<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 10,
2000, was 90,747,178.
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000 (unaudited) and December 31, 1999.................. 3
Unaudited Condensed Consolidated Statements
of Operations - three and six months ended
June 30, 2000 and 1999 .......................................... 4
Unaudited Condensed Consolidated Statement of
Stockholders' Equity (Deficit) - six months ended
June 30, 2000.................................................... 5
Unaudited Condensed Consolidated Statements
of Cash Flows - six months ended
June 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................. 16
Item 3. Quantitative and Qualitative Disclosures...................... 28
PART II. Other Information.............................................. 29
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures .............................................................. 32
2
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 436,354 $ 93,331
Short term investments 147,189 152,640
----------- -----------
Cash, cash equivalents and short term investments 583,543 245,971
Accounts receivable, net of allowance for doubtful accounts 174,280 139,725
Inventories 33,020 18,194
Prepaid expenses and other current assets 180,774 86,930
----------- -----------
Total current assets 971,617 490,820
Investments in marketable equity securities 1,363 80,267
Investments, at cost 121,809 17,478
Property and equipment, net 2,342,433 1,793,982
Licenses, net 314,892 317,386
Other intangible assets, net 197,072 193,399
Deferred financing costs, net 69,881 54,759
Other assets 169,003 117,202
----------- -----------
Total assets $ 4,188,070 $ 3,065,293
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt $ 12,199 $ 18,512
Current portion of capitalized lease obligations 151,142 121,747
Accounts payable and accrued expenses 289,670 376,501
Deferred revenues - current 16,920 11,699
----------- -----------
Total current liabilities 469,931 528,459
Capitalized lease obligations, less current portion 139,901 179,600
Long-term debt, less current portion 3,049,189 2,144,782
Deferred revenues - non current 205,572 164,238
Other liabilities 20,722 16,604
Deferred income taxes 11,500 14,500
----------- -----------
Total liabilities 3,896,815 3,048,183
----------- -----------
Series C cumulative exchangeable redeemable preferred stock -- 231,212
Series D senior cumulative convertible redeemable preferred stock 200,000 200,000
Stockholder's equity (deficit)
Series F preferred stock 3 3
Series G preferred stock 9 --
Series A preferred stock 45 44
Series E preferred stock 1 1
Common stock, par value $.01; authorized 400,000 shares,
issued and outstanding 90,656 and 83,640, respectively 907 836
Additional paid-in-capital 1,986,966 1,022,229
Accumulated deficit (1,895,480) (1,457,519)
Accumulated other comprehensive (loss) income (1,196) 20,304
----------- -----------
Total stockholder's equity (deficit) 91,255 (414,102)
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit) $ 4,188,070 $ 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 six months ended
June 30, June 30,
-------------------------- ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenue
Broadband services $ 152,823 $ 76,856 $ 286,284 $ 145,443
Other 23,465 19,649 52,792 39,155
--------- --------- --------- ---------
Total operating revenue 176,288 96,505 339,076 184,598
--------- --------- --------- ---------
Operating expenses
Cost of revenue 98,542 73,353 195,033 141,295
Selling, general and administrative expenses 122,587 106,242 245,517 206,163
Depreciation, amortization and non-cash expenses 72,878 34,818 138,852 63,276
--------- --------- --------- ---------
Total operating expenses 294,007 214,413 579,402 410,734
--------- --------- --------- ---------
Operating loss (117,719) (117,908) (240,326) (226,136)
Other income (expense)
Interest expense (73,987) (50,641) (136,762) (101,334)
Interest income 11,597 4,971 22,308 9,980
Other income (expense) (5,672) -- 18,482 --
--------- --------- --------- ---------
Loss before income tax benefit and extraordinary item (185,781) (163,578) (336,298) (317,490)
Income tax benefit 1,500 1,000 3,141 2,000
--------- --------- --------- ---------
Loss before extraordinary item (184,281) (162,578) (333,157) (315,490)
Extraordinary loss on debt extinguishment (104,804) -- (104,804) --
--------- --------- --------- ---------
Net loss (289,085) (162,578) (437,961) (315,490)
Preferred stock dividends and redemption premiums (54,486) (12,801) (81,619) (24,992)
--------- --------- --------- ---------
Net loss applicable to common stockholders $(343,571) $(175,379) $(519,580) $(340,482)
========= ========= ========= =========
Basic and diluted loss per share:
Loss before extraordinary item (see note 8) $ (2.67) $ (2.35) $ (4.74) $ (4.82)
Extraordinary loss on debt extinguishment (1.17) -- (1.20) --
--------- --------- --------- ---------
Net loss per share (see note 8) $ (3.84) $ (2.35) $ (5.94) $ (4.82)
========= ========= ========= =========
Weighted average shares outstanding 89,562 74,559 87,408 70,602
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Six Months Ended June 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Series F Series G Series A
preferred stock preferred stock preferred stock
-------------------- ------------------- ---------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 2000 300 $ 3 -- $ -- 4,405 $ 44
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 133 1
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 gain on forward exchange contract
Total comprehensive loss
---- ------- ------- -------- ------- -------
Balances at June 30, 2000 300 $ 3 900 $ 9 4,538 $ 45
==== ======= ======= ======== ======= =======
<CAPTION>
Series E
preferred stock Commont stock Additional
--------------------- ---------------------- paid-in
Shares Amount Shares Amount capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 2000 75 $ 1 83,640 836 1,022,229
Issuances of common stock:
For stock option exercises and other 2,322 24 15,823
For acquisitions, investments and licenses 1,328 13 63,480
For warrant exercises 2,736 27 37,485
For advertising services 281 3 8,510
Issuance of Series G Preferred Stock 888,167
Dividends declared on Series A preferred stock (3,334)
Issuances of Series A preferred stock as
dividends in kind 3,333
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 (7,000)
Issuances of common stock as dividends
on Series D preferred stock 72 1 3,499
Dividends declared on Series F preferred stock (10,875)
Issuances of common stock as dividends
on Series F preferred stock 277 3 10,872
Dividends declared on Series G preferred stock (21,410)
Issuance of dividends on Series G
preferred stock 19,095
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 gain on forward exchange contract
Total comprehensive loss
-------- -------- ------ ------ ------------
Balances at June 30, 2000 75 $ 1 90,656 $ 907 $ 1,986,966
======== ======== ====== ===== ============
<CAPTION>
Accumulated Total
other stockholders'
Accumulated comprehensive equity
deficit income (loss) (deficit)
------- ------------- ---------
<S> <C> <C> <C>
Balances at January 1, 2000 $(1,457,519) $20,304 $(414,102)
Issuances of common stock:
For stock option exercises and other 15,847
For acquisitions, investments and licenses 63,493
For warrant exercises 37,512
For advertising services 8,513
Issuance of Series G Preferred Stock 888,176
Dividends declared on Series A preferred stock (3,334)
Issuances of Series A preferred stock as
dividends in kind 3,334
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 (7,000)
Issuances of common stock as dividends
on Series D preferred stock 3,500
Dividends declared on Series F preferred stock (10,875)
Issuances of common stock as dividends
on Series F preferred stock 10,875
Dividends declared on Series G preferred stock (21,410)
Issuance of dividends on Series G
preferred stock 19,095
Comprehensive loss:
Net loss (437,961) (437,961)
Reversal of unrealized gain on investments in
marketable equity securities (19,837) (19,837)
Unrealized loss on marketable equity securities (1,637) (1,637)
Foreign currency translation adjustment (352) (352)
Unrealized gain on forward exchange contract 326 326
-----------
Total comprehensive loss (459,461)
===========
------------ -------- ---------
Balances at June 30, 2000 $ (1,895,480) $ (1,196) $ 91,255
============ ======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (437,961) $ (315,490)
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 138,852 63,276
Deferred income tax benefit (3,000) (2,000)
Provision for doubtful accounts 9,089 11,354
Loss in equity method investment 834 --
Minority interest share of losses in consolidated subsidiary (7,252) --
Gain on foreign currency transaction (1,383) --
Gain on sale of marketable equity securities (19,837) --
Non cash interest expense 47,195 64,370
Changes in operating assets and liabilities:
Accounts receivable (14,538) (53,500)
Inventories (7,480) (4,376)
Prepaid expenses and other current assets (60,386) (35,226)
Other assets (44,064) (5,676)
Accounts payable and accrued expenses (3,761) 25,602
Deferred revenues 18,404 121,561
----------- -----------
Net cash used in operating activities (280,484) (130,105)
----------- -----------
Cash flows from investing activities:
Decrease in short-term investments, net 5,451 4,607
Increase in investments in unconsolidated entities (58,187) --
Net proceeds from sale of marketable equity securities 80,132 --
Purchase of property and equipment (376,506) (147,840)
Deposit on FCC license auction (32,000) --
Acquisitions, net of cash acquired, including licenses (6,334) (14,235)
----------- -----------
Net cash used in investing activities (387,444) (157,468)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt, net of transaction costs 2,108,257 141,759
Repayment of long-term debt (1,975,143) --
Net proceeds from preferred stock offerings 888,176 290,878
Net proceeds from common stock offering -- 167,454
Net proceeds from exercise of warrants 37,512 --
Net proceeds from other equity transactions 15,847 35,657
Payment of capital lease obligations (63,698) (45,628)
Other, net -- (103)
----------- -----------
Net cash provided by financing activities 1,010,951 590,017
----------- -----------
Net increase in cash and cash equivalents 343,023 302,444
Cash and cash equivalents at beginning of period 93,331 208,257
----------- -----------
Cash and cash equivalents at end of period 436,354 510,701
Short-term investments at end of period 147,189 100,166
----------- -----------
Cash, cash equivalents and short-term investments
at end of period $ 583,543 $ 610,867
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business
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 12 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. 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
7
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 June 30, 2000, the statements of
operations for the three and six months ended June 30, 2000 and 1999, the
statements of cash flows for the six months ended June 30, 2000 and 1999, and
the statement of stockholders' equity (deficit) for the six months ended June
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 six months ended June 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.
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. We will account
for the investment in Wam!Net Class E 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
security.
8
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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 155% of the conversion price
on such date. 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.
9
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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
A portion of the proceeds, together with approximately $100.2 million from
our existing cash resources, was used to fund the tender offer for most of our
outstanding senior notes, which had an aggregate book balance of approximately
$668.0 million. A portion of the remaining balance of the new notes were issued
in exchange for most of our outstanding subordinated notes with an aggregate
principal or accreted amount of approximately $650.4 million. The remaining
portion of the new notes were 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.
10
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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, 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 (approximately US$190.5 million at June 30, 2000). 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.
Subsequent to June 30, 2000, we entered into a cross currency swap transaction
to effectively convert the Euro-denominated obligations into U.S. dollar
obligations. The cross currency swap will be accounted for as a hedging
instrument in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities."
11
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 $248.1 million as of June 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.
12
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 six months
ended ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Loss before extraordinary item ($184,281) ($162,578) ($333,157) ($315,490)
Preferred stock dividends
and redemption premiums (54,486) (12,801) (81,619) (24,992)
--------- --------- --------- ---------
Loss applicable to common
stock-holders before
extraordinary item (238,767) (175,379) (414,776) (340,482)
Extraordinary loss on debt
extinguishment (104,804) -- (104,804) --
--------- --------- --------- ---------
Loss applicable to common
stockholders ($343,571) ($175,379) ($519,580) ($340,482)
========= ========= ========= =========
Weighted average shares
outstanding 89,562 74,559 87,408 70,602
========= ========= ========= =========
Basic and diluted loss per share:
Loss before extraordinary items ($ 2.67) ($ 2.35) ($ 4.74) ($ 4.82)
Extraordinary loss on debt
extinguishment (1.17) -- (1.20) --
--------- --------- --------- ---------
Net loss per share ($ 3.84) ($ 2.35) ($ 5.94) ($ 4.82)
========= ========= ========= =========
</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 three and six months ended June 30, 2000 would have been $2.32 and
$4.39, respectively.
13
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
9. License Acquisitions
During the six months ended June 30, 2000, we were the successful bidder
for 931 38 GHz licenses auctioned by the FCC which cover an additional 679
million channel pops. The aggregate amount to be paid for these licenses will be
approximately $161.0 million, of which $32.0 million had been paid as a deposit
as of June 30, 2000. The balance of the $129.0 million payable will be due when
the licenses are issued by the FCC, which is expected to occur during the second
half of 2000.
10. 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 June 30, 2000 were not material. Information relating to our
reportable operating segments is as follows (in thousands):
<TABLE>
<CAPTION>
Other
Traditional Telecommuni- Total for Corporate
Broadband Media cacations Reportable Expenses and
Services Services Services Segments Assets Total
-------- -------- -------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
June 30, 2000
External revenue $ 152,823 $ 19,429 $ 4,036 $ 176,288 $ -- $ 176,288
Segment operating
(loss) income (85,675) 1,986 928 (82,761) (34,958) (117,719)
EBITDA (1) (15,259) 2,977 1,816 (10,466) (34,375) (44,841)
Segment assets 3,329,342 136,384 29,474 3,495,200 692,870 4,188,070
For the three months ended
June 30, 1999
External revenue $ 76,856 $ 12,619 $ 7,030 $ 96,505 $ -- $ 96,505
Segment operating
(loss) income (85,334) (73) 378 (85,029) (32,879) (117,908)
EBITDA (1) (51,951) 449 1,266 (50,236) (32,854) (83,090)
Segment assets 1,766,963 76,383 38,055 1,881,401 688,126 2,569,527
</TABLE>
14
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
<TABLE>
<CAPTION>
Other
Traditional Telecommuni- Total for Corporate
Broadband Media cacations Reportable Expenses and
Services Services Services Segments Assets Total
-------- -------- -------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
For the six months ended
June 30, 2000
External revenue $ 286,284 $ 43,830 $ 8,962 $ 339,076 $ -- $ 339,076
Segment operating
(loss) income (176,335) 6,130 2,257 (167,948) (72,378) (240,326)
EBITDA (1) (42,068) 8,101 4,033 (29,934) (71,540) (101,474)
Segment assets 3,329,342 136,384 29,474 3,495,200 692,870 4,188,070
For the six months ended
June 30, 1999
External revenue $ 145,443 $ 24,850 $ 14,305 $ 184,598 $ -- $ 184,598
Segment operating
(loss) income (156,039) (469) 872 (155,636) (70,500) (226,136)
EBITDA (1) (95,844) 706 2,648 (92,490) (70,370) (162,860)
Segment assets 1,766,963 76,383 38,055 1,881,401 688,126 2,569,527
</TABLE>
(1) EBITDA represents losses before interest, income taxes, depreciation and
amortization, non-cash expenses, other income (expense), and extraordinary
items.
15
<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(Registered), 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 12 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 decline over time through normal loss, or churn, of this customer
base.
16
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Results of Operations
Revenues from our operating business lines are as follows (in millions):
Three Months Ended
June 30,
-------------------------
2000 1999
------- -------
Operating revenue:
Broadband services ................................ $ 152.8 $ 76.9
Other ............................................. 23.5 19.6
------- -------
Total operating revenue ............................. $ 176.3 $ 96.5
======= =======
Revenue
Total revenue increased by $79.8 million, or 82.7%, to $176.3 million for
the three months ended June 30, 2000, from $96.5 million for the three months
ended June 30, 1999. This increase was principally attributable to the growth in
our broadband services.
Broadband Services Revenue
Revenue from broadband services increased by $75.9 million, or 98.7%, to
$152.8 million for the three months ended June 30, 2000, from $76.9 million for
the three months ended June 30, 1999. We experienced continued growth in all
types of broadband services revenue, driven principally by growth in the number
of addressable customers, the number of customers ordering multiple services,
and the addition of a number of new commercial contracts. Revenue from large
account solutions was $72.6 million for the three months ended June 30, 2000,
compared to $20.1 million for the three months ended June 30, 1999. We attribute
this success to the continued growth 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 over $1.4 billion from our large account customers (excluding the
federal government). We expect to recognize approximately $140.0 million of this
amount as revenue over the next 12 months.
Other Revenue
Revenue from other services increased by $3.9 million, or 19.9%, to $23.5
million for the three months ended June 30, 2000, from $19.6 million for the
three months ended June 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.
17
<PAGE>
Cost of Revenue
Cost of revenue increased by $25.1 million, or 34.2%, to $98.5 million for
the three months ended June 30, 2000, from $73.4 million for the three months
ended June 30, 1999. As a percentage of revenue, cost of revenue for the three
months ended June 30, 2000 was 55.9%, compared with 76.0% for the three months
ended June 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 $16.4 million, or
15.4%, to $122.6 million for the three months ended June 30, 2000, from $106.2
million for the three months ended June 30, 1999. As a percentage of revenues,
selling, general and administrative expenses declined from 110.1% for the three
months ended June 30, 1999 to 69.5% for the three months ended June 30, 2000.
During the three months ended June 30, 2000, we increased our advertising
support for Office.com, A Service From Winstar, and we incurred approximately
$9.4 million of incremental advertising expenses. 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 4,400
employees at June 30, 2000, as compared with 3,200 employees at June 30, 1999.
Depreciation, Amortization and Non-Cash Expenses
Depreciation, amortization and non-cash expenses increased by $38.1
million, or 109.5%, to $72.9 million for the three months ended June 30, 2000,
from $34.8 million for the three months ended June 30, 1999, principally
resulting from our acquisition and deployment of broadband communications
equipment in connection with our network buildout and amortization relating to
goodwill, purchased customer lists and spectrum licenses. Depreciation,
amortization and non-cash expenses for the three months ended June 30, 2000 also
included approximately $6.1 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
June 30, 2000 was $117.7 million, compared to $117.9 million for the three
months ended June 30, 1999.
18
<PAGE>
Interest Expense
Interest expense increased by $23.4 million, or 46.2%, for the three
months ended June 30, 2000, to $74.0 million, from $50.6 million for the three
months ended June 30, 1999. This increase was principally attributable to
additional borrowings under our original Lucent facility, which were paid in
full in May 2000 with the proceeds from our new bank 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 $74.0 million of interest
expense incurred for the three months ended June 30, 2000, $15.4 million
represented non-cash interest and amortization of deferred financing costs.
Interest Income
Interest income increased by $6.6 million, or 132.0%, to $11.6 million for
the three months ended June 30, 2000, from $5.0 million for the three months
ended June 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.
Other Income (Expense)
Other income (expense) for the three months ended June 30, 2000 consists
primarily of 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. Other income (expense) also includes CBS's minority interest
share of losses of Office.com of approximately $2.9 million, offset by a
one-time loss on the sale of telecommunications network equipment of
approximately $2.1 million.
Extraordinary Loss on Debt Extinguishment
For the three months ended June 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 and redemption premiums of $289.1 million for the three months ended
June 30, 2000, compared to a loss of $162.6 million for the three months ended
June 30, 1999.
19
<PAGE>
Preferred Stock Dividends and Redemption Premiums
For the three months ended June 30, 2000, we incurred dividend obligations
of $30.5 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 three months ended June 30,
1999, such obligations amounted to $12.8 million. The increase is primarily due
to the issuance of 300,000 shares of Series F Preferred Stock in June 1999 and
the issuance of 900,000 shares of Series G Preferred Stock in February 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.
Net Loss Applicable to Common Stockholders
For the reasons noted above, we reported a net loss applicable to common
stockholders of $343.6 million for the three months ended June 30, 2000,
compared to a net loss applicable to common stockholders of $175.4 million for
the three months ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Results of Operations
Revenues from our operating business lines are as follows (in millions):
Six Months Ended
June 30,
-------------------------
2000 1999
------- -------
Operating revenue:
Broadband services ....................... $ 286.3 $ 145.4
Other .................................... 52.8 39.2
------- -------
Total operating revenue .................... $ 339.1 $ 184.6
======= =======
Revenue
Total revenue increased by $154.5 million, or 83.7%, to $339.1 million for
the six months ended June 30, 2000, from $184.6 million for the six months ended
June 30, 1999. This increase was principally attributable to the growth in our
broadband services.
20
<PAGE>
Broadband Services Revenue
Revenue from broadband services increased by $140.9 million, or 96.9%, to
$286.3 million for the six months ended June 30, 2000, from $145.4 million for
the six months ended June 30, 1999. We experienced continued growth in all types
of broadband services revenue, driven principally by growth in the number of
addressable customers, the number of customers ordering multiple services, and
the addition of a number of new commercial contracts. Revenue from large account
solutions was $133.5 million for the six months ended June 30, 2000, compared to
$35.9 million for the six months ended June 30, 1999. We attribute this success
to the continued growth 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.
Other Revenue
Revenue from other services increased by $13.6 million, or 34.7%, to $52.8
million for the six months ended June 30, 2000, from $39.2 million for the six
months ended June 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 $53.7 million, or 38.0%, to $195.0 million
for the six months ended June 30, 2000, from $141.3 million for the six months
ended June 30, 1999. As a percentage of revenue, cost of revenue for the six
months ended June 30, 2000 was 57.5%, compared with 76.5% for the six months
ended June 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.
21
<PAGE>
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $39.3 million, or
19.1%, to $245.5 million for the six months ended June 30, 2000, from $206.2
million for the six months ended June 30, 1999. As a percentage of revenues,
selling, general and administrative expenses declined from 111.7% for the six
months ended June 30, 1999 to 72.4% for the six months ended June 30, 2000.
During the six months ended June 30, 2000, we increased our advertising support
for Office.com, A Service From Winstar, and we incurred approximately $21.4
million of incremental advertising expenses. 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 4,400
employees at June 30, 2000, as compared with 3,200 employees at June 30, 1999.
Depreciation, Amortization and Non-Cash Expenses
Depreciation, amortization and non-cash expenses increased by $75.6
million, or 119.4%, to $138.9 million for the six months ended June 30, 2000,
from $63.3 million for the six months ended June 30, 1999, principally resulting
from our acquisition and deployment of broadband communications equipment in
connection with our network buildout and amortization relating to goodwill,
purchased customer lists and spectrum licenses. Depreciation, amortization and
non-cash expenses for the six months ended June 30, 2000 also included
approximately $10.5 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 six months ended
June 30, 2000 was $240.3 million, compared with an operating loss of $226.1
million for the six months ended June 30, 1999.
Interest Expense
Interest expense increased by $35.5 million, or 35.0%, for the six months
ended June 30, 2000, to $136.8 million, from $101.3 million for the six months
ended June 30, 1999. This increase was principally attributable to additional
borrowings under our original Lucent facility, which were paid in full in May
2000 with the proceeds from our new bank 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 $143.8 million of interest expense
incurred for the six
22
<PAGE>
months ended June 30, 2000, $47.2 million represented non-cash interest and
amortization of deferred financing costs.
Interest Income
Interest income increased by $12.3 million, or 123.0%, to $22.3 million
for the six months ended June 30, 2000, from $10.0 million for the six months
ended June 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.
Other Income (Expense)
Other income (expense) of $18.5 million for the six months ended June 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 $7.3 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 a one-time loss on the sale of telecommunications network equipment
of approximately $2.1 million.
Extraordinary Loss on Debt Extinguishment
For the six months ended June 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 $438.0 million for the six months ended June 30, 2000, compared to
a net loss before preferred stock dividends of $315.5 million for the six months
ended June 30, 1999.
Preferred Stock Dividends and Redemption Premiums
For the six months ended June 30, 2000, we incurred dividend obligations
of $57.6 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 six months ended June 30, 1999,
such obligations amounted to $25.0 million. The increase is primarily due to the
issuance of 300,000 shares of Series F Preferred Stock in June 1999 and the
issuance of 900,000 shares of Series G Preferred Stock in February 2000.
23
<PAGE>
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.
Net Loss Applicable to Common Stockholders
For the reasons noted above, we reported a net loss applicable to common
stockholders of $519.6 million for the six months ended June 30, 2000, compared
to a net loss applicable to common stockholders of $340.5 million for the six
months ended June 30, 1999.
Liquidity and Capital Resources
At June 30, 2000, we had $583.5 million of cash, cash equivalents and
short-term investments. During the six months ended June 30, 2000, net cash
provided by financing activities was $1,011.0 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 six months ended June 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 $15.8 million from stock option
exercises and other equity transactions.
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
24
<PAGE>
one time for the purchase of network equipment and related services, of which we
had borrowed $248.1 million as of June 30, 2000. The new debt and credit
facilities are further discussed in Note 7 to our condensed consolidated
financial statements.
Cash provided by financing activities during the six months ended June 30,
2000 is net of $63.7 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 June 30, 2000, we had capital
lease obligations with Williams totaling $241.6 million. We expect to pay
Williams an additional $347.6 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 six months ended June 30, 2000, we used $280.5 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 months ended June 30,
2000 was approximately $44.8 million. 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 $387.4 million during the six months
ended June 30, 2000. Cash used in investing activities for the six months ended
June 30, 2000 primarily consists of cash used to purchase property and equipment
of $376.5 million. Purchases of property and equipment during the six months
ended June 30, 2000 were approximately $658.5 million, of which $480.5 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.
During the six months ended June 30, 2000, investing activities also
included $35.1 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 six months ended June 30, 2000, we were the successful bidder
for 931 38 GHz licenses auctioned by the FCC which cover an additional 679
million channel pops. The aggregate amount to be paid for these licenses will be
approximately $161.0 million, of which $32.0 million had been paid as a deposit
as of June 30, 2000. The balance of the $129.0 million
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payable will be due when the licenses are issued by the FCC, which is expected
to occur during the second half of 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 in the process of ordering and installing
switches, optronics equipment, radios 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.
To capitalize on opportunities in our industries, we are pursuing a rapid
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 operating losses. We plan to spend
approximately $1.0 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 we expect to be
available to us. 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.
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 through 2001. These financial resources
include the $2 billion Lucent credit facility. In addition, we may be required
to seek additional sources of capital if: our operating assumptions change or
prove to be inaccurate; we are unable to draw the full amount of the undrawn
commitment under the Lucent facility; we consummate any acquisitions of
significant businesses or assets (including spectrum licenses); 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
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2000. The adoption of this statement did not have a material effect on our
results of operations or our financial position.
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 FiberSM 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;
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; 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio, redeemable preferred stock and long-term
debt obligations. We do not use derivative instruments in our investment
portfolio. We place our investments with high 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 June 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.
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. In March 2000, we invested $85.0 million in
Wam!Net, Inc., which has filed a registration statement for its initial public
offering. We have accounted for our investment in Wam!Net under the cost method,
until such time as our holdings are freely tradable. We currently have no plans
to dispose of our investments in equity securities; however, if any such
transaction occurred, the value received for the investments would be affected
by the market value of the underlying stock at the time of any such transaction.
We currently do not utilize financial instruments to minimize our exposure to
price fluctuations in equity securities. Based upon our current holdings in
equity securities, our exposure to equity price risk is not material.
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<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
The following table sets forth certain information with respect to our
issuance of certain securities during the quarter ended June 30, 2000, without
registration of such securities under the Securities Act:
<TABLE>
<CAPTION>
Terms of
Exemption Conversion Use of
Securities Sold Purchasers Consideration Claimed or Exercise Proceeds
--------------- ---------- ------------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
280,600 shares of Lakeside media and services Section 4(2) N/A We did not receive
of Winstar common Ventures, LLC cash proceeds for
stock these shares
$107,190,000 Various issued in exchange Section 4(2) N/A We did not receive
12 3/4% Senior Institutions for Winstar's Rule 144A cash proceeds for
Notes due 2010 $172,800,000 these notes
and $157,260,801 14 1/4% Senior
14 3/4% Senior Subordinated
Discount Notes Deferred Interest
due 2010 Notes due 2007
($313,041,000
principal
amount at
maturity)
</TABLE>
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Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders (the "Meeting") held on June 28, 2000, we
submitted the following matters to a vote of our security holders, all of which
matters were approved:
1. Election of Class III Directors.
Name of Director Votes For Votes Withheld
---------------- --------- --------------
William J. Rouhana, Jr. 100,485,747 372,815
Steven B. Magyar 100,482,409 376,417
William J. vanden Heuvel 100,521,651 336,911
The term of office of each of the following additional directors continued
after the Meeting: James I. Cash, Timothy R. Graham, Nathan Kantor,
Hartley R. Rogers, Lawrence B. Sorrel, Bert Wasserman
2. Amendment to our certificate of incorporation to increase the number of
authorized shares of common stock from 200,000,000 to 400,000,000.
Votes For Votes Against Abstentions
--------- ------------- -----------
97,753,398 2,875,581 229,583
3. Amendment to our certificate of incorporation to increase the number of
authorized shares of preferred stock from 15,000,000 to 30,000,000.
Votes For Votes Against Abstentions
--------- ------------- -----------
70,882,553 9,766,250 249,799
4. Approval of adoption of the 2000 Performance Equity Plan
Votes For Votes Against Abstentions
--------- ------------- -----------
60,765,169 19,789,830 343,603
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Item 6. Exhibit and Report on Form 8-K
(a) Exhibit.
27 Financial Data Schedule
(b) Report on Form 8-K. We filed the following report on Form 8-K during the
three months ended June 30, 2000:
(1) Current report on Form 8-K for events occurring March 3, 2000 and
thereafter, which was filed on June 1, 2000, relating to the
consummation of a series of transactions relating to the refinancing
of our outstanding indebtedness.
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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: August 14, 2000
32
