<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________________ to ______________________
Commission File Number: 1-10726
WINSTAR COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3585278
----------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
685 Third Avenue, Suite 3100, New York, NY 10017
------------------------------------------------
(Address of principal executive offices)
(212) 792-9800
--------------
(Registrant's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, as of November 9,
2000, was 92,224,263.
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2000 (unaudited) and December 31, 1999............ 3
Unaudited Condensed Consolidated Statements
of Operations - three and nine months ended
September 30, 2000 and 1999 .................................... 4
Unaudited Condensed Consolidated Statement of
Stockholders' Deficit - nine months ended
September 30, 2000.............................................. 5
Unaudited Condensed Consolidated Statements
of Cash Flows - nine months ended
September 30, 2000 and 1999..................................... 6
Notes to Condensed Consolidated
Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 19
Item 3. Quantitative and Qualitative Disclosures........................ 32
PART II. Other Information............................................... 33
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures .............................................................. 34
2
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 302,693 $ 93,331
Short term investments 53,550 152,640
----------- -----------
Cash, cash equivalents and short term investments 356,243 245,971
Accounts receivable, net of allowance for doubtful accounts 229,563 139,725
Inventories and assets held for sale 51,742 26,146
Prepaid expenses and other current assets 174,423 86,930
----------- -----------
Total current assets 811,971 498,772
Investments in marketable equity securities 1,057 80,267
Investments, at cost 125,524 17,478
Property and equipment, net 2,672,616 1,773,707
Licenses, net 314,824 317,386
Other intangible assets, net 193,675 193,399
Deferred financing costs, net 76,251 54,759
Other assets 273,327 129,525
----------- -----------
Total assets $ 4,469,245 $ 3,065,293
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt $ 10,228 $ 18,512
Current portion of capitalized lease obligations 110,375 121,747
Accounts payable and accrued expenses 432,207 376,501
Deferred revenues - current 26,095 11,699
----------- -----------
Total current liabilities 578,905 528,459
Capitalized lease obligations, less current portion 219,982 179,600
Long-term debt, less current portion 3,312,358 2,144,782
Deferred revenues - non current 235,339 164,238
Other liabilities 22,686 16,604
Deferred income taxes 10,000 14,500
----------- -----------
Total liabilities 4,379,270 3,048,183
----------- -----------
Series C cumulative exchangeable redeemable preferred stock -- 231,212
Series D senior cumulative convertible redeemable preferred stock 200,000 200,000
Stockholders' deficit
Series F preferred stock 3 3
Series G preferred stock 9 --
Series A preferred stock 46 44
Series E preferred stock 1 1
Common stock, par value $.01; authorized 400,000 shares,
issued and outstanding 91,639 and 83,640, respectively 916 836
Additional paid-in-capital 1,993,467 1,022,229
Accumulated deficit (2,099,022) (1,457,519)
Accumulated other comprehensive (loss) income (5,445) 20,304
----------- -----------
Total stockholders' deficit (110,025) (414,102)
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' deficit $ 4,469,245 $ 3,065,293
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenue
Broadband services $ 175,903 $ 97,618 $ 462,187 $ 243,062
Other 19,220 21,917 72,012 61,071
--------- --------- --------- ---------
Total operating revenue 195,123 119,535 534,199 304,133
--------- --------- --------- ---------
Operating expenses
Cost of revenue 102,838 83,555 297,871 224,850
Selling, general and administrative expenses 124,246 108,601 369,763 314,764
Depreciation, amortization and non-cash expenses 87,074 42,976 225,926 106,252
--------- --------- --------- ---------
Total operating expenses 314,158 235,132 893,560 645,866
--------- --------- --------- ---------
Operating loss (119,035) (115,597) (359,361) (341,733)
Other income (expense)
Interest expense (95,597) (52,677) (232,359) (154,011)
Interest income 9,128 6,779 31,436 16,759
Other income 462 -- 18,944 --
--------- --------- --------- ---------
Loss before income tax benefit and extraordinary item (205,042) (161,495) (541,340) (478,985)
Income tax benefit 1,500 1,000 4,641 3,000
--------- --------- --------- ---------
Loss before extraordinary item (203,542) (160,495) (536,699) (475,985)
Extraordinary loss on debt extinguishment -- -- (104,804) --
--------- --------- --------- ---------
Net loss (203,542) (160,495) (641,503) (475,985)
Preferred stock dividends and redemption premiums (23,887) (18,372) (105,506) (43,364)
--------- --------- --------- ---------
Net loss applicable to common stockholders $(227,429) $(178,867) $(747,009) $(519,349)
========= ========= ========= =========
Basic and diluted loss per share:
Loss before extraordinary item (see note 8) $ (2.50) $ (2.18) $ (7.25) $ (6.98)
Extraordinary loss on debt extinguishment -- -- (1.18) --
--------- --------- --------- ---------
Net loss per share (see note 8) $ (2.50) $ (2.18) $ (8.43) $ (6.98)
========= ========= ========= =========
Weighted average shares outstanding 90,910 81,870 88,584 74,409
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Statement of Stockholders' Deficit
For the Nine Months Ended September 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Series F Series G
preferred stock preferred stock
----------------------------- ----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at January 1, 2000 300 $ 3 -- $ --
Issuances of common stock:
For stock option exercises and other
For acquisitions, investments and licenses
For warrant exercises
For advertising services
Issuance of Series G Preferred Stock 900 9
Dividends declared on Series A preferred stock
Issuances of Series A preferred stock as
dividends in kind
Dividends declared on Series C preferred stock
Preferred Series C - redemption premiums and fees
Dividends declared on Series D preferred stock
Issuances of common stock as dividends
on Series D preferred stock
Dividends declared on Series F preferred stock
Issuances of common stock as dividends
on Series F preferred stock
Dividends declared on Series G preferred stock
Issuance of dividends on Series G
preferred stock
Comprehensive loss:
Net loss
Reversal of unrealized gain on investments in
marketable equity securities
Unrealized loss on marketable equity securities
Foreign currency translation adjustment
Unrealized loss on forward exchange contract
Total comprehensive loss
----------- ----------- ----------- -----------
Balances at September 30, 2000 300 $ 3 900 $ 9
=========== =========== =========== ===========
<CAPTION>
Series A Series E
preferred stock preferred stock
---------------------------- ----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at January 1, 2000 4,405 $ 44 75 $ 1
Issuances of common stock:
For stock option exercises and other
For acquisitions, investments and licenses
For warrant exercises
For advertising services
Issuance of Series G Preferred Stock
Dividends declared on Series A preferred stock
Issuances of Series A preferred stock as
dividends in kind 201 2
Dividends declared on Series C preferred stock
Preferred Series C - redemption premiums and fees
Dividends declared on Series D preferred stock
Issuances of common stock as dividends
on Series D preferred stock
Dividends declared on Series F preferred stock
Issuances of common stock as dividends
on Series F preferred stock
Dividends declared on Series G preferred stock
Issuance of dividends on Series G
preferred stock
Comprehensive loss:
Net loss
Reversal of unrealized gain on investments in
marketable equity securities
Unrealized loss on marketable equity securities
Foreign currency translation adjustment
Unrealized loss on forward exchange contract
Total comprehensive loss
----------- ----------- ----------- -----------
Balances at September 30, 2000 4,606 $ 46 75 $ 1
=========== =========== =========== ===========
<CAPTION>
Common stock Additional
---------------------------- paid-in Accumulated
Shares Amount capital deficit
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at January 1, 2000 83,640 $ 836 $ 1,022,229 $(1,457,519)
Issuances of common stock:
For stock option exercises and other 2,720 28 20,569
For acquisitions, investments and licenses 1,328 13 63,480
For warrant exercises 2,736 27 37,485
For advertising services 604 6 13,768
Issuance of Series G Preferred Stock 888,167
Dividends declared on Series A preferred stock (5,038)
Issuances of Series A preferred stock as
dividends in kind 5,036
Dividends declared on Series C preferred stock (15,012)
Preferred Series C - redemption premiums and fees (27,896)
Dividends declared on Series D preferred stock (10,500)
Issuances of common stock as dividends
on Series D preferred stock 72 1 3,499
Dividends declared on Series F preferred stock (16,312)
Issuances of common stock as dividends
on Series F preferred stock 539 5 16,307
Dividends declared on Series G preferred stock (34,655)
Issuance of dividends on Series G
preferred stock 32,340
Comprehensive loss:
Net loss (641,503)
Reversal of unrealized gain on investments in
marketable equity securities
Unrealized loss on marketable equity securities
Foreign currency translation adjustment
Unrealized loss on forward exchange contract
Total comprehensive loss
----------- ----------- ----------- -----------
Balances at September 30, 2000 91,639 $ 916 $ 1,993,467 $(2,099,022)
=========== =========== =========== ===========
<CAPTION>
Accumulated
other Total
comprehensive stockholders'
income (loss) deficit
------------- -------------
<S> <C> <C>
Balances at January 1, 2000 $ 20,304 $ (414,102)
Issuances of common stock:
For stock option exercises and other 20,597
For acquisitions, investments and licenses 63,493
For warrant exercises 37,512
For advertising services 13,774
Issuance of Series G Preferred Stock 888,176
Dividends declared on Series A preferred stock (5,038)
Issuances of Series A preferred stock as
dividends in kind 5,038
Dividends declared on Series C preferred stock (15,012)
Preferred Series C - redemption premiums and fees (27,896)
Dividends declared on Series D preferred stock (10,500)
Issuances of common stock as dividends
on Series D preferred stock 3,500
Dividends declared on Series F preferred stock (16,312)
Issuances of common stock as dividends
on Series F preferred stock 16,312
Dividends declared on Series G preferred stock (34,655)
Issuance of dividends on Series G
preferred stock 32,340
Comprehensive loss:
Net loss (641,503)
Reversal of unrealized gain on investments in
marketable equity securities (19,837) (19,837)
Unrealized loss on marketable equity securities (1,949) (1,949)
Foreign currency translation adjustment (17) (17)
Unrealized loss on forward exchange contract (3,946) (3,946)
-----------
Total comprehensive loss (667,252)
===========
----------- -----------
Balances at September 30, 2000 $ (5,445) $ (110,025)
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (641,503) $ (475,985)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary loss on debt extinguishment 104,804 --
Depreciation, amortization and non-cash expenses 225,926 106,252
Deferred income tax benefit (4,500) (3,000)
Provision for doubtful accounts 13,753 18,641
Loss in equity method investment 1,388 --
Minority interest share of losses in consolidated subsidiary (10,320) --
Gain on foreign currency transaction (1,383) --
Gain on sale of marketable equity securities (19,837) --
Non cash interest expense 68,864 103,049
Changes in operating assets and liabilities:
Accounts receivable (74,371) (72,335)
Inventories (3,202) (8,362)
Prepaid expenses and other current assets (51,452) (54,145)
Other assets (168,150) (14,998)
Accounts payable and accrued expenses 134,611 65,360
Deferred revenues 57,346 152,761
----------- -----------
Net cash used in operating activities (368,026) (182,762)
----------- -----------
Cash flows from investing activities:
Decrease (increase) in short-term investments, net 99,090 (168,134)
Increase in investments in unconsolidated entities (44,984) --
Net proceeds from sale of marketable equity securities 80,132 --
Purchase of property and equipment (648,735) (367,004)
Deposit on FCC license auction (32,000) --
Acquisitions, net of cash acquired, including licenses (9,951) (18,547)
----------- -----------
Net cash used in investing activities (556,448) (553,685)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt, net of transaction costs 2,254,202 305,111
Repayment of long-term debt (1,977,114) --
Net proceeds from preferred stock offerings 888,176 290,540
Net proceeds from common stock offering -- 167,454
Net proceeds from exercise of warrants 37,512 --
Net proceeds from other equity transactions 20,597 43,111
Payment of capital lease obligations (89,537) (76,275)
Other, net -- 717
----------- -----------
Net cash provided by financing activities 1,133,836 730,658
----------- -----------
Net increase in cash and cash equivalents 209,362 (5,789)
Cash and cash equivalents at beginning of period 93,331 208,257
----------- -----------
Cash and cash equivalents at end of period 302,693 202,468
Short-term investments at end of period 53,550 274,453
----------- -----------
Cash, cash equivalents and short-term investments
at end of period $ 356,243 $ 476,921
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
1. Nature of Business
We provide our customers with broadband services. These services
include high-speed Internet and data, Web hosting and design, phone services,
Web-based applications, e-commerce, professional services and Office.com(R), A
Service From Winstar, the top-ranked online business service for small and
medium-sized businesses. We offer a comprehensive suite of these services across
our own end-to-end broadband network, and are continuously adding new broadband
services for our customers. We are also rapidly building a widely available
broadband network which we believe will enable us to offer broadband services to
a majority of the business market in the United States. We presently serve the
top 60 markets in the United States. We also offer services in 13 overseas
markets, including Amsterdam, Brussels, Buenos Aires, London and Tokyo.
We classify revenue into two categories: broadband services and other.
Broadband services revenue primarily includes revenue derived from:
Internet connectivity; data transmission services; web hosting; network capacity
sales; local and long distance voice services; web design and development
services; professional and enhanced services, including network design and
implementation, equipment selection, procurement, sales and installation; and
revenues derived from the development and distribution of information content
and related services over the Internet.
We also develop and distribute information content through traditional
media, such as television, video, cable and radio. These revenues and revenues
from sales of broadcast and programming rights and licenses are classified as
other revenue. Other revenues also include those derived from a portion of an
acquired long distance customer base located in markets which we do not have
current plans to serve with our broadband network.
2. Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements presented herein
include the accounts of Winstar Communications, Inc. and its subsidiaries
(collectively, "Winstar" or the "Company"). We consolidate all subsidiaries when
we own a majority of the voting stock of the subsidiary. All material
inter-company transactions and accounts have been eliminated in consolidation.
7
<PAGE>
We use the equity method to account for investments in certain
companies where we hold a 20% to 50% voting interest. Under the equity method,
we report our interest in the entity as an investment in our condensed
consolidated balance sheet and our percentage share of the earnings or losses
from the company as other income (expense) in our condensed consolidated
statement of operations. Investments in companies where we hold less than a 20%
voting interest are accounted for using the cost method because we do not
exercise significant influence over financial or operating policies of these
companies. Investments in marketable securities are classified as
available-for-sale and are reported at fair value based upon quoted market
values in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Unrealized gains and losses on marketable
securities are reflected as a component of accumulated other comprehensive
income (loss).
The condensed consolidated financial statements and related footnotes
are unaudited. The financial statements contain all adjustments (consisting only
of normal recurring accrual adjustments) which, in our opinion, are necessary to
fairly present our financial position as of September 30, 2000, the statements
of operations for the three and nine months ended September 30, 2000 and 1999,
the statements of cash flows for the nine months ended September 30, 2000 and
1999, and the statement of stockholders' deficit for the nine months ended
September 30, 2000.
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
consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 1999. Certain prior period
amounts have been reclassified to conform to the current period presentation.
The results of operations for the three and nine months ended September 30, 2000
are not necessarily indicative of the results of operations for the year ending
December 31, 2000.
3. Stock Split Effected in the Form of a Common Stock Dividend
On March 2, 2000, we distributed a 50% common stock dividend, pursuant
to which common stockholders of record as of February 16, 2000 received one
additional share of common stock for every two shares they owned. All share and
per-share amounts in the accompanying condensed consolidated financial
statements have been restated to give effect to the stock dividend.
4. Increase in Number of Authorized Shares
On June 28, 2000, our stockholders approved amendments to our
certificate of incorporation, which increased the number of authorized shares of
common stock from 200,000,000 to 400,000,000 and increased the number of
authorized shares of preferred stock from 15,000,000 to 30,000,000.
8
<PAGE>
5. Investments
In March 2000, we acquired 85,000 shares of Class E Convertible
Preferred Stock of Wam!Net Inc., a Minnesota corporation and a global provider
of business-to-business electronic services to the media industry. The aggregate
purchase price was $85.0 million, consisting of $35.0 million in cash and
1,071,429 shares of our common stock valued at $50.0 million.
In September 2000, we entered into a securities purchase agreement
with Wam!Net pursuant to which we have agreed to purchase up to 60,000 shares of
Class H Convertible Preferred Stock of Wam!Net (and warrants to purchase up to
3,000,000 shares of Wam!Net common stock at $.01 per share) for an aggregate
purchase price of $60.0 million in cash over the next several months.
We will account for our investment in Wam!Net's Convertible Preferred
Stock under the cost method of accounting until our investment in Wam!Net is
freely tradable on a national exchange, at which time it will be accounted for
as a marketable equity security.
In March 2000, we sold all of our interest in Advanced Radio Telecom
Corp. for $80.1 million in cash. We had previously recorded an unrealized gain
in accumulated other comprehensive income of $19.8 million. This gain was
reclassified to other income in our condensed consolidated statements of
operations during the three months ended March 31, 2000.
6. Issuance of Series G Preferred Stock
In February 2000, we sold 900,000 shares of our Series G Senior
Cumulative Participating Convertible Preferred Stock in a private placement for
an aggregate purchase price of $900.0 million. The net proceeds received were
approximately $888.2 million. The Series G Preferred Stock pays cumulative
dividends quarterly in arrears on March 15, June 15, September 15 and December
15, at a rate equal to the excess (if any) of (i) 5.75% per annum on the
liquidation preference over (ii) the amount of any regular cash dividends per
share of Series G Preferred Stock that have been paid during the applicable
dividend period on our common stock. If we do not pay any of these dividends in
cash, the amount of such dividends will be added to the liquidation preference
of the Series G Preferred Stock as of the dividend payment date.
9
<PAGE>
Each share of Series G Preferred Stock is convertible, at the option of
the holder, into shares of our common stock at a conversion price of $45.00 per
share, subject to certain adjustments. We will have the option to convert all of
the shares of Series G Preferred Stock into common stock at the conversion price
if on any date after February 1, 2003, the volume-weighted average trading price
of our common stock on the Nasdaq for the 20 consecutive trading days
immediately prior to such date is at least equal to $69.75, subject to
adjustments to the conversion price. The holders of the Series G Preferred Stock
have voting rights as if their shares were converted into our common stock.
On April 1, 2010, we will be required to redeem all of the outstanding
shares of Series G Preferred Stock at a redemption price per share equal to the
greater of (i) the accreted value of the Series G Preferred Stock on such date,
plus all dividends accrued to such date (whether or not earned or declared)
since the most recent dividend payment date and (ii) the volume-weighted average
trading price per share of our common stock on the Nasdaq for the 20 consecutive
trading days immediately prior to April 1, 2010 multiplied by the number of
conversion shares into which a share of Series G Preferred Stock is convertible
on such date. We have the option to pay the redemption price in cash or in
shares of our common stock. If we elect to pay the redemption price, in whole or
in part, in shares of our common stock, such shares will be valued at 97% of the
volume-weighted average trading price per share of common stock on the Nasdaq
for the 20 consecutive trading days immediately prior to April 1, 2010. If we
determine to pay the redemption price in shares of our common stock, we have
agreed to use our best efforts to register such shares under the Securities Act
of 1933, as amended, prior to the delivery of such shares.
7. Long-Term Debt and Series C Preferred Stock
During the second quarter of 2000, we engaged in a series of
transactions relating to our outstanding notes and Series C Preferred Stock.
These transactions included an institutional private placement of $1.6 billion,
consisting of the following new unsecured senior notes:
o $325.0 million of 12 1/2% Senior Notes due 2008
o $637.7 million of 12 3/4% Senior Notes due 2010
o $454.1 million at issuance of 14 3/4% Senior Discount Notes
due 2010
o (Euro)200.0 million Euro-denominated 12 3/4% Senior Notes due
2010
10
<PAGE>
A portion of the proceeds, together with approximately $100.2 million
from our existing cash resources, was used to fund a tender offer for most of
our then-outstanding senior notes, which had an aggregate book balance of
approximately $668.0 million. A portion of the remaining balance of the new
notes was issued in exchange for most of our then-outstanding subordinated notes
with an aggregate principal or accreted amount of approximately $650.4 million.
The remaining portion of the new notes was issued in exchange for substantially
all of our 14 1/4% Senior Subordinated Deferred Interest Debentures due 2007,
which in turn had been issued in June 2000 in exchange for all of our 14 1/4%
Series C Senior Cumulative Exchangeable Preferred Stock due 2007, which had a
liquidation preference of approximately $243.1 million. The new notes contain
covenants that are generally less restrictive on our operations than those
contained in the notes that were replaced. Approximately $16.3 million in
aggregate principal amount of old notes remain outstanding. However, the
indentures governing these notes were amended to eliminate substantially all of
the restrictive covenants and certain default provisions contained therein.
The tender of the senior notes and the exchange of our 10% Senior
Subordinated Notes due 2008 were accounted for as a debt extinguishment; the
exchange of our 11% Senior Subordinated Deferred Interest Notes due 2008 and our
15% Senior Subordinated Deferred Interest Notes were accounted for as a debt
modification; and the exchange of our 14 1/4% Series C Senior Cumulative
Exchangeable Preferred Stock due 2007 was accounted for as a redemption of the
Series C Preferred Stock. These transactions had the following non-recurring
impact on our results of operations for the three months ended June 30, 2000:
(1) an increase in other expense of approximately $7.0 million resulting from
the financing costs associated with the exchange of the 11% Notes and the 15%
Notes, (2) extraordinary losses on debt extinguishment of approximately $104.8
million resulting from the premiums paid on tendered notes and the write-off of
deferred financing costs associated with the tendered senior notes and the
exchange of the 10% Notes, and (3) a $24.0 million charge associated with the
Series C Preferred Stock redemption premiums.
The new notes are summarized below:
12 1/2% Senior Notes due 2008
-----------------------------
The principal amount of the 12 1/2% Senior Notes is $325.0 million.
Interest will accrue from the date of issuance at 12 1/2% per year and will be
payable semi-annually in arrears in cash on April 15 and October 15 of each
year, commencing October 15, 2000. The notes will mature on April 15, 2008 and
are not redeemable prior to maturity.
11
<PAGE>
12 3/4% Senior Notes due 2010
-----------------------------
The principal amount of the 12 3/4% Senior Notes is $637.7 million.
Interest will accrue from the date of issuance at 12 3/4% per year and will be
payable semi-annually in arrears in cash on April 15 and October 15 of each
year, commencing October 15, 2000. The notes will mature on April 15, 2010. On
or after April 15, 2005, we may redeem all or a portion of the 12 3/4% Senior
Notes at redemption prices specified in the note agreement. In addition, before
April 15, 2003, we may redeem a specified percentage of the outstanding notes
with the net proceeds of a public equity offering.
14 3/4% Senior Discount Notes due 2010
--------------------------------------
The 14 3/4% Senior Discount Notes have an initial accreted value of
$454.1 million, with a principal amount at maturity of $927.0 million. No cash
interest will accrue on these notes until April 15, 2005. From the date of
issuance through April 15, 2005, the aggregate accreted value of the 14 3/4%
Senior Discount Notes will increase at a rate of 14 3/4% per year, compounded
semi-annually, to their aggregate principal amount at maturity of $927.0
million. After April 15, 2005, cash interest will accrue at a rate of 14 3/4%
per year and will be payable on April 15 and October 15 of each year, commencing
October 15, 2005. The notes will mature on April 15, 2010. The 14 3/4% Senior
Discount Notes have redemption provisions similar to the 12 3/4% Senior Notes
described above.
12 3/4% Euro-denominated Senior Notes due 2010
----------------------------------------------
The principal amount of the 12 3/4% Euro-denominated Senior Notes is
200.0 million Euro. Interest will accrue from the date of issuance at 12 3/4%
per year and will be payable semi-annually in arrears in cash on April 15 and
October 15 of each year, commencing October 15, 2000. The notes will mature on
April 15, 2010. The 12 3/4% Euro-denominated Senior Notes have redemption
provisions similar to the 12 3/4% Senior Notes and the 14 3/4% Senior Discount
Notes described above. During the third quarter of 2000, we entered into a
series of cross currency swap transactions to effectively convert the
Euro-denominated obligations into U.S. dollar obligations. These U.S. dollar
obligations have a principal amount of US$191.6 million, which accrues interest
at an annual rate of 13.9%. The contracts mature on April 15, 2005, the first
date on which the 12 3/4% Euro-denominated Senior Notes can be redeemed. The
cross currency swaps will be accounted for as a hedging instrument in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Any gains or losses on the Euro-denominated obligations will be
offset by gains or losses on the cross currency swaps.
12
<PAGE>
In May 2000, we consummated a $1.15 billion senior secured credit
facility with a group of commercial banks and other financial institutions. The
proceeds from the credit facility were used to pay down loans outstanding under
our then existing facility with Lucent Technologies. The revolving credit and
term loan agreement provides for a $300.0 million revolving credit facility and
two term loans aggregating $850.0 million. The facilities bear interest at rates
based on the prime rate or LIBOR, plus applicable margins. The revolving line of
credit will be reduced beginning on December 31, 2004 and will be fully paid on
March 31, 2007. The term loans will be repaid in quarterly payments commencing
March 31, 2004 and ending on March 31, 2007 in one instance and on September 30,
2007 in the other instance. The amounts drawn under the credit facility are
secured by substantially all of our current and future assets, excluding assets
financed under the Lucent credit facility described below. The credit facility
contains customary loan covenants restricting or limiting our ability to engage
in certain activities, including limitations on debt, liens, investments,
restricted payments, transactions with affiliates, asset sales and dispositions,
and changes in our corporate existence. At varying times over the term of the
credit facility we are required to meet certain financial, operational and
network build out tests.
In May 2000, a subsidiary of Winstar entered into a new financing
arrangement with Lucent for a renewed credit facility in the aggregate amount of
$2.0 billion. Up to $1.0 billion of the credit facility is available to us at
any one time for the purchase of network equipment and related services, of
which we had borrowed $497.0 million as of September 30, 2000. Interest on loans
under the facility accrue at rates based on the prime rate or LIBOR, plus an
applicable margin. Amounts borrowed under the facility are to be repaid in equal
quarterly installments beginning on March 31, 2005 and ending on the maturity of
the facility on December 31, 2006. We pay an up-front commitment fee equal to a
specified percentage of the amount borrowed and an unused facility fee equal to
a percentage of the unused available commitment. At any time that the
outstanding amount of Lucent loans (as defined in the Lucent credit agreement)
exceed $500.0 million, then Lucent may request that we refinance the amounts
outstanding. If the amounts are not refinanced within a specified period after
notice is given, among other potential adjustments, the interest rate on the
outstanding amounts will be increased by a specified percentage per year.
Alternatively, after appropriate notice is given, Lucent can convert the amount
of Lucent loans outstanding under the facility to senior notes issued by Winstar
pursuant to an indenture similar to those governing our recently issued senior
notes. In addition, a portion of the proceeds of certain equity offerings are
required to be utilized to repay outstanding indebtedness under this facility.
Amounts borrowed under the facility are secured by a purchase money security
interest in the equipment financed under the facility. The Lucent facility
contains loan covenants similar to those governing the bank credit facility
described above.
13
<PAGE>
8. Basic and Diluted Loss Per Share
Basic and diluted loss per share is calculated by dividing the net loss
applicable to common stockholders by the weighted average number of shares of
common stock outstanding during each period. The incremental shares from assumed
conversion of preferred stock or assumed exercises of stock options and warrants
are not included in the calculation of diluted loss per share since their effect
would have been antidilutive. Basic and diluted loss per share were calculated
as follows (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
For the three months For the nine months
ended ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Loss before extraordinary item ($203,542) ($160,495) ($536,699) ($475,985)
Preferred stock dividends and
redemption premiums (23,887) (18,372) (105,506) (43,364)
--------- --------- --------- ---------
Loss applicable to common stock-
holders before extraordinary item (227,429) (178,867) (642,205) (519,349)
Extraordinary loss on debt
extinguishment -- -- (104,804) --
--------- --------- --------- ---------
Loss applicable to common
stockholders ($227,429) ($178,867) ($747,009) ($519,349)
========= ========= ========= =========
Weighted average shares outstanding 90,910 81,870 88,584 74,409
========= ========= ========= =========
Basic and diluted loss per share:
Loss before extraordinary items ($2.50) ($2.18) ($7.25) ($6.98)
Extraordinary loss on debt
extinguishment -- -- (1.18) --
--------- --------- --------- ---------
Net loss per share ($2.50) ($2.18) ($8.43) ($6.98)
========= ========= ========= =========
</TABLE>
Excluding the non-recurring impact of debt modification fees ($7.0 million) and
preferred stock redemption premiums ($24.0 million) related to the debt
refinancing during the second quarter of 2000, loss before extraordinary items
for the nine months ended September 30, 2000 would have been $6.90.
9. License Acquisitions
During the nine months ended September 30, 2000, we were the successful
bidder for 931 spectrum licenses in the 38 GHz band auctioned by the FCC which
cover an additional 679 million channel pops. The aggregate purchase price for
these licenses was approximately $161.0 million, which has been paid. Of this
amount, $32.0 million is reflected as a deposit as of September 30, 2000.
14
<PAGE>
10. Commitments
We expect to spend approximately $1.1 billion in capital expenditures
by December 31, 2001. Of this amount, at September 30, 2000, we had commitments
outstanding for capital expenditures under noncancelable purchase orders and
contracts of approximately $425 million.
11. Segments
Our operating segments represent business units that offer different
products and serve different markets. The Broadband Services segment derives its
revenues by offering its customers a variety of individual and bundled services.
The Traditional Media Services segment derives its revenues by marketing and
distributing information content, licenses and services in traditional markets,
such as television, video, cable and radio. Our Other Telecommunications
Services segment derives its revenue from a portion of an acquired long distance
customer base located in markets which we do not have current plans to serve
with our broadband network. Substantially all of our revenue is attributable to
customers in the United States, and our assets are predominately located in the
United States. Shared administrative services provided to the business units are
classified as Corporate Expenses. International activities, including joint
ventures, as of September 30, 2000 were not material. Information relating to
our reportable operating segments is as follows (in thousands):
<TABLE>
<CAPTION>
Traditional Total for Corporate
Broadband Media Other Telecom Reportable Expenses and
Services Services Services Segments Assets Totals
--------- ----------- ------------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
September 30, 2000
External revenue $ 175,903 $ 15,362 $ 3,858 $ 195,123 $ -- $ 195,123
Segment operating (loss) income (83,122) 933 848 (81,341) (37,694) (119,035)
EBITDA (1) 1,417 1,921 1,736 5,074 (37,035) (31,961)
Segment assets 3,771,802 139,581 28,916 3,940,299 528,946 4,469,245
For the three months ended
September 30, 1999
External revenue $ 97,618 $ 14,853 $ 7,064 $ 119,535 $ -- $ 119,535
Segment operating (loss) income (80,693) (2) 389 (80,306) (35,291) (115,597)
EBITDA (1) (39,259) 613 1,277 (37,369) (35,252) (72,621)
Segment assets 2,100,179 104,017 42,821 2,247,017 520,388 2,767,405
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Traditional Total for Corporate
Broadband Media Other Telecom Reportable Expenses and
Services Services Services Segments Assets Totals
--------- ----------- ------------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
For the nine months ended
September 30, 2000
External revenue $ 462,187 $ 59,192 $ 12,820 $ 534,199 $ -- $ 534,199
Segment operating (loss) income (259,457) 7,063 3,105 (249,289) (110,072) (359,361)
EBITDA (1) (40,651) 10,022 5,769 (24,860) (108,575) (133,435)
Segment assets 3,771,802 139,581 28,916 3,940,299 528,946 4,469,245
For the nine months ended
September 30, 1999
External revenue $ 243,062 $ 39,703 $ 21,368 $ 304,133 $ -- $ 304,133
Segment operating (loss) income (236,731) (471) 1,260 (235,942) (105,791) (341,733)
EBITDA (1) (135,102) 3,925 1,318 (129,859) (105,622) (235,481)
Segment assets 2,100,179 104,017 42,821 2,247,017 520,388 2,767,405
</TABLE>
(1) EBITDA represents losses before interest, income taxes, depreciation
and amortization, non-cash expenses, other income (expense), and
extraordinary items.
12. Events Subsequent to September 30, 2000
In November 2000, we obtained commitments for additional financing
totaling up to $1.02 billion, comprised of a private placement of our equity
securities, an additional loan tranche under our existing senior secured credit
facility and additional vendor financing.
Equity Investment
We have entered into a Securities Purchase Agreement with Microsoft
Corporation, CPQ Holdings, Inc. (a subsidiary of Compaq Computer Corporation),
Credit Suisse First Boston Equity Partners, L.P. (and certain affiliates) and
Welsh, Carson, Anderson & Stowe VIII, L.P. (and certain affiliates) pursuant to
which these investors will purchase, in a private placement, an aggregate of
270,000 shares of our Series H Senior Cumulative Participating Convertible
Preferred Stock and 4,590,000 common stock warrants (the "Warrants") for a
purchase price of $270.0 million.
The Series H Preferred Stock will pay cumulative dividends quarterly in
arrears at a rate equal to the excess (if any) of (i) 12.5% per annum on the
liquidation preference over (ii) the amount of any regular cash dividends per
share of Series H Preferred Stock that have been paid during the applicable
dividend period on our common stock. If we do not pay any of these dividends in
cash, the amount of such dividends will be added to the liquidation preference
of the Series H Preferred Stock as of the dividend payment date.
16
<PAGE>
Each share of Series H Preferred Stock will be convertible, at the
option of the holder, into shares of our common stock at a conversion price of
$25.00 per share, subject to certain adjustments. We will have the option to
convert all of the shares of Series H Preferred Stock into common stock, at the
then effective conversion price, if on any date after the fourth anniversary of
the date of the issuance of the Series H Preferred Stock, the volume-weighted
average trading price of our common stock on the Nasdaq for the 20 consecutive
trading days immediately prior to such date is at least equal to $69.75, subject
to adjustments to the Series G conversion price. The holders of the Series H
Preferred Stock have voting rights as if their shares were converted into our
common stock. The Warrants will be exercisable, commencing on the earlier of six
months from the date of their issuance or upon a change of control, at a per
share exercise price of $25, subject to certain adjustments, and will have a
term of five years from the date of issuance. The conversion price of the Series
H Preferred Stock and the exercise price of the Warrants are subject to
customary adjustment for stock-splits, combinations, reclassifications or other
similar events involving our common stock and weighted average anti-dilution
adjustments for issuances of our equity-based securities at a price less than
the respective conversion price or exercise price for the first two years after
the closing and issuances of securities at a price less than the Current Market
Price thereafter. "Current Market Price" means, as of any date, the
volume-weighted average trading price of the common stock on Nasdaq for the 20
consecutive trading days immediately prior to such date.
On April 1, 2010, we will be required to redeem all of the outstanding
shares of Series H Preferred Stock at a redemption price per share equal to the
greater of (i) the accreted value of a share of Series H Preferred Stock on such
date, plus all dividends accrued to such date (whether or not earned or
declared) since the most recent dividend payment date, and (ii) the
volume-weighted average trading price per share of our common stock on Nasdaq
for the 20 consecutive trading days immediately prior to April 1, 2010
multiplied by the number of conversion shares into which a share of Series H
Preferred Stock is convertible on such date. We will have the option to pay the
redemption price in cash or in shares of our common stock. If we elect to pay
the redemption price, in whole or in part, in shares of our common stock, such
shares will be valued at 97% of the volume-weighted average trading price per
share of common stock on Nasdaq for the 20 consecutive trading days immediately
prior to April 1, 2010. If we determine to pay the redemption price in shares of
our common stock, we have agreed to use our best efforts to register such shares
under the Securities Act of 1933, as amended, prior to the delivery of such
shares.
Additional Senior Secured Financing
We have received a commitment for a new $200 million term loan to be
made under our existing senior secured credit facility. The new loan will become
effective upon appropriate amendments to the existing facility agreement being
signed by the parties, including a majority in interest of the existing lenders
under the facility. Closing of this loan will be subject to certain customary
conditions. We expect to close this transaction during the fourth quarter of
2000.
17
<PAGE>
Equipment Leasing Facilities
We have also received commitments for additional equipment leasing
facilities from Cisco Systems Capital Corporation ("CSC"), a subsidiary of Cisco
Systems Inc., and Compaq Financial Services Corporation ("CFSC"), a subsidiary
of Compaq Computer Corporation, pursuant to which these lessors have committed
to provide us equipment lease financing ("Lease Financing") for purchases of
their equipment and related services.
CSC has agreed to provide up to $500 million of Lease Financing, of
which $125 million is immediately available. An additional $125 million becomes
available at such time as we raise $250 million of additional equity capital
(which will occur with the issuance of our Series H Preferred Stock described
above) or in certain other events. A second additional tranche of $125 million
of Lease Financing from CSC becomes available to us at such time as we raise an
additional $250 million of equity capital or in certain other events and a third
additional tranche of $125 million of Lease Financing from CSC becomes available
to us at such time as we raise a further additional $250 million of equity
capital or in certain other events. CFSC has committed to provide us with up to
$50 million of Lease Financing, subject to the satisfaction of certain
conditions, and to make up to $50 million of Lease Financing available directly
to our qualified customers.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We provide our customers with broadband services. These services
include high-speed Internet and data, Web hosting and design, phone services,
Web-based applications, e-commerce, professional services and Office.com(R), A
Service From Winstar, the top-ranked online business service for small and
medium-sized businesses. We offer a comprehensive suite of these services across
our own end-to-end broadband network and are continuously adding new broadband
services for our customers. We are also building a widely available broadband
network, which we believe will enable us to offer broadband services to a
majority of the business market in the United States. We presently serve the top
60 markets in the United States. We also offer services in 13 overseas markets,
including Amsterdam, Brussels, Buenos Aires, London and Tokyo.
Revenue
We classify revenue into two categories: broadband services and other.
Broadband services revenue primarily includes revenue derived from:
Internet connectivity; data transmission services; web hosting; network capacity
sales; local and long distance voice services; web design and development
services; professional and enhanced services, including network design and
implementation, equipment selection, procurement, sales and installation; and
revenues derived from the development and distribution of information content
and related services over the Internet. Broadband services revenue growth
depends upon our addition of new customers in existing markets, our sale of
bundled services, our expansion into new markets, our introduction of new
services and continued growth in the large account solutions business. We expect
our broadband services revenue to increase as we expand our network and add more
services to it.
We also develop and distribute information content through traditional
media, such as television, video, cable and radio. These revenues and revenues
from sales of broadcast and programming rights and licenses are classified as
other revenue. Other revenues also include those derived from a portion of an
acquired long distance customer base located in markets which we do not have
current plans to serve with our broadband network. We expect these long distance
revenues to continue to decline over time through normal loss, or churn, of this
customer base.
19
<PAGE>
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Results of Operations
Revenues from our operating business lines are as follows (in
millions):
Three Months Ended
September 30,
-------------------------
2000 1999
------- -------
Operating revenue:
Broadband services ...................... $ 175.9 $ 97.6
Other ................................... 19.2 21.9
------- -------
Total operating revenue .................... $ 195.1 $ 119.5
======= =======
Revenue
Total revenue increased by $75.6 million, or 63.3%, to $195.1 million
for the three months ended September 30, 2000, from $119.5 million for the three
months ended September 30, 1999. This increase was principally attributable to
the growth in our broadband services.
Broadband Services Revenue
Revenue from broadband services increased by $78.3 million, or 80.2%,
to $175.9 million for the three months ended September 30, 2000, from $97.6
million for the three months ended September 30, 1999. We experienced continued
growth in all types of broadband services revenue, driven principally by the
combination of our expanding network footprint, our enhanced product set, and
our evolving strength in provisioning. Revenue from large account solutions was
$86.4 million for the three months ended September 30, 2000, compared to $35.4
million for the three months ended September 30, 1999. We attribute this growth
to the continued expansion of our network through the installation of additional
local bandwidth, data and voice switching infrastructure and the addition of our
local and long-haul fiber. We are continuing to realize increased revenue
especially from the sale of these data-related products and services, including
end-to-end broadband connectivity, equipment and network deployment solutions to
our larger customers. We have now signed contracts totaling approximately $1.4
billion from our large account customers (excluding the federal government). We
expect to recognize approximately $175 million of this amount as revenue over
the next 12 months.
Other Revenue
Revenue from other services decreased by $2.7 million, or 12.3%, to
$19.2 million for the three months ended September 30, 2000, from $21.9 million
for the three months ended September 30, 1999. This decrease was due primarily
to the anticipated decline in revenue from the acquired long-distance customer
base, which is not in markets we serve.
20
<PAGE>
Cost of Revenue
Cost of revenue increased by $19.2 million, or 23.0%, to $102.8 million
for the three months ended September 30, 2000, from $83.6 million for the three
months ended September 30, 1999. As a percentage of revenue, cost of revenue for
the three months ended September 30, 2000 was 52.7%, compared with 69.9% for the
three months ended September 30, 1999. The improvement in the cost of revenue
percentage is the result of the increase in sales of higher margin large account
solutions, the increased volumes and larger percentages of traffic being
provisioned on our local and long haul networks, cost reductions received from
our vendors, and the larger number of customers taking multiple services.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $15.6 million,
or 14.4%, to $124.2 million for the three months ended September 30, 2000, from
$108.6 million for the three months ended September 30, 1999. As a percentage of
revenues, selling, general and administrative expenses declined from 90.9% for
the three months ended September 30, 1999 to 63.7% for the three months ended
September 30, 2000. During the three months ended September 30, 2000, we spent
approximately $6.5 million to expand the sales force and support the rollout of
our new Business Essentials program and other marketing initiatives.
Additionally, we continued to hire support personnel in connection with the
expansion of our core markets and services, both domestically and
internationally. We had approximately 4,700 employees at September 30, 2000, as
compared with approximately 3,600 employees at September 30, 1999.
Depreciation, Amortization and Non-Cash Expenses
Depreciation, amortization and non-cash expenses increased by $44.1
million, or 102.6%, to $87.1 million for the three months ended September 30,
2000, from $43.0 million for the three months ended September 30, 1999,
principally resulting from our acquisition and deployment of broadband
communications equipment in connection with our network buildout and
amortization relating to goodwill and spectrum licenses. Depreciation,
amortization and non-cash expenses for the three months ended September 30, 2000
also included approximately $5.8 million relating to promotion and advertising
services obtained through the issuance of common stock and contributed by CBS
Corporation relating to its equity interest in Office.com. These are not
cash-based transactions and therefore are amortized to depreciation,
amortization and non-cash expenses. We expect that depreciation, amortization
and non-cash expenses will continue to increase as we increase our investment in
the build out of our broadband network.
Operating Loss
For the reasons noted above, the operating loss for the three months
ended September 30, 2000 was $119.0 million, compared to $115.6 million for the
three months ended September 30, 1999.
21
<PAGE>
Interest Expense
Interest expense increased by $42.9 million, or 81.4%, for the three
months ended September 30, 2000, to $95.6 million, from $52.7 million for the
three months ended September 30, 1999. This increase was principally
attributable to borrowings under our new senior secured credit facility and the
issuance of our new unsecured senior notes. Of the $95.6 million of interest
expense incurred for the three months ended September 30, 2000, $21.7 million
represented non-cash interest and amortization of deferred financing costs.
Interest Income
Interest income increased by $2.3 million, or 33.8%, to $9.1 million
for the three months ended September 30, 2000, from $6.8 million for the three
months ended September 30, 1999. The increase was principally due to higher
balances in cash, cash equivalents and short-term investments as a result of the
issuance of the Series G Preferred Stock in February 2000.
Net Loss Before Preferred Stock Dividends and Redemption Premiums
For the reasons noted above, we reported a net loss before preferred
stock dividends and redemption premiums of $203.5 million for the three months
ended September 30, 2000, compared to a loss of $160.5 million for the three
months ended September 30, 1999.
Preferred Stock Dividends and Redemption Premiums
For the three months ended September 30, 2000, we incurred dividend
obligations of $23.9 million relative to our Series A Preferred Stock, Series D
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock, none of
which were paid in cash. For the three months ended September 30, 1999, such
obligations amounted to $18.4 million and included dividends of $7.6 million
relating to our Series C Preferred Stock, which was exchanged in June 2000 for
our 14 1/4% Senior Subordinated Deferred Interest Notes due 2007, substantially
all of which were in turn exchanged for a combination of our 12 3/4% Senior
Notes due 2010 and our 14 3/4% Senior Discount Notes due 2010. The increase in
dividends from 1999 to 2000 is primarily due to the issuance of 300,000 shares
of Series F Preferred Stock in September 1999 and the issuance of 900,000 shares
of Series G Preferred Stock in February 2000.
Net Loss Applicable to Common Stockholders
For the reasons noted above, we reported a net loss applicable to common
stockholders of $227.4 million for the three months ended September 30, 2000,
compared to a net loss applicable to common stockholders of $178.9 million for
the three months ended September 30, 1999.
22
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Results of Operations
Revenues from our operating business lines are as follows (in
millions):
Nine Months Ended
September 30,
-------------------------
2000 1999
------- -------
Operating revenue:
Broadband services ...................... $ 462.2 $ 243.1
Other ................................... 72.0 61.0
------- -------
Total operating revenue .................... $ 534.2 $ 304.1
======= =======
Revenue
Total revenue increased by $230.1 million, or 75.7%, to $534.2 million
for the nine months ended September 30, 2000, from $304.1 million for the nine
months ended September 30, 1999. This increase was principally attributable to
the growth in our broadband services.
Broadband Services Revenue
Revenue from broadband services increased by $219.1 million, or 90.1%,
to $462.2 million for the nine months ended September 30, 2000, from $243.1
million for the nine months ended September 30, 1999. We experienced continued
growth in all types of broadband services revenue, driven principally by the
combination of our expanding network footprint, our enhanced product set, and
our evolving strength in provisioning. Revenue from large account solutions was
$219.9 million for the nine months ended September 30, 2000, compared to $71.3
million for the nine months ended September 30, 1999. We attribute this growth
to the continued expansion of our network through the installation of additional
local bandwidth, data and voice switching infrastructure and the addition of our
local and long-haul fiber. We are continuing to realize increased revenue
especially from the sale of these data-related products and services, including
end-to-end broadband connectivity, equipment and network deployment solutions to
our larger customers.
23
<PAGE>
Other Revenue
Revenue from other services increased by $11.0 million, or 18.0%, to
$72.0 million for the nine months ended September 30, 2000, from $61.0 million
for the nine months ended September 30, 1999. This increase was due primarily to
improved revenue from our traditional media business, resulting from expanded
programming offerings, and broadcast license sales, offset by the anticipated
decline in revenue from the acquired long-distance customer base, which is not
in markets we serve.
Cost of Revenue
Cost of revenue increased by $73.0 million, or 32.5%, to $297.9 million
for the nine months ended September 30, 2000, from $224.9 million for the nine
months ended September 30, 1999. As a percentage of revenue, cost of revenue for
the nine months ended September 30, 2000 was 55.8%, compared with 73.9% for the
nine months ended September 30, 1999. The improvement in the cost of revenue
percentage is the result of the increase in sales of higher margin large account
solutions, the increased volumes and larger percentages of traffic being
provisioned on our local and long haul networks, cost reductions received from
our vendors, and the larger number of customers taking multiple services.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $55.0 million,
or 17.5%, to $369.8 million for the nine months ended September 30, 2000, from
$314.8 million for the nine months ended September 30, 1999. As a percentage of
revenues, selling, general and administrative expenses declined from 103.5% for
the nine months ended September 30, 1999 to 69.2% for the nine months ended
September 30, 2000. During the nine months ended September 30, 2000, we
increased our advertising support for Office.com, A Service From Winstar, and we
incurred approximately $22.7 million of incremental advertising expenses. In
addition, during the three months ended September 30, 2000, we spent
approximately $6.5 million to expand the sales force and support the rollout of
our new Business Essentials program and other marketing initiatives. We
continued to hire support personnel in connection with the expansion of our core
markets and services, both domestically and internationally. We had
approximately 4,700 employees at September 30, 2000, as compared with
approximately 3,600 employees at September 30, 1999.
24
<PAGE>
Depreciation, Amortization and Non-Cash Expenses
Depreciation, amortization and non-cash expenses increased by $119.6
million, or 112.5%, to $225.9 million for the nine months ended September 30,
2000, from $106.3 million for the nine months ended September 30, 1999,
principally resulting from our acquisition and deployment of broadband
communications equipment in connection with our network buildout and
amortization relating to goodwill and spectrum licenses. Depreciation,
amortization and non-cash expenses for the nine months ended September 30, 2000
also included approximately $16.3 million relating to promotion and advertising
services obtained through the issuance of common stock and contributed by CBS
Corporation relating to its equity interest in Office.com. These are not
cash-based transactions and therefore are amortized to depreciation,
amortization and non-cash expenses. We expect that depreciation, amortization
and non-cash expenses will continue to increase as we increase our investment in
the build out of our broadband network.
Operating Loss
For the reasons noted above, the operating loss for the nine months
ended September 30, 2000 was $359.4 million, compared with an operating loss of
$341.7 million for the nine months ended September 30, 1999.
Interest Expense
Interest expense increased by $78.4 million, or 50.9%, for the nine
months ended September 30, 2000, to $232.4 million, from $154.0 million for the
nine months ended September 30, 1999. This increase was principally attributable
to (i) additional borrowings under our original Lucent facility, which were paid
in full in May 2000 with the proceeds from our new bank facility, (ii) the
issuance of our new unsecured senior notes, and (iii) borrowings under our new
senior secured credit facility and our new Lucent facility subsequent to the
repayment of the original Lucent facility. This increase in interest expense was
offset, in part, by the conversion of $122.1 million of our 14% Convertible
Senior Subordinated Discount Notes into approximately 8.9 million shares of
common stock in June 1999. Of the $232.4 million of interest expense incurred
for the nine months ended September 30, 2000, $68.9 million represented non-cash
interest and amortization of deferred financing costs.
Interest Income
Interest income increased by $14.6 million, or 86.9%, to $31.4 million
for the nine months ended September 30, 2000, from $16.8 million for the nine
months ended September 30, 1999. The increase resulted from higher balances in
cash, cash equivalents and short-term investments due to the issuance of the
Series G Preferred Stock in February 2000.
25
<PAGE>
Other Income
Other income of $18.9 million for the nine months ended September 30,
2000 consists of the $19.9 million gain on the sale of shares of Advanced Radio
Telecom Corp. recorded during the first quarter of 2000 and CBS's minority
interest share of losses of Office.com of approximately $10.3 million, offset by
approximately $7.0 million of one-time transaction fees incurred during the
exchange of our 11% Senior Subordinated Notes and our 15% Senior Subordinated
Notes and various other immaterial one-time charges, which are primarily
non-cash.
Extraordinary Loss on Debt Extinguishment
For the nine months ended September 30, 2000, we reported an
extraordinary loss on debt extinguishment of approximately $104.8 million
resulting from the premiums paid on tendered notes and the write-off of deferred
financing costs associated with the tendered senior notes and the exchange of
the 10% Senior Subordinated Notes.
Net Loss Before Preferred Stock Dividends and Redemption Premiums
For the reasons noted above, we reported a net loss before preferred
stock dividends of $641.5 million for the nine months ended September 30, 2000,
compared to a net loss before preferred stock dividends of $476.0 million for
the nine months ended September 30, 1999.
Preferred Stock Dividends and Redemption Premiums
For the nine months ended September 30, 2000, we incurred dividend
obligations of $105.5 million relative to our Series A Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series F Preferred Stock and Series G
Preferred Stock, none of which were paid in cash. For the nine months ended
September 30, 1999, such obligations amounted to $43.4 million. The increase is
primarily due to the issuance of 300,000 shares of Series F Preferred Stock in
September 1999 and the issuance of 900,000 shares of Series G Preferred Stock in
February 2000, offset by the decrease associated with the exchange (and related
cancellation) of the Series C Preferred Stock in June 2000.
In June 2000, all of our Series C Preferred Stock was exchanged for our
14 1/4% Senior Subordinated Deferred Interest Notes due 2007, substantially all
of which were in turn exchanged for a combination of our 12 3/4% Senior Notes
due 2010 and our 14 3/4% Senior Discount Notes due 2010. As a result of this
exchange transaction, we recorded a $24.0 million one-time charge during the
three months ended June 30, 2000.
26
<PAGE>
Net Loss Applicable to Common Stockholders
For the reasons noted above, we reported a net loss applicable to
common stockholders of $747.0 million for the nine months ended September 30,
2000, compared to a net loss applicable to common stockholders of $519.3 million
for the nine months ended September 30, 1999.
Liquidity and Capital Resources
At September 30, 2000, we had $356.2 million of cash, cash equivalents
and short-term investments. During the nine months ended September 30, 2000, net
cash provided by financing activities was $1,133.8 million. In February 2000, we
received net proceeds of $888.2 million from the sale of 900,000 shares of our
Series G Preferred Stock. During the nine months ended September 30, 2000, we
also received $37.5 million of net proceeds from the exercise of warrants to
purchase 2.7 million shares of our common stock and $20.6 million from stock
option exercises and other equity transactions. In addition, in November 2000,
we obtained commitments for up to $1.02 billion of additional equity, senior
secured debt and vendor financing.
During the second quarter of 2000, we engaged in a series of
transactions relating to our outstanding notes and Series C Preferred Stock.
These transactions included an institutional private placement of $1.6 billion,
consisting of the following new unsecured senior notes:
o $325.0 million of 12 1/2% Senior Notes due 2008
o $637.7 million of 12 3/4% Senior Notes due 2010
o $454.1 million at issuance of 14 3/4% Senior Discount Notes
due 2010
o (Euro)200.0 million Euro-denominated 12 3/4% Senior Notes due
2010
These transactions replaced or refinanced our existing senior and
senior subordinated notes, including the exchange of our Series C Preferred
Stock. These notes are governed by indentures which contain customary
restrictive covenants, among other provisions. However, these covenants are
generally less restrictive than those governing our old notes, and permitted us
to enter into the $1.15 billion credit facility described below.
In May 2000, we consummated a $1.15 billion senior secured credit
facility with a group of commercial banks and other financial institutions. The
proceeds from the credit facility were used to pay down loans outstanding under
our then existing facility with Lucent Technologies. We also entered into a new
financing arrangement with Lucent for a renewed credit facility in the aggregate
amount of $2.0 billion. Up to $1.0 billion of the credit facility is available
to us at any one time for the purchase of network equipment and related
services, of which we had borrowed $497.0 million as of September 30, 2000. The
new debt and credit facilities are further discussed in Note 7 to our condensed
consolidated financial statements. These additional financing commitments are
further discussed in Note 12 to our condensed consolidated financial statements.
27
<PAGE>
In November 2000, we obtained commitments for additional financing
totaling up to $1.02 billion, comprised of a private placement of our equity
securities, an additional loan tranche under our existing senior secured credit
facility and additional vendor financing. We will use this new capital to fund
our ongoing business plan, which includes the expansion of our broadband
network, products and services. These additional financing commitments are
further discussed in Note 12 to our condensed consolidated financial statements.
Cash provided by financing activities during the nine months ended
September 30, 2000 is net of $89.5 million of payments under capital lease
obligations, primarily to Williams Communications related to the delivery of
certain dark fiber assets and specified fixed circuits. At September 30, 2000,
we had capital lease obligations with Williams totaling $243.9 million. We
expect to pay Williams an additional $312.5 million over the next six years for
dark fiber, long-haul transport services and other network services. We also
have an agreement with Metromedia Fiber Networks which allows us to obtain dark
fiber capacity in 50 major markets in the United States and in certain markets
outside the U.S. We will pay approximately $300.0 million over 20 years under
this agreement.
During the nine months ended September 30, 2000, we used $368.0 million
of cash in operating activities. Net cash used by operating activities is
primarily due to losses before extraordinary items and changes in working
capital items, offset by non-cash interest expense and depreciation,
amortization and non-cash expenses.
Cash used to fund negative EBITDA during the three and nine months
ended September 30, 2000 was approximately $32.0 million and $133.4 million,
respectively, compared to $72.6 million and $235.5 million during the same
periods in 1999. We expect our EBITDA losses to continue to decline and to reach
EBITDA breakeven during the first half of 2001. EBITDA represents losses before
interest, income taxes, depreciation, amortization and non-cash expenses,
extraordinary losses and other income (expense) and is commonly used in our
industry to measure cash flows and liquidity. EBITDA is not intended to
represent results of operations or cash flows from operating activities
determined in accordance with accounting principles generally accepted in the
United States and may not be comparable to similarly titled measures reported by
other companies.
Cash used in investing activities was $556.5 million during the nine
months ended September 30, 2000. Cash used in investing activities for the nine
months ended September 30, 2000 primarily consists of cash used to purchase
property and equipment of $648.7 million. Purchases of property and equipment
during the nine months ended September 30, 2000 were approximately $1,058.9
million, of which $831.4 million were financed collectively through the Lucent
Facilities and our arrangements with Williams and various other equipment
vendors. The original Lucent Facility was paid down with proceeds from our new
bank credit facility as previously described.
28
<PAGE>
During the nine months ended September 30, 2000, investing activities
also included $35.0 million of cash used to purchase 35,000 shares of Class E
Convertible Preferred Stock of Wam!Net, Inc. In addition, we received $80.1
million on the sale of all of our holdings in Advanced Radio Telecom Corp.
During the nine months ended September 30, 2000, we were the successful
bidder for 931 spectrum licenses in the 38 GHz band auctioned by the FCC which
cover an additional 679 million channel pops. The aggregate purchase price for
these licenses was approximately $161.0 million, which has been paid. Of this
amount, $32.0 million is reflected as a deposit as of September 30, 2000.
We have incurred significant operating and net losses, due in large
part to the development of our network and the growth of our sales and marketing
organization. We anticipate that such losses will continue over the near term as
we execute our growth strategy. We are pursuing the continued expansion of
services offered to our current 60 U.S. markets. We are also planning to offer
our services in up to 50 foreign markets by the end of 2004. This expansion will
require significant amounts of capital to finance capital expenditures as well
as anticipated losses.
We are in the process of ordering and installing switches, optronics
equipment, radios and other network equipment to be placed in our key markets,
and expect our core domestic network infrastructure to be completed by the end
of 2001. We plan to spend approximately $1.3 billion on capital expenditures
during 2000, which we expect to finance principally through our new Lucent
facility and other credit facilities (including vendor financing and capital
leases) which have been committed or which we otherwise expect to be available
to us. 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. We have the ability to moderate our
capital spending and operating losses to some extent by varying the pace of our
growth, including the number of markets in which we build network and offer
services, and by determining how many buildings we enter in each market. In the
event that we slow the speed or narrow the focus of our business plan, we would
expect to reduce our capital requirements and operating losses.
29
<PAGE>
We anticipate, based on our business plan and certain assumptions, that
our existing financial resources will be sufficient to fund our planned
operations and capital requirements into the first quarter of 2002. These
financial resources include our existing cash balances and amounts we expect to
receive in connection with our Series H financing and expansion of our credit
facility, as well as amounts we expect will be immediately available under our
vendor financing facilities with Lucent, Cisco and Compaq. In addition, we will
have additional amounts available to us under the Lucent facility as any portion
of our outstanding Lucent loans is syndicated (up to the aggregate facility
amount of $2 billion), and up to an additional $250 million available under the
Cisco facility as we meet certain conditions described elsewhere in this report.
As a result of our recently announced financing commitments, our expectation to
be EBITDA breakeven in the first half of 2001 and the expectation that our core
network infrastructure will be completed by the end of 2001, we believe we will
have the flexibility to grow our business at whatever pace is appropriate for
the existing capital environment. We may be required to seek additional sources
of capital if: our operating assumptions change or prove to be inaccurate; we
consummate any acquisitions of significant businesses or assets; or we further
accelerate our plan and enter markets more rapidly than currently anticipated.
We continually evaluate the financing alternatives available to us and may
decide to seek a variety of forms of additional debt and/or equity financing.
Effects of Recently Issued Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS 133 also specifies new
methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged and specifies detailed criteria to be met to
qualify for hedge accounting. SFAS 133, as amended by SFAS 137 and SFAS 138, is
effective for fiscal years beginning after September 15, 2000. We adopted SFAS
133 during the second quarter of 2000. The adoption of this statement did not
have a material effect on our results of operations or our financial position.
30
<PAGE>
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101. SAB No. 101 summarizes certain of the
staff's views in applying generally accepted accounting principals to revenue
recognition in financial statements and is required to be implemented during the
fourth quarter of 2000. In July 2000, the Financial Accounting Standards Board's
Emerging Issues Task Force ("EITF") reached a consensus on EITF 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent." The EITF
addressed whether a company should report revenue based on (a) the gross amount
billed to a customer because it has earned revenue from the sale of the goods or
services or (b) the net amount retained (that is, the amount billed to the
customer less the amount paid to a supplier) because it has earned a commission
or fee. The accounting principles and effective date of EITF 99-19 are
consistent with the requirements of SAB 101. We are currently analyzing the
impact these pronouncements will have on our financial statements. We do not
expect the adoption of these pronouncements will have a material effect on our
consolidated financial position or results of operations.
Forward-Looking Statements
This report contains 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," "predict," "project," "will,"
"could" and similar terms and expressions, as they relate to us, are intended to
identify forward-looking statements. These statements reflect our current views
with respect to future events and are subject to numerous risks, uncertainties
and assumptions. We cannot assure you that any of our expectations will be
realized. Reference is further made to the risk factors presented in our annual
report filed on Form 10-K for the fiscal year ended December 31, 1999.
The following factors and other factors may cause our actual results to
differ materially from those contemplated by some of the forward-looking
statements included in this report:
o the willingness of the marketplace to accept fixed wireless
services generally, and our Wireless Fiber(SM) services in
particular, as an acceptable alternative to other available
communications technologies and rapid technological innovation
bringing on constant enhancements in communications;
o our ability to penetrate our targeted markets, which are
dominated by much larger entrenched competitors, and attract
and retain a sufficient revenue-generating customer base;
o our ability to obtain sufficient capital to finance the
buildout of our domestic and international telecommunications
network, fund our projected operating losses and service our
debt obligations, which may be dependent on the state of the
financial and capital markets;
31
<PAGE>
o the general condition of the economy and the financial
markets, particularly within the telecommunications and
technology sector which has historically been even more
volatile than the markets as a whole;
o changes in the regulatory environment which may directly
affect: the breadth of services which we and our competitors
may offer and the terms of those services, the size and number
of our competitors, our ability to obtain necessary access to
customer buildings in order to provide our services, and our
use of our spectrum assets;
o the impact of capital market volatility and other events or
circumstances affecting our customers, including those of our
large accounts solutions business, and our major suppliers;
and
o our ability to hire and retain a sufficient number of highly
skilled and qualified employees sufficient to support our
growth objectives, particularly in light of the intense
competition for these employees in the recently de-regulated
telecommunications industry.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to our short-term investment portfolio, redeemable preferred stock and
long-term debt obligations. We do not use derivative instruments in our
short-term investment portfolio. We place our short-term investments with high
credit quality issuers and, by policy, limit the amount of credit exposure to
any one issuer. Our redeemable preferred stock and long-term obligations
primarily consist of fixed rate instruments, and accordingly, would not be
impacted by changes in interest rates. Amounts borrowed under the Lucent
Facility and the new bank credit facility bear interest at the prime rate or
LIBOR plus applicable margins. Therefore, the interest rate on these facilities
will fluctuate as these rates fluctuate. We primarily enter into debt
obligations to support the construction of our network and working capital
needs.
Foreign Exchange Rates
At September 30, 2000, our international operations were not material
to our consolidated financial position. Therefore, we do not believe we are
exposed to significant risk from changes in foreign currency exchange rates for
our international operations which use a foreign currency as their functional
currency and are translated into U.S. dollars.
In April 2000, we issued (Euro)200.0 million Euro-denominated 12 3/4%
Senior Notes. We recently entered into a cross currency swap transaction to
effectively convert the Euro-denominated obligations into U.S. dollar
obligations. This transaction hedges our exposure to exchange rate fluctuations
in the Euro.
32
<PAGE>
Equity Price Risk
We currently do not have any significant investments in marketable
equity securities. From time to time, we may consider acquiring equity
securities for investment or strategic purposes.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
The following table sets forth certain information with respect to our
issuance of certain securities during the quarter ended September 30, 2000,
without registration of such securities under the Securities Act:
<TABLE>
<CAPTION>
Terms of
Exemption Conversion or
Securities Sold Purchasers Consideration Claimed Exercise Use of Proceeds
--------------- ---------- ------------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C>
322,283 shares of Lakeside media and services Section 4(2) NA We did not receive
Winstar common Ventures, LLC cash proceeds for
stock these shares
16,682 shares of Several Shares issued in Section 4(2) NA We did not receive
Winstar common individuals connection with an cash proceeds for
stock acquisition these shares
</TABLE>
Item 6. Exhibit and Report on Form 8-K
(a) Exhibit.
27 Financial Data Schedule
(1) Report on Form 8-K.
We did not file any reports on Form 8-K during the quarter
ended September 30, 2000.
33
<PAGE>
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Winstar Communications, Inc.
Registrant
By: /s/Richard J. Uhl
-----------------------------------------------------
Richard J. Uhl
Group Executive and Chief Financial
Officer (Principal Financial and Accounting Officer) Dated: November 14, 2000
34
