<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 June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________________ to _____________________
Commission File Number: 1-10726
WINSTAR COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3585278
- ----------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
230 Park Ave., Suite 2700, New York, NY 10169
---------------------------------------------
(Address of principal executive offices)
(212) 584-4000
-------------------------------
(Registrant's telephone number)
-----------------------
(Former name, former address and former fiscal year end
if changed since last report)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
----
State the number of shares outstanding of each of the issuer's classes of common
stock, as of August 11, 1999: 54,545,389
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. Financial Information
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets -
June 30, 1999 (unaudited) and December 31, 1998................... 3
Unaudited Condensed Consolidated Statements
of Operations - three and six months ended
June 30, 1999 and 1998 ........................................... 4
Unaudited Condensed Consolidated Statement of
Stockholders' Equity (Deficit) - six months ended
June 30, 1999..................................................... 5
Unaudited Condensed Consolidated Statements
of Cash Flows - six months ended
June 30, 1999 and 1998............................................ 6
Notes to Condensed Consolidated
Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 15
Item 3. Quantitative and Qualitative Disclosures.......................... 26
PART II. Other Information.................................................... 27
Item 2. Changes in Securities
Item 6. Reports on Form 8-K
Signatures .............................................................. 28
</TABLE>
2
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------- ---------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 510,701 $ 208,257
Short term investments 100,166 104,773
---------------------- -------------------
Cash, cash equivalents and short term investments 610,867 313,030
Accounts receivable, net of allowance for doubtful
accounts 113,085 70,939
Inventories 19,256 14,880
Prepaid expenses and other current assets 63,649 28,402
--------------------- -----------------
Total current assets 806,857 427,251
Investments in marketable equity securities 48,686 26,400
Property and equipment, net 1,140,818 639,673
Licenses, net 318,334 310,649
Other intangible assets, net 171,546 178,050
Deferred financing costs, net 46,835 53,308
Other assets 36,451 27,851
------------------ ----------------
Total assets $ 2,569,527 $ 1,663,182
================== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 8,386 $ 6,487
Current portion of capitalized lease obligations 133,014 59,021
Accounts payable and accrued expenses 189,535 159,252
Deferred revenues - current 9,191 2,105
Net liabilities of discontinued operations 5,017 7,254
----------------- ----------------
Total current liabilities 345,143 234,119
Capitalized lease obligations, less current portion 189,112 49,354
Long-term debt, less current portion 1,615,158 1,396,635
Deferred revenues - non current 114,475 -
Other liabilities 14,585 12,588
Deferred income taxes 16,500 18,500
----------------- --------------
Total liabilities 2,294,973 1,711,196
----------------- --------------
Series C cumulative exchangeable redeemable preferred stock 215,834 201,478
Series D senior cumulative convertible redeemable preferred stock 200,000 200,000
Stockholders' equity (deficit)
Series F preferred stock 3 -
Series A preferred stock 42 41
Series E preferred stock 1 1
Common stock, par value $.01; authorized 200,000 shares,
issued and outstanding 54,326 and 41,403, respectively 543 414
Additional paid-in-capital 1,004,924 404,112
Accumulated deficit (1,134,732) (819,242)
Accumulated other comprehensive loss (12,061) (34,818)
----------------- --------------
Total stockholders' deficit (141,280) (449,492)
----------------- --------------
Total liabilities, redeemable preferred stock
and stockholders' deficit $ 2,569,527 $ 1,663,182
================= ==============
</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 For the six months ended
June 30, June 30,
--------------------------------------- --------------------------------
1999 1998 1999 1998
--------------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services
Core $ 76,856 $ 30,002 $ 145,443 $ 51,117
Other 7,030 13,707 14,305 26,621
-------------- ------------ --------------- ------------
Total telecommunications services 83,886 43,709 159,748 77,738
Information services 12,619 12,521 24,850 24,470
-------------- ------------ -------------- ------------
Total operating revenues 96,505 56,230 184,598 102,208
-------------- ------------ --------------- ------------
Operating expenses
Cost of services and products 73,353 45,225 141,295 86,477
Selling, general and administrative expenses 106,242 59,139 206,163 111,631
Depreciation and amortization 34,818 16,895 63,276 28,294
-------------- ------------- ---------------- ------------
Total operating expenses 214,413 121,259 410,734 226,402
-------------- -------------- ----------------- -------------
Operating loss (117,908) (65,029) (226,136) (124,194)
Other (expense) income
Interest expense (50,641) (40,492) (101,334) (69,105)
Interest income 4,971 10,300 9,980 15,185
------------------------------------ ---------------------------------
Loss from continuing operations before income
tax benefit (163,578) (95,221) (317,490) (178,114)
Income tax benefit 1,000 1,400 2,000 2,500
--------------- ------------- ---------------- ------------
Loss from continuing operations (162,578) (93,821) (315,490) (175,614)
Loss from discontinued operations -- (477) -- (3,643)
-------------- ------------- ---------------- -------------
Net loss (162,578) (94,298) (315,490) (179,257)
Preferred stock dividends (12,801) (11,287) (24,992) (19,485)
-------------- -------------- ----------------- -------------
Net loss applicable to common stockholders $ (175,379) $ (105,585) $ (340,482) $ (198,742)
============== ============== ================= =============
Basic and diluted loss per share:
From continuing operations $ (3.53) $ (2.76) $ (7.23) $ (5.27)
From discontinued operations -- (0.01) -- (0.10)
-------------- ---------------- ------------------- -------------
Net loss per share $ (3.53) $ (2.77) $ (7.23) $ (5.37)
============== ================ =================== =============
Weighted average shares outstanding 49,706 38,081 47,068 37,000
============== ================ =================== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Six Months Ended June 30, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Preferred Stock F Preferred Stock A Preferred Stock E Common Stock
------------------ ------------------- ------------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 - $ - 4,150 $ 41 75 $ 1 41,403 $ 414
Issuances of common stock: 2,576 26
For stock option exercises and other
For acquisitions and licenses 52 -
February 1999 Common Stock Equity Offering 4,200 42
For conversion of debentures 5,920 59
For conversion of preferred stock 8 -
Issuance of Series F Cumulative Convertible
Preferred Stock 300 3
Dividends declared on Series A preferred stock
Dividends declared on Series C preferred stock
Dividends on Series D preferred stock
Dividends on Series F preferred stock
Issuances of Series A preferred stock as
dividends in kind 125 1
Issuances of common stock as dividends
on Series D preferred stock 167 2
Comprehensive loss:
Net loss
Unrealized gain on investments in marketable
equity securities
Total comprehensive loss
------- ------- --------- ------- ------- ------- ------- -------
Balances at June 30, 1999 300 $ 3 4,275 $ 42 75 $ 1 54,326 $ 543
======= ======= ========= ======= ======= ======= ======= =======
<CAPTION>
Accumulated Total
Additional Other Stockholders'
Paid-in Accumulated Comprehensive Equity
Capital Deficit Loss (Deficit)
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1998 $ 404,112 $ (819,242) $ (34,818) $ (449,492)
Issuances of common stock:
For stock option exercises and other 35,631 35,657
For acquisitions and licenses 2,178 2,178
February 1999 Common Stock Equity Offering 167,412 167,454
For conversion of debentures 119,417 119,476
For conversion of preferred stock 158 158
Issuance of Series F Cumulative Convertible
Preferred Stock 290,875 290,878
Dividends declared on Series A preferred stock (3,136) (3,136)
Dividends declared on Series C preferred stock (14,356) (14,356)
Dividends on Series D preferred stock (7,000) (7,000)
Dividends on Series F preferred stock (500) (500)
Issuances of Series A preferred stock as
dividends in kind 3,135 3,136
Issuances of common stock as dividends
on Series D preferred stock 6,998 7,000
Comprehensive loss:
Net loss (315,490) (315,490)
Unrealized gain on investments in marketable
equity securities 22,757 22,757
---------
Total comprehensive loss (292,733)
==========
----------- ------------- --------------
Balances at June 30, 1999 $1,004,924 $ (1,134,732) $ (12,061) $ (141,280)
=========== ============= ============== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (315,490) $ (179,257)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations - 3,643
Depreciation and amortization 63,276 30,264
Deferred income tax benefit (2,000) (2,500)
Provision for doubtful accounts 11,354 4,103
Non cash interest expense 64,370 50,902
(Increase) decrease in operating assets:
Accounts receivable (53,500) (25,489)
Inventories (4,376) (2,756)
Prepaid expenses and other current assets (35,226) (3,083)
Other assets (5,676) (9,013)
Increase (decrease) in accounts
payable and accrued expenses 27,839 (27,840)
Increase in deferred revenues 121,561 -
Net cash used in discontinued operations (2,237) (6,335)
--------------- ---------------
Net cash used in operating activities (130,105) (167,361)
--------------- ---------------
Cash flows from investing activities:
Decrease (increase) in short-term investments, net 4,607 (111,181)
Purchase of property and equipment, net (147,840) (119,569)
Acquisitions, net of cash acquired, including licenses (14,235) (107,949)
--------------- ---------------
Net cash used in investing activities (157,468) (338,699)
--------------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt, net 141,759 437,592
Net proceeds from Series F cumulative preferred stock offering 290,878 193,145
Net proceeds from common stock offering 167,454 -
Net proceeds from equity transactions 35,657 12,604
Proceeds from sale of minority equity interest - 10,000
Proceeds from equipment lease financing - 30,900
Payment of capital lease obligations (45,628) (3,212)
Other, net (103) (2,887)
--------------- --------------
Net cash provided by financing activities 590,017 678,142
--------------- --------------
Net increase in cash and cash equivalents 302,444 172,082
Cash and cash equivalents at beginning of period 208,257 402,558
--------------- --------------
Cash and cash equivalents at end of period 510,701 574,640
Short-term investments at end of period 100,166 128,084
--------------- --------------
Cash, cash equivalents and short-term investments
at end of period $ 610,867 $ 702,724
=============== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business
The Company is a facilities-based provider of telecommunications services
primarily to businesses in a growing number of major markets throughout the
United States and in selected international markets. Through its local broadband
(i.e. high capacity) networks, the Company offers its customers a variety of
individual and bundled services, including local and long distance voice
services, data transport, high speed Internet access and enhanced communications
services. The Company classifies telecommunications revenues into two
categories: Core telecommunications services and other telecommunications
services. Core telecommunications revenues primarily include local and long
distance voice services, data transmission services, internet connectivity,
capacity sales, professional and enhanced services including network design and
acquisition, equipment selection and procurement and installation, and web
design and web hosting services. Other telecommunications services revenues are
those derived from the acquired MidCom long distance customer base, the majority
of which are located in cities in which we do not have current plans to provide
Wireless Fiber service. Additionally, the Company markets and distributes
information content and services in both traditional markets (such as
television, video, cable and radio) and through the bundling of content as an
enhanced telecommunications service. The Company's telecommunications services
are subject to varying degrees of federal, state and local regulation.
To capitalize on opportunities in the telecommunications industry, the Company
is pursuing a rapid expansion of its telecommunications services to 60 U.S.
markets by the end of 2000 and up to 50 foreign markets by the end of 2004. This
expansion 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 accrual adjustments) which are, in the
opinion of the Company's management, necessary to present fairly the financial
position of the Company as of June 30, 1999, the statements of operations for
the three and the six months ended June 30, 1999 and 1998, the statements of
cash flows for the six months ended June 30, 1999 and 1998, and the statement of
stockholders' equity for the six months ended June 30, 1999.
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
7
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
2. Basis of Presentation (Continued)
with the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998. The
unaudited financial statements and related footnotes for the three and six month
periods ended June 30, 1998 reflect certain reclassifications such that they
conform to the current period presentation.
The results of operations for the three and six months ended June 30, 1999 are
not necessarily indicative of the results of operations for the year ending
December 31, 1999.
3. Deferred Revenues
Deferred revenues principally relate to the Company's sale of Wireless Fiber
Capacity to Williams Communications, Inc. ("Williams") under a 25 year IRU.
Under the terms of this agreement, Williams will pay the Company approximately
$400.0 million as hubs are delivered, which is expected to occur by December 31,
2001, of which approximately $117.8 million has been received through June 30,
1999. The related revenue will be recognized ratably over 25 years.
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
presented. Stock options and warrants have been excluded from the calculation of
diluted loss per share as their effect would have been antidilutive.
5. 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 $200.0 million and $50.0 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. All of the proceeds of the WEC and WEC II Notes were used to
purchase Designated Equipment. 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 hold Designated
Equipment and to lease same to the Company's other telecommunications
subsidiaries. Given this operating environment, it is unlikely, in the opinion
of management, that WEC or WEC II will generate
8
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
5. Condensed Financial Information of WinStar Equipment Corp. and WinStar
Equipment II Corp. (Continued)
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 for WEC and WEC II, which are included in the
condensed consolidated financial statements of the Company, are as follows (in
thousands):
Balance sheet information as of June 30, 1999 is as follows:
WEC WEC II
--- ------
Current assets $ 47,105 $ 7,839
Long-term assets 184,716 37,657
Current liabilities (7,564) (1,840)
Long- term debt (200,000) (50,000)
Due to parent (58,719) (1,900)
-------- --------
Stockholders' deficit $(34,462) $ (8,244)
======== ========
Statements of operations information for WEC and WEC II for the periods
presented below are as follows (in thousands):
<TABLE>
<CAPTION>
WEC WEC II
---------------------------------------- ---------------------------------------
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, June 30 June 30, June 30
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rental revenues from other
WinStar subsidiaries......... $ 1,056 $ 502 $ 2,230 $ 1,014 $ 125 $ - $ 250 $ -
Interest income from other
WinStar subsidiaries......... 3,250 828 6,617 1,692 694 - 1,167 -
Interest income - investments... - 906 - 2,448 - 879 - 1,525
Selling, general and
administrative expenses...... (1,656) (597) (3,273) (1,639) (96) - (478) -
Interest expense................ (6,483) (6,008) (12,990) (12,009) (1,629) (1,631) (3,259) (3,261)
------- ------ -------- ------- ------ ------ ------ -------
Net loss........................ $(3,833) $(4,369) $ (7,416) $(8,494) $ (906) $ (752) $(2,320) $(1,736)
======= ====== ======== ======= ====== ====== ====== =======
</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
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
6. Discontinued Operations
a. WinStar Global Products
In May 1997, the Company's Board of Directors approved a formal plan of
disposal for the Company's consumer products subsidiary, WinStar Global
Products, Inc., ("Global"). The disposal of Global was accounted for as
a discontinued operation. In November 1998, the Company sold Global's
remaining assets for certain other assets recorded at a nominal value.
During the six months ended June 30, 1998, the Company recorded a loss
on discontinued operations of approximately $1.9 million. Global's
operating results were segregated from continuing operations and were
reported as discontinued operations in the accompanying condensed
consolidated statements of operations and cash flow for the three and
six months ended June 30, 1998.
b. WinStar Gateway Network
In November 1998, a formal plan of disposal for the Company's
Residential Long Distance Business, WinStar Gateway Network, Inc.
("Gateway"), was approved by management of the Company, and it is
anticipated that the disposal will be completed during the three months
ending September 30, 1999. The disposal of Gateway has been accounted
for as a discontinued operation and accordingly, its net liabilities
have been segregated from the net assets of continuing operations in
the accompanying condensed consolidated balance sheets and its
operating results are segregated from continuing operations and are
reported as discontinued operations in the accompanying condensed
consolidated statements of operations and cash flows. Cumulative losses
from the measurement date through June 30, 1999 amounted to $2.6
million as compared with an accrued phase out loss of $4.2 million.
Net liabilities of the discontinued operations of Gateway are composed
of the following (in thousands of dollars):
<TABLE>
<CAPTION>
As of June 30, As of December 31,
1999 1998
--------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 196 $ 665
Other current assets 2 2
Property, plant and equipment 36 38
--------------- --------------
Total assets 234 705
Accounts payable and accrued expenses 2,916 1,262
Capitalized lease obligations 193 277
--------------- --------------
Total liabilities 3,109 1,539
--------------- --------------
Net liabilities $ (2,875) ($834)
=============== ==============
</TABLE>
10
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Marketable Securities
The Company has recorded "other comprehensive income" (representing a recovery
of unrealized losses on 3.3 million shares of Advanced Radio Telecom Corp.) of
$22.8 million in the Statement of Stockholders' Equity (Deficit).
8. Capital Lease Obligations
During 1999, the Company took delivery of certain dark fiber assets, as well as
certain specified fixed circuits from Williams under the terms of its long haul
dark fiber IRU dated December 17, 1998 ("December IRU"). On April 1, 1999, the
Company and Williams amended the December IRU ("Amended IRU") to include an
additional exclusive 20 year indefeasible right to use additional specified
fixed circuits which extended WinStar's long haul telecommunications network.
Pursuant to this amendment, the Company will pay $100.0 million over the next
seven years and account for the Amended IRU as a capitalized lease. Accordingly,
capitalized lease obligations of approximately $159.2 million under the December
IRU and $100.0 million under the Amended IRU have been recorded by the Company
in the first half of 1999.
9. Long-Term Debt
During the first half of 1999, the Company drew down approximately $285.2
million under its financing agreement with Lucent Technologies. As of June 30,
1999, the total amount outstanding under the Lucent financing agreement was
approximately $362.7 million. Under the terms of the financing agreement, the
Company has access to up to $2.0 billion to finance the purchase of equipment
and related services, not to exceed $500.0 million at any one time held by
Lucent. In July 1999, a commercial bank purchased from Lucent, for syndication,
$350.0 million of the Company's borrowings under the financing agreement,
thereby creating additional availability in such amount.
On June 2, 1999, the Company's 14% Convertible Senior Subordinated Discount
Notes due in 2005 automatically converted into 5.9 million shares of the
Company's $0.01 par value common stock. At the time of the conversion, the notes
had an aggregate accreted value of approximately $122.3 million and the Company
had unamortized deferred financing costs of approximately $2.6 million. Under
the terms of the indenture governing these notes, the notes automatically
converted at a fixed conversion rate of $20.625 per share on the thirtieth
consecutive trading day on which the closing price of the Company's common stock
was above $42-3/8.
In June 1999, the Company completed a $35.0 million accounts receivable
securitization financing. Under this financing, the Company may borrow up to the
lesser of the maximum amount of the facility (which has been initially set at
$25.0 million, increasing to $35.0 million when certain conditions are met) and
the amount determined under a borrowing base formula. Borrowings under this
facility will bear interest at the London Inter-Bank Offered Rate ("LIBOR"),
plus 1.5%. As of June 30, 1999, the Company had no outstanding balance under
this financing.
11
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
10. Equity Offerings
In February 1999, the Company issued 4.2 million shares of its $0.01 par value
common stock in a registered public offering pursuant to which it received net
proceeds of $167.5 million.
In June 1999, the Company sold 300,000 shares of its Series F 7 1/4% Senior
Cumulative Convertible Preferred Stock (Liquidation Preference $1,000 per share)
("Convertible Preferred Stock") for net proceeds of approximately $290.9
million. The shares of Convertible Preferred Stock are convertible, at the
option of the holder, into shares of the Company's $0.01 par value common stock,
at a conversion rate of 16.13912 shares of common stock for each share of
Convertible Preferred Stock (representing a conversion price of $61.96 per share
of common stock), subject to adjustment in certain events. The Convertible
Preferred Stock ranks senior to the Company's common stock and Series A and E
Preferred Stock and on a parity with the Company's Series C and D Preferred
Stock. Dividends at the rate of 7-1/4% per annum are payable quarterly in cash
or at the Company's election through the issuance of common stock.
11. Sale of Equity Interest in Subsidiary
In April 1999, the Company sold a one-third equity interest in Office.com, Inc.,
a subsidiary of the Company which operates an online business service
destination site for small and medium-sized businesses, to CBS Corporation for
$42.0 million of promotion and advertising across the full range of CBS media
properties, which be provided over a term of six years.
12
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
12. Segments
The Company is an integrated communications provider, and as such has two
reportable operating segments: Telecommunications and Interactive Services, and
Traditional Media Services . International activities, including joint ventures,
as of June 30, 1999 were not material. Information relating to the Company's
reportable operating segments is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Telecommunications Traditional Total for Corporate
and Interactive Media Reportable Expenses Discontinued
Services Services Segments and Assets Operations Total
------------------ ----------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
June 30, 1999
External revenue $ 85,711 $ 10,794 $ 96,505 $ -- $ -- $ 96,505
Segment operating loss (107,009) (1,193) (108,202) (9,706) -- (117,908)
EBITDA (1) (72,794) (616) (73,410) (9,680) -- (83,090)
Segment assets 1,821,906 53,414 1,875,320 694,207 -- 2,569,527
For the three months ended
June 30, 1998
External revenue $ 44,872 $ 11,358 $ 56,230 $ -- $ -- $ 56,230
Segment operating (loss) profit (58,496) 197 (58,299) (6,730) -- (65,029)
EBITDA (1) (41,894) 481 (41,413) (6,721) -- (48,134)
Segment assets 853,874 56,441 910,315 722,620 7,357 1,640,292
For the six months ended
June 30, 1999
External revenue $ 163,225 $ 21,373 $ 184,598 $ -- $ -- $ 184,598
Segment operating loss (207,897) (775) (208,672) (17,464) -- (226,136)
EBITDA (1) (145,822) 372 (145,450) (17,410) -- (162,860)
For the six months ended
June 30, 1998
External revenue $ 80,511 $ 21,697 $ 102,208 $ -- $ -- $ 102,208
Segment operating (loss) profit (111,539) 1,459 (110,080) (14,114) -- (124,194)
EBITDA (1) (83,854) 2,048 (81,806) (14,094) -- (95,900)
</TABLE>
(1) EBITDA represents losses before interest, income taxes, depreciation and
amortization, other income (expense) and discontinued operations.
13
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
12. Segment (Continued)
As the Company pursues its broadband bundled services strategy it will offer
more traditional media services over its network. Over time, the Company
believes it will operate under one segment.
13. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which requires entities to recognize all derivatives in their financial
statements as either assets or liabilities measured at fair value. SFAS 133 also
specifies new methods of accounting for hedging transactions, prescribes the
items and transactions that may be hedged and specifies detailed criteria to be
met to qualify for hedge accounting. SFAS 133, as amended by SFAS 137, is
effective for fiscal years beginning after June 15, 2000. The Company is
currently evaluating the impact that SFAS 133 will have on its consolidated
financial statements and disclosures.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company Overview
WinStar is a facilities-based provider of telecommunications services primarily
to businesses in a growing number of major markets throughout the United States
and in selected international markets. Through our local broadband (i.e. high
capacity) networks, we offer our customers a variety of individual and bundled
services, including local and long distance voice services, data transport, high
speed Internet access and enhanced communications services. We classify
telecommunications revenues into two categories: Core telecommunications
services and other telecommunications services. Core telecommunications revenues
primarily include local and long distance voice services, data transmission
services, internet connectivity, capacity sales, professional and enhanced
services including network design and acquisition, equipment selection and
procurement and installation, web design and web hosting services. Other
telecommunications services revenues are those derived from the acquired MidCom
customer base, the majority of which are located in cities in which we do not
have current plans to provide Wireless Fiber service. Additionally, we market
and distribute information content and services in both traditional markets
(such as television, video, cable and radio) and through the bundling of content
as an enhanced telecommunications service. Our telecommunications services are
subject to varying degrees of federal, state and local regulation.
To capitalize on opportunities in the telecommunications industry, we are
pursuing a rapid expansion of our telecommunications services to 60 U.S. markets
by the end of 2000 and up to 50 foreign markets by the end of 2004. This
expansion will require significant amounts of capital to finance capital
expenditures and anticipated operating losses. We may elect to slow the speed or
narrow the focus of this expansion in the event that we are unable to raise
sufficient amounts of capital on acceptable terms.
15
<PAGE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues from our operating business lines are as follows (in millions):
Three Months Ended
June 30,
---------
1999 1998
---- ----
Telecommunications Services:
Core Services $ 76.9 $ 30.0
Other Services 7.0 13.7
------- ------
83.9 43.7
Information Services 12.6 12.5
------- ------
Total Revenues $ 96.5 $ 56.2
======= ======
Revenues increased by $40.3 million, or 71.7%, for the three months ended June
30, 1999, to $96.5 million, from $56.2 million for the three months ended June
30, 1998. This increase was principally attributable to the growth in revenues
generated by our Core telecommunications operations.
Revenues from Core services increased by $46.9 million, or 156.3%, for the three
months ended June 30, 1999, to $76.9 million, from $30.0 million, for the three
months ended June 30, 1998. The revenue growth was primarily attributable to our
continued revenue growth in existing markets, the addition of new domestic
markets, and from new services including broadband data and enhanced services,
which includes our provision of end-to-end products and services to our
customers, such as connectivity, transport, network design, equipment and
intelligent software to customers, including VoCall Communications, Inc.
Revenues from other telecommunications services, which consist of MidCom long
distance voice services, decreased by $6.7 million, or 48.9%, for the three
months ended June 30, 1999, to $7.0 million, from $13.7 million for the three
months ended June 30, 1998. The decrease, which was anticipated, resulted
primarily from the attrition of this customer base.
Revenues from information services were $12.6 million for the three months ended
June 30, 1999, which is comparable to revenues of $12.5 million for the three
months ended June 30, 1998.
Traditional media revenues were $10.8 million for the three months ended June
30,1999 as compared to $11.4 million for the three months ended June 30, 1998.
Interactive service revenues
16
<PAGE>
were $1.8 million for the three months ended June 30, 1999 as compared to $1.1
million for the three months ended June 30, 1998. Management anticipates that
Interactive service revenues will grow at an increasing pace.
Cost of services and products increased by $28.1 million, or 62.2%, for the
three months ended June 30, 1999, to $73.4 million, from $45.3 million for the
three months ended June 30, 1998. As a percentage of revenues, cost of services
and products for the three months ended June 30, 1999 was 76.0%, compared with
80.4% for the three months ended June 30, 1998. The percentage of traffic
carried over our own network facilities has continued to increase, resulting in
a decreased cost of revenue percentage. Various other items, however, impact our
cost of revenue each quarter, including revenue volumes, control over internal
costs and rate of expansion. While we believe that our gross profit margin will
continue to improve as increased volumes and larger percentages of traffic are
provisioned over our own network facilities, the rate of improvement will be
slower during periods when we expand into new markets, but will accelerate as
these markets mature. In fact, if many new markets are added or the Company's
other cost control efforts are not as successful as in the current quarter, the
cost of revenue percentage could increase.
Selling, general and administrative expense increased by $47.1 million to $106.2
million for the three months ended June 30, 1999, from $59.1 million for the
three months ended June 30, 1998. We continued to hire sales, marketing, network
and related support personnel in connection with the expansion of our domestic
and international markets. We had approximately 2,300 employees at June 30, 1998
and approximately 3,200 at June 30, 1999. As a percentage of revenues, selling,
general and administrative expenses increased slightly from 105.2% for the three
months ended June 30, 1998 to 110.1% for the three months ended June 30, 1999.
With the rapid expansion of our markets from 26 at June 30, 1998 to 31 at June
30, 1999, and with our planned expansion to 45 domestic markets and 6
international markets by December 31, 1999, we expect selling, general and
administrative expenses to continue to grow in absolute dollars, but to be a
declining percentage of revenues over time.
Depreciation and amortization expense increased by $17.9 million for the three
months ended June 30, 1999, to $34.8 million, from $16.9 million for the three
months ended June 30, 1998 principally resulting from our acquisition and
deployment of telecommunications equipment in connection with our
telecommunications network buildout and amortization relating to goodwill,
purchased customer lists and spectrum licenses from our 1998 acquisitions.
For the reasons noted above, the operating loss for the three months ended June
30, 1999, was $117.9 million, compared with an operating loss of $65.0 million
for the three months ended June 30, 1998.
Interest expense increased by $10.1 million, or 25.1%, for the three months
ended June 30, 1999, to $50.6 million, from $40.5 million for the three months
ended June 30, 1998. This increase was principally attributable to the issuance
of $450.0 million of debt in the first quarter of 1998, aggregate draw-downs of
$362.7 million under the Lucent financing agreement, as well as $304.0
17
<PAGE>
million in new capital lease obligations under the Williams IRU. Of the $50.6
million of interest expense incurred for the quarter, $26.9 million is not
payable in cash.
For the three months ended June 30, 1999, we incurred dividends of $12.8 million
on our placements of Series A, C, D and F Preferred Stock, none of which were
paid in cash.
For the reasons noted above, we reported a net loss applicable to common
stockholders of $175.4 million for the three months ended June 30, 1999,
compared to a net loss applicable to common stockholders of $105.6 million for
the three months ended June 30, 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues of our operating business lines are as follows (in millions):
Six Months Ended
June 30,
--------
1999 1998
---- ----
Telecommunications Services:
Core Services $ 145.4 $ 51.1
Other Services 14.3 26.6
-------- --------
159.7 77.7
Information Services 24.9 24.5
-------- --------
Total Revenues $ 184.6 $ 102.2
======== ========
Revenues increased by $82.4 million, or 80.6% for the six months ended June 30,
1999, to $184.6 million, from $102.2 million for the six months ended June 30,
1998. This increase was attributable to the growth in revenues generated by our
Core telecommunications operations.
Revenues from Core services increased by $94.3, or 184.5%, to $145.4 million for
the six months ended June 30, 1999, from $51.1 million for the six months ended
June 30, 1998. The revenue growth was primarily attributable to our continued
revenue growth in existing markets, the addition of new domestic markets, and
the expansion of our broadband data and enhanced service offerings.
Revenues from other telecommunications services decreased $12.3 million to $14.3
million for the six months ended June 30, 1999, as compared to $26.6 million for
the six months ended June 30, 1998. The decrease, which was anticipated,
resulted primarily from attrition of the MidCom customer base.
Revenues from information services were $24.9 million for the six months ended
June 30, 1999, which is comparable to $24.5 million for the six months ended
June 30, 1998.
18
<PAGE>
Traditional media revenues were $21.4 million for the six months ended June 30,
1999 as compared to $21.7 million for the six months ended June 30, 1998.
Interactive service revenues were $3.5 million for the six months ended June 30,
1999 as compared to $2.8 million for the six months ended June 30, 1998.
Management anticipates that Interactive service revenues will grow at an
increasing pace.
Cost of services and products increased by $54.8 million, or 63.4%, for the six
months ended June 30, 1999, to $141.3 million, from $86.5 million for the six
months ended June 30, 1998. As a percentage of revenues, cost of services and
products for the six months ended June 30, 1999 was 76.5%, compared with 84.6%
for the six months ended June 30, 1998. This decrease in the cost of revenue
percentage is the result of increased volumes and larger percentages of traffic
being provisioned on our local and long haul networks.
Selling, general and administrative expense increased by $94.6 million to $206.2
million for the six months ended June 30, 1999, from $111.6 million for the six
months ended June 30, 1998. We continued to hire sales, marketing, network and
related support personnel in connection with the expansion of our Core markets.
We had approximately 2,300 employees at June 30, 1998, as compared with 3,200
employees at June 30, 1999. As a percentage of revenues, selling, general and
administrative expenses increased slightly from 109.2% for the six months ended
June 30, 1998 to 111.7% for the six months ended June 30, 1999. With the rapid
expansion of our markets from 26 at June 30, 1998, and with our planned
expansion to 45 domestic markets and 6 international markets by December 31,
1999, we expect our selling, general and administrative expenses to continue to
grow in absolute dollars, but to be a steadily declining percentage of revenues.
Depreciation and amortization expense increased by $35.0 million for the six
months ended June 30, 1999, to $63.3 million, from $28.3 million for the six
months ended June 30, 1998 principally resulting from our acquisition and
deployment of telecommunications equipment in connection with our network
buildout and amortization relating to goodwill, purchased customer lists and
spectrum licenses.
For the reasons noted above, the operating loss for the six months ended June
30, 1999, was $226.1 million, compared with an operating loss of $124.2 million
for the six months ended June 30, 1998.
Interest expense increased by $32.2 million, or 46.6%, for the six months ended
June 30, 1999, to $101.3 million, from $69.1 million for the six months ended
June 30, 1998. This increase was principally attributable to the issuance of
$450.0 million of debt in the first quarter of 1998, aggregate draw downs of
$362.7 million under the Lucent financing agreement and capital lease
obligations of $304.0 million under the Williams' IRUs. Of the $101.3 million of
interest expense incurred for the six months ended June 30, 1999, $64.4 million
is not payable in cash.
For the six months ended June 30, 1999, we incurred dividends of $25.0 million
on our placements of Series A, C, D and F Preferred Stock, none of which were
paid in cash.
19
<PAGE>
For the reasons noted above, we reported a net loss applicable to common
stockholders of $340.5 million for the six months ended June 30, 1999, compared
to a net loss applicable to common stockholders of $198.7 million for the six
months ended June 30, 1998.
Liquidity and Capital Resources
In February 1999, we sold 4.2 million shares of our common stock at $41.75 per
share and received net proceeds of approximately $167.5 million.
Additionally, from January 1, 1999 through June 30, 1999, we received $117.8
million from Williams Communications, Inc. ("Williams") in connection with the
delivery of 77 hub sites under the Wireless Fiber IRU Agreement signed in
December 1998. We also took delivery of certain dark fiber assets, as well as
certain specified fixed circuits, which extended our long haul
telecommunications network, thus increasing capitalized lese obligations by
$259.1 million.
In June 1999, we sold 300,000 shares of our Series F 7-1/4% Senior Cumulative
Convertible Preferred Stock and received net proceeds of $290.9 million.
During the six months ended June 30, 1999, we incurred approximately $285.2
million in indebtedness under our financing agreement with Lucent Technologies
("Lucent"). Under the terms of this five year agreement, Lucent will provide up
to $2.0 billion to finance the purchase of equipment and related services, not
to exceed $500.0 million at any one time held by Lucent. In July 1999, a
commercial bank purchased from Lucent, for syndication, $350.0 million of
WinStar's borrowings under the financing agreement, thereby creating additional
availability in such amount.
In June 1999, our 14% Convertible Senior Subordinated Discount Notes due in 2005
automatically converted into 5.9 million shares of our $0.01 par value common
stock. At the time of the conversion the notes had an aggregate accreted value
of approximately $122.3 million.
In June 1999, we completed a $35.0 million accounts receivable securitization
financing. Under this financing, we may borrow up to the lesser of the maximum
amount of the facility (which has been set initially at $25.0 million,
increasing to $35.0 million when certain conditions are met) and the amount
determined under a borrowing base formula. Borrowings under this facility will
bear interest at the London Inter-Bank Offered Rate ("LIBOR"), plus 1.5%. As of
June 30, 1999, the Company had no outstanding balance under this financing.
We have incurred significant operating and net losses, due in large part to the
development of our telecommunications services business, and we anticipate that
such losses will continue over the near term as we execute our growth strategy.
We are building direct sales forces, having opened sales offices currently
serving the 31 domestic major markets in which we offer our Core
telecommunications services, and we are expanding into other metropolitan areas.
We are in the process of ordering and installing switches and other network
equipment to be placed in our key
20
<PAGE>
markets. Historically, we have funded our 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 June 30, 1999 was approximately $83.1 million, and
purchases of property and equipment during the three months ended June 30, 1999
was approximately $328.0 million, including purchases under capitalized lease
obligations. At June 30, 1999, working capital was $461.7 million (including
cash, cash equivalents and short-term investments of $610.9 million) as compared
to $193.1 million at December 31, 1998 (including cash, cash equivalents and
short-term investments of $313.0 million).
We have the ability to moderate our capital spending and EBITDA losses by
varying the number of markets in which we build network and offer services. In
the event that we slow the speed or narrow the focus of our business plan, we
will reduce our capital requirements and EBITDA losses. Under our current plan
to expand to 45 major domestic and six international markets by the end of 1999,
we plan to spend approximately $600.0 million in 1999 for capital equipment
(inclusive of amounts incurred in the first and second quarters), which we
expect to finance principally through the Lucent financing agreement and other
vendor financing arrangements which we believe are available to us.
We anticipate, based on our business plan and related assumptions (including an
assumption of full availability of the $2.0 billion under our Lucent financing
agreement), that our existing financial resources, accounts receivable and
additional equipment financings that we intend to seek, will be sufficient to
fund our operations for approximately 18 to 24 months, and to fund our capital
requirements for the next several years. We may be required to seek additional
sources of capital sooner than we anticipate if: our operating assumptions
change or prove to be inaccurate; less than $2.0 billion becomes available under
the Lucent financing agreement; we fail to secure additional equipment and
accounts receivable financing; we consummate any acquisitions of significant
businesses or assets (including spectrum licenses); or we further accelerate our
plan and enter markets more rapidly.
We continually evaluate the financing alternatives available to us and may
decide to seek a variety of forms of additional debt and/or equity financing.
Year 2000 Compliance
We are continuing to correct, test and re-deploy our systems that have been
identified as being at risk for errors and failures as a result of the "Year
2000" problem, which is the result of certain computer programs being written
using two digits, rather than four digits, to define the applicable year. Any
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, or not recognize the date at
all. This could result in major system failures or miscalculations. We believe
that our exposure to this issue, based on our internal systems, is somewhat
limited by the fact that substantially all of our existing systems have been
purchased or replaced since 1996 or currently remain under development.
Notwithstanding this belief, we are aggressively working to identify and
renovate potential Year 2000 problems in all of
21
<PAGE>
our new and existing mission-critical and business-critical systems and
applications, including those supplied by third party vendors.
Our first priority is to protect customer-sensitive operations from service
interruptions or billing discrepancies that could occur as a result of the Year
2000 transition. Customer-sensitive mission critical operations include our
telecommunications network, traffic data, customer order processing and
provisioning systems, customer billing and invoicing, and data interfaces to and
from these systems. Our business-critical operations include systems,
applications and operations which do not directly impact the customer, but are
essential to internal communications and our ability to run the business
day-to-day. Finally, we are also addressing matters for which failure might
cause inconvenience and delay for our employees, but would not directly impact
customers, service, or routine business operations.
We have developed Year 2000 compliance standards that follow industry
requirements. In order to implement these standards, we formed a Year 2000
Program Office to manage the Year 2000 project plan enterprise-wide. The project
team is comprised of management and technical representatives from our major
operational areas, together with experienced Year 2000 subject matter experts.
The Year 2000 Program Office is responsible for program participation and
compliance of all corporate entities; working with outside Year 2000
consultants; oversight of testing, quality assurance and compliance; and Year
2000 communications. The Program Management Office reports to the Chief
Information Officer and other senior corporate officers on the WinStar Year 2000
Executive Steering Committee. Together, the Year 2000 Program Office and
Executive Steering Committee ensure the participation of all WinStar
organizations, and the timely implementation of any Year 2000 solutions.
Key activities in our Year 2000 program include: planning and program
definition, inventory and prioritization of date-sensitive systems (including
computer and electrical systems, equipment and the systems of companies acquired
or to be acquired by us), risk assessment, remediation, testing, audit and
certification, contingency planning, implementation, and post-implementation
monitoring.
We have substantially completed the planning, inventory and assessment phases of
this project which entailed, among other things, identification of the several
hundred systems used by us in the operation of our business, and in reviewing
all of our hardware and software systems for date related code issues. The
results of this review are guiding our remediation, testing and contingency
planning efforts which are well underway. We are conducting Year 2000
remediation and testing of non-compliant systems, which will continue through
August 1999.
We recognize the need to remediate and test our mission-critical and
business-critical systems to ensure that individually the systems are Year 2000
functional and that collectively they inter-operate in such a manner as to
ensure that our enterprise is Year 2000 functional. Both WinStar-owned, and
vendor-supplied systems are being subjected to integration testing following
stand-alone evaluation, in accordance with WinStar's Year 2000 Compliance
Standards. WinStar is conducting Year 2000 systems and integration testing of
its business applications in a dedicated,
22
<PAGE>
on-site test lab where system environments can be set to Year 2000 dates without
impacting current operations. With the exception of a few remaining applications
now in process, WinStar has completed the individual renovation and testing of
its critical business applications.
WinStar is also conducting Year 2000 Network Integration Testing in a separate
Network Integration Test Facility. The Network Integration Test Facility
simulates end-to-end call processing across WinStar's telecommunications
network. Year 2000 testing conducted in Phase I was successfully completed with
no Year 2000 date issues. Phase II testing is nearing completion, with no date
issues found to-date. Planning for subsequent phases is in progress and is
targeted for completion this Fall. This project will necessarily be a continuing
one as remediated systems are monitored in production for compliance, and as
further modifications are warranted to cover systems changes and to support the
growth of the network.
We have, where we deemed necessary, required suppliers and third-party vendors
to provide statements of Year 2000 compliance in their contracts with us. In
addition, and as part of our Year 2000 project, we have contacted our vendors
and suppliers, including other telecommunications providers, equipment
manufacturers and software vendors, to obtain a statement regarding the vendor's
Year 2000 compliance. We currently require our outside vendors and suppliers to
provide reasonable assurances that their hardware and/or software is Y2K ready.
In the event that a vendor or supplier is not able to provide such assurance, we
will monitor the vendor's progress in this area and, if appropriate, may arrange
to have available an alternate vendor or supplier who can give such assurances.
WinStar is finalizing contingency plans in all key business areas for potential
Year 2000 problems. Contingency plans cover major business processes, including
operation of the WinStar network, customer billing, and other mission and
business-critical operations. Training for WinStar personnel who will implement
contingencies will begin in the third quarter of this year. Testing and
simulation of Contingency and Emergency Response Plans is targeted for the
fourth quarter of this year. A Year 2000 Command Center will be in place in
December, and key personnel will be on-site or on-call before, during, and after
the critical transition period from late December, 1999 through mid-January,
2000.
The total cost associated with our Year 2000 compliance project is not expected
to be material to our financial position. The estimated total cost of the
project is $6 million to $8 million. The total amount expended through June 30,
1999 was approximately $3.9 million. As additional systems are reviewed and
tested and the scope of any Year 2000 issues is further defined, we will make
appropriate adjustments to the estimated costs of completing this project.
Our failure to make our key systems Year 2000 compliant could adversely impact
our ability to service our telecommunications and other customers and otherwise
carry on our business. Such problems could include interruptions in the
operation of our telecommunications network, traffic data, customer order
processing and provisioning systems, customer billing and invoicing, and data
interfaces to and from these systems. Although we expect that we will have
identified and remediated any Year 2000 problems in our internal systems prior
to the end of 1999, if any
23
<PAGE>
significant Year 2000 problems in our systems are not uncovered or are not
remediated in a timely manner, significant failures of these functions could
occur and could have material adverse consequences to our operations.
While we are working to test our own mission critical systems for Year 2000
problems, we do not control the systems of our suppliers. As discussed above, we
are seeking assurances from our suppliers regarding the Year 2000 readiness of
their systems. We also plan to conduct interoperability testing, where feasible,
to test whether our suppliers' systems will accurately provide our systems with
date data and telecommunications functionality into and beyond the new
millennium. Notwithstanding these measures, there is some risk that the
interoperation of our systems with those of our suppliers' may be impacted by
the Year 2000 date change. In addition, in light of the vast interconnection and
interoperability of telecommunications networks worldwide, and the vast array of
telecommunications equipment used in those networks (including equipment used by
customers on their premises) the ability of any telecommunications provider,
including WinStar, to provide services to customers (e.g., to complete calls and
transport data and to bill for such services) is dependent, to some extent, on
the networks, systems and equipment of other carriers and numerous equipment
manufacturers. To the extent the networks, systems and equipment of other
carriers and customer premise equipment and systems are adversely impacted by
Year 2000 problems, the ability of WinStar to provide service may be adversely
impacted as well. Any such impact could have a material adverse effect on our
operations.
Certain industry-wide efforts are underway to test individual network components
and to address issues related to the interoperability of telecommunications
networks both domestically and worldwide. For instance, WinStar is a member of
the Alliance for Telecommunications Industry Solutions (ATIS) Network Testing
Committee (NTC), an industry forum made up of telecommunications carriers which
has sponsored a series of Year 2000 tests to test, among other things, Year
2000 readiness with respect to transmissions between and over various domestic
and international carriers' networks. However, while many carriers are working
toward understanding the worldwide communications infrastructure and helping to
avoid potential problems stemming from the Year 2000 issue, WinStar cannot give
assurances that the interconnection of the networks of different carriers will
not be adversely impacted by the Year 2000 issue.
We also may consummate acquisitions prior to the end of 1999. The extent of the
Year 2000 problems associated with any such acquired companies and the cost and
timing of remediation will be evaluated during and after completion of the
acquisition process. Our Year 2000 efforts include active participation by newly
acquired businesses and a plan is in place for immediate coordination in the
event of future acquisitions. However, we cannot give assurances that the
systems of any acquired company will be fully Year 2000 compliant when acquired
or will be capable of timely remediation.
Having identified our mission critical and business critical systems and our key
suppliers, and the associated risks of failure of those systems to be Year 2000
ready, we are finalizing contingency plans which will be implemented in the
event we determine that any such systems will not be made Year 2000 compliant in
a timely manner.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which requires entities to recognize all derivatives in their financial
statements as either assets or liabilities measured at fair value. SFAS 133 also
specifies new methods of accounting for hedging transactions, prescribes the
items and transactions that may be hedged and specifies detailed criteria to be
met to qualify for hedge accounting. SFAS 133, as amended by SFAS 137, is
effective for fiscal years beginning after June 15, 2000. We are currently
evaluating the impact that SFAS 133 will have on its consolidated financial
statements and disclosures.
24
<PAGE>
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 us, are intended to identify forward-looking
statements. Such statements reflect our current views 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) our ability to
service our debt or to obtain financing for the buildout of our
telecommunications network; (b) our ability to attract and retain a sufficient
revenue-generating customer base; (c) competitive pressures in the
telecommunications industry; and (d) general economic conditions.
25
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio, redeemable preferred stock and long-term debt
obligations. We do not use derivative instruments in our investment portfolio.
We place our investments with high quality credit issuers and, by policy, limit
the amount of credit exposure to any one issuer. With the exception of our
obligations under the Lucent Financing, we have no cash flow exposure due to
rate changes for long-term obligations. Our Lucent obligations are variable rate
instruments, however, there has been no material changes in market risk since
December 31, 1998. We primarily enter into debt obligations to support the
construction of our network and working capital needs.
26
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
The following table sets forth certain information with respect to the issuance
by the Company of certain securities during the quarter ended June 30, 1999,
without registration of such securities under the Securities Act:
<TABLE>
<CAPTION>
Terms of
Exemption Conversion or Use of
Securities Sold Purchasers Consideration Claimed Exercise Proceeds
--------------- ---------- ------------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
2,669 shares of Common Various Shares issued as Section 4(2) Not Applicable The Company did
Stock individuals consideration in not receive cash
(various dates from and entities various proceeds for
4/1/99 - 6/30/99) acquisitions these shares.
300,000 shares of Various $300,000,000 Section 4(2) and Each preferred General
Series F qualified (gross proceeds; Rule 144A share is development and
7-1/4% Senior institutional does not reflect convertible into growth of the
Cumulative Convertible buyers deduction for 16.13912 shares Company's
Preferred Stock discounts and of common stock telecommuni-cations
expenses) (equivalent to a and related
conversion price business
of $61.96) operations
</TABLE>
Item 6. Reports on Form 8-K
(1) Current report on Form 8-K filed July 16, 1999
(2) Current report on Form 8-K filed June 24, 1999
(3) Current report on Form 8-K filed June 3, 1999
27
<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: August 16, 1999
By: /s/Joseph P. Dwyer
- -----------------------
Joseph P. Dwyer
Senior Vice President, Finance
(Principal Accounting Officer) Dated: August 16, 1999
28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 510,701,000
<SECURITIES> 100,166,000
<RECEIVABLES> 113,085,000
<ALLOWANCES> 0
<INVENTORY> 19,256,000
<CURRENT-ASSETS> 806,857,000
<PP&E> 1,140,818,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,569,527,000
<CURRENT-LIABILITIES> 345,143,000
<BONDS> 1,615,158,000
415,834,000
46,000
<COMMON> 543,000
<OTHER-SE> (141,869,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,569,527,000
<SALES> 0
<TOTAL-REVENUES> 96,505,000
<CGS> 0
<TOTAL-COSTS> 73,353,000
<OTHER-EXPENSES> 141,060,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,641,000
<INCOME-PRETAX> (163,578,000)
<INCOME-TAX> (1,000,000)
<INCOME-CONTINUING> (162,578,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (162,578,000)
<EPS-BASIC> (3.53)
<EPS-DILUTED> (3.53)
<FN>
<F1>
Receivables are net of allowance for doubtful accounts
<F2>
PP&E are net of acumulated depreciation
</TABLE>
