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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WINSTAR COMMUNICATIONS, INC.
(EXACT NAME OF 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)
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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 REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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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)
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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 the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE
TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE
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Series D 7% Cumulative Convertible Preferred Stock
('Preferred Stock').................................. 4,000,000 shares $50.00(1) $ 200,000,000
Common Stock, par value $.01 per share underlying
Preferred Stock...................................... 4,031,445 shares(2) $49.61(3) $ 200,000,000
Common Stock to be resold by certain persons......... 2,059,662 shares $39.54(4) $ 86,316,072
Total...............................................
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TITLE OF SECURITIES AMOUNT OF
TO BE REGISTERED REGISTRATION FEE
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Series D 7% Cumulative Convertible Preferred Stock
('Preferred Stock').................................. $ 68,965.52
Common Stock, par value $.01 per share underlying
Preferred Stock...................................... $ 68,965.52
Common Stock (underlying certain options) to be
resold by certain persons............................ $ 28,082.43
Total............................................... $ 166,013.47
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(1) Represents the per-share sales price ($50.00) of the Preferred Stock sold by
the Registrant in an institutional private placement in March 1998, each
share having a liquidation preference of $50.00.
(2) Pursuant to Rule 416(b) promulgated under the Securities Act of 1933, as
amended (the 'Act'), this Registration Statement also covers a presently
indeterminable number of additional shares of Common Stock which may be
issued in lieu of cash dividends during the term of the Preferred Stock
('Dividend Shares'). Pursuant to Rule 416, this Registration Statement also
covers a presently indeterminable number of additional shares of Common
Stock issuable by the Company in the event the Preferred Stock is converted
in connection with a change of control of the Company.
(3) Represents the conversion price ($49.61) for a share of Common Stock.
(4) Based on the last sale price of a share of Common Stock as reported by
Nasdaq on April 15, 1998, based on Rule 457.
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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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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 21, 1998
4,000,000 SHARES OF SERIES D 7% SENIOR CUMULATIVE CONVERTIBLE
PREFERRED STOCK DUE 2010
WINSTAR COMMUNICATIONS INC.
6,091,107 SHARES OF COMMON STOCK
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This Prospectus relates to offers which may occur from time to time for the
account of certain persons ('Selling Preferred Stockholders') of (i) an
aggregate of 4,000,000 shares of the Series D 7% Senior Cumulative Convertible
Preferred Stock ('Series D Preferred Stock') of WinStar Communications, Inc.
('Company'); (ii) an indeterminable number of shares of the Company's common
stock ('Common Stock') that the Company may issue on a quarterly basis in lieu
of cash dividend payments on the Series D Preferred Stock ('Dividend Shares');
and (iii) up to an aggregate of 4,031,445 shares of Common Stock, subject to
adjustment, that may be issued by the Company upon conversion of the Series D
Preferred Stock ('Conversion Shares').
Dividends on each share of Series D Preferred Stock are payable at a per
annum rate of 7% of the liquidation preference thereof ($50.00), which is
equivalent to an annual dividend of $3.50. Dividends are payable to each holder
of Series D Preferred Stock quarterly on March 15, June 15, September 15 and
December 15 of each year, commencing September 15, 1998 and may be paid in cash
or, at the Company's election, through the issuance of that number of Dividend
Shares determined by dividing the amount of the dividend due to such holder by
the Discounted Current Market Value of the Common Stock (rounding up or down to
the next nearest whole share). 'Discounted Current Market Value' means the
product of (a) 97% and (b) the closing bid price for a share of Common Stock as
reported by the Nasdaq National Market on the fourth trading day preceding the
dividend payment date.
The Series D Preferred Stock is convertible into Conversion Shares at a
rate of 1.0079 Conversion Shares for each share of Series D Preferred Stock
converted, which, based on the Series D Preferred Stock's liquidation preference
of $50.00 per preferred share, is equivalent to a conversion price of $49.61 for
each Conversion Share received upon conversion.
This Prospectus also relates to offers which may occur from time to time
for the account of certain persons ('Selling Stockholders' and, together with
the Selling Preferred Stockholders, the 'Selling Securityholders') of an
aggregate of 2,059,662 shares of Common Stock ('Selling Stockholder Shares').
There is no public market for the Series D Preferred Stock and no such
market is expected to develop. The Common Stock is traded on the Nasdaq National
Market under the symbol 'WCII.' The last sale price of the Common Stock on the
Nasdaq National Market on April 17, 1998 was $38 1/16 per share. See 'Price
Range of Common Stock.'
The Company will not receive any cash proceeds from the sale of the Series
D Preferred Stock, Dividend Shares, Conversion Shares or Selling Stockholder
Shares by the Selling Securityholders. All costs, expenses and fees in
connection with the registration of the securities offered by this Prospectus
will be borne by the Company. Such expenses are estimated to be approximately
$302,000. See 'Selling Securityholders and Plan of Distribution.'
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SEE 'RISK FACTORS' BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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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 , 1998
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TABLE OF CONTENTS
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Incorporation of Certain Documents by Reference............................................................ 2
Summary.................................................................................................... 3
Risk Factors............................................................................................... 11
Price Range of Common Stock................................................................................ 22
Certain United States Federal Income Tax Considerations.................................................... 23
Description of Capital Stock............................................................................... 29
Selling Securityholders and Plan of Distribution........................................................... 40
Legal Matters.............................................................................................. 41
Experts.................................................................................................... 41
Available Information...................................................................................... 42
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or information have been filed by the Company with
the Securities and Exchange Commission ('Commission') pursuant to the Securities
Exchange Act of 1934, as amended ('Exchange Act'), and are incorporated herein
by reference:
(1) Annual Report on Form 10-K 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 5, 1998;
(5) Current Report on Form 8-K filed March 12, 1998;
(6) Current Report on Form 8-K filed March 30, 1998; and
(7) The description of the Company's (i) Common Stock contained in the
Company's registration statement on Form 8-A under the Exchange Act
(File No. 1-10726) and (ii) Series B Preferred Stock Purchase Rights
contained in the Company's Registration Statement on Form 8-A, as
amended, under the Exchange Act (File No. 0-20876).
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed incorporated by reference into this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person to WinStar Communications, Inc., 230 Park Avenue, New
York, New York 10169 (telephone 212-584-4000), Attention: Investor Relations
(extension 4053), a copy of any and all of the documents referred to above
(other than exhibits to such documents) which have been incorporated by
reference in this Prospectus.
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SUMMARY
This summary is qualified in its entirety by the detailed information and
financial statements (and notes thereto) incorporated by reference into this
Prospectus. Unless otherwise indicated, references herein to the 'Company' or
'WinStar' refer to WinStar Communications, Inc. and, where appropriate, its
subsidiaries. Wireless Fiber(SM) 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 21 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 over 350 times the rate of the
fastest integrated services digital network line in general use (128 Kbps). It
is
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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 21 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 capabilities, its voice and data
switches and, where appropriate, facilities leased from other carriers. The
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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 the form of (i) $61.3 million in cash, paid at
the closing of the US ONE Asset Acquisition and (ii) $20.0 million, to be paid
on the effective date of US ONE's confirmed plan of reorganization in its case
under Chapter 11 of the U.S. Bankruptcy Code ('Chapter 11'), in either cash or
shares of the Company's common stock, at the Company's discretion. 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 offering in December 1997 of $175 million of the Company's Series C 14 1/4%
Senior Cumulative Exchangeable Preferred Stock due 2007 ("Series C Preferred
Stock"). 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.
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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 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
On March 17, 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 ('Preferred Stock Placement'). The sale
price per Preferred Share was $50.00, with each of the initial purchasers
thereof receiving a discount equal to 3.38% (or $1.6875) of the purchase price
of each Preferred Share it purchased. The Registration Statement of which this
Prospectus forms a part serves to register the resale of the Preferred Shares as
well as the Dividend Shares and Conversion Shares, if any, issued with respect
thereto. See Description of Capital Stock--Preferred Stock--Series D Preferred
Stock.'
On March 20, 1998, the Company sold in an institutional private placement
(the '1998 Debt Placement') $200.0 million of its 10% Senior Subordinated Notes
due 2008 ('Cash-Pay Notes') and $250.0 million of its 11% Senior Subordinated
Deferred Interest Notes due 2008 ('Deferred Interest Notes' and, together with
the Cash-Pay Notes, the '1998 Notes'). Each of the initial purchasers of the
1998 Notes received a discount equal to 2.875% of the aggregate purchase price
of the 1998 Notes it purchased.
The Company received aggregate net proceeds of approximately $629.6 million
from the Preferred Stock Placement and 1998 Debt Placement which it intends to
use to fund the expansion of its telecommunications and other operations.
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.
RISK FACTORS
See 'Risk Factors' commencing on page 11 hereof for a discussion of certain
risks that should be considered in connection with an investment in the Series D
Preferred Stock and the Common Stock.
7
<PAGE>
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
------------ ------------ -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Telecommunications................................... $ 13,137 $ 33,969 $ 38,277
Information services................................. 2,648 14,650 41,354
------------ ------------ -------------------
Total net sales.................................... 15,785 48,619 79,631
Operating income (loss):
Telecommunications................................... (7,288) (43,698) (153,139)
Information services................................. 217 (1,409) (4,092)
General corporate.................................... (3,861) (11,373) (30,815)
------------ ------------ -------------------
Total operating loss............................... (10,932) (56,480) (188,046)
Interest expense.......................................... (7,186) (36,748) (77,257)
Interest income........................................... 2,890 10,515 17,577
Other (expenses) income, net (b).......................... (866) -- 4,719
------------ ------------ -------------------
Loss from continuing operations........................... (16,094) (82,713) (243,007)
(Loss) income from discontinued operations................ 237 (1,010) (6,477)
------------ ------------ -------------------
Net loss.................................................. (15,857) (83,723) (249,484)
Preferred stock dividends................................. -- -- (5,879)
------------ ------------ -------------------
Net loss applicable to common stockholders................ $(15,857) $(83,723) $ (255,363)
------------ ------------ -------------------
BASIC AND DILUTED LOSS PER SHARE:
Loss per common share from continuing operations........ $ (0.71) $ (2.96) $ (7.49)
(Loss) income per common share from discontinued
operations........................................... 0.01 (0.04) (0.19)
------------ ------------ -------------------
Net loss per common share outstanding................... $ (0.70) $ (3.00) $ (7.68)
------------ ------------ -------------------
Weighted average common shares outstanding.............. 22,770 27,911 33,249
<CAPTION>
PRO FORMA(A)
-------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Telecommunications................................... $ 136,560
Information services................................. 41,354
-------------------
Total net sales.................................... 177,914
Operating income (loss):
Telecommunications................................... (241,054)
Information services................................. (4,092)
General corporate.................................... (30,815)
-------------------
Total operating loss............................... (275,961)
Interest expense.......................................... (152,752)
Interest income........................................... 12,793
Other (expenses) income, net (b).......................... (481)
-------------------
Loss from continuing operations........................... (416,401)
(Loss) income from discontinued operations................ (6,477)
-------------------
Net loss.................................................. (422,878)
Preferred stock dividends................................. (45,806)
-------------------
Net loss applicable to common stockholders................ (468,684)
-------------------
BASIC AND DILUTED LOSS PER SHARE:
Loss per common share from continuing operations........ $ (13.81)
(Loss) income per common share from discontinued
operations........................................... (0.19)
-------------------
Net loss per common share outstanding................... $ (14.00)
-------------------
Weighted average common shares outstanding.............. 33,469
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED YEAR ENDED DECEMBER 31, 1997
DECEMBER 31, DECEMBER 31, -------------------
1995 1996 ACTUAL
------------ ------------ -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER FINANCIAL DATA:
<S> <C> <C> <C>
Ratio of earnings from continuing operations to combined
fixed charges and preferred stock dividends(c)....... -- -- --
Capital expenditures(d)................................. $ 8,123 $ 47,842 $ 222,300
<CAPTION>
PRO FORMA(A)
-------------------
OTHER FINANCIAL DATA:
<S> <C>
Ratio of earnings from continuing operations to combined
fixed charges and preferred stock dividends(c)....... --
Capital expenditures(d)................................. $ 222,300
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL PRO FORMA(E)
------ ------------
<S> <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' deficit.................................................. (118,392) (125,542)
</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) a private placement (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 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).
(Footnotes continued on next page)
9
<PAGE>
(Footnotes continued from previous page)
(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.
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. The words 'anticipate,' 'believe,'
'estimate,' 'expect,' 'plan,' 'intend' and similar expressions, as they relate
to the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions. No
assurance can be given that any of such expectations will be realized. Factors
that may cause actual results to differ materially from those contemplated by
such forward-looking statements include, among others, the factors described
under 'Risk Factors,' including 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.
10
<PAGE>
RISK FACTORS
Prospective purchasers of the Series D Preferred Stock, Dividend Shares,
Conversion Shares or Selling Stockholder Shares offered hereby should carefully
consider the risk factors set forth below, as well as the other information
appearing in or incorporated by reference into this Prospectus, before making an
investment in any such securities.
HISTORICAL AND PROJECTED NET AND OPERATING LOSSES
The Company has historically incurred significant and growing operating
losses and net losses, including net losses of approximately $15.9 million for
the ten months ended December 31, 1995, $83.7 million for the year ended
December 31, 1996 and $249.5 million for the year ended December 31, 1997. After
giving effect to the Pro Forma Transactions, the Company would have a net loss
of $422.9 million for the year ended December 31, 1997.
The Company expects to continue to experience significant operating losses
and net losses while it seeks to establish a sufficient revenue-generating
customer base and build its network infrastructure. There can be no assurance
that the Company will ever achieve (or if achieved, maintain) operating income
or profitability 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, including the
Series D Preferred Stock, or to make any cash dividend payments thereon.
Further, any failure by the Company to achieve operating income and
profitability will ultimately have an adverse effect on the market value of its
Common Stock and preferred stock, including the Series D Preferred Stock.
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. The Company also faces competition from
other entities which offer, or are licensed to offer, 38 GHz services
11
<PAGE>
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
12
<PAGE>
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 PAY CASH DIVIDENDS ON AND REDEEM THE SERIES D PREFERRED STOCK
The Company's ability 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 governing the Company's existing debt ('Indentures') and
any other indebtedness of the Company then outstanding. The terms of the
Indentures
13
<PAGE>
currently prohibit the Company from paying cash dividends on any preferred
stock, including the Series D Preferred Stock. The ability of the Company in the
future to pay cash dividends on the Series D Preferred Stock will depend on the
Company 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 Series D Preferred Stock.
Further, the terms of the Series D Preferred Stock provide that cash payments
thereon will not be made by the Company until certain outstanding indebtedness
of the Company has been paid. Moreover, under Delaware law, the Company is
permitted to pay dividends on its capital stock, including the Series D
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 redeem
the Series D Preferred Stock or pay cash dividends thereon. See 'Description of
Capital Stock--Preferred Stock-- Series D Preferred Stock.'
The Indentures 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. All additional
indebtedness of the Company will rank senior in right of payment to any payment
obligations with respect to the Series D Preferred Stock. The debt service
requirements of any additional indebtedness would make it more difficult for the
Company to pay cash obligations with respect to the Series D Preferred Stock. In
addition, the terms of the Indentures restrict the ability of the Company to
redeem the Series D Preferred Stock. The ability of the Company to redeem or
repurchase the Series D Preferred Stock will depend on its meeting certain
financial criteria, which in turn will require significant improvements in the
Company's consolidated net worth.
ABILITY TO SERVICE SUBSTANTIAL INDEBTEDNESS AND TO COVER FIXED CHARGES;
REFINANCING RISK
At December 31, 1997, after giving pro forma 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
Cash-Pay Notes and on the 1997 Notes, the accrual of dividends on the Series C
Preferred Stock and the accretion of original issue discount on the 14%
Convertible Senior Subordinated Discount Notes due 2005 (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
Indentures and the Certificate of Designations governing the Series C Preferred
Stock ('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 (as
defined in the Indentures).
The level of the Company's indebtedness could have important consequences
for holders of the Series D Preferred Stock, including the following: (i) the
combined debt service requirements of the 1995 Notes, 1997 Notes and the 1998
Notes, and the Company's obligations respecting the Series C Preferred Stock
will make it more difficult for the Company to make payments when due with
respect to the Series D Preferred Stock; (ii) the ability of the Company to
obtain any necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes may be limited; (iii)
beginning in 2001, a substantial portion of the Company's cash flow from
operations, if any, must be dedicated to the payment of principal and interest
on its indebtedness and other obligations and will not be available for use in
the Company's business or for repurchase of the Series D Preferred Stock or
payment of cash dividends thereon; (iv) the Company's level of indebtedness
could limit its flexibility in planning for, or reacting to changes in, its
business; (v) the Company is more highly
14
<PAGE>
leveraged than many of its competitors, which may place it at a competitive
disadvantage; and (vi) the Company's high degree of indebtedness would make it
more vulnerable in the event of a downturn in its business or if operating cash
flow does not significantly increase. In addition, a substantial portion of the
Company's indebtedness will mature in accordance with its terms and mandatory
redemption payments will be required with respect to the Series C Preferred
Stock prior to the maturity date of the Series D Preferred Stock. The Company
anticipates that earnings will be insufficient to cover fixed charges and
preferred stock dividends for at least the next several years. In order for the
Company to meet its debt service obligations and make mandatory redemption
payments with respect to its preferred stock, including the Series D Preferred
Stock, the Company will need to substantially improve its operating results.
There can be no assurance that the Company's operating results will be
sufficient to enable the Company to meet such debt service obligations or make
such redemption payments. In the absence of significantly improved operating
results, the Company could face substantial liquidity problems and might be
required to raise additional financing through the issuance of debt or equity
securities, although there can be no assurance that the Company would be
successful in raising such financing.
A substantial amount of the Company's indebtedness begins to require cash
payments of interest thereon starting in 2001 and begins to mature starting in
2004. The Company may not have sufficient cash flow to make such interest or
principal payments. The Company expects that it will need to refinance such
indebtedness on or prior to its maturity dates. However, the Company's ability
to obtain financing at such time may be limited by the financial condition or
operating results of the Company or financial markets at such time. There can be
no assurance that the Company will be able to refinance such indebtedness or
what the terms of such refinancing will be. If the Company is unable to make the
required debt service payments, the Company may be in default under its other
outstanding indebtedness, and, depending on the circumstances, the holders of
such indebtedness could elect to accelerate their indebtedness. In such event,
it is unlikely that all of the obligations of the Company, including with
respect to the Series D Preferred Stock, would be paid in full.
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 its existing financial resources, together with 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 of this Prospectus. 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 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 financial condition.
PRO FORMA FINANCIAL INFORMATION; MIDCOM
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. Midcom's financial statements for the
year ended December 31, 1997 (and, consequently, the Pro Forma Financial
Information) include
15
<PAGE>
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. 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 Information, as they relate to Midcom.
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 Securities
offered hereby, and the ability of the Company and its subsidiaries to make
principal and interest payments on their outstanding debt and of the Company to
repurchase or redeem its preferred stock, including the Series D Preferred
Stock, as required. As part of its 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.
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
16
<PAGE>
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.
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
17
<PAGE>
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 Series D Preferred Stock, the ability of the Company
and its subsidiaries to make principal and interest payments on their
outstanding debt and of the Company to repurchase or redeem its preferred stock,
including the Series D Preferred Stock, as required. 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.
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, 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.
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<PAGE>
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, including the Series D
Preferred Stock, and the ability of the Company and its subsidiaries to make
principal, interest and dividend payments on their outstanding debt and
preferred stock, including the Series D Preferred Stock.
CERTAIN TAX CONSIDERATIONS RELATING TO THE SERIES D PREFERRED STOCK
Distributions on the Series D Preferred Stock will be taxable for United
States federal income tax purposes as ordinary dividend income (and eligible for
the dividends-received deduction for certain United States corporate holders)
only to the extent paid out of current or accumulated earnings and profits of
the Company as determined for federal income tax purposes and otherwise will be
treated in the manner described under 'Certain United States Federal Income Tax
Considerations-Tax Considerations for U.S. Holders of Series D Preferred
Stock-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 Series D Preferred Stock will constitute
tax-free returns of capital to the extent of the holder's tax basis in the
Series D Preferred Stock and thereafter capital gain, and will not be eligible
for the dividends-received deduction.
In the case of a distribution on the Series D Preferred Stock that is paid
in the form of shares of Common Stock, the fair market value of the distributed
shares on the distribution date will be taxable for United States federal income
tax purposes in the same manner as a cash distribution on the distribution date
notwithstanding that the cash attributable to such distribution will not be
received by the holder until a subsequent period. See 'Certain United States
Federal Income Tax Considerations.'
RANKING OF THE SERIES D PREFERRED STOCK
The Company's obligations with respect to the Series D Preferred Stock do
not constitute indebtedness for borrowed money and with respect to right of
payment rank junior to all present and future indebtedness and other payment
obligations of the Company and its subsidiaries and all future Senior Stock (as
defined in the Series D Certificate of Designations), pari passu with the Series
C Preferred Stock and senior to the Series A Preferred Stock. Further, the
claims of creditors of the Company's subsidiaries will be effectively senior to
all payments, including dividends and redemption, on the Series D Preferred
Stock. As of December 31, 1997, after giving effect to the Pro Forma
Transactions, the Company would have had (on an unconsolidated basis)
approximately $1,224.5 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 Series D 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 Series D
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 Series D Preferred Stock then outstanding. See
'Description of Capital Stock--Preferred Stock--Series D Preferred Stock.'
HOLDING COMPANY STRUCTURE
The Company is a holding company and its only material assets consist of
the common stock of its subsidiaries and the proceeds raised from the sale of
its equity and debt securities, all of which the Company has loaned or
contributed, or intends to loan or contribute, to its subsidiaries. The Company
may have to rely upon dividends and other payments from its subsidiaries to
generate the funds necessary to repurchase the Series D
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Preferred Stock and to make cash dividend payments, if any. The subsidiaries,
however, are legally distinct from the Company and have no obligation,
contingent or otherwise, to pay amounts due pursuant to the Series D Preferred
Stock, or to make funds available for such payment. The ability of the Company's
subsidiaries to make such dividends and other payments to the Company is subject
to, among other things, the availability of funds, the terms of such
subsidiaries' indebtedness and applicable state laws. Claims of creditors of the
Company's subsidiaries, including trade creditors, will generally have priority
as to the assets of such subsidiaries over the claims of the Company, the
holders of the Company's indebtedness and the holders of preferred stock,
including the Series D Preferred Stock. Accordingly, the Company's obligations
with respect to the Series D Preferred Stock are effectively subordinated to all
liabilities (including trade payables) of the subsidiaries of the Company. At
December 31, 1997, the subsidiaries of the Company had approximately $373.2
million of liabilities (including trade payables and $256.1 million of
indebtedness guaranteed by the Company). See 'Description of Capital
Stock--Preferred Stock--Series D Preferred Stock.'
POTENTIAL ADVERSE EFFECTS OF ISSUANCE OF SENIOR PREFERRED STOCK
The Company is authorized to issue preferred stock in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors. In certain instances, subject to the approval of the holders of at
least two-thirds of the outstanding shares of the Series D Preferred Stock, such
series of preferred stock could include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights senior to the Series D Preferred
Stock, and in all instances, senior to the Common Stock. Accordingly, future
issuance of such preferred stock, depending upon the rights, preferences and
designations thereof, could effectively diminish or supersede the dividends and
liquidation preferences of the Series D Preferred Stock and adversely affect the
Common Stock and the rights of the holders thereof.
VOLATILITY OF MARKET PRICE OF COMMON STOCK
Since the Common Stock has been publicly traded, the market price of the
Common Stock has fluctuated over a wide range and may continue to do so in the
future. See 'Price Range of Common Stock.' The market price of the Common Stock
could be subject to significant fluctuations in response to various factors and
events, including, among other things, the depth and liquidity of the trading
market of the Common Stock, variations in the Company's operating results, press
reports, including with respect to regulation and industry trends, and the
difference between actual results and the results expected by investors and
analysts. In addition, the stock market in recent years has experienced broad
price and volume fluctuations that have often been unrelated to the operating
performance of companies, particularly telecommunications companies. These broad
market fluctuations also may adversely affect the market price of the Common
Stock. Accordingly, there can be no assurance that, at any time in the future,
the market price for the Common Stock will exceed the effective conversion price
of the Series D Preferred Stock.
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND OTHER CONVERTIBLE SECURITIES
As of December 31, 1997, there were outstanding (i) options with respect to
an aggregate of approximately 11,651,000 shares of Common Stock at per-share
exercise prices ranging from $1.50 to $31.13, (ii) the Convertible Notes, (iii)
the Series A Preferred Stock, (iv) warrants pursuant to which 2,000,000 shares
of Common Stock may be issued and (v) obligations to issue a number of shares of
Common Stock having an aggregate market value of $55.0 million for the purchase
of certain 38 GHz licenses. Substantially all of the shares of Common Stock
underlying such securities have been or will be registered for resale under the
Securities Act. The Company has two existing stock option plans under which
options to purchase an additional 3,189,000 shares of Common Stock may be
granted. The exercise of outstanding stock options and warrants and the
conversion of other convertible securities will dilute the percentage ownership
of the Company's current stockholders, and any sales in the public market of
shares of Common Stock issuable upon the exercise or conversion of such stock
options, warrants and convertible securities may adversely affect prevailing
market prices for the Common Stock.
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LACK OF PUBLIC MARKET FOR THE SERIES D PREFERRED STOCK
There is currently no active trading market for the Series D Preferred
Stock. The Series D Preferred Stock is designated eligible for trading in the
PORTAL Market. The Series D Preferred Stock may trade, if at all, at a discount
from its initial offering price, depending upon the market for similar
securities and other factors, including general economic conditions and the
financial condition of, performance of, and prospects for the Company. The
Company does not intend to apply for listing of the Series D Preferred Stock or
to seek approval for quotation through any automated quotation system.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Series D Preferred Stock or any securities issued in exchange
therefor. If such a market were to develop, the Series D Preferred Stock may
trade at prices that may be higher or lower than the initial offering prices.
Such markets may be subject to disruptions that historically have caused
substantial volatility in the prices of similar securities. Such disruptions
could materially and adversely affect liquidity and trading of the Series D
Preferred Stock, independent of the financial performance of, and prospects for,
the Company.
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PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
since June 1994 under the symbol 'WCII.'
The following table sets forth, for the fiscal periods indicated, the high
and low last sale prices of the Common Stock as reported on the Nasdaq National
Market. The quotes represent 'inter-dealer' prices without adjustment or
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
PERIOD ENDING HIGH LOW
- --------------------------------------------------------------------------------------- ---- ----
<S> <C> <C>
March 31, 1996......................................................................... $18 1/2 $13 3/8
June 30, 1996.......................................................................... 32 1/4 16
September 30, 1996..................................................................... 29 15 3/4
December 31, 1996...................................................................... 23 7/8 16 1/2
March 31, 1997......................................................................... 20 1/4 11 5/8
June 30, 1997.......................................................................... 14 5/8 10 1/8
September 30, 1997..................................................................... 19 3/16 14 1/4
December 31, 1997...................................................................... 29 1/4 21 1/4
March 31, 1998......................................................................... 44 11/16 24 5/8
</TABLE>
The last sale price of the Common Stock on April 17, 1998 was $38 1/16 per
share. As of April 17, 1998, the Company had 37,217,000 shares of Common Stock
outstanding held by more than 1,000 beneficial holders.
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<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material United States federal
income tax considerations applicable to holders of the Series D Preferred Stock
resulting from their purchase, ownership and disposition. This discussion is
based on the Internal Revenue Code of 1986, as amended (the 'Code'), regulations
of the Treasury Department ('Treasury Regulations'), administrative rulings and
pronouncements of the Internal Revenue Service ('IRS') and judicial decisions,
all of which are subject to change, possibly with retroactive effect. This
discussion does not purport to address all the United States federal income tax
consequences that may be applicable to particular holders, including dealers in
securities, financial institutions, insurance companies and tax-exempt
organizations. In addition, except as provided below with respect to Non-U.S.
Holders, this discussion is limited to U.S. persons who will hold the Series D
Preferred Stock and the Common Stock as a 'capital asset' within the meaning of
Section 1221 of the Code. As used in the discussion which follows, the term
'U.S. Holder' means any person or entity which is (a) a citizen or resident (as
defined in Section 7701(b)(1) of the Code) of the United States, (b) a
corporation or other entity taxable as a corporation created or organized in or
under the laws of the United States or of any state thereof (including the
District of Columbia) or (c) an estate or trust that is described in Section
7701(a)(30) of the Code, and a 'Non-U.S. Holder' means any holder of the Series
D Preferred Stock and the Common Stock that is not a U.S. Holder.
PROSPECTIVE HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO ANY
FEDERAL, STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES TO THEM OF PURCHASING,
OWNING AND DISPOSING OF SERIES D PREFERRED STOCK.
TAX CONSIDERATIONS FOR U.S. HOLDERS OF SERIES D PREFERRED STOCK
Distributions in General
Distributions with respect to the Series D Preferred Stock, whether paid in
cash or in shares of Common Stock, will be treated as dividends (taxable as
ordinary income) to the extent of the current and accumulated earnings and
profits of the Company. The amount of any distribution with respect to the
Series D Preferred Stock will be equal to the amount of cash distributed or, in
the case of a distribution in the form of Common Stock, the fair market value of
the shares of Common Stock on the date of the distribution. The Company does not
anticipate paying cash dividends on the Series D Preferred Stock in the
foreseeable future. To the extent that the amount of a distribution with respect
to the Series D 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 Series D Preferred Stock, and
thereafter as capital gain from the sale of the Series D Preferred Stock
(taxable as described below under '--Sale, Redemption or Other Taxable
Disposition of Series D 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's tax basis in shares of Common
Stock received as a distribution on the Series D Preferred Stock will be the
fair market value of such shares on the date of the distribution. A holder's
holding period for such shares of Common Stock will commence on the day
following the date of distribution and will not include such holder's holding
period for the shares of Series D Preferred Stock with respect to which the
shares of Common Stock were distributed.
Dividends to Corporate Holders
A U.S. 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 Series D 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
the Taxpayer Relief Act of 1997 ('TRA 1997'), Section 246(c) of the Code
disallows the dividends-received deduction in its entirety if the holder does
not satisfy the applicable holding period requirement for the dividend-paying
stock for a period immediately before or immediately after such holder becomes
entitled to receive each dividend on the stock. 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
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(i) has, among other things, an option to sell Series D Preferred Stock which it
owns, (ii) is under a contractual obligation to sell Series D 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. For purposes of (ii) above, the obligation to sell upon the Company's
exercise of its option to redeem Series D Preferred Stock is not considered a
contractual obligation to sell by a corporate holder. Under certain
circumstances, Section 1059 of the Code (a) reduces the tax basis of stock by a
portion of any 'extraordinary dividends' that are eligible for the
dividends-received deduction and (b) to the extent that the basis reduction
would otherwise reduce the tax basis of the Series D Preferred Stock below zero,
requires immediate recognition of gain, which is treated as gain from the sale
or exchange of the stock. In the case of the Series D Preferred Stock, an
'extraordinary dividend' would include any amount treated as a dividend with
respect to a redemption that is not pro rata to all stockholders (or meets
certain other requirements), without regard to either the relative amount of the
dividend or the holder's holding period for the Series D Preferred Stock.
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
Series D Preferred Stock.
Receipt of Common Stock Upon Conversion of the Series D Preferred Stock
Gain or loss will not be recognized by a holder upon the conversion of the
Series D Preferred Stock into Common Stock if no cash is received. A holder who
receives cash in lieu of a fractional share of Common Stock will in general be
treated as having received such fractional share and having exchanged it for
cash in a redemption, which would be treated in the manner described under
'--Sale, Redemption or other Taxable Disposition of the Series D Preferred
Stock.' As discussed therein, a holder who cannot qualify for sale or exchange
treatment under the rules applicable to redemptions will generally be taxable on
the cash received in lieu of a fractional share as a distribution described in
'--Distributions in General' above.
Generally, a holder's basis in the Common Stock received upon the
conversion of the Series D Preferred Stock will equal the adjusted tax basis of
the converted Series D Preferred Stock (other than the portion of such Series D
Preferred Stock, the conversion of which resulted in the recognition of gain or
loss due to the receipt of cash in lieu of fractional shares). The holding
period of such Common Stock will include the holding period of the converted
Series D Preferred Stock.
Adjustment of Conversion Price in Respect of Series D Preferred Stock
Adjustments to the conversion price ratio of Common Stock to take into
account a stock dividend or stock split will not be taxable. However, an
adjustment to the conversion price ratio to reflect the Company's issuance of
certain rights, warrants, evidences of indebtedness, securities or other assets
to holders of Common Stock (an 'Adjustment') may result in constructive
distributions to the holders of the Series D Preferred Stock. The amount of any
such constructive distribution would be the fair market value on the date of the
Adjustment of the number of shares of Common Stock which, if actually
distributed to holders of Series D Preferred Stock, would produce the same
increase in the proportionate interests of such holders in the assets or
earnings and profits of the Company as that produced by the Adjustment. The
distribution would be treated in the manner described above under
'--Distributions in General' and '--Dividends to Corporate Holders.'
Excessive Redemption Price
Under Section 305 of the Code and Treasury Regulations authorized
thereunder, if the redemption price of Series D 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 Series D Preferred
Stock would be 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 Series D Preferred Stock
will not exceed its issue price by more than a de minimis amount.
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Accrued Dividends on the Series D Preferred Stock
Any unpaid dividends on the Series D Preferred Stock will accrue and will
be payable upon the optional or mandatory redemption of the Series D Preferred
Stock. The tax treatment of such accruing dividends ('Accrued Dividends') is not
free from doubt. Under current law, it appears that Accrued Dividends would not
be treated as having been received by holders of the Series D Preferred Stock
until such Accrued Dividends were actually paid in cash, at which time such
amounts would be taxable for United States federal income tax purposes in the
same manner as distributions described above under 'Distributions in General.'
The Company intends to take this position and will report to the IRS on that
basis.
In addition, to the extent of available funds therefor, the Company will be
obligated under the Certificate of Designation to declare a dividend on the
Series D Preferred Stock prior to an optional or mandatory redemption thereof in
an amount equal to any Accrued Dividends on the Series D Preferred Stock.
Prospective purchasers of Preferred Stock are urged to consult their own
tax advisors as to the tax treatment of Accrued Dividends.
Sale, Redemption or other Taxable Disposition of the Series D Preferred
Stock
Upon a sale or other taxable disposition a holder generally (except upon
certain redemptions as discussed below) will recognize capital gain or loss for
United States federal income tax purposes 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 Series D Preferred Stock being disposed. Such
gain or loss will be long-term capital gain or loss if the Series D Preferred
Stock has been held by the holder for more than one year at the time of
disposition. Under TRA 1997, capital gain or loss on the sale or other taxable
disposition of the Series D Preferred Stock held by noncorporate taxpayers for
(i) more than one year but not more than 18 months shall be subject to a maximum
tax rate of 28 percent, and (ii) more than 18 months shall be subject to a
maximum tax rate of 20 percent.
A holder's initial tax basis in the Series D Preferred Stock generally will
be the price such holder paid for such Series D Preferred Stock.
Gain or loss recognized by a holder on a redemption of the Series D
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, (ii) such
holder's percentage ownership of the Company's voting stock immediately after
the redemption is less than 80% of such holder's percentage ownership
immediately before the redemption or (iii) 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. For this purpose, an
option would include the conversion right under the Series D Preferred Stock.
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
Series D 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 to qualify for sale or
exchange treatment, 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 Series D Preferred Stock would be
transferred to the holder's remaining shares of the Company's stock (if any). If
the holder does not retain any shares of the Company's stock, but dividend
treatment arises because of the constructive ownership rules, such basis will be
entirely lost to the holder.
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Information Reporting and Backup Withholding on U.S. Holders
Information reporting and backup withholding may apply with respect to
payments by the Company of dividends on the Series D Preferred Stock and to
certain payments of proceeds on the sale or redemption of the Series D Preferred
Stock. Such payments will be subject to backup withholding at a rate of 31
percent unless the beneficial owner of such security furnishes 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
Series D Preferred Stock is 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
(ii) 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 the backup withholding rules from a payment to a
holder is allowable as a credit against the holder's United States 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.
TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF SERIES D PREFERRED STOCK
Dividends
Dividends paid to a Non-U.S. Holder of Series D Preferred Stock will be
subject to withholding of United States Federal income tax at a 30% rate or such
lower rate as may be provided by an income tax treaty between the United States
and the country of which the Non-U.S. Holder is a tax resident, unless (i) the
dividends are effectively connected with the conduct of a trade or business of
the Non-U.S. Holder within the United States and the Non-U.S. Holder provides
the payor with proper documentation or (ii) if a tax treaty applies, are
attributable to a U.S. permanent establishment maintained by the Non-U.S.
Holder. In order to claim the benefit of an applicable tax treaty rate, a
Non-U.S. Holder may have to file with the Company or its dividend paying agent
an exemption or reduced treaty rate certificate or letter in accordance with the
terms of such treaty. Dividends that are effectively connected with the conduct
of a trade or business within the United States or, if a tax treaty applies, are
attributable to such a United States permanent establishment, are subject to
United States Federal income tax on a net income basis (that is, after allowance
for applicable deductions) at applicable graduated individual or corporate
rates. Any such effectively connected dividends received by a foreign
corporation may, under certain circumstances, be subject to an additional
'branch profits tax' at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Under current Treasury Regulations, dividends paid to an address outside
the United States are presumed to be paid to a resident of such country for
purposes of the withholding discussed above (unless the payor has knowledge to
the contrary) and, under the current interpretation of Treasury Regulations, for
purposes of determining the applicability of a tax treaty. However, under final
Treasury Regulations issued October 6, 1997, in the case of dividends paid after
December 31, 1998 (December 31, 1999 in the case of dividends paid to accounts
in existence prior to December 31, 1998), a Non-U.S. Holder generally would be
subject to United States withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or a reduced rate
under an income tax treaty, unless certain certification procedures (or, in the
case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures) are complied with, directly or
through an intermediary. Certain certification and disclosure requirements must
be complied with in order to be exempt from withholding under the effectively
connected income exemption.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
IRS, provided that the required information is furnished to the IRS.
See above '--Tax Considerations for U.S. Holders of Series D Preferred
Stock' for when distributions will be treated as dividends.
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Gain on Disposition of Series D Preferred Stock
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other taxable
disposition of Series D Preferred Stock unless (i) (a) the gain is effectively
connected with a trade or business conducted by the Non-U.S. Holder within the
United States or (b) if a tax treaty applies, the gain is attributable to a
United States permanent establishment maintained by the Non-U.S. Holder, (ii) in
the case of a Non-U.S. Holder who is an individual and holds the Series D
Preferred Stock as a capital asset, such holder is present in the United States
for 183 or more days in the taxable year of the sale or other disposition and
certain other conditions are met, (iii) the Non-U.S. Holder is subject to tax
pursuant to certain provisions of the Code applicable to United States
expatriates and former residents, or (iv) the Company is or has been a 'U.S.
real property holding corporation' for United States federal income tax purposes
at any time within the shorter of the five-year period preceding such
disposition or the period such Non-U.S. Holder held the Series D Preferred
Stock. If the Company currently is, or were to become, a U.S. real property
holding corporation, gains realized upon a disposition of Series D Preferred
Stock by a Non-U.S. Holder which did not directly or indirectly own more than 5%
of the Series D Preferred Stock during the shorter of the periods described
above generally would not be subject to United States federal income tax so long
as the Series D Preferred Stock is 'regularly traded' on an established
securities market. The Company believes that it is not currently, and does not
anticipate becoming, a 'U.S. real property holding corporation' for United
States federal income tax purposes.
If an individual Non-U.S. Holder falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale under
regular graduated United States federal income tax rates. If an individual Non-
U.S. Holder falls under clause (ii) above, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by certain United States capital losses (notwithstanding the fact that such
individual is not considered a resident of the United States). Thus, individual
Non-U.S. Holders who have spent (or expect to spend) 183 days or more in the
United States in the taxable year in which they contemplate a sale of Series D
Preferred Stock are urged to consult their tax advisors as to the tax
consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
of the first sentence above, it generally will be taxed on its net gain under
regular graduated United States federal income tax rates and, in addition, will
be subject to the branch profits tax equal to 30% of its 'effectively connected
earnings and profits' within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.
No United States federal income tax will be imposed on a Non-U.S. Holder
upon the conversion of the Series D Preferred Stock into Common Stock if no cash
is received. See '--Tax Considerations for U.S. Holders of Series D Preferred
Stock--Receipt of Common Stock Upon Conversion of the Series D Preferred Stock.'
Federal Estate Tax
Series D Preferred Stock owned or treated as owned by an individual who is
neither a United States citizen nor a United States resident (as defined for
United States federal estate tax purposes) at the time of death will be included
the individual's gross estate for the United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise and, therefore, may be
subject to United States federal estate tax.
Information Reporting and Backup Withholding Tax
Under Treasury Regulations, the Company must report annually to the IRS and
to each Non-U.S. Holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected with a trade or business in the United States of the
Non-U.S. Holder or withholding was reduced or eliminated by an applicable income
tax treaty. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in
which the Non-U.S. Holder is a resident under the provisions of an applicable
income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-U.S. Holders that are
subject to the 30%
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withholding discussed above (or that are not so subject because a tax treaty
applies that reduces or eliminates such 30% withholding) or (ii) under current
law, dividends paid to a Non-U.S. Holder at an address outside of the United
States. However, under final Treasury Regulations issued October 6, 1997, in the
case of dividends paid after December 31, 1998 (December 31, 1999 in the case of
dividends paid to accounts in existence prior to December 31, 1998), a Non-U.S.
Holder generally would be subject to backup withholding at 31% rate, unless
certain certification procedures (or, in the case of payments made outside the
United States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Series D
Preferred Stock to beneficial owners that are not 'exempt recipients' and that
fail to provide in the manner required certain identifying information.
Payment by a United States office of a broker of the proceeds of a sale of
Series D Preferred Stock, or the proceeds of a redemption of Series D Preferred
Stock that are not treated as a dividend is subject to both backup withholding
and information reporting unless the beneficial owner certifies under penalties
of perjury that it is a Non-U.S. Holder, or otherwise establishes an exemption.
Backup withholding and information reporting generally will not apply to payment
of the proceeds of a sale effected at a foreign office of a broker. If, however,
such broker is, for United States federal income tax purposes, a U.S. person, a
controlled foreign corporation or a foreign person 50% or more of whose gross
income for certain periods is derived from activities that are effectively
connected with the conduct of a trade or business in the United States, such
payments will not be subject to backup withholding but will be subject to
information reporting unless (i) such broker has documentary evidence in its
records that the beneficial owner is a Non-U.S. Holder and certain other
certification conditions are met, or (ii) the beneficial owner otherwise
establishes an exemption, provided such broker does not have actual knowledge
that the payee is a United States person.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a credit against such holder's
United States federal income tax liability, which may entitle such holder to a
refund, provided the required information is furnished to the IRS.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND
DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL INCOME TAXATION THAT MAY
BE RELEVANT TO A PARTICULAR PURCHASER OR HOLDER OF SERIES D PREFERRED STOCK IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. ACCORDINGLY,
EACH PURCHASER OR HOLDER OF THE SERIES D PREFERRED STOCK SHOULD CONSULT WITH ITS
OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OR HOLDER
FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE SERIES D PREFERRED STOCK,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Company includes 200 million shares of
Common Stock, $0.01 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 cash
dividends on the Common Stock (and is restricted from doing so by the
Indentures), 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 all liabilities and the liquidation preferences of any
outstanding 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 non-assessable.
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. 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.
PREFERRED STOCK
Series A Preferred Stock
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
Series A Preferred Stock and Warrants to purchase 1,600,000 shares of the
Company's Common Stock for an aggregate purchase price of $100.0 million.
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.
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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 March 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 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, purported 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 C Preferred Stock
On December 17, 1997, the Company sold in a private placement an aggregate
of 175,000 shares of Series C Preferred Stock for an aggregate purchase price of
$175.0 million.
Dividends on the Series C 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 Series
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C 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 Series C
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 Series C Preferred Stock ranks (i) senior to all existing and future
Junior Stock (as defined), including the Series A Preferred Stock; (ii) on a
parity with all existing and future Parity Stock (as defined), including the
Series D Preferred Stock; and (iii) junior to all future Senior Stock (as
defined). In addition, as equity, the Series C Preferred Stock will rank junior
in right of payment to all indebtedness of the Company and its subsidiaries.
The Series C Preferred Stock will not be redeemable prior to December 15,
2002. On or after December 15, 2002, the Series C Preferred Stock will be
redeemable at the option of the Company, in whole or in part, at specified
redemption prices plus accumulated and unpaid dividends, if any, to the date of
redemption. On December 15, 2007, the Company will be required to redeem the
Series C Preferred Stock at a price equal to the Accumulated Amount thereof plus
accumulated and unpaid dividends, if any, out of funds legally available
therefor.
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 Series C 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 Series C Preferred Stock outstanding at the time of such exchange,
plus accumulated and unpaid dividends to the date of exchange.
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. 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 Notes, 1997 Senior Subordinated Notes and the
Convertible Notes. 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.
Series D Preferred Stock
On March 17, 1998, the Company and a wholly-owned subsidiary sold in the
Preferred Stock Placement an aggregate of 4,000,000 shares of the Series D
Preferred Stock for an aggregate purchase price of $200.0 million.
Ranking. The Series D 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 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 Series D 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) on a parity with the Series C Preferred Stock
and 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 Series D Preferred Stock as
to dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as 'Parity Stock'); and (iii) 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 Series D 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 Series D 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 Series D Preferred Stock
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with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up, or (ii) that is on a parity with the Series D
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 Series D Preferred Stock, in
each case without the consent of the holders of at least 66 2/3% of the
outstanding shares of Series D Preferred Stock. However, without the consent of
any holder of Series D 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 Series D
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.'
Dividends. Holders of shares of Series D Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors of the Company out
of funds of the Company legally available for payment, cumulative dividends at
the rate per annum of 7% per share on the liquidation preference thereof of
$50.00 per share of Series D Preferred Stock (equivalent to $3.50 per annum per
share). Dividends on the Series D Preferred Stock will be payable quarterly on
March 15, June 15, September 15 and December 15 of each year commencing
September 15, 1998, at such annual rate and shall accrue from the most recent
date as to which dividends shall have been paid or, if no dividends have been
paid, from the date of the original issuance of the Series D Preferred Stock.
Each such dividend will be payable to holders of record as they appear on the
stock records of the Company at the close of business on the Business Day next
preceding such quarterly dividend payment date. Dividends will be cumulative
from such date, whether or not in any dividend period or periods there shall be
funds of the Company legally available for the payment of such dividends.
Accumulations of dividends on shares of Series D Preferred Stock will not bear
interest. Dividends payable on the Series D Preferred Stock for any period
greater or less than a full quarterly dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months.
Any dividend on the Series D Preferred Stock shall be, at the option of the
Company, payable (i) in cash or (ii) through the issuance of a number of
Dividend Shares (rounded up or down to the nearest whole share) equal to the
dividend amount divided by the Discounted Current Market Value of the Common
Stock; provided, however, that the Company shall not pay any dividends on the
Series D Preferred Stock in cash prior to the date all obligations under each of
the Specified Indentures shall have been satisfied in full (the 'Specified Debt
Satisfaction Date'). With respect to shares of Series D Preferred Stock that are
'restricted securities' as defined in Rule 144 under the Securities Act ('Rule
144') on a record date for the payment of dividends, all such Dividend Shares
distributed on the related dividend payment date in payment of dividends on the
Series D Preferred Stock will be treated as 'restricted securities' will bear a
legend to such effect and will not be transferable by the recipient thereof
except pursuant to an effective registration statement or pursuant to an
exemption from the registration requirements of the Securities Act. All such
Dividend Shares will be issued in physical certificated form and will not be
eligible for receipt in global form through the facilities of the Depositary.
Certificates for such Dividend Shares will be mailed or made available at the
office of the Transfer Agent for the Series D Preferred Stock on or as soon as
possible after the relevant dividend payment date to those beneficial holders of
Series D Preferred Stock shown on the records of the Depositary which shall be
delivered to the Company at the close of business on the relevant record date.
As a result of the requirement for physical delivery of such Dividend Shares,
holders who have not made arrangements with the Depositary, the Transfer Agent
and the Company prior to a dividend payment date for the delivery of such
physical certificates on such dividend payment date may not receive such
physical delivery until several days after such dividend payment date. See
'--Registration Rights.' With respect to shares of Series D Preferred Stock that
are no longer 'restricted securities' on a record date for the payment of
dividends, either as a result of a resale of the Series D Preferred Stock
pursuant to the Shelf Registration Statement or otherwise, all Dividend Shares
distributed on the related dividend payment date in payment of dividends will be
freely transferable without restriction under the Securities Act (other than by
affiliates), and such shares will be eligible for receipt in global form through
the facilities of the Depositary.
'Specified Indentures' means each of the Indentures governing the 1995
Notes and the 1997 Notes and the Exchangeable Debentures.
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 Series D
Preferred Stock with respect to any dividend period unless all
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<PAGE>
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 Series D 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 Series D 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
Series D 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 Series D Preferred Stock for all
prior dividend periods; provided, however, if accrued dividends on the Series D
Preferred Stock for all prior dividend periods have not been paid in full then
any dividend declared on the Series D Preferred Stock for any dividend period
and on any Parity Stock will be declared ratably in proportion to accrued and
unpaid dividends on the Series D 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
shares of Parity Stock or Junior Stock (in the case of Parity Stock) or of
Junior Stock (in the case of Junior Stock) 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.
The Company's ability to pay cash dividends with respect to the Series D
Preferred Stock is limited by the terms of the Company's outstanding
indebtedness. See 'Risk Factors--Ability to Pay Cash Dividends on and Redeem the
Series D Preferred Stock.'
Optional Redemption. The Series D Preferred Stock will not be redeemable
at the option of the Company prior to March 20, 2001. Thereafter, each share of
the Series D 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, payable in cash, plus
accumulated and unpaid dividends, if any (including a prorated dividend for any
partial dividend period).
If redeemed during the period commencing March 20, 2001 through March 14,
2002, the redemption price shall be $51.75.
If redeemed during the 12-month period commencing on March 15 of the years
set forth below, the redemption prices shall be:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------------------------------------------------------------- ----------
<S> <C>
2002......................................................... $51.17
2003......................................................... 50.58
2004 and thereafter.......................................... 50.00
</TABLE>
In the case of any partial optional redemption, selection of the Series D
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 Series D Preferred Stock is listed, or if the Series D 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 the shares held
by holders of fewer than 100 shares (or all of the shares held by the holders
who would hold fewer than 100 shares as a result of such redemption) as may be
determined by the Company.
In the case of a redemption date falling after a dividend payment record
date and prior to the related payment date, the holders of the Series D
Preferred Stock at the close of business on such record date will be entitled to
receive the dividend payable on such shares on the corresponding dividend
payment date, notwithstanding the redemption of such shares following such
dividend payment record date. Except as provided
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<PAGE>
for in the preceding sentence, no payment or allowance will be made for accrued
dividends on any shares of Series D Preferred Stock called for redemption.
The Company's ability to redeem the Series D 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 Series D Preferred Stock at its option unless it
simultaneously redeems or repays such indebtedness. See 'Risk Factors--Ability
to Pay Cash Dividends on and Redeem the Series D Preferred Stock.'
Mandatory Redemption. On March 15, 2010, the Company will be required to
redeem in cash (subject to the legal availability of funds therefor) all
outstanding shares of Series D Preferred Stock at a price in cash equal to
$50.00 per share, 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 Series D Preferred Stock. The Certificate of
Designations provides that the Company will take all actions required or
permitted under Delaware law to permit such redemption.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, each holder of Series D 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
of $50.00 per share of Series D 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 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 Series D Preferred Stock and all other Parity Stock are not paid
in full, the holders of the Series D 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 Series D 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 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 Designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Series D
Preferred Stock even though it is substantially in excess of the par value
thereof.
Voting Rights. The holders of Series D Preferred Stock, except as
otherwise required under Delaware law or as provided in the Certificate of
Designations, are 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 Designations provides that if dividends on the Series D
Preferred Stock are in arrears and unpaid for six or more dividend periods
(whether or not consecutive), or if the Company shall fail to redeem all the
Series D Preferred Stock in cash on the mandatory redemption date, then the
holders of the outstanding shares of Series D 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 Series D Preferred Stock will continue until such time
as all dividends in arrears on the Series D Preferred Stock, or the mandatory
redemption price, as the case may be, are paid in full 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.
The Certificate of Designations also provides 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 Series D 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
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<PAGE>
the consent of the holders of Series D Preferred Stock and shall not be deemed
to affect adversely the rights, preferences, privileges or voting rights of
shares of Series D Preferred Stock.
Conversion Rights. Shares of Series D Preferred Stock are convertible, in
whole or in part, at the option of the holders thereof, into Conversion Shares
initially at the conversion price stated on the cover page of this Prospectus,
subject to adjustment as described below ('Conversion Price'). The right to
convert shares of Series D Preferred Stock called for redemption will terminate
at the close of business on the relevant redemption date.
Conversion of shares of Series D Preferred Stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to the Company or in blank, to the office or agency to be
maintained by the Company for that purpose. Initially such office will be
located at 230 Park Avenue, New York, New York.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of Series
D Preferred Stock shall have been surrendered and notice (and if applicable,
payment of an amount equal to the dividend payable on such shares) received by
the Company as aforesaid. The Company will issue a certificate evidencing the
Conversion Shares as soon as reasonably practical after the conversion date.
With respect to any shares of Series D Preferred Stock that are 'restricted
securities' on the conversion date, the shares of Conversion Shares distributed
upon conversion will be treated as 'restricted securities,' will bear a legend
to such effect and will not be transferable by the recipient thereof except
pursuant to an effective registration statement or pursuant to an exemption from
the registration requirements of the Securities Act. All such shares will be
issued in physical certificated form and will not be eligible for receipt in
global form through the facilities of the Depositary. With respect to shares of
Series D Preferred Stock that are no longer 'restricted securities' on a
conversion date, either as a result of a resale of the Series D Preferred Stock
pursuant to a registration statement or otherwise, all shares of Conversion
Shares distributed upon conversion will be freely transferable without
restriction under the Securities Act (other than by affiliates), and such shares
will be eligible for receipt in global form through the facilities of the
Depositary.
Holders of shares of Series D Preferred Stock at the close of business on a
dividend payment record date will be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date notwithstanding the
conversion of such shares following such dividend payment record date and prior
to such dividend payment date. However, shares of Series D Preferred Stock
surrendered for conversion during the period between the close of business on
any dividend payment record date and the opening of business on the
corresponding dividend payment date (except shares converted after the issuance
of a notice of redemption with respect to a redemption date during such period,
which will be entitled to such dividend) must be accompanied by payment of an
amount equal to the dividend payable on such shares on such dividend payment
date. A holder of shares of Series D Preferred Stock on a dividend payment
record date who (or whose transferee) tenders any such shares for conversion
into Conversion Shares on such dividend payment date will receive the dividend
payable by the Company on such shares of Series D Preferred Stock on such date,
and the converting holder need not include payment of the amount of such
dividend upon surrender of shares of Series D Preferred Stock for conversion.
Except as provided above, the Company will make no payment or allowance for
unpaid dividends, whether or not in arrears, on converted shares or the
dividends on the shares of Common Stock issued upon such conversion.
Fractional shares of Common Stock need not be issued upon conversion but,
in lieu thereof, the Company may pay a cash adjustment based on the current
market price of the Common Stock on the day prior to such conversion date.
The Conversion Price will be subject to adjustment, under certain
circumstances, upon the occurrence of certain events, including: (i) the payment
of dividends (and other distributions) of Common Stock on outstanding shares of
Common Stock; (ii) the issuance to all holders of Common Stock of rights,
warrants or options entitling them to subscribe for or purchase Common Stock at
less than the current market price (as defined) thereof; (iii) subdivisions and
combinations of Common Stock; (iv) distributions to all holders of Common Stock
of evidences of indebtedness of the Company, shares of capital stock,
securities, cash or property (excluding any rights, warrants or options referred
to in clause (ii) above and any dividend or distribution paid exclusively in
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<PAGE>
cash and any dividend or distribution referred to in clause (i) above); (v)
distributions consisting exclusively of cash to all holders of Common Stock in
an aggregate amount that, together with (A) other all-cash distributions made
within the preceding 12 months and (B) any cash and the fair market value, as of
the expiration of the tender or exchange offer referred to below, of
consideration payable in respect of any tender or exchange offer by the Company
or a subsidiary of the Common Stock concluded within the preceding 12 months,
exceeds 12.5% of the Company's aggregate market capitalization (such aggregate
market capitalization being the product of the current market price of the
Common Stock multiplied by the number of shares of Common Stock then
outstanding) on the date of such distribution; and (vi) the successful
completion of a tender or exchange offer made by the Company or any subsidiary
for the Common Stock which involves an aggregate consideration that, together
with (X) any cash and the fair market value of other consideration payable in
respect of any tender or exchange offer by the Company or a subsidiary for the
Common Stock concluded within the preceding 12 months and (Y) the aggregate
amount of any all-cash distributions to all holders of the Company's Common
Stock made within the preceding 12 months, exceeds 12.5% of the Company's
aggregate market capitalization on the expiration of such tender or exchange
offer. No adjustment of the Conversion Price will be required to be made until
cumulative adjustments amount to 1% or more of the Conversion Price as last
adjusted.
Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Change in Control (as defined) occurs, then the Conversion
Price in effect will be adjusted immediately after such Change in Control as
described below. In addition, in the event of a Common Stock Change in Control
(as defined), each share of the Series D Preferred Stock shall be convertible
solely into common stock of the kind received by holders of Common Stock as the
result of such Common Stock Change in Control.
A 'Change in Control' shall be deemed to have occurred at such time as (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all the assets of the Company and its subsidiaries taken as a
whole to any 'person' (as such term is used in Section 13(d)(3) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company, (iii) the consummation of any transaction (including any merger or
consolidation) the result of which is that any 'person' (as defined above),
other than certain present officers, directors and stockholders of the Company
and their affiliates, becomes the beneficial owner (as such term is defined in
Rules 13d-3 and 13d-5 promulgated under the Exchange Act, except that a person
will be deemed to have beneficial ownership of all shares that such person has
the right to acquire whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the voting
stock of the Company or (iv) the first day on which a majority of the members of
the board of directors are not Continuing Directors (as defined in the
Certificate of Designations).
The term 'Common Stock Change in Control' means any Change in Control in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock of another company that for each of the 10
consecutive Trading Days referred to in the definition of 'Applicable Price'
below has been admitted for listing or admitted for listing subject to notice of
issuance on a national securities exchange or quoted on the Nasdaq National
Market; provided, however, that a Change in Control shall not be a Common Stock
Change in Control unless either (i) the Company continues to exist after the
occurrence of such Change in Control and the outstanding shares of Series D
Preferred Stock continue to exist as outstanding shares of Series D Preferred
Stock, or (ii) not later than the occurrence of such Change in Control, the
outstanding shares of Series D Preferred Stock are converted into or exchanged
for shares of Series D Preferred Stock of a corporation succeeding to the
business of the Company, which Series D Preferred Stock has powers, preferences
and relative, participating, optional or other rights, and qualifications,
limitations and restrictions, substantially similar to those of the Series D
Preferred Stock.
The term 'Non-Stock Change in Control' means any Change in Control other
than a Common Stock Change in Control.
The term 'Applicable Price' means (i) in the event of a Non-Stock Change in
Control in which the holders of the Common Stock receive only cash, the amount
of cash received by the holder of one share of Common Stock and (ii) in the
event of any other Non-Stock Change in Control or any Common Stock Change in
Control, the average of the closing bid prices for the Common Stock during the
10 Trading Days prior to and including the
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<PAGE>
record date for the determination of the holders of Common Stock entitled to
receive cash, securities, property or other assets in connection with such
Non-Stock Change in Control or Common Stock Change in Control or, if there is no
such record date, the date upon which the holders of the Common Stock shall have
the right to receive such cash, securities, property or other assets or the date
upon which such Non-Stock Change in Control is deemed to have occurred, as the
case may be, in each case as adjusted in good faith by the Board of Directors to
appropriately reflect any of the events referred to in clauses (i) through (vi)
of the sixth paragraph of this subsection.
For purposes of calculating any adjustment to be made in the event of a
Change in Control, immediately after such Change in Control:
(i) in the case of a Non-Stock Change in Control, the Conversion Price
will thereupon become the lower of (A) the Conversion Price in effect
immediately prior to such Non-Stock Change in Control, but after giving
effect to any other prior adjustments, and (B) the result obtained by
multiplying the greater of the Applicable Price and the then applicable
Reference Market Price (as defined) by a fraction of which the numerator
will be $50.00 and the denominator will be the then current redemption
price per share or, prior to March 20, 2001, an amount per share of Series
D Preferred Stock determined by the Company in its sole discretion, after
consultation with an investment banking firm, to be the equivalent of the
hypothetical redemption price that would have been applicable if the Series
D Preferred Stock had been redeemable during such period; and
(ii) in the case of a Common Stock Change in Control, the Conversion
Price in effect immediately prior to such Common Stock Change in Control,
but after giving effect to any other prior adjustments, will thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator will be the Purchaser Stock Price (as defined) and the
denominator will be the Applicable Price; provided, however, that in the
event of a Common Stock Change in Control in which (A) 100% of the value of
the consideration received by a holder of Common Stock is common stock of
the successor, acquiror or other third party (and cash, if any, is paid
with respect to any fractional interests in such common stock resulting
from such Common Stock Change in Control) and (B) all the Common Stock will
have been exchanged for, converted into, or acquired for, common stock (and
cash with respect to fractional interests) of the successor, acquiror or
other third party, the Conversion Price in effect immediately prior to such
Common Stock Change in Control will thereupon be adjusted by multiplying
such Conversion Price by a fraction, of which the numerator will be one (1)
and the denominator will be the number of shares of common stock of the
successor, acquiror, or other third party received by a holder of one share
of Common Stock as a result of such Common Stock Change in Control.
The foregoing Conversion Price adjustments in the event of a Non-Stock
Change in Control will apply in situations whereby a Change in Control not
involving a change in beneficial ownership of the Common Stock has occurred or
whereby all or substantially all of the Common Stock is acquired in a
transaction in which 50% or less of the value received by holders of Common
Stock consists of common stock that has been admitted for listing on a national
securities exchange or quoted on the Nasdaq National Market. If the market price
of the Common Stock immediately prior to a Non-Stock Change in Control is lower
than the applicable Conversion Price then in effect, the Conversion Price will
be adjusted as described in (i) above and the holders of the Series D Preferred
Stock will be entitled to receive the amount and kind of consideration that
would have been received if the Series D Preferred Stock had been converted into
Conversion Shares, prior to the Non-Stock Change in Control after giving effect
to such adjustment.
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The foregoing Conversion Price adjustments in the event of a Common Stock
Change in Control will apply in situations whereby more than 50% of the value
received by holders of Common Stock consists of common stock of another company
that has been admitted for listing on a national securities exchange or quoted
on the Nasdaq National Market, in which case the Series D Preferred Stock will
become convertible into shares of common stock of the other company. If
consideration for the Common Stock consists partly of common stock of another
company and partly of other securities, cash or property, each share of Series D
Preferred Stock will be convertible solely into a number of shares of such
common stock determined so that the initial value of such shares (measured as
described in the definition of Purchaser Stock Price) equals the value of the
Conversion Shares into which such share of Series D Preferred Stock was
convertible immediately before the transaction (measured as described in the
definition of Applicable Price). If consideration for Common Stock is solely
common stock of another company, each share of Series D Preferred Stock will be
convertible into the same number of shares of such common stock receivable by a
holder of the number of Conversion Shares into which such share of Series D
Preferred Stock was convertible immediately before such transaction.
The term 'Purchaser Stock Price' means, with respect to any Common Stock
Change in Control, the product of (i) the number of shares of common stock
received as consideration in such Common Stock Change of Control for each share
of Common Stock, and (ii) the average of the per share Closing Prices for the
common stock received as consideration in such Common Stock Change in Control
for the 10 consecutive Trading Days prior to and including the record date for
the determination of the holders of Common Stock entitled to receive such common
stock, or if there is no such record date, the date upon which the holders of
the Common Stock shall have the right to receive such common stock, in each
case, as adjusted in good faith by the Board of Directors to appropriately
reflect any of the events referred to in clauses (i) through (vi) of the sixth
paragraph of this subsection; provided, however, that is no such Closing Prices
exist, then the Purchaser Stock Price shall be set at a price determined in good
faith by the Board of Directors of the Company.
The term 'Reference Market Price' shall initially mean $26.46 (which is an
amount equal to 66 2/3% of the reported last sale price for the Common Stock on
the Nasdaq National Market on March 11, 1998), and in the event of any
adjustment to the Conversion Prices other than as a result of a Change in
Control, the Reference Market Price shall also be adjusted so that the ratio of
the Reference Market Price to the Conversion Price after giving effect to any
such adjustment shall always be the same as the ratio of $26.46 to the initial
Conversion Price set forth on the cover page of this Prospectus.
Depending upon whether the Change in Control is a Non-Stock Change in
Control or Common Stock Change in Control, a holder may receive significantly
different consideration upon conversion. In the event of a Non-Stock Change in
Control, the holder has the right to convert each share of the Series D
Preferred Stock into the kind and amount of the shares of stock and other
securities or property or assets receivable by a holder of the number of shares
of Common Stock issuable upon conversion of such share of the Series D Preferred
Stock immediately prior to such Non-Stock Change in Control, but after giving
effect to the adjustment described above. However, in the event of a Common
Stock Change in Control in which less than 100% of the value of the
consideration received by a holder of Common Stock is common stock of the
acquiror or other third party, a holder of a share of Series D Preferred Stock
who converts a share following the Common Stock Change in Control will receive
consideration in the form of such common stock only, whereas a holder who has
converted his share prior to the Common Stock Change in Control will receive
consideration in the form of common stock as well as any other securities or
assets (which may include cash) receivable thereupon by a holder of the number
of shares of Common Stock issuable upon conversion of such share of Series D
Preferred Stock immediately prior to such Common Stock Change in Control.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Common Stock is
converted into the right to receive other securities, cash or other property,
each share of Series D Preferred Stock then outstanding would, without the
consent of any holders of Series D Preferred Stock, become convertible only into
the kind and amount of securities, cash and other property receivable upon the
transaction by a holder of the number of shares of Common Stock which would have
been received by a holder immediately prior to such transaction if such holder
had converted its share of Series D Preferred Stock.
38
<PAGE>
If at any such time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (for example, distributions or evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for capital stock) and, pursuant to the antidilution
provisions described above, the Conversion Price of the Series D Preferred Stock
is reduced, such reduction may be deemed to be the receipt of taxable income by
holders of the Series D Preferred Stock.
If, as a result of the operation of the Conversion Price adjustment
provisions, (i) the cumulative number of shares of Common Stock
issued or issuable upon conversion of the Series D Preferred Stock, after giving
effect to the adjustment described in this clause (i) and all prior conversions
of Series D Preferred Stock, would exceed a number (the 'Threshold Number')
equal to 20% of the outstanding shares of Common Stock as of the issue date of
the Series D Preferred Stock, then until and unless the Company obtains the
approval of its common stockholders for the issuance of any shares of Common
Stock in excess of the Threshold Number, the Conversion Price shall be adjusted
to that price that would entitle the holders of Series D Preferred Stock to
receive in the aggregate, upon conversion of all the Series D Preferred Stock
(including all prior conversions of Series D Preferred Stock), no more than the
Threshold Number of shares of Common Stock. If as a result of the operation of
the preceeding sentence, the adjustments required by operation of the
Conversion Price adjustment provision is limited because appropriate stockholder
approval has not been obtained, the Company agrees for the benefit of the
holders of the Series D Preferred Stock to seek, as promptly as reasonably
practicable, the requisite approval of its common stockholders for the full
adjustment of the Conversion Price as required by operation of the Conversion
Price adjustment provisions (without giving effect to the preceding sentence).
Consolidation, Merger and Sale of Assets. The Certificate of Designations
provides that the Company, without the consent of the holders of any of the
outstanding Series D Preferred Stock, may consolidate with or merge into any
other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person or may permit any Person to
consolidate with or merge into, or transfer or lease its properties
substantially as an entirety to, the Company; provided, however that (a) the
successor, transferee or lessee is organized under the laws of any United States
jurisdiction; (b) the shares of Series D Preferred Stock shall become shares of
such successor, transferee or lessee, having in respect of such successor,
transferee or lessee the same powers, preferences and relative participating,
optional or other special rights and the qualification, limitations or
restrictions thereon, the Series D Preferred Stock had immediately prior to such
transaction; and (c) certain other conditions are met.
Under any consolidation by the Company with, or merger by the Company into,
any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety as described in the preceding
paragraph, the successor resulting from such consolidation or into which the
Company is merged or the transferee or lessee to which such conveyance, transfer
or lease is made, will succeed to, and be substituted for, and may exercise
every right and power of, the Company under the shares of Series D Preferred
Stock, and thereafter, except in the case of a lease, the predecessor (if still
in existence) will be released from its obligations and covenants with respect
to the Series D Preferred Stock.
Restrictions on Transfer. The Series D Preferred Stock, the Dividend
Shares and the Conversion Shares may not be sold or otherwise transferred until
the expiration of two years following the date of payment for and delivery of
the Series D Preferred Stock, except pursuant to registration under the
Securities Act or in accordance with Rule 144 (if available), Rule 144A (if
available) or Rule 904 thereunder, and will bear a legend to this effect.
SEC Reports and Reports to Holders. Whether or not the Company is required
to file reports with the SEC, if any shares of Series D 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 Series D Preferred Stock, upon request, without cost to
such Holders, copies of such reports or other information.
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock. The
Company intends to retain future earnings, if any, to finance the development
and expansion of its business. Accordingly, the Company anticipates that no
dividends will be paid on the Common Stock in the foreseeable future and that
dividends with respect to the Series A Preferred Stock will be paid by the
issuance of additional shares of Series A Preferred Stock and with respect to
the Series D Preferred Stock will be paid by the issuance of Dividend Shares.
Further, certain covenants in the Indentures currently effectively prohibit the
Company from declaring or paying cash dividends. The terms of the Series A, C
and D Preferred Stock provide that such Preferred Stock ranks senior to the
Common Stock with respect to the payment of dividends. Accordingly, in the event
the Company is no longer restricted from declaring cash dividends under its
Indentures and determines to do so, no holders of Common Stock will receive any
such dividend until such time as all holders of the Preferred Stock have
received payment of the entire dividend to which they are entitled under the
terms of the Preferred Stock, and then only if, and to the extent that, there is
sufficient cash remaining to pay dividends to the holders of the Common Stock.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Series A, Series C Preferred Stock
and Series D Preferred Stock and Common Stock is Continental Stock Transfer &
Trust Company, 2 Broadway, New York, New York 10004.
39
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
This Prospectus relates to the resale by the Selling Securityholders of the
securities listed below. All of the securities being registered under the
Registration Statement of which this Prospectus forms a part are being so
registered pursuant to certain registration rights granted by the Company to the
Selling Securityholders. None of the Selling Securityholders has had a material
relationship with the Company or any of its predecessors or affiliates within
the past three years, except as described in the footnotes below or otherwise in
this Prospectus.
Series D Preferred Stock
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF NUMBER OF SHARES OF
NAME OF SERIES D PREFERRED STOCK SERIES D PREFERRED
SELLING SECURITYHOLDER AS OF APRIL , 1998 STOCK TO BE SOLD
- -------------------------------------------------------------------- ------------------------ -------------------
<S> <C> <C>
Credit Suisse First Boston Corporation(1)........................... 2,200,000 2,200,000
Morgan Stanley & Co. Incorporated(1)................................ 400,000 400,000
NationsBanc Montgomery Securities LLC(1)............................ 200,000 200,000
Smith Barney Inc.(1)................................................ 1,200,000 1,200,000
</TABLE>
Common Stock
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF NUMBER OF SHARES OF
NAME OF OF COMMON STOCK AS COMMON STOCK
SELLING SECURITYHOLDER OF APRIL , 1998 TO BE SOLD
- --------------------------------------------------------------------- ------------------------ -------------------
<S> <C> <C>
Altron Communications, L.C.(2)....................................... 91,831 91,831
J. Daniel Beriault(2)................................................ 2,581 2,581
Beada & Sala, Inc.(3)(4)............................................. 41,197 41,197
Bear Stearns International Limted(2)................................. 47,000 47,000
Bear Stearns Securities Corp.(2)..................................... 518,234
Beltron Communications, Inc.(2)...................................... 4,973 4,973
BizTel, Inc.(2)...................................................... 78,572 78,572
Linda Chester(2)..................................................... 41,020 41,020
Neal R. Coffey(2).................................................... 2,581 2,581
Columbus Wireless Ltd.(2)............................................ 122,439 122,439
Linda Davidson(2).................................................... 66,622 66,622
Edward Dunay(2)...................................................... 66,622 66,622
Robert P. Edwards(2)................................................. 2,581 2,581
Michael Ferro(3)(4).................................................. 176 176
Nancy Franco(2)...................................................... 61,766 61,766
Shawn Freeman(3)(4).................................................. 176 176
Jonathan Goldman(5).................................................. 10,000 10,000
Kirkland & Associates(2)............................................. 13,938 13,938
William Lampson(3)................................................... 2,581 2,581
Richard Landy(2)..................................................... 116,588 116,588
Paul R. Linkins(2)................................................... 35,380 35,380
Richard Lorber(6).................................................... 30,738 30,738
David Lund(3)(4)..................................................... 366 366
Jeffrey Pitts(3)(4).................................................. 4,582 4,582
Cornelius T. Ryan(2)................................................. 31,424 31,424
Ronna L. Sauro(2).................................................... 61,773 61,773
SMC Associates(2).................................................... 36,024 36,024
Walter H. Sonnenfeldt(2)............................................. 18,719 18,719
Southfield Communications, Inc.(2)................................... 65,609 65,609
Telesoft Corp.(3)(4)................................................. 479,387 479,387
Darin Wayrnen(3)(4).................................................. 4,382 4,382
Total................................................................ 2,059,662
</TABLE>
(Footnotes on next page)
40
<PAGE>
(Footnotes from previous page)
- ------------------
(1) The shares of Series D Preferred Stock set forth above were sold in the
Preferred Stock Placement. The Selling Preferred Stockholders shall also be
entitled to sell, and the Registration Statement of which this Prospectus
forms a part also covers, any and all Dividend Shares that may be issued in
lieu of cash dividends on such Series D Preferred Stock during the term of
the Series D Preferred Stock and any and all Conversion Shares issued upon
conversion of the Series D Preferred Stock. In addition, each transferee of
the Selling Preferred Stockholders will be entitled to sell the foregoing
securities as described.
(2) The shares of Common Stock set forth above were issued originally in
consideration of 38 GHz licenses purchased by the Company.
(3) The shares of Common Stock set forth above were issued by the Company as
consideration in the GoodNet Acquisition.
(4) 50% of the holder's shares ('Lock-Up Shares') are subject to a lock-up
('Lock-Up'). The Lock-Up terminates with respect to half of the Lock-Up
Shares on May 1, 1998 and with respect to the remaining half of the Lock-Up
shares on June 1, 1998. Further, the holder may not sell more than 50% of
any of his or its shares set forth above in any single calendar month until
July 1998.
(5) The shares of Common Stock set forth above were issued in connection with
the acquisition by the Company of the remaining equity interest of The
Winning Line, a producer of sports programming, that it did not already own.
(6) The shares of Common Stock set forth above were issued in connection with
the acquisition by the Company of the remaining equity interest of
Fox/Lorber Associates, Inc., a producer of documentary programs, that it did
not already own.
The shares of Series D Preferred Stock, Dividend Shares and Selling
Stockholder Shares may be offered and sold from time to time by the Selling
Securityholders or by their pledgees, donees, transferees or other successors in
interest, and the Conversion Shares, if and when issued, may be offered and sold
from time to time by the holders thereof or by their pledgees, donees,
transferees or other successors in interest, as market conditions permit in the
over-the-counter market, including the Nasdaq National Market, in negotiated
transactions or otherwise, at prices and terms then prevailing or at prices
related to the then-current market price, or in negotiated transactions. The
Securities may be sold by one or more of the following methods, without
limitation: (i) a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (ii) purchases by a broker or
dealer as principal and resale by such broker or dealer for its account pursuant
to this Prospectus; (iii) ordinary brokerage transactions and transactions in
which the broker solicits purchases; and (iv) transactions between sellers and
purchasers without a broker/dealer; and (v) underwritten offerings. In effecting
sales, brokers or dealers may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive commissions or discounts from
Selling Securityholders in amounts to be negotiated. Such brokers and dealers
and any other participating brokers and dealers may be deemed to be
'underwriters' within the meaning of the Securities Act, in connection with such
sales. Currently, there is no market for the Series D Preferred Stock and none
is expected to develop.
LEGAL MATTERS
The legality of the issuance of the Dividend Shares and Conversion Shares
will be passed upon for the Company by Graubard Mollen & Miller, New York, New
York. Certain partners and employees of Graubard Mollen & Miller own shares of
Common Stock.
EXPERTS
The consolidated financial statements of (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
41
<PAGE>
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 and
for the periods indicated in their report thereon.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at prescribed rates. In addition, all
reports filed by the Company via the Commission's Electronic Data Gathering and
Retrieval System (EDGAR) can be obtained from the Commission's Internet web site
located at http:\\www.sec.gov. The Common Stock of the Company is traded on the
Nasdaq National Market (Symbol: WCII), and such reports, proxy statements and
other information concerning the Company also can be inspected at the offices of
the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement under
the Securities Act on Form S-3 (No. 333- ) with respect to the securities
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information set forth in the
Registration Statement. For further information about the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the financial statements, exhibits and schedules filed therewith. The
statements contained in this Prospectus about the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statements, each such statement being qualified in
all respects by such reference. Copies of each such document may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the charges prescribed by the Commission.
42
<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
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 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee......................................................................... 167,695
Printing and engraving expenses.............................................................. 50,000
Legal fees and expenses...................................................................... 35,000
Accounting fees and expenses................................................................. 25,000
Miscellaneous................................................................................ 22,305
Total........................................................................................ 300,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by the Company to the fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
'Section 145. Indemnification of officers, directors, employees and agents;
insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgement in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
II-1
<PAGE>
(d) Any indemnification under sections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suite or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer, to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to 'the corporation' shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to 'other enterprises' shall
include employee benefit plans; references to 'fines' shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to 'serving at the request of the corporation' shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith an in a manner he reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner 'not opposed to
the best interests of the corporation' as referred to in this section.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers, and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-2
<PAGE>
ITEM 16.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------------------------------
<S> <C> <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>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment of this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the 'Calculation of
Registration Fee' table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the registration statement is on Form S-3, Form S-8 or Form
F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933,
each filing of the registrant's annual report pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and
II-3
<PAGE>
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<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-3 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 DAY OF APRIL,
1998.
WINSTAR COMMUNICATIONS, INC.
By: /S/ William J. Rouhana, Jr.
----------------------------------
William J. Rouhana, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William J. Rouhana, Jr. and Timothy R. Graham his
true and lawful attorneys-in-fact and agents, each acting alone, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratifies and
confirms all that said attorneys-in-fact and agents, each acting alone, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ William J. Rouhana, Jr. Chairman of the Board of Directors and April 20, 1998
- ------------------------------------------ Chief Executive Officer (and principal
William J. Rouhana, Jr. executive officer)
/s/ Nathan Kantor President, Chief Operating Officer and April 20, 1998
- ------------------------------------------ Director
Nathan Kantor
/s/ Steven G. Chrust Vice Chairman of the Board of Directors April 20, 1998
- ------------------------------------------
Steven G. Chrust
/s/ Charles T. Dickson Executive Vice President and Chief April 20, 1998
- ------------------------------------------ Financial Officer (and principal accounting
Charles T. Dickson officer)
/s/ Bert W. Wasserman Director April 20, 1998
- ------------------------------------------
Bert W. Wasserman
/s/ William J. vanden Heuvel Director April 20, 1998
- ------------------------------------------
William J. vanden Heuvel
/s/ Steven B. Magyar Director April 20, 1998
- ------------------------------------------
Steven B. Magyar
/s/ James I. Cash Director April 20, 1998
- ------------------------------------------
James I. Cash
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------- ------------------------------------------------------------------------------------------------- ---------
<S> <C> <C> <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 as part of Exhibit 5.1)
23.4 -- Consent of Ernst & Young LLP
</TABLE>
II-6
<PAGE>
EXHIBIT 5.1
April 17, 1998
WinStar Communications, Inc.
230 Park Avenue
Suite 2700
New York, New York 10169
Gentlemen:
It is our opinion that the securities being registered for issuance by the
registrant with the Securities and Exchange Commission, pursuant to the
Registration Statement of WinStar Communications, Inc. on Form S-3, as amended,
when sold and paid for, will be legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the aforesaid
Registration Statement and further consent to the reference made to us under the
caption 'Legal Matters' in the Prospectus constituting a part of such
Registration Statement.
Very truly yours,
/s/ GRAUBARD MOLLEN & MILLER
<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
April 17, 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
April 17, 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-3 and related Prospectus of Winstar
Communications Inc. for the registration of 4,000,000 shares of its Series D 7%
Senior Cumulative Convertible Preferred Stock Due 2010 and 6,091,107 shares of
its Common Stock 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. for the year ended December 31, 1996
included in the Current Report on Form 8K/A of Winstar Communications Inc. dated
February 5, 1998, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
February 17, 1998
