<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1998.
REGISTRATION NO. 333-40755
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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>
15% Senior Subordinated Deferred Interest Exchange
Notes Due 2007 ("New Equipment Notes")(1)....... 100,000 $1,000(2) $100,000,000(3) $30,303.03
Total......................................... $100,000,000 $30,303.03(4)
</TABLE>
(1) The New Notes being registered hereby are being offered by WinStar
Communications, Inc. (the "Company"), in exchange for certain 15% senior
subordinated deferred interest notes due 2007 ("Old Notes").
(2) Represents the minimum principal amount of each of the Old Notes for which
the New Notes will be exchanged.
(3) Based on the book value of the notes as of the latest practicable date
pursuant to Rule 457(f)(2) under the Securities Act of 1933 ("Securities
Act").
(4) Registration fee previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998
OFFER TO EXCHANGE
15% SENIOR SUBORDINATED DEFERRED INTEREST
EXCHANGE NOTES DUE 2007
(INTEREST PAYABLE ON MARCH 1 AND SEPTEMBER 1,
COMMENCING SEPTEMBER 1, 2002)
FOR
ALL OUTSTANDING
15% SENIOR SUBORDINATED DEFERRED INTEREST NOTES DUE 2007
(INTEREST PAYABLE ON MARCH 1 AND SEPTEMBER 1,
COMMENCING SEPTEMBER 1, 2002)
OF
WINSTAR COMMUNICATIONS, INC.
-----------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON MARCH 27, 1998
UNLESS EXTENDED BY
WINSTAR COMMUNICATIONS, INC.
-----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 22 HEREOF FOR A DISCUSSION OF CERTAIN
INFORMATION
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND
AN INVESTMENT IN THE 15% SENIOR SUBORDINATED DEFERRED INTEREST EXCHANGE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 1998
(CONTINUED ON NEXT PAGE)
<PAGE>
(COVER PAGE CONTINUED)
WinStar Communications, Inc., a Delaware corporation ("Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the letter of transmittal ("Letter of Transmittal") to be
delivered to each holder of Old Notes (as defined below), to exchange ("Exchange
Offer") $1,000 principal amount of its 15% Senior Subordinated Deferred Interest
Exchange Notes Due 2007 ("New Notes") for each $1,000 principal amount of its
outstanding 15% Senior Subordinated Deferred Interest Notes Due 2007 ("Old
Notes"). The Old Notes and the New Notes are referred to herein collectively as
the "Notes."
The New Notes will be registered under the Securities Act of 1933, as
amended ("Securities Act"), pursuant to the registration statement on Form S-4
("Registration Statement") of which this Prospectus forms a part. As of the date
hereof, $100.0 million principal amount of the Old Notes were outstanding. The
Registration Statement of which this Prospectus forms a part has been filed by
the Company in accordance with the terms of the Purchase Agreement, dated as of
October 1, 1997 ("Purchase Agreement"), and Registration Rights Agreement, dated
as of October 1, 1997 ("Registration Agreement"), between the Company and Credit
Suisse First Boston Corporation and BT Alex Brown Incorporated, the initial
purchasers of the Old Notes ("Initial Purchasers"). The Exchange Offer is being
made by the Company to fulfill certain obligations under the Purchase Agreement
and Registration Agreement. After the consummation of the Exchange Offer, the
Company will have no further obligation to make any other such exchange offers.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires, which will be March 27, 1998, unless the
Exchange Offer is extended by the Company in its sole discretion ("Expiration
Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain conditions which may
be waived by the Company and to the terms and provisions of the Registration
Statement. The Old Notes may be tendered only in denominations of $1,000
principal amount and integral multiples thereof. The Company has agreed to pay
all expenses related to the Exchange Offer, except costs related to the delivery
of the Old Notes by each holder of such notes to the United States Trust Company
of New York, the exchange agent ("Exchange Agent" or "U.S. Trust"), and
underwriting discounts, commissions and transfer taxes. Any waiver, extension or
termination of the Exchange Offer will be publicly announced by the Company
through a release to the Dow Jones News Service and as otherwise required by
applicable laws or regulations. See "The Exchange Offer."
The New Notes will be entitled to the benefits of the indenture under which
the Old Notes were issued (the "Indenture"). The form of the New Notes will be
identical to the form of the Old Notes, except that the New Notes will have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The New Notes will have the same terms,
conditions and rankings as the Old Notes. The Notes are unsecured, senior
subordinated obligations of the Company, rank PARI PASSU in right of payment
with the Company's existing 14% Convertible Senior Subordinated Discount Notes
Due 2005 ("Convertible Notes"), and are junior in right of payment to all
existing and future senior indebtedness of the Company.
The Notes bear interest at a rate of 15% per annum, 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), but will not be payable in cash. Interest on the
Accumulated Amount (as defined) 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 the redemption prices set forth herein.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission ("Commission") to third parties, the Company believes that
New Notes issued pursuant to this Exchange Offer in
2
<PAGE>
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than a broker-dealer who purchased such
Old Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the New Notes in the ordinary course of its
business and is not participating, and has no arrangement or understanding with
any person to participate, in the distribution of the New Notes. Holders of Old
Notes wishing to accept the Exchange Offer must represent to the Company in the
Letter of Transmittal that such conditions have been met.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
As of January 31, 1998, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the registered holder of $100.0
million aggregate principal amount of the Old Notes and held such Old Notes for
nine of its participants. The Company believes that no such participant is an
affiliate (as such term is defined in Rule 405 of the Securities Act) of the
Company. There has previously been only a limited secondary market, and no
public market, for the Old Notes. The Old Notes are, and the New Notes will be,
eligible for trading in the Private Offering, Resales and Trading through
Automatic Linkages ("PORTAL") market. There can be no assurance as to the
liquidity of the trading market for either the New Notes or the Old Notes. The
New Notes constitute securities for which there is no established trading
market, and the Company does not currently intend to list the New Notes on any
securities exchange. If such a trading market develops for the New Notes, future
trading prices will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on such factors, the New Notes may trade at a
discount from their face value. See "Risk Factors--Absence of Public Market for
the New Notes."
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following the
consummation of the Exchange Offer, the holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such holders to provide for any other exchange
offer with respect to the Old Notes held by such holders. Following the
completion of the Exchange Offer in accordance with the terms hereof and the
Registration Agreement, certain of the Old Notes may not be entitled to the
contingent increase in interest rate as provided in the Registration Agreement.
See "The Exchange Offer."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of February , 1998.
The Company will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Plan
of Distribution."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes were issued originally in global form (the "Old Global
Notes"). The Old Global Notes were deposited with, or on behalf of, DTC, as the
initial depository with respect to the Old Notes (in such capacity, the
"Depository"). The Old Global Notes are registered in the name of Cede, as
nominee of
3
<PAGE>
DTC, and beneficial interests in the Old Global Notes are shown on, and
transfers thereof are effected only through, records maintained by the
Depository and its participants. The use of the Old Global Notes to represent
the Old Notes permits the Depository's participants, and anyone holding a
beneficial interest in an Old Note registered in the name of such a participant,
to transfer interests in the Old Notes electronically in accordance with the
Depository's established procedures without the need to transfer a physical
certificate. Except as provided below, the New Notes will also be issued
initially as a note in global form (the "New Global Notes", and together with
the Old Global Notes, the "Global Notes") and deposited with, or on behalf of,
the Depository. Notwithstanding the foregoing, any holder of Old Notes who at
any time is not a qualified institutional buyer under Rule 144A (a "Qualified
Institutional Buyer"), who exchanges Old Notes in the Exchange Offer, will
receive the New Notes in certificated form. Any such holder is not, and will not
be, able to trade such securities through the Depository unless the New Notes
are resold to a Qualified Institutional Buyer. After the initial issuance of the
New Global Notes, New Notes in certificated form will be issued in exchange for
a holder's proportionate interest in the New Global Notes only as set forth in
the Indenture.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE EXCHANGE AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NEW NOTES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS SHALL NOT,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AT ANY TIME SUBSEQUENT TO ITS DATE.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Incorporation of Information by Reference........ 6
Prospectus Summary............................... 7
Risk Factors..................................... 22
The Exchange Offer............................... 34
Description of The Notes......................... 41
Certain United States Federal Income Tax
Considerations................................. 68
<CAPTION>
PAGE
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<S> <C>
Description of Certain Indebtedness and Preferred
Stock.......................................... 74
Plan of Distribution............................. 80
Legal Matters.................................... 81
Experts.......................................... 81
</TABLE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the New Notes offered in the
Exchange Offer. For the purposes hereof, the term "Registration Statement" means
the original Registration Statement and any and all amendments thereto. In
accordance with the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and the schedules and exhibits thereto. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete statement
of its provisions. For further information pertaining to the Company and the New
Notes offered in the Exchange Offer, reference is made to such Registration
Statement, including the exhibits and schedules thereto and the financial
statements, notes and schedules filed as a part thereof. The Registration
Statement (and the exhibits and schedules thereto) may be inspected and copied
at the public reference facilities maintained by the Commission at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 ("Washington Office"), or at its regional offices at Citicorp Center, 500
West Madison Street, 14th Floor, Chicago, Illinois 60661 ("Chicago Office"), and
at Seven World Trade Center, 13th Floor, New York, New York 10048 ("New York
Office"). Any interested party may obtain copies of all or any portion of the
Registration Statement and the exhibits thereto at prescribed rates from the
Public Reference Section of the Commission at its Washington Office.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at prescribed rates. In addition, all
reports filed by the Company via the Commission's Electronic Data Gathering and
Retrieval System (EDGAR) can be obtained from the Commission's Internet web site
located at http:\\www.sec.gov.
If the Company ceases to be subject to the informational reporting
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes are outstanding, it will file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act. The Company will supply the
United States Trust Company of New York, as trustee ("Trustee") and each holder
of Notes, or will supply to the Trustee for forwarding to each such holder,
without cost to such holder, copies of such reports or other information.
5
<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.
6
<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 Boston, Chicago, Dallas, Forth Worth, Los Angeles,
Newark, New York City, San Diego and Washington, D.C., and is offering local
exchange services solely on a resale basis in Atlanta, Hartford, Milwaukee,
Orange County (California), 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 49 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 enable the Company to provide services in all 50 of the
most populated MSAs and 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.
7
<PAGE>
The 38 GHz portion of the radio spectrum has characteristics well suited for
the provision of local telecommunications services, including:
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.
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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 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:
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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 markets. The Company has
the necessary Roof Rights to install its Wireless Fiber transmission facilities
on more than 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 38 GHz 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
10
<PAGE>
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 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 an
institutional private placement (the "December 1997 Preferred Stock Placement").
The net proceeds of the December 1997 Preferred Stock Placement were used to
repay approximately $62 million of indebtedness incurred in the US ONE 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.
11
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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 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
BACKGROUND--THE PRIVATE OFFERING OF DEBT SECURITIES
<TABLE>
<S> <C>
General...................... An aggregate of $100.0 million principal amount of Old Notes
were sold to institutional purchasers ("Initial Purchasers")
by the Company in an institutional private placement in
October 1997 ("October 1997 Debt Placement"). The Initial
Purchasers, in turn, sold such Old Notes to certain
Qualified Institutional Buyers in reliance on Rule 144A
under the Securities Act.
Exchange of Old Notes........ In connection with the October 1997 Debt Placement, the
Company entered into the Registration Agreement pursuant to
which the Company is obligated to use its best efforts to
consummate this Exchange Offer with respect to the Old Notes
pursuant to the Registration Statement of which this
Prospectus forms a part or, if required in lieu thereof,
cause the Old Notes to be registered under the Securities
Act pursuant to a shelf registration statement. If (i) by
April 6, 1998, neither the Exchange Offer is consummated nor
the shelf registration statement is declared effective; or
(ii) after either the Registration Statement of which this
Prospectus forms a part (or the shelf registration
statement) is declared effective, such registration
statement thereafter ceases to be effective or usable
(subject to certain exceptions) in connection with resales
of the Old Notes or the applicable New Notes in accordance
with and during the periods specified in the Registration
Agreement (each such event referred to in clauses (i) and
(ii) a "Registration Default"), additional interest of 0.50%
will accrue on such Notes from and including the date on
which any such Registration Default shall occur, but
excluding the date on which all Registration Defaults have
been cured.
TERMS OF THE EXCHANGE OFFER
The Exchange Offer........... Pursuant to the Exchange Offer, $1,000 principal amount of
New Notes will be issued in exchange for each $1,000
principal amount of outstanding Old Notes validly tendered
and not withdrawn. The New Notes will be issued to tendering
holders of Old Notes as promptly as practicable after the
Expiration Date.
Resale....................... Based on an interpretation by the staff of the Commission
set forth in no-action letters issued to third parties, the
Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any holder
thereof (other than broker-dealers, as set forth below)
without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that
such New Notes are acquired in the ordinary course of such
holder's business and that such holder has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. Each broker-dealer that
receives New Notes for its own account in exchange for Old
Notes that were acquired as a result of market-making or
other trading activity must acknowledge that it will deliver
a prospectus in connection with any resale of New Notes. The
Letter of Transmittal states that by so acknowledging and
delivering a prospectus, such broker-dealer will not be
deemed to admit that it is an "underwriter"
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may
be used by such broker-dealer in connection with resales of
New Notes received in exchange for Old Notes where such New
Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The
Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to
any such broker-dealer for use in connection with any such
resale. See "Plan of Distribution." Any holder who tenders
in the Exchange Offer with the intention to participate, or
for the purpose of participating, in a distribution of the
New Notes may not rely on the foregoing position of the
staff of the Commission and, in the absence of an exemption
therefrom, must comply with the registration and prospectus
delivery requirements of the Securities Act in connection
with a secondary resale transaction. Failure to comply with
such requirements in such instance may result in such holder
incurring liabilities under the Securities Act for which the
holder is not indemnified by the Company or the Company.
The Exchange Offer is not being made to, nor will be
accepted from, holders of Old Notes in any jurisdiction in
which this Exchange Offer or the acceptance thereof would
not be in compliance with the securities laws of such
jurisdiction.
Expiration Date.............. 5:00 p.m., New York City time, March 27, 1998, unless the
Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to which
the Exchange Offer is extended. Any extension, if made, will
be publicly announced through a release to the Dow Jones
News Service and as otherwise required by applicable law or
regulations. The Company may extend the Expiration Date in
its sole and absolute discretion.
Conditions to the Exchange
Offer...................... The Exchange Offer is not subject to any conditions, other
than that the Exchange Offer does not violate applicable law
or any applicable interpretation of the staff of the
Commission. See "The Exchange Offer--Conditions to the
Exchange Offer." The Exchange Offer is not conditioned upon
any minimum principal amount of Old Notes being tendered.
Procedures for Tendering Old
Notes...................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or
otherwise deliver the Letter of Transmittal, or a facsimile
thereof, together with the Old Notes to be exchanged and any
other required documentation to U.S. Trust, as Exchange
Agent, at the address set forth herein and therein. By
executing a Letter of Transmittal, each holder will
represent to the Company that, among other things, the New
Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person
receiving such New Notes, whether or not such person is the
holder, and that neither the holder nor any such other
person has any arrangement or understanding with any person
to participate in the distribution of such New Notes.
</TABLE>
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<TABLE>
<S> <C>
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are registered in the
name of a broker, commercial bank, trust company or other
nominee, and who wishes to tender in the Exchange Offer
should contact such registered holder promptly and instruct
such registered holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on his own
behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a
properly completed bond power from the registered holder.
Beneficial owners should be aware that the transfer of
registered ownership may take considerable time and may not
be able to be completed prior to the Expiration Date.
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender such Old Notes and
whose Old Notes are not immediately available or who cannot
otherwise deliver their Old Notes and a properly completed
Letter of Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering."
Acceptance of Old Notes and
Delivery of New Notes...... Subject to certain conditions (as described more fully in
"The Exchange Offer--Conditions to the Exchange Offer"), The
Company will accept for exchange any and all Old Notes which
are properly tendered in the Exchange Offer and not
withdrawn, prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the
Exchange Offer will be delivered as promptly as practicable
following the Expiration Date.
Withdrawal Rights............ Subject to the conditions set forth herein, tenders of Old
Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time on the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations............. The exchange pursuant to the Exchange Offer does not
constitute a taxable exchange for federal income tax
purposes. Each New Note will be treated as having been
originally issued at the time the Old Note exchanged
therefor was originally issued. However, holders should
consult their own tax advisors. See "Certain United States
Federal Income Tax Considerations."
Exchange Agent............... U.S. Trust, the Trustee under the Indenture, is serving as
Exchange Agent in connection with the Exchange Offer. For
information with respect to the Exchange Offer, the
telephone number for the Exchange Agent is (212) 852-1000
and the facsimile number for the Exchange Agent is (212)
852-1625.
</TABLE>
SEE "THE EXCHANGE OFFER," BELOW, FOR MORE DETAILED INFORMATION
CONCERNING THE TERMS OF THE EXCHANGE OFFER.
15
<PAGE>
THE NEW NOTES
The Exchange Offer applies to $100.0 million aggregate principal amount of
Old Notes. The form and terms of the New Notes will be the same as the form and
terms of the Old Notes, except that the New Notes will be registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof. The New Notes will evidence the same debt as the Old Notes and the New
Notes will be entitled to the benefits of the Indenture. Upon consummation of
the Exchange Offer, the New Notes will be treated as a single class with any Old
Notes that remain outstanding. Upon consummation of the Exchange Offer, the Old
Notes will not be entitled to certain registration rights under the Registration
Agreement. See "Description of Notes."
<TABLE>
<S> <C>
SECURITIES OFFERED........... $100,000,000 principal amount of 15% Senior Subordinated
Deferred Interest Notes Due 2007 of the Company (the
"Offering").
MATURITY DATE................ March 1, 2007.
INTEREST PAYMENT DATES....... March 1 and September 1, commencing September 1, 2002. Until
March 1, 2002, interest on the Notes will accrue at a rate
of 15% per annum and be compounded semiannually on each
SemiAnnual Accrual Date with respect to the Notes, but,
other than additional interest payable upon any Registration
Default (as defined), will not be payable in cash. Interest
on the Accumulated Amount of the Notes as of March 1, 2002
will be payable semiannually in cash, commencing September
1, 2002. For a discussion of the federal income tax
treatment of the Notes under the original issue discount
rules, see "Certain United States Federal Income Tax
Considerations."
OPTIONAL REDEMPTION.......... The Notes are not redeemable prior to March 1, 2002.
Thereafter, the Notes are redeemable at the option of the
Company, in whole or in part, at the redemption prices set
forth herein, plus accrued interest, if any, on the
Accumulated Amount of the Notes to the date of redemption.
CHANGE OF CONTROL............ Upon a Change of Control, each holder of Notes may require
the Company to repurchase such Notes at 101% of the
Accumulated Amount of such Notes on the date of repurchase,
plus accrued interest, if any, on such amount to the date of
repurchase.
</TABLE>
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<TABLE>
<S> <C>
RANKING...................... The Notes are unsecured, senior subordinated obligations of
the Company, rank PARI PASSU with the Convertible Notes and
are junior in right of payment to all existing and future
senior indebtedness of the Company. At 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
there of to repay certain indebtedness, and the Midcom
Acquisition, the Company would have had (on an
unconsolidated basis, excluding trade payables)
approximately $758.6 million of indebtedness, $561.1 million
of which would have been senior indebtedness and $197.5
million of which would have been senior subordinated
indebtedness. The Company is a holding company and,
accordingly, the Notes are effectively subordinated to all
liabilities of the Company's subsidiaries, including trade
payables. At September 30, 1997, after giving effect to the
aforementioned transactions, the total liabilities of the
Company's subsidiaries were approximately $359.7 million,
including trade payables.
RESTRICTIVE COVENANTS........ The Indenture restricts the incurrence of additional debt by
the Company, the issuance of debt and preferred stock by the
Company's subsidiaries, dividends on and redemptions of
capital stock of the Company, the redemption of certain
subordinated obligations of the Company, the sale of assets
and subsidiaries' stock and transactions with affiliates.
The Indenture also prohibits certain restrictions on
distributions from subsidiaries and restricts the Company
from consolidating or merging with or transferring all or
substantially all of its assets to another person. However,
all of these restrictions and prohibitions are subject to a
number of important qualifications, including the ability of
the Company to designate certain subsidiaries as
unrestricted subsidiaries.
</TABLE>
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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 referenced 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>
YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
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)
</TABLE>
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
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>
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>
<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
19
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
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.
(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 incorporated by reference in this Prospectus from Midcom's
Quarterly Report on Form 10-Q for the nine months ended September 30, 1997. In
the opinion of management, the
20
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
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 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.
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."
21
<PAGE>
RISK FACTORS
THE NEW NOTES OFFERED HEREBY CONTAIN THE SAME TERMS AND CONDITIONS AS THE
OLD NOTES AND, ACCORDINGLY, INVOLVE A HIGH DEGREE OF RISK. EACH PROSPECTIVE
INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS RELATING TO BOTH
THE OLD NOTES AND THE NEW NOTES.
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 Milliware 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 thereof to the repayment of certain indebtedness and
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, including the Notes
offered hereby.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
At 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 and trade payables. 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 Notes, 1995 Notes and 1997
Notes. The Company also may need to incur additional indebtedness in the future.
The respective indentures pursuant to which the 1995 Notes, 1997 Notes and 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 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 1995
Notes and 1997 Notes could make it more difficult
22
<PAGE>
for the Company to make payments on the Notes offered hereby; (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; and (vi) the Company's high degree of
indebtedness would make it more vulnerable in the event of a downturn in its
business or if operating cash flow does not significantly increase.
HOLDING COMPANY STRUCTURE; RANKING OF THE NOTES; UNSECURED INDEBTEDNESS
The Company is a holding company and its only material assets consist of the
common stock of its operating subsidiaries and the proceeds raised from certain
private placements of equity and debt securities, all of which the Company has
loaned or contributed, or intends to loan or contribute, to its subsidiaries.
The Company may have to rely upon dividends and other payments from its
subsidiaries to generate the funds necessary to pay the principal of and
interest on the Notes. The subsidiaries, however, are legally distinct from the
Company and have no obligation, contingent or otherwise, to pay amounts due
pursuant to the Notes or to make funds available for such payment. The Company's
subsidiaries have not guaranteed the Notes. The ability of the Company's
subsidiaries to make such dividends and other payments to the Company is subject
to, among other things, the availability of funds, the terms of such
subsidiaries' indebtedness and applicable state laws. See "Description of
Certain Indebtedness and Preferred Stock." Claims of creditors of the Company's
subsidiaries, including trade creditors, will generally have priority as to the
assets of such subsidiaries over the claims of the Company and the holders of
the Company's indebtedness, including the Notes. Accordingly, the Notes are
effectively subordinated to all liabilities (including trade payables) of the
subsidiaries of the Company. At September 30, 1997, after giving effect to 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
indebteness, and the Midcom Acquisition, the subsidiaries of the Company had
approximately $359.7 million of liabilities (excluding intercompany payables to
the Company and each other), including $293.4 million of indebtedness (excluding
trade payables).
The Notes are unsecured indebtedness of the Company. At September 30, 1997,
after giving effect to the October 1997 Debt Placement, 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 on a consolidated basis had an aggregate of
approximately $793.8 million of indebtedness, including capitalized lease
obligations, $293.4 million of which was secured by liens on certain of the
Company's assets. In the event such secured indebtedness goes into default and
the holders thereof foreclose on the collateral, the holders of secured
indebtedness will be entitled to payment out of the proceeds of their collateral
prior to any holders of general unsecured indebtedness, including the Notes,
notwithstanding the existence of any event of default with respect to the Notes.
In addition, the Notes are subordinated to all senior indebtedness of the
Company, including indebtedness under the 1995 Senior Notes, the 1997 Senior
Notes, the guarantee by the Company of the WEC Notes (the "WEC Note Guarantee"),
the Company's guarantee of the WEC II Notes (the "WEC II Note Guarantee" and,
together with the WEC Note Guarantee, the "Equipment Note Guarantees") and the
Company's guarantees under the Equipment Lease Financing, the Finova Lease
Financing, the Revolving Credit Facility and the CIT Credit Facility (all as
defined herein). Therefore, in the event of a bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Notes only after all senior indebtedness has been paid in
full and there may not be sufficient assets remaining to pay amounts due on the
Notes. At September 30, 1997, after giving effect to the October 1997 Debt
Placement, the US ONE Asset Acquisition, the December 1997 Preferred Stock
23
<PAGE>
Placement and the application of a portion of the proceeds thereof to the
repayment of certain indebtedness and the Midcom Acquisition, the amount of
outstanding senior indebtedness of the Company was approximately $596.3 million.
NEED TO REFINANCE SUBSTANTIAL AMOUNT OF INDEBTEDNESS TO REPAY NOTES AT MATURITY
The Notes mature in March 2007. If the Company does not have cash flow from
operations with which to pay the Notes, the Company would be forced to raise the
cash to pay the Notes through equity offerings or additional debt financings.
The Company's ability to raise additional debt financing to repay the Notes is
severely restricted under the terms of the Indentures, which may require the
Company to refinance the 1995 Notes and the 1997 Senior Notes, WEC Notes and WEC
II Notes prior to or simultaneously with any refinancing of the Notes.
Accordingly, the Company may be forced to refinance a substantial amount of
other indebtedness in order for the Notes to be paid when due. There can be no
assurance that the Company will be able to refinance any or all of such
indebtedness at such time.
RISKS RELATED TO CLEC STRATEGY; ANTICIPATED INITIAL 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 begun and are
expected to continue to substantially decline 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. 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
24
<PAGE>
Fiber links so that a substantial portion of the Company's traffic in that city
can be originated and terminated over the Company's Wireless Fiber facilities
instead of 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 have a material adverse effect on
the operations of the Company and the ability of the Company and its
subsidiaries to make principal and interest payments on their outstanding debt,
including the Notes.
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 ability of the Company and its subsidiaries to make principal and
interest payments on their outstanding debt, including the Notes.
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.
25
<PAGE>
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, each of which were purchased in a bankruptcy proceeding, with more
success than their previous managements or that the assets 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 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.
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.
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
26
<PAGE>
RBOCs and CLECs also will become significant competitors in the long distance
telecommunications industry. 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 the 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 equipment 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
could adversely affect the ability of the Company and its subsidiaries to make
principal and interest payments on their outstanding debt, including the Notes.
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 services 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 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
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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 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 or, in other instances, unfairly
impeding customers seeking to switch providers. The FCC, the Federal Trade
Commission and a number of state authorities are seeking to introduce more
stringent regulation to curtail the intentional or
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erroneous switching of customers, which could include the imposition of fines,
penalties and possible operating restrictions on entities which engage in
unauthorized switching 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, and, upon
expiration, to renew all such licenses for ten years. Licenses granted on or
after August 1, 1996 have an initial term not to exceed ten years, but with an
expectation of renewal if the Fee'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 ruled, among other things and in addition to
the expiration and renewal policy described above, that (i) it would impose no
limits on the accumulation of licenses in the 38GHz band, (ii) the 39.5-40.0 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 mobile services, and (iv)
currently unlicensed channels in the 38 GHZ band will be auctioned.
The Company anticipates that the 38 GHZ Order, or portions thereof, will be
contested by various parties and the outcome of such proceedings is uncertain.
Therefore, while the Company views the 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 such rulings will not be repealed or altered as a result of
such 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.
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 NPRM, there can be no assurance
that the FCC will approve all or any of the proposed acquisitions.
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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 ability of the Company
and its subsidiaries to make principal and interest payments on their
outstanding debt, including the Notes.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The indebtedness of the Company and the Indentures 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 ability of the Company and its
subsidiaries to make principal and interest payments on their outstanding debt,
including the Notes. See "Description of Certain Indebtedness and Preferred
Stock."
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES AND THE COMPANY
As there will be no periodic payments in cash of interest on the Notes prior
to September 2002, original issue discount (the difference between the stated
redemption price at maturity and the issue price of the Notes) will accrue from
the issue date of the Notes. Original issue discount must be included as
interest income periodically in a United States noteholder's gross income for
United States federal income tax purposes in advance of receipt of the cash
payments to which the income is attributable.
Further, the Notes will be subject to the high yield discount obligation
rules. Consequently, the Company will not be able to deduct the original issue
discount attributable to the Notes until actually paid. As explained in, and
subject to, the discussion under "Certain United States Federal Income Tax
Consequences--Tax Consequences to U.S. Holders--Applicable High Yield Discount
Rules," the Notes are subject to these rules because their yield to maturity
equals or exceeds the Treasury-based interest rate in effect for the month of
their issuance plus five percentage points. For mid-term debt instruments issued
in October 1997, such Treasury-based interest rate plus five percentage points
is 11.24%, compounded semiannually. Moreover, because the yield to maturity of
the Notes exceeds a Treasury-based interest rate in effect for the month of
their issuance plus six percentage points, a portion of the original issue
discount attributable to the Notes will not be deductible at all. For mid-term
debt instruments issued in October 1997, such Treasury-based interest rate plus
six percentage points is 12.24%, compounded semiannually. As a result of the
application of these high yield discount rules, the Company's after tax cash
flow might be less than if such original issue discount were deductible when
accrued. See "Certain United
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States Federal Income Tax Considerations" for a more detailed discussion of the
United States federal income tax consequences to holders of Notes regarding the
purchase, ownership and disposition of such Notes.
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 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 ability of the Company and its subsidiaries to make principal and
interest payments on their outstanding debt, including the Notes. See
"Description of Certain Indebtedness and 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
provides and is in various stages of discussions with them.
RELIANCE ON EQUIPMENT SUPPLIERS
The Company currently purchases substantially all 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
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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). 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
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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 ability of
the Company and its subsidiaries to make principal and interest payments on
their outstanding debt, including the Notes.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
There is no public market and only a limited secondary market for the New
Notes. The Old Notes are and the New Notes will be designated eligible for
trading in The Private Offerings, Resales and Trading through Automated Linkages
(PORTAL) Market of The Nasdaq Stock Market, Inc. New Notes traded after their
initial issuance may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar securities and
other factors, including general economic conditions and the financial condition
of, performance of, and prospects for the Company.
INVESTMENT COMPANY ACT CONSIDERATIONS
The Company has substantial cash, cash equivalents and short-term
investments. Such amount may be invested from time to time in investment
securities, which may result in the Company being treated as an "investment
company" under the Investment Company Act of 1940 (the "1940 Act"). The 1940 Act
requires the registration of, and imposes various substantive restrictions on,
certain companies ("investment companies") that are, or hold themselves out as
being, engaged primarily, or propose to engage primarily in, the business of
investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding composition of assets and sources of income and are
not primarily engaged in businesses other than investing, reinvesting, owning,
holding or trading securities.
The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company is
found to be an investment company, it intends to rely upon an exemption from the
1940 Act for certain "transient" or temporary investment companies. However,
such exemption is only available for one year.
If the Company was required to register as an investment company under the
1940 Act, it would become subject to substantial regulation with respect to its
capital structure, management, operations, transactions with affiliated persons
(as defined in the 1940 Act) and other matters. Application of the provisions of
the 1940 Act to the Company would have a material adverse effect on the Company.
In addition, if the Company is an investment company under the 1940 Act, the
Notes will not be eligible to be resold in reliance on Rule 144A under the
Securities Act and certain holders of the Notes may not be able to own the
Notes. In such event, the market price of the Notes may be adversely affected.
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD NOTES
After Exchange Offer is consummated, the Company may not be required to
register certain of the Old Notes not tendered and accepted in the Exchange
Offer. In such event, holders of certain of the Old Notes 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, certain of the Old Notes may not be
entitled to the contingent increase in interest rate provided for in the event
of a failure to consummate the Exchange Offer in accordance with the terms of
the Registration Agreement.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company in the October 1997 Debt Placement to
the Initial Purchasers who, in turn, sold such Old Notes to certain qualified
institutional buyers in reliance on Rule 144A under the Securities Act. In
connection with the October 1997 Debt Placement, the Company entered into the
Registration Agreement, pursuant to which the Company is obligated to use its
best efforts to consummate this Exchange Offer of the Old Notes for the New
Notes pursuant to an effective registration statement by April 6, 1998. Unless
the context requires otherwise, the term "holder" with respect to the Exchange
Offer means any person in whose name Old Notes are registered on the books of
the Company, or any other person who has obtained a properly completed bond
power from the registered holder, or any person whose Old Notes are held of
record by DTC (who may deliver such Old Notes by book-entry transfer at DTC).
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder of such New
Notes (except in the case of broker-dealers, as set forth below) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holder's business and such holder has no arrangement or understanding
with any person to participate in the distribution of such New Notes. Any holder
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may not rely on such interpretation by the staff
of the Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each holder of Old Notes will represent
to the Company that, among other things, (i) the New Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is such holder, (ii)
neither the holder of Old Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of New Notes,
and (iii) if the holder is not a broker-dealer, or is a broker-dealer but will
not receive New Notes for its own account in exchange for Old Notes, neither the
holder nor any such other person is engaged in or intends to participate in the
distribution of such New Notes.
Following the consummation of the Exchange Offer, holders of Old Notes not
tendered will no longer have certain registration rights and the Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. Subject to the minimum denomination requirements of the New
Notes, The Company will issue $1,000 principal amount of New Notes in exchange
for each $1,000 principal amount of outstanding Old Notes accepted in the
Exchange Offer. Holders may
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tender some or all of their Old Notes pursuant to the Exchange Offer. However,
Old Notes may be tendered only in integral multiples of $1,000 principal amount.
The forms and terms of the New Notes will be identical in all material
respects to the forms and terms of the corresponding Old Notes, except that the
New Notes will have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof. The Exchange Offer is
not conditioned upon any minimum aggregate principal amount at maturity of Old
Notes being tendered for exchange. DTC is the sole registered holder of the Old
Notes, and holds such notes on behalf of numerous participants. This Prospectus,
together with the Letter of Transmittal, is being sent to all such registered
holders as of , 1998.
Under the Indenture, holders of Old Notes do not have any appraisal or
dissenters rights in connection with the Exchange Offer. The Company intends to
conduct the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the applicable rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if it has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the New Notes from The Company. If any tendered Old Notes
are not accepted for exchange, such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March 27, 1998 unless the Company in its sole discretion extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. Although the Company has no
current intention to extend the Exchange Offer, the Company reserves the right
to extend the Exchange Offer at any time and from time to time by giving oral or
written notice to the Exchange Agent and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Notes previously tendered pursuant to the Exchange Offer
and not withdrawn will remain subject to the Exchange Offer. The date of the
exchange of the New Notes for Old Notes will be the first New York Stock
Exchange trading day following the Expiration Date.
The Company expressly reserves the right to (i) terminate the Exchange Offer
and not accept for exchange any Old Notes if any of the events set forth below
under "--Conditions to the Exchange Offer" shall have occurred and shall not
have been waived by the Company and (ii) amend the terms of the Exchange Offer
in any manner which, in its good faith judgment, is advantageous to the holders
of the Old Notes, whether before or after any tender of the Old Notes.
PROCEDURES FOR TENDERING
The tender to the Company of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and The Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal signed by such
holder. A holder of the Old Notes may tender such Old Notes by (i) properly
completing and signing a Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to a Letter of Transmittal shall be
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<PAGE>
deemed to include a facsimile thereof) and delivering the same, together with
any corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the New Notes to be issued in exchange therefor are to be
issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC whose name appears on a security listing as the owner of
Old Notes), the signature of such signer need not be guaranteed. In any other
case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under
the Exchange Act (any of the foregoing hereinafter referred to as an "Eligible
Institution"). If the New Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the register for the Old Notes, the signature in the Letter of Transmittal must
be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF TRANSMITTAL AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
THE COMPANY.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the Old
Notes at DTC for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in
DTC's system may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account with respect to the
Old Notes in accordance with DTC's procedure for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an appropriate Letter of Transmittal with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at the address
set forth in the Letter of Transmittal on or prior to the Expiration Date, or,
if the guaranteed delivery procedures described below are complied with, within
the time period provided under such procedures.
If the holder desires to accept the Exchange Offer and time will not permit
a Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its office, on or prior to the Expiration Date, a letter, telegram or facsimile
transmission from an Eligible Institution setting forth the name and address of
the tendering holder, the name(s) in which the Old Notes are registered and the
certificate number(s) of the Old Notes to be tendered, and stating that the
tender is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission by the Eligible Institution, such Old Notes, in proper
form for transfer (or a confirmation of book-entry transfer of such Old Notes
into the Exchange Agent's account at DTC), will be delivered by such Eligible
Institution together with a properly completed and duly executed Letter of
Transmittal (and any other required documents). Unless Old Notes being tendered
by the above-described method are deposited with the Exchange Agent within the
time period set forth above (accompanied or preceded by a properly completed
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<PAGE>
Letter of Transmittal and any other required documents), the Company may, at its
option, reject the tender. Copies of a Notice of Guaranteed Delivery which may
be used by Eligible Institutions for the purposes described in this paragraph
are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC) is received by the Exchange
Agent or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram
or facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserve the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of The Company, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. If any Old Notes received by the Exchange Agent are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Old Notes are submitted in a principal amount greater than the
principal amount of Old Notes being tendered by such tendering holder, such
unaccepted or non-exchanged Old Notes will be returned by the Exchange Agent to
the tendering holders, unless otherwise provided in the Letter of Transmittal,
as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, to the
extent permitted by the Indenture to (a) purchase or make offers for any Old
Notes that remain outstanding subsequent to the Expiration Date and (b) to the
extent pertained by applicable law, purchase Old Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers will differ from the terms of the Exchange Offer.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange ("Transferor") exchanges, assigns
and transfers the Old Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to
cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire New Notes issuable
upon the exchange of such tendered Old Notes, and that, when the same are
accepted for exchange, the Company will acquire good and unencumbered title to
the tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Company to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Old Notes or transfer ownership of such Old Notes on
the account books maintained by DTC. All authority conferred by the Transferor
will survive the death, bankruptcy or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
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By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above in the third paragraph under the heading
"--Purpose and Effect of the Exchange Offer."
WITHDRAWAL OF TENDERS
Tenders of Old Notes pursuant to the Exchange Offer are irrevocable, except
that Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic, or facsimile transmission notice of
withdrawal must be timely received by the Exchange Agent at the address set
forth in the Letter of Transmittal prior to 5:00 p.m., New York City time on the
Expiration Date. Any such notice of withdrawal must specify the holder named in
the Letter of Transmittal as having tendered Old Notes to be withdrawn, the
certificate numbers and designation of Old Notes to be withdrawn, the principal
amount of Old Notes delivered for exchange, a statement that such holder is
withdrawing his election to have such Old Notes exchanged, and the name of the
registered holder of such Old Notes, and must be signed by the holder in the
same manner as the original signature on the Letter of Transmittal (including
any required signature guarantees) or be accompanied by evidence satisfactory to
The Company that the person withdrawing the tender has succeeded to the
beneficial ownership of the Old Notes being withdrawn. The Exchange Agent will
return the properly withdrawn Old Notes promptly following receipt of notice of
withdrawal. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer, any notice of withdrawal must specify the name and number
of the account at DTC to be credited with the withdrawn Old Notes or otherwise
comply with DTC procedure. All questions as to the validity of notices of
withdrawal, including time of receipt, will be determined by the Company and
such determination will be final and binding on all parties.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue New Notes in
exchange for any properly tendered Old Notes not theretofore accepted and may
terminate the Exchange Offer, or, at their option, modify or otherwise amend the
Exchange Offer, if either of the following events occur:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the sole judgment of the Company, would prohibit, restrict or otherwise
render illegal the consummation of the Exchange Offer, or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which, in the Company's sole judgment, might
materially impair The Company's ability to proceed with the Exchange Offer.
The Company expressly reserves the right to terminate the Exchange Offer and
not accept for exchange any Old Notes upon the occurrence of either of the
foregoing conditions (which represent all of the material conditions to the
acceptance by The Company of properly tendered Old Notes).
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company if it is legally permitted to do so, in whole or in part,
in its sole discretion. The foregoing conditions must be either satisfied or
waived prior to termination of the Exchange Offer. Any determination made by the
Company concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
EXCHANGE AGENT
U.S. Trust has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
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BY MAIL (REGISTERED OR CERTIFIED MAIL RECOMMENDED):
United States Trust Company of New York
P.O. Box 844
Cooper Station
New York, New York 10276-0844
BY OVERNIGHT COURIER:
United States Trust Company of New York
770 Broadway--13th Floor
Corporate Trust Operations Department
New York, New York 10003
Attn: Corporate Trust Operations Department
BY HAND DELIVERY:
United States Trust Company of New York
111 Broadway, Lower Level
New York, New York 10006
Attn: Corporate Trust Services
BY FACSIMILE (FOR ELIGIBLE INSTITUTIONS ONLY):
(212) 420-6152
Confirm by telephone (800) 548-6565
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
The expenses to be incurred by the Company in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Trustee and
accounting and legal fees, will be paid by the Company. The Company will not,
however, pay the costs incurred by a holder in delivering its Old Notes to the
Exchange Agent, underwriting fees, or Commissions or transfer taxes.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the date of the exchange
because the exchange of the Old Notes for the New Notes is the completion of the
selling process contemplated in the issuance of the Old Notes. Accordingly, no
gain or loss for accounting purposes will be recognized. The expenses of the
Exchange
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Offer and the unamortized expenses related to the issuance of the Old Notes will
be amortized over the term of the New Notes.
OTHER MATTERS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the dates as of which information is given herein.
The Exchange Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Old Notes in any jurisdiction in which the making of the
Exchange Offer or the acceptance thereof would not be in compliance with the
laws of such jurisdiction. However, the Company may, at its discretion, take
such action as it may deem necessary to make the Exchange Offer in any such
jurisdiction and extend the Exchange Offer to holders of Old Notes in such
jurisdiction.
As a result of the making of the Exchange Offer, the Company will have
fulfilled a covenant contained in the Registration Agreement. Holders of the Old
Notes who do not tender their Old Notes in the Exchange Offer will continue to
hold such Old Notes and will be entitled to all the rights and limitations
applicable thereto under the Indenture except for certain rights under the
Registration Agreement and except that certain of the Old Notes may not be
entitled to the contingent increase in interest rate provided for in the Old
Notes. All untendered Old Notes will continue to be subject to the restrictions
on transfer set forth in the Indenture and the Old Notes. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market, if
any, for untendered Old Notes could be adversely affected.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as contemplated
in this Prospectus, the Company will receive in exchange Old Notes, in like
principal amount, the terms of which are identical to the New Notes except that
such New Notes will be registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof. Old Notes surrendered in
exchange for New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in a change in the
indebtedness of the Company.
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<PAGE>
DESCRIPTION OF THE NOTES
The Old Notes were issued in the October 1997 Debt Placement under the
Indenture, dated as of October 1, 1997, between WinStar (for the purposed of
this Description of Notes, "WCI"), and United States Trust Company of New York,
as trustee (in such capacity, the "Trustee"). Copies of the form of Indenture
are available on request from WCI.
The New Notes will be issued under the Indenture. The form and terms of the
New Notes are the same as the form and terms of the Old Notes, except that the
New Notes will have been registered under the Securities Act, and therefore,
will not bear legends restricting transfer thereof. The New Notes will evidence
the same debt as the Old Notes. Upon consummation of this Exchange Offering, the
New Notes will be treated as a single class under the Indenture with any Old
Notes remaining outstanding. Upon the consummation of this Exchange Offer,
holders of Old Notes may not be entitled to certain registration rights under,
or the contingent increase in interest rate provided by, the Registration
Agreement.
GENERAL
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple of $1,000.
See "--Book-Entry, Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but WCI may require payment of a
sum sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith. The Notes may be exchanged or transferred at
the office or agency of WCI in the Borough of Manhattan, The City of New York
(which initially will be the corporate trust office of the Trustee at 114 West
47th Street, New York, New York 10036-1532).
Although for United States federal income tax purposes a significant amount
of original issue discount, taxable as ordinary income, will be recognized by a
Holder of Notes as such discount is amortized from the date of issuance of the
Notes, Holders of Notes will not receive any payments on the Notes until
September 1, 2002. For a description of certain tax matters related to an
investment in the Notes, see "Certain United States Federal Income Tax
Considerations."
TERMS OF THE NOTES
The Notes are unsecured, senior subordinated obligations of WCI, limited to
$100.0 million aggregate principal amount, and will mature on March 1, 2007.
Until March 1, 2002, interest on the Notes will accrue at a rate of 15% per
annum and be compounded semiannually on each SemiAnnual Interest Accrual Date
with respect to the Notes, but, except as described herein, will not be payable
in cash. Interest on the Accumulated Amount of each Note as of March 1, 2002
will be paid semiannually, commencing September 1, 2002, to Holders of record at
the close of business on the February 15 or August 15 immediately preceding the
interest payment date of March 1 and September 1 of each year. Interest on the
Notes will be paid on a 360-day year, twelve 30-day month basis.
OPTIONAL REDEMPTION
The Notes are not redeemable prior to March 1, 2002. Thereafter, the Notes
will be redeemable, at WCI's option, in whole at any time, or in part from time
to time, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holder's registered address, at the following
redemption prices (expressed as a percentage of the Accumulated Amount of the
Notes), plus accrued and unpaid interest, if any, on such Accumulated Amount to
the redemption date (subject to the right of Holders of record on the relevant
regular record date that is on or prior to the redemption date to receive
interest due
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on the relevant interest payment date), if redeemed during the 12-month period
commencing March 1 of the years set forth below:
<TABLE>
<CAPTION>
NOTE
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2002........................................................................ 107.500%
2003........................................................................ 103.750
2004 and thereafter......................................................... 100.000
</TABLE>
SELECTION OF NOTES FOR OPTIONAL REDEMPTION
In the case of any partial optional redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes 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 Note of
$1,000 in principal amount or less shall be redeemed in part. If any Note is to
be redeemed in part only, the notice of redemption relating to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
WCI's ability to redeem the Notes at its option is severely limited under
the terms of WCI's outstanding indebtedness. WCI may not be able to redeem the
Notes at its option unless it simultaneously redeems or repays such other
indebtedness.
RANKING
The indebtedness evidenced by the Notes represents unsecured senior
subordinated obligations of WCI. The payment of the Senior Subordinated
Obligations will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full, in cash or cash equivalents, of
all Senior Indebtedness of WCI, including, without limitation, WCI's obligations
under the 1995 Senior Notes, the 1997 Senior Notes and the Equipment Note
Guarantees, as well as WCI's guarantees under the Equipment Lease Financing, the
CIT Credit Facility, the Revolving Credit Facility and the Finova Lease
Financing. As of the Issue Date, there was no indebtedness of WCI outstanding
PARI PASSU with or junior to the Notes, except for the Convertible Notes, which
rank PARI PASSU with the Notes. See "Risk Factors-- Substantial Indebtedness;
Ability to Service Indebtedness" and "--Holding Company Structure; Ranking of
the Notes; Unsecured Indebtedness" and "Capitalization."
"Senior Subordinated Obligations" is defined in the Indenture to mean any
principal of, premium, if any, or interest on the Notes payable pursuant to the
terms of the Notes or upon acceleration, to the extent relating to the purchase
of Notes or amounts corresponding to such principal, premium, if any, or
interest on the Notes.
At 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, WCI had (on an unconsolidated
basis) approximately $758.6 million of indebtedness (excluding trade payables),
$561.1 million of which would have been senior indebtedness and $197.5 million
of which would have been senior subordinated indebtedness.
WCI is a holding company. Substantially all the operations of WCI are
conducted through its subsidiaries. Claims of creditors of such subsidiaries,
including trade creditors, secured creditors and creditors holding indebtedness
and guarantees issued by such subsidiaries, and claims of preferred stockholders
(if any) of such subsidiaries, generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of WCI,
including holders of the Notes. The Notes,
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<PAGE>
therefore, are effectively subordinated to creditors (including trade creditors)
and preferred stockholders (if any) of subsidiaries of WCI. At September 30,
1997 after giving effect to the US One Asset Acquisition and the Midcom
Acquisition, the total liabilities of WCI's subsidiaries was approximately
[$359.7] million, including trade payables. Although the Indentures limit the
incurrence of Indebtedness and the issuance of preferred stock of certain of
WCI's subsidiaries, such limitations are subject to a number of significant
qualifications. Moreover, the Indentures do not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness under the Indentures.
To the extent any payment of Senior Indebtedness of WCI (whether by or on
behalf of WCI, as proceeds of security or enforcement of any right of setoff or
otherwise) is declared to be fraudulent or preferential, set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then if such payment is recovered by, or paid over
to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person, the Senior Indebtedness of WCI or part thereof originally
intended to be satisfied shall be deemed to be reinstated and outstanding as if
such payment had not occurred. To the extent the obligation to repay any Senior
Indebtedness of WCI is declared to be fraudulent, invalid, or otherwise set
aside under any bankruptcy, insolvency, receivership, fraudulent conveyance or
similar law, then the obligation so declared fraudulent, invalid or otherwise
set aside (and all other amounts that would come due with respect thereto had
such obligation not been so affected) shall be deemed to be reinstated and
outstanding as Senior Indebtedness of WCI for all purposes of the Indenture as
if such declaration, invalidity or setting aside had not occurred. Upon any
payment or distribution of assets or securities of WCI of any kind or character,
whether in cash, property or securities, upon any dissolution or winding up or
total or partial liquidation or reorganization of WCI, whether voluntary or
involuntary or in bankruptcy, insolvency, receivership or other proceedings, all
amounts due or to become due upon all Senior Indebtedness of WCI (including any
interest accruing subsequent to an event of bankruptcy, whether or not such
interest is an allowed claim enforceable against the debtor under the Bankruptcy
Code) shall first be paid in full, in cash or cash equivalents, before the
Holders of the Notes or the Trustee, on behalf of the Holders of the Notes,
shall be entitled to receive any payment by WCI on account of Senior
Subordinated Obligations, or any payment to acquire any of the Notes for cash,
property or securities, or any distribution with respect to the Notes of any
cash, property or securities. Before any payment may be made by, or on behalf
of, WCI of any Notes upon any such dissolution, winding up, liquidation or
reorganization, any payment or distribution of assets or securities of WCI of
any kind or character, whether in cash, property or securities, to which the
Holders of the Notes or the Trustee, on behalf of the Holders of the Notes,
would be entitled, but for the subordination provisions of the Indenture, shall
be made by WCI or by any receiver, trustee in bankruptcy, liquidating trustee,
agent or other similar Person making such payment or distribution or by the
Holders of the Notes or the Trustee if received by them or it, directly to the
holders of the Senior Indebtedness of WCI (pro rata to such holders on the basis
of the respective amounts of Senior Indebtedness of WCI held by such holders) or
their representatives as their respective interests appear, to the extent
necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents, after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of WCI of Senior Subordinated
Obligations, whether pursuant to the terms of the Notes or upon acceleration or
otherwise, shall be made if, at the time of such payment, there exists a default
in the payment of all or any portion of the obligations on any Senior
Indebtedness of WCI, and such default shall not have been cured or waived or the
benefits of this sentence waived by or on behalf of the holders of such Senior
Indebtedness. In addition, during the continuance of any other event of default
with respect to any Designated Senior Indebtedness of WCI pursuant to which the
maturity thereof may be accelerated, upon receipt by the 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 WCI
upon or in respect of the Notes for
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<PAGE>
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
Notes Trustee for such trustee of, or other representatives for, such holders).
Not more than one Payment Blockage Period may be commenced with respect to the
Notes during any period of 360 consecutive days. Notwithstanding anything in the
Indenture to the contrary, there must be 180 consecutive days in any 360-day
period in which no Payment Blockage Period is in effect. No event of default
that existed or was continuing (it being acknowledged that any subsequent action
that would give rise to an event of default pursuant to any provision under
which an event of default previously existed or was continuing shall constitute
a new event of default for this purpose) on the date of the commencement of any
Payment Blockage Period with respect to the Designated Senior Indebtedness of
WCI initiating such Payment Blockage Period shall be, or shall be made, the
basis for the commencement of a second Payment Blockage Period by the
representative for, or the holders of, such Designated Senior Indebtedness,
whether or not within a period of 360 consecutive days, unless such event of
default shall have been cured or waived for a period of not less than 90
consecutive days.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of WCI who are not holders of Senior
Indebtedness of WCI may recover less, ratably, than holders of Senior
Indebtedness of WCI and may recover more, ratably, than Holders of the Notes.
"Senior Indebtedness" as defined under the Indenture means the following
obligations of WCI, whether outstanding on the Issue Date or thereafter
Incurred: (i) all Indebtedness and all other monetary obligations of WCI under
the 1995 Senior Notes, the 1997 Senior Notes and the Equipment Note Guarantees,
(ii) all other Indebtedness of WCI (other than the Notes and the Convertible
Notes), including principal and interest on such Indebtedness, unless such
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such Indebtedness is issued, is PARI PASSU with, or
subordinated in right of payment to, the Notes and (iii) all fees, expenses and
indemnities payable in connection with the 1995 Senior Notes, the 1997 Senior
Notes and the Equipment Note Guarantees (including any agreements pursuant to
which the 1995 Senior Notes, the 1997 Senior Notes or the Equipment Note
Guarantees were issued); PROVIDED, HOWEVER, that the term "Senior Indebtedness"
as defined in the Indenture shall not include (a) any Indebtedness of WCI that,
when Incurred and without respect to any election under Section 1111(b) of the
Bankruptcy Code, was without recourse to WCI, (b) any Indebtedness of WCI to a
Subsidiary of WCI or to a joint venture in which WCI has an interest, (c) any
Indebtedness of WCI, to the extent not permitted pursuant to the covenants
described under "--Covenants--Limitation on Indebtedness" or
"--Covenants--Limitation on Senior Subordinated Indebtedness", (d) any
repurchase, redemption or other obligation in respect of Redeemable Stock, (e)
any Indebtedness to any employee of WCI or any of its Subsidiaries, (f) any
liability for federal, state, local or other taxes owed or owing by WCI or (g)
any trade payables of WCI. Senior Indebtedness of WCI will also include interest
accruing subsequent to events of bankruptcy of WCI and its Subsidiaries at the
rate provided for in the document governing such Senior Indebtedness, whether or
not such interest is an allowed claim enforceable against the debtor in a
bankruptcy case under federal bankruptcy law.
"Designated Senior Indebtedness" as defined under the Indenture means the
1995 Senior Notes, the 1997 Senior Notes, the Equipment Note Guarantees and any
Indebtedness constituting Senior Indebtedness of WCI that, at the date of
determination, has an aggregate principal amount of at least $25.0 million and
that is specifically designated by WCI in the instrument creating or evidencing
such Senior Indebtedness as "Designated Senior Indebtedness."
The Indenture specifically designates that the Notes rank PARI PASSU with
the Convertible Notes.
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SAME-DAY PAYMENT
The Indenture requires that payments in respect of Notes (including
principal, premium and interest) be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address.
REGISTRATION RIGHTS
The Registration Statement of which this Prospectus forms a part, has been
filed by WCI pursuant to the Registration Agreement. Under the terms of the
Registration Agreement, the Company will be entitled to close the Exchange Offer
30 days after the commencement thereof provided that it has accepted all Old
Notes theretofore validly tendered in accordance with the terms of such Exchange
Offer. After consummation of the Exchange Offer, the Company will have no
further obligation to make any other such exchange offers.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
WCI must commence, within 30 days of the occurrence of a Change of Control,
and consummate an Offer to Purchase for all the Notes then outstanding, at a
purchase price equal to 101% of the Accumulated Amount of such Notes on the date
of purchase, 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
Notes commencing such Offer to Purchase, but in any event within 30 days
following any Change of Control, WCI covenants to (i) repay in full all
indebtedness of WCI that would prohibit the repurchase of the Notes pursuant to
such Offer to Purchase or (ii) obtain any requisite consents under instruments
governing any such indebtedness of WCI to permit the repurchase of the Notes.
WCI shall first comply with the covenant in the preceding sentence before it
shall purchase Notes pursuant to the "Repurchase of Notes upon a Change of
Control" covenant.
Under the terms of the Indenture, WCI may not repurchase any Notes or any
other subordinated indebtedness, including the Convertible Notes, pursuant to
this covenant until WCI has repurchased all of the 1995 Senior Notes and the
1997 Senior Notes and has caused each of WEC and WEC II to repurchase all of the
WEC Notes and WEC II Notes, respectively, tendered pursuant to any Offer to
Purchase as a result of such Change of Control. However, if WCI is unable to
repay or cause repayment of all of the indebtedness that would prohibit
repurchase of the Notes or is unable to obtain the consents of the holders of
indebtedness, if any, outstanding at the time of a Change of Control whose
consent would be so required to permit the repurchase of Notes or otherwise
fails to purchase any Notes validly tendered, then WCI will have breached such
covenant. This breach will constitute an Event of Default under the Indenture if
it continues for a period of 30 consecutive days after written notice is given
to WCI by the Trustee or the Holders of at least 25% in aggregate principal
amount of the outstanding Notes, the 1995 Senior Notes, the 1997 Senior Notes,
the WEC Notes or the WEC II Notes, as the case may be. In addition, the failure
by WCI to repurchase Notes at the conclusion of the Offer to Purchase will
constitute an Event of Default without any waiting period or notice
requirements.
There can be no assurance that WCI, WEC and/or WEC II will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of WCI, WEC and WEC II which might be
outstanding at the time). The above covenant requiring WCI to repurchase the
Notes will, unless the consents referred to above are obtained, require WCI, WEC
and WEC II to repay all indebtedness then outstanding which by its terms would
prohibit such Note repurchase, either prior to or concurrently with such Note
repurchase.
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COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS
(a) WCI will not, and will not permit any of its Restricted Subsidiaries to,
Incur any Indebtedness (other than the Notes and Indebtedness existing on the
Issue Date); PROVIDED, HOWEVER, that WCI may Incur Indebtedness if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than
zero and less than 5:1.
Notwithstanding the foregoing, WCI and any Restricted Subsidiary (except as
specified below) may Incur each and all of the following: (i) Indebtedness of
WCI outstanding at any time in an aggregate principal amount not to exceed
$125.0 million, less any amount of Indebtedness Incurred pursuant to this clause
(i) and permanently repaid as provided under "--Limitation on Asset Sales"
below; (ii) Indebtedness (A) to WCI evidenced by an unsubordinated promissory
note or (B) to any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that any
event which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other than to WCI or
another Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness, other than Indebtedness
Incurred under clause (i), (ii), (v), (vi) or (viii) of this paragraph, and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); PROVIDED,
HOWEVER, that Indebtedness the proceeds of which are used to refinance or refund
the Notes or Indebtedness that is PARI PASSU with, or subordinated in right of
payment to, the Notes shall only be permitted under this clause (iii) if (A) in
case the Notes are refinanced in part or the Indebtedness to be refinanced is
PARI PASSU with the Notes, such new Indebtedness, by its terms or by the terms
of any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made PARI PASSU with, or subordinate in right of
payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made subordinate in right of payment
to the Notes, at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes, and (C) such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; PROVIDED FURTHER, HOWEVER, that in no
event may Indebtedness of WCI be refinanced by means of any Indebtedness of any
Restricted Subsidiary of WCI pursuant to this clause (iii); (iv) Indebtedness
(A) in respect of performance, surety or appeal bonds provided in the ordinary
course of business, (B) under Currency Agreements and Interest Rate Agreements;
PROVIDED, HOWEVER, that such agreements do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder, and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of WCI or any of the Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Subsidiary of WCI
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary of WCI for the
purpose of financing such acquisition), in a principal amount not to exceed the
gross proceeds actually received by WCI or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of WCI not to exceed, at any
one time outstanding, two times the Net Cash Proceeds received by WCI from and
after October 23, 1995 from the issuance and sale of its Capital Stock (other
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than Redeemable Stock and Preferred Stock that provides for the payment of
dividends in cash); PROVIDED, HOWEVER, that such Indebtedness (x) does not
mature prior to the Stated Maturity of the Notes and has an Average Life longer
than the Notes and (y) is PARI PASSU with or subordinated to the Notes at least
to the extent that the Notes are subordinated to Senior Indebtedness; (vi)
Indebtedness of any Restricted Subsidiary Incurred pursuant to any credit
agreement of such Restricted Subsidiary in effect on the Issue Date (and
refinancings thereof), up to the amount of the commitment under such credit
agreement on the Issue Date; (vii) Indebtedness to the extent such Indebtedness
is secured by Liens which are purchase money or other Liens upon equipment or
inventory acquired or held by WCI or any of its Restricted Subsidiaries taken or
obtained by (A) the seller or lessor of such equipment or inventory to secure
all or a part of the purchase price or lease payments therefor or (B) the person
who makes advances or incurs obligations, thereby giving value to WCI to enable
it to purchase or acquire rights in such equipment or inventory, to secure the
repayment of all or a part of the advances so made or obligations so incurred;
PROVIDED, HOWEVER, that such Liens do not extend to or cover any property or
assets of WCI or any Restricted Subsidiary other than the equipment or inventory
acquired; (viii) Indebtedness of any Restricted Subsidiary not to exceed, at any
one time outstanding, 80% of the accounts receivable net of reserves and
allowances for doubtful accounts, determined in accordance with GAAP, of such
Restricted Subsidiary and its Restricted Subsidiaries (without duplication);
PROVIDED, HOWEVER, that such Indebtedness is not Guaranteed by WCI or any of its
Restricted Subsidiaries; and (ix) Indebtedness of WCI, to the extent the
proceeds thereof are immediately used to purchase the 1995 Notes or the 1997
Notes or the Notes tendered in an Offer to Purchase made as a result of a Change
of Control.
(b) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this "Limitation on Indebtedness" covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, WCI, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
(c) WCI will not, and will not permit any Restricted Subsidiary to, Incur
any Guarantee of Indebtedness of any Unrestricted Subsidiary.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
WCI will not (i) Incur any Indebtedness, other than the Notes, that is
expressly made subordinated in right of payment to any Senior Indebtedness of
WCI unless such Indebtedness, by its terms and by the terms of any agreement or
instrument pursuant to which such Indebtedness is outstanding is expressly made
PARI PASSU with, or subordinate in right of payment to, the Notes pursuant to
provisions substantially similar to those contained in the Indenture; PROVIDED,
HOWEVER, that the foregoing limitation shall not apply to distinctions between
categories of Senior Indebtedness of WCI that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all Senior Indebtedness
of WCI or (ii) Incur any Indebtedness secured by a Lien if such Indebtedness is
not Senior Indebtedness of WCI, unless contemporaneously therewith effective
provision is made to secure the Notes equally and ratably with such secured
Indebtedness for so long as such secured Indebtedness is secured by a Lien. The
Indenture provides that the Notes are PARI PASSU with the Convertible Notes.
LIMITATION ON RESTRICTED PAYMENTS
WCI will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on its
Capital Stock (other than dividends or distributions payable solely in shares of
its or such Restricted Subsidiary's Capital Stock (other than Redeemable Stock)
held by such holders or in options, warrants or other rights to acquire such
shares of Capital Stock) other than such Capital Stock held by WCI or any of its
Restricted Subsidiaries (and other than pro rata dividends or
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distributions on Common Stock of Restricted Subsidiaries), (ii) repurchase,
redeem, retire or otherwise acquire for value any shares of Capital Stock of WCI
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by Persons other than any Wholly Owned Restricted Subsidiaries of
WCI, (iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or retirement
for value, of Indebtedness of WCI that is subordinated in right of payment to
the Note Guarantee or (iv) make any Investment, other than a Permitted
Investment, in any Person (such payments or any other actions described in
clauses (i) through (iv) being collectively "Restricted Payments") if, at the
time of, and after giving effect to, the proposed Restricted Payment: (A) a
Default or Event of Default shall have occurred and be continuing, (B) except
with respect to any Investment (other than an Investment consisting of the
designation of a Restricted Subsidiary as an Unrestricted Subsidiary), WCI could
not Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant or (C) the aggregate amount expended for
all Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) after the Closing Date shall
exceed the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated
Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of
such amount) (determined by excluding income resulting from transfers of assets
by WCI or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed pursuant to "--SEC Reports and Reports to
Holders" plus (2) the aggregate Net Cash Proceeds received by WCI after the
Closing Date from the issuance and sale permitted by the Indentures of its
Capital Stock (other than Redeemable Stock) to a Person who is not a Subsidiary
of WCI, or from the issuance to a Person who is not a Subsidiary of WCI of any
options, warrants or other rights to acquire Capital Stock of WCI (in each case,
exclusive of any convertible Indebtedness, Redeemable Stock or any options,
warrants or other rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the 1997 Senior Notes
and the Notes) plus (3) an amount equal to the net reduction in Investments
(other than reductions in Permitted Investments and other than reductions in
Investments made pursuant to clauses (vi) or (vii) of the second paragraph of
this "Limitation on Restricted Payments" covenant) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to WCI or any Restricted
Subsidiary (except to the extent any such payment is included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed the amount of Investments previously
made by WCI and its Restricted Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Note
Guarantee, including premium, if any, and accrued and unpaid interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the
second paragraph of the covenant described under "--Limitation on Indebtedness;"
(iii) the repurchase, redemption or other acquisition of Capital Stock of WCI
(or options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent sale of, shares of
Capital Stock or options, warrants or other rights to acquire such Capital Stock
(in each case other than Redeemable Stock) of WCI; (iv) the making of any other
Restricted Payment made by exchange for, or out of the proceeds of, a
substantially concurrent sale of, shares of the Capital Stock or options,
warrants or other rights to acquire such Capital Stock (in each case other than
Redeemable Stock) of WCI; (v) payments or distributions, in the nature of
satisfaction of dissenters' rights, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of
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the property and assets of WCI; (vi) Investments, not to exceed $15 million at
any one time outstanding; (vii) Investments, not to exceed $15 million at any
one time outstanding, in entities, substantially all of the assets of which
consist of Telecommunications Assets; (viii) (A) cash payments in lieu of the
issuance of fractional shares of Common Stock upon conversion (including
mandatory conversion) of the Convertible Notes provided for in the Convertible
Notes Indenture and (B) cash payments on the Convertible Notes required to be
made under the provisions of the Convertible Notes Indenture that relate to
repurchases of Convertible Notes upon a change of control and that relate to
limitations on sales of assets; (ix) cash payments in lieu of the issuance of
fractional shares of Common Stock of WCI upon conversion of any class of
Preferred Stock of WCI; PROVIDED, HOWEVER, that this exception shall not be
available with respect to more than two such conversions with respect to any
such class of Preferred Stock by any given Affiliate of WCI; 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 WCI or a
Restricted Subsidiary shall, at the time of making such Investment, have an
active role in the management or operation of such entity and in the provision
of telecommunications services by such entity; PROVIDED, HOWEVER, that, except
in the case of clauses (i) and (iii) of this paragraph, no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth herein. Any Investments made other than in cash
shall be valued, in good faith, by the Board of Directors. Any Investment made
pursuant to clause (vi) or (vii) of this paragraph shall be deemed to be no
longer outstanding (and repaid in full) if and when the Person in which such
Investment is made becomes a Restricted Subsidiary of WCI.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof), and the Net
Cash Proceeds from any issuance and sale of Capital Stock referred to in clauses
(iii) or (iv) shall be included in calculating whether the conditions of clause
(C) of the first paragraph of this "Limitation on Restricted Payments" covenant
have been met with respect to any subsequent Restricted Payments. In the event
the proceeds of an issuance of Capital Stock of WCI are used for the redemption,
repurchase or other acquisition of the Notes or Indebtedness that is PARI PASSU
with the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
WCI will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by WCI
or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to WCI or any
other Restricted Subsidiary that owns, directly or indirectly, any Capital Stock
of such Restricted Subsidiary, (iii) make loans or advances to WCI or any other
Restricted Subsidiary that owns, directly or indirectly, any Capital Stock of
such Restricted Subsidiary or (iv) transfer any of its property or assets to WCI
or any other Restricted Subsidiary that owns, directly or indirectly, any
Capital Stock of such Restricted Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or
restrictions: (i) existing on the Issue Date in any agreement in effect on the
Issue Date, and any extensions, refinancings, renewals or replacements of such
agreements; PROVIDED, HOWEVER, that the encumbrances and restrictions in any
such extensions, refinancings, renewals or replacements are no less favorable in
any material respect to the Holders than those encumbrances or restrictions that
are then in effect and that are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law; (iii) existing with respect
to any Person or the property or assets of such Person acquired by WCI or any
Restricted Subsidiary, at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable to
any Person or the property or assets of any Person other than such
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Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
WCI or any Restricted Subsidiary not otherwise prohibited by the 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 WCI or any Restricted Subsidiary in any
manner material to WCI or any Restricted Subsidiary; or (v) with respect to a
Restricted Subsidiary and imposed pursuant to an agreement that has been entered
into for the sale or disposition of all or substantially all of the Capital
Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent WCI or any Restricted
Subsidiary from (i) restricting the sale or other disposition of property or
assets of WCI or any of its Restricted Subsidiaries that secure Indebtedness of
WCI or any of its Restricted Subsidiaries or (ii) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted pursuant to the 1997 Senior
Notes Indenture as in effect on the Closing Date.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
WCI will not sell, and will not permit any Restricted Subsidiary, directly
or indirectly, to issue or sell any shares of Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to purchase shares of
such Capital Stock) except (i) to WCI or a Wholly Owned Restricted Subsidiary,
(ii) issuances or sales to foreign nationals of shares of Capital Stock of
foreign Restricted Subsidiaries, 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, WCI or such Restricted Subsidiary applies an amount not less than the Net
Cash Proceeds thereof (if any) in accordance with clause (A) or (B) of the first
paragraph of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
WCI will not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee any Indebtedness of WCI ("Guaranteed Indebtedness"), unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee (a "Subsidiary Guarantee")
of payment of the Notes by such Restricted Subsidiary and (ii) such Restricted
Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against WCI or any other Restricted Subsidiary as a result
of any payment by such Restricted Subsidiary under its Subsidiary Guarantee;
PROVIDED, HOWEVER, that this paragraph shall not be applicable to any Guarantee
of any Restricted Subsidiary that (x) existed at the time such Person became a
Restricted Subsidiary and (y) was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) PARI PASSU with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of WCI of all of WCI's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the
Indenture) or (ii) the release or discharge of the Guarantee
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which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
WCI will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5% or more of any class of Capital Stock of WCI or with any Affiliate of WCI or
any Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to WCI or such Restricted Subsidiary than could be obtained, at the
time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor, in
a comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which WCI or a Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to WCI or such Restricted Subsidiary from a
financial point of view; (ii) any transaction solely between WCI and any of its
Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted
Subsidiaries; (iii) the payment of reasonable fees to directors of WCI who are
not employees of WCI; (iv) any payments or other transactions pursuant to any
tax-sharing agreement between WCI and any other Person with which WCI files a
consolidated tax return or with which WCI is part of a consolidated group for
tax purposes; or (v) any Restricted Payments not prohibited by the covenant
described under "--Limitation on Restricted Payments" (other than pursuant to
clause (iv) of the definition of "Permitted Investment" or clause (vi) of the
second paragraph of such covenant). Notwithstanding the foregoing, any
transaction 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
WCI will not, and will not permit any Restricted Subsidiary to, consummate
any Asset Sale, unless (i) the consideration received by WCI or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of and (ii) at least 85% of the consideration received consists of cash
or Temporary Cash Investments. In the event and to the extent that the Net Cash
Proceeds received by WCI or its Restricted Subsidiaries from one or more Asset
Sales occurring on or after the 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 WCI and its Subsidiaries has been prepared), then
WCI shall or shall cause the relevant Restricted Subsidiary to (i) within six
months after the date Net Cash Proceeds so received exceed 10% of Adjusted
Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net
Cash Proceeds to permanently repay unsubordinated Indebtedness of WCI, or
Indebtedness of any Restricted Subsidiary, in each case owing to a Person other
than WCI or any of its Restricted Subsidiaries or (B) invest an equal amount, or
the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within six months after the date of such
agreement), in property or assets of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, WCI and its Restricted Subsidiaries existing
on the date of such investment (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) apply (no later than the end of the six-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following
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paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such six-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10.0 million, WCI must
commence, not later than the 15th Business Day after the first day of such
month, and consummate an Offer to Purchase from the Holders on a pro rata basis
an aggregate principal amount of Notes equal to the Excess Proceeds on such
date, at a purchase price equal to 101% of the Accumulated Amount of such Notes
on the date of purchase, plus accrued and unpaid interest (if any) on such
amount to the date of purchase; PROVIDED, HOWEVER, that no Offer to Purchase
shall be required to be commenced with respect to the Notes until the Business
Day following the payment date with respect to the Offer to Purchase any 1997
Notes and need not be commenced if the Excess Proceeds remaining after
application thereof to the 1997 Notes purchased in such Offer to Purchase
applicable thereto are less than $10,000,000; PROVIDED FURTHER, however, that no
Notes may be purchased under this covenant unless WCI shall have purchased all
1997 Notes tendered pursuant to the Offer to Purchase applicable thereto.
Because of similar requirements in the Indentures governing the 1995 Notes
and the 1997 Notes, WCI may not have Excess Proceeds from an Asset Sale to be
able to comply with the foregoing requirements.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not WCI is required to file reports with the SEC, if any Notes
are outstanding, WCI shall file with the SEC all such reports and other
information as it would be required to file with the SEC by Sections 13(a) or
15(d) under the Exchange Act. See "Available Information." WCI shall supply the
Trustee and each Holder of Notes, as the case may be, or shall supply to the
relevant Trustee for forwarding to each such Holder, without cost to such
Holder, copies of such reports or other information.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Indenture, WCI shall not consolidate with, merge with
or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially an
entirety in one transaction or a series of related transactions) to, any Person
(other than a consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth; PROVIDED, HOWEVER, that, in connection
with any such merger or consolidation, no consideration (other than Common Stock
in the surviving Person or WCI) shall be issued or distributed to the
stockholders of WCI) or permit any Person to merge with or into WCI unless: (i)
WCI shall be the continuing Person, or the Person (if other than WCI) formed by
such consolidation or into which WCI is merged or that acquired or leased such
property and assets of WCI shall be a corporation organized and validly existing
under the laws of the United States of America or any jurisdiction thereof and
shall expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, all of the obligations of WCI on the Notes and under the Indenture;
(ii) immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, WCI or any Person becoming the
successor obligor of the Notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of WCI immediately prior to such
transaction; (iv) immediately after giving effect to such transaction on a pro
forma basis WCI, or any Person becoming the successor obligor of the Notes,
could Incur at least $1.00 of Indebtedness under the first paragraph of the
covenant described under "--Covenants--Limitation on Indebtedness;" and (v) WCI
delivers to the Trustee an Officers' Certificate (attaching the arithmetical
computations to demonstrate compliance with clauses (iii) and, if applicable,
(iv)) and Opinion of Counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture complies with this provision
and that all conditions precedent provided for herein relating to such
transaction have been complied with; PROVIDED, HOWEVER, that clauses (iii) and
(iv) above do not apply if, in the good faith determination of the Board of
Directors of WCI, whose determination shall be evidenced by a Board Resolution,
the principal purpose of such transaction is to change the state of
incorporation of WCI; PROVIDED FURTHER, HOWEVER, that any such transaction shall
not have as one of its purposes the evasion of the foregoing limitations.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (i) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise, whether or not such payment is prohibited by the
provisions described above under "Ranking"; (ii) default in the payment of
interest on any Note when the same becomes due and payable, and such default
continues for a period of 30 days, whether or not such payment is prohibited by
the provisions described above under "Ranking"; (iii) WCI defaults in the
performance of or breaches any other covenant or agreement of WCI in the
Indenture, or under the Notes, and such default or breach continues for a period
of 30 consecutive days after written notice by the Trustee or the Holders of 25%
or more in aggregate principal amount of the Notes; (iv) there occurs with
respect to any issue or issues of Indebtedness of WCI or any Significant
Subsidiary having an outstanding principal amount of $25.0 million or more in
the aggregate for all such issues of all such Persons, whether such Indebtedness
now exists or shall hereafter be created, (a) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and payable
prior to its Stated Maturity and such Indebtedness has not been discharged in
full or such acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or (b) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall not
have been made, waived or extended within 30 days of such payment default; (v)
any final judgment or order (not covered by insurance) for the payment of money
in excess of $25.0 million in the aggregate for all such final judgments or
orders against all such Persons (treating any deductibles, self-insurance or
retention as not so covered) shall be rendered against WCI or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
60 consecutive days following entry of the final judgment or order that causes
the aggregate
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amount for all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $25.0 million during which a stay
of enforcement of such final judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; (vi) a court having jurisdiction in the
premises enters a decree or order for (a) relief in respect of WCI or any
Significant Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (b) appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of WCI or any Significant Subsidiary or for all or substantially all of
the property and assets of WCI or any Significant Subsidiary or (c) the winding
up or liquidation of the affairs of WCI or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; or (vii) WCI or any Significant Subsidiary (a) commences
a voluntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or consents to the entry of an order for relief
in an involuntary case under any such law, (b) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of WCI or any Significant Subsidiary or for all
or substantially all of the property and assets of WCI or any Significant
Subsidiary or (c) effects any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(vi) or (vii) above that occurs with respect to WCI and is continuing under the
Indenture, the Trustee or the Holders of at least 25% in aggregate principal
amount of the Notes then outstanding, by written notice to WCI (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, if any, on the Notes, to be immediately due and payable. Upon
a declaration of acceleration, such principal, premium, if any, and accrued
interest, if any, shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (iv)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (iv) shall be remedied or cured by WCI or
the relevant Significant Subsidiary or waived by the holders of the relevant
Indebtedness within 60 days after the declaration of acceleration with respect
thereto. If an Event of Default specified in clause (vi) or (vii) above occurs
with respect to WCI, the principal of, premium, if any, and accrued interest, if
any, on the Notes then outstanding shall ipso facto become and be immediately
due and payable without any declaration or other act on the part of Trustee or
any Holder. The Holders of at least a majority in principal amount of the
outstanding Notes, by written notice to WCI and to the Trustee, may waive all
past defaults and rescind and annul a declaration of acceleration and its
consequences if (A) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Notes that have become
due solely by such declaration of acceleration, have been cured or waived and
(B) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see "--
Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes 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 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 of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability 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 Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
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not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture will require certain officers of WCI to certify, on or before
a date not more than 90 days after the end of each fiscal year, that a review
has been conducted of the activities of WCI and its Restricted Subsidiaries'
performance under the Indenture and that, to the best knowledge of such officer,
WCI has fulfilled all obligations thereunder, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default and the
nature and status thereof. WCI will also be obligated to notify the Trustee of
any default or defaults in the performance of any covenants or agreements under
the Indenture.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture will provide that WCI be deemed to
have paid and will be discharged from any and all obligations in respect of the
Notes on the 123rd day after the deposit referred to below, and the provisions
of the Indenture will no longer be in effect with respect to the Notes (except
for, among other matters, certain obligations to register the transfer or
exchange of the Notes, to replace stolen, lost or mutilated Notes, to maintain
paying agencies, to hold monies for payment in trust), if, among other things,
(A) WCI has deposited with the 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
Notes on the Stated Maturity of such payments or upon earlier optional
redemption, in each case in accordance with the terms of the Indenture and the
Notes, (B) WCI has delivered to the Trustee (i) either (x) an Opinion of Counsel
to the effect that Holders will not recognize income, gain or loss for federal
income tax purposes as a result of WCI's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit, defeasance and discharge had not occurred, which Opinion of
Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Issue Date such that a ruling is no
longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the Bankruptcy Code or Section 15 of the
New York Debtor and Creditor Law, (C) immediately after giving effect to such
deposit on a pro forma basis, no Event of Default, or event that after the
giving of notice or lapse of time or both would become an Event of Default,
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 123rd day after the date of such deposit, and such deposit
shall not result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which WCI is a party or by which WCI is bound,
and (D) if at such time the Notes are listed on a national securities exchange,
WCI has delivered to the Trustee an Opinion of Counsel to the effect that the
Notes will not be delisted as a result of such deposit, defeasance and
discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that its provisions will no longer be in effect with
respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of
Assets" and all the covenants described herein under "Covenants," clause (c)
under "--Events of Default" with respect to such covenants and clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets," and clauses (d) and (e)
and, if applicable, (i) and (ii) under "--Events of Default" shall be deemed not
to be Events of Default, 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
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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 Notes on the Stated Maturity of such payments or upon earlier
optional redemption, in each case in accordance with the terms of the Indenture
and the Notes, the satisfaction of the provisions described in clauses (B)(ii),
(C) and (D) of the preceding paragraph and the delivery by WCI to the Trustee of
an Opinion of Counsel to the effect that, among other things, the Holders will
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit and defeasance of certain covenants and Events of Default and
will be subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit and defeasance
had not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event WCI exercises
its option to omit compliance with certain covenants and provisions of the
Indenture with respect to the Notes as described in the immediately preceding
paragraph and the Notes are declared due and payable because of the occurrence
of an Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on the Notes at the time of their Stated Maturity but may not be
sufficient to pay amounts due on the Notes at the time of the acceleration
resulting from such Event of Default. However, WCI will remain liable for such
payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by WCI and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount of the outstanding Notes; PROVIDED, HOWEVER, that no such
modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
Without the consent of any Holder of the Notes, WCI and the Trustee may
modify or amend the Indenture to cure any ambiguity, defect or inconsistency, to
provide for the assumption by a successor company of WCI's obligations under the
Indenture, to comply with the requirements of the Trust Indenture Act, to
appoint a successor Trustee or to make any change that, in the opinion of the
Board of Directors of WCI evidenced by a Board Resolution, does not materially
and adversely affect the rights of any Holder.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of WCI in the Indenture, or in any of the Notes or because
of the creation of any Indebtedness represented thereby, shall be had against
any incorporator, stockholder, officer, director, employee or controlling person
of WCI or of any successor Person thereof in such capacity. Each Holder, by
accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides 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 Indenture. If an Event of
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Default has occurred and is continuing, the Trustee will use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of WCI to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claims, as
security or otherwise. The 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.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
"1995 Notes" means the 1995 Senior Notes and the Convertible Notes.
"1997 Notes" means the 1997 Senior Notes and the Notes.
"1995 Senior Notes" means the 14% Senior Discount Notes due 2005 of WCI.
"1997 Senior Notes" means the 14 1/2% Senior Deferred Interest Notes Due
2005 of WCI.
"Accumulated Amount" means, as of any date (the "Specified Date"), the
amount provided below for each $1,000 principal amount of Notes.
(i) if the Specified Date occurs on one of the following dates (each, a
"SemiAnnual Interest Accrual Date"), the Accumulated Amount will equal the
amount set forth below for such SemiAnnual Interest Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL INTEREST ACCRUAL DATE ACCUMULATED AMOUNT
- ------------------------------------------------------------------------- -------------------
<S> <C>
March 1, 1998............................................................ $ 1060.000
September 1, 1998........................................................ 1139.500
March 1, 1999............................................................ 1224.963
September 1, 1999........................................................ 1316.835
March 1, 2000............................................................ 1415.597
September 1, 2000........................................................ 1521.767
March 1, 2001............................................................ 1635.900
September 1, 2001........................................................ 1758.592
March 1, 2002............................................................ 1890.486
</TABLE>
(ii) if the Specified Date occurs before the first SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal the sum of (A) $1,000 and
(B) an amount equal to the product of (1) the Accumulated Amount for the
first SemiAnnual Interest Accrual Date less $1,000 multiplied by (2) a
fraction, the numerator of which is the number of days elapsed from the
Closing 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 Closing
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
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preceding SemiAnnual Interest Accrual Date to the Specified Date, using a
360-day year of twelve 30-day months, and the denominator of which is 180;
or
(iv) if the Specified Date occurs after the last SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal $1890.486.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of WCI and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED, HOWEVER, that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than WCI or
any of its Restricted Subsidiaries) has a joint interest and the net income of
any Unrestricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to WCI or any of its Restricted Subsidiaries
by such other Person, including, without limitation, an Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the covenant described under "--Covenants--Limitation on Restricted
Payments" (and in such case, except to the extent includable pursuant to clause
(i) above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with WCI or
any of its Restricted Subsidiaries or all or substantially all of the property
and assets of such Person are acquired by WCI or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the covenant described under "--Covenants--Limitation on Restricted
Payments," any amount paid as, or accrued for, cash dividends on Preferred Stock
of WCI or any Restricted Subsidiary owned by Persons other than WCI and any of
its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary
losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of WCI and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of WCI and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than
licenses issued by the FCC), all as set forth on the quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries, prepared in
conformity with GAAP and most recently filed with the Commission pursuant to
"--SEC Reports and Reports to Holders;" PROVIDED, HOWEVER, that the value of any
licenses issued by the FCC shall, in the event of an auction for similar
licenses, be equal to the fair market value ascribed thereto in good faith by
the Board of Directors and evidenced by a Board Resolution. As used in the
Indenture, references to financial statements of WCI and its Restricted
Subsidiaries shall be adjusted to exclude Unrestricted Subsidiaries if the
context requires.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by WCI or any of its Restricted
Subsidiaries in any other Person pursuant to which such Person shall become a
Restricted Subsidiary of WCI or shall be merged into
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or consolidated with WCI or any of its Restricted Subsidiaries or (ii) an
acquisition by WCI or any of its Restricted Subsidiaries of the property and
assets of any Person other than WCI or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business of such Person.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transactions) in one transaction or a
series of related transactions by WCI or any of its Restricted Subsidiaries to
any Person other than WCI or any of its Restricted Subsidiaries of (i) all or
any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially
all of the property and assets of an operating unit or business of WCI or any of
its Restricted Subsidiaries or (iii) any other property or assets of WCI or any
of its Restricted Subsidiaries outside the ordinary course of business of WCI or
such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
assets of WCI; PROVIDED, HOWEVER, that the following shall not be included
within the meaning of "Asset Sale": (A) sales or other dispositions of
inventory, receivables and other current assets; (B) sales or other dispositions
of equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of WCI or its Restricted
Subsidiaries; (C) a substantially simultaneous exchange of, or a sale or
disposition (other than 85% or more for cash or cash equivalents) by WCI or any
of its Restricted Subsidiaries of, licenses issued by the FCC or applications or
bids therefor; PROVIDED, HOWEVER, that the consideration received by WCI or any
such Restricted Subsidiary in connection with such exchange, sale or disposition
shall be equal to the fair market value of licenses so exchanged, sold or
disposed of, as determined by the Board of Directors; and (D) except for
purposes of the definition of "Indebtedness to EBITDA Ratio," any sale or other
disposition of securities of an Unrestricted Subsidiary. The Indenture also
provides that, notwithstanding anything to the contrary in this definition, any
sale, transfer or other disposition (other than a lease in the ordinary course
of business but including the receipt of insurance proceeds in respect of
Collateral) of any Collateral shall be deemed to be an Asset Sale of such
Collateral.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Business Day" means any day except a Saturday, Sunday or other day on which
commercial banks in The City of New York, or in the city of the Corporate Trust
Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended ("Exchange Act")), other than the Permitted Investor, becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Stock representing more than 50% of the total voting power of the Voting
Stock of WCI on a fully diluted basis or (ii) individuals who on the 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 WCI's
stockholders was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date
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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.
"Closing Date" means March 18, 1997.
"Consolidated EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
nonrecurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income and (vi) all other noncash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all noncash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for WCI and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED, HOWEVER, that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by WCI or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by WCI or any of its Restricted Subsidiaries) and all but the principal
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by WCI and its Restricted Subsidiaries
during such period; excluding, however, (i) any amount of such interest of any
Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof (but only in the same proportion as the
net income of such Restricted Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof) and (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes and the offering of the
1997 Notes in the March 1997 Debt Placement and August 1997 Debt Placement, all
as determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries (which shall
be as of a date not more than 90 days prior to the date of such computation, and
which shall not take into account Unrestricted Subsidiaries), less any amounts
attributable to Redeemable Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of the Capital Stock of
WCI or any of its Restricted Subsidiaries, each item to be determined in
conformity with GAAP (excluding the effects of foreign currency exchange
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Convertible Notes" means the 14% Convertible Senior Subordinated Discount
Notes of WCI due 2005.
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"Convertible Notes Indenture" means the Indenture dated as of October 23,
1995, between WCI and United States Trust Company of New York pursuant to which
the Convertible Notes were issued.
"Default" means any event that is, or after notice or passage of time or
both would be, 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.
"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 Indenture, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained in the
Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indentures shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the Offering of the Notes, the March 1997 Debt Placement or the
August 1997 Debt Placement and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED, HOWEVER, that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Holder" means the Person in whose name a Note is registered on the books of
the registrar for the Notes.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including, with respect to the Company and its Restricted Subsidiaries, an
"incurrence" of Indebtedness by reason of a Person becoming a Restricted
Subsidiary of the Company; PROVIDED, HOWEVER, that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or
non-negotiable), (iii) all
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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 WCI and its Restricted
Subsidiaries on a consolidated basis ("Consolidated Indebtedness") as at the
date of determination (the "Transaction Date") to (ii) the Consolidated EBITDA
of WCI for the then most recent four full fiscal quarters for which reports have
been filed pursuant to "--SEC Reports and Reports to Holders" (such four full
fiscal quarter period being referred to herein as the "Four Quarter Period");
PROVIDED, HOWEVER, that (x) pro forma effect shall be given to any Indebtedness
Incurred from the beginning of the Four Quarter Period through the Transaction
Date (including any Indebtedness Incurred on the Transaction Date), to the
extent outstanding on the Transaction Date, (y) if during the period commencing
on the first day of such Four Quarter Period through the Transaction Date (the
"Reference Period"), WCI or any of the Restricted Subsidiaries shall have
engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced
by an amount equal to the EBITDA (if positive), or increased by an amount equal
to the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if such
Asset Sale and related retirement of Indebtedness had occurred on the first day
of such Reference Period or (z) if during such Reference Period WCI or any of
the Restricted Subsidiaries shall have made any Asset Acquisition, Consolidated
EBITDA of WCI shall be calculated on a pro forma basis as if such Asset
Acquisition and any Incurrence of Indebtedness to finance such Asset Acquisition
had taken place on the first day of such Reference Period.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of WCI or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock held by WCI and the Restricted Subsidiaries of
any Person that has ceased to be a Restricted Subsidiary by reason of any
transaction permitted by clause (iii) of the covenant described under
"--Covenants--Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries." For purposes of the definition of "Unrestricted Subsidiary" and
the covenant described under "--Covenants--Limitation on Restricted Payments,"
(i)
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"Investment" shall include the fair market value of the assets (net of
liabilities) of any Restricted Subsidiary of WCI at the time that such
Restricted Subsidiary of WCI is designated an Unrestricted Subsidiary and shall
exclude the fair market value of the assets (net of liabilities) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of WCI and (ii) any property transferred to
or from an Unrestricted Subsidiary shall be valued at its fair market value at
the time of such transfer, in each case as determined by the Board of Directors
in good faith.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to WCI or any Restricted Subsidiary of WCI) and proceeds from
the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of WCI and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by WCI or
any Restricted Subsidiary of WCI as a reserve against any liabilities associated
with such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to WCI or any Restricted Subsidiary of WCI) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable by WCI or any of its subsidiaries as a result thereof.
"Notes" means in either case, the 15% Senior Subordinated Deferred Interest
Notes Due 2007 or 15% Senior Subordinated Deferred Interest Exchange Notes due
2007 of WCI.
"Offer to Purchase" means an offer to purchase Notes by WCI from the Holders
that is required by the covenant described under "--Repurchase of Notes upon a
Change of Control" or "--Covenants -- Limitation on Asset Sales" and which is
commenced by mailing a notice to the Trustee and each Holder stating: (i) the
covenant pursuant to which the offer is being made and that all Notes validly
tendered will be accepted for payment on a pro rata basis; (ii) the purchase
price and the date of purchase (which shall be a Business Day no earlier than 30
days nor later than 60 days from the date such notice is mailed) (the "Payment
Date"); (iii) that any Note not tendered will continue to accrue interest
pursuant to its terms; (iv) that, unless WCI defaults in the payment of the
purchase price, any Note accepted for payment pursuant to the Offer to Purchase
shall cease to accrue interest on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side
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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 Accumulated
Amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
Accumulated Amount (and accrued and unpaid interest) to the unpurchased portion
thereof; PROVIDED, HOWEVER, that each Note purchased and each new Note issued
shall be in a principal amount of $1,000 or integral multiples thereof. On the
Payment Date, WCI shall (i) accept for payment on a pro rata basis Notes or
portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by
WCI. The Paying Agent shall promptly mail to the Holders of Notes so accepted
for payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail to such Holders a new Note equal in principal
amount to any unpurchased portion of the Note surrendered; PROVIDED, HOWEVER,
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or integral multiples thereof. WCI will publicly announce the results
of an Offer to Purchase as soon as practicable after the Payment Date. The
Trustee shall act as the Paying Agent for an Offer to Purchase. WCI will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that WCI is required to repurchase Notes pursuant to an Offer to
Purchase.
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary or
a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, WCI or a Restricted Subsidiary; (ii)
Temporary Cash Investments; (iii) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) loans or advances to employees in a
principal amount not to exceed $1.0 million at any one time outstanding; (v)
stock, obligations or securities received in satisfaction of judgments; (vi)
Investments, to the extent that the consideration provided by WCI or any of its
Restricted Subsidiaries consists solely of Capital Stock (other than Redeemable
Stock) of WCI; (vii) notes payable to WCI that are received by WCI as payment of
the purchase price for Capital Stock (other than Redeemable Stock) of WCI; and
(viii) acquisitions of a minority equity interest in entities engaged in the
telecommunications business; PROVIDED, HOWEVER, that (A) the acquisition of a
majority equity interest in such entities is not permitted under U.S. law
without FCC consent, (B) the Company or one of its Restricted Subsidiaries has
the right to acquire Capital Stock representing a majority of the voting power
of the Voting Stock of such entity upon receipt of FCC consent and (C) in the
event that such consent has not been obtained within 18 months of funding such
Investment, the Company or one of its Restricted Subsidiaries has the right to
sell such minority equity interest in the seller thereof for consideration
consisting of the consideration originally paid by the Company and its
Restricted Subsidiaries for such minority equity interest.
"Permitted Investor" means Mr. William J. Rouhana, Jr.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference stock, whether
now outstanding or issued after the Closing Date, including, without limitation,
all series and classes of such preferred or preference stock.
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"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes (unless the redemption price is, at WCI's option, without
conditions precedent, payable solely in Common Stock (other than Redeemable
Stock) of WCI) or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED, HOWEVER, that any
Capital Stock that would not constitute Redeemable Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in "--Repurchase of Notes
Upon a Change of Control" and "--Covenants--Limitation on Asset Sales" and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to WCI's repurchase of
such Notes as are required to be repurchased pursuant to "--Repurchase of Notes
Upon a Change of Control" and "--Covenants--Limitation on Asset Sales."
"Restricted Subsidiary" means any Subsidiary of WCI other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission and any successor agency.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary of WCI that, together with its Subsidiaries, (i) for the most recent
fiscal year of WCI, accounted for more than 10% of the consolidated revenues of
WCI and its Restricted Subsidiaries or (ii) as of the end of such fiscal year,
was the owner of more than 10% of the consolidated assets of WCI and its
Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of WCI for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which Voting Stock representing more than 50% of the
voting power of the outstanding Voting Stock is owned, directly or indirectly,
by such Person and one or more other Subsidiaries of such Person.
"Telecommunications Assets" means any (i) entity or business substantially
all the revenues of which are derived from (a) providing transmission of sound,
data or video; (b) the sale or provision of phone cards, "800" services, voice
mail, switching, enhanced telecommunications services, telephone directory or
telephone number information services or telecommunications network
intelligence; or (c) any business ancillary or directly related to the
businesses referred to in clause (a) or (b) above and (ii) any assets used
primarily to effect such transmission or provide the products or services
referred to in clause (a) or (b) above and any directly related or ancillary
assets including, without limitation, licenses and applications, bids and
agreements to acquire licenses, or other authority to provide transmission
services previously granted, or to be granted, by the FCC.
"Telecommunications Subsidiary" means (i) WinStar Gateway Network, Inc.,
WinStar Wireless, Inc., WinStar Telecommunications, Inc., WinStar Milliwave,
Inc., WinStar Locate, Inc. and WinStar Wireless Fiber Corp., and, in each case,
its successors and (ii) any other Restricted Subsidiary of WCI that holds more
than a DE MINIMIS amount of Telecommunications Assets.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof; (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
company which is organized
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under the laws of the United States, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50.0 million (or the
foreign currency equivalent thereof) and has outstanding deposits or debt which
is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor; (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above; (iv) commercial paper, maturing not more than
six months after the date of acquisition, issued by a corporation (other than an
Affiliate of WCI) organized and in existence under the laws of the United
States, any state thereof or any foreign country recognized by the United States
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Group; and (v) securities with maturities
of six months or less from the date of acquisition issued or fully and
unconditionally guaranteed by any state, commonwealth or territory of the United
States, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or Moody's Investors Service,
Inc.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by WCI or any of its Restricted Subsidiaries, the date such Indebtedness is to
be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of WCI that at the time
of determination shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of WCI (including any newly acquired or newly formed Subsidiary of
WCI), other than a guarantor of the Notes, to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, WCI or any Restricted Subsidiary; PROVIDED, HOWEVER, that
neither WCI nor its Restricted Subsidiaries has any Guarantee of any
Indebtedness of such Subsidiary outstanding at the time of such designation and
either (A) the Subsidiary to be so designated has total assets of $1,000 or less
or (B) if such Subsidiary has assets greater than $1,000, such designation would
be permitted under the covenant described under "--Covenants--Limitation on
Restricted Payments." Notwithstanding the foregoing, WinStar New Media Company
Inc., Non Fiction Films Inc. and WinStar Global Products, Inc. and their
Subsidiaries are Unrestricted Subsidiaries. The Board of Directors may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary of WCI; PROVIDED,
HOWEVER, that immediately after giving effect to such designation (x) WCI could
Incur $1.00 of additional Indebtedness under the first paragraph of the covenant
described under "--Covenants--Limitation on Indebtedness" and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions. Anything to the contrary contained in the Indentures
notwithstanding, no Telecommunications Subsidiary may be designated an
Unrestricted Subsidiary.
"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 Company thereof at any time
prior to the Stated Maturity of the Notes, and shall also include a depositary
receipt issued by a bank or trust company as custodian with respect to any such
U.S. Government Obligation or a specific payment of interest on or principal of
any such custodian for the account of the holder of a depositary receipt;
PROVIDED, HOWEVER, that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depositary receipt from any amount received by the
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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.
"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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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF THE MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
THIS SUMMARY IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), EXISTING AND PROPOSED TREASURY REGULATIONS PROMULGATED THEREUNDER, AND
ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS THEREOF, ALL AS IN EFFECT OR
PROPOSED ON THE DATE HEREOF AND ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY
WITH RETROACTIVE EFFECT, OR DIFFERENT INTERPRETATIONS. This summary assumes that
all of the New Notes will be held as capital assets (I.E., generally assets that
are held for investment), within the meaning of Section 1221 of the Code, and
will not be part of a straddle, a hedge or a conversion transaction, within the
meaning of Section 1258 of the Code. The discussion is for general information
only, and does not address all of the tax consequences that may be relevant to
particular purchasers in light of their personal circumstances, or to certain
types of purchasers (such as certain financial institutions, insurance
companies, tax-exempt entities or dealers in securities). Persons considering
the exchange of Old Notes for New Notes should consult their tax advisors with
regard to the application of the United States federal income tax laws to their
particular situations, as well as any tax consequences arising under the laws of
any state, local, or foreign taxing jurisdictions.
As used in the summary which follows, the term "U.S. Holder" means a
beneficial owner of New Notes that for United States federal income tax purposes
is (i) a citizen or resident of the United States, (ii) a corporation, or other
entity Taxable as a corporation, created or organized in or under the laws of
the United States or of any political subdivision thereof, or (iii) otherwise
subject to United States federal income taxation on a net income basis with
respect to worldwide income. The term "Non-U.S. Holder" means a holder of New
Notes, that is, for United States federal income tax purposes, not a U.S.
Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF EXCHANGING THE OLD NOTES FOR NEW NOTES AND PURCHASING,
HOLDING AND DISPOSING OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE FOR OLD NOTES
The exchange by a holder of an Old Note for a New Note does not constitute a
taxable exchange because the New Notes do not differ materially in kind or
extent from the Old Notes. Each New Note will be treated as having been
originally issued at the time the Old Note exchanged therefor was originally
issued. The tax basis and holding period of each Old Note will carry over to the
New Note issued in exchange of each Old Note.
TAX CONSEQUENCES TO U.S. HOLDERS
ORIGINAL ISSUE DISCOUNT. The Old Notes were issued with original issue
discount, as defined in the Code. The New Notes will similarly be treated as
issued with original issue and discount. The amount of original issue discount
on a debt instrument, within the meaning of Section 1273 of the Code, is the
excess (if any) of its "stated redemption price at maturity" over its issue
price. The issue price of each of the Old Notes was the respective offering
price to the purchasers (not including any sales to a bond house, broker, or
similar person or organization acting in the capacity of an underwriter,
placement agent or wholesaler) at which a substantial amount of each of the Old
Notes was sold. According to the Treasury Regulations, the issue price of the
New Notes does not change even if part of the issue is subsequently sold at a
different price. The "stated redemption price at maturity" of a debt instrument
is the sum of its principal amount plus all other payments required thereunder,
other than payments of "qualified stated interest" (defined generally as stated
interest that is unconditionally payable in cash or in property (other than the
debt instruments of the issuer) at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
Because interest on the New Notes is not payable in cash until 2002, the stated
interest on the Notes will not be treated as qualified stated interest, but
will, for United
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States federal income tax purposes, be added to the stated redemption price at
maturity of the New Notes. As a result, the New Notes will be treated as having
been issued with original issue discount equal to the excess of their stated
redemption price at maturity over their issue price.
Each U.S. Holder of a New Note (regardless of whether such U.S. Holder is a
cash or an accrual basis taxpayer) will be required to include in such U.S.
Holder's gross income in each taxable year, in advance of the receipt of cash
payments attributable to such income, that portion of the original issue
discount, computed on a constant yield basis, attributable to each day during
such taxable year on which the U.S. Holder held the New Note. In general, under
Section 1272 of the Code, the amount of original issue discount that a holder of
a debt instrument must include in gross income for United States federal income
tax purposes will be the sum of the daily portions of original issue discount
with respect to such debt instrument for each day during the taxable year or
portion of a taxable year in which such holder holds the debt instrument. The
daily portion is determined under a constant yield method by allocating to each
day of an accrual period a pro rata portion of an amount equal to the "adjusted
issue price" of the debt instrument at the beginning of the accrual period
multiplied by the yield to maturity of the debt instrument (stated in a manner
appropriately taking into account the length of the accrual period). Accrual
periods with respect to a New Note may be of any length selected by the U.S.
Holder and may vary in length over the term of the New Note as long as (i) no
accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the New Note occurs on either the final or first day of
an accrual period. The yield to maturity of a debt instrument is the discount
rate that, when applied to all payments due under the debt instrument produces a
present value equal to the issue price of the debt instrument. The "adjusted
issue price" is the issue price of the debt instrument increased by the accrued
original issue discount for all prior accrual periods (and decreased by the
amount of cash payments made in all prior accrual periods).
U.S. Holders of New Notes should be aware that, because of the above
original issue discount rules, a U.S. Holder of a New Note will be required for
United States federal income tax purposes to include amounts in ordinary income
in advance of the receipt of the cash attributable to such income.
ACQUISITION PREMIUM. If a U.S. Holder of an Old Note acquires a New Note at
a cost in excess of its "adjusted issue price" (as defined above) but less than
its stated redemption price at maturity, such New Note will have an acquisition
premium to the extent of such excess. Under the acquisition premium rules of the
Code and the Treasury Regulations promulgated thereunder, the amount of the
original issue discount which such U.S. Holder must include in its gross income
with respect to such New Note for any taxable year will be reduced by the
portion of such acquisition premium properly allocable to such year.
MARKET DISCOUNT. If a U.S. Holder purchased Old Notes for an amount that is
less than the "revised issue price" of the Notes at the time of acquisition, the
amount of such difference will be treated as "market discount" for United States
federal income tax purposes, unless such difference is less than a specified de
minimis amount ("DE MINIMIS market discount"). The "revised issue price" is the
original issue price of an Old Note plus the aggregate amount of previously
accrued original issue discount without regard to any reductions for acquisition
premium, less payments other than qualified stated interest. Under the market
discount rules, a holder will be required to treat any principal payment on or
any gain on the sale, exchange, retirement or other disposition of, New Notes as
ordinary income to the extent of the market discount which has not previously
been included in income and is treated as having accrued on such New Notes at
the time of such payment or disposition. If a holder makes a gift of a New Note,
accrued market discount, if any, will be recognized as if such holder had sold
such New Note for a price equal to its fair market value. In addition, the
holder may be required to defer, until the maturity of the New Notes or the
earlier disposition of the New Notes in a taxable transaction, the deduction of
a portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such New Notes.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the New
Notes, unless a holder elects to accrue market discount
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on a constant interest method. A holder of New Notes may elect to include market
discount in income currently as it accrues (on either a straight-line basis or
constant interest method), in which the case rules described above regarding the
deferral of interest deductions and ordinary income treatment of gain on
disposition will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the Service.
SALE OR OTHER DISPOSITION. In general, a U.S. Holder of New Notes will
recognize gain or loss upon the sale, exchange, redemption, or other taxable
disposition of such New Notes measured by the difference between (i) the amount
of cash and the fair market value of property received and (ii) the U.S.
Holder's adjusted tax basis in the New Notes. A U.S. Holder's adjusted tax basis
for determining gain or loss on the sale or other disposition of a New Note will
initially equal the cost of the New Note to such U.S. Holder and will be
increased by any accrued original issue discount (net of all amortized
acquisition premium) and any market discount includable in such U.S. Holder's
gross income and decreased by the amount of any cash payments received by such
U.S. Holder regardless of whether such payments are denominated as principal or
interest (other than payments of qualified stated interest) and amortizable bond
premium, if any, deducted over the term of the New Notes. Subject to the market
discount rules discussed above, any such gain or loss will generally be
long-term capital gain or loss, provided the New Notes have been held for more
than one year. Under the Taxpayer Relief Act of 1997, lower capital gains rates
apply to the sale or exchange of New Notes held by an individual taxpayer for
more than 18 months.
ELECTIONS. A U.S. Holder of New Notes, subject to certain limitations, may
elect to include all stated and unstated interest and discount on the New Notes
in gross income under the constant yield method. For this purpose, interest
includes original issue discount, DE MINIMIS market discount and market
discount, as adjusted by any amortizable bond premium or acquisition premium.
Any such election, if made in respect of a market discount bond, will constitute
an election to include market discount in income currently on all market
discount bonds acquired by such U.S. Holder on or after the first day of the
first taxable year to which the election applies. See "--Market Discount." U.S.
Holders should consult with their tax advisors regarding any tax elections they
intend to make with respect to any Notes.
APPLICABLE HIGH YIELD DISCOUNT RULES. Generally, under Section 163(e)(5) of
the Code, original issue discount is not deductible until paid in cash or
property (other than the Company debt or stock) with respect to any "applicable
high yield discount obligations" ("AHYDOs") issued by a corporation. A New Note
will continue to constitute an AHYDO since the Old Note it is replacing (i) had
a maturity date which is more than five years from the date of issue, (ii) has a
yield to maturity which equals or exceeds the sum of five percentage points plus
the "applicable federal rate" ("AFR") for the calendar month in which the
obligation was issued and (iii) had "significant original issue discount" (as
defined in Section 163(i)(2) of the Code). (The AFR for the month of October
1997 was 6.24% for instruments with a weighted average maturity in excess of
three years but not in excess of nine years providing semiannual compounding).
Since the New Notes continue to be AHYDOs, (i) the product of the total original
issue discount under the New Notes times the ratio of (a) the excess of the
yield to maturity over the sum of the AFR plus six percentage points to (b) the
yield to maturity will not be deductible by the Company and will be treated for
some purposes as dividends to corporate holders of the New Notes (to the extent
that the Company has sufficient current or accumulated earnings and profits for
federal income tax purposes that such non-deductible amounts would have been
treated as dividends if they had been distributions with respect to the
Company's stock), and (ii) any original issue discount for which the Company's
deductions are not disallowed under clause (i) above will not be deductible by
the Company until actually paid. Amounts treated as dividends under clause (i)
will be non-deductible by the Company, and may qualify for the dividends
received deduction for corporate holders, but should be treated as original
issue discount and must be included in income, as described above. The Company
believes that it does not presently have any current or accumulated earnings and
profits and it cannot predict whether it will have any earnings and profits for
future years. As such, in any year in which the Company has no earnings and
profits, the non-
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deductible portion in clause (i) relating to such year would not be eligible for
the dividends received deduction in the case of corporate holders.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Company will report
annually to the Service and to noncorporate record holders of the New Notes the
original issue discount accrued and the amount of interest paid during the
calendar year. The "backup" withholding and information reporting requirements
may apply to certain payments of principal and interest (including original
issue discount) on a New Note and to certain payments of proceeds on the sale or
retirement of a New Note. The Company, its agent, a broker, the Trustee or any
paying agent, as the case may be, will be required to withhold tax from any
payment that is subject to backup withholding at a rate of 31% if the U.S.
Holder, among other things, (i) fails to furnish his or her social security
number or other taxpayer identification number ("TIN") to the payor responsible
for backup withholding, (ii) furnishes to such payor an incorrect TIN, (iii)
fails to provide such payor with a certified statement, signed under penalties
of perjury, that the TIN provided to the payor is correct and that the U.S.
Holder is not subject to backup withholding or (iv) fails to report properly
interest and dividends on his or her tax return. A holder who does not provide
the Company or the applicable reporting entity with his or her correct TIN may
be subject to penalties under the Code. Certain holders, including corporations,
are not subject to backup withholding if their exempt status is properly
established.
Backup withholding is not an additional tax. The amount of any backup
withholding from a payment to a U.S. Holder will be allowed as a credit against
such holder's United States federal income tax liability and may entitle such
holder to a refund, provided that the required information is furnished to the
Service.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
PORTFOLIO INTEREST EXEMPTION
A Non-U.S. Holder will generally, under the portfolio interest exemption of
the Code, not be subject to United States federal income taxes and/or United
States federal withholding tax, on payments of principal, premium, if any, and
interest (including original issue discount) on the New Notes, provided that (in
the case of interest, including original issue discount) (i) the Non-U.S. Holder
does not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, (ii) the Non-U.S.
Holder is not a controlled foreign corporation that is related to the Company
through stock ownership, (iii) such original issue discount or interest is not
effectively connected with a United States trade or business of the Non-U.S.
Holder and (iv) either (a) the beneficial owner of the New Notes certifies to
the Company or its agent, under penalties of perjury, that it is a Non-U.S.
Holder and provides a completed IRS Form W-8 ("Certificate of Foreign Status")
or (b) a securities clearing organization, bank or other financial institution
which holds customers' securities in the ordinary course of its trade or
business (a "financial institution") and holds the New Notes, certifies to the
Company or its agent, under penalties of perjury, that it has received Form W-8
from the beneficial owner or that it has received from another financial
institution a Form W-8 and furnishes the payor with a copy thereof. If any of
the situations described in proviso (i), (ii) or (iv) of the preceding sentence
do not exist, interest on the New Notes when received is subject to United
States withholding tax at the rate of 30% unless an income tax treaty between
the United States and the country of which the Non-U.S. Holder is a tax resident
provides for the elimination or reduction in the rate of United States federal
withholding tax. Final Treasury Regulations (the "Regulations") issued October
6, 1997 will provide alternative methods for satisfying the certification
requirement described in clause (iv)(a) and (b). The Regulations are proposed to
be effective for payments made after December 31, 1998.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States and interest (including original issue discount) on the New Note
is effectively connected with the conduct of such trade or business, such
holder, although exempt from United States federal withholding tax by reason of
the delivery of a properly completed Form 4224, will be subject to United States
federal income tax on such
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interest (including original issue discount) and on any gain realized on the
sale, exchange or other disposition of a New Note in the same manner as if it
were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for that taxable year, unless it
qualifies for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
New Notes owned or treated as owned by an individual who is neither a United
States citizen nor a United States resident (as defined for United States
federal estate tax purposes) at the time of death will be excluded from the
individual's gross estate for the United States federal estate tax purposes and
will not be subject to United States federal estate tax if the nonresident
qualifies for the portfolio interest exemption (without regard to the
certification requirements) discussed above.
SALE OF NEW NOTES
A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain realized in connection with the sale, exchange or
retirement of New Notes, unless (i) (a) the gain is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States or,
(b) if a tax treaty applies, the gain is attributable to the United States
permanent establishment maintained by the Non-U.S. Holder, (ii) in the case of a
Non-U.S. Holder who is an individual, such holder is present in the United
States for 183 days or more in the taxable year of disposition and certain other
conditions are satisfied, or (iii) the Non-U.S. Holder is subject to tax
pursuant to provisions of the Code applicable to United States expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, there is no United States information reporting requirement or
backup withholding tax on payments to Non-U.S. Holders who provide the
appropriate certification described above regarding qualification for the
portfolio interest exemption from United States federal income tax for payments
of principal or interest (including original interest discount) on the Notes.
Payment by the Company of principal on the New Notes or payment by a United
States office of a broker of the proceeds of a sale of New Notes is subject to
both backup withholding and information reporting unless the beneficial owner
provides a completed IRS Form W-8 which certifies under penalties of perjury
that such owner is a Non-U.S. Holder who meets all the requirements for
exemption from United States federal income tax on any gain from the sale,
exchange or retirement of the New Notes.
In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of New Notes effected at a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, a U.S. person, a controlled foreign corporation or a
foreign person 50% or more of whose gross income for certain periods is derived
from activities that are effectively connected with the conduct of a trade or
business in the United States, such payments will not be subject to backup
withholding, but will be subject to information reporting unless (i) such broker
has documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met, or (ii) the beneficial owner
otherwise establishes an exemption, provided such broker does not have actual
knowledge that the payee is a United States person. Non-U.S. Holders should
consult their tax advisors regarding the application of these rules to their
particular situations, the availability of an exemption therefrom and the
procedure for obtaining such an exemption, if available.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a credit against such holder's
United States federal income tax liability and may entitle such holder to a
refund, provided the required information is furnished to the Service.
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THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NEW NOTES IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM FROM
THE EXCHANGE OF OLD NOTES FOR NEW NOTES AND PURCHASE, OWNERSHIP AND DISPOSITION
OF THE NEW NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX
LAWS.
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DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK
INDEBTEDNESS
DEBT PLACEMENTS
1997 DEBT PLACEMENTS
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. 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 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), 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 August 1997 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. 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 1997 Senior Notes Indenture) of the 1997 Senior Notes as of October 15, 2000
will be payable semiannually in cash on April 15 and October 15 of each year
commencing April 15, 2001. The 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.
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
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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 1995 Notes and 1997 Notes contain certain
covenants which, among other things, restrict the ability of the Company and
certain of its subsidiaries to: incur additional indebtedness; create liens;
engage in sale-leaseback transactions; pay dividends or make distributions in
respect of their capital stock; make investments or certain other restricted
payments; sell assets; issue or sell stock of such subsidiaries; enter into
transactions with stockholders or affiliates; acquire assets or businesses not
constituting "telecommunications assets" (as defined in the Indentures relating
to the 1995 Notes); or consolidate, merge or sell all or substantially all of
their assets. The covenants contained in the Indentures are subject to
exceptions and the Company's new media and consumer products subsidiaries are
not subject to many of the covenants contained therein, although the Company's
ability to make additional investments in such subsidiaries is limited.
EQUIPMENT LEASE FINANCINGS AND CREDIT LINES
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 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
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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 ("US ONE Asset Acquisition")
of certain telecommunications assets (the "Assets") from US ONE Communications
Corp. ("US ONE"), US ONE Communications Services Corp. and US ONE Communications
of New York, Inc. (each individually a "Seller" and collectively, the
"Sellers"). The Assets included 12 Lucent class 5 switching systems and other
non-switch assets. The transaction required and received the approval of the
United States Bankruptcy Court, District of Delaware ("Court"), because the
Sellers are debtors 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 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's discretion, on the effective date of Sellers' 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 (the
"Loan") from certain institutions, 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.
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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 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.
PREFERRED STOCK
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 Series A Preferred
Stock ("Series A Preferred Stock") and warrants to purchase 1,600,000 shares of
the Company's Common Stock (the "Warrants") for an aggregate purchase price of
$100.0 million. 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.
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
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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.
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
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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.
SERIES C PREFERRED STOCK
On December 17, 1997, the Company entered into a Securities Purchase
Agreement with certain purchasers, pursuant to which the Company agreed to sell
to such purchasers an aggregate of 175,000 shares of its Series C 14 1/4% Senior
Cumulative Preferred Stock Due 2007 ("Series C Preferred Stock") for an
aggregate purchase price of $175,000. The Preferred Stock Placement was
conducted through Salomon Smith Barney Inc. and Credit Suisse First Boston
Corporation, which acted as placement agents 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.
Dividends on the Series C Preferred Stock accrue from December 22, 1997 at
the rate per share of 14 1/4% of the Accumulated Amount (as defined) per annum,
compounded semiannually on each June 15 and December 15, but will not be payable
in cash, except as set forth in the next sentence. Commencing on the first June
15 or December 15 (each a "Dividend Payment Date") which is at least six months
after the later of December 15, 2002, and the Specified Debt Satisfaction Date
(as defined) (the "Cash Payment Date"), dividends on the Series C Preferred
Stock will be payable in cash at a rate per annum equal to 14 1/4% of the
Accumulated Amount as of the Dividend Payment Date preceding such date. In the
event that the Specified Debt Satisfaction Date shall not have occurred before
December 15, 2002, the rate otherwise applicable to the Series C Preferred Stock
shall be increased by 150 basis points from December 15, 2002, until the
Dividend Payment Date falling on or after the Specified Debt Satisfaction Date.
The Series C Preferred Stock ranks (i) senior to all existing and future
Junior Stock, including the Series A Preferred Stock; (ii) on a parity with all
existing and future Parity Stock; and (iii) junior to all future senior stock.
In addition, as equity, the Series C Preferred Stock will rank junior in right
of payment to all indebtedness of the Company and its subsidiaries.
The Series C Preferred Stock will not be redeemable prior to December 15,
2002. On or after December 15, 2002, the Series C Preferred Stock will be
redeemable at the option of the Company, in
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whole or in part, at the redemption prices set forth herein plus accumulated and
unpaid dividends, if any, to the date of redemption. On December 15, 2007, the
Company will be required to redeem the Series C Preferred Stock at a price equal
to the Accumulated Amount thereof plus accumulated and unpaid dividends, if any,
out of funds legally available therefor.
On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, the Company may, at its option, exchange all but not less
than all of the shares of Series C Preferred Stock then outstanding for 14 1/4%
Senior Subordinated Deferred Interest Notes Due 2007 ("Exchange Debentures") in
an aggregate Accumulated Amount equal to the aggregate Accumulated Amount of the
shares of Series C Preferred Stock outstanding at the time of such exchange,
plus accumulated and unpaid dividends to the date of exchange.
Until the Cash Payment Date, interest on the Exchange Debentures will accrue
at a rate of 14 1/4% of the Accumulated Amount per annum and will be compounded
semiannually on each June 15 and December 15 (each an "Interest Payment Date")
but will not be payable in cash except as set forth in the next sentence.
Commencing on the first Interest Payment Date following the later of the
Exchange Date (as defined) or the Cash Payment Date, interest will be payable in
cash at a rate per annum equal to 14 1/4% of the Accumulated Amount as of the
Exchange Date. The Exchange Debentures, if issued, will be unsecured, senior
subordinated obligations of the Company, subordinated in right of payment to all
Senior Indebtedness of the Company and to all indebtedness and other liabilities
(including trade payables) of the Company's subsidiaries, and will rank PARI
PASSU with the October 1997 Notes and the Convertible Notes. The Exchange
Debentures, if issued, will not be redeemable prior to December 15, 2002. On or
after December15, 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.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
this Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date (or such longer period as required by the terms of the
Registration Rights Agreement), it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until , 1998 all dealers effecting transactions
in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to an 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 Notes 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 Notes. Any broker-dealer that
resells New Notes that were received by it for is own account pursuant to an
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
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.
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For a period of 180 days after the Expiration Date (or such longer period as
required by the terms of the Registration Agreement), 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 Offers (including the reasonable expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the Holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the Securities
Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and transfer
taxes and costs incurred by a holder in transmitting its Old Notes to the
Exchange Agent and will indemnify the holders of the Old Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the New Notes offered hereby and certain tax matters are
being passed upon for the Company by Graubard Mollen & Miller, New York, New
York. Certain partners and employees of Graubard Mollen & Miller own shares of
the Company's Common Stock.
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 incorporated by reference into this
Prospectus 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
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<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
II-1
<PAGE>
though less than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses (including attorney's fees) incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
(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
II-2
<PAGE>
Company in a successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
* 4.1 Form of New Note
* 5.1 Opinion of Graubard Mollen & Miller
* 12.1 Calculation of Ratio to Fixed Charges
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)
* 25.1 Statement of Eligibility of United States Trust Company of New York on Form T-1
* 99.1 Form of Letter of Transmittal for Exchange of Notes
* 99.2 Form of Notice of Guaranteed Delivery
</TABLE>
- ------------------------
* Previously filed.
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.
II-3
<PAGE>
(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 5th 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>
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.
Chairman of the Board of
/s/ WILLIAM J. ROUHANA, JR. Directors and Chief
- ------------------------------ Executive Officer (and February 5, 1997
William J. Rouhana, Jr. principal executive
officer)
*
- ------------------------------ President, Chief Operating February 5, 1997
Nathan Kantor Officer and Director
*
- ------------------------------ Vice Chairman of the Board February 5, 1997
Steven G. Chrust of Directors
Executive Vice President
* and Chief Financial
- ------------------------------ Officer (and principal February 5, 1997
Charles T. Dickson accounting officer)
*
- ------------------------------ Director February 5, 1997
Bert W. Wasserman
*
- ------------------------------ Director February 5, 1997
William J. vanden Heuvel
*
- ------------------------------ Director February 5, 1997
Steven B. Magyar
*
- ------------------------------ Director February 5, 1997
James I. Cash
- ------------------------
* By power of attorney.
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Grant Thornton LLP
23.2 Consent of Ernst & Young
23.4 Consent of Grant Thornton LLP
</TABLE>
II-6
<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
February 3, 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
Amendment No. 1 to the Registration Statement on Form S-4 No. 333-40755 and
related Prospectus of WINSTAR COMMUNICATIONS, INC. for the registration of 15%
Senior Subordinated Deferred Interest Exchange Notes 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
report 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
February 3, 1998
