchange
Debentures.
'Incur' means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including, with respect to the Company and its Restricted Subsidiaries, an
'Incurrence' of Indebtedness by reason of a Person becoming a Restricted
Subsidiary of the Company; provided, however, that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
'Indebtedness' means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or
non-negotiable), (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except trade
payables, (v) all obligations of such Person as lessee under Capitalized Leases,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided,
however, that the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such Person and (viii)
to the extent not otherwise
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included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations that are included in
any of clauses (i) through (viii) above, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided, however,
that (A) the amount outstanding at any time of any Indebtedness issued with
original issue discount is (1) for purposes of determining the Indebtedness to
EBITDA Ratio, the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP and (2) for all other purposes, the
amount determined in clause (1) on the date such Indebtedness is originally
Incurred and (B) Indebtedness shall not include any liability for federal,
state, local or other taxes.
'Indebtedness to EBITDA Ratio' means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis ('Consolidated Indebtedness') as
at the date of determination (the 'Transaction Date') to (ii) the Consolidated
EBITDA of the Company for the then most recent four full fiscal quarters for
which reports have been filed pursuant to '--SEC Reports and Reports to Holders'
(such four full fiscal quarter period being referred to herein as the 'Four
Quarter Period'); provided, however, that (x) pro forma effect shall be given to
any Indebtedness Incurred from the beginning of the Four Quarter Period through
the Transaction Date (including any Indebtedness Incurred on the Transaction
Date), to the extent outstanding on the Transaction Date, (y) if during the
period commencing on the first day of such Four Quarter Period through the
Transaction Date (the 'Reference Period'), the Company or any of the Restricted
Subsidiaries shall have engaged in any Asset Sale, Consolidated EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive), or
increased by an amount equal to the EBITDA (if negative), directly attributable
to the assets which are the subject of such Asset Sale and any related
retirement of Indebtedness as if such Asset Sale and related retirement of
Indebtedness had occurred on the first day of such Reference Period or (z) if
during such Reference Period the Company or any of the Restricted Subsidiaries
shall have made any Asset Acquisition, Consolidated EBITDA of the Company shall
be calculated on a pro forma basis as if such Asset Acquisition and any
Incurrence of Indebtedness to finance such Asset Acquisition had taken place on
the first day of such Reference Period.
'Initial Liquidation Preference' per share of Exchangeable Preferred Stock
means $1,000.
'Interest Rate Agreement' means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect the Company or any of its Restricted Subsidiaries against
fluctuations in interest rates in respect of Indebtedness to or under which the
Company or any of its Restricted Subsidiaries is a party or a beneficiary on the
date of the Exchange Indenture or becomes a party or a beneficiary hereafter;
provided, however, that the notional principal amount thereof does not exceed
the principal amount of the Indebtedness of the Company and its Restricted
Subsidiaries that bears interest at floating rates.
'Investment' in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock held by the Company and the Restricted
Subsidiaries of any Person that has ceased to be a Restricted Subsidiary by
reason of any transaction permitted by clause (iii) of the covenant described
under '--Covenants--Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries.' For purposes of the definition of 'Unrestricted
Subsidiary' and the covenant described under '--Covenants--Limitation on
Restricted Payments,' (i) 'Investment' shall include the fair market value of
the assets (net of liabilities) of any Restricted Subsidiary of the Company at
the time that such Restricted Subsidiary of the Company is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company and
(ii) any property transferred to or from an Unrestricted Subsidiary
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shall be valued at its fair market value at the time of such transfer, in each
case as determined by the Board of Directors in good faith.
'Issue Date' means the date on which the Exchangeable Preferred Stock is
originally issued.
'Lien' means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
'Liquidation Preference' means the Accumulated Amount of the Exchangeable
Preferred Stock from time to time.
'Net Cash Proceeds' means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes
will actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of the Company and its
Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP and (b) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection with
such issuance or sale and net of taxes paid or payable by the Company or any of
its subsidiaries as a result thereof.
'Offer to Purchase' means an offer to purchase Exchangeable Preferred Stock
or Exchange Debentures, as applicable, by the Company from the Holders required
by the covenant described under '--Repurchase of Exchangeable Preferred Stock
upon a Change of Control', '--Repurchase of Exchange Debentures upon a Change of
Control' or '--Covenants--Limitation on Asset Sales' and which is commenced by
mailing a notice to the Trustee, as applicable, and each Holder stating: (i) the
covenant pursuant to which the offer is being made and that all shares of
Exchangeable Preferred Stock or all Exchange Debentures validly tendered will be
accepted for payment on a pro rata basis; (ii) the purchase price and the
Payment Date; (iii) that any shares of Exchangeable Preferred Stock or any
Exchange Debentures not tendered will continue to accrue dividends or interest
pursuant to their terms; (iv) that, unless the Company defaults in the payment
of the purchase price, any shares of Exchangeable Preferred Stock or any
Exchange Debentures accepted for payment pursuant to the Offer to Purchase shall
cease to accrue dividends or interest on and after the Payment Date; (v) that
Holders electing to have shares of Exchangeable Preferred Stock or Exchange
Debentures purchased pursuant to the Offer to Purchase will be required to
surrender the applicable security together with the form entitled 'Option of the
Holder to Elect Purchase' on the reverse side thereof completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the Business Day immediately preceding the Payment Date; (vi) that Holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the third Business Day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the number of shares of Exchangeable Preferred Stock or the
principal amount of Exchange Debentures delivered for purchase and a statement
that such Holder is withdrawing his election to have such securities purchased;
and (vii) that Holders whose Exchangeable Preferred
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Stock or Exchange Debentures are being purchased only in part will be issued new
shares of Exchangeable Preferred Stock or new Exchange Debentures equal in
amount (and accrued and unpaid dividends or interest) to the unpurchased portion
thereof; provided, however, that each Exchange Debenture purchased and each new
Exchange Debenture issued shall be in a principal amount of $1,000 or integral
multiples thereof. On the Payment Date, the Company shall (i) accept for payment
on a pro rata basis any Exchangeable Preferred Stock or Exchange Debentures or
portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Exchangeable
Preferred Stock or Exchange Debentures or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the Trustee all Exchangeable
Preferred Stock or Exchange Debentures or portions thereof so accepted together
with an Officers' Certificate specifying the Securities or portions thereof
accepted for payment by the Company. The Paying Agent shall promptly mail to the
Holders of the Exchangeable Preferred Stock or Exchange Debentures so accepted
for payment in an amount equal to the purchase price, and, with respect to
Exchange Debentures the Trustee shall promptly authenticate and mail to such
Holders a new Exchange Debenture equal in principal amount to any unpurchased
portion of the Exchange Debentures surrendered; provided, however, that each
Exchange Debenture purchased and each new Exchange Debenture issued shall be in
a principal amount of $1,000 or integral multiples thereof. The Company will
publicly announce the results of an Offer to Purchase as soon as practicable
after the Payment Date. The Transfer Agent shall act as the Paying Agent for an
Offer to Purchase Exchangeable Preferred Stock and Trustee shall act as the
Paying Agent for an Offer to Purchase Exchange Debentures. The Company will
comply with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Exchangeable Preferred
Stock or Exchange Debentures pursuant to an Offer to Purchase.
'Officer' means, with respect to the Company, (i) the Chairman of the
Board, the Vice Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Chief Financial Officer and (ii) the
Treasurer or any Assistant Treasurer, or the Secretary or any Assistant
Secretary.
'Officers' Certificate' means a certificate signed by one Officer listed in
clause (i) of the definition thereof and one Officer listed in clause (ii) of
the definition thereof; provided, however, that any such certificate may be
signed by any two of the Officers listed in clause (i) of the definition thereof
in lieu of being signed by one Officer listed in clause (i) of the definition
thereof and one Officer listed in clause (ii) of the definition thereof.
'Opinion of Counsel' means a written opinion signed by legal counsel who
may be an employee of or counsel to the Company.
'Payment Date' means the date of purchase, which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date a notice is mailed
pursuant to an Offer to Purchase.
'Permitted Investment' means (i) an Investment in a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, the Company or a Restricted Subsidiary; (ii)
Temporary Cash Investments; (iii) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) loans or advances to employees in a
principal amount not to exceed $1.0 million at any one time outstanding; (v)
stock, obligations or securities received in satisfaction of judgments; (vi)
Investments, to the extent that the consideration provided by the Company or any
of its Restricted Subsidiaries consists solely of Capital Stock (other than
Redeemable Stock) of the Company; (vii) notes payable to the Company that are
received by the Company as payment of the purchase price for Capital Stock
(other than Redeemable Stock) of the Company; and (viii) acquisitions of a
minority equity interest in entities engaged in the telecommunications business;
provided, however, that (A) the acquisition of a majority equity interest in
such entities is not permitted under U.S. law without FCC consent, (B) the
Company or one of its Restricted Subsidiaries has the right to acquire Capital
Stock representing a majority of the voting power of the Voting Stock of such
entity upon receipt of FCC consent and (C) in the event that such consent has
not been obtained within 18 months of funding such Investment, the Company or
one of its Restricted Subsidiaries has the right to sell such minority equity
interest in the seller thereof for consideration consisting of the consideration
originally paid by the Company and its Restricted Subsidiaries for such minority
equity interest.
'Permitted Investor' means William J. Rouhana, Jr.
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'Person' means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
'Preferred Stock' means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or nonvoting) of such Person's preferred or preference stock, whether now
outstanding or issued after the Issue Date, including, without limitation, all
series and classes of such preferred or preference stock.
'Redeemable Stock' means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Exchange Debentures, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Exchange Debentures (unless the redemption price is, at the
Company's option, without conditions precedent, payable solely in Common Stock
(other than Redeemable Stock) of the Company) or (iii) convertible into or
exchangeable for Capital Stock referred to in clause (i) or (ii) above or
Indebtedness having a scheduled maturity prior to the Stated Maturity of the
Exchange Debentures; provided, however, that any Capital Stock that would not
constitute Redeemable Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an 'asset sale' or 'change of control' occurring prior to the
Stated Maturity of the Exchange Debentures shall not constitute Redeemable Stock
if the 'asset sale' or 'change of control' provisions applicable to such Capital
Stock are no more favorable to the holders of such Capital Stock than the
provisions '--Repurchase of Exchange Debentures upon a Change of Control' and
'--Covenants--Limitation on Asset Sales' and such Capital Stock specifically
provides that such Person will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Securities as are
required to be repurchased pursuant to '--Repurchase of Exchange Debentures upon
a Change of Control' and '--Covenants--Limitation on Asset Sales.'
'Restricted Subsidiary' means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
'SEC' means the Securities and Exchange Commission and any successor
agency.
'Significant Subsidiary' means, at any date of determination, any
Restricted Subsidiary of the Company that, together with its Subsidiaries, (i)
for the most recent fiscal year of the Company, accounted for more than 10% of
the consolidated revenues of the Company and its Restricted Subsidiaries or (ii)
as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
'Specified Indentures' means the each of the following; (i) the Convertible
Senior Subordinated Discount Notes Indenture dated October 23, 1995, governing
the Convertible Notes; (ii) the Senior Discount Notes Indenture dated October
23, 1995 governing the 1995 Senior Notes; (iii) the Senior Deferred Interest
Notes Indenture dated as of March 1, 1997, governing the 1997 Senior Notes; (iv)
the Guaranteed Senior Secured Notes Indenture dated as of March 1, 1997,
governing the 12 1/2% Senior Secured Notes of WEC due 2004; (v) the Guaranteed
Senior Secured Notes Indenture dated as of August 1, 1997, governing the 12 1/2%
Senior Secured Notes of WEC II due 2004; and (vi) the Senior Subordinated
Deferred Interest Notes Indenture dated as of October 1, 1997, governing the
1997 Senior Subordinated Notes.
'Stated Maturity' means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
'Subsidiary' means, with respect to any Person, any corporation,
association or other business entity of which Voting Stock representing more
than 50% of the voting power of the outstanding Voting Stock is owned, directly
or indirectly, by such Person and one or more other Subsidiaries of such Person.
'Telecommunications Assets' means any (i) entity or business substantially
all the revenues of which are derived from (a) providing transmission of sound,
data or video; (b) the sale or provision of phone cards, '800' services, voice
mail, switching, enhanced telecommunications services, telephone directory or
telephone number
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information services or telecommunications network intelligence; or (c) any
business ancillary or directly related to the businesses referred to in clause
(a) or (b) above and (ii) any assets used primarily to effect such transmission
or provide the products or services referred to in clause (a) or (b) above and
any directly related or ancillary assets including, without limitation, licenses
and applications, bids and agreements to acquire licenses, or other authority to
provide transmission services previously granted, or to be granted, by the FCC.
'Telecommunications Subsidiary' means (i) WCI Gateway, WinStar Wireless,
Inc., WinStar Telecommunications, Inc., WinStar Milliwave, Inc., WinStar Locate,
Inc., and WinStar Wireless Fiber Corp. and, in each case, its successors and
(ii) any other Restricted Subsidiary of the Company that holds more than a de
minimis amount of Telecommunications Assets.
'Temporary Cash Investment' means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof; (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States, any state
thereof or any foreign country recognized by the United States, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $50.0 million (or the foreign currency equivalent thereof) and has
outstanding deposits or debt which is rated 'A' (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor; (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above; (iv)
commercial paper, maturing not more than six months after the date of
acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States, any state
thereof or any foreign country recognized by the United States with a rating at
the time as of which any investment therein is made of 'P-1' (or higher)
according to Moody's Investors Service, Inc. or 'A-1' (or higher) according to
Standard & Poor's Ratings Group; and (v) securities with maturities of six
months or less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States, or by
any political subdivision or taxing authority thereof, and rated at least 'A' by
Standard & Poor's Ratings Group or Moody's Investors Service, Inc.
'Transaction Date' means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
'Unrestricted Subsidiary' means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company), other than a guarantor of the Securities, to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, the Company or any Restricted
Subsidiary; provided, however, that neither the Company nor its Restricted
Subsidiaries has any Guarantee of any Indebtedness of such Subsidiary
outstanding at the time of such designation and either (A) the Subsidiary to be
so designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, that such designation would be permitted under the
covenant described under '--Covenants--Limitation on Restricted Payments.'
Notwithstanding the foregoing, WinStar New Media Company Inc., Non Fiction Films
Inc. and WinStar Global Products, Inc. and their Subsidiaries are Unrestricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary of the Company; provided, however, that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under the first paragraph of the covenant
described under '--Covenants--Limitation on Indebtedness' and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions. Anything to the contrary contained in the Exchange
Indenture notwithstanding, no Telecommunications Subsidiary may be designated an
Unrestricted Subsidiary.
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'U.S. Government Obligations' means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Exchange Debentures, and shall also include a
depositary receipt issued by a bank or trust company as custodian with respect
to any such U.S. Government Obligation or a specific payment of interest on or
principal of any such U.S. Government Obligation held by such custodian for the
account of the holder of a depositary receipt; provided, however, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depositary receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of interest on or principal of the U.S. Government Obligation
evidenced by such depositary receipt.
'Voting Stock' means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
'WEC' means WinStar Equipment Corp. and its successors.
'WEC II' means WinStar Equipment II Corp. and its successors.
'WSAC' means WinStar Switch Acquisition Corp. and its successors.
'WSAC Credit Agreement' means the Credit Agreement dated as of October 17,
1997, among WSAC, the Lenders named therein, Credit Suisse First Boston, as
documentation agent, and Salomon Brothers Inc, as syndication agent and
collateral and administrative agent, as in effect from time to time.
'WSAC Loan' means all Indebtedness and other obligations of WSAC arising in
connection with the WSAC Credit Agreement.
'WCI Gateway' means WinStar Gateway Network, Inc. and its successors.
'Wholly Owned' means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
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DESCRIPTION OF OTHER CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Company includes 200,000,000 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.
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 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; provides that directors may be removed with or without cause and
only by at least a majority of the capital stock of the Company entitled to vote
thereon; and further requires an affirmative vote of the holders of at least
two-thirds of the capital stock of the Company entitled to vote thereon 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 Company 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 the transfer agent for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
OTHER 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.
Series A Preferred Stock and Warrants
In February 1997, the Company and a wholly-owned subsidiary sold in the
February 1997 Preferred Stock Placement an aggregate of 4,000,000 shares of the
Company's Series A Preferred Stock ('Series A Preferred Stock') and warrants to
purchase 1,600,000 shares of the Company's Common Stock (the 'Warrants') for an
aggregate purchase price of $100.0 million.
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Each share of Series A Preferred Stock has a stated value of $25 ('Stated
Value') and entitles the holder thereof to receive from the Company dividends at
a rate per annum equal to 6% of the Stated Value. Dividends accrue and are
cumulative from the date of issuance and are payable in arrears quarterly as of
March 31, June 30, September 30 and December 31 of each year. The Company may,
at its election, pay such dividends in cash or through the issuance of
additional shares of Series A Preferred Stock.
The shares of Series A Preferred Stock are convertible into that number of
shares of Common Stock derived by dividing the aggregate Stated Value of the
Series A Preferred Stock being converted by $25 (subject to adjustment). 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.
The Warrants entitle the holders thereof to purchase an aggregate of
1,600,000 shares of Common Stock for $25 per share (subject to adjustment) at
any time until February 11, 2002. The Company may accelerate the expiration date
at any time after February 11, 2000 if the Common Stock trades at $40 or more
for a period of 20 consecutive days.
The Company and the purchasers of the Series A Preferred Stock also entered
into a Registration Rights Agreement, dated February 6, 1997 (the 'Preferred
Stock Registration Rights Agreement'), pursuant to which the Company currently
maintains an effective registration statement under the Securities Act,
registering (i) the resale of the Series A Preferred Stock and Warrants and (ii)
the issuance by the Company of the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and exercise of the Warrants.
As of April 30, 1998, after giving effect to conversions of Series A
Preferred Stock into Common Stock and the issuance of shares of Series A
Preferred Stock as dividends, there were 3,910,466 shares of Series A Preferred
Stock outstanding.
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 the 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. Currently the Rights are not separate from the Common Stock and are
not exercisable, and the Rights will only separate from the Common Stock and
become exercisable if a person or group acquires 10% or more of the Company's
outstanding Common Stock (an 'Acquiring Person') or launches a tender or
exchange offer that would result in ownership of 10% or more the Company's
outstanding Common Stock. Each Right that is not owned by an Acquiring Person
entitles the holder of the Right to buy one one-thousandth of one share (a
'Unit') of Series B Preferred Stock which will be issued by the Company. If any
person becomes an Acquiring Person, or if an Acquiring Person engages in certain
transactions involving conflicts of interest or in a business combination in
which the Company's Common Stock remains outstanding, then the Rights Plan
provides that each Right, other than any Right held by the Acquiring Person,
entitles the holder to purchase, for $70, Units with a market value of $140.
However, if the Company is involved in a business combination in which the
Company itself is not the survivor, or if the Company sells 50% or more of its
assets or earning power to another person, then the Rights Plan provides that
each Right entitled 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
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Rights expire in July 2002. The Series B Preferred Stock will have dividend and
liquidation preferences over the Common Stock of the Company, but junior to any
other series of preferred stock of the Company.
In January 1998, a stockholder suit, purporting to be a class action, was
commenced against the Company, its directors (and certain former directors) and
one non-director officer in the Delaware Chancery Court seeking, among other
things, to invalidate certain portions of the Rights Plan and to recover
unspecified damages and attorneys' fees. The complaint alleges that certain
provisions of the Rights Plan, particularly the so-called 'Continuing Directors'
provision are not permitted under the Delaware General Corporation Law and the
Company's Certificate of Incorporation. The Company believes that these
allegations are without merit and that the Rights Plan was properly adopted and
is valid in its entirety. The Company is reviewing its available alternatives
with regard to responding to this action.
Series D Preferred Stock
On March 17, 1998, the Company and one of its subsidiaries sold an
aggregate of $200.0 million of the Company's Series D Preferred Stock in the
1998 Preferred Stock Placement. Dividends at the rate of 7% per annum on the
Series D Preferred Stock are cumulative from the date of issuance and are
payable quarterly in arrears on each March 15, June 15, September 15 and
December 15, commencing September 15, 1998, out of funds legally available
therefor. Dividends shall be, at the option of the Company, payable (i) in cash
or (ii) through the issuance of shares of Common Stock. The Series D Preferred
Stock is convertible at any time after the issue date, at the option of the
holders thereof, into shares of Common Stock at a rate (subject to adjustment in
certain events) of 1.0079 shares of Common Stock (the 'Conversion Common Stock')
for each share of Series D Preferred Stock, equivalent to a conversion price of
$49.61 for each share of Common Stock.
The Series D Preferred Stock is not redeemable prior to March 20, 2001. On
or after such date, the Series D Preferred Stock will be redeemable at the
option of the Company, in whole or in part, at any time or from time to time, at
specified redemption prices plus accrued and unpaid dividends. The Series D
Preferred Stock is subject to mandatory redemption on March 15, 2010, at a
redemption price of $50.00 per share plus accrued and unpaid dividends. Upon the
occurrence of a Change in Control (as defined in the Certificate of Designations
governing the Series D Preferred Stock), the Company will be obligated to adjust
the conversion price as provided in the Certificate of Designations relating to
the Series D Preferred Stock.
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 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.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
INDEBTEDNESS
DEBT PLACEMENTS
1995 Debt Placement
In October 1995, the Company issued an aggregate of $225.0 million of 1995
Notes in the 1995 Debt Placement. The 1995 Notes will not accrue interest prior
to October 15, 2000, nor pay cash interest prior to April 15, 2001; however, the
principal value of the 1995 Notes has accreted since issuance and, at October
15, 2000, the 1995 Senior Notes and the Convertible Notes will have aggregate
principal amounts of $294.2 million and $147.1 million, respectively. From and
after October 15, 2000, the 1995 Notes will accrue interest at the rate of 14%
per annum, payable semiannually in cash commencing April 15, 2001. The 1995
Notes mature on October 15, 2005.
The Convertible Notes are convertible, at any time, at the option of the
holder, into that number of shares of Common Stock derived by dividing the
principal amount of the Convertible Notes being converted by $20.625 (subject to
adjustment). In addition, if the closing sale price of the Common Stock on the
Nasdaq National Market during any twelve-month period from October 15, 1995
through October 15, 1999 (each a 'Market Criteria Period') has exceeded the
Market Criteria (as defined in the Indenture governing the Convertible Notes)
and a registration statement with respect to Common Stock issuable upon
conversion of the Convertible Notes ('Conversion Shares') is effective and
available, all of the Convertible Notes automatically will be converted into
Conversion Shares at the close of business on the last day of the Market
Criteria Period. The Company has caused to be declared effective, and continues
to maintain the effectiveness of, a registration statement registering the
issuance or resale of the Conversion Shares.
1997 Debt Placements
In March 1997, the Company and WEC issued an aggregate of $300.0 million of
notes in the March 1997 Debt Placement, consisting of (i) $100.0 million of the
1997 Senior Notes, ranking pari passu with the 1995 Senior Notes, and (ii)
$200.0 million of the WEC Notes. In order to provide additional future liquidity
to the Company, the Company also obtained a $150.0 million facility
('Facility'). In August 1997, WEC II issued, pursuant to the Facility, $50.0
million of the WEC II Equipment Notes. In October 1997, the Company utilized the
remaining $100.0 million available under the Facility, issuing an aggregate of
$100.0 million principal amount of 1997 Senior Subordinated Notes in the October
1997 Debt Placement.
The WEC Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC Notes will
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at the redemption prices set forth
herein. If by March 18, 1999, the Company has not applied the $200.0 million of
proceeds from the sale of the WEC Notes to fund the acquisition costs of
Designated Equipment (as defined), the Company is required to redeem the WEC
Notes in an aggregate principal amount equal to such shortfall at a redemption
price of 112.5% of such principal amount, plus accrued interest, if any, to the
date of redemption.
The WEC II Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC II Notes
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at certain prices. If by August 8,
1999, the Company has not applied the $50.0 million of proceeds from the sale of
the WEC II Notes to fund the acquisition costs of Designated Equipment, the
Company is required to redeem the WEC II Notes in an aggregate principal amount
equal to such shortfall at a redemption price of 112.5% of such principal
amount, plus accrued interest, if any, to the date of redemption.
The obligations of WEC and WEC II under the WEC Notes and the WEC II Notes
are unconditionally guaranteed by the Company and are secured by a security
interest in the equipment and other property purchased by WEC and WEC II, as the
case may be, with the proceeds thereof. The 1997 Senior Notes are unsecured,
senior indebtedness of the Company, rank pari passu in right of payment with all
existing and future senior
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indebtedness of the Company, and are senior in right of payment to all existing
and future subordinated indebtedness of the Company, including the Notes. Until
October 15, 2000, interest on the 1997 Senior Notes will accrue and compound
semiannually at a rate of 14 1/2%, but will not be payable in cash. Interest on
the Accumulated Amount (as defined in the Indenture relating to the 1997 Senior
Notes) of the 1997 Senior Notes as of October 15, 2000 will be payable
semiannually in cash on April 15 and October 15 of each year commencing April
15, 2001. The 1997 Senior Notes mature on October 15, 2005 and are redeemable on
or after October 15, 2000, at the option of the Company, in whole or in part, at
certain prices.
The 1997 Senior Subordinated Notes are unsecured, senior subordinated
obligations of the Company, rank pari passu in right of payment with the Notes
and Convertible Notes and are junior in right of payment to all existing and
future senior indebtedness of the Company. The 1997 Senior Subordinated Notes
bear interest at a rate of 15% per annum, and payable on March 1 and September
1, commencing September 1, 2002. Until March 1, 2002, interest on the 1997
Senior Subordinated Notes will accrue and be compounded semiannually on each
SemiAnnual Interest Accrual Date (as defined in the Indenture relating to the
1997 Senior Subordinated Notes), but will not be payable in cash. Interest on
the Accumulated Amount (as defined in the Indenture relating to the 1997 Senior
Subordinated Notes) of the 1997 Senior Subordinated Notes as of March 1, 2002
will be payable semiannually commencing September 1, 2002. The 1997 Senior
Subordinated Notes will mature on March 1, 2007 and are redeemable on or after
March 1, 2002, at the option of the Company, in whole or in part, at certain
prices.
Indentures
The Indentures relating to the 1995 Notes and 1997 Notes contain certain
covenants which, among other things, restrict the ability of the Company and
certain of its subsidiaries to: incur additional indebtedness; create liens;
engage in sale-leaseback transactions; pay dividends or make distributions in
respect of their capital stock; make investments or certain other restricted
payments; sell assets; issue or sell stock of such subsidiaries; enter into
transactions with stockholders or affiliates; acquire assets or businesses not
constituting 'telecommunications assets' (as defined in the Indentures relating
to the 1995 Notes); or consolidate, merge or sell all or substantially all of
their assets. The covenants contained in the Indentures are subject to
exceptions and the Company's new media and consumer products subsidiaries are
not subject to many of the covenants contained therein, although the Company's
ability to make additional investments in such subsidiaries is limited.
Equipment Lease Financings and Credit Lines
The Company's subsidiaries have entered into, and will continue to seek,
financing arrangements with respect to equipment, including telecommunications
switches, radios and other related equipment. In September 1995, the Company's
wholly owned subsidiary, WinStar Wireless, Inc. ('WinStar Wireless'), entered
into an equipment lease financing arrangement pursuant to which the lessor has
made available $7.0 million in equipment financing. The Company's subsidiary,
WinStar Telecommunications, Inc., consummated a $4.3 million sale/leaseback of
its New York City switch in December 1996 and a $3.8 million sale/leaseback of
its Los Angeles switch in April 1997 and borrowed approximately $3.3 million
from a third party lender in connection with its purchase of its Chicago switch
in March 1997. In May 1997, WinStar Wireless consummated a $10.0 million
sale/leaseback of 38 GHz radios.
In January 1998, WinStar New Media and certain of its subsidiaries (the
'Guarantors') entered into a Loan, Security and Guaranty Agreement (the 'ING
Loan Agreement') with ING (U.S.) Capital Corporation, as Agent and Lender. Under
the ING Loan Agreement, WinStar New Media may borrow up to $15.0 million
outstanding at any one time, either in the form of revolving loans or by the
issuance of letters of credit. All of WinStar New Media's obligations under the
ING Loan Agreement are guaranteed by the Guarantors and are secured by
substantially all of the assets of WinStar New Media and the Guarantors,
including the capital stock of the Guarantors. This facility matures and all
outstanding loans are payable in full on January 26, 2001.
In February 1998, Global Products entered into a Second Amended and
Restated Loan and Security Agreement (the 'Loan Agreement') with Century
Business Credit Corporation ('Century') pursuant to which Century has agreed to
make a $12.0 million revolving credit facility, including a letter of credit
facility, available to Global Products until February 26, 2000. The Loan
Agreement amends and restates a loan agreement
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providing for a $6.0 million credit facility from Century established in 1994
which was assigned (including all security interests and the guaranty given by
the Company) to IBJ Schroder Bank & Trust Company in 1996 and reassigned to
Century.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to the exchange of Old Preferred Stock for New
Preferred Stock, and applicable to holders of the Exchangeable Preferred Stock
in general. This summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the 'Code'), regulations of the Treasury
Department, administrative rulings and pronouncements of the Internal Revenue
Service (the 'IRS') and judicial decisions currently in effect, all of which are
subject to change, possibly with retroactive effect. The discussion does not
deal with all aspects of U.S. Federal income taxation that may be relevant to
particular investors in light of their personal investment circumstances (for
example, to persons holding the Exchangeable Preferred Stock as part of a
conversion transaction or as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes), nor does it discuss U.S. Federal
income tax considerations applicable to certain types of investors subject to
special treatment under the U.S. Federal income tax laws (for example, insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
taxpayers subject to the alternative minimum tax or non U.S. holders). In
addition, the discussion does not consider the effect of any foreign, state,
local, gift, estate or other tax laws that may be applicable to a particular
investor. The discussion assumes that investors are U.S. Holders (as defined
below) that will hold the Exchangeable Preferred Stock as capital assets within
the meaning of Section 1221 of the Code. EACH POTENTIAL INVESTOR SHOULD CONSULT
ITS TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING
AND DISPOSING OF THE EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Exchangeable Preferred Stock that is (i) a
citizen or resident (as defined in Section 7701(b) (1) of the Code) of the
United States, (ii) a corporation or other entity taxable as a corporation
created or organized under the laws of the United States or any State thereof
(including the District of Columbia), (iii) an estate or trust described in
Section 7701 (a) (30) of the Code, or (iv) a person whose worldwide income or
gain is otherwise subject to U.S. Federal income taxation on a net income basis
(a 'U.S. Holder').
THE EXCHANGE OFFER
The exchange of Old Preferred Stock for New Preferred Stock will not
constitute a recognition event for federal income tax purposes. Consequently, no
gain or loss will be recognized by a holder on the exchange. Immediately after
the exchange, a holder's adjusted tax basis in the New Preferred Stock will be
the same as the holder's adjusted basis in the Old Preferred Stock immediately
before the exchange. A holder will be considered to have held the New Preferred
Stock from the time the holder originally acquired the Old Preferred Stock.
Dividends on each share of New Preferred Stock will accrue from the last
Dividend Payment Date on the Old
Preferred Stock. No additional dividends will be paid on the Old Preferred Stock
tendered and accepted for exchange.
EXCHANGEABLE PREFERRED STOCK AND EXCHANGE DEBENTURES
Distributions in General
Distributions with respect to the Exchangeable Preferred Stock will be
treated as dividends (taxable as ordinary income) to the extent of the current
and accumulated earnings and profits of the Company. To the extent that the
amount of a distribution with respect to the Exchangeable Preferred Stock
exceeds the current and accumulated earnings and profits of the Company, it will
be treated first as a tax-free return of capital to the extent of the holder's
basis in the Exchangeable Preferred Stock, and thereafter as capital gain from
the sale of the Exchangeable Preferred Stock (taxable as described below under
'Sale, Redemption or Other Taxable
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Disposition of Exchangeable Preferred Stock'). The Company does not currently
have any current or accumulated earnings and profits, and cannot accurately
predict when it will have earnings and profits.
A holder that is a corporation otherwise entitled to the dividends-received
deduction as provided in Section 243 of the Code will be entitled to that
deduction (generally at a 70% rate) with respect to amounts treated as dividends
on the Exchangeable Preferred Stock but will not be entitled to that deduction
with respect to amounts treated as a return of capital or capital gain. In
addition, the benefit of a dividends-received deduction may be reduced by the
corporate alternative minimum tax. In determining entitlement to the
dividends-received deduction, corporate holders should also consider the
provisions of Sections 246(c), 246A and 1059 of the Code and Treasury
Regulations promulgated thereunder, and IRS rulings and administrative
pronouncements relating to such Code provisions. Under current law as amended by
certain legislation recently enacted by Congress (the 'New Legislation'),
Section 246(c) of the Code disallows the dividends-received deduction in its
entirety if the holder does not hold the stock for at least a 90 day continuous
period beginning 45 days prior to the date such holder becomes entitled to
receive each dividend on the stock. The New Legislation also requires immediate
recognition of gain under Section 1059 of the Code to the extent that the
non-taxed portion of a dividend exceeds a corporate shareholder's tax basis in
the Exchangeable Preferred Stock, rather than deferring such gain until the sale
of such Exchangeable Preferred Stock. The New Legislation also increases the
holding period of Exchangeable Preferred Stock required for purposes of the
dividends-received deduction. Section 246(c)(4) of the Code provides that a
holder may not count toward this minimum holding period any period in which the
holder (i) has, among other things, an option to sell Exchangeable Preferred
Stock which it owns, (ii) is under a contractual obligation to sell Exchangeable
Preferred Stock which it owns, (iii) has made (and not closed) a short sale of
substantially identical stock or securities, or (iv) has diminished its risk of
loss by holding one or more positions with respect to substantially similar or
related property. Section 246A of the Code contains the 'debt-financed portfolio
stock' rules, under which the dividends-received deduction could be reduced to
the extent that a holder incurs indebtedness directly attributable to its
investment in the Exchangeable Preferred Stock.
Excessive Redemption Price
Under Section 305 of the Code and Treasury Regulations authorized
thereunder, if the redemption price of Exchangeable Preferred Stock exceeds its
issue price (i.e., its fair market value at its date of original issue) by more
than a de minimis amount, such excess may be treated as a constructive
distribution that will be treated in the same manner as distributions described
above under 'Distributions in General.' A holder of such Exchangeable Preferred
Stock is required to treat such excess as a constructive distribution received
by the holder over the life of such stock under a constant interest (economic
yield) method that takes into account the compounding of yield. It is
anticipated that the mandatory redemption price of the Exchangeable Preferred
Stock will not exceed such Exchangeable Preferred Stock issue price by more than
a de minimis amount.
Sale, Redemption or other Taxable Disposition of the Exchangeable Preferred
Stock
Upon a sale or other taxable disposition (but not including on exchange of
Exchangeable Preferred Stock for Exchange Debentures or other redemption), a
holder generally will recognize capital gain or loss for U.S. Federal income tax
purposes (except to the extent of cash payments received on the disposition that
are attributable to accrued dividends, which will be treated in the same manner
as distributions described above under 'Distributions in General') in an amount
equal to the difference between (i) the sum of the amount of cash and the fair
market value of any property received upon such sale or other taxable
disposition and (ii) the holder's adjusted tax basis in the Exchangeable
Preferred Stock being disposed. Under New Legislation, any gain or loss on the
sale, exchange or retirement of the Exchangeable Preferred Stock held by
individual taxpayers for (i) one year or less shall be treated as short-term
capital gain or loss, (ii) more than one year but not more than 18 months shall
be subject to a maximum tax rate of 28 percent, (iii) more than 18 months shall
be subject to a maximum tax rate of 20 percent and (iv) beginning in the year
2006, the Exchangeable Preferred Stock acquired after the year 2000 and held for
at least five years shall be taxed at a maximum rate of 18 percent.
A holder's initial tax basis in the Exchangeable Preferred Stock generally
will be the price such holder paid for such Exchangeable Preferred Stock.
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Gain or loss recognized by a holder on a redemption of the Exchangeable
Preferred Stock would be treated as a sale or exchange and therefore qualify for
the treatment described above if, taking into account stock that is actually or
constructively owned under the constructive ownership rules of Section 318 of
the Code by such holder, either (i) the holder's interest in the stock of the
Company is completely terminated as a result of the redemption or (ii) the
redemption is 'not essentially equivalent to a dividend.' Under Section 318 of
the Code, a person generally will be treated as the owner of stock of the
Company owned by certain related parties or certain entities in which the person
owns an interest and stock that a holder could acquire through exercise of an
option. Whether a redemption is not essentially equivalent to a dividend depends
on each holder's facts and circumstances, but in any event requires a
'meaningful reduction' in such holder's equity interest in the Company. A holder
of the Exchangeable Preferred Stock who sells some or all of the stock of the
Company owned by it may be able to take such sales into account to satisfy one
of the foregoing conditions. Conversely, a holder who purchases additional
shares of stock of the Company may be required to take such shares into account
in determining whether any of the foregoing conditions are satisfied.
If none of the above conditions is satisfied, the entire amount of the cash
(or property) received on a redemption will be treated as a distribution
(without offset by the holder's tax basis in the redeemed shares), which will be
treated in the same manner as distributions described above under 'Distributions
in General.' In such case, the holder's basis in the redeemed the Exchangeable
Preferred Stock would be transferred to the holder's remaining shares of the
Company stock (if any). If the holder does not retain any shares of the Company
stock, such basis may be entirely lost.
A redemption of Exchangeable Preferred Stock for Exchange Debentures will
be subject to the same general rules as a redemption for cash, as described
above, except that the amount of the redemption proceeds will be determined
based upon the issue price of the Exchange Debentures. The issue price of such
Exchange Debentures generally will be the fair market value of such Exchange
Debentures on their issue date, provided that such Exchange Debentures are
traded on an established securities market within thirty days either prior to or
following such issue date. If the Exchangeable Preferred Stock, but not the
Exchange Debentures issued therefor, is traded on an established securities
market within either thirty days prior to or following the issue date of the
Exchange Debentures, then the issue price of such Exchange Debentures will be
the fair market value of the Exchangeable Preferred Stock exchanged therefor. In
the event that neither the Exchangeable Preferred Stock nor the Exchange
Debentures is traded on an established securities market within the applicable
period, the issue price of the Exchange Debentures will be their stated
principal amount--generally their face value--unless the Exchange Debentures do
not bear 'adequate stated interest' within the meaning of Section 1274 of the
Code, in which case the issue price of such Exchange Debentures generally will
be an amount equal to the sum of the present values of all payments due under
the Exchange Debentures, determined using a discount rate equal to the
applicable Federal rate ('AFR') (discussed further under 'Applicable High-Yield
Discount Obligation' below). Additionally, any gain recognized on a redemption
of Exchangeable Preferred Stock for Exchange Debentures may be eligible for
deferral under the installment sale method, subject to a $5 million dollar
limitation and provided that neither the Exchangeable Preferred Stock nor the
Exchange Debentures are readily tradeable on an established securities market.
The Company does not anticipate that either the Exchangeable Preferred Stock or
the Exchange Debentures will be readily tradeable on an established securities
market.
TAXATION OF THE EXCHANGE DEBENTURES
Interest on the Exchange Debentures
With respect to any Exchange Debenture issued after December 15, 2002, a
holder of an Exchange Debenture will be required to report stated interest
earned on the Exchange Debenture as ordinary interest income for U.S. Federal
income tax purposes in accordance with such holder's method of tax accounting.
Original Issue Discount
Some or all of the Exchange Debentures may be considered issued with
original issue discount for U.S. Federal income tax purposes. In general,
original issue discount on the Exchange Debentures, defined as the excess of
'stated redemption price at maturity' over 'issue price,' must be included in a
holder's gross income
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in advance of the receipt of cash representing that income (regardless of
whether the holder is a cash or accrual method taxpayer).
The 'issue price' of an Exchange Debenture will depend on whether the
Exchange Debenture or the Exchangeable Preferred Stock is traded on an
established securities market as discussed above under 'Sale, Redemption or
Other Taxable Disposition of Exchangeable Preferred Stock.' The 'stated
redemption price at maturity' of the Exchange Debentures will equal their
principal amount at maturity plus, in the case of an Exchange Debenture issued
on or prior to December 15, 2002, the aggregate amount of the stated interest
payable on such Exchange Debentures.
The Company will report annually to the IRS and to record holders of the
Exchange Debentures information with respect to original issue discount accruing
during the calendar year.
A holder of an Exchange Debenture will be required to include in gross
income for U.S. Federal income tax purposes the sum of the 'daily portions' of
original issue discount with respect to the Exchange Debenture for each day of
the taxable year during which such holder holds the Exchange Debenture. The
daily portions of original issue discount with respect to an Exchange Debenture
are determined by allocating to each day in an 'accrual period' a ratable
portion of the original issue discount allocable to such accrual period. Accrual
periods with respect to an Exchange Debenture may be any set of periods (which
may be of varying lengths) selected by a holder provided that (i) no accrual
period is longer than one year and (ii) each scheduled payment of interest or
principal on the Exchange Debenture occurs on either the first or final day of
an accrual period.
The amount of original issue discount allocable to each accrual period
equals the amount determined by multiplying the 'adjusted issue price' of the
Exchange Debenture at the beginning of the accrual period by the yield to
maturity of the Exchange Debenture (i.e., the discount rate that, when applied
to all payments under the Exchange Debenture, including payments of stated
interest or principal, results in a present value equal to the issue price). The
'adjusted issue price' at the beginning of any accrual period is the issue price
of the Exchange Debenture, plus the amount of original issue discount taken into
account for all prior accrual periods, minus the amount of all cash payments
previously made on the Exchange Debenture (including payments of stated
interest). This constant yield method of determining the amount of original
issue discount included in income for any period generally will require a holder
of an Exchange Debenture to include increasing amounts of original issue
discount in income in successive accrual periods. The holder will not be
required to recognize as additional income payments of stated interest to the
extent such payments are already taken into account as original issue discount.
Bond Premium
If the holder's basis in the Exchange Debentures exceeds the amount payable
at the maturity date, such excess will be deductible by the holder of the
Exchange Debentures as amortizable bond premium over the term of the Exchange
Debentures under a yield-to-maturity formula if the holder has already made an
election under Section 171 of the Code. An election under Section 171 of the
Code is (i) available only if the Exchange Debentures are held as capital
assets, (ii) is revocable only with the consent of the IRS and (iii) applies to
all obligations owned or subsequently acquired by the holder on or after the
first day of the taxable year in which such election applies. To the extent that
the excess is deducted as amortizable bond premium, the holder's adjusted tax
basis in the Exchange Debentures will be reduced. Current Treasury Regulations
under Section 171 of the Code provide that the amortizable bond premium will
offset interest income on the Exchange Debentures and will not be treated as a
separate deduction item. However, Proposed Regulations under Section 171 of the
Code would conform the treatment of amortizable bond premium to the treatment of
original issue discount.
Sale or Redemption
A holder generally will recognize taxable gain or loss upon the sale,
exchange, retirement or other taxable disposition of an Exchange Debenture equal
to the difference between the amount realized upon such disposition (other than
amounts attributable to stated interest not included in the stated redemption
price at maturity of such Exchange Debentures) and its adjusted tax basis in the
Exchange Debenture. A holder's adjusted tax basis in an Exchange Debenture will
equal the issue price of such Exchange Debentures, increased by accrued original
issue
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discount previously included in the holder's gross income with respect to the
Exchange Debenture, and decreased by any cash payments (including payments of
stated interest) made with respect thereto.
Applicable High-Yield Discount Obligation
The original issue discount on any obligation that constitutes an
'applicable high yield discount obligation' is not deductible until paid. An
'applicable high yield discount obligation' is any debt instrument that (i) has
a maturity date which is more than five years from the date of issue, (ii) has a
yield to maturity which equals or exceeds the AFR (as set forth in Section
1274(d) of the Code) for the calendar month in which the obligation is issued
plus five percentage points and (iii) has 'significant original issue discount.'
The AFR is an interest rate announced monthly by the IRS, that is based on the
yield of debt obligations issued by the U.S. Treasury. A debt instrument
generally has 'significant original issue discount' if the aggregate amount
(including original issue discount) that would be includable in gross income
with respect to the debt instrument for periods before the close of any accrual
period that ends more than five years after the date of issue exceeds the sum of
(i) the aggregate amount of interest to be paid on the instrument before the
close of such accrual period and (ii) the product of the issue price of the
instrument and its yield to maturity. Moreover, if the debt instrument's yield
to maturity exceeds the AFR plus six percentage points, a ratable portion of the
issuing corporation's deduction for original issue discount (the 'Disqualified
Original Issue Discount') (based on the portion of the yield to maturity that
exceeds the applicable Federal rate plus six percentage points) will be denied.
For purposes of the dividends-received deduction under Section 243 of the Code,
the Disqualified Original Issue Discount will be treated as a dividend to the
extent it would have been so treated had such amount been distributed by the
Company with respect to its stock. Whether the Exchange Debentures will
constitute applicable high yield debt obligations will depend upon the facts and
circumstances existing at the time of their issuance.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding may apply to certain
non-corporate holders with respect to payments by the Company of dividends on
the Exchangeable Preferred Stock or payments of interest on the Exchange
Debentures. Such payments will be subject to backup withholding at a rate of 31
percent unless the beneficial owner of such security supplies the payor or its
agent with a taxpayer identification number, certified under penalties of
perjury, and certain other information, or otherwise establishes, in the manner
prescribed by law, an exemption from backup withholding. In addition, if the
Exchangeable Preferred Stock or Exchange Debentures are sold to (or through) a
'broker,' the broker may be required to withhold 31 percent of the entire sales
price, unless either (i) the broker determines that the seller is a corporation
or other exempt recipient or (it) the seller provides, in the required manner,
certain identifying information. Such a sale must also be reported by the broker
to the IRS, unless the broker determines that the seller is an exempt recipient.
The term 'broker' as defined by Treasury Regulations includes all persons who,
in the ordinary course of their business, stand ready to effect sales made by
others.
Any amount withheld under backup withholding rules from a payment to a
holder is allowable as a credit against the holder's U.S. Federal income tax,
which may entitle the holder to a refund, provided that the holder furnishes the
required information to the IRS. In addition, certain penalties may be imposed
by the IRS on a holder who is required to supply information but does not do so
in the proper manner.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PURCHASER OF THE EXCHANGEABLE PREFERRED STOCK OR HOLDER OF
EXCHANGE DEBENTURES SHOULD CONSULT WITH ITS OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES TO SUCH PURCHASER FROM THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for sale, resold or otherwise transferred by any
holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that the New Preferred Stock issued pursuant to the Exchange Offer in
exchange for Old Preferred Stock may be offered for resale, resold and otherwise
transferred by any holder of such New Preferred Stock (except in the case of
broker-dealers, as set forth below) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Preferred Stock is acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Preferred Stock. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Preferred Stock may not rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Preferred Stock for its own
account in exchange for Old Preferred Stock, where such Old Preferred Stock was
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Stock.
The Company will not receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Preferred Stock or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such New Preferred Stock. Any broker-dealer that resells New
Preferred Stock that was received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Preferred Stock may be deemed to be an 'underwriter' within the meaning
of the Securities Act and any profit on any such resale of New Preferred Stock
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of Transmittal
states that by, acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
'underwriter' within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incidental to the Exchange Offer (including the reasonable fees and
disbursements of one counsel for the holders of the Exchangeable Preferred
Stock) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Exchangeable Preferred Stock (including certain
broker-dealers) against certain liabilities, including certain liabilities under
the Securities Act.
Each holder of the Old Preferred Stock who wishes to exchange its Old
Preferred Stock for New Preferred Stock in the Exchange Offer will be required
to make certain representations to the Company as set forth in 'The Exchange
Offer--Terms and Conditions of the Letter of Transmittal.' The Company has not
entered into any arrangement or understanding with any person to distribute the
New Preferred Stock to be received in the Exchange Offer and, as of the
Expiration Date, to the best of the Company's information and belief, each
person participating in the Exchange Offer will be acquiring the New Preferred
Stock in its ordinary course of business and will not have any arrangement or
understanding with any person to participate in the distribution of the New
Preferred Stock to be received in the Exchange Offer.
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LEGAL MATTERS
The validity of the New Preferred Stock and the Exchange Debentures will be
passed upon for WinStar Communications, Inc. by Graubard Mollen & Miller, New
York, New York. Certain partners and employees of Graubard Mollen & Miller are
holders of shares of the Common Stock of WinStar Communications, Inc.
EXPERTS
The consolidated financial statements of (i) the Company as of December 31,
1996 and 1997 and for the years ended December 31, 1996 and December 31, 1997,
and the ten months ended December 31, 1995, and (ii) Midcom as of and for the
year ended December 31, 1997, each of which is 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. The financial statements of Midcom Communications, Inc. as of December
31, 1995 and December 31, 1996 and for each of the three years in the period
ended December 31, 1996, incorporated by reference into this Prospectus, have
been audited by Ernst & Young LLP, independent auditors, to the extent for the
periods indicated in their report thereon.
92
<PAGE>
INDEX TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Statements............................................ F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1997........................... F-3
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.......................................... F-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Year Ended December 31, 1997........... F-5
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations................................ F-6
</TABLE>
F-1
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1997 gives effect to the February
1997 Preferred Stock Placement, the issuance of the March 1997 Notes in the
March 1997 Debt Placement, the WEC II Equipment Notes issued in the August 1997
Debt Placement, the Senior Subordinated Notes issued in the October 1997 Debt
Placement, the US ONE Asset Acquisition and Financing, the issuance of the
Exchangeable Preferred Stock in the December 1997 Exchangeable Preferred Stock
Placement (the 'Financing Transactions'), the Midcom Asset Purchase, the
Preferred Stock Placement and the 1998 Debt Placement (collectively, the 'Pro
Forma Transactions') as if they occurred as of January 1, 1997.
The following unaudited pro forma condensed consolidated balance sheet as
of December 31, 1997 gives effect to the Midcom Asset Purchase, the Preferred
Stock Placement and the 1998 Debt Placement (collectively, the 'Pro Forma
Transactions') as if they had occurred on December 31, 1997.
The Pro Forma Financial Statements do not purport to represent what the
Company's results of operations or financial condition would actually have been
had the Pro Forma Transactions in fact occurred on such date or to project the
Company's results of operations or financial condition for any future period or
date.
These pro forma financial statements should be read in conjunction with the
notes to the unaudited pro forma condensed consolidated financial statements.
The Pro Forma Financial Information gives effect to the Pro Forma
Transactions, including the Midcom Asset Acquisition, and relies upon the
historical financial statements of Midcom (which are incorporated by reference
into this Prospectus). Midcom's financial statements for the year ended December
31, 1997 (and, consequently, the Pro Forma Financial Information) include
Midcom's operations during the 10-month period in 1997 prior to Midcom's
bankruptcy filing in November 1997 and, therefore, do not accurately reflect the
state of the business actually acquired by the Company in January 1998. See Note
A to the Midcom Consolidated Financial Statements. In addition, one of the
significant assets acquired by the Company in the acquisition was Midcom's
customer base, all of whom now must be notified by the Company of the transfer
of their accounts to the Company and have the option to replace the Company as
their service provider. Although the Company expects that a significant number
of customers will elect to terminate their service and move to other carriers,
the Pro Forma Financial Information does not give effect to the loss of any
Midcom customers. Moreover, the Pro Forma Financial Information does not purport
to represent what the Company's results of operations or financial condition
would actually have been had the Midcom Asset Acquisition in fact occurred on
January 1, 1997 or to project the Company's results of operations or financial
condition for any future period or date. Although the Company believes the
assets it acquired from Midcom were purchased on attractive terms, the Company
believes that investors in any of the Securities offered hereby should not place
any reliance on the pro forma operating results contained in the Pro Forma
Financial Statements as they relate to Midcom.
F-2
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
PRO FORMA FOR THE
FOR THE PREFERRED STOCK
THE ADJUSTMENTS MIDCOM PLACEMENT AND
COMPANY, MIDCOM, FOR THE MIDCOM ASSET THE 1998 DEBT
HISTORICAL HISTORICAL ASSET ACQUISITION ACQUISITION PLACEMENT PRO FORMA
----------- ---------- ----------------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......... $ 402,359 $ 2,285 $ (92,000)(a) $310,359 $ 192,850(b) $ 939,872
(2,285)(a) 436,663(c)
Short term investments............ 16,903 16,903 16,903
----------- ---------- ----------------- --------- --------------- -----------
Cash, cash equivalents and short
term investments.............. 419,262 2,285 (94,285) 327,262 629,513 956,775
Accounts receivable, net.......... 30,328 20,661 50,989 50,989
Inventories....................... 10,296 10,296 10,296
Prepaid expenses and other current
assets.......................... 8,985 6,125 15,110 15,110
Net assets of discontinued
operations...................... 2,105 2,105 2,105
----------- ---------- ----------------- --------- --------------- -----------
Total current assets.......... 470,976 29,071 (94,285) 405,762 629,513 1,035,275
Property and equipment, net......... 284,835 25,331 (16,667)(a) 293,499 293,499
Licenses, net....................... 174,763 174,763 174,763
Intangible assets, net.............. 14,293 4,481 51,388(a) 70,162 70,162
Deferred financing costs............ 27,463 27,463 13,337(c) 40,800
Other assets........................ 4,071 681 4,752 4,752
----------- ---------- ----------------- --------- --------------- -----------
Total assets.................. $ 976,401 $ 59,564 $ (59,564) $976,401 $ 642,850 $1,619,251
----------- ---------- ----------------- --------- --------------- -----------
----------- ---------- ----------------- --------- --------------- -----------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long term
debt ........................... $ 386 $ $ $ 386 $ $ 386
Notes payable..................... 32,332 (32,332)(a)
Accounts payable and accrued
expenses........................ 97,714 9,402 (9,402)(a) 97,714 97,714
Current portion of capitalized
lease obligations............... 6,848 15,263 (15,263)(a) 6,848 6,848
----------- ---------- ----------------- --------- --------------- -----------
Total current liabilities..... 104,948 56,997 (56,997) 104,948 -- 104,948
Capitalized lease obligations, less
current portion................... 21,823 21,823 21,823
Long-term debt, less current
portion........................... 768,469 768,469 450,000(c) 1,218,469
Liabilities subject to compromise... 175,886 (175,886)(a)
Deferred income taxes............... 24,000 24,000 24,000
----------- ---------- ----------------- --------- --------------- -----------
Total liabilities............. 919,240 232,883 (232,883) 919,240 450,000 1,369,240
----------- ---------- ----------------- --------- --------------- -----------
Exchangeable redeemable preferred
stock............................. 175,553 175,553 175,553
Cumulative Convertible Redeemable
preferred stock................... 200,000(b) 200,000
Commitments and contingencies
Stockholders' equity:
Preferred stock................... 39 39 39
Common stock, $.01 par value;
authorized 200,000 shares,
issued and outstanding 34,610
shares, 34,610 pro forma issued
and outstanding shares and
34,610 pro forma as adjusted
issued and outstanding shares... 346 67,548 (67,548)(a) 346 346
Additional paid-in capital........ 255,741 255,741 (7,150)(b) 248,591
Deferred compensation............. (1,192) 1,192(a)
Accumulated deficit............... (374,518) (239,675) 239,675(a) (374,518 ) (374,518 )
----------- ---------- ----------------- --------- --------------- -----------
Total stockholders' equity.... (118,392) (173,319) 173,319 (118,392 ) (7,150) (125,542 )
----------- ---------- ----------------- --------- --------------- -----------
Total liabilities and
stockholders' equity....... $ 976,401 $ 59,564 $ (59,564) $976,401 $ 642,850 $1,619,251
----------- ---------- ----------------- --------- --------------- -----------
----------- ---------- ----------------- --------- --------------- -----------
</TABLE>
F-3
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
The adjustments below were prepared based on data currently available and
in some cases are based on estimates or approximations. It is possible that the
actual amounts recorded may have an impact on the results of operations and the
balance sheet different from that reflected in the accompanying unaudited pro
forma condensed consolidated financial statements. It is therefore possible that
the entries presented below will not be the amounts actually recorded.
BALANCE SHEET AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
(a) To record the Midcom Asset Purchase as follows:
Cash purchase price........................................................................... $ (92,000)
Eliminate cash retained by the seller......................................................... (2,285)
Eliminate property and equipment retained by the seller....................................... (16,667)
Excess of purchase price over seller's historical basis....................................... 51,388
--------------
Total Asset Adjustments.................................................................. $ (59,564)
--------------
--------------
ELIMINATE LIABILITIES RETAINED BY THE SELLER AS FOLLOWS:
Notes payable................................................................................. $ (32,332)
Accounts payable and accrued expenses......................................................... (9,402)
Liabilities subject to compromise............................................................. (175,886)
Current portion of capitalized lease obligations.............................................. (15,263)
ELIMINATION OF HISTORICAL EQUITY ACCOUNTS AS FOLLOWS:
Common stock of Midcom........................................................................ (67,548)
Deferred compensation of Midcom............................................................... 1,192
Accumulated deficit of Midcom................................................................. 239,675
--------------
Total Liability and Equity Adjustments................................................... $ (59,564)
--------------
--------------
</TABLE>
(b) To record the issuance of the Preferred Stock Placement and related
fees and expenses.
(c) To record the issuance of the 1998 Debt Placement and the related fees
and expenses.
F-4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
THE FOR THE
COMPANY, PRO FORMA PRO FORMA FOR THE MIDCOM,
HISTORICAL FINANCINGS FINANCING TRANSACTIONS HISTORICAL
----------- ----------- ---------------------- ----------
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services................................... $ 38,277 $ $ 38,277 $ 98,283
Information services ......................................... 41,354 41,354
----------- ----------- ---------- ----------
Total operating revenues........................................ 79,631 79,631 98,283
----------- ----------- ---------- ----------
Operating expenses
Cost of services and products................................. 81,017 81,017 72,440
Selling, general and administrative expenses.................. 156,959 156,959 86,004
Depreciation and amortization................................. 29,701 5,062(a) 34,763 17,168
----------- ----------- ---------- ----------
Total operating expenses........................................ 267,677 5,062 272,739 175,612
----------- ----------- ---------- ----------
Operating loss................................................ (188,046) (5,062) (193,108) (77,329)
Other expense
Interest expense.............................................. (77,257) (25,905)(a) (103,162) (9,929)
Interest income............................................... 17,577 17,577 --
Reorganization items.......................................... (11,310)
Other income (expense)........................................ 2,219 2,219 (5,200)
----------- ----------- ---------- ----------
Loss from continuing operations before income tax benefit....... (245,507) (30,967) (276,474) (103,768)
Income tax benefit.............................................. 2,500 2,500
----------- ----------- ---------- ----------
Loss from continuing operations................................. (243,007) (30,967) (273,974) (103,768)
Loss from discontinued operations............................... (6,477) (6,477)
----------- ----------- ---------- ----------
Net loss........................................................ (249,484) (30,967) (280,451) (103,768)
Less preferred stock dividends.................................. (5,879) (25,927)(a) (31,806)
----------- ----------- ---------- ----------
Net loss applicable to common stockholders...................... $(255,363) $ (56,894) $ (312,257) $ (103,768)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Loss applicable to common stock per share from continuing
operations.................................................... $ (7.49) $ (9.20)
Loss per share from discontinued operations..................... (0.19) (0.19)
----------- ----------
Net loss applicable to common stock per share................... $ (7.68) $ (9.39)
----------- ----------
----------- ----------
Weighted average shares outstanding ............................ 33,249 33,249
----------- ----------
----------- ----------
<CAPTION>
ADJUSTMENTS
FOR THE
ADJUSTMENTS PRO FORMA PREFERRED
FOR THE FOR THE STOCK PLACEMENT
MIDCOM MIDCOM AND THE
ASSET ASSET 1998
ACQUISITION ACQUISITION DEBT PLACEMENT PRO FORMA
----------- ----------- --------------- ---------
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services................................... $ $ 136,560 $ $136,560
Information services ......................................... 41,354 41,354
----------- ----------- --------------- ---------
Total operating revenues........................................ -- 177,914 177,914
----------- ----------- --------------- ---------
Operating expenses
Cost of services and products................................. 153,457 153,457
Selling, general and administrative expenses.................. 714(b) 243,677 243,677
Depreciation and amortization................................. 5,139(b) 56,741 56,741
(329)(b)
----------- ----------- --------------- ---------
Total operating expenses........................................ 5,524 453,875 453,875
----------- ----------- --------------- ---------
Operating loss................................................ (5,524) (275,961) (275,961 )
Other expense
Interest expense.............................................. 9,929(b) (103,162) (49,590)(d) (152,752 )
Interest income............................................... (4,784)(b) 12,793 12,793
Reorganization items.......................................... 11,310(b) --
Other income (expense)........................................ (2,981) (2,981 )
----------- ----------- --------------- ---------
Loss from continuing operations before income tax benefit....... 10,931 (369,311) (49,590) (418,901 )
Income tax benefit.............................................. 2,500 2,500
----------- ----------- --------------- ---------
Loss from continuing operations................................. 10,931 (366,811) (49,590) (416,401 )
Loss from discontinued operations............................... (6,477) (6,477 )
----------- ----------- --------------- ---------
Net loss........................................................ 10,931 (373,288) (45,590) (422,878 )
Less preferred stock dividends.................................. (31,806) (14,000)(c) (45,806 )
----------- ----------- --------------- ---------
Net loss applicable to common stockholders...................... $ 10,931 $(405,094) $ (63,590) (468,684 )
----------- ----------- --------------- ---------
----------- ----------- --------------- ---------
Loss applicable to common stock per share from continuing
operations.................................................... $ (11.99) $ (13.81 )
Loss per share from discontinued operations..................... (0.19) (0.19 )
----------- ---------
Net loss applicable to common stock per share................... $ (12.18) $ (14.00 )
----------- ---------
----------- ---------
Weighted average shares outstanding ............................ 33,249 220 33,469
----------- --------------- ---------
----------- --------------- ---------
</TABLE>
F-5
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
(a) To record the Financing Transactions as if they occurred as of January
1, 1997, including preferred stock dividends and amortization of debt
offering costs and other related fees, but not to include interest
income earned on unused cash, as follows:
Preferred Stock dividends on the Preferred Stock issued by the Company
in the February 1997 Preferred Stock Placement ($654).
Interest expense on the debt issued in the March 1997 Debt Placement
($8,476).
Interest expense on the debt issued in the August 1997 Debt Placement
($4,018).
Interest expense on the Senior Subordinated Notes issued in the October
1997 Debt Placement ($12,336).
Depreciation expense on the assets acquired in the US ONE Asset
Acquisition, ($5,062) and the interest expense on the related
financing ($6,877).
Preferred Stock dividends on the Exchangeable Redeemable Preferred
Stock issued in the December 1997 Preferred Stock Placement
($25,273).
Eliminate the pro forma interest expense ($6,877) related to the US ONE
Asset Financing and to record the interest expense ($1,075) related
to the write-off of the related financing fees.
(b) To record the MIDCOM Asset Acquisition as follows:
Amortization of the excess of the purchase price over Seller's
historical basis of the assets acquired in the Midcom Asset
Acquisition over ten years ($5,139).
Eliminate the interest expense recorded on the Midcom debt, which was
not assumed in the Midcom Asset Acquisition ($9,929).
Eliminate interest income on the purchase price of the Midcom
Acquisition, as if the Midcom Acquisition had occurred as of January
1, 1997 ($4,784).
Eliminate depreciation expense ($329) related to the Midcom assets not
purchased by the Company and to record rental expense ($714) for the
Midcom assets leased by the Company.
Eliminate Reorganization items related to the Midcom bankruptcy
($11,310).
(c) To reflect Preferred Stock dividends (assuming the dividends are paid
in Common Stock) as if the Preferred Stock Placement had been completed
as of January 1, 1997.
(d) To record interest expense on the 1998 Debt Placement, including
amortization of debt offering costs and other related fees, as if the
Notes issued in the 1998 Debt Placement, were issued as of January 1,
1997, but not to include interest income earned on available cash.
F-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 shall have power to 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 the person 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 the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person 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 the
person's 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 the person 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 the
person's conduct was unlawful.
(b) A corporation shall have power to 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
judgment in its favor by reason of the fact that the person 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
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person 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 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 the person has
met the applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
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
II-1
<PAGE>
corporation as authorized in this section. Such expenses (including attorney's
fees) 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 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 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 any 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; and a person who acted in good faith and 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.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.'
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 of
1933 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 a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
5.1 -- Opinion of Graubard Mollen & Miller
12.1 -- Ratio of Earnings to Combined Fix 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)
23.4 -- Consent of Ernst & Young LLP
99.1 -- Form of Letter of Transmittal for Exchange of Preferred Stock
</TABLE>
II-2
<PAGE>
ITEM 22. 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 to 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 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 (a)(1)(i) and (a)(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 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) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
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-4 AND HAS DULY CAUSED THIS 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 9TH DAY OF MAY,
1998.
WINSTAR COMMUNICATIONS, INC.
By:
______________________________________
William J. Rouhana, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------- -------------
<S> <C> <C>
Chairman of the Board of Directors and Chief May 9, 1998
- ------------------------------------------ Executive Officer (and principal executive
William J. Rouhana, Jr. officer)
/s/ * President, Chief Operating Officer and Director May 9, 1998
- ------------------------------------------
Nathan Kantor
/s/ * Vice Chairman of the Board of Directors May 9, 1998
- ------------------------------------------
Steven G. Chrust
/s/ * Executive Vice President and Chief Financial May 9, 1998
- ------------------------------------------ Officer (and principal accounting officer)
Charles T. Dickson
/s/ * Director May 9, 1998
- ------------------------------------------
Bert W. Wasserman
/s/ * Director May 9, 1998
- ------------------------------------------
William J. vanden Heuvel
/s/ * Director May 9, 1998
- ------------------------------------------
Steven B. Magyar
/s/ * Director May 9, 1998
- ------------------------------------------
James I. Cash
</TABLE>
- ------------------
* By Power of Attorney.
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
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)
23.4 Consent of Ernst & Young LLP
</TABLE>
<PAGE>
EXHIBIT 12.1
WINSTAR COMMUNICATIONS, INC.
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED YEAR ENDED DECEMBER
YEAR ENDED FEBRUARY 28, DECEMBER 31, DECEMBER 31, 31, 1997
--------------------------- ------------ ------------ ---------------------
1993 1994 1995 1995 1996 ACTUAL PRO FORMA
------- ------- ------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net loss from continuing operations before
income taxes............................. $(4,594) $(8,205) $(7,226) $(16,094) $(82,713) $(245,507) $(418,901)
Adjustments to earnings:
Fixed charges, as detailed below......... 674 915 900 8,063 38,520 85,324 160,819
Interest capitalized..................... -- -- -- -- (320) (4,200) (4,200 )
Extraordinary item....................... -- (194) -- -- -- -- --
Minority interest in WinStar Gateway
Network................................ -- (155) -- -- -- -- --
------- ------- ------- ------------ ------------ --------- ---------
Earnings as adjusted....................... $(3,920) $(7,639) $(6,326) $ (8,031) $(44,513) $(164,383) $(262,282)
------- ------- ------- ------------ ------------ --------- ---------
------- ------- ------- ------------ ------------ --------- ---------
Fixed charges:
Interest expense......................... $ 567 $ 793 $ 733 $ 7,715 $ 36,834 $ 77,257 $152,752
Capitalized interest..................... -- -- -- -- 320 4,200 4,200
Portion of rental expense which is
representative of interest............. 107 122 167 348 1,366 3,867 3,867
------- ------- ------- ------------ ------------ --------- ---------
Total fixed charges...................... 674 915 900 8,063 38,520 85,324 160,819
Preferred stock dividends.................... 85 68 62 216 -- 5,879 45,806
------- ------- ------- ------------ ------------ --------- ---------
Combined fixed charges and preferred stock
dividends.................................. $ 759 $ 983 $ 962 $ 8,279 $ 38,520 $ 91,203 $206,625
------- ------- ------- ------------ ------------ --------- ---------
------- ------- ------- ------------ ------------ --------- ---------
Deficiency in earnings to cover combined
fixed charges and preferred stock
dividends.................................. $(4,679) $(8,622) $(7,288) $(16,310) $(83,033) $(255,586) $(468,907)
------- ------- ------- ------------ ------------ --------- ---------
------- ------- ------- ------------ ------------ --------- ---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 12, 1998, accompanying the
consolidated financial statements of Winstar Communications, Inc. and
Subsidiaries appearing in the 1997 Annual Report of the Company to its
shareholders and accompanying the schedule included in the Annual Report on Form
10-K for the year ended December 31, 1997, which are incorporated by reference
in this Registration Statement and Prospectus. We consent to the incorporation
by reference in the Registration Statement and Prospectus of the aforementioned
reports and to the use of our name as it appears under the caption 'Experts.'
GRANT THORNTON LLP
New York, New York
May 8, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated March 6, 1998, accompanying the consolidated
financial statements of Midcom Communications Inc. and Subsidiaries for the year
ended December 31, 1997 included in Form 8-K, filed on March 12, 1998, which is
incorporated by reference in this Registration Statement and Prospectus. We
consent to the incorporation by reference in the Registration Statement and
Prospectus of the aforementioned report and to the use of our name as it appears
under the caption 'Experts.'
GRANT THORNTON LLP
Detroit, Michigan
May 4, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' in the
Registration Statement on Form S-4 and related Prospectus of Winstar
Communications Inc. for the registration of its Series C 14-1/4% Senior
Cumulative Exchangeable Preferred Stock due 2007 and to the incorporation by
reference therein of our report dated March 21, 1997, with respect to the
consolidated financial statements and schedules of Midcom Communications Inc. as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, included in the Current Report on Form 8-K/A of Winstar
Communications Inc. dated February 5, 1998, filed with the Securities and
Exchange Commission.
ERNST & YOUNG LLP
Detroit, Michigan
May 11, 1998
<PAGE>
LETTER OF TRANSMITTAL
for
Tender of all Outstanding
Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock Due 2007
in Exchange for
Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock Due 2007
of
WinStar Communications, Inc.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JUNE 15, 1998 (THE "EXPIRATION DATE"),
UNLESS EXTENDED BY WINSTAR COMMUNICATIONS, INC.
EXCHANGE AGENT:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
By Mail: By Overnight Courier: By Hand: By Facsimile:
<S> <C> <C> <C>
United States Trust United States Trust United States Trust Fax No. (212) 420-6152
Company of New York Company of New York Company of New York (For Eligible Institutions Only)
P.O. Box 844 770 Broadway, 13th Floor 111 Broadway, Lower Level Confirm by telephone:
Cooper Station New York, NY 10003 New York, NY 10006 Telephone no. (800) 548-6565
New York, NY 10276-0844 Attn: Corporate Trust Attn: Corporate Trust Services
(registered or certified mail Operations Department
recommended)
</TABLE>
Delivery of this Letter of Transmittal to an address other
than as set forth above or transmission of instructions via a facsimile
transmission to a number other than as set forth above will not constitute a
valid delivery.
The undersigned acknowledges receipt of the Prospectus dated
May 11, 1998 (the "Prospectus") of WinStar Communications, Inc. ("Company")
which, together with this Letter of Transmittal (the "Letter of Transmittal"),
constitute the Company's offer (the "Exchange Offer") to exchange a new series
of Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock Due 2007 (the
"New Preferred Stock") of the Company for all outstanding Series C 14 1/4%
Senior Cumulative Exchangeable Preferred Stock Due 2007 (the "Old Preferred
Stock") of the Company. The terms of the New Preferred Stock are identical to
the terms of the Old Preferred Stock for which they may be exchanged pursuant to
the Exchange Offer, except that the New Preferred Stock will have been
registered under the Securities Act of 1933, as amended, and, therefore, will
not bear legends restricting the transfer thereof.
The undersigned has checked the appropriate boxes below and
signed this Letter of Transmittal to indicate the action the undersigned desires
to take with respect to the Exchange Offer.
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE
PROSPECTUS CAREFULLY BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST
BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF
THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE
AGENT.
List below the Old Preferred Stock to which this Letter of
Transmittal relates. If the space provided below is inadequate, the Certificate
Numbers and Principal Amounts should be listed on a separate signed schedule
affixed hereto.
DESCRIPTION OF OLD PREFERRED STOCK TENDERED HEREWITH
================================================================================
Name(s) and address(es) of Certificate Aggregate Principal Amount
Registered Holder(s) Number(s) Principal Amount Tendered*
(Please fill in) Represented by
Notes
Total
============= ================= ================
* Unless otherwise indicated, the holder will be deemed to have tendered the
full aggregate principal amount represented by Old Preferred Stock. See
Instruction 2.
================================================================================
This Letter of Transmittal is to be used if certificates for
Old Preferred Stock are to be forwarded herewith.
Unless the context requires otherwise, the term "Holder" for
purposes of this Letter of Transmittal means any person in whose name Old
Preferred Stock are registered or any other person who has obtained a properly
completed bond power from the registered holder.
2
<PAGE>
Holders whose Old Preferred Stock are not immediately
available or who cannot deliver their Old Preferred Stock and all other
documents required hereby to the Exchange Agent on or prior to the Expiration
Date may tender their Old Preferred Stock according to the guaranteed delivery
procedure set forth in the Prospectus under the caption "The Exchange
Offer--Procedures for Tendering."
/ / CHECK HERE IF TENDERED OLD PREFERRED STOCK ARE BEING
DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND
COMPLETE THE FOLLOWING:
Name of Registered Holder(s):
------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
-----------------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name:
-----------------------------
Address:
--------------------------
3
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange
Offer, the undersigned hereby tenders to the Company the above-described
principal amount of Old Preferred Stock. Subject to, and effective upon, the
acceptance for exchange of the Old Preferred Stock tendered herewith, the
undersigned hereby exchanges, assigns and transfers to, or upon the order of,
the Company all right, title and interest in and to such Old Preferred Stock.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
as the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that said Exchange Agent acts as the agent of the undersigned in
connection with the Exchange Offer) to cause the Old Preferred Stock to be
assigned, transferred and exchanged. The undersigned represents and warrants
that it has full power and authority to tender, exchange, assign and transfer
the Old Preferred Stock and to acquire New Preferred Stock issuable upon the
exchange of such tendered Old Preferred Stock, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Preferred Stock, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claim. The undersigned
also warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Preferred Stock.
The Exchange Offer is subject to certain conditions as set
forth in the Prospectus under the caption "Exchange Offer--Conditions to the
Exchange Offer". The undersigned recognizes that as a result of these conditions
(which may be waived, in whole or in part, by the Company) as more particularly
set forth in the Prospectus, the Company may not be required to exchange any of
the Old Preferred Stock tendered hereby and, in such event, the Old Preferred
Stock not exchanged will be returned to the undersigned at the address shown
below the signature of the undersigned.
By tendering, each Holder of Old Preferred Stock represents to
the Company that (i) the New Preferred Stock acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such New Preferred Stock, whether or not such person is such Holder,
(ii) neither the Holder of Old Preferred Stock nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Notes, and (iii) if the Holder is not a broker-dealer or is a
broker-dealer but will not receive New Preferred Stock for its own account in
exchange for Old Preferred Stock, neither the Holder nor any such other person
is engaged in or intends to participate in a distribution of the New Preferred
Stock. If the tendering Holder is a broker-dealer that will receive New
Preferred Stock for its own account in exchange for Old Preferred Stock, it
represents that the Old Preferred Stock to be exchanged for the New Preferred
Stock were acquired by it as a result of market-making activities or other
trading activities, and acknowledges that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
4
<PAGE>
Preferred Stock. By acknowledging that it will deliver and by delivering a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Preferred Stock, the undersigned is not deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
All authority herein conferred or agreed to be conferred shall
survive the death, bankruptcy or incapacity of the undersigned and every
obligation of the undersigned hereunder shall be binding upon the heirs,
personal representatives, successors and assigns of the undersigned. Tendered
Old Preferred Stock may be withdrawn at any time prior to 5:00 p.m., New York
City Time on the Expiration Date.
Certificates for all New Preferred Stock delivered in exchange
for tendered Old Preferred Stock and any Old Preferred Stock delivered herewith
but not exchanged, in each case registered in the name of the undersigned, shall
be delivered to the undersigned at the address shown below the signature of the
undersigned.
5
<PAGE>
TENDERING HOLDER(S) SIGN HERE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature(s) of Holder(s)
Dated: , 199__
(Must be signed by registered Holder(s) exactly as name(s) appear(s) on
certificate(s) for Old Preferred Stock or by any person(s) authorized to become
registered Holder(s) by endorsements and documents transmitted herewith. If
signature by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, please set forth the full title of such person.) See Instruction 3.
Name(s):
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title):
----------------------------------------------------------
Address:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Including Zip Code)
Area Code and Telephone No.:
-----------------------------------
- --------------------------------------------------------------------------------
Tax Identification No.
6
<PAGE>
GUARANTEE OF SIGNATURE(S)
(If Required -- See Instruction 3)
Authorized Signature:
-----------------------------------------------------------
Name:
---------------------------------------------------------------------------
Title:
--------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
Name of Firm:
-------------------------------------------------------------------
Area Code and Telephone No.:
--------------------------------
Dated: , 199
------------------------------ --
7
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Exchange Offer
1. Delivery of this Letter of Transmittal and Certificates.
Certificates for all physically delivered Old Preferred Stock, as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile thereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at any of its addresses set
forth herein on or prior to the Expiration Date.
The method of delivery of this Letter of Transmittal, the Old
Preferred Stock and any other required documents is at the election and risk of
the Holder and, except as otherwise provided below, the delivery will be deemed
made only when actually received by the Exchange Agent. Instead of delivery by
mail, it is recommended that Holders use an overnight or hand delivery service.
Holders whose Old Preferred Stock are not immediately
available or who cannot deliver their Old Preferred Stock and all other required
documents to the Exchange Agent on or prior to the Expiration Date may tender
their Old Preferred Stock pursuant to the guaranteed delivery procedure set
forth in the Prospectus under "Exchange Offer--Procedures for Tendering."
Pursuant to such procedure: (i) such tender must be made by or through an
Eligible Institution (as defined in the Prospectus); (ii) on or prior to the
Expiration Date, the Exchange Agent must have received from such Eligible
Institution a letter, telegram or facsimile transmission setting forth the name
and address of the tendering Holder, the names in which such Old Preferred Stock
are registered, and, if possible, the certificate numbers of the Old Preferred
Stock to be tendered; and (iii) all tendered Old Preferred Stock as well as this
Letter of Transmittal and all other documents required by this Letter of
Transmittal must be received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such letter, telex,
telegram or facsimile transmission, all as provided in the Prospectus under the
caption "Exchange Offer--Procedures for Tendering".
No alternative, conditional, irregular or contingent tenders
will be accepted. All tendering Holders, by execution of this Letter of
Transmittal (or facsimile thereof), shall waive any right to receive notice of
the acceptance of the Old Preferred Stock for exchange.
2. Partial Tenders; Withdrawals. Tenders of Old Preferred
Stock will be accepted in denominations of $1,000 and integral multiples in
excess thereof. If less than the entire principal amount of Old Preferred Stock
evidenced by a submitted certificate is tendered, the tendering Holder must fill
in the principal amount tendered in the box entitled "Principal Amount
Tendered." A newly issued certificate for the principal amount of Old Preferred
Stock submitted but not tendered will be sent to such Holder as soon as
practicable after the Expiration
8
<PAGE>
Date. All Old Preferred Stock delivered to the Exchange Agent will be deemed to
have been tendered unless otherwise indicated.
Tenders of Old Preferred Stock pursuant to the Exchange Offer
are irrevocable, except that Old Preferred Stock tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. To be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent. Any such notice of withdrawal must specify the person named in
the Letter of Transmittal as having tendered Old Preferred Stock to be
withdrawn, the certificate numbers and designation of the Old Preferred Stock to
be withdrawn, the principal amount of Old Preferred Stock delivered for
exchange, a statement that such a Holder is withdrawing its election to have
such Old Preferred Stock exchanged, and the name of the registered Holder of
such Old Preferred Stock, and must be signed by the Holder in the same manner as
the original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Old Preferred Stock being withdrawn. The Exchange Agent will return the
properly withdrawn Old Preferred Stock promptly following receipt of notice of
withdrawal.
3. Signature on this Letter of Transmittal; Written
Instruments and Endorsements; Guarantee of Signatures. If this Letter of
Transmittal is signed by the registered Holder(s) of the Old Preferred Stock
tendered hereby, the signature must correspond with the name(s) as written on
the face of certificates without alteration, enlargement or any change
whatsoever.
If any of the Old Preferred Stock tendered hereby are owned of
record by two or more joint owners, all such owners must sign this Letter of
Transmittal.
If a number of Old Preferred Stock registered in different
names are tendered, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal as there are different
registrations of Old Preferred Stock.
When this Letter of Transmittal is signed by the registered
Holder or Holders of Old Preferred Stock listed and tendered hereby, no
endorsements of certificates or separate written instruments of transfer or
exchange are required.
If this Letter of Transmittal is signed by a person other than
the registered Holder or Holders of the Old Preferred Stock listed, such Old
Preferred Stock must be endorsed or accompanied by separate written instruments
of transfer or exchange in form satisfactory to the Company and duly executed by
the registered Holder or Holders, in either case signed exactly as the name or
names of the registered Holder or Holders appear(s) on the Old Preferred Stock.
If this Letter of Transmittal, any certificates or separate
written instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-
9
<PAGE>
in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written
instruments of transfer or exchange required by this Instruction 3 must be
guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal need not be
guaranteed by an Eligible Institution, provided the Old Preferred Stock are
tendered: (i) by a registered Holder of such Old Preferred Stock; or (ii) for
the account of any Eligible Institution.
4. Transfer Taxes. The Company shall pay all transfer taxes,
if any, applicable to the exchange of Old Preferred Stock pursuant to the
Exchange Offer. If, however, certificates representing New Preferred Stock, or
Old Preferred Stock for principal amounts not tendered or accepted for exchange,
are to be delivered to, or are to be issued in the name of, any person other
than the registered Holder of the Old Preferred Stock tendered hereby, or if a
transfer tax is imposed for any reason other than the exchange of Old Preferred
Stock pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted herewith, the amount of such transfer taxes
will be billed directly to such tendering Holder.
Except as provided in this Instruction 4, it will not be
necessary for transfer tax stamps to be affixed to the Old Preferred Stock
listed in this Letter of Transmittal.
5. Waiver of Conditions. The Company reserves the absolute
right to waive, in whole or in part, any of the conditions to the Exchange Offer
set forth in the Prospectus.
6. Mutilated, Lost, Stolen or Destroyed Notes. Any Holder
whose Old Preferred Stock have been mutilated, lost, stolen or destroyed should
contact the Exchange Agent at the address indicated above for further
instructions.
7. Requests for Assistance or Additional Copies. Questions
relating to the procedure for tendering, as well as requests for additional
copies of the Prospectus and this Letter of Transmittal, may be directed to the
Exchange Agent at the address and telephone number set forth above. In addition,
all questions relating to the Exchange Offer, as well as requests for assistance
or additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address specified in the Prospectus.
8. Irregularities. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance of Letters of
Transmittal or Old Preferred Stock will be resolved by the Company, whose
determination will be final and binding. The Company reserves the absolute right
to reject any or all Letters of Transmittal or tenders that are not in proper
form or
10
<PAGE>
the acceptance of which would, in the opinion of the Company's counsel, be
unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to the particular Old Preferred Stock covered by any
Letter of Transmittal or tendered pursuant to such Letter of Transmittal. None
of the Company, the Exchange Agent or any other person will be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification. The Company's
interpretation of the terms and conditions of the Exchange Offer shall be final
and binding.
9. Definitions. Capitalized terms used in this Letter of
Transmittal and not otherwise defined have the meanings given in the Prospectus.
IMPORTANT: This Letter of Transmittal or a facsimile thereof
(together with certificates for Old Preferred Stock and all other required
documents) or a Notice of Guaranteed Delivery must be received by the Exchange
Agent on or prior to the Expiration Date.
11
