<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1998.
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ON
FORM S-4
------------------
WINSTAR COMMUNICATIONS, INC.
(Exact Name of Each Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
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
<TABLE>
<CAPTION>
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER NOTE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Series C 14 1/4% Senior Cumulative Exchangeable
Preferred Stock Due 2007 ("New Preferred
Stock")(1)...................................... 175,000 $1,000(2) $175,000,000 $51,625.00
14 1/4% Senior Subordinated Deferred Interest
Notes Due 2007(3)............................... -- -- -- --
Total............................................. $175,000,000 $51,625.00
</TABLE>
(1) The New Preferred Stock being registered hereby are being offered by WinStar
Communications, Inc. (the "Company"), in exchange for certain outstanding
shares of Old Preferred Stock.
(2) Represents the liquidation amount of each of the shares of Old Preferred
Stock for which the New Preferred Stock will be exchanged.
(3) These securities are issuable under certain circumstances in exchange for
the Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock.
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>
PROSPECTUS (SUBJECT TO COMPLETION)
DATED FEBRUARY 4, 1998
WINSTAR COMMUNICATIONS, INC.
OFFER TO EXCHANGE SHARES OF ITS
SERIES C 14 1/4% SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING SHARES OF
SERIES C 14 1/4% SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK DUE 2007
WinStar Communications, Inc. ("Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
letter of transmittal ("Letter of Transmittal") to exchange one share of its
Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock Due 2007 ("New
Preferred Stock") which has been registered under the Securities Act of 1933, as
amended ("Securities Act"), for each outstanding share of its Series C 14 1/4%
Senior Cumulative Exchangeable Preferred Stock Due 2007 ("Old Preferred Stock"
and, together with the New Preferred Stock, the "Exchangeable Preferred Stock"),
of which 175,000 shares having an aggregate liquidation preference of
$175,000,000 are outstanding as of the date hereof. The terms of the New
Preferred Stock are substantially identical in all material respects (e.g.,
aggregate liquidation preference, dividend rate, mandatory redemption and
ranking) to the terms of the Old Preferred Stock, except that the New Preferred
Stock has been registered under the Securities Act and therefore will not be
subject to certain transfer restrictions applicable to the Old Preferred Stock.
See "The Exchange Offer" and "Description of the Exchangeable Preferred Stock."
The Company will accept for exchange any and all shares of Old Preferred
Stock validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on , 1998 (such time and date, as it may be extended, being referred to
herein as the "Expiration Date"). Tenders of shares of Old Preferred Stock may
be withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum number of shares of Old Preferred Stock being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions. The Company will not receive any proceeds from the
Exchange Offer. See "The Exchange Offer."
The Exchange Offer is being made to satisfy certain obligations of the
Company under a registration rights agreement ("Registration Rights Agreement")
dated as of December 17, 1997 between the Company and the initial purchasers of
the Old Preferred Stock named therein (the "Initial Purchasers"). Following the
completion of the Exchange Offer, holders of shares of the Old Preferred Stock
not tendered in the Exchange Offer will not have any further registration rights
(except that the Company may be required to file a Shelf Registration Statement
(as defined) in certain limited instances) and such shares will continue to be
subject to restrictions on transfer. Accordingly, the liquidity of the market
for a holder's shares of Old Preferred Stock could be adversely affected if the
holder does not participate in the Exchange Offer. See "Risk Factors --
Consequences For Non-Tendering Holders of the Old Preferred Stock."
The Old Preferred Stock was originally issued and sold on December 22, 1997
in a transaction exempt from registration under the Securities Act in reliance
upon the exemptions provided by Rule 144A and by Section 4(2) of the Securities
Act (the "December 1997 Preferred Stock Placement"). Accordingly, the Old
Preferred Stock may not be reoffered, resold or otherwise pledged, hypothecated
or transferred in the United States unless so registered or unless an exemption
from the registration requirements of the Securities Act and applicable state
securities laws is available.
(CONTINUED ON FOLLOWING PAGE)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF OLD PREFERRED STOCK ON , 1998.
SEE "RISK FACTORS" ON PAGE 23 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD
BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 1998.
<PAGE>
(CONTINUATION OF COVER PAGE)
Each share of Exchangeable Preferred Stock has a liquidation preference of
$1,000 ("Liquidation Preference"). Dividends on the Exchangeable Preferred Stock
accrue from December 22, 1997 at the rate per share of 14 1/4% of the
Accumulated Amount (as defined) per annum, compounded semiannually on each June
15 and December 15, but will not be payable in cash, except as set forth in the
next sentence. Commencing on the first June 15 or December 15 (each a "Dividend
Payment Date") which is at least six months after the later of December 15,
2002, and the Specified Debt Satisfaction Date (as defined) (the "Cash Payment
Date"), dividends on the Exchangeable Preferred Stock will be payable in cash at
a rate per annum equal to 14 1/4% of the Accumulated Amount as of the Dividend
Payment Date preceding such date. In the event that the Specified Debt
Satisfaction Date shall not have occurred before December 15, 2002, the rate
otherwise applicable to the Exchangeable Preferred Stock shall be increased by
150 basis points from December 15, 2002, until the Dividend Payment Date falling
on or after the Specified Debt Satisfaction Date.
The Exchangeable Preferred Stock is not be redeemable prior to December 15,
2002. On or after December 15, 2002, the Exchangeable Preferred Stock is
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth herein plus accumulated and unpaid dividends, if any, to the
date of redemption. The Company is required to redeem the Exchangeable Preferred
Stock at the Liquidation Preference thereof, plus accumulated and unpaid
dividends, if any, on December 15, 2007, out of any funds legally available
therefor.
The Exchangeable Preferred Stock ranks (i) senior to all existing and future
Junior Stock (as defined), including the Series A Preferred Stock (as defined);
(ii) on a parity with all existing and future Parity Stock; and (iii) junior to
all future Senior Stock (as defined). In addition, as equity, the Exchangeable
Preferred Stock will rank junior in right of payment to all indebtedness of the
Company and its subsidiaries. See "Description of the Exchangeable Preferred
Stock." As of September 30, 1997, after giving effect to the October 1997 Debt
Placement (as defined), the US ONE Asset Acquisition (as defined), the December
1997 Preferred Stock Placement and the application of a portion of the proceeds
thereof to repay certain indebtedness, and the Midcom Acquisition (as defined),
the Company would have had approximately $890.7 million of indebtedness
(including approximately $359.7 million of outstanding indebtedness and other
liabilities, including trade payables, of the Company's subsidiaries).
On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, the Company may, at its option, exchange all but not less
than all of the shares of Exchangeable Preferred Stock then outstanding for
14 1/4% Senior Subordinated Deferred Interest Notes Due 2007 ("Exchange
Debentures") in an aggregate Accumulated Amount equal to the aggregate
Accumulated Amount of the shares of Exchangeable Preferred Stock outstanding at
the time of such exchange, plus accumulated and unpaid dividends to the date of
exchange. The issuance of the Exchange Debentures upon each exchange is
registered under the Securities Act pursuant to the Registration Statement of
which this Prospectus is a part. Until the Cash Payment Date, interest on the
outstanding Exchange Debentures, if any, will accrue at a rate of 14 1/4% of the
Accumulated Amount per annum and will be compounded semiannually on each June 15
and December 15 (each an "Interest Payment Date") but will not be payable in
cash except as set forth in the next sentence. Commencing on the first Interest
Payment Date following the later of the Exchange Date (as defined) or the Cash
Payment Date, interest will be payable in cash at a rate per annum equal to
14 1/4% of the Accumulated Amount as of the Exchange Date. The Exchange
Debentures, if issued, will be unsecured, senior subordinated obligations of the
Company, subordinated in right of payment to all Senior Indebtedness (as
defined) of the Company and to all indebtedness and other liabilities (including
trade payables) of the Company's subsidiaries, and will rank PARI PASSU with the
Company's existing 15% Senior Subordinated Deferred Interest Notes Due 2007 (the
"October 1997 Notes") and the Company's 14% Convertible Senior Subordinated
Discount Notes Due 2005 (the "Convertible Notes"). As of September 30, 1997,
after giving effect to the October 1997 Debt Placement, the US ONE Asset
Acquisition, the December 1997 Preferred Stock Placement and the application of
a portion of the proceeds thereof to repay certain indebtedness, and the Midcom
Acquisition, the Company would have had approximately $693.2 million of Senior
Indebtedness, and the Company's subsidiaries would have had approximately $101.4
million of outstanding liabilities (other than liabilities guaranteed by the
Company). The Exchange Debentures, if issued, will not be redeemable prior to
December 15, 2002. On or after December15, 2002, the Exchange Debentures will be
redeemable at the option of the Company, in whole or in part, at the redemption
prices set forth herein plus accrued and unpaid interest, if any, to the date of
redemption. See "Description of the Exchange Debentures."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") with respect to similar transactions set forth in
no-action letters issued to third parties unrelated to the Company, the
2
<PAGE>
(CONTINUATION OF COVER PAGE)
New Preferred Stock issued pursuant to the Exchange Offer in exchange for the
Old Preferred Stock may be offered for resale, resold and otherwise transferred
by holders thereof who are not "affiliates" of the Company (within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery requirements of the Securities Act; PROVIDED, HOWEVER,
that the New Preferred Stock is acquired in the ordinary course of the holders'
business, such holders have no arrangement or understanding with any person to
participate in any distribution (within the meaning of the Securities Act) of
the New Preferred Stock and neither the holders nor any other person is engaging
in or intends to engage in a distribution of the New Preferred Stock. Each
broker-dealer that receives New Preferred Stock for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Stock. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Preferred Stock received in exchange for Old Preferred Stock
where such Old Preferred Stock was acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale.
Prior to this Exchange Offer, there has been no public market for the
Exchangeable Preferred Stock. The Old Preferred Stock has traded on the Private
Offerings, Resale and Trading through Automated Linkages ("PORTAL") Market. If a
market for the New Preferred Stock should develop, the New Preferred Stock could
trade at prices higher or lower than their original offering price. The Company
does not currently intend to list the New Preferred Stock on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active public market for the New
Preferred Stock will develop. See "Risk Factors -- Absence of Public Market for
the Exchangeable Preferred Stock."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD PREFERRED STOCK IN ANY JURISDICTION
IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AVAILABLE INFORMATION...................................................................................... 4
INCORPORATION OF INFORMATION BY REFERENCE.................................................................. 5
PROSPECTUS SUMMARY......................................................................................... 6
RISK FACTORS............................................................................................... 23
THE EXCHANGE OFFER......................................................................................... 36
DESCRIPTION OF THE EXCHANGEABLE PREFERRED STOCK............................................................ 43
DESCRIPTION OF THE EXCHANGE DEBENTURES..................................................................... 58
DESCRIPTION OF OTHER CAPITAL STOCK......................................................................... 90
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS.................................................................. 93
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES............................................................... 97
PLAN OF DISTRIBUTION....................................................................................... 102
LEGAL MATTERS.............................................................................................. 103
EXPERTS.................................................................................................... 104
</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 Preferred Stock offered in
the Exchange Offer (and the Exchange Debentures issuable upon the exchange of
the Exchangeable Preferred Stock). For the purposes hereof, the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. In accordance with the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth in
the Registration Statement and the schedules and exhibits thereto. Each
statement made in this Prospectus concerning a document filed as an exhibit to
the Registration Statement is qualified in its entirety by reference to such
exhibit for a complete statement of its provisions. For further information
pertaining to the Company and the New Preferred Stock offered in the Exchange
Offer, reference is made to such Registration Statement, including the exhibits
and schedules thereto and the financial statements, notes and schedules filed as
a part thereof. The Registration Statement (and the exhibits and schedules
thereto) may be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 ("Washington Office"), or
at its regional offices at Citicorp Center, 500 West Madison Street, 14th Floor,
Chicago, Illinois 60661 ("Chicago Office"), and at Seven World Trade Center,
13th Floor, New York, New York 10048 ("New York Office"). Any interested party
may obtain copies of all or any portion of the Registration Statement and the
exhibits thereto at prescribed rates from the Public Reference Section of the
Commission at its Washington Office.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ("Exchange Act"), and in accordance with the Exchange Act,
the Company files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company with the Commission can be inspected and copied (at prescribed
rates) at the Commission's Washington Office, Chicago Office and New York
Office. In addition, reports, proxy statements and other information concerning
the Company can be inspected and copied at the offices of The Nasdaq Stock
Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Commission
maintains a Web site that contains certain reports, proxy and information
statements and other information relating to the Company, which the Company has
filed via the Commission's electronic data gathering and retrieval (EDGAR)
system. The Web site can be reached at http://www.sec.gov.
If the Company ceases to be subject to the informational reporting
requirements of the Exchange Act, the Company has agreed that, so long as any
Exchangeable Preferred Stock or Exchange Debentures are outstanding, it will
file with the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Exchange Act. The Company will supply Continental Stock Transfer & Trust
Company, as exchange agent ("Exchange Agent") and each holder of Exchangeable
Preferred Stock, or will supply to the Exchange Agent for forwarding to each
such holder, without cost to such holder, copies of such reports or other
information.
4
<PAGE>
INCORPORATION OF INFORMATION BY REFERENCE
The following documents or information have been filed by the Company with
the Commission pursuant to the Exchange Act and are incorporated herein by
reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1996;
(2) Current Report on Form 8-K filed January 17, 1997;
(3) Current Report on Form 8-K filed February 14, 1997;
(4) Current Report on Form 8-K filed February 27, 1997;
(5) Current Report on Form 8-K filed March 27, 1997;
(6) Quarterly Report on Form 10-Q for the three-month period ended March
31, 1997, as amended on June 10, 1997;
(7) Proxy Statement, dated May 15, 1997;
(8) Current Report on Form 8-K filed June 10, 1997;
(9) Quarterly Report on Form 10-Q for the six-month period ended June
30, 1997;
(10) Current Report on Form 8-K filed July 2, 1997;
(11) Current Report on Form 8-K filed September 11, 1997;
(12) Current Report on Form 8-K filed October 29, 1997;
(13) Current Report on Form 8-K filed October 31, 1997;
(14) Quarterly Report on Form 10-Q for the nine-month period ended
September 30, 1997;
(15) Current Report on Form 8-K filed December 24, 1997; and
(16) Current Report on Form 8-K filed January 30, 1998.
All documents subsequently filed by the Company with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed incorporated by reference into this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON THE WRITTEN OR ORAL
REQUEST OF SUCH PERSON TO WINSTAR COMMUNICATIONS, INC., 230 PARK AVENUE, SUITE
2700, NEW YORK, NEW YORK 10169 (TELEPHONE 212-584-4000), ATTENTION: INVESTOR
RELATIONS, A COPY OF ANY AND ALL OF THE DOCUMENTS REFERRED TO ABOVE (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS) WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS
PROSPECTUS. ALL SUCH DOCUMENTS CAN ALSO BE RETRIEVED FROM THE COMMISSION'S
ELECTRONIC DATA GATHERING AND RETRIEVAL (EDGAR) SYSTEM AT WWW.SEC.GOV.
5
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO
THE "COMPANY" OR "WINSTAR" REFER TO WINSTAR COMMUNICATIONS, INC. AND, WHERE
APPROPRIATE, ITS SUBSIDIARIES. WIRELESS FIBER(SM) IS A SERVICE MARK AND
WINSTAR-REGISTERED TRADEMARK- IS A TRADEMARK OF WINSTAR COMMUNICATIONS, INC.
THE COMPANY
The Company provides a full range of telecommunications services, including
local, long distance and Internet access services, as a competitive local
exchange carrier ("CLEC"). By exploiting its fiber-quality digital capacity in
the 38 GHz portion of the radio spectrum ("Wireless Fiber") and a switch-based
infrastructure, the Company seeks to distinguish itself as a facilities-based,
value-added provider of high-capacity telecommunications services to small and
medium-sized businesses and an attractive alternative to established providers,
such as the regional Bell operating companies ("RBOCs"). The Company introduced
its switch-based local exchange services to end users in New York City in
October 1996. The Company is offering local exchange services on a switched
basis and resale basis in Atlanta, Boston, Chicago, Dallas, Forth Worth, Los
Angeles, Newark, New York City, Orange County (California), San Diego and
Washington, D.C., and is offering local exchange services solely on a resale
basis in Milwaukee, Philadelphia, San Francisco and Stamford (Connecticut). The
Company's local exchange services include the provision of PBX trunks,
individual business lines and Centrex and Internet access, and provide customers
with full-feature services such as custom calling, caller ID, conference calling
and voice mail. During the next several years, the Company intends to introduce
its local exchange services in each of the other major metropolitan areas where
it is licensed to provide 38 GHz services over four or more 100 MHz channels.
Over time, the Company intends to carry a substantial majority of its local
telecommunications service traffic utilizing Wireless Fiber and its own switched
networks, unlike most fiber-based CLECs, which typically do not carry the
majority of their customer traffic over their own networks. The Company also
offers a variety of facilities-based broadband, high-capacity local access and
digital network services ("Carrier Services") to other telecommunications
service providers on a wholesale basis. The Company currently has more than 40
carrier customers, including, among others, Ameritech Cellular Services, MCI
Communications, Pacific Bell and Teleport Communications Group.
The Company is the holder of the largest amount of 38 GHz spectrum in the
United States and is utilizing this asset to build local telephone networks for
the transmission of voice, data and video traffic in the major metropolitan
areas covered by the Company's 38 GHz licenses (the "Wireless Licenses"). The
Wireless Licenses cover an aggregate of more than 125 cities with populations
exceeding 100,000 each, and encompass an aggregate population of approximately
180 million people and address more than 625 million channel pops (population
coverage multiplied by the number of 100 MHz channels). Furthermore, the
Wireless Licenses allow the Company to provide Wireless Fiber services in each
of the 50 most populated Metropolitan Statistical Areas ("MSAs") in the United
States. The Company has agreed to acquire certain additional 38 GHz licenses in
various transactions, subject to approval by the Federal Communications
Commission ("FCC"). Upon completion of these acquisitions, the Company's
Wireless Licenses will cover cities encompassing an aggregate population of over
185 million people and address more than 800 million channel pops. The Company
holds one or more Wireless Licenses in numerous markets which allow it to
provide Wireless Fiber services over four or more channels in such markets. The
Company believes that the utilization of multiple 38 GHz channels in a single
licensed area provides it with advantages over other providers of fixed wireless
local telecommunications services that possess fewer channels in their
respective portions of the radio spectrum, by allowing the Company to densely
deploy its Wireless Fiber services and build out city-wide networks of broadband
capacity.
The 38 GHz portion of the radio spectrum has characteristics well suited for
the provision of local telecommunications services, including:
6
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RAPID DEPLOYMENT OF ALTERNATIVE LOCAL INFRASTRUCTURE. 38 GHz technology
generally can be deployed considerably more rapidly than wireline (because of
permit procedures and construction time required for wireline buildout) and many
other wireless technologies (because of their infrastructure requirements and,
in many instances, the need to follow FCC frequency coordination procedures).
BROAD BANDWIDTH. The total amount of bandwidth for each 38 GHz channel is
100 MHz, which supports full broadband capability. For example, one 100 MHz 38
GHz channel can support transmission capacity of one DS-3 at 45 Mbps which can
transfer data at a rate that is over 750 times the rate of the fastest dial-up
modem currently in general use (56 Kbps) and over 350 times the rate of the
fastest ISDN line currently in general use (128 Kbps). Data transfer rates of a
38 GHz DS-3 channel even exceed the data transfer rates of cable modems (30
Mbps). Further, it is anticipated that the Company's commercial deployment of
multi-point facilities, planned to begin in 1998, will allow a single 38 GHz 100
MHz channel to support one OC-3 of capacity at 155 Mbps, which represents data
transfer rates that are three times faster than those provided by currently
deployed point-to-point technology. The broadband capacity of 38 GHz provides
improved speed and quality in transmissions, as compared to transmissions that
are carried over a "last mile" consisting of copper wire. In addition to
accommodating standard voice and data requirements, data transmission rates of
45 Mbps and higher allow end users to receive full-motion video and 3-D graphics
and to use highly interactive applications on the Internet and other networks.
EASE OF INSTALLATION. The equipment used for point-to-point applications in
38 GHz (i.e., antennae, transceivers and digital interface units) is typically
smaller, less obtrusive, less expensive, and uses less power than equipment used
for similar applications at most lower frequencies. These characteristics make
it relatively easier to obtain the roof rights ("Roof Rights") required to
install 38 GHz transceivers, and less costly to initiate 38 GHz-based services
as compared to most other wireless services.
EFFICIENT CHANNEL REUSE. Certain characteristics of 38 GHz, including the
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 the reuse of bandwidth capacity in a
licensed area. The ability to reuse capacity allows the 38 GHz license holder to
densely deploy its 38 GHz services in a given geographic area, provide services
to multiple customers over the same 38 GHz channel, and conserve bandwidth
capacity, thereby enhancing the types of services that can be provided and
increasing the number of customers to which such services can be provided.
BUSINESS STRATEGY
The Company's objective is to become the full-service telecommunications
provider of choice to small and medium-sized business customers and a provider
of high-quality alternative and broadband facilities to its Carrier Services
customers. Key elements of the Company's strategy are to:
EXPAND NETWORK INFRASTRUCTURE. The Company is creating an infrastructure on
a city-by-city basis using its Wireless Fiber capabilities, switches and other
telecommunications equipment acquired by the Company from equipment vendors and
facilities leased from other carriers to originate and terminate traffic.
Pursuant to its building-centric network plan, the Company is identifying
strategically located sites in each metropolitan area where it provides service
to serve as hubs for its network in that metropolitan area. These hub sites will
be connected via Wireless Fiber links to end users. The Company believes that a
limited number of hub sites (generally less than a dozen) in each metropolitan
area will allow it to address more than 70% of its targeted buildings and to
carry the majority of its customers' traffic on its own network instead of the
higher cost facilities of other carriers.
EXPLOIT FIRST-TO-MARKET ADVANTAGES. The Company seeks to capitalize on the
significant opportunities emerging in the industry as a result of the
Telecommunications Act of 1996 (the "Telecommunications Act") by exploiting a
"first-to-market" advantage as one of the few holders of 38 GHz licenses with an
established operating and management infrastructure. The Company believes that
its early entrance into
7
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its markets provides it with advantages over many potential competitors by
allowing it to: (i) establish a customer base prior to widespread competition
from other CLECs; (ii) develop a proven, reliable network infrastructure using
its own switching and transmission capabilities ahead of many other CLECs; (iii)
develop pioneering expertise in the utilization of 38 GHz for the delivery of
telecommunications and multimedia services and the design and management of 38
GHz-based networks; and (iv) acquire Roof Rights to place its 38 GHz antennae on
a large number of buildings on favorable terms and in advance of other wireless
service providers.
FOCUS ON SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS. The Company believes
there exists a substantial opportunity to attract a base of small and
medium-sized business customers by providing superior customer service and sales
support. The customer base initially targeted by the Company consists of
businesses typically located in buildings that have more than 100,000 square
feet of commercial space and which, in many instances, are not served by fiber
facilities provided by CLECs or competitive access providers ("CAPs"). The
Company estimates that there are more than 8,000 buildings in this target group,
populated by approximately 9.7 million workers using more than 2.1 million phone
lines. Over time, the Company intends to expand its target customer base to
include the majority of small and medium-sized businesses in the metropolitan
areas covered by the Wireless Licenses, which the Company estimates contain
approximately 60% of all such businesses in the United States and represent a
market opportunity in excess of $30 billion per year.
MARKET WIRELESS FIBER TO OTHER CARRIERS. The Company markets its Carrier
Services to other carriers such as the RBOCs and other local exchange carriers
("LECs"), interexchange carriers ("IXCs"), other CAPs and CLECs, providers of
personal communications services ("PCS") and cellular and specialized mobile
radio services ("CMRS") providers. The Company believes that its Carrier
Services present an attractive, economical method for telecommunications service
providers to add a high-capacity extension to their own networks and service
territories, especially as they seek rapidly to penetrate new markets opening as
a result of the Telecommunications Act. The Company's Carrier Services can also
provide cost-efficient route diversity where network reliability concerns
require multiple telecommunications paths.
MARKET WIRELESS FIBER SERVICES AS A SOLUTION TO GROWING CAPACITY
SHORTAGES. The Company believes that demand for its Wireless Fiber-based CLEC
and Carrier Services will grow because of the expanding volume of data
communications traffic resulting from increasing Internet usage and other
high-volume data transmission requirements. This type of traffic increasingly
requires high-capacity, end-to-end networks that are often difficult to provide
economically with older RBOC and LEC infrastructure.
PROVIDE INFORMATION AND CONTENT SERVICES. The Company believes that the
ability to deliver information and other content will become an increasingly
important factor in the choice of a telecommunications provider by businesses as
competition increases and the markets covered by the Wireless Licenses mature.
Accordingly, the Company actively seeks opportunities to utilize its information
and content assets and services to enhance the marketability of the Company's
telecommunications services.
DEVELOPMENT OF CORE ASSETS
The Company believes that in order to effectively compete with incumbent
LECs and other telecommunications service providers in its target markets, it
must develop a core group of assets, capabilities and resources. The Company has
made substantial progress in acquiring and developing these core assets, which
include:
TRANSMISSION AND SWITCHING FACILITIES. In October 1996, the Company
initiated local switched services in New York City, utilizing its first 5ESS
switch, purchased from Lucent Technologies, Inc. ("Lucent"), and facilities
leased from NYNEX. Since that time, the Company has initiated local switched
services in Boston, Chicago, Dallas, Fort Worth, Los Angeles, Newark, San Diego
and Washington, D.C. During the next three years, the Company intends to acquire
or install Lucent switches to serve most of its major
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markets. The Company has the necessary Roof Rights to install its Wireless Fiber
transmission facilities on more than approximately 2,200 buildings in its
licensed areas. The Company also has developed business and operational support
and network monitoring and management systems that will ensure the efficient use
of its networks and provide network reliability and transmission quality
equivalent to that provided by fiber-optic networks. The Company maintains a
network operations center ("NOC"), which is operating 24 hours a day, 7 days a
week, and is currently building a national field service force.
In October 1997, the Company purchased (the "US ONE Asset Acquisition") from
US ONE Communications Corp. and its subsidiaries, entities in bankruptcy
(collectively, "US ONE"), 12 Lucent switches, leased fiber-optic capacity in the
New York metropolitan area and certain related assets for a purchase price of
approximately $81.25 million in the form of (i) $61.25 million cash, paid at the
closing of the US ONE Asset Acquisition and (ii) $20 million, to be paid on the
effective date of US ONE's confirmed plan of reorganization in its pending
Chapter 11 bankruptcy case, in either cash or shares of the Company's common
stock, at the Company's discretion. The Company believes that the US ONE Asset
Acquisition will allow the Company to accelerate the city-by-city rollout of its
Wireless Fiber and switch based infrastructure, although there can be no
assurance of this.
The Company recently entered into an agreement with a manufacturer and is
negotiating with other manufacturers for the initial development and deployment
of equipment for use in local digital multi-point networks. A multi-point
network, also known as a point-to-multi-point or a multiple point-to-point
network, enables a single radio and antenna at a hub location to send and
receive unique transmissions to and from many remote radios located within a
cluster of buildings. The Company believes that the implementation of
multi-point network architecture will provide it with (i) substantially reduced
network deployment costs, (ii) more efficient spectrum utilization and reduced
operating and installation costs and (iii) an improved ability to tailor
spectrum allocation to address specific customer requirements ("bandwidth on
demand"). The Company began initial test deployment of multi-point technology
during the fourth quarter of 1997 and anticipates general deployment of this
technology during 1998.
STATE AUTHORIZATIONS. The Company has obtained authorization to operate as
a CLEC in 29 states and the District of Columbia and is in the process of
seeking authorization to operate as a CLEC in a number of additional
jurisdictions. The Company is authorized to provide its local access and other
Carrier Services as a CAP in 37 states and the District of Columbia and has
applications pending for such authorizations in a number of additional
jurisdictions.
SALES AND CUSTOMER SUPPORT ORGANIZATIONS. The Company is expending a
significant amount of time and capital to build a dedicated, responsive sales
and customer support organization in order to ensure that the people and systems
necessary to achieve customer satisfaction keep pace with a growing customer
base. The Company has a direct sales organization for its CLEC services,
currently consisting of approximately 400 people located in 16 major markets, a
broadband services sales group, currently consisting of approximately 30 people,
and a Carrier Services sales group, currently consisting of approximately 35
people.
INFORMATION SYSTEMS. The Company is investing significant capital
developing state-of-the-art information systems platforms directed toward the
accurate and flexible handling of the billing and customer satisfaction
requirements of a diverse customer base purchasing a variety of
telecommunications services. The Company believes that its information systems
allow it to provide customers with a level of service and responsiveness that
many other telecommunications services providers do not offer and that such
level of service will become a key factor in customers' choice of
telecommunications services providers as the market matures.
EXPERIENCED MANAGEMENT AND OPERATING PERSONNEL. The Company has assembled a
management team and hired operating personnel experienced in all areas of
telecommunications operations, including more than 250 former officers and
employees of MCI Communications and Sprint Corporation, as well as
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officers and employees from other established telecommunications companies. The
Company plans to hire additional experienced telecommunications marketing and
operations personnel as appropriate.
RECENT DEVELOPMENTS
DECEMBER 1997 PREFERRED STOCK PLACEMENT
In December 1997, the Company raised net proceeds of $168.3 million through
the sale and issuance of 175,000 shares of Old Preferred Stock in the December
1997 Preferred Stock Placement. The net proceeds of the December 1997 Preferred
Stock Placement were used to repay approximately $62 million of indebtedness
incurred in connection with the US ONE Asset Acquisition, as required pursuant
to the terms of such indebtedness, to fund the purchase price of the Midcom
Acquisition and for working capital and general corporate purposes.
GOODNET ACQUISITION
On January 12, 1998, pursuant to an agreement between the Company and
Telesoft Corp. ("Telesoft"), the Company acquired (the "GoodNet Acquisition")
Telesoft's Internet services subsidiary, commercially known as GoodNet
("GoodNet"), for a purchase price of approximately $22.0 million, consisting of
$3.5 million cash and 732,784 shares of common stock of the Company ("Common
Stock"). GoodNet is a national provider of Internet services, offering
high-capacity data communication services to high-bandwidth users including
Internet service providers, universities and colleges, large landlords, RBOCs,
cable television operators and value-added resellers, and dial-up Internet
access to consumers. GoodNet possesses a national network of multi-protocol
asynchronous transfer mode (ATM) switches, with points of presence in 27 cities
and more than 130 peering arrangements with other U.S. and foreign Internet
service providers.
GoodNet is now operated as part of the Company's new division, WinStar
Broadband Services ("WBS"), which was formed by the Company in December 1997 to
facilitate the Company's expansion into the growing data communications market.
WBS will develop the Company's presence in the areas of Internet services and
data transport; local area and wide area network professional services; and
network applications. The Company believes that GoodNet's and WBS's other data
communications service offerings will enhance the Company's ability to win and
retain business customers. The Company believes that by utilizing its broadband
local networks, WBS will be able to deliver broadband networking applications
and services to businesses that are currently unable to receive such service
offerings from their telecommunications providers.
MIDCOM ACQUISITION
On January 21, 1998, pursuant to an agreement between the Company and MIDCOM
Communications Inc. and its subsidiaries (collectively, "Midcom"), the Company
acquired substantially all of Midcom's assets and business (the "Midcom
Business") for a purchase price of approximately $92.0 million in cash (the
"Midcom Acquisition"). The Company anticipates, however, that its net costs for
the Midcom Acquisition will amount to less than $70 million after the expected
collection of approximately $20 million in accounts receivable acquired in the
transaction and the planned divestiture of two small business lines acquired in
the transaction. Midcom is an entity in bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code.
The Midcom Business is a provider of long distance voice and data
telecommunications services primarily to small and medium-sized businesses at
approximately 100,000 customer locations, most of which are in major
metropolitan areas of California, Florida, Illinois, New York, Ohio and
Washington. The Midcom Business services include basic "1 plus" and "800" long
distance, frame relay data transmission and dedicated private line. The Company
believes that the Midcom Acquisition will accelerate its expansion into the
growing data communications market, broaden its data transmission and long
distance
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service offerings and significantly enhance its direct sales and marketing
capabilities to its primary market of small and medium-sized businesses. As
reflected in the unaudited condensed consolidated financial statements included
elsewhere in this Prospectus, during the nine months ended September 30, 1997
and 1996, Midcom generated revenues of approximately $74.3 million and $124.6
million, respectively.
OTHER BUSINESSES
The Company has historically generated a significant portion of its revenues
from the resale of long distance services to residential customers. As part of
its CLEC service offerings, the Company is focusing on the sale of long distance
services to small and medium-sized businesses and is not currently marketing
such services to residential customers on an active basis.
Prior to the Company's entry into the telecommunications industry, it
marketed and distributed consumer products, including personal care and bath and
beauty products, through a nonstrategic subsidiary. That subsidiary continues to
sell such products, primarily to large retailers, mass merchandisers, discount
stores, department stores, national and regional drug store chains and other
regional retail chains. The Company expects to divest itself of this subsidiary
in the near future.
CORPORATE INFORMATION
The Company was incorporated under the laws of the State of Delaware in
September 1990, its principal office is located at 230 Park Avenue, New York,
New York 10169 and its telephone number is (212) 584-4000.
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SUMMARY OF THE EXCHANGE OFFER
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General......................... The Company is offering to exchange one share of New
Preferred Stock for each outstanding share of Old
Preferred Stock that was issued in the December 1997
Preferred Stock Placement. The terms of the New Preferred
Stock are substantially identical in all material respects
(e.g., liquidation preference, dividend rate, redemption
and ranking) to the terms of the Old Preferred Stock,
except that the New Preferred Stock has been registered
under the Securities Act and therefore will not be subject
to certain transfer restrictions applicable to the Old
Preferred Stock. The Exchange Offer satisfies the
registration obligations of the Company under the
Registration Rights Agreement. Holders that do not tender
all of their Old Preferred Stock will no longer have any
registration rights under the Registration Rights
Agreement (except that the Company may be required to file
a Shelf Registration Statement in certain limited
instances). See "The Exchange Offer" for a description of
the procedures for tendering Old Preferred Stock.
The Exchange Offer is not being made to, nor will be
accepted from, holders of Old Preferred Stock in any
jurisdiction in which this Exchange Offer or the
acceptance thereof would not be in compliance with the
securities laws of such jurisdiction.
Resale.......................... Based on an interpretation by the staff of the Commission
set forth in no-action letters issued to third parties,
the Company believes that the New Preferred Stock issued
pursuant to the Exchange Offer in exchange for Old
Preferred Stock may be offered for resale, resold and
otherwise transferred by any holder thereof (other than
broker-dealers, as set forth below) without compliance
with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Preferred
Stock is acquired in the ordinary course of such holder's
business and that such holder has no arrangement or
understanding with any person to participate in the
distribution of such New Preferred Stock. Each
broker-dealer that receives New Preferred Stock for its
own account in exchange for Old Preferred Stock that was
acquired as a result of market-making or other trading
activity must acknowledge that it will deliver a
prospectus in connection with any resale of New Preferred
Stock. The Letter of Transmittal states that by so
acknowledging and delivering a prospectus, such
broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from
time to time, may be used by such broker-dealer in
connection with resales of New Preferred Stock received in
exchange for Old Preferred Stock where such Old Preferred
Stock was acquired by such broker-dealer as a result of
market-making activities or other trading activities.
Expiration Date................. 5:00 p.m., New York City time, , 1998, unless the
Exchange Offer is extended, in which case the term
"Expiration Date" means
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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.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to customary conditions,
certain of which may be waived by the Company. It is not,
however, conditioned upon any minimum number of shares of
Old Preferred Stock being tendered. See "The Exchange
Offer -- Conditions to the Exchange Offer."
Procedures for Tendering Old
Preferred Stock............... Each holder of Old Preferred Stock wishing to accept the
Exchange Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail or
otherwise deliver the Letter of Transmittal, or a
facsimile thereof, together with the shares of Old
Preferred Stock to be exchanged and any other required
documentation to Continental Stock Transfer & Trust
Company, as Exchange Agent, at the address set forth
herein and therein. By executing a Letter of Transmittal,
each holder will represent to the Company that, among
other things, the New Preferred Stock acquired pursuant to
the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New
Preferred Stock, whether or not such person is the holder,
and that neither the holder nor any such other person has
any arrangement or understanding with any person to
participate in the distribution of such New Preferred
Stock.
Special Procedures for
Beneficial Owners............. Any beneficial owner whose Old Preferred Stock is
registered in the name of a broker, commercial bank, trust
company or other nominee, and who wishes to tender in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to tender on
such beneficial owner's behalf. If such beneficial owner
wishes to tender on his own behalf, such beneficial owner
must, prior to completing and executing the Letter of
Transmittal and delivering his Old Preferred Stock, either
make appropriate arrangements to register ownership of the
Old Preferred Stock in such owner's name or obtain a
properly completed bond power from the registered holder.
Beneficial owners should be aware that the transfer of
registered ownership may take considerable time and may
not be able to be completed prior to the Expiration Date.
Guaranteed Delivery
Procedures.................... Any beneficial owner whose shares of Old Preferred Stock
are not immediately available or who cannot otherwise
deliver their shares of Old Preferred Stock and a properly
completed Letter of Transmittal or any other documents
required by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date may tender their Old
Preferred Stock according to the guaranteed
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delivery procedures set forth in "The Exchange Offer --
Procedures for Tendering."
Acceptance of Old Preferred
Stock and Delivery of New
Preferred Stock............... Subject to certain conditions (as described more fully in
"The Exchange Offer -- Conditions to the Exchange Offer"),
the Company will accept for exchange any and all Old
Preferred Stock which are properly tendered in the
Exchange Offer and not withdrawn, prior to 5:00 p.m., New
York City time, on the Expiration Date. The New Preferred
Stock issued pursuant to the Exchange Offer will be
delivered as promptly as practicable following the
Expiration Date.
Withdrawal Rights............... Subject to the conditions set forth herein, tenders of Old
Preferred Stock may be withdrawn at any time prior to 5:00
p.m., New York City time on the Expiration Date. See "The
Exchange Offer -- Withdrawal of Tenders."
Certain Federal Income Tax
Considerations................ The exchange pursuant to the Exchange Offer does not
constitute a taxable exchange for federal income tax
purposes. Each share of New Preferred Stock will be
treated as having been originally issued at the time the
Old Preferred Stock exchanged therefor was originally
issued. However, holders should consult their own tax
advisors. See "Certain United States Federal Income Tax
Considerations."
Exchange Agent.................. Continental Stock Transfer & Trust Company, is serving as
Exchange Agent in connection with the Exchange Offer. For
information with respect to the Exchange Offer, the
telephone number for the Exchange Agent is (212) 509-4000.
Proceeds........................ The Company will not derive any proceeds from the Exchange
Offer.
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SEE "THE EXCHANGE OFFER," BELOW, FOR MORE DETAILED
INFORMATION CONCERNING THE TERMS OF THE EXCHANGE OFFER.
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THE NEW PREFERRED STOCK
The Exchange Offer applies to all outstanding shares of Old Preferred Stock.
The form and terms of the New Preferred Stock will be the same as the form and
terms of the Old Preferred Stock, except that the New Preferred Stock will be
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. Upon consummation of the Exchange Offer, the
New Preferred Stock will be treated as a single class with any Old Preferred
Stock that remain outstanding. Upon consummation of the Exchange Offer, the Old
Preferred Stock will not be entitled to certain registration rights under the
Registration Agreement. See "Description of the Exchangeable Preferred Stock."
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General........................... One share of Series C 14 1/4% Senior Cumulative
Preferred Stock Due 2007, registered for issuance under
the Securities Act (I.E., the New Preferred Stock), in
exchange for one share of outstanding Series C 14 1/4%
Senior Cumulative Preferred Stock (I.E., the Old
Preferred Stock).
Dividends......................... Dividends on the New Preferred Stock accrue from
December 22, 1997 at the rate per share of 14 1/4% of
the Accumulated Amount (as defined) per annum,
compounded semiannually on each June 15 and December 15,
but will not be payable in cash, except as set forth in
the next sentence. Commencing on the first June 15 or
December 15 (each a "Dividend Payment Date") which is at
least six months after the later of December 15, 2002,
and the Specified Debt Satisfaction Date (as defined)
(the "Cash Payment Date"), dividends on the New
Preferred Stock will be payable in cash at a rate per
annum equal to 14 1/4% of the Accumulated Amount as of
the Dividend Payment Date preceding such date. In the
event that the Specified Debt Satisfaction Date shall
not have occurred before December 15, 2002, the rate
otherwise applicable to the New Preferred Stock shall be
increased by 150 basis points from December 15, 2002,
until the Dividend Payment Date falling on or after the
Specified Debt Satisfaction Date.
Initial Liquidation Preference.... $1,000 per share.
Ranking........................... The New Preferred Stock ranks (i) senior to all existing
and future Junior Stock, including the Series A
Preferred Stock (as defined); (ii) on a parity with all
existing and future Parity Stock (including any
untendered shares of the Old Preferred Stock); and (iii)
junior to all future Senior Stock. In addition, as
equity, the New Preferred Stock will rank junior in
right of payment to all indebtedness of the Company and
its subsidiaries. As of September 30, 1997, after giving
effect to the October 1997 Debt Placement (as defined),
the US ONE Asset Acquisition, the December 1997
Preferred Stock Placement and the application of a
portion of the proceeds thereof to repay certain
indebtedness, and the Midcom Acquisition, the Company
would have had approximately $890.7 million of
indebtedness (including approximately $359.7 million of
outstanding indebtedness and other liabilities,
including trade payables, of
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the Company's subsidiaries). See "Description of the
Exchangeable Preferred Stock--Ranking."
Optional Redemption............... The New Preferred Stock will not be redeemable prior to
December 15, 2002. On or after December 15, 2002, the
New Preferred Stock will be redeemable at the option of
the Company, in whole or in part, at the redemption
prices set forth herein plus accumulated and unpaid
dividends, if any, to the date of redemption. See
"Description of the New Preferred Stock--Optional
Redemption."
Mandatory Redemption.............. On December 15, 2007, the Company will be required to
redeem the New Preferred Stock at a price equal to the
Accumulated Amount thereof plus accumulated and unpaid
dividends, if any, out of funds legally available
therefor.
Change of Control................. In the event of a Change of Control, the Company shall
offer to purchase all of the New Preferred Stock at a
purchase price equal to 101% of the aggregate
Accumulated Amount thereof, plus accumulated and unpaid
dividends, if any, to the date of purchase.
Voting Rights..................... Holders of the New Preferred Stock will have limited
voting rights, including (i) those required by law and
(ii) that holders of the outstanding shares of New
Preferred Stock voting together as a class with the
holders of any other series of preferred stock upon
which like rights have been conferred and are
exercisable, upon the failure of the Company (1) to pay
dividends for six or more Dividend Periods (as defined),
whether or not consecutive, (2) to satisfy any mandatory
redemption obligation with respect to the New Preferred
Stock, (3) to comply with the covenants set forth in the
Certificate of Designation (as defined) or (4) to comply
with certain covenants or make certain payments on
certain Indebtedness (as defined), will be entitled to
elect to the Board of Directors of the Company, the
lesser of (x) two additional members to the Board of
Directors or (y) that number of directors constituting
at least 25% of the members of the Board of Directors.
See "Description of the Exchangeable Preferred
Stock--Voting Rights."
Covenants......................... The Certificate of Designation for the New Preferred
Stock (the "Certificate of Designation") limits: (i) the
incurrence of additional debt by the Company and certain
of its subsidiaries, (ii) the payment of dividends on
capital stock of the Company and the purchase,
redemption or retirement of such capital stock, (iii)
certain investments, (iv) certain transactions with
affiliates and (v) certain consolidations, mergers and
transfers of assets. The Certificate of Designation also
prohibits certain restrictions on distributions from
certain subsidiaries. All of these limitations and
prohibitions, however, are subject to a number of
important qualifications. See "Description of the
Exchangeable Preferred Stock--Certain Covenants."
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Debt Restrictions................. The Company's existing debt instruments contain
provisions which restrict, and if a default under any
thereof exists, prohibit, redemption or repurchase of
the New Preferred Stock, including upon a Change of
Control or through the issuance of Exchange Debentures,
and the payment of cash dividends on the New Preferred
Stock. See "Risk Factors" and "Description of Certain
Indebtedness."
Exchange Feature.................. On any scheduled Dividend Payment Date following the
Specified Debt Satisfaction Date, the Company may, at
its option, exchange all but not less than all of the
shares of Exchangeable Preferred Stock then outstanding
for Exchange Debentures in an aggregate Accumulated
Amount equal to the aggregate Accumulated Amount of the
shares of New Preferred Stock outstanding at the time of
such exchange, plus accumulated and unpaid dividends to
the date of exchange.
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THE EXCHANGE DEBENTURES
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General........................... 14 1/4% Senior Subordinated Deferred Interest Notes Due
2007 issuable in exchange for the Exchangeable Preferred
Stock in an aggregate Accumulated Amount equal to the
Accumulated Amount of the Exchangeable Preferred Stock,
plus accumulated and unpaid dividends to the date of
exchange.
Maturity.......................... December 15, 2007.
Interest.......................... Until the Cash Payment Date, interest on the Exchange
Debentures will accrue at a rate of 14 1/4% of the
Accumulated Amount per annum and will be compounded
semiannually on each June 15 and December 15 (each an
"Interest Payment Date") but will not be payable in cash
except as set forth in the next sentence. Commencing on
the first Interest Payment Date following the later of
the Exchange Date (as defined) or the Cash Payment Date,
interest will be payable in cash at a rate per annum
equal to 14 1/4% of the Accumulated Amount as of the
Exchange Date.
Ranking........................... The Exchange Debentures, if issued, will be unsecured,
senior subordinated obligations of the Company,
subordinated in right of payment to all Senior
Indebtedness of the Company and to all indebtedness and
other liabilities (including trade payables) of the
Company's subsidiaries, and will rank pari passu with
the October 1997 Notes and the Convertible Notes. As of
September 30, 1997, after giving effect to the October
1997 Debt Placement, the US ONE Asset Acquisition, the
December 1997 Preferred Stock Placement and the
application of a portion of the proceeds thereof to
repay certain indebtedness, and the Midcom Acquisition,
the Company would have had approximately $693.2 million
of Senior Indebtedness, and the Company's subsidiaries
would have had approximately $101.4 million of
outstanding liabilities (other than liabilities
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guaranteed by the Company). See "Description of the
Exchange Debentures--Ranking."
Optional Redemption............... The Exchange Debentures, if issued, will not be
redeemable prior to December 15, 2002. On or after
December 15, 2002, the Exchange Debentures are
redeemable at the option of the Company, in whole or in
part, at the redemption prices set forth herein plus
accrued and unpaid interest, if any, to the date of
redemption. See "Description of the Exchange
Debentures-- Optional Redemption."
Change of Control................. In the event of a Change of Control, the Company shall
offer to purchase all outstanding Exchange Debentures at
a price equal to 101% of the aggregate Accumulated
Amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase. See "Description of the
Exchange Debentures--Change of Control."
Restrictive Covenants............. The indenture under which the Exchange Debentures will
be issued (the "Exchange Indenture") will limit (i) the
incurrence of additional debt by the Company and certain
of its subsidiaries, (ii) the payment of dividends on
capital stock of the Company and the purchase,
redemption or retirement of capital stock or
indebtedness which ranks junior to the Exchange
Debentures, (iii) investments, (iv) certain transactions
with affiliates, (v) sales of assets, including capital
stock of subsidiaries and (vi) certain consolidations,
mergers and transfers of assets. The Exchange Indenture
will also prohibit certain restrictions on distributions
from certain subsidiaries. All of these limitations and
prohibitions, however, are subject to a number of
important qualifications. See "Description of the
Exchange Debentures--Certain Covenants."
Senior Debt Restrictions.......... The Company's debt instruments contain provisions which
substantially restrict the redemption or repurchase of
the Exchange Debentures.
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RISK FACTORS
See "Risk Factors" commencing on page 23 hereof for a discussion of certain
risks that should be considered in connection with an investment in the New
Preferred Stock.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
THE COMPANY
The summary financial data presented below for the year ended February 28,
1995, the ten months ended December 31, 1995 and the year ended December 31,
1996 have been derived from the Company's audited Consolidated Financial
Statements incorporated by reference in this Prospectus from the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, reclassified to
reflect the operations of WinStar Global Products, Inc. ("Global Products"), the
Company's merchandising subsidiary, as a discontinued operation. The summary
financial data for the nine months ended September 30, 1996 and 1997 have been
derived from the unaudited Condensed Consolidated Financial Statements and notes
thereto incorporated by reference in this Prospectus from the Company's
Quarterly Report on Form 10-Q for the nine months ended September 30, 1997. In
the opinion of management, the unaudited Consolidated Financial Statements have
been prepared on the same basis as the audited Consolidated Financial Statements
and include all adjustments, which consist only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for the period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED
TEN MONTHS DECEMBER 31, 1996 -------------------------------
YEAR ENDED ENDED -------------------- 1997
FEBRUARY 28, DECEMBER 31, PRO 1996 1997 PRO
1995 1995 ACTUAL FORMA(1) ACTUAL ACTUAL FORMA(1)
------------- ------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Telecommunications...................... $ 14,909 $ 13,137 $ 33,969 $ 181,258 $ 27,957 $ 23,910 $ 98,249
Information services.................... 473 2,648 14,650 14,650 7,479 25,693 25,693
------------- ------------- --------- --------- --------- --------- ---------
Total net sales....................... 15,382 15,785 48,619 195,908 35,436 49,603 123,942
Operating income (loss):
Telecommunications...................... (4,984) (7,288) (43,698) (148,403) (21,746) (105,982) (175,067)
Information services.................... (157) 217 (1,409) (1,409) (563) (2,632) (2,632)
General corporate....................... (944) (3,861) (11,373) (11,373) (8,749) (15,661) (15,661)
------------- ------------- --------- --------- --------- --------- ---------
Total operating loss.................. (6,085) (10,932) (56,480) (161,185) (31,058) (124,275) (193,360)
Interest expense.......................... (375) (7,186) (36,748) (101,619) (26,695) (53,074) (78,667)
Interest income........................... 343 2,890 10,515 3,746 8,342 11,052 7,891
Other (expenses) income, net.............. (1,109) (866) -- -- -- 2,219 2,219
------------- ------------- --------- --------- --------- --------- ---------
Net loss from continuing operations....... (7,226) (16,094) (82,713) (259,058) (49,411) (164,078) (261,917)
Net (loss) income from discontinued
operations(2)........................... (4) 237 (1,010) (1,010) (616) (1,977) (1,977)
------------- ------------- --------- --------- --------- --------- ---------
Net loss.................................. (7,230) (15,857) (83,723) (260,068) (50,027) (166,055) (263,894)
Preferred stock dividends................. -- -- -- (31,826) -- (3,881) (23,682)
------------- ------------- --------- --------- --------- --------- ---------
Net loss applicable to common stock....... $ (7,230) $ (15,857) $ (83,723) $(291,894) $ (50,027) $(169,936) $(287,576)
------------- ------------- --------- --------- --------- --------- ---------
------------- ------------- --------- --------- --------- --------- ---------
Net loss per share from continuing
operations.............................. $ (0.42) $ (0.71) $ (2.96) $ (9.23) $ (1.79) $ (5.10) $ (8.67)
Net (loss) income per share from
discontinued operations................. -- 0.01 (0.04) (0.03) (0.02) (0.06) (0.06)
------------- ------------- --------- --------- --------- --------- ---------
Net loss per common share outstanding..... $ (0.42) $ (0.70) $ (3.00) $ (9.26) $ (1.81) $ (5.16) $ (8.73)
Weighted average common shares
outstanding............................. 17,122 22,770 27,911 31,506 27,691 32,923 32,923
OTHER FINANCIAL DATA:
Ratio of earnings from continuing
operations to combined fixed charges and
preferred stock dividends(3)............ -- -- -- -- -- -- --
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
<S> <C> <C>
ACTUAL PRO FORMA(4)
---------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...................................... $ 302,769 $ 410,870
Property and equipment, net............................................................ 155,025 215,802
Total assets........................................................................... 719,964 1,007,402
Current portion of long-term debt and capital lease obligations........................ 8,577 8,577
Long-term debt and capital lease obligations, less current portion..................... 675,991 775,991
Redeemable Preferred Stock............................................................. -- 175,000
Common and preferred stock and additional paid-in capital.............................. 253,024 246,362
Stockholders' equity (deficit)......................................................... (38,065) (45,802)
</TABLE>
- ------------------------
(1) Gives effect to (a) the acquisition of Milliwave Limited Partnership
completed in January 1997, (b) an institutional private placement of $100
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"), (c) a private
placement in March 1997 ("March 1997 Debt Placement") of $100 million
14 1/2% Senior Deferred Interest Notes Due 2005 of the Company ("1997 Senior
Notes") and $200 million 12 1/2% Guaranteed Senior Secured Notes Due 2004 of
WinStar Equipment Corp. ("WEC"), a wholly owned subsidiary of the Company
("WEC Notes"), (d) 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 million aggregate principal amount of its 12%
Guaranteed Senior Secured Notes Due 2004 (the "WEC II Notes" and, together
with the 1997 Senior Notes, October 1997 Notes and WEC Notes, the "1997
Notes"), (e) a private placement in October 1997 of $100 million October
1997 Notes ("October 1997 Debt Placement"), (f) the US ONE Asset
Acquisition, (g) the December 1997 Preferred Stock Placement (including
$19.1 million and $25.8 million of dividends on the Series C Preferred Stock
in the nine months ended September 30, 1997 and year ended December 31,
1996, respectively) and the application of the net proceeds therefrom to
working capital, and (h) the Midcom Acquisition, each as if they occurred as
of the beginning of the respective period. Interest expense has been (a)
increased to include approximately $31.0 million and $72.5 million of
interest on such debt and amortization of debt offering costs and other
related fees in the nine months ended September 30, 1997 and the year ended
December 31, 1996, respectively, but not to include interest income earned
on additional available cash and (b) reduced by approximately $5.4 million
and $7.6 million for the nine months ended September 30, 1997 and the year
ended December 31, 1996, respectively to reflect the repayment of
approximately $62 million for the US ONE Asset Acquisition. Since the
Milliwave Acquisition was completed on January 2, 1997, its operations are
reflected in the historical results of the Company for the nine month period
ended September 30, 1997. See "Description of Certain Indebtedness and Other
Preferred Stock" and "Description of Exchangeable Preferred Stock."
Depreciation expense has been adjusted to include approximately $4.8 million
and $6.4 million, respectively, 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.
(2) Such loss or income is from the operations of Global Products, the Company's
consumer products subsidiary. On May 13, 1997, a formal plan of disposition
for Global Products was approved by the Company's Board of Directors, and it
is anticipated that the disposition will be completed within the next 12
months. The disposition of Global Products has been accounted for as a
discontinued operation and, accordingly, its net assets have been segregated
from continuing operations in the balance sheet data, and its operating
results through September 30, 1997 are segregated and reported as
discontinued operations in the statement of operations data.
20
<PAGE>
(3) For the year ended February 28, 1995, the ten months ended December 31,
1995, the year ended December 31, 1996 and the nine months ended September
30, 1996 and 1997, earnings from continuing operations were insufficient to
cover combined fixed charges and dividends on the Company's Series A and
Series C Preferred Stock by approximately $7.3 million, $16.3 million, $83.0
million, $49.4 million and $169.2 million, respectively. On a pro forma
basis, giving effect to the items described in footnote (1) above, earnings
from continuing operations were insufficient to cover combined fixed charges
and dividends on preferred stock by $286.8 million, for the nine months
ended September 30, 1997 and the year ended December 31, 1996 by $291.2
million, 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.
(4) Gives effect to the October 1997 Debt Placement and the US ONE Asset
Acquisition, as well as the consummation of the December 1997 Preferred
Stock Placement and the application of a portion of the net proceeds thereof
to repay approximately $62 million in indebtedness incurred in connection
with the US ONE Asset Acquisition, as well as the Midcom Acquisition as if
each had occurred on September 30, 1997.
MIDCOM
The summary consolidated financial and operating data presented below for
the years ended December 31, 1994, 1995 and 1996 have been derived from Midcom's
Audited Consolidated Financial Statements included elsewhere in this Prospectus.
The summary financial data for the nine months ended September 30, 1996 and 1997
have been derived from the unaudited Condensed Consolidated Financial Statements
and notes thereto included elsewhere in this Prospectus. In the opinion of
management, the unaudited Consolidated Financial Statements have been prepared
on the same basis as the audited Consolidated Financial Statements and include
all adjustments, which consist only of normal recurring adjustments, necessary
for a fair presentation of the results of operations for the period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER SEPTEMBER 30,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................. $ 111,699 $ 203,554 $ 148,777 $ 124,590 $ 74,339
Operating income (loss)............................. 824 (23,673) (88,670) (71,255) (61,639)
Net loss(1)......................................... (3,029) (33,418) (97,319) (77,420) (69,549)
Net loss per share.................................. $ (0.31) $ (2.76) $ (6.27) $ (5.01) $ (4.51)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................... $ 1,532
Total assets................................................................................. 58,192
Short Term portion of Notes payable, line of credit and capital lease obligations, including
Current portion of long-term obligations................................................... 149,107
Long-term obligations, less current portion.................................................. --
Shareholders' deficit........................................................................ $ (144,715)
</TABLE>
- ------------------------
(1) Includes $3.0 million of original issue discount and $1.1 million of
deferred financing costs written off as extraordinary items in the third and
fourth quarters of 1995, respectively.
21
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference herein contain
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations and business of the Company. These forward-looking statements
involve certain risks and uncertainties. No assurance can be given that any of
such matters will be realized. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following: (a) the Company's ability to service its debt or to
obtain financing for the buildout of its telecommunications network; (b) the
Company's ability to attract and retain a sufficient revenue-generating customer
base; (c) competitive pressures in the telecommunications industry; and (d)
general economic conditions. For further information and other factors which
could affect the financial results of the Company and such forward-looking
statements, see "Risk Factors."
22
<PAGE>
RISK FACTORS
THE NEW PREFERRED STOCK OFFERED HEREBY HAS THE SAME TERMS AND CONDITIONS AS
THE OLD PREFERRED STOCK AND, ACCORDINGLY, INVOLVES A HIGH DEGREE OF RISK. EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
RELATING TO BOTH THE OLD PREFERRED STOCK AND THE NEW PREFERRED STOCK.
HISTORICAL AND ANTICIPATED FUTURE NET AND OPERATING LOSSES AND NEGATIVE EBITDA
The Company has incurred significant operating and net losses attributable
in substantial part to the development of its telecommunications businesses. The
Company historically has had net losses and negative EBITDA, including net
losses and negative EBITDA of approximately $15.9 million and $9.9 million,
respectively, for the ten months ended December 31, 1995, $83.7 million and
$52.0 million, respectively, for the year ended December 31, 1996 and $166.1
million and $108.8 million, respectively, for the nine months ended September
30, 1997. On a pro forma basis, after giving effect to the Milliwave
Acquisition, the issuance of the Series A Preferred Stock, the 1997 Notes, the
US ONE Asset Acquisition, the December 1997 Preferred Stock Placement and the
application of a portion of the proceeds therefrom to working capital, and the
Midcom Acquisition, the Company would have net losses and negative EBITDA of
$260.1 and $110.4, respectively, for the year ended December 31, 1996, and
$263.9 and $156.8, respectively for the nine months ended September 30, 1997.
The Company has been offering local access and other Carrier Services only since
December 1994, and local exchange services as a CLEC only since April 1996, and
has made and is making significant expenditures in the development of its local
telecommunications operations, including expenditures associated with
establishing an operating infrastructure and introducing and marketing its
telecommunications services. The Company expects to continue to experience
significant and increasing operating losses, net losses and total and per share
amounts of net loss, along with decreasing net current assets, and to generate
increasingly negative EBITDA while it seeks to establish a sufficient
revenue-generating customer base and build its network infrastructure so that it
can provide services over its own facilities. As a result of increased expenses,
principally relating to an increase in the number of employees in connection
with the rollout of CLEC services and expenses relating to the servicing of
debt, there will continue to be substantial increases in the Company's net loss,
operating loss and negative EBITDA. There can be no assurance that the Company
will achieve or sustain positive EBITDA or profitability or at any time have
sufficient financial resources to make principal and interest payments on its
outstanding debt, or cash dividend payments on the Exchangeable Preferred Stock
or to redeem such Exchangeable Preferred Stock as required (or to service the
debt requirements of the Exchange Debentures, should same be issued in exchange
for the Exchangeable Preferred Stock). Further, the failure of the Company to
achieve and sustain profitability would have a material adverse effect on the
Company and the value of the Exchangeable Preferred Stock.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS AND TO COVER FIXED
CHARGES
As of September 30, 1997, after giving effect to the consummation of the
October 1997 Debt Placement, the US ONE Asset Acquisition, the December 1997
Preferred Stock Placement and the application of a portion of the proceeds
thereof to the payment of certain indebtedness and the Midcom Acquisition, the
Company would have had, on a consolidated basis, approximately $890.7 million of
indebtedness, including capitalized lease obligations. The accrual of interest
on the 1997 Notes and the accretion of original issue discount on the
Convertible Notes and the Company's outstanding 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 (except to
the extent that the Convertible Notes are converted into the Company's Common
Stock). The Company has significant indebtedness and interest expense as a
result of the issuance of the 1997 Notes and 1995 Notes (collectively, the
"Notes"). The Company also may need to incur additional indebtedness in the
future. The respective indentures pursuant to which the Notes were issued
(collectively, the "Indentures") limit, but do not prohibit, the incurrence of
additional indebtedness by the Company and its subsidiaries. Additionally, the
Indentures do
23
<PAGE>
not limit the amount of indebtedness that may be incurred by the Company's new
media and consumer products subsidiaries.
The level of the Company's indebtedness could have important consequences,
including the following: (i) the combined debt service requirements of the Notes
could make it more difficult for the Company to make payments on the
Exchangeable Preferred Stock; (ii) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (iii) 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; (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; and (vii) a substantial portion of the Company's indebtedness will
mature in accordance with its terms prior to the date of mandatory redemption of
the Exchangeable Preferred Stock. The Company anticipates that earnings will be
insufficient to cover fixed charges and preferred stock dividends for the next
several years. In order for the Company to meet its debt service obligations,
and its redemption obligations with respect to the Exchangeable 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 meets its debt service obligations or its redemption
obligations with respect to the Exchangeable Preferred Stock. In the absence of
such operating results, the Company could face substantially 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.
ABILITY TO PAY DIVIDENDS ON AND REDEEM THE EXCHANGEABLE PREFERRED STOCK AND
ISSUE EXCHANGE DEBENTURES
The ability of the Company to pay any dividends is subject to applicable
provisions of state law, and its ability to pay cash dividends is subject to the
terms of the Indentures and any other indebtedness of the Company then
outstanding. The terms of the Indentures currently prohibit the Company from
paying cash dividends on any preferred stock, including the Exchangeable
Preferred Stock offered hereby and the Series A Preferred Stock. The ability of
the Company in the future to pay cash dividends on the Exchangeable Preferred
Stock or the Series A Preferred Stock will depend on its meeting certain
financial criteria, which in turn will require significant improvements in the
Company's EBITDA and consolidated net worth. There can be no assurance that the
Company will be able to meet such financial criteria in order to pay cash
dividends on the Exchangeable Preferred Stock or the Series A Preferred Stock.
See "Description of Certain Indebtedness." Further, the terms of the
Exchangeable Preferred Stock provide that cash payments on the Exchangeable
Preferred Stock will not be made by the Company until all currently outstanding
indebtedness of the Company has been repaid. Moreover, under Delaware law the
Company is permitted to pay dividends on its capital stock, including the
Exchangeable Preferred Stock, only out of its surplus, or in the event that it
has no surplus, out of its net profits for the year in which a dividend is
declared or for the immediately preceding fiscal year. Surplus is defined as the
excess of a company's total assets over the sum of its total liabilities plus
the par value of its outstanding capital stock. In order to pay dividends in
cash, the Company must have surplus or net profits equal to the full amount of
the cash dividends at the time such dividend is declared. The Company cannot
predict what the value of its assets or the amount of its liabilities will be in
the future and, accordingly, there can be no assurance that the Company will be
able to pay cash dividends on the Exchangeable Preferred Stock.
In addition, the terms of the Indentures restrict the ability of the Company
to redeem or repurchase the Exchangeable Preferred Stock, including pursuant to
the covenants described under "Description of the Exchangeable Preferred
Stock--Repurchase of Exchangeable Preferred Stock Upon a Change of
24
<PAGE>
Control" and "--Limitation on Asset Sales." The ability of the Company to redeem
or repurchase the Exchangeable Preferred Stock will depend on its meeting
certain financial criteria, which in turn will require significant improvements
in the Company's EBITDA and consolidated net worth.
The terms of the Exchangeable Preferred Stock provide that the Company may
not issue the Exchange Debentures in exchange for the Exchangeable Preferred
Stock until the date on which all obligations under the Indentures have been
satisfied. The Company's obligations under the Indentures are not scheduled to
be fully satisfied until 2007. There can be no assurance that the Company will
be able to retire or refinance such obligations prior to 2007. Furthermore, the
ability of the Company to issue the Exchange Debentures is currently limited by
the terms of the Indentures.
RISKS ASSOCIATED WITH RAPID EXPANSION AND ACQUISITIONS
The Company intends to pursue a strategy of aggressive and rapid growth,
including the accelerated rollout of its CLEC services, acquisitions of
businesses and assets, including additional spectrum licenses, continued
marketing of its Carrier Services, and the hiring of additional management,
technical and marketing personnel, all of which will result in significantly
higher operating expenses. Rapid expansion of the Company's operations may place
a significant strain on the Company's management, financial and other resources.
The Company's ability to manage future growth, should it occur, will depend upon
its ability to monitor operations, control costs, maintain effective quality
controls and significantly expand the Company's internal management, technical,
information and accounting systems. Any failure to expand these areas and to
implement and improve such systems, procedures and controls in an efficient
manner at a pace consistent with the growth of the Company's business could have
a material adverse effect on the business, financial condition and results of
operations of the Company and the value of the Exchangeable Preferred Stock. 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 acquired assets from three entities, two of which,
U.S. ONE and Midcom, were in bankruptcy at the time of acquisition. There can be
no assurance that the Company will be able to exploit the assets of Midcom and
US ONE with more success than their previous managements or that the assets of
any of the three entities can be effectively integrated into the Company's other
operations, or that the Company will realize the benefits it expects to achieve
through the businesses purchased in the Midcom Acquisition and GoodNet
Acquisition. Moreover, the Company expects that a portion of Midcom's customers
and independent sales agents may elect 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 Federal Communications
Commission (the "FCC") and the assignment of Midcom's existing letters of
authorization to provide interexchange services may be subject to approval by
government regulators, customers and competing IXCs. In the event that the FCC
determines that the Company engaged in improper practices in converting such
customers and codes, the FCC may impose substantial penalties on the Company.
RANKING OF THE EXCHANGEABLE PREFERRED STOCK
The Company's obligations with respect to the Exchangeable Preferred Stock
do not constitute indebtedness for borrowed money and rank junior in right of
payment to all present and future indebtedness and other payment obligations of
the Company and its subsidiaries and all future Senior Stock. Further, the
claims of creditors of the Company's subsidiaries will be effectively senior to
all payments,
25
<PAGE>
including dividends and redemption, on the Exchangeable Preferred Stock. As of
September 30, 1997, after giving effect to the October 1997 Debt Placement, the
US ONE Asset Acquisition, the December 1997 Preferred Stock Placement and the
application of a portion of the proceeds thereof to the repayment of certain
indebtedness, and the Midcom Acquisition and GoodNet Acquisition, the Company
would have had approximately $890.7 million of indebtedness (including
capitalized lease obligations and approximately $359.7 million of outstanding
indebtedness and other liabilities, including trade payables, of the Company's
subsidiaries), all of which would have been senior in right of payment to the
Exchangeable Preferred Stock. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Exchangeable Preferred Stock only after all indebtedness
of the Company and all Senior Stock, if any, has been paid, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Exchangeable
Preferred Stock then outstanding. See "Description of the Exchangeable Preferred
Stock -- Ranking."
SUBORDINATION OF THE EXCHANGE DEBENTURES
The payment of principal, premium, if any, and interest on or any other
amounts owing in respect of, the Exchange Debentures, if issued in exchange for
the Exchangeable Preferred Stock, will be subordinated to the prior payment in
full of all existing and future Senior Indebtedness, and will be effectively
subordinated to all indebtedness and other liabilities (including trade
payables) of the Company's subsidiaries. As of September 30, 1997, after giving
effect to the October 1997 Debt Placement, the US ONE Asset Acquisition, the
December 1997 Preferred Stock Placement and the application of a portion of the
proceeds therefrom to the repayment of certain indebtedness and the Midcom
Acquisition, the Company would have had approximately $693.2 million of Senior
Indebtedness, and the Company's subsidiaries would have had approximately $101.4
million of outstanding liabilities (other than liabilities guaranteed by the
Company). The Certificate of Designation and the Exchange Indenture permit the
incurrence by the Company and its subsidiaries of additional indebtedness. In
addition, the Company may not pay principal of, premium, if any, or interest on
or any other amounts owing in respect of, the Exchange Debentures, or purchase,
redeem or otherwise retire the Exchange Debentures, if (i) the obligations with
respect to Senior Indebtedness are not paid when due or (ii) other events of
default have occurred and the lenders elect to prohibit the Company from making
payments with respect to the Exchange Debentures. In the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Exchange Debentures only after all Senior
Indebtedness has been paid, and there may not be sufficient assets remaining to
pay amounts due on any or all of the Exchange Debentures then outstanding. See
"Description of the Exchange Debentures--Ranking."
EFFECT OF SUBSTANTIAL ADDITIONAL INDEBTEDNESS ON THE COMPANY'S ABILITY TO MAKE
PAYMENTS ON THE EXCHANGEABLE PREFERRED STOCK
The Indentures and the Certificate of Designation limit, but do not
prohibit, the incurrence of additional indebtedness by the Company and its
subsidiaries, and the Company may incur substantial additional indebtedness
during the next few years to finance the buildout of its telecommunications
networks and operations. Further, the proceeds raised by the Company in this
December 1997 Preferred Stock Placement will, in certain instances, increase the
amount of indebtedness the Company may incur under the terms of the Indentures.
All additional indebtedness of the Company will rank senior in right of payment
to any payment obligations with respect to the Exchangeable Preferred Stock. The
debt service requirements of any additional indebtedness would make it more
difficult for the Company to pay cash obligations with respect to the
Exchangeable Preferred Stock, including obligations to redeem the Exchangeable
Preferred Stock.
26
<PAGE>
RISKS RELATED TO CLEC STRATEGY; ANTICIPATED NEGATIVE OPERATING MARGINS IN CLEC
BUSINESS
The Company is pursuing an accelerated strategy to enter the local exchange
services market as a CLEC in the metropolitan areas in which it has Wireless
Licenses and to develop and obtain the facilities necessary to provide its own
switched local exchange services. The Company has limited experience providing
local exchange services and there can be no assurance that the Company's CLEC
strategy will be successful. In addition, local exchange service providers have
never utilized 38 GHz wireless-based systems as a significant segment of their
local exchange services facilities and there can be no assurance that the
Company will be successful in implementing its Wireless Fiber-based system. The
Company's CLEC strategy is subject to risks relating to: the receipt of
necessary regulatory approvals; the negotiation and implementation of resale
agreements with other local service providers; the negotiation and
implementation of interconnection agreements with RBOCs and other incumbent
LECs; the failure of LECs and RBOCs to honor the letter and spirit of
consummated interconnection agreements; the ability of third-party equipment
providers and installation and maintenance contractors to meet the Company's
rollout schedule; the 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
new entrant in a rapidly evolving industry.
Historically, almost all of the Company's telecommunications revenues have
been derived from the resale of long distance services to residential customers.
As part of its CLEC strategy, the Company is marketing its long distance
services to small and medium-sized businesses and is no longer actively
marketing such services to residential customers. As a result, revenues from the
provision of long distance services to residential customers have declined
through attrition of the Company's long distance residential customer base.
Although the Company's initial implementation of its CLEC strategy entails
the resale of the facilities and services of other service providers, which
itself is dependent on the negotiation and implementation of satisfactory resale
arrangements, the Company's CLEC strategy will require significant capital
investment related to the purchase and installation of numerous switches and the
interconnection of these facilities to customers' buildings and LEC and CLEC
local networks, including the installation of Wireless Fiber links and the
buildout of other facility infrastructure, in advance of generating material
revenues.
As the Company rolls out its CLEC operations, it will experience negative
operating margins while it develops its facilities. The Company has recently
accelerated its rollout by completing the US ONE Asset Acquisition which will
enable the Company to penetrate a higher number of markets. This accelerated
rollout will result in increasing operating costs over the buildout. After
initial rollout of its CLEC services in a particular city, the Company expects
operating margins for such operations to improve only when and if: (i) sales
efforts result in sufficiently increased volumes of traffic; (ii) the Company
has installed a switch and a sufficient number of Wireless Fiber links so that a
substantial portion of the Company's traffic in that city is originated and
terminated over the Company's Wireless Fiber facilities instead of LEC or other
CLEC facilities; and (iii) higher margin-enhanced services are sought by,
provided to and accepted by customers. While the Company believes that the
unbundling and resale of LEC services and the implementation of local telephone
number portability (which will permit customers to retain their telephone
numbers when switching carriers), which are mandated by the Telecommunications
Act, will reduce the Company's costs of providing local exchange services and
facilitate the marketing of such services, there can be no assurance that the
Company's CLEC operations will become profitable due to, among other factors,
lack of customer demand, competition from other CLECs and pricing pressure from
the LECs and other CLECs. The Company's failure to implement its CLEC strategy
successfully would
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have a material adverse effect on the operations of the Company and the value of
the Exchangeable Preferred Stock.
NEGATIVE OPERATING MARGINS IN THE INITIAL PROVISION OF WIRELESS FIBER-BASED
CARRIER SERVICES
The Company has experienced negative operating margins in connection with
the development and initial provision of its Wireless Fiber-based Carrier
Services and expects to continue to experience negative operating margins until
it develops a sufficient revenue-generating customer base for such services. In
order to demonstrate the efficacy of Wireless Fiber, the Company often provides
complimentary service on a trial basis for a limited period. The Company expects
to improve operating margins in the provision of its Carrier Services over time
by: (i) continuing to obtain appropriate Roof Rights; (ii) acquiring and
retaining an adequate customer base; (iii) placing telecommunications traffic of
new customers and additional telecommunications traffic of existing customers
across installed Wireless Fiber links; and (iv) inducing providers of
telecommunications services to utilize and market the Company's Wireless Fiber
services as part of their own networks, systems and services, thereby reducing
the Company's related marketing costs. If the Company fails to accomplish any of
the foregoing, particularly acquiring and retaining an adequate customer base,
it will not be able to improve the operating margins of its Carrier Services
business. There can be no assurance that the Company will be able to achieve or
sustain positive operating margins. Failure to achieve positive operating
margins would have a material adverse effect on the operations of the Company
and the value of the Exchangeable Preferred Stock.
COMPETITION
The Company is subject to intense competition in each of the areas in which
it operates. Many of the Company's competitors have longer-standing
relationships with customers and suppliers in their respective industries,
greater name recognition and significantly greater financial, technical and
marketing resources than the Company. Further, sales of the Company's Carrier
Services are typically made to other telecommunications providers that compete
or may compete in the future with the Company.
LOCAL TELECOMMUNICATIONS MARKET. The local telecommunications market is
intensely competitive for new entrants and currently is dominated by the RBOCs
and other LECs. The LECs have long-standing relationships with their customers,
have the ability to subsidize competitive services with revenues from a variety
of other services and benefit from existing state and federal regulations that
currently favor the LECs over the Company in certain respects. In addition to
competition from the LECs, the Company also faces competition from a growing
number of new market entrants, such as other CLECs and CAPs. The Company also
may face competition in the provision of local telecommunications services from
cable companies, electric utilities, LECs operating outside their current local
service areas and IXCs. Moreover, the consolidation of telecommunications
companies and the formation of strategic alliances within the telecommunications
industry, which have accelerated, could give rise to significant new or stronger
competitors. The Company currently also faces or anticipates facing competition
from other entities which offer, or are licensed to offer, 38 GHz services and
could face competition in certain aspects of its existing and proposed
businesses from competitors providing wireless services in other portions of the
radio spectrum (including 2 GHz, 18 GHz, 24 GHz, 28 GHz and 47 GHz, among
others). The initial perceived success of the Company's business is also likely
to encourage increased competition from other spectrum users. The Company's
Internet services also face significant competition from, among others, cable
television operators deploying cable modems that provide high-speed data
transmission over existing coaxial cable television networks. As competition
increases in the local telecommunications market, the Company anticipates that
general pricing competition and pressures will increase significantly. The
Company has not obtained significant market share in any of the areas where it
offers its services, nor does it expect to do so given the size of its local
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.
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LONG DISTANCE MARKET. The long distance market has relatively insignificant
barriers to entry, numerous entities competing for the same customers and a high
(and increasing) average churn rate as customers frequently change long distance
providers in response to the offering of lower rates or promotional incentives
by competitors. The Company competes for long distance customers with major
IXCs, as well as other national and regional long distance carriers and
resellers, many of whom own substantially all of their own facilities and are
able to provide services at costs lower than the Company's current costs since
the Company generally leases its access facilities. The Company believes that
the RBOCs and CLECs also will become significant competitors in the long
distance telecommunications industry both inside and outside their current
geographic territories. To maintain its competitive posture, the Company
believes that it must be in a position to reduce its prices in order to meet
reductions in rates, if any, by competitors. Any such reductions could adversely
affect the Company. In addition, LECs have been obtaining additional pricing and
regulatory flexibility. This may enable LECs to grant volume discounts to larger
long distance companies, which also could put the Company's long distance
business at a disadvantage in competing with larger providers.
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 distribution channels. There can be no assurance that the Company will
be able to compete successfully in the emerging new media industry.
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. The amount of capital
required to execute the Company's business plan is a function of the speed at
which its plan is executed. In the event the Company's plans or assumptions
change or prove to be inaccurate, or if the Company consummates any acquisitions
of businesses or assets (including additional spectrum licenses, by auction or
otherwise), or if the Company fails to secure additional financing arrangements,
if necessary, the Company may be required to seek additional sources of capital
sooner than currently anticipated. Sources of additional capital may include
public and private equity and debt financing, sales of nonstrategic assets and
other financing arrangements. There can be no assurance that the Company will be
able to obtain additional financing or, if such financing is available, that the
Company will be able to obtain it on acceptable terms. Failure to obtain
additional financing, if needed, could result in the delay or abandonment of
some or all of the Company's development and expansion plans, which would have a
material adverse effect on the Company's business and the value of the
Exchangeable Preferred Stock.
GOVERNMENT REGULATION
The Company's telecommunications services are subject to varying degrees of
federal, state and local regulation. Generally, the FCC exercises jurisdiction
over all telecommunications service providers to the extent such services
involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect
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callers to long distance carriers and the use of electromagnetic spectrum (i.e.,
wireless services). With the passage of the Telecommunications Act, the FCC's
jurisdiction has been extended to include certain issues that traditionally have
been considered subject primarily to state regulation (e.g., number portability
and carrier discrimination issues). The state regulatory commissions retain
jurisdiction over the provision of telecommunications services to the extent
such services involve the provision of jurisdictionally intrastate
telecommunications in certain instances.
The Telecommunications Act is intended to remove the formal barriers between
the long distance and local telecommunications services markets, allowing
service providers from each market (as well as providers of cable television and
other services) to compete in all communications markets. The Telecommunications
Act will permit the RBOCs eventually to compete in the provision of long
distance services between local access transport areas ("LATAs"). Additionally,
the FCC is required to promulgate new regulations to address mandates contained
in the Telecommunications Act, which will change the regulatory environment
significantly. The Telecommunications Act generally requires LECs to provide
competitors with interconnection and nondiscriminatory access to the LEC network
on more favorable terms than have been available in the past and prohibits the
RBOCs from providing long distance services prior to meeting the requirements of
a 14-point competitive checklist with respect to their local markets. A Federal
District Court in Texas has ruled, among other things, that certain provisions
of the Telecommunications Act codifying such prohibition constitute an
unconstitutional "bill of attainder." This ruling has been appealed to the Fifth
Circuit Court of Appeals. However, such interconnection and the terms thereof
are subject to negotiations with each LEC, which may involve considerable delays
and may not necessarily be obtained on terms and conditions that are acceptable
to the Company. In such instances, although the Company may petition the proper
regulatory agency to arbitrate disputed issues, there can be no assurance that
the Company will be able to obtain acceptable interconnection agreements
covering each of the markets where it intends to offer services.
As required by the Telecommunications Act, in August 1996, the FCC adopted
new rules implementing the interconnection and resale provisions of the
Telecommunications Act (the "Interconnection Order"). These rules generally
constitute a pro-competitive, national policy framework designed to remove or
minimize the regulatory, economic and operational impediments to full
competition for local services, including switched local exchange services. The
United States Court of Appeals for the Eighth Circuit stayed the Interconnection
Order in October 1996 and, in July 1997, invalidated certain provisions of the
Interconnection Order, including those provisions in which the FCC asserted
jurisdiction over the pricing of interconnection elements and the "pick and
choose" provisions for interconnectors to select discrete provisions of other
carriers' interconnection agreements. Many states, however, continue to set the
prices for interconnection, resale and unbundled network elements. In October,
the Eighth Circuit issued a further decision with respect to the Interconnection
Order that vacated the obligation of incumbent LECs, under certain
circumstances, to provide combinations of network elements, rather than provide
them individually. The FCC has appealed the Eighth Circuit's rulings to the
United States Supreme Court which has agreed to hear the case in the Fall of
1998. The Company believes that the Eighth Circuit's rulings will not adversely
affect its CLEC operations and may, in certain instances, positively affect the
operations of its Carrier Services business. In addition, pursuant to the
Telecommunications Act, the FCC recently promulgated regulations to, among other
things, implement universal service reform, provide support for the provision of
ubiquitous national telephone service and effect access charge reform to more
explicitly align the access charges paid by long distance carriers to incumbent
LECs to the actual cost of providing such services. In light of the continued
litigation challenging the validity of the Telecommunications Act and the
regulations promulgated thereunder by the FCC, as well as efforts before
Congress to seek modification of provisions of the Telecommunications Act, the
Company is unable to predict with specificity what effect the Telecommunications
Act or recently promulgated FCC regulations will have on the telecommunications
industry in general and on the Company in particular. No assurance can be given
that any regulation will broaden the opportunities available to the Company or
will not have a material adverse effect on the Company and its operations.
Further, there can be no assurance that the Company
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will be able to comply with additional applicable laws, regulations and
licensing requirements or have sufficient resources to take advantage of the
opportunities which may arise from this dynamic regulatory environment.
Providers of telecommunications services, including the major IXCs, RBOCs,
CLECs and others, are coming under intensified regulatory scrutiny for
activities by them or their agents which may result in unauthorized switching of
customers from one service provider to another, unfairly impeding customers
seeking to switch providers or, in other instances, providing customers with,
and billing them for, additional services without authorization. The FCC, the
Federal Trade Commission and a number of state authorities are seeking to
introduce more stringent regulation to curtail the intentional or erroneous
switching of customers, which could include the imposition of fines, penalties
and possible operating restrictions on entities which engage in such
unauthorized activities. In addition, the Telecommunications Act requires the
FCC to prescribe regulations imposing procedures for verifying the switching of
customers and additional remedies on behalf of carriers for unauthorized
switching of their customers. The effects, if any, the adoption of any such
regulations would have on the telecommunications industry and the business
practices therein cannot be predicted. Statutes and regulations which are or may
become applicable to the Company as it expands could require the Company to
alter methods of operations, at costs which could be substantial, or otherwise
limit the types of services it offers.
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 before August 1,
1996 such that they mature concurrently on February 1, 2001. Licenses granted on
or after August 1, 1996 have terms not to exceed ten years. In each case, the
licensee is entitled to an expectation of renewal if the FCC's buildout
requirements are 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.
In the 38 GHz Order, the FCC also ruled that (i) it would impose no limits
on the accumulation of licenses in the 38GHz band, (ii) the 39.5 to 40.0 GHz
portion of this band would not be reserved for use by satellite operations and
that co-primary sharing of the 38 GHz band with satellite operators is not
feasible, (iii) licensees should be permitted great flexibility in use of this
spectrum, including use for point-to-multi-point and future mobile services, and
(iv) currently unlicensed channels in the 38 GHz band will be auctioned.
While the Company views the vast 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 all or a portion of the 38 GHz Order will not be repealed or
altered as a result of further proceedings.
The Wireless Licenses are integral assets of the Company, the value of which
will depend significantly upon the success of the Company's wireless
telecommunications operations and the future direction of the wireless
telecommunications segment of the telecommunications industry. The value of
licenses to provide wireless services also may be affected by fluctuations in
the level of supply and demand for such licenses and by valuations placed on
such licenses in any future auction of such spectrum. 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.
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The Company has entered into agreements to acquire a number of additional 38
GHz licenses. The transfer of licenses issued by the FCC, including 38 GHz
licenses (as well as a change of control of entities holding licenses), is
subject to the prior consent of the FCC, which consent generally turns on a
number of factors including the identity, background and the legal and financial
qualifications of the transferee and the satisfaction of certain other
regulatory requirements. In light of the foregoing, the newness of this service
and possible revisions to the policies and regulations set forth in the 38 GHz
Order as a result of the challenges thereto, the uncertainty of final
regulations to be issued in connection with the Order, there can be no assurance
that the FCC will approve all or any of the proposed acquisitions.
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 of the Company and the value of the
Exchangeable Preferred Stock.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
Certain indebtedness of the Company and the Indentures, as well as the
Exchangeable Preferred Stock, 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, and there can be no assurance that the Company
will be able to comply with such restrictions. Moreover, these restrictions
could limit the Company's ability to engage in certain business transactions
which the Company may desire to consummate. The Company's inability to
consummate any such transaction could have an adverse effect on the Company's
operations and the value of the Exchangeable Preferred Stock. See "Description
of Certain Indebtedness."
DEPENDENCE ON THIRD PARTIES FOR SERVICE AND MARKETING; POSSIBLE SERVICE
INTERRUPTIONS
AND EQUIPMENT FAILURES
The Company's long distance resale business is dependent on utilizing the
facilities of major IXCs to carry its customers' long distance telephone calls
and, in many instances, especially during initial market penetrations, the
Company's CLEC business will be dependent on the facilities of the LECs and
other local exchange service providers to carry its customers' local telephone
calls. The Company has an agreement with MCI that provide it with access to such
carrier's networks and has entered or is entering into interconnect agreements
with various LECs, and other CLECs, to access their local exchange facilities.
Although the Company believes that it currently has sufficient access to long
distance networks and will be able to obtain sufficient access to local exchange
facilities, any increase in the rates or access fees charged by the owners of
such facilities or their unwillingness to provide access to such facilities to
the Company, as well as potential reticence of the LECs to honor appropriate
provisioning and service
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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 Exchangeable Preferred Stock. Further, the Company's CLEC operations will
rely to some extent upon network elements which the LECs must provide pursuant
to the Telecommunications Act and the Interconnection Order. These facilities
often use copper wire for "last mile" access to end users. To the extent that
the Company relies upon LEC facilities that use copper wire, the Company may not
be able to offer potential customers the benefits of Wireless Fiber with respect
to high transmission capacity and quality. In addition, the Company's operations
require that the networks leased by it, and any facilities which may be
developed by the Company, operate on a continuous basis. It is not unusual for
networks and switching facilities to experience periodic service interruptions
and equipment failures. It is therefore possible that the networks and
facilities utilized by the Company may from time to time experience service
interruptions or equipment failures resulting in material delays which would
adversely affect consumer confidence as well as the Company's business
operations and reputation.
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.
RELIANCE ON EQUIPMENT SUPPLIERS
The Company currently purchases the great majority of its wireless
telecommunications equipment, including transceivers and network monitoring
equipment, from a single supplier and its switches and related equipment from a
single supplier even though, in each case, there are other manufacturers of such
equipment. Any reduction or interruption in supply from its suppliers could have
a material adverse effect on the Company until sufficient alternative supply
sources are established. The Company does not manufacture, nor does it have the
capability to manufacture, any of its telecommunications equipment. Although
there are other manufacturers who have, or are developing, equipment that would
satisfy the Company's needs, there can be no assurance that the Company would be
able to replace its current primary suppliers on commercially reasonable terms.
In addition, as no industry standard or uniform protocol currently exists for 38
GHz equipment, a single manufacturer's equipment must be used in establishing
each wireless link.
LINE OF SIGHT; DISTANCE LIMITATIONS IMPOSED BY RAINFALL CONDITIONS IN CERTAIN
GEOGRAPHIC AREAS; ROOF RIGHTS
In order to provide quality transmission, Wireless Fiber services require an
unobstructed line of sight between two transceivers comprising a link, with a
maximum distance between any two corresponding transceivers of up to five miles
(or shorter distances in certain areas; weather conditions may necessitate
distances as short as 1.1 miles between transceivers to maintain desired
transmission quality), although the Company typically limits its link distances
to less than two miles to ensure a high quality of transmission.
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The areas in which such shorter distances are required are those where rainfall
intensity and the size of the raindrops adversely impact transmission quality at
longer distances. Other weather conditions, such as snow, electrical storms and
high winds, have not, in the Company's experience, affected the quality or
reliability of Wireless Fiber services. The establishment of Wireless Fiber
services may require additional transceivers to triangulate around obstacles
(such as buildings). Similarly, to establish Wireless Fiber services covering a
distance in excess of five miles, additional transceivers are required to
establish a chain with links no more than five miles apart or to establish a
system of interconnected hub sites. The cost of additional transceivers where
required by weather, physical obstacles or distance may render Wireless Fiber
uneconomical in certain instances. The Company must obtain Roof Rights (or
rights to access other locations where lines of sight are available) in each
building where a transceiver will be placed. The Company seeks to prequalify and
obtain Roof Rights at buildings targeted by potential customers in its licensed
areas in advance of anticipated orders. There can be no assurance, however, that
the Company will be successful in obtaining Roof Rights necessary to establish
its Wireless Fiber services in its potential markets. The Company's
prequalification activities often require the payment of option fees to the
owners of buildings that are being prequalified. There can be no assurance that
the Company will receive orders for Wireless Fiber services which allow the
Company to utilize Roof Rights it obtains.
UNCERTAINTY OF MARKET ACCEPTANCE OF WIRELESS FIBER SERVICES
The Company has been marketing its Wireless Fiber services since December
1994. The Company has not obtained a significant market share in any of the
licensed areas where it offers Wireless Fiber services. The provision of
wireless local telecommunications services over 38 GHz represents an emerging
sector of the telecommunications industry and the demand for and acceptance of
Wireless Fiber services are subject to a high level of uncertainty. Despite the
Company's initial success in attracting customers, there can 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 and the value of the Exchangeable Preferred Stock.
CERTAIN TAX CONSIDERATIONS
Distributions on the Exchangeable Preferred Stock will be taxable for U.S.
Federal income tax purposes as ordinary dividend income (and eligible for the
dividends-received deduction for certain U.S. corporate holders) only to the
extent paid out of current or accumulated earnings and profits of the Company as
determined for U.S. Federal income tax purposes and otherwise will be treated in
the manner described under "Certain U.S. Federal Income Tax
Consequences--Exchangeable Preferred Stock and Exchange
Debentures--Distributions in General." However, the Company does not currently
have any current or accumulated earnings and profits and cannot accurately
predict at what point it will have current or accumulated earnings and profits.
In the absence of current or accumulated earnings and profits of the Company, it
is anticipated that distributions on the Exchangeable Preferred Stock will
constitute tax-free returns of capital to the extent of the holder's tax basis
in the Exchangeable Preferred Stock and thereafter
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capital gain, and will not be eligible for the dividends-received deduction. The
exchange of Exchangeable Preferred Stock for Exchange Debentures will be treated
as a redemption giving rise to a dividend in the amount of the issue price
unless such exchange (i) terminates such holder's equity interest in the Company
(taking into account stock that is actually or constructively owned by the
holder); or (ii) is not "essentially equivalent to a dividend." To the extent
that the exchange of Exchangeable Preferred Stock for Exchange Debentures does
not give rise to a dividend, such exchange shall be treated as a sale or other
taxable exchange of the Exchangeable Preferred Stock, and such sale or exchange
may be eligible for installment sale treatment, unless either the Exchangeable
Preferred Stock or Exchange Debentures is readily tradeable in an established
securities market. See "Certain U.S. Federal Income Tax Consequences."
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGEABLE PREFERRED STOCK
The Exchangeable Preferred Stock is a new class of security for which there
is currently no market. The Company does not intend to apply for listing of the
Exchangeable Preferred Stock or, if issued, the Exchange Debentures issued in
exchange therefor pursuant to the Registration Statement on any securities
exchange or to seek approval for quotation through any automated quotation
system. The Exchangeable Preferred Stock is eligible for trading in the PORTAL
Market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Exchangeable Preferred Stock, they are
not obligated to do so and any such market-making may be discontinued at any
time without notice. In addition, such market-making activity may be limited
during the pendency of the Registration Statement or the Shelf Registration
Statement. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchangeable Preferred Stock or the Exchange
Debentures (collectively, the "Securities"). If a market for and of the
Securities were to develop, such Securities may trade at prices that may be
higher or lower than the initial offering price of the Exchangeable Preferred
Stock depending upon many factors, including prevailing interest rates, the
Company's operating results and the markets for similar securities.
Historically, the market for securities such as the Securities has been subject
to disruptions that have caused substantial volatility in the prices of
securities similar to the Securities. There can be no assurance that, if a
market for any of the Securities were to develop, such a market would not be
subject to similar disruptions. Such disruptions may materially and adversely
affect such liquidity and trading independent of the financial performance of,
and prospects for, the Company.
CONSEQUENCES FOR NON-TENDERING HOLDERS OF THE OLD PREFERRED STOCK
After the Exchange Offer is consummated, the Company will not be required to
register shares of the Old Preferred Stock not tendered and accepted in the
Exchange Offer. In such event, holders of any such shares of Old Preferred Stock
seeking liquidity in their investment would have to rely on exemptions to the
registration requirements under the securities laws, including the Securities
Act. Following the consummation of the Exchange Offer, holders of shares of Old
Preferred Stock not tendered in the Exchange Offer may not be entitled to the
contingent increase in dividend rate provided for in the event of a failure to
consummate the Exchange Offer in accordance with the terms of the Registration
Rights Agreement.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Preferred Stock was sold by the Company in the December 1997
Preferred Stock Placement to the Initial Purchasers who, in turn, sold such Old
Preferred Stock to certain qualified institutional buyers in reliance on Rule
144A under the Securities Act. In connection with the December 1997 Preferred
Stock Placement, the Company entered into the Registration Rights Agreement,
pursuant to which the Company is obligated to use its best efforts to consummate
the Exchange Offer of the New Preferred Stock for the Old Preferred Stock
pursuant to an effective Registration Statement by June 15, 1998.
Pursuant to the Registration Rights Agreement, the Company is required to
file a shelf registration statement ("Shelf Registration Statement") for a
continuous offering pursuant to Rule 415 under the Securities Act in respect of
the Old Preferred Stock if: (i) because of any change in law or in currently
prevailing interpretations of the staff of the Commission, the Company is not
permitted to effect the Exchange Offer; (ii) the Exchange Offer is not
consummated by June 15, 1998; (iii) any Initial Purchaser so requests with
respect to the Old Preferred Stock not eligible to be exchanged for New
Preferred Stock in the Exchange Offer and held by it following consummation of
the Exchange Offer; or (iv) any holder of Old Preferred Stock (other than an
exchanging dealer) is not eligible to participate in the Exchange Offer or, in
the case of any holder of Old Preferred Stock (other than an exchanging dealer)
that participates in the Exchange Offer, such holder does not receive freely
tradeable New Preferred Stock on the date of the exchange. The Company is
required to use its best efforts to keep the Shelf Registration Statement
continuously effective for a period of two years from the date of its
effectiveness or such shorter period that will terminate when all the Old
Preferred Stock covered by the shelf registration statement has been sold
pursuant thereto or is eligible for sale under Rule 144(k) under the Securities
Act.
TERMS OF THE EXCHANGE OFFER
The Company offers to exchange, upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, the
same number and aggregate liquidation preference of New Preferred Stock for the
Old Preferred Stock tendered for exchange. The terms of the New Preferred Stock
are substantially identical in all material respects (e.g., aggregate
liquidation preference, dividend rate, mandatory redemption and ranking) to the
terms of the Old Preferred Stock, except that the New Preferred Stock has been
registered under the Securities Act and therefore will not be subject to certain
transfer restrictions applicable to the Old Preferred Stock). The New Preferred
Stock, like the Old Preferred Stock, is governed by the Certificate of
Designation. See "Description of the Exchangeable Preferred Stock." The Exchange
Offer is not conditioned upon any minimum number of shares of Old Preferred
Stock being tendered for exchange.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for sale, resold or otherwise transferred by any
holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that the New Preferred Stock issued pursuant to the Exchange Offer in
exchange for Old Preferred Stock may be offered for resale, resold and otherwise
transferred by any holder of such New Preferred Stock (except in the case of
broker-dealers, as set forth below) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Preferred Stock is acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Preferred Stock. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Preferred Stock may not rely on such interpretation by the staff of the
Commission and must
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comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction. Each
broker-dealer that receives New Preferred Stock for its own account in exchange
for Old Preferred Stock, where such Old Preferred Stock was acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Preferred Stock.
By tendering in the Exchange Offer, each holder of Old Preferred Stock will
represent to the Company, as the case may be, that, among other things: (i) the
New Preferred Stock acquired pursuant to the Exchange Offer is being obtained in
the ordinary course of business of the person receiving such New Preferred
Stock, whether or not such person is such holder; (ii) neither the holder of Old
Preferred Stock nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Preferred Stock;
and (iii) if the holder is not a broker-dealer, or is a broker-dealer but will
not receive New Preferred Stock for its own account in exchange for Old
Preferred Stock. Neither the holder nor any such other person is engaged in or
intends to participate in the distribution of such New Preferred Stock.
Following the consummation of the Exchange Offer, holders of shares of Old
Preferred Stock that have not been tendered will no longer have certain
registration rights and the Old Preferred Stock will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
the Old Preferred Stock could be adversely affected.
EXPIRATION DATE
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998 unless the Company in its sole discretion extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. Although the Company has no
current intention to extend the Exchange Offer, the Company reserves the right
to extend the Exchange Offer at any time and from time to time by giving oral or
written notice to the Exchange Agent and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Preferred Stock previously tendered pursuant to the
Exchange Offer and not withdrawn will remain subject to the Exchange Offer. The
date of the exchange of the New Preferred Stock for the Old Preferred Stock will
be the first New York Stock Exchange trading day following the Expiration Date.
The Company expressly reserves the right to (i) terminate the Exchange Offer
and not accept for exchange any Old Preferred Stock if any of the events set
forth below under " -- Conditions to the Exchange Offer" shall have occurred and
shall not have been waived by the Company and (ii) amend the terms of the
Exchange Offer in any manner which, in its good faith judgment, is advantageous
to the holders of the Old Preferred Stock, whether before or after any tender of
the Old Preferred Stock.
PROCEDURES FOR TENDERING
The Exchange Offer is subject to the terms and conditions set forth in this
Prospectus and the Letter of Transmittal.
Shares of Old Preferred Stock may be tendered by properly completing and
signing the Letter of Transmittal and delivering the Letter of Transmittal to
the Exchange Agent at its address set forth in this Prospectus on or prior to
the Expiration Date, together with: (i) the certificate or certificates
representing the shares of Old Preferred Stock being tendered and any required
signature guarantees; (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of the Old Preferred Stock, if such procedure is
available, into the Exchange Agent's account at the Depository pursuant to the
procedure for book-entry transfer described below; or (iii) the completion of
the procedures for guaranteed delivery set forth below. See "Guaranteed Delivery
Procedures."
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If shares of the New Preferred Stock (and any untendered shares of Old
Preferred Stock) are to be issued in the name of the registered holder and the
registered holder has signed the Letter of Transmittal the holder's signature
need not be guaranteed. In any other case, the tendered shares of Old Preferred
Stock must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Exchange Agent and duly executed by the registered holder
and the signature on the endorsement or instrument of transfer must be
guaranteed by a commercial bank or trust company located or having an office or
correspondent in the United States, or by a member firm of a national securities
exchange or of the National Association of Securities Dealers, Inc. (an
"Eligible Institution"). If shares of the New Preferred Stock (and any
untendered shares of Old Preferred Stock) are to be delivered to an address
other than that of the registered holder appearing on the register for the Old
Preferred Stock, the signature on the Letter of Transmittal must be guaranteed
by an Eligible Institution. Each broker-dealer that receives shares of New
Preferred Stock for its own account in exchange for shares of Old Preferred
Stock, where such shares of Old Preferred Stock were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such shares of New Preferred Stock.
THE METHOD OF DELIVERY OF OLD PREFERRED STOCK, LETTERS OF TRANSMITTAL AND
ALL OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL,
IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED,
PROPER INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF
THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE, NO LETTERS OF TRANSMITTAL OR OLD PREFERRED STOCK SHOULD BE SENT
TO THE COMPANY.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal,
shares of the Old Preferred Stock or a Book-Entry Confirmation, and all other
required documents are received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Preferred Stock will
be determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of Issuer's
counsel, be unlawful. The Company also reserves the absolute right to waive any
of the conditions of the Exchange Offer or any defect or irregularity in the
tender of any shares of Old Preferred Stock. Neither the Company, the Exchange
Agent nor any other person will be under any duty to give notification of any
defects or irregularities in tenders or incur any liability for failure to give
any such notification. If any shares of Old Preferred Stock received by the
Exchange Agent are not validly tendered and as to which the defects or
irregularities have not been cured or waived, or if shares of Old Preferred
Stock are submitted in a amount greater than the number of shares of Old
Preferred Stock being tendered by such tendering holder, such unaccepted or
non-exchanged shares of Old Preferred Stock will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, to the
extent permitted (a) purchase or make offers for any shares of Old Preferred
Stock that remain outstanding subsequent to the Expiration Date and (b) to the
extent pertained by applicable law, purchase shares of Old Preferred Stock in
the open market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers will differ from the terms of the Exchange Offer.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
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<PAGE>
The party tendering Old Preferred Stock ("Transferor") exchanges, assigns
and transfers the Old Preferred Stock to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Preferred Stock to be assigned, transferred and exchanged. The
Transferor represents and warrants that it has full power and authority to
tender, exchange, assign and transfer the Old Preferred Stock and to acquire the
New Preferred Stock issuable upon the exchange of such tendered shares of Old
Preferred Stock, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered shares of Old Preferred
Stock, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The Transferor also warrants that it will,
upon request, execute and deliver any additional documents deemed by the Company
to be necessary or desirable to complete the exchange, assignment and transfer
of tendered Old Preferred Stock or transfer ownership of such Old Preferred
Stock on the account books maintained by DTC. All authority conferred by the
Transferor will survive the death, bankruptcy or incapacity of the Transferor
and every obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above in the third paragraph under the heading "
- -- Purpose and Effect of the Exchange Offer."
WITHDRAWAL OF TENDERS
Tenders of Old Preferred Stock pursuant to the Exchange Offer are
irrevocable, except that Old Preferred Stock tendered pursuant to the Exchange
Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date.
To be effective, a written, telegraphic, or facsimile transmission notice of
withdrawal must be timely received by the Exchange Agent at the address set
forth in the Letter of Transmittal prior to 5:00 p.m., New York City time on the
Expiration Date. Any such notice of withdrawal must specify the holder named in
the Letter of Transmittal as having tendered Old Preferred Stock to be
withdrawn, the certificate numbers and designation of Old Preferred Stock to be
withdrawn, the principal amount of Old Preferred Stock delivered for exchange, a
statement that such holder is withdrawing his election to have such Old
Preferred Stock exchanged, and the name of the registered holder of such Old
Preferred Stock, and must be signed by the holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to The Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Old Preferred Stock being withdrawn. The Exchange Agent will return the
properly withdrawn Old Preferred Stock promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at DTC to be credited with the withdrawn Old Preferred Stock or
otherwise comply with DTC procedure. All questions as to the validity of notices
of withdrawal, including time of receipt, will be determined by the Company and
such determination will be final and binding on all parties.
ACCEPTANCE OF OLD PREFERRED STOCK; DELIVERY OF NEW PREFERRED STOCK
Upon terms and subject to the conditions of the Exchange Offer, the Company
will accept for exchange any and all shares of Old Preferred Stock which are
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. For the purposes of the Exchange Offer, the Company shall
be deemed to have accepted for exchange validly tendered Old Preferred Stock
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of Old
Preferred Stock for the purpose of causing the Old Preferred Stock to be
assigned, transferred and exchanged for New Preferred Stock. Upon the terms and
subject to the conditions of the Exchange Offer, delivery of New Preferred Stock
in exchange for Old Preferred Stock will be made by the Exchange Agent after
acceptance of the
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<PAGE>
tendered Old Preferred Stock by the Company and promptly following the
Expiration Date. Any Old Preferred Stock not accepted for exchange by the
Company for any reason will be returned without expense to the tendering holders
(or, in the case of Old Preferred Stock tendered by book-entry transfer, by
crediting an account maintained with the Book-Entry Transfer Facility) as
promptly as practicable after the Expiration Date or, if the Company terminates
the Exchange Offer prior to the Expiration Date, promptly after the Exchange
Offer is terminated. See "--Conditions to the Exchange Offer."
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after the
date of this Prospectus, and any financial institution that is a participant in
the Book-Entry Transfer Facility's systems may make book-entry delivery of Old
Preferred Stock by causing the Book-Entry Transfer Facility to transfer the Old
Preferred Stock into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with the Book-Entry Transfer Facility's procedure for
transfer. The Letter of Transmittal with any required signature guarantees and
any other required documents, must be received by the Exchange Agent on or prior
to the Expiration Date for any book-entry transfers.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Preferred Stock and (i) whose Old
Preferred Stock is not immediately available or (ii) who cannot deliver their
Old Preferred Stock, the Letter of Transmittal or any other documents required
hereby to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date, must tender their Old Preferred Stock and follow the guaranteed
delivery procedures. Pursuant to such procedures: (i) such tender must be made
by or through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed notice of guaranteed delivery (a "Notice of
Guaranteed Delivery") (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of the Old Preferred Stock, the
certificate number or numbers of such Old Preferred Stock and the aggregate
liquidation preference of the Old Preferred Stock tendered, stating that the
tender is being made thereby and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Old Preferred Stock (or a
confirmation of electronic delivery or book-entry delivery into the Exchange
Agent's account at the Depository) and any of the required documents will be
deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed Letter of Transmittal (or facsimile thereof), as
well as all other documents required by the Letter of Transmittal and the
certificate(s) representing all tendered Old Preferred Stock in proper form for
transfer (or a confirmation of electronic mail delivery or book-entry delivery
into the Exchange Agent's account at the Depository), must be received by the
Exchange Agent within five business days after the Expiration Date. Any holder
of Old Preferred Stock who wishes to tender its Old Preferred Stock pursuant to
the guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York
City time, on the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue New Preferred
Stock in exchange for any properly tendered Old Preferred Stock not theretofore
accepted and may terminate the Exchange Offer, or, at their option, modify or
otherwise amend the Exchange Offer, if either of the following events occur:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the sole judgment of the Company, would prohibit, restrict or otherwise
render illegal the consummation of the Exchange Offer, or
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<PAGE>
(b) there shall occur a change in the current interpretation by the
staff of the Commission which, in the Company's sole judgment, might
materially impair The Company's ability to proceed with the Exchange Offer.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Preferred Stock upon the occurrence of either of
the foregoing conditions (which represent all of the material conditions to the
acceptance by The Company of properly tendered Old Preferred Stock).
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company if it is legally permitted to do so, in whole or in part,
in its sole discretion. The foregoing conditions must be either satisfied or
waived prior to termination of the Exchange Offer. Any determination made by the
Company concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
EXCHANGE AGENT
Continental Stock Transfer and Trust Company 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:
<TABLE>
<S> <C>
BY MAIL (REGISTERED OR CERTIFIED MAIL
RECOMMENDED), OVERNIGHT COURIER OR HAND
DELIVERY: Continental Stock Transfer and Trust Company
2 Broadway
New York, New York 10002
Attention: Compliance Department
BY FACSIMILE (FOR ELIGIBLE INSTITUTIONS (212) 509-5150
ONLY): Confirm by telephone (212) 509-4000
</TABLE>
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Preferred
Stock and in handling or forwarding tenders for exchange.
The expenses to be incurred by the Company in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Transfer Agent and
accounting and legal fees, will be paid by the Company. The Company will not,
however, pay the costs incurred by a holder in delivering its Old Preferred
Stock to the Exchange Agent, underwriting fees, or Commissions or transfer
taxes.
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ACCOUNTING TREATMENT
The New Preferred Stock will be recorded at the same carrying value as the
Old Preferred Stock as reflected in the Company's accounting records on the date
of the exchange because the exchange of the Old Preferred Stock for the New
Preferred Stock is the completion of the selling process contemplated in the
issuance of the Old Preferred Stock. Accordingly, no gain or loss for accounting
purposes will be recognized.
OTHER MATTERS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Preferred Stock are
urged to consult their financial and tax advisors in making their own decisions
on what action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by The Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company or the Company since the dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Preferred Stock in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, The
Company may, at its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to holders of Old Preferred Stock in such jurisdiction.
As a result of the making of the Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration Agreement. Holders of the Old
Preferred Stock who do not tender their Old Preferred Stock in the Exchange
Offer will continue to hold such Old Preferred Stock and will be entitled to all
the rights and limitations applicable thereto under the Equipment Notes
Indenture except for certain rights under the Registration Agreement and except
that certain of the Old Preferred Stock may not be entitled to the contingent
increase in interest rate provided for in the Old Preferred Stock. All
untendered Old Preferred Stock will continue to be subject to the restrictions
on transfer set forth in the Equipment Notes Indenture and the Old Preferred
Stock. To the extent that Old Preferred Stock are tendered and accepted in the
Exchange Offer, the trading market, if any, for untendered Old Preferred Stock
could be adversely affected.
The Company will not receive any cash proceeds from the issuance of the New
Preferred Stock offered hereby. In consideration for issuing the New Preferred
Stock as contemplated in this Prospectus, The Company will receive in exchange
Old Preferred Stock, in like principal amount, the terms of which are identical
to the New Preferred Stock except that such New Preferred Stock will be
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. Old Preferred Stock surrendered in exchange
for New Preferred Stock will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Preferred Stock will not result in a change in
the indebtedness of the Company.
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DESCRIPTION OF THE EXCHANGEABLE PREFERRED STOCK
The following is a summary of certain provisions of the Certificate of
Designation and the Exchangeable Preferred Stock (which encompasses both the New
Preferred Stock and Old Preferred Stock, as such securities have substantially
identical terms). A copy of the Certificate of Designation and the form of
Exchangeable Preferred Stock is available upon request to the Company at the
address set forth under "Available Information." The following summary of
certain provisions of the Certificate of Designation does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Certificate of Designation. The definitions of certain
capitalized terms used but not defined in the following summary are set forth
under "Description of the Exchange Debentures -- Certain Definitions." Other
capitalized terms used but not defined herein and not otherwise defined under
"Description of the Exchange Debentures -- Certain Definitions" are defined in
the Certificate of Designation.
GENERAL
The holders of the Exchangeable Preferred Stock have no preemptive or
preferential right to purchase or subscribe to stock, obligations, warrants or
other securities of the Company of any class. The Exchangeable Preferred Stock
is eligible for trading in the PORTAL Market. Subject to certain conditions, the
Exchangeable Preferred Stock will be exchangeable for the Exchange Debentures at
the option of the Company on any scheduled Dividend Payment Date on or after the
date all obligations under each of the Specified Indentures shall have been
satisfied in full (the "Specified Debt Satisfaction Date"). When issued, the
Exchangeable Preferred Stock will be validly issued, fully paid and
nonassessable.
RANKING
The Exchangeable Preferred Stock, with respect to dividend rights and rights
on liquidation, winding-up and dissolution, ranks (i) senior to all classes of
common stock and to the Company's Series A Preferred Stock and to each other
class of Capital Stock or series of Preferred Stock established hereafter by the
Board of Directors the terms of which do not expressly provide that it ranks
senior to, or on a parity with, the Exchangeable Preferred Stock as to dividend
rights and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to, together with all classes of common stock of the
Company, as "Junior Stock"); (ii) subject to certain conditions, on a parity
with each class of Capital Stock or series of Preferred Stock established
hereafter by the Board of Directors, the terms of which expressly provide that
such class or series will rank on a parity with the Exchangeable Preferred Stock
as to dividend rights and rights on liquidation, winding-up and dissolution
(collectively referred to as "Parity Stock"); and (iii) subject to certain
conditions, junior to each class of Capital Stock or series of Preferred Stock
established hereafter by the Board of Directors, the terms of which expressly
provide that such class or series will rank senior to the Exchangeable Preferred
Stock as to dividend rights and rights upon liquidation, winding-up and
dissolution of the Company (collectively referred to as "Senior Stock").
While any shares of Exchangeable Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any class
or series of stock (i) that ranks senior to the Exchangeable Preferred Stock
with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding up, or (ii) that is on a parity with the Exchangeable
Preferred Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up and that has a mandatory redemption
earlier, or an average life less, than that of the Exchangeable Preferred Stock,
in each case without the consent of the holders of at least 66 2/3% of the
outstanding shares of Exchangeable Preferred Stock. However, without the consent
of any holder of Exchangeable Preferred Stock, the Company may create additional
classes of stock, increase the authorized number of shares of preferred stock or
issue series of a stock that ranks on a parity with, or junior to, the
Exchangeable Preferred Stock with respect, in each case, to the payment of
dividends and amounts upon liquidation, dissolution and winding up (subject, in
the case of Parity Stock, to the preceding sentence). See "--Voting Rights."
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DIVIDENDS
The Exchangeable Preferred Stock accumulates cumulative preferential
dividends from December 22, 1997, at the rate of 14 1/4% per annum on the
Accumulated Amount with respect to the Exchangeable Preferred Stock compounded
semi-annually on each SemiAnnual Dividend Accrual Date, but, except as described
in the second following sentence, dividends on the Exchangeable Preferred Stock
will not be payable in cash. Until such time as the Accumulated Amount becomes a
fixed and final amount pursuant to the first proviso to the definition of
"Accumulated Amount," the dividends accruing on the Exchangeable Preferred Stock
will be deemed paid by the periodic adjustments provided for in such definition.
Commencing on the first June 15 or December 15 (each a "Dividend Payment Date")
which is at least six months after the later of December 15, 2002 and the
Specified Debt Satisfaction Date (the "Cash Payment Date"), dividends will be
payable in cash in respect of the Exchangeable Preferred Stock at a rate per
annum equal to 14 1/4% of the Accumulated Amount as of the Dividend Payment Date
preceding the Cash Payment Date. Thereafter, dividends on the Exchangeable
Preferred Stock will be payable semiannually in arrears on each Dividend Payment
Date or, if any such date is not a Business Day, on the next succeeding Business
Day, to the holders of record of the Exchangeable Preferred Stock as of the next
preceding June 1 and December 1. Dividends payable on the Exchangeable Preferred
Stock will be computed on a basis of a 360-day year consisting of twelve 30-day
months and will be deemed to accrue on a daily basis. For a discussion of
certain Federal income tax considerations relevant to the Exchangeable Preferred
Stock, see "Certain U.S. Federal Income Tax Consequences."
Notwithstanding anything herein to the contrary, if the Specified Debt
Satisfaction Date shall not have occurred before December 15, 2002, the rate
otherwise applicable to the Exchangeable Preferred Stock shall be increased by
150 basis points from December 15, 2002, until the Dividend Payment Date falling
on or after the Specified Debt Satisfaction Date.
Dividends on the Exchangeable Preferred Stock will accrue whether or not the
Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Certificate of
Designation will provide that the Company will, subject to the terms of any
indebtedness of the Company existing on the Issue Date, take all actions
required or permitted under the Delaware General Corporation Law (the "DGCL") to
permit the payment of dividends on the Exchangeable Preferred Stock, including,
without limitation, through the revaluation of its assets in accordance with the
DGCL.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Exchangeable
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Exchangeable Preferred Stock.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Stock or (ii)
redeem, purchase or otherwise acquire for consideration any Junior Stock through
a sinking fund or otherwise, unless (A) all accrued and unpaid dividends with
respect to the Exchangeable Preferred Stock and any Parity Stock at the time
such dividends are payable have been paid or funds have been set apart for
payment of such dividends and (B) sufficient funds have been paid or set apart
for the payment of the dividend for the current dividend period with respect to
the Exchangeable Preferred Stock and any Parity Stock.
No dividend will be declared or paid on any Parity Stock unless full
cumulative dividends have been paid on the Exchangeable Preferred Stock for all
prior dividend periods; PROVIDED, HOWEVER, if accrued dividends on the
Exchangeable Preferred Stock for all prior dividend periods have not been paid
in full then any dividend declared on the Exchangeable Preferred Stock for any
dividend period and on any Parity
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Stock will be declared ratably in proportion to accrued and unpaid dividends on
the Exchangeable Preferred Stock and such Parity Stock.
Notwithstanding anything herein to the contrary, the Company may declare and
pay dividends on Parity Stock or Junior Stock which are payable solely in
additional shares of or by the increase in the liquidation value of Parity Stock
or Junior Stock, as applicable, or repurchase, redeem or otherwise acquire
Junior Stock in exchange for Junior Stock and Parity Stock in exchange for
Parity Stock or Junior Stock.
The Company's ability to pay dividends with respect to the Exchangeable
Preferred Stock is limited by the terms of the Company's outstanding
indebtedness. See "Risk Factors--Ability to Pay Dividends on and Redeem the
Exchangeable Preferred Stock and Issue Exchange Debentures."
OPTIONAL REDEMPTION
The Exchangeable Preferred Stock will not be redeemable at the option of the
Company prior to December 15, 2002. Thereafter, the Exchangeable Preferred Stock
will be redeemable, at the Company's option, in whole or in part, at any time or
from time to time, upon not less than 30 nor more than 60 days' prior notice
mailed by first-class mail to each Holder's registered address, at the following
redemption prices (expressed as percentages of the Accumulated Amount thereof),
plus accumulated and unpaid dividends, if any (including an amount in cash equal
to a prorated dividend for any partial dividend period), on such Accumulated
Amount if redeemed during the 12-month period commencing on December 15 of the
years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ----------------------------------------------------------------------------- -----------
<S> <C>
2002......................................................................... 107.125%
2003......................................................................... 105.344%
2004......................................................................... 103.563%
2005......................................................................... 101.781%
2006 and thereafter.......................................................... 100.000%
</TABLE>
In the case of any partial optional redemption, selection of the
Exchangeable Preferred Stock for redemption will be made by the Company in
compliance with the requirements of the principal national securities exchange,
if any, on which the Exchangeable Preferred Stock is listed, or if the
Exchangeable Preferred Stock is not listed on a national securities exchange, on
a pro rata basis, by lot or such other method as the Company, in its sole
discretion, shall deem fair and appropriate; PROVIDED, HOWEVER, that the Company
may redeem all of the shares held by holders of fewer than 100 shares (or all of
the shares held by holders who would hold less than 100 shares as a result of
such redemption) as may be determined by the Company.
The Company's ability to redeem the Exchangeable Preferred Stock at its
option is limited by the terms of the Company's outstanding indebtedness. The
Company may not be able to redeem the Exchangeable Preferred Stock at its option
unless it simultaneously redeems or repays such indebtedness. See "Risk
Factors--Ability to Pay Dividends on and Redeem the Exchangeable Preferred Stock
and to Issue Exchange Debentures."
MANDATORY REDEMPTION
On December 15, 2007, the Company will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Exchangeable
Preferred Stock at a price in cash equal to the Liquidation Preference thereof,
plus accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if any, to the date of
redemption. The
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Company will not be required to make sinking fund payments with respect to the
Exchangeable Preferred Stock. The Certificate of Designation will provide that
the Company will take all actions required or permitted under Delaware law to
permit such redemption.
EXCHANGE
The Company may, at its option, subject to certain conditions, on any
scheduled Dividend Payment Date following the Specified Debt Satisfaction Date,
exchange the Exchangeable Preferred Stock, in whole, but not in part, for the
Exchange Debentures; PROVIDED, HOWEVER, that (i) on the date of such exchange
(the "Exchange Date") there are no accumulated and unpaid dividends on the
Exchangeable Preferred Stock (including the dividend payable on such date) or
other contractual impediments to such exchange; (ii) there shall be funds
legally available sufficient therefor; and (iii) the Company shall have
delivered to the Transfer Agent under the Exchange Indenture an opinion of
counsel with respect to the due authorization and issuance of the Exchange
Debentures.
Upon any exchange pursuant to the preceding paragraph, holders of
outstanding shares of Exchangeable Preferred Stock will be entitled to receive,
subject to the second succeeding sentence, $1.00 Accumulated Amount of Exchange
Debentures for each $1.00 Accumulated Amount of Exchangeable Preferred Stock
held by them. The Exchange Debentures will be issued in registered form, without
coupons. Exchange Debentures issued in exchange for Exchangeable Preferred Stock
will be issued in principal amounts of $1,000 and integral multiples thereof to
the extent possible, and will also be issued in principal amounts less than
$1,000 so that each holder of Exchangeable Preferred Stock will receive
certificates representing the entire amount of Exchange Debentures to which such
holder's shares of Exchangeable Preferred Stock entitle such holder; PROVIDED,
HOWEVER, that the Company may pay cash in lieu of issuing an Exchange Debenture
in a principal amount less than $1,000. The Company will send a written notice
of exchange by mail to each holder of record of shares of Exchangeable Preferred
Stock not fewer than 30 days nor more than 60 days before the date fixed for
such exchange. On and after the Exchange Date, dividends will cease to accrue on
the outstanding shares of Exchangeable Preferred Stock, and all rights of the
holders of Exchangeable Preferred Stock (except the right to receive the
Exchange Debentures and, if the Company so elects, cash in lieu of any Exchange
Debenture that is in a principal amount that is not an integral multiple of
$1,000) will terminate. The person entitled to receive the Exchange Debentures
issuable upon such exchange will be treated for all purposes as the registered
holder of such Exchange Debentures as of the Exchange Date. See "Description of
the Exchange Debentures."
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, each holder of Exchangeable Preferred Stock will be entitled to be
paid, out of the assets of the Company available for distribution to
stockholders, an amount equal to the Liquidation Preference per share of
Exchangeable Preferred Stock held by such holder, plus accumulated and unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding-up
before any distribution is made on any Junior Stock, including, without
limitation, common stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Exchangeable Preferred Stock and all other Parity Stock are not
paid in full, the holders of the Exchangeable Preferred Stock and the Parity
Stock will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference and accumulated and
unpaid dividends to which each is entitled. After payment of the full amount of
the Liquidation Preference and accumulated and unpaid dividends to which they
are entitled, the holders of shares of Exchangeable Preferred Stock will not be
entitled to any further participation in any distribution of assets of the
Company. However, neither the sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially all
of the property or assets of the Company nor the consolidation or merger of the
Company with one or more entities shall be deemed to be a liquidation,
dissolution or winding-up of the Company.
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The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Exchangeable
Preferred Stock, although such Liquidation Preference will be substantially in
excess of the par value of such shares of Exchangeable Preferred Stock.
VOTING RIGHTS
The holders of Exchangeable Preferred Stock, except as otherwise required
under Delaware law or as provided in the Certificate of Designation, shall not
be entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Company.
The Certificate of Designation will provide that if (i) dividends on the
Exchangeable Preferred Stock are in arrears and unpaid for six or more Dividend
Periods (whether or not consecutive); (ii) the Company fails to redeem the
Exchangeable Preferred Stock on December 15, 2007, or fails to otherwise
discharge any redemption or repurchase obligation with respect to the
Exchangeable Preferred Stock; (iii) a breach or violation of any of the
provisions described under the caption "-- Certain Covenants" occurs and the
breach or violation continues for a period of 30 days or more after the Company
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Exchangeable Preferred Stock then outstanding; or (iv) the
Company fails to pay at final maturity (giving effect to any applicable grace
period) the principal amount of any Indebtedness of the Company or any
Significant Subsidiary or the final maturity of any such Indebtedness is
accelerated because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $25.0 million, then the holders of the outstanding
shares of Exchangeable Preferred Stock, voting together as a class with the
holders of any other series of Preferred Stock upon which like rights have been
conferred and are exercisable, will be entitled to elect to serve on the Board
of Directors the lesser of (x) two additional members to the Board of Directors
or (y) that number of directors constituting at least 25% of the members of the
Board of Directors, and the number of members of the Board of Directors will be
immediately and automatically increased by such number. Such voting rights of
the Exchangeable Preferred Stock will continue until such time as, in the case
of a dividend default, all dividends in arrears on the Exchangeable Preferred
Stock are paid in full in cash and, in all other cases, any failure, breach or
default giving rise to such voting rights is remedied or waived by the holders
of a majority of the shares of Exchangeable Preferred Stock then outstanding, at
which time the term of any directors elected pursuant to the provisions of this
paragraph (subject to the right of holders of any other preferred stock to elect
such directors) shall terminate. Each such event described in clauses (i)
through (iv) above is referred to herein as a "Voting Rights Triggering Event."
The Certificate of Designation will also provide that, except as expressly
set forth above under "Ranking," (a) the creation, authorization or issuance of
any shares of Junior Stock, Parity Stock or Senior Stock, including the
designation of a series thereof within the existing class of Exchangeable
Preferred Stock, or (b) the increase or decrease in the amount of authorized
Capital Stock of any class, including any preferred stock, shall not require the
consent of the holders of Exchangeable Preferred Stock and shall not be deemed
to affect adversely the rights, preferences, privileges or voting rights of
shares of Exchangeable Preferred Stock.
REPURCHASE OF EXCHANGEABLE PREFERRED STOCK UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all the Exchangeable Preferred
Stock then outstanding, at a purchase price equal to 101% of the Accumulated
Amount of the Exchangeable Preferred Stock on the date of purchase, plus accrued
and unpaid dividends (if any) on such Accumulated Amount to the date of
purchase. Prior to the mailing of the notice to holders of Exchangeable
Preferred Stock commencing such Offer to Purchase, but in any event within 30
days following any Change of Control, the Company covenants to (i) repay in full
all indebtedness of the Company that would prohibit the repurchase of the
Exchangeable Preferred Stock pursuant to such Offer to Purchase or (ii) obtain
any requisite consents under instruments governing any such indebtedness of the
Company to permit repurchase of the
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Exchangeable Preferred Stock. The Company shall first comply with the covenant
in the preceding sentence before it shall repurchase Exchangeable Preferred
Stock pursuant to the "Repurchase of Exchangeable Preferred Stock Upon a Change
of Control" covenant.
The Certificate of Designation prohibits the Company from repurchasing any
Exchangeable Preferred Stock so long as any indebtedness of the Company
contractually prohibits such repurchase. However, if the Company is unable to
repay or cause repayment of all of its indebtedness that would prohibit a
repurchase of the Exchangeable Preferred Stock or is unable to obtain the
consents of the holders of indebtedness, if any, outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase of
Exchangeable Preferred Stock or otherwise fails to purchase any Exchangeable
Preferred Stock validly tendered, then the Company will have breached this
covenant. This breach will constitute a Voting Rights Triggering Event under the
Certificate of Designation if it continues for a period of 30 consecutive days
after written notice is given to the Company by the holders of at least 25% in
aggregate amount of the Exchangeable Preferred Stock outstanding. In addition,
the failure by the Company to repurchase Exchangeable Preferred Stock at the
conclusion of the Offer to Purchase will constitute a breach of this covenant
without any waiting period or notice requirements.
There can be no assurance that the Company, WEC and/or WEC II will have
sufficient funds
available at the time of a Change of Control to make any payment required by the
foregoing covenant (as well as any similar covenant that may be contained in
other securities of the Company, WEC and WEC II which might be outstanding at
the time). The above covenant requiring the Company to repurchase the
Exchangeable Preferred Stock will, unless the consents referred to above are
obtained, require the Company, WEC and WEC II to repay all indebtedness then
outstanding which by its terms would prohibit such Exchangeable Preferred Stock
repurchase, either prior to or concurrently with such Exchangeable Preferred
Stock repurchase.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into transactions,
including acquisitions, refinancings or recapitalizations, that would not
constitute a Change of Control, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness are contained in the
covenant described under "-- Certain Covenants -- Limitation on Indebtedness."
Such restrictions can only be waived with the consent of the holders of a
majority of the outstanding shares of the Exchangeable Preferred Stock. Except
for the limitations contained in such covenants, however, the Certificate of
Designation will not contain any covenants or provisions that may afford holders
of the Exchangeable Preferred Stock protection in the event of a highly
leveraged transaction.
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness (other than Indebtedness existing on the Issue Date);
PROVIDED, HOWEVER, that the Company may Incur Indebtedness if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than
zero and less than 5:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company outstanding at any time in an aggregate principal
amount not to exceed $125 million, less any amount of Indebtedness Incurred
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pursuant to this clause (i) and permanently repaid as provided under
"--Limitation on Asset Sales" below; (ii) Indebtedness (A) to the Company
evidenced by an unsubordinated promissory note or (B) to any of its Restricted
Subsidiaries; PROVIDED, HOWEVER, that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness, other than Indebtedness Incurred under clause (i),
(ii), (v), (vi) or (viii) of this paragraph, and any refinancings thereof in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); PROVIDED, HOWEVER, that Indebtedness the
proceeds of which are used to refinance or refund Indebtedness that would be
PARI PASSU with, or subordinated in right of payment to, the Exchange Debentures
(when issued) shall only be permitted under this clause (iii) if (A) in case the
Indebtedness to be refinanced is PARI PASSU with the Exchange Debentures, such
new Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made PARI
PASSU with, or subordinate in right of payment to, the Exchange Debentures, (B)
in case the Indebtedness to be refinanced is subordinated in right of payment to
the Exchange Debentures, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made subordinate in right of payment to the Exchange
Debentures at least to the extent that the Indebtedness to be refinanced is
subordinated to the Exchange Debentures and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded;
PROVIDED FURTHER, HOWEVER, that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary of the
Company pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; PROVIDED, HOWEVER,
that such agreements do not increase the Indebtedness of the obligor outstanding
at any time other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and compensation
payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of the Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary of the Company (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company not to exceed,
at any one time outstanding, two times the Net Cash Proceeds received by the
Company from and after October 23, 1995, from the issuance and sale of its
Capital Stock (other than Redeemable Stock and Preferred Stock that provides for
the payment of dividends in cash), including the Exchangeable Preferred Stock,
PROVIDED, HOWEVER, that such Indebtedness (x) does not mature prior to the
Stated Maturity of the Exchange Debentures and has an Average Life longer than
the Exchange Debentures and (y) is PARI PASSU with or subordinated to the
Exchange Debentures; (vi) Indebtedness of any Restricted Subsidiary Incurred
pursuant to any credit agreement of such Restricted Subsidiary in effect on the
Issue Date (and refinancings thereof), up to the amount of the commitment under
such credit agreement on the Issue Date; (vii) Indebtedness to the extent such
Indebtedness is secured by Liens which are purchase money or other Liens upon
equipment or inventory acquired or held by the Company or any of its Restricted
Subsidiaries taken or obtained by (A) the seller or lessor of such equipment or
inventory to secure all or a part of the purchase price or lease payments
therefor or (B) the person who makes advances or incurs obligations, thereby
giving value to the Company to enable it to purchase or acquire rights in such
equipment or inventory, to secure the repayment of all or a part of the advances
so made or obligations so
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incurred; PROVIDED, HOWEVER, that such Liens do not extend to or cover any
property or assets of the Company or any Restricted Subsidiary other than the
equipment or inventory acquired; (viii) Indebtedness of any Restricted
Subsidiary not to exceed, at any one time outstanding, 80% of the accounts
receivable net of reserves and allowances for doubtful accounts, determined in
accordance with GAAP, of such Restricted Subsidiary and its Restricted
Subsidiaries (without duplication); PROVIDED, HOWEVER, that such Indebtedness is
not Guaranteed by the Company or any of its Restricted Subsidiaries; (ix)
Indebtedness of the Company, to the extent the proceeds thereof are immediately
used to purchase 1995 Notes or 1997 Notes tendered in an offer to purchase made
as a result of a Change of Control; and (x) the Exchange Debentures.
For purposes of determining any particular amount of Indebtedness under this
"Limitation on Indebtedness" covenant, Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this "Limitation on Indebtedness" covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in the above clauses, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Guarantee of Indebtedness of any Unrestricted Subsidiary.
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Indebtedness which restricts the Company's ability to pay cash
dividends on, or to redeem on December 15, 2007, the Exchangeable Preferred
Stock in accordance with its terms.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
The Company will not (i) Incur any Indebtedness, other than the Exchange
Debentures, that is expressly made subordinated in right of payment to any
Senior Indebtedness of the Company unless such Indebtedness, by its terms and by
the terms of any agreement or instrument pursuant to which such Indebtedness is
outstanding is expressly made PARI PASSU with, or subordinate in right of
payment to, the Exchange Debentures pursuant to provisions substantially similar
to those contained in Article Ten of the Exchange Indenture; PROVIDED, HOWEVER,
that the foregoing limitation shall not apply to distinctions between categories
of Senior Indebtedness that exist by reason of any Liens or Guarantees arising
or created in respect of some but not all Senior Indebtedness or (ii) Incur any
Indebtedness secured by a Lien if such Indebtedness is not Senior Indebtedness,
unless contemporaneously therewith effective provision is made to secure the
Exchange Debentures equally and ratably with such secured Indebtedness for so
long as such secured Indebtedness is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on its Capital Stock (other than (a) dividends or distributions in respect of
the Exchangeable Preferred Stock or (b) dividends or distributions payable
solely in shares of its or such Restricted Subsidiary's Capital Stock (other
than Redeemable Stock) held by such holders or in options, warrants or other
rights to acquire such shares of Capital Stock) other than such Capital Stock
held by the Company or any of its Restricted Subsidiaries (and other than pro
rata dividends or distributions on Common Stock of Restricted Subsidiaries);
(ii) repurchase, redeem, retire or otherwise acquire for value any shares of
Capital Stock (other than the Exchangeable Preferred Stock) of the Company
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by Persons other than any Wholly Owned Restricted Subsidiaries of
the Company; (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Exchange Debentures; or (iv) make any Investment, other
than a Permitted Investment, in
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any Person (such payments or any other actions described in clauses (i) through
(iv) being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default shall have
occurred and be continuing, (B) except with respect to any Investment (other
than an Investment consisting of the designation of a Restricted Subsidiary as
an Unrestricted Subsidiary), the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant, or (C) the aggregate amount expended for all Restricted Payments (the
amount so expended, if other than in cash, to be determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) after the Deemed Closing Date shall exceed the sum of (1) 50%
of the aggregate amount of the Adjusted Consolidated Net Income (or, if the
Adjusted Consolidated Net Income is a loss, minus 100% of such amount)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Deemed Closing
Date and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed pursuant to "--SEC Reports
and Reports to Holders" PLUS (2) the aggregate Net Cash Proceeds received by the
Company after the Deemed Closing Date from the issuance and sale permitted by
the Certificate of Designation of its Capital Stock (other than Junior Stock or
Redeemable Stock), including the Exchangeable Preferred Stock, to a Person who
is not a Subsidiary of the Company, or from the issuance to a Person who is not
a Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any convertible
Indebtedness, Redeemable Stock or any options, warrants or other rights that are
redeemable at the option of the holder, or are required to be redeemed, prior to
the Stated Maturity of the 1997 Senior Notes, 1997 Senior Subordinated Notes and
the Exchange Debentures), plus (3) an amount equal to the net reduction in
Investments (other than reductions in Permitted Investments and other than
reductions in Investments made pursuant to clauses (vi) or (vii) of the second
paragraph of this "--Limitation on Restricted Payments" covenant) in any Person
resulting from payments of interest on Indebtedness, dividends, repayments of
loans or advances, or other transfers of assets, in each case to the Company or
any Restricted Subsidiary (except to the extent any such payment is included in
the calculation of Adjusted Consolidated Net Income), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed the amount of
Investments previously made by the Company and its Restricted Subsidiaries in
such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the
Exchange Debentures, including premium, if any, and accrued and unpaid interest,
with the proceeds of, or in exchange for, Indebtedness Incurred under clause
(iii) of the second paragraph of the covenant described under "--Limitation on
Indebtedness"; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent sale of, shares of Capital Stock or options, warrants or other rights
to purchase such Capital Stock (in each case other than Redeemable Stock) of the
Company; (iv) the making of any other Restricted Payment made by exchange for,
or out of the proceeds of, a substantially concurrent sale of shares of the
Capital Stock or options, warrants or other rights to acquire such Capital Stock
(in each case other than Redeemable Stock) of the Company; (v) payments or
distributions, in the nature of satisfaction of dissenters' rights, pursuant to
or in connection with a consolidation, merger or transfer of assets that
complies with the provisions of the Certificate of Designation applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company; (vi) Investments, not to exceed $15.0
million at any one time outstanding; (vii) Investments, not to exceed $15.0
million at any one time outstanding, in entities, substantially all of the
assets of which consist of Telecommunications Assets; (viii) cash payments in
lieu of the issuance of fractional shares of Common Stock upon conversion
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(including mandatory conversion) of the Convertible Notes as provided for in the
Convertible Notes Indenture; (ix) cash payments in lieu of the issuance of
fractional shares of Common Stock of the Company upon conversion of any class of
Preferred Stock of the Company; PROVIDED, HOWEVER, that this exception shall not
be available with respect to more than two such conversions with respect to any
such class of Preferred Stock by any given Affiliate of the Company; and (x)
Investments in entities that directly (or indirectly through subsidiaries) own
licenses granted by the FCC or any other governmental entity with authority to
grant telecommunications licenses; PROVIDED, HOWEVER, that, in each case the
Company or a Restricted Subsidiary shall, at the time of making such Investment,
have an active role in the management or operation of such entity and in the
provision of telecommunications services by such entity; PROVIDED, HOWEVER,
that, except in the case of clauses (i) and (iii) of this paragraph, no Voting
Rights Triggering Event shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth herein. Any Investments made
other than in cash shall be valued, in good faith, by the Board of Directors.
Any Investment made pursuant to clause (vi) or (vii) of this paragraph shall be
deemed to be no longer outstanding (and repaid in full) if and when the Person
in which such Investment is made becomes a Restricted Subsidiary of the Company.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof)), and the Net
Cash Proceeds from any issuance and sale of Capital Stock referred to in clauses
(iii) or (iv) shall be included in calculating whether the conditions of clause
(C) of the first paragraph of this "Limitation on Restricted Payments" covenant
have been met with respect to any subsequent Restricted Payments. In the event
the proceeds of an issuance of Capital Stock of the Company are used for the
redemption, repurchase or other acquisition of Indebtedness that is PARI PASSU
with the Exchange Debentures or Preferred Stock that is on a parity with the
Exchangeable Preferred Stock then the Net Cash Proceeds of such issuance shall
be included in clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant only to the extent such proceeds are not so used
for such redemption, repurchase or other acquisition.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary; (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary that owns, directly or
indirectly, any Capital Stock of such Restricted Subsidiary; (iii) make loans or
advances to the Company or any other Restricted Subsidiary that owns, directly
or indirectly, any Capital Stock of such Restricted Subsidiary; or (iv) transfer
any of its property or assets to the Company or any other Restricted Subsidiary
that owns, directly or indirectly, any Capital Stock of such Restricted
Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or restrictions
(i) existing on the Issue Date in the Certificate Designation or any other
agreement in effect on the Issue Date, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED, HOWEVER, that the
encumbrances and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the holders of
Exchangeable Preferred Stock than those encumbrances or restrictions that are
then in effect and that are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law; (iii) existing with respect
to any Person or the property or assets of such Person acquired by the Company
or any Restricted Subsidiary, at the time of such acquisition and not incurred
in contemplation thereof, which encumbrances or restrictions are not applicable
to any Person or the property or assets of any Person other than such Person or
the property or assets of such Person so acquired; (iv) in the case of clause
(iv) of the first 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
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<PAGE>
contract or similar property or asset, (B) existing by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the Certificate of Designation or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary or; (v) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary. Nothing contained in this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary
from (i) restricting the sale or other disposition of property or assets of the
Company or any of its Restricted Subsidiaries that secure Indebtedness of the
Company or any of its Restricted Subsidiaries or (ii) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted under Section 4.09
of the 1997 Senior Notes Indenture as in effect on the Deemed Closing Date.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances or sales to foreign nationals of shares of
Capital Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law; (iii) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary; or (iv) issuances or sales of Common Stock of Restricted
Subsidiaries, other than the Telecommunications Subsidiaries, if within six
months of each such issuance or sale, the Company or such Restricted Subsidiary
applies an amount not less than the Net Cash Proceeds thereof (if any) in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers (a) a written agreement and (b) a supplemental indenture to the
Exchange Indenture providing for a Guarantee (a "Subsidiary Guarantee") of
payment of the Exchangeable Preferred Stock and the Exchange Debentures,
respectively, by such Restricted Subsidiary and (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any other
rights against the Company or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee; PROVIDED,
HOWEVER, that this paragraph shall not be applicable to any Guarantee of any
Restricted Subsidiary that (x) existed at the time such Person became a
Restricted Subsidiary and (y) was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) PARI PASSU with the Exchange Debentures then the
Guarantee of such Guaranteed Indebtedness shall be PARI PASSU with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Exchange
Debentures then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the Exchange Debentures.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by this Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
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LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
obtains a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view; (ii) any transaction solely between
the Company and any of its Wholly Owned Restricted Subsidiaries or solely
between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable
fees to directors of the Company who are not employees of the Company; (iv) any
payments or other transactions pursuant to any tax-sharing agreement between the
Company and any other Person with which the Company files a consolidated tax
return or with which the Company is part of a consolidated group for tax
purposes; or (v) any Restricted Payments not prohibited under "--Limitation on
Restricted Payments" (other than pursuant to clause (iv) of the definition of
"Permitted Investment" or clause (vi) of the second paragraph of such covenant).
Notwithstanding the foregoing, any transaction covered by the first paragraph of
this "Limitation on Transactions with Shareholders and Affiliates" covenant and
not covered by clauses (ii) through (iv) of this paragraph, the aggregate amount
of which exceeds $250,000 in value, must be approved or determined to be fair in
the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Deemed
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been prepared), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within six months after
the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net
Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay Indebtedness of the Company that is not subordinated to the
Exchange Debentures, or Indebtedness of any Restricted Subsidiary, in each case
owing to a Person other than the Company or any of its Restricted Subsidiaries
or (B) invest an equal amount, or the amount not so applied pursuant to clause
(A) (or enter into a definitive agreement committing to so invest within six
months after the date of such agreement), in property or assets of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the six-month period referred to in clause (i)) such excess Net Cash Proceeds
(to the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such six-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
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If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10.0 million, the Company
must commence, not later than the 15th Business Day after the first day of such
month, and consummate an Offer to Purchase from the holders of the Exchangeable
Preferred Stock on a pro rata basis a number of shares of Exchangeable Preferred
Stock having an aggregate Accumulated Amount equal to the Excess Proceeds on
such date, at a purchase price per share of Exchangeable Preferred Stock equal
to 101% of such Accumulated Amount on such date of purchase, plus accrued and
unpaid dividends (if any) on such Accumulated Amount to the date of purchase;
PROVIDED, HOWEVER, that no Offer to Purchase shall be required to be commenced
with respect to the Exchangeable Preferred Stock until the Business Day
following the payment date with respect to the offer(s) to purchase any 1997
Notes and need not be commenced if the Excess Proceeds remaining after
application to the 1997 Notes purchased in such Offer to Purchase applicable
thereto are less than $10.0 million; PROVIDED FURTHER, HOWEVER, that (i) no
Exchangeable Preferred Stock may be purchased under this "Limitation on Asset
Sales" covenant unless the Company shall have purchased all 1997 Notes tendered
pursuant to the offer(s) to purchase applicable thereto and (ii) no Exchangeable
Preferred Stock shall be required to be purchased under this covenant to the
extent, and for so long as, such purchase is prohibited under any indebtedness
of the Company. The Company's existing indebtedness contains, and future
indebtedness of the Company is likely to contain, restrictions on the ability of
the Company to make an Offer to Purchase the Exchangeable Preferred Stock
pursuant to this covenant. See "Risk Factors -- Ability to Pay Dividends On and
Redeem the Exchangeable Preferred Stock and to Issue Exchange Debentures."
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the SEC, if any
shares of Exchangeable Preferred Stock are outstanding, the Company shall file
with the SEC all such reports and other information as it would be required to
file with the SEC by Sections 13(a) or 15(d) under the Exchange Act. See
"Available Information." The Company shall supply each Holder of Exchangeable
Preferred Stock, without cost to such Holders, copies of such reports or other
information.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Certificate of Designation, the Company shall not
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person (other than a consolidation or merger with or into
a Wholly Owned Restricted Subsidiary with a positive net worth; PROVIDED,
HOWEVER, that, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the surviving Person or the Company)
shall be issued or distributed to the stockholders of the Company) or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume all of the obligations of the
Company on the Exchangeable Preferred Stock and under the Certificate of
Designation; (ii) immediately after giving effect to such transaction, no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis the Company, or any Person
becoming the successor obligor of the Exchangeable Preferred Stock, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction; (iv) immediately after giving
effect to such transaction on a pro forma basis the Company, or any Person
becoming the successor obligor of the Exchangeable Preferred Stock, could Incur
at least $1.00 of Indebtedness under the first paragraph of the covenant
described under "--Covenants--Limitation on Indebtedness;" and (v) the Company
delivers to each Holder of Exchangeable Preferred Stock an Officers' Certificate
(attaching the arithmetical computations to demonstrate compliance with clauses
(iii) and, if applicable, (iv)) and Opinion of Counsel, in each case stating
that such consolidation, merger or transfer
55
<PAGE>
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with; PROVIDED, HOWEVER,
that clauses (iii) and (iv) above do not apply if, in the good faith
determination of the Board of Directors of the Company, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of the Company; PROVIDED
FURTHER, HOWEVER, that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations.
BOOK-ENTRY, DELIVERY AND FORM
The Exchangeable Preferred Stock sold will be issued in the form of a Global
Security. The Global Security will be deposited with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of the
Depositary or its nominee. Except as set forth below, the Global Security may be
transferred, in whole and not in part, only to the Depositary or another nominee
of the Depositary. Investors may hold their beneficial interests in the Global
Security directly through the Depositary if they have an account with the
Depositary or indirectly through organizations which have accounts with the
Depositary.
Shares of Exchangeable Preferred Stock that are issued as described below
under "Certificated Exchangeable Preferred Stock" will be issued in definitive
form. Upon the transfer of Exchangeable Preferred Stock in definitive form, such
Exchangeable Preferred Stock will, unless the Global Security has previously
been exchanged for Exchangeable Preferred Stock in definitive form, be exchanged
for an interest in the Global Security representing the Liquidation Preference
of Exchangeable Preferred Stock being transferred.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depositary's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the Liquidation Preference of the
Exchangeable Preferred Stock represented by such Global Security to the accounts
of participants. The accounts to be credited shall be designated by the Initial
Purchasers of such Exchangeable Preferred Stock. Ownership of beneficial
interests in the Global Security will be limited to participants or persons that
may hold interests through participants. Ownership of beneficial interests in
the Global Security will be shown on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depositary
(with respect to participants' interest) and such participants (with respect to
the owners of beneficial interests in the Global Security other than
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Security.
So long as the Depositary, or its nominee, is the registered holder and
owner of the Global Security, the Depositary or such nominee, as the case may
be, will be considered the sole legal owner and holder of the related
Exchangeable Preferred Stock for all purposes of such Exchangeable Preferred
Stock and the Certificate of Designation. Except as set forth below, owners of
beneficial interests in the Global Security will not be entitled to have the
Exchangeable Preferred Stock represented by the Global Security registered in
their names, will not receive or be entitled to receive physical delivery of
certificated
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Exchangeable Preferred Stock in definitive form and will not be considered to be
the owners or holders of any Exchangeable Preferred Stock under the Global
Security. The Company understands that under existing industry practice, in the
event an owner of a beneficial interest in the Global Security desires to take
any action that the Depositary, as the holder of the Global Security, is
entitled to take, the Depositary would authorize the participants to take such
action, and that the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Payment in respect of dividends and redemption payments on Exchangeable
Preferred Stock represented by the Global Security registered in the name of and
held by the Depositary or its nominee will be
made to the Depositary or its nominee, as the case may be, as the registered
owner and holder of the Global Security.
The Company expects that the Depositary or its nominee, upon receipt of any
payment in respect of dividends and redemption payments on the Global Security,
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the liquidation preference of the
Global Security as shown on the records of the Depositary or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in the Global Security held through such participants will be governed
by standing instructions and customary practices and will be the responsibility
of such participants. The Company will not have any responsibility or liability
for any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Global Security for any Exchangeable
Preferred Stock or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or for any other aspect of the
relationship between the Depositary and its participants or the relationship
between such participants and the owners of beneficial interests in the Global
Security owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchangeable Preferred Stock in definitive form, the Global Security may not be
transferred except as a whole by the Depositary to a nominee of such Depositary
or by a nominee of such Depositary to such Depositary or another nominee of such
Depositary.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Security among participants of
the Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Transfer Agent nor the Company will have any responsibility for the performance
by the Depositary or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED EXCHANGEABLE PREFERRED STOCK
The Exchangeable Preferred Stock represented by the Global Security is
exchangeable for certificated Exchangeable Preferred Stock in definitive form of
like tenor as such Exchangeable Preferred Stock if (i) the Depositary notifies
the Company that it is unwilling or unable to continue as Depositary for the
Global Security and a successor is not promptly appointed or if at any time the
Depositary ceases to be a clearing agency registered under the Exchange Act,
(ii) the Company in its discretion at any time determines not to have all of the
Exchangeable Preferred Stock represented by the Global Security or (iii) any
Voting Rights Triggering Event occurs. Any Exchangeable Preferred Stock that is
exchangeable pursuant to the preceding sentence is exchangeable for certificated
Exchangeable Preferred Stock issuable in authorized denominations and registered
in such names as the Depositary shall direct. Subject to the foregoing, the
Global Security is not exchangeable, except for a Global Security of the same
aggregate denomination to be registered in the name of the Depositary or its
nominee. In addition, such certificates will bear the legend referred to under
"Notice to Investors" (unless the Company determines otherwise in accordance
with applicable law) subject, with respect to such Exchangeable Preferred Stock,
to the provisions of such legend.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under an indenture to be
entered into at the time of issuance of the Exchange Debentures (the "Exchange
Indenture"), between WinStar Communications, Inc. (for purposes of this
Description of the Exchange Debentures, the "Company") and such qualified trust
company as shall be selected by the Company, as Transfer Agent (in such
capacity, the "Transfer Agent"). The following is a summary of certain
provisions of the Exchange Indenture and the Exchange Debentures. A copy of the
Exchange Indenture and the form of Exchange Debentures are available upon
request to the Company at the address set forth under "Available Information."
The following summary of certain provisions of the Exchange Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Exchange Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended. The terms of the Specified Indentures
limit the Company's ability to issue the Exchange Debentures. See "Risk
Factors--Ability to Pay Dividends on and Redeem the Exchangeable Preferred Stock
and Issue Exchange Debentures."
Although for United States federal income tax purposes a significant amount
of original issue discount, taxable as ordinary income, may be recognized by a
Holder of Exchange Debentures as such discount is amortized from the date of
issuance of the Exchange Debentures, Holders of Exchange Debentures will not
receive any cash payments on the Exchange Debentures until the Cash Payment
Date. For a description of certain tax matters related to an investment in the
Exchange Debentures, see "Certain U.S. Federal Income Tax Consequences."
The Exchange Debentures will be unsecured senior subordinated obligations of
the Company, limited in aggregate Accumulated Amount to the Accumulated Amount
of the Exchangeable Preferred Stock. The Exchange Debentures will be issued only
in fully registered form, without coupons, in denominations of $1,000 and any
integral multiple of $1,000 (other than as described in "Description of the
Exchangeable Preferred Stock--Exchange" ). The Exchange Debentures may be
exchanged or transferred at the office or agency of the Company in the Borough
of Manhattan, The City of New York.
The Exchange Debentures will mature on December 15, 2007. Until the Cash
Payment Date, interest on the Exchange Debentures will accrue at a rate of
14 1/4% of the Accumulated Amount per annum and will be compounded semiannually
on each Interest Payment Date, but, except as described in the second following
sentence, interest on the Exchange Debentures, will not be payable in cash.
Until such time as the Accumulated Amount becomes a fixed and final amount
pursuant to the first proviso to the definition of "Accumulated Amount," the
interest accruing on the Exchange Debentures will be deemed paid by the periodic
adjustments provided for in such definition. Commencing on the first Interest
Payment Date following the later of the Exchange Date or the Cash Payment Date,
interest will be payable in cash at a rate per annum equal to 14 1/4% of the
Accumulated Amount as of the Exchange Date. Thereupon, cash interest will be
payable semiannually to Holders of record at the close of business on June 1 or
December 1 immediately preceding the interest payment date of June 15 and
December 15 of each year. Interest on the Exchange Debentures will be computed
on the basis of a 360-day year comprised of twelve 30-day months and the actual
number of days elapsed.
OPTIONAL REDEMPTION
The Exchange Debentures will not be redeemable at the option of the Company
prior to December 15, 2002. Thereafter, the Exchange Debentures will be
redeemable, at the Company's option, in whole or in part, at any time or from
time to time, upon not less than 30 nor more than 60 days' prior notice mailed
by first-class mail to each Holder's registered address, at the following
redemption prices (expressed in percentages of the Accumulated Amount of the
Exchange Debentures), plus accrued and unpaid interest, if any, on such
Accumulated Amount to the redemption date (subject to the right of
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Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month period
commencing on December 15 of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2002............................................................................. 107.125%
2003............................................................................. 105.344%
2004............................................................................. 103.563%
2005............................................................................. 101.781%
2006 and thereafter.............................................................. 100.000%
</TABLE>
In the case of any partial optional redemption, selection of the Exchange
Debentures for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Exchange Debentures are listed, or if the Exchange Debentures are not listed on
a national securities exchange, on a pro rata basis, by lot or such other method
as the Trustee, in its sole discretion, shall deem fair and appropriate;
PROVIDED, HOWEVER, that no Exchange Debenture of $1,000 in principal amount or
less shall be redeemed in part. If any Exchange Debenture is to be redeemed in
part only, the notice of redemption relating to such Exchange Debenture shall
state the portion of the principal amount thereof to be redeemed. A new Exchange
Debenture in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Exchange Debenture.
The Company's ability to redeem the Exchange Debentures at its option is
limited by the terms of the Company's outstanding indebtedness. The Company may
not be able to redeem the Exchange Debentures at its option unless it
simultaneously redeems or repays such other indebtedness. See "Risk Factors--
Ability to Pay Dividends on and Redeem the Exchangeable Preferred Stock and
Issue Exchange Debentures."
RANKING
The indebtedness evidenced by the Exchange Debentures will represent
unsecured senior subordinated obligations of the Company. The payment of the
Senior Subordinated Obligations will, to the extent set forth in the Exchange
Indenture, be subordinated in right of payment to the prior payment in full, in
cash or cash equivalents, of all Senior Indebtedness of the Company. As of the
Issue Date, there will be no indebtedness of the Company outstanding that would
rank PARI PASSU with or junior to the Exchange Debentures, except for the
Convertible Notes and the 1997 Senior Subordinated Notes, which would rank PARI
PASSU with the Exchange Debentures. See "Risk Factors--Substantial Indebtedness;
Ability to Service Indebtedness and to Cover Fixed Charges" and "--Subordination
of the Exchange Debentures."
"Senior Subordinated Obligations" is defined in the Exchange Indenture to
mean any principal of, premium, if any, or interest on the Exchange Debentures
payable pursuant to the terms of the Exchange Debentures or upon acceleration,
to the extent relating to the purchase of Exchange Debentures or amounts
corresponding to such principal, premium, if any, or interest on the Exchange
Debentures.
As of September 30, 1997, after giving effect to the December 1997 Preferred
Stock Placement and the application of the proceeds thereof, the October 1997
Debt Placement, the US ONE Asset Acquisition and the Midcom Acquisition, the
Company would have had outstanding approximately $890.7 million of indebtedness,
$693.2 million of which would have been Senior Indebtedness (which would rank
senior to the Exchange Debentures).
The Company is a holding company. Substantially all the operations of the
Company are conducted through its subsidiaries. Claims of creditors of such
subsidiaries, including trade creditors, secured creditors and creditors holding
indebtedness and guarantees issued by such subsidiaries, and claims of preferred
stockholders (if any) of such subsidiaries, generally will have priority with
respect to the assets
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and earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Exchange Debentures. The Exchange Debentures,
therefore, are effectively subordinated to creditors (including trade creditors)
and preferred stockholders (if any) of subsidiaries of the Company. As of
September 30, 1997, after giving effect to the December 1997 Preferred Stock
Placement and the application of the proceeds thereof, the October 1997 Debt
Placement and the US ONE Asset Acquisition, the total liabilities of the
Company's subsidiaries would have been approximately $359.7 million, including
trade payables. Although the Certificate of Designation and the Exchange
Indenture limit the incurrence of Indebtedness and the issuance of preferred
stock of certain of the Company's subsidiaries, such limitations are subject to
a number of significant qualifications. Moreover, the Certificate of Designation
and the Exchange Indenture do not impose any limitation on the incurrence by
such subsidiaries of liabilities that are not considered Indebtedness under the
Certificate of Designation and the Exchange Indenture.
To the extent any payment of Senior Indebtedness of the Company (whether by
or on behalf of the Company, as proceeds of security or enforcement of any right
of setoff or otherwise) is declared to be fraudulent or preferential, set aside
or required to be paid to any receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then if such payment is
recovered by, or paid over to, such receiver, trustee in bankruptcy, liquidating
trustee, agent or other similar Person, the Senior Indebtedness of the Company
or part thereof originally intended to be satisfied shall be deemed to be
reinstated and outstanding as if such payment had not occurred. To the extent
the obligation to repay any Senior Indebtedness of the Company is declared to be
fraudulent, invalid or otherwise set aside under any bankruptcy, insolvency,
receivership, fraudulent conveyance or similar law, then the obligation so
declared fraudulent, invalid or otherwise set aside (and all other amounts that
would come due with respect thereto had such obligation not been so affected)
shall be deemed to be reinstated and outstanding as Senior Indebtedness of the
Company for all purposes of the Exchange Indenture as if such declaration,
invalidity or setting aside had not occurred. Upon any payment of distribution
of assets or securities of the Company of any kind or character, whether in
cash, property or securities, upon any dissolution or winding up or total or
partial liquidation or reorganization of the Company, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all
amounts due or to become due upon all Senior Indebtedness of the Company
(including any interest accruing subsequent to an event of bankruptcy, whether
or not such interest is an allowed claim enforceable against the debtor under
the Bankruptcy Code) shall first be paid in full, in cash or cash equivalents,
before the Holders of the Exchange Debentures or the Trustee, on behalf of the
Holders of the Exchange Debentures, shall be entitled to receive any payment by
the Company on account of Senior Subordinated Obligations, or any payment to
acquire any of the Exchange Debentures for cash, property or securities, or any
distribution with respect to the Exchange Debentures of any cash, property or
securities. Before any payment may be made by, or on behalf of, the Company of
any Exchange Debentures upon any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets or securities of the
Company of any kind or character, whether in cash, property or securities, to
which the Holders of the Exchange Debentures or the Trustee, on behalf of the
Holders of the Exchange Debentures, would be entitled, but for the subordination
provisions of the Exchange Indenture, shall be made by the Company or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other similar
Person making such payment or distribution or by the Holders of the Exchange
Debentures or the Trustee if received by them or it, directly to the holders of
the Senior Indebtedness of the Company (pro rata to such holders on the basis of
the respective amounts of Senior Indebtedness of the Company held by such
holders) or their representatives as their respective interests appear, to the
extent necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment, distribution or
provisions therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of the Company of Senior
Subordinated Obligations, whether pursuant to the terms of the Exchange
Debentures or upon acceleration or otherwise, shall be
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made if, at the time of such payment, there exists a default in the payment of
all or any portion of the obligations on any Senior Indebtedness of the Company,
and such default shall not have been cured or waived or the benefits of this
sentence waived by or on behalf of the holders of such Senior Indebtedness. In
addition, during the continuance of any other event of default with respect to
any Designated Senior Indebtedness of the Company pursuant to which the maturity
thereof may be accelerated, upon receipt by the Trustee of written notice from
the trustee or other representative for the holders of such Designated Senior
Indebtedness (or the holders of at least a majority in principal amount of such
Designated Senior Indebtedness then outstanding), no payment of Senior
Subordinated Obligations may be made by or on behalf of the Company upon or in
respect of the Exchange Debentures for a period (a "Payment Blockage Period")
commencing on the date of receipt of such notice and ending 159 days thereafter
(unless, in each case, such Payment Blockage Period shall be terminated by
written notice to the Senior Subordinated Exchange Debentures Trustee for such
trustee of, or other representative for, such holders). Not more than one
Payment Blockage Period may be commenced with respect to the Exchange Debentures
during any period of 360 consecutive days. Notwithstanding anything in the
Exchange Indenture to the contrary, there must be 180 consecutive days in any
360-day period in which no Payment Blockage Period is in effect. No event of
default that existed or was continuing (it being acknowledged that any
subsequent action that would give rise to any event of default pursuant to any
provision under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose) on the date of the
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness of the Company initiating such Payment Blockage Period shall
be, or shall be made, the basis for the commencement of a second Payment
Blockage Period by the representative for, or the holders of, such Designated
Senior Indebtedness, whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors or the Company who are not holders of
Senior Indebtedness of the Company may recover less, ratably, than holders of
Senior Indebtedness of the Company and may recover more, ratably, than Holders
of Exchange Debentures.
"Senior Indebtedness" as defined under the Exchange Indenture means the
following obligations of the Company, whether outstanding on the Issue Date or
thereafter Incurred: (i) all Indebtedness and all other monetary obligations of
the Company under the 1995 Senior Exchange Debentures, the 1997 Senior Exchange
Debentures and the Equipment Note Guarantees, (ii) all other Indebtedness of the
Company (other than the 1997 Senior Subordinated Notes, Exchange Debentures and
the Convertible Notes), including principal and interest on such Indebtedness,
unless such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, is PARI PASSU with, or
subordinated in right of payment to, the Exchange Debentures and (iii) all fees,
expenses and indemnities payable in connection with the 1995 Senior Notes, the
1997 Senior Notes and the Equipment Note Guarantees (including any agreements
pursuant to which the 1995 Senior Notes, the 1997 Senior Notes or the Equipment
Note Guarantees were issued); PROVIDED, HOWEVER, that the term "Senior
Indebtedness" as defined in the Exchange Indenture shall not include (a) any
Indebtedness of the Company that, when Incurred and without respect to any
election under Section 1111(b) of the Bankruptcy Code, was without recourse to
the Company, (b) any Indebtedness of the Company to a Subsidiary of the Company
or to a joint venture in which the Company has an interest, (c) any Indebtedness
of the Company, to the extent not permitted pursuant to the covenants described
under "--Covenants--Limitation on Indebtedness" or "--Covenants--Limitation on
Senior Subordinated Indebtedness," (d) any repurchase, redemption or other
obligation in respect of Redeemable Stock, (e) any Indebtedness to any employee
of the Company or any of its Subsidiaries, (f) any liability for federal, state,
local or other taxes owed or owing by the Company or (g) any trade payables of
the Company. Senior Indebtedness of the Company will also include interest
accruing subsequent to events of bankruptcy of the Company and its Subsidiaries
at the rate provided for in the document governing such Senior Indebtedness,
whether or not such interest is an allowed claim enforceable against the debtor
in a bankruptcy case under federal bankruptcy law.
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"Designated Senior Indebtedness" as defined under the Exchange Indenture
means the 1995 Senior Notes, the 1997 Senior Notes, the Equipment Note
Guarantees and any Indebtedness constituting Senior Indebtedness of the Company
that, at the date of determination, has an aggregate principal amount of at
least $25.0 million and that is specifically designated by the Company in the
instrument creating or evidencing such Senior Indebtedness as "Designated Senior
Indebtedness."
The Exchange Indenture will specifically provide that the Exchange
Debentures will rank PARI PASSU with the Convertible Notes and the 1997 Senior
Subordinated Notes.
BOOK-ENTRY, DELIVERY AND FORM
If at the time the Exchange Debentures are issued, the Exchangeable
Preferred Stock is represented by a Global Security, the Exchange Debentures
will be issued in the form of a global note (the "Global Note"). The Global Note
will be deposited with, or on behalf of, the Depositary and registered in the
name of the Depositary or its nominee. Except as set forth below, the Global
Note may be transferred, in whole and not in part, only to the Depositary or
another nominee of the Depositary. Investors may hold their beneficial interests
in the Global Note directly through the Depositary if they have an account with
the Depositary or indirectly through organizations which have accounts with the
Depositary.
Exchange Debentures that are issued as described below under "Certificated
Exchange Debentures" will be issued in definitive form. Upon the transfer of an
Exchange Debenture in definitive form, such Exchange Debenture will, unless the
Global Note has previously been exchanged for Exchange Debentures in definitive
form, be exchanged for an interest in the Global Note representing the principal
amount of Exchange Debentures being transferred.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depositary's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Note, the Depositary will credit, on its
book-entry registration and transfer system, the principal amount of the
Exchange Debentures represented by such Global Note to the accounts of
participants. Ownership of beneficial interests in the Global Note will be
limited to participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depositary (with respect to participants' interest) and such
participants (with respect to the owners of beneficial interests in the Global
Note other than participants). The laws of some jurisdictions may require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Note.
So long as the Depositary, or its nominee, is the registered holder and
owner of the Global Note, the Depositary or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Exchange
Debentures for all purposes of such Exchange Debentures and the Exchange
Indenture. Except as set forth below, owners of beneficial interests in the
Global Note will not be entitled to have the Exchange Debentures represented by
the Global Note registered in their names, will not receive or be
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entitled to receive physical delivery of certificated Exchange Debentures in
definitive form and will not be considered to be the owners or holders of any
Exchange Debentures under the Global Note. The Company understands that under
existing industry practice, in the event an owner of a beneficial interest in
the Global Note desires to take any action that the Depositary, as the holder of
the Global Note, is entitled to take, the Depositary would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Payment of principal of and interest on Exchange Debentures represented by
the Global Note registered in the name of and held by the Depositary or its
nominee will be made to the Depositary or its nominee, as the case may be, as
the registered owner and holder of the Global Note.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depositary or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will be the responsibility of such participants. The
Company will not have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Exchange Debenture or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between the Depositary and
its participants or the relationship between such participants and the owners of
beneficial interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Exchange Debentures in definitive form, the Global Note may not be transferred
except as a whole by the Depositary to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depositary or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE DEBENTURES
The Exchange Debentures represented by the Global Note are exchangeable for
certificated Exchange Debentures in definitive form of like tenor as such
Exchange Debentures in denominations of U.S. $1,000 and integral multiples
thereof if (i) the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for the Global Note and a successor is not
promptly appointed, or if at any time the Depositary ceases to be a clearing
agency registered under the Exchange Act, (ii) the Company in its discretion at
any time determines not to have all of the Exchange Debentures represented by
the Global Note or (iii) a default entitling the holders of the Exchange
Debentures to accelerate the maturity thereof has occurred and is continuing.
Any Exchange Debenture that is exchangeable pursuant to the preceding sentence
is exchangeable for certificated Exchange Debentures issuable in authorized
denominations and registered in such names as the Depositary shall direct.
Subject to the foregoing, the Global Note is not exchangeable, except for a
Global Note of the same aggregate denomination to be registered in the name of
the Depositary or its nominee. In addition, such certificates will bear the
legend referred to under "Transfer Restrictions" (unless the Company determines
otherwise in accordance with applicable law) subject, with respect to such
Exchange Debentures, to the provisions of such legend.
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SAME-DAY PAYMENT
The Exchange Indenture will require that payments in respect of Exchange
Debentures (including principal, premium and interest) be made by wire transfer
of immediately available funds to the accounts specified by the Holders thereof
or, if no such account is specified, by mailing a check to each such Holder's
registered address.
REPURCHASE OF EXCHANGE DEBENTURES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all the Exchange Debentures
then outstanding, at a purchase price equal to 101% of the Accumulated Amount of
the Exchange Debentures, plus accrued and unpaid interest (if any) on such
Accumulated Amount to the date of purchase. Prior to the mailing of the notice
to Holders of Exchange Debentures commencing such Offer to Purchase, but in any
event within 30 days following any Change of Control, the Company covenants to
(i) repay in full all indebtedness of the Company that would prohibit the
repurchase of the Exchange Debentures pursuant to such Offer to Purchase or (ii)
obtain any requisite consents under instruments governing any such indebtedness
of the Company to permit repurchase of the Exchange Debentures. The Company
shall first comply with the covenant in the preceding sentence before it shall
repurchase Exchange Debentures pursuant to the "Repurchase of Exchange
Debentures Upon a Change of Control" covenant.
Under the terms of the Exchange Indenture, the Company may not repurchase
any Exchange Debentures or any other subordinated obligations, including the
Convertible Notes and the 1997 Senior Subordinated Notes, pursuant to this
covenant until it has (i) repurchased all of the 1995 Senior Notes, the 1997
Senior Notes and (ii) caused each of WEC or WEC II to repurchase all Equipment
Notes and WEC II Equipment Notes, respectively, tendered pursuant to any offer
to purchase as a result of such Change of Control. However, if the Company is
unable to repay or cause repayment of all of its indebtedness that would
prohibit a repurchase of the Exchange Debentures or is unable to obtain the
consents of the holders of indebtedness, if any, outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase of
Exchange Debentures or otherwise fails to purchase any Exchange Debentures
validly tendered, then the Company will have breached such covenant. This breach
will constitute an Event of Default under the Exchange Indenture if it continues
for a period of 30 consecutive days after written notice is given to the Company
by the holders of at least 25% in aggregate amount of the Exchange Debentures
outstanding. In addition, the failure by the Company to repurchase Exchange
Debentures at the conclusion of the Offer to Purchase will constitute a breach
of this covenant without any waiting period or notice requirements.
There can be no assurance that the Company, WEC and WEC II have sufficient
funds available at the time of a Change of Control to make any payment required
by the foregoing covenant (as well as any similar covenant that may be contained
in other securities of the Company, WEC and WEC II which might be outstanding at
the time). The above covenant requiring the Company to repurchase the Exchange
Debentures will, unless the consents referred to above are obtained, require the
Company, WEC and WEC II to repay all indebtedness then outstanding which by its
terms would prohibit such Exchange Debentures repurchase, either prior to or
concurrently with such Exchange Debentures repurchase.
The Change of Control purchase feature is a result of negotiations between
the Company and the Initial Purchasers. The Company has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into transactions,
including acquisitions, refinancings or recapitalizations, that would not
constitute a Change of Control, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness are contained in the
covenant described under "--Certain Covenants--
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Limitation on Indebtedness." Such restrictions can only be waived with the
consent of the holders of a majority of the outstanding shares of the Exchange
Debentures. Except for the limitations contained in such covenants, however, the
Exchange Indenture will not contain any covenants or provisions that may afford
Holders of the Exchange Debentures protection in the event of a highly leveraged
transaction.
CERTAIN COVENANTS
The Exchange Indenture will contain covenants including, among others, the
following:
LIMITATION ON INDEBTEDNESS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness (other than Indebtedness existing on the Issue Date);
PROVIDED, HOWEVER, that the Company may Incur Indebtedness if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than
zero and less than 5:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company outstanding at any time in an aggregate principal
amount not to exceed $125 million, less any amount of Indebtedness Incurred
pursuant to this clause (i) and permanently repaid as provided under
"--Limitation on Asset Sales" below; (ii) Indebtedness (A) to the Company
evidenced by an unsubordinated promissory note or (B) to any of its Restricted
Subsidiaries; PROVIDED, HOWEVER, that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness, other than Indebtedness Incurred under clause (i),
(ii), (v), (vi) or (viii) of this paragraph, and any refinancings thereof in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); PROVIDED, HOWEVER, that Indebtedness the
proceeds of which are used to refinance or refund the Exchange Debentures or
Indebtedness that is PARI PASSU with, or subordinated in right of payment to,
the Exchange Debentures shall only be permitted under this clause (iii) if (A)
in case the Exchange Debentures are refinanced in part or the Indebtedness to be
refinanced is PARI PASSU with the Exchange Debentures, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which such
new Indebtedness is outstanding, is expressly made PARI PASSU with, or
subordinate in right of payment to, the remaining Exchange Debentures, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Exchange Debentures, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made subordinate in right of payment to the Exchange
Debentures at least to the extent that the Indebtedness to be refinanced is
subordinated to the Exchange Debentures and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded;
PROVIDED FURTHER, HOWEVER, that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary of the
Company pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; PROVIDED, HOWEVER,
that such agreements do not increase the Indebtedness of the obligor outstanding
at any time other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and compensation
payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of the Restricted Subsidiaries pursuant
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to such agreements, in any case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary of the Company (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any portion
of such business, assets or Restricted Subsidiary of the Company for the purpose
of financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company not to exceed,
at any one time outstanding, two times the Net Cash Proceeds received by the
Company from and after October 23, 1995, from the issuance and sale of its
Capital Stock (other than Redeemable Stock and Preferred Stock that provides for
the payment of dividends in cash), including the Exchangeable Preferred Stock,
PROVIDED, HOWEVER, that such Indebtedness (x) does not mature prior to the
Stated Maturity of the Exchange Debentures and has an Average Life longer than
the Exchange Debentures and (y) is PARI PASSU with or subordinated to the
Exchange Debentures; (vi) Indebtedness of any Restricted Subsidiary Incurred
pursuant to any credit agreement of such Restricted Subsidiary in effect on the
Issue Date (and refinancings thereof), up to the amount of the commitment under
such credit agreement on the Issue Date; (vii) Indebtedness to the extent such
Indebtedness is secured by Liens which are purchase money or other Liens upon
equipment or inventory acquired or held by the Company or any of its Restricted
Subsidiaries taken or obtained by (A) the seller or lessor of such equipment or
inventory to secure all or a part of the purchase price or lease payments
therefor or (B) the person who makes advances or incurs obligations, thereby
giving value to the Company to enable it to purchase or acquire rights in such
equipment or inventory, to secure the repayment of all or a part of the advances
so made or obligations so incurred; PROVIDED, HOWEVER, that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the equipment or inventory acquired; (viii) Indebtedness
of any Restricted Subsidiary not to exceed, at any one time outstanding, 80% of
the accounts receivable net of reserves and allowances for doubtful accounts,
determined in accordance with GAAP, of such Restricted Subsidiary and its
Restricted Subsidiaries (without duplication); PROVIDED, HOWEVER, that such
Indebtedness is not Guaranteed by the Company or any of its Restricted
Subsidiaries; (ix) Indebtedness of the Company, to the extent the proceeds
thereof are immediately used to purchase 1995 Notes or 1997 Notes tendered in an
offer to purchase made as a result of a Change in Control; and (x) the Exchange
Debentures.
For purposes of determining any particular amount of Indebtedness under this
"Limitation on Indebtedness" covenant, Guarantees, Liens or Obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this "Limitation on Indebtedness" covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in the above clauses, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Guarantee of Indebtedness of any Unrestricted Subsidiary.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
The Company will not (i) Incur any Indebtedness, other than the Exchange
Debentures, that is expressly made subordinated in right of payment to any
Senior Indebtedness of the Company unless such Indebtedness, by its terms and by
the terms of any agreement or instrument pursuant to which such Indebtedness is
outstanding is expressly made PARI PASSU with, or subordinate in right of
payment to, the Exchange Debentures pursuant to provisions substantially similar
to those contained in Article Ten of the Exchange Indenture; PROVIDED, HOWEVER,
that the foregoing limitation shall not apply to distinctions between categories
of Senior Indebtedness that exist by reason of any Liens or Guarantees arising
or created in respect of some but not all Senior Indebtedness or (ii) Incur any
Indebtedness secured by a Lien if such Indebtedness is not Senior Indebtedness,
unless contemporaneously therewith effective provision is made to secure the
Exchange Debentures equally and ratably with such secured Indebtedness for so
long as such secured Indebtedness is secured by a Lien.
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LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, make a Restricted Payment if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) except with respect to any
Investment (other than an Investment consisting of the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary), the Company could not
Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant, or (C) the aggregate amount expended for
all Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) after the Deemed Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of such amount) (determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted
Subsidiary) accrued on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter immediately
following the Deemed Closing Date and ending on the last day of the last fiscal
quarter preceding the Transaction Date for which reports have been filed
pursuant to "--SEC Reports and Reports to Holders" PLUS (2) the aggregate Net
Cash Proceeds received by the Company after the Deemed Closing Date from the
issuance and sale permitted by the Exchange Indenture of its Capital Stock
(other than Redeemable Stock), including the Exchangeable Preferred Stock, to a
Person who is not a Subsidiary of the Company, or from the issuance to a Person
who is not a Subsidiary of the Company of any options, warrants or other rights
to acquire Capital Stock of the Company (in each case, exclusive of any
convertible Indebtedness, Redeemable Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the 1997 Senior Notes, 1997 Senior
Subordinated Notes and the Exchange Debentures), plus (3) an amount equal to the
net reduction in Investments (other than reductions in Permitted Investments and
other than reductions in Investments made pursuant to clauses (vi) or (vii) of
the second paragraph of this "--Limitation on Restricted Payments" covenant) in
any Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary (except to the extent any such payment
is included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed the
amount of Investments previously made by the Company and its Restricted
Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance, or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the
Exchange Debentures, including premium, if any, and accrued and unpaid interest,
with the proceeds of, or in exchange for, Indebtedness Incurred, under clause
(iii) of the second paragraph of the covenant described under "--Limitation on
Indebtedness;" (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock in exchange for, or out of the proceeds of a substantially
concurrent sale of, shares of Capital Stock or options, warrants or other rights
to purchase such Capital Stock (in each case other than Redeemable Stock) of the
Company; (iv) the making of any other Restricted Payment made by exchange for,
or out of the proceeds of, a substantially concurrent sale of shares of the
Capital Stock or options, warrants or other rights to acquire such Capital Stock
(in each case other than Redeemable Stock) of the Company; (v) payments or
distributions, in the nature of satisfaction of dissenters' rights, pursuant to
or in connection with a consolidation, merger or transfer of assets that
complies with the provisions of the Certificate of Designation applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company; (vi) Investments, not to exceed $15.0
million at any one time outstanding; (vii) Investments, not to exceed $15.0
million at any one time outstanding, in entities, substantially all of the
assets of which consist of Telecommunications
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Assets; (viii) cash payments in lieu of the issuance of fractional shares of
Common Stock upon conversion (including mandatory conversion) of the Convertible
Notes as provided for in the Convertible Notes Indenture; (ix) cash payments in
lieu of the issuance of fractional shares of Common Stock of the Company upon
conversion of any class of Preferred Stock of the Company; PROVIDED, HOWEVER,
that this exception shall not be available with respect to more than two such
conversions with respect to any such class of Preferred Stock by any given
Affiliate of the Company; and (x) Investments in entities that directly (or
indirectly through subsidiaries) own licenses granted by the FCC or any other
governmental entity with authority to grant telecommunications licenses;
PROVIDED, HOWEVER, that, in each case the Company or a Restricted Subsidiary
shall, at the time of making such Investment, have an active role in the
management or operation of such entity and in the provision of
telecommunications services by such entity; PROVIDED, HOWEVER, that, except in
the case of clauses (i) and (iii) of this paragraph, no Voting Rights Triggering
Event shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth herein. Any Investments made other than in cash
shall be valued, in good faith, by the Board of Directors. Any Investment made
pursuant to clause (vi) or (vii) of this paragraph shall be deemed to be no
longer outstanding (and repaid in full) if and when the Person in which such
Investment is made becomes a Restricted Subsidiary of the Company.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof), and the Net
Cash Proceeds from any issuance and sale of Capital Stock referred to in clauses
(iii) or (iv) shall be included in calculating whether the conditions of clause
(C) of the first paragraph of this "Limitation on Restricted Payments" covenant
have been met with respect to any subsequent Restricted Payments. In the event
the proceeds of an issuance of Capital Stock of the Company are used for the
redemption, repurchase or other acquisition of the Exchange Debentures or
Indebtedness that is PARI PASSU with the Exchange Debentures then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary; (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary that owns, directly or
indirectly, any Capital Stock of such Restricted Subsidiary; (iii) make loans or
advances to the Company or any other Restricted Subsidiary that owns, directly
or indirectly, any Capital Stock of such Restricted Subsidiary; or (iv) transfer
any of its property or assets to the Company or any other Restricted Subsidiary
that owns, directly or indirectly, any Capital Stock of such Restricted
Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or restrictions
(i) existing on the Issue Date in the Exchange Debenture or any other agreement
in effect on the Issue Date, and any extensions, refinancings, renewals or
replacements of such agreements; PROVIDED, HOWEVER, that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders of Exchange Debentures
than those encumbrances or restrictions that are then in effect and that are
being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by the Company or any Restricted
Subsidiary, at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person or
the property or assets of any Person other than such Person or the property or
assets of such Person so acquired; (iv) in the case of clause (iv) of the first
paragraph of this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary
manner
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the subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) existing by
virtue of any transfer of, agreement to transfer, option or right with respect
to, or Lien on, any property or assets of the Company or any Restricted
Subsidiary not otherwise prohibited by the Exchange Indenture or (C) arising or
agreed to in the ordinary course of business, not relating to any Indebtedness,
and that do not, individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary or; (v) with respect to a
Restricted Subsidiary and imposed pursuant to an agreement that has been entered
into for the sale or disposition of all or substantially all of the Capital
Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent the Company or any
Restricted Subsidiary from (i) restricting the sale or other disposition of
property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries or (ii)
creating, incurring, assuming or suffering to exist any Liens otherwise
permitted under Section 4.09 of the 1997 Senior Notes Indenture as in effect on
the Deemed Closing Date.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances or sales to foreign nationals of shares of
Capital Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law; (iii) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary; or (iv) issuances or sales of Common Stock of Restricted
Subsidiaries, other than the Telecommunications Subsidiaries, if within six
months of each such issuance or sale, the Company or such Restricted Subsidiary
applies an amount not less than the Net Cash Proceeds thereof (if any) in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Exchange Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Exchange Debentures by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee; PROVIDED, HOWEVER,
that this paragraph shall not be applicable to any Guarantee of any Restricted
Subsidiary that (x) existed at the time such Person became a Restricted
Subsidiary and (y) was not Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is
(A) PARI PASSU with the Exchange Debentures then the Guarantee of such
Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Exchange Debentures then the
Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Exchange Debentures.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by this Indenture) or (ii) the release or discharge of the
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Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable fees to directors of the Company who are not employees of the
Company; (iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company files
a consolidated tax return or with which the Company is part of a consolidated
group for tax purposes; or (v) any Restricted Payments not prohibited under
"--Limitation on Restricted Payments" (other than pursuant to clause (iv) of the
definition of "Permitted Investment" or clause (vi) of the second paragraph of
such covenant). Notwithstanding the foregoing, any transaction covered by the
first paragraph of this "Limitation on Transactions with Shareholders and
Affiliates" covenant and not covered by clauses (ii) through (iv) of this
paragraph, the aggregate amount of which exceeds $250,000 in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Deemed
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been prepared), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within six months after
the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net
Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company, or Indebtedness of
any Restricted Subsidiary, in each case owing to a Person other than the Company
or any of its Restricted Subsidiaries or (B) invest an equal amount, or the
amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within six months after the date of such
agreement), in property or assets of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) apply (no later than the end of the six-month period
referred to in clause (i)) such excess Net Cash Proceeds (to
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the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such six-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10.0 million, the Company
must commence, not later than the 15th Business Day after the first day of such
month, and consummate an Offer to Purchase from the holders of the Exchange
Debentures on a pro rata basis an aggregate principal amount of Exchange
Debentures equal to the Excess Proceeds on such date, at a purchase price equal
to 101% of the Accumulated Amount of such Exchange Debentures on such date of
purchase, plus accrued and unpaid interest (if any) on such Accumulated Amount
to the date of purchase; PROVIDED, HOWEVER, that no Offer to Purchase shall be
required to be commenced with respect to the Accumulated Amount of such Exchange
Debentures until the Business Day following the payment date with respect to the
offer(s) to purchase any 1997 Notes and need not be commenced if the Excess
Proceeds remaining after application to the 1997 Notes purchased in such
Offer(s) to Purchase applicable thereto are less than $10.0 million PROVIDED
FURTHER, HOWEVER, that no Exchange Debentures may be purchased under this
"Limitation on Asset Sales" covenant unless the Company shall have purchased all
1997 Notes tendered pursuant to the offer(s) to purchase applicable thereto.
Because of similar requirements in the Indentures governing the 1995 Notes and
the 1997 Notes, the Company may not have Excess Proceeds from an Asset Sale to
be able to comply with the foregoing requirements. In addition, the terms of the
Company's existing indebtedness, including the 1997 Notes, restrict the ability
of the Company to prepay or repurchase the Exchange Debentures in accordance
with this covenant. See "Risk Factors -- Ability to Pay Dividends on and Redeem
the Exchangeable Preferred Stock and to Issue Exchange Debentures."
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the SEC, if any
Exchange Debentures are outstanding, the Company shall file with the SEC, all
such reports and other information as it would be required to file with the SEC
by Sections 13(a) or 15(d) under the Exchange Act. See "Available Information."
The Company shall supply the Trustee and each Holder of Exchange Debentures,
without cost to the Trustee or such Holders, copies of such reports or other
information.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Exchange Indenture, the Company shall not consolidate
with, merge with or into, or sell, convey, transfer, lease or otherwise dispose
of all or substantially all of its property and assets (as an entirety or
substantially an entirety in one transaction or a series of related
transactions) to, any Person (other than a consolidation or merger with or into
a Wholly Owned Restricted Subsidiary with a positive net worth; PROVIDED,
HOWEVER, that, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the surviving Person or the Company)
shall be issued or distributed to the stockholders of the Company) or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company on
the Exchange Debentures and under the Exchange Indenture; (ii) immediately after
giving effect to such transaction, no Default or Event of Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Exchange Debentures, shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such
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transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Exchange Debentures, could Incur at least $1.00 of
Indebtedness under the first paragraph of the covenant described under
"--Covenants--Limitation on Indebtedness;" and (v) the Company delivers to the
Trustee an Officers' Certificate (attaching the arithmetical computations to
demonstrate compliance with clauses (iii) and, if applicable, (iv)) and Opinion
of Counsel, in each case stating that such consolidation, merger or transfer
complies with this provision and that all conditions precedent provided for
herein relating to such transaction have been complied with; PROVIDED, HOWEVER,
that clauses (iii) and (iv) above do not apply if, in the good faith
determination of the Board of Directors of the Company, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of the Company; PROVIDED
FURTHER, HOWEVER, that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the Exchange
Indenture: (i) default in the payment of the principal of (or premium, if any,
on) any Exchange Debenture when the same becomes due and payable, upon
acceleration, redemption or otherwise, whether or not such payment is prohibited
pursuant to the provisions described above under "Ranking"; (ii) default in the
payment of interest on any Exchange Debenture when the same becomes due and
payable, and such default continues for a period of 30 days, whether or not such
payment is prohibited pursuant to the provisions described above under
"Ranking"; (iii) the Company defaults in the performance of or breaches any
other covenant or agreement of the Company contained in the Exchange Indenture
or under the Exchange Debentures and such default or breach continues for a
period of 30 consecutive days after written notice to the Company by the Trustee
or the Holders of 25% or more in aggregate principal amount of the Exchange
Debentures; (iv) there occurs with respect to any issue or issues of
Indebtedness of the Company, or any Significant Subsidiary having an outstanding
principal amount of $25.0 million or more in the aggregate for all such issues
of all such Persons, whether such Indebtedness now exists or shall hereafter be
created, (a) an event of default that has caused the holder thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration and/or (b) the failure
to make a principal payment at the final (but not any interim) fixed maturity
and such defaulted payment shall not have been made, waived or extended within
30 days of such payment default; (v) any final judgment or order (not covered by
insurance) for the payment of money in excess of $25.0 million in the aggregate
for all such final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be rendered
against the Company or any Significant Subsidiary and shall not be paid or
discharged, and there shall be any period of 60 consecutive days following entry
of the final judgment or order that causes the aggregate amount for all such
final judgments or orders outstanding and not paid or discharged against all
such Persons to exceed $25.0 million during which a stay of enforcement of such
final judgment or order, by reason of a pending appeal or otherwise, shall not
be in effect; (vi) a court having jurisdiction in the premises enters a decree
or order for (a) relief in respect of the Company or any Significant Subsidiary
in an involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (b) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (c) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or (vii) the Company or any
Significant Subsidiary (a) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under any
such law, (b) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or
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substantially all of the property and assets of the Company or any Significant
Subsidiary or (c) effects any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(vi) or (vii) above that occurs with respect to the Company) occurs and is
continuing under the Exchange Indenture, the Trustee or the Holders of at least
25% in aggregate principal amount of the Exchange Debentures, then outstanding,
by written notice to the Company (and to the Trustee if such notice is given by
the Holders), may, and the Trustee at the request of such Holders shall, declare
the principal of, premium, if any, and accrued interest on the Exchange
Debentures to be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (iv) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (iv) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (vi) or (vii) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Exchange Debentures then outstanding shall IPSO FACTO
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of at least a majority in
principal amount of the outstanding Exchange Debentures, by written notice to
the Company and to the Trustee, may waive all past Defaults and rescind and
annul such declaration of acceleration and its consequences if (A) all existing
Events of Default, other than the nonpayment of the principal of, premium, if
any, and accrued interest on the Exchange Debentures that have become due solely
by such declaration of acceleration, have been cured or waived and (B) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction.
The Holders of at least a majority in aggregate principal amount of the
outstanding Exchange Debentures may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or the Exchange Indenture, that may
involve the Trustee in personal liability, or that the Trustee determines in
good faith may be unduly prejudicial to the rights of Holders not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any directions received from Holders of Exchange
Debentures. A Holder may not pursue any remedy with respect to the Exchange
Indenture or the Exchange Debentures unless: (i) the Holder given the Trustee
written notice of a continuing Event of Default; (ii) the Holders of at least
25% in aggregate principal amount of outstanding Exchange Debentures make a
written request to pursue the remedy; (iii) such Holder or Holders offer the
Trustee indemnity reasonably satisfactory to the Trustee against any costs,
liabilities or expense; (iv) the Trustee does not comply with the request within
60 days after receipt of the request and the offer of indemnity; and (v) during
such 60-day period, the Holders of a majority in aggregate principal amount of
the outstanding Exchange Debentures do not give the Trustee a direction that is
inconsistent with such written request. However, such limitations do not apply
to the right of any Holder of an Exchange Debenture to receive payment of the
principal of, premium, if any, or interest on, such Exchange Debenture or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Exchange Debentures, which right shall not be impaired or
affected without the consent of the Holder.
The Exchange Indenture will require certain officers of the Company to
certify, on or before a date not more than 90 days after the end of each fiscal
year, that a review has been conducted of the activities of the Company and its
Restricted Subsidiaries' performance under the Exchange Indenture and that, to
the best knowledge of such officer, the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Exchange Indenture.
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DEFEASANCE
DEFEASANCE AND DISCHARGE. The Exchange Indenture will provide that the
Company will be deemed to have paid and will be discharged from any and all
obligations in respect of the Exchange Debentures on the 123rd day after the
deposit referred to below, and the provisions of the Exchange Indenture will no
longer be in effect with respect to the Exchange Debentures (except for, among
other matters, certain obligations to register the transfer or exchange of the
Exchange Debentures, to replace stolen, lost or mutilated Exchange Debentures,
to maintain paying agencies and to hold monies for payment in trust), if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Exchange Debentures on the Stated Maturity of such payments or
upon earlier redemption, in each case in accordance with the terms of the
Exchange Indenture and the Exchange Debentures, (B) the Company has delivered to
the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders of
Exchange Debentures will not recognize income, gain, or loss for federal income
tax purposes as a result of the Company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, which Opinion of
Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect or a change in applicable Federal
income tax law after the Issue Date or (y) a ruling directed to the Trustee
received from the Internal Revenue Serve to the same effect as the
aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect
that the creation of the defeasance trust does not violate the Investment
Company Act of 1940 and after the passage of 123 days following the deposit, the
trust fund will not be subject to the effect of Section 547 of the Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately
after giving effect to such deposit on a pro forma basis, no Event of Default,
or event that after the giving of notice or lapse of time or both would become
an Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company is a party or by which the Company is bound, and (D) if at such time the
Exchange Debentures are listed on a national securities exchange, the Company
has delivered to the Trustee an Opinion of Counsel to the effect that the
Exchange Debentures will not be delisted as a result of such deposit, defeasance
and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The Exchange
Indenture will further provide that its provisions will no longer be in effect
with respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of
Assets" and all the covenants described herein under "Covenants," clause (iii)
under "--Events of Default" with respect to such covenants and clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets" and clauses (iv) and (v)
under "--Events of Default" shall be deemed not to be Events of Default, the
provisions described under "--Ranking" with respect to the assets held by the
Trustee referred to below shall not apply, upon, among other things, the deposit
with the Trustee, in trust, of money and/or U.S. Government Obligations that
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the principal
of, premium, if any, and accrued interest on the Exchange Debentures on the
Stated Maturity of such payments or upon earlier optional redemption, in each
case in accordance with the terms of the Exchange Indenture and the Exchange
Debentures, the satisfaction of the provisions described in clauses (B)(ii), (C)
and (D) of the preceding paragraph and the delivery by the Company to the
Trustee of an Opinion of Counsel to the effect that, among other things, the
holders will not recognize income, gain or loss for Federal income tax purposes
as a result of such deposit and defeasance of certain covenants and Events of
Default and will be subject to federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such deposit
and defeasance had not occurred.
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DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Exchange Indenture as described in the immediately preceding paragraph and
the Exchange Debentures are declared due and payable because of the occurrence
of an Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on the Exchange Debentures at the time of their Stated Maturity but
may not be sufficient to pay amounts due on the Exchange Debentures at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Exchange
Debentures to redemption or maturity, as the case may be, and must comply with
certain other conditions.
MODIFICATION AND WAIVER
Modifications and amendments of the Exchange Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Exchange Debentures;
PROVIDED, HOWEVER, that no such modification or amendment may, without the
consent of each Holder affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Exchange Debenture, (ii)
reduce the principal amount of, or premium, if any, or interest on, any Exchange
Debentures, (iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Exchange Debentures, (iv) impair the right
to institute suit for the enforcement of any payment on or after the Stated
Maturity (or, in the case of a redemption, on or after the Redemption Date) of
any Exchange Debenture, (v) reduce the above-stated percentage of outstanding
Exchange Debentures the consent of whose Holders is necessary to modify or amend
the Exchange Indenture, (vi) waive a default in the payment of principal of,
premium, if any, or interest on the Exchange Debentures or (vii) reduce the
percentage or aggregate principal amount of outstanding Exchange Debentures the
consent of whose Holders is necessary for waiver of compliance with certain
provisions of the Exchange Indenture or for waiver of certain defaults.
Without the consent of any Holder of the Exchange Debentures, the Company
and the Trustee may modify or amend the Exchange Indenture to cure any
ambiguity, defect or inconsistency, to provide for the assumption by a successor
company of the Company's obligations under the Exchange Indenture, to comply
with the requirements of the Trust Indenture Act, to appoint a successor Trustee
or to make any change that, in the opinion of the Board of Directors of the
Company evidenced by a Board Resolution, does not materially and adversely
affect the rights of any Holder of the Exchange Debentures.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Exchange Indenture will provide that no recourse for the payment of the
principal of, premium, if any, or interest on any of the Exchange Debentures or
for any claim based thereon or otherwise in respect thereof, and no recourse
under or upon any obligation, covenant or agreement of the Company in the
Exchange Indenture, or in any of the Exchange Debentures or because of the
creation of any Indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer, director, employee or controlling person of
the Company or of any successor Person thereof in such capacity. Each Holder, by
accepting the Exchange Debentures, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Exchange Indenture will provide that, except during the continuance of a
Default, the Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Exchange Indenture. If an Event of
Default has occurred and is continuing, the Trustee will use the same degree of
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care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Exchange Indenture and provisions of the Trust Indenture Act
incorporated by reference therein will contain limitations on the rights of the
Trustee, should it become a creditor of the Company to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; PROVIDED, HOWEVER, that if the Trustee acquires any
conflicting interest, it must eliminate such conflict or resign.
GOVERNING LAW
The Exchange Indenture will provide that it and the Exchange Debentures will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
CERTAIN DEFINITIONS
The following definitions are applicable to the descriptions of both the
Exchangeable Preferred Stock and the Exchange Debentures.
"1995 Notes" means the 1995 Senior Notes and the Convertible Notes.
"1997 Notes" means the 1997 Senior Notes, the 1997 Senior Subordinated Notes
and the Equipment Notes.
"1995 Senior Notes" means the 14% Senior Discount Notes due 2005 of the
Company.
"1997 Senior Notes" means the 14 1/2% Senior Deferred Interest Notes Due
2005 of the Company.
"1997 Senior Subordinated Notes" means the 15% Senior Subordinated Deferred
Interest Notes Due 2007 of the Company.
"1997 Senior Subordinated Notes Indenture" means the Indenture dated as of
October 1, 1997, between the Company and the Trustee pursuant to which the 1997
Senior Subordinated Notes were issued.
"Accumulated Amount" means, with respect to Exchangeable Preferred Stock, as
of any date (the "Specified Date"), the amount provided below with respect to
each $1,000 Initial Liquidation Preference thereof.
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(i) If the Specified Date occurs on one of the following dates (each, a
"SemiAnnual Dividend Accrual Date"), the Accumulated Amount will equal the
amount set forth below for such SemiAnnual Dividend Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL DIVIDEND ACCRUAL DATE ACCUMULATED AMOUNT
- --------------------------------------------------------------- -------------------
<S> <C>
June 15, 1998.................................................. $ 1,068.387
December 15, 1998.............................................. 1,144.509
June 15, 1999.................................................. 1,226.055
December 15, 1999.............................................. 1,313.412
June 15, 2000.................................................. 1,406.992
December 15, 2000.............................................. 1,507.241
June 15, 2001.................................................. 1,614.632
December 15, 2001.............................................. 1,729.674
June 15, 2002.................................................. 1,852.913
December 15, 2002.............................................. 1,984.933
June 15, 2003.................................................. 2,141.247
December 15, 2003.............................................. 2,309.870
June 15, 2004.................................................. 2,491.772
December 15, 2004.............................................. 2,687.999
June 15, 2005.................................................. 2,899.679
December 15, 2005.............................................. 3,128.029
June 15, 2006.................................................. 3,374.361
December 15, 2006.............................................. 3,640.092
June 15, 2007.................................................. 3,926.750
December 15, 2007.............................................. 4,235.981
</TABLE>
(ii) if the Specified Date occurs before the first SemiAnnual Dividend
Accrual Date, the Accumulated Amount will equal the sum of (A) the Initial
Liquidation Preference and (B) an amount equal to the product of (1) the
Accumulated Amount for the first SemiAnnual Dividend Accrual Date less the
Initial Liquidation Preference multiplied by (2) a fraction, the numerator
of which is the number of days elapsed from the Issue Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of
which is the number of days from the Issue Date to the first SemiAnnual
Dividend Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two SemiAnnual Dividend
Accrual Dates, the Accumulated Amount will equal the sum of (A) the
Accumulated Amount for the SemiAnnual Dividend Accrual Date immediately
preceding such Specified Date and (B) an amount equal to the product of (1)
the Accumulated Amount for the immediately following SemiAnnual Dividend
Accrual Date less the Accumulated Amount for the immediately preceding
SemiAnnual Dividend Accrual Date multiplied by (2) a fraction, the numerator
of which is the number of days elapsed from the immediately preceding
SemiAnnual Dividend Accrual Date to the Specified Date, using a 360-day year
or twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last SemiAnnual Dividend
Accrual Date, the Accumulated Amount will equal the Accumulated Amount as of
the last SemiAnnual Dividend Accrual Rate;
PROVIDED, HOWEVER, that at all times on and after the Dividend Payment Date
immediately preceding the Cash Payment Date, the Accumulated Amount shall equal
the Accumulated Amount as of such Dividend Payment Date; and provided, further,
that if the rate applicable to the Exchangeable Preferred Stock shall have been
increased as a result of a Registration Default (as defined under "Exchange
Offer; Registration Rights"), the Accumulated Amount shall be recalculated as if
dividends with respect to the Exchangeable Preferred Stock had been accruing at
a rate of 14 3/4% from the date of such Registration Default to but excluding
the date all Registration Defaults have been cured.
"Accumulated Amount" means, with respect to Exchangeable Debentures, as of
any Specified Date, the amount provided below for each $1,000 principal amount
thereof.
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(i) If the Specified Date occurs on one of the following dates (each, a
"SemiAnnual Interest Accrual Date"), the Accumulated Amount will equal the
amount set forth below for such SemiAnnual Interest Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL DIVIDEND ACCRUAL DATE ACCUMULATED AMOUNT
- --------------------------------------------------------------- -------------------
<S> <C>
June 15, 1998.................................................. $ 1,068.387
December 15, 1998.............................................. 1,144.509
June 15, 1999.................................................. 1,226.055
December 15, 1999.............................................. 1,313.412
June 15, 2000.................................................. 1,406.992
December 15, 2000.............................................. 1,507.241
June 15, 2001.................................................. 1,614.632
December 15, 2001.............................................. 1,729.674
June 15, 2002.................................................. 1,852.913
December 15, 2002.............................................. 1,984.933
June 15, 2003.................................................. 2,141.247
December 15, 2003.............................................. 2,309.870
June 15, 2004.................................................. 2,491.772
December 15, 2004.............................................. 2,687.999
June 15, 2005.................................................. 2,899.679
December 15, 2005.............................................. 3,128.029
June 15, 2006.................................................. 3,374.361
December 15, 2006.............................................. 3,640.092
June 15, 2007.................................................. 3,926.750
December 15, 2007.............................................. 4,235.981
</TABLE>
(ii) if the Specified Date occurs before the first SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal the sum of (A) the Initial
Liquidation Preference and (B) an amount equal to the product of (1) the
Accumulated Amount for the first SemiAnnual Interest Accrual Date less the
Initial Liquidation Preference multiplied by (2) a fraction, the numerator
of which is the number of days elapsed from the Issue Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the denominator of
which is the number of days from the Issue Date to the first SemiAnnual
Interest Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two SemiAnnual Interest
Accrual Dates, the Accumulated Amount will equal the sum of (A) the
Accumulated Amount for the SemiAnnual Interest Accrual Date immediately
preceding such Specified Date and (B) an amount equal to the product of (1)
the Accumulated Amount for the immediately following SemiAnnual Interest
Accrual Date less the Accumulated Amount for the immediately preceding
SemiAnnual Interest Accrual Date multiplied by (2) a fraction, the numerator
of which is the number of days elapsed from the immediately preceding
SemiAnnual Interest Accrual Date to the Specified Date, using a 360-day year
or twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal the Accumulated Amount as of
the last SemiAnnual Interest Accrual Date;
PROVIDED, HOWEVER, that at all times on and after the SemiAnnual Interest
Accrual Date immediately preceding the Cash Payment Date, the Accumulated Amount
shall equal the Accumulated Amount as of such SemiAnnual Interest Accrual Date
and PROVIDED, FURTHER, that if the rate applicable to the Exchange Preferred
Stock shall have been increased as a result of a Registration Default,
appropriate revisions shall be made so that the Accumulated Amount for the
Exchange Debentures shall be increased in the same fashion as that for the
Exchangeable Preferred Stock.
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"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED, HOWEVER, that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than the
Company or any of its Restricted Subsidiaries) has a joint interest and the net
income of any Unrestricted Subsidiary, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any of its
Restricted Subsidiaries by such other Person, including, without limitation, an
Unrestricted Subsidiary during such period; (ii) solely for the purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the covenant described under
"--Covenants--Limitation on Restricted Payments" (and in such case, except to
the extent includable pursuant to clause (i) above), the net income (or loss) of
any Person accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with the Company or any of its Restricted
Subsidiaries or all or substantially all of the property and assets of such
Person are acquired by the Company or any of its Restricted Subsidiaries; (iii)
the net income of any Restricted Subsidiary to the extent that the declaration
or payment of dividends or similar distributions by such Restricted Subsidiary
of such net income is not at the time permitted by the operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to such Restricted Subsidiary; (iv) any
gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except
for purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the covenant described under
"--Covenants--Limitation on Restricted Payments", any amount paid as, or accrued
for, cash dividends on Preferred Stock of the Company or any Restricted
Subsidiary owned by Persons other than the Company and any of its Restricted
Subsidiaries; and (vi) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than
licenses issued by the FCC), all as set forth on the quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and most recently filed with the SEC pursuant
to the covenant described under "--SEC Reports and Reports to Holders";
PROVIDED, HOWEVER, that the value of any licenses issued by the FCC shall, in
the event of an auction for similar licenses, be equal to the fair market value
ascribed thereto in good faith by the Board of Directors and evidenced by a
Board Resolution. As used in the Exchange Indenture, references to financial
statements of the Company and its Restricted Subsidiaries shall be adjusted to
exclude Unrestricted Subsidiaries if the context requires.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary of the Company or shall be merged into or
consolidated with the Company or any of its Restricted Subsidiaries or (ii) an
acquisition by the Company or any of its Restricted Subsidiaries of the property
and assets of any Person other than the Company or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person.
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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 the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property or assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of the Exchange Indenture applicable to mergers, consolidations, and sales of
assets of the Company; PROVIDED, HOWEVER, that the following shall not be
included within the meaning of "Asset Sale": (A) sales or other dispositions of
inventory, receivables and other current assets; (B) sales or other dispositions
of equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or its
Restricted Subsidiaries and (C) a substantially simultaneous exchange of, or a
sale or disposition (other than 85% or more for cash or cash equivalents) by the
Company or any of its Restricted Subsidiaries of, licenses issued by the FCC or
applications or bids therefor; PROVIDED, HOWEVER, that the consideration
received by the Company or any such Restricted Subsidiary in connection with
such exchange, sale or disposition shall be equal to the fair market value of
licenses so exchanged, sold or disposed of, as determined by the Board of
Directors; and (D) except for purposes of the definition of "Indebtedness to
EBITDA Ratio," any sale or other disposition of securities of an Unrestricted
Subsidiary.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means the Board of Directors of the Company or any
committee of such Board of Directors duly authorized to act with respect to the
Exchange Indenture.
"Board Resolution" means a copy of a resolution, certified by the Secretary
or Assistant Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day" means any day except a Saturday, Sunday or other day on which
commercial banks in The City of New York, or in the city of the Corporate Trust
Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Exchange Indenture, including, without limitation,
all Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), other than the Permitted Investor, becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Stock representing more than 50% of the total voting power of the Voting
Stock of the Company on a fully diluted basis or (ii) individuals who on the
Deemed Closing Date constituted the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the
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members of the Board of Directors then in office who either were members of the
Board of Directors on the Deemed Closing Date or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of the Exchange Indenture, including, without limitation,
all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
nonrecurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other noncash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all noncash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED, HOWEVER, that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by the Company or any of its Restricted Subsidiaries) and all but the
principal component of rentals in respect of Capitalized Lease Obligations paid,
accrued or scheduled to be paid or to be accrued by the Company and its
Restricted Subsidiaries during such period; excluding, however, (i) any amount
of such interest of any Restricted Subsidiary if the net income of such
Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded from
the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Exchange
Debentures and the 1997 Senior Subordinated Notes and the 1997 Notes in the
March 1997 Debt Placement and the August 1997 Debt Placement and the Incurrence
of the WSAC Loan, all as determined on a consolidated basis (without taking into
account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with
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GAAP (excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 52).
"Convertible Notes" means the 14% Convertible Senior Subordinated Discount
Notes due 2005 of the Company.
"Convertible Notes Indenture" means the Indenture dated as of October 23,
1995, between the Company and United States Trust Company of New York pursuant
to which the Convertible Notes were issued.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Restricted Subsidiaries against fluctuations in currency
values to or under which the Company or any of its Restricted Subsidiaries is a
party or a beneficiary on the date of the Exchange Indenture or becomes a party
or a beneficiary thereafter.
"Deemed Closing Date" means March 18, 1997.
"Default" means any event that is, or after notice or passage of time or
both would be, in the case of Exchangeable Preferred Stock, a Voting Rights
Triggering Event and, in the case of the Exchange Debentures, an Event of
Default.
"Equipment Notes" means the $200.0 million of 12 1/2% Guaranteed Senior
Secured Notes Due 2004 of WEC and the $50.0 million of 12 1/2% Guaranteed Senior
Secured Notes Due 2004 of WEC II.
"Equipment Note Guarantees" means the Company's Guarantees of the Equipment
Notes.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors (whose determination shall be conclusive)
and evidenced by a Board Resolution.
"FCC" means the United States Federal Communications Commission and any
state or local telecommunications authority, department, commission or agency
(and any successors thereto).
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Exchange Indenture, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
contained in the Exchange Indenture shall be computed in conformity with GAAP
applied on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other provisions
of the Certificate of Designation and the Exchange Indenture shall be made
without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Exchange Debentures and the 1997 Senior
Subordinated Notes, the WSAC Loan and the 1997 Notes in the March 1997 Debt
Placement and the August 1997 Debt Placement and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of
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such Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); PROVIDED,
HOWEVER, that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Holder" means the Person in whose name, in the case of the Exchangeable
Preferred Stock, a share of Exchangeable Preferred Stock is registered on the
Transfer Agent's books or, in the case of the Exchange Debentures, an Exchange
Debenture is registered on the books of the registrar for the Exchange
Debentures.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including, with respect to the Company and its Restricted Subsidiaries, an
"Incurrence" of Indebtedness by reason of a Person becoming a Restricted
Subsidiary of the Company; PROVIDED, HOWEVER, that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or
non-negotiable), (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except trade
payables, (v) all obligations of such Person as lessee under Capitalized Leases,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; PROVIDED,
HOWEVER, that the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such Person and (viii)
to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations that are included in any of clauses (i) through (viii) above, the
maximum liability upon the occurrence of the contingency giving rise to the
obligation; PROVIDED, HOWEVER, that (A) the amount outstanding at any time of
any Indebtedness issued with original issue discount is (1) for purposes of
determining the Indebtedness to EBITDA Ratio, the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (2) for all other purposes, the amount determined in clause (1) on the date
such Indebtedness is originally Incurred and (B) Indebtedness shall not include
any liability for federal, state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis ("Consolidated Indebtedness") as
at the date of determination (the "Transaction Date") to (ii) the Consolidated
EBITDA of the Company for the then most recent four full fiscal quarters for
which reports have been filed pursuant to "--SEC Reports and Reports to Holders"
(such four full fiscal quarter period being referred to herein as the "Four
Quarter Period"); PROVIDED, HOWEVER, that (x) pro forma effect shall be given to
any Indebtedness Incurred from the beginning of the Four Quarter Period through
the Transaction Date (including any Indebtedness Incurred on the Transaction
Date), to the extent outstanding on the Transaction Date, (y) if during the
period commencing on the first day of such Four Quarter Period through the
Transaction Date (the "Reference Period"), the Company or any of the Restricted
Subsidiaries shall have engaged in any Asset Sale, Consolidated EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive), or
increased by an amount equal to the EBITDA (if negative),
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directly attributable to the assets which are the subject of such Asset Sale and
any related retirement of Indebtedness as if such Asset Sale and related
retirement of Indebtedness had occurred on the first day of such Reference
Period or (z) if during such Reference Period the Company or any of the
Restricted Subsidiaries shall have made any Asset Acquisition, Consolidated
EBITDA of the Company shall be calculated on a pro forma basis as if such Asset
Acquisition and any Incurrence of Indebtedness to finance such Asset Acquisition
had taken place on the first day of such Reference Period.
"Initial Liquidation Preference" per share of Exchangeable Preferred Stock
means $1,000.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement or other similar agreement or arrangement designed
to protect the Company or any of its Restricted Subsidiaries against
fluctuations in interest rates in respect of Indebtedness to or under which the
Company or any of its Restricted Subsidiaries is a party or a beneficiary on the
date of the Exchange Indenture or becomes a party or a beneficiary hereafter;
PROVIDED, HOWEVER, that the notional principal amount thereof does not exceed
the principal amount of the Indebtedness of the Company and its Restricted
Subsidiaries that bears interest at floating rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock held by the Company and the Restricted
Subsidiaries of any Person that has ceased to be a Restricted Subsidiary by
reason of any transaction permitted by clause (iii) of the covenant described
under "--Covenants-- Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries." For purposes of the definition of "Unrestricted
Subsidiary" and the covenant described under "--Covenants--Limitation on
Restricted Payments," (i) "Investment" shall include the fair market value of
the assets (net of liabilities) of any Restricted Subsidiary of the Company at
the time that such Restricted Subsidiary of the Company is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company and
(ii) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each case as
determined by the Board of Directors in good faith.
"Issue Date" means the date on which the Exchangeable Preferred Stock is
originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
"Liquidation Preference" means the Accumulated Amount of the Exchangeable
Preferred Stock from time to time.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of (i) brokerage commissions and other
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fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP and (b) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection with
such issuance or sale and net of taxes paid or payable by the Company or any of
its subsidiaries as a result thereof.
"Offer to Purchase" means an offer to purchase Exchangeable Preferred Stock
or Exchange Debentures, as applicable, by the Company from the Holders required
by the covenant described under "-- Repurchase of Exchangeable Preferred Stock
upon a Change of Control", "--Repurchase of Exchange Debentures upon a Change of
Control" or "--Covenants--Limitation on Asset Sales" and which is commenced by
mailing a notice to the Trustee, as applicable, and each Holder stating: (i) the
covenant pursuant to which the offer is being made and that all shares of
Exchangeable Preferred Stock or all Exchange Debentures validly tendered will be
accepted for payment on a PRO RATA basis; (ii) the purchase price and the
Payment Date; (iii) that any shares of Exchangeable Preferred Stock or any
Exchange Debentures not tendered will continue to accrue dividends or interest
pursuant to their terms; (iv) that, unless the Company defaults in the payment
of the purchase price, any shares of Exchangeable Preferred Stock or any
Exchange Debentures accepted for payment pursuant to the Offer to Purchase shall
cease to accrue dividends or interest on and after the Payment Date; (v) that
Holders electing to have shares of Exchangeable Preferred Stock or Exchange
Debentures purchased pursuant to the Offer to Purchase will be required to
surrender the applicable security together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side thereof completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the Business Day immediately preceding the Payment Date; (vi) that Holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the third Business Day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the number of shares of Exchangeable Preferred Stock or the
principal amount of Exchange Debentures delivered for purchase and a statement
that such Holder is withdrawing his election to have such securities purchased;
and (vii) that Holders whose Exchangeable Preferred Stock or Exchange Debentures
are being purchased only in part will be issued new shares of Exchangeable
Preferred Stock or new Exchange Debentures equal in amount (and accrued and
unpaid dividends or interest) to the unpurchased portion thereof; PROVIDED,
HOWEVER, that each Exchange Debenture purchased and each new Exchange Debenture
issued shall be in a principal amount of $1,000 or integral multiples thereof.
On the Payment Date, the Company shall (i) accept for payment on a pro rata
basis any Exchangeable Preferred Stock or Exchange Debentures or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Exchangeable Preferred
Stock or Exchange Debentures or portions thereof so accepted; and (iii) deliver,
or cause to be delivered, to the Trustee all Exchangeable Preferred Stock or
Exchange Debentures or portions thereof so accepted together with an Officers'
Certificate specifying the Securities
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or portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the Holders of the Exchangeable Preferred Stock or Exchange
Debentures so accepted for payment in an amount equal to the purchase price,
and, with respect to Exchange Debentures the Trustee shall promptly authenticate
and mail to such Holders a new Exchange Debenture equal in principal amount to
any unpurchased portion of the Exchange Debentures surrendered; PROVIDED,
HOWEVER, that each Exchange Debenture purchased and each new Exchange Debenture
issued shall be in a principal amount of $1,000 or integral multiples thereof.
The Company will publicly announce the results of an Offer to Purchase as soon
as practicable after the Payment Date. The Transfer Agent shall act as the
Paying Agent for an Offer to Purchase Exchangeable Preferred Stock and Trustee
shall act as the Paying Agent for an Offer to Purchase Exchange Debentures. The
Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that the Company is required to
repurchase Exchangeable Preferred Stock or Exchange Debentures pursuant to an
Offer to Purchase.
"Officer" means, with respect to the Company, (i) the Chairman of the Board,
the Vice Chairman of the Board, the Chief Executive Officer, the President, any
Vice President, the Chief Financial Officer and (ii) the Treasurer or any
Assistant Treasurer, or the Secretary or any Assistant Secretary.
"Officers' Certificate" means a certificate signed by one Officer listed in
clause (i) of the definition thereof and one Officer listed in clause (ii) of
the definition thereof; PROVIDED, HOWEVER, that any such certificate may be
signed by any two of the Officers listed in clause (i) of the definition thereof
in lieu of being signed by one Officer listed in clause (i) of the definition
thereof and one Officer listed in clause (ii) of the definition thereof.
"Opinion of Counsel" means a written opinion signed by legal counsel who may
be an employee of or counsel to the Company.
"Payment Date" means the date of purchase, which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date a notice is mailed
pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary or
a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, the Company or a Restricted Subsidiary; (ii)
Temporary Cash Investments; (iii) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) loans or advances to employees in a
principal amount not to exceed $1.0 million at any one time outstanding; (v)
stock, obligations or securities received in satisfaction of judgments; (vi)
Investments, to the extent that the consideration provided by the Company or any
of its Restricted Subsidiaries consists solely of Capital Stock (other than
Redeemable Stock) of the Company; (vii) notes payable to the Company that are
received by the Company as payment of the purchase price for Capital Stock
(other than Redeemable Stock) of the Company; and (viii) acquisitions of a
minority equity interest in entities engaged in the telecommunications business;
PROVIDED, HOWEVER, that (A) the acquisition of a majority equity interest in
such entities is not permitted under U.S. law without FCC consent, (B) the
Company or one of its Restricted Subsidiaries has the right to acquire Capital
Stock representing a majority of the voting power of the Voting Stock of such
entity upon receipt of FCC consent and (C) in the event that such consent has
not been obtained within 18 months of funding such Investment, the Company or
one of its Restricted Subsidiaries has the right to sell such minority equity
interest in the seller thereof for consideration consisting of the consideration
originally paid by the Company and its Restricted Subsidiaries for such minority
equity interest.
"Permitted Investor" means William J. Rouhana, Jr.
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"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or nonvoting) of such Person's preferred or preference stock, whether now
outstanding or issued after the Issue Date, including, without limitation, all
series and classes of such preferred or preference stock.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Exchange Debentures, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Exchange Debentures (unless the redemption price is, at the
Company's option, without conditions precedent, payable solely in Common Stock
(other than Redeemable Stock) of the Company) or (iii) convertible into or
exchangeable for Capital Stock referred to in clause (i) or (ii) above or
Indebtedness having a scheduled maturity prior to the Stated Maturity of the
Exchange Debentures; PROVIDED, HOWEVER, that any Capital Stock that would not
constitute Redeemable Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Exchange Debentures shall not constitute Redeemable Stock
if the "asset sale" or "change of control" provisions applicable to such Capital
Stock are no more favorable to the holders of such Capital Stock than the
provisions "--Repurchase of Exchange Debentures upon a Change of Control" and
"--Covenants-- Limitation on Asset Sales" and such Capital Stock specifically
provides that such Person will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Securities as are
required to be repurchased pursuant to "--Repurchase of Exchange Debentures upon
a Change of Control" and "--Covenants--Limitation on Asset Sales."
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission and any successor agency.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary of the Company that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Specified Indentures" means the each of the following; (i) the Convertible
Senior Subordinated Discount Notes Indenture dated October 23, 1995, governing
the Convertible Notes; (ii) the Senior Discount Notes Indenture dated October
23, 1995 governing the 1995 Senior Notes; (iii) the Senior Deferred Interest
Notes Indenture dated as of March 1, 1997, governing the 1997 Senior Notes; (iv)
the Guaranteed Senior Secured Notes Indenture dated as of March 1, 1997,
governing the 12 1/2% Senior Secured Notes of WEC due 2004; (v) the Guaranteed
Senior Secured Notes Indenture dated as of August 1, 1997, governing the 12 1/2%
Senior Secured Notes of WEC II due 2004; and (vi) the Senior Subordinated
Deferred Interest Notes Indenture dated as of October 1, 1997, governing the
1997 Senior Subordinated Notes.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
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"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 information services or telecommunications network
intelligence; or (c) any business ancillary or directly related to the
businesses referred to in clause (a) or (b) above and (ii) any assets used
primarily to effect such transmission or provide the products or services
referred to in clause (a) or (b) above and any directly related or ancillary
assets including, without limitation, licenses and applications, bids and
agreements to acquire licenses, or other authority to provide transmission
services previously granted, or to be granted, by the FCC.
"Telecommunications Subsidiary" means (i) WCI Gateway, WinStar Wireless,
Inc., WinStar Telecommunications, Inc., WinStar Milliwave, Inc., WinStar Locate,
Inc., and WinStar Wireless Fiber Corp. and, in each case, its successors and
(ii) any other Restricted Subsidiary of the Company that holds more than a DE
MINIMIS amount of Telecommunications Assets.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof; (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States, any state
thereof or any foreign country recognized by the United States, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $50.0 million (or the foreign currency equivalent thereof) and has
outstanding deposits or debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor; (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above; (iv)
commercial paper, maturing not more than six months after the date of
acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States, any state
thereof or any foreign country recognized by the United States with a rating at
the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard & Poor's Ratings Group; and (v) securities with maturities of six
months or less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States, or by
any political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Group or Moody's Investors Service, Inc.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company), other than a guarantor of the Securities, to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, the Company or any Restricted
Subsidiary; PROVIDED, HOWEVER, that neither the Company nor its Restricted
Subsidiaries has any Guarantee of any Indebtedness of such Subsidiary
outstanding at the time of such designation and either (A) the Subsidiary to be
so designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000,
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that such designation would be permitted under the covenant described under
"--Covenants--Limitation on Restricted Payments." Notwithstanding the foregoing,
WinStar New Media Company Inc., Non Fiction Films Inc. and WinStar Global
Products, Inc. and their Subsidiaries are Unrestricted Subsidiaries. The Board
of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company; PROVIDED, HOWEVER, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under the first paragraph of the covenant described under
"--Covenants--Limitation on Indebtedness" and (y) no Default or Event of Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions. Anything to the contrary contained in the Exchange
Indenture notwithstanding, no Telecommunications Subsidiary may be designated an
Unrestricted Subsidiary.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Exchange Debentures, and shall also include a
depositary receipt issued by a bank or trust company as custodian with respect
to any such U.S. Government Obligation or a specific payment of interest on or
principal of any such U.S. Government Obligation held by such custodian for the
account of the holder of a depositary receipt; PROVIDED, HOWEVER, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depositary receipt from any amount
received by the custodian in respect of the U.S. Government Obligation or the
specific payment of interest on or principal of the U.S. Government Obligation
evidenced by such depositary receipt.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"WEC" means WinStar Equipment Corp. and its successors.
"WEC II" means WinStar Equipment II Corp. and its successors.
"WSAC" means WinStar Switch Acquisition Corp. and its successors.
"WSAC Credit Agreement" means the Credit Agreement dated as of October 17,
1997, among WSAC, the Lenders named therein, Credit Suisse First Boston, as
documentation agent, and Salomon Brothers Inc, as syndication agent and
collateral and administrative agent, as in effect from time to time.-
"WSAC Loan" means all Indebtedness and other obligations of WSAC arising in
connection with the WSAC Credit Agreement.
"WCI Gateway" means WinStar Gateway Network, Inc. and its successors.
"Wholly Owned" means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
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DESCRIPTION OF OTHER CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Company includes 200,000,000 shares of
Common Stock, $.01 par value. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Although the Company has no present intention of paying any
dividends, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation or dissolution of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preference of preferred shares.
Holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
The Company's Certificate of Incorporation, as amended, provides for a Board
of Directors divided into three classes, each of which will generally serve for
a term of three years, with only one class of directors being elected in each
year; provides that directors may be removed with or without cause and only by
at least a majority of the capital stock of the Company entitled to vote
thereon; and further requires an affirmative vote of the holders of at least
two-thirds of the capital stock of the Company entitled to vote thereon to
alter, amend or repeal the provisions relating to the classification of, and the
removal of members from, the Board of Directors. Nominations for the Board of
Directors may be made by the Company Board or by any stockholder entitled to
vote for the election of directors. A stockholder entitled to vote for the
election of directors at a meeting may nominate a person or persons for election
as director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting. The Company's Certificate of Incorporation and By-Laws
do not provide for cumulative voting rights which means that holders of more
than one-half of the outstanding voting rights, voting for the election of
directors, can elect all of the directors to be elected, if they so choose and,
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors. A special meeting of stockholders of the Company may
be called by the request of the holders of at least 10% of the outstanding
capital stock of the Company entitled to vote generally in all matters.
The registrar and the transfer agent for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
OTHER PREFERRED STOCK
The authorized capital stock of the Company includes 15,000,000 shares of
"blank check" preferred stock, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. The Board of
Directors, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges and restrictions applicable to each series of preferred stock. The
issuance of preferred stock (and the ability of the Board of Directors to do so
without stockholder approval), while providing flexibility in connection with
possible acquisitions and other corporate purposes could, among other things,
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to gain control
of the Company, discourage bids for the Common Stock at a premium or otherwise
adversely affect the market price of the Common Stock.
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SERIES A PREFERRED STOCK
On February 6, 1997, the Company and its wholly owned subsidiary, WinStar
Credit Corp. ("WCC"), entered into a Securities Purchase Agreement with certain
purchasers, pursuant to which the Company and WCC agreed to sell to such
purchasers an aggregate of 4,000,000 shares of the Company's 6% Series A
Cumulative Convertible 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. The Preferred Stock Placement was
consummated on February 11, 1997. The Preferred Stock Placement was conducted
through Credit Suisse First Boston Corporation, which acted as placement agent
and received customary fees for acting in such capacity. The principal purpose
of the Preferred Stock Placement was to raise proceeds to fund the expansion of
the Company's telecommunications and other operations. The Series A Preferred
Stock is Junior Stock.
Each share of Series A Preferred Stock has a stated value of $25 ("Stated
Value") and entitles the holder thereof to receive from the Company dividends at
a rate per annum equal to 6% of the Stated Value. Dividends accrue and are
cumulative from the date of issuance and are payable in arrears quarterly as of
March 31, June 30, September 30 and December 31 of each year. 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 shares of Common
Stock by dividing the aggregate Stated Value of the Series A Preferred Stock
being converted by the Conversion Price (as defined below). Subject to certain
adjustments, the "Conversion Price" will be: (i) with respect to any conversion
of Series A Preferred Stock occurring prior to February 11, 1998, the lesser of
(x) $25 and (y) the average of the closing bid prices for the Common Stock for
the 20 consecutive trading days immediately preceding the date of conversion and
(ii) with respect to any conversion of the Series A Preferred Stock occurring on
or after February 11, 1998, the lesser of (x) $25 and (y) the average of the
closing bid prices for the 20 consecutive trading days immediately preceding
February 11, 1998. Notwithstanding the foregoing, if a holder of Series A
Preferred Stock requests conversion at a time when the Conversion Price is less
than $15, the Company may (subject to certain notice requirements), in lieu of
converting such Series A Preferred Stock into shares of Common Stock, pay such
holder in cash an amount equal to 110% of the Liquidation Preference (as defined
below) for each share of Series A Preferred Stock requested to be converted. 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 at any time commencing
February 11, 1998 and ending February 11, 2002. The Company may accelerate the
expiration date at any time after February 11, 2000 if Common Stock trades at
$40 or more for a period of 20 consecutive days.
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 exercise
of the Series A Preferred Stock and Warrants.
As of the date of this Prospectus, after giving effect to any 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.
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RIGHTS TO PURCHASE SERIES B PREFERRED STOCK
The following is a summary of the Rights Agreement dated as of July 2, 1997
(the "Rights Plan"), between the Company and Continental Stock Transfer & Trust
Company, as Rights Agent, which was adopted by the Board of Directors of the
Company on July 2, 1997. This summary of the Rights Plan does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
Rights Plan.
Under the Rights Plan, holders of Common Stock of the Company received, as a
dividend, preferred stock purchase rights (the "Rights") at the rate of one
Right for each share of Common Stock held as of the close of business on July
14, 1997. One Right will also attach to each share of Common Stock issued
thereafter. Currently the Rights are not separate from the Common Stock and are
not exercisable, and the Rights will only separate from the Common Stock and
become exercisable if a person or group acquires 10% or more of the Company's
outstanding Common Stock (an "Acquiring Person") or launches a tender or
exchange offer that would result in ownership of 10% or more the Company's
outstanding Common Stock. Each Right that is not owned by an Acquiring Person
entitles the holder of the Right to buy one one-thousandth of one share (a
"Unit") of Series B Preferred Stock which will be issued by the Company. If any
person becomes an Acquiring Person, or if an Acquiring Person engages in certain
transactions involving conflicts of interest or in a business combination in
which the Company's Common Stock remains outstanding, then the Rights Plan
provides that each Right, other than any Right held by the Acquiring Person,
entitles the holder to purchase, for $70, Units with a market value of $140.
However, if the Company is involved in a business combination in which the
Company itself is not the survivor, or if the Company sells 50% or more of its
assets or earning power to another person, then the Rights Plan provides that
each Right entitled the holder to purchase, for $70, shares of the common stock
of the Acquiring Person's ultimate parent having a market value of $140.
At any time until ten days following the date on which a person acquires 10%
or more of the Company's Common Stock, the Company may redeem all (but not less
than all) of the Rights for $0.0001 per Right. The Rights expire in ten years.
The Series B Preferred Stock will be junior, with respect to dividends and
liquidation rights, to any other series of preferred stock of the Company. The
Series B Preferred Stock has dividend and liquidation preferences over the
Common Stock of the Company.
In January 1998, a stockholder class action suit was commenced against the
Company and directors (and certain former directors) and officers of the Company
in the Delaware Chancery Court seeking, among other things, to invalidate
certain portions of the Rights Plan and to recover unspecified damages and
attorney's fees. The complaint alleges that certain provisions of the Rights
Plan are not permitted under the DGCL and the Company's Certificate of
Incorporation. The Company believes strongly 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.
STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless prior to
the date the stockholder became an interested stockholder the board approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder or unless one of two exceptions
to the prohibitions are satisfied: (i) upon consummation of the transaction that
resulted in such person becoming an interested stockholder, the interested
stockholder owned at least 85% of the Company's voting stock outstanding at the
time the transaction commenced (excluding, for purposes of determining the
number of shares outstanding, shares owned by certain directors or certain
employee stock plans) or (ii) on or after the date the stockholder became an
interested stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote (and not by written consent) of
at least two-thirds
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of the outstanding voting stock, excluding the stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority-owned subsidiary of the corporation), together with
affiliates and associates, owns (or, as an affiliate or associate, within three
years prior, did own) 15% or more of the corporation's outstanding voting stock.
It is possible that these provisions may have the effect of delaying, deterring
or preventing a change in control of the Company.
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
INDEBTEDNESS
DEBT PLACEMENTS
1997 DEBT PLACEMENT
In March 1997, the Company and WEC issued an aggregate of $300 million of
notes in the March 1997 Debt Placement, consisting of (i) $100 million of the
1997 Senior Notes, ranking PARI PASSU with the 1995 Senior Notes, and (ii) $200
million of the WEC Notes. In order to provide additional future liquidity to the
Company, the Company also obtained a $150 million facility ("Facility") from
affiliates of the initial purchasers involved in the March 1997 Debt Placement.
In August 1997, WEC II issued, pursuant to the Facility, $50.0 million of the
WEC II Equipment Notes, thereby reducing the amount available under the Facility
by $50.0 million. In October 1997, the Company utilized the remaining $100
million available under the Facility, issuing an aggregate of $100 million
principal amount of the October 1997 Notes in the October 1997 Debt Placement.
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 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.
Additionally, in the event that by March 18, 1999, the Company has not applied
$200.0 million to fund the acquisition costs of Designated Equipment (as defined
in the Indentures relating to the WEC and WEC II Notes), the Company is required
to redeem the WEC Notes in an aggregate principal amount equal to such shortfall
at a redemption price of 112.50% 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. Additionally, in
the event that by August 8, 1999, the Company has not applied $50.0 million to
fund the acquisition costs of Designated Equipment, the Company is required to
redeem WEC II Equipment Notes in an aggregate principal amount equal to such
shortfall at a redemption price of 112.50% of such principal amount, plus
accrued interest, if any, to the date of redemption.
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 all existing
and future subordinated indebtedness of the Company. The 1997 Senior Notes bear
interest at a rate of 14 1/2% per annum. Until October 15, 2000, interest on the
1997 Senior Notes will accrue and compound semiannually, 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,
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2001. The 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 October 1997 Notes are unsecured, senior subordinated obligations of the
Company, rank PARI PASSU in right of payment with the Convertible Notes and are
junior in right of payment to all existing future senior indebtedness of the
Company. The October 1997 Notes bear interest at a rate of 15% per annum, and
are payable on March 1 and September 1, commencing September 1, 2002. Until
March 1, 2002, interest on the Notes will accrue and be compounded semiannually
on each SemiAnnual Interest Accrual Date (as defined in the Indenture relating
to the October 1997 Notes), but will not be payable in cash. Interest on the
Accumulated Amount (as defined in the Indenture relating to the October 1997
Notes) of the Notes as of March 1, 2002 will be payable semiannually commencing
September 1, 2002. The 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 redemption prices.
1995 DEBT PLACEMENT
In October 1995, the Company raised net proceeds of $214.5 million from 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 such 1995 Notes have accreted since issuance and at maturity 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. 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 a registration statement registering the
issuance or resale of the Conversion Shares.
INDENTURES
The Indentures relating to the 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
In September 1995, the Company's wholly owned subsidiary, WinStar Wireless,
Inc. ("WinStar Wireless") entered into an equipment lease financing arrangement
(the "Equipment Lease Financing") with ML Investors Services, Inc. ("ML"),
pursuant to which ML has made available $7.0 million in
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equipment financing. Pursuant to a master lease agreement between WinStar
Wireless and ML entered into in connection with the Equipment Lease Financing,
WinStar Wireless has leased transceivers and related network equipment from ML
or its assignee at the rate of 2.2753% of the equipment value per month (a
return of approximately 13% per annum to the lessor), which lease payment
obligations are non-cancelable for sixty months. After twelve months WinStar
Wireless may purchase the equipment at scheduled rates which decline over the
term of the lease and provide for a return of approximately 15% per annum to the
lessor. WinStar Wireless' obligations under the lease are guaranteed by the
Company. As additional consideration for providing the Equipment Lease
Financing, the Company has issued to ML options to purchase 55,000 shares of
Common Stock at an exercise price of $17.125 per share and options to purchase
15,000 shares of Common Stock at an exercise price of $18.0625 per share.
In November 1994, WinStar Gateway entered into a Loan and Security Agreement
("CIT Loan Agreement") with The CIT Group/Credit Finance, Inc. ("CIT"), pursuant
to which CIT agreed to make a $5.0 million revolving credit facility (the "CIT
Credit Facility") available to WinStar Gateway until November 1998 as extended.
Pursuant to the terms of the CIT Loan Agreement, borrowings are limited to 90%
of the most eligible accounts receivable with eligibility of certain types of
accounts receivable limited to 80% and 50% (less appropriate reserves as
determined by CIT). In addition, WinStar Gateway is prohibited from paying
dividends to the Company. The Company also is party to a keepwell agreement
requiring the Company to make a monthly contribution to WinStar Gateway in an
amount equal to the amount by which WinStar Gateway's net income (loss) before
depreciation and amortization minus its capital expenditures is less than zero
for a particular month. Borrowings bear interest at a rate of 1.75% in excess of
the prime commercial lending rate of The Chase Manhattan Bank, N.A. subject to
increase if WinStar Gateway's or the Company's net worth (as defined) drops
below specified amounts, and are secured by a lien on all of WinStar Gateway's
assets as well as a guarantee by the Company as to the first $2.2 million in
borrowings. The CIT Loan Agreement also provides for certain underutilization
fees and subordinates a $5 million revolving credit facility made by the Company
to WinStar Gateway. As additional consideration for providing the CIT Credit
Facility, the Company issued to CIT warrants to purchase 50,000 shares of Common
Stock, which warrants have been exercised.
In August 1996, WinStar Global Products entered into an Amended and Restated
Credit and Security Agreement (as amended, the "Credit Agreement") with IBJ
Schroder Bank & Trust Company ("IBJ"), pursuant to which IBJ agreed to make a
$10.0 million revolving credit facility (the "Revolving Credit Facility") and a
$250,000 Letter of Credit facility (included within the Revolving Credit
Facility) available to WinStar Global Products until August 8, 1999. Pursuant to
the terms of the Credit Agreement, borrowings are limited to an amount equal to
the sum of (a) 85% of eligible accounts receivable plus (b) the lesser of 50% of
eligible inventory or $4,500,000 plus (c) for the period commencing March 1 of
each year through January 31 of the following year, $3.0 million (the
"Overadvance"). Borrowings bear interest at a rate of 0.75% in excess of the
base lending rate of IBJ and are secured by a lien on all of the assets of
WinStar Global Products as well as a guaranty by the Company of any amounts
borrowed as an Overadvance. The Credit Agreement also requires the payment of
certain periodic fees by WinStar Global Products, contains certain affirmative
and negative covenants including restrictions upon WinStar Global Products'
ability to pay dividends or make other payments to the Company and subordinates
a $3.1 million loan made by the Company to WinStar Global Products. The Credit
Agreement amends and restates a loan agreement providing a $6.0 million credit
facility from Century Business Credit Corporation ("Century") which was
established in 1994 and assigned (including all security interests and a $3.0
million guaranty given by the Company) by Century to IBJ.
In October 1997, WinStar Switch Acquisition Corp. ("WSAC"), a wholly owned
subsidiary of the Company, consummated a purchase of certain telecommunications
assets (the "Assets") from US ONE. The Assets included 12
Lucent Class 5 switching systems and other nonswitch assets. The transaction
required and received the approval of the United States Bankruptcy Court,
District of Delaware ("Court"), because US ONE is a
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debtor in possession under Chapter 11 of the United States Bankruptcy Code of
1978, as amended. The aggregate purchase price paid for the Assets was
approximately $81.1 million, of which approximately $61.1 million was paid in
cash at the closing of the asset purchase and $20 million of which is payable by
the Company and WSAC in cash and/or shares of the common stock of the Company,
at the Company's discretion, on the effective date of US ONE's confirmed plan of
reorganization. In order to finance the cash portion of the purchase price and
to pay certain expenses, on the Closing Date, WSAC borrowed $62.25 million from
certain affiliates of the Initial Purchasers, Salomon Brothers Holding Company
Inc. and Credit Suisse First Boston, which borrowings were repaid with proceeds
obtained from the December 1997 Preferred Stock Placement.
The Company's subsidiaries have entered into, and will continue to seek,
financing arrangements with respect to equipment, including telecommunications
switches, 38 GHz radios and other related equipment. The Company's subsidiary,
WinStar Telecommunications, Inc., consummated a $3.1 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, the Company's subsidiary, WinStar Wireless, Inc.,
consummated a $10 million sale/leaseback of 38 GHz radios. The Company may enter
into additional financing arrangements for switches, radios and other equipment
on similar terms in the future.
WINSTAR NEW MEDIA CREDIT FACILITY
In January 1998, the Company's wholly-owned subsidiary, WinStar New Media
Company, Inc. ("WNM"), and certain of its subsidiaries (the "Guarantors")
entered into a Loan, Security and Guaranty Agreement ("Loan Agreement") with ING
(U.S.) Capital Corporation ("ING"), as Agent and Lender.
Under the Loan Agreement, WNM may borrow up to $15 million outstanding at
any one time, either in the form of revolving loans or by the issuance of
letters of credit. Borrowings outstanding under the Loan Agreement may not be
made in excess of the amount of the "Borrowing Base" determined pursuant to the
Loan Agreement. All of WNM's obligations under the Loan Agreement are guaranteed
by the Guarantors and are secured by substantially all of the assets of WNM and
the Guarantors (together, the "Credit Parties"), including the capital stock of
the Guarantors, and products and proceeds thereof.
Revolving loans bear interest at either .25% per annum above the prime rate
(the "Base Rate") or at 2.75% per annum above the London Inter Bank Offering
Rate ("LIBOR") in effect at the time an advance is made. Amounts drawn by
beneficiaries of a letter of credit bear interest at the Base Rate.
This facility matures and all outstanding loans are payable in full on
January 26, 2001. If any of the Credit Parties receives any net cash proceeds
from other permitted borrowings, offerings and sales of equity securities
generating gross proceeds in excess of $25 million cumulatively or a sale,
lease, transfer or other disposition of its property other than in the ordinary
course of business, such net cash proceeds must be used to repay principal of
revolving loans and, in such event, the $15 million total commitment of the
lenders will be reduced by the amount of such prepayment.
The Loan Agreement contains certain affirmative and negative covenants of
the Credit Parties typical of a transaction of this type, including financial
covenants which require WNM to maintain specified levels of minimum net worth
and tangible net worth, and to not exceed certain specified levels of selling,
general and administrative expenses and corporate overhead allocations. It will
be an Event of Default if, until such time as WNM has obtained aggregate cash
proceeds of at least $10 million from issuance of new equity, the Company shall
have less than $75 million cash on hand or if it be subject to any contractual
or other restriction which would prevent it from making additional investments
of at least $6 million in WNM.
The Loan Agreement also contains customary Events of Default, including the
occurrence of a "Change of Control," which is defined to be a transaction or
event as a result of which the Company ceases
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to own beneficially at least 66% of the issued and outstanding or fully diluted
capital stock of WNM or another person or group acquires more than 50% of the
issued and outstanding or fully diluted capital stock of the Company.
CERTAIN U.S. FEDERAL INCOME TAX CONSEEQUENCES
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to the exchange of Old Preferred Stock for New
Preferred Stock, and applicable to holders of the Exchangeable Preferred Stock
in general. This summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), regulations of the Treasury
Department, administrative rulings and pronouncements of the Internal Revenue
Service (the "IRS") and judicial decisions currently in effect, all of which are
subject to change, possibly with retroactive effect. The discussion does not
deal with all aspects of U.S. Federal income taxation that may be relevant to
particular investors in light of their personal investment circumstances (for
example, to persons holding the Exchangeable Preferred Stock as part of a
conversion transaction or as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes), nor does it discuss U.S. Federal
income tax considerations applicable to certain types of investors subject to
special treatment under the U.S. Federal income tax laws (for example, insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
taxpayers subject to the alternative minimum tax or non U.S. holders). In
addition, the discussion does not consider the effect of any foreign, state,
local, gift, estate or other tax laws that may be applicable to a particular
investor. The discussion assumes that investors are U.S. Holders (as defined
below) that will hold the Exchangeable Preferred Stock as capital assets within
the meaning of Section 1221 of the Code. EACH POTENTIAL INVESTOR SHOULD CONSULT
ITS TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING
AND DISPOSING OF THE EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
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The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Exchangeable Preferred Stock that is (i) a
citizen or resident (as defined in Section 7701(b) (1) of the Code) of the
United States, (ii) a corporation or other entity taxable as a corporation
created or organized under the laws of the United States or any State thereof
(including the District of Columbia), (iii) an estate or trust described in
Section 7701 (a) (30) of the Code, or (iv) a person whose worldwide income or
gain is otherwise subject to U.S. Federal income taxation on a net income basis
(a "U.S. Holder").
THE EXCHANGE OFFER
The exchange of Old Preferred Stock for New Preferred Stock will not
constitute a recognition event for federal income tax purposes. Consequently, no
gain or loss will be recognized by a holder on the exchange. Immediately after
the exchange, a holder's adjusted tax basis in the New Preferred Stock will be
the same as the holder's adjusted basis in the Old Preferred Stock immediately
before the exchange. A holder will be considered to have held the New Preferred
Stock from the time the holder originally acquired the Old Preferred Stock.
Dividends on each share of New Preferred Stock will accrue from the last
Dividend Payment Date on the Old Preferred Stock. No additional dividends will
be paid on the Old Preferred Stock tendered and accepted for exchange.
EXCHANGEABLE PREFERRED STOCK AND EXCHANGE DEBENTURES
DISTRIBUTIONS IN GENERAL
Distributions with respect to the Exchangeable Preferred Stock will be
treated as dividends (taxable as ordinary income) to the extent of the current
and accumulated earnings and profits of the Company. To the extent that the
amount of a distribution with respect to the Exchangeable Preferred Stock
exceeds the current and accumulated earnings and profits of the Company, it will
be treated first as a tax-free return of capital to the extent of the holder's
basis in the Exchangeable Preferred Stock, and thereafter as capital gain from
the sale of the Exchangeable Preferred Stock (taxable as described below under
"Sale, Redemption or Other Taxable Disposition of Exchangeable Preferred
Stock"). The Company does not currently have any current or accumulated earnings
and profits, and cannot accurately predict when it will have earnings and
profits.
A holder that is a corporation otherwise entitled to the dividends-received
deduction as provided in Section 243 of the Code will be entitled to that
deduction (generally at a 70% rate) with respect to amounts treated as dividends
on the Exchangeable Preferred Stock but will not be entitled to that deduction
with respect to amounts treated as a return of capital or capital gain. In
addition, the benefit of a dividends-received deduction may be reduced by the
corporate alternative minimum tax. In determining entitlement to the
dividends-received deduction, corporate holders should also consider the
provisions of Sections 246(c), 246A and 1059 of the Code and Treasury
Regulations promulgated thereunder, and IRS rulings and administrative
pronouncements relating to such Code provisions. Under current law as amended by
certain legislation recently enacted by Congress (the "New Legislation"),
Section 246(c) of the Code disallows the dividends-received deduction in its
entirety if the holder does not hold the stock for at least a 90 day continuous
period beginning 45 days prior to the date such holder becomes entitled to
receive each dividend on the stock. The New Legislation also requires immediate
recognition of gain under Section 1059 of the Code to the extent that the
non-taxed portion of a dividend exceeds a corporate shareholder's tax basis in
the Exchangeable Preferred Stock, rather than deferring such gain until the sale
of such Exchangeable Preferred Stock. The New Legislation also increases the
holding period of Exchangeable Preferred Stock required for purposes of the
dividends-received deduction. Section 246(c)(4) of the Code provides that a
holder may not count toward this minimum holding period any period in which the
holder (i) has, among other things, an option to sell Exchangeable Preferred
Stock which it owns, (ii) is under a contractual obligation to sell Exchangeable
Preferred Stock which it owns, (iii) has made (and not closed) a short sale of
substantially identical stock or securities, or (iv) has diminished its risk of
loss by holding one or more positions with respect to substantially similar or
related
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property. Section 246A of the Code contains the "debt-financed portfolio stock"
rules, under which the dividends-received deduction could be reduced to the
extent that a holder incurs indebtedness directly attributable to its investment
in the Exchangeable Preferred Stock.
EXCESSIVE REDEMPTION PRICE
Under Section 305 of the Code and Treasury Regulations authorized
thereunder, if the redemption price of Exchangeable Preferred Stock exceeds its
issue price (I.E., its fair market value at its date of original issue) by more
than a DE MINIMIS amount, such excess may be treated as a constructive
distribution that will be treated in the same manner as distributions described
above under "Distributions in General." A holder of such Exchangeable Preferred
Stock is required to treat such excess as a constructive distribution received
by the holder over the life of such stock under a constant interest (economic
yield) method that takes into account the compounding of yield. It is
anticipated that the mandatory redemption price of the Exchangeable Preferred
Stock will not exceed such Exchangeable Preferred Stock issue price by more than
a DE MINIMIS amount.
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF THE EXCHANGEABLE PREFERRED
STOCK
Upon a sale or other taxable disposition (but not including on exchange of
Exchangeable Preferred Stock for Exchange Debentures or other redemption), a
holder generally will recognize capital gain or loss for U.S. Federal income tax
purposes (except to the extent of cash payments received on the disposition that
are attributable to accrued dividends, which will be treated in the same manner
as distributions described above under "Distributions in General") in an amount
equal to the difference between (i) the sum of the amount of cash and the fair
market value of any property received upon such sale or other taxable
disposition and (ii) the holder's adjusted tax basis in the Exchangeable
Preferred Stock being disposed. Under New Legislation, any gain or loss on the
sale, exchange or retirement of the Exchangeable Preferred Stock held by
individual taxpayers for (i) one year or less shall be treated as short-term
capital gain or loss, (ii) more than one year but not more than 18 months shall
be subject to a maximum tax rate of 28 percent, (iii) more than 18 months shall
be subject to a maximum tax rate of 20 percent, and (iv) beginning in the year
2006, the Exchangeable Preferred Stock acquired after the year 2000 and held for
at least five years shall be taxed at a maximum rate of 18 percent.
A holder's initial tax basis in the Exchangeable Preferred Stock generally
will be the price such holder paid for such Exchangeable Preferred Stock.
Gain or loss recognized by a holder on a redemption of the Exchangeable
Preferred Stock would be treated as a sale or exchange and therefore qualify for
the treatment described above if, taking into account stock that is actually or
constructively owned under the constructive ownership rules of Section 318 of
the Code by such holder, either (i) the holder's interest in the stock of the
Company is completely terminated as a result of the redemption or (ii) the
redemption is "not essentially equivalent to a dividend." Under Section 318 of
the Code, a person generally will be treated as the owner of stock of the
Company owned by certain related parties or certain entities in which the person
owns an interest and stock that a holder could acquire through exercise of an
option. Whether a redemption is not essentially equivalent to a dividend depends
on each holder's facts and circumstances, but in any event requires a
"meaningful reduction" in such holder's equity interest in the Company. A holder
of the Exchangeable Preferred Stock who sells some or all of the stock of the
Company owned by it may be able to take such sales into account to satisfy one
of the foregoing conditions. Conversely, a holder who purchases additional
shares of stock of the Company may be required to take such shares into account
in determining whether any of the foregoing conditions are satisfied.
If none of the above conditions is satisfied, the entire amount of the cash
(or property) received on a redemption will be treated as a distribution
(without offset by the holder's tax basis in the redeemed shares), which will be
treated in the same manner as distributions described above under "Distributions
in
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General." In such case, the holder's basis in the redeemed the Exchangeable
Preferred Stock would be transferred to the holder's remaining shares of the
Company stock (if any). If the holder does not retain any shares of the Company
stock, such basis may be entirely lost.
A redemption of Exchangeable Preferred Stock for Exchange Debentures will be
subject to the same general rules as a redemption for cash, as described above,
except that the amount of the redemption proceeds will be determined based upon
the issue price of the Exchange Debentures. The issue price of such Exchange
Debentures generally will be the fair market value of such Exchange Debentures
on their issue date, provided that such Exchange Debentures are traded on an
established securities market within thirty days either prior to or following
such issue date. If the Exchangeable Preferred Stock, but not the Exchange
Debentures issued therefor, is traded on an established securities market within
either thirty days prior to or following the issue date of the Exchange
Debentures, then the issue price of such Exchange Debentures will be the fair
market value of the Exchangeable Preferred Stock exchanged therefor. In the
event that neither the Exchangeable Preferred Stock nor the Exchange Debentures
is traded on an established securities market within the applicable period, the
issue price of the Exchange Debentures will be their stated principal amount --
generally their face value -- unless the Exchange Debentures do not bear
"adequate stated interest" within the meaning of Section 1274 of the Code, in
which case the issue price of such Exchange Debentures generally will be an
amount equal to the sum of the present values of all payments due under the
Exchange Debentures, determined using a discount rate equal to the applicable
Federal rate ("AFR") (discussed further under "Applicable High-Yield Discount
Obligation" below). Additionally, any gain recognized on a redemption of
Exchangeable Preferred Stock for Exchange Debentures may be eligible for
deferral under the installment sale method, subject to a $5 million dollar
limitation and provided that neither the Exchangeable Preferred Stock nor the
Exchange Debentures are readily tradeable on an established securities market.
The Company does not anticipate that either the Exchangeable Preferred Stock or
the Exchange Debentures will be readily tradeable on an established securities
market.
TAXATION OF THE EXCHANGE DEBENTURES
INTEREST ON THE EXCHANGE DEBENTURES
With respect to any Exchange Debenture issued after December 15, 2002, a
holder of an Exchange Debenture will be required to report stated interest
earned on the Exchange Debenture as ordinary interest income for U.S. Federal
income tax purposes in accordance with such holder's method of tax accounting.
ORIGINAL ISSUE DISCOUNT
Some or all of the Exchange Debentures may be considered issued with
original issue discount for U.S. Federal income tax purposes. In general,
original issue discount on the Exchange Debentures, defined as the excess of
"stated redemption price at maturity" over "issue price," must be included in a
holder's gross income in advance of the receipt of cash representing that income
(regardless of whether the holder is a cash or accrual method taxpayer).
The "issue price" of an Exchange Debenture will depend on whether the
Exchange Debenture or the Exchangeable Preferred Stock is traded on an
established securities market as discussed above under "Sale, Redemption or
Other Taxable Disposition of Exchangeable Preferred Stock." The "stated
redemption price at maturity" of the Exchange Debentures will equal their
principal amount at maturity plus, in the case of an Exchange Debenture issued
on or prior to December 15, 2002, the aggregate amount of the stated interest
payable on such Exchange Debentures.
The Company will report annually to the IRS and to record holders of the
Exchange Debentures information with respect to original issue discount accruing
during the calendar year.
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A holder of an Exchange Debenture will be required to include in gross
income for U.S. Federal income tax purposes the sum of the "daily portions" of
original issue discount with respect to the Exchange Debenture for each day of
the taxable year during which such holder holds the Exchange Debenture. The
daily portions of original issue discount with respect to an Exchange Debenture
are determined by allocating to each day in an "accrual period" a ratable
portion of the original issue discount allocable to such accrual period. Accrual
periods with respect to an Exchange Debenture may be any set of periods (which
may be of varying lengths) selected by a holder provided that (i) no accrual
period is longer than one year and (ii) each scheduled payment of interest or
principal on the Exchange Debenture occurs on either the first or final day of
an accrual period.
The amount of original issue discount allocable to each accrual period
equals the amount determined by multiplying the "adjusted issue price" of the
Exchange Debenture at the beginning of the accrual period by the yield to
maturity of the Exchange Debenture (I.E., the discount rate that, when applied
to all payments under the Exchange Debenture, including payments of stated
interest or principal, results in a present value equal to the issue price). The
"adjusted issue price" at the beginning of any accrual period is the issue price
of the Exchange Debenture, plus the amount of original issue discount taken into
account for all prior accrual periods, minus the amount of all cash payments
previously made on the Exchange Debenture (including payments of stated
interest). This constant yield method of determining the amount of original
issue discount included in income for any period generally will require a holder
of an Exchange Debenture to include increasing amounts of original issue
discount in income in successive accrual periods. The holder will not be
required to recognize as additional income payments of stated interest to the
extent such payments are already taken into account as original issue discount.
BOND PREMIUM
If the holder's basis in the Exchange Debentures exceeds the amount payable
at the maturity date, such excess will be deductible by the holder of the
Exchange Debentures as amortizable bond premium over the term of the Exchange
Debentures under a yield-to-maturity formula if the holder has already made an
election under Section 171 of the Code. An election under Section 171 of the
Code is (i) available only if the Exchange Debentures are held as capital
assets, (ii) is revocable only with the consent of the IRS, and (iii) applies to
all obligations owned or subsequently acquired by the holder on or after the
first day of the taxable year in which such election applies. To the extent that
the excess is deducted as amortizable bond premium, the holder's adjusted tax
basis in the Exchange Debentures will be reduced. Current Treasury Regulations
under Section 171 of the Code provide that the amortizable bond premium will
offset interest income on the Exchange Debentures and will not be treated as a
separate deduction item. However, Proposed Regulations under Section 171 of the
Code would conform the treatment of amortizable bond premium to the treatment of
original issue discount.
SALE OR REDEMPTION
A holder generally will recognize taxable gain or loss upon the sale,
exchange, retirement or other taxable disposition of' an Exchange Debenture
equal to the difference between the amount realized upon such disposition (other
than amounts attributable to stated interest not included in the stated
redemption price at maturity of such Exchange Debentures) and its adjusted tax
basis in the Exchange Debenture. A holder's adjusted tax basis in an Exchange
Debenture will equal the issue price of such Exchange Debentures, increased by
accrued original issue discount previously included in the holder's gross income
with respect to the Exchange Debenture, and decreased by any cash payments
(including payments of stated interest) made with respect thereto.
APPLICABLE HIGH-YIELD DISCOUNT OBLIGATION
The original issue discount on any obligation that constitutes an
"applicable high yield discount obligation" is not deductible until paid. An
"applicable high yield discount obligation" is any debt
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instrument that (i) has a maturity date which is more than five years from the
date of issue, (ii) has a yield to maturity which equals or exceeds the AFR (as
set forth in Section 1274(d) of the Code) for the calendar month in which the
obligation is issued plus five percentage points and (iii) has "significant
original issue discount." The AFR is an interest rate announced monthly by the
IRS, that is based on the yield of debt obligations issued by the U.S. Treasury.
A debt instrument generally has "significant original issue discount" if the
aggregate amount (including original issue discount) that would be includable in
gross income with respect to the debt instrument for periods before the close of
any accrual period that ends more than five years after the date of issue
exceeds the sum of (i) the aggregate amount of interest to be paid on the
instrument before the close of' such accrual period and (ii) the product of the
issue price of the instrument and its yield to maturity. Moreover, if the debt
instrument's yield to maturity exceeds the AFR plus six percentage points, a
ratable portion of the issuing corporation's deduction for original issue
discount (the "Disqualified Original Issue Discount") (based on the portion of
the yield to maturity that exceeds the applicable Federal rate plus six
percentage points) will be denied. For purposes of the dividends-received
deduction under Section 243 of the Code, the Disqualified Original Issue
Discount will be treated as a dividend to the extent it would have been so
treated had such amount been distributed by the Company with respect to its
stock. Whether the Exchange Debentures will constitute applicable high yield
debt obligations will depend upon the facts and circumstances existing at the
time of their issuance.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding may apply to certain
non-corporate holders with respect to payments by the Company of dividends on
the Exchangeable Preferred Stock or payments of interest on the Exchange
Debentures. Such payments will be subject to backup withholding at a rate of 31
percent unless the beneficial owner of such security supplies the payor or its
agent with a taxpayer identification number, certified under penalties of
perjury, and certain other information, or otherwise establishes, in the manner
prescribed by law, an exemption from backup withholding. In addition, if the
Exchangeable Preferred Stock or Exchange Debentures are sold to (or through) a
"broker," the broker may be required to withhold 31 percent of the entire sales
price, unless either (i) the broker determines that the seller is a corporation
or other exempt recipient or (it) the seller provides, in the required manner,
certain identifying information. Such a sale must also be reported by the broker
to the IRS, unless the broker determines that the seller is an exempt recipient.
The term "broker" as defined by Treasury Regulations includes all persons who,
in the ordinary course of their business, stand ready to effect sales made by
others.
Any amount withheld under backup withholding rules from a payment to a
holder is allowable as a credit against the holder's U.S. Federal income tax,
which may entitle the holder to a refund, provided that the holder furnishes the
required information to the IRS. In addition, certain penalties may be imposed
by the IRS on a holder who is required to supply information but does not do so
in the proper manner.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PURCHASER OF THE EXCHANGEABLE PREFERRED STOCK OR HOLDER OF
EXCHANGE DEBENTURES SHOULD CONSULT WITH ITS OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES TO SUCH PURCHASER FROM THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Preferred Stock issued pursuant to the Exchange Offer in exchange for the Old
Preferred Stock may be offered for sale, resold or otherwise transferred by any
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holder without compliance with the registration and prospectus delivery
provisions of the Securities Act. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to third parties, the Company
believes that the New Preferred Stock issued pursuant to the Exchange Offer in
exchange for Old Preferred Stock may be offered for resale, resold and otherwise
transferred by any holder of such New Preferred Stock (except in the case of
broker-dealers, as set forth below) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Preferred Stock is acquired in the ordinary course of such holder's business and
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Preferred Stock. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Preferred Stock may not rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Preferred Stock for its own
account in exchange for Old Preferred Stock, where such Old Preferred Stock was
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Preferred Stock.
The Company will not receive any proceeds from any sale of New Preferred
Stock by broker-dealers. New Preferred Stock received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Preferred Stock or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New
Preferred Stock. Any broker-dealer that resells New Preferred Stock that was
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such New Preferred Stock may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of New Preferred Stock and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by,
acknowledging that it will deliver and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay all expenses incidental to the
Exchange Offer (including the reasonable fees and disbursements of one counsel
for the holders of the Exchangeable Preferred Stock) other than commissions or
concessions of any brokers or dealers and will indemnify the holders of the
Exchangeable Preferred Stock (including certain broker-dealers) against certain
liabilities, including certain liabilities under the Securities Act.
Each holder of the Old Preferred Stock who wishes to exchange its Old
Preferred Stock for New Preferred Stock in the Exchange Offer will be required
to make certain representations to the Company as set forth in "The Exchange
Offer -- Terms and Conditions of the Letter of Transmittal." The Company has not
entered into any arrangement or understanding with any person to distribute the
New Preferred Stock to be received in the Exchange Offer and, as of the
Expiration Date, to the best of the Company's information and belief, each
person participating in the Exchange Offer will be acquiring the New Preferred
Stock in its ordinary course of business and will not have any arrangement or
understanding with any person to participate in the distribution of the New
Preferred Stock to be received in the Exchange Offer.
LEGAL MATTERS
The validity of the New Preferred Stock will be passed upon for the Company
by Graubard Mollen & Miller, New York, New York. Certain partners and employees
of Graubard Mollen & Miller are holders of shares of the Common Stock of WinStar
Communications, Inc.
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EXPERTS
The consolidated financial statements of the Company as of December 31, 1995
and 1996 and for the years ended February 28, 1995, December 31, 1996 and the
ten months ended December 31, 1995 and the financial statements of Milliwave
Limited Partnership as of December 31, 1995 and 1996 and for the period April
25, 1995 (inception) through December 31, 1995 and for the year ended December
31, 1996 incorporated by reference into this Prospectus have been audited by
Grant Thornton LLP, independent certified public accountants, to the extent and
for the periods indicated in their reports thereon.
The consolidated financial statements of Midcom as of and for each of the
three years in the period ended December 31, 1996 included in this Prospectus
have been so included in reliance on the report of Ernst & Young LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MIDCOM COMMUNICATIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994............... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1996, 1995 and
1994................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996,1995 and 1994................ F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
<TABLE>
<S> <C>
MIDCOM COMMUNICATIONS, INC. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 1997...................... F-25
Condensed Consolidated Statements of Operations, Nine Months Ended September 30,
1996............................................................................. F-26
Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30,
1996 and 1997.................................................................... F-27
Notes to Condensed Consolidated Financial Statements............................... F-28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Financial Statements.................... F-36
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30,
1997............................................................................. F-37
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Nine Months
Ended September 30, 1997......................................................... F-38
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Year Ended
December 31, 1996................................................................ F-40
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements........... F-42
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders and Board of Directors
MIDCOM Communications Inc.
We have audited the accompanying consolidated balance sheets of MIDCOM
Communications Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MIDCOM Communications Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and has
a shareholders' deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Seattle, Washington
March 21, 1997
F-2
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1995
----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 30,962 $ 1,083
Accounts receivable, less allowance for doubtful accounts of $7,802 and $10,581 in
1996 and 1995, respectively......................................................... 16,969 51,814
Due from related parties.............................................................. -- 502
Prepaid expenses and other current assets............................................. 1,548 2,510
----------- -----------
Total current assets.............................................................. 49,479 55,909
Investments in and advances to joint venture.......................................... -- 2,000
Furniture, equipment and leasehold improvements, net.................................. 11,045 13,719
Intangible assets, less accumulated amortization of $39,532 and $12,812 in 1996 and
1995, respectively.................................................................. 15,547 60,781
Other assets, net..................................................................... 3,852 922
----------- -----------
Total assets...................................................................... $ 79,923 $ 133,331
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................................................................... $ 3,179 $ 6,624
Carrier accounts payable.............................................................. 17,143 32,534
Accrued expenses...................................................................... 10,006 10,051
Notes payable......................................................................... 9,680 14,576
Interest payable...................................................................... 2,932 335
Current portion of long-term obligations.............................................. 3,314 41,721
----------- -----------
Total current liabilities......................................................... 46,254 105,841
Long-term obligations, less current portion............................................. 99,153 1,844
Other long-term liabilities............................................................. 3,800 1,847
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.0001 par value, 10,000,000 shares authorized no shares issued or
outstanding......................................................................... -- --
Common stock, $.0001 par value, 90,000,000 shares authorized, 15,803,242 and
15,128,829 shares issued and outstanding in 1996 and 1995, respectively............. 68,330 62,400
Deferred stock option compensation.................................................... (1,707) (13)
Accumulated deficit................................................................... (135,907) (38,588)
----------- -----------
Total shareholders' equity (deficit).............................................. (69,284) 23,799
----------- -----------
Total liabilities and shareholders' equity (deficit).............................. $ 79,923 $ 133,331
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenue...................................................................... $ 148,777 $ 203,554 $ 111,699
Cost of revenue.............................................................. 107,950 139,546 79,044
---------- ---------- ----------
40,827 64,008 32,655
Operating expenses:
Selling, general and administrative........................................ 65,025 62,061 27,697
Depreciation............................................................... 5,966 4,481 1,477
Amortization............................................................... 26,721 9,309 2,657
Restructuring charge....................................................... 2,220 -- --
Contract settlement........................................................ 8,800 -- --
Loss on impairment of assets............................................... 20,765 11,830 --
---------- ---------- ----------
Total operating expenses..................................................... 129,497 87,681 31,831
---------- ---------- ----------
Operating income (loss)...................................................... (88,670) (23,673) 824
Other income (expense):
Equity in loss of joint venture............................................ -- (52) (458)
Other income (expense)..................................................... 77 (338) (430)
Interest expense........................................................... (8,726) (5,288) (2,531)
Interest expense--shareholders............................................. -- -- (434)
---------- ---------- ----------
Loss before extraordinary item............................................... (97,319) (29,351) (3,029)
Extraordinary item: loss on early redemption of debt......................... -- (4,067) --
---------- ---------- ----------
Net loss..................................................................... $ (97,319) $ (33,418) $ (3,029)
---------- ---------- ----------
---------- ---------- ----------
Per share amounts:
Loss before extraordinary item............................................... $ (6.27) $ (2.42)
Extraordinary item........................................................... -- (0.34) --
---------- ---------- ----------
Net loss..................................................................... $ (6.27) $ (2.76)
---------- ---------- ----------
Shares used in calculating per share data.................................... 15,529 12,101 9,930
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
DEFERRED SHAREHOLDERS'
NUMBER COMMON STOCK OPTION ACCUMULATED EQUITY
OF SHARES STOCK COMPENSATION DEFICIT (DEFICIT)
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at January 1, 1994...................... 8,011 $ 502 $ (104) $ (6,963) $ (6,565)
Conversion from S corporation to C
corporation................................. -- (7,679) -- 7,679 --
Stock issued in acquisition................... 114 1,040 -- -- 1,040
Compensation attributable to stock options
vesting..................................... -- -- 20 -- 20
Stock option forfeitures...................... -- (54) 50 -- (4)
Issuance of common stock warrant.............. -- 3,500 -- -- 3,500
Distributions by acquired company............. -- -- -- (1,266) (1,266)
Net loss for the year......................... -- -- -- (3,029) (3,029)
----------- ----------- ------------- ------------ -------------
Balance at December 31, 1994.................... 8,125 (2,691) (34) (3,579) (6,304)
Issuance of compensatory stock options........ -- 268 -- -- 268
Stock issued in acquisitions.................. 500 4,757 -- -- 4,757
Compensation attributable to stock options
vesting..................................... -- -- 21 -- 21
Stock issued in initial public offering....... 5,456 54,182 -- -- 54,182
Stock issued in customer base acquisitions.... 331 5,120 -- -- 5,120
Stock issued for exercise of stock options and
warrants and employee stock purchase plan... 717 442 -- -- 442
Distributions by acquired company............. -- -- -- (1,269) (1,269)
Conversion of acquired company from S
corporation to C corporation................ -- 322 -- (322) --
Net loss for the year......................... -- -- -- (33,418) (33,418)
----------- ----------- ------------- ------------ -------------
Balance at December 31, 1995.................... 15,129 62,400 (13) (38,588) 23,799
Stock issued in acquisitions.................. 107 933 -- -- 933
Stock issued for exercise of stock options and
employee stock purchase plan................ 567 2,861 -- -- 2,861
Issuance of compensatory stock options........ -- 2,136 (2,136) -- --
Compensation attributable to stock options
vesting..................................... -- -- 442 -- 442
Net loss for the year......................... -- -- -- (97,319) (97,319)
----------- ----------- ------------- ------------ -------------
Balance at December 31, 1996.................... 15,803 $ 68,330 $ (1,707) $ (135,907) $ (69,284)
----------- ----------- ------------- ------------ -------------
----------- ----------- ------------- ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss........................................................................... $ (97,319) $ (33,418) $ (3,029)
Depreciation....................................................................... 5,966 4,481 1,477
Amortization of intangibles........................................................ 26,721 9,309 2,657
Amortization of deferred financing costs........................................... 896 620 483
Loss on impairment of assets....................................................... 20,765 11,830 --
Equity in loss of joint venture.................................................... -- 52 458
Compensation attributable to stock options......................................... 862 289 16
Noncompetition payments............................................................ -- -- (250)
Loss on sale of assets............................................................. 53 -- --
Long-term portion of contract settlement........................................... 3,800 -- --
Extraordinary item--write-off of original issue discount and deferred financing
costs............................................................................ -- 4,067 --
Changes in operating assets and liabilities:
Accounts receivable................................................................ 34,563 (17,784) (9,811)
Due from related parties........................................................... 502 138 (606)
Notes receivable................................................................... 86 390 (348)
Prepaid expenses and other current assets.......................................... 776 (719) (1,201)
Other assets....................................................................... (324) (142) 11
Accounts payable and accrued expenses.............................................. (4,295) (3,559) 4,062
Carrier accounts payable........................................................... (15,391) 16,638 8,236
Accrued interest payable........................................................... 2,597 228 (869)
Deferred income.................................................................... -- (67) (3,229)
Other long-term liabilities........................................................ 150 1,717 (202)
--------- --------- ---------
Net cash used in operating activities................................................ (19,592) (5,930) (2,145)
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements......................... (4,309) (6,884) (4,187)
Net assets acquired in business and customer base acquisitions....................... -- (11,407) (5,089)
Proceeds from sale of assets......................................................... 692 -- --
Investment in and advances to joint venture.......................................... -- (2,625) (4,190)
Loan to related party................................................................ -- -- (1,234)
--------- --------- ---------
Net cash used in investing activities................................................ (3,617) (20,916) (14,700)
--------- --------- ---------
FINANCING ACTIVITIES
Repayment of loans from related parties.............................................. -- -- (3,617)
Proceeds from notes payable.......................................................... 333 -- 3,485
Repayment of notes payable........................................................... (5,229) (21,628) (10,592)
Proceeds from long-term obligations.................................................. 112,743 69,205 34,350
Repayment of long-term obligations................................................... (53,814) (64,841) (3,851)
Proceeds from common stock issued for stock purchase plan and stock options.......... 2,861 442 --
Issuance of common stock............................................................. -- 54,182 --
Preferred stock redemption........................................................... -- (8,597) --
Distributions to shareholders of acquired companies.................................. -- (1,269) (1,266)
Deferred financing costs............................................................. (3,806) (525) (1,512)
--------- --------- ---------
Net cash provided by financing activities............................................ 53,088 26,969 16,997
--------- --------- ---------
Net increase in cash and cash equivalents............................................ 29,879 123 152
Cash and cash equivalents at the beginning of year................................... 1,083 960 808
--------- --------- ---------
Cash and cash equivalents at the end of year......................................... $ 30,962 $ 1,083 $ 960
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF OPERATIONS
MIDCOM Communications Inc. ("Midcom" or the Company") provides long distance
voice and data telecommunications services. As primarily a nonfacilities-based
reseller, Midcom principally utilizes the network switching and transport
facilities of Tier I long distance carriers such as Sprint Corporation
("Sprint"), WorldCom, Inc. ("WorldCom") and AT&T Corp. ("AT&T") to provide a
broad array of telecommunications services. Midcom's service offerings include
basic "1 plus" and "800" long distance voice, frame relay data transmission
services, wireless services, dedicated private lines between customer locations
and enhanced telecommunications services such as facsimile broadcast services
and conference calling. The Company's customers are primarily small to
medium-sized commercial businesses.
RISKS AND UNCERTAINTIES
The Company is subject to certain significant risks and uncertainties that
may affect the amounts reported in the financial statements. These significant
risks and uncertainties include impairment of assets and litigation. Additional
information concerning these risks and uncertainties is included in the notes to
the consolidated financial statements.
GOING CONCERN AND LIQUIDITY
The Company incurred operating losses during each of the three years ended
December 31, 1996 and, as of December 31, 1996, had a shareholders' deficit of
$69.3 million. The Company's credit facility at December 31, 1996 was terminated
on January 31, 1997. In February 1997, the Company entered into a new credit
facility with Foothill Capital Corporation (the "Foothill Credit Facility").
However, borrowings under the Foothill Credit Facility will not be available
until satisfaction of a number of conditions, which is expected to occur by May
1997. The consolidated financial statements have been prepared assuming the
Company will continue as a going concern and do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets and liabilities that may result from this uncertainty.
Assuming borrowings become and remain available under the Foothill Credit
Facility and the Company achieves anticipated revenue growth, the Company
believes that its existing cash resources together with funds available under
the Foothill Credit Facility, leasing facilities and cash flow from operations
will be sufficient to fund the Company's expected working capital requirements.
However, the exact amount and timing of these working capital requirements and
the Company's ability to continue as a going concern will be determined by
numerous factors, including the level of, and gross margin on, future sales, the
outcome of outstanding contingencies and disputes such as pending lawsuits,
payment terms achieved by the Company and the timing of capital expenditures.
Furthermore, there can be no assurance that borrowings under the Foothill Credit
Facility will become and remain available or that this facility together with
the Company's other anticipated sources of working capital will be sufficient to
implement the Company's operating strategy or meet the Company's other working
capital requirements. If (i) the Company experiences greater than anticipated
capital requirements, (ii) the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any material claim against it, (iii)
the Company is unable to make borrowings under any of its credit facilities for
any reason, (iv) the implementation of the Company's operating strategy fails to
produce the anticipated revenue growth and cash flows or (v) additional working
capital is required for any other reason, the Company will be required to
refinance all or a portion of its existing debt or obtain additional equity or
debt financing. There can be no assurance that any such refinancing would be
possible or that the Company would be able to obtain additional equity
F-7
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF OPERATIONS (CONTINUED)
or debt financing, if and when needed, on terms that the Company finds
acceptable. Any additional equity or debt financing may involve substantial
dilution to the interests of holders of the Company's debt and equity
securities.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it will be forced to curtail operations, dispose of assets or seek
extended payment terms from its vendors. There can be no assurance that the
Company would be able to reduce expenses or successfully complete other steps
necessary to continue as a going concern. Such events would materially and
adversely affect the value of the Company's debt and equity securities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MIDCOM
Communications Inc. and its wholly-owned subsidiaries, PacNet Inc. ("PacNet"),
Cel-Tech International Corp. ("Cel-Tech"), AdVal, Inc. ("AdVal") and Advanced
Network Design ("AND") (collectively referred to as "Midcom" or the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company's investment in Dal Telecom International ("Dal Telecom"), a
Russian corporate joint venture, was accounted for on the equity method,
adjusted to estimated fair value, in accordance with generally accepted
accounting principles. During 1995 and 1994, the Company recorded its pro rata
share of Dal Telecom's income or loss one month in arrears.
CASH AND CASH EQUIVALENTS
All short-term investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents.
REVENUE RECOGNITION
Resale and transmission revenue and related costs are recognized in the
period the customer utilizes the Company's service. At December 31, 1996 and
1995, net unbilled resale revenue totaled $5,636 and $26,153, respectively.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts and carrier accounts payable, notes payable and
long-term obligations. The fair value of the financial instruments, except
long-term obligations, approximates their recorded value based on the short-term
maturity of the instruments. The fair value of the long-term obligations
approximates their recorded value based on the current rates offered to the
Company for similar debt of the same maturities. The Company does not have
financial instruments with off-balance-sheet risk.
Financial instruments that potentially subject the Company to concentrations
of credit risk are accounts receivable. Concentration of credit risk with
respect to receivables are limited due to diversity in geographic locations of
customers as well as diversity of industries. The Company continually evaluates
the credit worthiness of its customers; however, it generally does not require
collateral. The Company's
F-8
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowance for doubtful accounts is based on historical trends, current market
conditions and other relevant factors.
DEFERRED FINANCING COSTS
Financing costs are capitalized and amortized over the term of the related
debt on a straight-line basis which approximates the effective-interest method.
Included in other assets at December 31, 1996 and 1995 are deferred financing
costs of $3,419 and $510, respectively (net of accumulated amortization of $297
and $15, respectively).
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost.
Maintenance and repairs are expensed as incurred. When properties are retired or
otherwise disposed of, gains and losses are reflected in the consolidated
statement of operations. Depreciation and amortization, which includes
amortization of assets recorded under capital leases, are computed using the
straight-line method over the following useful lives:
<TABLE>
<S> <C>
Buildings and towers......................................... 30 years
Transmission equipment....................................... 12 to 15
years
Data processing systems and equipment........................ 3 to 5 years
Switches..................................................... 5 to 7 years
Furniture, equipment and leasehold improvements.............. 3 to 7 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets represent the excess of the purchase price over the
estimated fair value of identifiable assets acquired in business and customer
base acquisitions. Amounts are allocated primarily to customer bases which are
amortized over three years using the straight-line method. Amounts are also
allocated to noncompete agreements and goodwill as applicable, which are
amortized using the straight-line method over terms ranging from 18 months to 25
years.
The Company periodically reviews the carrying value of its intangible assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. To the extent the estimated future cash inflows attributable
to the asset, less estimated future cash outflows, is less than the carrying
amount, an impairment loss is recognized.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common and
equivalent shares outstanding using the treasury stock method. Common stock
equivalents are excluded from the calculation of net loss per share due to their
antidilutive effect, except that pursuant to Securities and Exchange Commission
("SEC") requirements, for periods prior to the Company's initial public
offering, common and equivalent shares issued during the 12-month period prior
to the initial public offering have been included in the calculation as if they
were outstanding for all periods prior to the Company's initial public offering
using the treasury stock method.
F-9
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
STOCK BASED COMPENSATION
In 1996, the Company adopted the Financial Accounting Standards Statement
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. It defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans and include the cost in the income statement as compensation
expense. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees. The Company has elected to account for compensation
cost for stock option plans in accordance with APB Opinion No. 25.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
3. CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents as of December 31 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash..................................................................... $ 1,194 $ 1,083
Commercial Paper......................................................... 19,878 --
Money Market............................................................. 9,890 --
--------- ---------
$ 30,962 $ 1,083
--------- ---------
--------- ---------
</TABLE>
Due to the short-term nature of these investments, changes in market
interest rates would not have a significant impact on the fair value of these
securities. These securities are carried at amortized cost which approximates
fair value.
F-10
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Major classes of furniture, equipment and leasehold improvements, including
assets under capital leases, as of December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Buildings and towers..................................................... $ 534 $ 787
Transmission equipment................................................... 3,842 3,747
Data processing systems and equipment.................................... 12,133 11,120
Switches................................................................. 141 --
Furniture, equipment and leasehold improvements.......................... 6,974 4,663
--------- ---------
23,624 20,317
Accumulated depreciation and amortization................................ (12,579) (6,598)
--------- ---------
$ 11,045 $ 13,719
--------- ---------
--------- ---------
</TABLE>
The gross amount of furniture, equipment and leasehold improvements recorded
under capital leases was $6,073 at December 31, 1996 and 1995.
Included in furniture, equipment and leasehold improvements are unamortized
development costs related to the Company's proprietary management information
system. This system was placed in service in May 1995 and is being amortized on
a straight-line basis. As a result of billing problems encountered after the
system was placed in service, the Company evaluated the system during the fourth
quarter of 1995 and determined that the system would require additional
enhancements to meet its initial design objectives and that its value had been
impaired. As a result, in 1995 the Company reduced the unamortized costs from
$4,471 to $2,000 and recorded a $2,471 loss on impairment of the asset.
In the fourth quarter of 1995, the Company determined that it intended to
replace certain limited capacity switches, the majority of which were acquired
through acquisitions of other telecommunications service providers, with newer
switches having increased functionality and capacity. As a result of this
decision, the Company wrote off these switches and in 1995 recorded a $2,544
loss on impairment of assets. In June 1996, the Company recorded a $1,000 loss
on impairment of microwave equipment.
5. INVESTMENT IN JOINT VENTURE
In December 1993, Midcom contracted to acquire a 50% interest in Dal Telecom
International ("Dal Telecom"), a provider of local, long distance, international
and cellular telecommunications services in the Russian Far East. To acquire its
interest in Dal Telecom, Midcom committed to make a capital contribution of
cash, equipment and services of approximately $12,700. As of December 31, 1995,
the Company had invested a total of $8,815 in the joint venture but was unable
to fund additional contributions. In March 1996, the Company and the joint
venture partner agreed to amend the terms of the joint venture to provide that
the Company had a 40% equity interest in the joint venture.
The Company's commitment to Dal Telecom required significant amounts of
capital resources and management attention given the logistics of maintaining a
relationship in Russia. As a result, the Company decided that it was in its best
interests to focus on its domestic business and to sell its interest in Dal
Telecom. As a result of this decision, the Company wrote down its investment in
Dal Telecom to $2,000 at
F-11
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. INVESTMENT IN JOINT VENTURE (CONTINUED)
December 31, 1995, which was the Company's estimate of the net recoverable value
of its investment in Dal Telecom, and recorded a $6,815 loss on impairment of
the asset. This estimate was based on market information currently available to
the Company and certain assumptions about the future operations of Dal Telecom,
over which the Company had limited control. The Company discontinued recording
its share of the income or losses of Dal Telecom as of December 31, 1995. During
the third quarter of 1996, the remaining investment of $2,000 was written off to
loss on impairment of assets, as the Company was unable to locate a purchaser
for its interest.
6. BUSINESS COMBINATIONS
During 1994, 1995, and the first three months of 1996, the Company completed
a series of acquisitions from telecommunications companies offering services
similar or complementary to those offered by the Company. Certain of these
acquisitions included the purchase of substantially all of the operating assets
of the acquiree, including customer bases, and in other situations only specific
customer bases. These asset acquisitions have been accounted for using the
purchase method, with the excess of the purchase price over the net tangible
assets acquired being allocated to acquired customer bases, non-compete
agreements and goodwill. Revenue generated from the acquired customer bases are
included in the accompanying statements of operations from the dates of the
acquisitions.
The total consideration paid for these acquisitions was $89,769 of which
$74,735 was allocated to intangible assets. These acquisitions generally were
financed through borrowings under the Company's lines of credit, issuance of
debt and stock and assumption of liabilities.
Components of intangible assets at December 31, 1996 and their respective
estimated useful lives were as follows:
<TABLE>
<S> <C> <C>
Customer bases........................................ $ 49,986 3 years
Non-compete agreements................................ 2 to 4
3,527 years
Goodwill.............................................. 1,566 25 years
---------
$ 55,079
---------
---------
</TABLE>
Based on certain changes in circumstances that occurred in the first quarter
of 1996, including turnover in personnel, reduction in sales force and
continuing attrition of acquired customer bases, the Company determined that
effective January 1, 1996, a reduction in the estimated life of previously
acquired customer bases from 5 years to 3 years was appropriate. This reduction
in estimated life increased amortization expense by $10,260 for the year ended
December 31, 1996. In addition, the Company wrote down certain acquired customer
bases and recorded a loss on impairment of assets of $17,765 during 1996.
Substantially all of the Company's intangible assets consist of acquired
customer bases which are subject to attrition. The estimated useful lives of
these customer bases are based on attrition rates considered standard in the
industry. If the Company's actual attrition rates were to exceed these
estimates, or other unfavorable changes in business conditions were to occur,
the value of the related customer bases would be impaired and future operating
results would be adversely affected.
F-12
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. BUSINESS COMBINATIONS (CONTINUED)
In connection with certain previous acquisitions, the Company was obligated
to issue or release from escrow additional shares of its common stock or pay
additional cash consideration upon the satisfaction of certain contingencies.
Such contingencies include, among other things, maintenance of specified revenue
levels and satisfaction of general representations and warranties. The
contingency periods range from six months to two years. During 1996, the Company
issued or released from escrow a total of 106,782 shares of common stock and
paid $1,154 in cash to partially satisfy these obligations. As of December 31,
1996, there were a total of 151,675 shares in escrow that may be released upon
the satisfaction of remaining contingencies.
In accordance with applicable accounting standards, the common stock or
other consideration issuable under the contingency arrangements has not been
included in the determination of purchase price, nor have the shares been
considered outstanding for purposes of net loss per share calculations.
Additional consideration will be recorded when the outcome of a contingency is
determined.
The Company is obligated in certain cases to issue additional shares of its
common stock in the event that the market price of such stock, when the shares
become registerable, is less than the price at the acquisition dates. In January
1997, the Company issued 49,233 shares of common stock in partial satisfaction
of these obligations. Based on the Company's stock price on March 21, 1997,
approximately 255,000 additional shares remain to be issued as a result of these
obligations.
7. NOTES PAYABLE
At December 31, 1996 and 1995, the Company had $680 in notes outstanding,
secured by a personal guarantee of the principal shareholder of the Company. The
notes are due upon 30-day demand, or no later than March 28, 1999. Interest on
these notes is payable monthly, at a rate of prime plus 2% (but in no event
lower than 9% or greater than 13%) per annum. Warrants to purchase up to a total
of 59,500 shares of Common Stock at an exercise price of $7.44 per share,
subject to adjustments in the exercise price related to dilutive activities,
were granted to the holders of the notes. The warrants expire on March 28, 1999.
In connection with a customer base purchase agreement, the Company had a
noninterest-bearing obligation totaling $12,000 as of December 31, 1995. The
unsecured obligation required monthly payments of $3,000 from January through
April 1996, payable in cash or common stock. The Company paid $3,000 to the
seller in January 1996 and has withheld the remaining payments pending
resolution of certain disputes with the seller. Based on the Company's stock
price on March 21, 1997, the Company would be required to issue approximately
507,000 shares of its common stock to satisfy this obligation.
At December 31, 1995, the Company had approximately $2,000 in additional
notes payable to sellers of certain customer bases. These notes bore interest at
rates up to 10% and were paid in full during 1996.
F-13
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM OBLIGATIONS
Long-term obligations as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Convertible subordinated notes payable, maturing on August 15, 2003, interest at 8 1/4%,
interest payable semi-annually, convertible into common stock at the option of the holder
at any time prior to maturity.............................................................. $ 97,743 $ --
Senior Revolving Credit Facility with Transamerica Business Credit Corporation. Applicable
interest rate on outstanding advances at December 31, 1995 was 9%. This facility was
secured by substantially all of the Company's assets. The balance was repaid in full in
1996....................................................................................... -- 37,428
Note payable secured by assets acquired, interest payable quarterly at the prime rate plus
1%. Balance due in full September 30, 1998................................................. 800 800
Note payable secured by certain property and equipment, interest at 5% to 15%, principal and
interest payments due in monthly installments through May 31, 1997......................... 27 408
Capital Lease Obligations, interest at 5% to 14.3%, principal and interest payments due in
monthly installments through 2002.......................................................... 3,897 4,929
--------- ---------
102,467 43,565
Less current portion......................................................................... 3,314 41,721
--------- ---------
$ 99,153 $ 1,844
--------- ---------
--------- ---------
</TABLE>
Principal maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 3,314
1998.............................................................. 976
1999.............................................................. 142
2000.............................................................. 144
2001.............................................................. 148
Thereafter........................................................ 97,743
---------
Total............................................................. $ 102,467
---------
---------
</TABLE>
In August and September of 1996, the Company completed a private placement
(the "Private Placement") of $97,743 in aggregate principal amount of 8 1/4%
Convertible Subordinated Notes due 2003 (the "Notes"). Interest on the Notes is
due semi-annually, on February 15 and August 15 of each year, commencing
February 15, 1997. The Notes are convertible into shares of the Company's common
stock, at a conversion price of $14.0875 per share (equivalent to a conversion
rate of 70.985 share per $1,000 principal amount of Notes), subject to
adjustment in certain events.
In November 1995, the Company obtained a senior secured revolving credit
facility from Transamerica Business Credit Corporation ("Transamerica") and
certain other lenders (the "Transamerica Credit Facility") which provided for
borrowings of up to $50,000, subject to certain limitations and financial
covenants. The Company was not in compliance with some of these covenants as of
December 31, 1995. The Transamerica Credit Facility was further amended in March
1996 to reduce the overall commitment by the lender from $50,000 to $43,000. The
outstanding balance under the Transamerica Credit Facility was
F-14
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM OBLIGATIONS (CONTINUED)
repaid in full in August 1996 with the proceeds of the Private Placement, and
the facility was terminated on January 31, 1997.
On March 28, 1996, the Company obtained a temporary bridge loan of $15,000
from Transamerica. The bridge loan was secured by substantially all of the
Company's assets, bore interest at 12% and was originally due on April 27, 1996.
The Company paid an initial loan fee of $500 and had the right to extend the due
date of the loan for 30-day periods upon payment of an additional fee of $200
for each 30-day extension, with final payment due by September 24, 1996. This
bridge loan was repaid in August 1996.
The Company recorded an extraordinary item in the third and fourth quarters
of 1995 of $2,992 and $1,075, respectively, related to the write off of original
issue discounts and deferred financing costs.
9. PREFERRED STOCK
During 1994, the Company issued 859,653 shares of Series A Redeemable
Preferred Stock (the "Preferred Stock") to retire shareholder notes payable. The
preferred stock was redeemed at $10 per share in July 1995 with proceeds from
the Company's initial public offering.
10. COMMON STOCK
On July 6, 1995, the Company completed the initial public offering of shares
of its common stock at $11.00 per share, which resulted in net proceeds of
approximately $54,182 to the Company after deducting the expenses of the
offering. The net proceeds were used to repay indebtedness and redeem all of the
outstanding shares of Preferred Stock.
At December 31, 1996, common stock was reserved for the following:
<TABLE>
<S> <C>
Conversion of the Notes......................................... 6,938,279
Exercise and future grant of stock options...................... 4,108,816
Employee stock purchase plan.................................... 256,354
Exercise of outstanding warrants................................ 59,500
---------
Total common stock reserved..................................... 11,362,949
---------
---------
</TABLE>
11. STOCK OPTION PLAN
The Company has a stock option plan which provides for the granting of
nonqualified and incentive stock options to purchase up to 4,739,063 shares of
common stock. Options granted become exercisable over vesting periods of up to
five years at exercise prices determined by the Board of Directors, and
generally expire ten years from the date of grant.
Stock options have generally been granted at the fair market value at the
date of grant. However, a limited number of options have been granted at less
than the fair market value, in which case compensation expense has been
recognized over the vesting period based on the excess of the fair market value
stock at the date of grant over the exercise price.
F-15
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTION PLAN (CONTINUED)
Presented below is a summary of stock option plans activity for the years
shown:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
---------- ----------------
<S> <C> <C>
Options outstanding at January 1, 1994................................... 484,805 $ 2.29 - $5.71
Granted................................................................ 663,139 $ 2.29 - $9.14
Canceled............................................................... (117,460) $ 2.29 - $9.14
---------- ----------------
Options outstanding at December 31, 1994................................. 1,030,484 $ 2.29 - $9.14
Granted................................................................ 740,954 $ 1.00 - $18.50
Canceled............................................................... (365,619) $ 2.29 - $15.75
Exercises.............................................................. (66,333) $ 2.29 - $18.50
---------- ----------------
Options outstanding at December 31, 1995................................. 1,339,486 $ 1.00 - $18.50
Granted................................................................ 3,545,009 $ 3.00 - $15.50
Canceled............................................................... (637,202) $ 2.29 - $18.50
Exercises.............................................................. (563,914) $ 1.00 - $10.50
---------- ----------------
Options outstanding at December 31, 1996................................. 3,683,379 $ 2.29 - $18.50
---------- ----------------
---------- ----------------
</TABLE>
At December 31, 1996, a total of 425,437 shares were available for future
issuance under the plans.
The following table summarizes information for options currently outstanding
and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- --------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
2.29 - $6.50............ 128,215 8.8 $ 3.69 89,000 $ 3.50
6.51 - $12.00........... 3,316,815 9.5 $ 8.85 228,532 $ 9.70
12.01 - $18.50........... 238,349 8.5 $ 15.69 57,250 $ 16.96
----------- -----------
3,683,379 374,782
----------- -----------
----------- -----------
</TABLE>
The Company applies APB 25 in accounting for its stock issued to employees.
Had compensation cost for the Company's stock options been recognized based upon
the fair value on the grant date under the methodology prescribed by SFAS 123,
the Company's net loss and net loss per share for the years ended December 31,
1996 and 1995 would have been impacted as indicated in the following table. Note
that due to the adoption methodology prescribed by SFAS 123, the proforma
results shown below only reflect the impact of options granted in 1995 and 1996.
Since option vesting occurs over five years, the proforma impact shown for 1996
and 1995 is not representative of what the impact will be in future years.
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Net loss--as reported.......................................................... $ (97,319) $ (33,418)
Net loss--proforma............................................................. $ (101,549) $ (34,066)
Loss per share--as reported.................................................... $ (6.27) $ (2.76)
Loss per share--proforma....................................................... $ (6.54) $ (2.82)
</TABLE>
F-16
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTION PLAN (CONTINUED)
This fair value of options granted (which is amortized to expense over the
option vesting period in determining the proforma impact), is estimated on the
date of grant using the Black Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996 and 1995:
<TABLE>
<S> <C>
Expected life of option..................................................... 3 1/2 yrs
Risk free interest rate..................................................... 6.5%
Expected volatility......................................................... 60.0%
Dividend yield.............................................................. --
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Fair value of each option granted............................................. $ 4.16 $ 7.02
Total number of options granted............................................... 3,545,009 740,954
------------ ----------
Total fair value of all options granted....................................... $ 14,747 $ 5,201
------------ ----------
------------ ----------
</TABLE>
In accordance with SFAS 123, the weighted average fair value of stock
options granted is required to be based on a theoretical statistical model using
the preceding Black-Scholes assumptions. In actuality, because company stock
options do not trade on a secondary exchange, employees can receive no value nor
derive any benefit from holding stock options under these plans without an
increase in the market price of Midcom stock. Such an increase in stock price
would benefit all stockholders commensurably.
F-17
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
Components of the Company's deferred tax liabilities and assets as of
December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Sales reserves and allowances........................................................... $ 2,248 $ 1,326
Accrued compensation costs.............................................................. 322 --
Provisions not currently deductible..................................................... 1,829 376
Accrued restructuring costs............................................................. 373 --
Contract settlement..................................................................... 1,520 --
Tax depreciation different than financial accounting depreciation....................... 1,455 --
Intangible tax amortization different than financial financial statement amortization... 17,560 1,832
Losses and write-down of foreign joint venture.......................................... 3,769 3,022
Net operating loss carry forwards....................................................... 24,817 7,648
---------- ----------
Total deferred tax assets............................................................... 53,893 14,204
Valuation allowance....................................................................... (53,502) (13,017)
---------- ----------
$ 391 $ 1,187
---------- ----------
Deferred tax liabilities:
Tax depreciation different than financial accounting depreciation....................... -- (424)
Cash to accrual change.................................................................. (391) (763)
---------- ----------
Total deferred tax liabilities.......................................................... (391) (1,187)
---------- ----------
Net deferred tax liabilities............................................................ $ -- $ --
---------- ----------
---------- ----------
</TABLE>
On January 1, 1994, when the Company became a C Corporation, a valuation
allowance on deferred tax assets was not required due to the net deferred tax
liability position. At December 31, 1994, the valuation allowance of $316 was
established for the deferred tax assets in excess of deferred tax liabilities.
The valuation allowance was increased $40,485 and $13,333 in 1996 and 1995,
respectively.
The Company has net operating loss carry forwards for federal income tax
purposes available to offset future federal taxable income, if any, of
approximately $60,042 with the following expirations: $4,536 in 2009, $8,770 in
2010 and $46,736 in 2011.
F-18
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The provisions for income taxes differ from the "expected" income tax
benefit as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Computed expected federal tax benefit................................................ (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit.................................................. (6.0)% (6.0)% (6.0)%
Deferred taxes associated with Midcom S Corporation to C Corporation conversion,
January 1, 1994.................................................................... -- -- 6.8%
Deferred tax asset realization related to acquisitions............................... -- -- 16.8%
Change in valuation allowance for net deferred tax assets............................ 39.8% 38.0% 10.4%
Other................................................................................ 0.2% 2.0% 6.0%
--------- --------- ---------
--% --% --%
--------- --------- ---------
--------- --------- ---------
</TABLE>
13. RELATED-PARTY TRANSACTIONS
The largest shareholder of the Company and the Company's former President
and Chief Executive Officer jointly own QuestWest Inc. QuestWest Inc., in turn,
holds approximately an 85% interest in Quest America Limited Partnership ("Quest
LP"). In December 1993, the Company entered into a distribution agreement with
Quest LP that entitles Quest LP to a sales commission from the Company at a rate
equal to the most favorable rate available to other comparable Company
distributors. In October 1995 the largest shareholder sold their interest in
Quest LP to a third party and the most favorable rate clause in the distribution
agreement was eliminated. During 1995 and 1994, Quest LP received $295 and $66,
respectively, in net commissions.
Effective May 1996, the Company entered into an employment agreement with
William H. Oberlin, the Company's President and Chief Executive Officer. The
agreement provides for a base salary of $25 per month and an annual bonus to be
determined each year by the Company's Board of Directors based on certain
quantitative and qualitative targets set forth in the Company's annual business
plan. In connection with entering into the agreement, the Company granted Mr.
Oberlin options to purchase up to 1,214,714 shares of Common Stock pursuant to
the Company's Stock Option Plan. The options vest ratably over a five-year
period. Mr. Oberlin is entitled to up to two years severance (reduced to one
year severance in certain circumstances) in the event of termination. Severance
generally equals the sum of the annualized base salary at the time of
termination and the average annual bonuses for the fiscal years preceding
termination. The agreement also contains a non-interference provision pursuant
to which, for a period of six months following termination of employment, Mr.
Oberlin has agreed to, among other things, preserve the confidentiality of the
Company's customer list and refrain from actively soliciting the Company's
customers existing at the date of termination.
Effective May 1996, the Company entered into consulting agreements with
Marvin C. Moses and John M. Zrno, each a director of the Company, pursuant to
which Messrs. Moses and Zrno have agreed to provide consulting services to the
Company with respect to acquisitions, investor and other strategic relations and
strategic financial matters. Pursuant to the agreements, the Company is required
to pay each of these individuals a retainer of $8.333 per month. In addition, in
connection with the agreements, the Company has granted to each of these
individuals options for the purchase of 253,681 shares of Common Stock pursuant
to the Company's Stock Option Plan. The options vest ratably over a five-year
period. The
F-19
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED-PARTY TRANSACTIONS (CONTINUED)
agreements terminate after a period of five years beginning on June 1, 1996,
unless terminated earlier in accordance with the terms thereof. The agreements
may be terminated by either party at any time upon 30 days prior written notice.
In June 1994, the Company entered into an employment agreement with Ashok
Rao, the former President and Chief Executive Officer of the Company. The
agreement provided for a base salary of $25 per month. Mr. Rao resigned from the
Company in April 1996. In connection with Mr. Rao's resignation, the Company has
elected to repurchase 885,360 shares of Common Stock held by Mr. Rao and certain
trusts established by Mr. Rao (the "Rao Shares"). See Note 15, below. Under an
agreement between Mr. Rao and Paul Pfleger, Vice Chairman of the Company's Board
of Directors, pursuant to which Mr. Rao purchased the Rao Shares from Mr.
Pfleger, Mr. Pfleger is entitled to receive payments aggregating approximately
$2.2 million out of proceeds received by Mr. Rao from the sale of the Rao Shares
to the Company.
14. EMPLOYEE BENEFIT PLANS
401(K) SALARY DEFERRAL AND PROFIT SHARING PLAN
Prior to February 1, 1996, the Company maintained a 401(k) Salary Deferral
and Profit Sharing Plan with its affiliate SP Investments Inc. ("SPII").
Effective February 1, 1996, SPII withdrew from the Retirement Plan. The Company
maintains a voluntary defined contribution profit sharing plans covering all
eligible employees as defined in the plan documents. Participating employees may
elect to defer and contribute a stated percentage of their compensation to the
plan, not to exceed the dollar amount set by law. The Company matches 50% of
each employee's contribution up to a maximum of the first 6% of each employee's
compensation.
The Company's matching contributions to the plan were approximately $283,
$253, and $156 for the years ended December 31, 1996, 1995 and 1994,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
In December 1994, the Company established an Employee Stock Purchase Plan
which became effective upon the successful completion of the Company's initial
public offering of common stock. The Company's plan provides that eligible
employees may contribute up to 10% of their base earnings toward the semi-annual
purchase of the Company's common stock. The employee's purchase price is 95% of
the lesser of the fair market value of the stock on the first business day or
the last business day of the semi-annual offering period. The total number of
shares issuable under the plan is 262,500. There were 3,717 shares issued under
the plan during fiscal 1996 at prices ranging from $8.08 to $13.66, and 2,429
shares issued under the plan during fiscal 1995 at a price of $14.61.
15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office space and certain equipment under terms of
noncancelable operating leases, which expire on various dates through 2004. The
leases generally require that the Company pay certain maintenance, insurance and
other operating expenses. Rent expense under operating leases for the years
ended December 31, 1996, 1995 and 1994 was $3,281, $2,535, and $566,
respectively.
F-20
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1996, minimum future lease payments under noncancelable
operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1997............................................................................... $ 3,092
1998............................................................................... 2,797
1999............................................................................... 2,521
2000............................................................................... 2,271
2001............................................................................... 1,765
Thereafter......................................................................... 3,340
-----------
Total............................................................................ $ 15,786
-----------
-----------
</TABLE>
COMMITMENTS WITH PROVIDERS
Under the terms of carrier contracts executed with AT&T and other carriers,
the Company has made commitments to maintain or achieve certain volume levels in
order to obtain special forward pricing. Under some of these contracts, the
Company guarantees to sell a certain amount of long distance volume within a
certain time period or purchase all or a portion of any unused volume. Under
others, if certain volume levels are not achieved during stated periods, pricing
is adjusted going forward to levels justified by current volumes.
At December 31, 1996, minimum future usage commitments are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 26,790
1998.............................................................. 3,287
1999.............................................................. --
2000.............................................................. 75,000
---------
Total........................................................... $ 105,077
---------
---------
</TABLE>
As of September 30, 1996, Midcom's minimum volume commitment under its
supply contract with AT&T Corp. ("AT&T"), its largest supply contract, was
$117,000. The Company estimated that, as of the last measurement date on
September 30, 1996, it would have been in shortfall of its minimum commitments
to AT&T by approximately $27,600 based on then current contract requirements.
However, on October 31, 1996, the Company and AT&T executed a Release and
Settlement Agreement pursuant to which substantially all disputes between the
Company and AT&T have been resolved. Also on October 31, 1996, the Company and
AT&T executed a new carrier contract pursuant to which the Company's minimum
commitment to AT&T was reduced to $13,700 to be used over the eighteen month
period immediately following execution of the agreement. In addition, the new
carrier contract provides for more favorable pricing for certain network
services provided by AT&T. In consideration for the terms of the settlement and
the new rate structure, the Company is required to pay AT&T $8,800 payable in
two installments. The first payment of $5,000 was made on November 6, 1996, and
the remaining balance of $3,800 will be due within 30 days of Midcom announcing
quarterly gross revenue in excess of $75,000 or upon completion of a change in
control.
F-21
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At the present time, the Company has achieved or reserved for all of its
required volume commitments. There can be no assurance that the minimum usage
commitments will be achieved in the future, and if such commitments are not
achieved future operating results could be adversely affected.
During the years ended December 31, 1996, 1995 and 1994, the Company relied
on three carriers to carry traffic representing approximately 74%, 67% and 97%
of the Company's revenue, respectively. The Company has the ability to transfer
its customers' traffic from one supplier to another in the event a supplier
declines to continue to carry the Company's traffic. However, such transfers
could result in disruption of service to the customers, with a subsequent loss
of revenue which would adversely affect operating results.
ACQUISITIONS
In connection with several business or customer base acquisition agreements,
the Company is obligated to issue additional consideration upon the satisfaction
of certain contingencies.
SHARE REDEMPTION
In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company has elected to repurchase
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao (the "Rao Shares") at a price equal to the fair market value of the Rao
Shares on the date of Mr. Rao's resignation. The date of resignation and the
amount of the restricted security discount to be applied to the value of the Rao
Shares have been submitted to arbitration. Once determined, the purchase price
is to be paid by the Company in 36 equal monthly installments and will bear
interest at a rate of 8% per annum.
REGULATION
FEDERAL
The Company has all necessary authority to provide domestic interstate and
international telecommunications services under current FCC regulations. Midcom
has filed both domestic and international tariffs with the FCC, and PacNet has,
and is only required to file, international tariffs. Pursuant to a 1995 court
decision, detailed rate schedules now must be filed in lieu of the "reasonable
range of rates" tariff previously accepted by the FCC. In reliance on the FCC's
past practice of allowing relaxed range of rates tariffs for non-dominant
carriers, Midcom and most of its competitors did not maintain detailed rate
schedules. Until the two-year statute of limitations expires, Midcom could be
held liable for damages for its failure to maintain detailed rate schedules,
although it believes that such an outcome is highly unlikely and would not have
a material adverse effect on it. Pursuant to authority granted to it in the 1996
Telecommunications Act, the FCC is considering "mandatory detariffing" for
domestic non-dominant carriers. This proposal (which has been stayed by an order
of the federal district court in Washington, D.C.) would relieve the Company of
its obligation to file tariffs applicable to its domestic interexchange
offerings.
STATE
The intrastate long distance operations of Midcom are also subject to
various state laws. The majority of states require certification or
registration, which the Company has secured in 47 states and Washington, D.C.
Many states require tariff filings as well.
F-22
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In certain states, approval for transfers of control and acquisitions of
customer bases must be obtained. Midcom has been successful in obtaining all
necessary regulatory approvals to date, although revisions of tariffs,
authorities and approvals are being made on a continuing basis, and many such
requests are pending at any one time.
Some states may assess penalties on long distance service providers for
traffic sold prior to tariff approval or the state's consent to an acquisition.
Such states may require refunds to be made to customers. It is the opinion of
management that such penalties and refunds, if any, would not have a material
adverse effect on the results of operations or financial condition of the
Company.
DISPUTES AND LITIGATION
CLASS ACTION LAWSUIT. The Company, its Vice Chairman of the Board of
Directors and largest shareholder, the Company's former President, Chief
Executive Officer and director, and the Company's former Chief Financial Officer
are named as defendants in a securities action filed in the U.S. District Court
for the Western District of Washington (the "Complaint"). The Complaint was
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class Period"). An amended complaint
(the "Amended Complaint") was filed on July 8, 1996. In November 1996, the Court
granted the defendants' motion to dismiss the amended Complaint. The Amended
Complaint alleges, among other things, that the registration statement and
prospectus relating to the Company's initial public offering contained false and
misleading statements concerning the Company's billing software and financial
condition. The Amended Complaint further alleges that, throughout the Class
Period, the defendants inflated the price of the Common Stock by intentionally
or recklessly making material misrepresentations or omissions which deceived the
public about the Company's financial condition and prospects. The Amended
Complaint alleges claims under the Securities Act and the Exchange Act as well
as various state laws, and seeks damages in an unstated amount. Defendants filed
a motion to dismiss on August 7, 1996 and filed a reply to plaintiffs'
opposition on September 18, 1996. Oral arguments were heard on November 1, 1996.
All discovery proceedings are stayed until defendants' motion to dismiss is
acted on by the Court. While the Company believes that it has substantive
defenses to the claims in the Amended Complaint and intends to vigorously defend
this lawsuit, it is unable to predict the outcome of this action.
SEC INVESTIGATION. The Company was informed in May 1996 that the SEC was
conducting an informal inquiry regarding the Company. The Company has
voluntarily provided the documents requested by the Commission. In addition, the
SEC has requested the Company's cooperation in interviewing certain current and
former Company personnel and the Company is in the process of scheduling such
interviews. However, the Company has not been informed whether or not the SEC
intends to commence a formal action against the Company or any of its
affiliates. The Company is, therefore, unable to predict the ultimate outcome of
the investigation. In the event that the SEC elects to initiate a formal
enforcement proceeding, the Company and certain of its current and/or former
officers could be subject to civil or criminal sanctions including monetary
penalties and injunctive measures. Any such enforcement proceeding could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is also party to other routine litigation incident to its
business and to which its property is subject. The Company's management believes
the ultimate resolution of these matters will not have a material adverse effect
on the Company's business, financial condition or results of operations.
F-23
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Noncash investing and financing activities:
Application of related-party accounts receivable to related-party accounts
payable........................................................................... $ -- $ -- $ 1,234
Conversion of amounts due to related parties to redeemable preferred stock.......... -- -- 8,597
Issuance of notes payable and assumption of liabilities for acquisitions of customer
bases............................................................................. 459 42,591 5,154
Capital lease obligation for equipment.............................................. -- 1,892 2,207
Issuance of notes payable for equipment............................................. -- 310 --
Issuance of common stock warrants in connection with financing...................... -- -- 3,500
Issuance of common stock for acquisitions........................................... 513 9,877 1,040
Issuance of note payable for settlement of carrier accounts payable................. 3,800 3,500 --
Cash paid for interest................................................................ 5,074 4,128 1,453
Cash paid for income taxes............................................................ -- 25 131
</TABLE>
17. RESTRUCTURING CHARGE
In March and April 1996, the Company made announcements regarding changes in
senior management and the restructuring of its operations in order to reduce
expenses to the level of available capital. These actions included the layoff of
certain employees and contractors and the closure of 6 sales offices. As a
result, the Company recorded a charge of $1,620 during the first quarter 1996
and $600 during the second quarter of 1996, the components of which relate
primarily to severance and lease cancellation charges. Included in the first
quarter restructuring charge is approximately $420 relating to the extension of
the time period to exercise outstanding stock options. As of December 31, 1996,
$807 of this restructuring charge remained in accrued liabilities.
18. SUBSEQUENT EVENTS
In February 1997, the Company entered into an agreement with Foothill
Capital Corporation for a revolving credit facility. Under the terms of the
agreement, the Company will be able to borrow up to $30,000, subject to a
borrowing base limitation of 85% of eligible billed and 75% of eligible unbilled
receivables. Borrowings under this agreement will bear interest at a prime rate,
plus one percent, and will be secured by substantially all of the assets of the
Company. Pursuant to the agreement, the Company is required to maintain minimum
levels of adjusted net worth and is subject to a number of negative covenants
which place limitations on, among other things, capital expenditures,
investments and additional debt. Other covenants preclude payment of cash
dividends and require the Company to obtain the lenders' consent prior to making
any acquisitions. Borrowings under the agreement will not be available until
satisfaction of a number of conditions, consisting primarily of final
documentation of security arrangements, which is expected to occur by May 1997.
On February 18, 1997, the Company announced that it had awarded a supply
agreement to Northern Telecom ("Nortel") for the acquisition of a total of six
DMS-250 and DMS-500 local/long distance switching systems. Scheduled for
completion by mid-1997, the network will handle local, long distance and value
added services. The Company also announced that it had entered into a master
lease agreement with Comdisco, Inc. ("Comdisco"), to provide financing for the
Nortel switches. The initial financing is approximately $13,000. In March 1997,
a warrant for the purchase of up to 117,000 shares of the Company's common stock
was granted to Comdisco in connection with this financing arrangement.
F-24
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 1,532
Accounts receivable, less allowance for doubtful accounts of $6,184........... 20,421
Prepaid expenses and other current assets..................................... 1,820
-----------
Total current assets........................................................ 23,773
Furniture, equipment and leasehold improvements, net............................ 24,126
Intangible assets, less accumulated amortization of $49,199..................... 6,402
Other assets and deferred charges, net.......................................... 3,891
-----------
$ 58,192
-----------
-----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable................................................................. $ 113,872
Line of credit................................................................ 20,734
Current portion of capital lease obligations.................................. 14,501
Accounts payable.............................................................. 8,524
Carrier accounts payable...................................................... 25,316
Accrued expenses and other current liabilities................................ 16,160
-----------
Total current liabilities................................................... 199,107
Long-term obligations, less current portion..................................... --
Other long-term liabilities..................................................... 3,800
Shareholders' deficit:
Common stock.................................................................. 62,063
Deferred compensation......................................................... (1,321)
Accumulated deficit........................................................... (205,457)
-----------
Total shareholders' deficit..................................................... (144,715)
-----------
$ 58,192
-----------
-----------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-25
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue.................................................................................. $ 74,339 $ 124,590
Cost of revenue.......................................................................... 54,809 89,828
---------- ----------
Gross profit............................................................................. 19,530 34,762
Operating expenses:
Selling, general and administrative.................................................... 62,646 48,048
Depreciation........................................................................... 4,133 4,327
Amortization........................................................................... 9,524 21,857
Settlement of contract dispute......................................................... -- 8,800
Relocation of corporate headquarters................................................... 4,866 --
Restucturing charge.................................................................... -- 2,220
Loss on impairment of assets........................................................... -- 20,765
---------- ----------
81,169 106,017
---------- ----------
Operating loss........................................................................... (61,639) (71,255)
Other expense (income):
Interest expense, net.................................................................. 8,337 5,959
Other expense (income), net............................................................ (427) 206
---------- ----------
Loss before provision for income taxes................................................... (69,549) (77,420)
Provision for income taxes............................................................... -- --
---------- ----------
Net loss................................................................................. $ (69,549) $ (77,420)
---------- ----------
---------- ----------
Net loss per share....................................................................... $ (4.51) $ (5.01)
---------- ----------
---------- ----------
Weighted average common shares outstanding............................................... 15,438 15,442
---------- ----------
---------- ----------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-26
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Net cash used in operating activities..................................................... $ (40,150) $ (6,591)
---------- ----------
Investing activities:
Purchases of furniture, equipment and leasehold improvements.......................... (7,370) (1,729)
Net assets acquired in acquisition.................................................... (291) --
Proceeds from sale of assets.......................................................... 33 673
---------- ----------
Net cash used in investing activities............................................. (7,628) (1,056)
---------- ----------
Financing activities:
Borrowings under line of credit....................................................... 43,735 --
Repayments of line of credit.......................................................... (23,001) --
Proceeds from issuance of convertible subordinated notes payable...................... -- 97,743
Proceeds from notes payable........................................................... -- 333
Repayment of notes payable............................................................ (921) (3,946)
Proceeds from long-term obligations................................................... 6,544 15,000
Repayment of long-term obligations, including capital leases.......................... (1,165) (53,687)
Deferred financing costs.............................................................. (480) (3,569)
Repurchase of common shares........................................................... (6,544) --
Proceeds from common stock issued for stock purchase plan and stock options........... 180 2,828
---------- ----------
Net cash provided by financing activities......................................... 18,348 54,702
---------- ----------
Net (decrease) increase in cash........................................................... (29,430) 47,055
Cash and cash equivalents at beginning of period.......................................... 30,962 1,083
---------- ----------
Cash and cash equivalents at end of period................................................ $ 1,532 $ 48,138
---------- ----------
---------- ----------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
F-27
<PAGE>
MIDCOM COMMUNICATIONS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of MIDCOM Communications Inc. and its wholly-owned
subsidiaries, collectively referred to as "Midcom" or the "Company." The
unaudited interim condensed consolidated financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The accompanying unaudited
condensed consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and related notes thereto
included in the Company's Form 10-K as filed with the Securities and Exchange
Commission on March 31, 1997.
On November 7, 1997, Midcom and three of its wholly-owned subsidiaries,
PacNet Inc. ("PacNet"), Ad Val, Inc. ("Adval") and Cel-Tech International Corp.
("Cel-Tech"), each filed a petition (collectively, the "Petitions") for relief
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the Eastern District of Michigan (the
"Bankruptcy Court"), Case Nos. 97-59044-S, 59052-G, 59064-G and 59057-S,
respectively, with such cases to be jointly administered by the Bankruptcy Court
under Case No. 97-59044-S, and are currently operating their respective
businesses as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code and subject to the jurisdiction of the Bankruptcy Court. The
accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the filing under Chapter 11 of the Bankruptcy
Code and related circumstances, including the Company's leveraged financial
structure and losses from operations, such realization of assets and liquidation
of liabilities is subject to significant uncertainty. While under the protection
of Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose
of assets, and liquidate or settle liabilities, for amounts other than those
reflected in the accompanying unaudited condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts reported in such financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. The appropriateness of
using the going concern basis depends upon, among other things, confirmation of
a plan of reorganization, future profitable operations, the ability to comply
with the terms of any debtor-in-possession credit facility and the ability to
generate sufficient cash from operations and financing arrangements to meet
obligations.
The information furnished in the accompanying unaudited condensed
consolidated financial statements reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the results for the interim periods presented. Interim results
are not necessarily indicative of results for a full year.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the reporting of operating segment information by
publicly held companies in interim financial reports and annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 15, 1997. The
adoption of SFAS 131 will have no impact on the Company's consolidated results
of operations, financial position or cash flows.
F-28
<PAGE>
MIDCOM COMMUNICATIONS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 is effective for financial statements for years ending
after December 15, 1997. As of December 31, 1997, the Company will be required
to change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share (referred to in SFAS No. 128 as basic earnings per share), the
dilutive stock options will be excluded. There is no expected impact on primary
earnings per share. The Company has not yet determined the impact of SFAS 128 on
the calculation of fully diluted earnings per share (referred to in SFAS No. 128
as diluted earnings per share).
2. LIQUIDITY, CAPITAL RESOURCES, BANKRUPTCY FILING AND OTHER SUBSEQUENT EVENTS
The Company has operated at substantial losses since its inception. Net
losses were approximately $69.5 million, $97.3 million and $33.4 million for the
nine months ended September 30, 1997 and the years ended December 31, 1996 and
1995, respectively. As a result of these losses, significant attrition in
certain acquired customer bases, investments in business expansion and various
other factors, the Company has required substantial external working capital. As
of September 30, 1997, the book value of the Company's assets was approximately
$58.2 million, total debt outstanding was approximately $149.1 million, and the
Company had a negative net worth of approximately $144.7 million.
In its Quarterly Report on Form 10-Q for the quarter ended June 30,1997, the
Company disclosed that, in addition to borrowings available under its revolving
credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill"), and financing available under its capital lease
facilities, the Company would require between $20 million and $30 million of
additional capital in order to fund operating losses, working capital
requirements and capital expenditures during the remainder of 1997. In August
1997, the Company obtained an $8 million bridge loan from Foothill (the
"Foothill Bridge Loan"). The Foothill Bridge Loan had an interest rate of 15%
per annum and was payable in full on November 1, 1997. In addition, on October
10, 1997, the Company completed a private placement of 875,000 shares of Common
Stock. The Company received net proceeds from the private placement of
approximately $5.5 million which were used for working capital purposes in
October 1997.
In early September 1997, the Company received a term sheet from a major
financial institution for an equity financing ranging from $40 million to $50
million. Due diligence with respect to the proposed equity financing commenced
immediately with the goal of closing the financing by October 31, 1997. In
addition, throughout September and October 1997, the Company continued to pursue
other short-term financing. However, at the end of October 1997, the Company had
not been successful in its efforts to close the proposed equity financing or
obtain additional financing.
On November 4, 1997, as a result of the Company's failure to repay the
Foothill Bridge Loan in full when due, Foothill gave notice of a default under
the Foothill Credit Facility and ceased making any further advances to the
Company or any of its subsidiaries. In addition to the repayment of the Foothill
Bridge Loan, the Company was required to make substantial payments to Sprint
Communications Company ("Sprint"), and several of the Company's suppliers
threatened termination of services.
Faced with the imminent termination of service by the Company's principal
long-distance carriers, on November 7, 1997, the Company and three of its
wholly-owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and
are currently operating their respective businesses as debtors-in-possession
pursuant
F-29
<PAGE>
MIDCOM COMMUNICATIONS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LIQUIDITY, CAPITAL RESOURCES, BANKRUPTCY FILING AND OTHER SUBSEQUENT EVENTS
(CONTINUED)
to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. The Petitions were filed in order to allow
the Company and its subsidiaries to continue operations while obtaining relief
from the immediate collection of obligations owed to Foothill, Sprint and other
creditors.
The voluntary filing of a petition for relief under the Bankruptcy Code
constitutes a default under the Foothill Credit Facility, the Company's
equipment lease facilities, the Indenture relating to the Company's $97.7
aggregate principal amount of 8 1/4% Subordinated Convertible Notes due 2003 and
the note payable to Ashok Rao in connection with the redemption of certain
shares of Common Stock (see Note 6, "Stock Repurchase," below). Accordingly,
approximately $112.1 million of long-term indebtedness has been reclassified as
current liabilities as of September 30, 1997. Since it is not possible to
predict the impact of a sale or liquidation of the Company, no other adjustments
have been made to the historical carrying values of the assets and liabilities.
The Company has arranged for debtor-in-possession financing (the "Foothill
DIP Facility") from Foothill. In connection with the Foothill DIP Financing, the
Company incurred a loan fee of $250,000. The Foothill DIP Facility consists of a
revolving credit facility with borrowing availability of up to $8.5 million,
subject to the Company's satisfaction of various terms and conditions, bears
interest at prime plus 4% on receivable based advances and 18% on overadvances
and expires on January 15, 1997. There can be no assurance that borrowings
available under the Foothill DIP Facility will be adequate to meet the Company's
working capital needs or that the Company will not require additional debt or
equity financing in the future, and there can be no assurance that any such
additional debt or equity financing, if needed, would be available to the
Company on acceptable terms or at all. In addition, the Company is currently
attempting to solicit offers to purchase all or portions of its assets. There
can be no assurance that any such transaction will be available to the Company
on acceptable terms or at all. The Company is also undertaking aggressive
cost-cutting measures, including the lay-off on November 7, 1997 of 170 of its
790 employees. Further cost-cutting measures will be required if the Company is
unable to complete a sale of all or part of its business or obtain additional
sources of working capital in the near-term. Cost-cutting measures, particularly
those affecting the Company's sales and service functions, could have a material
adverse effect on the Company's ability to generate revenue.
The Company is required to submit a plan of reorganization to the Bankruptcy
Court. The Company is in the process of developing a plan of reorganization,
which the Company expects will involve the sale of all or part of its business.
There can be no assurance that the Company will be successful in completing a
sale of all or part of its business. In addition, there can be no assurance that
the Bankruptcy Court will approve the Company's reorganization plan. If the
Company is unable to find a buyer for all or part of its business, or if the
Company's reorganization plan is not approved, the Company may be forced to
liquidate.
3. ACQUISITION OF PHOENIX NETWORK, INC. AND TRANS NATIONAL COMMUNICATIONS
On November 10, 1997, the Company announced that the August 13, 1997 merger
agreements with Phoenix Network, Inc. ("Phoenix") and Trans National
Communications ("TNC") had been terminated. On October 31, 1997, Phoenix
notified the Company of its intent to terminate the merger agreement, effective
November 5, 1997, due to alleged material breaches by the Company, including the
Company's termination of its agreement with Sprint and the deterioration of the
Company's financial condition. In
F-30
<PAGE>
MIDCOM COMMUNICATIONS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF PHOENIX NETWORK, INC. AND TRANS NATIONAL COMMUNICATIONS
(CONTINUED)
addition, on November 6, 1997, TNC notified the Company of its intent to
terminate its purchase agreements with Phoenix that Phoenix had assigned to the
Company.
4. RELOCATION OF CORPORATE HEADQUARTERS AND RESTRUCTURING CHARGES
In May 1997, the Company announced its intention to relocate its corporate
headquarter functions based in Seattle, Washington to Southfield, Michigan,
where the Company's Chief Executive Officer and other key executives maintained
offices. During the third quarter of 1997, the Company completed the relocation
of various corporate support functions, including human resources, legal,
finance and information services, affecting approximately 130 employees, to
temporary office space in Southfield. The Company had originally planned to move
these corporate support functions to permanent office space in Southfield when
it became available in December 1997; however, in light of the recent
deterioration of the Company's financial condition, those plans are being
re-evaluated.
In June 1997, the Company recorded a restructuring charge of $2.5 million,
consisting primarily of the cost of severance and loss on disposal of assets in
connection with the corporate headquarters relocation. This restructuring charge
is included in the corporate headquarters relocation expenses reported on the
accompanying unaudited condensed consolidated statement of operations for the
nine-month period ended September 30, 1997. As of September 30, 1997, $0.4
million of this restructuring charge remained in accrued liabilities.
During the third quarter of 1997, the Company incurred approximately $2.1
million of expenses related to the corporate headquarters relocation. If the
corporate headquarters relocation is completed as originally planned, the
Company now estimates that an additional $0.8 million of expenses would be
incurred in the fourth quarter of 1997.
5. BUSINESS COMBINATIONS COMPLETED IN PRIOR YEARS
On January 27, 1997, in connection with a customer base acquisition
completed on July 31, 1995, the Company issued to the assignee of Communications
Services of America, Inc. ("CSA") 10,522 shares of common stock valued at $10.38
per share, and in April 1997, the Company issued an additional 18,536 additional
shares to compensate for the decrease in value of the common stock since the
closing of the acquisition.
On January 22, 1997, in connection with a customer base acquisition
completed in September 30, 1995, the Company issued to the shareholders of
Fairfield County Telephone Corporation ("Fairfield") 38,711 shares of common
stock valued at $10.25, and in April 1997 the Company issued an additional
59,631 shares to compensate for the decrease in value of the common stock since
the closing of the acquisition.
In January 1997, the Company issued to Richard John 9,457 shares of common
stock valued at $9.38 per share, and in August 1997, the Company issued to
Richard John 60,000 shares of common stock valued at $8.56 per share in
connection with the acquisition of Cel-Tech International Corp.
F-31
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK REPURCHASE
In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company redeemed, in April 1997,
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao at a price of $6.80 per share (plus interest at 8% from April 1996), to
be paid in equal monthly installments over a period of 36 months, beginning May
1997.
7. STOCK OPTION PLAN
In July 1997, the Company reduced the exercise price of 1.344 million
employee stock options with a weighted average exercise price of approximately
$8.85 per share to $5.19 per share.
8. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common and
equivalent shares outstanding using the treasury stock method. Common stock
equivalents are excluded from the calculation of net loss per share due to their
antidilutive effect.
9. DISPUTES AND LITIGATION
BANKRUPTCY FILING. On November 7, 1997, Midcom and three of its
wholly-owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and
are currently operating their respective businesses as debtors-in-possession
pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. See Note 1, "Basis of Presentation,"
above.
SPRINT SETTLEMENT. The Company has had a series of ongoing disputes
relating to service and billing with Sprint Communications Company ("Sprint"),
one of its primary suppliers. For this and other reasons, on September 18, 1997,
the Company discontinued its payments to Sprint and, on October 10, 1997, the
Company received a notice of default from Sprint. On October 29, 1997, the
Company entered into a settlement with Sprint whereby it agreed to pay Sprint
$1,250,000 on October 31, 1997, November 7, 1997 and November 14, 1997;
$4,000,000 on November 21, 1997; and thereafter, so long as Sprint continues to
provide service to the Company, weekly payments equal to the lesser of
$2,000,000 or the current amount outstanding. Sprint and the Company agreed to
arbitrate the Company's claims against Sprint up to an aggregate of $5,000,000
and the parties agreed that the Company would transition its traffic to its own
or other networks over the ninety day period ending January 29, 1998.
CLASS ACTION LAWSUIT. The Company, its Vice Chairman of the Board of
Directors and largest shareholder, the Company's former President, Chief
Executive Officer and Director and the Company's former Chief Financial Officer
were named as defendants in a securities action filed in the U.S. District Court
for the Western District of Washington (the "Complaint"). The Complaint was
filed on behalf of a class of purchasers of the Company's Common Stock during
the period beginning on July 6, 1995, the date of the Company's initial public
offering, and ending on March 4, 1996 (the "Class Period"). In April 1997, the
Board of Directors of the Company unanimously approved the terms of a settlement
of all claims against the Company and all of the individual defendants. The
settlement, which is subject to Court approval and which admits no liability or
fault, provides for the payment of $1.0 million in cash by the Company's
insurance carrier, and the issuance of approximately 420,000 shares of the
Company's common stock, subject to adjustments depending upon the fair market
value of the stock on the date that the settlement is approved by the Court.
F-32
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DISPUTES AND LITIGATION (CONTINUED)
SEC INVESTIGATION. The Company was informed in May 1996 that the Commission
was conducting an informal inquiry regarding the Company. In May 1997 the
Company learned that a formal order of investigation had been entered by the
Commission. The Company believes that the focus of the investigation is on (i)
the accuracy of disclosures in certain documents filed by the Company with the
SEC; (ii) whether the Company had maintained adequate books and records and had
adequate internal controls; and (iii) whether records had been falsified. The
Company has voluntarily provided documents requested by the Commission, is in
the process of furnishing additional requested documents, and has cooperated
with the Commission in scheduling interviews with certain former Company
personnel. The Company is unable to predict the ultimate outcome of the
investigation. The Company and certain of its former employees could be subject
to civil or criminal sanctions including monetary penalties and injunctive
measures. If imposed on the Company, such penalties and injunctive measures
could have a material adverse effect on the Company's business, financial
condition and results of operation.
FRONTIER LAWSUITS. On August 19, 1996 the Company was served with a
complaint filed in the U.S. District Court for the Eastern District of Michigan
by Frontier Corporation ("Frontier"). The complaint named as defendants the
Company and eleven individuals, all of whom are former employees of Frontier who
resigned their positions with Frontier. Frontier agreed to dismiss all of the
individual defendants in the case except William H. Oberlin, the Company's
President and CEO. Moreover, in September 1997, the Court dismissed certain
causes of action in the context of a summary judgment hearing. The surviving
claims are that: (i) Midcom is in violation of a non-disclosure agreement
between Frontier and Midcom by virtue of its alleged use of confidential
information of Frontier obtained through employees hired from Frontier and
otherwise; and (ii) Midcom and Mr. Oberlin tortuously interfered in Frontier's
contractual relationships with various Frontier employees and contractors. The
complaint seeks: (i) that the defendants be preliminarily and permanently
enjoined from breaching their respective agreements with Frontier; (ii) that
Midcom be enjoined from aiding and abetting certain alleged breaches of
fiduciary duties; (iii) an order that Midcom hold all profits which it earns as
a result of its hiring of the individual defendant and other Frontier employees
as constructive trustees for the benefit of Frontier; (iv) an accounting of all
profits realized by Midcom as a result of its hiring of the defendant and other
Frontier employees; (v) a declaratory judgment on its various claims; (vi)
damages in an unspecified amount; (vii) Frontier's costs, including reasonable
attorney's fees, incurred in bringing the action; and (viii) other appropriate
relief. The Company has recently filed a motion to dismiss the action and it
awaits a hearing on this motion.
An affiliate of Frontier has also filed a complaint in the same U.S. Federal
District Court claiming $515,000 for unpaid amounts under a supply agreement.
The Company believes this claim to be without substantial merit and is
vigorously defending it. The Company's motion to dismiss on statute of
limitations grounds was granted in part and remaining matters have been
transferred to the FCC as a matter of primary jurisdiction.
On November 6, 1997, the Company and Frontier agreed to enter into a
settlement pursuant to which Frontier would dismiss all claims against the
Company and Mr. Oberlin. The settlement would provide, among other things, that,
over the next three years, Midcom will transfer approximately $40.5 million of
long distance traffic to Frontier and Frontier will transfer approximately
$20.25 million of long distance traffic to Midcom. There is some uncertainty as
to whether the settlement creates a pre-petition or post-petition claim, which
issue is to be decided by the District Court.
CHERRY COMMUNICATIONS LAWSUIT. In September and December 1995, the Company
purchased two significant customer bases from Cherry Communications. The first
transaction ("Cherry I") provided for
F-33
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DISPUTES AND LITIGATION (CONTINUED)
the purchase of long distance customer accounts having monthly revenue for the
three months preceding the date of closing of $2.0 million, net of taxes,
customer credits and bad debt. The second transaction ("Cherry II") provided for
the purchase of long distance customer accounts having monthly revenue which
were to average $2.0 million per month over the 12 months following the
transaction, net of taxes, customer credits and bad debt. The purchase price
payable with respect to Cherry I was a total of $10.5 million, of which $5.5
million was paid in cash and the balance was paid by the delivery of 317,460
shares of Common Stock (subject to a possible increase in such number based on
the future value of the Common Stock), of which 126,984 shares are held in
escrow to be applied to indemnify claims or to cover shortfalls in revenue from
the $2.0 million monthly average. The purchase price for Cherry II was $18.0
million, of which $7.0 million has been paid in cash. Additional installments of
$3.4 million were due in February, March and April of 1996, of which $400,000 of
each installment was to be placed in an escrow account for satisfaction of
indemnity claims or to cover shortfalls in revenue from the $2.0 million monthly
average. The parties later agreed that the Company could pay up to $9.0 million
of the Cherry II payments either in cash or by delivery of shares of Common
Stock. Separately, the Company also agreed to pay Cherry Communications for
servicing customer accounts on behalf of the Company. The acquired customer
bases have not generated the required minimum revenue levels and Cherry
Communications has failed to remit to the Company collections received by Cherry
Communications from a portion of the acquired customers. Accordingly, the
Company has withheld the final three installment payments for Cherry II (a total
of $9.0 million excluding escrowed sums), payment of invoices for carrier
service for the acquired bases (up to $11.0 million) and accrued customer
service charges of $840,000. Negotiations between Cherry Communications and the
Company failed to produce a settlement of these disputes.
Cherry Communications filed a lawsuit against the Company in the United
States District Court for the Northern District of Illinois, Eastern Division.
In its First Amended Complaint filed on July 18, 1996, Cherry Communications
seeks recovery of (i) approximately $7.2 million plus interest and attorneys'
fees alleged to be due and owing under a Rebiller/Reseller Agreement for
Switched Services between Cherry Communications and the Company, (ii)
approximately $9.0 million plus interest and attorney's fees alleged to be due
and owing under the November 1, 1995 Customer Base Purchase and Sale Agreement
between Cherry Communications and the Company (the "Cherry II Agreement"), and a
Promissory Note executed in connection with the Cherry II Agreement, (iii)
customer service charges of $840,000. It is the position of the Company that
Cherry Communications has breached its obligations under the Cherry I Agreement
and the Cherry II Agreement by among other breaches (i) failing to sell Midcom
customer bases having the average monthly revenues required by the customer base
agreements, and (ii) failing to remit to Midcom monies collected from the
customer accounts. It is also the position of the Company that, as a result of
Cherry Communication's breaches of the Cherry I Agreement and the Cherry II
Agreement, as amended by certain addenda, that the Company has offsets and
counterclaims against Cherry Communications in excess of the sums it has
withheld from Cherry Communications. The Company is attempting to negotiate a
resolution of the disputes. In the event that a settlement is not reached, the
Company intends to vigorously defend the lawsuit filed by Cherry Communications.
However, the Company is unable to predict the outcome of this lawsuit. As a
result of this litigation, as of September 1, 1996, the Company discontinued
booking revenue generated by the customer bases purchased from Cherry
Communications. In October 1997, Cherry filed a petition for relief under
Chapter 11 of the Bankruptcy Code.
DISCOM ARBITRATION. Discom Corporation ("Discom"), a former distributor of
the Company, in an arbitration proceeding in New York against the Company has
filed to increase the amount of its claim against the Company to approximately
$8.0 million purportedly based upon a lost profit and damage
F-34
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DISPUTES AND LITIGATION (CONTINUED)
analysis of its expert. The Company has not yet had an opportunity to depose
Discom's expert, but preliminary indications are that the evaluation is
seriously flawed and that the Company's own expert testimony will more
accurately reflect the maximum possible damage claim of $250,000 to $500,000,
which amount has been escrowed by the Company. The Company disputes that any
amounts are owed to Discom and it is vigorously defending the case. Arbitration
dates were scheduled in August, September and October 1997 with a decision by
the arbitration panel expected by the end of fiscal 1997.
OTHER LITIGATION. The Company is also party to other routine litigation
incidental to its business and to which its property is subject. The Company's
management believes the ultimate resolution of these matters will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
10. ADDITIONAL SUBSEQUENT EVENT (UNAUDITED)
On January 21, 1998, pursuant to an Asset Purchase Agreement between the
Company and WinStar Communications, Inc. and one of its subsidiaries
(collectively, "Winstar"), Winstar acquired substantially all of Midcom's assets
and business for a purchase price of approximately $92.0 million. Approximately
$36.6 million of the proceeds were utilized to repay the Foothill credit
facility. In addition, approximately $20 million was placed in an escrow account
to fund any indemnification claims WinStar may have against Midcom under the
Asset Purchase Agreement and approximately $23.5 million was placed in escrow to
fund a potential purchase price adjustment provided for in the Asset Purchase
Agreement.
F-35
<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, 1996 gives effect to the Company's
acquisition (the "Milliwave Acquisition") of Milliwave Limited Partnership
("Milliwave") and 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 Preferred Stock in the December 1997 Preferred
Stock Placement and the Midcom Asset Purchase (the "Financing Transactions and
Midcom Asset Purchase" and, together with the Milliwave Acquisition, the
"Transactions") as if they occurred as of the beginning of the year ended
December 31, 1996. The revenues and results of operations included in the
following unaudited pro forma condensed consolidated statements of operations
are not indicative of anticipated results of operations for periods subsequent
to the Transactions nor are they considered necessarily to be indicative of the
results of operations for the year ended December 31, 1996 had the Transactions
actually been completed at the beginning of the year ended December 31, 1996.
The following unaudited pro forma condensed consolidated statement of
operations for the nine months ended September 30, 1997 gives effect to the
Financing Transactions and Midcom Asset Purchase as if they occurred as of the
beginning of the nine months ended September 30, 1997. The revenues and results
of operations included in the following unaudited pro forma condensed
consolidated statement of operations are not indicative of anticipated results
of operations for periods subsequent to the Financing Transactions and Midcom
Asset Purchase nor are they considered necessarily to be indicative of the
results of operations for the nine months ended September 30, 1997 had the
Financing Transactions and Midcom Asset Purchase actually been completed at the
beginning of the nine months ended September 30, 1997.
The following unaudited pro forma condensed consolidated balance sheet as of
September 30, 1997 gives effect to the issuance of the Senior Subordinated Notes
issued in the October 1997 Debt Placement, the US ONE Asset Acquisition and
Financing, the issuance of the Preferred Stock in the December 1997 Preferred
Stock Placement and the Midcom Asset Purchase as if the issuance of the Senior
Subordinated Notes issued in the October 1997 Debt Placement, the US ONE Asset
Acquisition and Financing, the issuance of the Preferred Stock in the December
1997 Preferred Stock Placement and the Midcom Asset Purchase had occurred on
September 30, 1997. The unaudited pro forma condensed consolidated balance sheet
has been prepared for information purposes only and does not purport to be
indicative of the financial condition that necessarily would have resulted had
the issuance of the Senior Subordinated Notes issued in the October 1997 Debt
Placement, the US ONE Asset Acquisition and Financing, the issuance of the
Preferred Stock in the December 1997 Preferred Stock Placement and the Midcom
Asset Purchase taken place on September 30, 1997.
These financial statements should be read in conjunction with the notes to
the unaudited pro forma condensed consolidated financial statements, which
follow, the consolidated financial statements of the Company and the related
notes thereto, the condensed consolidated financial statements of the Company
for the nine months ended September 30, 1997 and the related notes thereto, the
financial statements of Midcom and the related notes thereto, the condensed
financial statements of Midcom for the nine months ended September 30, 1997 and
the related notes thereto, and the financial statements of Milliwave, and the
related notes thereto, in each case incorporated by reference into or included
elsewhere in this Prospectus.
F-36
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE) PRO FORMA
FOR THE FOR THE
OCTOBER 1997 OCTOBER 1997
THE COMPANY, DEBT DEBT
HISTORICAL PLACEMENT PLACEMENT
------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 273,537 $ 93,915(a) $ 367,452
Short term investments........................................................... 29,232 29,232
------------- ------------ ------------
Cash, cash equivalents and short term investments.............................. 302,769 93,915 396,684
Investments in marketable equity securities...................................... -- --
Accounts receivable, net......................................................... 26,196 26,196
Inventories...................................................................... 4,954 4,954
Prepaid expenses and other current assets........................................ 19,683 19,683
Assets held for sale............................................................. -- --
Net assets of discontinued operations............................................ 5,015 5,015
------------- ------------ ------------
Total current assets........................................................... 358,617 93,915 452,532
Property and equipment, net.......................................................... 155,025 155,025
Licenses, net........................................................................ 168,679 168,679
Intangible assets, net............................................................... 14,998 14,998
Deferred financing costs............................................................. 21,315 6,185(a) 27,500
Other assets......................................................................... 1,330 1,330
------------- ------------ ------------
Total assets................................................................... $ 719,964 $ 100,100 $ 820,064
------------- ------------ ------------
------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long term debt................................................ $ 1,910 $ $ 1,910
Accounts payable and accrued expenses............................................ 46,961 100(a) 47,061
Current portion of capitalized lease obligations................................. 6,667 6,667
------------- ------------ ------------
Total current liabilities...................................................... 55,538 100 55,638
Capitalized lease obligations, less current portion.................................. 25,172 25,172
Long-term debt, less current portion................................................. 650,819 100,000(a) 750,819
Other long term liabilities..........................................................
Deferred income taxes................................................................ 26,500 26,500
------------- ------------ ------------
Total liabilities.............................................................. 758,029 100,100 858,129
------------- ------------ ------------
Commitments and contingencies
Redeemable preferred stock........................................................... --
Stockholders' equity:
Preferred stock.................................................................. 42 42
Common stock, $.01 par value; authorized 200,000 shares, issued and outstanding
33,493 shares, pro forma issued and outstanding 33,493 shares and pro forma as
adjusted issued and outstanding 33,493 shares.................................. 335 335
Additional paid-in capital....................................................... 252,647 252,647
Deferred compensation............................................................
Accumulated deficit.............................................................. (291,089) (291,089)
------------- ------------ ------------
Total stockholders' equity..................................................... (38,065) -- (38,065)
------------- ------------ ------------
Total liabilities, redeemable preferred stock and stockholders' equity......... $ 719,964 $ 100,100 $ 820,064
------------- ------------ ------------
------------- ------------ ------------
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
ADJUSTMENTS INCREASE/
INCREASE/ (DECREASE)
(DECREASE) FOR THE
FOR THE US ONE DECEMBER 1997
ASSET PREFERRED
ACQUISITION STOCK
AND FINANCING PRO FORMA PLACEMENT
--------------- ---------- --------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 98(b) $ 367,550 $ 168,338(c)
(62,250)(d
)
Short term investments........................................................... 29,232
------- ---------- --------------
Cash, cash equivalents and short term investments.............................. 98 396,782 106,088
Investments in marketable equity securities...................................... --
Accounts receivable, net......................................................... 26,196
Inventories...................................................................... 4,954
Prepaid expenses and other current assets........................................ 19,683
Assets held for sale............................................................. 30,000(b) 30,000
Net assets of discontinued operations............................................ 5,015
------- ---------- --------------
Total current assets........................................................... 30,098 482,630 106,088
Property and equipment, net.......................................................... 51,152(b) 206,177
Licenses, net........................................................................ 168,679
Intangible assets, net............................................................... 14,998
Deferred financing costs............................................................. 1,075(b) 28,575 (1,075)(d
)
Other assets......................................................................... 1,330
------- ---------- --------------
Total assets................................................................... $ 82,325 $ 902,389 $ 105,013
------- ---------- --------------
------- ---------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long term debt................................................ $ 62,250(b) $ 64,160 $ (62,250)(d
)
Accounts payable and accrued expenses............................................ 20,075(b) 67,136
Current portion of capitalized lease obligations................................. 6,667
------- ---------- --------------
Total current liabilities...................................................... 82,325 137,963 (62,250)
Capitalized lease obligations, less current portion.................................. 25,172
Long-term debt, less current portion................................................. 750,819
Other long term liabilities..........................................................
Deferred income taxes................................................................ 26,500
------- ---------- --------------
Total liabilities.............................................................. 82,325 940,454 (62,250)
------- ---------- --------------
Commitments and contingencies
Redeemable preferred stock........................................................... -- 175,000(c)
Stockholders' equity:
Preferred stock.................................................................. 42
Common stock, $.01 par value; authorized 200,000 shares, issued and outstanding
33,493 shares, pro forma issued and outstanding 33,493 shares and pro forma as
adjusted issued and outstanding 33,493 shares.................................. 335
Additional paid-in capital....................................................... 252,647 (6,662)(c
)
Deferred compensation............................................................
Accumulated deficit.............................................................. (291,089) (1,075)(d
)
------- ---------- --------------
Total stockholders' equity..................................................... -- (38,065) (7,737)
------- ---------- --------------
Total liabilities, redeemable preferred stock and stockholders' equity......... $ 82,325 $ 902,389 $ 105,013
------- ---------- --------------
------- ---------- --------------
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE)
FOR THE
MIDCOM
MIDCOM, ASSET
AS ADJUSTED HISTORICAL ACQUISITION
-------------- ------------ ------------
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 473,638 $ 1,532 $ (92,000 )
(e)
(1,532
)(e)
Short term investments........................................................... 29,232
-------------- ------------ ------------
Cash, cash equivalents and short term investments.............................. 502,870 1,532 (93,532)
Investments in marketable equity securities...................................... --
Accounts receivable, net......................................................... 26,196 20,421
Inventories...................................................................... 4,954
Prepaid expenses and other current assets........................................ 19,683 1,820
Assets held for sale............................................................. 30,000
Net assets of discontinued operations............................................ 5,015
-------------- ------------ ------------
Total current assets........................................................... 588,718 23,773 (93,532)
Property and equipment, net.......................................................... 206,177 24,126 (14,501)(e
)
Licenses, net........................................................................ 168,679
Intangible assets, net............................................................... 14,998 6,402 49,841(e)
Deferred financing costs............................................................. 27,500
Other assets......................................................................... 1,330 3,891
-------------- ------------ ------------
Total assets................................................................... $ 1,007,402 $ 58,192 $ (58,192)
-------------- ------------ ------------
-------------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long term debt................................................ $ 1,910 $ 134,606 $ (134,606
)(e)
Accounts payable and accrued expenses............................................ 67,136 50,000 (50,000)(e
)
Current portion of capitalized lease obligations................................. 6,667 14,501 (14,501)(e
)
-------------- ------------ ------------
Total current liabilities...................................................... 75,713 199,107 (199,107)
Capitalized lease obligations, less current portion.................................. 25,172
Long-term debt, less current portion................................................. 750,819
Other long term liabilities.......................................................... 3,800 (3,800)(e
)
Deferred income taxes................................................................ 26,500
-------------- ------------ ------------
Total liabilities.............................................................. 878,204 202,907 (202,907)
-------------- ------------ ------------
Commitments and contingencies
Redeemable preferred stock........................................................... 175,000 -- --
Stockholders' equity:
Preferred stock.................................................................. 42
Common stock, $.01 par value; authorized 200,000 shares, issued and outstanding
33,493 shares, pro forma issued and outstanding 33,493 shares and pro forma as
adjusted issued and outstanding 33,493 shares.................................. 335 62,063 (62,063)(e
)
Additional paid-in capital....................................................... 245,985
Deferred compensation............................................................ (1,321) 1,321(e)
Accumulated deficit.............................................................. (292,164) (205,457) 205,457
(e)
-------------- ------------ ------------
Total stockholders' equity..................................................... (45,802) (144,715) 144,715
-------------- ------------ ------------
Total liabilities, redeemable preferred stock and stockholders' equity......... $ 1,007,402 $ 58,192 $ (58,192)
-------------- ------------ ------------
-------------- ------------ ------------
<CAPTION>
AS FURTHER
ADJUSTED
------------
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 381,638
Short term investments........................................................... 29,232
------------
Cash, cash equivalents and short term investments.............................. 410,870
Investments in marketable equity securities...................................... --
Accounts receivable, net......................................................... 46,617
Inventories...................................................................... 4,954
Prepaid expenses and other current assets........................................ 21,503
Assets held for sale............................................................. 30,000
Net assets of discontinued operations............................................ 5,015
------------
Total current assets........................................................... 518,959
Property and equipment, net.......................................................... 215,802
Licenses, net........................................................................ 168,679
Intangible assets, net............................................................... 71,241
Deferred financing costs............................................................. 27,500
Other assets......................................................................... 5,221
------------
Total assets................................................................... $ 1,007,402
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long term debt................................................ $ 1,910
Accounts payable and accrued expenses............................................ 67,136
Current portion of capitalized lease obligations................................. 6,667
------------
Total current liabilities...................................................... 75,713
Capitalized lease obligations, less current portion.................................. 25,172
Long-term debt, less current portion................................................. 750,819
Other long term liabilities.......................................................... --
Deferred income taxes................................................................ 26,500
------------
Total liabilities.............................................................. 878,204
------------
Commitments and contingencies
Redeemable preferred stock........................................................... 175,000
Stockholders' equity:
Preferred stock.................................................................. 42
Common stock, $.01 par value; authorized 200,000 shares, issued and outstanding
33,493 shares, pro forma issued and outstanding 33,493 shares and pro forma as
adjusted issued and outstanding 33,493 shares.................................. 335
Additional paid-in capital....................................................... 245,985
Deferred compensation............................................................ --
Accumulated deficit.............................................................. (292,164)
------------
Total stockholders' equity..................................................... (45,802)
------------
Total liabilities, redeemable preferred stock and stockholders' equity......... $ 1,007,402
------------
------------
</TABLE>
F-37
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE)
FOR THE PRO FORMA PRO FORMA
FEBRUARY FOR THE ADJUSTMENTS
1997 FEBRUARY 1997 INCREASE/
PREFERRED PREFERRED (DECREASE) FOR
THE COMPANY, STOCK STOCK THE MARCH 1997
HISTORICAL PLACEMENT PLACEMENT DEBT PLACEMENT
------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Telecommunications services............................. $ 23,910 $ $ 23,910 $
Information services.................................... 25,693 25,693
------------- ----------- ------------- -------
Total operating revenues.................................. 49,603 -- 49,603 --
------------- ----------- ------------- -------
Operating expenses
Cost of services and products........................... 48,488 48,488
Selling, general and administrative expenses............ 109,916 109,916
Relocation of corporate headquarters.................... --
Depreciation and amortization........................... 15,474 15,474
------------- ----------- ------------- -------
Total operating expenses 173,878 -- 173,878 --
------------- ----------- ------------- -------
Operating loss.......................................... (124,275) -- (124,275) --
Other expense
Interest expense........................................ (53,074) (53,074) (8,476)(f)
Interest income......................................... 11,052 11,052
Other income............................................ 2,219 2,219
------------- ----------- ------------- -------
Net loss from continuing operations....................... (164,078) -- (164,078) (8,476)
Loss from discontinued operations......................... (1,977) (1,977)
------------- ----------- ------------- -------
Net loss.................................................. (166,055) -- (166,055) (8,476)
Less preferred stock dividends............................ (3,881) (654)(e) (4,535)
------------- ----------- ------------- -------
Net loss applicable to common stock....................... $ (169,936) $ (654) $ (170,590) $ (8,476)
------------- ----------- ------------- -------
------------- ----------- ------------- -------
Net loss applicable to common stock per share from
continuing operations................................... $ (5.10) $ (5.12)
Net loss per share from discontinued operations........... (0.06) (0.06)
------------- -------------
Net loss applicable to common stock per share............. $ (5.16) $ (5.18)
------------- -------------
------------- -------------
Weighted average shares outstanding....................... 32,923 32,923
------------- -------------
------------- -------------
<CAPTION>
PRO FORMA
PRO FORMA FOR THE
FOR THE FEBRUARY 1997
FEBRUARY 1997 PRO FORMA PREFERRED PRO FORMA
PREFERRED ADJUSTMENTS STOCK PLACEMENT, ADJUSTMENTS
STOCK INCREASE/ THE MARCH 1997 INCREASE/
PLACEMENT AND (DECREASE) FOR DEBT PLACEMENT (DECREASE) FOR
THE MARCH 1997 THE AUGUST 1997 AND THE AUGUST 1997 THE OCTOBER 1997
DEBT PLACEMENT DEBT PLACEMENT DEBT PLACEMENT DEBT PLACEMENT
-------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services............................. $ 23,910 $ $ 23,910 $
Information services.................................... 25,693 25,693
-------------- ------- ---------- --------
Total operating revenues.................................. 49,603 -- 49,603 --
-------------- ------- ---------- --------
Operating expenses
Cost of services and products........................... 48,488 48,488
Selling, general and administrative expenses............ 109,916 109,916
Relocation of corporate headquarters.................... -- --
Depreciation and amortization........................... 15,474 15,474
-------------- ------- ---------- --------
Total operating expenses 173,878 -- 173,878 --
-------------- ------- ---------- --------
Operating loss.......................................... (124,275) -- (124,275) --
Other expense
Interest expense........................................ (61,550) (4,018)(g) (65,568) (12,024)(h)
Interest income......................................... 11,052 11,052
Other income............................................ 2,219 2,219
-------------- ------- ---------- --------
Net loss from continuing operations....................... (172,554) (4,018) (176,572) (12,024)
Loss from discontinued operations......................... (1,977) (1,977)
-------------- ------- ---------- --------
Net loss.................................................. (174,531) (4,018) (178,549) (12,024)
Less preferred stock dividends............................ (4,535) (4,535)
-------------- ------- ---------- --------
Net loss applicable to common stock....................... $ (179,066) $ (4,018) $ (183,084) $ (12,024)
-------------- ------- ---------- --------
-------------- ------- ---------- --------
Net loss applicable to common stock per share from
continuing operations................................... $ (5.38) $ (5.50)
Net loss per share from discontinued operations........... (0.06) (0.06)
-------------- ----------
Net loss applicable to common stock per share............. $ (5.44) $ (5.56)
-------------- ----------
-------------- ----------
Weighted average shares outstanding....................... 32,923 32,923
-------------- ----------
-------------- ----------
</TABLE>
F-38
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
FEBRUARY 1997
PREFERRED PRO FORMA
STOCK PLACEMENT, ADJUSTMENTS
THE MARCH 1997 INCREASE/
DEBT PLACEMENT, (DECREASE) FOR
THE AUGUST 1997 THE
DEBT PLACEMENT US ONE ASSET
AND THE OCTOBER 1997 ACQUISITION AND
DEBT PLACEMENT FINANCING PRO FORMA
-------------------- ---------------- -----------
<S> <C> <C> <C>
Operating revenues
Telecommunications services........................................ $ 23,910 $ $ 23,910
Information services............................................... 25,693 25,693
---------- -------- -----------
Total operating revenues............................................. 49,603 -- 49,603
---------- -------- -----------
Operating expenses
Cost of services and products...................................... 48,488 48,488
Selling, general and administrative expenses....................... 109,916 109,916
Relocation of corporate headquarters............................... -- --
Depreciation and amortization...................................... 15,474 4,796(i) 20,270
---------- -------- -----------
Total operating expenses 173,878 4,796 178,674
---------- -------- -----------
Operating loss..................................................... (124,275) (4,796) (129,071)
Other expense
Interest expense................................................... (77,592) (6,515)(i) (84,107)
Interest income.................................................... 11,052 11,052
Other income....................................................... 2,219 2,219
---------- -------- -----------
Net loss from continuing operations.................................. (188,596) (11,311) (199,907)
Loss from discontinued operations.................................... (1,977) (1,977)
---------- -------- -----------
Net loss............................................................. (190,573) (11,311) (201,884)
Less preferred stock dividends....................................... (4,535) (4,535)
---------- -------- -----------
Net loss applicable to common stock.................................. $ (195,108) $ (11,311) $(206,419)
---------- -------- -----------
---------- -------- -----------
Net loss applicable to common stock per share from continuing
operations......................................................... $ (5.87) $ (6.21)
Net loss per share from discontinued operations...................... (0.06) (0.06)
---------- -----------
Net loss applicable to common stock per share........................ $ (5.93) $ (6.27)
---------- -----------
---------- -----------
Weighted average shares outstanding.................................. 32,923 32,923
---------- -----------
---------- -----------
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS
INCREASE/ INCREASE/
(DECREASE) FOR (DECREASE)
THE FOR THE
DECEMBER 1997 MIDCOM
PREFERRED STOCK PRO FORMA MIDCOM, ASSET
PLACEMENT AS ADJUSTED HISTORICAL ACQUISITION
---------------- ----------- ----------- -----------
<S> <C>
Operating revenues
Telecommunications services........................................ $ $ 23,910 $ 74,339 $
Information services............................................... 25,693
-------- ----------- ----------- -----------
Total operating revenues............................................. -- 49,603 74,339 --
-------- ----------- ----------- -----------
Operating expenses
Cost of services and products...................................... 48,488 54,809
Selling, general and administrative expenses....................... 109,916 62,646
Relocation of corporate headquarters............................... -- 4,866
Depreciation and amortization...................................... 20,270 13,657 3,738(l)
(1,088)(o)
-------- ----------- ----------- -----------
Total operating expenses -- 178,674 135,978 2,650
-------- ----------- ----------- -----------
Operating loss..................................................... -- (129,071) (61,639) (2,650)
Other expense
Interest expense................................................... 6,515(k) (78,667) (8,337) 8,337(m)
(1,075)(k)
Interest income.................................................... 11,052 427 (3,588)(n)
Other income....................................................... 2,219
-------- ----------- ----------- -----------
Net loss from continuing operations.................................. 5,440 (194,467) (69,549) 2,099
Loss from discontinued operations.................................... (1,977)
-------- ----------- ----------- -----------
Net loss............................................................. 5,440 (196,444) (69,549) 2,099
Less preferred stock dividends....................................... (19,147)(j) (23,682) -- --
-------- ----------- ----------- -----------
Net loss applicable to common stock.................................. $ (13,707) $(220,126) $ (69,549) $ 2,099
-------- ----------- ----------- -----------
-------- ----------- ----------- -----------
Net loss applicable to common stock per share from continuing
operations......................................................... $ (6.63)
Net loss per share from discontinued operations...................... (0.06)
-----------
Net loss applicable to common stock per share........................ $ (6.69)
-----------
-----------
Weighted average shares outstanding.................................. 32,923
-----------
-----------
<CAPTION>
PRO FORMA
AS FURTHER
ADJUSTED
-----------
Operating revenues
Telecommunications services........................................ $ 98,249
Information services............................................... 25,693
-----------
Total operating revenues............................................. 123,942
-----------
Operating expenses
Cost of services and products...................................... 103,297
Selling, general and administrative expenses....................... 172,562
Relocation of corporate headquarters............................... 4,866
Depreciation and amortization...................................... 36,577
-----------
Total operating expenses 317,302
-----------
Operating loss..................................................... (193,360)
Other expense
Interest expense................................................... (78,667)
Interest income.................................................... 7,891
Other income....................................................... 2,219
-----------
Net loss from continuing operations.................................. (261,917)
Loss from discontinued operations.................................... (1,977)
-----------
Net loss............................................................. (263,894)
Less preferred stock dividends....................................... (23,682)
-----------
Net loss applicable to common stock.................................. $(287,576)
-----------
-----------
Net loss applicable to common stock per share from continuing
operations......................................................... $ (8.67)
Net loss per share from discontinued operations...................... (0.06)
-----------
Net loss applicable to common stock per share........................ $ (8.73)
-----------
-----------
Weighted average shares outstanding.................................. 32,923
-----------
-----------
</TABLE>
F-39
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE)
PRO FORMA FOR
ADJUSTMENTS PRO FORMA THE
INCREASE/ FOR FEBRUARY 1997
(DECREASE) FOR THE PREFERRED
THE COMPANY, MILLIWAVE LP, THE ACQUISITION ACQUISITION STOCK
HISTORICAL HISTORICAL OF MILLIWAVE OF MILLIWAVE PLACEMENT
------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Telecommunications services................. $ 33,969 $ 4 $ (1,492)(a) $ 32,481 $
Information services........................ 14,650 -- -- 14,650
------------- ------------- ------- -------------- -------------
Total operating revenues...................... 48,619 4 (1,492) 47,131 --
------------- ------------- ------- -------------- -------------
Operating expenses
Cost of services and products............... 38,233 -- (686)(a) 37,547
Selling, general and administrative
expenses.................................. 62,365 1,634 -- 63,999
Relocation of corporate headquarters........ --
Loss on impairment of assets................ --
Contract settlement......................... --
Depreciation and amortization............... 4,501 201 3,470(b) 8,172
------------- ------------- ------- -------------- -------------
Total operating expenses...................... 105,099 1,835 2,784 109,718 --
------------- ------------- ------- -------------- -------------
Operating loss.............................. (56,480) (1,831) (4,276) (62,587) --
Other expense
Interest expense............................ (36,748) (6) -- (36,754)
Interest income............................. 10,515 93 (2,155)(c) 8,453
------------- ------------- ------- -------------- -------------
Net loss from continuing operations........... (82,713) (1,744) (6,431) (90,888) --
Loss from discontinued operations............. (1,010) -- -- (1,010)
------------- ------------- ------- -------------- -------------
Net loss...................................... (83,723) (1,744) (6,431) (91,898) --
Less preferred stock dividends................ -- -- -- -- (6,000)(e)
------------- ------------- ------- -------------- -------------
Net loss applicable to common stock........... $ (83,723) $ (1,744) $ (6,431) $ (91,898) $ (6,000)
------------- ------------- ------- -------------- -------------
------------- ------------- ------- -------------- -------------
Net loss applicable to common stock per share
from continuing operations.................. $ (2.96) $ (2.89)
Net loss per share from discontinued
operations.................................. (0.04) (0.03)
------------- --------------
Net loss applicable to common stock per
share....................................... $ (3.00) $ (2.92)
------------- --------------
------------- --------------
Weighted average shares outstanding........... 27,911 3,595(d) 31,506
------------- ------- --------------
------------- ------- --------------
<CAPTION>
PRO FORMA FOR
THE ACQUISITION
PRO FORMA FOR OF MILLIWAVE,
THE PRO FORMA THE
ACQUISITION ADJUSTMENTS FEBRUARY 1997
OF MILLIWAVE INCREASE/ PREFERRED PRO FORMA
AND FOR THE (DECREASE) STOCK ADJUSTMENTS
FEBRUARY 1997 FOR PLACEMENT INCREASE/
PREFERRED THE MARCH AND (DECREASE) FOR
STOCK 1997 DEBT THE MARCH 1997 THE AUGUST 1997
PLACEMENT PLACEMENT DEBT PLACEMENT DEBT PLACEMENT
-------------- ------------- --------------- ---------------
<S> <C>
Operating revenues
Telecommunications services................. $ 32,481 $ $ 32,481 $
Information services........................ 14,650 14,650
-------------- ------------- --------------- -------
Total operating revenues...................... 47,131 -- 47,131 --
-------------- ------------- --------------- -------
Operating expenses
Cost of services and products............... 37,547 37,547
Selling, general and administrative
expenses.................................. 63,999 63,999
Relocation of corporate headquarters........ -- --
Loss on impairment of assets................ -- --
Contract settlement......................... -- --
Depreciation and amortization............... 8,172 8,172
-------------- ------------- --------------- -------
Total operating expenses...................... 109,718 -- 109,718 --
-------------- ------------- --------------- -------
Operating loss.............................. (62,587) -- (62,587) --
Other expense
Interest expense............................ (36,754) (41,077)(f) (77,831) (6,494)(g)
Interest income............................. 8,453 8,453
-------------- ------------- --------------- -------
Net loss from continuing operations........... (90,888) (41,077) (131,965) (6,494)
Loss from discontinued operations............. (1,010) (1,010)
-------------- ------------- --------------- -------
Net loss...................................... (91,898) (41,077) (132,975) (6,494)
Less preferred stock dividends................ (6,000) (6,000)
-------------- ------------- --------------- -------
Net loss applicable to common stock........... $ (97,898) $ (41,077) $ (138,975) $ (6,494)
-------------- ------------- --------------- -------
-------------- ------------- --------------- -------
Net loss applicable to common stock per share
from continuing operations.................. $ (3.08) $ (4.38)
Net loss per share from discontinued
operations.................................. (0.03) (0.03)
-------------- ---------------
Net loss applicable to common stock per
share....................................... $ (3.11) $ (4.41)
-------------- ---------------
-------------- ---------------
Weighted average shares outstanding........... 31,506 31,506
-------------- ---------------
-------------- ---------------
<CAPTION>
PRO FORMA FOR THE
ACQUISITION OF
MILLIWAVE,
THE FEBRUARY 1997 PRE-
FERRED STOCK
PLACEMENT,
THE MARCH 1997
DEBT PLACEMENT
AND THE AUGUST 1997
DEBT PLACEMENT
----------------------
Operating revenues
Telecommunications services................. $ 32,481
Information services........................ 14,650
----------
Total operating revenues...................... 47,131
----------
Operating expenses
Cost of services and products............... 37,547
Selling, general and administrative
expenses.................................. 63,999
Relocation of corporate headquarters........ --
Loss on impairment of assets................ --
Contract settlement......................... --
Depreciation and amortization............... 8,172
----------
Total operating expenses...................... 109,718
----------
Operating loss.............................. (62,587)
Other expense
Interest expense............................ (84,325)
Interest income............................. 8,453
----------
Net loss from continuing operations........... (138,459)
Loss from discontinued operations............. (1,010)
----------
Net loss...................................... (139,469)
Less preferred stock dividends................ (6,000)
----------
Net loss applicable to common stock........... $ (145,469)
----------
----------
Net loss applicable to common stock per share
from continuing operations.................. $ (4.59)
Net loss per share from discontinued
operations.................................. (0.03)
----------
Net loss applicable to common stock per
share....................................... $ (4.62)
----------
----------
Weighted average shares outstanding........... 31,506
----------
----------
</TABLE>
F-40
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR THE
ACQUISITION OF
MILLIWAVE,
THE FEBRUARY 1997 PRE-
FERRED STOCK PRO FORMA
PLACEMENT, ADJUSTMENTS
PRO FORMA THE MARCH 1997 INCREASE/
ADJUSTMENTS DEBT PLACEMENT, (DECREASE) FOR
INCREASE/ THE AUGUST 1997 THE
(DECREASE) FOR DEBT PLACEMENT AND US ONE ASSET
THE OCTOBER 1997 THE OCTOBER 1997 ACQUISITION AND
DEBT PLACEMENT DEBT PLACEMENT FINANCING
---------------- ---------------------- ----------------
<S> <C> <C> <C>
Operating revenues
Telecommunications services.................................... $ $ 32,481 $
Information services........................................... 14,650
-------- ---------- --------
Total operating revenues......................................... -- 47,131 --
-------- ---------- --------
Operating expenses
Cost of services and products.................................. 37,547
Selling, general and administrative expenses................... 63,999
Relocation of corporate headquarters........................... --
Loss on impairment of assets................................... --
Contract settlement............................................ --
Depreciation and amortization.................................. 8,172 6,394(i)
-------- ---------- --------
Total operating expenses......................................... -- 109,718 6,394
-------- ---------- --------
Operating loss................................................. -- (62,587) (6,394)
Other expense
Interest expense............................................... (16,219)(h) (100,544) (8,686)(i)
Interest income................................................ 8,453
-------- ---------- --------
Net loss from continuing operations.............................. (16,219) (154,678) (15,080)
Loss from discontinued operations................................ (1,010)
-------- ---------- --------
Net loss......................................................... (16,219) (155,688) (15,080)
Less preferred stock dividends................................... (6,000)
-------- ---------- --------
Net loss applicable to common stock.............................. $ (16,219) $ (161,688) $ (15,080)
-------- ---------- --------
-------- ---------- --------
Net loss applicable to common stock per share from continuing
operations..................................................... $ (5.10)
Net loss per share from discontinued operations.................. (0.03)
----------
Net loss applicable to common stock per share.................... $ (5.13)
----------
----------
Weighted average shares outstanding.............................. 31,506
----------
----------
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE) FOR
THE
DECEMBER 1997
PREFERRED STOCK MIDCOM,
PRO FORMA PLACEMENT AS ADJUSTED HISTORICAL
----------- ---------------- ----------- -----------
<S> <C> <C>
Operating revenues
Telecommunications services.................................... $ 32,481 $ $ 32,481 $ 148,777
Information services........................................... 14,650 14,650 --
----------- -------- ----------- -----------
Total operating revenues......................................... 47,131 -- 47,131 148,777
----------- -------- ----------- -----------
Operating expenses
Cost of services and products.................................. 37,547 37,547 107,950
Selling, general and administrative expenses................... 63,999 63,999 65,025
Relocation of corporate headquarters........................... -- -- 2,220
Loss on impairment of assets................................... -- -- 20,765
Contract settlement............................................ -- -- 8,800
Depreciation and amortization.................................. 14,566 14,566 32,687
----------- -------- ----------- -----------
Total operating expenses......................................... 116,112 -- 116,112 237,447
----------- -------- ----------- -----------
Operating loss................................................. (68,981) -- (68,981) (88,670)
Other expense
Interest expense............................................... (109,230) 8,686(k) (101,619) (8,726)
(1,075)(k)
Interest income................................................ 8,453 8,453 77
----------- -------- ----------- -----------
Net loss from continuing operations.............................. (169,758) 7,611 (162,147) (97,319)
Loss from discontinued operations................................ (1,010) (1,010)
----------- -------- ----------- -----------
Net loss......................................................... (170,768) 7,611 (163,157) (97,319)
Less preferred stock dividends................................... (6,000) (25,826)(j) (31,826)
----------- -------- ----------- -----------
Net loss applicable to common stock.............................. $(176,768) $ (18,215) $(194,983) $ (97,319)
----------- -------- ----------- -----------
----------- -------- ----------- -----------
Net loss applicable to common stock per share from continuing
operations..................................................... $ (5.58) $ (6.16)
Net loss per share from discontinued operations.................. (0.03) (0.03)
----------- -----------
Net loss applicable to common stock per share.................... $ (5.61) $ (6.19)
----------- -----------
----------- -----------
Weighted average shares outstanding.............................. 31,506 31,506
----------- -----------
----------- -----------
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE)
FOR THE
MIDCOM
ASSET AS FURTHER
ACQUISITION ADJUSTED
----------- -----------
Operating revenues
Telecommunications services.................................... $ $ 181,258
Information services........................................... 14,650
----------- -----------
Total operating revenues......................................... -- 195,908
----------- -----------
Operating expenses
Cost of services and products.................................. 145,497
Selling, general and administrative expenses................... 129,024
Relocation of corporate headquarters........................... 2,220
Loss on impairment of assets................................... 20,765
Contract settlement............................................ 8,800
Depreciation and amortization.................................. 4,984(l) 50,787
(1,450)(o)
----------- -----------
Total operating expenses......................................... 3,534 357,093
----------- -----------
Operating loss................................................. (3,534) (161,185)
Other expense
Interest expense............................................... 8,726(m) (101,619)
Interest income................................................ (4,784)(n) 3,746
----------- -----------
Net loss from continuing operations.............................. 408 (259,058)
Loss from discontinued operations................................ (1,010)
----------- -----------
Net loss......................................................... 408 (260,068)
Less preferred stock dividends................................... (31,826)
----------- -----------
Net loss applicable to common stock.............................. $ 408 $(291,894)
----------- -----------
----------- -----------
Net loss applicable to common stock per share from continuing
operations..................................................... $ (9.23)
Net loss per share from discontinued operations.................. (0.03)
-----------
Net loss applicable to common stock per share.................... $ (9.26)
-----------
-----------
Weighted average shares outstanding.............................. 31,506
-----------
-----------
</TABLE>
F-41
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The adjustments below were prepared based on data currently available and in
some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts that were
actually recorded.
BALANCE SHEET AT SEPTEMBER 30, 1997
(a) To record the issuance of the Senior Subordinated Notes in the October 1997
Debt Placement and related fees and expenses.
(b) To record the acquisition of the US ONE assets and the related financing and
related fees and expenses.
(c) To record the issuance of the Preferred Stock in the December 1997 Preferred
Stock Placement and related fees and expenses.
(d) To repay the $62.25 million US ONE Asset Financing with a portion of the
proceeds of the December 1997 Preferred Stock Placement and to write off the
related deferred financing costs.
(e) To record the Midcom Asset Purchase as follows:
<TABLE>
<CAPTION>
<S> <C>
Record Cash Payment to Midcom Creditors.......................................... $ (92,000)
Eliminate Cash not Acquired...................................................... (1,532)
Eliminate Property and Equipment not Retained.................................... (14,501)
Allocate Excess Purchase Price to Intangible Assets.............................. 49,841
-----------
Total Asset Adjustments...................................................... $ (58,192)
-----------
-----------
Eliminate Current Portion of Midcom Long Term Debt............................... (134,606)
Eliminate Midcom Accounts Payable and Accrued Expenses........................... (50,000)
Eliminate Midcom Capital Lease Obligations....................................... (14,501)
Eliminate the Other Long Term Liabilities of Midcom.............................. (3,800)
Eliminate the Common Stock of Midcom............................................. (62,063)
Eliminate Deferred Compensation of Midcom........................................ 1,321
Eliminate Accumulated Deficit of Midcom.......................................... 205,457
-----------
Total Liability and Equity Adjustments....................................... $ (58,192)
-----------
-----------
</TABLE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(a) To eliminate sales, management fees, and cost of sales recorded by the
Company pursuant to management and other agreements with Milliwave.
(b) To record amortization on the licenses acquired in the acquisition of
Milliwave.
(c) To eliminate interest income, at an assumed rate of 5.3% per annum, on $40.6
million cash, assuming such cash was paid at the beginning of the year in
connection with the acquisition of Milliwave.
F-42
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) To record 3,594,620 shares of the Company's Common Stock issued in
connection with the acquisition of Milliwave at $20.87 per share.
(e) To record Preferred Stock dividends on the 4,000,000 shares of Preferred
Stock issued by the Company in the February 1997 Preferred Stock Placement,
at 6% of the stated value of $25.00 per share.
(f) To record interest expense on the debt issued in the March 1997 Debt
Placement, including amortization of debt offering costs and other related
fees, as if the debt were issued at the beginning of the respective period,
but not to include interest income earned on additional available cash.
(g) To record interest expense on the debt issued in the August 1997 Debt
Placement, including amortization of debt offering costs and other related
fees, as if the debt were issued at the beginning of the respective period,
but not to include interest income earned on additional available cash.
(h) To record interest expense on the Senior Subordinated Notes issued in the
October 1997 Debt Placement, including amortization of debt offering costs
and other related fees, as if the debt were issued at the beginning of the
respective period, but not to include interest income earned on additional
available cash.
(i) To record depreciation expense on the assets acquired in the US ONE Asset
Acquisition, and the interest expense on the related financing, including
amortization of financing costs and other related fees, as if the
acquisition and financing had occurred at the beginning of the respective
period.
(j) To reflect Preferred Stock dividends as if the December 1997 Preferred Stock
Placement had been completed at the beginning of the respective period.
(k) To eliminate the pro forma interest expense related to the US ONE Asset
Financing and to record the interest expense related to the write-off of the
related financing fees as if the retirement of the US ONE Asset Financing
had occurred at the beginning of the respective period.
(l) To record amortization of the excess of the purchase price over the net book
value of the assets acquired in the Midcom Acquisition.
(m) To eliminate the interest expense recorded on the Midcom debt, which is not
being assumed in the Midcom Acquisition.
(n) To eliminate interest income on the purchase price of the Midcom
Acquisition, as if the Midcom Acquisition had occurred as of the beginning
of the respective period.
(o) To eliminate depreciation expense related to the Midcom assets not retained
by the Company.
F-43
<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.
II-1
<PAGE>
(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.
(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.
II-2
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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 Ernst & Young
23.3 Consent of Graubard Mollen & Miller (included in its opinion filed as Exhibit 5.1)
23.4 Consent of Grant Thornton 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 Preferred Stock
</TABLE>
II-3
<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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on this 2nd day of
February, 1998.
<TABLE>
<S> <C> <C>
WINSTAR COMMUNICATIONS, INC.
By: /s/ WILLIAM J. ROUHANA, JR.
------------------------------------------
William J. Rouhana, Jr.
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William J. Rouhana, Jr. and Timothy R. Graham his
true and lawful attorneys-in-fact and agents, each acting alone, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, and hereby ratifies and
confirms all that said attorneys-in-fact and agents, each acting alone, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------- ------------------------------------------------ ----------------------
<C> <S> <C>
/s/ WILLIAM J. ROUHANA, JR. Chairman of the Board of Directors and Chief
------------------------------- Executive Officer (and principal executive February 2, 1998
William J. Rouhana, Jr. officer)
/s/ NATHAN KANTOR
------------------------------- President, Chief Operating Officer and Director February 2, 1998
Nathan Kantor
/s/ STEVEN G. CHRUST
------------------------------- Vice Chairman of the Board of Directors February 2, 1998
Steven G. Chrust
/s/ CHARLES T. DICKSON
------------------------------- Executive Vice President and Chief Financial February 2, 1998
Charles T. Dickson Officer
/s/ BERT W. WASSERMAN
------------------------------- Director February 2, 1998
Bert W. Wasserman
/s/ WILLIAM J. VANDEN HEUVEL
------------------------------- Director February 2, 1998
William J. vanden Heuvel
/s/ STEVEN B. MAGYAR
------------------------------- Director February 2, 1998
Steven B. Magyar
------------------------------- Director
James I. Cash
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
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 Ernst & Young
23.3 Consent of Graubard Mollen & Miller (included in its opinion filed as Exhibit 5.1)
23.4 Consent of Grant Thornton 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 Preferred Stock
</TABLE>
<PAGE>
EXHIBIT 5.1
February 2, 1998
WinStar Communications, Inc.
230 Park Avenue
New York, New York
Gentlemen:
Reference is made to the proposed issuance by WinStar Communications, Inc.
("Company") of 14- 1/4% Senior Cumulative Exchangeable Preferred Stock due 2007
("New Preferred Stock") and the proposed exchange of the Company's 14- 1/4%
Senior Cumulative Exchangeable Preferred Stock due 2007 for the New Preferred
Stock pursuant to the registration statement on Form S-4 ("Registration
Statement"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
We have examined such documents and considered such legal matters as we have
deemed necessary and relevant as the basis for the opinion set forth below. With
respect to such examinations, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as reproduced or
certified copies, and the authenticity of the originals of those latter
documents. As to questions of fact material to this opinion, we have, to the
extent deemed appropriate, relied upon certain representations of certain
officers and employees of the Company and its subsidiaries.
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized and existing under the laws
of the State of Delaware.
2. The shares of New Preferred Stock have been duly and validly authorized
by all necessary corporate action and will, when issued, constitute valid and
binding obligations on the part of the Company enforceable in accordance with
its terms, except as may be limited by (i) bankruptcy, reorganization,
insolvency or other similar laws of general application affecting the rights and
remedies of creditors and secured parties and (ii) the discretion of the courts
in applying equitable principles.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, to the use of our name as counsel to the Company, and to
all references made to us in the Registration Statement and the Prospectus
forming a part thereof. In giving this consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder.
Very truly yours,
GRAUBARD MOLLEN & MILLER
<PAGE>
EXHIBIT 12.1
<TABLE>
<CAPTION>
WinStar Communications, Inc
Ratio of earnings to combined fixed charges and preferred stock dividends
(in thousands)
Ten months
ended
Year Ended February 28, December 31,
----------------------------------------- ----------------
1993 1994 1995 1995
---- ---- ---- ----
EARNINGS:
<S> <C> <C> <C> <C>
Net loss from continuing operations
before income taxes $ (4,594) $(8,205) $ (7,226) $ (16,094)
Adjustments to Earnings:
Fixed Charges, as Detailed Below 674 915 900 8,063
Interest Capitalized - - - -
Extraordinary item - (194) - -
Minority interest in WinStar Gateway Network - (155) - -
------------- ------------- ------------- -------------
Earnings as Adjusted $ (3,920) $(7,639) $ (6,326) $ (8,031)
============= ============= ============= =============
FIXED CHARGES:
Interest Expense $ 567 $ 793 $ 733 $ 7,715
Capitalized Interest - - - -
Portion of Rental Expense which is
Representative of Interest 107 122 167 348
------------- ------------- ------------- -------------
Total Fixed Charges 674 915 900 8,063
PREFERRED STOCK DIVIDENDS: 85 68 62 216
------------- ------------- ------------- -------------
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS: $ 759 $ 983 $ 962 $ 8,279
============= ============= ============= =============
DEFICIENCY IN EARNINGS TO COVER COMBINED
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS: $ (4,679) $(8,622) $ (7,288) $ (16,310)
============= ============= ============= =============
<CAPTION>
Year Ended December 31, 1996 Nine Months Ended September 30,
--------------------------------------------------------------------------
EARNINGS: 1997
ACTUAL PRO FORMA 1996 1997 PRO FORMA
------ --------- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Net loss from continuing operations
before income taxes $ (82,713) $ (259,058) $ (49,411) $ (164,078) $(261,918)
Adjustments to Earnings:
Fixed Charges, as Detailed Below 38,520 103,891 27,783 56,358 81,888
Interest Capitalized (320) (320) - (1,213) (1,213)
Extraordinary item - - - - -
Minority interest in
WinStar Gateway Network - - - - -
------------- --------------- ----------- -------------- --------------
Earnings as Adjusted $ (44,513) $ (155,487) $ (21,628) $ (108,933) $(181,243)
============= =============== =========== ============== ==============
FIXED CHARGES:
Interest Expense $ 36,834 $ 101,705 $ 26,758 $ 53,137 $ 78,667
Capitalized Interest 320 320 - 1,213 1,213
Portion of Rental Expense which is
Representative of Interest 1,366 1,866 1,025 2,008 2,008
------------- --------------- ----------- -------------- --------------
Total Fixed Charges 38,520 103,891 27,783 56,358 81,888
PREFERRED STOCK DIVIDENDS: - 31,826 - 3,881 23,682
------------- --------------- ----------- -------------- --------------
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS: $ 38,520 $ 135,717 $ 27,783 $ 60,239 $ 105,570
============= =============== =========== ============== ==============
DEFICIENCY IN EARNINGS TO COVER COMBINED
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS: $ (83,033) $ (291,204) $ (49,411) $ (169,172) $(286,813)
============= =============== =========== ============== ==============
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our reports dated January 24, 1997 and January 24, 1997, except
for the last paragraph of Note 19, as to which the date is May 13, 1997,
accompanying the consolidated financial statements and schedules included in the
Annual Report of WinStar Communications, Inc. and Subsidiaries on Form 10-K for
the year ended December 31, 1996 and in Form 8-K filed June 10, 1997,
respectively, which are incorporated by reference in the Registration Statement
and Prospectus. We consent to the incorporation by reference of the
aforementioned reports in the Registration Statement and Prospectus and to the
use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
New York, New York
January 27, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 21, 1997, with respect to the consolidated
financial statements and schedule of MIDCOM COMMUNICATIONS, INC. included in the
Registration Statement on Form S-4 and related Prospectus of WINSTAR
COMMUNICATIONS, INC. for the registration of 14 1/4% Senior Cumulative
Exchangeable Preferred Stock Due 2007.
/s/ Ernst & Young LLP
Detroit, Michigan
February 2, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 9, 1997, accompanying the financial
statements of Milliwave Limited Partnership included in Form 8-K filed June 10,
1997, which is incorporated by reference in the Registration Statement and
Prospectus. We consent to the incorporation by reference of the aforementioned
reports in the Registration Statement and Prospectus and to the use of our name
as it appears under the caption "Experts."
GRANT THORNTON LLP
New York, New York
January 27, 1998
<PAGE>
LETTER OF TRANSMITTAL
FOR
TENDER OF ALL OUTSTANDING
SERIES C 14 1/4% SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK DUE 2007
IN EXCHANGE FOR
SERIES C 14 1/4% SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK DUE 2007
OF
WINSTAR COMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998 (THE "EXPIRATION DATE"),
UNLESS EXTENDED BY WINSTAR COMMUNICATIONS, INC.
EXCHANGE AGENT:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<TABLE>
<CAPTION>
BY MAIL: BY OVERNIGHT COURIER: BY HAND: BY FACSIMILE:
<S> <C> <C> <C>
Continental Stock Continental Stock Continental Stock Fax No. (212)509-5150
Transfer & Transfer & Transfer & CONFIRM BY TELEPHONE:
Trust Company Trust Company Trust Company Telephone no.
2 Broadway 2 Broadway 2 Broadway (212)-509-4000
New York, NY 100002 New York, NY 10002 New York, NY 10002
(registered or Attn: Compliance Attn: Compliance
certified mail Department Department
recommended)
Attn: Compliance
Department
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER
OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated , 1998
(the "Prospectus") of WinStar Communications, Inc. ("Company") which, together
with this Letter of Transmittal (the "Letter of Transmittal"), constitute the
Company's offer (the "Exchange Offer") to exchange a new series of Series C
14 1/4% Senior Cumulative Exchangeable Preferred Stock due 2007 (the "New
Preferred Stock") of the Company for all outstanding Series C 14 1/4% Senior
Cumulative Exchangeable Preferred Stock Due 2007 (the "Old Preferred Stock") of
the Company. The terms of the New Preferred Stock are identical to the terms of
the Old Preferred Stock for which they may be exchanged pursuant to the Exchange
Offer, except that the New Preferred Stock have been registered under the
Securities Act of 1933, as amended, and, therefore, will not bear legends
restricting the transfer thereof.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
<PAGE>
List below the shares of Old Preferred Stock to which this Letter of
Transmittal relates. If the space provided below is inadequate, the Certificate
Numbers and the number of shares should be listed on a separate signed schedule
affixed hereto.
DESCRIPTION OF OLD PREFERRED STOCK TENDERED HEREWITH
<TABLE>
<CAPTION>
NAME(S) AND ADDRESS(ES) OF NUMBER OF SHARES NUMBER OF SUCH
REGISTERED HOLDER(S) CERTIFICATE REPRESENTED BY SHARES TENDERED
(PLEASE FILL IN) NUMBER(S) CERTIFICATE HEREBY
- ----------------------------------------------------------------- ------------------- ----------------- -----------------------
<S> <C> <C> <C>
Total
</TABLE>
- ------------------------
* Unless otherwise indicated, the holder will be deemed to have tendered the
full number of shares represented by the certificate evidencing the Old
Preferred Stock. See Instruction 2.
This Letter of Transmittal is to be used if certificates for Old Preferred
Stock are to be forwarded herewith.
Unless the context requires otherwise, the term "Holder" for purposes of
this Letter of Transmittal means any person in whose name the shares of Old
Preferred Stock are registered or any other person who has obtained a properly
completed stock power from the registered holder.
Holders whose shares of Old Preferred Stock are not immediately available or
who cannot deliver their Old Preferred Stock and all other documents required
hereby to the Exchange Agent on or prior to the Expiration Date may tender their
Old Preferred Stock according to the guaranteed delivery procedure set forth in
the Prospectus under the caption "The Exchange Offer--Procedures for Tendering."
/ / CHECK HERE IF TENDERED SHARES OF OLD PREFERRED STOCK ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s): ______________________________________________
Name of Eligible Institution that Guaranteed Delivery: _____________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ______________________
Address: ___________________
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described shares of Old
Preferred stock. Subject to, and effective upon, the acceptance for exchange of
the Old Preferred Stock tendered herewith, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Preferred Stock. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent as the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that said Exchange
Agent acts as the agent of the undersigned in connection with the Exchange
Offer) to cause the Old Preferred Stock to be assigned, transferred and
exchanged. The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Preferred Stock and
to acquire the New Preferred Stock issuable upon the exchange of such tendered
Old Preferred Stock, and that, when the same are accepted for exchange, the
Company will acquire good and unencumbered title to the tendered Old Preferred
Stock, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The undersigned also warrants that it will,
upon request, execute and deliver any additional documents deemed by the
Exchange Agent or the Company to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Old Preferred Stock.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "Exchange Offer--Conditions to the Exchange Offer."
The undersigned recognizes that as a result of these conditions (which may be
waived, in whole or in part, by the Company) as more particularly set forth in
the Prospectus, the Company may not be required to exchange any of the Old
Preferred Stock tendered hereby and, in such event, the Old Preferred Stock not
exchanged will be returned to the undersigned at the address shown below the
signature of the undersigned.
By tendering, each Holder of Old Preferred Stock represents to the Company
that (i) the shares of New Preferred Stock acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such New Preferred Stock, whether or not such person is such Holder,
(ii) neither the Holder of Old Preferred Stock nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such New Preferred Stock, and (iii) if the Holder is not a broker-dealer or
is a broker-dealer but will not receive New Preferred Stock for its own account
in exchange for Old Preferred Stock, neither the Holder nor any such other
person is engaged in or intends to participate in a distribution of the New
Preferred Stock. If the tendering Holder is a broker-dealer that will receive
New Preferred Stock for its own account in exchange for Old Preferred Stock, it
represents that the shares of Old Preferred Stocks to be exchanged for the New
Preferred Stock were acquired by it as a result of market-making activities or
other trading activities, and acknowledges that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Preferred Stock. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Preferred Stock, the undersigned is not
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
All authority herein conferred or agreed to be conferred shall survive the
death, bankruptcy or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Tendered shares of Old Preferred
Stock may be withdrawn at any time prior to 5:00 p.m., New York City Time on the
Expiration Date.
Certificates for all New Preferred Stock delivered in exchange for tendered
Old Preferred Stock and any Old Preferred Stock delivered herewith but not
exchanged, in each case registered in the name of the undersigned, shall be
delivered to the undersigned at the address shown below the signature of the
undersigned.
<PAGE>
TENDERING HOLDER(S) SIGN HERE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature(s) of Holder(s)
Dated: , 1998
(Must be signed by registered Holder(s) exactly as name(s) appear(s) on
certificate(s) for Old Notes or by any person(s) authorized to become registered
Holder(s) by endorsements and documents transmitted herewith. If signature by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
please set forth the full title of such person.) See Instruction 3.
Name(s): _______________________________________________________________________
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title): _________________________________________________________
Address: _______________________________________________________________________
- --------------------------------------------------------------------------------
(Including Zip Code)
Area Code and Telephone No.: _______________________
- --------------------------------------------------------------------------------
Tax Identification No.
<PAGE>
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED--SEE INSTRUCTION 3)
Authorized Signature: __________________________________________________________
Name: __________________________________________________________________________
Title: _________________________________________________________________________
Address: _______________________________________________________________________
Name of Firm: __________________________________________________________________
Area Code and Telephone No.: ___________________________
Dated: ____________, 1998
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. Certificates for
all physically delivered Old Preferred Stock, as well as a properly completed
and duly executed copy of this Letter of Transmittal or facsimile thereof, and
any other documents required by this Letter of Transmittal, must be received by
the Exchange Agent at any of its addresses set forth herein on or prior to the
Expiration Date.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD PREFERRED
STOCK AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER
AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY
WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE.
Holders whose shares of Old Proffered Stock are not immediately available or
who cannot deliver their Old Preferred Stock and all other required documents to
the Exchange Agent on or prior to the Expiration Date may tender their Old
Preferred Stock pursuant to the guaranteed delivery procedure set forth in the
Prospectus under "Exchange Offer--Procedures for Tendering." Pursuant to such
procedure: (i) such tender must be made by or through an Eligible Institution
(as defined in the Prospectus); (ii) on or prior to the Expiration Date, the
Exchange Agent must have received from such Eligible Institution a letter,
telegram or facsimile transmission setting forth the name and address of the
tendering Holder, the names in which such shares of Old Preferred Stock are
registered, and, if possible, the certificate numbers of the Old Preferred Stock
to be tendered; and (iii) all tendered Old Preferred Stock as well as this
Letter of Transmittal and all other documents required by this Letter of
Transmittal must be received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such letter, telex,
telegram or facsimile transmission, all as provided in the Prospectus under the
caption "Exchange Offer--Procedures for Tendering".
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Preferred Stock for exchange.
2. PARTIAL TENDERS; WITHDRAWALS. If less than the entire number of shares of
Old Preferred Stock evidenced by a submitted certificate is tendered, the
tendering Holder must fill in the number of shares tendered in the box entitled
"Number of Shares Being Tendered" A newly issued certificate for the number of
shares of Old Preferred Stocks submitted but not tendered will be sent to such
Holder as soon as practicable after the Expiration Date. All Old Preferred Stock
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
Tenders of Old Preferred Stock pursuant to the Exchange Offer are
irrevocable, except that shares of Old Preferred Stock tendered pursuant to the
Exchange Offer may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. To be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent. Any such notice of withdrawal must specify the person named in
the Letter of Transmittal as having tendered Old Preferred Stock to be
withdrawn, the certificate numbers and designation of the Old Preferred Stock to
be withdrawn, the number of shares of Old Preferred Stock delivered for
exchange, a statement that such a Holder is withdrawing its election to have
such Old Preferred Stock exchanged, and the name of the registered Holder of
such Old Preferred Stock, and must be signed by the Holder in the same manner as
the original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Old Preferred Stock being withdrawn. The Exchange Agent will return the
properly withdrawn Old Preferred Stock promptly following receipt of notice of
withdrawal.
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the registered Holder(s) of the Old Preferred Stock
<PAGE>
tendered hereby, the signature must correspond with the name(s) as written on
the face of certificates without alteration, enlargement or any change
whatsoever.
If any of the shares of Old Preferred Stock tendered hereby are owned of
record by two or more joint owners, all such owners must sign this Letter of
Transmittal.
If a number of shares of Old Preferred Stock registered in different names
are tendered, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of Old
Preferred Stock.
When this Letter of Transmittal is signed by the registered Holder or
Holders of Old Preferred Stock listed and tendered hereby, no endorsements of
certificates or separate written instruments of transfer or exchange are
required.
If this Letter of Transmittal is signed by a person other than the
registered Holder or Holders of the Old Preferred Stock listed, such Old
Preferred Stock must be endorsed or accompanied by separate written instruments
of transfer or exchange in form satisfactory to the Company and duly executed by
the registered Holder or Holders, in either case signed exactly as the name or
names of the registered Holder or Holders appear(s) on the Old Preferred Stock.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the shares of Old Preferred Stock are tendered:
(i) by a registered Holder of such Old Preferred Stock; or (ii) for the account
of any Eligible Institution.
4. TRANSFER TAXES. The Company shall pay all transfer taxes, if any,
applicable to the exchange of Old Preferred Stock pursuant to the Exchange
Offer. If, however, certificates representing New Preferred Stock, or shares of
Old Preferred Stock not tendered or accepted for exchange, are to be delivered
to, or are to be issued in the name of, any person other than the registered
Holder of the Old Preferred Stock tendered hereby, or if a transfer tax is
imposed for any reason other than the exchange of Old Preferred Stock pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered Holder or any other person) will be payable by the
tendering Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted herewith, the amount of such transfer taxes will be
billed directly to such tendering Holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Preferred Stock listed in this
Letter of Transmittal.
5. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive,
in whole or in part, any of the conditions to the Exchange Offer set forth in
the Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any Holder whose Old
Preferred Stock certificates have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent
at the address and telephone number set forth above. In addition, all questions
relating to the Exchange Offer, as well as requests for assistance or additional
copies of the Prospectus and this Letter of Transmittal, may be directed to the
Exchange Agent at the address specified in the Prospectus.
<PAGE>
8. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of Letters of Transmittal or Old
Preferred Stock certificates will be resolved by the Company, whose
determination will be final and binding. The Company reserves the absolute right
to reject any or all Letters of Transmittal or tenders that are not in proper
form or the acceptance of which would, in the opinion of the Company's counsel,
be unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to the particular shares of Old Preferred Stock covered
by any Letter of Transmittal or tendered pursuant to such Letter of Transmittal.
None of the Company, the Exchange Agent or any other person will be under any
duty to give notification of any defects or irregularities in tenders or incur
any liability for failure to give any such notification. The Company's
interpretation of the terms and conditions of the Exchange Offer shall be final
and binding.
9. DEFINITIONS. Capitalized terms used in this Letter of Transmittal and not
otherwise defined have the meanings given in the Prospectus.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH
CERTIFICATES FOR OLD PREFERRED STOCK AND ALL OTHER REQUIRED DOCUMENTS) OR A
NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR
TO THE EXPIRATION DATE.
