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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1998
REGISTRATION NO. 333-51749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
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
OF WINSTAR COMMUNICATIONS, INC.)
</TABLE>
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 584-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF EACH REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM J. ROUHANA, JR.
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
WINSTAR COMMUNICATIONS, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 584-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
DAVID ALAN MILLER, ESQ.
GRAUBARD MOLLEN & MILLER
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 818-8800
FAX: (212) 818-8881
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE
<S> <C> <C> <C>
10% Senior Subordinated Notes Due 2008 ('New Cash-Pay
Notes')(1)....................................................... 200,000 $1,000(2) $ 200,000,000(3)
11% Senior Subordinated Deferred Interest Exchange Notes Due 2008
('New Deferred Interest Notes')(4)............................... 250,000 $1,000(5) $ 250,000,000(3)
Total........................................................... $ 450,000,000
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
10% Senior Subordinated Notes Due 2008 ('New Cash-Pay
Notes')(1)....................................................... $ 68,965.52
11% Senior Subordinated Deferred Interest Exchange Notes Due 2008
('New Deferred Interest Notes')(4)............................... $ 86,206.90
Total........................................................... $ 155,172.42(6)
</TABLE>
(1) The New Cash-Pay Notes being registered hereby are being offered by WinStar
Communications, Inc. (the 'Company'), in exchange for certain 10% Senior
Subordinated Notes due 2008 ('Old Cash-Pay Notes').
(2) Represents the minimum principal amount of each of the Old Cash-Pay Notes
for which the New Cash-Pay Notes will be exchanged.
(3) Based on the book value of the notes as of the latest practicable date
pursuant to Rule 457(f)(2) under the Securities Act of 1933 ('Securities
Act').
(4) The New Deferred Interest Notes being registered hereby are being offered by
the Company in exchange for certain 11% senior subordinated deferred
interest notes due 2008 ('Old Deferred Interest Notes').
(5) Represents the minimum principal amount of each of the Old Deferred Interest
Notes for which the New Deferred Interest Notes will be exchanged.
(6) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
OFFER TO EXCHANGE 10% SENIOR SUBORDINATED CASH-PAY
EXCHANGE NOTES DUE 2008
(INTEREST PAYABLE ON MARCH 15 AND SEPTEMBER 15,
COMMENCING SEPTEMBER 15, 1998)
FOR ALL OUTSTANDING
10% SENIOR SUBORDINATED CASH-PAY NOTES DUE 2008
(INTEREST PAYABLE ON MARCH 15 AND SEPTEMBER 15,
COMMENCING SEPTEMBER 15, 1998)
AND
OFFER TO EXCHANGE 11% SENIOR SUBORDINATED DEFERRED
INTEREST EXCHANGE NOTES DUE 2008
(INTEREST PAYABLE ON MARCH 15 AND SEPTEMBER 15,
COMMENCING SEPTEMBER 15, 2003)
FOR ALL OUTSTANDING
11% SENIOR SUBORDINATED DEFERRED INTEREST NOTES DUE 2008
(INTEREST PAYABLE ON MARCH 15 AND SEPTEMBER 15,
COMMENCING SEPTEMBER 15, 2003)
OF
WINSTAR COMMUNICATIONS, INC.
------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON SEPTEMBER 16,
1998 UNLESS EXTENDED BY WINSTAR COMMUNICATIONS, INC.
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 21 HEREOF FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE NOTES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 6, 1998
(Continued on next page)
<PAGE>
(Cover page continued)
WinStar Communications, Inc., a Delaware corporation ('Company'), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the letter of transmittal ('Cash-Pay Letter of Transmittal'), to
be delivered to each holder of Old Cash-Pay Notes (as defined below), to
exchange $1,000 principal amount of its 10% Senior Subordinated Cash-Pay
Exchange Notes Due 2008 ('New Cash-Pay Notes') for each $1,000 principal amount
of its 10% Senior Subordinated Cash-Pay Notes Due 2008 ('Old Cash-Pay Notes'
and, together with the New Cash-Pay Notes, the 'Cash-Pay Notes'). The Company
also hereby offers, upon the terms and subject to the conditions set forth in
this Prospectus and the letter of transmittal ('Deferred Interest Letter of
Transmittal,' together with the Cash-Pay Letter of Transmittal, the 'Letter of
Transmittal'), to be delivered to each holder of Old Deferred Interest Notes (as
defined below) to exchange (together with the offer to exchange the New Cash-Pay
Notes for the Old Cash-Pay Notes, the 'Exchange Offer'), $1,000 principal amount
of its 11% Senior Subordinated Deferred Interest Exchange Notes Due 2008 ('New
Deferred Interest Notes') for each $1,000 principal amount of its outstanding
11% Senior Subordinated Deferred Interest Notes Due 2008 ('Old Deferred Interest
Notes' and, together with the New Deferred Interest Notes, the 'Deferred
Interest Notes'). The Old Cash-Pay Notes and the New Cash-Pay Notes, together
with the Old Deferred Interest Notes and the New Deferred Interest Notes are
referred to herein collectively as the 'Notes.'
The New Cash-Pay Notes and the New Deferred Interest Notes (referred to
herein collectively as the 'New Notes' or 'Exchange Notes') will be registered
under the Securities Act of 1933, as amended ('Securities Act'), pursuant to the
registration statement on Form S-4 ('Registration Statement') of which this
Prospectus forms a part. As of the date hereof, $200.0 million principal amount
of the Old Cash-Pay Notes and $250.0 million principal amount of the Old
Deferred Interest Notes (together with the Old Cash-Pay Notes, the 'Old Notes')
were outstanding. The Registration Statement of which this Prospectus forms a
part has been filed by the Company in accordance with the terms of the Purchase
Agreement, dated as of March 20, 1998 ('Purchase Agreement'), and Registration
Rights Agreement, dated as of March 20, 1998 ('Registration Rights Agreement'),
among the Company and Credit Suisse First Boston Corporation, Salomon Brothers,
Inc., Morgan Stanley & Co. Incorporated and NationsBanc Montgomery Securities
LLC, the initial purchasers of the Old Notes ('Initial Purchasers'). The
Exchange Offer is being made by the Company to fulfill certain obligations under
the Purchase Agreement and Registration Rights Agreement. After the consummation
of the Exchange Offer, the Company will have no further obligation to make any
other such exchange offers.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires, which will be September 16, 1998, unless the
Exchange Offer is extended by the Company in its sole discretion ('Expiration
Date'). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain conditions which may
be waived by the Company and to the terms and provisions of the Registration
Statement. The Old Notes may be tendered only in denominations of $1,000
principal amount and integral multiples thereof. The Company has agreed to pay
all expenses related to the Exchange Offer, except costs related to the delivery
of the Old Notes by each holder of such notes to the United States Trust Company
of New York, the exchange agent ('Exchange Agent' or 'U.S. Trust'), and
underwriting discounts, commissions and transfer taxes. Any waiver, extension or
termination of the Exchange Offer will be publicly announced by the Company
through a release to the Dow Jones News Service and as otherwise required by
applicable laws or regulations. See 'The Exchange Offer.'
The New Notes will be entitled to the benefits of the Indentures under
which the Old Notes were issued (the 'Indentures'). The form of the New Notes
will be identical to the form of the Old Notes, except that the New Notes will
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof. The New Notes will have the same
terms, conditions and rankings as the Old Notes. The Notes are unsecured, senior
subordinated obligations of the Company, rank pari passu in right of payment
with the Company's existing 14% Convertible Senior Subordinated Discount Notes
Due 2005 ('Convertible Notes') and 15% Senior Subordinated Notes due 2007 ('1997
Senior Subordinated Notes'), 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 on
March 15 and September 15, commencing September 15, 1998, and are redeemable on
or after March 15, 2003 at the option of the Company, in whole or in part, at
the redemption prices set forth herein. The Deferred Interest Notes bear
interest at a rate of 11% per annum, payable semiannually on March 15 and
September 15, commencing September 15, 2003. Until March 15, 2003, interest on
the Deferred Interest Notes will accrue and be compounded semiannually on each
2
<PAGE>
SemiAnnual Interest Accrual Date (as defined), but will not be payable in cash.
Interest on the Accumulated Amount (as defined) of the Deferred Interest Notes
as of March 15, 2003 will be payable semiannually commencing September 15, 2003.
The Deferred Interest Notes will mature on March 15, 2008 and are redeemable on
or after March 15, 2003 at the option of the Company, in whole or in part, at
the redemption price set forth herein.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission ('Commission') to third parties, the Company believes that
New Notes issued pursuant to this Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than a broker-dealer who purchased such Old Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the holder is acquiring
the New Notes in the ordinary course of its business and is not participating,
and has no arrangement or understanding with any person to participate, in the
distribution of the New Notes. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company in the Letter of Transmittal that
such conditions have been met.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an 'underwriter' within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See 'Plan of Distribution.'
As of June 30, 1998, Cede & Co. ('Cede'), as nominee for The Depository
Trust Company, New York, New York ('DTC'), was the registered holder of $450.0
million aggregate principal amount of the Old Notes. The Company believes that
no such participant is an affiliate (as such term is defined in Rule 405 of the
Securities Act) of the Company. There has previously been only a limited
secondary market, and no public market, for the Old Notes. The Old Notes are,
and the New Notes will be, eligible for trading in the Private Offering, Resales
and Trading through Automatic Linkages ('PORTAL') market. There can be no
assurance as to the liquidity of the trading market for either the New Notes or
the Old Notes. The New Notes constitute securities for which there is no
established trading market, and the Company does not currently intend to list
the New Notes on any securities exchange. If such a trading market develops for
the New Notes, future trading prices will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on such factors, the
New Notes may trade at a discount from their face value. See 'Risk
Factors--Absence of Public Market for the New Notes.'
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indentures. Following
the consummation of the Exchange Offer, the holders of Old Notes will continue
to be subject to the existing restrictions upon transfer thereof and the Company
will have no further obligation to such holders to provide for any other
exchange offer with respect to the Old Notes held by such holders. Following the
completion of the Exchange Offer in accordance with the terms hereof and the
Registration Rights Agreement, certain of the Old Notes may not be entitled to
the contingent increase in interest rate as provided in the Registration Rights
Agreement. See 'The Exchange Offer.'
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of August 3, 1998.
The Company will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See 'Plan
of Distribution.'
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes were issued originally in global form (the 'Old Global
Notes'). The Old Global Notes were deposited with, or on behalf of, DTC, as the
initial depository with respect to the Old Notes (in such capacity, the
'Depositary'). The Old Global Notes are registered in the name of Cede, as
nominee of DTC, and beneficial
3
<PAGE>
interests in the Old Global Notes are shown on, and transfers thereof are
effected only through, records maintained by the Depositary and its
participants. The use of the Old Global Notes to represent the Old Notes permits
the Depositary's participants, and anyone holding a beneficial interest in an
Old Note registered in the name of such a participant, to transfer interests in
the Old Notes electronically in accordance with the Depositary's established
procedures without the need to transfer a physical certificate. Except as
provided below, the New Notes will also be issued initially as a note in global
form (the 'New Global Notes', and together with the Old Global Notes, the
'Global Notes') and deposited with, or on behalf of, the Depositary.
Notwithstanding the foregoing, any holder of Old Notes who at any time is not a
qualified institutional buyer under Rule 144A (a 'Qualified Institutional
Buyer'), who exchanges Old Notes in the Exchange Offer, will receive the New
Notes in certificated form. Any such holder is not, and will not be, able to
trade such securities through the Depositary unless the New Notes are resold to
a Qualified Institutional Buyer. After the initial issuance of the New Global
Notes, New Notes in certificated form will be issued in exchange for a holder's
proportionate interest in the New Global Notes only as set forth in the
Indentures.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus and the Letter of Transmittal and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Exchange Agent. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy the New Notes in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. The delivery of this Prospectus shall not,
under any circumstances, create any implication that the information herein is
correct at any time subsequent to its date.
4
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Available Information...................................................................................... 5
Incorporation of Certain Information by Reference.......................................................... 6
Prospectus Summary......................................................................................... 7
Risk Factors............................................................................................... 21
The Exchange Offer......................................................................................... 30
Capitalization............................................................................................. 36
Description of the Notes................................................................................... 39
Description of Certain Other Indebtedness and Preferred Stock.............................................. 64
Certain United States Federal Income Tax Considerations.................................................... 68
Legal Matters.............................................................................................. 74
Experts.................................................................................................... 74
</TABLE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the New Notes offered in the
Exchange Offer. For the purposes hereof, the term 'Registration Statement' means
the original Registration Statement and any and all amendments thereto. In
accordance with the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and the schedules and exhibits thereto. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete statement
of its provisions. For further information pertaining to the Company and the New
Notes offered in the Exchange Offer, reference is made to such Registration
Statement, including the exhibits and schedules thereto and the financial
statements, notes and schedules filed as a part thereof. The Registration
Statement (and the exhibits and schedules thereto) may be inspected and copied
at the public reference facilities maintained by the Commission at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 ('Washington Office'), or at its regional offices at Citicorp Center, 500
West Madison Street, 14th Floor, Chicago, Illinois 60661 ('Chicago Office'), and
at Seven World Trade Center, 13th Floor, New York, New York 10048 ('New York
Office'). Any interested party may obtain copies of all or any portion of the
Registration Statement and the exhibits thereto at prescribed rates from the
Public Reference Section of the Commission at its Washington Office.
The Company is subject to the informational requirements of the 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.
If the Company ceases to be subject to the informational reporting
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes are outstanding, it will file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act. The Company will supply the
United States Trust Company of New York, as trustee ('Trustee') and each holder
of Notes, or will supply to the Trustee for forwarding to each such holder,
without cost to such holder, copies of such reports or other information.
5
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents or information have been filed by the Company with
the Commission pursuant to the Exchange Act and are incorporated herein by
reference:
(1) Annual Report on Form 10-K (as amended) for the year ended December 31,
1997;
(2) Current Report on Form 8-K/A filed January 30, 1998;
(3) Current Report on Form 8-K/A filed February 5, 1998;
(4) Current Report on Form 8-K filed March 12, 1998;
(5) Current Report on Form 8-K filed March 30, 1998;
(6) Current Report on Form 8-K filed June 25, 1998;
(7) Current Report on Form 8-K filed July 23, 1998;
(8) Quarterly Report on Form 10-Q for the three months ended March 31, 1998; and
(9) Proxy Statement regarding the Annual Meeting of Stockholders to be held on
June 10, 1998, filed May 7, 1998.
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed incorporated by reference into this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person to WinStar Communications, Inc., 230 Park Avenue, Suite
2700, New York, New York 10169 (telephone 212-584-4000), Attention: Investor
Relations, a copy of any and all of the documents referred to above (other than
exhibits to such documents) which have been incorporated by reference in this
Prospectus. All such documents can also be retrieved from the Commission's
electronic data gathering and retrieval (EDGAR) system at www.sec.gov.
6
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PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information and
financial statements (and notes thereto) incorporated by reference into or
appearing elsewhere in this Prospectus. Unless otherwise indicated, references
herein to the 'Company' or 'WinStar' refer to WinStar Communications, Inc. and,
where appropriate, its subsidiaries. Wireless Fiber(Service Mark) is a service
mark and WinStar(Registered) is a trademark of WinStar Communications, Inc.
THE COMPANY
GENERAL
WinStar provides facilities-based voice and data telecommunications
services to businesses and other customers in major metropolitan areas
throughout the United States. WinStar holds licenses ('Wireless Licenses') which
provide it with the largest amount of 38 GHz radio spectrum in the country,
covering more than 110 Metropolitan Statistical Areas ('MSAs') with a total
population of approximately 185 million, including the 50 largest MSAs. WinStar
is building a unique nationwide network using its fiber-quality digital capacity
in the 38 GHz and 28 GHz bands ('Wireless Fiber') in order to provide its
customers with a broad range of attractively priced services and an alternative
to the incumbent local exchange carriers ('ILECs'), other competitive local
exchange carriers ('CLECs') and the interexchange carriers ('IXCs'). WinStar
believes that its ability to provide information content and services further
differentiates it from competitors. The annual business telecommunications
market in the United States is estimated at $110 billion, with local telephony
and data services, WinStar's target segment, accounting for approximately $47
billion.
WinStar is rapidly building a modern telecommunications infrastructure. It
currently provides telecommunications services on a switched basis in 24 major
metropolitan markets, including Atlanta, Boston, Chicago, Dallas, Los Angeles,
New York City, San Diego and Washington, D.C. WinStar expects to provide
telecommunications services using its own switches in 30 major metropolitan
markets by the end of 1998 and 40 major metropolitan markets by the end of 1999.
WinStar's network buildout has been accelerated through several recent strategic
acquisitions. In October 1997, WinStar purchased from US ONE Communications
Corp. ('US ONE') twelve Lucent 5ESS switches, seven of which are located in
markets that WinStar had targeted but had not yet entered. In January 1998,
WinStar purchased GoodNet, a Tier I Internet service provider ('ISP'), from
Telesoft Corp. ('Telesoft'). GoodNet maintains a national Asynchronous Transfer
Mode ('ATM') backbone, points of presence ('POPs') in 27 cities throughout the
United States and more than 130 peering arrangements with other ISPs. Also in
January 1998, as part of its acquisition of the assets of Midcom Communications
Inc. ('Midcom'), WinStar acquired PacNet, a data transmission services provider.
PacNet maintains a network of frame relay data switches, POPs in 20 cities
throughout the western United States and, through its membership in the Unispan
consortium, interconnection and cooperative service arrangements with other
frame relay providers with networks across the United States and
internationally.
NETWORK STRENGTHS
WinStar believes that its Wireless Fiber and switch-based infrastructure
provides it with significant competitive advantages, including:
Ability to Provide a Full Range of Voice and Data Telecommunications
Services. The large amount of bandwidth afforded by the Wireless Licenses,
together with WinStar's voice and data switching facilities, allow WinStar to
offer customers a full range of voice and data telecommunications services,
including (i) local dial tone, private branch exchange ('PBX') trunks,
individual business lines, Centrex and long distance, (ii) data services, such
as Internet access, Wide Area Network ('WAN') services utilizing frame relay,
Internet Protocol ('IP') and ATM data transport, and private network services
and (iii) facilities-based broadband local access and digital network services
('Carrier Services'). WinStar holds Wireless Licenses in each of the 50 largest
MSAs. Including certain additional licenses which WinStar has agreed to acquire,
the Wireless Licenses cover an average of approximately seven 100 MHz channels
in the 20 largest U.S. markets and four 100 MHz channels in the next 20 largest
U.S. markets. Each 100 MHz Wireless Fiber channel can support transmission
capacity of one DS-3 at 45 Mbps, which is over 750 times the rate of the fastest
dial-up modem in general use (56 Kbps) and over 350 times the rate of the
fastest integrated services digital network line in general use (128 Kbps). It
is
7
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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 and 28 GHz bands
transmissions (e.g., antennae, transceivers and digital interface units) is
small, unobtrusive and relatively inexpensive.
Ability to Penetrate Target Markets. In implementing its network plan,
WinStar identifies strategically located sites to serve as hubs in each of its
metropolitan areas. These hub sites are connected via Wireless Fiber links to
customer buildings. Certain characteristics of the 38 GHz frequency, including
the effective range of its radio signal and the small amount of dispersion
(i.e., scattering) of the radio beam as compared to the more dispersed radio
beams produced at lower frequencies, allow for multiple hub sites using the same
channel in a licensed area. Further, WinStar's ability to use multiple 38 GHz
channels in its target markets provides it with advantages over other providers
of fixed wireless telecommunications services that possess fewer channels in
their respective portions of the radio spectrum. WinStar believes that its
multiple channels, together with the deployment of multipoint technology and its
hub-based network architecture, will allow it to address the needs of a
significant portion of the business customers in its target markets via its
Wireless Fiber services.
Scalable Capital Expenditures. Because of WinStar's Wireless Fiber
capacity and hub-based network architecture, a substantial portion of its
planned capital expenditures is variable and more directly tied to demand.
WinStar expects to be able to minimize non-revenue generating deployment of
infrastructure because (i) it does not need to fully build out its network in a
market before offering services in that market, (ii) bandwidth can be more
easily allocated as demanded and (iii) the small size and relatively low cost of
radio transceivers and other equipment allow for cost-efficient redeployment as
customer demands change.
Deployment of Multipoint Technology. WinStar expects that its planned
deployment of point-to-multipoint technology within its networks will allow it
to further reduce per-building installation and equipment costs, better leverage
existing and future investment in hub equipment, address a significantly greater
number of buildings in each market and provide customers with variable amounts
of bandwidth as their demands and needs change. WinStar believes that it will be
able to efficiently integrate point-to-multipoint technology into its
point-to-point network infrastructure, thereby enabling the Company to create
point-to-multipoint infrastructure in its markets rapidly and cost effectively.
Other Core Assets. WinStar has accumulated a group of core assets, in
addition to those described above, which it believes are necessary for it to
commercially deploy its telecommunications services. Among these assets are (i)
authorizations to operate as a CLEC in 30 states and the District of Columbia,
(ii) agreements that allow it to interconnect its facilities with those of other
carriers in 41 of the 50 most populated MSAs, (iii) roof rights to install its
radios on more than 2,200 buildings and (iv) state-of-the-art information
systems platforms to assure the accurate and flexible handling of the billing
and customer satisfaction requirements of a diverse customer base purchasing a
variety of telecommunications services. WinStar intends to acquire additional
core assets as it further rolls out its services and expands its network
coverage.
BUSINESS STRATEGY
The telecommunications industry is being reshaped by a number of factors,
including the deregulation of local telecommunications markets, growing demand
for high-speed, high-capacity digital telecommunications services and the rapid
advances in wireless technologies that enable service providers to address this
demand, as well as the increasing importance to customers of information
services. WinStar believes it is well-positioned to compete successfully in this
new telecommunications environment. Key elements of WinStar's strategy to
continue its growth as a national provider of telecommunications services are
to:
Continue to Expand Network Infrastructure. WinStar currently provides
switch-based telecommunications services in 24 major metropolitan markets and
expects to provide telecommunications services using its own switches in 30
major metropolitan markets by the end of 1998 and 40 major metropolitan markets
by the end of 1999. WinStar is continuing to deploy network infrastructure on a
city-by-city basis using its Wireless Fiber capabilities, its voice and data
switches and, where appropriate, facilities leased from other carriers. The
Company believes that a limited number of hub sites (generally less than 10) in
each metropolitan area will allow it to address more than 70% of its targeted
buildings and ultimately to carry the majority of its customers' traffic
8
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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 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.
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Capitalize on Management Team Experience. WinStar has assembled a
management team and hired operating personnel experienced in all areas of
telecommunications and information services, including more than 250 former
officers and employees of MCI Communications Corp. and Sprint Corporation, as
well as numerous executives and other employees from Regional Bell Operating
Companies ('RBOCs') and other established telecommunications companies. WinStar
continues to hire additional experienced telecommunications and information
services personnel as appropriate.
RECENT ACQUISITIONS OF KEY STRATEGIC ASSETS
Three acquisitions consummated since October 1997 have provided WinStar
with various strategic assets, including additional customers, additions to its
sales force serving the medium to large-sized business segment, voice and data
switches and a data network with which to launch its data services business.
US ONE Asset Acquisition
In October 1997, WinStar purchased from US ONE and its subsidiaries (the
'US ONE Asset Acquisition'), 12 Lucent switches, leased fiber-optic capacity in
the New York metropolitan area and certain related assets for a purchase price
of approximately $81.3 million in cash. In order to finance the cash portion of
the purchase price of, and to pay certain expenses relating to, the US ONE Asset
Acquisition, WinStar borrowed $62.3 million from certain institutions, which
borrowings were repaid with proceeds obtained from the December 1997 Preferred
Stock Placement (as defined). The US ONE Asset Acquisition will allow WinStar to
accelerate the city-by-city buildout of its Wireless Fiber and switch-based
infrastructure.
GoodNet Acquisition
In January 1998, WinStar acquired GoodNet, a Tier I ISP, from Telesoft for
a purchase price of approximately $22.0 million, consisting of $3.5 million in
cash and 732,784 shares of Common Stock (the 'GoodNet Acquisition'). GoodNet is
a national provider of Internet access services, offering high-capacity data
services to high-bandwidth users, including Internet service providers,
universities and colleges, large landlords, RBOCs and cable television
operators, and dial-up Internet access to consumers.
Midcom Asset Acquisition
In January 1998, WinStar acquired substantially all of the assets and
business of Midcom (the 'Midcom Business') for a purchase price of approximately
$92.0 million in cash (the 'Midcom Asset Acquisition'). WinStar anticipates,
however, that its net costs for the Midcom Asset Acquisition will amount to less
than $70.0 million after the expected collection of accounts receivable acquired
in the transaction, the planned divestiture of two small business interests
acquired in the transaction and certain post-closing price adjustments. Midcom
is an entity in bankruptcy under Chapter 11.
The Midcom Business is providing long distance voice and data
telecommunications services. The Midcom Business includes basic '1 plus' and
'800' long distance provided primarily to small and medium-sized businesses,
most of which are in major metropolitan areas in California, Florida, Illinois,
New York, Ohio and Washington, and Midcom's PacNet operations, which provide
frame relay data transmission and dedicated private line services.
OTHER RECENT DEVELOPMENTS
Acquisition of 28 GHz Licenses
WinStar participated in the FCC's recently concluded auction of 28 GHz
local multipoint distribution services licenses ('LMDS Licenses'). At the close
of the auction, WinStar was the high bidder for the A-Block LMDS Licenses in
nine markets and the B-Block LMDS Licenses in six markets. Each LMDS License
covers a defined Basic Trading Area (BTA), with each A-Block LMDS License
consisting of 1150 MHz of spectrum and each B-Block LMDS License consisting of
150 MHz of spectrum. WinStar made aggregate bids for such LMDS 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 third quarter of 1998. Additionally, to supplement its LMDS spectrum and
enhance its aggregate bandwidth availability in the
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New York metropolitan area, in July 1998, WinStar agreed to acquire from
CellularVision USA, Inc. ('CVUS'), 850 MHz of LMDS spectrum covering the New
York metropolitan area for a purchase price of $32.5 million. Combined with
WinStar's 38 GHz spectrum, this purchase will increase WinStar's total bandwidth
in the New York metropolitan area to 1,750 MHz. In connection with this
purchase, WinStar also has agreed to lend up to $5.5 million to CVUS under
certain conditions.
Acquisition of Dark Fiber Capacity
In July 1998, the Company entered in to a 25-year lease of dark fiber
capacity in and between a number of major markets at an aggregate cost of
approximately $40 million. The Company has paid $6.5 million of this amount,
with the balance to become payable as portions of the fibre network are fully
constructed and become available to the Company, which is expected to occur over
the next 18 months. The agreement will provide intracity fiber rings,
consisting of multiple fiber optic strands, to connect the Company's present and
future hub sites and central offices (which house WinStar's switches) in the
metropolitan areas of Chicago, New York, Oakland, Philadelphia, San Francisco,
San Jose and Washington, D.C. The agreement also will include intercity fiber
optic capacity to connect the Company's present and planned central offices,
including its switches, serving Baltimore, New York City, Newark, Philadelphia,
Stamford and Washington, D.C.
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 ('1998 Preferred Stock Placement'). The
sale price per Preferred Share was $50.00.
On March 20, 1998, the Company sold $200 million principal amount of Old
Cash-Pay Notes and $250 million principal amount of Old Deferred Interest Notes
in an institutional private placement ('1998 Debt Placement'). The Company
received net proceeds of approximately $629.6 million from the 1998 Preferred
Stock Placement and 1998 Debt Placement, which it intends to use to fund the
expansion of its telecommunications and other operations.
CORPORATE INFORMATION
The Company was incorporated under the laws of the State of Delaware in
September 1990. Its principal office is located at 230 Park Avenue, New York,
New York 10169 and its telephone number is (212) 584-4000.
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SUMMARY OF THE EXCHANGE OFFER
BACKGROUND--1998 DEBT PLACEMENT
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General................................... An aggregate of $450.0 million principal amount of Old Notes were
sold to institutional purchasers ('Initial Purchasers') by the
Company in the 1998 Debt Placement. The Initial Purchasers, in turn,
sold such Old Notes to certain Qualified Institutional Buyers in
reliance on Rule 144A under the Securities Act.
Exchange of Old Notes..................... In connection with the 1998 Debt Placement, the Company entered into
the Registration Rights Agreement pursuant to which the Company is
obligated to use its best efforts to consummate this Exchange Offer
with respect to the Old Notes pursuant to the Registration Statement
of which this Prospectus forms a part or, if required in lieu
thereof, cause the Old Notes to be registered under the Securities
Act pursuant to a shelf registration statement. If (i) by May 4,
1998, the Exchange Offer has been filed with the SEC; (ii) by
September 16, 1998, neither the Registered Exchange Offer is
consummated nor the Shelf Registration Statement is declared
effective with respect to the applicable Notes; or (iii) after either
the Exchange Offer Registration Statement or the Shelf Registration
Statement with respect to the applicable Notes is declared effective
such Registration Statement ceases to be effective or usable (subject
to certain exceptions) in connection with resales of the applicable
Notes or the related Exchange Notes in accordance with and during the
periods specified in the Registration Rights Agreement (each such
event referred to in clauses (i) through (iii) a 'Registration
Default'), additional interest will accrue on such Notes and related
Exchange Notes from and including the date on which any such
Registration Default shall occur to but excluding the date on which
all Registration Defaults with respect to such Notes or Exchange
Notes have been cured.
In the case of the Cash-Pay Notes, such additional interest will be
payable in cash semiannually in arrears, at a rate per annum equal to
0.50% of the principal amount of such Notes. In the case of the
Deferred Interest Notes, such additional interest will be payable in
cash semiannually in arrears, at a rate per annum equal to 0.50% of
the Accumulated Amount of such Notes. Such additional interest will
be payable on each SemiAnnual Interest Accrual Date or interest
payment date, as the case may be, commencing with the first
SemiAnnual Interest Accrual Date, as the case may be, following the
applicable Registration Default. Payments of additional interest on
the Notes will be made to the Holders on the regular record date (or,
if there is no regular record date, the date 15 days prior to such
SemiAnnual Interest Accrual Date) immediately preceding such
SemiAnnual Interest Date or interest payment date.
If the Company effects a Registered Exchange Offer, it will be
entitled to close the Registered Exchange Offer 30 days after the
commencement thereof provided that it has accepted all the applicable
Notes theretofore validly tendered in accordance with the terms of
such Registered Exchange Offer.
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TERMS OF THE EXCHANGE OFFER
The Exchange Offer........................ Pursuant to the Exchange Offer, $1,000 principal amount of New Notes
will be issued in exchange for each $1,000 principal amount of
outstanding Old Notes validly tendered and not withdrawn. The New
Notes will be issued to tendering holders of Old Notes as promptly as
practicable after the Expiration Date.
Resale.................................... Based on an interpretation by the staff of the Commission set forth
in no-action letters issued to third parties, the Company believes
that the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than broker-dealers, as set
forth below) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business
and that such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account in exchange
for Old Notes that were acquired as a result of market-making or
other trading activity must acknowledge that it will deliver a
prospectus in connection with any resale of New Notes. The Letter of
Transmittal states that by so acknowledging and delivering a
prospectus, such broker-dealer will not be deemed to admit that it is
an 'underwriter' within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time,
may be used by such broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such New Notes were
acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that,
for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any such broker-dealer for use in connection
with any such resale. See 'Plan of Distribution.' Any holder who
tenders in the Exchange Offer with the intention to participate, or
for the purpose of participating, in a distribution of the New Notes
may not rely on the foregoing position of the staff of the Commission
and, in the absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction. Failure to
comply with such requirements in such instance may result in such
holder incurring liabilities under the Securities Act for which the
holder is not indemnified by the Company or the Company.
The Exchange Offer is not being made to, nor will be accepted from,
holders of Old Notes in any jurisdiction in which this Exchange Offer
or the acceptance thereof would not be in compliance with the
securities laws of such jurisdiction.
Expiration Date........................... 5:00 p.m., New York City time, September 16, 1998, unless the
Exchange Offer is extended, in which case the term 'Expiration Date'
means the latest date and time to which the Exchange Offer is
extended. Any extension, if made, will be publicly announced through
a release to the Dow Jones News Service and as otherwise required by
applicable law or regulations. The Company may extend the Expiration
Date in its sole and absolute discretion.
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Conditions to the Exchange Offer.......... The Exchange Offer is not subject to any conditions, other than that
the Exchange Offer does not violate applicable law or any applicable
interpretation of the staff of the Commission. See 'The Exchange
Offer--Conditions to the Exchange Offer.' The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being
tendered.
Procedures for Tendering Old Notes........ Each holder of Old Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or otherwise deliver the Letter of Transmittal, or
a facsimile thereof, together with the Old Notes to be exchanged and
any other required documentation to U.S. Trust, as Exchange Agent, at
the address set forth herein and therein. By executing a Letter of
Transmittal, each holder will represent to the Company that, among
other things, the New Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the holder,
and that neither the holder nor any such other person has any
arrangement or understanding with any person to participate in the
distribution of such New Notes.
Special Procedures for Beneficial
Owners.................................. Any beneficial owner whose Old Notes are registered in the name of a
broker, commercial bank, trust company or other nominee, and who
wishes to tender in the Exchange Offer should contact such registered
holder promptly and instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner wishes to tender
on his own behalf, such beneficial owner must, prior to completing
and executing the Letter of Transmittal and delivering his Old Notes,
either make appropriate arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly completed bond power
from the registered holder. Beneficial owners should be aware that
the transfer of registered ownership may take considerable time and
may not be able to be completed prior to the Expiration Date.
Guaranteed Delivery Procedures............ Holders of Old Notes who wish to tender such Old Notes and whose Old
Notes are not immediately available or who cannot otherwise deliver
their Old Notes and a properly completed Letter of Transmittal or any
other documents required by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date may tender their Old Notes
according to the guaranteed delivery procedures set forth in 'The
Exchange Offer--Procedures for Tendering.'
Acceptance of Old Notes and Delivery of
New Notes............................... Subject to certain conditions (as described more fully in 'The
Exchange Offer--Conditions to the Exchange Offer'), The Company will
accept for exchange any and all Old Notes which are properly tendered
in the Exchange Offer and not withdrawn, prior to 5:00 p.m., New York
City time, on the Expiration Date. The New Notes issued pursuant to
the Exchange Offer will be delivered as promptly as practicable
following the Expiration Date.
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Withdrawal Rights......................... Subject to the conditions set forth herein, tenders of Old Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time on
the Expiration Date. See 'The Exchange Offer--Withdrawal of Tenders.'
Certain Federal Income Tax
Considerations.......................... The exchange pursuant to the Exchange Offer does not constitute a
taxable exchange for federal income tax purposes. Each New Note will
be treated as having been originally issued at the time the Old Note
exchanged therefor was originally issued. However, holders should
consult their own tax advisors. See 'Certain United States Federal
Income Tax Considerations.'
Exchange Agent............................ U.S. Trust, the Trustee under the Indenture, is serving as Exchange
Agent in connection with the Exchange Offer. For information with
respect to the Exchange Offer, the telephone number for the Exchange
Agent is (212) 852-1000 and the facsimile number for the Exchange
Agent is (212) 852-1625.
</TABLE>
See 'The Exchange Offer,' below, for more detailed information
concerning the terms of the Exchange Offer.
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THE NEW NOTES
The Exchange Offer applies to $450.0 million aggregate principal amount of
Old Notes. The form and terms of the New Notes will be the same as the form and
terms of the Old Notes, except that the New Notes will be registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof. The New Notes will evidence the same debt as the Old Notes and the New
Notes will be entitled to the benefits of the Indentures. Upon consummation of
the Exchange Offer, the New Notes will be treated as a single class with any Old
Notes that remain outstanding. Upon consummation of the Exchange Offer, the Old
Notes which have not been exchanged for New Notes, if any, will not be entitled
to further registration rights under the Registration Rights Agreement. See
'Description of the Notes.'
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Securities Offered........................ $200.0 million principal amount of 10% Senior Subordinated Cash- Pay
Exchange Notes Due 2008.
$250.0 million principal amount of 11% Senior Subordinated Deferred
Interest Exchange Notes Due 2008.
Maturity Dates
New Cash-Pay Notes...................... March 15, 2008.
New Deferred Interest Notes............. March 15, 2008.
Interest Payment Dates
New Cash-Pay Notes...................... March 15 and September 15, commencing September 15, 1998.
New Deferred Interest Notes............. March 15 and September 15, commencing September 15, 2003. Until March
15, 2003, interest on the Deferred Interest Notes will accrue at a
rate of 11% per annum and be compounded semiannually on each
SemiAnnual Accrual Date, but, except for additional interest payable
upon any Registration Default (as defined), will not be payable in
cash. Interest on the Accumulated Amount of the Deferred Interest
Notes as of March 15, 2003 will be payable semiannually in cash,
commencing September 15, 2003. For a discussion of the federal income
tax treatment of the Deferred Interest Notes under the original issue
discount rules, see 'Certain United States Federal Income Tax
Considerations.'
Optional Redemption....................... The Notes are not redeemable prior to March 15, 2003. Thereafter, the
Notes are redeemable at the option of the Company, in whole or in
part, at the redemption prices set forth herein, plus accrued
interest, if any, on the Relevant Amounts of the Notes to the date of
redemption.
Change of Control......................... Upon a Change of Control, each holder of Notes may require the
Company to repurchase such Notes at 101% of the Relevant Amounts of
such Notes on the date of repurchase, plus accrued interest, if any,
on such amount to the date of repurchase.
Ranking................................... The Notes are unsecured, senior subordinated obligations of the
Company, rank pari passu in right of payment with the Company's
Convertible Notes and 1997 Senior Subordinated Notes (each as
defined), and are junior in right of payment to all existing and
future Senior Indebtedness of the Company. At March 31, 1998, the
Company had (on an unconsolidated basis) approximately $1,273.6
million of indebtedness, $611.1 million of which was Senior
Indebtedness (including guarantees of its subsidiaries' indebtedness)
and $662.5 million of which was senior subordinated
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indebtedness. The Company is a holding company and, accordingly, the
Notes are effectively subordinated to all liabilities of the
Company's subsidiaries, including trade payables. At March 31, 1998,
the total liabilities of the Company's subsidiaries were
approximately $393.9 million, including trade payables and $287.0
million of indebtedness guaranteed by the Company.
Restrictive Covenants..................... The Indentures pursuant to which the New Notes will be issued (the
'Offering Indentures') restrict the incurrence of additional
indebtedness by the Company and its Restricted Subsidiaries (as
defined), dividends on and redemptions of capital stock of the
Company, the redemption of certain subordinated obligations of the
Company, the making of certain Investments (as defined) by the
Company and its Restricted Subsidiaries, the sale of certain assets
and subsidiaries' stock and certain transactions with affiliates. The
Offering Indentures also prohibit certain restrictions on
distributions from Restricted Subsidiaries and restrict the Company
from consolidating or merging with or transferring all or
substantially all of its assets to another person. However, all of
these restrictions and prohibitions are subject to a number of
important qualifications, including the ability of the Company to
designate certain subsidiaries as Unrestricted Subsidiaries (as
defined). See 'Description of the Notes--Covenants.'
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SUMMARY FINANCIAL INFORMATION
The summary financial historical data presented below for the ten months
ended December 31, 1995, and the years ended December 31, 1996 and 1997 have
been derived from the Company's audited Consolidated Financial Statements
incorporated by reference into this Prospectus from the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, reclassified to reflect the
operations of WinStar Global Products, Inc. ('Global Products'), the Company's
merchandising subsidiary, as a discontinued operation. The summary financial
historical data for the three months ended March 31, 1997 and 1998 have been
derived from the Unaudited Condensed Consolidated Financial Statements
incorporated by reference into this Prospectus from the Company's Quarterly
Report on Form 10Q for the quarterly period ended March 31, 1998. In the opinion
of management, the Unaudited Condensed Consolidated Financial Statements have
been prepared on the same basis as the audited Consolidated Financial Statements
and include all adjustments which consist of only normal recurring adjustments
necessary for a fair presentation of the results of operations for the period.
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.
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TEN MONTHS YEAR ENDED THREE MONTHS ENDED
ENDED YEAR ENDED DECEMBER 31, 1997 MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------------------------ ------------------
1995 1996 ACTUAL PRO FORMA(A) 1997
------------ ------------ ------------------- ------------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales:
Telecommunications.... $ 13,137 $ 33,969 $ 38,277 $ 136,560 $ 7,063
Information
services............ 2,648 14,650 41,354 41,354 6,014
------------ ------------ ---------- ---------- --------
Total net sales..... 15,785 48,619 79,631 177,914 13,077
Operating income (loss):
Telecommunications.... (7,288) (43,698) (153,139) (241,054) (26,548)
Information
services............ 217 (1,409) (4,092) (4,092) (1,105)
General corporate..... (3,861) (11,373) (30,815) (30,815) (5,283)
------------ ------------ ---------- ---------- --------
Total operating
loss.............. (10,932) (56,480) (188,046) (275,961) (32,936)
Interest expense.......... (7,186) (36,748) (77,257) (152,752) (10,798)
Interest income........... 2,890 10,515 17,577 12,793 2,235
Other (expenses) income,
net(c).................. (866) -- 4,719 (481) --
------------ ------------ ---------- ---------- --------
Loss from continuing
operations.............. (16,094) (82,713) (243,007) (416,401) (41,499)
(Loss) income from
discontinued
operations.............. 237 (1,010) (6,477) (6,477) (477)
------------ ------------ ---------- ---------- --------
Net loss.................. (15,857) (83,723) (249,484) (422,878) (41,976)
Preferred stock
dividends............... -- -- (5,879) (45,806) --
------------ ------------ ---------- ---------- --------
Net loss applicable to
common stockholders..... $(15,857) $(83,723) $(255,363) $(468,684) $(41,976)
------------ ------------ ---------- ---------- --------
------------ ------------ ---------- ---------- --------
BASIC AND DILUTED LOSS PER
SHARE:
Loss per common share
from continuing
operations............ $ (0.71) $ (2.96) $ (7.49) $ (13.81) $ (1.27)
(Loss) income per common
share from
discontinued
operations............ 0.01 (0.04) (0.19) (0.19) (0.02)
------------ ------------ ---------- ---------- --------
Net loss per common
share outstanding..... $ (0.70) $ (3.00) $ (7.68) $ (14.00) $ (1.29)
------------ ------------ ---------- ---------- --------
------------ ------------ ---------- ---------- --------
Weighted average common
shares outstanding.... 22,770 27,911 33,249 33,469 32,610
<CAPTION>
1998 PRO FORMA(B)
------------------ ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales:
Telecommunications.... $ 35,487 $ 39,259
Information
services............ 11,949 11,949
-------- ----------
Total net sales..... 47,436 51,208
Operating income (loss):
Telecommunications.... (49,889) (50,291)
Information
services............ (1,425) (1,425)
General corporate..... (9,035) (9,035)
-------- ----------
Total operating
loss.............. (60,349) (60,751)
Interest expense.......... (28,656) (39,413)
Interest income........... 4,928 4,928
Other (expenses) income,
net(c).................. 1,100 1,100
-------- ----------
Loss from continuing
operations.............. (82,977) (94,136)
(Loss) income from
discontinued
operations.............. (1,982) (1,982)
-------- ----------
Net loss.................. (84,959) (96,118)
Preferred stock
dividends............... (8,198) (11,192)
-------- ----------
Net loss applicable to
common stockholders..... $(93,157) $ (107,310)
-------- ----------
-------- ----------
BASIC AND DILUTED LOSS PER
SHARE:
Loss per common share
from continuing
operations............ $ (2.54) $ (2.92)
(Loss) income per common
share from
discontinued
operations............ (0.06) (0.06)
-------- ----------
Net loss per common
share outstanding..... $ (2.60) $ (2.98)
-------- ----------
-------- ----------
Weighted average common
shares outstanding.... 35,899 35,971
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED THREE MONTHS ENDED
ENDED YEAR ENDED DECEMBER 31, 1997 MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------------------------ ------------------
1995 1996 ACTUAL PRO FORMA(A) 1997
------------ ------------ ------------------- ------------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER FINANCIAL DATA:
<S> <C> <C> <C> <C> <C>
Ratio of earnings from
continuing operations
to combined fixed
charges and preferred
stock dividends(d).... -- -- -- -- --
Capital
expenditures(e)....... $ 8,123 $ 47,842 $ 222,300 $ 222,300 $ 32,380
<CAPTION>
1998 PRO FORMA(B)
------------------ ------------------
OTHER FINANCIAL DATA:
<S> <C> <C>
Ratio of earnings from
continuing operations
to combined fixed
charges and preferred
stock dividends(d).... -- --
Capital
expenditures(e)....... $ 29,641 $ 29,641
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........................................... $ 853,365
Property and equipment, net................................................................. 304,074
Total assets............................................................................ 1,648,413
Current portion of long-term debt and capital lease obligations............................. 14,287
Long-term debt and capital lease obligations, less current portion.......................... 1,284,061
Series C Exchangeable Redeemable Preferred Stock............................................ 181,779
Series D Convertible Redeemable Preferred Stock............................................. 200,000
Common and preferred stock and additional paid-in capital................................... 310,625
Stockholders' deficit....................................................................... (148,852)
</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 principal amount of 14 1/4% Senior
Cumulative Exchangeable Preferred Stock Due 2007 ('Series C Preferred
Stock'), including $25.3 million of dividends on the Series C Preferred
Stock in the year ended December 31, 1997, (vii) the Midcom Asset
Acquisition, (viii) the 1998 Debt Placement, and (ix) the 1998 Preferred
Stock Placement, each as if they occurred as of January 1, 1997. The
transactions set forth in clauses (i) through (ix) are referred to herein
collectively as the 'Pro Forma Transactions.' Interest expense has been (A)
increased to include approximately $81.3 million of interest on such debt
and amortization of debt offering costs and other related fees in the year
ended December 31, 1997, but not to include interest income earned on
additional available cash and (B) reduced by approximately $5.8 million for
the year ended December 31, 1997 to reflect the repayment of approximately
$62.3 million borrowed in connection with the US ONE Asset Acquisition and
repaid from the proceeds of the December 1997 Preferred Stock Placement.
Depreciation expense has been adjusted to include approximately $5.1 million
for the year ended December 31, 1997 of depreciation on certain of the
assets acquired in the US ONE Asset Acquisition, assuming straight line
depreciation over the expected useful lives of the assets which will
ultimately be placed in service. Preferred stock dividends have been
adjusted to include approximately $14.0 million of dividends on the Series D
Preferred Stock (assuming the dividends are paid in Dividend Shares).
(b) Gives effect to (i) the MidCom Asset Acquisition, (ii) the March 1998 Debt
Placement and (iii) the 1998 Preferred Stock Placement, each as if they
occurred on January 1, 1998. Interest expense has been increased to include
approximately $10.8 million of interest on such debt and amortization of
debt offering costs and other related
(Footnotes continued on next page)
19
<PAGE>
(Footnotes continued from previous page)
fees in the three months ended March 31, 1998, but not to include interest
income earned on additional available cash. Preferred stock dividends have
been adjusted to include approximately $3.0 million of dividends on the
Series D Preferred Stock (assuming the dividends are paid in dividend
shares).
(c) The year ended December 31, 1997 and the three months ended March 31, 1998
include deferred income tax benefits of $2.5 million and $1.1 million
respectively.
(d) For the ten months ended December 31, 1995, the years ended December 31,
1996 and 1997, and the three months ended March 31, 1997 and 1998, earnings
from continuing operations were insufficient to cover combined fixed charges
and dividends on the Company's Series A, Series C and Series D Preferred
Stock by approximately $16.3 million, $83.0 million and $255.6 million,
$42.5 million and $90.6 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 and $106.9 million for the year ended December 31,
1997 and the three months ended March 31, 1998, respectively. 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.
(e) Excludes Midcom capital expenditures for the year ended December 31, 1997
and the three months ended March 31, 1998.
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.
20
<PAGE>
RISK FACTORS
The New Notes offered hereby contain the same terms and conditions as the
Old Notes and, accordingly, involve a high degree of risk. Each prospective
purchaser should carefully consider the following risk factors relating to both
the Old Notes and the New Notes.
HISTORICAL AND PROJECTED NET AND OPERATING LOSSES
The Company has historically incurred significant and growing operating
losses and net losses and significant negative EBITDA. EBITDA consists of loss
before interest, income taxes, depreciation and amortization and other income
and expense. The Company historically has had net losses and negative EBITDA of
approximately $15.9 million and $9.9 million, respectively, for the ten months
ended December 31, 1995, $83.7 million and $52.0 million, respectively, for the
year ended December 31, 1996, $249.5 million and $158.3 million, respectively,
for the year ended December 31, 1997, $42.0 million and $29.4 million,
respectively, for the three months ended March 31, 1997 and $85.0 million and
$49.0 million, respectively, for the three months ended March 31, 1998. After
giving effect to the Pro Forma Transactions, the Company would have a net loss
and negative EBITDA of $422.9 million and $219.2 million, respectively, for the
year ended December 31, 1997 and $96.1 million and $49.2 million, respectively,
for the three months ended March 31, 1998.
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
21
<PAGE>
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 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.
22
<PAGE>
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 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.
23
<PAGE>
ABILITY TO SERVICE SUBSTANTIAL INDEBTEDNESS AND TO COVER FIXED CHARGES;
REFINANCING RISK
At March 31, 1998, the Company had, on a consolidated basis, approximately
$1,303.8 million of indebtedness, including capitalized lease obligations and
trade payables. The Company also had outstanding, at March 31, 1998, $181.8
million stated value of Series C Preferred Stock and $200.0 million, stated
value of Series D Preferred Stock. The accrual of interest on the Deferred
Interest Notes and on the 1997 Notes, the accrual of dividends on the Series C
and Series D Preferred Stock and the accretion of original issue discount on the
Convertible Notes and the Company's 14% Senior Discount Notes due 2005 (the
'1995 Senior Notes' and, together with the Convertible Notes, the '1995 Notes')
will significantly increase the Company's liabilities and obligations (except to
the extent that the Convertible Notes are converted into Common Stock). The
Company may also need to incur additional indebtedness in the future. Although
the Offering Indentures and the respective Indentures pursuant to which the 1995
Notes and 1997 Notes were issued (collectively, the 'Indentures') and the
Certificate of Designations governing the Series C Preferred Stock (the 'Series
C Certificate of Designations') place certain limitations on the incurrence of
additional indebtedness by the Company and its subsidiaries, under certain
circumstances permitted by the Company's debt instruments, such additional
indebtedness could be substantial. Additionally, the Indentures do not limit the
amount of indebtedness that may be incurred by the Company's new media and
consumer products subsidiaries or other Unrestricted Subsidiaries.
The level of the Company's indebtedness could have important consequences
for holders of the Notes, including the following: (i) the combined debt service
requirements of the 1995 Notes and 1997 Notes and its obligations respecting the
Series C and Series D Preferred Stock will make it more difficult for the
Company to make payments when due on its indebtedness, including the Notes; (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; (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 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 and Series D Preferred Stock prior to the
maturity date of the Notes. 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, 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. All of the Company's indebtedness under the Indentures matures prior to
the maturity date of the Notes. 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 those represented by the Notes, would be paid in full.
24
<PAGE>
SIGNIFICANT CAPITAL REQUIREMENTS
The expansion of the Company's telecommunications operations and the
continued funding of operating expenses will require substantial capital
investment. Additionally, as part of its strategy, the Company may seek to
acquire complementary assets or businesses (including additional spectrum
licenses, by auction or otherwise), which also could require substantial capital
investment. The Company's decision to accelerate the development of its CLEC
operations in response to the Telecommunications Act has substantially increased
the Company's near-term capital expenditure requirements. Under its current
plans to expand to 40 markets by the end of 1999, the Company plans to spend
approximately $300.0 million in each of 1998 and 1999 for capital equipment,
which may require the Company to seek additional financing from financial
institutions or equipment vendors or in the financial markets. The Company
anticipates, based on current plans and assumptions relating to its operations,
that the estimated net proceeds from the Offerings, together with existing
financial resources and additional equipment and accounts receivable financing
arrangements that the Company intends to seek, will be sufficient to fund the
Company's operations and capital requirements for approximately 18 to 30 months
from the date on which the Offerings were consummated. In the event that the
Company's assumptions change or prove to be inaccurate, the Company consummates
any acquisitions of significant businesses or assets (including spectrum
licenses other than those won by the Company in the FCC's recently completed
auction of 28 GHz Local Multipoint Distribution Service licenses ('LMDS
Licenses')), the Company accelerates its plan and enters markets more rapidly,
or the Company fails to secure additional equipment financing arrangements, the
Company may be required to seek additional sources of capital sooner than
currently anticipated. Sources of additional capital may include public and
private equity and debt financing, sales of nonstrategic assets and other
financing arrangements. There can be no assurance that additional financing will
be available or, if available, that the Company will be able to obtain it on
acceptable terms. Failure to obtain additional financing, if needed, could
result in the delay or abandonment of some or all of the Company's development
and expansion plans, which would have a material adverse effect on the Company's
business and the ability of the Company and its subsidiaries to make principal
and interest payments on their debt, including the Notes.
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 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. Additionally, the historical results of Midcom for the period
January 1, 1998 through January 21, 1998 is based pro rata on the actual
operating results of the Midcom operations for the period January 22, 1998
through March 31, 1998. In addition, one of the significant assets acquired by
the Company in the acquisition was Midcom's customer base. All customers
comprising such base 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
25
<PAGE>
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 Notes offered hereby, and the ability of the
Company and its subsidiaries to make principal and interest payments on their
outstanding debt, including the Notes, 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
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
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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
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 Notes, and the ability of the Company and its
subsidiaries to make principal and interest payments on their outstanding debt,
including the Notes. Further, the Company's CLEC operations will rely to some
extent upon network elements which the ILECs must provide pursuant to the
Telecommunications Act and the Interconnection Order. These facilities often use
copper wire for 'last mile' access to end users. To the extent that the Company
relies upon ILEC facilities that use copper wire, the Company may not be able to
offer potential customers the benefits of Wireless Fiber with respect to high
transmission capacity and quality. In addition, the Company's operations require
that the networks leased by it, and any facilities which may be developed by the
Company, operate on a continuous basis. It is not unusual for networks and
switching facilities to experience periodic service interruptions and equipment
failures. It is therefore possible that the networks and facilities utilized by
the Company may from time to time experience service interruptions or equipment
failures resulting in material delays which would adversely affect consumer
confidence as well as the Company's business operations and reputation.
The Company utilizes, in certain cases, third parties for marketing its
Wireless Fiber services and maintaining its operational systems. The Company has
entered into master service agreements with other telecommunications providers
that allow those companies to utilize and resell the Company's Wireless Fiber
services to their own customers. The Company also has an agreement with Lucent
to provide field service for, and network monitoring of, the Company's Wireless
Fiber facilities and another agreement with Lucent for the purchase by the
Company of telecommunications switches and related equipment. The failure of any
of these third parties to perform under their respective agreements or the loss
of any of these agreements could have a material adverse effect on the Company's
results of operations and its ability to service its customers. The Company has
approached a number of major telecommunications service providers to solicit
interest in entering into a multi-year, multi-region network transaction in
which the Company would build and maintain a co-exclusive network utilizing
Wireless Fiber for providing access to their customer base. Although there can
be no assurance that such a transaction will be entered into, the Company
believes that such a transaction would be attractive to a number of these
providers and is in various stages of discussions with them.
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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.
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 Notes, and the
ability of the Company and its subsidiaries to make principal and interest
payments on their outstanding debt, including the Notes.
RANKING OF THE NOTES; UNSECURED INDEBTEDNESS
The Notes are unsecured indebtedness of the Company. At March 31, 1998, the
Company had (on an unconsolidated basis) approximately $1,273.6 million of
indebtedness, $611.1 million of which was Senior Indebtedness (including
guarantees of its subsidiaries' indebtedness) and $662.5 million of which was
senior subordinated indebtedness. Of such Senior Indebtedness, $317.2 million
was secured by liens on certain assets of the Company and its subsidiaries. In
the event such secured indebtedness goes into default and the holders thereof
foreclose on the collateral, the holders of secured indebtedness will be
entitled to payment out of the proceeds of their collateral prior to any holders
of general unsecured indebtedness, including the Notes, notwithstanding the
existence of any event of default with respect to the Notes.
In addition, the Notes are subordinated to all Senior Indebtedness of the
Company (as defined), including indebtedness under the 1995 Senior Notes, the
1997 Senior Notes, the guarantee by the Company of the WEC Notes (the 'WEC Note
Guarantee'), the guarantee by the Company of the WEC II Notes (the 'WEC II Note
Guarantee' and, together with the WEC Note Guarantee, the 'Equipment Note
Guarantees') and guarantees by the Company under certain equipment lease
financings and credit facilities of subsidiaries. Therefore, in the event of a
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Notes only after all Senior
Indebtedness has been paid in full and there may not be sufficient
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assets remaining to pay amounts due on the Notes. At March 31, 1998, the amount
of outstanding Senior Indebtedness of the Company was approximately $641.3
million. See 'Description of the Notes--Ranking.'
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 pay the principal of and interest on the Notes.
The subsidiaries, however, are legally distinct from the Company and have no
obligation, contingent or otherwise, to pay amounts due pursuant to the Notes,
or to make funds available for such payment. The Company's subsidiaries have not
guaranteed the Notes. 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, including the Notes, and the holders of preferred stock.
Accordingly, the Notes are effectively subordinated to all liabilities
(including trade payables) of the subsidiaries of the Company. At March 31,
1998, the subsidiaries of the Company had approximately $393.9 million of
liabilities (including trade payables and $287.0 million of indebtedness
guaranteed by the Company). See 'Description of the Notes' and 'Description of
Certain Other Indebtedness and Preferred Stock.'
ORIGINAL ISSUE DISCOUNT; CERTAIN TAX CONSIDERATIONS AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF DEFERRED INTEREST NOTES AND THE COMPANY
As there will be no periodic payments in cash of interest on the Deferred
Interest Notes prior to September 15, 2003, original issue discount (the
difference between the stated redemption price at maturity and the issue price
of the Deferred Interest Notes) will accrue from the issue date of the Deferred
Interest Notes. Original issue discount must be included as interest income
periodically in a United States noteholder's gross income for United States
federal income tax purposes in advance of receipt of the cash payments to which
the income is attributable.
The Deferred Interest Notes will also be subject to the high yield discount
obligation rules. Consequently, the Company will not be able to deduct the
original issue discount attributable to the Deferred Interest Notes until
actually paid. As explained in, and subject to, the discussion under 'Certain
United States Federal Income Tax Considerations,' the Deferred Interest Notes
are subject to these rules because their yield to maturity equals or exceeds the
Treasury-based interest rate in effect for the month of their issuance plus five
percentage points. For long-term debt instruments issued in March 1998, such
Treasury-based interest rate plus five percentage points is 10.83%, compounded
semiannually. As a result of the application of these high yield discount rules,
the Company's after tax cash flow might be less than if such original issue
discount were deductible when accrued. See 'Certain United States Federal Income
Tax Considerations' for a more detailed discussion of the United States federal
income tax consequences to holders of Deferred Interest Notes regarding the
purchase, ownership and disposition of such Deferred Interest Notes.
LACK OF PUBLIC MARKET FOR THE NOTES
The Notes are designated eligible for trading in the PORTAL Market. If the
Notes are traded after their initial issuance, they may trade at a discount from
their initial offering price, depending upon prevailing interest rates, 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 Notes or to
seek approval for quotation through any automated quotation system. Although the
Initial Purchasers have informed the Company that they currently intend to make
a market in the Notes, they are not obligated to do so and any such
market-making may be discontinued at any time without notice. In addition, such
market-making activity may be limited during the pendency of the Exchange Offer
Registration Statement. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes or any securities issued in
exchange therefor. If such a market were to develop, the Notes 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
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adversely affect liquidity and trading of either or both of the Notes,
independent of the financial performance of, and prospects for the Company.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company in the 1998 Debt Placement to the
Initial Purchasers who, in turn, sold such Old Notes to certain qualified
institutional buyers in reliance on Rule 144A under the Securities Act. In
connection with the 1998 Debt Placement, the Company entered into the
Registration Rights Agreement, pursuant to which the Company is obligated to use
its best efforts to consummate this Exchange Offer of the Old Notes for the New
Notes pursuant to an effective registration statement by September 16, 1998.
Unless the context requires otherwise, the term 'holder' with respect to the
Exchange Offer means any person in whose name Old Notes are registered on the
books of the Company, or any other person who has obtained a properly completed
bond power from the registered holder, or any person whose Old Notes are held of
record by DTC (who may deliver such Old Notes by book-entry transfer at DTC).
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder of such New
Notes (except in the case of broker-dealers, as set forth below) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holder's business and such holder has no arrangement or understanding
with any person to participate in the distribution of such New Notes. Any holder
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may not rely on such interpretation by the staff
of the Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
By tendering in the Exchange Offer, each holder of Old Notes will represent
to the Company that, among other things, (i) the New Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is such holder, (ii)
neither the holder of Old Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of New Notes,
and (iii) if the holder is not a broker-dealer, or is a broker-dealer but will
not receive New Notes for its own account in exchange for Old Notes, neither the
holder nor any such other person is engaged in or intends to participate in the
distribution of such New Notes.
Following the consummation of the Exchange Offer, holders of Old Notes not
tendered will no longer have certain registration rights and the Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. Subject to the minimum denomination requirements of the New
Notes, The Company will issue $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of outstanding Old Notes accepted in the
Exchange Offer. Holders may tender some or all of their Old Notes pursuant to
the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000 principal amount.
The forms and terms of the New Notes will be identical in all material
respects to the forms and terms of the corresponding Old Notes, except that the
New Notes will have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof. The Exchange Offer is
not conditioned upon any
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minimum aggregate principal amount at maturity of Old Notes being tendered for
exchange. DTC is the sole registered holder of the Old Notes, and holds such
notes on behalf of numerous participants. This Prospectus, together with the
Letter of Transmittal, is being sent to all such registered holders as of
August 3, 1998.
Under the Indentures, holders of Old Notes do not have any appraisal or
dissenters rights in connection with the Exchange Offer. The Company intends to
conduct the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the applicable rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if it has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the New Notes from the Company. If any tendered Old Notes
are not accepted for exchange, such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
'--Fees and Expenses.'
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term 'Expiration Date' shall mean 5:00 p.m., New York City time, on
September 16, 1998 unless the Company in its sole discretion extends the
Exchange Offer, in which case the term 'Expiration Date' shall mean the latest
date and time to which the Exchange Offer is extended. Although the Company has
no current intention to extend the Exchange Offer, the Company reserves the
right to extend the Exchange Offer at any time and from time to time by giving
oral or written notice to the Exchange Agent and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Notes previously tendered pursuant to the Exchange Offer
and not withdrawn will remain subject to the Exchange Offer. The date of the
exchange of the New Notes for Old Notes will be the first New York Stock
Exchange trading day following the Expiration Date.
The Company expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Old Notes if any of the events set forth
below under '--Conditions to the Exchange Offer' shall have occurred and shall
not have been waived by the Company and (ii) amend the terms of the Exchange
Offer in any manner which, in its good faith judgment, is advantageous to the
holders of the Old Notes, whether before or after any tender of the Old Notes.
PROCEDURES FOR TENDERING
The tender to the Company of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal signed by such
holder. A holder of the Old Notes may tender such Old Notes by (i) properly
completing and signing a Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the New Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC whose name appears on a security listing as the owner of
Old Notes), the signature of such signer need not be guaranteed. In any other
case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an 'eligible guarantor institution' as defined by Rule 17Ad-15 under
the Exchange Act (any of the foregoing hereinafter referred to as an 'Eligible
Institution'). If the New
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Notes and/or Old Notes not exchanged are to be delivered to an address other
than that of the registered holder appearing on the register for the Old Notes,
the signature in the Letter of Transmittal must be guaranteed by an Eligible
Institution.
THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF TRANSMITTAL AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
THE COMPANY.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account with respect to
the Old Notes in accordance with DTC's procedure for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an appropriate Letter of Transmittal with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at the address
set forth in the Letter of Transmittal on or prior to the Expiration Date, or,
if the guaranteed delivery procedures described below are complied with, within
the time period provided under such procedures.
If the holder desires to accept the Exchange Offer and time will not permit
a Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its office, on or prior to the Expiration Date, a letter, telegram or facsimile
transmission from an Eligible Institution setting forth the name and address of
the tendering holder, the name(s) in which the Old Notes are registered and the
certificate number(s) of the Old Notes to be tendered, and stating that the
tender is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission by the Eligible Institution, such Old Notes, in proper
form for transfer (or a confirmation of book-entry transfer of such Old Notes
into the Exchange Agent's account at DTC), will be delivered by such Eligible
Institution together with a properly completed and duly executed Letter of
Transmittal (and any other required documents). Unless Old Notes being tendered
by the above-described method are deposited with the Exchange Agent within the
time period set forth above (accompanied or preceded by a properly completed
Letter of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC) is received by the Exchange
Agent or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram
or facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserve the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of The Company, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. If any Old Notes received by the Exchange Agent are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Old Notes are submitted in a principal amount greater than the
principal amount of Old Notes being tendered by such tendering holder, such
unaccepted or non-
32
<PAGE>
exchanged Old Notes will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, to the
extent permitted by the Indentures to (a) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date and (b) to the
extent pertained by applicable law, purchase Old Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers will differ from the terms of the Exchange Offer.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange ('Transferor') exchanges,
assigns and transfers the Old Notes to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire New Notes issuable
upon the exchange of such tendered Old Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Company to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Old Notes or transfer ownership of such Old Notes on
the account books maintained by DTC. All authority conferred by the Transferor
will survive the death, bankruptcy or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above in the third paragraph under the heading
'--Purpose and Effect of the Exchange Offer.'
WITHDRAWAL OF TENDERS
Tenders of Old Notes pursuant to the Exchange Offer are irrevocable, except
that Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic, or facsimile transmission notice
of withdrawal must be timely received by the Exchange Agent at the address set
forth in the Letter of Transmittal prior to 5:00 p.m., New York City time on the
Expiration Date. Any such notice of withdrawal must specify the holder named in
the Letter of Transmittal as having tendered Old Notes to be withdrawn, the
certificate numbers and designation of Old Notes to be withdrawn, the principal
amount of Old Notes delivered for exchange, a statement that such holder is
withdrawing his election to have such Old Notes exchanged, and the name of the
registered holder of such Old Notes, and must be signed by the holder in the
same manner as the original signature on the Letter of Transmittal (including
any required signature guarantees) or be accompanied by evidence satisfactory to
The Company that the person withdrawing the tender has succeeded to the
beneficial ownership of the Old Notes being withdrawn. The Exchange Agent will
return the properly withdrawn Old Notes promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at DTC to be credited with the withdrawn Old Notes or otherwise
comply with DTC procedure. All questions as to the validity of notices of
withdrawal, including time of receipt, will be determined by the Company and
such determination will be final and binding on all parties.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue New Notes in
exchange for any properly tendered Old Notes not theretofore accepted and may
terminate the Exchange Offer, or, at their option, modify or otherwise amend the
Exchange Offer, if either of the following events occur:
33
<PAGE>
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the sole judgment of the Company, would prohibit, restrict or otherwise
render illegal the consummation of the Exchange Offer, or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which, in the Company's sole judgment, might
materially impair the Company's ability to proceed with the Exchange Offer.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of either of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes).
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company if it is legally permitted to do so, in whole or in part,
in its sole discretion. The foregoing conditions must be either satisfied or
waived prior to termination of the Exchange Offer. Any determination made by the
Company concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
EXCHANGE AGENT
U.S. Trust has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Mail (registered or certified mail recommended):
United States Trust Company of New York
P.O. Box 844
Cooper Station
New York, New York 10276-0844
By Overnight Courier:
United States Trust Company of New York
770 Broadway--13th Floor
Corporate Trust Operations Department
New York, New York 10003
Attn: Corporate Trust Operations Department
By Hand Delivery:
United States Trust Company of New York
111 Broadway, Lower Level
New York, New York 10006
Attn: Corporate Trust Services
By Facsimile (for Eligible Institutions only):
(212) 420-6152
Confirm by telephone (800) 548-6565
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred
34
<PAGE>
by them in forwarding copies of this Prospectus, the Letter of Transmittal and
related documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange.
The expenses to be incurred by the Company in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Trustee and
accounting and legal fees, will be paid by the Company. The Company will not,
however, pay the costs incurred by a holder in delivering its Old Notes to the
Exchange Agent, underwriting fees, or Commissions or transfer taxes.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the date of the exchange
because the exchange of the Old Notes for the New Notes is the completion of the
selling process contemplated in the issuance of the Old Notes. Accordingly, no
gain or loss for accounting purposes will be recognized. The expenses of the
Exchange Offer and the unamortized expenses related to the issuance of the Old
Notes will be amortized over the term of the New Notes.
OTHER MATTERS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the dates as of which information is given herein.
The Exchange Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Old Notes in any jurisdiction in which the making of the
Exchange Offer or the acceptance thereof would not be in compliance with the
laws of such jurisdiction. However, the Company may, at its discretion, take
such action as it may deem necessary to make the Exchange Offer in any such
jurisdiction and extend the Exchange Offer to holders of Old Notes in such
jurisdiction.
As a result of the making of the Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration Rights Agreement. Holders of
the Old Notes who do not tender their Old Notes in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
limitations applicable thereto under the Indenture except for certain rights
under the Registration Rights Agreement and except that certain of the Old Notes
may not be entitled to the contingent increase in interest rate provided for in
the Old Notes. All untendered Old Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture and the Old Notes. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for untendered Old Notes could be adversely affected.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as contemplated
in this Prospectus, the Company will receive in exchange Old Notes, in like
principal amount, the terms of which are identical to the New Notes except that
such New Notes will be registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof. Old Notes surrendered in
exchange for New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in a change in the
indebtedness of the Company.
35
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of March 31, 1998. The following table should be read in conjunction with the
audited Consolidated Financial Statements and related notes incorporated by
reference into this Prospectus and the Pro Forma Financial Statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31,
1998
-------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
Cash, cash equivalents and short-term investments.............................................. $ 853,365
-------------------
-------------------
Liabilities and stockholders' equity:
Long-term debt and capital lease obligations:
12 1/2% Guaranteed Senior Secured Notes Due 2004 of WEC...................................... 200,000
12 1/2% Guaranteed Senior Secured Notes Due 2004 of WEC II................................... 50,000
14% Senior Discount Notes Due 2005........................................................... 208,602
14 1/2% Senior Deferred Interest Notes Due 2005.............................................. 115,622
14% Convertible Senior Subordinated Discount Notes Due 2005.................................. 104,301
15% Senior Subordinated Deferred Interest Notes Due 2007..................................... 107,367
10% Senior Subordinated Notes Due 2008....................................................... 200,000
11% Senior Subordinated Deferred Interest Notes Due 2008..................................... 250,840
Capital lease obligations and other notes (including current portion)........................ 61,616
-------------------
Total long-term debt and capital lease obligations...................................... 1,298,348
-------------------
Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock due 2007..................... 181,779
-------------------
Series D 7% Senior Cumulative Convertible Preferred Stock Due 2010........................... 200,000
Stockholders' equity (deficit):
6% Series A Cumulative Convertible Preferred Stock, $.01 par value, 15,000,000 shares
authorized, 3,969,126 shares issued and outstanding(a)..................................... 40
Common Stock, $.01 par value, 200,000,000 shares authorized, 37,111,000 shares issued and
outstanding(b)............................................................................. 371
Additional paid-in capital................................................................... 310,214
Accumulated deficit.......................................................................... (459,477)
-------------------
Total stockholders' deficit............................................................. (148,852)
-------------------
Total capitalization.................................................................. $ 1,531,275
-------------------
-------------------
</TABLE>
- ------------------
(a) See 'Description of Certain Other Indebtedness and Preferred
Stock--Preferred Stock' for a description of the Series A Preferred Stock,
Series C Preferred Stock, the Series D Preferred Stock and existing rights
to purchase the Company's Series B Preferred Stock.
(b) Does not include (i) an aggregate of 994,000 shares of Common Stock issuable
upon exercise of options granted or which may be granted under the 1992
Performance Equity Plan ('1992 Plan'), (ii) an aggregate of 7,390,000 shares
of Common Stock issuable upon exercise of options granted or which may be
granted under the 1995 Performance Equity Plan ('1995 Plan') and (iii)
8,456,000 shares of Common Stock issuable upon exercise of other outstanding
options and warrants. Also does not include shares of Common Stock issuable
under commitments to pay approximately $55.0 million in Common Stock in
connection with the acquisition of additional spectrum licenses. See
'Description of Certain Other Indebtedness and Preferred Stock.' The
exercise and conversion prices of a substantial majority of the foregoing
securities are below the current market price of the Common Stock as of the
date of this Prospectus. The information above also does not include shares
of Common Stock that may be issued by the Company to certain holders of the
common stock of WinStar New Media Company, Inc., a wholly-owned subsidiary
of the Company, upon exercise of such holders' right to put such stock to
WinStar at certain minimum prices.
36
<PAGE>
SELECTED FINANCIAL DATA
The selected 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 selected historical
financial data presented below for the years ended February 28, 1994 and 1995
have been derived from the Company's audited Consolidated Financial Statements
which are not included or incorporated by reference in this Prospectus,
reclassified to reflect the operations of Global Products as a discontinued
operation. The summary financial historical data for the three months ended
March 31, 1997 and 1998 have been derived from the unaudited Condensed
Consolidated Financial Statements incorporated by reference into this Prospectus
from the Company's Quarterly Report on Form 10-Q for the three months ended
March 31, 1998. In the opinion of management, the unaudited Condensed
Consolidated Financial Statements have been prepared on the same basis as the
audited Consolidated Financial Statements and include all adjustments which
consist of only normal recurring adjustments necessary for a fair presentation
of the results of operations for the period. The summary pro forma data
presented below have been derived from the Pro Forma Financial Statements
included elsewhere in this Prospectus. 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 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>
YEAR ENDED DECEMBER
TEN MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED 31, 1997 MARCH 31,
FEBRUARY 28, DECEMBER 31, DECEMBER 31, ---------------------- -------------------
----------------- ------------ ------------ PRO
1994 1995 1995 1996 ACTUAL FORMA(A) 1997 1998
------- ------- ------------ ------------ --------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Telecommunications............ $ 8,505 $14,909 $ 13,137 $ 33,969 $ 38,277 $ 136,560 $ 7,063 $ 35,487
Information services.......... -- 473 2,648 14,650 41,354 41,354 6,014 11,949
Other......................... 1,278 -- -- -- -- -- -- --
------- ------- ------------ ------------ --------- ---------- -------- --------
Total net sales............. 9,783 15,382 15,785 48,619 79,631 177,914 13,077 47,436
Operating income (loss):
Telecommunications............ (660) (4,984) (7,288) (43,698) (153,139) (241,054) (26,548) (49,889)
Information services.......... -- (157) 217 (1,409) (4,092) (4,092) (1,105) (1,425)
Other......................... (272) -- -- -- -- -- -- --
General corporate............. (1,342) (944) (3,861) (11,373) (30,815) (30,815) (5,283) (9,035)
------- ------- ------------ ------------ --------- ---------- -------- --------
Total operating loss........ (2,274) (6,085) (10,932) (56,480) (188,046) (275,961) (32,936) (60,349)
Interest expense................ (724) (375) (7,186) (36,748) (77,257) (152,752) (10,798) (28,656)
Interest income................. 109 343 2,890 10,515 17,577 12,793 2,235 4,928
Other (expenses) income,
net(c)........................ (5,316) (1,109) (866) -- 4,719 (481) -- 1,100
------- ------- ------------ ------------ --------- ---------- -------- --------
Loss from continuing
operations.................... (8,205) (7,226) (16,094) (82,713) (243,007) (416,401) (41,499) (82,977)
(Loss) income from discontinued
operations.................... 10 (4) 237 (1,010) (6,477) (6,477) (477) (1,982)
------- ------- ------------ ------------ --------- ---------- -------- --------
Net loss........................ (8,195) (7,230) (15,857) (83,723) (249,484) (422,878) (41,976) (84,959)
Preferred stock dividends....... -- -- -- -- (5,879) (45,806) -- (8,198)
------- ------- ------------ ------------ --------- ---------- -------- --------
Net loss applicable to common
stockholders.................. $(8,195) $(7,230) $(15,857) $(83,723) $(255,363) (468,684) $(41,976) $(93,157)
------- ------- ------------ ------------ --------- ---------- -------- --------
------- ------- ------------ ------------ --------- ---------- -------- --------
Basic and diluted loss per
share:
Loss per common share from
continuing operations..... $ (1.06) $ (0.42) $ (0.71) $ (2.96) $ (7.49) $ (13.81) $ (1.27) $ (2.54)
(Loss) income per common
share from discontinued
operations................ -- -- 0.01 (0.04) (0.19) (0.19) (0.02) (0.06)
------- ------- ------------ ------------ --------- ---------- -------- --------
Net loss per common share
outstanding................... $ (1.06) $ (0.42) $ (0.70) $ (3.00) $ (7.68) $ (14.00) $ (1.29) $ (2.60)
------- ------- ------------ ------------ --------- ---------- -------- --------
------- ------- ------------ ------------ --------- ---------- -------- --------
<CAPTION>
PRO
FORMA(B)
---------
<S> <<C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Telecommunications............ $ 39,259
Information services.......... 11,949
Other......................... --
---------
Total net sales............. 51,208
Operating income (loss):
Telecommunications............ (50,291)
Information services.......... (1,425)
Other......................... --
General corporate............. (9,035)
---------
Total operating loss........ (60,751)
Interest expense................ (39,413)
Interest income................. 4,928
Other (expenses) income,
net(c)........................ 1,100
---------
Loss from continuing
operations.................... (94,136)
(Loss) income from discontinued
operations.................... (1,982)
---------
Net loss........................ (96,118)
Preferred stock dividends....... (11,192)
---------
Net loss applicable to common
stockholders.................. $(107,310)
---------
---------
Basic and diluted loss per
share:
Loss per common share from
continuing operations..... $ (2.92)
(Loss) income per common
share from discontinued
operations................ (0.06)
---------
Net loss per common share
outstanding................... $ (2.98)
---------
---------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
TEN MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED 31, 1997 MARCH 31,
FEBRUARY 28, DECEMBER 31, DECEMBER 31, ---------------------- -------------------
----------------- ------------ ------------ PRO
1994 1995 1995 1996 ACTUAL FORMA(A) 1997 1998
------- ------- ------------ ------------ --------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Weighted average common shares
outstanding................... 7,719 17,122 22,770 27,911 33,249 33,469 32,610 35,899
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Ratio of earnings from
continuing operations to
combined fixed charges and
preferred stock
dividends(d).................. -- -- -- -- -- --
Capital expenditures(e)......... $ 307 $ 1,816 $ 8,123 $ 47,842 $ 222,300 $ 222,300 $ 32,380 $ 29,641
<CAPTION>
PRO
FORMA(B)
---------
Weighted average common shares
outstanding................... 35,971
<S> <<C>
OTHER FINANCIAL DATA:
Ratio of earnings from
continuing operations to
combined fixed charges and
preferred stock
dividends(d)..................
Capital expenditures(e)......... $ 29,641
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
ACTUAL
--------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......................................................... $ 853,365
Property and equipment, net................................................................................ 304,074
Total assets............................................................................................... 1,648,413
Current portion of long-term debt and capital lease obligations............................................ 14,287
Long-term debt and capital lease obligations, less current portion......................................... 1,284,061
Series C Exchangeable Redeemable Preferred Stock........................................................... 181,779
Series D Convertible Redeemable Preferred Stock............................................................ 200,000
Common and preferred stock and additional paid-in capital.................................................. 310,625
Stockholders' deficit...................................................................................... (148,852)
</TABLE>
- ------------------
(a) Gives effect to the Pro Forma Transactions as if each occurred as of January
1, 1997. 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 $25.3
million of dividends on the Series C Preferred Stock and approximately $14.0
million of dividends on the Series D Preferred Stock (assuming the dividends
are paid in Dividend Shares). See 'Risk Factors--Pro Forma Financial
Information; Midcom.'
(b) Gives effect to (i) the MidCom Asset Acquisition, (ii) the March 1998 Debt
Placement and (iii) the 1998 Preferred Stock Placement, as if they each had
occurred on January 1, 1998. Interest expense has been increased to include
approximately $10.8 million of interest on such debt and amortization of
debt offering costs and other related fees for the three months ended March
31, 1998, but not to include interest income earned on additional available
cash. Preferred stock dividends have been adjusted to include approximately
$3.0 million of dividends on the Series D Preferred Stock (assuming the
dividends are paid in dividend shares).
(c) For the year ended February 28, 1994, principally represents noncash expense
of $5.3 million, consisting of the difference between the exercise prices of
certain options granted in connection with the Company's initial public
offering in April 1991 and the market value of the underlying shares of
Common Stock on the date such options became exercisable. The year ended
December 31, 1997 and the three months ended March 31, 1998 include deferred
income tax benefits of $2.5 million and $1.1 million, respectively.
(d) For the years ended February 28, 1994 and 1995, the ten months ended
December 31, 1995, the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1997 and 1998, earnings from continuing operations
were insufficient to cover combined fixed charges and dividends on the
Company's Series A, Series C and Series D Preferred Stock by approximately
$8.6 million, $7.3 million, $16.3 million, $83.0 million, $255.6 million,
$42.5 million and $90.6 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 and $106.9 million, respectively for the year ended
December 31, 1997 and the three months ended March 31, 1998, respectively.
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.
(e) Excludes Midcom capital expenditures for the year ended December 31, 1997
and the three months ended March 31, 1998.
38
<PAGE>
DESCRIPTION OF THE NOTES
The New Cash-Pay Notes will be issued under an existing Indenture, dated as
of March 15, 1998 (the 'Cash-Pay Note Indenture'), between WinStar
Communications, Inc., as issuer (for purposes of this 'Description of the Notes'
section, 'WCI') and United States Trust Company of New York, as trustee (in such
capacity the 'Cash-Pay Note Trustee').
The New Deferred Interest Notes will be issued under an existing Indenture,
dated as of March 15, 1998 (the 'Deferred Interest Note Indenture'), between
WCI, as issuer, and United States Trust Company of New York, as trustee (in such
capacity, the 'Deferred Interest Note Trustee' and together with the Cash-Pay
Note Trustee, the 'Trustees'). For purposes of this 'Description of the Notes'
section only, the Deferred Interest Note Indenture and the Cash-Pay Note
Indenture are referred to as the 'Indentures.'
The form and terms of the New Notes are the same as the form and terms of
the Old Notes, except that the New Notes will have been registered under the
Securities Act, and therefore, will not bear legends restricting transfer
thereof. The New Notes will evidence the same debt as the Old Notes. Upon
consummation of this Exchange Offering, the New Notes will be treated as a
single class under the Indenture with any Old Notes remaining outstanding. Upon
the consummation of this Exchange Offer, holders of Old Notes may not be
entitled to certain registration rights under, or the contingent increase in
interest rate provided by, the Registration Agreement.
GENERAL
The New Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple of $1,000. See '--Book-Entry, Delivery and Form.' No service charge
will be made for any registration of transfer or exchange of Notes, but WCI may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith. The New Notes may be
exchanged or transferred at the office or agency of WCI in the Borough of
Manhattan, The City of New York (which initially will be the corporate trust
office of the applicable Trustee at 114 West 47th Street, New York, New York
10036-1532).
In the case of the New Deferred Interest Notes, for United States federal
income tax purposes a significant amount of original issue discount, taxable as
ordinary income, will be recognized by a Holder of New Deferred Interest Notes
as such discount is amortized from the date of issuance of such Notes. However,
Holders of New Deferred Interest Notes will not receive any payments on the
Deferred Interest Notes until September 15, 2003. For a description of certain
tax matters related to an investment in the Deferred Interest Notes, see
'Certain United States Federal Income Tax Considerations.'
TERMS OF THE NOTES
Cash-Pay Notes
The Cash-Pay Notes are unsecured, senior subordinated obligations of WCI,
limited to $200.0 million principal amount, and will mature on March 15, 2008.
The Cash-Pay Notes accrue interest at a rate of 10% per annum, payable
semiannually to Holders of record at the close of business on the March 1 or
September 1 immediately preceding the interest payment date of March 15 and
September 15 of each year, commencing September 15, 1998. Interest on the
Cash-Pay Notes will be paid on a 360-day year, twelve 30-day month basis.
Deferred Interest Notes
The Deferred Interest Notes are unsecured, senior subordinated obligations
of WCI, limited to $250.0 million aggregate principal amount, and will mature on
March 15, 2008. Until March 15, 2003 Deferred Interest Notes accrue interest at
a rate of 11% per annum compounded semiannually on each SemiAnnual Interest
Accrual Date, but, except as described herein, such interest will not be payable
in cash. Interest on the Accumulated Amount of each Deferred Interest Note as of
March 15, 2003 will accrue at the same rate but will be paid semiannually
commencing September 15, 2003, to Holders of record at the close of business on
the
39
<PAGE>
March 1 or September 1 immediately preceding the interest payment date of March
15 and September 15 of each year. Interest on the Deferred Interest Notes will
be paid on a 360-day year, twelve 30-day month basis.
OPTIONAL REDEMPTION
Cash-Pay Notes
The Cash-Pay Notes are not redeemable prior to March 15, 2003. Thereafter,
the Cash-Pay Notes will be redeemable, at WCI's option, in whole at any time, or
in part from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed as a percentage of the principal amount
of the Cash-Pay Notes), plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
regular record date that is on or prior to the redemption date to receive
interest due on the relevant interest payment date), if redeemed during the
12-month period commencing March 15 of the years set forth below:
<TABLE>
<CAPTION>
NOTE
REDEMPTION
YEAR YEAR PRICE
- ------------------------------------------------------------- ----------
<S> <C>
2003......................................................... 105.000%
2004......................................................... 103.333
2005......................................................... 101.667
2006 and thereafter.......................................... 100.000
</TABLE>
Deferred Interest Notes
The Deferred Interest Notes are not redeemable prior to March 15, 2003.
Thereafter, the Deferred Interest Notes will be redeemable, at WCI's option, in
whole at any time, or in part from time to time, upon not less than 30 nor more
than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed as a
percentage of the Accumulated Amount of the Deferred Interest Notes), plus
accrued and unpaid interest, if any, on such Accumulated Amount to the
redemption date (subject to the right of Holders of record on the relevant
regular record date that is on or prior to the redemption date to receive
interest due on the relevant interest payment date), if redeemed during the
12-month period commencing March 15 of the years set forth below:
<TABLE>
<CAPTION>
NOTE
REDEMPTION
YEAR YEAR PRICE
- ------------------------------------------------------------- ----------
<S> <C>
2003......................................................... 105.500%
2004......................................................... 103.667
2005......................................................... 101.833
2006 and thereafter.......................................... 100.000
</TABLE>
Selection of Notes for Optional Redemption
In the case of any partial optional redemption, selection of the Notes for
redemption will be made by the applicable Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
applicable Notes are listed or, if the applicable Notes are not listed on a
national securities exchange, on a pro rata basis, by lot or such other method
as the applicable Trustee, in its sole discretion, shall deem fair and
appropriate. If such Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed; provided, however, that no Note of $1,000 in principal
amount or less shall be redeemed in part. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
WCI's ability to redeem the Notes at its option is severely limited under
the terms of WCI's outstanding indebtedness. WCI may not be able to redeem the
Notes at its option unless it simultaneously redeems or repays such other
indebtedness.
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RANKING
The indebtedness evidenced by the Notes represents unsecured senior
subordinated obligations of WCI. The payment of the Senior Subordinated
Obligations will, to the extent set forth in each Indenture, be subordinated in
right of payment to the prior payment in full, in cash or cash equivalents, of
all Senior Indebtedness of WCI, including WCI's obligations under the 1995
Senior Notes, the 1997 Senior Notes and the Equipment Note Guarantees, as well
as WCI's guarantees under certain equipment lease financings and subsidiaries'
credit lines. The Convertible Notes and the 1997 Senior Subordinated Notes rank
pari passu with the Notes. See 'Risk Factors--Substantial Indebtedness; Ability
to Service Substantial Indebtedness and to Cover Fixed Charges; Refinancing
Risk' and '--Holding Company Structure; Ranking of the Notes; Unsecured
Indebtedness' and 'Capitalization.'
'Senior Subordinated Obligations' with respect to the Cash-Pay Notes and
the Deferred Interest Notes is defined in the relevant Indenture to mean any
principal of, premium, if any, or interest on such Notes, payable pursuant to
the terms of such Notes or upon acceleration, to the extent relating to the
purchase of such Notes or amounts corresponding to such principal, premium, if
any, or interest on such Notes.
At March 31, 1998, WCI had (on an unconsolidated basis) approximately
$1,273.6 million of indebtedness, $611.1 million of which was Senior
Indebtedness (including guarantees of its subsidiaries' indebtedness) and $662.5
million of which was senior subordinated indebtedness. Of such Senior
Indebtedness, $317.2 million was secured by liens on certain assets of WCI and
its subsidiaries.
WCI is a holding company. Substantially all of the operations of WCI are
conducted through its subsidiaries. Claims of creditors of such subsidiaries,
including trade creditors, secured creditors and creditors holding indebtedness
and guarantees issued by such subsidiaries, and claims of preferred stockholders
(if any) of such subsidiaries, generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of WCI,
including holders of the Notes. The Notes, therefore, are effectively
subordinated to creditors (including trade creditors) and stockholders (other
than WCI) of subsidiaries of WCI. At March 31, 1998, the total liabilities of
WCI's subsidiaries was approximately $393.9 million, including trade payables
and liabilities of $287.0 million guaranteed by the Company. Although the
Indentures limit the incurrence of Indebtedness and the issuance of preferred
stock of certain of WCI's subsidiaries, such limitations are subject to a number
of significant qualifications. Moreover, the Indentures do not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness under the Indentures.
To the extent any payment of Senior Indebtedness of WCI (whether by or on
behalf of WCI, as proceeds of security or enforcement of any right of setoff or
otherwise) is declared to be fraudulent or preferential, set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then if such payment is recovered by, or paid over
to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person, the Senior Indebtedness of WCI or part thereof originally
intended to be satisfied shall be deemed to be reinstated and outstanding as if
such payment had not occurred. To the extent the obligation to repay any Senior
Indebtedness of WCI is declared to be fraudulent, invalid or otherwise set aside
under any bankruptcy, insolvency, receivership, fraudulent conveyance or similar
law, then the obligation so declared fraudulent, invalid or otherwise set aside
(and all other amounts that would come due with respect thereto had such
obligation not been so affected) shall be deemed to be reinstated and
outstanding as Senior Indebtedness of WCI for all purposes of each of the
Indentures as if such declaration, invalidity or setting aside had not occurred.
Upon any payment or distribution of assets or securities of WCI of any kind or
character, whether in cash, property or securities, upon any dissolution or
winding up or total or partial liquidation or reorganization of WCI, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership or other
proceedings, all amounts due or to become due upon all Senior Indebtedness of
WCI (including any interest accruing subsequent to an event of bankruptcy,
whether or not such interest is an allowed claim enforceable against the debtor
under the Bankruptcy Code) shall first be paid in full, in cash or cash
equivalents, before the Holders of the Notes or either of the Trustees, on
behalf of the Holders of the Notes, shall be entitled to receive any payment by
WCI on account of Senior Subordinated Obligations, or any payment to acquire any
of the Notes for cash, property or securities, or any distribution with respect
to the Notes of any cash, property or securities. Before any payment may be made
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<PAGE>
by, or on behalf of, WCI with respect to any of the Notes upon any such
dissolution, winding up, liquidation or reorganization, any payment or
distribution of assets or securities of WCI of any kind or character, whether in
cash, property or securities, to which the Holders of the Notes or the Trustees,
on behalf of the Holders of the Notes, would be entitled, but for the
subordination provisions of the Indentures, shall be made by WCI or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other similar
Person making such payment or distribution or by the Holders of the Notes or
either of the Trustees if received by them or it, as the case may be, directly
to the holders of the Senior Indebtedness of WCI (pro rata to such holders on
the basis of the respective amounts of Senior Indebtedness of WCI held by such
holders) or their representatives as their respective interests appear, to the
extent necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of WCI of Senior Subordinated
Obligations, whether pursuant to the terms of the applicable Notes or upon
acceleration or otherwise, shall be made if, at the time of such payment, there
exists a default in the payment of all or any portion of the obligations on any
Senior Indebtedness of WCI, and such default shall not have been cured or waived
or the benefits of this sentence waived by or on behalf of the holders of such
Senior Indebtedness. In addition, during the continuance of any other event of
default with respect to any Designated Senior Indebtedness of WCI pursuant to
which the maturity thereof may be accelerated, upon receipt by the relevant
Trustee of written notice from the trustee or other representative for the
holders of such Designated Senior Indebtedness (or the holders of at least a
majority in principal amount of such Designated Senior Indebtedness then
outstanding), no payment of Senior Subordinated Obligations with respect to the
applicable Notes may be made by or on behalf of WCI upon or in respect of such
Notes for a period (a 'Payment Blockage Period') commencing on the date of
receipt of such notice and ending 159 days thereafter (unless, in each case,
such Payment Blockage Period shall be terminated by written notice to the
relevant Trustee by such trustee of, or other representatives for, such
holders). Not more than one Payment Blockage Period may be commenced with
respect to the Notes during any period of 360 consecutive days. Notwithstanding
anything in the applicable Indenture to the contrary, there must be 180
consecutive days in any 360-day period in which no Payment Blockage Period is in
effect. No event of default that existed or was continuing (it being
acknowledged that any subsequent action that would give rise to an event of
default pursuant to any provision under which an event of default previously
existed or was continuing shall constitute a new event of default for this
purpose) on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness of WCI initiating such Payment
Blockage Period shall be, or shall be made, the basis for the commencement of a
second Payment Blockage Period by the representative for, or the holders of,
such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such event of default shall have been cured or waived
for a period of not less than 90 consecutive days.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of WCI who are not holders of Senior
Indebtedness of WCI may recover less, ratably, than holders of Senior
Indebtedness of WCI and may recover more, ratably, than Holders of the Notes.
'Senior Indebtedness' as defined under each Indenture means the following
obligations of WCI, whether outstanding on the Issue Date or thereafter
Incurred: (i) all Indebtedness and all other monetary obligations of WCI under
the 1995 Senior Notes, the 1997 Senior Notes, and the Equipment Note Guarantees,
(ii) all other Indebtedness of WCI (other than the Notes, the 1997 Senior
Subordinated Notes, the Exchange Debentures and the Convertible Notes),
including principal and interest on such Indebtedness, unless such Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant to which
such Indebtedness is issued, is pari passu with, or subordinated in right of
payment to, the Notes and (iii) all fees, expenses and indemnities payable in
connection with the 1995 Senior Notes, the 1997 Senior Notes and the Equipment
Note Guarantees (including any agreements pursuant to which the 1995 Senior
Notes, the 1997 Senior Notes or the Equipment Note Guarantees were issued);
provided, however, that the term 'Senior Indebtedness' as defined in each
Indenture shall not include (a) any Indebtedness of WCI that, when Incurred and
without respect to any election under Section 1111(b) of the Bankruptcy Code,
was without recourse to WCI, (b) any Indebtedness of WCI to a Subsidiary of WCI
or to a joint venture in which WCI has an interest, (c) any Indebtedness of WCI,
to the extent not permitted pursuant to the covenants described under
'--Covenants--Limitation on Indebtedness' or '--Covenants--Limitation on Senior
Subordinated Indebtedness', (d) any repurchase, redemption or other
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<PAGE>
obligation in respect of Redeemable Stock, (e) any Indebtedness to any employee
of WCI or any of its Subsidiaries, (f) any liability for federal, state, local
or other taxes owed or owing by WCI or (g) any trade payables of WCI. Senior
Indebtedness of WCI will also include interest accruing subsequent to events of
bankruptcy of WCI and its Subsidiaries at the rate provided for in the document
governing such Senior Indebtedness, whether or not such interest is an allowed
claim enforceable against the debtor in a bankruptcy case under federal
bankruptcy law.
'Designated Senior Indebtedness' as defined under each Indenture means the
1995 Senior Notes, the 1997 Senior Notes, the Equipment Note Guarantees and any
Indebtedness constituting Senior Indebtedness of WCI that, at the date of
determination, has an aggregate principal amount of at least $25.0 million and
that is specifically designated by WCI in the instrument creating or evidencing
such Senior Indebtedness as 'Designated Senior Indebtedness.'
Each Indenture specifically designates that the Notes issued pursuant
thereto rank pari passu with the Convertible Notes, the 1997 Senior Subordinated
Notes, the Exchange Debentures and the other series of Notes.
SAME-DAY PAYMENT
Each Indenture requires that payments in respect of the applicable Notes
(including principal, premium and interest) be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address.
REGISTRATION RIGHTS
The Registration Statement of which this Prospectus forms a part, has been
filed by WCI pursuant to the Registration Agreement. Under the terms of the
Registration Agreement, the Company will be entitled to close the Exchange Offer
30 days after the commencement thereof provided that it has accepted all Old
Notes theretofore validly tendered in accordance with the terms of such Exchange
Offer. After consummation of the Exchange Offer, the Company will have no
further obligation to make any other such exchange offers.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Pursuant to the terms of each Indenture, WCI must commence, within 30 days
of the occurrence of a Change of Control, and consummate an Offer to Purchase
for all the applicable Notes then outstanding, at a purchase price equal to 101%
of the Accumulated Amount of such Deferred Interest Notes or 101% of the
principal amount of such Cash-Pay Notes, as the case may be (such principal
amount, together with the Accumulated Amount, the 'Relevant Amounts'), on the
date of purchase, plus accrued and unpaid interest (if any) on such Relevant
Amounts to the date of purchase. Prior to the mailing of the notice to Holders
of Notes commencing such Offer to Purchase, but in any event within 30 days
following any Change of Control, WCI covenants to (i) repay in full all
indebtedness of WCI that would prohibit the repurchase of the applicable Notes
pursuant to such Offer to Purchase or (ii) obtain any requisite consents under
instruments governing any such indebtedness of WCI to permit the repurchase of
the Notes. WCI shall first comply with the covenant in the preceding sentence
before it shall purchase any of the applicable Notes pursuant to the 'Repurchase
of Notes upon a Change of Control' covenant.
Under the terms of each Indenture, WCI may not repurchase any of the
applicable Notes or any other subordinated indebtedness, including the 1997
Senior Subordinated Notes, the Exchange Debentures and the Convertible Notes,
pursuant to this covenant until WCI has repurchased all of the 1995 Senior Notes
and the 1997 Senior Notes and has caused each of WEC and WEC II to repurchase
all of the WEC Equipment Notes and WEC II Equipment Notes, respectively,
tendered pursuant to any Offer to Purchase as a result of such Change of
Control. However, if WCI is unable to repay or cause repayment of all of the
indebtedness that would prohibit repurchase of the applicable Notes or is unable
to obtain the consents of the holders of Indebtedness, if any, outstanding at
the time of a Change of Control whose consent would be so required to permit the
repurchase of the applicable Notes or otherwise fails to purchase any of the
applicable Notes validly tendered, then WCI will have breached such covenant.
Such breach will constitute an Event of Default under the applicable Indenture
if it continues for a period of 30 consecutive days after written notice is
given to WCI by the applicable Trustee or the Holders of at least 25% in
aggregate principal amount of the applicable Notes. In addition, the failure by
WCI to
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<PAGE>
repurchase the applicable Notes at the conclusion of the Offer to Purchase will
constitute an Event of Default without any waiting period or notice
requirements.
There can be no assurance that WCI, WEC and/or WEC II will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including repurchases of the applicable Notes) required by the foregoing
covenant (as well as may be contained in other securities of WCI, WEC and WEC II
which might be outstanding at the time). The above covenant requiring WCI to
repurchase the Notes will, unless the consents referred to above are obtained,
require WCI, WEC and WEC II to repay all indebtedness then outstanding which by
its terms would prohibit such Note repurchase, either prior to or concurrently
with such Note repurchase.
COVENANTS
Each Indenture contains covenants including, among others, the following:
Limitation on Indebtedness
(a) WCI will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness (other than the Notes and Indebtedness existing on
the Issue Date); provided, however, that WCI may Incur Indebtedness if, after
giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Indebtedness to EBITDA Ratio would be
greater than zero and less than 5:1.
Notwithstanding the foregoing, WCI and any Restricted Subsidiary (except as
specified below) may Incur each and all of the following: (i) Indebtedness of
WCI outstanding at any time in an aggregate principal amount not to exceed
$200.0 million, less any amount of Indebtedness Incurred pursuant to this clause
(i) and permanently repaid as provided under '--Limitation on Asset Sales'
below; (ii) Indebtedness (A) to WCI evidenced by an unsubordinated promissory
note or (B) to any of its Restricted Subsidiaries; provided, however, that any
event which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other than to WCI or
another Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness, other than Indebtedness
Incurred under clause (i), (ii), (v), (vi) or (viii) of this paragraph, and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided,
however, that Indebtedness the proceeds of which are used to refinance or refund
the Notes or Indebtedness that is pari passu with, or subordinated in right of
payment to, the Notes shall only be permitted under this clause (iii) if (A) in
case the Notes are refinanced in part or the Indebtedness to be refinanced is
pari passu with the Notes, such new Indebtedness, by its terms or by the terms
of any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in right of
payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made subordinate in right of payment
to the Notes, at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes, and (C) such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; provided further, however, that in no
event may Indebtedness of WCI be refinanced by means of any Indebtedness of any
Restricted Subsidiary of WCI pursuant to this clause (iii); (iv) Indebtedness
(A) in respect of performance, surety or appeal bonds provided in the ordinary
course of business, (B) under Currency Agreements and Interest Rate Agreements;
provided, however, that such agreements do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder, and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of WCI or any of the Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Subsidiary of WCI
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary of WCI for the
purpose of financing such acquisition), in a principal amount not to exceed the
gross proceeds actually received by WCI or any Restricted
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<PAGE>
Subsidiary in connection with such disposition; (v) Indebtedness of WCI not to
exceed, at any one time outstanding, two times the Net Cash Proceeds received by
WCI from and after March 1, 1998 (less the amount of any such Net Cash Proceeds
the receipt of which permitted the Company or any Restricted Subsidiary to make
any Restricted Payment, including any Restricted Payment described in the second
paragraph under '--Limitation on Restricted Payments') from the issuance and
sale of its Capital Stock (other than Redeemable Stock and Preferred Stock that
provides for the payment of dividends in cash); provided, however, that such
Indebtedness (x) does not mature prior to the Stated Maturity of the Notes and
has an Average Life longer than the Notes and (y) is pari passu with or
subordinated to the Notes at least to the extent that the Notes are subordinated
to Senior Indebtedness; (vi) Indebtedness of any Restricted Subsidiary Incurred
pursuant to any credit agreement of such Restricted Subsidiary in effect on the
Issue Date (and refinancings thereof), up to the amount of the commitment under
such credit agreement on the Issue Date; (vii) Indebtedness to the extent such
Indebtedness is secured by Liens which are purchase money or other Liens upon
equipment or inventory acquired or held by WCI or any of its Restricted
Subsidiaries taken or obtained by (A) the seller or lessor of such equipment or
inventory to secure all or a part of the purchase price or lease payments
therefor or (B) the person who makes advances or incurs obligations, thereby
giving value to WCI to enable it to purchase or acquire rights in such equipment
or inventory, to secure the repayment of all or a part of the advances so made
or obligations so incurred; provided, however, that such Liens do not extend to
or cover any property or assets of WCI or any Restricted Subsidiary other than
the equipment or inventory acquired; (viii) Indebtedness of any Restricted
Subsidiary not to exceed, at any one time outstanding, 80% of the accounts
receivable net of reserves and allowances for doubtful accounts, determined in
accordance with GAAP, of such Restricted Subsidiary and its Restricted
Subsidiaries (without duplication); and (ix) Indebtedness of WCI, to the extent
the proceeds thereof are immediately used to purchase the 1995 Notes, the 1997
Notes, the 1997 Senior Subordinated Notes, the Exchange Debentures or the Notes
tendered in an Offer to Purchase made as a result of a Change of Control.
(b) For purposes of determining any particular amount of Indebtedness under
this 'Limitation on Indebtedness' covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this 'Limitation on Indebtedness' covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, WCI, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
(c) WCI will not, and will not permit any Restricted Subsidiary to, Incur
any Guarantee of Indebtedness of any Unrestricted Subsidiary.
Limitation on Senior Subordinated Indebtedness
WCI will not (i) Incur any Indebtedness, other than the Notes, that is
expressly made subordinated in right of payment to any Senior Indebtedness of
WCI unless such Indebtedness, by its terms and by the terms of any agreement or
instrument pursuant to which such Indebtedness is outstanding is expressly made
pari passu with, or subordinate in right of payment to, the Notes pursuant to
provisions substantially similar to those contained in the Indentures; provided,
however, that the foregoing limitation shall not apply to distinctions between
categories of Senior Indebtedness of WCI that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all Senior Indebtedness
of WCI or (ii) Incur any Indebtedness secured by a Lien if such Indebtedness is
not Senior Indebtedness of WCI, unless contemporaneously therewith effective
provision is made to secure the Notes equally and ratably with such secured
Indebtedness for so long as such secured Indebtedness is secured by a Lien. Each
Indenture provides that the applicable Notes are pari passu with the Convertible
Notes, the 1997 Senior Subordinated Notes, the Exchange Debentures and the other
series of Notes.
Limitation on Restricted Payments
WCI will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on its
Capital Stock (other than dividends or distributions payable solely in shares of
its or such Restricted Subsidiary's Capital Stock (other than Redeemable Stock)
held by such holders or in options, warrants or other rights to acquire such
shares of Capital Stock) other than such Capital Stock held by WCI or any of its
Restricted Subsidiaries (and other than pro rata dividends or distributions on
Common Stock of
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<PAGE>
Restricted Subsidiaries), (ii) repurchase, redeem, retire or otherwise acquire
for value any shares of Capital Stock of WCI (including options, warrants or
other rights to acquire such shares of Capital Stock) held by Persons other than
any Wholly Owned Restricted Subsidiaries of WCI, (iii) make any voluntary or
optional principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of WCI
that is subordinated in right of payment to the Notes or (iv) make any
Investment, other than a Permitted Investment, in any Person (such payments or
any other actions described in clauses (i) through (iv) being collectively
'Restricted Payments') if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Default or Event of Default shall have
occurred and be continuing, (B) except with respect to any Investment (other
than an Investment consisting of the designation of a Restricted Subsidiary as
an Unrestricted Subsidiary), WCI could not Incur at least $1.00 of Indebtedness
under the first paragraph of the 'Limitation on Indebtedness' covenant or (C)
the aggregate amount expended for all Restricted Payments (the amount so
expended, if other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) after the Deemed Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of such amount) (determined by
excluding income resulting from transfers of assets by WCI or a Restricted
Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative basis during
the period (taken as one accounting period) beginning on the first day of the
fiscal quarter immediately following the Deemed Closing Date and ending on the
last day of the last fiscal quarter preceding the Transaction Date for which
reports have been filed pursuant to '--SEC Reports and Reports to Holders' plus
(2) the aggregate Net Cash Proceeds received by WCI after the Deemed Closing
Date (less the amount of such Net Cash Proceeds the receipt of which served as
the basis on which WCI incurred Indebtedness pursuant to clause (v) of the
second paragraph under '--Limitation on Indebtedness' or pursuant to any similar
provision contained in the indenture relating to the 1995 Senior Notes as in
effect on the Deemed Closing Date (such Net Cash Proceeds being herein called
'Allocated Proceeds')) from the issuance and sale permitted by the Indentures of
its Capital Stock (other than Redeemable Stock) to a Person who is not a
Subsidiary of WCI, or from the issuance to a Person who is not a Subsidiary of
WCI of any options, warrants or other rights to acquire Capital Stock of WCI (in
each case, exclusive of any convertible Indebtedness, Redeemable Stock or any
options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes) plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments and other than reductions in Investments
made pursuant to clauses (vi) or (vii) of the second paragraph of this
'Limitation on Restricted Payments' covenant) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to WCI or any Restricted
Subsidiary (except to the extent any such payment is included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of 'Investments'), not to exceed the amount of Investments previously
made by WCI and its Restricted Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes,
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of the covenant described under '--Limitation on Indebtedness;' (iii)
the repurchase, redemption or other acquisition of Capital Stock of WCI (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds (other than Allocated Proceeds), of a substantially
concurrent sale of, shares of Capital Stock or options, warrants or other rights
to acquire such Capital Stock (in each case other than Redeemable Stock) of WCI;
(iv) the making of any other Restricted Payment made by exchange for, or out of
the proceeds (other than Allocated Proceeds) of, a substantially concurrent sale
of, shares of the Capital Stock or options, warrants or other rights to acquire
such Capital Stock (in each case other than Redeemable Stock) of WCI; (v)
payments or distributions, in the nature of satisfaction of dissenters' rights,
pursuant to or in connection with a consolidation, merger or transfer of assets
that complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of WCI; (vi) Investments, not to exceed $30.0 million at any one time
outstanding; (vii) Investments, not to exceed $30.0 million at any one time
outstanding, in entities, substantially all of the assets of which consist of
Telecommunications Assets;
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(viii) (A) cash payments in lieu of the issuance of fractional shares of Common
Stock upon conversion (including mandatory conversion) of the Convertible Notes
provided for in the Convertible Notes Indenture and (B) cash payments on the
Convertible Notes required to be made under the provisions of the Convertible
Notes Indenture that relate to repurchases of Convertible Notes upon a change of
control and that relate to limitations on sales of assets; (ix) cash payments in
lieu of the issuance of fractional shares of Common Stock of WCI upon conversion
of any class of Preferred Stock of WCI; provided, however, that this exception
shall not be available with respect to more than two such conversions with
respect to any such class of Preferred Stock by any given Affiliate of WCI; (x)
Investments in entities that directly (or indirectly through subsidiaries) own
licenses granted by the FCC or any other governmental entity with authority to
grant telecommunications licenses; provided, however, that, in each case WCI or
a Restricted Subsidiary shall, at the time of making such Investment, have an
active role in the management or operation of such entity and in the provision
of telecommunications services by such entity; and (xi) the redemption of the
shares of Exchangeable Preferred Stock upon mandatory redemption on December 15,
2007; provided, however, that, except in the case of clauses (i) and (iii) of
this paragraph, no Default or Event of Default shall have occurred and be
continuing or occur as a consequence of the actions or payments set forth
herein. Any Investments made other than in cash shall be valued, in good faith,
by the Board of Directors. Any Investment made pursuant to clause (vi) or (vii)
of this paragraph shall be deemed to be no longer outstanding (and repaid in
full) if and when the Person in which such Investment is made becomes a
Restricted Subsidiary of WCI.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof), and the
Net Cash Proceeds from any issuance and sale of Capital Stock referred to in
clauses (iii) or (iv) shall be included in calculating whether the conditions of
clause (C) of the first paragraph of this 'Limitation on Restricted Payments'
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of WCI are used for the
redemption, repurchase or other acquisition of the Notes or Indebtedness that is
pari passu with the Notes, then the Net Cash Proceeds of such issuance shall be
included in clause (C) of the first paragraph of this 'Limitation on Restricted
Payments' covenant only to the extent such proceeds are not used for such
redemption, repurchase or other acquisition of the Notes or such Indebtedness.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
WCI will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by WCI
or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to WCI or any
other Restricted Subsidiary that owns, directly or indirectly, any Capital Stock
of such Restricted Subsidiary, (iii) make loans or advances to WCI or any other
Restricted Subsidiary that owns, directly or indirectly, any Capital Stock of
such Restricted Subsidiary or (iv) transfer any of its property or assets to WCI
or any other Restricted Subsidiary that owns, directly or indirectly, any
Capital Stock of such Restricted Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or
restrictions: (i) existing on the Issue Date in any agreement in effect on the
Issue Date, and any extensions, refinancings, renewals or replacements of such
agreements; provided, however, that the encumbrances and restrictions in any
such extensions, refinancings, renewals or replacements are no less favorable in
any material respect to the Holders than those encumbrances or restrictions that
are then in effect and that are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law; (iii) existing with respect
to any Person or the property or assets of such Person acquired by WCI or any
Restricted Subsidiary, at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired; (iv) in the case of clause (iv)
of the first paragraph of this 'Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries' covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of WCI or any
Restricted Subsidiary not otherwise prohibited by the applicable Indenture or
(C) arising or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate,
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detract from the value of property or assets of WCI or any Restricted Subsidiary
in any manner material to WCI or any Restricted Subsidiary; or (v) with respect
to a Restricted Subsidiary and imposed pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this 'Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries' covenant shall prevent WCI or any Restricted
Subsidiary from (i) restricting the sale or other disposition of property or
assets of WCI or any of its Restricted Subsidiaries that secure Indebtedness of
WCI or any of its Restricted Subsidiaries or (ii) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted pursuant to the indenture
relating to the 1997 Senior Notes as in effect on the Deemed Closing Date.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
WCI will not sell, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell any shares of Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to purchase shares of
such Capital Stock) except (i) to WCI or a Wholly Owned Restricted Subsidiary,
(ii) issuances or sales to foreign nationals of shares of Capital Stock of
foreign Restricted Subsidiaries, (iii) if, immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary or (iv) issuances or sales of Common Stock of Restricted
Subsidiaries, other than the Telecommunications Subsidiaries, if within six
months of each such issuance or sale, WCI or such Restricted Subsidiary applies
an amount not less than the Net Cash Proceeds thereof (if any) in accordance
with clause (A) or (B) of the first paragraph of the 'Limitation on Asset Sales'
covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
WCI will not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee any Indebtedness of WCI ('Guaranteed Indebtedness'), unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the applicable Indenture providing for a Guarantee (a 'Subsidiary
Guarantee') of payment of the applicable Notes by such Restricted Subsidiary and
(ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against WCI or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; provided, however, that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that (x) existed at the
time such Person became a Restricted Subsidiary and (y) was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of WCI of all of WCI's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the
applicable Indenture) or (ii) the release or discharge of the Guarantee which
resulted in the creation of such Subsidiary Guarantee, except a discharge or
release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
WCI will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5% or more of any class of Capital Stock of WCI or with any Affiliate of WCI or
any Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to WCI or such Restricted Subsidiary than could be obtained, at the
time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement
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providing therefor, in a comparable arm's-length transaction with a Person that
is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which WCI or a Restricted Subsidiary delivers to
the applicable Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to WCI or such Restricted
Subsidiary from a financial point of view; (ii) any transaction solely between
WCI and any of its Wholly Owned Restricted Subsidiaries or solely between Wholly
Owned Restricted Subsidiaries; (iii) the payment of reasonable fees to directors
of WCI who are not employees of WCI; (iv) any payments or other transactions
pursuant to any tax-sharing agreement between WCI and any other Person with
which WCI files a consolidated tax return or with which WCI is part of a
consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the covenant described under '--Limitation on Restricted Payments'
(other than pursuant to clause (iv) of the definition of 'Permitted Investment'
or clause (vi) of the second paragraph of such covenant). Notwithstanding the
foregoing, any transaction (or series of related transactions) with any
Unrestricted Subsidiary covered by the first paragraph of this 'Limitation on
Transactions with Shareholders and Affiliates' covenant and not covered by
clauses (i) through (v) of this paragraph, the aggregate amount of which does
not exceed $250,000 in value in any year will not be covered by this covenant
and, if the aggregate value of such transaction exceeds $250,000 in any year,
will not be covered by this covenant if such transaction has been determined by
the Board of Directors to be fair to the Company.
Limitation on Asset Sales
WCI will not, and will not permit any Restricted Subsidiary to, consummate
any Asset Sale, unless (i) the consideration received by WCI or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of and (ii) at least 85% of the consideration received consists of cash
or Temporary Cash Investments. In the event and to the extent that the Net Cash
Proceeds received by WCI or its Restricted Subsidiaries from one or more Asset
Sales occurring on or after the Issue Date in any period of 12 consecutive
months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of
the date closest to the commencement of such 12-month period for which a
consolidated balance sheet of WCI and its Subsidiaries has been prepared), then
WCI shall or shall cause the relevant Restricted Subsidiary to (i) within six
months after the date Net Cash Proceeds so received exceed 10% of Adjusted
Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net
Cash Proceeds to permanently repay unsubordinated Indebtedness of WCI, or
Indebtedness of any Restricted Subsidiary, in each case owing to a Person other
than WCI or any of its Restricted Subsidiaries or (B) invest an equal amount, or
the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within six months after the date of such
agreement), in property or assets of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, WCI and its Restricted Subsidiaries existing
on the date of such investment (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) apply (no later than the end of the six-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
'Limitation on Asset Sales' covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
six-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute 'Excess
Proceeds.'
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
'Limitation on Asset Sales' covenant totals at least $10.0 million, WCI must
commence, not later than the 15th Business Day after the first day of such
month, and consummate an Offer to Purchase from the Holders on a pro rata basis
an aggregate principal amount of Notes equal to the Excess Proceeds on such
date, at a purchase price equal to 101% of the Relevant Amounts of such Notes on
the date of purchase, plus accrued and unpaid interest (if any) on such amount
to the date of purchase; provided, however, that no Offer to Purchase shall be
required to be commenced with respect to the Notes until the Business Day
following the payment date with respect to any related offer to purchase any
1997 Notes and need not be commenced if the Excess Proceeds remaining after
application thereof to the 1997 Notes purchased in such offer to purchase
applicable thereto are less than $10 million; provided further, however, that no
Notes
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may be purchased under this covenant unless WCI shall have purchased all 1997
Notes tendered pursuant to such offer to purchase applicable thereto.
Because of similar requirements in the Indentures governing or to govern
the 1995 Notes, the 1997 Notes, the 1997 Senior Subordinated Notes and the
Exchange Debentures and in the Certificate of Designations relating to the
Exchangeable Preferred Stock, WCI may not have Excess Proceeds from an Asset
Sale to be able to comply with the foregoing requirements.
SEC Reports and Reports to Holders
Whether or not WCI is required to file reports with the SEC, if any Notes
are outstanding, WCI 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.' WCI shall supply the
applicable Trustee and each Holder of Notes, as the case may be, or shall supply
to the applicable Trustee for forwarding to each such Holder, without cost to
such Holder, copies of such reports or other information.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of each Indenture, WCI shall not consolidate with, merge
with or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially an
entirety in one transaction or a series of related transactions) to, any Person
(other than a consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth; provided, however, that, in connection
with any such merger or consolidation, no consideration (other than Common Stock
in the surviving Person or WCI) shall be issued or distributed to the
stockholders of WCI) or permit any Person to merge with or into WCI unless: (i)
WCI shall be the continuing Person, or the Person (if other than WCI) formed by
such consolidation or into which WCI is merged or that acquired or leased such
property and assets of WCI shall be a corporation organized and validly existing
under the laws of the United States of America or any jurisdiction thereof and
shall expressly assume, by a supplemental indenture, executed and delivered to
the applicable Trustee, all of the obligations of WCI on the applicable Notes
and under the applicable Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, WCI or any Person becoming the successor obligor of the applicable
Notes shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of WCI immediately prior to such transaction; (iv)
immediately after giving effect to such transaction on a pro forma basis WCI, or
any Person becoming the successor obligor of the applicable Notes, could Incur
at least $1.00 of Indebtedness under the first paragraph of the covenant
described under '--Covenants--Limitation on Indebtedness;' and (v) WCI delivers
to the applicable Trustee an Officers' Certificate (attaching the arithmetical
computations to demonstrate compliance with clauses (iii) and, if applicable,
(iv)) and Opinion of Counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture complies with this provision
and that all conditions precedent provided for herein relating to such
transaction have been complied with; provided, however, that clauses (iii) and
(iv) above do not apply if, in the good faith determination of the Board of
Directors of WCI, whose determination shall be evidenced by a Board Resolution,
the principal purpose of such transaction is to change the state of
incorporation of WCI; provided further, however, that any such transaction shall
not have as one of its purposes the evasion of the foregoing limitations.
EVENTS OF DEFAULT
The following events will be defined as 'Events of Default' in each
Indenture: (i) default in the payment of principal of (or premium, if any, on)
any applicable Note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise, whether or not such payment is prohibited
by the provisions described above under 'Ranking'; (ii) default in the payment
of interest on any applicable Note when the same becomes due and payable, and
such default continues for a period of 30 days, whether or not such payment is
prohibited by the provisions described above under 'Ranking'; (iii) WCI defaults
in the performance of or breaches any other covenant or agreement of WCI in the
applicable Indenture, or under the applicable Notes, and such default or breach
continues for a period of 30 consecutive days after written notice by the
applicable Trustee or the Holders of 25% or more in aggregate principal amount
of the applicable Notes; (iv) there occurs with
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respect to any issue or issues of Indebtedness of WCI or any Significant
Subsidiary having an outstanding principal amount of $25.0 million or more in
the aggregate for all such issues of all such Persons, whether such Indebtedness
now exists or shall hereafter be created, (a) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and payable
prior to its Stated Maturity and such Indebtedness has not been discharged in
full or such acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or (b) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall not
have been made, waived or extended within 30 days of such payment default; (v)
any final judgment or order (not covered by insurance) for the payment of money
in excess of $25.0 million in the aggregate for all such final judgments or
orders against all such Persons (treating any deductibles, self-insurance or
retention as not so covered) shall be rendered against WCI or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
60 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $25.0 million during which
a stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (vi) a court having jurisdiction in
the premises enters a decree or order for (a) relief in respect of WCI or any
Significant Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (b) appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of WCI or any Significant Subsidiary or for all or substantially all of
the property and assets of WCI or any Significant Subsidiary or (c) the winding
up or liquidation of the affairs of WCI or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; or (vii) WCI or any Significant Subsidiary (a) commences
a voluntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or consents to the entry of an order for relief
in an involuntary case under any such law, (b) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of WCI or any Significant Subsidiary or for all
or substantially all of the property and assets of WCI or any Significant
Subsidiary or (c) effects any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(vi) or (vii) above that occurs with respect to WCI) occurs and is continuing
under the applicable Indenture, the applicable Trustee or the Holders of at
least 25% in aggregate principal amount of the applicable Notes then
outstanding, by written notice to WCI (and to the applicable Trustee if such
notice is given by the Holders), may, and the applicable Trustee at the request
of such Holders shall, declare the principal of, premium, if any, and accrued
interest, if any, on all such Notes, to be immediately due and payable. Upon a
declaration of acceleration, such principal, premium, if any, and accrued
interest, if any, shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (iv)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (iv) shall be remedied or cured by WCI or
the relevant Significant Subsidiary or waived by the holders of the relevant
Indebtedness within 60 days after the declaration of acceleration with respect
thereto. If an Event of Default specified in clause (vi) or (vii) above occurs
with respect to WCI, the principal of, premium, if any, and accrued interest, if
any, on all such Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the applicable Trustee or any Holder. The Holders of at least a majority in
principal amount of the outstanding Notes, by written notice to WCI and to the
applicable Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration and its consequences if (A) all existing Events of
Default, other than the nonpayment of the principal of, premium, if any, and
interest on such Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (B) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see '--Modification and Waiver.'
The Holders of at least a majority in aggregate principal amount of the
outstanding applicable Notes may direct the time, method and place of conducting
any proceeding for any remedy available to the applicable Trustee or exercising
any trust or power conferred on the applicable Trustee. However, the applicable
Trustee may refuse to follow any direction that conflicts with law or the
applicable Indenture, that may involve the applicable Trustee in personal
liability, or that the applicable Trustee determines in good faith may be unduly
prejudicial to the rights of Holders of such Notes not joining in the giving of
such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of such Notes. A
Holder may not pursue any remedy with respect to the applicable Indenture or the
applicable Notes unless:
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(i) the Holder gives the applicable Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount of
the outstanding applicable Notes make a written request to the applicable
Trustee to pursue the remedy; (iii) such Holder or Holders offer the applicable
Trustee indemnity satisfactory to such Trustee against any costs, liability or
expense; (iv) the applicable Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and (v) during
such 60-day period, the Holders of a majority in aggregate principal amount of
the outstanding applicable Notes do not give the applicable Trustee a direction
that is inconsistent with the request. However, such limitations do not apply to
the right of any Holder of a Note to receive payment of the principal of,
premium, if any, or interest on, such Note or to bring suit for the enforcement
of any such payment, on or after the due date expressed in such Notes, which
right shall not be impaired or affected without the consent of the Holder.
Each Indenture will require certain officers of WCI to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of WCI and its Restricted
Subsidiaries' performance under the applicable Indenture and that, to the best
knowledge of such officer, WCI has fulfilled all obligations thereunder, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default and the nature and status thereof. WCI will also be obligated
to notify the applicable Trustee of any default or defaults in the performance
of any covenants or agreements under the applicable Indenture.
DEFEASANCE
Defeasance and Discharge
Each Indenture will provide that WCI be deemed to have paid and will be
discharged from any and all obligations in respect of the applicable Notes on
the 123rd day after the deposit referred to below, and the provisions of the
applicable Indenture will no longer be in effect with respect to the applicable
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the applicable Notes, to replace stolen, lost or
mutilated Notes, to maintain paying agencies, to hold monies for payment in
trust), if, among other things, (A) WCI has deposited with the applicable
Trustee, in trust, money and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the applicable Notes on the Stated
Maturity of such payments or upon earlier optional redemption, in each case in
accordance with the terms of the applicable Indenture and the applicable Notes,
(B) WCI has delivered to the applicable Trustee (i) either (x) an Opinion of
Counsel to the effect that Holders will not recognize income, gain or loss for
federal income tax purposes as a result of WCI's exercise of its option under
this 'Defeasance' provision and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Issue Date such that a ruling is no
longer required or (y) a ruling directed to the applicable Trustee received from
the Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the Bankruptcy Code or Section 15 of the
New York Debtor and Creditor Law, (C) immediately after giving effect to such
deposit on a pro forma basis, no Event of Default, or event that after the
giving of notice or lapse of time or both would become an Event of Default,
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after the date of such deposit, and such deposit
shall not result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which WCI is a party or by which WCI is bound,
and (D) if at such time the applicable Notes are listed on a national securities
exchange, WCI has delivered to the applicable Trustee an Opinion of Counsel to
the effect that the applicable Notes will not be delisted as a result of such
deposit, defeasance and discharge.
Each Indenture further provides that its provisions will no longer be in
effect with respect to clauses (iii) and (iv) under 'Consolidation, Merger and
Sale of Assets' and all the covenants described herein under 'Covenants,' clause
(c) under '--Events of Default' with respect to such covenants and clauses (iii)
and
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(iv) under 'Consolidation, Merger and Sale of Assets,' and clauses (d) and (e)
and, if applicable, (i) and (ii) under '--Events of Default' shall be deemed not
to be Events of Default and the provisions described under '--Ranking' with
respect to the assets held by the applicable Trustee referred to below shall not
apply, upon, among other things, the deposit with the applicable Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the applicable Notes on the Stated Maturity of such
payments or upon earlier optional redemption, in each case in accordance with
the terms of the applicable Indenture and the applicable Notes, the satisfaction
of the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by WCI to the applicable Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default
In the event WCI exercises its option to omit compliance with certain
covenants and provisions of an Indenture with respect to a series of Notes as
described in the immediately preceding paragraph and the applicable Notes are
declared due and payable because of the occurrence of an Event of Default that
remains applicable, the amount of money and/or U.S. Government Obligations on
deposit with the applicable Trustee will be sufficient to pay amounts due on the
applicable Notes at the time of their Stated Maturity but may not be sufficient
to pay amounts due on the applicable Notes at the time of the acceleration
resulting from such Event of Default. However, WCI will remain liable for such
payments.
MODIFICATION AND WAIVER
Modifications and amendments of an Indenture may be made by WCI and the
applicable Trustee with the consent of the Holders of not less than a majority
in aggregate principal amount of the outstanding applicable Notes; provided,
however, that no such modification or amendment may, without the consent of each
Holder affected thereby, (i) change the Stated Maturity of the principal of, or
any installment of interest on, any such Note, (ii) reduce the principal amount
of, or premium, if any, or interest on, any such Note, (iii) change the place or
currency of payment of principal of, or premium, if any, or interest on, any
such Note, (iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption, on or
after the Redemption Date) of any such Note, (v) reduce the above-stated
percentage of such outstanding Notes the consent of whose Holders is necessary
to modify or amend the applicable Indenture, (vi) waive a default in the payment
of principal of, premium, if any, or interest on such Notes or (vii) reduce the
percentage or aggregate principal amount of such outstanding Notes the consent
of whose Holders is necessary for waiver of compliance with certain provisions
of the applicable Indenture or for waiver of certain defaults.
Without the consent of any Holder of the applicable Notes, WCI and the
applicable Trustee may modify or amend the applicable Indenture to cure any
ambiguity, defect or inconsistency, to provide for the assumption by a successor
company of WCI's obligations under the applicable Indenture, to comply with the
requirements of the Trust Indenture Act, to appoint a successor Trustee or to
make any change that, in the opinion of the Board of Directors of WCI evidenced
by a Board Resolution, does not materially and adversely affect the rights of
any Holder.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
Each Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the applicable Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of WCI in the applicable Indenture, or in any
of the applicable Notes or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, stockholder,
officer, director, employee or controlling person of WCI or of any successor
Person thereof in such capacity. Each Holder, by accepting the Notes, waives and
releases all such liability.
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CONCERNING THE TRUSTEE
Each Indenture provides that, except during the continuance of a Default,
the applicable Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Indenture. If an Event of Default
has occurred and is continuing, the applicable Trustee will use the same degree
of care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
Each Indenture and the provisions of the Trust Indenture Act incorporated
by reference therein contain limitations on the rights of the applicable
Trustee, should it become a creditor of WCI to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The applicable Trustee is permitted to
engage in other transactions; provided, however, that if the applicable Trustee
acquires any conflicting interest, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
applicable Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
'1995 Notes' means the 1995 Senior Notes and the Convertible Notes.
'1997 Notes' means the 1997 Senior Notes and the Equipment Notes.
'1995 Senior Notes' means the 14% Senior Discount Notes Due 2005 of WCI.
'1997 Senior Notes' means the 14 1/2% Senior Deferred Interest Notes Due
2005 of WCI.
'1997 Senior Subordinated Notes' means the 15% Senior Subordinated Deferred
Interest Notes Due 2007 of WCI.
'Accumulated Amount' means, as of any date (the 'Specified Date'), the
amount provided below for each $1,000 principal amount of Deferred Interest
Notes:
(i) if the Specified Date occurs on one of the following dates (each,
a 'SemiAnnual Interest Accrual Date'), the Accumulated Amount will equal
the amount set forth below for such SemiAnnual Interest Accrual Date:
<TABLE>
<CAPTION>
ACCUMULATED
SEMIANNUAL INTEREST ACCRUAL DATE AMOUNT
- ------------------------------------------------------------------------------------------ -----------
<S> <C>
September 15, 1998........................................................................ $1,053.78
March 15, 1999............................................................................ 1,111.74
September 15, 1999........................................................................ 1,172.88
March 15, 2000............................................................................ 1,237.39
September 15, 2000........................................................................ 1,305.45
March 15, 2001............................................................................ 1,377.25
September 15, 2001........................................................................ 1,452.99
March 15, 2002............................................................................ 1,532.91
September 15, 2002........................................................................ 1,617.22
March 15, 2003............................................................................ 1,706.17
</TABLE>
(ii) if the Specified Date occurs before the first SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal the sum of (A) $1,000 and
(B) an amount equal to the product of (1) the Accumulated Amount for the
first SemiAnnual Interest Accrual Date less $1,000 multiplied by (2) a
fraction, the numerator of which is the number of days elapsed from the
Issue Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is the number of days from the Issue
Date to the first SemiAnnual Interest Accrual Date, using a 360-day year of
twelve 30-day months;
(iii) if the Specified Date occurs between two SemiAnnual Interest
Accrual Dates, the Accumulated Amount will equal the sum of (A) the
Accumulated Amount for the SemiAnnual Interest Accrual Date immediately
preceding such Specified Date and (B) an amount equal to the product of (1)
the Accumulated
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Amount for the immediately following SemiAnnual Interest Accrual Date less
the Accumulated Amount for the immediately preceding SemiAnnual Interest
Accrual Date multiplied by (2) a fraction, the numerator of which is the
number of days elapsed from the immediately preceding SemiAnnual Interest
Accrual Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal $1,706.17.
'Adjusted Consolidated Net Income' means, for any period, the aggregate net
income (or loss) of WCI and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided, however, that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than WCI or
any of its Restricted Subsidiaries) has a joint interest and the net income of
any Unrestricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to WCI or any of its Restricted Subsidiaries
by such other Person, including, without limitation, an Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the covenant described under '--Covenants--Limitation on Restricted
Payments' (and in such case, except to the extent includable pursuant to clause
(i) above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with WCI or
any of its Restricted Subsidiaries or all or substantially all of the property
and assets of such Person are acquired by WCI or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the covenant described under '--Covenants--Limitation on Restricted
Payments,' any amount paid as, or accrued for, cash dividends on Preferred Stock
of WCI or any Restricted Subsidiary owned by Persons other than WCI and any of
its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary
losses.
'Adjusted Consolidated Net Tangible Assets' means the total amount of
assets of WCI and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of WCI and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than
licenses issued by the FCC), all as set forth on the quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries, prepared in
conformity with GAAP and most recently filed with the Commission pursuant to
'--SEC Reports and Reports to Holders;' provided, however, that the value of any
licenses issued by the FCC shall, in the event of an auction for similar
licenses, be equal to the fair market value ascribed thereto in good faith by
the Board of Directors and evidenced by a Board Resolution. As used in each
Indenture, references to financial statements of WCI and its Restricted
Subsidiaries shall be adjusted to exclude Unrestricted Subsidiaries if the
context requires.
'Affiliate' means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling,' 'controlled by'
and 'under common control with'), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
'Asset Acquisition' means (i) an Investment by WCI or any of its Restricted
Subsidiaries in any other Person pursuant to which such Person shall become a
Restricted Subsidiary of WCI or shall be merged into or consolidated with WCI or
any of its Restricted Subsidiaries or (ii) an acquisition by WCI or any of its
Restricted Subsidiaries of the property and assets of any Person other than WCI
or any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person.
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'Asset Sale' means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transactions) in one transaction
or a series of related transactions by WCI or any of its Restricted Subsidiaries
to any Person other than WCI or any of its Restricted Subsidiaries of (i) all or
any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially
all of the property and assets of an operating unit or business of WCI or any of
its Restricted Subsidiaries or (iii) any other property or assets of WCI or any
of its Restricted Subsidiaries outside the ordinary course of business of WCI or
such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the applicable Indenture applicable to mergers, consolidations and
sales of assets of WCI; provided, however, that the following shall not be
included within the meaning of 'Asset Sale': (A) sales or other dispositions of
inventory, receivables and other current assets; (B) sales or other dispositions
of equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of WCI or its Restricted
Subsidiaries; (C) a substantially simultaneous exchange of, or a sale or
disposition (other than 85% or more for cash or cash equivalents) by WCI or any
of its Restricted Subsidiaries of, licenses issued by the FCC or applications or
bids therefor; provided, however, that the consideration received by WCI or any
such Restricted Subsidiary in connection with such exchange, sale or disposition
shall be equal to the fair market value of licenses so exchanged, sold or
disposed of, as determined by the Board of Directors; and (D) except for
purposes of the definition of 'Indebtedness to EBITDA Ratio,' any sale or other
disposition of securities of an Unrestricted Subsidiary.
'Average Life' means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
'Business Day' means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the Corporate
Trust Office of the Trustee, are authorized by law to close.
'Capital Stock' means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
Common Stock and Preferred Stock.
'Capitalized Lease' means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and 'Capitalized
Lease Obligations' means the discounted present value of the rental obligations
under such lease.
'Change of Control' means such time as (i) a 'person' or 'group' (within
the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended ('Exchange Act')), other than the Permitted Investor, becomes
the ultimate 'beneficial owner' (as defined in Rule 13d-3 under the Exchange
Act) of Voting Stock representing more than 50% of the total voting power of the
Voting Stock of WCI on a fully diluted basis or (ii) individuals who on the
Issue Date constituted the Board of Directors (together with any new directors
whose election by the Board of Directors or whose nomination for election by
WCI's stockholders was approved by a vote of at least two-thirds of the members
of the Board of Directors then in office who either were members of the Board of
Directors on the Issue Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
'Consolidated EBITDA' means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
nonrecurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income and (vi) all other noncash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all noncash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for WCI and its Restricted
Subsidiaries in
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conformity with GAAP; provided, however, that, if any Restricted Subsidiary is
not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced
(to the extent not otherwise reduced in accordance with GAAP) by an amount equal
to (A) the amount of the Adjusted Consolidated Net Income attributable to such
Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares
of outstanding Common Stock of such Restricted Subsidiary not owned on the last
day of such period by WCI or any of its Restricted Subsidiaries divided by (2)
the total number of shares of outstanding Common Stock of such Restricted
Subsidiary on the last day of such period.
'Consolidated Interest Expense' means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by WCI or any of its Restricted Subsidiaries) and all but the principal
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by WCI and its Restricted Subsidiaries
during such period; excluding, however, (i) any amount of such interest of any
Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof (but only in the same proportion as the
net income of such Restricted Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof) and (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes, the Convertible Preferred
Stock, the 1997 Senior Subordinated Notes, the 1997 Notes, the WSAC Loan and the
Exchangeable Preferred Stock, all as determined on a consolidated basis (without
taking into account Unrestricted Subsidiaries) in conformity with GAAP.
'Consolidated Net Worth' means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries (which shall
be as of a date not more than 90 days prior to the date of such computation, and
which shall not take into account Unrestricted Subsidiaries), less any amounts
attributable to Redeemable Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of the Capital Stock of
WCI or any of its Restricted Subsidiaries, each item to be determined in
conformity with GAAP (excluding the effects of foreign currency exchange
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
'Convertible Notes' means the 14% Convertible Senior Subordinated Discount
Notes of WCI due 2005.
'Convertible Notes Indenture' means the Indenture dated as of October 23,
1995, between WCI and United States Trust Company of New York pursuant to which
the Convertible Notes were issued.
'Convertible Preferred Stock' means the Series D 7% Senior Cumulative
Convertible Preferred Stock Due 2010 of WCI.
'Default' means any event that is, or after notice or passage of time or
both would be, an Event of Default.
'Deemed Closing Date' means March 18, 1997.
'Equipment Notes' means the $200.0 million of 12 1/2% Guaranteed Senior
Secured Notes Due 2004 of WEC and the $50.0 million of 12 1/2% Guaranteed Senior
Secured Notes Due 2004 of WEC II.
'Exchange Debentures' means the 14 1/4% Senior Subordinated Deferred
Interest Notes Due 2007 of WCI issuable in exchange for the Exchangeable
Preferred Stock.
'Exchangeable Preferred Stock' means the Series C Senior Cumulative
Exchangeable Preferred Stock Due 2007 of WCI.
'Fair market value' means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors (whose determination shall be conclusive)
and evidenced by a Board Resolution.
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'FCC' means the United States Federal Communications Commission and any
state or local telecommunications authority, department, commission or agency
(and any successors thereto).
'GAAP' means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained in the
Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indentures shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes, the Convertible Preferred Stock, the
1997 Senior Subordinated Notes, the 1997 Notes, the WSAC Loan and the
Exchangeable Preferred Stock and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
'Guarantee' means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term 'Guarantee' shall not
include endorsements for collection or deposit in the ordinary course of
business. The term 'Guarantee' used as a verb has a corresponding meaning.
'Holder' means the Person in whose name a Note is registered on the books
of the registrar for the Notes.
'Incur' means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including, with respect to the Company and its Restricted Subsidiaries, an
'incurrence' of Indebtedness by reason of a Person becoming a Restricted
Subsidiary of the Company; provided, however, that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
'Indebtedness' means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or
non-negotiable), (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except trade
payables, (v) all obligations of such Person as lessee under Capitalized Leases,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided,
however, that the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such Person and (viii)
to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations that are included in any of clauses (i) through (viii) above, the
maximum liability upon the occurrence of the contingency giving rise to the
obligation; provided, however, that (A) the amount outstanding at any time of
any Indebtedness issued with original issue discount is (1) for purposes of
determining the Indebtedness to EBITDA Ratio, the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (2) for all other purposes, the amount determined in
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clause (1) on the date such Indebtedness is originally Incurred and (B)
Indebtedness shall not include any liability for federal, state, local or other
taxes.
'Indebtedness to EBITDA Ratio' means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of WCI and its Restricted
Subsidiaries on a consolidated basis ('Consolidated Indebtedness') as at the
date of determination (the 'Transaction Date') to (ii) the Consolidated EBITDA
of WCI for the then most recent four full fiscal quarters for which reports have
been filed pursuant to '--SEC Reports and Reports to Holders' (such four full
fiscal quarter period being referred to herein as the 'Four Quarter Period');
provided, however, that (x) pro forma effect shall be given to any Indebtedness
Incurred from the beginning of the Four Quarter Period through the Transaction
Date (including any Indebtedness Incurred on the Transaction Date), to the
extent outstanding on the Transaction Date, (y) if during the period commencing
on the first day of such Four Quarter Period through the Transaction Date (the
'Reference Period'), WCI or any of the Restricted Subsidiaries shall have
engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced
by an amount equal to the EBITDA (if positive), or increased by an amount equal
to the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if such
Asset Sale and related retirement of Indebtedness had occurred on the first day
of such Reference Period or (z) if during such Reference Period WCI or any of
the Restricted Subsidiaries shall have made any Asset Acquisition, Consolidated
EBITDA of WCI shall be calculated on a pro forma basis as if such Asset
Acquisition and any Incurrence of Indebtedness to finance such Asset Acquisition
had taken place on the first day of such Reference Period.
'Investment' in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of WCI or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock held by WCI and the Restricted Subsidiaries of
any Person that has ceased to be a Restricted Subsidiary by reason of any
transaction permitted by clause (iii) of the covenant described under
'--Covenants--Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries.' For purposes of the definition of 'Unrestricted Subsidiary' and
the covenant described under '--Covenants--Limitation on Restricted Payments,'
(i) 'Investment' shall include the fair market value of the assets (net of
liabilities) of any Restricted Subsidiary of WCI at the time that such
Restricted Subsidiary of WCI is designated an Unrestricted Subsidiary and shall
exclude the fair market value of the assets (net of liabilities) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of WCI and (ii) any property transferred to
or from an Unrestricted Subsidiary shall be valued at its fair market value at
the time of such transfer, in each case as determined by the Board of Directors
in good faith.
'Issue Date' means the date on which the Notes are originally issued under
the Indentures.
'Lien' means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
'Net Cash Proceeds' means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to WCI or any Restricted Subsidiary of WCI) and proceeds from
the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of WCI and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by
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WCI or any Restricted Subsidiary of WCI as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to WCI or any Restricted Subsidiary of WCI) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable by WCI or any of its subsidiaries as a result thereof.
'Offer to Purchase' means an offer to purchase applicable Notes by WCI from
the Holders thereof that is required by the covenant described under
'--Repurchase of Notes upon a Change of Control' or '--Covenants--Limitation on
Asset Sales' and which is commenced by mailing a notice to the applicable
Trustee and each applicable Holder stating: (i) the covenant pursuant to which
the offer is being made and that all such Notes validly tendered will be
accepted for payment on a pro rata basis; (ii) the purchase price and the date
of purchase (which shall be a Business Day no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the 'Payment Date'); (iii)
that any such Note not tendered will continue to accrue interest pursuant to its
terms; (iv) that, unless WCI defaults in the payment of the purchase price, any
such Note accepted for payment pursuant to the Offer to Purchase shall cease to
accrue interest on and after the Payment Date; (v) that Holders electing to have
an applicable Note purchased pursuant to the Offer to Purchase will be required
to surrender such Note together with the form entitled 'Option of the Holder to
Elect Purchase' on the reverse side thereof completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the
Business Day immediately preceding the Payment Date; (vi) that Holders will be
entitled to withdraw their election if the Paying Agent receives, not later than
the close of business on the third Business Day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the Relevant Amounts of the applicable Notes delivered for
purchase and a statement that such Holder is withdrawing his election to have
such Notes purchased; and (vii) that Holders whose Notes are being purchased
only in part will be issued new Notes equal in Relevant Amounts (and accrued and
unpaid interest) to the unpurchased portion thereof; provided, however, that
each such Note purchased and each such new Note issued shall be in a principal
amount of $1,000 or integral multiples thereof. On the Payment Date, WCI shall
(i) accept for payment on a pro rata basis applicable Notes or portions thereof
tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent
money sufficient to pay the purchase price of all such Notes or portions thereof
so accepted; and (iii) deliver, or cause to be delivered, to the applicable
Trustee all such Notes or portions thereof so accepted together with an
Officers' Certificate specifying the applicable Notes or portions thereof
accepted for payment by WCI. The Paying Agent shall promptly mail to the Holders
of such Notes so accepted for payment in an amount equal to the purchase price,
and the applicable Trustee shall promptly authenticate and mail to such Holders
a new Note equal in principal amount to any unpurchased portion of the
applicable Note surrendered; provided, however, that each such Note purchased
and each such new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. WCI will publicly announce the results of an Offer
to Purchase as soon as practicable after the Payment Date. The applicable
Trustee shall act as the Paying Agent for an Offer to Purchase. WCI will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that WCI is required to repurchase applicable Notes pursuant to an
Offer to Purchase.
'Permitted Investment' means (i) an Investment in a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, WCI or a Restricted Subsidiary; (ii)
Temporary Cash Investments; (iii) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) loans or advances to employees in a
principal amount not to exceed $1.0 million at any one time outstanding; (v)
stock, obligations or securities received in satisfaction of judgments; (vi)
Investments, to the extent that the consideration provided by WCI or any of its
Restricted Subsidiaries consists solely of Capital Stock (other than Redeemable
Stock) of WCI; (vii) notes payable to WCI
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that are received by WCI as payment of the purchase price for Capital Stock
(other than Redeemable Stock) of WCI; and (viii) acquisitions of a minority
equity interest in entities engaged in the telecommunications business;
provided, however, that (A) the acquisition of a majority equity interest in
such entities is not permitted under U.S. law without FCC consent, (B) the
Company or one of its Restricted Subsidiaries has the right to acquire Capital
Stock representing a majority of the voting power of the Voting Stock of such
entity upon receipt of FCC consent and (C) in the event that such consent has
not been obtained within 18 months of funding such Investment, the Company or
one of its Restricted Subsidiaries has the right to sell such minority equity
interest in the seller thereof for consideration consisting of the consideration
originally paid by the Company and its Restricted Subsidiaries for such minority
equity interest.
'Permitted Investor' means Mr. William J. Rouhana, Jr.
'Person' means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
'Preferred Stock' means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference stock, whether
now outstanding or issued after the Deemed Closing Date, including, without
limitation, all series and classes of such preferred or preference stock.
'Redeemable Stock' means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes (unless the redemption price is, at WCI's option, without
conditions precedent, payable solely in Common Stock (other than Redeemable
Stock) of WCI) or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided, however, that any
Capital Stock that would not constitute Redeemable Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of an 'asset sale' or 'change of
control' occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the 'asset sale' or 'change of control'
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in '--Repurchase of Notes
Upon a Change of Control' and '--Covenants--Limitation on Asset Sales' and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to WCI's repurchase of
such Notes as are required to be repurchased pursuant to '--Repurchase of Notes
Upon a Change of Control' and '--Covenants--Limitation on Asset Sales.'
'Restricted Subsidiary' means any Subsidiary of WCI other than an
Unrestricted Subsidiary.
'SEC' means the Securities and Exchange Commission and any successor
agency.
'Significant Subsidiary' means, at any date of determination, any
Restricted Subsidiary of WCI that, together with its Subsidiaries, (i) for the
most recent fiscal year of WCI, accounted for more than 10% of the consolidated
revenues of WCI and its Restricted Subsidiaries or (ii) as of the end of such
fiscal year, was the owner of more than 10% of the consolidated assets of WCI
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of WCI for such fiscal year.
'Stated Maturity' means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
'Subsidiary' means, with respect to any Person, any corporation,
association or other business entity of which Voting Stock representing more
than 50% of the voting power of the outstanding Voting Stock is owned, directly
or indirectly, by such Person and one or more other Subsidiaries of such Person.
'Telecommunications Assets' means any (i) entity or business substantially
all the revenues of which are derived from (a) providing transmission of sound,
data or video; (b) the sale or provision of phone cards, '800' services, voice
mail, switching, enhanced telecommunications services, telephone directory or
telephone number
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information services or telecommunications network intelligence; or (c) any
business ancillary or directly related to the businesses referred to in clause
(a) or (b) above and (ii) any assets used primarily to effect such transmission
or provide the products or services referred to in clause (a) or (b) above and
any directly related or ancillary assets including, without limitation, licenses
and applications, bids and agreements to acquire licenses, or other authority to
provide transmission services previously granted, or to be granted, by the FCC.
'Telecommunications Subsidiary' means (i) WinStar Gateway Network, Inc.,
WinStar Wireless, Inc., WinStar Telecommunications, Inc., WinStar Milliwave,
Inc., WinStar Locate, Inc. and WinStar Wireless Fiber Corp., and, in each case,
its successors and (ii) any other Restricted Subsidiary of WCI that holds more
than a de minimis amount of Telecommunications Assets.
'Temporary Cash Investment' means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof; (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States, any state
thereof or any foreign country recognized by the United States, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $50.0 million (or the foreign currency equivalent thereof) and has
outstanding deposits or debt which is rated 'A' (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor; (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above; (iv)
commercial paper, maturing not more than six months after the date of
acquisition, issued by a corporation (other than an Affiliate of WCI) organized
and in existence under the laws of the United States, any state thereof or any
foreign country recognized by the United States with a rating at the time as of
which any investment therein is made of 'P-1' (or higher) according to Moody's
Investors Service, Inc. or 'A-1' (or higher) according to Standard & Poor's
Ratings Group; and (v) securities with maturities of six months or less from the
date of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States, or by any political subdivision
or taxing authority thereof, and rated at least 'A' by Standard & Poor's Ratings
Group or Moody's Investors Service, Inc.
'Transaction Date' means, with respect to the Incurrence of any
Indebtedness by WCI or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
'Unrestricted Subsidiary' means (i) any Subsidiary of WCI that at the time
of determination shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of WCI (including any newly acquired or newly formed Subsidiary of
WCI), other than a guarantor of the Notes, to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, WCI or any Restricted Subsidiary; provided, however, that
neither WCI nor its Restricted Subsidiaries has any Guarantee of any
Indebtedness of such Subsidiary outstanding at the time of such designation and
either (A) the Subsidiary to be so designated has total assets of $1,000 or less
or (B) if such Subsidiary has assets greater than $1,000, such designation would
be permitted under the covenant described under '--Covenants--Limitation on
Restricted Payments.' Notwithstanding the foregoing, WinStar New Media Company,
Inc., Non Fiction Films Inc. and WinStar Global Products, Inc. and their
Subsidiaries are Unrestricted Subsidiaries. The Board of Directors may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary of WCI; provided,
however, that immediately after giving effect to such designation (x) WCI could
Incur $1.00 of additional Indebtedness under the first paragraph of the covenant
described under '--Covenants--Limitation on Indebtedness' and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions. Anything to the contrary contained in the Indentures
notwithstanding, no Telecommunications Subsidiary may be designated an
Unrestricted Subsidiary.
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'U.S. Government Obligations' means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Notes, and shall also include a depositary receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such custodian for the account of the holder of a depositary receipt; provided,
however, that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depositary
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of interest on or principal of the
U.S. Government Obligation evidenced by such depositary receipt.
'Voting Stock' means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
'WEC' means WinStar Equipment Corp. and its successors.
'WEC II' means WinStar Equipment II Corp. and its successors.
'WSAC' means WinStar Switch Acquisition Corp. and its successors.
'WSAC Credit Agreement' means the Credit Agreement dated as of October 17,
1997, among WSAC, the Lenders named therein, Credit Suisse First Boston, as
documentation agent, and Salomon Brothers Inc, as syndication agent and
collateral and administrative agent, as in effect from time to time.
'WSAC Loan' means all Indebtedness and other obligations of WSAC arising in
connection with the WSAC Credit Agreement.
'Wholly Owned' means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS AND PREFERRED STOCK
INDEBTEDNESS
1995 Debt Placement
In October 1995, the Company issued an aggregate of $225.0 million of 1995
Notes in the 1995 Debt Placement. The 1995 Notes will not accrue interest prior
to October 15, 2000, nor pay cash interest prior to April 15, 2001; however, the
principal value of the 1995 Notes has accreted since issuance and, at October
15, 2000, the 1995 Senior Notes and the Convertible Notes will have aggregate
principal amounts of $294.2 million and $147.1 million, respectively. From and
after October 15, 2000, the 1995 Notes will accrue interest at the rate of 14%
per annum, payable semiannually in cash commencing April 15, 2001. The 1995
Notes mature on October 15, 2005.
The Convertible Notes are convertible, at any time, at the option of the
holder, into that number of shares of Common Stock derived by dividing the
principal amount of the Convertible Notes being converted by $20.625 (subject to
adjustment). In addition, if the closing sale price of the Common Stock on the
Nasdaq National Market during any twelve-month period from October 15, 1995
through October 15, 1999 (each a 'Market Criteria Period') has exceeded the
Market Criteria (as defined in the Indenture governing the Convertible Notes)
and a registration statement with respect to Common Stock issuable upon
conversion of the Convertible Notes ('Conversion Shares') is effective and
available, all of the Convertible Notes automatically will be converted into
Conversion Shares at the close of business on the last day of the Market
Criteria Period. The Company has caused to be declared effective, and continues
to maintain the effectiveness of, a registration statement registering the
issuance or resale of the Conversion Shares.
1997 Debt Placements
In March 1997, the Company and WEC issued an aggregate of $300.0 million of
notes in the March 1997 Debt Placement, consisting of (i) $100.0 million of the
1997 Senior Notes, ranking pari passu with the 1995 Senior Notes, and (ii)
$200.0 million of the WEC Notes. In order to provide additional future liquidity
to the Company, the Company also obtained a $150.0 million facility
('Facility'). In August 1997, WEC II issued, pursuant to the Facility, $50.0
million of the WEC II Equipment Notes. In October 1997, the Company utilized the
remaining $100.0 million available under the Facility, issuing an aggregate of
$100.0 million principal amount of 1997 Senior Subordinated Notes in the October
1997 Debt Placement.
The WEC Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC Notes will
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at the redemption prices set forth
herein. If by March 18, 1999, the Company has not applied the $200.0 million of
proceeds from the sale of the WEC Notes to fund the acquisition costs of
Designated Equipment (as defined), the Company is required to redeem the WEC
Notes in an aggregate principal amount equal to such shortfall at a redemption
price of 112.5% of such principal amount, plus accrued interest, if any, to the
date of redemption.
The WEC II Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC II Notes
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at certain prices. If by August 8,
1999, the Company has not applied the $50.0 million of proceeds from the sale of
the WEC II Notes to fund the acquisition costs of Designated Equipment, the
Company is required to redeem the WEC II Notes in an aggregate principal amount
equal to such shortfall at a redemption price of 112.5% of such principal
amount, plus accrued interest, if any, to the date of redemption.
The obligations of WEC and WEC II under the WEC Notes and the WEC II Notes
are unconditionally guaranteed by the Company and are secured by a security
interest in the equipment and other property purchased by WEC and WEC II, as the
case may be, with the proceeds thereof.
The 1997 Senior Notes are unsecured, senior indebtedness of the Company,
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company, and are senior in right of payment to
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all existing and future subordinated indebtedness of the Company, including the
Notes. Until October 15, 2000, interest on the 1997 Senior Notes will accrue and
compound semiannually at a rate of 14 1/2%, but will not be payable in cash.
Interest on the Accumulated Amount (as defined in the Indenture relating to the
1997 Senior Notes) of the 1997 Senior Notes as of October 15, 2000 will be
payable semiannually in cash on April 15 and October 15 of each year commencing
April 15, 2001. The 1997 Senior Notes mature on October 15, 2005 and are
redeemable on or after October 15, 2000, at the option of the Company, in whole
or in part, at certain prices.
The 1997 Senior Subordinated Notes are unsecured, senior subordinated
obligations of the Company, rank pari passu in right of payment with the Notes
and Convertible Notes and are junior in right of payment to all existing and
future senior indebtedness of the Company. The 1997 Senior Subordinated Notes
bear interest at a rate of 15% per annum, and payable on March 1 and September
1, commencing September 1, 2002. Until March 1, 2002, interest on the 1997
Senior Subordinated Notes will accrue and be compounded semiannually on each
SemiAnnual Interest Accrual Date (as defined in the Indenture relating to the
1997 Senior Subordinated Notes), but will not be payable in cash. Interest on
the Accumulated Amount (as defined in the Indenture relating to the 1997 Senior
Subordinated Notes) of the 1997 Senior Subordinated Notes as of March 1, 2002
will be payable semiannually commencing September 1, 2002. The 1997 Senior
Subordinated Notes will mature on March 1, 2007 and are redeemable on or after
March 1, 2002, at the option of the Company, in whole or in part, at certain
prices.
Indentures
The Indentures relating to the 1995 Notes and 1997 Notes contain certain
covenants which, among other things, restrict the ability of the Company and
certain of its subsidiaries to: incur additional indebtedness; create liens;
engage in sale-leaseback transactions; pay dividends or make distributions in
respect of their capital stock; make investments or certain other restricted
payments; sell assets; issue or sell stock of such subsidiaries; enter into
transactions with stockholders or affiliates; acquire assets or businesses not
constituting 'telecommunications assets' (as defined in the Indentures relating
to the 1995 Notes); or consolidate, merge or sell all or substantially all of
their assets. The covenants contained in the Indentures are subject to
exceptions and the Company's new media and consumer products subsidiaries are
not subject to many of the covenants contained therein, although the Company's
ability to make additional investments in such subsidiaries is limited.
Equipment Lease Financings and Credit Lines
The Company's subsidiaries have entered into, and will continue to seek,
financing arrangements with respect to equipment, including telecommunications
switches, radios and other related equipment. In September 1995, the Company's
wholly owned subsidiary, WinStar Wireless, Inc. ('WinStar Wireless'), entered
into an equipment lease financing arrangement pursuant to which the lessor has
made available $7.0 million in equipment financing. The Company's subsidiary,
WinStar Telecommunications, Inc., consummated a $4.3 million sale/leaseback of
its New York City switch in December 1996 and a $3.8 million sale/leaseback of
its Los Angeles switch in April 1997 and borrowed approximately $3.3 million
from a third party lender in connection with its purchase of its Chicago switch
in March 1997. In May 1997, WinStar Wireless consummated a $10.0 million
sale/leaseback of 38 GHz radios.
In January 1998, WinStar New Media and certain of its subsidiaries (the
'Guarantors') entered into a Loan, Security and Guaranty Agreement (the 'ING
Loan Agreement') with ING (U.S.) Capital Corporation, as Agent and Lender. Under
the ING Loan Agreement, WinStar New Media may borrow up to $15.0 million
outstanding at any one time, either in the form of revolving loans or by the
issuance of letters of credit. All of WinStar New Media's obligations under the
ING Loan Agreement are guaranteed by the Guarantors and are secured by
substantially all of the assets of WinStar New Media and the Guarantors,
including the capital stock of the Guarantors. This facility matures and all
outstanding loans are payable in full on January 26, 2001.
In February 1998, Global Products entered into a Second Amended and
Restated Loan and Security Agreement (the 'Loan Agreement') with Century
Business Credit Corporation ('Century') pursuant to which Century has agreed to
make a $12.0 million revolving credit facility, including a letter of credit
facility, available to Global Products until February 26, 2000. The Loan
Agreement amends and restates a loan agreement providing for a $6.0 million
credit facility from Century established in 1994 which was assigned (including
all
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security interests and the guaranty given by the Company) to IBJ Schroder Bank &
Trust Company in 1996 and reassigned to Century.
PREFERRED STOCK
Series A Preferred Stock and Warrants
In February 1997, the Company and a wholly-owned subsidiary sold in the
February 1997 Preferred Stock Placement an aggregate of 4,000,000 shares of the
Company's Series A Preferred Stock ('Series A Preferred Stock') and warrants to
purchase 1,600,000 shares of the Company's Common Stock (the 'Warrants') for an
aggregate purchase price of $100.0 million.
Each share of Series A Preferred Stock has a stated value of $25 ('Stated
Value') and entitles the holder thereof to receive from the Company dividends at
a rate per annum equal to 6% of the Stated Value. Dividends accrue and are
cumulative from the date of issuance and are payable in arrears quarterly as of
March 31, June 30, September 30 and December 31 of each year. The Company may,
at its election, pay such dividends in cash or through the issuance of
additional shares of Series A Preferred Stock.
The shares of Series A Preferred Stock are convertible into that number of
shares of Common Stock derived by dividing the aggregate Stated Value of the
Series A Preferred Stock being converted by $25 (subject to adjustment). On
February 11, 2002, any Series A Preferred Stock still outstanding shall be
automatically converted into shares of Common Stock, unless the Company elects
to pay cash therefor in an amount equal to the Stated Value plus all accrued and
unpaid dividends thereon (the 'Liquidation Preference'). Unless paid for in
cash, such conversion will be effected by delivery of shares of Common Stock
having a value, based upon the closing bid prices for the Common Stock for the
20 consecutive trading days ending one trading day prior to such conversion
date, equal to the Liquidation Preference.
The Warrants entitle the holders thereof to purchase an aggregate of
1,600,000 shares of Common Stock for $25 per share (subject to adjustment) at
any time until February 11, 2002. The Company may accelerate the expiration date
at any time after February 11, 2000 if the Common Stock trades at $40 or more
for a period of 20 consecutive days.
The Company and the purchasers of the Series A Preferred Stock also entered
into a Registration Rights Agreement, dated February 6, 1997 (the 'Preferred
Stock Registration Rights Agreement'), pursuant to which the Company currently
maintains an effective registration statement under the Securities Act,
registering (i) the resale of the Series A Preferred Stock and Warrants and (ii)
the issuance by the Company of the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and exercise of the Warrants.
As of April 30, 1998, after giving effect to conversions of Series A
Preferred Stock into Common Stock and the issuance of shares of Series A
Preferred Stock as dividends, there were 3,910,466 shares of Series A Preferred
Stock outstanding.
Rights to Purchase Series B Preferred Stock
The following is a summary of the Rights Agreement dated as of July 2, 1997
(the 'Rights Plan'), between the Company and Continental Stock Transfer & Trust
Company, as Rights Agent, which was adopted by the Board of Directors of the
Company on July 2, 1997. This summary of the Rights Plan does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
Rights Plan.
Under the Rights Plan, holders of Common Stock of the Company received, as
a dividend, preferred stock purchase rights (the 'Rights') at the rate of one
Right for each share of Common Stock held as of the close of business on July
14, 1997. One Right will also attach to each share of Common Stock issued
thereafter. Currently the Rights are not separate from the Common Stock and are
not exercisable, and the Rights will only separate from the Common Stock and
become exercisable if a person or group acquires 10% or more of the Company's
outstanding Common Stock (an 'Acquiring Person') or launches a tender or
exchange offer that would result in ownership of 10% or more the Company's
outstanding Common Stock. Each Right that is not owned by an Acquiring Person
entitles the holder of the Right to buy one one-thousandth of one share (a
'Unit') of Series B Preferred Stock which will be issued by the Company. If any
person becomes an Acquiring Person, or if an
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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, purporting to be a class action, was
commenced against the Company, its directors (and certain former directors) and
one non-director officer in the Delaware Chancery Court seeking, among other
things, to invalidate certain portions of the Rights Plan and to recover
unspecified damages and attorneys' fees. The complaint alleges that certain
provisions of the Rights Plan, particularly the so-called 'Continuing Directors'
provision are not permitted under the Delaware General Corporation Law and the
Company's Certificate of Incorporation. The Company believes that these
allegations are without merit and that the Rights Plan was properly adopted and
is valid in its entirety. The Company is reviewing its available alternatives
with regard to responding to this action. See 'Business--Legal Proceedings.'
Series C Preferred Stock
On December 17, 1997, the Company and one of its subsidiaries sold in a
private placement an aggregate of 175,000 shares of its 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 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 C 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.
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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 one of its subsidiaries sold an
aggregate of $200.0 million of the Company's Series D Preferred Stock in the
1998 Preferred Stock Placement. Dividends at the rate of 7% per annum on the
Series D Preferred Stock are cumulative from the date of issuance and are
payable quarterly in arrears on each March 15, June 15, September 15 and
December 15, commencing September 15, 1998, out of funds legally available
therefor. Dividends shall be, at the option of the Company, payable (i) in cash
or (ii) through the issuance of shares of Common Stock. The Series D Preferred
Stock is convertible at any time after the issue date, at the option of the
holders thereof, into shares of Common Stock at a rate (subject to adjustment in
certain events) of 1.0079 shares of Common Stock (the 'Conversion Common Stock')
for each share of Series D Preferred Stock, equivalent to a conversion price of
$49.61 for each share of Common Stock.
The Series D Preferred Stock is not redeemable prior to March 20, 2001. On
or after such date, the Series D Preferred Stock will be redeemable at the
option of the Company, in whole or in part, at any time or from time to time, at
specified redemption prices plus accrued and unpaid dividends. The Series D
Preferred Stock is subject to mandatory redemption on March 15, 2010, at a
redemption price of $50.00 per share plus accrued and unpaid dividends. Upon the
occurrence of a Change in Control (as defined in the Certificate of Designations
governing the Series D Preferred Stock), the Company will be obligated to adjust
the conversion price as provided in the Certificate of Designations relating to
the Series D Preferred Stock.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Series A, Series C and Series D
Preferred Stock is Continental Stock Transfer & Trust Company, 2 Broadway, New
York, New York 10004.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES
The following is a general discussion of the material United States federal
income tax considerations applicable to initial holders of the Notes resulting
from their purchase, ownership and disposition. This summary is based upon
current provisions of the Internal Revenue Code of 1986, as amended (the
'Code'), regulations of the United States Treasury Department ('Treasury
Regulations'), administrative rulings and pronouncements of the Internal Revenue
Service (the 'IRS') and judicial decisions currently in effect, all of which are
subject to change, possibly with retroactive effect. The discussion does not
deal with all aspects of United States federal income taxation that may be
relevant to particular investors in light of their personal investment
circumstances (for example, as to persons holding the Notes as part of a
conversion transaction or as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes) or to situations in which the
functional currency of a holder who is a U.S. Holder (as defined below) is not
the United States dollar, nor does it discuss United States federal income tax
considerations applicable to certain types of investors subject to special
treatment under the United States federal income tax laws (for example,
insurance companies, tax-exempt organizations, financial
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institutions or broker-dealers or taxpayers subject to the alternative minimum
tax). In addition, the discussion does not consider the effect of any foreign,
state, local, gift, estate, inheritance or other tax laws that may be applicable
to a particular investor. This discussion deals only with Notes held as capital
assets within the meaning of Section 1221 of the Code. EACH POTENTIAL INVESTOR
SHOULD CONSULT ITS TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
As used in the discussion which follows, the term 'U.S. Holder' means a
beneficial owner of Notes that, for United States federal income tax purposes,
is (i) a citizen or resident (as defined in Section 7701(b) (1) of the Code) of
the United States, (ii) a corporation or other entity taxable as a corporation
created or organized under the laws of the United States or any State thereof
(including the District of Columbia), (iii) an estate or trust described in
Section 7701 (a) (30) of the Code, or (iv) a person whose worldwide income or
gain is otherwise subject to United States federal income taxation on a net
income basis. The term 'Non-U.S. Holder' means a holder of Notes, that is, for
United States federal income tax purposes, not a U.S. Holder.
EXCHANGE OFFER
The exchange of Old Notes for Exchange Notes pursuant to this Prospectus
should not be a taxable exchange. Consequently, a U.S. Holder should not
recognize taxable income or loss as a result of exchanging an Old Note for a New
Note pursuant to this Prospectus. The holding period of a New Note will include
the holding period of the Old Note and the basis of the New Note will be the
same as the basis of the Old Note immediately before the exchange.
TAX CONSIDERATIONS FOR U.S. HOLDERS OF NOTES
Payments of Interest on Cash-Pay Notes
A U.S. Holder of a Cash-Pay Note will be required to include interest
payable on a Cash-Pay Note as ordinary income as such interest accrues or is
received in accordance with such U.S. Holder's regular method of tax accounting.
Original Issue Discount on Deferred Interest Notes
The Old Deferred Interest Notes were issued with original issue discount,
as defined in the Code. The New Deferred Interest Notes will similarly be
treated as issued with original issue discount. The amount of original issue
discount on a debt instrument, within the meaning of Section 1273 of the Code,
is the excess (if any) of its 'stated redemption price at maturity' over its
'issue price.' The issue price of each of the Deferred Interest Notes was the
respective offering price to the purchasers (not including any sales to a bond
house, broker, or similar person or organization acting in the capacity of an
underwriter, placement agent or wholesaler) at which a substantial amount of
each of the Deferred Interest Notes was sold. According to the Treasury
Regulations, the issue price of the Deferred Interest Notes does not change even
if part of the issue is subsequently sold at a different price. The stated
redemption price at maturity of a debt instrument is the sum of its principal
amount plus all other payments required thereunder, other than payments of
'qualified stated interest' (defined generally as stated interest that is
unconditionally payable in cash or in property (other than the debt instruments
of the issuer) at least annually at a single fixed rate that appropriately takes
into account the length of intervals between payments). Because interest on the
Deferred Interest Notes is not payable in cash until 2003, the stated interest
on the Deferred Interest Notes will not be treated as qualified stated interest,
but will, for United States federal income tax purposes, be added to the stated
redemption price at maturity of the Deferred Interest Notes. As a result, the
Deferred Interest Notes will be treated as having been issued with original
issue discount equal to the excess of their stated redemption price at maturity
over their issue price.
Each U.S. Holder of a Deferred Interest Note (regardless of whether such
U.S. Holder is a cash or an accrual basis taxpayer) will be required to include
in such U.S. Holder's gross income in each taxable year, in advance of the
receipt of cash payments attributable to such income, that portion of the
original issue discount, computed on a constant yield basis, attributable to
each day during such taxable year on which the U.S. Holder held the
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Deferred Interest Note. In general, under Section 1272 of the Code, the amount
of original issue discount that a holder of a debt instrument must include in
gross income for United States federal income tax purposes will be the sum of
the 'daily portions' of original issue discount with respect to such debt
instrument for each day during the taxable year or portion of a taxable year in
which such holder holds the debt instrument. The daily portion is determined
under a constant yield method by allocating to each day of an 'accrual period' a
pro rata portion of an amount equal to the 'adjusted issue price' of the debt
instrument at the beginning of the accrual period multiplied by the 'yield to
maturity' of the debt instrument (stated in a manner appropriately taking into
account the length of the accrual period). Accrual periods with respect to a
Deferred Interest Note may be of any length selected by the U.S. Holder and may
vary in length over the term of the Deferred Interest Note as long as (i) no
accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the Deferred Interest Note occurs on either the final
or first day of an accrual period. The yield to maturity of a debt instrument is
the discount rate that, when applied to all payments due under the debt
instrument produces a present value equal to the issue price of the debt
instrument. The 'adjusted issue price' is the issue price of the debt instrument
increased by the accrued original issue discount for all prior accrual periods
(and decreased by the amount of cash payments made in all prior accrual
periods).
The Company will report annually to the IRS and to record holders of the
Notes the original issue discount accrued and the amount of interest paid during
the calendar year.
U.S. Holders of Deferred Interest Notes should be aware that, because of
the original issue discount rules, a U.S. Holder of a Deferred Interest Note
will be required for United States federal income tax purposes to include
amounts in ordinary income in advance of the receipt of the cash attributable to
such income.
The Cash-Pay Notes were not issued with original issue discount because
stated interest is unconditionally payable in cash semi-annually throughout the
life of the instrument.
Acquisition Premium on Deferred Interest Notes
If a U.S. Holder of a New Deferred Interest Note acquired an Old Deferred
Interest Note at a cost in excess of its 'adjusted issue price' (as defined
above) but less than its stated redemption price at maturity, such New Deferred
Interest Note will have an acquisition premium to the extent of such excess.
Under the acquisition premium rules of the Code and the Treasury Regulations
promulgated thereunder, the amount of the original issue discount which such
U.S. Holder must include in its gross income with respect to such Deferred
Interest Note for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
Market Discount
If a U.S. Holder purchased Notes for an amount that is less than the
'revised issue price' of the Notes at the time of acquisition, the amount of
such difference will be treated as 'market discount' for United States federal
income tax purposes, unless such difference is less than a specified de minimis
amount ('de minimis market discount'). The 'revised issue price' is the original
issue price of a Note plus the aggregate amount of previously accrued original
issue discount (in the case of a Deferred Interest Note), without regard to any
reductions for acquisition premium, less payments other than qualified stated
interest. Under the market discount rules, a holder will be required to treat
any principal payment on or any gain on the sale, exchange, retirement or other
disposition of, Notes as ordinary income to the extent of the market discount
which has not previously been included in income and is treated as having
accrued on such Notes at the time of such payment or disposition. If a holder
makes a gift of a Note, accrued market discount, if any, will be recognized as
if such holder had sold such Note for a price equal to its fair market value. In
addition, the holder may be required to defer, until the maturity of the Notes
or the earlier disposition of the Notes in a taxable transaction, the deduction
of a portion of the interest expense on any indebtedness incurred or continued
to purchase or carry such Notes.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Notes, unless a holder elects to accrue market discount on a constant interest
method. A holder of Notes may elect to include market discount in income
currently as it accrues (on either a straight-line basis or constant interest
method), in which the case rules described above regarding the deferral of
interest deductions and ordinary income treatment of gain on disposition will
not apply. This election
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to include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent of
the IRS.
Amortized Bond Premium on Cash-Pay Notes
Generally, if the tax basis of a Cash-Pay Note (generally, the purchase
price thereof) held as a capital asset exceeds the amount payable at maturity of
the obligation, such excess will constitute amortizable bond premium that the
holder may elect, under Section 171 of the Code, to amortize under the constant
yield method over the period from its acquisition date to the obligation's
maturity date. A holder of a Cash-Pay Note who elects to amortize bond premium
must reduce its tax basis in the related Cash-Pay Note by the amount of the
aggregate amortization allowable for amortizable bond premium. Amortizable bond
premium will be treated under the Code as an offset to interest income on the
Cash-Pay Note for United States federal income tax purposes. An election to
amortize bond premium on a Cash-Pay Note generally applies to all bonds held by
the holder at the beginning of the first taxable year to which the election
applies or thereafter acquired, and may not be revoked without the consent of
the IRS.
Additional Interest or Payment on Notes
Upon a Change of Control, an additional amount would be payable in the
event that a holder requires the Company to repurchase such holder's Notes, in
the manner described under 'Description of the Notes-- Repurchase of Notes Upon
a Change of Control.' Under Treasury Regulations, the possibility of any such
additional interest or payment will not affect the accrual of original issue
discount or the yield to maturity on the Notes unless, based on all the facts
and circumstances as of the issue date, it is more likely than not that such
additional interest or payment will be paid. The Company does not intend to
treat the possibility of such additional interest or payment as affecting the
computation of original issue discount or yield to maturity. If a holder of a
Deferred Interest Note becomes entitled to additional interest or payment, for
purposes of determining the accrual of original issue discount, the yield to
maturity of such Note will be redetermined by treating such Note as reissued on
the date it is determined that such additional interest or payment will be
required to be paid, for an amount equal to its adjusted issue price on such
date. Although the matter is not free from doubt, if a holder of a Cash-Pay Note
becomes entitled to additional interest or payment, such interest or payment
should be treated in the same manner as stated interest on such Note.
Elections
A U.S. Holder of Notes, subject to certain limitations, may elect to
include all stated and unstated interest and discount on the Notes in gross
income under the constant yield method. For this purpose, interest includes
original issue discount, de minimis market discount and market discount, as
adjusted by any amortizable bond premium or acquisition premium. Any such
election, if made in respect of a market discount bond, will constitute an
election to include market discount in income currently on all market discount
bonds acquired by such U.S. Holder on or after the first day of the first
taxable year to which the election applies. See '--Market Discount.' U.S.
Holders should consult with their tax advisors regarding any tax elections they
intend to make with respect to any Notes.
Sale or Other Disposition
In general, a U.S. Holder of Notes will recognize capital gain or loss upon
the sale, exchange, redemption or other taxable disposition of such Notes
measured by the difference between (i) the amount of cash and the fair market
value of property received (except, in the cash of Cash-Pay Notes, to the extent
attributable to accrued but unpaid interest, which will be taxable as ordinary
income) and (ii) the U.S. Holder's adjusted tax basis in the Notes. A U.S.
Holder's adjusted tax basis for determining gain or loss on the sale or other
disposition of a Note will initially equal the cost of the Note to such U.S.
Holder and will be increased by any accrued original issue discount (net of all
amortized acquisition premium) and any market discount includable in such U.S.
Holder's gross income and decreased by the amount of any cash payments received
by such U.S. Holder regardless of whether such payments are denominated as
principal or interest (other than payments of qualified stated interest) and
amortizable bond premium, if any, deducted over the term of the Notes. Subject
to the market discount rules
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discussed above, any such gain or loss will generally be long-term capital gain
or loss, provided the Notes have been held for more than one year. Capital gains
rates that apply to the sale or exchange of Notes by noncorporate U.S. Holders
will be reduced if the Notes were held for more than one year but not more than
18 months at the time of disposition and will be reduced further if the Notes
were held for more than 18 months at the time of disposition.
Applicable High Yield Discount Rules
Generally, under Section 163(e)(5) of the Code, original issue discount is
not deductible until paid in cash or property (other than issuer debt or stock)
with respect to any 'applicable high yield discount obligations' ('AHYDOs')
issued by a corporation. A Deferred Interest Note will constitute an AHYDO since
it (i) has a maturity date which is more than five years from the date of issue,
(ii) has a yield to maturity which equals or exceeds the sum of five percentage
points plus the 'applicable federal rate' ('AFR') for the calendar month in
which the obligation is issued and (iii) has 'significant original issue
discount' (as defined in Section 163(i)(2) of the Code). (The applicable AFR for
the month of March 1998 is 5.83%). Since the Deferred Interest Notes are AHYDOs,
(i) the product of the total original issue discount under the Deferred Interest
Notes times the ratio of (a) the excess of the yield to maturity over the sum of
the AFR plus six percentage points to (b) the yield to maturity will not be
deductible by the Company and will be treated for some purposes as dividends to
corporate holders of the Deferred Interest Notes (to the extent that the Company
has sufficient current or accumulated earnings and profits for United States
federal income tax purposes that such non-deductible amounts would have been
treated as dividends if they had been distributions with respect to the
Company's stock), and (ii) any original issue discount for which the Company's
deductions are not disallowed under clause (i) above will not be deductible by
the Company until actually paid. Amounts treated as dividends under clause (i)
will be non-deductible by the Company, and may qualify for the dividends
received deduction for corporate holders, but should be otherwise treated as
original issue discount and included in income, as described above. The Company
believes that it does not presently have any current or accumulated earnings and
profits and it cannot predict whether it will have any earnings and profits for
future years. As such, in any year in which the Company has no earnings and
profits, the non-deductible portion in clause (i) relating to such year would
not be eligible for the dividends received deduction in the case of corporate
holders.
INFORMATION REPORTING AND BACKUP WITHHOLDING ON U.S. HOLDERS
Information reporting and backup withholding may apply with respect to
certain payments of principal and interest (including original issue discount)
on the Notes and to certain payments of proceeds on the sale or redemption of
the Notes. 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
Notes are sold to (or through) a 'broker,' the broker may be required to
withhold 31 percent of the entire sales price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (it)
the seller provides, in the required manner, certain identifying information.
Such a sale must also be reported by the broker to the IRS, unless the broker
determines that the seller is an exempt recipient. The term 'broker' as defined
by Treasury Regulations includes all persons who, in the ordinary course of
their business, stand ready to effect sales made by others.
Any amount withheld under 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 NOTES
Portfolio Interest Exemption
A Non-U.S. Holder of Notes will generally, under the portfolio interest
exemption of the Code, not be subject to United States federal income taxes or
United States federal withholding tax, on payments of principal, premium, if
any, and interest (including original issue discount) on the Notes, provided
that (in the case of
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interest, including original issue discount) (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote, (ii) the Non-U.S. Holder
is not a controlled foreign corporation that is related to the Company through
stock ownership, (iii) such original issue discount or interest is not
effectively connected with a United States trade or business of the Non-U.S.
Holder and (iv) either (a) the beneficial owner of the Notes certifies to the
Company or its agent, under penalties of perjury, that it is a Non-U.S. Holder
and provides a completed IRS Form W-8 ('Certificate of Foreign Status') or (b) a
securities clearing organization, bank or other financial institution which
holds customers' securities in the ordinary course of its trade or business (a
'financial institution') and holds the Notes, certifies to the Company or its
agent, under penalties of perjury, that it has received Form W-8 from the
beneficial owner or that it has received from another financial institution a
Form W-8 and furnishes the payor with a copy thereof. If any of the situations
described in proviso (i), (ii) or (iv) of the preceding sentence do not exist,
interest on the Notes when received is subject to United States withholding tax
at the rate of 30% unless an income tax treaty between the United States and the
country of which the Non-U.S. Holder is a tax resident provides for the
elimination or reduction in the rate of United States federal withholding tax.
Final Treasury Regulations issued October 6, 1997 will provide alternative
methods for satisfying the certification requirement described in clause (iv)(a)
and (b). The final Treasury Regulations generally are to be effective for
payments made after December 31, 1998.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States and interest (including original issue discount) on the Note is
effectively connected with the conduct of such trade or business, such holder
will be exempt from United States federal withholding tax if such holder
delivers a properly completed Form 4224. Such holder will be subject to United
States federal income tax on such interest (including original issue discount)
and on any gain realized on the sale, exchange or other disposition of a Note in
the same manner as if it were a U.S. Holder. In addition, if such Non-U.S.
Holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% of its effectively connected earnings and profits for that taxable year,
unless it qualifies for a lower rate under an applicable income tax treaty.
Federal Estate Tax
Notes 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 excluded from the
individual's gross estate for the United States federal estate tax purposes and
will not be subject to United States federal estate tax if the nonresident
qualifies for the portfolio interest exemption (without regard to the
certification requirements) discussed above.
Sale of Notes
A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain realized in connection with the sale, exchange or
redemption of Notes, unless (i) (a) the gain is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States or,
(b) if a tax treaty applies, the gain is attributable to the 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, such holder is present in the United
States for 183 days or more in the taxable year of disposition and certain other
conditions are satisfied, or (iii) the Non-U.S. Holder is subject to tax
pursuant to provisions of the Code applicable to United States expatriates and
former residents.
Information Reporting and Backup Withholding
In general, there is no United States information reporting requirement or
backup withholding tax on payments to Non-U.S. Holders who provide the
appropriate certification described above regarding qualification for the
portfolio interest exemption from United States federal income tax for payments
of principal or interest (including original interest discount) on the Notes.
Payment by the Company of principal on, or payment by a United States
office of a broker of the proceeds of a sale of, Notes held by a Non-U.S. Holder
is subject to both backup withholding and information reporting unless the
beneficial owner provides a completed IRS Form W-8 which certifies under
penalties of perjury that
73
<PAGE>
such owner is a Non-U.S. Holder who meets all the requirements for exemption
from United States federal income tax on any gain from the sale, exchange or
retirement of the Notes.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of Notes 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. Non-U.S. Holders should
consult their tax advisors regarding the application of these rules to their
particular situations, the availability of an exemption therefrom and the
procedure for obtaining such an exemption, if available.
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 and 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 NOTES IN LIGHT OF ITS
PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. ACCORDINGLY, EACH PURCHASER
OR HOLDER OF THE NOTES 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 NOTES, INCLUDING THE APPLICATION AND EFFECT OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
LEGAL MATTERS
The validity of the Notes 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 of the Company.
EXPERTS
The consolidated financial statements of (i) the Company as of December 31,
1996 and 1997 and for the years ended December 31, 1996 and December 31, 1997,
and the ten months ended December 31, 1995, and (ii) Midcom as of and for the
year ended December 31, 1997, each of which is incorporated by reference into
this Prospectus have been audited by Grant Thornton LLP, independent certified
public accountants, to the extent and for the periods indicated in their reports
thereon. The financial statements of Midcom Communications, Inc. as of December
31, 1995 and December 31, 1996 and for each of the three years in the period
ended December 31, 1996, incorporated by reference into this Prospectus, have
been audited by Ernst & Young LLP, independent auditors, to the extent for the
periods indicated in their report thereon.
74
<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 Statement of Operations, Three Months Ended March 31, 1998...... F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Year Ended December 31, 1997........... F-4
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations............................... F-5
</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 statement of
operations for the three months ended March 31, 1998 gives effect to the Midcom
Asset Purchase, the Preferred Stock Placement and the 1998 Debt Placement, as if
they occurred as of January 1, 1998.
The Pro Forma Financial Statements do not purport to represent what the
Company's results of operations or financial condition would actually have been
had the Pro Forma Transactions in fact occurred on such date or to project the
Company's results of operations or financial condition for any future period or
date.
These pro forma financial statements should be read in conjunction with the
notes to the unaudited pro forma condensed consolidated financial statements.
The Pro Forma Financial Information gives effect to the Pro Forma
Transactions, including the Midcom Asset Acquisition, and relies upon the
historical financial statements of Midcom (which are incorporated by reference
into this Prospectus). Midcom's financial statements for the year ended December
31, 1997 (and, consequently, the Pro Forma Financial Information) include
Midcom's operations during the 10-month period in 1997 prior to Midcom's
bankruptcy filing in November 1997 and, therefore, do not accurately reflect the
state of the business actually acquired by the Company in January 1998. See Note
A to the Midcom Consolidated Financial Statements. In addition, one of the
significant assets acquired by the Company in the acquisition was Midcom's
customer base, all of whom now must be notified by the Company of the transfer
of their accounts to the Company and have the option to replace the Company as
their service provider. Although the Company expects that a significant number
of customers will elect to terminate their service and move to other carriers,
the Pro Forma Financial Information does not give effect to the loss of any
Midcom customers. Moreover, the Pro Forma Financial Information does not purport
to represent what the Company's results of operations or financial condition
would actually have been had the Midcom Asset Acquisition in fact occurred on
January 1, 1997 or to project the Company's results of operations or financial
condition for any future period or date. Although the Company believes the
assets it acquired from Midcom were purchased on attractive terms, the Company
believes that investors in any of the Securities offered hereby should not place
any reliance on the pro forma operating results contained in the Pro Forma
Financial Statements as they relate to Midcom.
F-2
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE 1998
PRO FORMA PREFERRED STOCK
THE FOR THE PLACEMENT
COMPANY, MIDCOM, MIDCOM AND THE 1998
HISTORICAL HISTORICAL(g) ASSET ACQUISITION DEBT PLACEMENT PRO FORMA
----------- ------------- ----------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues
Telecommunications services........ $ 35,487 $ 3,772 $ 39,259 $ $ 39,259
Information services............... 11,949 11,949 11,949
----------- ------------- ----------------- --------------- ----------
Total operating revenues............. 47,436 3,772 51,208 51,208
----------- ------------- ----------------- --------------- ----------
Operating expenses
Cost of services and products...... 42,775 3,321 46,096 46,096
Selling, general and administrative
expenses......................... 53,611 695 54,306 54,306
Depreciation and amortization...... 11,399 158 11,557 11,557
----------- ------------- ----------------- --------------- ----------
Total operating expenses............. 107,785 4,174 111,959 111,959
----------- ------------- ----------------- --------------- ----------
Operating loss................... (60,349) (402) (60,751) (60,751)
Other expenses
Interest expense................... (28,656) (28,656) (10,757)(e) (39,413)
Interest income.................... 4,928 -- 4,928 4,928
----------- ------------- ----------------- --------------- ----------
Loss from continuing operations
before income tax benefit.......... (84,077) (402) (84,479) (10,757) (95,236)
Income tax benefit................... 1,100 1,100 1,100
----------- ------------- ----------------- --------------- ----------
Loss from continuing operations...... (82,977) (402) (83,379) (10,757) (94,136)
Loss from discontinued operations.... (1,982) (1,982) (1,982)
----------- ------------- ----------------- --------------- ----------
Net loss............................. (84,959) (402) (85,361) (10,757) (96,118)
Less preferred stock dividends....... (8,198) -- (8,198) (2,994)(f) (11,192)
----------- ------------- ----------------- --------------- ----------
Net loss applicable to common stock
holders............................ $ (93,157) $ (402) $ (93,559) $ (13,751) $ (107,310)
----------- ------------- ----------------- --------------- ----------
----------- ------------- ----------------- --------------- ----------
Loss applicable to common stock per
share from continuing operations... $ (2.54) $ (2.55) $ (2.92)
Loss per share from discontinued
operations......................... (0.06) (0.06) (0.06)
----------- ----------------- ----------
Net loss applicable to common stock
per share.......................... $ (2.60) $ (2.61) $ (2.98)
----------- ----------------- ----------
----------- ----------------- ----------
Weighted average shares outstanding.. 35,899 35,899 72 35,971
----------- ----------------- --------------- ----------
----------- ----------------- --------------- ----------
</TABLE>
F-3
<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 1998
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) (49,590) (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-4
<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.
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
(e) 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,
1998, but not to include interest income earned on available cash.
(f) 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, 1998.
(g) The historical results of Midcom for the period January 1, 1998 through
January 21, 1998 is based pro-rata on the actual operating results of
the Midcom operations for the period January 22, 1998 through March 31,
1998.
F-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by the Company to the fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
'Section 145. Indemnification of officers, directors, employees and agents;
insurance.
(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under sections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because the person has
met the applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorney's fees) incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
II-1
<PAGE>
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to 'the corporation' shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to 'other enterprises' shall
include employee benefit plans; references to 'fines' shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to 'serving at the request of the corporation' shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner 'not
opposed to the best interests of the corporation' as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.'
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in a successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
* 5.1 -- Opinion of Graubard Mollen & Miller
12.1 -- Ratio of Earnings to Combined 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
*24.1 -- Powers of Attorney (included on the signature pages of this Registration Statement)
*99.1 -- Form of Letter of Transmittal for Exchange of Cash-Pay Notes
*99.2 -- Form of Letter of Transmittal for Exchange of Deferred Interest Notes
</TABLE>
- ------------------
* Previously filed
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the 'Calculation of
Registration Fee' table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM S-4 AND HAS DULY CAUSED THIS AMENDMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON THIS 6th DAY OF AUGUST, 1998.
WINSTAR COMMUNICATIONS, INC.
By: /s/William J. Rouhana, Jr.
_________________________________
William J. Rouhana, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
Chairman of the Board of Directors and August 6, 1998
- ------------------------------------------ Chief Executive Officer (and principal
William J. Rouhana, Jr. executive officer)
* President, Chief Operating Officer and August 6, 1998
- ------------------------------------------ Director
Nathan Kantor
* Vice Chairman of the Board of Directors August 6, 1998
- ------------------------------------------
Steven G. Chrust
* Executive Vice President and Chief August 6, 1998
- ------------------------------------------ Financial Officer (and principal accounting
Charles T. Dickson officer)
* Director August 6, 1998
- ------------------------------------------
Bert W. Wasserman
* Director August 6, 1998
- ------------------------------------------
William J. Vanden Heuvel
* Director August 6, 1998
- ------------------------------------------
Steven B. Magyar
* Director August 6, 1998
- ------------------------------------------
James I. Cash
</TABLE>
- ------------------
*By power of attorney
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
12.1 -- Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
23.1 -- Consent of Grant Thornton LLP
23.2 -- Consent of Grant Thornton LLP
23.3 -- Consent of Graubard Mollen & Miller (included in its opinion filed as Exhibit 5.1)
23.4 -- Consent of Ernst & Young LLP
</TABLE>
<PAGE>
EXHIBIT 12.1
WINSTAR COMMUNICATIONS, INC.
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
MONTHS
TEN MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED YEAR ENDED ENDED MARCH
YEAR ENDED FEBRUARY 28, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 MARCH 31, 31, 1998
--------------------------- ------------ ------------ --------------------- ------------ --------
1993 1994 1995 1995 1996 ACTUAL PRO FORMA 1997 ACTUAL
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Loss from continuing
operations before
income taxes........ $(4,594) $(8,205) $(7,226) $(16,094) $(82,713) $(245,507) $(418,901) (41,499) $(81,877)
Adjustments to
earnings:
Fixed charges, as
detailed below.... 674 915 900 8,063 38,520 85,324 160,819 12,382 29,989
Interest
capitalized....... -- -- -- -- (320) (4,200) (4,200 ) (1,050) (505)
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) $(30,167) $(52,393)
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
Fixed charges:
Interest expense.... $ 567 $ 793 $ 733 $ 7,715 $ 36,834 $ 77,257 $152,752 $ 10,798 $ 28,656
Capitalized
interest.......... -- -- -- -- 320 4,200 4,200 1,050 505
Portion of rental
expense which is
representative of
interest.......... 107 122 167 348 1,366 3,867 3,867 534 828
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
Total fixed
charges........... 674 915 900 8,063 38,520 85,324 160,819 12,382 29,989
Preferred stock
dividends............. 85 68 62 216 -- 5,879 45,806 -- 8,198
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
Combined fixed charges
and preferred stock
dividends............. $ 759 $ 983 $ 962 $ 8,279 $ 38,520 $ 91,203 $206,625 $ 12,382 $ 38,187
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
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) $(42,459) $(90,580)
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
------- ------- ------- ------------ ------------ --------- --------- ------------ --------
<CAPTION>
THREE
MONTHS
ENDED
MARCH
31, 1998
---------
PRO FORMA
---------
<S> <C>
Earnings:
Loss from continuing
operations before
income taxes........ $(95,236 )
Adjustments to
earnings:
Fixed charges, as
detailed below.... 40,746
Interest
capitalized....... (505 )
Extraordinary
item.............. --
Minority interest in
WinStar Gateway
Network........... --
---------
Earnings as
adjusted............ $(54,995 )
---------
---------
Fixed charges:
Interest expense.... $ 39,413
Capitalized
interest.......... 505
Portion of rental
expense which is
representative of
interest.......... 828
---------
Total fixed
charges........... 40,746
Preferred stock
dividends............. 11,192
---------
Combined fixed charges
and preferred stock
dividends............. $ 51,938
---------
---------
Deficiency in earnings
to cover combined
fixed charges and
preferred stock
dividends............. $(106,933)
---------
---------
</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
August 4, 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
August 4, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' in the
Registration Statement on Form S-4 and related Prospectus of Winstar
Communications Inc. for the registration of $200,000,000 of its 10% Senior
Subordinated Cash-Pay Exchange Notes Due 2008 and $250,000,000 of 11% Senior
Subordinated Deferred Interest Exchange Notes due 2008, and to the
incorporation by reference therein of our report dated March 21, 1997, with
respect to the consolidated financial statements and schedules of Midcom
Communications Inc. as of December 31, 1996 and 1995, and for each of the three
years in the period ended December 31, 1996, included in the Current Report on
Form 8-K/A of Winstar Communications Inc. dated February 5, 1998, filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Detroit, Michigan
August 4, 1998
