<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
---------------------- --------------------
Commission File Number: 1-10726
WINSTAR COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3585278
- ----------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
230 Park Ave., Suite 2700, New York, NY 10169
---------------------------------------------
(Address of principal executive offices)
(212) 584-4000
(Registrant's telephone number)
-----------------------
(Former name, former address and former fiscal year end
if changed since last report)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
State the number of shares outstanding of each of the issuer's classes of common
stock, as of May 14, 1998: 37,279,490
- ---------
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and March 31, 1998 (unaudited)........ 3
Unaudited Condensed Consolidated Statements
of Operations - three months ended
March 31, 1997 and 1998................................. 4
Unaudited Condensed Consolidated Statements
of Cash Flows - three months ended
March 31, 1997 and 1998................................. 5
Notes to Condensed Consolidated
Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 14
PART II. Other Information.......................................... 19
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures ..................................................... 20
2
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
--------------------- ---------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 402,359 $ 825,466
Short term investments 16,903 27,899
--------------------- ---------------------
Cash, cash equivalents and short term investments 419,262 853,365
Accounts receivable, net of allowance for doubtful
accounts 30,328 62,509
Inventories 10,296 10,506
Prepaid expenses and other current assets 8,985 32,476
Net assets of discontinued operations 2,105 2,105
--------------------- ---------------------
Total current assets 470,976 960,961
Property and equipment, net 284,835 304,074
Licenses, net 174,763 218,101
Intangible assets, net 14,293 123,558
Deferred financing costs 27,463 39,442
Other assets 4,071 2,277
--------------------- ---------------------
Total assets $ 976,401 $ 1,648,413
===================== =====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 386 $ 1,733
Accounts payable and accrued expenses 97,714 94,238
Current portion of capitalized lease obligations 6,848 12,554
--------------------- ---------------------
Total current liabilities 104,948 108,525
Capitalized lease obligations, less current portion 21,823 47,089
Long-term debt, less current portion 768,469 1,236,972
Deferred income taxes 24,000 22,900
--------------------- ---------------------
Total liabilities 919,240 1,415,486
--------------------- ---------------------
Series C exchangeable redeemable preferred stock 175,553 181,779
Series D senior cumulative convertible redeemable preferred stock - 200,000
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock 39 40
Common stock, par value $.01; authorized 200,000 shares,
issued and outstanding 34,610 and 37,111, respectively 346 371
Additional paid-in-capital 255,741 310,214
Accumulated deficit (374,518) (459,477)
--------------------- ---------------------
Total stockholders' deficit (118,392) (148,852)
--------------------- ---------------------
Total liabilities, redeemable preferred stock
and stockholders' deficit $ 976,401 $ 1,648,413
===================== =====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------------------
1997 1998
-------------- -----------------
<S> <C> <C>
Operating revenues
Telecommunications services
CLEC $ 1,979 $ 18,635
Other 5,084 16,852
-------------- -----------------
Total telecommunications services 7,063 35,487
Information services 6,014 11,949
-------------- -----------------
Total operating revenues 13,077 47,436
-------------- -----------------
Operating expenses
Cost of services and products 12,959 42,775
Selling, general and administrative expenses 29,553 53,611
Depreciation and amortization 3,501 11,399
-------------- -----------------
Total operating expenses 46,013 107,785
-------------- -----------------
Operating loss (32,936) (60,349)
Other (expense) income
Interest expense (10,798) (28,656)
Interest income 2,235 4,928
--------------------------------------
Loss from continuing operations before income
tax benefit (41,499) (84,077)
Income tax benefit - 1,100
-------------- -----------------
Loss from continuing operations (41,499) (82,977)
Loss from discontinued operations (477) (1,982)
-------------- -----------------
Net loss (41,976) (84,959)
Preferred stock dividends - (8,198)
-------------- -----------------
Net loss applicable to common stockholders $ (41,976) $ (93,157)
============== =================
Basic and diluted income loss per share:
From continuing operations $ (1.27) $ (2.54)
From discontinued operations (0.02) (0.06)
-------------- -----------------
Net loss per share $ (1.29) $ (2.60)
============== =================
Weighted average shares outstanding 32,610 35,899
============== =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------------
1997 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (41,976) $ (84,959)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations 477 1,982
Depreciation and amortization 3,791 12,518
Deferred income tax benefit - (1,100)
Provision for doubtful accounts 699 1,919
Non cash interest expense 9,691 18,502
(Increase) decrease in operating assets:
Accounts receivable (2,696) (22,427)
Inventories (1,352) (209)
Prepaid expenses and other current assets (306) (1,343)
Other assets (258) 1,794
Increase (decrease) in accounts
payable and accrued expenses 2,794 (20,786)
Net cash used in discontinued operations (617) (1,982)
--------------- ----------------
Net cash used in operating activities (29,753) (96,091)
--------------- ----------------
Cash flows from investing activities:
Increase in short-term investments, net (10,720) (10,996)
Purchase of property and equipment, net (32,380) (29,641)
Acquisitions (34,917) (107,955)
Other, net 40 -
--------------- ----------------
Net cash used in investing activities (77,977) (148,592)
--------------- ----------------
Cash flows from financing activities:
(Repayments) of proceeds from long-term debt, net 288,818 438,113
Net proceeds from redeemable preferred stock - 193,145
Net proceeds from equity transactions 96,644 8,019
Proceeds from equipment lease financing 3,347 30,900
Payment of capital lease obligations (709) (1,030)
Other, net (103) (1,357)
--------------- ----------------
Net cash provided by financing activities 387,997 667,790
--------------- ----------------
Net increase in cash and cash equivalents 280,267 423,107
Cash and cash equivalents at beginning of period 95,490 402,359
--------------- ----------------
Cash and cash equivalents at end of period 375,757 825,466
Short-term investments at end of period 37,717 27,899
--------------- ----------------
Cash, cash equivalents and short-term investments
at end of period $ 413,474 $ 853,365
=============== ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
1. Nature of Business
The Company provides facilities-based voice and broadband data
telecommunications services to businesses and other customers in major
metropolitan areas in the United States. By utilizing its Wireless Fiber
services and a switch-based infrastructure, the Company distinguishes itself as
a facilities-based, value-added provider of high-capacity telecommunications
services and an attractive alternative to established providers, such as the
RBOCs. The Company also utilizes its Wireless Fiber capacity to provide other
telecommunications services, including Internet, ATM and frame relay services.
The Company acquires rights to and distributes information services and
entertainment content as a complement to its telecommunications operations. The
Company also operates a nonstrategic consumer products company, which is treated
as a discontinued operation in this report.
To capitalize on opportunities in the telecommunications industry, the Company
is pursuing a rapid expansion of its telecommunications services, which will
require significant amounts of capital to finance capital expenditures and
anticipated operating losses. The Company may elect to slow the speed or narrow
the focus of this expansion in the event it is unable to raise sufficient
amounts of capital on acceptable terms.
2. Basis of Presentation
The condensed consolidated financial statements presented herein include the
accounts of WinStar Communications, Inc. and its subsidiaries (collectively,
"WinStar" or the "Company"). All material inter-company transactions and
accounts have been eliminated in consolidation. The accounts have been prepared
by the Company without audit. The foregoing statements contain all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
the Company's management, necessary to present fairly the financial position of
the Company as of March 31, 1998 and the statements of operations and cash flows
for the three months ended March 31, 1997 and 1998.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1997. The unaudited financial statements and related
footnotes for the three month period ended March 31, 1997 reflect certain
reclassifications such that they conform to the current period presentation.
6
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results of operations for the year ending December
31, 1998.
3. Dividends on Convertible Preferred Stock
Dividends on the 6% Series A Cumulative Convertible Preferred Stock ("Series A
Preferred Stock") since its issuance have been paid "in-kind" in additional
shares of the Series A Preferred Stock.
4. Basic and Diluted Loss Per Share
Basic and diluted loss per share have been calculated by dividing the net loss,
after consideration of preferred stock accretion and dividends, by the weighted
average number of shares of common stock outstanding during each period in
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS No.
128"). Stock options and warrants have been excluded from the calculation of
diluted loss per share as their effect would have been antidilutive. The
adoption of SFAS No. 128 had no effect on earnings per share for the quarter
ended March 31, 1997.
5. Acquisitions
GoodNet
On January 12, 1998, pursuant to an agreement between the Company, Telesoft
Corp. and others, the Company acquired GoodNet for a purchase price of
approximately $22.0 million, consisting of $3.5 million cash and 732,784 shares
of common stock of the Company valued at $18.5 million. GoodNet is a national
provider of Internet services, offering high-capacity data communications
services.
Midcom Communications, Inc.
Effective January 21, 1998 (the "Closing Date"), pursuant to an agreement
between the Company and MIDCOM Communications, Inc. and its subsidiaries
(collectively, "Midcom"), the Company acquired substantially all of Midcom's
assets and businesses for a purchase price of approximately $92.0 million in
cash. The purchase price is subject to a downward adjustment of up to $15
million in certain circumstances.
The Company has retained an independent third party to fully evaluate the assets
of Midcom, in order to complete the allocation of the purchase price of the
acquisition. Further adjustments may arise as a result of the finalization of
the ongoing study. The results of this evaluation are expected to be recorded in
the near term. The financial statements of Midcom have been consolidated into
the Company's financial statements as of the date of acquisition.
7
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
Midcom was a provider of long distance voice and frame relay data
telecommunications services, primarily to small and medium-sized businesses,
most of which are located in major metropolitan areas of California, Florida,
Illinois, New York, Ohio and Washington.
The following pro forma results of operations (in thousands, except per share
data) reflect the combined operations of the Company and Midcom as if the
acquisition was consummated at the beginning of each period presented. The
unaudited pro forma results of operations does not purport to represent the
results of operations that would have actually resulted had the purchase
occurred on the indicated dates, nor should it be taken as indicative of future
results of operations.
For The Three Months Ended
March 31,
---------
1997 1998
---- ----
Operating Revenues $ 37,383 $ 51,208
Net Loss applicable to common
stockholders (62,141) (93,559)
Basic and diluted loss per share $ (1.91) $ (2.61)
6. Issuance of Cumulative Convertible Preferred Stock
In March 1998, the Company sold 4,000,000 shares of Series D 7% senior
cumulative convertible preferred stock ("Convertible Preferred Stock") in a
private placement for aggregate gross proceeds of $200 million. The preferred
stock earns a 7% cumulative annual dividend, payable quarterly in (i) cash or
(ii) through the issuance of a number of shares of the Company's common stock
equal to the dividend amount divided by the discounted current market value of
the common stock (as defined), at the Company's option. The Company is currently
prohibited from paying such dividends in cash under the terms of its outstanding
indentures.
The Convertible Preferred Stock is convertible at the option of the holder at
any time after the issue date, into shares of the Company's common stock at a
conversion price of $49.61 per share of common stock.
The Convertible Preferred Stock is redeemable at the option of the Company after
March 20, 2001, at which time, each share of convertible stock will be
redeemable, at the Company's option, in whole or in part, at defined
redemption prices, payable in cash plus accumulated and unpaid dividends, if
any. The Convertible Preferred Stock is mandatorily redeemable on March 15, 2010
at a redemption price of $50 per share plus accrued and unpaid dividends.
8
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
The Convertible Preferred Stock, with respect to dividend rights and rights on
liquidation, winding up and dissolution, ranks (i) senior to all classes of
common stock and to the Series A Preferred Stock of the Company and (ii) on a
parity with the Series C Preferred Stock of the Company.
The Company has filed a shelf registration with the Securities and Exchange
Commission with respect to resales of the Convertible Preferred Stock, the
common stock related to the conversion thereof and the dividend common stock and
is obligated to use its best efforts to cause the Shelf Registration Statement
to be declared effective by August 15, 1998. Failure to comply with the
registration requirement will cause dividends to accrue at 9% per annum until
such time as the securities are registered.
7. March 1998 Notes
In March 1998, the Company issued $200 million principal amount of unsecured 10%
senior subordinated notes due 2008 ("Cash Pay Notes") and $250 million principal
amount of unsecured 11% senior subordinated deferred interest notes ("Deferred
Interest Notes") due 2008 (collectively, "the Notes"). The Notes are unsecured,
senior subordinated obligations of the Company and rank pari passu in right of
payment with the Company's 14% Convertible Senior Subordinated Notes Due 2005
and the Company's 15% Senior Subordinated Deferred Interest Notes Due 2007 and
are junior in right of payment to all existing and future senior indebtedness of
the Company.
The Cash Pay Notes bear interest at a rate of 10% per annum, payable
semiannually commencing September 15, 1998. The Deferred Interest Notes bear
interest at the rate of 11% per annum. Until March 15, 2003, interest on the
Deferred Interest Notes accrues and compounds semiannually, but will not be
payable in cash.
The Notes mature on March 15, 2008 and are redeemable by the Company on and
after March 15, 2003, at its option, at certain defined prices.
The Company has filed an Exchange Offer Registration Statement with the
Securities and Exchange Commission ("SEC") and is obligated to use its best
efforts to cause such Exchange Offer Registration to be declared effective under
the Securities Act within 150 days after the date of original issuance of such
Notes. Failure to comply with the registration requirement will cause the
interest on the Notes to be increased by 0.50% per annum until such time as the
Notes are registered.
9
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
8. Condensed Financial Information of WinStar Equipment Corp. and WinStar
Equipment II Corp.
The Company's wholly-owned subsidiaries, WinStar Equipment Corp. and WinStar
Equipment II Corp. ("WEC" and "WEC II", respectively), each of which is a
special purpose corporation which was formed to facilitate the financing and
purchase of telecommunications equipment and related property ("Designated
Equipment"), received $200 million and $50 million in gross proceeds,
respectively, from the issuance and sale of 12.5% Guaranteed Senior Secured
Notes ("the WEC and WEC II Notes") in placements of debt in March and August of
1997, respectively. The proceeds of the WEC and WEC II Notes are to be used to
purchase Designated Equipment and, if such equipment is not purchased within a
specified period, WEC and WEC II must apply unused proceeds thereof to redeem
the WEC and WEC II Notes, respectively. Both the interest and principal of the
WEC and WEC II notes are guaranteed by the Company.
WEC and WEC II have no independent operations other than to purchase Designated
Equipment and to lease same to the Company's other telecommunications
subsidiaries. It is therefore unlikely, in the opinion of management, that WEC
or WEC II will generate sufficient income, after the payment of interest on the
WEC and WEC II Notes, to pay dividends or make other distributions to the
Company.
Summary financial information of WEC and WEC II, which are included in the
condensed consolidated financial statements of the Company, are as follows (in
thousands):
Balance sheet information at March 31, 1998 is as follows:
WEC WEC II
--- ------
Current assets $118,689 $ 47,608
Long term assets 91,693 2,751
Current liabilities (24,424) (2,653)
Long term liabilities (200,000) (50,000)
--------- --------
Stockholders' deficit $(14,042) $(2,294)
========= ========
10
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
Statements of operations information for WEC for the three months ended March
31, 1998 and from its inception through March 31, 1997, and for WEC II for the
three months ended March 31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
WEC WEC II
---------------------------------------- -----------------------
Period from
March 13, 1997 Three Months Three Months
(Inception) to Ended Ended
March 31, March 31, March 31,
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
Rental revenues from other WinStar
subsidiaries............................ $ - $ 512
Interest income from other WinStar
subsidiaries............................ - 864
Interest income - investments............... 391 1,542 646
Selling, general and administrative
expenses................................ - (1,042)
Interest expense............................ (833) (5,745) (1,562)
---------- ---------- ---------
Net loss.................................... $ (442) $ (3,869) $ (916)
========== ========== ==========
</TABLE>
Separate financial statements for WEC or WEC II are not presented because
management of the Company has determined that such information would not provide
any material information that is not already presented in the condensed
consolidated financial statements of the Company.
9. Discontinued Operation - WinStar Global Products, Inc.
On May 13, 1997, a formal plan of disposal for the Company's consumer products
subsidiary, WinStar Global Products, Inc., ("Global Products") was approved by
the Board of Directors and it is anticipated that the disposal will be completed
within the near term. The disposal of Global Products has been accounted for as
a discontinued operation and, accordingly, is carried at its net realizable
value. During the quarter ended March 31, 1998, the Company recorded a loss on
discontinued operations of $1,982,000. The accompanying condensed consolidated
balance sheets, and operating results of Global Products are segregated and
reported as discontinued operations in the accompanying condensed consolidated
balance sheets and statements of operations and cash flows.
11
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
Information relating to the discontinued operations of Global Products is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
For The Three Months
Ended
March 31,
---------
1997 1998
---- ----
<S> <C> <C>
Operating revenues $ 3,692 $ 2,292
-------- --------
Cost of services and products 2,550 2,315
Selling, general & administrative
expenses 1,266 1,044
Depreciation and amortization 58 58
-------- --------
Total operating expenses 3,874 3,417
-------- --------
Operating loss (182) (1,125)
Interest expense ( 295) (176)
-------- --------
Net loss $ (477) $ (1,301)
========== =========
</TABLE>
Net assets of the discontinued operations of Global Products at December 31,
1997 and March 31, 1998 are composed of the following (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
---- ----
<S> <C> <C>
Assets:
Accounts Receivable, net $ 4,383 $ 1,317
Inventories 4,663 4,667
Other Assets 1,268 1,179
--------- ---------
Total assets 10,314 7,163
-------- ---------
Liabilities:
Current Liabilities 3,570 4,289
Other Liabilities 9,951 5,443
--------- ---------
Total liabilities 13,521 9,732
-------- ---------
Net deficit $ (3,207) $ (2,569)
========= =========
</TABLE>
12
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 1998
(unaudited)
10. Comprehensive Income
The Financial Accounting Standards Board ("FASB") released Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
governing the reporting and display of comprehensive income and its components.
Comprehensive income is defined as net income and other comprehensive income
(i.e. the change in equity of a business enterprise during a period, from
transactions and other events and circumstances from non-owner sources). Other
comprehensive income for the three month periods ended March 31, 1997 and 1998
was immaterial.
11. New Accounting Pronouncements
The FASB released Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of An Enterprise and Related Information"("SFAS
No.131"), requiring that all public businesses report financial and descriptive
information about their reportable operating segments. The Company will
implement SFAS No. 131 in its 1998 annual report on Form 10K, as required.
12. Subsequent Events
In April 1998, the Company sold a 10% equity stake in WinStar New Media, its
media and information services subsidiary, to a group of private investors for
$10 million.
In April 1998, the Company agreed to purchase 14.9% of the outstanding common
stock of Advanced Radio Telecom Corp. ("ART") from private investors. The
Company will issue one share of its common stock in exchange for every 2.2
shares of ART purchased. The conversion ratio results in a purchase price of
$17.39 per ART share based on the Company's closing stock price on the date the
agreement was signed, a 22% premium to ART's market price on that date. The
Company will issue approximately 1,525,000 restricted common shares in
connection with the transaction and will receive approximately 3,314,000 common
shares of ART and certain other unrelated assets. The purchase price is subject
to a waiting period under the Hart Scott Rodino Act.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company Overview
The Company provides facilities-based voice and broadband data
telecommunications services to businesses and other customers in major
metropolitan areas in the United States. By utilizing its Wireless Fiber
services and a switch-based infrastructure, the Company distinguishes itself as
a facilities-based, value-added provider of high-capacity telecommunications
services and an attractive alternative to established providers, such as the
RBOCs. The Company also utilizes its Wireless Fiber capacity to provide other
telecommunications services, including Internet, ATM and frame relay services.
The Company acquires rights to and distributes information services and
entertainment content as a complement to its telecommunications operations. The
Company also operates a nonstrategic consumer products company, which is treated
as a discontinued operation in this report.
During the first quarter of 1998 the Company completed its acquisition of the
assets of Midcom Communications, Inc., a national provider of long distance
voice and frame relay data telecomunications services, primarily to small and
medium-sized businesses nationally.
The Company also acquired GoodNet, a rapidly growing Tier I Internet and ATM
backbone provider. Through its national ATM network, GoodNet provides Internet
access and high capacity data services to high bandwidth users.
In connection with the Company's rollout of its local telecommunications
services, the Company also provides business information services to its CLEC
customers. These services are marketed directly to end users and through the
Company's direct sales force.
14
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues of the Company's operating segments are as follows (in millions):
Three Months Ended
March 31,
---------
1997 1998
---- ----
Telecommunications Services:
CLEC Services $ 1,979 $18,635
Other Services 5,084 16,852
------ ------------
7,063 35,487
Information Services 6,014 11,949
------ ------------
Total Revenues $13,077 $47,436
======= ============
Revenues increased by $34.4 million, or 263%, for the three months ended March
31, 1998, to $47.4 million, from $13.1 million for the three months ended March
31, 1997. This increase was attributable to the growth in revenues generated by
the Company's CLEC and information services businesses, as well as, revenues
attributable to Midcom's long distance operations.
Revenues from CLEC services were $18.6 million in the quarter ended March 31,
1998, compared to $2.0 million in the quarter ended March 31, 1997. The CLEC
business commenced operations in the second quarter of 1996. The Company has
since been rapidly adding markets and installing voice and data lines for its
business customers, and, as of March 31, 1998, had installed over 145,000 lines
in 21 markets, up from approximately 13,000 lines at March 31, 1997. As of March
31, 1998, the annualized revenues from the CLEC business were $89 million, up
from $46 million annualized as of December 31, 1997 and $10 million annualized
as of March 31, 1997.
Revenues from other telecommunications services increased $11.8 million to $16.9
million in the quarter ended March 31, 1998, as compared to $5.1 million in the
quarter ended March 31, 1997. Other telecommunications services include:
commercial long distance, for former Midcom customers, wholesale carrier access
services, and WinStar Gateway Network residential long distance services. The
increase resulted primarily from sales, attributable to former Midcom long
distance operations which were acquired in January 1998. These revenues are not
classified as CLEC revenues because this customer group is not currently known
by the Company to be located in buildings targeted by the Company's local
network. Over time the Company will target its network to a portion of these
customers and include them in CLEC results.
Revenues from information services increased by $5.9 million, or 99%, for the
three months ended March 31, 1998, to $11.9 million, from $6.0 million for the
three months ended March 31, 1997, due to higher demand for its specialized
information content for businesses, as well as, continued internal growth and
acquisitions.
15
<PAGE>
Cost of services and products increased by $29.8 million, or 230.0%, for the
three months ended March 31, 1998, to $42.8 million, from $13.0 million for the
three months ended March 31, 1997.
As a percentage of revenues, cost of services and products in the quarter ended
March 31, 1998 was 90.1%, compared with 99.2% in the quarter ended March 31,
1997, and 108.3% for the quarter ended December 31,1997. This decrease in the
cost of revenue percentage is the result of increased volumes and a larger
percentage of traffic being provisioned on the Company's network.
Selling, general and administrative expense increased by $24.1 million to $53.6
million for the three months ended March 31, 1998, from $29.6 million for the
three months ended March 31, 1997. The Company continued to hire sales,
marketing, network and related support personnel in connection with the
expansion of its CLEC markets. The Company had approximately 500 employees at
March 31, 1997 and over 2,100 at March 31, 1998. As a percentage of revenues,
selling, general and administrative expenses declined from 226% for the quarter
ended March 31, 1997 to 113% for the quarter ended March 31, 1998. With the
rapid expansion of its markets from 1 in December 1996 to 21 at March 31, 1998,
and to its plan of 30 at December 31, 1998, the Company expects its selling,
general and administrative expenses to continue to grow in amount but to be a
steadily declining percentage of revenues.
Depreciation and amortization expense increased by $7.9 million for the three
months ended March 31, 1998, to $11.4 million, from $3.5 million for the three
months ended March 31, 1997 principally resulting from the Company's acquisition
and deployment of switches, radios and other equipment in connection with its
telecommunications network buildout.
For the reasons noted above, the operating loss for the three months ended March
31, 1998, was $60.3 million, compared with an operating loss of $32.9 million
for the three months ended March 31, 1997.
Interest expense increased by $17.9 million, or 165%, for the three months ended
March 31, 1998, to $28.7 million, from $10.8 million for the three months ended
March 31, 1997. This increase was principally attributable to the issuance of
$450 million of debt in 1997 and another $450 million of debt in the first
quarter of 1998. $18.5 million of the $28.7 million interest expense for the
quarter is not payable in cash.
Interest income increased by $2.7 million, or 120.5%, for the three months ended
March 31, 1998, to $4.9 million, from $2.2 million for the three months ended
March 31, 1997. The increase resulted from the additional interest income earned
on the proceeds from the Company's various stock and debt placements.
For the reasons noted above, the Company reported a loss from continuing
operations of $83.0 million for the three months ended March 31, 1998, compared
to a net loss from continuing operations of $41.5 million for the three months
ended March 31, 1997.
16
<PAGE>
Liquidity and Capital Resources
In March 1998, the Company sold 4,000,000 shares of its 7% Series D Senior
Cumulative Convertible Preferred Stock pursuant to which the Company realized
net proceeds of approximately $192.9 million.
Additionally, in March 1998, the Company sold an aggregate of $450 million
principal amount of notes (the "1998 Debt Placements"), pursuant to which it
realized net proceeds of approximately $436.7 million.
At March 31, 1998, the Company had approximately $853.4 million in cash, cash
equivalents and short term investments, approximately $149.9 million of which
may only be used to finance equipment purchases in connection with the Company's
rollout of its telecommunications infrastructure.
The Company has incurred significant operating and net losses, due in large part
to the development of its telecommunications services business, and anticipates
that such losses will continue over the near term as the Company executes its
growth strategy. A significant portion of the Company's increased capital
requirements will result from the rollout of the Company's CLEC business. The
Company is building a direct sales force, having opened sales offices currently
serving the 24 major cities in which it offers CLEC services, and is in the
process of expanding into other metropolitan areas. Additionally, the Company is
in the process of ordering and installing switches and other network equipment
to be placed in its key markets. Historically, the Company has funded its
operating losses and capital expenditures through public and private offerings
of debt and equity securities and from credit and lease facilities. Cash used to
fund negative EBITDA during the three months ended March 31, 1998 was
approximately $48.9 million, and purchases of property and equipment during the
three months ended March 31, 1998 was approximately $30 million. At March 31,
1998, working capital was $852.4 million, including cash, cash equivalents and
short-term investments of $853.4 million, as compared to working capital and
cash, cash equivalents and short-term investments at December 31, 1997 of $366.0
million and $419.3 million, respectively.
Under its current plans to expand to 40 major metropolitan markets on by the end
of 1999, the Company plans to spend approximately $300.0 million in each of 1998
and 1999 for capital equipment, which may require the Company to seek additional
capital from financial institutions, equipment vendors or in the financial
markets. The Company anticipates, based on current plans and assumptions
relating to its operations, that with existing financial resources and
additional equipment financing arrangements that the Company intends to seek,
will be sufficient to fund the Company's operations and capital requirements for
approximately 18 to 24 months. The Company believes that it will be able to
obtain sufficient capital to execute its business plan. In the event that the
Company's assumptions change or prove to be inaccurate, the Company consummates
any acquisitions of significant businesses or assets (including spectrum
licenses), the Company accelerates its plan and enters markets more rapidly, or
the Company fails to secure additional equipment financing
17
<PAGE>
arrangements, the Company may be required to seek additional sources of capital
sooner than currently anticipated.
Additionally, the Company was the highest bidder on certain LMDS licenses in
the LMDS Auction and has committed to pay approximately $30.4 million in
connection therewith (in addition to the Company's $13.0 million initial
downpayment in such auction).
In addition to binding commitments to purchase approximately $20.0 million of
telecommunications equipment, the Company is committed to pay approximately
$24.2 million in Common Stock, or at the Company's election, cash, in
connection with the acquisition of additional spectrum licenses.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition, results of operations and business of the Company. These
forward-looking statements involve certain risks and uncertainties. The words
"anticipate", "believe", "estimate", "expect", "plan", "intend" and similar
expressions, as they relate to the Company, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. No assurance can be given that any of such
expectations will be realized. Factors that may cause actual results to differ
materially from those contemplated by such forward looking statements include,
without limitation: (a) the Company's ability to service its debt or to obtain
financing for the buildout of its telecommunications network; (b) the Company's
ability to attract and retain a sufficient revenue-generating customer base; (c)
competitive pressures in the telecommunications industry; and (d) general
economic conditions.
18
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
The following table sets forth certain information with respect to the issuance
by the Company of certain securities during the first quarter of 1998, without
registration of such securities under the Securities Act:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Securities Sold Exemption Terms of Conversion
(Date Sold) Purchaser(s) Consideration Claimed or Exercise Use of Proceeds
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
926,643 shares of Various Shares issued 4(2) Not applicable The Company did
Common Stock individuals in connection not receive cash
(various dates from and entities with various proceeds for
1/1/98 - 3/31/98) acquisitions of these shares
38 GHz licenses
and related
assets
- ---------------------------------------------------------------------------------------------------------------------
732,783 shares of Telesoft Corp. Shares issued 4(2) Not Applicable The Company did
Common Stock and certain in connection not receive cash
(January 12, 1998) individuals with the proceeds for
purchase of the these shares
GoodNet business
from Telesoft
Corp.
and certain
individual
stockholders
- ---------------------------------------------------------------------------------------------------------------------
4,000,000 shares of Certain $200 million, 4(2) and Rule Convertible at the The proceeds of
Series D 7% Senior Institutions less certain 144A option of the holder this issue
Cumulative discounts and into Common Stock of were/will be used
Convertible expenses the Company at a rate for general
Preferred Stock Due of 1.0079 shares of corporate
2010 Common Stock for each purposes in
(March 12, 1998) share of Convertible connection with
Preferred Stock the growth of the
Company's business
- ---------------------------------------------------------------------------------------------------------------------
$200,000,000 10% Certain $450 million, 4(2) and Rule Not Applicable The proceeds of
Senior Subordinated Institutions less certain 144A this issue
Notes due 2008 and discounts and were/will be used
$250,000,000 Senior expenses for general
Subordinated corporate
Deferred Interest purposes in
Note due 2008 connection with
the growth of the
Company's business
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Form of Executive Severence Agreement entered into between the
Company and certain officers and other senior executives.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K/A filed January 30, 1998.
(2) Current Report on Form 8-K/A filed February 5, 1998.
(3) Current Report on Form 8-K filed March 12, 1998.
(4) Current Report on Form 8-K filed March 30, 1998.
19
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
WinStar Communications, Inc.
Registrant
By: /s/Charles T. Dickson
- ------------------------------
Charles T. Dickson
Executive Vice President and Chief Financial
Officer (Principal Financial Officer) Dated: May 15, 1998
By: /s/Joseph P. Dwyer
- ------------------------------
Joseph P. Dwyer
Vice President, Finance
(Principal Accounting Officer) Dated: May 15, 1998
<PAGE>
EXHIBIT 10.1
[WINSTAR COMMUNICATIONS, INC. LETTERHEAD]
[Date]
[Executive Name]
[Address]
[Telecopier No.]
Re: Executive Severance Benefits
----------------------------
Dear :
WinStar Communications, Inc. (the "Company") considers it essential
and in the best interests of the Company's stockholders to foster the
continued employment of key management personnel. In this connection, the
Board of Directors of the Company (the "Board") recognizes that, as with many
publicly held corporations, the possibility of a change of control of the
Company may exist and that such possibility, along with the uncertainties it
could raise among management, may result in the distraction or unwanted
departure of management personnel to the detriment of the Company and its
stockholders.
Accordingly, the Board has determined that appropriate steps should
be taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including yourself, to their assigned
duties without distraction in the face of potentially disturbing circumstances
that could arise out of a change of control of the Company.
In order to induce you to remain in the employ of the Company and its
subsidiaries, the Company agrees that you shall receive the severance benefits
set forth in this letter agreement ("Agreement") in the event your employment
with the Company and its subsidiaries is terminated subsequent to a "Change of
Control" (as defined in Section 2 hereof) under the circumstances described
below.
I. TERM OF AGREEMENT. The term of this Agreement shall commence on
the date hereof and shall continue in effect until the third (3rd) anniversary
of the date of this Agreement; provided, however, that the term of this
Agreement shall automatically be extended for one (1) additional year
commencing on such third (3rd) anniversary and each anniversary thereafter
without action of the parties hereto unless, not later than the date which is
six (6) months preceding any such anniversary, the Company shall have given
notice that it does not wish to extend this Agreement. Notwithstanding the
foregoing and any such notice by the Company not to extend, if a Change of
Control has occurred during the original or any extended term of this
Agreement, this Agreement shall continue in effect for a period of twenty-four
(24) months beyond the month in which such Change of Control occurred or such
other period determined under Section 3(v).
2. CHANGE OF CONTROL. No benefits shall be payable pursuant to this
Agreement unless there shall have been a Change of Control of the Company as
set forth below.
<PAGE>
For purposes of this Agreement, a "Change of Control" of the Company shall
mean the occurrence of one of the following events during the term of this
Agreement:
(i) any "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes the "beneficial owner" (within the meaning of Rule
13d-3 under the Exchange Act) of common stock having thirty-five percent (35%)
or more of the total voting power of all of the Company's voting capital stock
then outstanding, unless such person or group is or includes (a) an individual
who, as of the date of this Agreement, is an executive officer of the Company
and holds beneficial ownership in excess of two percent (2%) of the
outstanding common stock of the Company, or an Affiliate or Associate (within
the meaning of Rule 12b-2 under the Exchange Act) of such individual, or (b)
an underwriter who obtains such thirty-five percent (35%) interest in
connection with a public offering;
(ii) a merger or consolidation of the Company other than one
resulting in the Company's voting securities outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least sixty-five
percent (65%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(iii) the sale or other disposition of all, or substantially
all, of the Company's assets, or the approval of a plan of liquidation of the
Company other than a sale to an entity which is owned by the shareholders of
the Company in substantially the same proportion as they own the Company
immediately prior to such sale.
You agree that, subject to the terms and conditions of this Agreement, in the
event of a "potential change of control of the Company" (as defined below)
occurring during the term of this Agreement, you will not voluntarily
terminate your employment with the Company or its subsidiaries (other than for
Good Reason) for a period of six (6) months from the occurrence of such
potential change of control of the Company. If more than one potential change
of control of the Company occurs during the term of this Agreement, the
provisions of the preceding sentence shall be applicable to each potential
change of control of the Company occurring prior to the occurrence of a Change
of Control. Solely for purposes of Sections 1, 3, 4 and 8 of this Agreement,
references to a Change of Control shall be deemed to refer also to a
"potential change of control of the Company." A potential change of control of
the Company shall be deemed to have occurred if (A) the Company enters into an
agreement, the consummation of which would result in the occurrence of a
Change of Control; (B) any person (including the Company) publicly announces
an intention to take or to consider taking actions which if consummated would
constitute a Change of Control and subsequently takes affirmative action
toward such consummation; (C) the rights to purchase units of the Company's
Class B Preferred Stock issued to the Company's stockholders pursuant to the
Rights Agreement dated July 2, 1997 shall have become exercisable; or (D) the
Board adopts a resolution to the effect that, for purposes of this Agreement,
a potential change in control of the Company has occurred.
3. TERMINATION FOLLOWING A CHANGE OF CONTROL. If a Change of Control
described in Section 2 hereof occurs, you will be entitled to the benefits
provided pursuant to Sections 4(iv) or 5 hereof, as applicable, upon the
subsequent termination of your employment with the Company and its
subsidiaries during the term of this Agreement unless such termination is (A)
a result of your death, (B) by the Company or any of its subsidiaries for
Disability or Cause (as defined in Sections 3(i) and 3(ii) hereof,
respectively) or (C) except as otherwise provided in
-2-
<PAGE>
Section 5 below, by you for other than Good Reason (as defined in
Section 3(iii) hereof).
(i) Disability. You may be terminated for "Disability" if
(A) you are unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which is reasonably
expected to last for a continuous period of not less than twelve (12) months,
(B) you have been absent from the full-time performance of your duties with
the Company for a period of one hundred eighty (180) consecutive days, and (C)
within thirty (30) days of the Company's written notice to you of the
termination of your employment with the Company and its subsidiaries, you have
not returned to full-time performance of your duties for the Company.
(ii) Cause. For purposes of this Agreement, "Cause" shall
mean a termination of your employment during the term of this Agreement which
is a result of (A) your conviction of or plea of nolo contendere to a felony
involving fraud, dishonesty or moral turpitude, (B) your willful disclosure of
material trade secrets or other material confidential information (which has
been identified in writing as such to you) related to the business of the
Company and its subsidiaries, or (C) your willful and continued failure
substantially to perform your duties for the Company or its subsidiaries
(other than any such failure resulting from your incapacity due to physical or
mental illness or any such actual or anticipated failure resulting from a
resignation by you for Good Reason) after a written demand for substantial
performance is delivered to you by the Board, which demand specifically
identifies the manner in which the Board believes that you have not
substantially performed your duties, and which performance is not
substantially corrected (if capable of correction) by you within thirty (30)
days of receipt of such demand. For purposes of this Section 3(ii), no act, or
failure to act, on your part shall be deemed "willful" unless done, or omitted
to be done, by you intentionally and in bad faith (i. e., without reasonable
belief that your action or omission was in furtherance of the interests of the
Company and its subsidiaries). Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have
been delivered to you a copy of a resolution duly adopted by the affirmative
vote of not less than three-quarters (3/4) of the entire membership of the
Board at a meeting of the Board called and held for such purpose (after
reasonable notice to you and an opportunity for you, together with your
counsel, to be heard before the Board), finding that in the good faith opinion
of the Board you were guilty of conduct set forth above in this Section 3(ii)
and specifying the particulars thereof in detail.
(iii) Good Reason. You shall be entitled to terminate your
employment for Good Reason. For the purposes of this Agreement, "Good Reason"
shall mean your good faith determination that any of the following
circumstances has occurred without your express written consent unless, in the
case of Paragraphs (D), (E), (F), or (G), such circumstances are fully
corrected prior to the Date of Termination (as defined in Section 3(v))
specified in the Notice of Termination (as defined in Section 3(iv)) given in
respect thereof:
(A) the assignment to you of any duties inconsistent with
your status as an officer of the Company or its subsidiaries, your removal
from that position, a substantial diminution in the nature or status of your
responsibilities from those in effect immediately prior to the Change of
Control, the assignment of duties or responsibilities to others that
diminishes the scope or status of your position, or an adverse change in your
reporting relationship;
(B) a reduction by the Company or any of its subsidiaries in
your annual base salary as in effect on the date hereof or as the same may be
increased from time to time;
-3-
<PAGE>
(C) the relocation of your principal office to a location
greater than ten (10) miles from its present location (or relocation from any
subsequent office agreed to by you or within such ten (10) mile limit) except
for required travel on Company business to an extent substantially consistent
with your business travel obligations on the date hereof, or a substantial
increase in your travel obligations;
(D) the failure by the Company or any of its subsidiaries to
continue in effect any compensation plan in which you were participating
immediately prior to the Change of Control which is material in your total
compensation (including, but not limited to, the Company's 1995 Performance
Equity Plan and other stock option plans and arrangements), unless an
equivalent alternative compensation arrangement (embodied in an ongoing
substitute or alternative plan) has been provided for you, or the failure by
the Company or any of its subsidiaries to continue your participation in any
such incentive plan on the same basis, both in terms of the amount of benefits
provided and the level of your participation relative to other participants,
as existed at the time of the Change of Control, or the failure by the Company
to award a cash bonus to you in an amount and at the time substantially
consistent with past practice but in no event less than the amount received in
the immediately preceding year;
(E) except as required by law, the failure by the Company or
any of its subsidiaries to continue to provide you with benefits at least as
favorable as those enjoyed by you under the employee benefit and welfare plans
of the Company and its subsidiaries, including, without limitation, the
pension, life insurance, medical, dental, health and accident, disability,
deferred compensation, retirement and savings plans, in which you were
participating at the time of the Change of Control, the taking of any action
by the Company or any of its subsidiaries which would directly or indirectly
materially reduce any of such benefits or deprive you of any material fringe
benefit enjoyed by you at the time of the Change of Control, or the failure by
the Company or any of its subsidiaries to provide you with the number of paid
vacation days to which you are entitled at the time of the Change of Control,
or a material reduction in your perquisites or amenities of office (including
your physical office space, secretarial and travel support) from those in
existence immediately prior to the Change in Control;
(F) the failure of the Company to obtain a satisfactory
agreement from any successor to assume and agree to perform this Agreement, as
contemplated in Section 6 hereof; or
(G) any purported termination of your employment which is
not effected pursuant to a Notice of Termination satisfying the requirements
of Section 3(iv) below (and, if applicable, the requirements of Section 3(ii)
above); for purposes of this Agreement, no such purported termination shall be
effective.
Your continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstances constituting Good Reason hereunder.
(iv) Notice of Termination. Any purported termination of
your employment by the Company or its subsidiaries or by you shall be
communicated by Notice of Termination to the other party hereto in accordance
with Section 7 hereof. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement or such other basis relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment and, in the case of Notice
of Termination by the Company, shall include a written certification by the
chief
-4-
<PAGE>
executive officer of the Company certifying under oath to the truth of
such facts and circumstances.
(v) Date of Termination. "Date of Termination" shall mean,
if your employment with the Company is terminated pursuant to Section 3(ii)
(Cause) or 3(iii) (Good Reason) above or for any other reason (other than
Disability), the date specified in the Notice of Termination (which, in the
case of a termination pursuant to Section 3(ii) (Cause) above shall not be
less than thirty (30) days, and in the case of a termination pursuant to
Section 3(iii) (Good Reason) above shall not be less than thirty (30) nor more
than (60) days, respectively, from the date such Notice of Termination is
given); provided that, if within thirty (30) days after any Notice of
Termination is given the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the grounds for termination,
the Date of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a binding
arbitration award or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or the time for appeal
therefrom having expired and no appeal having been perfected); provided
further that the Date of Termination shall be extended by a notice of dispute
only if such notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute or the provisions of
Paragraphs 4(i) through 4(iv), the Company and its subsidiaries will continue
to pay you your full compensation in effect when the Notice of Termination
giving rise to the dispute was given (including, but not limited to, base
salary (payable in the amount and at the intervals in effect immediately prior
to Notice of Termination or, if greater, immediately prior to a Change of
Control) and "Applicable Bonus" (payable not later than the date bonuses were
payable to executives in comparable positions in the immediately preceding
year)) and continue you as a participant in all compensation, benefit and
welfare plans in which you were participating when the Notice of Termination
giving rise to the dispute was given, until the dispute is finally resolved in
accordance with this Section 3(v) or, if sooner, the date which is four (4)
months following the date Notice of Termination is given; provided, further,
that you shall not be required to perform services for the Company during such
period. For purposes of this Agreement, "Applicable Bonus" shall mean (A) the
annual bonus you received (or, if you received a partial-year bonus, an amount
equal to your annualized bonus) for the immediately preceding year, or (B) if
you did not receive a bonus for such immediately preceding year, one-third
(1/3) of your current base salary. In the event of such a dispute, the term of
this Agreement shall continue in effect until the date on which the dispute is
finally determined. Amounts paid under this Section 3(v) are in addition to
all other amounts due under this Agreement and shall not be offset against or
reduce any other amounts due under this Agreement.
4. COMPENSATION UPON TERMINATION. Following a Change of Control
during the term of this Agreement, as defined by Section 2, upon termination
of your employment you shall be entitled to the following benefits, provided
that your Date of Termination occurs during the term of this Agreement:
(i) Disability. If your employment is terminated by the
Company or any of its subsidiaries for Disability, your benefits shall be
determined in accordance with the compensation and benefit plans, programs and
agreements of the Company and its subsidiaries then in effect, and the Company
shall have no further obligations to you under this Agreement.
(ii) Cause; Other than Good Reason. If your employment is
terminated by the Company or any of its subsidiaries for Cause or by you other
than for Good Reason, the Company (or one of its subsidiaries, if applicable)
shall pay you not later than the fifth (5th) day
-5-
<PAGE>
following the Date of Termination your full base salary through the Date of
Termination, at the rate in effect at the time Notice of Termination is given
and shall pay any amounts to be paid to you pursuant to any other compensation
plans, programs or employment agreements of the Company then in effect, and
the Company shall have no further obligations to you under this Agreement and
you shall have no obligations to the Company.
(iii) Death. If your employment shall be terminated by
reason of your death, the Company (or one of its subsidiaries, if applicable)
shall pay your estate not later than the fifth (5th) day following the date of
your death your full base salary through the date of your death at the rate
then in effect, and a pro-rata portion of your Applicable Bonus, and shall pay
any amounts to be paid to you pursuant to any other compensation and benefit
plans, programs and agreements of the Company then in effect, and the Company
shall have no further obligations to you under this Agreement.
(iv) Other Terminations. If your employment by the Company
and its subsidiaries shall be terminated (a) by the Company (or one of its
subsidiaries, if applicable) other than for either Cause, your death or
Disability, or (b) by you for Good Reason, then you shall be entitled, subject
to Section 4(iv)(E) hereof, to the benefits provided below:
(A) The Company (or one of its subsidiaries, if applicable)
shall pay you the sum of (I) your full base salary through the Date of
Termination, at the rate then in effect (or if greater, at the rate in effect
immediately prior to a Change of Control), any unpaid bonus earned in a year
prior to the year of your Date of Termination and a pro rata portion of your
Applicable Bonus, plus (II) all other amounts to which you are entitled under
any compensation plan of the Company applicable to you in accordance with the
terms of such plan at the time such payments are due.
(B) In lieu of any further salary payments to you for
periods subsequent to the Date of Termination, the Company shall pay to you a
lump sum severance payment (the "Severance Payment") in an amount equal to one
hundred and fifty percent (150%) of the sum of (I) your base salary at the
rate then in effect, or if greater, at the rate in effect immediately prior to
a Change of Control, plus (II) your average annual bonus for the number of
full years in which you were eligible for a bonus (but not more than two (2)
such full years) prior to the year in which your termination of employment
occurs, or if greater, the number of full years in which you were eligible for
a bonus (but not more than two (2) such full years) prior to a Change of
Control. In the event you were not eligible for a full-year bonus in any of
such years, the Severance Payment will be the Applicable Bonus.
(C) For a period of eighteen (18) months after your
termination of employment, the Company shall arrange to provide you with life,
disability, accident and health insurance benefits substantially similar to
those which you are receiving immediately prior to the Notice of Termination,
or if greater, immediately prior to a Change of Control.
(D) For a period of eighteen (18) months after your
termination of employment, the Company shall provide to you executive level
career outplacement services from the provider of your choice with a maximum
cost to the Company equal to twenty percent (20%) of your base salary at the
rate in effect on the Date of Termination, or if greater, at the rate in
effect immediately prior to a Change of Control.
(E) Notwithstanding any other provision of this Agreement to
the contrary, in
-6-
<PAGE>
the event that any payment received or to be received by you in connection
with a Change of Control or the termination of your employment from the
Company (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any person whose actions result in
a Change of Control or any person affiliated with the Company or such person)
(collectively, the "Total Payments") would not be deductible (in whole or in
part) by the Company or an affiliate or other person making such payment or
providing such benefit, as a result of the application of Section 280G of the
Internal Revenue Code (the "Code"), then the aggregate present value of any
amounts or benefits which are payable, distributable or provided to you
pursuant to this Agreement (such amounts or benefits pursuant to this
Agreement, the "Agreement Payments") shall be reduced (but not below zero) to
an amount (the "Reduced Amount") expressed in present value which maximizes
the aggregate present value of Agreement Payments without causing any of the
Total Payments to be nondeductible by the Company as a result of the
application of Section 280G of the Code. If an independent accounting firm
selected by the Company's independent auditors and approved by you in writing
(the "Accounting Firm") determines that any of the Total Payments would be
nondeductible by the Company as a result of the application of Section 280G of
the Code, the Company shall promptly give you notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and you may
then elect, in your sole discretion, which and how much of the Agreement
Payments shall be eliminated or reduced (provided that after such election no
portion of the Total Payments would be nondeductible by the Company), and you
shall advise the Company, in writing, of your election within thirty (30) days
of your receipt of the calculation of the Accounting Firm. If no such written
election is made by you within such thirty (30) day period, the Company may
elect which and how much of the Agreement Payments shall be eliminated or
reduced (provided that after such election by the Company no portion of the
Total Payments would be nondeductible by the Company) and shall notify you
promptly thereafter. For purposes of this Paragraph (E), present value shall
be determined in accordance with Section 280G(d)(3) and (4) of the Code. All
determinations made by the Accounting Firm under this Paragraph (E) shall be
binding upon the Company and you, and shall be made within thirty (30) days of
the termination of your employment from the Company. All fees and expenses of
the Accounting Firm in connection with the determinations made hereunder shall
be paid by the Company.
(F) The cash payments provided for in Paragraphs (A) and (B)
above shall be made not later than the fifth (5th) day following the Date of
Termination, provided, however, that if the amount of such payments, and the
limitation on such payments set forth in Paragraph (E) above, cannot be
finally determined on or before such day, the Company shall pay to you on such
fifth (5th) day an estimated amount, as determined in good faith by the
Company, of the maximum amount of such payments which would not trigger the
limitation of Paragraph (E) above and shall pay the remainder of such payments
(together with interest at the rate provided in Section 1274(b)(2)(B) of the
Code) as soon as the amount thereof can be determined, but in no event later
than the sixtieth (60th) day after the Date of Termination. In the event that
the amount of the estimated payments exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan by the
Company to you, payable on the fifth (5th) day after demand by the Company
(together with interest at the rate provided in Section 1274(b)(2)(B) of the
Code). All other amounts or benefits payable, distributable or provided to you
under this Agreement shall be paid, distributed or provided in accordance with
the terms of the applicable Company plan or other arrangement with respect to
such benefits except as otherwise expressly set forth herein.
(G) The Company shall also pay to you all legal fees and
expenses as reasonably incurred by you in connection with this Agreement
(including all such fees and expenses, if any, incurred in contesting or
disputing the nature of your termination for purposes of this Agreement or
-7-
<PAGE>
in defending this Agreement or settling any dispute regarding this Agreement
or in seeking to obtain or enforce any right or benefit provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any payment or
benefit provided under this Agreement) except to the extent that the payment
of such fees and expenses would not be, or would cause any other portion of
the Total Payments not to be, deductible by reason of Section 280G of the
Code. Such payment shall be made at the later of the times specified in
Paragraph (F) above, or within five (5) days after your request for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require). If the payment by the Company of any fees and legal
expenses pursuant to this Paragraph (G) shall constitute taxable income to
you, the Company agrees, as a separate and independent undertaking, to pay to
you upon demand any and all taxes, of whatever nature or description,
applicable to such payment, together with any taxes thereon (on the basis of a
customary "gross-up" formula and assuming you are in the highest tax bracket
for applicable federal, state and local taxes).
(H) All payments and benefits payable, distributable or
provided to you under this Agreement shall be offset and reduced by any
similar amounts or benefits payable, distributable or provided to you at the
same time or with respect to the same period or on the same terms and
conditions under any employment agreement executed between you and the Company
which is in effect immediately prior to the Date of Termination the
("Employment Agreement").
(I) You shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit payable,
distributable or provided under this Section 4 be reduced by any compensation
earned by you as the result of employment by another employer or by retirement
or other benefits received after the Date of Termination or otherwise except
as provided in Paragraph (H) above.
5. CHANGE OF CONTROL WINDOW. Notwithstanding the provisions of
Sections 3 or 4 hereof, if (i) you provide Notice of Termination to the
Company and its subsidiaries for any reason or no reason during the period
commencing on the first anniversary of a Change of Control and ending thirty
(30) days thereafter, (ii) your Notice of Termination specifies a Date of
Termination no less than thirty (30) and no more than sixty (60) days from the
date such Notice of Termination is given, and (iii) you have not received
Notice of Termination for Cause prior to the date you provide such Notice of
Termination, you will be entitled to the benefits provided in Section 4(iii)
hereof upon your subsequent termination of your employment with the Company
and its subsidiaries as if you had terminated employment from the Company for
Good Reason, regardless of the reasons for such termination.
6. SUCCESSORS; BINDING AGREEMENT.
(i) The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company is required to perform it. Failure of the Company to
obtain such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle you to
compensation from the Company in the same amount and on the same terms as you
would be entitled hereunder if you had terminated your employment for
-8-
<PAGE>
Good Reason following a Change of Control, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which assumes and agrees to perform
this Agreement by operation of law or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to your devisee,
legatee or other designee or, if there is no such designee, to your estate.
7. NOTICE. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when (i) delivered by hand, (b) sent by
telecopier (with electronically generated written confirmation of receipt),
provided that a copy is mailed by registered mail, return receipt requested,
or (c) when received by the addressee, if sent by a nationally recognized
overnight delivery service (receipt requested), in each case to the
appropriate addresses and telecopier numbers set forth on the first page of
this Agreement with respect to you and on the signature page with respect to
the Company, provided that all notices to the Company shall be directed to the
attention of the General Counsel of the Company, or to such other address or
telecopier numbers as either party may have furnished to the other in writing
in accordance herewith, except that notice of change shall be effective only
upon receipt.
8. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed
to in writing and signed by you and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any conditions or
provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the state
in which your principal office is located immediately prior to a Change of
Control, except to the extent preempted by Federal law. All references to
sections of the Code shall be deemed also to refer to any successor provisions
to such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law. The
obligations of the Company under Section 4 shall survive the expiration of the
term of this Agreement.
9. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force an effect.
10. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
-9-
<PAGE>
11. ARBITRATION OF DISPUTES; SERVICE OF PROCESS; AND CONSENT TO SUIT.
Any controversy or claim arising out of or related to this Agreement, or the
breach thereof, shall be settled by binding arbitration in the City of New
York, in accordance with the rules of the American Arbitration Association
then in effect, and the arbitrator's decision shall be binding and final and
judgment upon the award rendered may be entered in any court having
jurisdiction thereof, except that you may elect to have any such controversy
or claim settled by judicial determination in lieu of arbitration by bringing
a court action, if you are the plaintiff or, if you are not the plaintiff,
demanding such judicial determination within the time to answer any complaint
in any arbitration action that may be commenced. The Company shall bear the
expense of any such arbitration or court action and shall pay or reimburse
you, regardless of outcome, for all of your reasonable costs and expenses
relating to such arbitration proceeding or court action, including, without
limitation, reasonable attorneys' fees and expenses, as such costs and
expenses are incurred, unless the trier of fact in such arbitration proceeding
or court action affirmatively determines that you were not acting in good
faith in such arbitration proceeding or court action. In the event that the
trier of fact in such arbitration proceeding or court action affirmatively
determines that the Company was not acting in good faith in such arbitration
proceeding or court action, the Company shall pay to you, within five (5) days
following such determination, as liquidated damages in addition to the cash
payments otherwise due pursuant to Paragraphs (A) and (B) of Section 4(iv)
hereof, an additional cash payment equal to the cash payments otherwise due
pursuant to such Paragraphs (A) and (B) of Section 4(iv) hereof.
12. EFFECT ON EXISTING AGREEMENT. This Agreement constitutes the
entire understanding and agreement between you and the Company with regard to
the matters herein and incorporates and supersedes all prior agreements
between the parties concerning your employment with the Company other than the
Employment Agreement and all employee benefit plans and stock option or
incentive plans of the Company; other than such agreements and plans, there
are no other agreements, conditions or representations, oral or written,
express or implied with regard thereto.
If this letter sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
letter which will then constitute our agreement on this subject.
Sincerely,
WINSTAR COMMUNICATIONS, INC.
230 Park Avenue, 27th Floor
New York, New York 10169
Telecopier No.: (212) 922-1637
By: ___________________________________
Name: ___________________________________
Title: ___________________________________
Agreed to this ____ day of _____________, 1998.
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 825,466,000
<SECURITIES> 27,899,000
<RECEIVABLES> 62,509,000
<ALLOWANCES> 0
<INVENTORY> 10,506,000
<CURRENT-ASSETS> 960,961,000
<PP&E> 304,074,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,648,413,000
<CURRENT-LIABILITIES> 108,525,000
<BONDS> 1,236,972,000
381,779,000
40,000
<COMMON> 371,000
<OTHER-SE> (149,263,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,648,413,000
<SALES> 0
<TOTAL-REVENUES> 47,436,000
<CGS> 0
<TOTAL-COSTS> 42,775,000
<OTHER-EXPENSES> 65,010,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,656,000
<INCOME-PRETAX> (84,077,000)
<INCOME-TAX> (1,100,000)
<INCOME-CONTINUING> (82,977,000)
<DISCONTINUED> (1,982,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,959,000)
<EPS-PRIMARY> (2.60)
<EPS-DILUTED> (2.60)
<FN>
(1) Receivables are net of allowance for doubtful accounts
(2) PP&E are net of acumulated depreciation
(3) Discontinued reflects operations of WinStar Global Products
</TABLE>
