<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________________ to _____________________
Commission File Number: 1-10726
WINSTAR COMMUNICATIONS, INC.
----------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3585278
- ----------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
230 Park Ave., Suite 2700, New York, NY 10169
---------------------------------------------
(Address of principal executive offices)
(212) 584-4000
--------------
(Registrant's telephone number)
-----------------------
(Former name, former address and former fiscal year end
if changed since last report)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
State the number of shares outstanding of each of the issuer's classes of common
stock, as of November 10, 1998: 43,206,247
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 (unaudited)............3
Unaudited Condensed Consolidated Statements
of Operations - three and nine months ended
September 30, 1997 and 1998 ....................................4
Unaudited Condensed Consolidated Statement of
Stockholders' Equity (Deficit) - nine months ended
September 30, 1998..............................................5
Unaudited Condensed Consolidated Statements
of Cash Flows - nine months ended
September 30, 1997 and 1998.....................................6
Notes to Condensed Consolidated
Financial Statements............................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................18
PART II. Other Information..............................................28
Item 2. Changes in Securities
Item 5. Other Information
Item 6. Reports on Form 8-K
Signatures ...........................................................29
2
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
--------------------- ---------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 402,559 $ 311,863
Short term investments 16,903 162,043
--------------------- ---------------------
Cash, cash equivalents and short term investments 419,462 473,906
Accounts receivable, net of allowance for doubtful
accounts 28,728 80,606
Inventories 10,296 16,028
Prepaid expenses and other current assets 8,834 39,427
Net assets of discontinued operations 1,145 -
--------------------- ---------------------
Total current assets 468,465 609,967
Property and equipment, net 284,835 447,186
Investment in equity securities - 14,954
Licenses, net 174,763 283,558
Intangible assets, net 14,293 149,291
Deferred financing costs 27,463 39,378
Other assets 4,015 12,492
--------------------- ---------------------
Total assets $ 973,834 $ 1,556,826
===================== =====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 386 $ 5,517
Accounts payable and accrued expenses 95,685 78,530
Net liabilities of discontinued operations - 11,618
Current portion of capitalized lease obligations 6,741 13,646
--------------------- ---------------------
Total current liabilities 102,812 109,311
Capitalized lease obligations, less current portion 21,392 52,448
Long-term debt, less current portion 768,469 1,293,823
Other liabilities - 13,237
Deferred income taxes 24,000 20,000
--------------------- ---------------------
Total liabilities 916,673 1,488,819
--------------------- ---------------------
Series C exchangeable redeemable preferred stock 175,553 194,738
Series D senior cumulative convertible redeemable preferred stock - 200,000
Stockholders' equity (deficit)
Series A Preferred stock 39 41
Series E Preferred stock - 1
Common stock, par value $.01; authorized 200,000 shares,
issued and outstanding 34,610 and 40,565, respectively 346 405
Additional paid-in-capital 255,741 394,303
Accumulated deficit (374,518) (676,116)
Accumulated other comprehensive loss - (45,365)
--------------------- ---------------------
Total stockholders' deficit (118,392) (326,731)
--------------------- ---------------------
Total liabilities, redeemable preferred stock
and stockholders' deficit $ 973,834 $ 1,556,826
===================== =====================
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
</TABLE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services
CLEC $ 7,429 $ 37,221 $ 13,417 $ 85,858
Other -- 11,175 3,792 40,276
--------- --------- --------- ---------
Total telecommunications services 7,429 48,396 17,209 126,134
Information services 11,017 12,750 25,693 37,220
--------- --------- --------- ---------
Total operating revenues 18,446 61,146 42,902 163,354
--------- --------- --------- ---------
Operating expenses
Cost of services and products 18,408 45,722 43,783 132,199
Selling, general and administrative expenses 39,864 63,764 105,486 175,395
Depreciation and amortization 6,802 20,372 14,649 48,666
--------- --------- --------- ---------
Total operating expenses 65,074 129,858 163,918 356,260
--------- --------- --------- ---------
Operating loss (46,628) (68,712) (121,016) (192,906)
Other (expense) income
Interest expense (22,018) (42,599) (52,863) (111,704)
Interest income 4,298 8,805 12,415 24,043
Other income 2,220 -- 2,220 --
--------- --------- --------- ---------
Loss from continuing operations before income
tax benefit (62,128) (102,506) (159,244) (280,567)
Income tax benefit -- 1,500 -- 4,000
--------- --------- --------- ---------
Loss from continuing operations (62,128) (101,006) (159,244) (276,567)
Discontinued operations:
Loss from operations (1,655) (1,045) (4,834) (2,759)
Estimated loss on disposal (including a
provision of $4,183 for operating losses
during the phase out period) (1,500) (20,290) (1,977) (22,272)
--------- --------- --------- ---------
Loss from discontinued operations (3,155) (21,335) (6,811) (25,031)
--------- --------- --------- ---------
Net loss (65,283) (122,341) (166,055) (301,598)
Preferred stock dividends (1,535) (11,710) (3,881) (31,195)
--------- --------- --------- ---------
Net loss applicable to common stockholders $ (66,818) $(134,051) $(169,936) $(332,793)
========= ========= ========= =========
Basic and diluted loss per share:
From continuing operations $ (1.91) $ (2.83) $ (4.95) $ (8.10)
From discontinued operations (0.10) (0.53) (0.21) (0.66)
--------- --------- --------- ---------
Net loss per share $ (2.01) $ (3.36) $ (5.16) $ (8.76)
========= ========= ========= =========
Weighted average shares outstanding 33,188 39,876 32,923 37,970
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Nine Months Ended September 30, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Preferred Stock A Preferred Stock E
---------------------------- ---------------------------
Shares Amount Shares Amount
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 3,910 $ 39 -- $ --
Issuances of common stock:
For stock option exercises and other
For acquisitions and licenses
For investment in equity securities
Issuances of Series E preferred stock 75 1
Dividends declared on Series A preferred stock
Dividends declared on Series C preferred stock
Dividends on Series D preferred stock
Issuances of Series A preferred stock as
dividends in kind 179 2
Issuances of common stock as dividends
on Series D preferred stock
Preferred stock issuance costs and other, net
Comprehensive loss:
Net loss
Unrealized loss on investments in marketable
equity securities
====== =========== ============ =========
Balances at September 30, 1998 4,089 $ 41 75 $ 1
====== =========== ============ =========
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
------------- ------------ --------------- -------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997 34,610 $ 346 $ 255,741 $ (374,518)
Issuances of common stock:
For stock option exercises and other 1,399 14 15,300
For acquisitions and licenses 2,712 27 89,269
For investment in equity securities 1,525 15 60,329
Issuances of Series E preferred stock 1,670
Dividends declared on Series A preferred stock (4,466)
Dividends declared on Series C preferred stock (19,185)
Dividends on Series D preferred stock (7,544)
Issuances of Series A preferred stock as
dividends in kind 4,464
Issuances of common stock as dividends 319 3 6,957
on Series D preferred stock
Preferred stock issuance costs and other, net (8,232)
Comprehensive loss:
Net loss (301,598)
Unrealized loss on investments in marketable
equity securities
============= =============== ================= ======================
Balances at September 30, 1998 40,565 $ 405 $ 394,303 $ (676,116)
============= =============== ================= ======================
<CAPTION>
Accumulated Total
Additional Other Stockholders'
Comprehensive Equity
Loss (Deficit)
---------------------- -------------------
<S> <C> <C>
Balances at December 31, 1997 $ - $ (118,392)
Issuances of common stock:
For stock option exercises and other 15,314
For acquisitions and licenses 89,296
For investment in equity securities 60,344
Issuances of Series E preferred stock 1,671
Dividends declared on Series A preferred stock (4,466)
Dividends declared on Series C preferred stock (19,185)
Dividends on Series D preferred stock (7,544)
Issuances of Series A preferred stock as
dividends in kind 4,466
Issuances of common stock as dividends 6,960
on Series D preferred stock
Preferred stock issuance costs and other, net (8,232)
Comprehensive loss:
Net loss (301,598)
Unrealized loss on investments in marketable
equity securities (45,365) (45,365)
-------------------
(346,963)
-------------------
======================== =====================
Balances at September 30, 1998 $ (45,365) $ (326,731)
======================== =====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(166,055) $(301,598)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations 6,811 25,031
Depreciation and amortization 16,166 48,666
Deferred income tax benefit -- (4,000)
Provision for doubtful accounts 1,608 8,150
Non cash interest expense 35,825 75,938
(Increase) decrease in operating assets:
Accounts receivable (15,778) (29,848)
Inventories (3,875) (3,911)
Prepaid expenses and other current assets (4,374) (17,799)
Other assets 560 (8,475)
Increase (decrease) in accounts
payable and accrued expenses 21,842 (37,292)
Net cash used in discontinued operations (9,194) (12,269)
--------- ---------
Net cash used in operating activities (116,464) (257,407)
--------- ---------
Cash flows from investing activities:
Increase in short-term investments, net (2,235) (145,140)
Purchase of property and equipment (103,835) (222,852)
Proceeds from sale of property and equipment -- 22,334
Acquisitions (35,428) (177,380)
Other, net (1,396) --
--------- ---------
Net cash used in investing activities (142,894) (523,038)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net 319,730 437,451
Net proceeds from redeemable preferred stock -- 192,008
Net proceeds from equity transactions 99,691 15,314
Proceeds from sale of minority equity interest -- 10,000
Proceeds from equipment lease financing 20,504 41,629
Payment of capital lease obligations (2,370) (4,671)
Other, net (301) (1,982)
--------- ---------
Net cash provided by financing activities 437,254 689,749
--------- ---------
Net increase in cash and cash equivalents 177,896 (90,696)
Cash and cash equivalents at beginning of period 95,641 402,559
--------- ---------
Cash and cash equivalents at end of period 273,537 311,863
Short-term investments at end of period 29,232 162,043
--------- ---------
Cash, cash equivalents and short-term investments
at end of period $ 302,769 $ 473,906
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business
The Company provides facilities-based voice and broadband data
telecommunications services to businesses and other customers in major
metropolitan areas in the United States. By utilizing its Wireless FiberSM
services and a switch-based infrastructure, the Company distinguishes itself as
a facilities-based, value-added provider of high-capacity telecommunications
services and an attractive alternative to established providers, such as the
RBOCs. The Company also utilizes its Wireless Fiber services to provide other
telecommunications offerings, including Internet, ATM and frame relay services.
The Company creates and/or acquires rights to and distributes information and
entertainment content as a complement to its telecommunications operations. The
Company operated a nonstrategic consumer products company, the remaining assets
of which were sold to a third party in November 1998. The company presently
operates a residential long distance company. Both of these companies have been
treated as discontinued operations in this report.
To capitalize on opportunities in the telecommunications industry, the Company
is pursuing a rapid expansion of its telecommunications services, which will
require significant amounts of capital to finance capital expenditures and
anticipated operating losses. The Company may elect to slow the speed or narrow
the focus of this expansion in the event it is unable to raise sufficient
amounts of capital on acceptable terms.
2. Basis of Presentation
The condensed consolidated financial statements presented herein include the
accounts of WinStar Communications, Inc. and its subsidiaries (collectively,
"WinStar" or the "Company"). All material inter-company transactions and
accounts have been eliminated in consolidation. The accounts have been prepared
by the Company without audit. The foregoing statements contain all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
the Company's management, necessary to present fairly the financial position of
the Company as of September 30, 1998, the statements of operations for the three
and nine months ended September 30, 1997 and 1998, the statements of cash flows
for the nine months ended September 30, 1997 and 1998 and the statement of
stockholders' equity for the nine months ended September 30, 1998.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1997. The unaudited financial statements and related
footnotes for the three and nine month periods ended September 30, 1997 reflect
certain reclassifications such that they conform to the current period
presentation.
- --------------------------
Wireless Fiber(Service Mark) is a service mark of WinStar Communications, Inc.
7
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results of operations for the year ending
December 31, 1998.
3. Dividends on Convertible Preferred Stock
Dividends on the 6% Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") since its issuance have been paid "in-kind" in additional
shares of the Series A Preferred Stock. [Reference is made to Notes 7 and 9.]
4. Basic and Diluted Loss Per Share
Basic and diluted loss per share have been calculated by dividing the net loss,
after consideration of preferred stock accretion and dividends, by the weighted
average number of shares of common stock outstanding during each period in
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"). Stock options and warrants have been excluded from the calculation of
diluted loss per share as their effect would have been antidilutive. The
adoption of SFAS No. 128 had no effect on earnings per share for the three and
nine months ended September 30, 1997.
5. Acquisition of MidCom Communications, Inc.
Effective January 21, 1998 (the "Closing Date"), pursuant to an agreement
between the Company and MIDCOM Communications, Inc. and its subsidiaries
(collectively, "MidCom"), the Company acquired substantially all of MidCom's
assets and businesses for a purchase price of approximately $92.0 million in
cash. The purchase price is subject to a downward adjustment under certain
circumstances.
The Company retained an independent third party to fully evaluate the assets and
certain liabilities of MidCom, in order to complete the allocation of the
purchase price of the acquisition. The results of this evaluation were recorded
in the third quarter and did not result in a material adjustment. The financial
statements of MidCom have been consolidated into the Company's financial
statements as of the date of acquisition.
MidCom was a provider of long distance voice and frame relay data
telecommunications services primarily to small and medium-sized businesses, most
of which are located in major metropolitan areas of California, Florida,
Illinois, New York, Ohio and Washington.
The following pro forma results of operations (in thousands, except per share
data) reflect the combined operations of the Company and MidCom as if the
acquisition was consummated at the beginning of each period presented. The
unaudited pro forma results of operations do not purport to represent the
results of operations that would have actually resulted had the purchase
8
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
occurred on the indicated dates, nor should it be taken as indicative of future
results of operations.
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
September 30, September 30,
----------------- -----------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 43,366 $ 61,146 $ 117,241 $ 167,126
Net Loss applicable to common
stockholders (92,174) (134,051) (239,799) (333,195)
Basic and diluted loss per share $ (2.80) $ (3.36) $ (7.28) $ (8.78)
</TABLE>
6. Other Acquisitions
On January 12, 1998, pursuant to an agreement between the Company, Telesoft
Corp. and others, the Company acquired GoodNet for a purchase price of
approximately $22.0 million, consisting of $3.5 million cash and 732,784 shares
of common stock of the Company valued at $18.5 million. GoodNet is a national
provider of Internet backbone and other services, offering high-capacity data
communications services.
During the third quarter of 1998, a subsidiary of the Company acquired a number
of small companies engaged in systems integration and Internet services
provisioning primarily to supplement its existing broadband service offerings.
The accounts of the acquired companies have been consolidated with the Company's
financial statements as of the effective date of the acquisitions. These
acquisitions were treated as purchases for accounting purposes. The aggregate
consideration for the acquisitions was approximately $49.1 million,
(including $15.0 million which was for acquired accounts receivable), consisting
of $38.6 million in cash, 283,942 shares of the Company's common stock valued at
$8.8 million and 75,100 shares of the Company's Series E preferred Stock valued
at $1.7 million. [Reference is made to Note 9.] The largest of these
acquisitions was LAN Systems, which was for $23.0 million, of which $15.0
million was for the acquired accounts receivable mentioned above.
7. Issuance of Cumulative Convertible Preferred Stock
In March 1998, the Company sold 4,000,000 shares of Series D 7% senior
cumulative convertible preferred stock ("Convertible Preferred Stock") in a
private placement for aggregate gross proceeds of $200 million. The preferred
stock earns a 7% cumulative annual dividend, payable quarterly (commencing on
September 15, 1998) in (i) cash or, at the Company's election, (ii) through the
issuance of a number of shares of the Company's common stock equal to the
dividend amount divided by the discounted current market value of the common
stock (as defined), at the Company's option. The Company is currently prohibited
from paying such dividends in cash under the terms of its outstanding
indentures.
The Convertible Preferred Stock is convertible at the option of the holder at
any time after the issue date, into shares of the Company's common stock at a
conversion price of $49.61 per share of common stock.
9
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Convertible Preferred Stock is redeemable at the option of the Company after
March 20, 2001, in whole or in part, at defined redemption prices, plus
accumulated and unpaid dividends, if any, payable in cash. The terms of the
Company's outstanding indentures currently prohibit any such redemption prior to
the repayment of the debt issued under the indenture. The Convertible Preferred
Stock is mandatorily redeemable on March 15, 2010 at a redemption price of $50,
per share plus accrued and unpaid dividends, payable in cash.
The Convertible 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 and Series E Preferred Stock of the Company and
(ii) on a parity with the Series C Preferred Stock of the Company.
The Company filed a shelf registration with the Securities and Exchange
Commission (which was declared effective on June 18, 1998) with respect to
resales of the Convertible Preferred Stock and the common stock which may be
issued on the conversion thereof or as dividends thereon. (Reference is made to
Notes 3 and 9.)
8. March 1998 Notes
In March 1998, the Company issued $200 million principal amount of unsecured 10%
senior subordinated notes due 2008 ("Cash Pay Notes") and $250 million principal
amount of unsecured 11% senior subordinated deferred interest notes ("Deferred
Interest Notes") due 2008 (collectively, "the Notes"). The Notes are unsecured,
senior subordinated obligations of the Company and rank pari passu in right of
payment with the Company's 14% Convertible Senior Subordinated Notes Due 2005
and the Company's 15% Senior Subordinated Deferred Interest Notes Due 2007 and
are junior in right of payment to all existing and future senior indebtedness of
the Company.
The Cash Pay Notes bear interest at a rate of 10% per annum, payable
semiannually commencing September 15, 1998. The Deferred Interest Notes bear
interest at the rate of 11% per annum. Until March 15, 2003, interest on the
Deferred Interest Notes accrues and compounds semiannually, but will not be
payable in cash.
The Notes mature on March 15, 2008 and are redeemable by the Company on and
after March 15, 2003, at its option, at certain defined prices.
The Company has filed an Exchange Offer Registration Statement with the
Securities and Exchange Commission ("SEC") which has been declared effective
under the Securities Act. The Company has completed an exchange offer for the
Notes, pursuant to such registration statement.
10
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
9. Series E Preferred Stock
In connection with an acquisition, the Company issued 75,100 shares of its
Series E Preferred Stock ("the Stock"). The Stock is non-voting, non-redeemable
junior convertible preferred stock which does not earn dividends. The holders of
the Stock may convert all, but not less than all, into shares of the Company's
common stock on a one-for-one basis anytime after August 1, 1998. Each share of
Class E Preferred Stock has a liquidation preference of $59.93 per share.
[Reference is made to Notes 3, 6 and 7.]
10. Condensed Financial Information of WinStar Equipment Corp. and WinStar
Equipment II Corp.
Two of the Company's wholly-owned subsidiaries: WinStar Equipment Corp. and
WinStar Equipment II Corp. ("WEC" and "WEC II", respectively), each of which is
a special purpose corporation which was formed to facilitate the financing and
purchase of telecommunications equipment and related property ("Designated
Equipment"), received $200 million and $50 million in gross proceeds,
respectively, from the issuance and sale of 12.5% Guaranteed Senior Secured
Notes ("the WEC and WEC II Notes") in placements of debt in March and August of
1997, respectively. The proceeds of the WEC and WEC II Notes are to be used to
purchase Designated Equipment and, if such equipment is not purchased within a
specified period, WEC and WEC II must apply unused proceeds thereof to redeem
the WEC and WEC II Notes, respectively. Both the interest and principal of the
WEC and WEC II notes are guaranteed by the Company.
WEC and WEC II have no independent operations other than to purchase Designated
Equipment and to lease this equipment to the Company and its other
telecommunications affiliates. It is therefore unlikely, in the opinion of
management, that WEC or WEC II will generate sufficient income, after the
payment of interest on the WEC and WEC II Notes, to pay dividends or make other
distributions to the Company.
11
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Summary financial information of WEC and WEC II, which are included in the
condensed consolidated financial statements of the Company, are as follows (in
thousands):
Balance sheet information at September 30, 1998 is as follows:
WEC WEC II
--- -------
Current assets $ 29,795 $ 40,722
Long term assets 194,917 14,210
Current liabilities (8,182) (4,024)
Long term liabilities (238,732) (54,897)
--------- --------
Stockholders' deficit $(22,202) $ (3,989)
========= ==========
Statements of operations information for WEC and for WEC II for the periods
presented below, are as follows (in thousands):
<TABLE>
<CAPTION>
WEC WEC II
-------------------------------------------------- ------------------------------------
Period from Period from
March 13, August 8,
Three Three 1997 Nine 1997 Three Nine
Months Months (Inception) Months (Inception) Months Months
Ended ended to Ended To Ended Ended
September September September September September September September
30, 30, 30, 30, 30, 30, 30,
1997 1998 1997 1998 1997 1998 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenues from other
WinStar subsidiaries........ $ 740 $ 714 $ 740 $ 1,728 $ - $ - $ -
Interest income from other
WinStar subsidiaries........ - 1,790 - 3,482 - - -
Interest income - investments.. 1,306 597 4,292 3,045 391 567 2,092
Selling, general and
administrative expenses..... - (1,168) - (2,807) - (16) (16)
Interest expense............... (6,159) (5,981) (12,609) (17,477) (920) (1,562) (4,687)
------- ------- -------- -------- ----- ------- -------
Net loss....................... $ (4,113) $ (4,048) $ (7,577) $(12,029) $ (529) $ (1,011) $(2,611)
========= ========== ========== ========= ======== ========= ========
</TABLE>
Separate financial statements for WEC or WEC II are not presented because
management of the Company has determined that such information would not provide
any material information that is not already presented in the condensed
consolidated financial statements of the Company.
12
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Discontinued Operations
WinStar Global Products
On May 13, 1997, a formal plan of disposal for the Company's consumer products
subsidiary, WinStar Global Products, Inc., ("Global Products") was approved by
the Board of Directors. The disposal of Global Products has been accounted for
as a discontinued operation and, accordingly, is carried at its estimated net
realizable value. In November 1998, the Company entered into an asset purchase
agreement to sell the remaining assets of Global Products. Under the agreement,
the Company will receive certain assets recorded at a nominal value.
Accordingly, the Company has recorded an additional loss on the disposition of
Global Products of approximately $16.8 million. The accompanying condensed
consolidated balance sheets, and operating results of Global Products are
segregated and reported as discontinued operations in the accompanying condensed
consolidated balance sheets and statements of operations and cash flows.
Information relating to the discontinued operations of Global Products is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30
-------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues $ 3,635 $ 2,138 $ 9,910 $ 6,633
--------- --------- --------- ----------
Cost of services and products 3,015 2,219 7,560 6,756
Selling, general & administrative
expenses 1,576 973 4,124 3,046
Depreciation and amortization 58 70 174 194
--------- --------- --------- ----------
Total operating expenses 4,649 3,262 11,858 9,996
--------- --------- --------- ----------
Operating loss (1,014) (1,124) (1,948) (3,363)
Interest expense (208) (157) (612) (490)
--------- --------- --------- ----------
Net loss $(1,222) $(1,281) $(2,560) $(3,853)
======== ======== ======== ========
</TABLE>
13
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Net assets of the discontinued operations of Global Products at December 31,
1997 and September 30, 1998 are composed of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---- ----
<S> <C> <C>
Assets:
Accounts Receivable, net $ 4,383 $ 857
Inventories 4,663 3,968
Other Assets 1,268 1,411
--------- -------
Total assets 10,314 6,236
-------- -------
Liabilities:
Current Liabilities 3,570 3,764
Other Liabilities 9,951 5,160
--------- --------
Total liabilities 13,521 8,924
-------- --------
Net deficit $ (3,207) $(2,688)
========= ========
</TABLE>
Winstar Gateway Network
In November 1998, a formal plan of disposal for the Company's Residential Long
Distance Business, ("the Business"), was approved by management of the Company,
and it is anticipated that the disposal will be completed within the next twelve
months. The Company expects to incur additional operating losses of
approximately $5.5 million during the phase out of this business. The disposal
of the Business has been accounted for as a discontinued operation and
accordingly, its net liabilities have been segregated from the net assets of
continuing operations in the accompanying condensed consolidated balance sheet
and its operating results are segregated from continuing operations and are
reported as discontinued operations in the accompanying condensed consolidated
statements of operations and cash flows.
14
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Information relating to the discontinued operations of the Business is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
------------------------------------ ------------------------------------
1997 1998 1997 1998
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues $ 1,739 $ 901 $ 6,700 $ 3,392
---------------- ---------------- ----------------- ----------------
Cost of revenue 1,213 886 4,706 3,365
Selling, general & administrative 1,271 1,056 4,428 2,729
Depreciation and amortization 275 - 826 -
---------------- ---------------- ----------------- ----------------
Total operating expenses 2,759 1,942 9,960 6,094
---------------- ---------------- ----------------- ----------------
Operating loss (1,020) (1,041) (3,260) (2,702)
Interest expense (635) (4) (1,574) (57)
================ ================ ================= ================
Net loss $ (1,655) $ (1,045) $ (4,834) $ (2,759)
================ ================ ================= ================
</TABLE>
15
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Net assets of the discontinued operations as of December 31, 1997 and September
30, 1998 are composed of the following (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
-------------- -------------
<S> <C> <C>
Accounts receivable, net $ 1,600 $ 215
Other assets 206 490
-------------- ------------
Total assets 1,806 705
Current liabilities 2,335 1,000
Other liabilities 431 177
-------------- ------------
Total liabilities 2,766 1,177
-------------- ------------
Net deficit $ (960) $ (472)
============== ============
</TABLE>
12. Marketable Securities
On June 21, 1998, the Company purchased approximately 3,314,000 shares of
Advanced Radio Telecom Corp. ("ART"), which represents approximately 12.9% of
the outstanding common stock of ART, and certain other equity securities from
private investors. The Company issued one share of its common stock in exhange
for every 2.2 shares of ART purchased. The conversion ratio resulted in a
purchase price of $17.90 per ART share based on the Company's closing stock
price on the date the transaction was closed. The Company issued approximately
1,525,000 restricted common shares in connection with the transaction and
received the ART shares and certain other unrelated assets. The marketable
securities acquired are accounted for as "Available for Sale Securities". The
Company has recorded an "other comprehensive loss" (representing unrealized
losses on these securities) of $45,365,000 in the Statement of Shareholders'
Equity.
13. New Accounting Pronouncements
The FASB released Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of An Enterprise and Related Information" ("SFAS No.
131"), requiring that all public businesses report financial and descriptive
information about their reportable operating segments. The Company will
implement SFAS No. 131 in its 1998 annual report on Form 10K, as required.
16
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
14. Subsequent Events
In October 1998, the Company and Lucent Technologies ("Lucent") entered into a
long term strategic relationship to build out WinStar's telecommunications
network in major domestic and international markets. Under the terms of this
five year agreement, Lucent will provide up to $2.0 billion in equipment
financing; provided however, that Lucent is not required to have outstanding at
any one time aggregate loans and commitments in excess of $500 million.
Additional amounts of the credit commitment will become available on a
dollar-for-dollar basis as the loans and/or unfunded commitments are syndicated
to other lenders.
In October 1998, the Company signed a fifteen year operating lease for up to
257,000 square feet of office space in New York City. Future minimum lease
payments under this lease commitment approximate $146.7 million. The Company
will consolidate all of its existing New York City offices which include its
Corporate offices, WinStar for Buildings, WinStar New Media, WinStar Broadband
Services, WinStar Large Accounts and operating offices for WinStar General
Business and WinStar Network Services in this new space. It expects to sublet
many of its existing offices in New York City.
17
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company Overview
The Company provides facilities-based voice and broadband data
telecommunications services to businesses and other customers in major
metropolitan areas in the United States. By utilizing its Wireless FiberSM
services and a switch-based infrastructure, the Company distinguishes itself as
a facilities-based, value-added provider of high-capacity telecommunications
services and an attractive alternative to established providers, such as the
RBOCs. The Company also utilizes its Wireless Fiber services to provide other
telecommunications offerings, including Internet, ATM and frame relay services.
The Company acquires rights to and distributes information services and
entertainment content as a complement to its telecommunications operations. The
Company operated a nonstrategic consumer products company, the remaining assets
of which were sold in November 1998. The Company presently operates a
residential long distance company. Both of these companies have been treated as
discontinued operations in this report.
During the first quarter of 1998 the Company completed its acquisition of the
assets of MidCom Communications, Inc., a national provider of long distance
voice and frame relay data telecommunications services, primarily to small and
medium-sized businesses nationally.
The Company also acquired GoodNet, a rapidly growing Tier I Internet and ATM
backbone provider. Through its national ATM network, GoodNet provides Internet
access and high capacity data services to high bandwidth users. Additionally,
during the third quarter of 1998, the Company acquired a number of small
companies, including LANSystems, engaged in systems integration and Internet
services provisioning.
18
<PAGE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues of the Company's operating segments are as follows (in millions):
Three Months Ended
September 30,
-------------
1997 1998
---- ----
Telecommunications Services:
CLEC Services $ 7.4 $37.2
Other Services - 11.2
----- ----
$ 7.4 48.4
Information Services 11.0 12.7
---- ----
Total Revenues $18.4 $61.1
===== =====
Revenues increased by $42.7 million, or 232.0%, for the three months ended
September 30, 1998, to $61.1 million, from $18.4 million for the three months
ended September 30, 1997. This increase was principally attributable to the
growth in the Company's telecommunications business, where the addition of new
markets and new services led to 554.1% gain in revenues over the prior year.
Revenues from CLEC services increased by $29.8 million, or 402.7%, for the
quarter ended September 30, 1998, to $37.2 million, from $7.4 million, for the
quarter ended September 30, 1997. The revenue growth was primarily attributable
to the Company's existing customer base, continued national sales and
installation of local, long distance and internet services to small and medium
size business customers, the geographic and other expansions of sales, network
and business operations, along with the rapidly expanding broadbrand and large
account business units and acquisitions including: MidCom, PacNet, GoodNet and
LANSystems. Total CLEC service revenues reached an annual run rate in excess of
$176.0 million at the end of September, compared with $33.0 million a year ago.
Revenues from other telecommunications services, which consist of wholesale
operations and MidCom long distance voice services (other than sales
attributable to National Accounts), increased to $11.2 million in the quarter
ended September 30, 1998. This amount was insignificant in the quarter ended
September 30, 1997. The increase resulted primarily from revenues, attributable
to former MidCom long distance operations which were acquired in January 1998.
The Company expects a gradual attrition of this revenue over subsequent
quarters.
Revenues from information services increased by $1.7 million, or 15.4%, for the
three months ended September 30, 1998, to $12.7 million, from $11.0 million, for
the three months ended September 30, 1997, due to strong Internet and other
advertising revenues.
19
<PAGE>
Cost of revenue increased by $27.3 million, or 148.4%, for the three months
ended September 30, 1998, to $45.7 million, from $18.4 million, for the three
months ended September 30, 1997. As a percentage of revenues, cost of revenue
and products in the quarter ended September 30, 1998 was 74.7%, compared with
100.0% in the quarter ended September 30, 1997, and 80.6% for the quarter ended
June 30, 1998. Various items impact the Company's cost of revenue each quarter,
including sales volumes, the percentage of traffic provisioned over the
Company's network, supplier cost adjustments and/or credits for volume or
performance, and control over internal costs. The Company continuosly seeks to
lower its vendor costs by renegotiating term contracts, moving to its own
network through bulk capacity and/or IRU purchases wherever possible, and
seeking refunds and credits where the Company believes it is appropriate because
of volume or performance standards. The success of such activities and credits
favorably impacted the current quarter in a material manner, and may impact
future quarters to the extent the Company is successful in negotiating further
volume or performance reductions, credits or other bulk capacity and/or IRU's.
While, the Company's gross profit margins could continue to gradually improve as
increased volumes and larger percentages of traffic are provisioned over its own
network facilities, the rate of improvement will be slower during periods when
the Company expands into new markets, but will accelerate as these markets
mature. In fact, if many new markets are added or the Company's other cost
control efforts are not as successful as in the current quarter the cost of
revenue percentage could increase.
Selling, general and administrative expense increased by $24.0 million to $63.8
million for the three months ended September 30, 1998, from $39.8 million for
the three months ended September 30, 1997. The Company continued to hire sales,
marketing, network and related support personnel in connection with the
expansion of its CLEC markets. The Company had approximately 800 employees at
September 30, 1997 and approximately 2,567 at September 30, 1998. As a
percentage of revenues, selling, general and administrative expenses declined
from 216.3% for the quarter ended September 30, 1997 to 104.2% for the quarter
ended September 30, 1998. With the rapid expansion of its markets from 1 in
December 1996 to 27 at September 30, 1998, and to its plan of 30 at December 31,
1998, the Company expects its selling, general and administrative expenses to
continue to grow in absolute dollars, but to be a steadily declining percentage
of revenues.
Depreciation and amortization expense increased by $13.6 million for the three
months ended September 30, 1998, to $20.4 million, from $6.8 million for the
three months ended September 30, 1997 principally resulting from the Company's
acquisition and deployment of switches, radios and other equipment in connection
with its telecommunications network buildout.
For the reasons noted above, the operating loss for the three months ended
September 30, 1998, was $68.7 million, compared with an operating loss of $46.6
million for the three months ended September 30, 1997.
Interest expense increased by $20.6 million, or 93.6%, for the three months
ended September 30, 1998, to $42.6 million, from $22.0 million for the three
months ended September 30, 1997. This increase was principally attributable to
the issuance of $150 million of debt in the third and fourth quarters of 1997
and another $450 million of debt in the first quarter of 1998. Of the $42.6
million of interest expense incurred for the quarter, $25.0 million is not
payable in cash.
20
<PAGE>
Interest income increased by $4.5 million, or 104.7%, for the three months ended
September 30, 1998, to $8.8 million, from $4.3 million for the three months
ended September 30, 1997. The increase resulted from the additional interest
income earned on the proceeds from the Company's various stock and debt
placements.
For the reasons noted above, the Company reported a loss from continuing
operations of $101.0 million for the three months ended September 30, 1998,
compared to a net loss from continuing operations of $62.1 million for the three
months ended September 30, 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues of the Company's operating segments are as follows (in millions):
Nine Months Ended
September 30,
-----------------
1997 1998
---- ----
Telecommunications Services:
CLEC Services $ 13.4 $ 85.9
Other Services 3.8 40.3
----- -----
17.2 126.2
Information Services 25.7 37.2
------ ------
Total Revenues $ 42.9 $163.4
====== ======
Revenues increased by $120.5 million, or 280.9% for the nine months ended
September 30, 1998, to $163.4 million, from $42.9 million for the nine months
ended September 30, 1997. This increase was attributable to the growth in
revenues generated by the Company's telecommunications operations.
Revenues from CLEC services increased by $72.5 million, or 541.0%, to $85.9
million for the nine months ended September 30, 1998, from $13.4 million in the
nine months ended September 30, 1997. The CLEC business commenced operations in
the second quarter of 1996. The Company has since been rapidly adding markets
and installing voice and data lines for its business customers.
Revenues from other telecommunications services increased $36.5 million to $40.3
million for the nine months ended September 30, 1998, as compared to $3.8
million in the nine months ended September 30, 1997. The increase resulted
primarily from sales, attributable to former MidCom long distance operations
which were acquired in January 1998.
21
<PAGE>
Revenues from information services increased by $11.5 million, or 44.7%, for the
nine months ended September 30, 1998, to $37.2 million, from $25.7 million for
the nine months ended September 30, 1997, due to strong Internet and other
advertising revenues, as well as increased home video, license and film
production sales.
Cost of revenue increased by $88.4 million, or 201.8%, for the nine months ended
September 30, 1998, to $132.2 million, from $43.8 million for the nine months
ended September 30, 1997. As a percentage of revenues, cost of revenue for the
nine months ended September 30, 1998 was 80.9%, compared with 102.1% in the nine
months ended September 30, 1997. This decrease in the cost of revenue percentage
is the result of increased sales volumes, larger percentages of traffic being
provisioned on the Company's network, substantial supplier cost adjustments
and/or credits for volume or performance and control over internal costs.
Selling, general and administrative expense increased by $69.9 million to $175.4
million for the nine months ended September 30, 1998, from $105.5 million for
the nine months ended September 30, 1997. The Company continued to hire sales,
marketing, network and related support personnel in connection with the
expansion of its CLEC markets. The Company had approximately 1,479 employees at
December 31, 1997 and approximately 2,567 at September 30, 1998. As a percentage
of revenues, selling, general and administrative expenses declined from 245.9%
for the nine months ended September 30, 1997 to 107.3% for the nine months ended
September 30, 1998. With the rapid expansion of its markets from 1 in December
1996 to 27 at September 30, 1998, and to its plan of 30 at December 31, 1998,
the Company expects its selling, general and administrative expenses to continue
to grow in absolute dollars, but to be a steadily declining percentage of
revenues.
Depreciation and amortization expense increased by $34.1 million for the nine
months ended September 30, 1998, to $48.7 million, from $14.6 million for the
nine months ended September 30, 1997 principally resulting from the Company's
acquisition and deployment of switches, radios and other equipment in connection
with its telecommunications network buildout.
For the reasons noted above, the operating loss for the nine months ended
September 30, 1998, was $192.9 million, compared with an operating loss of
$121.0 million for the nine months ended September 30, 1997.
Interest expense increased by $58.8 million, or 111.2%, for the nine months
ended September 30, 1998, to $111.7 million, from $52.9 million for the nine
months ended September 30, 1997. This increase was principally attributable to
the issuance of $450 million of debt in 1997 and another $450 million of debt in
the first quarter of 1998. Of the $111.7 million of interest expense incurred
for the nine months ended September 30, 1998, $75.9 million is not payable in
cash.
Interest income increased by $11.6 million, or 93.5%, for the nine months ended
September 30, 1998, to $24.0 million, from $12.4 million for the nine months
ended September 30, 1997. The
22
<PAGE>
increase resulted from the additional interest income earned on the proceeds
from the Company's various stock and debt placements.
For the reasons noted above, the Company reported a loss from continuing
operations of $276.6 million for the nine months ended September 30, 1998,
compared to a net loss from continuing operations of $159.2 million for the nine
months ended September 30, 1997.
Liquidity and Capital Resources
In March 1998, the Company sold 4,000,000 shares of its 7% Series D Senior
Cumulative Convertible Preferred Stock pursuant to which the Company realized
net proceeds of approximately $192.0 million.
Additionally, in March 1998, the Company sold an aggregate of $450 million
principal amount of notes (the "1998 Debt Placements"), pursuant to which it
realized net proceeds of approximately $437.4 million.
In October 1998 the Company signed an equipment financing agreement with Lucent
Technologies in which Lucent will provide technology, network design,
integration and buildout services and the vast majority of the Company's
communications network ("Lucent Financing Agreement"). Under the terms of this
five year agreement, Lucent will provide up to $2.0 billion in equipment
financing; provided however, that Lucent is not required to have outstanding at
any one time aggregate loans and commitments in excess of $500 million.
Additional amounts will become available on a dollar-for-dollar basis as the
loans and/or unfunded commitments are syndicated to other lenders.
At September 30, 1998, the Company had approximately $473.9 million in cash,
cash equivalents and short term investments, approximately $34.8 million of
which may only be used to finance equipment purchases in connection with the
Company's rollout of its telecommunications infrastructure.
The Company has incurred significant operating and net losses, due in large part
to the development of its telecommunications services business, and anticipates
that such losses will continue over the near term as the Company executes its
growth strategy. A significant portion of the Company's increased capital
requirements will result from the rollout of the Company's CLEC business. The
Company is building a direct sales force, having opened sales offices currently
serving the 27 major markets in which it offers CLEC services, and is in the
process of expanding into other metropolitan areas. Additionally, the Company is
in the process of ordering and installing switches and other network equipment
to be placed in its key markets. Historically, the Company has funded its
operating losses and capital expenditures through public and private offerings
of debt and equity securities and from credit and lease facilities. Cash used to
fund negative EBITDA during the three months ended September 30, 1998 was
approximately $48.3 million, and purchases of property and equipment during the
three months ended September 30, 1998 was approximately $103.3 million. At
September 30, 1998, working capital was $500.7 million, including cash, cash
equivalents and short-term investments of
23
<PAGE>
$473.9 million, as compared to working capital and cash, cash equivalents and
short-term investments at December 31, 1997 of $365.7 million and $419.5
million, respectively.
Under its current plan to expand to 40 major metropolitan markets by the end of
1999, the Company plans to spend approximately $350 million or more through 1999
for capital equipment, which the Company expects to finance principally through
the Lucent Financing Agreement. The Company anticipates that this financing
commitment will be sufficient to finance the capital equipment for the 1999 40
market buildout, and to finance capital equipment relating to the expansion into
additional markets both domestically and internationally. Given this possible
expansion, the Company may seek additional capital to finance its operations to
the period in which it achieves free cash flow. The Company believes that it
will be able to obtain sufficient capital to execute its business plan. 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), the Company accelerates its plan and enters
markets more rapidly, the Company may be required to seek additional sources of
capital sooner than currently anticipated.
The Company is committed to pay approximately $34.8 million in connection with
the acquisition of additional spectrum licenses, all of which are subject to FCC
approval, of which $29.0 million is payable in cash and $3.5 million as an
offset against a loan made by the Company, the balance is payable in common
stock or, at the Company's option, in cash.
In October 1998, the company signed a fifteen year operating lease for up to
257,000 square feet of office space in New York City. Future minimum lease
payments under this lease commitment are approximately $146.7 million.
The Company will consolidate all of its existing New York City offices which
include headquarters for its Corporate offices, WinStar for Buildings, WinStar
NewMedia, WinStar Broadband Services, WinStar Large Accounts and operating
offices for WinStar General Business and WinStar Network Services. The Company
expects to sublease many of its existing offices in New York City.
The Company has entered into a twenty five year lease agreement for dark fiber
capacity in and between a number of major markets at an aggregate cost of
approximately $40 million. Amounts will become payable over the next eighteen
months as portions of the fiber network are fully constructed and become
available to the Company. To date the Company has paid $6.5 million of this
amount.
Year 2000 Compliance
The Company is currently addressing the issue of whether or to what extent its
systems will be vulnerable to potential errors and failures as a result of the
"Year 2000" problem, which is the result of certain computer programs being
written using two digits, rather than four digits, to define the applicable
year. Any computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000, or not recognize the
date at all. This could result in major system failures or miscalculations. The
Company believes that its exposure to this issue, based on its internal systems,
is somewhat limited by the fact that substantially all of its existing systems
have been purchased or replaced since 1996 or currently remain under
development.
24
<PAGE>
Notwithstanding this belief, the Company is aggressively working to identify and
remediate potential Year 2000 problems in all of its new and existing
mission-critical and business-critical systems and applications, including those
supplied by third party vendors.
The Company's first priority is to protect customer-sensitive operations from
service interruptions or billing discrepancies that could occur as a result of
the Year 2000 transition. Customer-sensitive mission critical operations include
WinStar's telecommunications network, traffic data, customer order processing
and provisioning systems, customer billing and invoicing, and data interfaces to
and from these systems. The Company's business-critical operations include
systems, applications and operations which do not directly impact the customer,
but are essential to internal communications and the Company's ability to run
the business day-to-day. Finally, the Company will address matters for which
failure might cause inconvenience and delay for Company employees, but would not
directly impact customers, service, or routine business operations.
The Company has developed Year 2000 compliance standards that follow industry
requirements. In order to implement these standards, the Company has formed a
Year 2000 Program Office to manage the Year 2000 project plan enterprise-wide.
The project team is comprised of management and technical representatives from
the Company's major operational areas, together with experienced Year 2000
consultants.
Key activities in the Company's Year 2000 program include: planning and program
definition, inventory and prioritization of date-sensitive systems (including
computer and electrical systems, equipment and the systems of companies acquired
or to be acquired by the Company), risk assessment, remediation, testing, audit
and certification, contingency planning, implementation, and post-implementation
monitoring.
The Company has completed the planning and inventory/assessment phases of this
project which entailed, among other things, identification of the several
hundred systems used by the Company in the operation of its business, and in
reviewing all of the Company's hardware and software systems for date related
code issues. The results of this review are guiding the Company's remediation,
testing and contingency planning efforts which are underway. The Company has
been undertaking certain Year 2000 testing and remediation of non-compliant
systems which will continue into 1999.
The Company recognizes the need to remediate and test its mission-critical and
business-critical systems to insure that individually the systems are Year 2000
functional and that collectively they inter-operate in such a manner as to
insure that the WinStar enterprise is Year 2000 functional. The Company expects
to complete the individual testing of mission-critical and business-critical
systems prior to June 30, 1999. The Company expects to start inter-operability
testing prior to June 30, 1999 and to complete that phase prior to August 31,
1999. This project will necessarily be a continuing one as remediated systems
are monitored for compliance and as further modifications are warranted to cover
systems changes and to support the growth of the network.
25
<PAGE>
The Company has, where it deemed necessary, required suppliers and third-party
vendors to provide statements of Year 2000 compliance in their contracts with
the Company. In addition, and as part of the Company's Year 2000 project, it is
contacting its vendors and suppliers, including other telecommunications
providers, equipment manufacturers and software vendors, to obtain a statement
regarding the vendor's Year 2000 compliance. The Company currently requires its
outside vendors and suppliers to provide reasonable assurances that their
hardware and/or software is Y2K ready. In the event that a vendor or supplier is
not able to provide such assurance, the Company will monitor the vendor's
progress in this area and, if appropriate, may arrange to have available an
alternate vendor or supplier who can give such assurances.
The total cost associated with the Company's Year 2000 compliance project is not
expected to be material to the Company's financial position. The estimated total
cost of the project is $4 million to $8 million. The total amount expended
through September 30, 1998 was approximately $1 million. As additional systems
are reviewed and tested and the scope of any Year 2000 issues is further
defined, the Company will make appropriate adjustments to the estimated costs of
completing this project.
Failure of key systems of the Company to be made Year 2000 compliant could
adversely impact the Company's ability to service its telecommunications and
other customers and otherwise carry on its business, including by causing
interruptions in the operation of WinStar's telecommunications network, traffic
data, customer order processing and provisioning systems, customer billing and
invoicing, and data interfaces to and from these systems. Although the Company
expects that it will have identified and remediated any Year 2000 problems in
its internal systems prior to the end of 1999, if any significant Year 2000
problems in such systems are not uncovered or are not remediated in a timely
manner, significant failures of these functions could occur and could have
material adverse consequences for the Company's operations.
While the Company is working to test its own mission critical systems for Year
2000 problems, the Company does not control the systems of its suppliers. As
discussed above, the Company is seeking assurances from its suppliers regarding
the Year 2000 readiness of their systems. The Company also plans to conduct
interoperability testing to test whether its suppliers' systems will accurately
provide the Company's systems with date data and telecommunications
functionality into and beyond the new millennium. Notwithstanding these measures
there is some risk that the interoperation of the Company's systems with those
of its suppliers' may be impacted by the Year 2000 date change. In addition, in
light of the vast interconnection and interoperability of telecommunications
networks worldwide, the ability of any telecommunications provider, including
the Company, to provide services to its customers (e.g., to complete calls and
transport data and to bill for such services) is dependent, to some extent, on
the networks and systems of other carriers. To the extent the networks and
systems of those carriers are adversely impacted by Year 2000 problems, the
ability of the Company to service its customers may be adversely impacted as
well. Any such impact could have a material adverse effect on the Company's
operations.
26
<PAGE>
The Company also expects to consummate acquisitions prior to the end of 1999.
The extent of the Year 2000 problems associated with any such acquired companies
and the cost and timing of remediation will be evaluated during and after
completion of the acquisition process. However, the Company cannot give
assurances that the systems of any acquired company will be fully Year 2000
compliant when acquired or will be capable of timely remediation.
Having identified the mission critical and business critical systems of the
Company and its key suppliers, and the associated risks of failure of those
systems to be Year 2000 ready, the Company is in the process of devising
contingency plans which will be implemented in the event the Company determines
that any such systems will not be made year 2000 compliant in a timely manner.
Alternative contingency plans are under consideration by the Company and will be
ready for implementation by the third quarter of 1999.
Forward-Looking Statements
This report contains 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,
without limitation: (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.
27
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
The following table sets forth certain information with respect to the issuance
by the Company of certain securities during the quarter ended September 30,
1998, without registration of such securities under the Securities Act:
<TABLE>
<CAPTION>
- ---------------------- ---------------- ----------------- --------------- ----------------------- -------------------
Terms of
Securities Sold Exemption Conversion or
(Date Sold) Purchaser(s) Consideration Claimed Exercise Use of Proceeds
- ---------------------- ---------------- ----------------- --------------- ----------------------- -------------------
<S> <C> <C> <C> <C> <C>
341,754 shares of Various Shares issued 4(2) Not applicable The Company did
Common Stock individuals in connection not receive cash
(various dates from and entities with various proceeds for
7/1/98 - 9/30/98) acquisitions of these shares
businesses and
38 GHz licenses
and related
assets
75,100 shares of Systron, Inc. Shares issued 4(2) Not Applicable The Company did
Series E Preferred in connection not receive cash
Stock with the proceeds for
(8/28/98) purchase of the these shares
assets of
Systron, Inc.
- ---------------------- ---------------- ----------------- --------------- ----------------------- -------------------
</TABLE>
Item 5 - Other Information
Notes to Stockholders Regarding 1999 Annual Meeting of Stockholders:
Pursuant to Rule 14a-4 promulgated by the Securities and Exchange Commission,
stockholders are advised that the Company's management shall be permitted to
exercise discretionary voting authority under proxies its solicits and obtains
from the Company's 1999 Annual Meeting of Stockholders with respect to any
proposal presented by a stockholder at such meeting, without any discussion of
the proposal in the Company's proxy statement for such meeting, unless the
Company receives notice of such proposal at its principal office in New York,
New York no later than March 24, 1999.
Item 6. Reports on Form 8-K
(1) Current report on Form 8-K filed August 19, 1998.
28
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
WinStar Communications, Inc.
Registrant
By: /s/Charles T. Dickson
- --------------------------------------------
Charles T. Dickson
Executive Vice President and Chief Financial
Officer (Principal Financial Officer) Dated: November 16, 1998
By: /s/Joseph P. Dwyer
- --------------------------------------------
Joseph P. Dwyer
Vice President, Finance
(Principal Accounting Officer) Dated: November 16, 1998
29
<TABLE> <S> <C>
<PAGE>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 311,863,000
<SECURITIES> 162,043,000
<RECEIVABLES> 80,606,000
<ALLOWANCES> 0
<INVENTORY> 16,028,000
<CURRENT-ASSETS> 609,967,000
<PP&E> 447,186,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,556,826,000
<CURRENT-LIABILITIES> 109,311,000
<BONDS> 1,293,823,000
394,738,000
42,000
<COMMON> 405,000
<OTHER-SE> (327,178,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,556,826,000
<SALES> 0
<TOTAL-REVENUES> 163,354,000
<CGS> 0
<TOTAL-COSTS> 132,199,000
<OTHER-EXPENSES> 224,061,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111,704,000
<INCOME-PRETAX> (280,567,000)
<INCOME-TAX> (4,000,000)
<INCOME-CONTINUING> (276,567,000)
<DISCONTINUED> (25,031,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (301,598,000)
<EPS-PRIMARY> (8.76)
<EPS-DILUTED> (8.76)
</TABLE>
