<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, 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 May 13, 1999: 47,621,115
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998 3
Unaudited Condensed Consolidated Statements
of Operations - three months ended
March 31, 1999 and 1998 ............................... 4
Unaudited Condensed Consolidated Statement of
Stockholders' Equity (Deficit) - three months ended
March 31, 1999......................................... 5
Unaudited Condensed Consolidated Statements
of Cash Flows - three months ended
March 31, 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.......... 14
PART II. Other Information...................................... 22
Item 2. Changes in Securities
Item 6. Reports on Form 8-K
Signatures .................................................... 23
2
<PAGE>
<TABLE>
WinStar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<CAPTION>
March 31, December 31,
1999 1998
------------ -------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 329,901 $ 208,257
Short term investments 79,663 104,773
------------ ------------
Cash, cash equivalents and short term investments 409,564 313,030
Accounts receivable, net of allowance for doubtful
accounts 90,482 70,939
Inventories 17,271 14,880
Prepaid expenses and other current assets 61,823 28,402
------------ ------------
Total current assets 579,140 427,251
Investment in equity securities 38,938 26,400
Property and equipment, net 841,185 639,673
Licenses, net 319,118 310,649
Other intangible assets, net 175,060 178,050
Deferred financing costs, net 50,891 53,308
Other assets 24,899 27,851
------------ ------------
Total assets $ 2,029,231 $ 1,663,182
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 8,102 $ 6,487
Current portion of capitalized lease obligations 96,210 59,021
Accounts payable and accrued expenses 135,614 159,252
Deferred revenues - current 7,765 2,105
Net liabilities of discontinued operations 5,854 7,254
------------ ------------
Total current liabilities 253,545 234,119
Capitalized lease obligations, less current portion 146,987 49,354
Long-term debt, less current portion 1,526,890 1,396,635
Deferred revenues - non current 78,343 -
Other liabilities 13,564 12,588
Deferred income taxes 17,500 18,500
------------ ------------
Total liabilities 2,036,829 1,711,196
------------ ------------
Series C cumulative exchangeable redeemable preferred stock 208,614 201,478
Series D senior cumulative convertible redeemable preferred stock 200,000 200,000
Stockholders' equity (deficit)
Series A Preferred stock 42 41
Series E Preferred stock 1 1
Common stock, par value $.01; authorized 200,000 shares,
issued and outstanding 46,766 and 41,403, respectively 468 414
Additional paid-in-capital 576,974 404,112
Accumulated deficit (972,154) (819,242)
Accumulated other comprehensive loss (21,543) (34,818)
---------- -----------
Total stockholders' deficit (416,212) (449,492)
------------ ------------
Total liabilities, redeemable preferred stock
and stockholders' deficit $ 2,029,231 $ 1,663,182
============ ============
</TABLE>
3
See Notes to Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<CAPTION>
For the three months ended
March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating revenues
Telecommunications services
Core $ 68,587 $ 18,635
Other 7,275 15,394
----------- -----------
Total telecommunications services 75,862 34,029
Information services 12,231 11,949
----------- -----------
Total operating revenues 88,093 45,978
----------- -----------
Operating expenses
Cost of services and products 67,942 41,252
Selling, general and administrative expenses 99,921 52,492
Depreciation and amortization 28,483 11,399
----------- -----------
Total operating expenses 196,346 $ 105,143
----------- -----------
Operating loss (108,253) (59,165)
Other (expense) income
Interest expense (50,563) (28,613)
Interest income 5,009 4,885
Other expense (105) -
--------- -----------
Loss from continuing operations before income
tax benefit (153,912) (82,893)
Income tax benefit 1,000 1,100
----------- -----------
Loss from continuing operations (152,912) (81,793)
Loss from discontinued operations - (3,166)
----------- -----------
Net loss (152,912) (84,959)
Preferred stock dividends (12,191) (8,198)
----------- -----------
Net loss applicable to common stockholders $(165,103) $ (93,157)
=========== ===========
Basic and diluted loss per share:
From continuing operations $ (3.72) $ (2.51)
From discontinued operations - (0.09)
----------- ----------
Net loss per share $ (3.72) $ (2.60)
=========== ===========
Weighted average shares outstanding 44,384 35,899
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
<TABLE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 1999
(in thousands)
(unaudited)
<CAPTION>
Preferred Stock A Preferred Stock E Common Stock
-------------------- ------------------- ------------------
Shares Amount Shares Amount Shares Amount
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 ................ 4,150 $ 41 75 $ 1 41,403 $ 414
Issuances of common stock:
For stock option exercises and other ....... 1,025 10
For acquisitions and licenses .............. 49 1
February 1999 Common Stock Equity Offering . 4,200 42
Dividends declared on Series A preferred stock
Dividends declared on Series C preferred stock
Dividends on Series D preferred stock ........
Issuances of Series A preferred stock as
dividends in kind .......................... 62 1
Issuances of common stock as dividends
on Series D preferred stock ................ 89 1
Comprehensive loss:
Net loss .....................................
Unrealized gain on investments in marketable
equity securities ..........................
Total comprehensive loss .....................
----- -------- -------- -------- ------ --------
Balances at March 31, 1999 ................... 4,212 $ 42 75 $ 1 46,766 $ 468
===== ======== ======== ======== ====== ========
</TABLE>
<TABLE>
<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 ....... 11,671 11,681
For acquisitions and licenses .............. 2,045 2,046
February 1999 Common Stock Equity Offering . 166,284 166,326
Dividends declared on Series A preferred stock (1,556) (1,556)
Dividends declared on Series C preferred stock (7,136) (7,136)
Dividends on Series D preferred stock ........ (3,500) (3,500)
Issuances of Series A preferred stock as
dividends in kind .......................... 1,555 1,556
Issuances of common stock as dividends
on Series D preferred stock ................ 3,499 3,500
Comprehensive loss:
Net loss ..................................... (152,912) (152,912)
Unrealized gain on investments in marketable
equity securities .......................... 13,275 13,275
--------
Total comprehensive loss ..................... (139,837)
========
--------- ---------- ------------ ------------
Balances at March 31, 1999 ................... $ 576,974 $ (972,154) $ (21,543) $ (416,212)
========= ========== ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
<TABLE>
WinStar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
For the three months ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (152,912) $ (84,959)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations - 3,166
Depreciation and amortization 28,483 11,399
Deferred income tax benefit (1,000) (1,100)
Provision for doubtful accounts 5,619 1,746
Loss in equity method investment 105 -
Non cash interest expense 37,487 19,621
(Increase) decrease in operating assets:
Accounts receivable (25,162) (21,275)
Inventories (2,391) (209)
Prepaid expenses and other current assets (33,400) (1,249)
Other assets 3,090 1,792
Decrease in accounts
payable and accrued expenses (28,542) (19,421)
Increase in deferred revenues 84,003 -
Net cash used in discontinued operations (1,400) (7,210)
------------ ------------
Net cash used in operating activities (86,020) (97,699)
------------ ------------
Cash flows from investing activities:
(Increase) decrease in short-term investments, net 25,110 (10,996)
Purchase of property and equipment (75,851) (29,641)
Acquisitions, net of cash acquired, including licenses (9,368) (107,955)
------------ ------------
Net cash used in investing activities (60,109) (148,592)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt, net 104,788 438,113
Net proceeds from redeemable preferred stock offering - 193,145
Net proceeds from common stock offering 166,326 -
Net proceeds from other equity transactions 11,681 8,019
Proceeds from equipment lease financing - 30,900
Payment of capital lease obligations (18,136) (881)
Other, net 3,114 (1,237)
------------ ------------
Net cash provided by financing activities 267,773 668,059
------------ ------------
Net increase in cash and cash equivalents 121,644 421,768
Cash and cash equivalents at beginning of period 208,257 402,599
------------ ------------
Cash and cash equivalents at end of period 329,901 824,367
Short-term investments at end of period 79,663 27,899
------------ ------------
Cash, cash equivalents and short-term investments
at end of period $ 409,564 $ 852,266
============ ============
</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. 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. 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 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, 1999, the statements of operations and the
statements of cash flows for the three months ended March 31, 1998 and 1999 and
the statement of stockholders' equity for the three months ended March 31,
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 with the 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 month period ended March 31, 1998 reflect
certain reclassifications such that they conform to the current period
presentation.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results of operations for the year ending
December 31, 1999.
7
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 over the next
three years. Through March 31, 1999, the Company has received approximately
$84.0 million. The related revenue will be recognized ratably over 25 years.
For the three months ended March 31, 1999, the Company recognized revenues of
approximately $1.1 million.
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. Acquisitions
In January 1999, the Company along with KDD Corporation and Sumitomo
Corporation formed a joint venture to pursue the deployment of fixed wireless
services in Japan. The three companies have established a new Japanese
corporation, KDD WinStar Corporation, to secure spectrum rights and build a
broadband network. The Company's initial subscription payment for a 35% interest
in the venture was approximately $3.0 million, $0.3 million of which was paid in
March 1999 and approximately $2.7 million of which was paid in April 1999.
In February 1999, the Company acquired 95% of Macrocom SA, a company holding a
nationwide license for 400 MHz of spectrum in the 38 GHz band in Argentina. The
purchase price was approximately $7.1 million consisting of $5.5 million cash
and 36,000 shares of common stock of the Company valued at $1.6 million.
6. 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
affiliates. Given this operating environment, it is 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.
8
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 at March 31, 1999 is as follows:
WEC WEC II
--------- ---------
Current assets $ 38,945 $ 7,807
Long-term assets 190,223 37,032
Current liabilities (1,346) (278)
Long-term debt (200,000) (50,000)
Due to parent (58,451) (1,900)
--------- ---------
Stockholders' deficit $ (30,629) $ (7,339)
========= =========
Statements of operations information for WEC and for WEC II for the periods
presented below are as follows (in thousands):
WEC WEC II
------------------------ --------------------
Three Months Ended Three Months Ended
March 31, March 31,
1999 1998 1999 1998
------- ------- ------- -------
Rental revenues from
other WinStar
subsidiaries....... $ 1,174 $ 512 $ 125 $ -
Interest income from
other WinStar
subsidiaries....... 3,367 864 473 -
Interest income -
investments........ 20 1,542 1 -
Selling, general and
administrative
expenses........... (1,637) (1,042) (383) (646)
Interest expense...... (6,507) (6,238) (1,630) (1,630)
------- ------- ------- -------
Net loss.............. $(3,583) $(4,362) $(1,414) $(2,276)
======= ======= ======= =======
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.
7. 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 entered into an asset purchase agreement and sold Global's
remaining assets for certain other assets recorded at a nominal value.
During the quarter ended March 31, 1998, the Company recorded a loss on
discontinued operations of approximately $1,982,000.
9
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 months ended March 31, 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 within the next six
months. 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 sheet 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.
Information relating to the discontinued operations of Gateway is as
follows (in thousands of dollars):
Three Months Ended
March 31,
1999 1998
---------- -----------
Operating revenues $ 585 $ 1,458
---------- -----------
Cost of revenue 622 1,523
Selling, general & administrative
expenses 557 1,119
---------- -----------
Total operating expenses 1,179 2,642
---------- -----------
Net loss $ (594) $ (1,184)
========== ===========
10
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Net liabilities of the discontinued operations of Gateway as of March
31, 1999 and December 31, 1998 are composed of the following (in
thousands of dollars):
1999 1998
----------- ----------
Total assets $ 74 $ 472
----------- ----------
Current liabilities 2,095 1,140
Non current liabilities 157 166
----------- ----------
Total liabilities 2,252 1,306
----------- ----------
Net liabilities $ (2,178) $ (834)
=========== ==========
8. Marketable Securities
The Company has recorded "other comprehensive income" (representing
unrealized gains on 3.3 million shares of Advanced Radio Telecom Corp.)
of $13,275,000 in the Statement of Shareholders' Equity.
9. Capital Lease Obligations
During the first quarter of 1999, the Company took delivery of certain dark
fiber, as well as certain specified fixed circuits from Williams under the
terms of its long haul dark fiber IRU dated December 17, 1998. Accordingly,
capitalized lease obligations of approximately $149.2 million have been
recorded by the Company in the first quarter of 1999.
10. Long-Term Debt
During the first quarter of 1999, the Company drew down approximately
$102.5 million under its equipment financing agreement with Lucent
Technologies. As of March 31, 1999, the total amount outstanding under
this Agreement was approximately $180.1 million. The proceeds of this
debt were utilized to fund capital expenditures.
11
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Notes to Condensed Financial Statements
(unaudited)
11. Equity Offering
In February 1999 the Company issued 4.2 million shares of its common stock in a
registered public offering pursuant to which it received net proceeds of
approximately $166.3 million.
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 March 31, 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
and Interactive Media Reportable General Discontinued
Services Services Segments Corporate Operations Total
------------------ ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended
March 31, 1999
External revenue $ 77,514 $10,579 $ 88,093 $ -- $ -- $ 88,093
Segment operating (loss) profit (100,914) 418 (100,496) (7,757) -- (108,253)
EBITDA (1) (73,028) 988 (72,040) (7,730) -- (79,770)
Segment assets 1,483,689 52,319 1,536,008 493,223 -- 2,029,231
For the Three Months Ended
March 31, 1998
External revenue $ 35,639 $10,339 $ 45,978 $ -- $ -- $ 45,978
Segment operating (loss) profit (53,043) 1,262 (51,781) (7,384) -- (59,165)
EBITDA (1) (41,960) 1,567 (40,393) (7,373) -- (47,766)
Segment assets 833,210 48,094 881,304 762,505 4,604 1,648,413
</TABLE>
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.
(1) EBITDA represents losses before interest, income taxes, depreciation and
amortization, other income (expense) and discontinued operations.
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 transaction that may be hedged and specifies detailed criteria to
be met to qualify for hedge accounting. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. The Company is currently evaluating the impact
that SFAS 133 will have on its consolidated financial statements and
disclosures.
12
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
14. Subsequent Event
Subsequent to March 31, 1999, the Company and Williams signed an amendment,
with an effective date of April 1, 1999 ("amended IRU"), to the long haul dark
fiber IRU agreement dated December 17, 1998. Under the terms of the amended
IRU, Williams has granted the Company an exclusive 20 year indefeasible right
to use specified fixed circuits for WinStar's long haul telecommunications
network. The Company will pay Williams $100.0 million over the next seven years
and account for the amended IRU as a capitalized lease.
13
<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. 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. 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.
14
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Revenues from our operating business lines are as follows (in millions):
Three Months Ended
March 31,
1999 1998
---- ----
Telecommunications Services:
Core $68.6 $18.6
Other Services 7.3 15.4
----- -----
75.9 34.0
Information Services 12.2 11.9
----- -----
Total Revenues $88.1 $45.9
===== =====
Revenues increased by $42.2 million, or 91.9%, for the three months ended March
31, 1999, to $88.1 million, from $45.9 million for the three months ended March
31, 1998. This increase was principally attributable to the growth in revenues
generated by our telecommunications operations, where the addition of new
domestic markets and new services including broadband data and enhanced
services, as well as revenue growth in our existing markets, led to a 122.9%
gain in telecommunications revenues over the prior year.
Revenues from Core services increased by $50.0 million, or 268.1%, for the
three months ended March 31, 1999, to $68.6 million, from $18.6 million, for
the three months ended March 31, 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 service
offerings. Based on revenues generated in March 1999, total Core service
revenues reached an annual run rate in excess of $280.0 million, compared with
$89.0 million based on revenues generated in March 1998. Through March 31,
1999, cumulative lines installed were approximately 384,000 as compared with
approximately 145,000 at March 31, 1998.
Revenues from other telecommunications services, which consist of MidCom long
distance voice services, decreased by $8.1 million, or 52.7%, for the three
months ended March 31, 1999, to $7.3 million, from $15.4 million for the three
months ended March 31, 1998. The decrease, which was anticipated, resulted
primarily from attrition of this customer base.
Revenues from information services were $12.2 million for the three months
ended March 31, 1999, which is comparable to revenues of $11.9 million for the
three months ended March 31, 1998. Traditional media revenues were $10.6 million
for the three months ended March 31, 1999, as compared to $10.3 million for the
three months ended March 31, 1998. Interactive service revenues were $1.7
million for the three months ended March 31, 1999 as compared to $1.6 million
for the three months ended March 31, 1998. Management anticipates that
Interactive service revenues will grow at an increasing pace.
15
<PAGE>
As a percentage of revenues, cost of services and products for the three months
ended March 31, 1999 was 77.1%, compared with 89.7% for the three months ended
March 31, 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 and control over internal costs. 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 $47.4 million to $99.9
million for the three months ended March 31, 1999, from $52.5 million for the
three months ended March 31, 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 2,076 employees at
March 31, 1998 and approximately 2,872 at March 31, 1999. As a percentage of
revenues, selling, general and administrative expenses declined slightly from
114.2% for the three months ended March 31, 1998 to 113.4% for the three months
ended March 31, 1999. With the rapid expansion of our markets from 21 at March
1998 to 31 at March 31, 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 $17.1 million for the three
months ended March 31, 1999, to $28.5 million, from $11.4 million for the three
months ended March 31, 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
March 31, 1999, was $108.3 million, compared with an operating loss of $59.2
million for the three months ended March 31, 1998.
Interest expense increased by $22.0 million, or 76.7%, for the three months
ended March 31, 1999, to $50.6 million, from $28.6 million for the three months
ended March 31, 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 $180.1 million under the Lucent Financing agreement, as well as
$193.8 million in new capital lease obligations under the Williams IRU. Of the
$50.6 million of interest expense incurred for the quarter, $37.5 million is
not payable in cash.
For the three months ended March 31, 1999, we incurred dividends of $12.2
million on our placements of Series A, Series C and Series D Preferred Stock,
none of which were paid in cash.
16
<PAGE>
For the reasons noted above, we reported a net loss applicable to common
stockholders of $165.1 million for the three months ended March 31, 1999,
compared to a net loss applicable to common stockholders of $93.2 million for
the three months ended March 31, 1998.
Liquidity and Capital Resources
In February 1999, we sold 4,200,000 shares of our common stock at $41.75 per
share and received net proceeds of approximately $166.3 million.
Additionally, in February 1999, the Company received $84.0 million from
Williams Communications, Inc. ("Williams") in connection with the delivery of
57 hub sites under the Wireless Fiber IRU Agreement signed in December 1998.
In the first quarter of 1999, we incurred approximately $102.5 million in
indebtedness under our equipment financing agreement with Lucent Technologies
("Lucent"). Under the terms of this five year agreement, Lucent will provide up
to $2.0 billion in equipment financing; provided, however, that Lucent is not
required to have outstanding at any one time aggregate loans and commitments in
excess of $500.0 million. Additional amounts automatically become available on a
dollar-for-dollar basis as the loans and/or unfunded commitments are syndicated
to other lenders.
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 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 March 31, 1999
was approximately $79.8 million, and purchases of property and equipment during
the three months ended March 31, 1999 was approximately $102.5 million. At
March 31, 1999, working capital was $325.6 million (including cash, cash
equivalents and short-term investments of $409.6 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 quarter), which we expect
to finance principally through the Lucent credit agreement and other vendor
financing arrangements which we believe are available to us and,
17
<PAGE>
we expect to finance an additional $220.0 million (inclusive of amounts incurred
in the first quarter) under the Williams IRU's.
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
arrangement), 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 12 to 15 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 arrangement; 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 redeploy 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
remediate potential Year 2000 problems in all of 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 will address matters for which failure might cause
inconvenience and delay for Company 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
18
<PAGE>
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.
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 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 underway. We are conducting Year 2000 testing and remediation
of non-compliant, mission and business-critical systems, which will continue
through August 1999.
We recognize the need to remediate and test our mission-critical and
business-critical systems to insure that individually the systems are Year 2000
functional and that collectively they inter-operate in such a manner as to
insure that our enterprise is Year 2000 functional. We expect to complete the
individual testing of mission-critical and business-critical systems prior to
June 30, 1999. We expect to start inter-operability testing in June 1999 and to
complete that phase prior to August 31, 1999. 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.
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 $4 million to $8 million. The total amount expended through March
31, 1999 was approximately $2.0 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
19
<PAGE>
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 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 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 those
carriers are adversely impacted by Year 2000 problems, the ability of WinStar to
service its customers may be adversely impacted as well. Any such impact could
have a material adverse effect on our Company's operations.
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 ours
key suppliers, and the associated risks of failure of those systems to be Year
2000 ready, we are in the process of devising 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 transaction that may be hedged and specifies detailed criteria to
be met to qualify for hedge accounting. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. The
20
<PAGE>
Company is currently evaluating the impact that SFAS 133 will have on its
consolidated financial statements and disclosures.
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.
21
<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 March 31, 1999,
without registration of such securities under the Securities Act:
<TABLE>
<CAPTION>
Terms of
Exemption Conversion or
Securities Sold Purchasers Consideration Claimed Exercise Use of Proceeds
--------------- ---------- ------------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
48,860 shares of Various Shares issued as 4(2) Not Applicable The Company did
Common Stock (various individuals consideration in not receive cash
dates from and entities various acquisitions proceeds for
1/1/99 - 3/31/99) these shares
</TABLE>
Item 6. Reports on Form 8-K
(1) Current report on Form 8-K filed January 11, 1999 (reporting on items 5 and
7(c), and amendments thereto on Form 8-K/A filed on February 2, 1999 and
February 3, 1999.
22
<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 17, 1999
By: /s/Joseph P. Dwyer
----------------------------------------
Joseph P. Dwyer
Senior Vice President, Finance
(Principal Accounting Officer) Dated: May 17, 1999
23
<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:_________________________________________
Charles T. Dickson
Executive Vice President and Chief Financial
Officer (Principal Financial Officer) Dated: May 17, 1999
By:_________________________________________
Joseph P. Dwyer
Senior Vice President, Finance
(Principal Accounting Officer) Dated: May 17, 1999
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracting from form 10-Q
and is qualified in its entirety to such financial statements (in thousands,
except per share data)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 329,901,000
<SECURITIES> 79,663,000
<RECEIVABLES> 90,482,000
<ALLOWANCES> 0
<INVENTORY> 17,271,000
<CURRENT-ASSETS> 579,140,000
<PP&E> 841,185,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,029,231,000
<CURRENT-LIABILITIES> 253,545,000
<BONDS> 1,526,890,000
408,614,000
43,000
<COMMON> 468,000
<OTHER-SE> (416,723,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,029,231,000
<SALES> 0
<TOTAL-REVENUES> 88,093,000
<CGS> 0
<TOTAL-COSTS> 67,942,000
<OTHER-EXPENSES> 128,404,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,563,000
<INCOME-PRETAX> (153,912,000)
<INCOME-TAX> (1,000,000)
<INCOME-CONTINUING> (152,912,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152,912,000)
<EPS-PRIMARY> (3.72)
<EPS-DILUTED> (3.72)
<FN>
(1) Receivables are net of allowance for doubtful accounts
(2) PP&E are net of accumulated depreciation
</FN>
</TABLE>
