<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1999
REGISTRATION NO. 333-70263
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WINSTAR COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4812 13-3585278
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 584-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TIMOTHY R. GRAHAM
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 584-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With copies to:
<TABLE>
<S> <C>
DAVID ALAN MILLER, ESQ. STEPHEN L. BURNS, ESQ.
GRAUBARD MOLLEN & MILLER CRAVATH, SWAINE & MOORE
600 THIRD AVENUE 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10016 NEW YORK, NEW YORK 10019
(212) 818-8800 (212) 474-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with an underwritten public offering in the United States and
Canada and one to be used in a concurrent underwritten public offering outside
the United States and Canada. The two prospectuses are identical except for the
front and back cover pages and the "Underwriting" section. The form of U.S.
prospectus is included herein and is followed by the alternate pages to be used
in the international prospectus. The alternate pages for the international
prospectus included herein are each labeled "International Prospectus--Alternate
Page." Final forms of each prospectus will be filed with the Securities and
Exchange Commission under Rule 424(b) under the Securities Act.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 1999
PROSPECTUS
4,200,000 SHARES
WINSTAR COMMUNICATIONS, INC.
COMMON STOCK
------------------
We are selling 4,200,000 shares of our common stock. The U.S. underwriters
named in this prospectus may purchase up to 630,000 additional shares of our
common stock under certain circumstances.
Of the 4,200,000 shares of common stock that we are selling, 3,360,000
shares are being offered in the United States and Canada by a syndicate of U.S.
underwriters and 840,000 shares are being offered concurrently outside the
United States and Canada by a syndicate of international underwriters.
Our common stock is quoted on the Nasdaq National Market under the symbol
"WCII". The last reported sale price of our common stock on Nasdaq on
January 14, 1999, was $40.56 per share.
------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price..................................................................... $ $
Underwriting discount..................................................................... $ $
Proceeds to WinStar (before expenses)..................................................... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
February , 1999.
------------------
SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON
February , 1999
<PAGE>
[ARTWORK]
WINSTAR'S NETWORK OPERATIONS CENTER
[ARTWORK]
A POINT TO POINT HUB SITE
IN CHICAGO
[ARTWORK]
A POINT TO POINT HUB
SITE AND TARGET BUILDINGS
[ARTWORK]
A POINT TO POINT MULTIPOINT
HUB ANTENNA
[ARTWORK]
A POINT TO POINT CAPITAL
ANTENNA INSTALLATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................................................... 2
Risk Factors............................................................................................... 9
Use of Proceeds............................................................................................ 17
Capitalization............................................................................................. 18
Dilution................................................................................................... 19
Selected Financial Data.................................................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 31
Management................................................................................................. 47
Principal Stockholders..................................................................................... 50
Description of Capital Stock............................................................................... 52
Description of Certain Indebtedness........................................................................ 55
Certain United States Federal Tax Considerations for Non-U.S. Holders of Common Stock...................... 60
Underwriting............................................................................................... 62
Legal Matters.............................................................................................. 64
Experts.................................................................................................... 64
Forward-Looking Statements................................................................................. 64
Where You Can Find More Information........................................................................ 64
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON
THE FRONT OF THIS PROSPECTUS.
1
<PAGE>
SUMMARY
This summary highlights certain information appearing elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information that you should consider before purchasing our common stock. Unless
otherwise stated in this prospectus, references to "we," "us," "our" or
"WinStar" refer to WinStar Communications, Inc. and, where appropriate, our
subsidiaries. Wireless Fiber(Service Mark) and Office.com(Service Mark) are
service marks, and WinStar(Registered), WinStar for Business(Trademark) and
WinStar Business Info Center(Trademark) are trademarks, of WinStar. Unless
otherwise indicated, all information contained in this prospectus assumes that
the U.S. underwriters will not exercise their option to purchase an additional
630,000 shares.
GENERAL
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, high-speed data transport, Internet
access and other enhanced communications services. We also provide
Internet-based information content and services, such as online business
resources. We provide our services with a high degree of customer care and at
competitive prices, which affords our customers an attractive alternative to the
incumbent local exchange carriers ("ILECs") and other service providers. As of
September 30, 1998, we had more than 257,000 installed lines serving over 12,000
business customers. We currently provide service in more than 30 major U.S.
markets, including Atlanta, Boston, Chicago, Dallas, Los Angeles, New York City,
San Diego, San Francisco and Washington, D.C. Revenues from our core
telecommunications services for September 1998 were $14.8 million
($176.3 million on an annualized basis) compared to $2.7 million for September
1997 ($33.2 million on an annualized basis).
In order to take advantage of the benefits derived from early market entry,
we recently announced a plan to accelerate the growth of our business by
expanding into 60 U.S. markets by the end of 2000, rather than the 40 U.S.
markets previously announced. Additionally, we now plan to expand
internationally by entering up to 50 foreign markets by the end of 2004. We
intend to serve each of these markets primarily with our local broadband
network. Our recently announced strategic relationship with Lucent Technologies,
Inc. facilitates this expanded rollout. As part of this relationship, Lucent,
under our direction, will provide design, engineering and construction services
for the buildout of our local broadband networks in the United States and
abroad. Lucent has also made financing available for the purchase of up to
$2.0 billion of equipment and services necessary for this buildout
($500.0 million of which was made immediately available). At December 31, 1998,
we had borrowed $77.5 million under this financing arrangement.
We also recently announced a plan to interconnect our local broadband
networks in the United States with long-haul fiber to create a national
end-to-end broadband network. This seamless national network will operate as a
true broadband alternative to the existing public telephone networks that are
owned and controlled by the incumbent service providers. Our national broadband
network will enable us to carry a substantial portion of our customers' voice,
data and video transmissions, from point of origination to point of termination.
Since this network will reduce our reliance on the facilities of other
providers, we will be able to substantially reduce our costs and have greater
control over the quality of service we provide. In furtherance of our plan to
create such a national broadband network, we recently purchased 25-year
indefeasible rights of use ("IRUs") to intracity and intercity fiber facilities
being constructed by Metromedia Fiber Network, Inc. ("MFN") and Williams
Communications, Inc. We are also integrating our existing national ATM backbone
and our network of frame relay data switches into this developing national
broadband network.
WINSTAR LOCAL BROADBAND NETWORKS
Local telephone service has historically been carried by the ILECs across
their "legacy" networks. The portion of these legacy networks that ultimately
connects to customer buildings, called the "last mile," is typically copper
wire. The rapid growth of bandwidth-intensive communications services, such as
Internet access and data transport, has created a shortage of capacity across
the last mile. We believe that this shortage will become more acute as the use
of bandwidth-intensive applications continues to grow. Our local
2
<PAGE>
broadband networks offer a solution to this increasing need for bandwidth to a
larger addressable market than fiber or copper-based connections.
An integral part of our local broadband networks is our wireless
transmission capability ("Wireless Fiber"), which uses the 38 GHz, 28 GHz and
other portions of the radio spectrum to carry voice, data and video
transmissions. Our Wireless Fiber services can provide fiber-quality
transmission at speeds more than 350 times faster than ISDN, the fastest service
currently in general use on legacy networks. We believe that in order to
effectively use wireless spectrum for the commercial provision of broadband
communications services, a provider must have access to a large amount of
spectrum in each of the markets where it operates. We hold licenses that provide
us with the largest amount of 38 GHz radio spectrum in the country, as well as a
large amount of 28 GHz spectrum and other various spectrum rights. Our spectrum
holdings cover markets encompassing more than 200 million people and more than
80% of the business market in the United States.
We use our Wireless Fiber to establish connections between buildings in
which our customers are located and our hub site buildings. Transmissions are
carried between these locations using wireless connections between antennas
placed on the roof of each building. Accordingly, securing access rights for our
antennas is a crucial step in the construction or expansion of our local
broadband networks. Currently, we have access rights to more than 4,200
buildings. We select hub site buildings to maximize the number of customer
buildings which will have line of sight to the hub. Connections between our hub
sites and our switching facilities are made using fiber or, in some instances, a
second wireless link. Our switches seamlessly deliver voice, data and video
traffic to customers directly connected to our network, the public switched
telephone network or the Internet.
BUSINESS STRATEGY AND STRENGTHS
Our goal is to create one of the first national broadband networks and to
drive a high volume of customer traffic across this network. We believe that our
Wireless Fiber and switch-based infrastructure provides us with significant
competitive advantages, particularly over service providers that rely on
wireline connection for the last mile. Our strategy, elements of which are set
forth below, is to exploit these advantages in order to attain our goal.
Rapidly and Cost-effectively Deploy Our Local Infrastructure. We are
rapidly and cost-effectively deploying our local broadband networks to create a
first-to-market presence in our targeted buildings. Through this presence, we
seek to establish a strong customer base ahead of our competitors and to cost-
effectively grow our business as our markets mature. In pursuit of this
strategy, we are expanding the rollout of our services to 60 U.S. markets by the
end of 2000 and up to 50 foreign markets by the end of 2004. The following
factors enhance our deployment capabilities:
o we do not have to lay underground fiber to establish broadband
connections to customer buildings;
o we are a leader in securing the critical building access rights necessary
to build out broadband wireless networks;
o we are able to install a Wireless Fiber antenna and establish a broadband
last mile connection to a customer building within a few days after
obtaining building access;
o our technology is scalable and we can create wireless broadband
connectivity to a building at a fraction of the cost of a fiber link;
o we can generally tie capital expenditures directly to demand by
connecting a building to our network when it is ready to generate
revenue; and
o our strategic relationship with Lucent provides us with ready access to
equipment and services, qualified engineering and installation personnel,
and equipment financing.
These advantages will be accentuated as we integrate point to multipoint
technology into our network infrastructure. We began the commercial deployment
of point to multipoint technology during the fourth quarter of 1998. Point to
multipoint technology adds another dimension to our ability to create network
3
<PAGE>
capacity and presents significant advantages over network buildout using only
point to point technology, including:
o the reduction of capital expenditures because a single hub-based
multipoint antenna can simultaneously carry transmissions to multiple
customer buildings; and
o the more efficient management of our Wireless Fiber capacity because
multipoint technology allows us to allocate the same spectrum among
multiple customers to be used when required.
Interconnect Local Networks to Create a National Broadband Network. We are
interconnecting our local broadband networks to create a national broadband
network in order to maximize the advantages afforded by our Wireless Fiber-based
infrastructure. Our IRUs with Williams and MFN will allow us to complete the
intercity and selected intracity portions of this national broadband network on
a rapid and cost-effective basis. In addition, our strategic relationship with
Lucent substantially enhances the speed at which we can construct and expand our
national network.
Target Customers Located in "On-Net" Buildings. In the past, we entered a
new market by reselling the services of the incumbent providers to our
customers, intending to transfer these customers to our local broadband network
once deployed. Due to our growing size and scale, we recently decided to
intensify the focus of our sales and marketing efforts on customers located in
buildings connected to our local broadband networks (i.e., "On-Net"). We believe
these efforts will result in greater profitability as our local broadband
networks continue to expand and a greater percentage of our customers are
located in On-Net buildings. As part of this objective, we use unique marketing
strategies to expand our customer base. One such program is "Project
Millennium," which is currently being offered to businesses located in
approximately 1,000 buildings in 13 of our existing markets. Under Project
Millennium, first-time customers who sign a one-, two- or three-year service
contract prior to January 31, 1999, receive up to $1,000 per month of free local
phone service during the first one-third of the contract term.
Offer Attractive Pricing and Superior Customer Care. We strive to offer
our customers attractive pricing and service superior to that of other
telecommunications service providers. We believe our Wireless Fiber technology,
integrated service offerings, network management and customer support systems
enable us to offer such pricing and service. By carrying our customers' local
traffic over our Wireless Fiber, instead of the more costly facilities of the
ILECs, we are able to provide our customers with more attractive rates. We also
tailor our services to the particular needs of our customers through regular
customer consultation. We monitor our network 24 hours a day through our new
network operations center, allowing us to react quickly to potential service
problems and ensuring that we provide our customers with reliable service. We
also provide our customers with 24-hour-a-day access to our new
centrally-managed customer care and support center. In addition, we are
developing customer-centric operations support systems designed to allow us to
track ordering, provisioning, billing, servicing and other information for each
customer from a central point of access.
Provide Integrated Voice and Data Telecommunications and Information
Services. We offer a full range of basic and enhanced voice and data services.
We believe that the customers we target typically prefer to purchase their voice
and data communications services as a single package from a single provider. We
also believe that the ability to package business information, entertainment and
other content and services with telecommunications services will become an
increasingly important factor in the business customer's decision to select or
retain a telecommunications provider. Accordingly, we seek opportunities to
expand our information and content assets and services which we believe will
enhance the marketing of our telecommunications services and the value we
provide our customers.
4
<PAGE>
RECENT DEVELOPMENTS
We have recently entered into certain agreements and strategic
relationships that will help us achieve our goal of creating one of the first
national broadband networks.
Strategic Relationship with Lucent
In October 1998, we entered into a long-term strategic supply and financing
relationship with Lucent. We have agreed to purchase Lucent equipment for a
significant portion of the components needed for our network, to the extent this
equipment represents the "best-of-breed" in the marketplace (i.e. the best and
most cost-effective with regard to the particular requirements of our network).
If Lucent's equipment is not the best-of-breed, we may, subject to certain
limitations, purchase network components from other vendors through Lucent or
directly from such vendors. Under our direction, a team of Lucent professionals
dedicated to WinStar will provide us with design, engineering, deployment,
installation and other services in connection with the buildout of our network
domestically and abroad. Lucent will also provide us with other assets and
services such as access rights to buildings it controls and certain services of
its Bell Labs testing facilities. Lucent has also made financing available for
the purchase of up to $2.0 billion of best-of-breed equipment and related
services necessary for the build out of our network ($500.0 million of which was
made immediately available). At December 31, 1998, we had borrowed
$77.5 million under this financing arrangement.
Purchases of Fiber Capacity
In December 1998 and July 1998, we entered into agreements to purchase
fiber capacity from Williams and MFN, respectively. These agreements will
provide us with:
o a substantial portion of the intercity fiber necessary to interconnect
our local broadband networks;
o a large amount of intracity fiber in six major cities in the United
States, which we will use to interconnect our hub and switch facilities
in such cities;
o availabile capacity for our future growth; and
o reduced costs related to the transmission of our long-haul traffic and
intracity back-haul traffic.
Under our agreement with Williams, we purchased a 25-year IRU to four fiber
strands, each on a national route encompassing 14,684 route miles (58,736 fiber
miles), and a seven-year option to purchase two additional strands over the same
route (29,368 fiber miles). This fiber capacity is being delivered as routes are
built and is expected to be completely available by the end of 2001, until which
time Williams will fulfill substantially all of our long-haul transport
requirements at no additional cost to us. We will pay Williams approximately
$640.0 million over the next seven years for the IRU, the capacity option,
certain long-haul transport and other network assets. We can exercise the
capacity option for approximately $51.0 million, payable in cash and/or
services.
Under our agreement with MFN, we purchased a 25-year IRU to fiber rings
consisting of multiple fiber strands in six U.S. cities and multiple strands of
intercity fiber connecting major cities in the northeastern United States for
$43.6 million. As of December 31, 1998, we have paid $6.5 million of this
amount, with additional payments due as additional portions of these facilities
are completed. We will use the intracity fiber rings to connect our hub sites
and switching facilities in Chicago, New York City, Oakland, Philadelphia, San
Francisco, San Jose and Washington, D.C. The intercity fiber will connect our
central offices in the northeastern United States. This intracity and intercity
fiber capacity is being delivered as routes are built and is expected to be
completely available by the second quarter of 2000.
Sale of Wireless Fiber Capacity
The large amount of spectrum afforded us under our wireless licenses allows
us to create local broadband networks having substantial capacity. This capacity
allows us to not only provide broadband services to our customers, but to also
provide valuable last mile connectivity to other select service providers for
use in extending their own networks, without compromising our ability to deliver
our own services. We believe that such capacity sales will allow us to fully
realize the value of our local broadband networks. To
5
<PAGE>
this end, in December 1998, we sold Williams a 25-year IRU for up to 2% of our
current and future local Wireless Fiber capacity in the United States. Williams
will pay us $400.0 million for this IRU, with payments due ratably as we
construct up to 270 hub sites. We expect to complete construction of at least
270 hub sites over the next four years. In addition, Williams will pay us at
least $45.6 million over a ten-year period for network maintenance services that
we will provide over the term of the IRU.
CORPORATE INFORMATION
WinStar was incorporated under the laws of the State of Delaware in
September 1990. Our principal office is located at 230 Park Avenue, New York,
New York 10169 and our telephone number is (212) 584-4000.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered:
U.S. offering (a)......................................... 3,360,000 shares
International offering.................................... 840,000 shares
Total(a)............................................... 4,200,000 shares
Shares outstanding at January 12, 1999 (b).................. 41,544,753 shares
Shares to be outstanding after the offering (a)(b).......... 45,744,753 shares
Use of proceeds............................................. We intend to use the net proceeds for the
general development and growth of our
operations, both domestically and abroad.
Nasdaq National Market symbol............................... WCII
</TABLE>
- ------------------
(a) If the U.S. underwriters exercise their option to purchase additional
shares of our common stock, the total number of shares to be offered in the
U.S. offering, and to be outstanding after this offering each would
increase by up to 630,000 shares.
(b) Does not include (i) 916,000 shares of common stock issuable upon exercise
of options granted or which may be granted under the 1992 Performance
Equity Plan, (ii) 9,384,000 shares of common stock issuable upon exercise
of options granted or which may be granted under the 1995 Performance
Equity Plan, (iii) 8,158,000 shares of common stock issuable upon exercise
of other outstanding options and warrants, (iv) 746,000 shares of common
stock issuable under the Employee Stock Purchase Plan and
(v) approximately 13,786,000 shares of common stock issuable upon
conversion of our convertible preferred stock and convertible debt. The
exercise and conversion prices of a substantial majority of the foregoing
are below the current market price of our common stock.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary historical financial data presented below for the years ended
December 31, 1996 and 1997 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus, reclassified to
reflect the operations of both WinStar Global Products, Inc. ("Global
Products"), our merchandising subsidiary, and WinStar Gateway Network, Inc.
("Gateway"), our residential long distance subsidiary, as discontinued
operations. The summary historical financial data for the nine months ended
September 30, 1997 and as of and for the nine months ended September 30, 1998
have been derived from our unaudited condensed consolidated financial statements
and notes included elsewhere in this prospectus, reclassified to reflect the
operations of Global Products and Gateway as discontinued operations. In our
opinion, the unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, which consist of only normal recurring adjustments,
necessary for a fair presentation of the results of operations for the periods
presented. The summary pro forma data presented below for the year ended
December 31, 1997 and as of and for the nine months ended September 30, 1998
have been derived from the unaudited pro forma condensed consolidated financial
statements included elsewhere in this prospectus. The summary pro forma data
presented below for the nine months ended September 30, 1997 has been derived
from our unaudited condensed consolidated financial statements adjusted to
reflect the 1997 Financing Transactions and the Pro Forma Transactions (each as
defined in footnotes (a) and (b) below). The pro forma adjustments are based
upon available information and certain assumptions that we believe are
reasonable. The pro forma financial statements and summary data do not purport
to represent what our results of operations or financial condition would
actually have been had the 1997 Financing Transactions, the Pro Forma
Transactions and this offering in fact occurred on the dates discussed in
footnotes (a), (b) and (g) below, or to project our results of operations or
financial condition for any future period or date. The financial data below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the pro forma, consolidated
and condensed consolidated financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1997 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
DECEMBER 31, ----------------------- ----------------------- -----------------------
1996 ACTUAL PRO FORMA(A) ACTUAL PRO FORMA(A) ACTUAL PRO FORMA(B)
------------ --------- ------------ --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER FINANCIAL AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues
Telecommunications services
CLEC........................... $ 604 $ 22,653 $ 22,653 $ 13,418 $ 13,418 $ 85,858 $ 85,858
Other.......................... 3,883 7,143 105,426 3,792 78,131 40,276 44,048
-------- --------- ---------- --------- ---------- --------- ----------
Total telecommunications
services....................... 4,487 29,796 128,079 17,210 91,549 126,134 129,906
Information services............. 14,650 41,354 41,354 25,693 25,693 37,220 37,220
-------- --------- ---------- --------- ---------- --------- ----------
Total operating revenues....... 19,137 71,150 169,433 42,903 117,242 163,354 167,126
Operating loss
Telecommunications services...... (40,731) (147,134) (235,049) (102,722) (171,807) (150,430) (150,832)
Information services............. (1,409) (4,092) (4,092) (2,632) (2,632) (7,036) (7,036)
General corporate................ (11,373) (27,312) (27,312) (15,661) (15,661) (35,440) (35,440)
-------- --------- ---------- --------- ---------- --------- ----------
Total operating loss........... (53,513) (178,538) (266,453) (121,015) (190,100) (192,906) (193,308)
Interest expense................... (36,748) (77,257) (152,752) (53,074) (115,671) (111,704) (122,461)
Interest income.................... 10,515 17,577 12,793 11,052 7,891 23,986 23,986
Other (expense) income, net (c).... -- 4,719 (481) 2,219 2,219 4,000 4,000
-------- --------- ---------- --------- ---------- --------- ----------
Loss from continuing operations.... (79,746) (233,499) (406,893) (160,818) (295,661) (276,624) (287,783)
Loss from discontinued
operations....................... (3,977) (15,985) (15,985) (5,237) (5,237) (24,974) (24,974)
-------- --------- ---------- --------- ---------- --------- ----------
Net loss........................... (83,723) (249,484) (422,878) (166,055) (300,898) (301,598) (312,757)
Preferred stock dividends.......... -- (5,879) (45,806) (3,881) (34,182) (31,195) (34,189)
-------- --------- ---------- --------- ---------- --------- ----------
Net loss applicable to common
stockholders..................... $(83,723) $(255,363) $ (468,684) $(169,936) $ (335,080) $(332,793) $ (346,946)
-------- --------- ---------- --------- ---------- --------- ----------
-------- --------- ---------- --------- ---------- --------- ----------
Basic and Diluted Loss per Share:
Actual and Pro Forma:
Loss per share from continuing
operations................... $ (2.86) $ (7.20) $ (13.52) $ (5.00) $ (9.96) $ (8.10) $ (8.46)
Loss per share from
discontinued operations...... (0.14) (0.48) (0.48) (0.16) (0.16) (0.66) (0.66)
-------- --------- ---------- --------- ---------- --------- ----------
Loss per share outstanding..... $ (3.00) $ (7.68) $ (14.00) $ (5.16) $ (10.12) $ (8.76) $ (9.12)
-------- --------- ---------- --------- ---------- --------- ----------
-------- --------- ---------- --------- ---------- --------- ----------
Weighted average common shares
outstanding.................. 27,911 33,249 33,469 32,923 33,099 37,970 38,042
-------- --------- ---------- --------- ---------- --------- ----------
-------- --------- ---------- --------- ---------- --------- ----------
Pro Forma As Adjusted:
Loss per share from continuing
operations................... $ (12.02)(e) $ (8.84)(e) $ (7.62)(f)
Loss per share from
discontinued operations...... $ (.42)(e) $ (.14)(e) $ (.59)(f)
---------- ---------- ----------
Loss per share outstanding..... $ (12.44)(e) $ (8.98)(e) $ (8.21)(f)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares
outstanding.................. 37,669 (e) 37,299 (e) 42,242 (f)
---------- ---------- ----------
---------- ---------- ----------
OTHER FINANCIAL DATA:
Capital expenditures (d)........... $ 46,651 $ 222,196 $ 222,196 $ 103,835 $ 103,835 $ 264,481 $ 264,481
Depreciation and amortization...... 3,764 25,102 52,142 14,649 35,752 48,666 48,824
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Markets - Voice............................................. 10 17 13 27
Switches Installed.......................................... 1 8 7 17
Hubs In-service............................................. -- 33 14 58
Building Access Rights...................................... 770 2,113 1,794 3,554
Access Lines in Service..................................... 4,417 81,423 51,419 257,663
Employees................................................... 755 1,479 1,329 2,567
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------
ACTUAL AS ADJUSTED(G)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 473,906 $ 635,873
Property and equipment, net................................. 447,186 447,186
Total assets................................................ 1,556,826 1,718,793
Current portion of long-term debt and capital lease
obligations............................................... 19,163 19,163
Long-term debt and capital lease obligations, less curent
portion................................................... 1,346,271 1,346,271
Total debt.................................................. 1,365,434 1,365,434
Exchangeable redeemable preferred stock..................... 194,738 194,738
Convertible redeemable preferred stock...................... 200,000 200,000
Common and preferred stock and additional paid-in capital... 394,750 556,717
Stockholders' deficit....................................... (326,731) (164,764)
</TABLE>
- ------------------
(a) Gives effect to (i) a private placement in February 1997 ("February 1997
Preferred Stock Placement") of $100.0 million of units, consisting of our 6%
Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock")
and warrants ("Warrants"), (ii) a private placement in March 1997 ("March
1997 Debt Placement") of $100.0 million of our 14 1/2% Senior Deferred
Interest Notes Due 2005 ("1997 Senior Notes") and $200.0 million 12 1/2%
Guaranteed Senior Secured Notes Due 2004 ("WEC Notes") of WinStar Equipment
Corp., our wholly owned subsidiary ("WEC"), (iii) a private placement in
August 1997 ("August 1997 Debt Placement") of $50.0 million of 12 1/2%
Guaranteed Senior Secured Notes Due 2004 ("WEC II Notes"), of WinStar
Equipment II Corp., our wholly owned subsidiary ("WEC II"), (iv) a private
placement in October 1997 ("October 1997 Debt Placement") of $100.0 million
of our 15% Senior Subordinated Deferred Interest Notes Due 2007 ("1997
Senior Subordinated Notes" and, together with the 1997 Senior Notes, WEC
Notes and WEC II Notes, the "1997 Notes"), (v) the acquisition of 12 Lucent
switches, leased fiber-optic capacity and related assets in October 1997
("US ONE Asset Acquisition"), (vi) a private placement in December 1997
("December 1997 Preferred Stock Placement") of $175.0 million principal
amount of our 14 1/4% Senior Cumulative Exchangeable Preferred Stock Due
2007 ("Series C Preferred Stock") ((i)-(vi) collectively, the "1997
Financing Transactions"), (vii) a private placement in March 1998 of
(A) $200.0 million of our 10% Senior Subordinated Notes Due 2008 ("March
1998 Cash-Pay Notes"), (B) $250.0 million of our 11% Senior Subordinated
Deferred Interest Notes Due 2008 ("March 1998 Deferred Interest Notes" and,
together with the March 1998 Cash-Pay Notes, the "1998 Notes") and
(C) $200.0 million principal amount of our 7% Senior Cumulative Convertible
Preferred Stock Due 2010 ("Series D Preferred Stock") ((vii)(A)-(C)
collectively, the "March 1998 Financing Transactions") and (viii) the
acquisition in January 1998 of substantially all of the assets of MIDCOM
Communications Inc. (the "Midcom Asset Acquisition"), each as if they had
occurred on January 1, 1997. Interest expense has been (1) increased to
include approximately $68.0 million and $81.3 million of interest on such
debt and amortization of deferred debt offering costs and other related fees
for the nine months ended September 30, 1997 and the year ended December 31,
1997, respectively, but not to include interest income earned on additional
available cash and (2) reduced by approximately $5.4 million and $5.8
million for the nine months ended September 30, 1997 and the year ended
December 31, 1997, respectively, to reflect the repayment of approximately
$62.3 million borrowed in connection with the US ONE Asset Acquisition and
repaid from the proceeds of the December 1997 Preferred Stock Placement.
Depreciation expense has been adjusted to include approximately $4.8 million
and $5.1 million for the nine months ended September 30, 1997 and the year
ended December 31, 1997, respectively, of depreciation on certain of the
assets acquired in the US ONE Asset Acquisition, assuming straight line
depreciation over the expected useful lives of the assets which will
ultimately be placed in service.
(b) Gives effect to the Midcom Asset Acquisition and the March 1998 Financing
Transactions (together, the "Pro Forma Transactions") as if they had
occurred on January 1, 1998. Interest expense has been increased to include
approximately $10.8 million of interest on such debt and amortization of
deferred debt offering costs and other related fees for the nine months
ended September 30, 1998, but not to include interest income earned on
additional available cash.
(c) The year ended December 31, 1997 and the nine months ended September 30,
1998 include a deferred income tax benefit of $2.5 million and $4.0 million,
respectively.
(d) Excludes capital expenditures relating to the operations of Midcom for the
year ended December 31, 1997 and prior periods presented and includes assets
acquired under capital leases.
(e) Gives pro forma effect to the 1997 Financing Transactions and the Pro Forma
Transactions, and as adjusted for this offering, as if each had occurred on
January 1, 1997.
(f) Gives pro forma effect to the Pro Forma Transactions and as adjusted for
this offering, as if each had occurred on January 1, 1998.
(g) As adjusted for this offering as if it had occurred on September 30, 1998.
8
<PAGE>
RISK FACTORS
You should carefully consider the risk factors described below, as well as
the other information appearing in this prospectus, before making an investment
in our common stock.
PAST AND PROBABLE FUTURE LOSSES--WE HAVE A HISTORY OF LOSSES AND EXPECT THAT
LOSSES WILL CONTINUE IN THE FUTURE.
Since our inception, we have incurred significant and growing net losses
and significant negative EBITDA. EBITDA means earnings, and negative EBITDA
means losses, in each case before interest, income taxes, depreciation and
amortization, other income (expense) and discontinued operations. Our net losses
and negative EBITDA will continue to increase substantially as a result of the
growth of our telecommunications business in some of our existing markets, our
expansion into additional domestic and international markets and expenses
relating to the servicing of our debt. We incurred net losses and negative
EBITDA of approximately $83.7 million and $49.7 million, respectively, for the
year ended December 31, 1996, $249.5 million and $153.4 million, respectively,
for the year ended December 31, 1997, $166.1 million and $106.4 million,
respectively, for the nine months ended September 30, 1997, and $301.6 million
and $144.2 million, respectively, for the nine months ended September 30,
1998. After giving effect to the Pro Forma Transactions as if they had occurred
on January 1, 1998, we would have had net losses and negative EBITDA of $312.8
million and $144.5 million, respectively, for the nine months ended
September 30, 1998. We cannot assure you that we will ever achieve (or, if
achieved, maintain) profitability or positive EBITDA.
REGULATORY COMPLIANCE AND APPROVALS--WE ARE SUBJECT TO EXTENSIVE FEDERAL AND
STATE LAWS, RULES AND REGULATIONS. THESE LAWS, RULES AND REGULATIONS COULD
CHANGE AT ANY TIME IN AN UNPREDICTABLE MANNER.
The telecommunications services business is highly regulated domestically
at the federal, state and local levels, and abroad by foreign governments. Our
continued ability to acquire and maintain wireless licenses, which are extremely
important to our success, is also subject to extensive regulation. This
regulatory environment directly affects the breadth of services we are able to
offer, the rates, terms and conditions of those services and the rates, terms
and conditions of necessary underlying services we must secure from other
telecommunications providers. We are also affected indirectly by such regulatory
environment's effect on companies that offer competing services. This regulatory
environment is subject to continual change as a result of new legislation,
regulations adopted from time to time by applicable regulatory authorities and
judicial interpretation of these laws and regulations. We are not able to
predict the extent to which any such change in the regulatory environment would
affect our business. We cannot assure you that changes in legislation,
regulations and interpretations would not have a significant adverse impact on
our ability to operate and achieve our business objectives. See
"Business--Government Regulation" for a further discussion of the regulatory
environment in which we operate.
COMPETITION--WE OPERATE OUR BUSINESS IN A HIGHLY COMPETITIVE INDUSTRY. MANY OF
OUR COMPETITORS ARE BETTER ESTABLISHED AND HAVE SIGNIFICANTLY MORE RESOURCES.
We face strong competition in each of the telecommunications markets where
we operate. Competitors include regional, national and global companies.
Moreover, the growing consolidation of telecommunications companies and
formation of strategic alliances within the telecommunications industry could
give rise to significant new or stronger competitors. Most of our competitors
are well-established and have larger and better developed networks and systems,
longer-standing relationships with customers and suppliers, greater name
recognition and significantly greater financial, technical and marketing
resources. Many of these companies have the ability to subsidize competing
services with revenues from a variety of their other services. As competition
increases in domestic and international telecommunications markets, we
anticipate a significant increase in general pricing pressures. We have not
obtained significant market share in any of the markets where we offer services,
nor do we expect to do so given the size of these markets, the intense
competition in these markets and the diversity of customer requirements. We
cannot assure you that we will be able to compete effectively in any of our
markets. See "Business--Competition" for a further discussion of the competitive
environment in which we operate.
9
<PAGE>
The industry in which our new media subsidiaries operate is also very
competitive. The new media industry consists of a large number of entities
producing, owning or controlling news, sports, entertainment, educational and
informational content and services (including on-line computer services),
telecommunications companies, television broadcast companies, sports franchises,
film and television studios, record companies, newspaper and magazine publishing
companies and universities. Competition is intense for timely and highly
marketable or usable information and entertainment content. Almost all of the
entities with which our new media subsidiaries compete have significantly
greater presence in the various media markets and greater resources, including
existing content libraries, financial resources, personnel and existing
production and distribution channels. We cannot assure you that we will be able
to compete successfully in the emerging new media industry. See
"Business--WinStar New Media" for a further discussion of our new media
subsidiaries and the industry in which they operate.
RISKS ASSOCIATED WITH RAPID EXPANSION AND ACQUISITIONS--OUR RAPID GROWTH WILL
PLACE A SIGNIFICANT STRAIN ON US. MANY FACTORS WILL AFFECT OUR ABILITY TO MANAGE
OUR FUTURE GROWTH.
We are pursuing a strategy of aggressive and rapid growth, including the
accelerated rollout of our telecommunications services, acquisitions of
businesses and assets (including additional spectrum licenses) and the hiring of
additional management and technical and marketing personnel, all of which will
result in higher capital expenditures and operating expenses. Our rapid growth
has in the past placed, and may in the future place, a significant strain on our
business resources. Our ability to manage future growth will depend upon our
ability to:
o manage the simultaneous implementation of our plan in multiple markets in
varying stages of development;
o cope with both predictable and unforseen problems associated with being a
relatively new entrant in a rapidly evolving industry;
o effectively monitor our operations so as to control costs and maintain
effective quality controls; and
o significantly expand our internal management, technical, information and
accounting systems.
Our failure to achieve any of the above in an efficient manner and at a pace
consistent with the growth of our business could have an adverse effect on our
business, financial condition, results of operations, the value of our
securities or our or our subsidiaries' abilities to make principal and interest
payments on outstanding indebtedness or dividends or distributions on our common
and preferred stock.
As part of our strategy, we may acquire complementary assets or businesses.
The pursuit of acquisition opportunities will place significant demands on the
time and attention of our senior management and will involve considerable
financial and other costs with respect to identifying and investigating
acquisition candidates, negotiating acquisition agreements and integrating the
acquired businesses with our existing operations. Employees and customers of
acquired businesses may sever their relationships with these businesses during
or after such an acquisition. We cannot assure you that we will be able to
successfully consummate any acquisitions or integrate any business or assets
which we may acquire.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS--WE PLAN ON ENTERING VARIOUS
FOREIGN MARKETS BY THE END OF 1999. WE WILL BE SUBJECT TO MANY ADDITIONAL RISKS
AS WE SEEK TO ENTER SUCH MARKETS AND AS THEY BECOME OPERATIONAL.
We are expanding the offering of our telecommunications services into parts
of Europe, Asia, Australia and South America. Certain risks inherent in our
seeking to enter foreign markets and doing business within such markets include:
o regulatory limitations delaying, restricting or prohibiting us from
providing our services, including the inability to acquire spectrum
rights or other licenses;
o difficulties in staffing and managing our foreign operations;
o unanticipated changes in regulatory requirements, tariffs, customs,
duties and other trade barriers;
10
<PAGE>
o limitations on our flexibility in structuring our foreign investments
imposed by the agreements governing our outstanding indebtedness;
o longer payment cycles and problems in collecting accounts receivable;
o political risks;
o fluctuations in exchange rates of international currencies; and
o potentially adverse tax consequences resulting from operating in multiple
countries with different laws and regulations.
Furthermore, the international rates charged to customers are likely to
decrease in the future for many reasons, including increased competition among
existing and new carriers and additional strategic alliances or joint ventures
among large international carriers. This pricing pressure is likely to have a
significant impact upon the profitability of our operations abroad. We cannot
assure you that we will be successful in overcoming these or other risks
associated with our international expansion. See "Business--The WinStar
Broadband Network--WinStar International" for a more detailed discussion of
issues relevant to our international operations.
SUBSTANTIAL LEVERAGE--OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY
AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OUTSTANDING DEBT
OBLIGATIONS.
Our high level of indebtedness and other payment obligations could have
important consequences for holders of our securities as well as our business in
general, including:
o limiting our ability to obtain any necessary additional financing;
o limiting our flexibility in planning for, or reacting to, changes in our
business; and
o placing us at a competitive disadvantage since our less leveraged
competitors would have more free cash flow to invest in their operations.
At September 30, 1998, we had approximately $1,495.9 million of
consolidated liabilities, including capitalized lease obligations and trade
payables, and $394.7 million stated value of redeemable preferred stock
outstanding. The accrual of interest and dividends on some of this debt and
outstanding preferred stock will place significant additional payment
obligations on us. We also may need to incur additional indebtedness. We
continually evaluate the financing alternatives available to us and may decide
to seek additional debt financing in the near future.
ADDITIONAL BORROWINGS AVAILABLE--IN ADDITION TO OUR CURRENT LEVEL OF
INDEBTEDNESS, WE AND OUR SUBSIDIARIES HAVE THE ABILITY TO INCUR SUBSTANTIALLY
MORE DEBT. THIS ADDITIONAL DEBT COULD FURTHER EXACERBATE THE RISKS DESCRIBED
ABOVE.
Although the agreements governing our indebtedness place certain
limitations on the incurrence of additional indebtedness by us and certain of
our subsidiaries, under certain circumstances we can incur substantial amounts
of additional indebtedness. For example, we may be able to borrow up to
$2.0 billion under our financing agreement with Lucent and engage in other
equipment financings. At December 31, 1998, we had borrowed $77.5 million under
this financing arrangement. Additionally, the agreements governing our
indebtedness do not limit the amount of debt that our new media or certain other
subsidiaries may incur. If we or our subsidiaries incur additional debt, the
related risks discussed above could intensify. See "Description of Certain
Indebtedness" for a more detailed discussion of the terms of certain of our
indebtedness.
ABILITY TO SERVICE DEBT AND PREFERRED STOCK--WE WILL REQUIRE A SIGNIFICANT
AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS AND OUTSTANDING PREFERRED STOCK. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR
CONTROL.
A substantial portion of our indebtedness requires cash interest payments
commencing in 2001 and will begin to mature in 2004. We may not have sufficient
cash flow to make these payments. If we are unable to make the required
payments, we may be in default under the terms of substantially all of our
outstanding
11
<PAGE>
indebtedness. Also, under certain circumstances, holders of such indebtedness
may be able to accelerate payments owed them under such indebtedness. In this
event, it is unlikely that all of our obligations would be paid in full. We
expect that we will need to refinance certain of our indebtedness on or prior to
maturity. However, our ability to obtain any such additional financing may be
limited by our financial condition, our operating results or the condition of
the financial markets. We cannot assure you that we will be able to refinance
these obligations or, if refinanced, what the terms of such refinancing will be.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a further discussion of our
current liquidity and the sufficiency of such liquidity now and in the near
future.
SIGNIFICANT CAPITAL REQUIREMENTS--WE REQUIRE SIGNIFICANT CAPITAL TO EXPAND OUR
OPERATIONS AND MAKE ACQUISITIONS.
The expansion of our telecommunications operations domestically and abroad
and the continued funding of operating expenses require substantial capital
investment. Additionally, as part of our strategy, we may seek to acquire
complementary assets or businesses (including additional spectrum licenses),
which also could require substantial capital investment. Under our current
business plan, we plan to spend approximately $500.0 to $600.0 million in 1999
for capital equipment. We anticipate, based on this plan and related assumptions
(including an assumption of full availability of the $2.0 billion under our
Lucent financing arrangement), that the net proceeds from this offering,
together with our existing financial resources, payments to be received from
Williams and accounts receivable and additional equipment financings that we
intend to seek, will be sufficient to fund our operations and capital
requirements for approximately 12 to 18 months following the consummation of
this offering. We may be required to seek additional sources of capital sooner
than we anticipate if:
o our operating assumptions change or prove to be inaccurate;
o less than $2.0 billion becomes available under the Lucent credit
agreement;
o we fail to secure additional equipment and accounts receivable financing;
o we consummate any acquisitions of significant businesses or assets
(including spectrum licenses); or
o we further accelerate our plan and enter markets more rapidly.
We continually evaluate the financing alternatives available to us and may
decide to seek additional debt financing in the near future. We cannot assure
you that additional financing would be available or, if available, that we would
be able to obtain it on acceptable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a further discussion of our current and expected future capital
requirements and our belief regarding our ability to meet those requirements.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS--OUR QUARTERLY RESULTS OF
OPERATIONS ARE NOT ALWAYS INDICATIVE OF OUR RESULTS OF OPERATIONS FOR THE FULL
YEAR OR OTHERWISE.
Our quarterly results of operations may vary significantly, depending on
factors such as timing of substantial capacity sales, the purchase of intercity
or intracity fiber backbones (in place of temporary leased circuits), or the
reduction of vendor costs through the renegotiation of term contracts or receipt
of refunds or credits resulting from volume or performance standards.
Accordingly, results of operations for any quarter are not necessarily
indicative of the results of operations for a full year or otherwise.
VOLATILITY OF MARKET PRICE OF COMMON STOCK--THE MARKET PRICE OF OUR COMMON STOCK
HAS FLUCTUATED SIGNIFICANTLY, SOMETIMES IN A MANNER UNRELATED TO OUR
PERFORMANCE.
The market price of our common stock could vary widely in response to
various factors and events, including:
o the number of shares of our common stock being sold and purchased in the
marketplace;
o variations in our operating results;
12
<PAGE>
o press reports;
o regulation and industry trends;
o rumors of significant events which can circulate quickly in the
marketplace, particularly over the Internet; and
o the difference between our actual results and the results expected by
investors and analysts.
Since our common stock has been publicly traded, its market price has fluctuated
over a wide range and we expect it to continue to do so in the future. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that have often been unrelated to the operating performance
of companies, particularly telecommunications and technology companies. These
broad market fluctuations also may adversely affect the market price of our
common stock.
USE OF PROCEEDS--WE WILL HAVE BROAD DISCRETION IN HOW WE APPLY PROCEEDS FROM
THIS OFFERING.
A substantial portion of the estimated net proceeds from this offering will
be allocated to our working capital and general corporate purposes and may be
applied to acquisitions, investments or strategic alliances in the United States
or abroad which have not yet been identified. We will analyze numerous, variable
factors before we determine how to use such net proceeds. Accordingly, we will
have broad discretion in allocating the net proceeds from this offering. In
addition, a portion of the net proceeds from the U.S. offering will be received
by one of our subsidiaries. Since this subsidiary has been designated an
"unrestricted subsidiary" under the agreements governing our indebtedness, there
will be few if any restrictions on its ability to use those proceeds.
BUILDING AND DISTANCE LIMITATIONS--WE MUST OBTAIN ACCESS RIGHTS TO BUILDINGS ON
WHICH WE WISH TO PLACE OUR ANTENNAS. FURTHERMORE, OUR WIRELESS FIBER SERVICES
OPERATE BY LINKING THESE ANTENNAS VIA A WIRELESS SIGNAL, BUT THERE IS A LIMIT ON
HOW FAR ANY TWO OF OUR LINKED ANTENNAS CAN BE APART.
We must obtain rights to access each building or structure where our
antennas will be placed. We will not be able to implement our expansion at the
rate currently planned if we do not obtain these access rights in a timely
manner. We seek to prequalify and obtain rights to buildings required to service
potential customers in our licensed areas in advance of anticipated orders. Our
prequalification activities may require the payment of option fees to the owners
of buildings. We cannot assure you that we will be successful in obtaining the
access rights necessary to expand our Wireless Fiber services as planned or in
obtaining any construction, zoning, franchises or other governmental permits
that may be necessary for us to provide Wireless Fiber service to our customers
at reasonable costs or on favorable terms, or at all. Further, we cannot assure
you that we will receive orders for Wireless Fiber services which allow us to
utilize access rights we do obtain.
In addition, we may be required to use additional antennas in certain
circumstances, which may render the use of Wireless Fiber uneconomical for the
provision of our services to certain buildings. Characteristics of Wireless
Fiber that may require us to use additional antennas include the following:
o Wireless Fiber services require an unobstructed line of sight between two
linked antennas. Accordingly, the establishment of Wireless Fiber
services may require additional antennas to avoid obstacles (such as
buildings).
o The maximum allowable distance between any two corresponding antennas is
five miles (although we generally maintain distances of less than two
miles, or shorter distances in certain areas, to meet our internal
performance standards). Accordingly, additional antennas are required to
cover distances in excess of optimal performance distances.
o Weather conditions, such as rainfall intensity and raindrop size, can
adversely impact transmission quality at standard optimal performance
distances and may necessitate shorter distances between antennas to
maintain desired transmission quality. Accordingly, in areas frequently
experiencing such weather conditions, we may be required to use
additional antennas to cover required distances.
13
<PAGE>
Where additional antennas are required, we must also obtain corresponding roof
rights, which can be a time-consuming and costly undertaking.
MARKET ACCEPTANCE OF SERVICES--AS FIXED WIRELESS TELECOMMUNICATIONS SERVICES ARE
NOT YET WIDELY USED, WE ARE UNCERTAIN HOW SUCCESSFUL WE WILL BE IN MARKETING OUR
WIRELESS FIBER SERVICES.
The provision of fixed wireless telecommunications services over 38 GHz and
28 GHz spectrum is an emerging sector of the telecommunications industry and has
not yet been widely accepted. Historically, this sector has been associated with
the reputation of previous microwave radio technologies for unreliability and
lack of security. We have not yet obtained a significant market share in any of
the licensed areas where we offer our Wireless Fiber services, although we have
been marketing them since December 1994. We cannot assure you that a substantial
market will develop for fixed wireless telecommunications services or that we
will be able to successfully market our Wireless Fiber services.
TECHNOLOGY CHANGES, NEW SERVICES AND EVOLVING STANDARDS--WE MUST RESPOND TO THE
RAPID CHANGES IN TECHNOLOGY, SERVICES AND STANDARDS WHICH CHARACTERIZE OUR
INDUSTRY.
The telecommunications and related technology industries are subject to
rapid technological change, frequent new service introductions and evolving
industry standards. We believe that our future success will depend largely on
our ability to anticipate or adapt to such changes and to offer, on a timely
basis, services that meet evolving standards. We cannot predict the extent to
which competitors using existing or currently undeployed methods of delivery of
telecommunications services will compete with our Wireless Fiber services.
Furthermore, we cannot be certain that existing, proposed or as yet undeveloped
technologies will not render 38 GHz-based (and other spectrum-based) systems
less profitable or less viable. There are several existing and evolving
technologies which may allow for broadband transmission, including coaxial
cable, unlicensed spectrum and digital subscriber line technology, which allows
broadband transmission over existing copper lines. We cannot assure you that we
will have the resources to acquire new technologies or to introduce new services
that could compete with future technologies or that equipment held in our
inventory will not be rendered obsolete.
DEPENDENCE ON THIRD PARTIES--WE RELY IN LARGE PART ON THIRD PARTIES WITH WHOM WE
HAVE BUSINESS ARRANGEMENTS. OUR SUCCESS DEPENDS ON THE ABILITIES OF THESE
PARTIES TO PROVIDE RELIABLE SERVICES TO US.
To operate our growing business, we have negotiated business arrangements
with unrelated third parties. The failure of any of these third parties to
perform under their respective agreements or the termination or discontinuance
of any of these agreements could have an adverse effect on our results of
operations or our ability to service our customers. Examples of these
arrangements include:
o Our use of the facilities of ILECs, fiber providers, such as Williams and
MFN, and major long distance companies to carry some or all of our
customers' traffic.
o Our use of third parties to market our Wireless Fiber services and
maintain our operational systems.
o Our agreement with Lucent to provide extensive services in connection
with the buildout of our broadband network. Our expansion and the
buildout of our network could be delayed if Lucent does not adequately
perform these services or if we are required to find an alternative to
Lucent.
FINANCIAL AND OPERATING RESTRICTIONS--THE AGREEMENTS GOVERNING OUR INDEBTEDNESS
AND PREFERRED STOCK IMPOSE SIGNIFICANT RESTRICTIONS ON OUR BUSINESS AND
FINANCING ACTIVITIES.
The agreements and other instruments governing our indebtedness and certain
of our preferred stock impose significant operating and financial restrictions
on us, including certain limitations on our ability to incur additional
indebtedness, create liens on our assets, pay dividends, sell assets, engage in
mergers or acquisitions or make investments. Our failure to comply with any such
restrictions could limit the availability of borrowings or result in a default
under the terms of our indebtedness. Moreover, these restrictions could limit
our ability to engage in certain business transactions which we may wish to
consummate, including joint ventures with foreign partners in connection with
our expansion abroad. Our inability to consummate any such transaction could
have an adverse effect on our operations, the value of our securities or our or
our
14
<PAGE>
subsidiaries' abilities to make principal and interest payments on outstanding
indebtedness or dividends or distributions on our common and preferred stock.
RELIANCE ON KEY PERSONNEL--WE MUST HIRE AND RETAIN QUALIFIED PERSONNEL TO
OPERATE OUR GROWING BUSINESS AND COMPETITION FOR THESE EMPLOYEES IS INTENSE.
We believe that our growth and future success will depend in large part on
our continued ability to attract and retain highly skilled and qualified
personnel. The failure to recruit additional qualified personnel in the future
could significantly impede our ability to expand our business domestically and
abroad, to complete the integration of acquired businesses or to otherwise
implement our strategy. Largely due to deregulation and the significant increase
in the number of companies providing telecommunications services, competition
for qualified personnel in the telecommunications industry is intense. We cannot
assure you that we will be able to hire or retain necessary personnel.
YEAR 2000 COMPLIANCE--COMPUTER PROGRAMS AND MICROPROCESSORS 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, WHICH COULD RESULT IN
MAJOR SYSTEM FAILURES OR MISCALCULATIONS.
We are currently addressing the issue of whether or to what extent our
systems will be vulnerable to potential 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. Computer programs and microprocessors 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, which could result in major system failures or
miscalculations. If we or our suppliers or vendors experience Year 2000
problems, these problems could adversely impact our ability to service our
customers or otherwise carry on our business, including causing interruptions in
the operation of our network, traffic data, customer order processing and
provisioning systems, customer billing and invoicing and data interfaces to and
from these systems.
We believe that our exposure to the Year 2000 problem, as it relates to our
internal systems, is somewhat limited by the fact that substantially all of our
existing systems have been purchased or replaced since 1996 or are currently
under development. Notwithstanding this belief, we are working aggressively 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. Although we expect to have
identified and remediated all Year 2000 problems in our internal systems prior
to the end of 1999, if any significant Year 2000 problems in these systems or
those of our suppliers or vendors are not uncovered or are not remediated in a
timely manner, significant failures of these functions could occur and could
have adverse consequences for our operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Compliance"
for a more detailed discussion of our response to the Year 2000 problem.
HEALTH RISKS CAUSED BY RADIO FREQUENCY EMISSIONS--EMISSIONS FROM OUR ANTENNAS
MAY BE A HEALTH RISK.
The use of wireless equipment, such as antennas, has been alleged to pose
health risks due to radio frequency emissions. Any allegations of health risks,
if proven, could result in liability on our part. In addition, we could be
required to reduce power in our transmissions or otherwise change the way we
operate in order to reduce emissions to acceptable levels. Any of these results
could adversely affect our financial condition or results of operations. The FCC
recently adopted new guidelines and methods for evaluating the environmental
effects of such emissions from FCC-regulated transmitters, including wireless
antennas. The updated guidelines and methods generally are more stringent than
those previously in effect. We expect that all of our equipment and operations
will comply with applicable FCC guidelines. See "Business--Government
Regulation" for a more complete discussion of FCC regulations relevant to our
equipment and operations.
15
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION--THE NET TANGIBLE BOOK VALUE PER SHARE OF OUR
COMMON STOCK AFTER THIS OFFERING WILL BE SUBSTANTIALLY LESS THAN THE PRICE PAID
FOR THE SHARES.
This offering will result in the immediate and substantial dilution of
$54.79 per share, representing the difference between our net tangible book
value per share after giving effect to this offering and the assumed public
offering price of $40.56 per share. See "Dilution" for a more detailed
description of the dilution which investors in this offering will experience.
ABSENCE OF CASH DIVIDENDS--WE ARE RESTRICTED FROM PAYING CASH DIVIDENDS. EVEN IF
WE WERE NOT SO RESTRICTED, WE DO NOT CURRENTLY INTEND TO PAY DIVIDENDS.
We have never paid any dividends on our common stock, and we do not intend
to pay any dividends in the foreseeable future. We are a holding company with no
independent operations. Accordingly, any amounts available for dividends will be
dependent on the prior declaration of dividends by our subsidiaries to us. In
addition, the terms of the instruments governing our indebtedness and preferred
stock restrict our ability to pay cash dividends. We intend to retain our cash
for the continued expansion of our business.
ANTI-TAKEOVER PROVISIONS--CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION
COULD HAVE EFFECTS THAT CONFLICT WITH THE INTERESTS OF OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation could make it more
difficult for a third party to acquire control of us, even if such change in
control would be beneficial to our stockholders. For example, our certificate of
incorporation allows us to issue preferred stock without stockholder approval.
We also have adopted a rights plan which grants certain of our stockholders the
right to buy shares of preferred stock if a person acquires 10% or more of our
outstanding common stock. Any such issuances of preferred stock could make it
more difficult for a third party to acquire us. See "Description of Capital
Stock" for a more detailed discussion of the terms of our rights plan and other
provisions of our certificate of incorporation which could hinder a third
party's attempts to acquire control of WinStar.
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND OTHER CONVERTIBLE SECURITIES--THE
EXERCISE OR CONVERSION OF THESE SECURITIES INTO COMMON STOCK WILL DILUTE THE
PERCENTAGE OWNERSHIP OF OUR OTHER STOCKHOLDERS. THE SALE OF SUCH COMMON STOCK IN
THE OPEN MARKET COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
There are outstanding options and warrants to purchase an aggregate of
17,438,000 shares of our common stock and more options will be granted in the
future under our employee benefit plans. Additionally, certain of our
outstanding securities are currently convertible into approximately 13,786,000
shares of our common stock. Substantially all of the shares of common stock
underlying such securities are or will be registered for resale under the
Securities Act. The exercise or conversion of outstanding stock options,
warrants or other convertible securities will dilute the percentage ownership of
our other stockholders. In addition, any sales in the public market of shares of
our common stock issuable upon the exercise or conversion of such stock options,
warrants or convertible securities, or the perception that such sales could
occur, may adversely affect the prevailing market price of our common stock.
SHARES ELIGIBLE FOR FUTURE SALE--THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF
OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK.
Substantially all of our currently outstanding shares of common stock have
been registered for sale under the Securities Act, are eligible for sale under
an exemption from the registration requirements or are subject to registration
rights pursuant to which holders may require WinStar to register such shares in
the future. Sales or the expectation of sales of a substantial number of shares
of our common stock in the public market could adversely affect the prevailing
market price of our common stock. We and our directors and executive officers
have agreed, except in limited circumstances, not to sell any shares for 90 days
after the date of this prospectus without the prior consent of Salomon Smith
Barney Inc. on behalf of the underwriters.
16
<PAGE>
USE OF PROCEEDS
The net proceeds of this offering are expected to be approximately
$162.0 million. If the U.S. underwriters exercise their right to purchase an
additional 630,000 shares, the net proceeds will be $186.4 million. These
estimates assume that the public offering price is $40.56 per share. Net
proceeds is computed by deducting the underwriting discount and our estimated
offering expenses from the total public offering price.
We intend to use the net proceeds we derive from this offering for the
general development and growth of our operations, both domestically and abroad,
including:
o working capital, including the hiring of sales, marketing, engineering
and customer service personnel and the funding of operating losses;
o the continued development of operating support and management systems;
o the acquisition of roof rights;
o the acquisition of additional spectrum;
o capital expenditures not funded under the Lucent credit agreement;
o the acquisition of businesses or assets; and
o payment of interest on indebtedness.
A substantial portion of the net proceeds from this offering will be
allocated to our working capital and for general corporate purposes and may be
applied to acquisitions, investments or strategic alliances domestically or
abroad which have not yet been identified. We will analyze numerous, variable
factors before we determine how to use such net proceeds. Accordingly, we will
have broad discretion in allocating the net proceeds from this offering. In
addition, up to 950,000 of the shares offered in the U.S. offering may be sold
by our wholly owned subsidiary. We will issue these shares to our subsidiary as
a capital contribution immediately prior to the closing of this offering. The
net proceeds from the sale of these shares will be received by our subsidiary.
Since this subsidiary has been designated an "unrestricted subsidiary" under the
agreements governing our indebtedness, there will be few if any restrictions on
its ability to use those proceeds.
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 the net proceeds from this offering,
together with our existing financial resources, payments to be received from
Williams and accounts receivable and additional equipment financings that we
intend to seek, will be sufficient to fund our operations and capital
requirements for approximately 12 to 18 months following the consummation of
this offering. We may be required to seek additional sources of capital sooner
than we anticipate if:
o our operating assumptions change or prove to be inaccurate;
o less than $2.0 billion becomes available under the Lucent credit
agreement;
o we fail to secure additional equipment and accounts receivable
financing;
o we consummate any acquisitions of significant businesses or assets
(including spectrum licenses); or
o we further accelerate our plan and enter markets more rapidly.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for a further discussion of our
current and expected future capital requirements and our belief regarding our
ability to meet those requirements.
17
<PAGE>
CAPITALIZATION
The following table sets forth our cash and capitalization as of September
30, 1998: (1) on an historical basis and (2) as adjusted for this offering as if
it had occurred on September 30, 1998. The following table should be read in
conjunction with the consolidated and condensed consolidated financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash, cash equivalents and short-term investments.......................................... $ 473,906 $ 635,873
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
12 1/2% Guaranteed Senior Secured Notes Due 2004 of WEC.................................. $ 200,000 $ 200,000
12 1/2% Guaranteed Senior Secured Notes Due 2004 of WEC II............................... 50,000 50,000
14% Senior Discount Notes Due 2005....................................................... 223,226 223,226
14 1/2% Senior Deferred Interest Notes Due 2005.......................................... 124,004 124,004
14% Convertible Senior Subordinated Discount Notes Due 2005.............................. 111,613 111,613
15% Senior Subordinated Deferred Interest Notes Due 2007................................. 115,420 115,420
10% Senior Subordinated Notes Due 2008................................................... 200,000 200,000
11% Senior Subordinated Deferred Interest Notes Due 2008................................. 264,651 264,651
Capital lease obligations and other notes (including current portion).................... 76,520 76,520
---------- -----------
Total long-term debt and capital lease obligations....................................... 1,365,434 1,365,434
---------- -----------
Series C 14 1/4% Senior Cumulative Exchangeable Preferred Stock Due 2007 (a)............... 194,738 194,738
---------- -----------
Series D 7% Senior Cumulative Convertible Preferred Stock Due 2010 (a)..................... 200,000 200,000
---------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A 6% Cumulative Convertible Preferred Stock, $.01 par value, 15,000,000 shares
authorized, 4,089,000 shares issued and outstanding (a)................................ 41 41
Series E Non-Redeemable Junior Convertible Preferred Stock, $.01 par, 75,100 shares
authorized, issued and outstanding (a)................................................. 1 1
Common Stock, $.01 par value, 200,000,000 shares authorized, 40,565,000 shares issued and
outstanding and 44,765,000 issued and outstanding as adjusted (b)...................... 405 447
Additional paid-in-capital............................................................... 394,303 556,228
Accumulated deficit...................................................................... (676,116) (676,116)
Accumulated other comprehensive loss..................................................... (45,365) (45,365)
---------- -----------
Total stockholders' deficit.............................................................. (326,731) (164,764)
---------- -----------
Total capitalization..................................................................... $1,433,441 $ 1,595,408
---------- -----------
---------- -----------
</TABLE>
- ------------------
(a) See "Description of Capital Stock--Preferred Stock" for a description of our
Series A Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and existing rights to purchase Series B
Preferred Stock.
(b) Does not include (i) 916,000 shares of common stock issuable upon exercise
of options granted or which may be granted under the 1992 Performance Equity
Plan, (ii) 9,384,000 shares of common stock issuable upon exercise of
options granted or which may be granted under the 1995 Performance Equity
Plan, (iii) 8,158,000 shares of common stock issuable upon exercise of other
outstanding options and warrants, (iv) 746,000 shares of common stock
issuable under the Employee Stock Purchase Plan, (v) approximately
13,786,000 shares of common stock issuable upon conversion of our
convertible preferred stock and convertible debt and (vi) up to 630,000
shares issuable upon the exercise of the U.S. underwriters' over-allotment
option. Also does not include shares of common stock issuable under
commitments to pay approximately $1.9 million in common stock in connection
with the acquisition of additional spectrum licenses. The exercise and
conversion prices of a substantial majority of the foregoing are below the
current market price of our common stock as of the date of this prospectus.
18
<PAGE>
DILUTION
Dilution is the amount by which the offering price paid by the purchasers
of our common stock offered hereby will exceed the net tangible book value per
share of our common stock after this offering. Net tangible book value per share
is determined at any date by subtracting our total liabilities and redeemable
preferred stock from the total book value of our tangible assets and dividing
the difference by the number of shares of our common stock deemed to be
outstanding at such date.
Our net tangible book value at September 30, 1998 was a deficit of
approximately $(799.0) million, or negative $(19.70) per share. After giving
effect to our sale of common stock offered under this prospectus at an assumed
public offering price of $40.56 per share (assuming no exercise of the U.S.
underwriters' over-allotment option) and our receipt of the net proceeds of this
offering, our as adjusted net tangible book value at September 30, 1998 would
have been a deficit of approximately $(637.0) million, or negative $(14.23) per
share. This represents an immediate increase in net tangible book value of $5.47
per share to existing stockholders and an immediate dilution to new investors
purchasing shares of common stock in this offering of $54.79 per share. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
PER SHARE
------------------
<S> <C> <C>
Assumed public offering price...................................................... $40.56
Net tangible book value deficiency at September 30, 1998 (a)..................... $ (19.70)
Increase in net tangible book value attributable to receipt of net proceeds...... 5.47
--------
As adjusted net tangible book value deficiency after this offering (a)............. (14.23)
------
Dilution of net tangible book value to new investors............................... $54.79
------
------
</TABLE>
- ------------------
(a) At September 30, 1998, our wireless licenses had an aggregate book value of
approximately $284.0 million (or $6.99 per share). They are treated as
intangible assets and, accordingly, have been excluded from the calculation
of net tangible book value.
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended
February 28, 1994 and 1995, the ten months ended December 31, 1995, and the
years ended December 31, 1996 and 1997 have been derived from our audited
consolidated financial statements, reclassified to reflect the operations of
both Global Products and Gateway as discontinued operations. The selected
financial data for the ten months ended December 31, 1994, the year ended
December 31, 1995, the nine months ended September 30, 1997 and as of and for
the nine months ended September 30, 1998 have been derived from our unaudited
condensed consolidated financial statements, reclassified to reflect the
operations of Global Products and Gateway as discontinued operations. In our
opinion, the unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, which consist of only normal recurring adjustments,
necessary for a fair presentation of the results of operations for the periods
presented. The data below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated and condensed consolidated financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
FEBRUARY 28, DECEMBER 31, DECEMBER 31,
----------------- -------------------------- ------------------------------------
1994 1995 1994 1995 1995 1996 1997
------- -------- ------------ ------------ -------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Telecommunications services
CLEC..................................... $ -- $ -- $ -- $ -- $ -- $ 604 $ 22,653
Other.................................... -- 125 105 130 149 3,883 7,143
------- -------- -------- -------- -------- -------- ----------
Total telecommunications services.......... -- 125 105 130 149 4,487 29,796
Information services......................... -- 473 194 2,648 2,928 14,650 41,354
Other........................................ 1,278 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ----------
Total operating revenues................. 1,278 598 299 2,778 3,077 19,137 71,150
Operating income (loss)
Telecommunications services................ -- (1,306) (34) (4,456) (4,274) (40,731) (147,134)
Information services....................... -- (157) 11 217 192 (1,409) (4,092)
General corporate.......................... (1,342) (944) (1,593) (3,861) (4,814) (11,373) (27,312)
Other...................................... (278) -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ----------
Total operating loss..................... (1,620) (2,407) (1,616) (8,100) (8,896) (53,513) (178,538)
Interest expense............................. (724) (375) (300) (7,186) (7,176) (36,748) (77,257)
Interest income.............................. 109 343 255 2,890 2,900 10,515 17,577
Other (expenses) income, net (a)............. (5,316) (1,109) (766) (866) (1,211) -- 4,719
------- -------- -------- -------- -------- -------- ----------
Loss from continuing operations.............. (7,551) (3,548) (2,427) (13,262) (14,383) (79,746) (233,499)
Loss from discontinued operations............ (644) (3,682) (2,190) (2,595) (3,836) (3,977) (15,985)
------- -------- -------- -------- -------- -------- ----------
Net loss..................................... (8,195) (7,230) (4,617) (15,857) (18,219) (83,723) (249,484)
Preferred stock dividends.................... -- -- -- -- -- -- (5,879)
------- -------- -------- -------- -------- -------- ----------
Net loss applicable to common stockholders... $(8,195) $ (7,230) $ (4,617) $(15,857) $(18,219) $(83,723) $ (255,363)
------- -------- -------- -------- -------- -------- ----------
------- -------- -------- -------- -------- -------- ----------
Basic and Diluted Loss per Share:
Loss per share from continuing operations.... $ (0.98) $ (0.21) $ (0.15) $ (0.58) $ (0.63) $ (2.86) $ (7.20)
Loss per share from discontinued
operations................................. (0.08) (0.21) (0.13) (0.12) (0.17) (0.14) (0.48)
------- -------- -------- -------- -------- -------- ----------
Loss per share outstanding................... $ (1.06) $ (0.42) $ (0.28) $ (0.70) $ (0.80) $ (3.00) $ (7.68)
------- -------- -------- -------- -------- -------- ----------
------- -------- -------- -------- -------- -------- ----------
Weighted average common shares outstanding... 7,719 17,122 16,609 22,770 22,827 27,911 33,249
OTHER FINANCIAL DATA:
Capital expeditures (b)...................... $ 15 $ 487 $ 73 $ 7,654 $13,432 $ 46,651 $ 222,196
Depreciation and amortization................ 97 21 13 564 507 3,764 25,102
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1998
------------- -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Telecommunications services
CLEC..................................... $ 13,418 $ 85,858
Other.................................... 3,792 40,276
--------- ---------
Total telecommunications services.......... 17,210 126,134
Information services......................... 25,693 37,220
Other........................................ -- --
--------- ---------
Total operating revenues................. 42,903 163,354
Operating income (loss)
Telecommunications services................ (102,722) (150,430)
Information services....................... (2,632) (7,036)
General corporate.......................... (15,661) (35,440)
Other...................................... -- --
--------- ---------
Total operating loss..................... (121,015) (192,906)
Interest expense............................. (53,074) (111,704)
Interest income.............................. 11,052 23,986
Other (expenses) income, net (a)............. 2,219 4,000
--------- ---------
Loss from continuing operations.............. (160,818) (276,624)
Loss from discontinued operations............ (5,237) (24,974)
--------- ---------
Net loss..................................... (166,055) (301,598)
Preferred stock dividends.................... (3,881) (31,195)
--------- ---------
Net loss applicable to common stockholders... $(169,936) $(332,793)
--------- ---------
--------- ---------
Basic and Diluted Loss per Share:
Loss per share from continuing operations.... $ (5.00) $ (8.10)
Loss per share from discontinued
operations................................. (0.16) (0.66)
--------- ---------
Loss per share outstanding................... $ (5.16) $ (8.76)
--------- ---------
--------- ---------
Weighted average common shares outstanding... 32,923 37,970
OTHER FINANCIAL DATA:
Capital expeditures (b)...................... $ 103,835 $ 264,481
Depreciation and amortization................ 14,649 48,666
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 28, DECEMBER 31, SEPTEMBER 30,
------------------ -------------------------------- -------------
1994 1995 1995 1996 1997 1998
------- ------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 319 $ 2,874 $211,583 $122,638 $419,462 $ 473,906
Property and equipment, net................... 68 250 13,053 59,983 284,835 447,186
Total assets.................................. 8,305 19,803 268,964 273,012 973,834 1,556,826
Current portion of long-term debt and capital
lease obligations........................... 300 28 1,839 21,121 7,127 19,163
Long-term debt and capital lease obligations,
less current portion........................ 2,612 17 239,957 275,513 789,861 1,346,271
Total debt.................................... 2,912 45 241,796 296,634 796,988 1,365,434
Exchangeable redeemable preferred stock ...... -- -- -- -- 175,553 194,738
Convertible redeemable preferred stock........ -- -- -- -- -- 200,000
Common and preferred stock and additional
paid-in-capital............................. 22,665 43,518 104,823 75,726 256,126 394,750
Stockholders' equity (deficit)................ 4,719 18,280 21,752 (49,671) (118,392) (326,731)
Dividends(c).................................. -- -- -- -- -- --
</TABLE>
- ------------------
(a) For the year ended February 28, 1994, principally represents non-cash
expense of $5.3 million, consisting of the difference between the exercise
prices of certain options granted in connection with our initial public
offering in April 1991 and the market value of the underlying shares of
common stock on the date such options became exercisable. The year ended
December 31, 1997 and the nine months ended September 30, 1998 include a
deferred income tax benefit of $2.5 million and $4.0 million, respectively.
(b) Includes assets acquired under capital leases.
(c) We did not declare or pay any dividends on our common stock during these
periods.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
As we discuss in other sections of this prospectus, we operate the
following lines of business: (1) telecommunications services consisting of
(a) competitive local exchange carrier ("CLEC") services, which include local
and long distance voice and data telecommunications services provided to
business customers and (b) other telecommunications services, which include
certain long distance operations which we acquired in January 1998 from Midcom,
wireless broadband local access services and dedicated network services and
(2) information services, which include the provision of information products
and services to our telecommunications customers as well as the creation and
distribution of information and entertainment products and services through a
variety of traditional and new media outlets such as radio, television and the
Internet.
The following discussion does not include the results of operations of
Global Products or Gateway, both of which have been reclassified as discontinued
operations.
REVENUES
Several factors drive our revenues, including:
CLEC Services
Revenues from local and long distance services are driven primarily by the
number of customer lines installed and in service. Customers generally are
billed a flat monthly fee and/or a per-minute usage charge. Data services
revenues generally are billed as a flat monthly charge for capacity ordered.
Revenue growth depends upon our addition of new customers in existing markets,
our sale of bundled services, our expansion into new markets and our
introduction of new services, such as broadband data transmission and video
conferencing. Revenues from CLEC services were approximately $37.2 million in
the quarter ended September 30, 1998, in comparison to $30.0 million in the
quarter ended June 30, 1998, $18.7 million in the quarter ended March 31, 1998
and $10.1 million in the quarter ended December 31, 1997. We expect our CLEC
services, our most significant revenue source, to generate increasing revenues
as we expand our network and as network utilization increases.
Other Telecommunications Services
Other telecommunications services consist principally of long distance
services provided to customers acquired from Midcom in January 1998 who are not
located in markets where we currently market or expect to market our
telecommunications services in the near term. We expect these revenues to
decline over time through normal churn of this customer base.
Information Services
Information services revenues are generated principally by: (1) sales of
content and related services to traditional customers, such as cable networks
and radio stations; (2) sales to new media distribution channels, such as
on-line services; (3) advertising sales and (4) the bundling of content with our
telecommunications services. Revenues also are driven by the amount and quality
of our available program rights during each quarter and some seasonality of
sales, which affect quarter-to-quarter comparability. We expect information
services revenues to increase as we expand our information service offerings and
cross-sales of these services to CLEC customers.
COSTS
Factors relating to costs are as follows:
CLEC Services
Costs associated with our telecommunications services business include
significant up-front capital expenditures for development of the infrastructure
required to provide facilities-based local exchange and data services, including
expenditures relating to the purchase and installation of switching equipment,
radios,
22
<PAGE>
customer premise equipment and related site acquisition and installation costs
along with intercity and intracity backbone facilities. In addition, we are
incurring start-up costs related to our telecommunications services business
that will not be capitalized, including some costs of engineering, sales office
and service personnel, marketing, administrative and other personnel, certain of
whom will be needed in advance of related revenues. As we commence operations in
a city, our cost of revenue percentage is greater as fixed costs are spread over
less traffic. Margins on CLEC services revenues are improved as: (1) traffic
increases and our fixed network costs are spread over a larger traffic base and
(2) we increase the total percentage of traffic carried on our networks because
this On-Net traffic results in higher operating margins than traffic carried on
resold facilities.
Other Telecommunications Services
Costs associated with other telecommunications services are currently
incurred through the resale of other carriers' long distance facilities. If this
traffic is migrated to our own long distance network when available, gross
margins will increase.
Information Services
Our information services businesses have production, distribution and
administrative costs. Film production costs include those related to producing
original products and licensing third-party products and are capitalized as
incurred and expensed as productions are completed and distributed. Overhead
costs in the production division are also capitalized, allocated to films in
progress and subsequently expensed as such films are completed and distributed.
Other media production costs are expensed as incurred. The distribution and
advertising divisions incur royalty costs payable to third-party producers and
selling costs, both of which vary directly with sales of acquired product, as
well as administrative costs and personnel-related costs, which are primarily
fixed in nature and are expensed as incurred.
RESULTS OF OPERATIONS
Revenues from our operating business lines are as follows (in millions):
<TABLE>
<CAPTION>
TEN MONTHS
ENDED YEAR ENDED
DECEMBER 31,(A) DECEMBER 31,
---------------------------------- ---------------------------
1994 1995 1995 1996 1997
--------------- --------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Telecommunications services
CLEC................................................. $ -- $ -- $ -- $ 0.6 $ 22.7
Other................................................ 0.1 0.1 0.1 3.9 7.1
------- ------- ------- ------- -------
0.1 0.1 0.1 4.5 29.8
Information services................................... 0.2 2.7 2.9 14.6 41.3
------- ------- ------- ------- -------
Total operating revenues............................. $ 0.3 $ 2.8 $ 3.0 $ 19.1 $ 71.1
------- ------- ------- ------- -------
------- ------- ------- ------- -------
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
1997 1998
------- -------------
<S> <C> <C>
Telecommunications services
CLEC................................................. $ 13.4 $ 85.9
Other................................................ 3.8 40.3
------- -------
17.2 126.2
Information services................................... 25.7 37.2
------- -------
Total operating revenues............................. $ 42.9 $ 163.4
------- -------
------- -------
</TABLE>
- ------------------
(a) We changed our fiscal year end to December 31 from February 28 effective
January 1, 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased by $120.5 million, or 280.9%, to $163.4 million for the
nine months ended September 30, 1998, from $42.9 million for the nine months
ended September 30, 1997. This increase was primarily attributable to the growth
in revenues generated by our telecommunications operations.
Revenues from CLEC services increased by $72.5 million, or 541.0%, to $85.9
million for the nine months ended September 30, 1998, from $13.4 million in the
nine months ended September 30, 1997. The CLEC business commenced operations in
the second quarter of 1996. The revenue growth was primarily attributable to our
existing customer base, continued national sales and installation of local, long
distance and Internet services to small and medium size business customers, the
geographic and other expansions of sales, network and business operations, along
with the rapidly expanding broadband and large account business units and
certain acquisitions. Based on revenues generated in September 1998, CLEC
service revenues reached an annual run rate in excess of $176.0 million compared
with approximately $33.0 million based on revenues generated in September 1997.
Through September 30, 1998, cumulative lines installed were more than 257,000.
23
<PAGE>
Revenues from other telecommunications services, which consist of wholesale
operations and Midcom long distance voice services (other than sales
attributable to national accounts), increased by $36.5 million, or 960.5%, to
$40.3 million for the nine months ended September 30, 1998, from $3.8 million
for the nine months ended September 30, 1997. The increase resulted primarily
from sales attributable to former Midcom long distance operations which were
acquired in January 1998. We expect a gradual attrition of this long distance
revenue over subsequent periods.
Revenues from information services increased by $11.5 million, or 44.7%, to
$37.2 million for the nine months ended September 30, 1998, from $25.7 million
for the nine months ended September 30, 1997, due to strong Internet and other
advertising revenues, as well as increased home video, license and film
production sales.
Cost of services and products increased by $88.4 million, or 201.8%, to
$132.2 million for the nine months ended September 30, 1998, from $43.8 million
for the nine months ended September 30, 1997. As a percentage of revenues, cost
of services and products for the nine months ended September 30, 1998 was 80.9%,
compared to 102.1% for the nine months ended September 30, 1997. This decrease
in the cost of revenue percentage is the result of increased sales volumes,
larger percentages of traffic being provisioned over our network, substantial
supplier cost adjustments and/or credits for volume or performance and control
over internal costs.
Selling, general and administrative expense increased by $69.9 million, or
66.3%, to $175.4 million for the nine months ended September 30, 1998, from
$105.5 million for the nine months ended September 30, 1997. As a percentage of
revenues, selling, general and administrative expenses declined from 245.9% for
the nine months ended September 30, 1997 to 107.3% for the nine months ended
September 30, 1998. We continued to hire sales, marketing, network and related
support personnel in connection with the expansion of our CLEC markets. We had
approximately 1,479 employees at December 31, 1997 and approximately 2,567 at
September 30, 1998. With our continued expansion, we expect 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 $34.1 million, or
233.6%, to $48.7 million for the nine months ended September 30, 1998, from
$14.6 million for the nine months ended September 30, 1997, principally
resulting from our acquisition and deployment of switches, radios and other
equipment in connection with its telecommunications network buildout.
For the reasons noted above, the operating loss for the nine months ended
September 30, 1998 was $192.9 million, compared with an operating loss of
$121.0 million for the nine months ended September 30, 1997.
Interest expense increased by $58.6 million, or 110.4%, to $111.7 million
for the nine months ended September 30, 1998, from $53.1 million for the nine
months ended September 30, 1997. This increase was principally attributable to
the issuance of $450.0 million of debt in 1997 and another $450.0 million of
debt in the first quarter of 1998. Of the $111.7 million of interest expense
incurred for the nine months ended September 30, 1998, $35.8 million was payable
in cash.
Interest income increased by $12.9 million, or 116.2%, to $24.0 million for
the nine months ended September 30, 1998, from $11.1 million for the nine months
ended September 30, 1997. The increase resulted from the additional interest
income earned on the proceeds from our various stock and debt placements.
For the reasons noted above, we reported a loss from continuing operations
of $276.6 million for the nine months ended September 30, 1998, compared to a
net loss from continuing operations of $160.8 million for the nine months ended
September 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues increased by $52.0 million, or 272.3%, to $71.1 million for the
year ended December 31, 1997, from $19.1 million for the year ended
December 31, 1996. This increase was attributable to increased revenues
generated by our CLEC services, other telecommunications services and
information services businesses, partially offset by a decrease in residential
long distance revenues.
24
<PAGE>
Revenues from CLEC services, which include all commercial end user customer
telecommunication revenues, were $22.7 million in the year ended December 31,
1997, and were minimal in the year ended December 31, 1996, as the CLEC business
commenced operations in the second quarter of 1996. Based on revenues generated
in December 1997 annualized revenues for the CLEC business were approximately
$46.2 million. As of December 31, 1997, the CLEC business had installed
approximately 81,500 lines, up from approximately 51,400 lines at September 30,
1997 and 4,400 lines at December 31, 1996.
Revenues from other telecommunications services increased $3.2 million, or
82.1%, to $7.1 million for the year ended December 31, 1997, from $3.9 million
for the year ended December 31, 1996. This increase resulted from the growing
number of billed circuits, along with installation revenues and equipment sales
related to contract services provided.
Revenues from information services increased by $26.7 million, or 182.9%,
to $41.3 million for the year ended December 31, 1997, from $14.6 million for
the year ended December 31, 1996, due to continued internal growth and
acquisitions, including the Telebase online business service acquired earlier in
1997.
Cost of services and products increased by $52.5 million, or 245.3%, to
$73.9 million for the year ended December 31, 1997, from $21.4 million for the
year ended December 31, 1996. As a percentage of revenues, cost of services and
products for the year ended December 31, 1997 was 103.9% compared to 111.8% in
the year ended December 31, 1996, as a result of increasing network costs from
the continued expansion of our local telecommunications business.
Selling, general and administrative expense increased by $103.2 million, or
217.3%, to $150.7 million for the year ended December 31, 1997, from
$47.5 million for the year ended December 31, 1996. As a percentage of revenues,
selling, general and administrative expenses declined from 248.0% for the year
ended December 31, 1996 to 212.0% for the year ended December 31, 1997. We
continued to hire sales, marketing and related support personnel in connection
with the accelerated rollout of our CLEC operations, which had only 500
employees at December 31, 1996 and approximately 1,200 employees at
December 31, 1997. In addition, we increased spending on related advertising and
marketing of our CLEC services.
Depreciation and amortization expense increased by $21.3 million, or
560.5%, to $25.1 million for the year ended December 31, 1997, from
$3.8 million for the year ended December 31, 1996, principally resulting from
our acquisition and deployment of switches, radios and other equipment in
connection with our telecommunications network buildout.
For the reasons noted above, the operating loss for the year ended
December 31, 1997 was $178.5 million, compared with an operating loss of
$53.5 million for the year ended December 31, 1996.
Interest expense increased by $40.5 million, or 110.4%, to $77.3 million
for the year ended December 31, 1997, from $36.7 million for the year ended
December 31, 1996. The increase was principally attributable to our issuance of
debt in 1997. Of the $77.3 million interest expense for the year, $23.8 million
is payable in cash.
Interest income increased by $7.1 million, or 67.6%, to $17.6 million for
the year ended December 31, 1997, from $10.5 million for year ended
December 31, 1996. The increase resulted from the additional interest income
earned on the proceeds from our issuance of debt and equity securities in 1997.
In 1997, we recognized dividends of $5.9 million on our placement of Series
A Preferred Stock and Series C Preferred Stock, which were paid in kind.
For the reasons noted above, we reported a net loss applicable to common
stockholders of $255.4 million for the year ended December 31, 1997, compared to
a net loss applicable to common stockholders of $83.7 million for the year ended
December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues from continuing operations increased by $16.1 million, or 536.7%,
to $19.1 million for the year ended December 31, 1996, from $3.0 million from
the year ended December 31, 1995. This increase was principally attributable to
increased revenues generated by our telecommunications and information services
segments.
Our telecommunications services revenues increased by $4.4 million, or
4,400.0%, to $4.5 million for the year ended December 31, 1996, from
$0.1 million for the year ended December 31, 1995. Revenues from the information
services segment increased by $11.7 million, or 403.4%, to $14.6 million for the
year ended
25
<PAGE>
December 31, 1996, from $2.9 million for the year ended December 31, 1995, due
to continued growth of this segment internally and through acquisitions. The
revenue increase in 1996 was generated principally from increased production and
distribution of entertainment content, including documentaries, foreign films
and multimedia sports programming.
Cost of services and products increased by $16.5 million, or 336.7%, to
$21.4 million, for the year ended December 31, 1996, from $4.9 million for the
year ended December 31, 1995. As a percentage of sales, cost of services and
products for the year ended December 31, 1996 was 111.8% compared to 163.3% for
the year ended December 31, 1995, due in part to increased start-up costs for
facilities in connection with the rollout of our telecommunications network.
Selling, general and administrative expense increased by $41.0 million, or
630.8%, to $47.5 million for the year ended December 31, 1996, from
$6.5 million in the year ended December 31, 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 216.7% for the year
ended December 31, 1995 to 248.7% for the year ended December 31, 1996. Selling,
general and administrative expense increased predominantly in the
telecommunications segment as we continued to hire sales, marketing and related
support personnel in connection with the accelerated rollout of our CLEC
operations and increased spending on related advertising and marketing of
services in new and existing cities where we offered our services.
Depreciation and amortization expense increased by $3.3 million, or 660.0%,
to $3.8 million for the year ended December 31, 1996, from $0.5 million for the
year ended December 31, 1995, principally resulting from our acquisition of
switches, radios and other telecommunications equipment.
For the reasons noted above, the operating loss for the year ended
December 31, 1996 was $53.5 million, compared to an operating loss of
$8.9 million for the year ended December 31, 1995.
Interest expense increased by $29.5 million, or 409.7%, to $36.7 million
for the year ended December 31, 1996, from $7.2 million for the year ended
December 31, 1995. The increase was primarily attributable to $33.5 million in
interest accrued on the 1995 Notes issued in the 1995 Debt Placement, which is
not payable in cash until after 1999.
Interest income increased by $7.6 million, or 262.1%, to $10.5 million for
the year ended December 31, 1996, from $2.9 million for the year ended
December 31, 1995. The increase is attributable to short-term investment
earnings on the proceeds of the 1995 Debt Placement.
For the reasons noted above, we reported a net loss of $83.7 million for
the year ended December 31, 1996, compared to a net loss of $18.2 million for
the year ended December 31, 1995.
TEN MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THE TEN MONTHS ENDED
DECEMBER 31, 1994
Revenues increased by $2.5 million, or 833.3%, to $2.8 million for the ten
months ended December 31, 1995, from $0.3 million in the comparable period of
the prior year. This increase was attributable to increased revenues in our
information services line of business. During the ten months ended December 31,
1995, our other telecommunications services business had only nominal revenues.
The information services line of business, which reported nominal revenues in
the prior year, had revenues of approximately $2.6 million for the ten months
ended December 31, 1995, primarily attributable to the completion of certain
documentary television products.
Cost of services and products increased to $3.6 million, for the ten months
ended December 31, 1995 from $0.0 million for the ten months ended December 31,
1994. As a percentage of revenues, cost of services and products for the ten
months ended December 31, 1995 was 129.9%. The increase was principally
attributable to the growth in our information services line of business, along
with initial expenses incurred in connection with our telecommunications
network.
Selling, general and administrative expenses increased by $4.8 million, or
252.6%, to $6.7 million for the ten months ended December 31, 1995, from
$1.9 million for the ten months ended December 31, 1994. As a percentage of
revenues, selling, general and administrative expenses declined from 633.3% for
the ten months ended December 31, 1994 to 239.3% for the ten months ended
December 31, 1995. Factors contributing to the increase were: the acquisition of
Avant-Garde Telecommunications, Inc. ("Avant-Garde," the original holder of many
of the wireless licenses) and the consolidation of that entity's results of
26
<PAGE>
operations into our financial statements from July 17, 1995 onward; the hiring
of additional personnel; and the expansion of our infrastructure to manage
future growth in its telecommunications business.
For the reasons noted above, the operating loss for the ten months ended
December 31, 1995, was $8.1 million, compared to an operating loss of
$1.6 million in the comparable period of the prior year.
Interest expense was $7.2 million for the ten months ended December 31,
1995, and a nominal amount for the ten months ended December 31, 1994,
reflecting principally the non-cash accretion of interest on certain
indebtedness issued in the 1995 Debt Placement.
Interest income for the ten months ended December 31, 1995 increased by
$2.6 million, or 866.7%, to $2.9 million from $0.3 million for the same period
during the prior year. The increase was attributable to earnings on the 1995
Debt Placement, which raised net proceeds of $214.5 million.
For the reasons noted above, we reported a net loss of $15.9 million for
the ten months ended December 31, 1995, compared to a net loss of $4.6 million
in the comparable period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
In October 1998, we entered into an expanded long-term strategic supply and
financing relationship with Lucent. We have agreed to purchase Lucent equipment
for a significant portion of the components needed for our network. Lucent has
also made financing available for the purchase of up to $2.0 billion of
equipment and related services necessary for this buildout ($500.0 million of
which was made immediately available). At December 31, 1998, we had borrowed
$77.5 million under this financing arrangement.
At September 30, 1998, we had approximately $473.9 million in cash, cash
equivalents and short-term investments. After giving effect to this offering as
if it occurred on September 30, 1998, we would have had $635.9 million in cash,
cash equivalents and short-term investments as of such date.
In March 1998, we sold 4,000,000 shares of our Series D Preferred Stock for
which we realized net proceeds of approximately $192.0 million. Additionally, in
March 1998, we sold an aggregate of $450.0 million principal amount of the 1998
Notes for which we realized net proceeds of approximately $437.4 million.
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 a direct sales force, having opened sales offices
currently serving the 30 major markets in which we offer CLEC services, and we
are in the process of 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. Negative EBITDA during the nine
months ended September 30, 1998 was approximately $144.2 million, and cash used
to fund purchases of property and equipment during the nine months ended
September 30, 1998 were approximately $222.9 million. At September 30, 1998,
working capital was $500.7 million (including cash, cash equivalents and
short-term investments of $473.9 million), as compared to $365.7 million at
December 31, 1997 (including cash, cash equivalents and short-term investments
of $419.5 million). After giving effect to this offering as if it had occurred
on September 30, 1998, working capital would have been $662.6 million (including
cash, cash equivalents and short-term investments of $635.9 million) as of such
date.
Other than the WEC Notes, the WEC II Notes and the 1998 Cash-Pay Notes, all
of which require periodic cash interest payments, our principal indebtedness
does not require us to pay cash interest until 2001.
In November 1998, we signed a 15-year lease for approximately
200,000 square feet of office space (with options to lease approximately 57,000
additional square feet) in New York City. Future minimum lease payments under
this lease commitment are approximately $158.0 million, which is comparable to
what we would have paid for existing facilities and anticipated additions over
the same 15-year period. We will consolidate certain of our existing New York
City offices in the new space, including the headquarters for our corporate
offices, WinStar for Buildings, WinStar Broadband Services, WinStar Large
Accounts and operating offices for WinStar General Business and WinStar Network
Services. We expect to sublease many of our existing offices in New York City.
27
<PAGE>
In December 1998, we signed a ten-year lease for approximately 200,000
square feet of office space (with a right of first refusal on substantial
additional space in a building currently under construction) located in Herndon,
Virginia. Future minimum lease payments under this lease commitment are
approximately $43.2 million.
We purchased from MFN an IRU to fiber in and between a number of major
markets at an aggregate cost of $43.6 million. Amounts will become payable over
the next eighteen months as portions of the fiber network are fully constructed
and become available to us. To date we have paid $6.5 million of this amount. We
also purchased from Williams an IRU to intercity fiber and an option to
additional intercity capacity. In connection with this purchase, Williams will
supply a substantial portion of our long-haul transport until such time as
construction of their facilities is completed. We will pay Williams an aggregate
of approximately $640.0 million over the next seven years for the fiber, option,
long-haul transport services and other network assets. We can exercise the
capacity option for approximately $51.0 million, payable in cash and/or
services.
Under our current plan to expand to 45 major domestic and six international
markets by the end of 1999, we plan to spend between $500.0 and $600.0 million
in 1999 for capital equipment, which we expect to finance principally through
the Lucent credit agreement.
We anticipate, based on our business plan and related assumptions
(including an assumption of full availabilty of the $2.0 billion under our
Lucent financing arrangement), that the net proceeds from this offering,
together with our existing financial resources and accounts receivable and
additional equipment financings that we intend to seek, will be sufficient to
fund our operations and capital requirements for approximately 12 to 18 months
following the consummation of this offering. We may be required to seek
additional sources of capital sooner than we anticipate if:
o our operating assumptions change or prove to be inaccurate;
o less than $2.0 billion becomes available under the Lucent credit
agreement;
o we fail to secure additional equipment and accounts receivable financing;
o we consummate any acquisitions of significant businesses or assets
(including spectrum licenses); or
o we further accelerate our plan and enter markets more rapidly.
We continually evaluate the financing alternatives available to us and may
decide to seek additional debt financing in the near future.
YEAR 2000 COMPLIANCE
We are currently addressing the issue of whether or to what extent our
systems will be vulnerable to potential 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 areas where 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 have formed a Year 2000
Program Office to manage the Year 2000 project
28
<PAGE>
plan enterprise-wide. The project team is comprised of management and technical
representatives from our major operational areas, together with experienced Year
2000 consultants.
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 and inventory/assessment phases of this
project which entailed, among other things, identification of the several
hundred systems we use in the operation of our business, and review 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 have been undertaking certain Year 2000 testing and
remediation of non-compliant systems which will continue into 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 we are 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 prior to June 30, 1999 and to
complete that phase prior to August 31, 1999. This project will necessarily be a
continuing one as remediated systems are monitored for compliance and as further
modifications are warranted to cover systems changes and to support the growth
of the network.
We have, where 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 are contacting our vendors
and suppliers, including other telecommunications providers, equipment
manufacturers and software vendors, to obtain a statement regarding their Year
2000 compliance. We currently require our outside vendors and suppliers to
provide reasonable assurances that their hardware and/or software is Year 2000
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 $4.0 million to $8.0 million. The total amount expended through
September 30, 1998 was approximately $1.0 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 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 for 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 determine
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, the ability of any telecommunications
provider, including WinStar, to provide services to its customers (e.g., to
complete calls and transport data and to bill for such services) is dependent,
to some extent, on the networks and systems of other carriers. To the extent the
networks and systems of those carriers are adversely impacted by Year 2000
problems, our ability to service our customers may be adversely impacted as
well. Any such impact could have a material adverse effect on our operations.
29
<PAGE>
We also may consummate acquisitions prior to the end of 1999. The extent of
the Year 2000 problems associated with any acquired company and the cost and
timing of remediation will be evaluated during and after completion of the
acquisition process. However, we cannot assure you 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 in the process of devising contingency plans which will
be implemented in the event we determine that any of those systems will not be
made year 2000 compliant in a timely manner. We are considering alternative
contingency plans that will be ready for implementation by the third quarter of
1999.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"), requiring that all public businesses
report financial and descriptive information about their reportable operating
segments. We will implement SFAS 131 as required in 1999. We are currently
evaluating the effect of SFAS No. 131 on our consolidated financial statement
disclosures.
The American Institute of Certified Public Accountant's Accounting
Standards Executive Committee recently issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires
that costs of start-up activities, including organization costs, be expensed as
incurred. Start-up activities are broadly defined and include one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer or beneficiary, initiating a new process in an existing
facility, commencing some new operation and organizing a new entity. SOP 98-5 is
generally effective for financial statements for fiscal years beginning after
December 15, 1998, with initial application reported as the cumulative effect of
a change in accounting principle. We are currently evaluating the impact that
SOP 98-5 will have on our consolidated financial statements and disclosures.
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 is effective for fiscal years
beginning after June 15, 1999. We are currently evaluating the impact that
SFAS 133 will have on our consolidated financial statements and disclosures.
30
<PAGE>
BUSINESS
GENERAL
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, high-speed data transport, Internet
access and other enhanced communications services. We also provide
Internet-based information content and services, such as online business
resources. We provide our services with a high degree of customer care and at
competitive prices, which affords our customers an attractive alternative to the
ILECs and other service providers. As of September 30, 1998, we had more than
257,000 installed lines serving over 12,000 business customers. We currently
provide service in more than 30 major U.S. markets including Atlanta, Boston,
Chicago, Dallas, Los Angeles, New York City, San Diego, San Francisco and
Washington, D.C. Revenues from our core telecommunications services for
September 1998 were $14.8 million ($176.3 million on an annualized basis)
compared to $2.7 million for September 1997 ($33.2 million on an annualized
basis).
In order to take advantage of the benefits derived from early market entry,
we recently announced a plan to accelerate the growth of our business by
expanding into 60 U.S. markets by the end of 2000, rather than the 40 U.S.
markets previously announced. Additionally, we now plan to expand
internationally by entering up to 50 foreign markets by the end of 2004. We
intend to serve each of these markets primarily with our local broadband
network.
THE WINSTAR BROADBAND NETWORK
The Need for a Broadband Network Solution
Local telephone service has historically been carried by the ILECs across
their "legacy" networks. The portion of these legacy networks that ultimately
connects to customer buildings, called the "last mile," is typically copper
wire. The rapid growth of bandwidth-intensive communications services, such as
Internet access and data transport, has created a shortage of capacity across
the last mile. We believe that this shortage will become more acute as the use
of bandwidth-intensive applications continues to grow.
There are more than 750,000 commercial buildings in the United States. Only
a very small percentage of these buildings have broadband connections. These
broadband connections are typically made using fiber. Construction of last mile
fiber connections has slowed substantially in the last few years as fiber-based
carriers are determining that the extension of fiber to many of the buildings in
any given local market is not economically justified because of the significant
cost of deployment. The overwhelming percentage of total construction costs for
last mile fiber is attributable to labor, with only a small percentage of such
total costs attributable to technology. Since labor costs tend to increase over
time, we believe that it will become more expensive to connect the majority of
commercial buildings with last mile fiber.
Local Broadband Networks
Our local broadband networks offer a solution to the increasing need for
bandwith to a larger addressable market than fiber or copper-based connections.
We are able to bring broadband last mile connections to the substantial majority
of buildings in each of our markets, and focus on those that do not have last
mile fiber or which do not justify the cost of last mile fiber.
An integral part of our local broadband networks is our Wireless Fiber,
which uses the 38 GHz, 28 GHz and other portions of the radio spectrum to carry
voice, data and video transmissions. Our Wireless Fiber services can provide
fiber-quality transmission at speeds more than 350 times faster than ISDN, the
fastest service currently in general use on legacy networks. We believe that in
order to effectively use wireless spectrum for the commercial provision of
broadband communications services, a provider must have access to a large amount
of spectrum in each of the markets where it operates. We hold licenses that
provide us with the largest amount of 38 GHz radio spectrum in the country, as
well as a large amount of 28 GHz spectrum and other various spectrum rights. Our
spectrum holdings cover markets encompassing more than 200 million people and
more than 80% of the business market in the United States.
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We use our Wireless Fiber to establish connections between buildings in
which our customers are located and our hub site buildings. Transmissions are
carried between these locations using wireless connections between antennas
placed on the roof of each building. Accordingly, securing access rights for our
antennas is a crucial step in the construction or expansion of our local
broadband networks. Currently, we have access rights to more than 4,200
buildings. We select hub site buildings to maximize the number of customer
buildings which will have line of sight to the hub. Connections between our hub
sites and our switching facilities are made using fiber or, in some instances, a
second wireless link. Our switches seamlessly deliver voice, data and video
traffic to customers directly connected to our network, the public switched
telephone network or the Internet.
Wireless Fiber. Our Wireless Fiber capacity is an integral component of
our local broadband networks for the origination and termination of voice and
data traffic and the interconnection of hub and switching sites. Each point to
point Wireless Fiber link at 38 GHz currently provides up to eight T-1s of
capacity (equivalent to 192 voice lines) or one DS-3 of capacity (equivalent to
672 voice lines). Our deployment of point to multipoint facilities will allow a
Wireless Fiber link to support up to one OC-3 equivalent of capacity (equivalent
to approximately 2,016 voice lines). There have been significant increases in
capacity over the last five years and we believe that there will be additional
increases in the capacity of Wireless Fiber over time as technology advances.
Wireless Fiber meets or exceeds general telephone industry standards and
provides transmission quality equivalent to that produced by commercially
deployed fiber facilities.
Each 38 GHz Wireless Fiber path consists of paired antennas generally
placed at a distance of less than three miles from one another within a direct,
unobstructed line of sight. The antennas are approximately 12 to 15 inches in
diameter and are typically installed on rooftops, towers or windows. Point to
multipoint technology allows a single hub site antenna to be used to form
multiple Wireless Fiber paths with antennas located on numerous customer
buildings. Each of these hubs will typically be able to address all of the
buildings in line of sight with that hub using as few as four hub site antennas.
Significant features of Wireless Fiber services include: (1) digital
millimeter wave transmissions having narrow beam width, reducing the potential
for channel interference and allowing dense deployment and channel re-use; (2) a
large amount of bandwidth in each channel, allowing for high subdivision of
voice and data traffic; (3) a range of up to five miles between transmission
links (although we generally maintain link distances of less than three miles or
shorter distances in certain areas to meet our internally established
performance standards); (4) performance engineered to provide up to 99.999%
reliability, as tested; (5) transmission accuracy engineered to provide bit
error rates of 10-13 (unfaded); and (6) relatively low installed cost for each
pair of transceivers comprising a transmission link, with even lower costs
allowed through the deployment of point to multipoint radios.
The cost of constructing a Wireless Fiber last mile connection is
significantly less than the cost of creating the same connection using fiber.
Further, the overwhelming percentage of construction costs for Wireless Fiber
is attributable to technology, whereas only a small percentage is attributable
to labor. Accordingly, our cost of establishing broadband last mile connections
to buildings using Wireless Fiber service is falling as an increasing number of
vendors are manufacturing wireless radio equipment and as more advances are
being made in radio technology. We expect these trends to continue. Our recently
initiated deployment of point to multipoint technology allows for transmissions
between a single hub site antenna and multiple customer antennas, thereby
allowing us to apportion the same spectrum among our customers and reduce our
capital expenditures. This deployment also allows us to allocate and share
network capacity on an as-needed basis and supply customers with bandwidth on
demand to address their changing capacity requirements.
Roof Rights. We must obtain roof rights on each building where a
transceiver will be placed. Our plan is to negotiate, prior to receipt of actual
service orders (i.e., prequalification), roof rights for the installation of
Wireless Fiber links on buildings in the metropolitan areas covered by our
wireless licenses. This includes hub site buildings which give direct lines of
sight to a number of other buildings we target and buildings that can provide
interconnection access to other carriers' points of presence, switch locations
and local access nodes. These prequalification activities may include the
payment of option fees to the owners of the buildings.
Historically, we have negotiated roof rights on a building-by-building
basis. We recently began to negotiate for roof rights with owners of portfolios
of buildings. For example:
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o In December 1998, we acquired roof rights to a portfolio of more than
600 buildings owned or controlled by Spieker Properties, one of the
largest publicly traded real estate investment trusts in the United
States. Of these buildings, 250 are included in our publicly reported
4,200 buildings for which we have roof rights because they are in
currently targeted markets.
o In October 1998, we acquired roof rights to a portfolio of more than 400
buildings through an agreement with DEVNET, LLC., a firm which manages
the telecommunications needs for commercial buildings throughout the
United States.
o In May 1998, we acquired roof rights to a portfolio of 96 commercial
buildings owned or managed by CIGNA Investments, Inc., an investment
subsidiary of CIGNA Corporation, a major insurance company.
In addition to obtaining roof rights, we must secure related building
access rights, including access to conduits from the roof and inside the
building, common space and internal wiring, from the owners of each building or
other structures on which we propose to install our equipment. Additionally, we
may be required to obtain construction, zoning, franchise or other governmental
permits.
Wireless Licenses. We hold licenses for our Wireless Fiber spectrum in
each of the 60 markets in the United States in which we currently operate or in
which we intend to operate by the end of 2000. These licenses provide us with an
average of more than 750 MHz of capacity in these markets. In addition to these
markets, we have an average of 230 MHz of capacity in 118 additional markets in
the United States. Internationally, we currently hold individual point to point
licenses and an experimental point to multipoint license in Amsterdam, The
Netherlands, and are negotiating agreements and submitting applications to
acquire spectrum rights in several other foreign markets.
The following chart indicates the amount of combined spectrum at 38 GHz and
28 GHz we hold in each of the 30 markets we currently provide service (indicated
by an asterisk (*)) and in each of the 30 additional domestic markets that we
have targeted:
<TABLE>
<CAPTION>
METROPOLITAN AREA TOTAL CAPACITY (MHZ)
- -------------------------------- --------------------
<S> <C>
Atlanta*........................ 900
Austin.......................... 300
Baltimore*...................... 600
Bergen-Passaic, NJ.............. 600
Boston*......................... 600
Buffalo......................... 800
Charlotte....................... 300
Chicago*........................ 700
Cincinnati...................... 900
Cleveland*...................... 500
Columbus*....................... 200
Dallas*......................... 800
Denver*......................... 700
Detroit*........................ 600
Fort Worth*..................... 900
Ft. Lauderdale.................. 1,000
Fresno.......................... 1,250
Greensboro...................... 1,350
Houston*........................ 900
Indianapolis.................... 500
Jacksonville.................... 400
Jersey City..................... 600
Kansas City*.................... 600
Las Vegas....................... 500
Long Island, NY................. 500
Los Angeles*.................... 600
Louisville...................... 500
Memphis......................... 600
Miami*.......................... 1,000
Milwaukee*...................... 600
<CAPTION>
METROPOLITAN AREA TOTAL CAPACITY (MHZ)
- -------------------------------- --------------------
<S> <C>
Minneapolis*.................... 700
Modesto, CA..................... 1,150
Nashville....................... 400
New Orleans..................... 1,450
New York City*.................. 1,750
Newark*......................... 600
Norfolk......................... 1,350
Oakbrook, IL*................... 700
Oakland*........................ 1,650
Orange County, CA*.............. 600
Orlando......................... 1,450
Philadelphia*................... 600
Phoenix*........................ 700
Pittsburgh...................... 600
Portland, OR.................... 300
Riverside/San Bernardino........ 500
Sacramento...................... 250
Salt Lake City.................. 1,250
San Antonio..................... 400
San Diego*...................... 400
San Francisco*.................. 1,650
San Jose........................ 1,250
Seattle*........................ 800
St. Louis*...................... 900
St. Paul........................ 700
Stamford*....................... 400
Tampa-St. Petersburg*........... 1,000
Washington, D.C.*............... 500
West Palm Beach, FL............. 300
White Plains, NY................ 1,150
</TABLE>
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We also hold licenses for a limited amount of spectrum in the 6 GHz,
10 GHz, 18 GHz, 23 GHz and 31 GHz portions of the radio spectrum. We use and
will continue to use these licenses to support and enhance the coverage of our
existing Wireless Fiber spectrum.
In February 1998, the FCC granted us 29 additional 38 GHz channels in 11
markets. Competing applicants have filed petitions with the FCC contesting these
grants, which we are opposing. This matter is still pending before the FCC. We
cannot assure you that the petitions will not result in such grants being
rescinded. However, we do not believe that the loss of this spectrum would
adversely effect our operations.
In November 1998, we acquired 850 MHz of 28 GHz capacity covering the New
York City area. We acquired this spectrum from CellularVision USA, Inc. for
$32.5 million in cash. Recently, certain shareholders of CellularVision filed
suit against CellularVision seeking to have this sale ruled void, but we believe
that this suit will not have any impact on our possession or use of this 28 GHz
spectrum.
Wireless Fiber Capacity Sale to Williams
The large amount of spectrum afforded us under our wireless licenses allows
us to create local broadband networks having substantial capacity. This capacity
allows us to not only provide broadband services to our customers, but to also
provide valuable last mile connectivity to other select service providers,
without compromising our ability to deliver our own services. We believe that
such capacity sales will allow us to fully realize the value of our local
broadband networks. To this end, in December 1998, we sold Williams a 25-year
IRU for up to 2% of our current and future local Wireless Fiber capacity in the
United States, subject to certain capacity limitations for any single building
or sector. Williams will pay us $400.0 million for this IRU, with payments due
ratably as we construct up to 270 hub sites. We expect to complete construction
of at least 270 hub sites over the next four years. In addition, Williams will
pay us at least $45.6 million over a ten-year period for network maintenance
services that we will provide over the term of the IRU.
End-to-End Broadband Network
We recently announced a plan to interconnect our local broadband networks
in the United States with long-haul fiber to create a national end-to-end
broadband network. This seamless national network will operate as a true
broadband alternative to the existing public telephone networks that are owned
and controlled by the incumbent service providers. Our national broadband
network will enable us to carry a substantial portion of our customers' voice,
data and video transmissions, from point of origination to point of termination.
Since this network will reduce our reliance on the facilities of other
providers, we will be able to substantially reduce our costs and have greater
control over the quality of service we provide.
In furtherance of our plan to create such a national broadband network, in
December 1998 and July 1998, we entered into agreements to purchase fiber
capacity from Williams and MFN, respectively. These agreements provide us with:
o a substantial portion of the intercity fiber necessary to interconnect
our local broadband networks;
o a large amount of intracity fiber in six major cities in the United
States, which we will use to interconnect our hub and switch facilities
in such cities;
o available capacity for our future growth; and
o reduced costs related to the transmission of our long-haul traffic.
Under our agreement with Williams, we purchased a 25-year IRU to four fiber
strands, each on a national route encompassing 14,684 route miles (58,736 fiber
miles), and a seven-year option to purchase two additional strands over the same
routes (29,368 fiber miles). This fiber capacity is being delivered as routes
are built and is expected to be completely available by the end of 2001. Until
such time as routes are completed, Williams will fulfill substantially all of
our long-haul transport requirements at no additional cost to us by immediately
assuming, or acting us our paying agent with respect to, our current long-haul
contracts. We will pay Williams $640.0 million over the next seven years for the
IRU, the capacity option, certain long-haul transport and other network assets.
We can exercise the capacity option for approximately $51.0 million, payable in
cash and/or services.
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Under our agreement with MFN, we purchased a 25-year IRU to fiber rings
consisting of multiple fiber strands in six U.S. cities and multiple strands of
intercity fiber connecting major cities in the northeastern United States for
$43.6 million. As of December 31, 1998, we have paid $6.5 million of this
amount, with additional payments due as additional portions of these facilities
are completed. We will use the intracity fiber rings to connect our hub sites
and switching facilities in Chicago, New York City, Oakland, Philadelphia, San
Francisco, San Jose and Washington, D.C. The intercity fiber will connect our
central offices in the northeastern United States. This intracity and intercity
fiber capacity is being delivered as routes are built and is expected to be
completely available by the second quarter of 2000.
We are also integrating our existing national ATM backbone and our network
of frame relay data switches into this developing national broadband network.
Strategic Relationship with Lucent
In October 1998, we entered into a long-term strategic supply and financing
relationship with Lucent. We have agreed to purchase Lucent equipment for a
significant portion of the components needed for our network, to the extent this
equipment represents the "best-of-breed" in the marketplace (i.e. the best and
most cost-effective with regard to the particular requirements of the network).
If Lucent's equipment is not the best-of-breed, we may, subject to certain
limitations, purchase network components from other vendors through Lucent or
directly from such vendors. Under our direction, a team of dedicated Lucent
professionals will provide us with design, engineering, deployment, installation
and other services in connection with the buildout of our network domestically
and abroad. Lucent will also provide us with other assets and services such as
access rights to buildings it controls and certain services of its Bell Labs
testing facilities. Lucent has also made financing available for the purchase of
up to $2.0 billion of best-of-breed equipment and related services necessary for
the buildout of our network ($500.0 million of which was made immediately
available). At December 31, 1998, we had borrowed $77.5 million under this
financing arrangement.
At WinStar's request, Lucent will provide building access rights (including
roof, interior space and conduit rights) in buildings for which Lucent has or
can obtain such rights pursuant to industry standard terms, and will assist
WinStar in obtaining similar rights in any other buildings leased or occupied by
Lucent. Lucent and WinStar will provide marketing support to each other in a
variety of areas relating to telecommunications services and equipment and other
associated business opportunities, including mutual assistance obtaining Federal
government business.
SERVICE OFFERINGS
We utilize our expanding local networks to provide our customers a full
range of voice and broadband services, including local and long distance voice
services, high-speed data transport, Internet access and other enhanced
communications services. We provide our services using our high-speed digital
switches, each of which can serve several primary and adjacent markets
simultaneously.
We make our services attractive to potential customers by (1) offering a
broad range of telecommunications services that specifically address targeted
customers' needs, while providing levels of customer satisfaction that we
believe exceed those provided by larger competitors, and (2) exploiting our
Wireless Fiber service whenever feasible for cost-effective origination and
termination of customer traffic, thereby allowing for attractive pricing of
services.
Local and Long Distance Voice Services
We provide customers with local, regional and long distance voice services.
Our services in these areas include the following:
Basic and Enhanced Voice Transmission Services. We offer analog and
digital telephone lines to customers. Our switches allow us to customize network
configurations and solutions to meet the individual needs of customers. We also
offer our customers a wide range of enhanced features such as call waiting, call
forwarding, conference calling and voice mail, as well as operator and directory
assistance services.
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Centrex Services. Business customers can use WinStar as their primary
Centrex provider, as a supplement to the ILEC's Centrex service, or as an
addition to customer-owned PBX.
PBX Services. Our PBX services provide businesses with access to the
local, regional and long distance telephone public networks. Our PBX services
allow customers to use either WinStar-assigned or ILEC-assigned telephone
numbers. Connection between the customer's PBX port and our network is made
through Wireless Fiber or digital facilities leased from other service
providers.
Integrated Long Distance Services. We also offer long distance services to
our business customers. Currently, we primarily resell long distance service
through agreements with major long distance companies. These agreements provide
us access to the long distance networks of these carriers at discounted rates,
which vary with the level of monthly traffic. As a result of our recent
agreements with Williams and MFN, we will begin to provide our own long distance
service between our local markets. Under our agreement with Williams, they will
arrange for our long-haul transport needs until the fiber facilities we have
purchased from them have been constructed. When Williams and MFN complete
construction of their fiber networks, a substantial majority of our long
distance traffic will be carried over fiber provided to us pursuant to our these
IRUs.
Data Services
The proliferation of local area networks ("LANs") and wide area networks
("WANs"), Internet services and video enhanced services is causing data flow to
become an increasingly larger portion of overall telecommunications traffic. The
ability to access and distribute data and other information quickly is critical
to business, education and government entities. By utilizing our broadband local
networks and national data transport backbone, we are able to deliver broadband
data services to businesses and other high-capacity users. WinStar offers its
customers a wide range of data telecommunications services including:
Internet Access Services. We offer dedicated and dial-up Internet access
services, as well as web hosting and colocation services. A large portion of our
Internet access business is as a National Services Provider, providing Internet
access to other Internet service providers ("ISPs") through our national
Internet backbone. WinStar is one of the largest Internet backbone providers in
the United States. In addition to other ISPs, our Internet customers include
small, medium and large businesses, educational institutions, large landlords,
ILECs, cable television operators, value-added resellers and a mix of dial-up
customers.
We also provide schools and libraries with high-speed Internet access and
specialized software with educational content. We are currently working with the
"Lattice" consortium in Washington, D.C., to develop cost-effective,
high-capacity Internet connectivity to schools and to nearby subsidized urban
housing. Our application suite provides educators with tools to integrate the
educational resources of the Internet into school curricula, enabling them to
create their own "electronic libraries," create forums for discussion and debate
and engage in collaborative projects with students and educators throughout the
world.
Other Data Transport Services. We utilize our ATM backbone to provide WAN
data transport services which allow customers to interconnect LANs maintained at
different sites at speeds that match the transmission speeds of their networks
(i.e. native speeds), thereby enabling the connection of workstations and
personal computers on one or more LANs. Our WAN services provide customers with
transmission capacity for various protocol speeds. Our native-speed WAN services
avoid bottleneck problems that are frequently encountered with customary DS-1
connections. Our ATM backbone network supports evolving high-speed applications,
such as multimedia, desktop video conferencing and medical imaging. Our WAN
services are offered at a variety of capacities to allow customers to choose the
level which meets their specific needs.
We also offer frame relay services that provide customers with
high-performance, cost-efficient global interconnection of multiple LANs or
legacy systems. Our frame relay services are high-speed packet switching systems
that utilize transmission links only when required. Frame relay allows for the
transportation of data much more rapidly than other packet switching protocols
such as X.25. We are affiliated with Unispan, a consortium of frame relay
providers that enables the frame relay traffic of such providers to be routed
throughout the United States and abroad, with termination in every local access
transport area in the United States through interconnection agreements.
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Interactive Video Applications. Wireless Fiber also offers substantial
opportunities for broadband interactive video applications, such as video
conferencing, and is suitable for highly customized commercial and institutional
demands. The narrow-beam characteristics of Wireless Fiber, allowing for
frequency re-use within a small area, coupled with its broadband capacity and
multichannel capabilities, may offer a significant market opportunity in the
future as the appropriate technologies emerge.
Dedicated Services
We market our Wireless Fiber services to businesses, government agencies
and institutions with multiple locations within our markets and which generate
heavy telecommunications traffic between such locations. These entities can
utilize Wireless Fiber services to establish their own independent
telecommunications systems, creating a dedicated private network. Our private
network services use high-capacity digital circuits to carry voice and data
transmission from point to point in flexible configurations involving different
standardized transmission speeds and circuit capacities.
Wireless Fiber dedicated services provide our customers with:
o high bandwidth telecommunications connections between their buildings on
a cost-effective basis;
o an alternative to the ILEC's network, generally allowing for faster, more
reliable data transmissions;
o greater control over local telecommunications traffic and costs;
o diverse routing and thus higher reliability against outage; and
o greater security because of the private line nature of these connections.
Professional Services
As part of our strategy to provide a full suite of complementary data
services, we provide systems integration and other similar services, primarily
to the legal and financial services communities in major cities in the United
States. Our specialties include network infrastructure design, implementation,
network and desktop operating systems, web-site design and management, document
management systems, groupware applications, Internet and intranet solutions, and
flexible support of LAN, WAN, and public networks. Additionally, we have
developed numerous strategic relationships with prominent technology providers
such as Microsoft, Novell, PC DOCS, Lotus, Bay Networks, Cisco and Compaq.
Government Services
Recently, we won a federal court case which opens telecommunications
contracts worth hundreds of millions of dollars to bidding by us and other
competitive carriers. The U.S. Court of Federal Claims rejected the federal
government's decision to limit multimillion-dollar federal telecommunications
contracts to a single awardee, opening federal telecommunications markets in
dozens of U.S. cities to more than one service provider. The Court made this
decision in response to a protest filed by us relating to a contract to be
awarded by the U.S. General Services Administration ("GSA") under its
Metropolitan Area Acquisition ("MAA") program. GSA originally announced that it
would award only one contract to serve federal agencies in the New York City
area for up to eight years. In sustaining our protest, the Court found that the
government failed to follow a statutory mandate to give preference to
multiple-award contracts. As a result, we recently became the first CLEC to be
placed on the GSA list of qualified vendors for these contracts.
The MAA program provides the basis for the purchase of local
telecommunications services by federal agencies in more than 40 major markets
across the United States. The first MAA contracts will be for local
telecommunications service in the Chicago, New York City and San Francisco areas
with an estimated value up to $600.0 million. We have bid on all three
contracts. We believe we are uniquely positioned to compete for a portion of
these and other federal government contracts because of the flexibility and
broadband capacity provided by Wireless Fiber.
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NETWORK AND CUSTOMER SUPPORT
We are currently developing customer-centric operations support systems
which are designed to allow us to track orders, provisioning, billing, servicing
and other information for each customer from a central point of access.
Our local broadband networks are monitored 24 hours a day through our new
network operations center located in Tysons Corner, Virginia. This center
provides us with points of contact for network monitoring, troubleshooting and
dispatching repair personnel in each market. The center provides a wide range of
network surveillance functions for each local broadband network, providing us
with the ability to remotely receive data regarding the diagnostics, status and
performance of our networks. Continuous monitoring of system components by the
center focuses on avoiding problems as well as reacting to known problems. We
believe that we provide network service reliability equal to or exceeding that
provided by the ILECs and other CLECs. We also maintain a separate, smaller
network operations center in Seattle, Washington to monitor our frame relay
network.
We maintain a 36,000 square-foot national customer satisfaction center in
Dublin, Ohio. The facility serves our customers 24 hours a day. The customer
satisfaction center enhances our customer care efforts by centralizing these
operations. As we expand our operations and our customers subscribe for a wider
variety of broadband services, our customer care center will ensure that our
high standards are met at every level. Our customer care representatives are
equipped to handle the majority of customer inquiries, thereby ensuring prompt
resolution of customer issues. All representatives must graduate from an
intensive seven-week training course, where they are schooled in our products,
services and systems. We also maintain a separate customer assistance center in
Indianapolis, Indiana to service our dial-up Internet access customers.
MARKETING
We attract customers by offering them a broad variety of attractively
priced voice and data services and high quality customer care. We market our
services on a city-by-city basis through combinations of direct sales,
alternative sales channels, television, print and other media. For example, we
used our first series of television commercials and print advertising in
introducing our telecommunications services and creating brand awareness in
Boston, Chicago, Los Angeles, New York City and Washington, D.C. This mass media
advertising supports our core marketing efforts, which are primarily focused on
customers in buildings that are either currently On-Net or soon to be brought
On-Net. We concentrate our marketing efforts on the telecommunications
decision-makers in these On-Net buildings, which are viewed as "vertical
villages" for our sales force to penetrate. We also deploy a variety of
building-based and other local marketing programs to reinforce our message in
these buildings.
In the past, we entered a new market by reselling the services of the
incumbent providers to our customers, intending to transfer these customers to
our local broadband network once deployed. Due to our growing size and scale, we
recently decided to intensify the focus of our sales and marketing efforts on
customers located in On-Net buildings. We believe these efforts will result in
greater profitability as our local broadband networks continue to expand and a
greater percentage of our customers are located in On-Net buildings. As part of
this objective, we use unique marketing strategies to expand our customer base.
One such program is "Project Millennium," which is currently being offered to
businesses located in approximately 1,000 buildings in 13 of our existing
markets. Under Project Millennium, first-time customers who sign a one-, two- or
three-year service contract prior to January 31, 1999, receive up to $1,000 per
month of free local phone service during the first one-third of the contract
term.
COMPETITION
The telecommunications market is intensely competitive and currently is
dominated by the ILECs and the large, established long distance companies. We
have not obtained significant market share in any of the areas where we offer
our services, nor do we expect to given the size of the telecommunications
services market, the intense competition and the diversity of customer
requirements. The ILECs and the large, established long distance companies have
long-standing relationships with their customers and have the potential to
subsidize competitive services with revenues from a variety of business services
(to the extent lawful). While legislative and regulatory changes have provided
us and other competitive providers with
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increased business opportunities, these changes have also given the incumbent
providers flexibility in the pricing of their services. This may allow the ILECs
and the large, established long distance companies to offer special discounts to
potential customers. Further, as competition increases in the telecommunications
market, we expect general pricing competition and pressures to increase
significantly. In addition, the Telecommunications Act of 1996 (the
"Telecommunications Act") establishes procedures under which an RBOC may compete
in the long distance business in its region. These procedures include compliance
with a 14-point competitive checklist designed to open the RBOC's local market
to competition. Once an RBOC is authorized to compete in the long distance
business in its region, it may be an even more significant competitor.
In addition to competition from the incumbent providers, we also face
competition from a growing number of other CLECs. There is at least one other
CLEC in each metropolitan area covered by our wireless licenses, including, in
many such areas, companies such as MCI WorldCom, AT&T/Teleport and Time Warner.
We also face competition from other entities which offer, or are licensed to
offer, directly competitive fixed wireless services, such as Teligent Corp.,
Advanced Radio Telecommunications, Inc., NEXTLINK Communications, Inc. (which
recently announced an agreement to acquire LMDS license holder WNP
Communications and the 50% interest in LMDS license holder NEXTBAND that it does
not already own), NextWave and other LMDS (28 GHz) licensees. We also face
competition in certain aspects of our existing and proposed businesses from a
number of competitors providing wireless television services and wireless access
on a licensed and unlicensed basis. In many instances, these service providers
hold 38 GHz and/or 28 GHz licenses or licenses for other frequencies in
geographic areas which encompass or overlap our market areas. Additionally, some
of these entities may have greater spectrum resources in a particular market or
enjoy the substantial backing of, or include among their stockholders, major
telecommunications companies. Due to the relative ease and speed of deployment
of many wireless-based technologies, we could face significant price competition
from these and other wireless-based service providers.
We also may face competition from cable companies, electric utilities,
ILECs operating outside their current local service areas, long distance
carriers and other entities in the provision of local telecommunications
services. The great majority of these entities provide transmission services
primarily over fiber, copper-based and/or microwave networks which, relative to
our Wireless Fiber services, enjoy substantially greater market acceptance for
the carriage of telecommunications traffic. Moreover, the consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, which are expected to accelerate, could give rise
to significant new or stronger competitors.
We believe that the principal competitive factors affecting our market
share are quality of service, pricing, customer service, accurate billing, clear
pricing policies and variety of offered services. Our ability to compete
effectively will depend upon our ability to continue to provide a broad range of
telecommunications services and to maintain high-quality, market-driven services
at prices generally perceived to be equal to or below those charged by our
competitors. To maintain our competitive posture, we believe that we must be in
a position to reduce our prices in order to meet any reductions in rates by our
competitors. Any such reductions could adversely affect us.
WINSTAR INTERNATIONAL
We believe that the rapidly growing demand for high-speed communications
capabilities is a global phenomenon. Even more so than in the United States, a
large majority of commercial office buildings in major cities abroad are not
directly connected to fiber or any other broadband alternative. Many countries
are just beginning to open up their telecommunications markets to competition
and to auction or otherwise make available spectrum rights. Therefore, we
believe there is a significant opportunity for us to sell our broadband
communications services abroad. We believe that we can use our domestic
experience in building and operating fixed wireless broadband networks to
successfully compete in numerous overseas markets. For these reasons, we plan to
build Wireless Fiber-based local networks and to sell communications services in
six overseas markets by the end of 1999 and 50 overseas markets by the end of
2004. These 50 markets are located primarily in Western Europe, the Asia/Pacific
region and the Americas. Our initial six target markets are Amsterdam, Buenos
Aires, London, Paris, Sydney and Tokyo.
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We have selected and prioritized these 50 markets based on numerous
factors, including:
o availability of appropriate spectrum rights;
o demand for competitive data communications services;
o availability of building access rights;
o availability of competitive backbone fiber; and
o generally pro-competitive regulatory environment.
Strategy. Initially, we intend to establish a direct sales force to sell
data transport services, Internet access and nonswitched voice services to large
commercial customers in our targeted overseas markets. Once we have become
established in a market, we will explore opportunities to sell other voice
services. We intend to sell most of our services to customers in On-Net
buildings. We believe that our foreign market strategy is advantageous for
several reasons:
o Since data switching equipment is smaller and significantly less
expensive than that used for voice traffic, the capital requirements for
starting a data transport business are less than for a voice telephone
business.
o By marketing our services to a relatively smaller number of large
businesses, we use fewer sales and service employees, thereby limiting
our costs.
o By selling primarily to customers in On-Net buildings, we limit the
amount of our upfront losses.
o The current prices and profit margins on sales of data services in our
target international markets are substantially higher than those in the
United States. Although we anticipate that prices will decrease as
competition further develops in these markets, the current pricing
structure is advantageous to new market entrants since it substantially
offsets the expense of initially entering a market.
For these reasons, we believe that on a city-by-city basis our target
international markets will become profitable more quickly than our U.S. markets.
Regulatory and Other Considerations Relating to Initial Market Entry. Our
ability to achieve our plans in each of our targeted overseas markets depends on
the willingness and ability of local regulators to grant us (i) licenses,
permits and other authorizations necessary to build facilities, provide services
and use spectrum, (ii) rights to obtain telephone numbers, (iii) rights-of-way
and rights to access rooftops, conduit, aerial pole space and radio antenna
tower space, and (iv) cost-based and nondiscriminatory interconnection,
including, in some markets, unbundled local loops. Many of the governments in
our targeted markets lack the United States's experience with regulation of a
competitive telecommunications market. This factor, combined with continued
government ownership of the incumbent PTT in some countries, could slow or even
undermine the development of competitive telecommunications markets. National
and local laws and regulations governing the provision of telecommunications
services differ significantly among the countries in which we intend to operate.
The interpretation and enforcement of such laws and regulations varies and could
limit our ability to provide certain telecommunications services in certain
markets.
Spectrum rights may be acquired in a number of ways, including:
o grants or sales of rights directly by the local government;
o purchases from third parties;
o acquisitions of or partnerships with entities that hold spectrum rights;
or
o public spectrum auctions.
In addition, we will need to enter into interconnection agreements with
other local carriers (especially the local incumbent providers) so that traffic
can be delivered to its ultimate destination where such destination is not an
On-Net building. Many foreign jurisdictions do not currently have clearly
defined policies or programs in place with regard to making spectrum rights
available. In these markets, it may be more difficult or take more time for us
to accomplish our initial objectives and to begin selling our services, all of
which could hinder our international expansion. Once we have acquired the
necessary spectrum in a targeted market, we intend to leverage our strategic
supply and financing relationship with Lucent as well as the capabilities and
resources of any joint venture partners we may have in that market to quickly
and cost-
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effectively build out a Wireless Fiber-based local broadband network. We believe
that Lucent has the international presence, state-of-the-art equipment and
expertise necessary to effectively assist us in this regard.
Current Activities. We conduct a number of activities prior to entering
targeted overseas markets, including:
o extensive market research;
o legal and regulatory analysis;
o review of initial staffing needs, including use of non-employee
consultants and advisors prior to obtaining spectrum rights and building
a local network;
o preparation of a business and network buildout plan, including revenue
and capital expenditure projections;
o assessment of financing needs, including discussions with Lucent to
leverage our recent financing arrangement and their expertise in certain
markets abroad; and
o identification of potential strategic partners to provide local market
expertise.
Western Europe--We currently have 15 employees in Europe, including
four in Amsterdam, where we are currently deploying network infrastructure,
10 in Brussels and one in Geneva. Included in this group is a senior
manager and engineers, as well as legal, finance, sales and other support
personnel. We intend to locate our European corporate headquarters in
Geneva, while maintaining our regulatory offices in Brussels and
establishing additional offices for specific areas of operations (e.g.
technical and engineering) where we believe suitable talent is most
available. We have obtained point to point spectrum licenses in Amsterdam,
applied for spectrum rights and other licenses in Germany and are preparing
to file for spectrum rights in the United Kingdom and France early in 1999.
Asia/Pacific--We have entered into an agreement with KDD Corporation
and Sumitomo Corporation to establish a new joint venture company of which
we own 35%. This entity will apply for spectrum rights and, if spectrum is
obtained, compete as a new fixed wireless broadband telecommunications
carrier in Japan, beginning with Tokyo in 1999. We also are participating
in Australia's 28 GHz LMDS auction, which began in February 1999 and have
filed bids for Sydney, Melbourne and Brisbane.
The Americas--We have purchased a 95% equity interest in an
Argentinean company that holds a nationwide license for 400 MHz of 38 GHz
point to multipoint spectrum for $5.5 million in cash and 36,000 shares of
our common stock.
GOVERNMENT REGULATION
Our telecommunications services are regulated extensively by federal, state
and local governments, and to the extent that we will operate in foreign
countries, by those governments. The federal government, through the FCC,
regulates our interstate and international telecommunications services and our
Wireless Licenses in the United States. In addition, Congress has begun to
impose regulations on certain aspects of Internet-related operation and
services. State governments regulate our intrastate telecommunications services,
generally through each state's public utility commission or public service
commission. Municipalities regulate limited aspects of our telecommunications
business by imposing zoning requirements, permit or right-of-way procedures or
franchise fees among other regulations. The governments of foreign countries in
which we intend to roll out our telecommunications business will regulate such
services as well as the use of spectrum in those countries. We believe that we
operate our business in compliance with applicable laws and regulations of the
various jurisdictions in which we operate or hold licenses and that we possess
the approvals necessary to conduct our current operations.
Regulation of Our Telecommunications Services
Federal. The Telecommunications Act was intended to remove some of the
barriers between the long distance and local telecommunications markets,
allowing service providers from each of these sectors (as well as cable
television operators and others) to compete in all communications markets. The
FCC must issue regulations to address various requirements of the
Telecommunications Act. For instance, the
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Telecommunications Act generally requires ILECs to (1) allow competitors such as
us to interconnect with the ILECs' networks and (2) give competitors
nondiscriminatory access to the ILECs' networks on more favorable terms than
have been available in the past. In August 1996, the FCC adopted regulations
intended to detail the requirements of the Telecommunications Act relating to
interconnection (the "Interconnection Order"). The Interconnection Order
includes detailed provisions regarding the interconnection of ILEC networks with
those of new competitors such as WinStar, as well as requirements that the ILECs
make certain of their network elements and services available to competitors.
However, in most cases, we still must negotiate the specifics of each
interconnection arrangement with the ILEC. This process is time consuming and
may not necessarily result in interconnection terms that are acceptable to us.
In such instances, we may petition the proper regulatory agency to arbitrate
disputed issues, but we cannot be assured that the results will be favorable. We
have generally been successful thus far in negotiating acceptable
interconnection agreements with the ILECs.
In October 1996, portions of the Interconnection Order were stayed by the
United States Court of Appeals for the Eighth Circuit. This court later
invalidated certain of those provisions, including ones in which the FCC
asserted jurisdiction over the pricing of interconnection elements and the
"pick-and-choose" provisions which allow carriers to adopt select provisions of
other carriers' interconnection agreements.
The FCC appealed this decision to the United States Supreme Court. In
January 1999, the Supreme Court reversed a majority of the Eighth Circuit's
decision, upholding in many respects the FCC's local competition rules as set
out in the Interconnection Order. Some of the key elements of the Supreme
Court's decision are:
o The Court upheld the FCC's pricing authority with regard to
interconnection, resale of ILEC services and competitors' use of
unbundled network elements (i.e., individual elements, features and
functions of an ILEC's network infrastructure such as access lines,
transport lines, operator service and switching features);
o The Court upheld the FCC's "pick and choose" rules (allowing requesting
carriers to select from among individual provisions of interconnection
agreements approved by state commissions);
o The Court upheld the FCC's jurisdiction to require all local phone
companies to implement intra LATA presubscription, the process by which
local telephone customers preselect interexchange carriers for
short-haul long distance calls; and
o The Court remanded for further consideration the FCC's rule that defines
those network elements which, under the Telecommunications Act, must be
unbundled by the ILECs and made available to competitors. The Court
found here that the FCC did not impose the limiting standard required by
the Telecommunications Act, which mandates a determination as to whether
those elements are necessary for competitors or the failure to obtain
access to them would impair competitors' ability to provide service.
The Supreme Court's decision has added uncertainty to the regulatory
landscape in which we and other CLECs operate. For example, the FCC will need to
commence a new and potentially lengthy rulemaking proceeding to determine which
unbundled network elements the ILECs must make available to competitors. This
uncertainty may adversely impact CLECs which rely in part on the facilities of
the ILECs to deliver their telecommunications services. We currently utilize
certain unbundled ILEC network elements to service some of our current
customers. However, in light of our focused On-Net strategy, a large majority of
our future customers will be serviced through our own broadband networks, with
only limited reliance on ILEC facilities. Therefore, we do not believe this
uncertainty or the ultimate resolution of this issue will have a material impact
on our business.
The FCC has also issued orders under the Telecommunications Act reforming
LEC access charges and universal service requirements. Under the access reform
order, ILECs that are subject to price cap regulation are required to reduce the
rates they charge long distance service providers for interstate switched local
access. In October 1998, AT&T filed a petition with the FCC seeking a ruling
that long distance carriers may elect not to purchase switched access services
offered under tariff by CLECs. This could also cause increased FCC scrutiny and
regulation of CLEC interstate access rates. The petition is pending. Under the
FCC's universal service order, all telecommunications service providers are
required to pay for universal service
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support based on a percentage of their end user telecommunications revenues to
be established quarterly by the FCC.
The FCC also regulates radio frequency (RF) emissions by us and other
wireless telecommunications providers. Under current regulations, if the total
RF emissions in any given area exceed the FCC's standards, then any FCC licensee
whose emissions in that area exceed 5% of the total must notify the FCC and
obtain a waiver to operate. The wireless equipment we use is designed to operate
at RF emission levels well below the FCC's standard. However, if we operate in
an area where other higher RF emitters are operating our emissions could exceed
5% of the total and we could be required to notify the FCC and request a waiver.
Providers of telecommunications services are coming under intensified
regulatory scrutiny for marketing activities that result in alleged unauthorized
switching of customers from one service provider to another, particularly in the
long distance sector. The FCC and a number of state authorities have begun
adopting more stringent regulations to curtail the intentional or erroneous
switching of customers, which include, among other things, the imposition of
fines, penalties and possible operating restrictions on entities which engage or
have engaged in unauthorized switching activities. In addition, the FCC has
adopted regulations imposing procedures for verifying the switching of customers
and additional remedies on behalf of carriers for unauthorized switching of
their customers.
The FCC also oversees the administration and assigning of local telephone
numbers. It has designated Lockheed Martin as the numbering plan administrator.
Extensive regulations have been adopted governing telephone numbering, area code
designation, dialing procedures that may be imposed by the ILECs and the
imposition of related fees by the ILECs. In addition, carriers are required to
contribute to the cost of numbering administration through a formula based on
their revenues. In 1996, the FCC permitted businesses and residential customers
to keep their numbers when changing local phone companies (referred to as number
portability). The availability of number portability is important to competitive
carries like us since customers, especially businesses, may be less likely to
switch to a competitive carrier if they cannot retain their existing telephone
numbers.
State. Some of our services are classified as intrastate and therefore are
subjected to state regulation, generally administered by the state's PUC. The
nature of these regulations varies from state to state and in some cases may be
more extensive than FCC regulations. In most instances, we are required to
obtain certification from a state PUC before providing services in that state.
We are certified to provide intrastate non-switched service in 42 states and the
District of Columbia. We are certified to offer switched local (i.e., CLEC)
services in 35 states and the District of Columbia and intrastate long distance
service in more than 45 states. We expect that as our business and product lines
expand and as more pro-competitive regulation of the local telecommunications
industry is implemented, we will offer additional intrastate services.
Interstate and intrastate regulatory requirements are changing rapidly and will
continue to change.
Local. The Telecommunications Act gives local governments the authority to
regulate certain aspects of our telecommunications infrastructure, including in
some cases imposing franchise fees for the use of certain public property,
laying of cable and management of certain rights of way and joining regulations
related to the siting of radio antennas and towers. These regulations vary
greatly among local governments. The scope of local authority under the
Telecommunications Act has been the subject of a number of disputes between
carriers and local authorities and we anticipate the administrative proceedings
and litigation relating to these disputes will continue.
Foreign. In order to provide services in each of our targeted overseas
markets, we need to obtain the required approvals and licenses. These typically
include a license to operate as a telecommunications carrier and, in our case,
the right to use appropriate radio spectrum. In addition, we will need to enter
into interconnection agreements with other local carriers (especially the local
incumbent providers) so that traffic can be delivered to its ultimate
destination where such destination is not an On-Net building. Many foreign
jurisdictions do not currently have clearly defined policies or programs in
place with regard to making spectrum rights available. In these markets, it may
be more difficult or take more time for us to accomplish the objectives
described above and to begin selling our services, all of which could hinder our
international expansion.
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Regulation of Our Spectrum
The grant, renewal and administration of spectrum licenses is extensively
regulated by the FCC. Our 38 GHz wireless licenses expire in February 2001. In
order to have its licenses renewed, a licensee must typically demonstrate
compliance with its regulatory obligations during the initial license period.
One such obligation is a substantial service buildout requirement. Although the
FCC has not specified specific buildout criteria for 38 GHz licenses, it has
suggested that the buildout of four wireless point to point links per million
population would constitute a substantial service. Based upon our regulatory
compliance and the FCC's practice of granting an expectation of renewal to
licensees that comply with their regulatory obligations, we believe our 38 GHz
licenses will be renewed; however, such renewal is not guaranteed.
In November 1997, the FCC issued a Report and Order and Second Notice of
Proposed Rule Making ("38 GHz Order") which addressed service rules and a
procedure for auctioning unlicensed 38 GHz spectrum. The FCC adopted many of the
major positions advocated by us in the rulemaking proceeding, including:
(1) flexible use of licenses, including multipoint and mobile operations;
(2) no quantitative restrictions on the accumulation of 38 GHz spectrum;
(3) rejection of commercial satellite industry positions that 39.5 to 40.0 GHz
should be shared with satellite operations; and (4) auction of unlicensed areas
of the 38 GHz band.
In January 1997, the FCC released an order addressing some application
processing matters. The FCC decided to process amendments of right filed between
November 13, 1995 and December 15, 1995. Other amendments filed on or after
November 13, 1995 would continue to be subject to the freeze which had been
imposed by the FCC in 1995. Applications that were amended to resolve mutual
exclusivity by December 15, 1995 would be processed, provided they had completed
their 60-day public notice period as of November 13, 1996. Amendments to reduce
existing license areas or delete frequency blocks on licenses would be
permitted.
The FCC is currently processing all pending license applications. Those
with defects or which were encumbered by mutually exclusive competing
applications will be dismissed. Pending petitions at the FCC seeking to protect
certain dismissed applications have yet to be addressed. The clear channel
portions of pending multichannel applications will be processed. Mutually
exclusive channels from those multichannel applications will be dismissed.
Currently, the FCC intends to auction unlicensed 38 GHz channels in 493
markets. The exact timing of the 38 GHz auction has not been specified.
In March 1998, petitions were filed with the FCC challenging a number of
the findings set forth in the 38 GHz Order. Among other things, these petitions
state or request that: the FCC's application processing procedures are in
violation of the Communications Act of 1934, as amended; certain frequency
coordination procedures should be modified; and the FCC inappropriately granted
29 of our single channel 38 GHz license applications. We filed our own petition
as well as comments on certain petitions; all petitions remain pending. Until
administrative and judicial remedies are exhausted, the actual effect of the new
rules adopted in the 38 GHz Order remain uncertain.
Pursuant to an international agreement to which the United States is a
signatory, the 38.6-40.0 GHz band is allocated on a co-primary basis to the
Fixed Satellite Services and the 39.5-40.5 GHz band is allocated on a co-primary
basis to the Mobile Satellite Services. The FCC has not proposed rules to
implement the agreement provisions, although comments and a petition for
rulemaking have been filed with the FCC by Motorola and other satellite
companies requesting that such rules be considered in order to allow satellite
systems and wireless systems to co-exist on a co-primary basis in the 38.6 to
40.0 GHz band. If the FCC were to allow transmissions from space to earth as
proposed by such applicants, such transmissions could possibly adversely affect
our existing or future operations by creating interference or causing the FCC to
institute power and other limitations upon our transmissions. On December 17,
1998, the FCC adopted a spectrum plan for the 36-51.4 GHz band, in which it
segmented the entire band, generally providing for exclusive, non-sharing,
primary designations for wireless and satellite services. In the plan, the FCC
reaffirmed its position that the 38.6-40.0 GHz band is to be exclusively
utilized domestically by wireless services only and specified that although the
band remains allocated to non-government satellite and fixed services on a
co-primary basis, it was designating exclusive primary non-government use to
fixed services.
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The FCC also reserved additional spectrum for future allocation to terrestrial
fixed wireless services. Separately, they indicated that satellite applicants
should modify their applications to conform to the FCC's new band plan.
Regulation of Internet Service Providers
During the past several months, Congress passed a number of laws that
concern the Internet, including the Digital Millennium Copyright Act, the
Children's Online Privacy Protection Act, the Children's Online Protection Act
and the Protection of Children from Sexual Predators Act of 1998. Generally,
these laws provide liability limitations for Internet service providers that do
not knowingly engage in unlawful activity. We are putting guidelines into place
to comply with this new legislation and do not anticipate that compliance with
these laws will have an adverse impact on us.
WINSTAR NEW MEDIA
WinStar New Media Company, Inc. markets and distributes information and
entertainment content and services both in traditional markets (such as
television, video, cable and radio) and through new media channels such as the
Internet. We believe that the ability to package information, entertainment and
other content and services with telecommunications services will become an
increasingly important factor in the business customer's decision to select or
retain a telecommunications provider. We also believe that such content and
services will enhance the marketability of our telecommunications services. In
April 1998, WinStar New Media sold 10% of its equity to a group of private
equity investors for $10.0 million.
WinStar New Media has established its operations primarily by offering
traditional media products and services which address the demand for niche and
special-interest content. By focusing on traditional media, it has been able to
generate revenues and profits which have contributed to the development of its
core assets, which include content, distribution channels, industry and
advertiser relationships and experienced management. While WinStar New Media
will continue to operate in traditional media, it is aggressively expanding its
new media content and distribution capabilities through a variety of
acquisitions and internal initiatives. WinStar New Media has assembled an asset
base which we believe to be critical for success in the emerging new media
markets as well as for the expansion of established traditional media
businesses.
WinStar New Media is engaged in interactive and traditional media
operations and makes investments in support of these businesses. It is currently
organized into two primary operating units: (1) WinStar Interactive Media, which
focuses on developing and utilizing online business information services and
products and interactive advertising sales, and (2) WinStar Traditional Media,
which concentrates on television and home video production, distribution and
licensing through its WinStar TV & Video division, and radio program production,
syndication and sales of advertising inventory through its WinStar Radio
Networks division.
WinStar Interactive Media
WinStar Interactive Media ("WI"). WI provides online business information
services primarily to small and medium-sized businesses through WinStar Telebase
("Telebase") and Office.com, each a Web-based business information service. WI
is also a leading advertising sales representative for branded Web properties
and interactive media content. It also seeks to produce and acquire business
content that can be commercially distributed through traditional media channels
to its target business customers.
Telebase provides customers with single-point access to business
information from more than 1,100 brand-name sources, including Dun & Bradstreet,
TRW, LEXIS-NEXIS, Standard & Poor's and Moody's. The Telebase service is
integrated as a private-label service into a number of online networks,
including America Online, CompuServe and Prodigy. WI also recently launched the
"WinStar Business Infocenter," a version of the Telebase service that is
customized for our telecommunications customers and offered through our
telecommunications sales force.
Office.com is a branded commercial Web-based business information service
designed to be the definitive destination site for the small- and medium-sized
business market. The initial phase of Office.com's debut in Summer 1998 included
a co-branded presence on Yahoo!. The broad commercial online launch is scheduled
for Summer 1999 when the site will offer consumers a full range of
comprehensive, user-friendly services, e-commerce and communications
capabilities.
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WinStar Traditional Media
WinStar TV & Video ("WTV"). WTV produces and distributes programming for
the worldwide television and domestic home video markets, with an emphasis on
foreign and "art" titles, as well as nonfiction and cultural films. WTV, through
its Wellspring division, is also engaged in the retail sale of holistic,
spiritual and wellness videos. WTV's focus enables us to exploit the increasing
worldwide demand for niche programming as the number of distribution channels
increases to accommodate specialized interests. WTV's library currently includes
rights to more than 1,500 hours of television and video programming, including
more than 300 film titles and 80 hours of WTV-produced documentaries.
WinStar Radio Networks ("WRN"). WRN is one of the largest independent
national syndicated radio advertising sales representatives in the United
States, representing both its own and third-party content. WRN also provides
related production and affiliate distribution services. WRN, through SportsFan
Enterprises, produces more than 100 hours of syndicated sports talk programming
each week, all or a portion of which is broadcast on more than 350 radio
stations nationwide. We believe this represents one of the widest distributions
of any syndicator of sports talk radio programming. WRN's original sports talk
radio programming currently features well-known personalities such as John
Madden, James Brown and Keith Olbermann. WRN provides national advertising sales
representation for programming produced by SportsFan and others, such as
MetroTraffic Report and SW Networks, as well as national distribution services
for certain of such programming.
EMPLOYEES
At December 31, 1998, we had over 2,800 employees. We are not a party to
any collective bargaining agreements and have never experienced a strike or work
stoppage. We consider our relations with our employees to be satisfactory.
PROPERTIES
WinStar's corporate headquarters are currently located at 230 Park Avenue
in New York City. In November 1998, we signed a 15-year lease for approximately
200,000 square feet of office space (with options to lease approximately 57,000
additional square feet) at 685 Third Avenue in New York City. We intend to move
our corporate headquarters and consolidate certain other New York City-based
operations to this new facility during the first half of 1999. Our
telecommunications operations are located in approximately 230,000 square feet
of space in several buildings in northern Virginia. In December 1998, we signed
a ten-year lease for approximately 200,000 square feet of additional space (with
a right of first refusal on substantial additional space in a building currently
under construction) located in Herndon, Virginia. We intend to consolidate some
of our northern Virginia operations in these new facilities during the second
and third quarters of 1999. We also lease numerous other facilities throughout
the United States and in certain markets abroad, including sales offices, switch
and hub locations, building roof rights, collocation facilities and our 36,000
square foot customer-care facility located in Dublin, Ohio.
LEGAL PROCEEDINGS
We are subject to various claims and proceedings that occur in the ordinary
course of business. Based on information currently available to us, we believe
that none of these current claims or proceedings, either individually or in the
aggregate, will have a material effect on our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and their ages as of the date of this
prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
William J. Rouhana, Jr.......................... 46 Chairman of the Board and Chief Executive
Officer
Nathan Kantor................................... 56 President, Chief Operating Officer and Director
Timothy R. Graham............................... 48 Executive Vice President, General Counsel and
Director
Bert Wasserman.................................. 66 Director
William J. vanden Heuvel........................ 68 Director
Steven B. Magyar................................ 49 Director
James I. Cash................................... 51 Director
Charles T. Dickson.............................. 44 Executive Vice President and Chief Financial
Officer
</TABLE>
William J. Rouhana has been a director since our inception, our Chairman of
the Board since February 1991, and Chief Executive Officer since May 1994.
Mr. Rouhana was President and Chief Executive Officer of WinStar Companies, Inc.
and its affiliated entities ("WinStar Companies") from 1983 until November 1995.
Through WinStar Companies he served, from August 1987 to February 1989, as Vice
Chairman of the Board and Chief Operating Officer of Management Company
Entertainment Group, Inc., a diversified distributor of entertainment products
and, thereafter, as its Vice Chairman of the Board until May 1990. Mr. Rouhana
was in private legal practice from 1977 to 1984, specializing in the financing
of entities involved in the development of entertainment products and
information services. Mr. Rouhana was Vice Chairman of the Board of Governors of
the United Nations Association through 1997 and is a member of certain other
associations, including Business Executives for National Security. He is a Phi
Beta Kappa graduate of Colby College, a Thomas J. Watson Fellow (1972-1973) and
a graduate of Georgetown University School of Law.
Nathan Kantor has been a director since October 1994 and President and
Chief Operating Officer since September 1995. Since its formation in November
1990, Mr. Kantor had been the President of ITC Group, Inc. ("ITC"), a company
which specializes in the development of emerging competitive telecommunications
companies. Mr. Kantor, through ITC, coordinated all of our telecommunications
operations from June 1994 to September 1995 when he became President and Chief
Operating Officer, at which time services provided by ITC to us ceased.
Mr. Kantor also is currently the Chairman of the Board and Chief Executive
Officer of Image Telecommunications Corp., a company involved in the development
of information and video servers. From January 1985 to December 1990, he was
President of MCI Telecommunications Corporation (Northeast Division).
Mr. Kantor was a founder of MCI International, Inc. and served as its President
and Chief Operating Officer from its founding in July 1982 to December 1984.
From 1972 to 1982, Mr. Kantor held a number of senior management positions with
MCI Communications, including Vice President of National Operations. Mr. Kantor
is a graduate of Florida State University and the United States Military Academy
at West Point.
Timothy R. Graham has served as Executive Vice President since October 1994
and as a director since January 1999. From October 1990 through September 1994,
Mr. Graham was engaged in the private practice of law and served in various
capacities with National Capital Management Corporation, a company engaged
through its subsidiaries in various businesses, such as the ownership of real
estate rental properties, industrial manufacturing and insurance matters,
including as Corporate Secretary and as President of its primary real estate and
insurance subsidiaries. During that period, Mr. Graham also acted in various
capacities for WinStar Services, Inc., a wholly owned subsidiary of WinStar
Companies. Prior to 1990, Mr. Graham was a partner in the law firm of Nixon,
Hargrave, Devans & Doyle, specializing in corporate finance, regulatory and
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business law. Mr. Graham was a Securities Law Editor of Barrister magazine, an
American Bar Association publication, from 1985 to 1986 and has authored a
number of publications, including "Public Offerings in the United States by
Foreign Companies" and "Financing of Foreign Companies through United States
Securities Markets." Mr. Graham also is a member of the Board of Advisors of the
Instructional Television Station of the Archdiocese of New York. Mr. Graham is a
graduate of Fordham Law School and the Georgetown University School of Foreign
Service.
Bert Wasserman has been a director since June 1995. Mr. Wasserman was
Executive Vice President and Chief Financial Officer of Time Warner from January
1990 to December 1994 and was also a director of Time Warner from January 1990
to March 1993. Mr. Wasserman was a member of the Office of the President and was
also a director of Warner Communications, Inc. ("Warner Communications"), from
1981 to 1990, when that company merged with Time Warner, and had served Warner
Communications in various capacities since 1966. Mr. Wasserman serves as a
member of various boards, including: several investment companies in the Dreyfus
Family of Funds; Lillian Vernon Corp., a catalog seller of home products;
Mountasia Entertainment International, Inc., an operator of family recreation
centers; The New German Fund, a New York Stock Exchange listed mutual fund
operated by Deutsche Bank AG; and IDT Corp., a provider of telecommunications
services, including Internet access and long distance services. Mr. Wasserman
also served as a director on the Chemical Bank National Advisory Board until
Chemical Bank merged with Chase Manhattan Bank in March 1996. He is a graduate
of Baruch College and Brooklyn Law School.
William J. vanden Heuvel has been a director since June 1995. Since 1984,
he has served as Senior Advisor to Allen & Co., an investment banking firm, as
well as counsel to the law firm Stroock & Stroock & Lavan. He served as a
director of Time Warner from 1981 to 1993 and currently is a director of Zemex
Corp., a New York Stock Exchange listed company engaged in the mining and
exploitation of industrial minerals. Ambassador vanden Heuvel also has been a
member of the IRC Group, a Washington D.C.-based consulting group made up of
former United States ambassadors, since 1981. He has been Chairman of the Board
of Governors of the United Nations Association since 1993. From 1979 to 1981,
Ambassador vanden Heuvel served as United States Deputy Permanent Representative
to the United Nations. From 1977 to 1979, he served as United States Ambassador
to the European Office of the United Nations and various other international
organizations. He was Special Assistant to United States Attorney General Robert
F. Kennedy from 1961 to 1964. Ambassador vanden Heuvel is a graduate of Deep
Springs College, Cornell University and Cornell Law School.
Stephen B. Magyar has been a director since June 1993. Since May 1994,
Mr. Magyar has owned and operated a private business which specializes in
financial services for high net worth individuals and business owners. From 1989
to May 1994, Mr. Magyar was a regional vice president of CIGNA Insurance Co. and
during the preceding fifteen years held various sales and sales management
positions with CIGNA. Mr. Magyar has served on CIGNA's strategic business
development committee and has been a guest lecturer at New York University.
Mr. Magyar also is a Certified Life Underwriter and Chartered Financial
Consultant with the American College of Insurance. Mr. Magyar is a member of the
General Agents and Managers Association, the National Association of
Underwriters and the American Society of CLU and ChFC. Mr. Magyar is a graduate
of Colby College.
James I. Cash has been a director since January 1997. Professor Cash has
been a member of the faculty of Harvard Business School since 1976, having
taught in its Masters of Business Administration, Management Development and
Advanced Management programs. Professor Cash currently serves as a trustee for
Massachusetts General Hospital and the Massachusetts Computer Software Council,
overseer for The Gardner Museum and the Boston Museum of Science, and is a
member of the Board of Directors of Cambridge Technology Partners, The Chubb
Corporation, General Electric Company, Knight-Ridder, Inc., State Street Bank
and Trust Company and Tandy Corporation. Professor Cash has authored numerous
articles and several books on topics related to information technology and
corporate management and structure and writes a regular column for Information
Week magazine. Professor Cash is a graduate of Texas Christian University,
Purdue University's Graduate School of Mathematical Sciences and Purdue
University's Krannert Graduate School of Management.
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<PAGE>
Charles T. Dickson has served as Executive Vice President and Chief
Financial Officer since December 1997. During the preceding four years,
Mr. Dickson served as Chief Financial Officer of General Instrument Corporation.
From 1984 to 1993, Mr. Dickson held numerous positions at MCI Communications
Corp., including Vice President, Finance and Administration, for the National
Accounts Division. From 1979 to 1984, Mr. Dickson was a consultant with ICF,
Inc., providing financial analysis to clients in the energy and
telecommunications industries. Mr. Dickson is a Phi Beta Kappa graduate of Clark
University and received a masters degree in public policy from the University of
California at Berkeley.
BOARD OF DIRECTORS AND COMMITTEES
Our Board of Directors is divided into three classes, each of which
generally serves for a term of three years, with only one class of directors
being elected in each year. The term of office of the first class of directors
(Class I), currently consisting of Mr. Graham and Professor Cash, will expire in
2001, the term of office of the second class of directors (Class II), currently
consisting of Mr. Wasserman and Mr. Kantor, will expire in 1999, and the term of
office of the third class of directors (Class III), currently consisting of
Mr. Rouhana, Ambassador vanden Heuvel and Mr. Magyar, will expire in 2000. In
each case, each director will hold office until the next annual meeting of
stockholders at which his class of directors is to be elected, or until his
successor is duly qualified and appointed. Our by-laws provide that, through
August 5, 1999, at each annual meeting of stockholders in which directors are
elected, persons will be elected so that a majority of the members of the Board
will be independent directors.
The responsibilities of the Audit Committee, which currently is composed of
Mr. Rouhana, Mr. Wasserman, Professor Cash and Mr. Magyar, include, in addition
to such other duties as the Board may specify, (1) recommending to the Board the
appointment of independent accountants, (2) reviewing the timing, scope and
results of the independent accountants' audit examination and the related fees,
(3) reviewing periodic comments and recommendations by our independent
accountants and our responses thereto, (4) reviewing the scope and adequacy of
internal accounting controls and internal auditing activities and (5) making
recommendations to the Board with respect to significant changes in accounting
policies and procedures. Our by-laws provide that, through August 5, 1999, a
majority of the members of this committee must be independent directors.
The responsibilities of the Compensation Committee, which currently is
composed of Mr. Rouhana, Mr. Magyar, Ambassador vanden Heuvel and Professor
Cash, include, in addition to such other duties as the Board may specify,
(1) reviewing and recommending to the Board the salaries, compensation and
benefits of our executive officers and key employees, (2) reviewing any related
party transactions on an ongoing basis for potential conflicts of interest and
(3) administering our stock option plans. Our by-laws provide that, through
August 5, 1999, a majority of the members of this Committee must be independent
directors and that, absent approval of a majority of the independent members of
the Compensation Committee, we will not enter into any material transaction with
any director or affiliate of any director.
The responsibilities of the Nominating Committee, which currently is
composed of Mr. Rouhana, Ambassador vanden Heuvel and Mr. Magyar, include, in
addition to such other duties as the Board may specify, considering and
recommending to the Board nominees for directors.
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PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding the ownership of
our common stock as of January 12, 1999, and as adjusted to reflect the sale of
the common stock offered hereby, by (1) those persons or groups who beneficially
own more than 5% of such stock, (2) each of our directors, (3) our Chief
Executive Officer and each of our next four most highly compensated executive
officers in 1998 and (4) all of our directors and executive officers as a group
(based upon information furnished by such persons). Unless otherwise indicated,
the address for the persons listed below is c/o WinStar Communications, Inc.,
230 Park Avenue, New York, New York 10169.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING
-------------------------- --------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER(A) PERCENT(B) NUMBER(A) PERCENT(C)
- ----------------------------------------------------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
William J. Rouhana, Jr..................................... 2,280,289(d) 5.3% 2,280,289(d) 4.8%
Nathan Kantor.............................................. 1,291,506(e) 3.0% 1,291,506(e) 2.7%
Timothy R. Graham.......................................... 465,904(f) 1.1% 465,904(f) 1.1%
Steven B. Magyar........................................... 75,403(g) * 75,403(g) *
Two Pine Point
Lloyd Harbor, New York 11742
William J. vanden Heuvel................................... 74,000(h) * 74,000(h) *
812 Park Avenue
New York, New York 10021
Bert Wasserman............................................. 110,000(i) * 110,000(i) *
126 East 56th Street
New York, New York 10022
James I. Cash.............................................. 70,000(j) * 70,000(j) *
Harvard University
Graduate School of Business Administration
Baker Library 187
Soldiers Field Road
Boston, Massachusetts 02163
Charles T. Dickson......................................... 50,000(k) * 50,000(k) *
Steven G. Chrust........................................... 514,979(l) 1.2% 514,979(l) 1.1%
SGC Advisory Services
One Canterbury Green
Stamford, CT 06901
FMR Corp................................................... 4,299,200(m) 10.2% 4,299,200(m) 9.3%
82 Devonshire Street
Boston, MA 02109
All Directors and Executive Officers as a
group (8 persons)........................................ 4,417,102(n) 10.4% 4,417,102(n) 9.4%
</TABLE>
- ------------------
* Less than 1%.
(Footnotes continued on next page)
50
<PAGE>
(Footnotes continued from previous page)
<TABLE>
<S> <C>
(a) To determine each person's beneficial share ownership, we included shares that may be acquired (now or
within 60 days of the date of this prospectus) by exercising options or warrants or converting convertible
securities. Those shares are also deemed to be outstanding for purposes of calculating the percentage
ownership of these individuals. We believe each of these persons has the sole power to vote and dispose of
the shares he beneficially owns.
(b) Based on 41,544,753 shares of common stock outstanding before this offering.
(c) Based on 45,744,753 shares of common stock outstanding after giving effect to this offering. Excludes a
maximum of 630,000 shares to cover any over-allotments.
(d) Includes 1,355,000 shares of common stock issuable upon exercise of certain options. Does not include
(1) 75,000 shares of common stock issuable upon exercise of options which become exercisable in three equal
annual installments commencing in April 1999, or (2) 300,000 shares of common stock issuable upon exercise
of options which become exercisable in March 2000.
(e) Includes 1,274,865 shares of common stock issuable upon exercise of certain options. Also includes 6,500
shares of common stock owned by Mr. Kantor's son, over which Mr. Kantor disclaims beneficial ownership. Does
not include (1) 30,000 shares of common stock issuable upon exercise of options which become exercisable in
three equal annual installments commencing in April 1999, (2) 166,917 shares of common stock issuable upon
exercise of options which become exercisable in September 1999 and (3) 166,916 shares of common stock
issuable upon exercise of options which become exercisable in September 2000.
(f) Includes 80,000 shares of common stock issuable upon exercise of certain options. Does not include 16,000
shares of common stock issuable upon exercise of options exercisable in various annual installments
commencing in April 1999.
(g) Includes (1) 1,000 shares of common stock owned by Mr. Magyar's spouse, over which Mr. Magyar disclaims
beneficial ownership, (2) 1,670 shares of common stock owned by benefit plans of which Mr. Magyar is the
sole trustee and primary beneficiary and (3) 60,000 shares of common stock issuable upon exercise of certain
options.
(h) Includes 70,000 shares of common stock issuable upon exercise of certain options. Also includes 500 shares
owned by Ambassador vanden Heuvel's spouse, over which he disclaims beneficial ownership.
(i) Includes 100,000 shares of common stock issuable upon exercise of certain options.
(j) Represents 70,000 shares of common stock issuable upon exercise of certain options.
(k) Represents 50,000 shares of common stock issuable upon exercise of certain options. Does not include 201,000
shares of common stock issuable upon exercise of options exercisable in various annual installments
commencing in October 1999.
(l) Includes 502,000 shares of common stock issuable upon exercise of certain options owned by Mr. Chrust and
his affiliates. Does not include (A) 120,000 shares of common stock issuable upon exercise of other options
which become exercisable in January 2000, or (B) 28,000 shares of common stock issuable upon exercise of
options which become exercisable in three equal annual installments commencing in April 1999. Mr. Chrust
resigned as an executive officer and director of WinStar as of December 31, 1998.
(m) Information with respect to FMR Corp. was derived from its Schedule 13G filed with the SEC in January 1999.
Includes 488,001 shares underlying shares of our convertible preferred stock beneficially owned by FMR Corp.
(n) Includes shares referred to as being included in footnotes (d) through (k).
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Our authorized capital stock includes 200,000,000 shares of common stock,
$.01 par value. The holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Although we are restricted from paying cash dividends under the terms of the
agreements governing our indebtedness (and, even if we were not so restricted,
we do not currently intend to pay any dividends), holders of common stock are
entitled to receive ratably such dividends as may be declared by our Board of
Directors out of funds legally available therefor. In the event of a liquidation
or dissolution, holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preference of
preferred stock.
Holders of common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All of the outstanding
shares of common stock are fully paid and nonassessable.
Our certificate of incorporation:
o provides for a board of directors divided into three classes, each
of which generally serves for a term of three years, with only one
class of directors being elected in each year;
o provides that directors may be removed with or without cause and
only by an affirmative vote of holders of at least a majority of our
capital stock entitled to vote thereon; and
o requires an affirmative vote of holders of at least two-thirds of
our capital stock entitled to vote thereon to alter, amend or repeal
the provisions relating to the classification of, and the removal of
members from, the Board of Directors.
Nominations for our Board of Directors may be made by our Board or by any
stockholder entitled to vote for the election of directors. A stockholder
entitled to vote for the election of directors may nominate a person or persons
for election as director only if written notice of such stockholder's intent to
make such nomination is given to our Secretary not later than sixty days in
advance of the meeting. Our certificate of incorporation and by-laws do not
provide for cumulative voting rights. This means that holders of a majority of
our capital stock who vote in the election of directors can elect all of the
directors and, in such event, the holders of the remaining shares will not be
able to elect any of our directors. A special meeting of our stockholders may be
called at the request of the holders of at least 10% of our outstanding capital
stock entitled to vote generally in all matters.
PREFERRED STOCK
Our certificate of incorporation and Delaware General Corporation Law give
our Board of Directors the authority, without further stockholder action, to
issue a maximum of 15,000,000 shares of preferred stock. Our Board of Directors
has the authority to fix the following terms with respect to shares of any
series of preferred stock:
o the designation of the series;
o the number of shares to comprise the series;
o the dividend rate or rates payable with respect to the shares of the
series;
o the redemption price or prices, if any, and the terms and conditions
of any redemption;
o the voting rights;
o any sinking fund provisions for the redemption or purchase of the
shares of the series;
o the terms and conditions upon which the shares are convertible or
exchangeable, if they are convertible or exchangeable; and
o any other relative rights, preferences and limitations pertaining to
the series.
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Series A Preferred Stock
In February 1997, we and one of our wholly owned subsidiaries sold in a
private placement an aggregate of 4,000,000 shares of Series A 6% Preferred
Stock ("Series A Preferred Stock") and warrants to purchase 1,600,000 shares of
our common stock for an aggregate purchase price of $100.0 million.
Each share of Series A Preferred Stock has a stated value of $25 ("Stated
Value") and entitles the holder thereof to receive dividends from us at a rate
per annum equal to 6% of the Stated Value. Dividends accrue and are cumulative
from the date of issuance and are payable in arrears quarterly as of March 31,
June 30, September 30 and December 31 of each year. We may, at our election, pay
such dividends in cash or through the issuance of additional shares of Series A
Preferred Stock.
The shares of Series A Preferred Stock are convertible into that number of
shares of our common stock derived by dividing the aggregate Stated Value of the
Series A Preferred Stock being converted by $25 (subject to adjustment). On
February 11, 2002, any Series A Preferred Stock still outstanding will be
automatically converted into shares of our common stock, unless we elect to pay
cash therefor in an amount equal to the Stated Value plus all accrued and unpaid
dividends thereon (the "Liquidation Preference"). Unless paid for in cash, such
conversion will be effected by delivery of shares of our common stock having a
value, based upon the closing bid prices for our common stock for the 20
consecutive trading days ending one trading day prior to such conversion date,
equal to the Liquidation Preference.
The warrants entitle the holders thereof to purchase an aggregate of
1,600,000 shares of our common stock for $25 per share (subject to adjustment)
at any time until February 11, 2002. We may accelerate the expiration date at
any time after February 11, 2000 if our common stock trades at $40 or more for a
period of 20 consecutive days.
As of September 30, 1998, after giving effect to conversions of Series A
Preferred Stock into our common stock and the issuance of shares of Series A
Preferred Stock as dividends, there were 4,089,000 shares of Series A Preferred
Stock outstanding.
Rights to Purchase Series B Preferred Stock
The following is a summary of the rights agreement dated as of July 2, 1997
(the "Rights Plan"), between us and Continental Stock Transfer & Trust Company,
as rights agent, which was adopted by our Board of Directors on July 2, 1997.
This summary of the Rights Plan does not purport to be complete and is not a
substitute for the complete discussion contained in the Rights Plan.
Under the Rights Plan, holders of our common stock received, as a dividend,
preferred stock purchase rights (the "Rights") at the rate of one Right for each
share of our common stock held as of the close of business on July 14, 1997. One
Right will also attach to each share of our common stock issued thereafter.
Currently, the Rights are not separate from our common stock and are not
exercisable, and the Rights will only separate from our common stock and become
exercisable if a person or group acquires 10% or more of our outstanding common
stock (an "Acquiring Person") or launches a tender or exchange offer that would
result in ownership of 10% or more of our outstanding common stock. Our Board of
Directors has determined that FMR Corp., which has reported to the SEC
beneficial ownership of more than 10% of our common stock, is not an Acquiring
Person under our Rights Plan. Each Right that is not owned by an Acquiring
Person entitles the holder of the Right to buy one one-thousandth of one share
(a "Unit") of Series B Preferred Stock which we will issue. If any person
becomes an Acquiring Person, or if an Acquiring Person engages in certain
transactions involving conflicts of interest or in a business combination in
which our common stock remains outstanding, then the Rights Plan provides that
each Right, other than any Right held by the Acquiring Person, entitles the
holder to purchase, for $70, Units with a market value of $140. However, if we
are involved in a business combination in which we are not the survivor, or if
we sell 50% or more of our assets or earning power to another person, then the
Rights Plan provides that each Right entitles the holder to purchase, for $70,
shares of the common stock of the Acquiring Person's ultimate parent having a
market value of $140.
At any time until ten days following the date on which a person acquires
10% or more of our common stock, we may redeem all (but not less than all) of
the Rights for $0.0001 per Right. The Rights expire in
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<PAGE>
July 2002. The Series B Preferred Stock will have dividend and liquidation
preferences over our common stock, but junior to any other series of our
preferred stock.
Series C Preferred Stock
On December 17, 1997, we and one of our wholly owned subsidiaries sold in a
private placement an aggregate of 175,000 shares of our Series C 14 1/4% Senior
Cumulative Preferred Stock Due 2007 ("Series C Preferred Stock") for an
aggregate purchase price of $175.0 million.
Dividends on the Series C Preferred Stock accrue from December 22, 1997 at
the rate per share of 14 1/4% of the Accumulated Amount (as defined in the
certificate of designations governing the Series C Preferred Stock) per annum,
compounded semiannually on each June 15 and December 15, but will not be payable
in cash, except as set forth in the next sentence. Commencing on the first
June 15 or December 15 (each a "Dividend Payment Date") which is at least six
months after the later of December 15, 2002, and the Specified Debt Satisfaction
Date (as defined in the certificate of designations governing the Series C
Preferred Stock) (the "Cash Payment Date"), dividends on the Series C Preferred
Stock will be payable in cash at a rate per annum equal to 14 1/4% of the
Accumulated Amount as of the Dividend Payment Date preceding such date. In the
event that the Specified Debt Satisfaction Date has not occurred before
December 15, 2002, the rate otherwise applicable to the Series C Preferred Stock
will be increased by 150 basis points from December 15, 2002, until the Dividend
Payment Date falling on or after the Specified Debt Satisfaction Date.
The Series C Preferred Stock ranks: (1) senior to all existing and future
Junior Stock (as defined in the certificate of designations governing the
Series C Preferred Stock), including the Series A Preferred Stock; (2) pari
passu with all existing and future Parity Stock (as defined in the certificate
of designations governing the Series C Preferred Stock), including the Series D
Preferred Stock; and (3) junior to all future Senior Stock (as defined). In
addition, as equity, the Series C Preferred Stock will rank junior in right of
payment to all of our indebtedness and that of our subsidiaries.
The Series C Preferred Stock will not be redeemable prior to December 15,
2002. On or after December 15, 2002, the Series C Preferred Stock will be
redeemable at our option, in whole or in part, at specified redemption prices
plus accumulated and unpaid dividends, if any, to the date of redemption. On
December 15, 2007, we will be required to redeem the Series C Preferred Stock at
a price equal to the Accumulated Amount thereof plus accumulated and unpaid
dividends, if any, out of funds legally available therefor.
On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, we may, at our option, exchange all but not less than all of
the shares of Series C Preferred Stock then outstanding for 14 1/4% Senior
Subordinated Deferred Interest Notes Due 2007 ("Exchange Debentures") in an
aggregate Accumulated Amount equal to the aggregate Accumulated Amount of the
shares of Series C Preferred Stock outstanding at the time of such exchange,
plus accumulated and unpaid dividends to the date of exchange. Until the Cash
Payment Date, interest on the Exchange Debentures will accrue at a rate of
14 1/4% of the Accumulated Amount per annum and will be compounded semiannually
on each June 15 and December 15 (each an "Interest Payment Date") but will not
be payable in cash except as set forth in the next sentence. Commencing on the
first Interest Payment Date following the later of the Exchange Date (as defined
in the indenture governing the Exchange Debentures) or the Cash Payment Date,
interest will be payable in cash at a rate per annum equal to 14 1/4% of the
Accumulated Amount as of the Exchange Date. The Exchange Debentures, if issued,
will be unsecured, senior subordinated obligations, subordinated in right of
payment to all of our senior indebtedness and to all indebtedness and other
liabilities (including trade payables) of our subsidiaries, and will rank pari
passu with the 1997 Senior Subordinated Notes and the Convertible Notes. The
Exchange Debentures, if issued, will not be redeemable prior to December 15,
2002. On or after December 15, 2002, the Exchange Debentures are redeemable at
our option, in whole or in part, at the redemption prices set forth herein plus
accrued and unpaid interest, if any, to the date of redemption.
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Series D Preferred Stock
On March 17, 1998, we and one of our subsidiaries sold an aggregate of
$200.0 million of our Series D 7% Senior Cumulative Convertible Preferred Stock
Due 2010 (the "Series D Preferred Stock") in a private placement.
Dividends at the rate of 7% per annum on the Series D Preferred Stock are
cumulative from the date of issuance and are payable quarterly in arrears on
each March 15, June 15, September 15 and December 15, commencing September 15,
1998, out of funds legally available therefor. Dividends shall be, at our
option, payable (1) in cash or (2) through the issuance of shares of our common
stock. The Series D Preferred Stock is convertible at any time after the issue
date, at the option of the holders thereof, into shares of our common stock at a
rate (subject to adjustment in certain events) of 1.0079 shares of our common
stock for each share of Series D Preferred Stock, equivalent to a conversion
price of $49.61 for each share of our common stock.
The Series D Preferred Stock ranks (1) senior to all existing and future
Junior Stock (as defined in the certificate of designations governing the
Series D Preferred Stock), including the Series A Preferred Stock; (2) pari
passu with all existing and future Parity Stock (as defined in the certificate
of designations governing the Series D Preferred Stock), including the Series C
Preferred Stock; and (3) junior to all future Senior Stock (as defined). In
addition, as equity, the Series D Preferred Stock will rank junior in right of
payment to all of our indebtedness and that of our subsidiaries.
The Series D Preferred Stock is not redeemable prior to March 20, 2001. On
or after such date, the Series D Preferred Stock will be redeemable at our
option, in whole or in part, at any time or from time to time, at specified
redemption prices plus accrued and unpaid dividends, if any. The Series D
Preferred Stock is subject to mandatory redemption on March 15, 2010, at a
redemption price of $50.00 per share plus accrued and unpaid dividends, if any.
Upon the occurrence of a Change in Control (as defined in the Certificate of
Designations governing the Series D Preferred Stock), we will be obligated to
adjust the conversion price as provided in the Certificate of Designations
relating to the Series D Preferred Stock.
Series E Preferred Stock
In connection with an acquisition we consummated in August 1998, we issued
an aggregate of 75,100 shares of our Series E Junior Convertible Preferred Stock
("Series E Preferred Stock"). The Series E Preferred Stock is non-voting,
non-redeemable and does not earn dividends. Each share of Series E Preferred
Stock has a liquidation preference of $59.93 per share, but is junior in right
to receive distributions in liquidation to all other currently existing
preferred stock and any other class of preferred stock authorized in the future
unless such new class is expressly made junior or equal to the Series E
Preferred Stock. The holders of the Series E Preferred Stock may convert all,
but not less than all, of their stock into shares of our common stock on a
one-for-one basis any time on or after August 28, 1999. Under certain
conditions, WinStar may require these holders to convert.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for our common stock, Series A Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock is Continental
Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004.
DESCRIPTION OF CERTAIN INDEBTEDNESS
1995 DEBT PLACEMENT
In October 1995, we issued an aggregate of $225.0 million of notes
consisting of (1) $150.0 million of 14% Senior Discount Notes due 2005 (the
"1995 Senior Notes") and (2) $75.0 million of 14% Convertible Senior
Subordinated Discount Notes due 2005 (the "Convertible Notes" and, together with
the 1995 Senior Notes, the "1995 Notes"). The 1995 Senior Notes are unsecured,
senior indebtedness, rank pari passu in right of payment with all of our
existing and future senior indebtedness and are senior in right of payment to
all existing and future subordinated indebtedness.
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The 1995 Notes will not accrue interest prior to October 15, 2000, nor pay
cash interest prior to April 15, 2001; however, the principal value of the 1995
Notes has accreted since issuance and, at October 15, 2000, the 1995 Senior
Notes and the Convertible Notes will have aggregate principal amounts of
$294.2 million and $147.1 million, respectively. From and after October 15,
2000, the 1995 Notes will accrue interest at the rate of 14% per annum, payable
semiannually in cash commencing April 15, 2001. The 1995 Notes mature on
October 15, 2005.
The Convertible Notes are unsecured, senior subordinated obligations, rank
pari passu in right of payment with the 1997 Senior Subordinated Notes and the
1998 Notes and are junior in right of payment to all of our existing and future
senior indebtedness. The Convertible Notes are convertible, at any time, at the
option of the holder, into that number of shares of our common stock derived by
dividing the principal amount of the Convertible Notes being converted by
$20.625 (subject to adjustment). In addition, if the closing sale price of our
common stock on the Nasdaq National Market during any twelve-month period from
October 15, 1995 through October 15, 1999 (each a "Market Criteria Period"), has
exceeded the Market Criteria (as defined in the indenture governing the
Convertible Notes) and a registration statement with respect to our common stock
issuable upon conversion of the Convertible Notes ("Conversion Shares") is
effective and available, all of the Convertible Notes automatically will be
converted into Conversion Shares at the close of business on the last day of the
Market Criteria Period. We have caused to be declared effective, and continue to
maintain the effectiveness of, a registration statement registering the issuance
or resale of the Conversion Shares.
1997 DEBT PLACEMENTS
In March 1997, we and WinStar Equipment Corp. ("WEC"), one of our
subsidiaries formed to facilitate the purchase of equipment, issued an aggregate
of $300.0 million of notes, consisting of (1) $100.0 million of our 14 1/2%
Senior Deferred Interest Notes Due 2005 (the "1997 Senior Notes"), ranking pari
passu with the 1995 Senior Notes, and (2) $200.0 million of WEC's 12 1/2%
Guaranteed Senior Secured Notes Due 2004 (the "WEC Notes"). In August 1997,
WinStar Equipment II Corp. ("WEC II"), another of our subsidiaries formed to
purchase equipment, issued $50.0 million of its 12 1/2% Guaranteed Senior
Secured Notes Due 2004 (the "WEC II Notes"). In October 1997, we issued an
aggregate of $100.0 million principal amount of our 15% Senior Subordinated
Deferred Interest Notes Due 2007 (the "1997 Senior Subordinated Notes" and,
together with the 1997 Senior Notes the WEC Notes, and the WEC II Notes, the
"1997 Notes").
The 1997 Senior Notes are unsecured senior indebtedness, rank pari passu in
right of payment with all of our existing and future unsecured senior
indebtedness, and are senior in right of payment to all our existing and future
subordinated indebtedness. Until October 15, 2000, interest on the 1997 Senior
Notes will accrue and compound semiannually at a rate of 14 1/2%, but will not
be payable in cash. Interest on the Accumulated Amount (as defined in the
indenture governing the 1997 Senior Notes) of the 1997 Senior Notes as of
October 15, 2000 will be payable semiannually in cash on April 15 and
October 15 of each year commencing April 15, 2001. The 1997 Senior Notes mature
on October 15, 2005 and are redeemable on or after October 15, 2000, at our
option, in whole or in part, at specified prices.
The WEC Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC Notes will
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at our
option, in whole or in part, at specified prices.
The WEC II Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC II Notes
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at our
option, in whole or in part, at specified prices.
We have unconditionally guaranteed the obligations of WEC and WEC II under
the WEC Notes and the WEC II Notes and such obligations are secured by security
interests in the equipment and other property purchased by WEC and WEC II, as
the case may be, with the proceeds thereof.
The 1997 Senior Subordinated Notes are unsecured senior subordinated
obligations, rank pari passu in right of payment with the Convertible Notes and
the 1998 Notes (as defined below), and are junior in right of payment to all of
our existing and future senior indebtedness. The 1997 Senior Subordinated Notes
bear interest at a rate of 15% per annum, payable on March 1 and September 1,
commencing September 1, 2002.
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Until March 1, 2002, interest on the 1997 Senior Subordinated Notes will accrue
and be compounded semiannually, but will not be payable in cash. Interest on the
Accumulated Amount (as defined in the indenture governing the 1997 Senior
Subordinated Notes) of the 1997 Senior Subordinated Notes as of March 1, 2002
will be payable semiannually commencing September 1, 2002. The 1997 Senior
Subordinated Notes will mature on March 1, 2007 and are redeemable on or after
March 1, 2002, at our option, in whole or in part, at specified prices.
1998 DEBT PLACEMENT
In March 1998, we issued $200.0 million in aggregate principal amount of
our 10% Senior Subordinated Notes Due 2008 (the "1998 Cash-Pay Notes") and
$250.0 million in aggregate principal amount of our 11% Senior Subordinated
Deferred Interest Notes Due 2008 (the "1998 Deferred Interest Notes" and,
together with the 1998 Cash-Pay Notes, the "1998 Notes"). The 1998 Notes are
unsecured, senior subordinated obligations, rank pari passu in right of payment
with the Convertible Notes and the 1997 Senior Subordinated Notes, and are
junior in right of payment to all of our existing and future senior
indebtedness.
The 1998 Cash-Pay Notes bear interest at a rate of 10%, payable on
March 15 and September 15, commencing September 15, 1998. The 1998 Cash-Pay
Notes will mature on March 15, 2008 and are redeemable on or after March 15,
2003, at our option, in whole or in part, at specified prices, plus accrued
interest, if any, to the date of redemption.
The 1998 Deferred Interest Notes bear interest at a rate of 11%, payable on
March 15 and September 15, commencing September 15, 2003. Until March 15, 2003,
interest on the 1998 Deferred Interest Notes will accrue and be compounded
semiannually, but will not be payable in cash. Interest on the Accumulated
Amount (as defined in the indenture governing the 1998 Deferred Interest Notes)
of the 1998 Deferred Interest Notes as of March 15, 2003 will be payable
semiannually commencing September 15, 2003. The 1998 Deferred Interest Notes
will mature on March 15, 2008 and are redeemable on or after March 15, 2003, at
our option, in whole or in part, at specified prices, plus accrued and unpaid
interest, if any, to the date of redemption.
INDENTURES
The indentures relating to the 1995 Notes, the 1997 Notes and the 1998
Notes contain certain covenants which, among other things, restrict our ability
and that of certain of our subsidiaries to: incur additional indebtedness;
create liens; engage in sale-leaseback transactions; pay dividends or make
distributions in respect of capital stock; make investments or certain other
restricted payments; sell assets; issue or sell stock of such subsidiaries;
enter into transactions with stockholders or affiliates; acquire assets or
businesses not constituting "telecommunications assets" (as defined in the
indentures relating to the 1995 Notes); or consolidate, merge or sell assets.
The covenants contained in these indentures are subject to exceptions and our
new media subsidiaries are not subject to many of the covenants contained
therein, although our ability to make additional investments in such
subsidiaries is limited.
LUCENT CREDIT AGREEMENT
In October 1998, we and WinStar Network Expansion, LLC ("WinStar Network
Expansion" or the "Borrower"), a limited liability company wholly owned by us
and formed to facilitate the financing of equipment purchases, entered into a
supply agreement with Lucent. Also in October 1998, WinStar, WinStar Network
Expansion, Lucent, as administrative agent and lender, and State Street Bank and
Trust Company, as collateral agent ("State Street Bank"), entered into a credit
agreement which sets forth the terms and conditions under which Lucent (or its
assignee lenders) will provide us with purchase money financing (the "Credit
Commitments") in an aggregate amount of up to $2.0 billion in connection with
the buildout of our domestic and international broadband network. The Credit
Commitments may be drawn by WinStar Network Expansion as and when needed during
the buildout of the network. The credit agreement allows for aggregate
borrowings of up to $2.0 billion; provided, however, that Lucent is not required
to have outstanding at any one time aggregate loans and commitments in excess of
$500.0 million. As of December 31, 1998, we had borrowed $77.5 million under the
credit agreement and had $422.5 million available under this agreement.
Additional amounts of the Credit Commitments become available on a
dollar-for-dollar basis as the loans or
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unfunded commitments are syndicated by Lucent to other lenders. The Borrower may
draw against the available Credit Commitments until they have been fully drawn
or, if earlier, the fifth anniversary of the credit agreement. The credit
agreement provides that borrowings will fall into one of five annual tranches
("Tranches"). The Tranche under which a loan is drawn will determine when such
loan is to be repaid. Borrowings made during the first year, second year, third
year, fourth year and fifth year would be considered Tranche 1, Tranche 2,
Tranche 3, Tranche 4 and Tranche 5 borrowings, respectively.
Interest on each loan made under the Credit Commitments will accrue at a
floating rate equal to, at the Borrower's election, either a base rate
(determined in relation to the then current prime rate) or an adjusted
Eurodollar rate ("LIBOR"), in each case plus a margin which may vary over the
life of the facility. Interest will be payable quarterly in arrears for base
rate advances and at the end of each interest period (which can be one, three or
six months in length, at the Borrower's election) for LIBOR advances; provided,
however, that interest on loans accruing during the first year of the Tranche of
which such loan is a part may, at the Borrower's election, be deferred and the
deferred interest shall accrue interest at the same rates as the principal of
the loans.
The principal of any Tranche as well as any deferred interest thereon will
be repaid in sixteen equal installments, payable on the last day of each
calendar quarter, commencing on the last day of the first quarter following the
fourth anniversary of the date the applicable Tranche first becomes available.
Loans made under the credit agreement are also subject to mandatory
prepayment upon the occurrence of certain events, including (1) receipt by us or
our Restricted Subsidiaries (as defined in the credit agreement) of proceeds of
certain asset sales or casualty events which are not reinvested in our business
and (2) the generation of Excess Cash Flow (as defined in the credit agreement),
if any, by us. The Borrower will also be entitled to prepay the loans at its
option at any time.
Loans made under the credit agreement will be secured by a purchase money
security interest in the equipment comprising the network, to the extent the
purchase of such equipment is financed under the credit agreement. Additionally,
the Borrower's obligations under the credit agreement are guaranteed by us and
certain of our subsidiaries.
The credit agreement contains significant covenants of the Borrower,
WinStar and certain of our subsidiaries, including, but not limited to:
(1) affirmative covenants with respect to compliance with laws, inspection
rights, performance of other obligations, delivery of financial statements and
other information, interest rate cap arrangements and maintenance of licenses
and certain other assets; (2) negative covenants restricting the ability to
incur or create (with certain exceptions) liens, debt and capitalized lease
obligations, and otherwise restricting (with customary exceptions) mergers or
consolidations, disposal of assets, investments, payments of dividends and
distributions, modification of tax-sharing or management or servicing fee
agreements, changes in the nature of the business conducted, prepayment or
redemption of debt, creation of partnerships and new subsidiaries and
transactions with affiliates; and (3) the following financial
covenants: (a) secured indebtedness to total capitalization (0.23 to 1.0 prior
to April 1, 1999, then increasing over several periods to a maximum of 0.61 to
1.0 for the period October 1, 2002 to December 31, 2002 and then decreasing over
several periods to a minimum of 0.25 to 1.0 for October 1, 2006 and thereafter),
(b) consolidated indebtedness to total capitalization (0.90 to 1.0 prior to
October 1, 1999, then increasing over several periods to a maximum of 0.94 to
1.0 for the period January 1, 2002 to December 31, 2003 and then decreasing over
several periods to a minimum of 0.46 to 1.0 for October 1, 2006 and thereafter),
(c) consolidated indebtedness to consolidated EBITDA (earnings before interest,
taxes, depreciation and amortization) (9.6 to 1.0 for the period January 1, 2002
to December 31, 2002, and then decreasing over several periods to a minimum of
2.0 to 1.0 for January 1, 2006 and thereafter), (d) consolidated EBITDA to
consolidated debt service (the ratio of 400% of consolidated EBITDA for any
fiscal quarter ending on or after July 1, 2002, to consolidated debt service for
the period of four consecutive fiscal quarters ending on such date shall not be
less than 1.0 to 1.0), (e) consolidated EBITDA to consolidated interest expense
(such ratio, for any fiscal quarter during the period January 1, 2002 to
December 31, 2003, shall not be less than 1.0 to 1.0 and such ratio for any
fiscal quarter beginning January 1, 2004, shall not be less than 1.5 to 1.0) and
(f) minimum revenues ($437.0 million for the fiscal year ending December 31,
1999, increasing over several periods to a maximum of $5.475 billion for fiscal
years ending after December 31, 2005). WinStar
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currently is in compliance with these covenants, including such financial
covenants as are presently applicable.
In connection with the arranging and making of the Credit Commitments, the
Borrower is required to pay various arrangement, commitment and other fees to
Lucent and its assignees in amounts customary for facilities of this type.
EQUIPMENT LEASE FINANCINGS AND CREDIT LINES
Our subsidiaries have entered into, and will continue to seek, financing
arrangements, including sale/leaseback transactions, with respect to equipment,
including telecommunications switches, radios and other related equipment. As of
September 30, 1998, we owed an aggregate of $66.1 million under such financing
arrangements, all of which are on terms we consider customary in the
telecommunications industry. In addition, WinStar New Media and certain of its
subsidiaries are parties to a $15.0 million revolving credit facility which they
use to finance a portion of their capital needs.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by a
holder that is not a "U.S. person" (a "non-U.S. holder"). A "U.S. person" is a
person or entity that, for U.S. federal income tax purposes, is a citizen or
resident of the United States, a corporation or other entity taxable as a
corporation for U.S. federal income tax purposes created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof (including each state and the District of Columbia), an
estate whose income is includible in gross income for U.S. federal income tax
purposes regardless of its source or a trust subject to the supervision of a
court within the United States and the control of one or more United States
persons as described in Section 7701 (a) (30) of Internal Revenue Code of 1986,
as amended (the "Code").
This discussion is based on the provisions of the Code and administrative
and judicial interpretations as of the date hereof, all of which may be changed
either retroactively or prospectively. This discussion does not address all the
aspects of U.S. federal income and estate taxation that may be relevant to
non-U.S. holders in light of their particular circumstances, nor does it address
tax consequences under the laws of any U.S. state, municipality or other taxing
jurisdiction or under the laws of any jurisdiction other than the United States.
The following discussion is merely a summary of the principal U.S. federal
income and estate tax consequences of the ownership and disposition of common
stock by non-U.S. Holders. THUS, ALL INVESTORS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE APPLICATION AND EFFECT OF THE U.S. FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES (CURRENT AND PROSPECTIVE) OF THE OWNERSHIP
AND DISPOSITION OF THE COMMON STOCK, AS WELL AS THE APPLICATION AND EFFECT OF
THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAXING JURISDICTION.
DIVIDENDS
We do not intend to pay any dividends in the foreseeable future. In the
event that dividends are paid to a non-U.S. holder, such dividends will
generally be subject to United States federal withholding tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty unless
such dividends are effectively connected with a trade or business carried on by
the non-U.S. holder within the United States or, if a tax treaty applies, are
attributable to a United States permanent establishment of the non-U.S. holder,
in which cases the dividends will be taxed as described below in the succeeding
paragraph. Under current U.S. Treasury regulations, dividends paid to an address
outside the United States are presumed to be paid to a resident of the country
of address (unless the payor has knowledge to the contrary) for purposes of the
withholding tax. For dividends paid on or prior to December 31, 1999, the same
presumption generally applies to determine the applicability of a reduced rate
of withholding under a U.S. tax treaty (the "address system"). Thus, non-U.S.
holders receiving dividends at addresses outside the United States generally are
not yet required to file tax forms to obtain the benefit of an applicable treaty
rate. Under U.S. Treasury regulations that were recently finalized, the address
system for claiming treaty benefits is eliminated for payments made after
December 31, 1999. Rather, to claim the benefits of a tax treaty with respect to
such dividends, a non-U.S. holder must file certain certifications attesting to
the holder's eligibility to claim such treaty benefits. If there is excess
withholding on a person eligible for a treaty benefit, the person can file for a
refund with the U.S. Internal Revenue Service (the "IRS").
Generally, there is no withholding tax on dividends that are
(i) effectively connected with the non-U.S. holder's conduct of a trade or
business within the United States if a Form 4224 is filed with us or (ii) if a
tax treaty applies, attributable to a United States permanent establishment of
the non-U.S. holder. If either exception applies, the dividends are subject to
the U.S. federal income tax on net income applicable to U.S. persons.
Effectively connected dividends received by a foreign corporation may be subject
to an additional "branch profits tax" at a 30% rate (or a lower rate under an
applicable income tax treaty) when such dividends are deemed repatriated from
the United States.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless (i) the
gain is effectively connected with the conduct of a trade or business of the
non-U.S. holder (or of a partnership that holds the common stock in which the
non-U.S.
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holder is a member) in the United States or, if a tax treaty applies, is
attributable to a United States permanent establishment of the non-U.S. holder,
(ii) in the case of a non-U.S. holder who is an individual and holds the common
stock as a capital asset within the meaning of Section 1221 of the Code (or is a
member in a partnership that holds the common stock as a capital asset), such
holder is present in the United States for 183 or more days in the taxable year
of the disposition and certain other conditions are met, (iii) the non-U.S.
holder is subject to tax pursuant to the provision of U.S. tax law applicable to
certain U.S. expatriates or (iv) we are or have been a "U.S. real property
holding corporation" for federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such non-U.S.
holder's holding period. We are not currently, have not been and do not
anticipate becoming a "U.S. real property holding corporation" for U.S. federal
income tax purposes ("USRPHC"). Even if we were to become a USRPHC, any gain
recognized by a non-U.S. Holder, on the disposition of the common stock, still
would not be subject to U.S. tax if the shares were considered to be "regularly
traded" (as per the meaning of the applicable U.S. Treasury regulations) on an
established securities market (e.g., Nasdaq National Market) and the non-U.S.
Holder did not own, actually, constructively, directly, or indirectly, at any
time during the shorter of the periods described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Pursuant to U.S. Treasury regulations, we must report annually to the IRS
and to each non-U.S. holder the amount of dividends paid to, and the tax
withheld with respect to, such holder, regardless of whether tax was actually
withheld. That information may also be made available to the tax authorities of
the country in which the non-U.S. holder resides.
United States federal backup withholding (which generally is withholding
imposed at the rate of 31% on certain payments to persons not otherwise exempt
who fail to furnish certain identifying information to the IRS) will generally
not apply to dividends paid to a non-U.S. holder that are subject to withholding
at the 30% rate (or would be so subject but for a reduced rate under an
applicable treaty). In addition, for dividends paid on or prior to December 31,
1999, the payor of dividends may rely on the payee's foreign address in
determining that the payee is exempt from backup withholding, unless the payor
has knowledge that the payee is a U.S. person. However, U.S. Treasury
regulations that were recently finalized eliminate this address system for
payments made after December 31, 1999 and require a payee to furnish certain
certification to the payor so as to be able to claim such exemption from backup
withholding.
The backup withholding and information reporting requirements also apply to
the gross proceeds paid to a non-U.S. holder upon the disposition of common
stock by or through a U.S. office of a U.S. or foreign broker, unless the holder
certifies to the broker under penalty of perjury as to its name, address and
status as a non-U.S. holder or the holder otherwise establishes an exemption.
Information reporting requirements, (but not backup withholding) will apply to a
payment of the proceeds of a disposition of common stock by or through a foreign
office of (i) a U.S. broker, (ii) a foreign broker 50% or more of whose gross
income for certain periods is effectively connected with the conduct of a trade
or business in the United States or (iii) a foreign broker that is a "controlled
foreign corporation" for U.S. federal income tax purposes, unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met, or the holder otherwise establishes an
exemption. Neither backup withholding nor information reporting will generally
apply to a payment of the proceeds of a disposition of common stock by or
through a foreign office of a foreign broker not subject to the preceding
sentence.
Any amounts withheld under the backup withholding rules will be refunded or
credited against the non-U.S. holder's United States federal income tax
liability, provided that required information is furnished to the IRS.
FEDERAL ESTATE TAXES
Common stock owned or treated as being owned by an individual who is
neither a citizen nor a resident of the United States for federal estate tax
purposes at the date of death will be included in such individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax unless an applicable estate tax treaty provides otherwise. Estates of
nonresident aliens are generally allowed a statutory credit for U.S. federal
estate tax purposes. Estate tax treaties may permit a larger credit. A special
definition of U.S. resident applies for U.S. federal estate tax purposes.
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UNDERWRITING
This offering consists of (1) an offering of 3,360,000 shares of our common
stock in the United States and Canada and (2) a concurrent offering of 840,000
shares of our common stock outside the United States and Canada. Salomon Smith
Barney Inc. is the global coordinator and bookrunner of this offering.
Subject to the terms and conditions stated in the U.S. underwriting
agreement, each U.S. underwriter named below has severally agreed to purchase,
and we have agreed to sell to such U.S. underwriter, the number of shares set
forth opposite its name:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------------------------ ------------
<S> <C>
Salomon Smith Barney Inc......................................................
Credit Suisse First Boston Corporation........................................
------------
Total.................................................................. 3,360,000
------------
------------
</TABLE>
The U.S. underwriting agreement provides that the obligations of the U.S.
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The U.S. underwriters are obligated to purchase all the shares (other than those
covered by their over-allotment option described below) if they purchase any of
the shares.
The U.S. underwriters, for whom Salomon Smith Barney Inc. and Credit Suisse
First Boston Corporation are acting as representatives, propose to offer some of
the shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
U.S. underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share on sales to certain other dealers. After the initial
offering of the shares to the public, the public offering price and such
concessions may be changed by the representatives.
We have granted to the U.S. underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to 630,000 additional
shares of common stock at the public offering price less the underwriting
discount. The U.S. underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, in connection with this offering. To the
extent such option is exercised, each U.S. underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to such U.S. underwriter's initial purchase
commitment.
We have also entered into an underwriting agreement with a syndicate of
international underwriters providing for the concurrent offering and sale of
840,000 shares of common stock outside the United States and Canada. Salomon
Brothers International Limited is the lead manager of the underwriters for the
international offering. The offering price and aggregate underwriting discounts
and commissions per share for the U.S. offering and the international offering
are identical. In addition, the U.S. offering and the international offering are
each conditioned upon the closing of the other.
The U.S. and international underwriters will enter into an agreement in
which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares of common stock. The U.S. and
international underwriters also have agreed that they may sell shares of common
stock between their respective underwriting syndicates.
We and our executive officers and directors have agreed that, subject to
certain exceptions, for a period of 90 days from the date of this prospectus, we
and they will not, without the prior written consent of Salomon Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of our
common stock or any securities convertible into, or exercisable or exchangeable
for, common stock. Salomon Smith Barney Inc. in its sole discretion may release
any of the securities subject to these lock-up agreements at any time without
notice.
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The following table shows the underwriting discounts and commissions to be
paid by us to the U.S. underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY WINSTAR
-----------------------------
NO EXERCISE FULL EXERCISE
------------ -------------
<S> <C> <C>
Per share.................................................... $ $
Total........................................................ $ $
</TABLE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while this offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member. These activities may cause the price of our
common stock to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise and,
if commenced, may be discountinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the common stock on the Nasdaq National Market, prior to the pricing and
completion of this offering. Passive market making consists of displaying bids
on the Nasdaq National Market no higher than the bid prices of independent
market makers and making purchases at prices no higher than those independent
bids and effected in response to order flow. Net purchases by a passive market
maker on each day are limited to a specific percentage of the passive market
maker's average daily trading volume in the common stock during a specified
period and must be discounted when such limit is reached. Passive market making
may cause the price of our common stock to be higher than the price that
otherwise would exist in the open market in the absence of such transactions. If
passive market making is commenced, it may be discontinued at any time.
The representatives have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The representatives may, from time to time, engage in transactions
with and perform services for us in the ordinary course of their business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
Up to 950,000 of the shares to be offered in the U.S. offering may be sold
by our wholly owned subsidiary. We will issue these shares to our subsidiary as
a capital contribution immediately prior to the closing of this offering. The
net proceeds from the sale of these shares will be received by our subsidiary.
This subsidiary will be a party to the U.S. underwriting agreement.
63
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Graubard Mollen & Miller, New York, New York. Certain partners and employees
of Graubard Mollen & Miller own shares of our common stock. The underwriters
have been represented by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of (i) WinStar as of December 31,
1996 and 1997 and for the years ended December 31, 1996 and December 31, 1997,
and the ten months ended December 31, 1995, and (ii) Midcom as of and for the
year ended December 31, 1997, in each case either included or incorporated by
reference into this prospectus, have been audited by Grant Thornton LLP,
independent certified public accountants, to the extent and for the periods
indicated in their reports thereon. The financial statements of Midcom as of
December 31, 1995 and December 31, 1996 and for each of the three years in the
period ended December 31, 1996, incorporated by reference into this prospectus,
have been audited by Ernst & Young LLP, independent auditors, as stated in their
report thereon.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
our financial condition, results of operations and business. 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. We
cannot assure you that any of our expectations will be realized. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, without limitation: (1) our ability to
service our debt or to obtain financing for the buildout of our domestic and
international telecommunications networks; (2) our ability to attract and retain
a sufficient revenue-generating customer base; (3) competitive pressures in the
telecommunications and technology industries; and (4) general economic
conditions.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. These documents are also available at the public
reference rooms at the SEC's regional offices in New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available at the offices of the
Nasdaq National Market in Washington, D.C.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. This
prospectus incorporates by reference our documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until we sell all of the securities.
o Annual Report on Form 10-K (as amended) for the year ended December
31, 1997;
o Current Report on Form 8-K/A filed January 30, 1998;
o Current Report on Form 8-K/A filed February 5, 1998;
o Current Report on Form 8-K filed March 12, 1998;
o Current Report on Form 8-K filed March 30, 1998;
64
<PAGE>
o Current Report on Form 8-K filed June 25, 1998;
o Current Report on Form 8-K filed July 23, 1998;
o Current Report on Form 8-K filed August 19, 1998;
o Current Report on Form 8-K (as amended) filed November 16, 1998;
o Current Report on Form 8-K (as amended) filed January 11, 1999;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
o Quarterly Report on Form 10-Q for the quarter ended June 30, 1998;
o Quarterly Report on Form 10-Q for the quarter ended September 30,
1998;
o Proxy Statement regarding the Annual Meeting of Stockholders held on
June 10, 1998, filed May 7, 1998; and
o The description of our common stock contained in our registration
statement on Form 8-A under the Exchange Act (File No. 1-10726).
During the course of this offering and prior to the consummation of any
sales, each potential investor is invited to ask us questions concerning the
terms and conditions of this offering. Potential investors may also obtain any
additional information necessary to verify the accuracy of the information in
this prospectus to the extent that we possess such information or can acquire it
without unreasonable effort or expense.
Potential investors may obtain a copy of any of the agreements summarized
herein (subject to certain restrictions because of the confidential nature of
the subject matter) or any of our SEC filings without charge by written or oral
request directed to WinStar Communications, Inc., Attention: Secretary, 230 Park
Avenue, New York, New York 10169, (212) 584-4000.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Condensed Consolidated Balance Sheet as of
September 30, 1998.............................. F-2
Condensed Consolidated Statements of Operations
for the Nine Months Ended September 30, 1997 and
1998............................................ F-3
Condensed Consolidated Statements of Stockholders'
Equity (Deficit) for the Nine Months Ended
September 30, 1998.............................. F-4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and
1998............................................ F-5
Notes to Consolidated Financial Statements........ F-6
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public
Accountants..................................... F-13
Consolidated Balance Sheets as of December 31,
1996 and 1997................................... F-14
Consolidated Statements of Operations, Ten Months
Ended December 31, 1995 and the Years Ended
December 31, 1996 and 1997...................... F-15
Consolidated Statements of Stockholders' Equity
(Deficit), Ten Months Ended December 31, 1995
and the Years Ended December 31, 1996 and
1997............................................ F-16
Consolidated Statements of Cash Flows, Ten Months
Ended December 31, 1995 and the Years Ended
December 31, 1996 and 1997...................... F-19
Notes to Consolidated Financial Statements........ F-20
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated
Financial Statements............................ F-44
Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of September 30, 1998.................. F-45
Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Nine Months
Ended September 30, 1998........................ F-46
Unaudited Pro Forma Condensed Consolidated
Statement of Operations, Year Ended
December 31, 1997............................... F-47
Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements............... F-48
</TABLE>
F-1
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents....................... $ 311,863
Short term investments.......................... 162,043
----------
Cash, cash equivalents and short term
investments................................. 473,906
Accounts receivable, net of allowance for
doubtful accounts............................ 80,606
Inventories..................................... 16,028
Prepaid expenses and other current assets....... 39,427
----------
Total current assets......................... 609,967
Property and equipment, net....................... 447,186
Investment in equity securities................... 14,954
Licenses, net..................................... 283,558
Intangible assets, net............................ 149,291
Deferred financing costs.......................... 39,378
Other assets...................................... 12,492
----------
Total assets................................. $1,556,826
----------
----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt............... $ 5,517
Accounts payable and accrued expenses........... 78,530
Net liabilities of discontinued operations...... 11,618
Current portion of capitalized lease
obligations.................................. 13,646
----------
Total current liabilities.................... 109,311
Capitalized lease obligations, less current
portion......................................... 52,448
Long-term debt, less current portion.............. 1,293,823
Other liabilities................................. 13,237
Deferred income taxes............................. 20,000
----------
Total liabilities............................ 1,488,819
----------
Series C exchangeable redeemable preferred
stock........................................... 194,738
Series D senior cumulative convertible redeemable
preferred stock................................. 200,000
Stockholders' equity (deficit)
Series A Preferred stock........................ 41
Series E Preferred stock........................ 1
Common stock, par value $.01; authorized 200,000
shares, issued and
outstanding 40,565........................... 405
Additional paid-in-capital...................... 394,303
Accumulated deficit............................. (676,116)
Accumulated other comprehensive loss............ (45,365)
----------
Total stockholders' deficit....................... (326,731)
----------
Total liabilities, redeemable preferred stock
and stockholders' deficit................... $1,556,826
----------
----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-2
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
Operating revenues
Telecommunications services
CLEC......................................... $ 13,418 $ 85,858
Other........................................ 3,792 40,276
--------- ---------
Total telecommunications services............ 17,210 126,134
Information services............................ 25,693 37,220
--------- ---------
Total operating revenues.......................... 42,903 163,354
--------- ---------
Operating expenses
Cost of services and products................... 43,783 132,199
Selling, general and administrative expenses.... 105,486 175,395
Depreciation and amortization................... 14,649 48,666
--------- ---------
Total operating expenses.......................... 163,918 356,260
--------- ---------
Operating loss.................................... (121,015) (192,906)
Other (expense) income
Interest expense................................ (53,074) (111,704)
Interest income................................. 11,052 23,986
Other income.................................... 2,219 --
--------- ---------
Loss from continuing operations before income tax
benefit......................................... (160,818) (280,624)
Income tax benefit................................ -- 4,000
--------- ---------
Loss from continuing operations................... (160,818) (276,624)
--------- ---------
Discontinued operations:
Loss from operations............................ (3,737) (2,702)
Estimated loss on disposal (including a
provision of $4,183 in 1998 for operating
losses during the phase out period).......... (1,500) (22,272)
--------- ---------
Loss from discontinued operations................. (5,237) (24,974)
--------- ---------
Net loss.......................................... (166,055) (301,598)
Preferred stock dividends......................... (3,881) (31,195)
--------- ---------
Net loss applicable to common stockholders........ $(169,936) $(332,793)
--------- ---------
--------- ---------
Basic and diluted loss per share:
From continuing operations...................... $ (5.00) $ (8.10)
From discontinued operations.................... (0.16) (0.66)
--------- ---------
Net loss per share................................ $ (5.16) $ (8.76)
--------- ---------
--------- ---------
Weighted average shares outstanding............... 32,923 37,970
--------- ---------
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-3
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------
A E COMMON STOCK ADDITIONAL
----------------- ----------------- ----------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ------ ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997...... 3,910 $ 39 -- $ -- 34,610 $ 346 $ 255,741 $ (374,518)
Issuances of common stock:
For stock option exercises and
other........................... 1,399 14 15,300
For acquisitions and licenses..... 2,712 27 89,269
For investment in equity
securities...................... 1,525 15 60,329
Issuances of Series E preferred
stock............................. 75 1 1,670
Dividends declared on Series A
preferred stock................... (4,466)
Dividends declared on Series C
preferred stock................... (19,185)
Dividends on Series D preferred
stock............................. (7,544)
Issuances of Series A preferred
stock as dividends in kind........ 179 2 4,464
Issuances of common stock as
dividends on Series D preferred
stock............................. 319 3 6,957
Preferred stock issuance costs and
other, net........................ (8,232)
Comprehensive loss:
Net loss.......................... (301,598)
Unrealized loss on investments in
marketable equity securities....
------ ---- -- ---- ------ ------ ---------- -----------
Balances at September 30, 1998..... 4,089 $ 41 75 $ 1 40,565 $ 405 $ 394,303 $ (676,116)
------ ---- -- ---- ------ ------ ---------- -----------
------ ---- -- ---- ------ ------ ---------- -----------
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE EQUITY
LOSS (DEFICIT)
------------- -----------
<S> <C> <C>
Balances at December 31, 1997...... $ -- $(118,392)
Issuances of common stock:
For stock option exercises and
other........................... 15,314
For acquisitions and licenses..... 89,296
For investment in equity
securities...................... 60,344
Issuances of Series E preferred
stock............................. 1,671
Dividends declared on Series A
preferred stock................... (4,466)
Dividends declared on Series C
preferred stock................... (19,185)
Dividends on Series D preferred
stock............................. (7,544)
Issuances of Series A preferred
stock as dividends in kind........ 4,466
Issuances of common stock as
dividends on Series D preferred
stock............................. 6,960
Preferred stock issuance costs and
other, net........................ (8,232)
Comprehensive loss:
Net loss.......................... (301,598)
Unrealized loss on investments in
marketable equity securities.... (45,365) (45,365)
---------
(346,963)
---------
---------
---------
Balances at September 30, 1998..... $ (45,365) $(326,731)
--------- ---------
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED
SEPTEMBER 30,
-------------------------
1997 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (166,055) $(301,598)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations........ 5,237 24,974
Depreciation and amortization................ 14,649 48,666
Deferred income tax benefit.................. -- (4,000)
Provision for doubtful accounts.............. 1,608 8,150
Non cash interest expense.................... 37,342 75,938
(Increase) decrease in operating assets:
Accounts receivable........................ (15,778) (29,848)
Inventories................................ (3,875) (3,911)
Prepaid expenses and other current
assets.................................... (4,374) (17,799)
Other assets............................... 560 (8,475)
Increase (decrease) in accounts payable and
accrued expenses............................ 21,842 (37,292)
Net cash used in discontinued operations..... (7,620) (12,212)
---------- ---------
Net cash used in operating activities............. (116,464) (257,407)
---------- ---------
Cash flows from investing activities:
Increase in short-term investments, net......... (2,235) (145,140)
Purchase of property and equipment.............. (103,835) (222,852)
Proceeds from sale of property and equipment.... -- 22,334
Acquisitions.................................... (35,428) (177,380)
Other, net...................................... (1,396) --
---------- ---------
Net cash used in investing activities............. (142,894) (523,038)
---------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net............... 319,730 437,451
Net proceeds from redeemable preferred stock.... -- 192,008
Net proceeds from equity transactions........... 99,691 15,314
Proceeds from sale of minority equity
interest..................................... -- 10,000
Proceeds from equipment lease financing......... 20,504 41,629
Payment of capital lease obligations............ (2,370) (4,671)
Other, net...................................... (301) (1,982)
---------- ---------
Net cash provided by financing activities......... 437,254 689,749
---------- ---------
Net increase in cash and cash equivalents......... 177,896 (90,696)
Cash and cash equivalents at beginning of
period.......................................... 95,641 402,559
---------- ---------
Cash and cash equivalents at end of period........ 273,537 311,863
Short-term investments at end of period........... 29,232 162,043
---------- ---------
Cash, cash equivalents and short-term investments
at end of period................................ $ 302,769 $ 473,906
---------- ---------
---------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-5
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS
WinStar Communications, Inc. (the "Company") provides facilities-based
voice and broadband data telecommunications services to businesses and other
customers in major metropolitan areas in the United States. By utilizing its
Wireless FiberSM services and a switch-based infrastructure, the Company
distinguishes itself as a facilities-based, value-added provider of
high-capacity telecommunications services and an attractive alternative to
established providers, such as the RBOCs. The Company also utilizes its Wireless
Fiber services to provide other telecommunications offerings, including
Internet, ATM and frame relay services. The Company creates and/or acquires
rights to and distributes information and entertainment content as a complement
to its telecommunications operations. The Company operated a nonstrategic
consumer products company, the remaining assets of which were sold to a third
party in November 1998. The Company also operates a residential long distance
company for which a formal plan of disposal was approved in November 1998. Both
of these companies have been treated as discontinued operations in this report.
To capitalize on opportunities in the telecommunications industry, the
Company is pursuing a rapid expansion of its telecommunications services, which
will require significant amounts of capital to finance capital expenditures and
anticipated operating losses. The Company may elect to slow the speed or narrow
the focus of this expansion in the event it is unable to raise sufficient
amounts of capital on acceptable terms.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements presented herein include
the accounts of WinStar Communications, Inc. and its subsidiaries. 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 September 30, 1998,
the statements of operations for the nine months ended September 30, 1997 and
1998, the statements of cash flows for the nine months ended September 30, 1997
and 1998 and the statement of stockholders' equity for the nine months ended
September 30, 1998.
The condensed consolidated statements of operations and cash flows for the
nine months ended September 30, 1997 have been restated to report the Company's
residential long distance subsidiary, WinStar Gateway Network, Inc. as a
discontinued operation. Certain amounts have been reclassified from previous
presentations between continuing and discontinued operations.
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 Company's audited
consolidated financial statements and notes thereto included elsewhere in the
prospectus. The unaudited financial statements and related footnotes for the
nine month periods ended September 30, 1997 reflect certain reclassifications
such that they conform to the current period presentation.
The results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of the results of operations for the year ending
December 31, 1998.
3. DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
Dividends on the Series A 6% Cumulative Convertible Preferred Stock
("Series A Preferred Stock") since its issuance have been paid "in-kind" in
additional shares of the Series A Preferred Stock (Reference is made to Notes 7
and 9).
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
- ------------------
Wireless FiberSM is a service mark of WinStar Communications, Inc.
F-6
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. BASIC AND DILUTED LOSS PER SHARE--(CONTINUED)
during each period in accordance with Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"). Stock options and warrants have been
excluded from the calculation of diluted loss per share as their effect would
have been antidilutive. The adoption of SFAS No. 128 had no effect on earnings
per share for the nine months ended September 30, 1997.
5. ACQUISITION OF MIDCOM COMMUNICATIONS INC.
Effective January 21, 1998 (the "Closing Date"), pursuant to an agreement
between the Company and MIDCOM Communications Inc. and its subsidiaries
(collectively, "Midcom"), the Company acquired substantially all of Midcom's
assets and businesses for a purchase price of approximately $92.0 million in
cash. The purchase price is subject to a downward adjustment under certain
circumstances.
The Company retained an independent third party to fully evaluate the
assets and certain liabilities of Midcom, in order to complete the allocation of
the purchase price of the acquisition. The results of this evaluation were
recorded in the third quarter and did not result in a material adjustment. The
financial statements of Midcom have been consolidated into the Company's
financial statements as of the date of acquisition.
Midcom was a provider of long distance voice and frame relay data
telecommunications services primarily to small and medium-sized businesses, most
of which are located in major metropolitan areas of California, Florida,
Illinois, New York, Ohio and Washington.
The following pro forma results of operations (in thousands of dollars,
except per share data) reflect the combined operations of the Company and Midcom
as if the acquisition was consummated at the beginning of each period presented.
The unaudited pro forma results of operations do not purport to represent the
results of operations that would have actually resulted had the purchase
occurred on the indicated dates, nor should it be taken as indicative of future
results of operations.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------------
1997 1998
--------- ---------
<S> <C> <C>
Operating Revenues......................................... $ 117,241 $ 167,126
Net Loss applicable to common stockholders................. $(239,799) $(333,195)
Basic and diluted loss per share........................... $ (7.28) $ (8.78)
</TABLE>
6. OTHER ACQUISITIONS
On January 12, 1998, pursuant to an agreement between the Company, Telesoft
Corp. and others, the Company acquired GoodNet for a purchase price of
approximately $22.0 million, consisting of $3.5 million cash and 732,784 shares
of common stock of the Company valued at $18.5 million. GoodNet is a national
provider of Internet backbone and other services, offering high-capacity data
communications services.
During the third quarter of 1998, a subsidiary of the Company acquired a
number of small companies engaged in systems integration and Internet services
provisioning primarily to supplement its existing broadband service offerings.
The accounts of the acquired companies have been consolidated with the Company's
financial statements as of the effective date of the acquisitions. These
acquisitions were treated as purchases for accounting purposes. The aggregate
consideration for the acquisitions was approximately $49.1 million (including
$15.0 million which was for acquired accounts receivable), consisting of
$38.6 million in cash, 283,942 shares of the Company's common stock valued at
$8.8 million and 75,100 shares of the Company's Series E Preferred Stock valued
at $1.7 million (Reference is made to Note 9). The largest of these acquisitions
was LANSystems, which was for $23.0 million, of which $15.0 million was for the
acquired accounts receivable mentioned above.
7. ISSUANCE OF CUMULATIVE CONVERTIBLE PREFERRED STOCK
In March 1998, the Company sold 4,000,000 shares of Series D 7% Senior
Cumulative Convertible Preferred Stock ("Convertible Preferred Stock") in a
private placement for aggregate gross proceeds of
F-7
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. ISSUANCE OF CUMULATIVE CONVERTIBLE PREFERRED STOCK--(CONTINUED)
$200.0 million. The Convertible Preferred Stock earns a 7% cumulative annual
dividend, payable quarterly (commencing on September 15, 1998) in (i) cash or,
at the Company's election, (ii) through the issuance of a number of shares of
the Company's common stock equal to the dividend amount divided by the
discounted current market value of the common stock (as defined), at the
Company's option. The Company is currently prohibited from paying such dividends
in cash under the terms of its outstanding indentures.
The Convertible Preferred Stock is convertible at the option of the holder
at any time after the issue date, into shares of the Company's common stock at a
conversion price of $49.61 per share of common stock.
The Convertible Preferred Stock is redeemable at the option of the Company
after March 20, 2001, in whole or in part, at defined redemption prices, plus
accumulated and unpaid dividends, if any, payable in cash. The terms of the
Company's outstanding indentures currently prohibit any such redemption prior to
the repayment of the debt issued under such indentures. The Convertible
Preferred Stock is mandatorily redeemable on March 15, 2010 at a redemption
price of $50.0 per share plus accrued and unpaid dividends, payable in cash.
The Convertible Preferred Stock, with respect to dividend rights and rights
on liquidation, winding up and dissolution, ranks (i) senior to all classes of
common stock and to the Series A Preferred Stock and Series E Preferred Stock of
the Company and (ii) pari passu with the Series C Preferred Stock of the
Company.
The Company filed a shelf registration with the Securities and Exchange
Commission (which was declared effective on June 18, 1998) with respect to
resales of the Convertible Preferred Stock and the common stock which may be
issued on the conversion thereof or as dividends thereon (Reference is made to
Notes 3 and 9).
8. MARCH 1998 NOTES
In March 1998, the Company issued $200.0 million principal amount of
unsecured 10% Senior Subordinated Notes Due 2008 ("Cash Pay Notes") and
$250.0 million principal amount of unsecured 11% Senior Subordinated Deferred
Interest Notes Due 2008 ("Deferred Interest Notes" and collectively, "the
Notes"). The Notes are unsecured, senior subordinated obligations of the Company
and rank pari passu in right of payment with the Company's 14% Convertible
Senior Subordinated Notes Due 2005 and the Company's 15% Senior Subordinated
Deferred Interest Notes Due 2007 and are junior in right of payment to all
existing and future senior indebtedness of the Company.
The Cash Pay Notes bear interest at a rate of 10% per annum, payable
semiannually commencing September 15, 1998. The Deferred Interest Notes bear
interest at the rate of 11% per annum. Until March 15, 2003, interest on the
Deferred Interest Notes accrues and compounds semiannually, but will not be
payable in cash.
The Notes mature on March 15, 2008 and are redeemable by the Company on and
after March 15, 2003, at its option, at certain defined prices.
The Company has filed an Exchange Offer Registration Statement with the
Securities and Exchange Commission ("SEC") which has been declared effective
under the Securities Act. The Company has completed an exchange offer for the
Notes, pursuant to such registration statement.
9. SERIES E PREFERRED STOCK
In connection with an acquisition in August 1998, the Company issued 75,100
shares of its Series E Preferred Stock ("the Stock"). The Stock is non-voting,
non-redeemable junior convertible preferred stock which does not earn dividends.
The holders of the Stock may convert all, but not less than all, into shares of
the Company's common stock on a one-for-one basis anytime after August 1, 1999.
Each share of the Stock has a liquidation preference of $59.93 per share
(Reference is made to Notes 3, 6 and 7).
10. CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP. AND WINSTAR
EQUIPMENT II CORP.
Two of 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
F-8
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
10. CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP. AND WINSTAR
EQUIPMENT II CORP.--(CONTINUED)
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. The proceeds of the WEC and WEC II Notes are to be used to
purchase Designated Equipment and, if such equipment is not purchased within a
specified period, WEC and WEC II must apply unused proceeds thereof to redeem
the WEC and WEC II Notes. Both the interest and principal of the WEC and WEC II
Notes are guaranteed by the Company.
WEC and WEC II have no independent operations other than to purchase
Designated Equipment and to lease this equipment to the Company and its other
telecommunications affiliates. It is therefore unlikely, in the opinion of
management, that WEC or WEC II will generate sufficient income, after the
payment of interest on the WEC and WEC II Notes, to pay dividends or make other
distributions to the Company.
Summary financial information of WEC and WEC II, which are included in the
condensed consolidated financial statements of the Company, are as follows (in
thousands of dollars):
Balance sheet information at September 30, 1998 is as follows:
<TABLE>
<CAPTION>
WEC WEC II
--------- --------
<S> <C> <C>
Current assets....................................................... $ 29,795 $ 40,722
Long term assets..................................................... 194,917 14,210
Current liabilities.................................................. (8,182) (4,024)
Long term liabilities................................................ (238,732) (54,897)
--------- --------
Stockholders' deficit................................................ $ (22,202) $ (3,989)
--------- --------
--------- --------
</TABLE>
Statements of operations information for WEC and WEC II for the periods
presented below, are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
WEC WEC II
----------------------------- ------------------------------
PERIOD FROM PERIOD FROM
MARCH 13, 1997 NINE MONTHS AUGUST 8, 1997 NINE MONTHS
(INCEPTION) TO ENDED (INCEPTION) TO ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Rental revenues from other WinStar subsidiaries............ $ 740 $ 1,728 $ -- $ --
Interest income from other WinStar subsidiaries............ -- 3,482 -- --
Interest income--investments............................... 4,292 3,045 391 2,092
Selling, general and administrative expenses............... -- (2,807) -- (16)
Interest expense........................................... (12,609) (17,477) (920) (4,687)
-------- --------- ----- -------
Net loss................................................... $ (7,577) $ (12,029) $(529) $(2,611)
-------- --------- ----- -------
-------- --------- ----- -------
</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.
11. DISCONTINUED OPERATIONS
WINSTAR GLOBAL PRODUCTS
On May 13, 1997, a formal plan of disposal for the Company's consumer
products subsidiary, WinStar Global Products, Inc. ("Global Products"), was
approved by the Board of Directors. The disposal of Global Products has been
accounted for as a discontinued operation and, accordingly, is carried at its
estimated net realizable value. In November 1998, the Company entered into an
asset purchase agreement to sell the remaining assets of Global Products. Under
the agreement, the Company will receive certain assets recorded at a nominal
value. Accordingly, the Company has recorded an additional loss on the
disposition of Global Products of
F-9
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
11. DISCONTINUED OPERATIONS--(CONTINUED)
approximately $16.8 million. The accompanying condensed consolidated balance
sheets, and operating results of Global Products are segregated and reported as
discontinued operations in the accompanying condensed consolidated balance
sheets and statements of operations and cash flows.
Information relating to the discontinued operations of Global Products is
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1997 1998
-------- -------
<S> <C> <C>
Operating revenues................................................. $ 9,910 $ 6,633
-------- -------
Cost of services and products...................................... 7,560 6,756
Selling, general & administrative expenses......................... 4,124 3,046
Depreciation and amortization...................................... 174 194
-------- -------
Total operating expenses........................................... 11,858 9,996
-------- -------
Operating loss..................................................... (1,948) (3,363)
Interest expense................................................... (612) (490)
-------- -------
Net loss........................................................... $ (2,560) $(3,853)
-------- -------
-------- -------
</TABLE>
Net assets of the discontinued operations of Global Products at December
31, 1997 and September 30, 1998 are composed of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Assets:
Accounts Receivable, net...................................... $ 4,383 $ 857
Inventories................................................... 4,663 3,968
Other Assets.................................................. 1,268 1,411
-------- -------
Total assets............................................... 10,314 6,236
-------- -------
Liabilities:
Current Liabilities........................................... 3,570 3,764
Other Liabilities............................................. 9,951 5,160
-------- -------
Total liabilities.......................................... 13,521 8,924
-------- -------
Net deficit................................................ $ (3,207) $(2,688)
-------- -------
-------- -------
</TABLE>
WINSTAR GATEWAY NETWORK
In November 1998, a formal plan of disposal for WinStar Gateway Network,
Inc., ("Gateway"), the Company's residential long distance subsidiary, was
approved by management of the Company, and it is anticipated that the disposal
will be completed within the next 12 months. The Company expects to incur
additional operating losses of approximately $4.2 million during the phase out
of this business, as well as, a disposal loss of approximately $1.3 million. 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.
F-10
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
11. DISCONTINUED OPERATIONS--(CONTINUED)
Information relating to the discontinued operations of Gateway is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1997 1998
------- -------
<S> <C> <C>
Operating revenues................................................... $ 6,700 $ 3,392
------- -------
Cost of revenue...................................................... 4,706 3,365
Selling, general & administrative.................................... 4,428 2,729
Depreciation and amortization........................................ 826 --
------- -------
Total operating expenses............................................. 9,960 6,094
------- -------
Net loss............................................................. $(3,260) $(2,702)
------- -------
------- -------
</TABLE>
Net assets of the discounted operations of Gateway as of December 31, 1997 and
September 30, 1998 are composed of the following (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Accounts receivable, net........................................ $1,600 $ 215
Other assets.................................................... 206 490
------ -------
Total assets.................................................. 1,806 705
Current liabilities............................................. 2,335 1,000
Other liabilities............................................... 431 177
------ -------
Total liabilities............................................. 2,766 1,177
------ -------
Net deficit................................................... $ (960) $ (472)
------ -------
------ -------
</TABLE>
12. MARKETABLE SECURITIES
On June 21, 1998, the Company purchased approximately 3,314,000 shares of
Advanced Radio Telecom Corp. ("ART"), which represents approximately 12.9% of
the outstanding common stock of ART, and certain other equity securities from
private investors. The Company issued one share of its common stock in exchange
for every 2.2 shares of ART purchased. The conversion ratio resulted in a
purchase price of $17.90 per ART share based on the Company's closing stock
price on the date the transaction was closed. The Company issued approximately
1,525,000 restricted common shares in connection with the transaction and
received the ART shares and certain other unrelated assets. The marketable
securities acquired are accounted for as "Available for Sale Securities". The
Company has recorded an "other comprehensive loss" (representing unrealized
losses on these securities) of $45,365,000 in the Statement of Shareholders'
Equity.
13. COMMITMENTS AND CONTINGENCIES
On March 9, 1998, certain petitions were filed with the Federal
Communications Commission alleging, among other things, that the FCC's
February 10, 1998 grant to the Company of one 100 MHz channel of 38 GHz spectrum
in each of Atlanta, Buffalo, Cincinnati, Dallas, Houston, Miami, New York City,
St. Louis, Seattle, Spokane and Tampa were made in violation of the FCC's
processing rules. The petitions were made available to the public on March 10,
1998. There can be no assurance that the petitions will not result in such
grants to WinStar being rescinded.
In July 1998, the Company acquired 850 MHz portion of the radio spectrum
for the New York City area this from CellularVision USA, Inc. for $32.5 million
in cash. Recently, certain shareholders of CellularVision filed suit against
CellularVision seeking to have this sale ruled null and void. The Company
believes this suit to be without merit. However, there can be no assurance that
the sale will not be ruled null and void pursuant to this action.
14. SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"), requiring that all public businesses
report financial and descriptive information about their reportable operating
segments. The
F-11
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
14. SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS--(CONTINUED)
Company will implement SFAS 131 as required in 1999. Management is currently
evaluating the effect of SFAS No.131 on consolidated financial statement
disclosures.
The American Institute of Certified Public Accountant's Accounting
Standards Executive Committee recently issued Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires that
costs of start-up activities, including organization costs, be expensed as
incurred. Start-up activities are broadly defined and include one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer or beneficiary, initiating a new process in an existing
facility, commencing some new operation, and organizing a new entity. SOP 98-5
is generally effective for financial statements for fiscal years beginning after
December 15, 1998, with initial application reported as the cumulative effect of
a change in accounting principle. The Company is currently evaluating the impact
that SOP 98-5 will have on the Company's financial statements.
In June 1998, The Financial Accounting Standards Board issued "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 is effective for fiscal years beginning
after June 15, 1999. The Company is currently evaluating the impact that SFAS
133 will have on the Company's consolidated financial statements and
disclosures.
15. SUBSEQUENT EVENTS
In December 1998, the Company agreed to sell to Williams Communications,
Inc. ("Williams") a 25-year indefeasible right to use up to 2% of the Company's
local Wireless Fiber capacity. For this right, Williams will pay the Company
$400.0 million over the next four years with payments due as the Company meets
hub construction requirements. The Company is required to complete construction
in 270 hub sites over the next four years, 60 of which are complete and 35 of
which are currently under construction. Williams will also pay the Company
approximately $45.6 million over the next ten years for maintenance services.
As an integral part of the Company's plan to create a national broadband
network, in December 1998, the Company agreed to purchase from Williams an
indefeasible right to use four strands of fiber on a national route of
approximately 14,850 miles and a seven year option to purchase two additional
strands of the same route ("Capacity Option"). For the Williams IRU, the
Capacity Option and certain long-haul transport and other services, the Company
will pay Williams approximately $640.0 million over the next seven years. The
Capacity Option is exercisable for a payment to Williams of approximately
$51.0 million.
In December 1998, the Company signed a ten year lease for approximately
200,000 square feet of office space (with a right of first refusal on
substantial additional space in a building currently under construction) located
in Herndon, Virginia. Future minimum lease payments under this lease commitment
are approximately $43.2 million.
In November 1998, the Company signed a 15 year operating lease for up to
257,000 square feet of office space in New York City. Future minimum lease
payments under this lease commitment are approximately $158.0 million. The
Company will consolidate certain of its existing New York City offices which
include its Corporate offices, WinStar for Buildings, WinStar Broadband
Services, WinStar Large Accounts and operating offices for WinStar General
Business and WinStar Network Services in this new space. The Company expects to
sublet many of its existing offices in New York City.
In October 1998, the Company and Lucent Technologies, Inc. ("Lucent")
entered into a long term strategic relationship to build out the Company's
telecommunications network in major domestic and international markets. 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 of the credit commitment will become
available on a dollar-for-dollar basis as the loans and/or unfunded commitments
are syndicated to other lenders.
The Company is offering securities as described in the prospectus of which
these financial statements form a part. There can be no assurance that the
offering will be consummated.
F-12
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
WinStar Communications, Inc.
We have audited the accompanying consolidated balance sheets of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the ten months ended December 31, 1995 and the years ended
December 31, 1996 and 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1996 and 1997 and the
consolidated results of their operations and their consolidated cash flows for
the ten months ended December 31, 1995 and the years ended December 31, 1996 and
1997, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
February 12, 1998, except for
paragraph b of Note 24 as to which
the date is November 5, 1998
F-13
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................... $ 95,641 $ 402,559
Short term investments.......................... 26,997 16,903
---------- ----------
Cash, cash equivalents and short term
investments................................. 122,638 419,462
Investments in equity securities................ 688 --
Accounts receivable, net of allowance for
doubtful accounts of $428 and $2,814,
respectively................................. 10,474 28,728
Inventories..................................... 5,009 10,296
Prepaid expenses and other current assets....... 15,749 8,834
Net assets of discontinued operations........... 5,352 1,145
---------- ----------
Total current assets......................... 159,910 468,465
Property and equipment, net....................... 59,983 284,835
Licenses, net..................................... 27,434 174,763
Intangible assets, net............................ 11,049 14,293
Deferred financing costs, net..................... 10,535 27,463
Other assets...................................... 4,101 4,015
---------- ----------
Total assets................................. $ 273,012 $ 973,834
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt............... $ 18,456 $ 386
Accounts payable and accrued expenses........... 26,049 95,685
Current portion of capitalized lease
obligations.................................. 2,665 6,741
---------- ----------
Total current liabilities.................... 47,170 102,812
Capitalized lease obligations, less current
portion......................................... 10,352 21,392
Long-term debt, less current portion.............. 265,161 768,469
Deferred income taxes............................. -- 24,000
---------- ----------
Total liabilities............................ 322,683 916,673
---------- ----------
Series C exchangeable redeemable preferred stock,
liquidation preference of $175,000 plus
accumulated dividends........................... -- 175,553
Commitments and contingencies
Stockholders' equity (deficit)
Series A preferred stock issued and outstanding
3,910 shares at December 31, 1997............ -- 39
Common stock, par value $.01; authorized 200,000
shares, issued and outstanding 28,989 and
34,611, respectively......................... 290 346
Additional paid-in-capital...................... 75,436 255,741
Accumulated deficit............................. (125,034) (374,518)
---------- ----------
(49,308) (118,392)
Unrealized loss on investments.................... (363) --
---------- ----------
Total stockholders' deficit.................. (49,671) (118,392)
---------- ----------
Total liabilities, exchangeable
redeemable preferred stock and
stockholders' deficit................. $ 273,012 $ 973,834
---------- ----------
---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-14
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE TEN FOR THE YEAR ENDED
MONTHS ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1995 1996 1997
------------ -------- ---------
<S> <C> <C> <C>
Operating revenues
Telecommunications services
CLEC......................................... $ -- $ 604 $ 22,653
Other........................................ 130 3,883 7,143
-------- -------- ---------
Total telecommunications services............ 130 4,487 29,796
Information services............................ 2,648 14,650 41,354
-------- -------- ---------
Total operating revenues.......................... 2,778 19,137 71,150
-------- -------- ---------
Operating expenses
Cost of services and products................... 3,609 21,389 73,898
Selling, general and administrative expenses.... 6,705 47,497 150,688
Depreciation and amortization................... 564 3,764 25,102
-------- -------- ---------
Total operating expenses.......................... 10,878 72,650 249,688
-------- -------- ---------
Operating loss.................................... (8,100) (53,513) (178,538)
Other (expense) income
Interest expense................................ (7,186) (36,748) (77,257)
Interest income................................. 2,890 10,515 17,577
Other (expense) income.......................... (866) -- 2,219
-------- -------- ---------
Loss from continuing operations before income tax
benefit......................................... (13,262) (79,746) (235,999)
Income tax benefit................................ -- -- 2,500
-------- -------- ---------
Loss from continuing operations................... (13,262) (79,746) (233,499)
-------- -------- ---------
Discontinued Operations
Loss from operations............................ (2,595) (3,977) (9,985)
Estimated loss on disposal...................... -- -- (6,000)
-------- -------- ---------
(2,595) (3,977) (15,985)
-------- -------- ---------
Net loss.......................................... (15,857) (83,723) (249,484)
Preferred stock dividends......................... -- -- (5,879)
-------- -------- ---------
Net loss applicable to common stockholders........ $(15,857) $(83,723) $(255,363)
-------- -------- ---------
-------- -------- ---------
Basic and diluted loss per share:
From continuing operations...................... $ (0.58) $ (2.86) $ (7.20)
From discontinued operations.................... (0.12) (0.14) (0.48)
-------- -------- ---------
Net loss per share................................ $ (0.70) $ (3.00) $ (7.68)
-------- -------- ---------
-------- -------- ---------
Weighted average shares outstanding............... 22,770 27,911 33,249
-------- -------- ---------
-------- -------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-15
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------------------
B E COMMON STOCK ADDITIONAL
--------------- ---------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------- ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1995..................... 0.73 $ 733 -- $ -- 20,147 $ 201 $ 42,583 $ (25,238)
Issuances of common stock......................... 4,447 45 10,639
Issuance of preferred stock....................... 932 6,000 (360)
Conversions of preferred stock.................... (0.15) (147) (932) (6,000) 684 7 6,140
Warrants and common stock equivalents issued in
connection with long-term debt and lease
financing........................................ 981
Conversion of long-term debt...................... 539 5 3,410
Preferred stock dividends......................... 0.11 103 (216)
Issuance of restricted stock...................... 150 2 1,236
Amortization of deferred compensation.............
WinStar Private Exchange transaction.............. 3,741 37 39,641
Unrealized loss on investments in marketable
equity securities................................
Other, net........................................ (433)
Net loss.......................................... (15,857)
------ ------ ------ ------- ------ ------- -------- ---------
Balances at December 31, 1995..................... 0.69 $ 689 -- $ -- 29,708 $ 297 $103,837 $ (41,311)
------ ------ ------ ------- ------ ------- -------- ---------
------ ------ ------ ------- ------ ------- -------- ---------
<CAPTION>
TREASURY STOCK
------------------------------------
PREFERRED
COMMON STOCK STOCK B
----------------- ---------------- DEFERRED UNREALIZED LOSS
SHARES AMOUNT SHARES AMOUNT COMPENSATION ON INVESTMENTS
------ -------- ------ ------- ------------ ---------------
<S> <C>
Balances at February 28, 1995..................... -- $ -- -- $ -- $ -- $ --
Issuances of common stock.........................
Issuance of preferred stock.......................
Conversions of preferred stock....................
Warrants and common stock equivalents issued in
connection with long-term debt and lease
financing........................................
Conversion of long-term debt......................
Preferred stock dividends.........................
Issuance of restricted stock...................... (1,238)
Amortization of deferred compensation............. 138
WinStar Private Exchange transaction.............. (2,507) (36,348) (0.69) (3,330)
Unrealized loss on investments in marketable
equity securities................................ (982)
Other, net........................................
Net loss..........................................
------ -------- ------ ------- -------- -----
Balances at December 31, 1995..................... (2,507) $(36,348) (0.69) $(3,330) $ (1,100) $(982)
------ -------- ------ ------- -------- -----
------ -------- ------ ------- -------- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balances at February 28, 1995..................... $ 18,279
Issuances of common stock......................... 10,684
Issuance of preferred stock....................... 5,640
Conversions of preferred stock.................... --
Warrants and common stock equivalents issued in
connection with long-term debt and lease
financing........................................ 981
Conversion of long-term debt...................... 3,415
Preferred stock dividends......................... (113)
Issuance of restricted stock...................... --
Amortization of deferred compensation............. 138
WinStar Private Exchange transaction.............. --
Unrealized loss on investments in marketable
equity securities................................ (982)
Other, net........................................ (433)
Net loss.......................................... (15,857)
---------
Balances at December 31, 1995..................... $ 21,752
---------
---------
</TABLE>
See Notes to Consolidated Financial Statements
F-16
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED B COMMON STOCK ADDITIONAL
--------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995.................................... 0.69 $ 689 29,708 $ 297 $103,837 $ (41,311)
Issuances of common stock........................................ 1,383 14 9,619
Acquisition of treasury shares...................................
Retirement of treasury shares.................................... (0.69) (689) (2,657) (27) (42,018)
Amortization of deferred compensation............................
Conversion of long-term debt..................................... 555 6 3,878
Fair value of stock options granted to nonemployees and other,
net............................................................. 120
Unrealized gain on investments in marketable equity securities...
Net loss......................................................... (83,723)
------ ------ ------ ------- -------- ---------
Balances at December 31, 1996.................................... -- $ -- 28,989 $ 290 $ 75,436 $(125,034)
------ ------ ------ ------- -------- ---------
------ ------ ------ ------- -------- ---------
<CAPTION>
TREASURY STOCK
---------------------------------------------------------
COMMON STOCK PREFERRED STOCK B
----------------- -------------------------------------
SHARES AMOUNT SHARES AMOUNT
------ -------- ----------------- -----------------
<S> <C> <C> <C>
Balances at December 31, 1995.................................... (2,507) $(36,348) (0.69) $(3,330)
Issuances of common stock........................................
Acquisition of treasury shares................................... (150) (3,056)
Retirement of treasury shares.................................... 2,657 39,404 0.69 3,330
Amortization of deferred compensation............................
Conversion of long-term debt.....................................
Fair value of stock options granted to nonemployees and other,
net.............................................................
Unrealized gain on investments in marketable equity securities...
Net loss.........................................................
------ -------- ----- -------
Balances at December 31, 1996.................................... -- $ -- -- $ --
------ -------- ----- -------
------ -------- ----- -------
<CAPTION>
TOTAL
UNREALIZED STOCKHOLDERS'
DEFERRED GAIN/(LOSS) EQUITY
COMPENSATION ON INVESTMENTS (DEFICIT)
------------ --------------- -------------
Balances at December 31, 1995.................................... $ (1,100) $(982) $ 21,752
Issuances of common stock........................................ 9,633
Acquisition of treasury shares................................... (3,056)
Retirement of treasury shares.................................... --
Amortization of deferred compensation............................ 1,100 1,100
Conversion of long-term debt..................................... 3,884
Fair value of stock options granted to nonemployees and other,
net............................................................. 120
Unrealized gain on investments in marketable equity securities... 619 619
Net loss......................................................... (83,723)
-------- ----- ---------
Balances at December 31, 1996.................................... $ -- $(363) $ (49,671)
-------- ----- ---------
-------- ----- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-17
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED A COMMON STOCK ADDITIONAL
----------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996............................... -- $ -- 28,989 $290 $ 75,436
Issuances of common stock................................... -- -- 1,218 12 8,769
Issuances of common stock for acquisitions.................. -- -- 3,984 40 83,311
Issuance of preferred stock Series A........................ 4,000 40 -- -- 95,960
Dividends declared on Series A preferred stock.............. -- -- -- -- (5,326)
Issuances of Series A preferred stock as dividends
in kind ................................................... 213 2 -- -- 5,324
Dividends on Series C preferred stock....................... -- -- -- -- (553)
Conversion of Series A preferred stock to common stock...... (303) (3) 420 4 (1)
Series C preferred stock issuance costs and
other, net ................................................ -- -- -- -- (7,179)
Unrealized gain on investments in marketable
equity securities ......................................... -- -- -- -- --
Net loss.................................................... -- -- -- -- --
------ ---- ------ ---- --------
Balances at December 31, 1997............................... 3,910 $ 39 34,611 $346 $255,741
------ ---- ------ ---- --------
------ ---- ------ ---- --------
<CAPTION>
UNREALIZED TOTAL
GAIN/(LOSS) STOCKHOLDERS'
ACCUMULATED ON EQUITY
DEFICIT INVESTMENTS (DEFICIT)
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1996............................... $(125,034) $(363) $ (49,671)
Issuances of common stock................................... -- -- 8,781
Issuances of common stock for acquisitions.................. -- -- 83,351
Issuance of preferred stock Series A........................ -- -- 96,000
Dividends declared on Series A preferred stock.............. -- -- (5,326)
Issuances of Series A preferred stock as dividends
in kind ................................................... -- -- 5,326
Dividends on Series C preferred stock....................... -- -- (553)
Conversion of Series A preferred stock to common stock...... -- -- --
Series C preferred stock issuance costs and
other, net ................................................ -- -- (7,179)
Unrealized gain on investments in marketable
equity securities ......................................... -- 363 363
Net loss.................................................... (249,484) -- (249,484)
--------- ----- ---------
Balances at December 31, 1997............................... $(374,518) $ -- $(118,392)
--------- ----- ---------
--------- ----- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-18
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TEN
MONTH FOR THE YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, -----------------------
1995 1996 1997
------------ -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(15,857) $(83,723) $(249,484)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net loss from discontinued operations........ 2,595 3,977 15,985
Depreciation and amortization................ 617 5,244 27,762
Deferred income tax benefit.................. -- -- (2,500)
Provision for doubtful accounts.............. 72 327 3,964
Equity in unconsolidated results of AGT...... 866 -- --
Non cash interest expense.................... 6,151 35,040 53,506
Decrease (increase) in operating assets:
Accounts receivable........................ (485) (5,325) (23,392)
Inventories................................ (991) (1,897) (9,217)
Prepaid expenses and other current
assets.................................. (1,621) (14,164) 441
Other assets............................... (947) (1,904) (199)
Increase in accounts payable and accrued
expenses................................... 2,465 11,755 51,670
Net assets used in discontinued operations... (2,585) (4,813) (11,568)
Other, net................................... 179 186 --
-------- -------- ---------
Net cash used in operating activities............. (9,541) (55,297) (143,032)
-------- -------- ---------
Cash flows from investing activities:
Investments in and advances to AGT.............. (5,704) -- --
Decrease (increase) in short-term investments,
net.......................................... (73,594) 46,597 10,094
Decrease (increase) in other investments, net... (7,497) 6,447 --
Purchase of property and equipment, net......... (7,654) (46,651) (213,252)
Acquisitions of licenses and other.............. -- (2,121) (40,190)
Other, net...................................... (499) (1,619) 2,494
-------- -------- ---------
Net cash (used in) provided by investing
activities...................................... (94,948) 2,653 (240,854)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from (repayments) of long-term debt,
net.......................................... 222,715 (1,069) 412,029
Net proceeds from redeemable preferred stock.... -- -- 168,138
Net proceeds from equity transactions........... 11,259 6,295 104,781
Proceeds from equipment lease financing......... 6,998 8,345 9,912
Payment of capital lease obligations............ (471) (2,264) (3,740)
Other, net...................................... (898) (1,010) (316)
-------- -------- ---------
Net cash provided by financing activities......... 239,603 10,297 690,804
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 135,114 (42,347) 306,918
Cash and cash equivalents at beginning of
period.......................................... 2,874 137,988 95,641
-------- -------- ---------
Cash and cash equivalents at end of period........ 137,988 95,641 402,559
Short-term investments at end of period........... 73,595 26,997 16,903
-------- -------- ---------
Cash, cash equivalents and short-term investments
at end of period................................ $211,583 $122,638 $ 419,462
-------- -------- ---------
-------- -------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-19
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of WinStar
Communications, Inc. and its subsidiaries (collectively, "WinStar" or the
"Company"). All material intercompany transactions and accounts have been
eliminated in consolidation. The accompanying consolidated financial statements
reflect the Company's merchandising subsidiary, WinStar Global Products, Inc.
("Global Products") and the Company's residential long distance subsidiary
WinStar Gateway Network, Inc. ("Gateway"), as discontinued operations (reference
is made to Notes 20 and 24).
NATURE OF BUSINESS
The Company provides facilities-based voice and data telecommunications
services to businesses and other customers in major metropolitan areas
throughout the United States. WinStar's licenses provide the Company with the
largest amount of 38 GHz radio spectrum in the country, which allows the Company
to create a nationwide network on a cost effective basis using its fiber-quality
digital capacity in the 38 GHz band to provide its customers with a broad range
of attractively priced services, and an alternative to the incumbent local
exchange carriers, other competitive local exchange carriers and the
interexchange carriers. Additionally, the Company produces, aggregates and
distributes information and entertainment content, some of which is distributed
as part of its telecommunications service offerings to different services in the
market place, as well as through traditional and new media outlets, including
television, video, cable, radio and the Internet. 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, which
will require significant amounts of capital to finance capital expenditures and
anticipated operating losses. The Company may elect to slow the speed or narrow
the focus of this expansion in the event it is unable to raise sufficient
amounts of capital on acceptable terms.
FISCAL YEAR
The Company changed its fiscal year end from February 28 to December 31,
effective January 1, 1996. Accordingly, these financial statements present the
ten-month transition period ended December 31, 1995, and the years ended
December 31, 1996 and 1997.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market fund investments, short-term certificates of
deposit, and commercial paper. Exclusive of cash in banks, cash equivalents at
December 31, 1996 and 1997 were $84.5 million and $395.3 million, respectively,
which approximate fair value.
SHORT-TERM INVESTMENTS
Short-term investments are widely diversified and principally consist of
certificates of deposit and money market deposits, U.S. government or government
agency securities, commercial paper rated "A-1/P-1" or higher, and municipal
securities rated "A" or higher with an original maturity of greater than three
months and less than six months. Short-term investments are considered
held-to-maturity and are stated at amortized cost which approximates fair value.
As of December 31, 1996 and 1997, cash, cash equivalents and short-term
investments totaled $122.6 million and $419.5 million, respectively.
INVENTORIES
Inventories are composed of film inventories that include direct and
indirect production costs, which are amortized to expense in the proportion that
revenue recognized during the year for each film bears to the estimated total
revenue to be received from all sources under the individual film forecast
method. Management's
F-20
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
estimate of forecasted revenues exceeds the unamortized costs on an individual
program basis. Such forecasted revenue is subject to revision in future periods
if warranted by changing market conditions.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
generally computed using the straight-line method over the estimated useful
lives of the related assets.
The Company constructs certain of its own network systems and related
facilities. Certain internal costs directly related to the construction of such
facilities, including interest and salaries of certain employees, are
capitalized. Such costs amounted to approximately $4.1 million for the year
ended December 31, 1997, and were insignificant in prior years.
Costs incurred to develop software for internal use are capitalized as
incurred. Such costs amounted to $452,000, and $7,091,000 for the years ended
December 31, 1996 and 1997, respectively, and were insignificant in prior years.
The Company follows the policy of capitalizing interest expense as a
component of the cost of its telecommunications equipment constructed for its
own use.
LICENSES AND INTANGIBLE ASSETS
Licenses and intangible assets are being amortized by the straight-line
method over their estimated useful lives.
Goodwill represents the excess of cost over the fair value of assets
acquired. The Company's policy is to measure goodwill impairment by considering
a number of factors as of each balance sheet date including (i) current
operating results of the applicable business, (ii) projected future operating
results of the applicable business, (iii) the occurrence of any significant
regulatory changes which may have an impact on the continuity of the business,
and (iv) any other material factors that affect the continuity of the applicable
business. The amortization period for goodwill is determined on a case-by-case
basis for each acquisition from which goodwill arises based on a review of the
nature of the business acquired as well as the factors cited above (see
Note 6).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Pursuant to SFAS 109, deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets and
liabilities, loss carryforwards and tax credit carryforwards for which income
tax benefits are expected to be realized in future years. A valuation allowance
is established to reduce deferred tax assets if it is more likely than not that
all, or some portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
REVENUE RECOGNITION
In the telecommunications segment, revenues are recorded upon placing of
calls or rendering of other related services. In the information services
segment, revenues from film productions are recognized when a program is
accepted by the licensee and is available for broadcast. Revenues from the
licensing of film productions are recognized when the license period begins and
the film is available for broadcast. Revenues from advertising sales are
recognized when the related advertising is broadcast.
F-21
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share is 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. The
adoption of Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" had no material impact on the presentation of loss per share for the
periods presented. Stock options and warrants have been excluded from the
calculation of diluted loss per share as their effect would have been
antidilutive. (See Notes 13 and 14.)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across geographic areas. The Company
routinely addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is limited. The
Company's short term investments and cash equivalents are potentially subject to
concentration of credit risk, but such risk is limited due to such amounts being
invested in investment grade securities.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
NOTE 2--ACQUISITIONS
ACQUISITIONS OF BUSINESSES
MILLIWAVE LIMITED PARTNERSHIP
On January 2, 1997, a subsidiary of the Company merged with the corporate
shareholders of Milliwave Limited Partnership ("Milliwave"), a large holder of
38 GHz licenses in the United States, covering 160 million people in more than
80 major markets. The merger consideration paid by the Company to the
shareholders of the corporate partners of Milliwave was $116.0 million ($40.7
million in cash and 3.6 million shares of the Company's common stock, which had
an aggregate market value of $75.0 million). The merger was treated as a
"purchase" for accounting purposes with the purchase price principally allocated
to licenses. In addition, approximately $26.5 million of deferred tax
liabilities were recorded in connection with the acquisition, with a
corresponding allocation to licenses, which will be amortized on a straight-line
basis over 40 years. Milliwave had minimal operations prior to its merger into
the Company. The accounts of Milliwave have been consolidated into the Company's
financial statements as of the date of acquisition.
F-22
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACQUISITIONS--(CONTINUED)
Unaudited pro forma results of operations (in thousands, except per share
data), which reflect the combined operations of the Company and Milliwave as if
the merger occurred as of January 1, 1996, are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER 31,
1996
------------------
<S> <C>
Operating Revenues....................................................... $ 17,649
Net Loss................................................................. $ (91,898)
Net Loss Per Share....................................................... $ (2.92)
</TABLE>
LOCAL AREA TELECOMMUNICATIONS, INC.
In October 1996, a subsidiary of the Company acquired certain assets of
Local Area Telecommunications, Inc. ("Locate"), comprising its business as a
competitive access provider of local digital microwave distribution services and
facilities to large corporations and to interexchange and other common carriers.
The assets acquired included multiple 38 GHz licenses in the New York
metropolitan area. The purchase price for such assets was $17.5 million, which
was paid in the form of promissory notes, which were paid in 1997 (see Note 7).
The acquisition has been accounted for as a "purchase" for accounting purposes,
with the majority of the purchase price allocated to licenses, which will be
amortized on a straight-line basis over 40 years. The accounts of Locate have
been consolidated into the Company's financial statements as of the date of the
acquisition.
AVANT-GARDE TELECOMMUNICATIONS, INC.
Avant-Garde Telecommunications, Inc. ("Avant-Garde" or "AGT") was a
privately held company which held 38 GHz radio licenses granted by the FCC in
September 1993. Through July 17, 1995, the Company owned 49% of Avant-Garde,
which it acquired for $4.9 million, and accounted for its investment in
Avant-Garde under the equity method. For the period from March 1, 1995 to July
17, 1995, Avant-Garde had net losses of $1.8 million. On July 17, 1995, pursuant
to the terms of a merger agreement, the Company exchanged 1,275,000 restricted
shares of its common stock valued at $5.1 million for the 51% of Avant-Garde
that it did not already own. The acquisition of Avant-Garde has been treated as
a "purchase" for accounting purposes, with $12.6 million allocated to the
licenses acquired, which are being amortized on a straight-line basis over 40
years. The accounts of Avant-Garde have been consolidated into the Company's
financial statements as of the date of the acquisition.
OTHER ACQUISITIONS OF BUSINESSES
During 1997, the Company acquired certain other telecommunications and
information services companies which were not material.
Unaudited results of operations for acquisitions consummated through
December 31, 1997 other than Milliwave have not been included because they are
not material to the consolidated statement of operations of the Company.
During 1996, a subsidiary of the Company acquired 100% ownership or a
controlling interest in a number of companies engaged in the production and
distribution of entertainment content. These acquisitions were treated as
"purchases" for accounting purposes. The aggregate consideration for the
acquisitions was approximately $6.4 million, consisting of $4.1 million in cash,
$800,000 in notes payable and 100,605 shares of the Company's common stock or
share equivalents, valued at $1.5 million. The accounts of the acquired
companies have been consolidated with the Company's financial statements as of
the date of acquisitions.
F-23
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--ACQUISITIONS--(CONTINUED)
ACQUISITION OF ASSETS
In October 1997, a subsidiary of the Company purchased certain
telecommunication assets from US ONE Communications Corp., US ONE Communications
Services, Corp. and US ONE Communications of New York, Inc. (collectively, the
"Sellers") which were entities in bankruptcy under chapter 11 of the United
States Bankruptcy code. The aggregate purchase price was approximately $81.3
million, of which approximately $61.3 million was paid in cash at the closing
and $20.0 million is payable by WinStar in cash and/or shares of the common
stock of WinStar, at WinStar's discretion, on the effective date of the Sellers
confirmed plan of reorganization. Included in fixed assets are certain equipment
which the Company plans to sell within the near term.
ACQUISITION OF ADDITIONAL LICENSES
During 1997, the Company executed agreements to acquire additional 38 GHz
licenses, subject to FCC approval. The total purchase price for the licenses
will be $55.0 million, payable in shares of common stock of the Company or in
certain instances, at the Company's election, cash, which will be payable at the
time of closing. During 1997, licenses acquired amounted to $10.4 million of
which $7.5 million was paid in common stock at the closing. The remaining
license acquisitions are expected to close within the next 12 months.
In connection with the acquisition of additional licenses, the Company
entered into service agreements whereby the Company supplied and installed
telecommunications equipment and provided related consulting services. Total
revenues recorded under such agreements were $4.2 million in 1997.
ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1997
GOODNET
On January 12, 1998, pursuant to an agreement between the Company and
Telesoft Corp., the Company acquired Telesoft's Internet services subsidiary,
("GoodNet"), for a purchase price of approximately $22.0 million, consisting of
$3.5 million cash and 732,784 shares of common stock of the Company valued at
$18.5 million. GoodNet is a national provider of Internet services, o ffering
high-capacity data communication services.
MIDCOM COMMUNICATIONS INC.
Effective January 21, 1998 (the "Closing Date"), pursuant to an agreement
between the Company and MIDCOM Communications Inc. and its subsidiaries
(collectively, "Midcom"), the Company acquired substantially all of Midcom's
assets and businesses for a purchase price of approximately $92.0 million in
cash. On December 23, 1997, $9.2 million of the purchase price was placed in
escrow. On the Closing Date, $48.5 million of the purchase price was paid in
cash to Midcom and its designees and $10.8 million of the purchase price was
placed in escrow along with the initial deposit of $9.2 million to secure
Midcom's obligations to indemnify the Company in certain circumstances. In
addition, $23.5 million of the purchase price was placed in escrow on the
Closing Date to secure Midcom's obligation to refund a portion of the purchase
price in the event of a post-closing adjustment of the purchase price under the
purchase agreement. Midcom is an entity in bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code.
Midcom is a provider of long distance voice and data telecommunications
services primarily to small and medium-sized businesses, most of which are
located in major metropolitan areas of California, Florida, Illinois, New York,
Ohio and Washington.
NOTE 3--INVESTMENTS IN MARKETABLE EQUITY SECURITIES
The Company treats its investments in marketable securities as available
for sale securities. As such, they are carried at market value, with the
difference between the historical cost (which is determined on a FIFO basis)
F-24
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INVESTMENTS IN MARKETABLE EQUITY SECURITIES--(CONTINUED)
and the market value reflected in unrealized gains or losses on marketable
equity securities, a component of stockholders' equity. During the year ended
December 31, 1996, proceeds of $6,400,000 were realized on the sale of
marketable securities, which were sold at carrying value. During the year ended
December 31, 1997, all such investments were sold, generating proceeds of
approximately $1,024,000 and a loss of approximately $27,000, which was
recognized in operations. At December 31, 1996 and 1997, unrealized losses of
$363,000 and $0 were carried in stockholders' equity.
NOTE 4--INVENTORIES
Inventory is comprised of film inventories of $5,009,000 and $10,296,000 at
December 31, 1996 and 1997, respectively.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, ESTIMATED
1996 1997 USEFUL LIFE
------------ ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Telecommunications equipment
and software........................................ $ 55,368 $290.266 5 to 10 years
Furniture, fixtures and other......................... 2,947 12,090 4 to 5 years
Leasehold improvements................................ 4,678 22,940 Lesser of life of
the lease or life
of the asset
-------- --------
62,993 325,296
Less accumulated depreciation
and amortization.................................... (3,010) (40,461)
-------- --------
$ 59,983 $284,835
-------- --------
-------- --------
</TABLE>
NOTE 6--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, ESTIMATED
1996 1997 USEFUL LIFE
------------ ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.............................................. $ 11,430 $ 15,569 5 to 20 years
Covenants not to compete and other.................... 15 4 5 to 10 years
-------- --------
11,445 15,573
Less accumulated amortization......................... (396) (1,280)
-------- --------
$ 11,049 $ 14,293
-------- --------
-------- --------
</TABLE>
Licenses, which are subject to renewal through February 2001, are amortized
over a 40-year period, in accordance with industry practice. As of December 31,
1996 and 1997, the value of licenses was $27.4 million and $174.8 million, net
of accumulated amortization of $820,000 and $4.9 million, respectively.
F-25
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC....................... $ -- $ 200,000
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC II.................... -- 50,000
14% Senior Discount Notes Due 2005.......................................... 176,328 201,843
14 1/2% Senior Deferred Interest Notes Due 2005............................. -- 111,691
15% Senior Subordinated Deferred Interest Notes Due 2007.................... -- 103,542
14% Convertible Senior Subordinated Discount Notes
Due 2005.................................................................. 88,164 100,922
Other Notes Payable......................................................... 19,125 857
--------- ---------
Total..................................................................... 283,617 768,855
Less Current Portion........................................................ 18,456 386
--------- ---------
Total Long Term Debt........................................................ $ 265,161 $ 768,469
--------- ---------
--------- ---------
</TABLE>
1995 DEBT PLACEMENT
In October 1995, the Company completed a $225.0 million private placement
of debt securities with institutional investors (the "1995 Debt Placement"). The
transaction was structured as a units offering with two components,
$150.0 million of Senior Discount Notes Due 2005 (the "Senior Discount Notes"),
and $75 million of Convertible Senior Subordinated Discount Notes Due 2005 (the
"1995 Convertible Notes"), convertible at $20.625 (subject to adjustment), a 10%
premium over the closing price on October 18, 1995, the day of pricing. Both
securities accrue interest at 14% per annum, with no interest payable during the
first five years, and principal payable only at maturity in October 2005.
Commencing April, 2001, both securities require the payment of interest only, in
cash, until maturity. In addition, the 1995 Convertible Notes, including
accretion thereon, will be automatically converted during the initial five-year
period if the market price of the Company's common stock exceeds certain levels
for thirty consecutive trading days, ranging from $37.50 per share in the first
year to $44.00 per share in the fifth year.
In accordance with the terms of the 1995 Debt Placement, the Company
consummated an exchange offer in 1996 with respect to the Senior Discount Notes,
whereby these notes were exchanged for new notes which were identical in every
respect to the original Senior Discount Notes except that the new notes were
registered under the Securities Act of 1933.
1997 DEBT PLACEMENTS
In March 1997, the Company and WinStar Equipment Corp. ("WEC") issued an
aggregate of $300.0 million of notes in the March 1997 Debt Placement,
consisting of (i) $100.0 million of the 1997 Senior Deferred Interest Notes Due
2005 (the "1997 Senior Notes"), ranking pari passu with the 1995 Senior Discount
Notes, and (ii) $200.0 million of 1997 Guaranteed Senior Secured Notes Due 2004
(the "WEC Notes"). The Company also obtained a $150.0 million facility
("Facility") from affiliates of certain of the underwriters of the Notes. In
August 1997, WinStar Equipment II Corp. ("WEC II") issued, pursuant to the
Facility, $50.0 million of 1997 Guaranteed Senior Secured Notes Due 2004 (the
"WEC II Notes") and in October 1997, the Company utilized the remaining $100.0
million available under the Facility, issuing an aggregate of $100.0 million
principal amount of 1997 Senior Subordinated Deferred Interest Notes Due 2007
(the "October 1997 Notes").
The obligations of WEC and WEC II under the WEC Notes and the WEC II Notes
are unconditionally guaranteed by the Company and are secured by a security
interest in the equipment and other property purchased by WEC and WEC II, as the
case may be, with the proceeds thereof.
F-26
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--LONG-TERM DEBT--(CONTINUED)
The WEC Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC Notes will
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at certain specified prices.
Additionally, in the event that by March 18, 1999, the Company has not applied
the $200.0 million of proceeds from the sale of the WEC Notes to fund the
acquisition costs of Designated Equipment (as defined), the Company is required
to redeem the WEC Notes in an aggregate principal amount equal to such shortfall
at a redemption price of 112.5% of such principal amount, plus accrued interest,
if any, to the date of redemption.
The WEC II Notes bear interest at a rate of 12 1/2% per annum, payable on
March 15 and September 15, commencing September 15, 1997. The WEC II Notes
mature on March 15, 2004 and are redeemable on or after March 15, 2002, at the
option of the Company, in whole or in part, at certain specified prices.
Additionally, in the event that by August 8, 1999, the Company has not applied
the $50.0 million of proceeds from the sale of the WEC Notes to fund the
acquisition costs of Designated Equipment, the Company is required to redeem the
WEC II Notes in an aggregate principal amount equal to such shortfall at a
redemption price of 112.5% of such principal amount, plus accrued interest, if
any, to the date of redemption.
The 1997 Senior Notes are unsecured, senior indebtedness of the Company,
rank pari passu in right of payment with all existing and future senior
indebtedness of the Company, and are senior in right of payment to all existing
and future subordinated indebtedness of the Company. The 1997 Senior Notes bear
interest at a rate of 14 1/2%. Until October 15, 2000, interest on the 1997
Senior Notes will accrue and compound semiannually, but will not be payable in
cash. Interest on the Accumulated Amount (as defined in the 1997 Senior Notes
Indenture) of the 1997 Senior Notes as of October 15, 2000 will be payable
semiannually in cash on April 15 and October 15 of each year commencing April
15, 2001. The 1997 Senior Notes mature on October 15, 2005 and are redeemable on
or after October 15, 2000, at the option of the Company, in whole or in part, at
certain specified prices.
The October 1997 Notes are unsecured, senior subordinated obligations of
the Company, rank pari passu in right of payment with the 1995 Convertible Notes
and are junior in right of payment to all existing future senior indebtedness of
the Company. The October 1997 Notes bear interest at a rate of 15% per annum,
and are payable on March 1 and September 1, commencing September 1, 2002. Until
March 1, 2002, interest on the Notes will accrue and be compounded semiannually
on each Semi Annual Interest Accrual Date (as defined in the Indenture relating
to the October 1997 Notes), but will not be payable in cash. Interest on the
Accumulated Amount (as defined in the Indenture relating to the October 1997
Notes) of the Notes as of March 1, 2002 will be payable semiannually commencing
September 1, 2002. The Notes will mature on March 1, 2007 and are redeemable on
or after March 1, 2002, at the option of the Company, in whole or in part, at
certain specified prices.
The terms of the Indentures relating to the 1995 and 1997 Debt Placements
and the Certificates of Designation relating to certain of the Company's
Preferred Stock agreements (see Notes 12 and 13) contain covenants placing
certain restrictions on the ability of the Company to pay dividends or make
other restricted payments, incur additional indebtedness, issue guarantees, sell
assets, or enter into certain other specified transactions.
OTHER
On October 8, 1996, in connection with the purchase of Locate (see Note 2),
the Company issued two promissory notes in the aggregate principal amount of
$17.5 million (the "Locate Notes") bearing interest at an annual rate of 8%.
Interest on the Locate Notes was payable on a quarterly basis. The Notes were
due on the earlier of April 8, 1997, or the day after the date on which the
shares into which the Notes may be converted have been registered pursuant to an
effective registration statement. During 1997, the Locate Notes including
accrued interest were paid in full. At December 31, 1996, the aggregate amount
of the Locate Notes, including accrued interest thereon, was $17.8 million.
F-27
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--LONG-TERM DEBT--(CONTINUED)
In May 1995, a subsidiary of the Company issued $7.5 million of five year
collateralized convertible notes bearing interest at a rate of 7%, payable
semiannually, with all principal due and payable on May 24, 2000. On December
28, 1995, the note holders converted $3.75 million of the convertible notes and
accrued interest thereon into 539,255 shares of common stock of the Company, and
on November 24, 1996, converted the remaining outstanding notes of
$3.75 million principal amount plus accrued interest thereon into 554,880 shares
of common stock of the Company.
Maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998.......................................................................... $ 386
1999.......................................................................... 277
2000.......................................................................... 194
2001.......................................................................... --
2002.......................................................................... --
Thereafter.................................................................... 767,998
--------
$768,855
--------
--------
</TABLE>
NOTE 8--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments classified as current
assets or liabilities, including cash and cash equivalents, short-term
investments, accounts and notes receivable, and accounts payable and accrued
expenses approximate carrying value, principally because of the short maturity
of these items. Marketable equity securities are stated at quoted market value.
The carrying amounts of the long-term debt payable to financial
institutions issued pursuant to two of the Company's subsidiaries' asset-based
lending agreements approximate fair value because the interest rates on these
agreements change with market interest rates.
The fair values of capitalized lease obligations approximate carrying value
based on their effective interest rates compared to current market rates.
Estimated fair values of the Company's Long Term Notes Payable, Convertible
Notes Payable, and Exchangeable Redeemable Preferred Stock which were calculated
based upon quoted market prices, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
14% Senior Discount Notes Due 2005...................................... $176,328 $179,455 $201,843 $233,144
14% Convertible Senior Subordinated Discount Notes Due 2005............. $88,164 $ 94,141 $100,922 $216,228
14 1/2% Senior Deferred Interest Notes Due 2005......................... -- -- $111,691 $132,000
15% Senior Subordinated Deferred Interest Notes Due 2007 ............... -- -- $103,542 $122,500
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC................... -- -- $200,000 $224,500
12 1/2% Guaranteed Senior Secured Notes Due 2004, WEC II ............... -- -- $50,000 $ 55,750
14 1/4% Series C Senior Cumulative Exchangeable Redeemable Preferred
Stock ................................................................ -- -- $175,553 $177,675
</TABLE>
NOTE 9--CAPITAL LEASE OBLIGATIONS
The Company leases telecommunications and other equipment through various
equipment lease financing facilities. Such leases have been accounted for as
capital leases.
F-28
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--CAPITAL LEASE OBLIGATIONS--(CONTINUED)
Future minimum lease payments on these capital leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $ 9,554
1999.......................................................................... 9,641
2000.......................................................................... 8,283
2001.......................................................................... 5,282
2002.......................................................................... 1,834
Thereafter.................................................................... 194
--------
Total payments................................................................ 34,788
Less amount representing interest............................................. (6,655)
--------
Present value of minimum lease payments....................................... $ 28,133
--------
--------
</TABLE>
The carrying value of assets under capital leases was $15.9 million and
$28.0 million at December 31, 1996 and 1997 respectively, and is included in
property and equipment. Amortization of these assets is included in depreciation
expense.
NOTE 10--COMMITMENTS AND CONTINGENCIES
A. OPERATING LEASES
The Company's offices, manufacturing and warehousing facilities, along with
various equipment and roof access rights, are leased under operating leases
expiring in 1998 through 2012. Certain leases contain escalation clauses based
upon increases in the consumer price index.
Future minimum lease payments on noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $ 13,600
1999.......................................................................... 13,400
2000.......................................................................... 13,000
2001.......................................................................... 12,600
2002.......................................................................... 12,400
Thereafter.................................................................... 80,500
--------
$145,500
--------
--------
</TABLE>
Rent expense for the ten month period ended December 31, 1995 and the years
ended December 31, 1996 and 1997 were $1.0 million, $3.6 million and
$11.6 million, respectively.
B. EMPLOYMENT CONTRACTS
Amounts due under employment contracts are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
- ------------------------------------------------------------------------------ --------------
<S> <C>
1998.......................................................................... $2,485
1999.......................................................................... 1,728
2000.......................................................................... 479
------
$4,692
------
------
</TABLE>
F-29
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
C. LITIGATION
The Company's residential long distance subsidiary, Gateway, which is
treated as a discontinued operation in the accompanying financial statements
(reference is made to Note 24), occasionally receives inquiries from state
authorities arising with respect to consumer complaints concerning the provision
of telecommunications services, including allegations of unauthorized switching
of long distance carriers and misleading marketing. The Company believes such
inquiries are common in the long distance industry and addresses such inquiries
in the ordinary course of business. In December 1996, the Federal Communications
Commission ("FCC") and Gateway entered into a consent decree which terminated an
inquiry by the FCC into any alleged violations of unauthorized carrier
conversions through the use of contest programs by certain of Gateway's agents.
The FCC cited Gateway's efforts in identifying the problems caused by these
agents and its proactive response in implementing self-directed remedial actions
on its own as significant factors leading to the consent decree in lieu of
initiating a formal investigation. The Company entered into assurances of
voluntary compliance with the attorneys general of a number of states and has
also initiated negotiations with other state authorities to resolve any claims
by such authorities arising from the contest programs. The Company does not
believe that the resolution of these issues will have a material adverse effect
on the Company, its financial condition, or its results of operations.
In June 1996, the Company commenced an action for declaratory judgment
against a former officer of Gateway, who had notified the Company of his belief
that he was entitled to the issuance of certain shares of common stock of the
Company (or payment of the cash value thereof) under the terms of stock options
granted to him during his employment with Gateway. He has based his beliefs on
standard antidilution language contained in his stock option agreement. Such
language was designed and intended to adjust the number of shares purchasable
thereunder in the event of a merger, capital restructuring or other similar
event of the Company. As WinStar Communications, Inc. has never been subject to
a merger or capital restructuring, the former officer was immediately notified
of the Company's belief that his claim was without merit in law or fact. To
expedite resolution of these issues, the Company currently is seeking
declaratory judgment that it has no obligation to the former officer.
In January 1998, a stockholder suit, purported to be a class action, was
commenced against the Company, its directors (and certain former directors) and
one non-director officer in the Delaware Chancery Court seeking among other
things, to invalidate certain portions of the Company's Stockholder Rights Plan,
adopted in July 1997 (the "Rights Plan") (see Note 12), and to recover
unspecified damages and attorneys' fees. The complaint alleges that certain
provisions of the Rights Plan, particularly the so-called "Continuing Directors"
provision, are not permitted under the Delaware General Corporation Law and the
Company's Certificate of Incorporation. The Company believes strongly that these
allegations are without merit and that the Rights Plan was properly adopted and
is valid in its entirety. The Company is reviewing its available alternatives
with regard to responding to this action.
The Company is also involved in miscellaneous claims, inquiries and
litigation arising in the ordinary course of business. The Company believes that
these matters, taken individually or in the aggregate, would not have a material
adverse impact on the Company's financial position or results of operations.
D. OTHER
In connection with the purchase of telecommunications equipment including
switches and radios, the Company enters into agreements with the suppliers of
such equipment. As of December 31, 1997, the Company's noncancellable purchase
commitments under these agreements were approximately $31 million. In addition,
the Company has guaranteed $3.0 million of debt of Global Products.
F-30
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--INCOME TAXES
SFAS No. 109 requires the use of the liability method in accounting for
income taxes. Temporary differences and carryforwards that give rise to deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......................... $ 48,218 $ 134,550
Deferred interest expense................................ 10,417 21,636
Allowance for doubtful accounts.......................... 433 1,140
Deferred compensation.................................... -- 748
Other.................................................... 961 2,291
---------- ----------
Gross deferred tax assets................................ 60,029 160,365
Valuation allowance...................................... (58,586) (119,874)
---------- ----------
Deferred tax asset net of allowance...................... 1,443 40,491
---------- ----------
Deferred tax liabilities:
Depreciation............................................. (1,354) (5,998)
Amortization............................................. (89) (58,493)
---------- ----------
Gross deferred tax liabilities........................... (1,443) (64,491)
---------- ----------
Net deferred tax asset (liability)......................... $ -- $ (24,000)
---------- ----------
---------- ----------
</TABLE>
The federal net operating loss carryforward at December 31, 1997 is
approximately $345.0 million. If not utilized, the net operating loss
carryforward will expire in various amounts through the year 2012.
Some of these losses are subject to utilization limitation under
Section 382 of the Internal Revenue Code. However, the Company believes that
substantially all of such losses will be available to offset future income.
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets may not be realized. The valuation allowances
at December 31, 1996 and December 31, 1997, primarily pertain to uncertainties
with respect to future utilization of net operating loss carryforwards.
On January 2, 1997, a net deferred tax liability of $26.5 million was
recorded in connection with the acquisition of Milliwave (see Note 2). This
deferred tax liability resulted from the temporary difference between the book
and tax basis of the acquired licenses, and related to the scheduled reversal of
the temporary differences through amortization in years 2018 through 2036 that
could not be offset by deferred tax assets existing at January 2, 1997, the date
of the Milliwave acquisition.
During 1997, the Company recognized a deferred income tax benefit of
$2.5 million relating to the Company's net loss carryforwards. The Company
recognizes income tax benefits to the extent of future reversals of existing
temporary differences.
NOTE 12--STOCKHOLDERS' EQUITY
COMMON STOCK
The authorized common stock of WinStar was increased during 1997 from
75.0 million shares to 200.0 million shares, $.01 par value. The holders of
common stock of WinStar are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders. Although the Company has no
present intention of paying any cash dividends (and is currently restricted from
doing so under its indentures), holders of the common stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. In the event of a liquidation or
dissolution of WinStar, holders of the common stock are entitled to share
ratably in all assets remaining after payment of all liabilities and the
liquidation
F-31
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--STOCKHOLDERS' EQUITY--(CONTINUED)
preferences of preferred shares. Holders of common stock have no preemptive
rights and have no rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock.
PREFERRED STOCK
The authorized capital stock of the Company includes 15 million shares of
"Blank Check" preferred stock, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. The Board of
Directors, without further approval of the stockholders, is authorized to fix
the rights and terms, conversion rights, voting rights, redemption rights and
terms, liquidation preferences and any other rights, preferences, privileges and
restrictions applicable to each series of preferred stock.
SERIES A
On February 11, 1997, the Company sold 4.0 million shares of 6% Series A
cumulative convertible preferred stock, par value $0.01, and 1.6 million
warrants to purchase common stock of the Company, par value $0.01, for gross
proceeds of $100.0 million. The preferred stock earns a 6% annual dividend,
payable quarterly in kind, and matures on February 11, 2002.
Two million shares of preferred stock became convertible beginning on
August 11, 1997, and certain of these shares were converted at prices ranging
from $16.75 per share to $18.86 per share, while the remainder became
convertible on February 11, 1998. All remaining outstanding shares are
convertible at $25 per share. On February 11, 2002, any preferred stock still
outstanding will be automatically converted into shares of the Company's common
stock, unless the Company elects to pay, in lieu of conversion, the equivalent
value in cash.
The warrants are exerciseable at $25 per share, and expire on February 11,
2002. The Company has the right to call the warrants after February 11, 2000, if
the Company's common stock price has exceeded $40 on each of the previous twenty
trading days.
RIGHTS TO PURCHASE SERIES B PREFERRED STOCK
Under a Rights Agreement dated as of July 2, 1997, between the Company and
Continental Stock Transfer & Trust Company, as Rights Agent, which was adopted
by the Board of Directors of the Company on July 2, 1997, holders of Common
Stock of the Company received, as a dividend, preferred stock purchase rights
(the "Rights") at the rate of one Right for each share of Common Stock held as
of the close of business on July 14, 1997. One Right will also attach to each
share of Common Stock issued thereafter. Currently the Rights are not separate
from the Common Stock and are not exercisable, and the Rights will only separate
from the Common Stock and become exercisable if a person or group acquires 10%
or more of the Company's outstanding Common Stock (an "Acquiring Person") or
launches a tender or exchange offer that would result in ownership of 10% or
more the Company's outstanding common Stock. Each Right that is not owned by an
Acquiring Person entitles the holder of the right to buy one one-thousandth of
one share (a "Unit") of Series B Preferred Stock which will be issued by the
Company. If any person becomes an Acquiring Person, or if an Acquiring Person
engages in certain transactions involving conflicts of interest or in a business
combination in which the Company's Common Stock remains outstanding, then the
Rights Plan provides that each Right, other than any Right held by the Acquiring
Person, entitles the holder to purchase, for $70, Units with a market value of
$140. However, if the Company is involved in a business combination in which the
Company itself is not the survivor, or if the Company sells 50% or more of its
assets or earning power to another person, then the Rights Plan provides that
each Right entitled the holder to purchase, for $70, shares of the common stock
of the Acquiring Person's ultimate parent having a market value of $140.
At any time until ten days following the date on which a person acquires
10% or more of the Company's Common Stock the Company may redeem all (but not
less than all) of the Rights for $0.0001 per Right. The Rights expire in ten
years. The Series B Preferred Stock will be junior, with respect to dividends
and liquidation
F-32
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--STOCKHOLDERS' EQUITY--(CONTINUED)
rights, to any other series of preferred stock of the Company. the Series B
Preferred Stock has dividend and liquidation preferences over the Common Stock
of the Company.
SERIES E PREFERRED STOCK
In April 1995, the Company completed a private placement of 932,040 shares
of Series E Convertible Preferred Stock ("Preferred Stock E") at a price of
$6.4375 per share, for gross proceeds of $6 million. Preferred Stock E holders
were entitled to dividends at the rate of 9% per annum, payable quarterly
beginning on June 30, 1995. During the ten month period ended December 31, 1995,
the entire 932,040 shares of Preferred Stock E were converted into 634,228
shares of common stock.
NOTE 13--REDEEMABLE SERIES C PREFERRED STOCK
On December 22, 1997, the Company issued 175,000 shares of Series C Senior
Cumulative Exchangeable Preferred Stock Due 2007 ("Series C Exchangeable
Preferred Stock"), for gross proceeds of $175.0 million. The Company agreed to
exchange the preferred stock for new preferred stock identical in every respect
except that it would be registered under the Securities Act of 1933. During
February 1998, the new preferred stock was registered.
Each share of Series C Exchangeable Preferred Stock has a liquidation
preference of $1,000 ("Liquidation Preference"). Dividends on the Series C
Exchangeable Preferred Stock accrue from December 22, 1997 at the rate per share
of 14 1/4% of the Accumulated Amount (as defined) per annum, compounded
semiannually on each June 15 and December 15, but will not be payable in cash,
except as set forth in the next sentence. Commencing on the first June 15 or
December 15 (each a "Dividend Payment Date") which is at least six months after
the later of December 15, 2002, and the Specified Debt Satisfaction Date (as
defined) (the "Cash Payment Date"), dividends on the Series C Exchangeable
Preferred Stock will be payable in cash as a rate per annum equal to 14 1/4% of
the Accumulated Amount as of the Dividend Payment Date preceding such date. In
the event that the Specified Debt Satisfaction Date shall not have occurred
before December 15, 2002, the rate otherwise applicable to the Series C
Exchangeable Preferred Stock shall be increased by 150 basis points from
December 15, 2002, until the Dividend Payment Date falling on or after the
Specified Debt Satisfaction Date. As of December 31, 1997 dividends totaling
approximately $553,000 have been accrued.
The Series C Exchangeable Preferred Stock is not redeemable prior to
December 15, 2002. On or after December 15, 2002, the Series C Exchangeable
Preferred Stock is redeemable at the option of the Company, in whole or in part,
at specified redemption prices plus accumulated and unpaid dividends, if any, to
the date of redemption. The Company is required to redeem the Series C
Exchangeable Preferred Stock at the Liquidation Preference thereof, plus
accumulated and unpaid dividends, if any, on December 15, 2007, out of any funds
legally available therefor.
The Series C Exchangeable Preferred Stock ranks (i) senior to all existing
and future Junior Stock (as defined) including the Series A Preferred Stock;
(ii) on a Parity basis with all existing and future Parity Stock; and
(iii) junior to all Senior Stock (as defined). In addition the Series C
Exchangeable Preferred Stock is junior in right of payment to all indebtedness
of the Company and its subsidiaries.
On any scheduled Dividend Payment Date following the Specified Debt
Satisfaction Date, the Company may, at is option, exchange all but not less than
all of the share of Series C Exchangeable Preferred Stock then outstanding for
14 1/4% Senior Subordinated Deferred Interest Notes Due 2007 ("Exchange
Debentures") in an aggregate Accumulated Amount equal to the aggregate
Accumulated Amount of the shares of Series C Exchangeable Preferred Stock
outstanding at the time of such exchange, plus accumulated and unpaid dividends
to the date of exchange. The issuance of the Exchange Debentures upon each
exchange will be registered under the Securities Act pursuant to a Registration
Statement. Until the Cash Payment Date, interest on the outstanding Exchange
Debentures if any, will accrue at a rate of 14 1/4% of the Accumulated Amount
per annum and will be compounded semiannually on each June 15 and December 15
(each an "Interest Payment Date") but will not be
F-33
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--REDEEMABLE SERIES C PREFERRED STOCK--(CONTINUED)
payable in cash except as set forth in the next sentence. Commencing on the
first Interest Payment Date following the later of the Exchange Date (as
defined) or the Cash Payment Date, interest will be payable in cash at a rate
per annum equal to 14 1/4% of the Accumulated Amount as of the Exchange Date.
The Exchange Debentures, if issued, will be unsecured, senior subordinated
obligations of the Company, subordinated in right of payment to all Senior
Indebtedness (as defined) of the Company and to all indebtedness and other
liabilities (including trade payables) of the Company's subsidiaries, and will
rank pari passu with the Company's existing 1997 Senior Subordinated Notes and
the Company's Convertible Notes.
NOTE 14--STOCK OPTIONS AND STOCK PURCHASE WARRANTS
The Company has three stock option plans, the 1990 Plan, the 1992
Performance Equity Plan ("1992 Plan"), and the 1995 Performance Equity Plan
("1995 Plan"). The 1990 Plan is a non-qualified common stock incentive plan, as
amended, pursuant to which options to purchase an aggregate of 150,000 shares of
common stock may be granted to key employees of the Company as selected by the
Board of Directors. The exercise price for shares covered by options granted
pursuant to this plan will not be less than the fair market value of the shares
on the date of the grant. The 1992 Plan authorizes the granting of awards up to
1.5 million shares of common stock to the Company's key employees, officers,
directors and consultants. Awards consist of stock options (both non-qualified
options and options intended to qualify as "incentive" stock options under the
Internal Revenue Code), restricted stock awards, deferred stock awards, stock
appreciation rights and other stock-based awards. The plan provides for
automatic issuance of 10,000 stock options annually to each director on January
13, at the fair market value at that date, subject to availability. The 1995
Plan authorizes the granting of awards of up to 7.5 million shares of the
Company's common stock to the Company's key employees, officers, directors and
consultants. The 1995 Plan is similar to the 1992 Plan, except that the 1995
Plan does not provide for annual automatic annual director grants. The Company
has also granted options to certain individuals outside the three plans. The
options are exercisable over a period ranging from immediately to five years,
depending on option terms.
The following table summarizes option activity for the ten months ended
December 31, 1995 and the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance, February 28, 1995.................................. 6,149 $ 3.85
Granted................................................... 3,896 $ 9.13
Exercised................................................. (2,092) $ 2.35
Canceled.................................................. (708) $ 3.21
-------
Balance, December 31, 1995.................................. 7,245 $ 6.90
Granted................................................... 4,057 $18.55
Exercised................................................. (921) $ 6.00
Canceled.................................................. (669) $12.72
-------
Balance, December 31, 1996.................................. 9,712 $11.43
Granted................................................... 3,905 $15.62
Exercised................................................. (1,214) $ 7.14
Canceled.................................................. (752) $16.18
-------
Balance, December 31, 1997.................................. 11,651 $13.27
-------
-------
</TABLE>
As of December 31, 1997, options outstanding for 5.2 million shares were
exercisable at prices ranging from $1.50 to $31.13, and the weighted remaining
contractual life was 4.9 years.
F-34
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--STOCK OPTIONS AND STOCK PURCHASE WARRANTS--(CONTINUED)
The following table summarizes option data as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER NUMBER
OUTSTANDING WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
AS OF AVERAGE AVERAGE AS OF AVERAGE
RANGE OF 12/31/97 REMAINING EXERCISE 12/31/97 EXERCISE
EXERCISE PRICES (IN THOUSANDS) CONTRACTUAL LIFE PRICE (IN THOUSANDS) PRICE
- -------------------------------------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.50-$ 7.00 2,541 2.83 $ 4.75 2,490 $ 4.72
$ 7.31-$12.00 2,759 5.46 $ 9.88 950 $ 8.14
$12.13-$16.81 2,481 5.21 $15.15 721 $15.02
$16.88-$20.38 2,571 5.95 $18.33 663 $18.40
$20.38-$31.13 1,299 5.17 $23.55 384 $22.24
------ ------
$ 1.50-$31.13 11,651 4.91 $13.27 5,208 $ 9.81
------ ------
------ ------
</TABLE>
Compensation cost charged to operations, which the Company records for
options granted to non-employees, was $0, $150,000 and $0 in the ten months
ended December 31, 1995 and the years ended December 31, 1996 and 1997,
respectively.
The Company measures compensation in accordance with the provisions of APB
Opinion No. 25 in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recorded for options granted to employees or
directors in the ten months ended December 31, 1995 or the years ended December
31, 1996 or 1997. The fair value of each option granted has been estimated on
the grant date using the Black-Scholes Option Valuation Model. The following
assumptions were made in estimating fair value:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Dividend Yield........................................... 0% 0% 0%
Risk-Free Interest Rate.................................. 6.0% 6.0% 6.0%
Expected Life after Vesting Period
Directors and Officers................................. 2.0 Years 2.0 Years 2.0 Years
Others................................................. 0.5 Years 0.5 Years 0.5 Years
Expected Volatility...................................... 66.88% 66.88% 66.88%
</TABLE>
Had compensation cost been determined under FASB Statement No. 123, net
loss and loss per share would have been increased as follows:
<TABLE>
<CAPTION>
TEN MONTHS YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Loss Applicable to Common Stockholders:
As reported............................................... $(15,857) $(83,723) $ (255,363)
Pro forma for FASB No. 123................................ $(21,795) $(98,765) $ (272,497)
Loss Per Share--Basic and Diluted:
As reported............................................... $ (0.70) $ (3.00) $ (7.68)
Pro forma for FASB No. 123................................ $ (0.96) $ (3.54) $ (8.20)
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1996 and 1997 was $18.78 and $15.63 per share, respectively.
During the initial phase-in period of FASB Statement No. 123, such
compensation expense may not be representative of the future effects of applying
this statement.
F-35
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--STOCK OPTIONS AND STOCK PURCHASE WARRANTS--(CONTINUED)
Warrants to purchase the Company's common stock were issued as follows
(warrants in thousands):
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------- ------------------------- -------------------------
WARRANTS PRICE/SHARE WARRANTS PRICE/SHARE WARRANTS PRICE/SHARE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance........... -- -- 400 $12.00-$13.00 400 $12.00-$13.00
Warrants
Issued.................... 400 $12.00-$13.00 -- -- 1,600 $ 25.00
Warrants Exercised.......... -- -- -- -- -- --
Warrants
Expired................... -- -- -- -- -- --
---- ---- ------
Ending
Balance................... 400 $12.00-$13.00 400 $12.00-$13.00 2,000 $12.00-$25.00
---- ---- ------
---- ---- ------
</TABLE>
NOTE 15--RELATED PARTY TRANSACTIONS
SERVICES AGREEMENTS
In connection with the Company's merger with Milliwave, the Company entered
into a Services Agreement with Milliwave in June 1996. Under the Services
Agreement, a subsidiary of the Company installed radio links and managed
Milliwave's communications network. Total fees under the Services Agreement and
equipment sales paid by Milliwave to the Company were $1.5 million through
December 31, 1996.
In connection with the Company' purchase of certain assets of Locate, the
Company entered into a Services Agreement with Locate in April 1996. Under the
Agreement, the Company provided consulting services to Locate regarding the
operation of Locate's business. During the year ended December 31, 1996, Locate
paid the Company approximately $352,000 under the Services Agreement.
PRIVATE EXCHANGE TRANSACTION
On November 29, 1995, the Company acquired, in exchange for the issuance of
3,741,224 shares of its common stock ("Private Exchange"), substantially all of
the assets of WinStar Companies, whose assets consisted of (i) all the
outstanding capital stock of WinStar Services and WinStar Venture, two wholly
owned subsidiaries of WinStar Companies, and (ii) 389,580 shares of the
Company's common stock owned by WinStar Companies. The sole assets of WinStar
Services and WinStar Venture were 2,117,183 shares of the Company's common stock
and other securities of the Company that were exercisable or convertible into
1,429,633 shares of the Company's common stock. Accordingly, the Company issued
3,741,224 shares of the Company's common stock and, in exchange, acquired
3,936,396 shares of common stock and common stock equivalents. All of the
Company's common stock and certain of the common stock equivalents received in
the Private Exchange were included in Treasury Stock at December 31, 1995 and
were retired in 1996. WinStar Companies, WinStar Services and WinStar Venture
had no liabilities at the time of the closing of the Private Exchange other than
a liability previously assumed by the Company or liabilities for which the
Company is being indemnified. No claims for any liabilities have been received
by the Company.
The new shares of the Company's common stock issued in the Private Exchange
represented that number of shares which had an aggregate market value based upon
the average of the closing sale price of the Company's common stock on the 30
trading days preceding November 15, 1995, the date as of which the exchange
agreement regarding the above-described transaction was executed, equal to the
market value of the Company's common stock (i) transferred by WinStar Companies
to the Company, (ii) owned by WinStar Services and WinStar Venture and
(iii) underlying certain other securities of the Company owned by WinStar
Services and WinStar Venture which were convertible into or exercisable for
shares of the Company's common stock, less the aggregate exercise price of such
latter securities.
F-36
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--RELATED PARTY TRANSACTIONS--(CONTINUED)
The stockholders of WinStar Companies included several of the Company's
current executive officers one of whom is also a director. Simultaneously with
the Private Exchange, WinStar Companies was dissolved and the new shares issued
in the Private Exchange were issued directly to the stockholders of WinStar
Companies in proportion to their equity ownership of WinStar Companies.
The Private Exchange was considered and approved by a special committee of
independent and disinterested directors of the Company and an opinion from an
independent investment banking firm that the Private Exchange was fair to the
Company and its stockholders was obtained in connection with the Private
Exchange.
AGREEMENT WITH ITC GROUP, INC.
In May 1994, the Company, WinStar Wireless, Inc. ("WWI") and ITC Group,
Inc. ("ITC"), a telecommunications consulting firm, entered into a two-year
agreement pursuant to which ITC advised the Company on the operations of its
telecommunications business. ITC, together with the management and employees of
WWI, developed and implemented a two-year operating plan for the Company's
wireless telecommunications business. Pursuant to the terms of the consulting
agreement, ITC made its consultants available to the Company and its
subsidiaries. The Company paid ITC an annual base consulting fee of $700,000 for
the services of a core management team, as well as supplemental fees at agreed
upon rates for additional consulting services rendered by ITC as necessary from
time to time. Under the terms of the agreement, ITC provided up to 12
consultants at any given time. From March 1995 through September 1995, ITC was
paid $1 million in fees and expenses in connection with the consulting
agreement, and the Company granted options to purchase an aggregate of 500,000
shares of its common stock for $4.41 per share to certain consultants of ITC.
Effective September 5, 1995, ITC's President became President and Chief
Operating Officer of the Company and certain core management personnel
previously provided by ITC also became employees. Concurrently, ITC ceased
providing services to the Company under the consulting agreement, and the
Company's obligation to pay any future compensation to ITC under such agreement
was terminated.
NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the ten months ended December 31, 1995, and
the years ended December 31, 1996 and 1997 was $1.3 million, $2.1 million and
$26.0 million, respectively. During the years ended December 31, 1996 and 1997,
the Company capitalized $300,000 and $4.2 million of interest incurred in
connection with the buildout of its telecommunications network respectively. No
interest was capitalized in the ten months ended December 31, 1995.
During the ten months ended December 31, 1995, the Company completed the
following material noncash transactions: (i) the conversion of $3.75 million of
convertible notes plus accrued interest thereon; (ii) the conversion of all
shares of Preferred Stock Series E; (iii) the acquisition of approximately $7.5
million in property and equipment through various capitalized leases; (iv) the
Private Exchange transaction (see Note 14); (v) the settlement of the Company's
placement expenses from the gross proceeds of the Debt Placement; and (vi) the
acquisition of Avant-Garde.
During the year ended December 31, 1996, the Company completed the
following material noncash transactions: (i) the conversion of $3.75 million of
convertible notes plus accrued interest; (ii) the acquisition of $8.6 million in
property and equipment through various capitalized leases; (iii) the issuance of
100,605 shares and share equivalents, with a value of $1.5 million, and $800,000
in notes payable in connection with certain acquisitions (see Note 2); (iv) the
issuance of $17.5 million in notes payable for the acquisition of Locate; and
(v) the acceptance of 150,000 shares of the Company's common stock for payment
of stock options exercised. Depreciation and amortization includes amortization
of deferred compensation.
During the year ended December 31, 1997, the Company completed the
following material noncash transactions: (i) dividends-in-kind on the Series A
Preferred Stock for the aggregate amount of $5.3 million; (ii) the acquisition
of $8.9 million in property and equipment through various capitalized leases;
(iii) the issuance
F-37
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)
of 337,648 shares of common stock with a value of $7.5 million in connection
with the acquisition of licenses; (iv) the issuance of 3,594,620 shares of
Common Stock with a value of approximately $75 million in connection with the
acquisition of Milliwave Limited Partnership.
NOTE 17--ADVERTISING COSTS
Advertising costs are charged to operations when the advertising first
takes place. Advertising expense for the ten months ended December 31, 1995, and
the years ended December 31, 1996 and 1997 was approximately $500,000, $4.3
million and $11.0 million, respectively.
NOTE 18--BUSINESS SEGMENTS
The Company's continuing business segments are telecommunications and
information services. The following table is a summary of the ten months ended
December 31, 1995 and the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Total
Continuing Consolidated
Telecommuni- Information Business General Continuing
cations Services Services Segments Corporate Operations
---------------- ----------- ---------- --------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
FOR THE TEN MONTHS ENDED
DECEMBER 31, 1995
Net Revenues................................... $ 130 $ 2,648 $ 2,778 $ -- $ 2,778
Operating income (loss)........................ $ (4,456) $ 217 $ (4,239) $ (3,861) $ (8,100)
EBITDA......................................... $ (4,019) $ 241 $ (3,778) $ (3,758) $ (7,536)
Depreciation and amortization.................. $ 436 $ 24 $ 460 $ 104 $ 564
Capital expenditures........................... $ 6,989 $ 14 $ 7,003 $ 651 $ 7,654
Identifiable assets at December 31, 1995........ $ 26,564 $20,195 $ 46,759 $ 217,711 $ 264,470
FOR THE YEAR ENDED DECEMBER 31, 1996
Net Revenues................................... $ 4,487 $14,650 $ 19,137 $ -- $ 19,137
Operating loss................................. $ (40,731) $(1,409) $ (42,140) $ (11,373) $ (53,513)
EBITDA......................................... $ (39,063) $ (890) $ (39,953) $ (9,796) $ (49,749)
Depreciation and amortization.................. $ 3,093 $ 469 $ 3,562 $ 202 $ 3,764
Capital expenditures........................... $ 45,441 $ 701 $ 46,142 $ 509 $ 46,651
Identifiable assets at December 31, 1996........ $ 94,065 $30,133 $ 124,198 $ 143,462 $ 267,660
FOR THE YEAR ENDED DECEMBER 31, 1997
Net Revenues................................... $ 29,796 $41,354 $ 71,150 -- $ 71,150
Operating loss................................. $ (147,134) $(4,092) $ (151,226) $ (27,312) $ (178,538)
EBITDA......................................... $ (123,728) $(2,786) $ (126,514) $ (26,922) $ (153,436)
Depreciation and amortization.................. $ 23,405 $ 1,306 $ 24,711 $ 391 $ 25,102
Capital expenditures........................... $ 219,875 $ 612 $ 220,487 $ 1,709 $ 222,196
Identifiable assets at December 31, 1997........ $ 394,002 $30,376 $ 424,378 $ 548,311 $ 972,689
<CAPTION>
Discontinued
Discontinued Operation--
Operation-- Residential
Merchandising Long Distance
------------- -------------
<S> <C> <C>
FOR THE TEN MONTHS ENDED
DECEMBER 31, 1995
Net Revenues...................................
Operating income (loss)........................ $ 237 $ (2,832)
EBITDA.........................................
Depreciation and amortization..................
Capital expenditures...........................
Identifiable assets at December 31, 1995........ $ 3,321 $ 1,173
FOR THE YEAR ENDED DECEMBER 31, 1996
Net Revenues...................................
Operating loss................................. $(1,010) $ (2,967)
EBITDA.........................................
Depreciation and amortization..................
Capital expenditures...........................
Identifiable assets at December 31, 1996........ $ 3,814 $ 1,538
FOR THE YEAR ENDED DECEMBER 31, 1997
Net Revenues...................................
Operating loss................................. $(6,477) $ (9,508)
EBITDA.........................................
Depreciation and amortization..................
Capital expenditures...........................
Identifiable assets at December 31, 1997........ $ 2,105 $ (960)
</TABLE>
- ------------------
EBITDA represents losses before interest, income taxes, depreciation and
amortization, other income (expense) and discontinued operations.
F-38
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly financial data for 1996 and 1997 for the Company is
as follows:
<TABLE>
<CAPTION>
QUARTER ENDED 1996 (UNAUDITED)
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services...................... $ 73 $ 284 $ 1,875 $ 2,255
Information services............................. 771 2,652 4,056 7,171
--------- --------- ---------- ----------
Total operating revenues........................... 844 2,936 5,931 9,426
--------- --------- ---------- ----------
Operating expenses
Cost of services and products.................... 1,286 4,088 5,868 10,147
Selling, general and administrative
expenses...................................... 4,744 9,819 12,208 20,726
Depreciation and amortization.................... 333 509 969 1,953
--------- --------- ---------- ----------
Total operating expenses...................... 6,363 14,416 19,045 32,826
--------- --------- ---------- ----------
Operating loss..................................... (5,519) (11,480) (13,114) (23,400)
Other (expense) income
Interest expense................................. (8,643) (9,007) (9,045) (10,053)
Interest income.................................. 3,108 2,664 2,570 2,173
--------- --------- ---------- ----------
Loss from continuing operations.................... (11,054) (17,823) (19,589) (31,280)
Income (loss) from discontinued operations......... 355 (293) (1,623) (2,416)
--------- --------- ---------- ----------
Net loss........................................... $ (10,699) $ (18,116) $ (21,212) $ (33,696)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Basic and diluted income (loss) per share:
From continuing operations......................... $ (0.40) $ (0.64) $ (0.69) $ (1.10)
From discontinued operations....................... 0.01 (0.01) (0.06) (0.08)
--------- --------- ---------- ----------
Net loss per share................................. $ (0.39) $ (0.65) $ (0.75) $ (1.18)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
F-39
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)--(CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED 1997 (UNAUDITED)
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services...................... $ 4,455 $ 5,326 $ 7,429 $ 12,586
Information services............................. 6,014 8,662 11,017 15,661
--------- --------- ---------- ----------
Total operating revenues........................... 10,469 13,988 18,446 28,247
--------- --------- ---------- ----------
Operating expenses
Cost of services and products.................... 11,210 14,165 18,407 30,116
Selling, general and administrative expenses..... 28,068 37,555 39,862 45,203
Depreciation and amortization.................... 3,227 4,622 6,802 10,451
--------- --------- ---------- ----------
Total operating expenses........................... 42,505 56,342 65,071 85,770
--------- --------- ---------- ----------
Operating loss..................................... (32,036) (42,354) (46,625) (57,523)
Other (expense) income
Interest expense................................. (10,798) (20,194) (22,082) (24,183)
Interest income.................................. 2,235 5,090 3,727 6,525
Other income..................................... -- -- 2,219 --
--------- --------- ---------- ----------
Loss from continuing operations before income tax
benefit.......................................... (40,599) (57,458) (62,761) (75,181)
Income tax benefit................................. -- -- -- 2,500
--------- --------- ---------- ----------
Loss from continuing operations.................... (40,599) (57,458) (62,761) (72,681)
Loss from discontinued operations.................. (1,377) (1,338) (2,522) (10,748)
--------- --------- ---------- ----------
Net loss........................................... $ (41,976) $ (58,796) $ (65,283) $ (83,429)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Basic and diluted loss per share:
From continuing operations......................... $ (1.25) $ (1.81) $ (1.94) $ (2.18)
From discontinued operations....................... (0.04) (0.04) (0.07) (0.32)
--------- --------- ---------- ----------
Net loss per share................................. $ (1.29) $ (1.85) $ (2.01) $ (2.50)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
The financial data presented above reflects certain reclassifications from
the amounts presented in the Company's filings on form 10-Q for the periods
ending March 31, June 30 and September 30, 1996. The reclassifications
principally relate to the breakout of revenues by operating segment and the
reclassification of certain telecommunication network costs from the selling,
general and administrative caption to the cost of services and products caption.
In addition, the financial data presented above has been reclassified to reflect
the operations of Global Products and Gateway as discontinued operations.
NOTE 20--DISCONTINUED OPERATION--WINSTAR GLOBAL PRODUCTS, INC.
On May 13, 1997, a formal plan of disposal for the Company's consumer
products subsidiary, Global Products, was approved by the Board of Directors,
and it is anticipated that the disposal will be completed within the next 12
months. The disposal of Global Products has been accounted for as a discontinued
operation and, accordingly, its net assets have been segregated from continuing
operations in the accompanying consolidated balance sheets, and its operating
results are segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows.
F-40
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--DISCONTINUED OPERATION--WINSTAR GLOBAL PRODUCTS, INC.--(CONTINUED)
Information relating to the discontinued operations of Global Products is
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE TEN FOR THE YEAR FOR THE YEAR
MONTHS ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ----------------- -----------------
<S> <C> <C> <C>
Operating revenues....................................... $ 13,986 $19,429 $ 15,665
-------- ------- ---------
Cost of services and products............................ 8,833 13,903 17,534
Selling, general & administrative........................ 4,289 5,323 8,393
Depreciation and amortization............................ 183 245 464
-------- ------- ---------
Total operating expenses................................. 13,305 19,471 26,391
-------- ------- ---------
Operating income (loss).................................. 681 (42) (10,726)
Interest expense, net.................................... (444) (968) (854)
-------- ------- ---------
Net income (loss)........................................ $ 237 $(1,010) $ (11,580)
-------- ------- ---------
-------- ------- ---------
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Assets:
Accounts receivable, net................................................ $ 4,499 $ 4,383
Inventories............................................................. 8,606 4,663
Other assets............................................................ 2,143 1,268
------- ---------
Total assets.......................................................... 15,248 10,314
------- ---------
Liabilities:
Current liabilities..................................................... 3,102 3,570
Other liabilities....................................................... 8,332 9,951
------- ---------
Total liabilities..................................................... 11,434 13,521
------- ---------
Net assets (deficit).................................................. $ 3,814 $ (3,207)
------- ---------
------- ---------
</TABLE>
Subsequent to March 31, 1997, the Company reduced the carrying amount of
its investment to $2,105,000 and recorded an additional estimated loss on
disposal of $6 million.
NOTE 21-- CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP. AND WINSTAR
EQUIPMENT II CORP.
The Company's wholly-owned subsidiaries, WEC and WEC II, 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 in placements of debt in March and August of 1997, respectively (see
Note 7). The use of the proceeds of the Guaranteed Senior Secured Notes are to
be used to purchase designated equipment and, if such equipment is not purchased
within a specified period, WEC and WEC II must apply unused proceeds thereof to
redeem the WEC and WEC II Notes, respectively. Both the interest and principal
of the WEC Notes are guaranteed by the Company.
WEC and WEC II have no independent operations other than to purchase
designated equipment 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 sufficient income, after the
payment of interest on the WEC and WEC II Notes, to pay dividends or make other
distributions to the Company.
F-41
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 21-- CONDENSED FINANCIAL INFORMATION OF WINSTAR EQUIPMENT CORP. AND WINSTAR
EQUIPMENT II CORP.--(CONTINUED)
Summary financial information of WEC and WEC II, which are included in the
consolidated financial statements of the Company, are as follows (in thousands):
Balance sheet information at December 31, 1997:
<TABLE>
<CAPTION>
WEC WEC II
--------- --------
<S> <C> <C>
Current assets................................................. $ 144,004 $ 48,394
Long-term assets............................................... 71,424 2,660
Current liabilities............................................ (25,601) (2,432)
Long-term liabilities.......................................... (200,000) (50,000)
--------- --------
Stockholders' deficit.......................................... $ (10,173) $ (1,378)
--------- --------
--------- --------
</TABLE>
Statements of operations information for WEC for the period from its
inception through December 31, 1997, and for WEC II for the period from its
inception through December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
WEC WEC II
PERIOD FROM PERIOD FROM
MARCH 13, 1997 AUGUST 8, 1997
(INCEPTION) TO (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Rental revenues from other WinStar subsidiaries.......... $ 854 $ --
Interest income from other WinStar subsidiaries.......... 1,207 --
Interest income--investments............................. 7,765 1,105
Selling, general and administrative expenses............. (1,470) --
Interest expense......................................... (18,529) (2,483)
--------- -------
Net loss................................................. $ (10,173) $(1,378)
--------- -------
--------- -------
</TABLE>
Separate financial statements concerning 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.
NOTE 22--EMPLOYEE BENEFIT PROGRAMS
The Company has a defined contribution 401K Plan for substantially all full
time employees. The Company makes a 25% matching contribution up to 6% of
participant's compensation, subject to certain limitations. The Company
contribution vests over a five year period. Company contributions to date have
not been significant.
NOTE 23--NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
governing the reporting and display of comprehensive income and its components,
and Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS No. 131), requiring
that all public businesses report financial and descriptive information about
their reportable operating segments. The Company will implement SFAS 130 and
SFAS 131 as required in 1998. The impact of adopting SFAS No. 130 is not
expected to be material to the consolidated financial statements or notes to
consolidated financial statements. Management is currently evaluating the effect
of SFAS No. 131 on consolidated financial statement disclosures.
F-42
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 24--SUBSEQUENT EVENTS
A. NOTES AND PREFERRED STOCK OFFERINGS (UNAUDITED)
In March 1998 the Company issued an aggregate of $650.0 million of notes
and preferred stock consisting of $200.0 million of 10% Senior Subordinated
Notes Due 2008, $250.0 million of 11% Senior Subordinated Deferred Interest
Notes Due 2008 and $200.0 million of Series D 7% Senior Cumulative Convertible
Preferred Stock Due 2010.
B. DISCONTINUANCE OF RESIDENTIAL LONG DISTANCE BUSINESS
In November 1998, a formal plan of disposal for Gateway, was approved by
management of the Company, and it is anticipated that the disposal will be
completed within the next twelve months. The Company expects to incur additional
operating losses of approximately $4.2 million during the phase out of this
business, as well as, a disposal loss of approximately $1.3 million. The
disposal of Gateway has been accounted for as a discontinued operation and
accordingly, its net assets have been segregated from the net assets of
continuing operations in the accompanying consolidated balance sheets and its
operating results are segregated from continuing operations and are reported as
discontinued operations in the accompanying consolidated statements of
operations and cash flows. Information relating to the discontinued operations
of Gateway is as follows (in thousands of dollars).
<TABLE>
<CAPTION>
FOR THE
TEN MONTHS FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues.......................................... $ 13,007 $ 29,482 $ 8,481
-------- -------- --------
Cost of revenue............................................. 8,464 16,843 7,119
Selling, general & administrative........................... 6,912 14,869 6,271
Depreciation and amortization............................... 463 737 4,599
-------- -------- --------
Total operating expenses.................................... 15,839 32,449 17,989
-------- -------- --------
Net loss.................................................... $ (2,832) $ (2,967) $ (9,508)
-------- -------- --------
-------- -------- --------
</TABLE>
Net assets of the discontinued operations of Gateway at December 31, 1996
and 1997 are composed of the following (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
----------------- -----------------
<S> <C> <C>
Accounts receivable, net................................................ $ 2,676 $ 1,600
Other assets............................................................ 4,639 206
------- -------
Total assets............................................................ 7,315 1,806
Current liabilities..................................................... 5,284 2,335
Other liabilities....................................................... 493 431
------- -------
Total liabilities....................................................... 5,777 2,766
------- -------
Net assets (liabilities)................................................ $ 1,538 $ (960)
------- -------
------- -------
</TABLE>
F-43
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet as
of September 30, 1998 gives effect to this offering as if it had occurred on
September 30, 1998.
The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1997 gives effect to the February
1997 Preferred Stock Placement, the issuance of the March 1997 Notes in the
March 1997 Debt Placement, the WEC II Equipment Notes issued in the August 1997
Debt Placement, the Senior Subordinated Notes issued in the October 1997 Debt
Placement, the US ONE Asset Acquisition and Financing, the issuance of the
Exchangeable Preferred Stock in the December 1997 Exchangeable Preferred Stock
Placement (collectively, the "1997 Financing Transactions"), the March 1998
Senior Subordinated Notes and Senior Subordinated Deferred Interest Notes issued
in the March 1998 Debt Placement, the issuance of the Cumulative Convertible
Preferred Stock in the March 1998 Cumulative Convertible Preferred Stock
Placement (collectively, the "March 1998 Financing Transactions"), and the
Midcom Asset Acquisition (collectively, the March 1998 Financing Transactions
and the January 1998 Midcom Asset Acquisition are referred to as the "Pro Forma
Transactions") as if they occurred on January 1, 1997. The following unaudited
pro forma as adjusted condensed consolidated statement of operations for the
year ended December 31, 1997 gives effect to the 1997 Financing Transactions,
the Pro Forma Transactions and this offering, as if each had occurred on
January 1, 1997.
The following unaudited pro forma condensed consolidated statement of
operations for the nine months ended September 30, 1998 gives effect to the Pro
Forma Transactions as if they occurred as of January 1, 1998. The following
unaudited pro forma as adjusted condensed consolidated statement of operations
for the nine months ended September 30, 1998 gives effect to the Pro Forma
Transactions and this offering, as if each had occurred on January 1, 1998.
The pro forma financial statements do not purport to represent what the
Company's results of operations or financial condition would actually have been
had each of the 1997 Financing Transactions, the Pro Forma Transactions and this
offering in fact occurred on the dates referenced above or to project our
results of operations or financial condition for any future period or date.
These pro forma financial statements should be read in conjunction with the
notes to the unaudited pro forma condensed consolidated financial statements,
which follow our consolidated financial statements included elsewhere in this
prospectus.
The pro forma financial information gives effect to the Pro Forma
Transactions, and relies upon the historical financial statements of Midcom.
Midcom's financial statements for the year ended December 31, 1997 (and,
consequently, the pro forma financial information) include Midcom's operations
during the 10-month period in 1997 prior to Midcom's bankruptcy filing in
November 1997 and, therefore, do not accurately reflect the state of the
business actually acquired by Winstar in January 1998. The historical financial
information for Midcom for the period January 1, 1998 through January 21, 1998
is based pro rata on the actual operating results of the Midcom operations for
the period January 22, 1998 through March 31, 1998. In addition, one of the
significant assets acquired by the Company in the acquisition was Midcom's
customer base, all of whom were notified by the Company of the transfer of their
accounts to the Company and have the option to replace the Company as their
service provider. Although the Company expects that a significant number of
customers will elect to terminate their service and move to other carriers, the
Pro Forma Financial Information does not give effect to the loss of any Midcom
customers. Moreover, the Pro Forma Financial Information does not purport to
represent what the Company's results of operations or financial condition would
actually have been had the Midcom Asset Acquisition in fact occurred on
January 1, 1997 or January 1, 1998 or to project the Company's results of
operations or financial condition for any future period or date. Although the
Company believes the assets it acquired from Midcom were purchased on attractive
terms, the Company believes that the purchasers of the common stock should not
place any reliance on the pro forma operating results contained in the Pro Forma
Financial Information as they relate to Midcom.
F-44
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THIS
HISTORICAL OFFERING AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................ $ 311,863 $ 161,967(a) $ 473,830
Short term investments................................................... 162,043 162,043
----------- --------- -----------
Cash, cash equivalents and short term investments...................... 473,906 161,967 635,873
Accounts receivable, net................................................. 80,606 80,606
Inventories.............................................................. 16,028 16,028
Prepaid expenses and other current assets................................ 39,427 39,427
----------- --------- -----------
Total current assets................................................... 609,967 161,967 771,934
Property and equipment, net................................................ 447,186 447,186
Investment in equity securities............................................ 14,954 14,954
Licenses, net.............................................................. 283,558 283,558
Intangible assets, net..................................................... 149,291 149,291
Deferred financing costs................................................... 39,378 39,378
Other assets............................................................... 12,492 12,492
----------- --------- -----------
Total assets........................................................... $ 1,556,826 $ 161,967 $ 1,718,793
----------- --------- -----------
----------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long term debt........................................ $ 5,517 $ $ 5,517
Accounts payable and accrued expenses.................................... 78,530 78,530
Net liabilities of discontinued operations............................... 11,618 11,618
Current portion of capitalized lease obligations......................... 13,646 13,646
----------- --------- -----------
Total current liabilities.............................................. 109,311 109,311
Capitalized lease obligations, less current portion........................ 52,448 52,448
Long-term debt, less current portion....................................... 1,293,823 1,293,823
Other liabilities.......................................................... 13,237 13,237
Deferred income taxes...................................................... 20,000 20,000
----------- --------- -----------
Total liabilities...................................................... 1,488,819 1,488,819
----------- --------- -----------
Series C exchangeable redeemable preferred stock........................... 194,738 194,738
Series D senior cumulative convertible redeemable preferred stock.......... 200,000 200,000
Commitments and contingencies
Stockholders' equity:
Series A preferred stock................................................. 41 41
Series E preferred stock................................................. 1 1
Common stock, $.01 par value; authorized 200,000 shares, issued and
outstanding 40,565 shares and 44,765 issued and outstanding as
adjusted............................................................... 405 42(a) 447
Additional paid-in capital............................................... 394,303 161,925(a) 556,228
Accumulated deficit...................................................... (676,116) (676,116)
Accumulated other comprehensive loss..................................... (45,365) (45,365)
----------- --------- -----------
Total stockholders' equity............................................. (326,731) 161,967 (164,764)
----------- --------- -----------
Total liabilities, redeemable preferred stock and stockholders'
deficit.............................................................. $ 1,556,826 $ 161,967 $ 1,718,793
----------- --------- -----------
----------- --------- -----------
</TABLE>
F-45
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
FOR THE FOR THE
THE COMPANY, MIDCOM, MIDCOM, MARCH 1998
HISTORICAL HISTORICAL ASSET ACQUISITION OFFERINGS
------------- ---------- ------------------ -----------
<S> <C> <C> <C> <C>
Operating revenues
Telecommunications services
CLEC........................................... $ 85,858 $ $ 85,858 $
Other.......................................... 40,276 3,772 44,048
--------- -------- ---------- ---------
Total telecommunications services.............. 126,134 3,772 129,906
Information services............................. 37,220 37,220
--------- -------- ---------- ---------
Total operating revenues.......................... 163,354 3,772 167,126
--------- -------- ---------- ---------
Operating expenses
Cost of services and products.................... 132,199 3,321 135,520
Selling, general and administrative expenses..... 175,395 695 176,090
Depreciation and amortization.................... 48,666 158 48,824
--------- -------- ---------- ---------
Total operating expenses.......................... 356,260 4,174 360,434
--------- -------- ---------- ---------
Operating loss................................... (192,906) (402) (193,308)
Other expense
Interest expense................................. (111,704) (111,704) (10,757)(b)
Interest income.................................. 23,986 23,986
--------- -------- ---------- ---------
Loss from continuing operations before income tax
benefit.......................................... (280,624) (402) (281,026) (10,757)
Income tax benefit................................ 4,000 4,000
--------- -------- ---------- ---------
Net loss from continuing operations............... (276,624) (402) (277,026) (10,757)
Loss from discontinued operations................. (24,974) (24,974)
--------- -------- ---------- ---------
Net loss.......................................... (301,598) (402) (302,000) (10,757)
Less preferred stock dividends.................... (31,195) (31,195) (2,994)(c)
--------- -------- ---------- ---------
Net loss applicable to common stock............... $(332,793) $ (402) $ (333,195) $ (13,751)
--------- -------- ---------- ---------
--------- -------- ---------- ---------
Net loss applicable to common stock per share from
continuing operations............................ $ (8.10) $ (8.12)
Net loss per share from discontinued operations... (0.66) (0.66)
--------- ----------
Net loss applicable to common stock per........... $ (8.76) $ (8.78)
--------- ----------
--------- ----------
Weighted average shares outstanding............... 37,970 37,970 72(c)
--------- ---------- ---------
--------- ---------- ---------
<CAPTION>
ADJUSTMENT
FOR THIS PRO FORMA
PRO FORMA OFFERING AS ADJUSTED
---------- --------------- -----------
<S> <C> <C> <C>
Operating revenues
Telecommunications services
CLEC........................................... $ 85,858 $ $ 85,858
Other.......................................... 44,048 44,048
---------- --------- ---------
Total telecommunications services.............. 129,906 129,906
Information services............................. 37,220 37,220
---------- --------- ---------
Total operating revenues.......................... 167,126 167,126
---------- --------- ---------
Operating expenses
Cost of services and products.................... 135,520 135,520
Selling, general and administrative expenses..... 176,090 176,090
Depreciation and amortization.................... 48,824 48,824
---------- --------- ---------
Total operating expenses.......................... 360,434 360,434
---------- --------- ---------
Operating loss................................... (193,308) (193,308)
Other expense
Interest expense................................. (122,461) (122,461)
Interest income.................................. 23,986 23,986
---------- --------- ---------
Loss from continuing operations before income tax
benefit.......................................... (291,783) (291,783)
Income tax benefit................................ 4,000 4,000
---------- --------- ---------
Net loss from continuing operations............... (287,783) (287,783)
Loss from discontinued operations................. (24,974) (24,974)
---------- --------- ---------
Net loss.......................................... (312,757) (312,757)
Less preferred stock dividends.................... (34,189) (34,189)
---------- --------- ---------
Net loss applicable to common stock............... $(346,946) $ $(346,946)
---------- --------- ---------
---------- --------- ---------
Net loss applicable to common stock per share from
continuing operations............................ $ (8.46) $ (7.62)
Net loss per share from discontinued operations... (0.66) (.59)
---------- ---------
Net loss applicable to common stock per........... $ (9.12) $ (8.21)
---------- ---------
---------- ---------
Weighted average shares outstanding............... 38,042 4,200(d) 42,242
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-46
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
ADJUSTMENTS PRO FORMA FOR THE
FOR THE FOR THE MIDCOM
THE COMPANY, 1997 1997 FINANCING MIDCOM, ASSET
HISTORICAL FINANCINGS TRANSACTIONS HISTORICAL ACQUISITION
------------ --------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Telecommunications services
CLEC....................................... $ 22,653 $ $ 22,653 $ $
Other...................................... 7,143 7,143 98,283
---------- --------- --------- --------- ----------
Total telecomunications services............... 29,796 29,796 98,283
Information services........................... 41,354 41,354
---------- --------- --------- --------- ----------
Total operating revenues.......................... 71,150 71,150 98,283
---------- --------- --------- --------- ----------
Operating expenses
Cost of services and products.................. 73,898 73,898 72,440
Selling, general and administrative expenses... 150,688 150,688 86,004 714 (f)
Depreciation and amortization.................. 25,102 5,062 (e) 30,164 17,168 5,139 (f)
(329)(f)
---------- --------- --------- --------- ----------
Total operating expenses.......................... 249,688 5,062 254,750 175,612 5,524
---------- --------- --------- --------- ----------
Operating loss................................. (178,538) (5,062) (183,600) (77,329) (5,524)
Other expense
Interest expense............................... (77,257) (25,905)(e) (103,162) (9,929) 9,929 (f)
Interest income................................ 17,577 17,577 -- (4,784)(f)
Reorganization items........................... -- (11,310) 11,310 (f)
Other income (expense)......................... 2,219 2,219 (5,200)
---------- --------- --------- --------- ----------
Loss from continuing operations before income tax
benefit.......................................... (235,999) (30,967) (266,966) (103,768) 10,931
Income tax benefit................................ 2,500 2,500
---------- --------- --------- --------- ----------
Net loss from continuing operations............... (233,499) (30,967) (264,466) (103,768) 10,931
Loss from discontinued operations................. (15,985) (15,985)
---------- --------- --------- --------- ----------
Net loss.......................................... (249,484) (30,967) (280,451) (103,768) 10,931
Less preferred stock dividends.................... (5,879) (25,927)(e) (31,806) --
---------- --------- --------- --------- ----------
Net loss applicable to common stock............... $ (255,363) $ (56,894) $(312,257) $(103,768) $ 10,931
---------- --------- --------- --------- ----------
---------- --------- --------- --------- ----------
Net loss applicable to common stock per share from
continuing operations............................ $ (7.20) $ (8.91)
Net loss per share from discontinued operations... (0.48) (0.48)
---------- ---------
Net loss applicable to common stock per share..... $ (7.68) $ (9.39)
---------- ---------
---------- ---------
Weighted average shares outstanding............... 33,249 33,249
---------- ---------
---------- ---------
<CAPTION>
PRO FORMA PRO FORMA
FOR THE ADJUSTMENTS
MIDCOM FOR THE ADJUSTMENT
ASSET MARCH 1998 FOR THIS PRO FORMA
ACQUISITION OFFERINGS PRO FORMA OFFERING AS ADJUSTED
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues
Telecommunications services
CLEC....................................... $ 22,653 $ $ 22,653 $ $ 22,653
Other...................................... 105,426 105,426 105,426
---------- ---------- --------- --------- ----------
Total telecomunications services............... 128,079 128,079 128,079
Information services........................... 41,354 41,354 41,354
---------- ---------- --------- --------- ----------
Total operating revenues.......................... 169,433 169,433 169,433
---------- ---------- --------- --------- ----------
Operating expenses
Cost of services and products.................. 146,338 146,338 146,338
Selling, general and administrative expenses... 237,406 237,406 237,406
Depreciation and amortization.................. 52,142 52,142 52,142
---------- ---------- --------- --------- ----------
Total operating expenses.......................... 435,886 435,886 435,886
---------- ---------- --------- --------- ----------
Operating loss................................. (266,453) (266,453) (266,453)
Other expense
Interest expense............................... (103,162) (49,590)(g) (152,752) (152,752)
Interest income................................ 12,793 12,793 12,793
Reorganization items........................... --
Other income (expense)......................... (2,981) (2,981) (2,981)
---------- ---------- --------- --------- ----------
Loss from continuing operations before income tax
benefit.......................................... (359,803) (49,590) (409,393) (409,393)
Income tax benefit................................ 2,500 2,500 2,500
---------- ---------- --------- --------- ----------
Net loss from continuing operations............... (357,303) (49,590) (406,893) (406,893)
Loss from discontinued operations................. (15,985) (15,985) (15,985)
---------- ---------- --------- --------- ----------
Net loss.......................................... (373,288) (49,590) (422,878) (422,878)
Less preferred stock dividends.................... (31,806) (14,000)(g) (45,806) (45,806)
---------- ---------- --------- --------- ----------
Net loss applicable to common stock............... $ (405,094) $ (63,590) $(468,684) $ $ (468,684)
---------- ---------- --------- --------- ----------
---------- ---------- --------- --------- ----------
Net loss applicable to common stock per share from
continuing operations............................ $ (11.70) $ (13.52) $ (12.02)
Net loss per share from discontinued operations... (0.48) (0.48) (0.42)
---------- --------- ----------
Net loss applicable to common stock per share..... $ (12.18) $ (14.00) $ (12.44)
---------- --------- ----------
---------- --------- ----------
Weighted average shares outstanding............... 33,249 220 33,469 4,200(h) 37,669
---------- ---------- --------- --------- ----------
---------- ---------- --------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-47
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The adjustments below were prepared based on data currently available and
in some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts that were
actually recorded.
BALANCE SHEET AT SEPTEMBER 30, 1998
(a) To record the issuance of the common stock issued in the offering as if
it occurred on September 30, 1998.
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(b) To record interest expense on the debt issued in the March 1998 Debt
Placements, including amortization of debt offering costs and other
related fees, as if the debt were issued at January 1, 1998, but not to
include interest income earned on additional available cash ($10,757).
(c) To reflect preferred stock dividends as if the March 1998 Preferred
Stock Placement had occurred on January 1, 1998 ($2,994).
(d) To record the issuance of the common stock issued in this offering as
if it occurred on January 1, 1998.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
(e) To record the 1997 Financing Transactions as if they occurred as of
January 1, 1997, including preferred stock dividends and amortization
of debt offering costs and other related fees, but not to include
interest income earned on unused cash, as follows:
Preferred Stock dividends on the Preferred Stock issued by the
Company in the February 1997 Preferred Stock Placement ($654).
Interest expense on the debt issued in the March 1997 Debt
Placement ($8,476).
Interest expense on the debt issued in the August 1997 Debt
Placement ($4,018).
Interest expense on the Senior Subordinated Notes issued in the
October 1997 Debt Placement ($12,336).
Depreciation expense on the assets acquired in the US ONE Asset
Acquisition, ($5,062) and the interest expense on the related
financing ($6,877).
Preferred Stock dividends on the Exchangeable Redeemable Preferred
Stock issued in the December 1997 Preferred Stock Placement
($25,273).
Eliminate the pro forma interest expense ($6,877) related to the US
ONE Asset Financing and to record the interest expense ($1,075)
related to the write-off of the related financing fees.
(f) To record the Midcom Asset Acquisition as follows:
Amortization of the excess of the purchase price over Seller's
historical basis of the assets acquired in the Midcom Asset
Acquisition over ten years ($5,139).
Eliminate the interest expense recorded on the Midcom debt, which
was not assumed in the Midcom Asset Acquisition ($9,929).
Eliminate interest income on the purchase price of the Midcom
Acquisition, as if the Midcom Acqusition had occurred as of
January 1, 1997 ($4,784).
F-48
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
Eliminate depreciation expense ($329) related to the Midcom assets
not purchased by the Company and to record rental expense ($714)
for the Midcom assets leased by the Company.
Eliminate Reorganization items related to the Midcom bankruptcy
($11,310).
(g) To record the March 1998 Financing Transactions as follows: Cumulative
Convertible Preferred Stock dividends on the Preferred Stock issued by
the Company (assuming the dividends are paid in Common Stock) as if the
Preferred Stock had been issued as of January 1, 1997 ($14,000).
Interest expense on the 1998 Notes issued, including amortization of
debt offering costs and other related fees, as if the 1998 Notes were
issued as of January 1, 1997, but not to include interest income earned
on available cash ($49,590).
(h) To record the issuance of the Common Stock issued in this offering as
if it occurred as of January 1, 1997.
F-49
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,200,000 SHARES
WINSTAR COMMUNICATIONS, INC.
COMMON STOCK
------------
PROSPECTUS
FEBRUARY , 1999
------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[INTERNATIONAL PROSPECTUS--ALTERNATE PAGE]
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 1999
PROSPECTUS
[LOGO]
4,200,000 SHARES
WINSTAR COMMUNICATIONS, INC.
COMMON STOCK
------------------
We are selling 4,200,000 shares of our common stock. The U.S. underwriters
named in this prospectus may purchase up to 630,000 additional shares of our
common stock under certain circumstances.
Of the 4,200,000 shares of common stock that we are selling, 840,000 shares
are being offered outside the United States and Canada by a syndicate of
international underwriters and 3,360,000 shares are being offered concurrently
in the United States and Canada by a syndicate of U.S. underwriters.
Our common stock is quoted on the Nasdaq National Market under the symbol
"WCII". The last reported sale price of our common stock on Nasdaq on
January 14, 1999, was $40.56 per share.
------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price..................................................................... $ $
Underwriting discount..................................................................... $ $
Proceeds to WinStar (before expenses)..................................................... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about February ,
1999.
------------------
SALOMON SMITH BARNEY INTERNATIONAL CREDIT SUISSE FIRST BOSTON
February , 1999
<PAGE>
[INTERNATIONAL PROSPECTUS--ALTERNATE PAGE]
UNDERWRITING
This offering consists of (1) an offering of 840,000 shares of our common
stock outside the United States and Canada and (2) a concurrent offering of
3,360,000 shares of our common stock in the United States and Canada. Salomon
Smith Barney Inc. is the global coordinator and bookrunner of this offering.
Subject to the terms and conditions stated in the international
underwriting agreement, each international underwriter named below has severally
agreed to purchase, and we have agreed to sell to such international
underwriter, the number of shares set forth opposite its name:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Salomon Brothers International Limited............................................
Credit Suisse First Boston (Europe) Limited.......................................
-------
Total...................................................................... 840,000
-------
-------
</TABLE>
The international underwriting agreement provides that the obligations of
the international underwriters to purchase the shares included in this offering
are subject to approval of certain legal matters by counsel and to certain other
conditions. The international underwriters are obligated to purchase all the
shares if they purchase any of the shares.
The international underwriters, for whom Salomon Brothers International
Limited and Credit Suisse First Boston (Europe) Limited are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The international underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share on sales to certain other dealers. After the initial offering of the
shares to the public, the public offering price and such concessions may be
changed by the representatives.
We have also entered into an underwriting agreement with a syndicate of
U.S. underwriters providing for the concurrent offer and sale of 3,360,000
shares of common stock in the United States and Canada. Salomon Smith Barney
Inc. is the lead manager of the underwriters for the U.S. offering. The offering
price and aggregate underwriting discounts and commissions per share for the
international offering and the U.S. offering are identical. In addition, the
international offering and the U.S. offering are each conditioned upon the
closing of the other.
The international and U.S. underwriters will enter into an agreement in
which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares of common stock. The international and
U.S. underwriters also have agreed that they may sell shares of common stock
between their respective underwriting syndicates.
We and our executive officers and directors have agreed that, subject to
certain exceptions, for a period of 90 days from the date of this prospectus, we
and they will not, without the prior written consent of Salomon Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of our
common stock or any securities convertible into, or exercisable or exchangeable
for, common stock. Salomon Smith Barney Inc. in its sole discretion may release
any of the securities subject to these lock-up agreements at any time without
notice.
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while this offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate
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[INTERNATIONAL PROSPECTUS--ALTERNATE PAGE]
member when Salomon Smith Barney Inc., in covering syndicate short positions or
making stabilizing purchases, repurchases shares originally sold by that
syndicate member. These activities may cause the price of our common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise and, if commenced,
may be discountinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the common stock on the Nasdaq National Market, prior to the pricing and
completion of this offering. Passive market making consists of displaying bids
on the Nasdaq National Market no higher than the bid prices of independent
market makers and making purchases at prices no higher than those independent
bids and effected in response to order flow. Net purchases by a passive market
maker on each day are limited to a specific percentage of the passive market
maker's average daily trading volume in the common stock during a specified
period and must be discounted when such limit is reached. Passive market making
may cause the price of our common stock to be higher than the price that
otherwise would exist in the open market in the absence of such transactions. If
passive market making is commenced, it may be discontinued at any time.
The U.S. representatives have performed certain investment banking and
advisory services for us from time to time for which they have received
customary fees and expenses. The U.S. representatives may, from time to time,
engage in transactions with and perform services for us in the ordinary course
of their business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
Up to 950,000 of the shares to be offered in the U.S. offering may be sold
by our wholly owned subsidiary. We will issue these shares to our subsidiary as
a capital contribution immediately prior to the closing of this offering. The
net proceeds from the sale of these shares will be received by our subsidiary.
This subsidiary will be a party to the U.S. underwriting agreement.
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[INTERNATIONAL PROSPECTUS--ALTERNATE PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,200,000 SHARES
WINSTAR COMMUNICATIONS, INC.
COMMON STOCK
[LOGO]
------------
PROSPECTUS
FEBRUARY , 1999
------------
SALOMON SMITH BARNEY INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses, other than underwriting discounts and commissions,
in connection with this offering of shares of common stock are as follows:
<TABLE>
<S> <C>
Securities Act Registration Fee............................ $ 51,947.25
NASD Filing Fee............................................ 19,186.00
Nasdaq Additional Listing Fee.............................. 17,500.00
Printing and Engraving Expenses............................ 200,000.00
Legal Fees and Expenses.................................... 300,000.00
Accounting Fees and Expenses............................... 275,000.00
Miscellaneous.............................................. 36,366.75
-----------
Total................................................. $900,000.00
-----------
-----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that all of our directors,
officers, employees and agents shall be entitled to be indemnified by us to the
fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
"Section 145. Indemnification of officers, directors, employees and agents;
insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe this conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, by
itself, create a presumption that the person did not act in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
II-1
<PAGE>
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under sections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer, to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for
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<PAGE>
indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by a director, officer or controlling person in a
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to the court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------
<C> <S>
1.1 Form of U.S. Underwriting Agreement*
1.2 Form of International Underwriting Agreement*
5 Opinion of Graubard Mollen & Miller*
23.1 Consent of Grant Thornton LLP*
23.2 Consent of Grant Thornton LLP*
23.3 Consent of Ernst & Young LLP*
23.4 Consent of Graubard Mollen & Miller (included in Exhibit 5)*
24 Power of Attorney*
</TABLE>
- ------------------
* Previously filed.
(B) SCHEDULES
<TABLE>
<S> <C>
S-1 Report of Independent Certified Public Accountants on Schedules
S-2 Schedule II--Valuation and Qualifying Accounts
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON FEBRUARY 2, 1999.
WINSTAR COMMUNICATIONS, INC.
By: /s/ TIMOTHY R. GRAHAM
----------------------------------
Timothy R. Graham
Executive Vice President,
General Counsel and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------------- -----------------
<S> <C> <C>
* Chairman of the Board and Chief Executive February 2, 1999
- ------------------------------------------ Officer
William J. Rouhana, Jr.
* President, Chief Operating Officer and February 2, 1999
- ------------------------------------------ Director
Nathan Kantor
/s/ TIMOTHY R. GRAHAM Executive Vice President, General Counsel and February 2, 1999
- ------------------------------------------ Director
Timothy R. Graham
* Executive Vice President and February 2, 1999
- ------------------------------------------ Chief Financial Officer
Charles T. Dickson
* Director February 2, 1999
- ------------------------------------------
Bert Wasserman
* Director February 2, 1999
- ------------------------------------------
William J. vanden Heuvel
* Director February 2, 1999
- ------------------------------------------
Steven B. Magyar
* Director February 2, 1999
- ------------------------------------------
James I. Cash
* Vice President, Finance and February 2, 1999
- ------------------------------------------ Principal Accounting Officer
Joseph P. Dwyer
*by: /s/ TIMOTHY R. GRAHAM February 2, 1999
--------------------------------------
Timothy R. Graham
as Attorney in Fact
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors
WinStar Communications, Inc.
In connection with our audit of the consolidated financial statements of WinStar
Communications, Inc. and Subsidiaries referred to in our report dated
February 12, 1998, except for paragraph b of Note 24 as to which the date is
November 5, 1998, we have also audited Schedule II for the ten months ended
December 31, 1995 and the years ended December 31, 1996 and 1997.
In our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
New York, New York
November 5, 1998
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<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------- ---------- ------------ -------------- --------------
ADDITIONS
BALANCE AT CHARGED
BEGINNING TO COSTS AND BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- --------------------------------------------------------- ---------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Reserves deducted from assets to which they apply:
Year ended December 31, 1997
Allowance for doubtful accounts(a)..................... $428,326 $3,963,612 $ 1,578,247(b) $2,813,691
-------- ---------- -------------- ----------
-------- ---------- -------------- ----------
Year ended December 31, 1996
Allowance for doubtful accounts(a)..................... $ 5,608 $ 584,212 $ 161,494(b) $ 428,326
-------- ---------- -------------- ----------
-------- ---------- -------------- ----------
Ten months ended December 31, 1995
Allowance for doubtful accounts(a)..................... $ -- $ 70,000 $ 64,392(b) $ 5,608
-------- ---------- -------------- ----------
-------- ---------- -------------- ----------
</TABLE>
- ------------------
(a) Deducted from accounts receivable. Excludes amounts pertaining to
discontinued operations.
(b) Uncollectible accounts receivable charged against allowance
S-2
