<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 May 11,
2000, was 89,279,428.
<PAGE>
FORM 10-Q
WINSTAR COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2000 (unaudited) and December 31, 1999 ............ 3
Unaudited Condensed Consolidated Statements
of Operations - three months ended
March 31, 2000 and 1999 ..................................... 4
Unaudited Condensed Consolidated Statement of
Stockholders' Equity (Deficit) - three months ended
March 31, 2000 .............................................. 5
Unaudited Condensed Consolidated Statements
of Cash Flows - three months ended
March 31, 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 ............... 15
Item 3. Quantitative and Qualitative Disclosures .................... 23
PART II. Other Information ........................................... 24
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures ........................................................... 26
2
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 702,475 $ 93,331
Short term investments 154,814 152,640
----------- -----------
Cash, cash equivalents and short term investments 857,289 245,971
Accounts receivable, net of allowance for doubtful accounts 152,520 139,725
Inventories 30,681 18,194
Prepaid expenses and other current assets 186,540 86,930
----------- -----------
Total current assets 1,227,030 490,820
Investments in marketable equity securities -- 80,267
Investments, at cost 110,381 17,478
Property and equipment, net 2,020,191 1,793,982
Licenses, net 315,570 317,386
Other intangible assets, net 210,281 193,399
Deferred financing costs, net 53,182 54,759
Other assets 127,735 117,202
----------- -----------
Total assets $ 4,064,370 $ 3,065,293
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt $ 22,465 $ 18,512
Current portion of capitalized lease obligations 118,208 121,747
Accounts payable and accrued expenses 253,388 376,501
Deferred revenues - current 18,111 11,699
----------- -----------
Total current liabilities 412,172 528,459
Capitalized lease obligations, less current portion 175,307 179,600
Long-term debt, less current portion 2,428,933 2,144,782
Deferred revenues - non current 176,236 164,238
Other liabilities 17,572 16,604
Deferred income taxes 13,000 14,500
----------- -----------
Total liabilities 3,223,220 3,048,183
----------- -----------
Series C cumulative exchangeable redeemable preferred stock 239,400 231,212
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 200,000 shares,
issued and outstanding 88,753 and 83,640, respectively 888 836
Additional paid-in-capital 2,005,834 1,022,229
Accumulated deficit (1,606,395) (1,457,519)
Accumulated other comprehensive income 1,365 20,304
----------- -----------
Total stockholder's equity (deficit) 401,750 (414,102)
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit) $ 4,064,370 $ 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)
For the three months ended
March 31,
--------------------------
2000 1999
--------------------------
Operating revenue
Broadband services $ 133,461 $ 68,587
Other 29,327 19,506
--------- ---------
Total operating revenue 162,788 88,093
--------- ---------
Operating expenses
Cost of revenue 96,491 67,942
Selling, general and administrative expenses 122,930 99,921
Depreciation and amortization 65,974 28,483
--------- ---------
Total operating expenses 285,395 196,346
--------- ---------
Operating loss (122,607) (108,253)
Other income (expense)
Interest expense (62,775) (50,563)
Interest income 10,711 5,009
Other income (expense) 24,154 (105)
--------- ---------
Loss before income tax benefit (150,517) (153,912)
Income tax benefit 1,641 1,000
--------- ---------
Net loss (148,876) (152,912)
Preferred stock dividends (27,133) (12,191)
--------- ---------
Net loss applicable to common stockholders $(176,009) $(165,103)
========= =========
Basic and diluted loss per share:
Net loss per share $ (2.06) $ (2.48)
========= =========
Weighted average shares outstanding 85,253 66,576
========= =========
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 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
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
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
Foreign currency translation adjustment
Total comprehensive loss
----------- ----------- ----------- -----------
Balances at March 31, 2000 300 $ 3 900 $ 9
=========== =========== =========== ===========
<CAPTION>
Series A Series E
preferred stock preferred stock Common stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 2000 4,405 $ 44 75 $ 1 83,640 $ 836
Issuances of common stock:
For stock option exercises and other 1,351 14
For acquisitions, investments and licenses 1,328 13
For warrant exercises 2,250 23
Issuance of Series G Preferred Stock
Dividends declared on Series A preferred stock
Issuances of Series A preferred stock as
dividends in kind 66 1
Dividends declared on Series C preferred stock
Dividends declared on Series D preferred stock
Issuances of common stock as dividends
on Series D preferred stock 72 1
Dividends declared on Series F preferred stock
Issuances of common stock as dividends
on Series F preferred stock 112 1
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
Foreign currency translation adjustment
Total comprehensive loss
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 2000 4,471 $ 45 75 $ 1 88,753 $ 888
=========== =========== =========== =========== =========== ===========
<CAPTION>
Accumulated Total
Additional other stockholders'
paid-in Accumulated comprehensive equity
capital deficit income (loss) (deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at January 1, 2000 $ 1,022,229 $(1,457,519) $ 20,304 $ (414,102)
Issuances of common stock:
For stock option exercises and other 4,759 4,773
For acquisitions, investments and licenses 63,496 63,509
For warrant exercises 37,490 37,513
Issuance of Series G Preferred Stock 888,367 888,376
Dividends declared on Series A preferred stock (1,655) (1,655)
Issuances of Series A preferred stock as
dividends in kind 1,654 1,655
Dividends declared on Series C preferred stock (8,188) (8,188)
Dividends declared on Series D preferred stock (3,500) (3,500)
Issuances of common stock as dividends
on Series D preferred stock 3,499 3,500
Dividends declared on Series F preferred stock (5,437) (5,437)
Issuances of common stock as dividends
on Series F preferred stock 5,436 5,437
Dividends declared on Series G preferred stock (8,353) (8,353)
Issuance of dividends on Series G
preferred stock 6,037 6,037
Comprehensive loss:
Net loss (148,876) (148,876)
Reversal of unrealized gain on investments in
marketable equity securities (19,836) (19,836)
Foreign currency translation adjustment 897 897
-----------
Total comprehensive loss (167,815)
===========
----------- ----------- -----------
Balances at March 31, 2000 $ 2,005,834 $(1,606,395) $ 1,365 $ 401,750
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
Winstar Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(148,876) $(152,912)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 65,974 28,483
Deferred income tax benefit (1,500) (1,000)
Provision for doubtful accounts 3,753 5,619
Loss in equity method investment 142 105
Minority interest share of losses in consolidated subsidiary (4,353) --
Gain on sale of marketable equity securities (19,836) --
Non cash interest expense 31,773 37,487
Changes in operating assets and liabilities:
Accounts receivable (15,593) (25,162)
Inventories (5,141) (2,391)
Prepaid expenses and other current assets (18,438) (33,400)
Other assets (12,664) 3,090
Accounts payable and accrued expenses (32,794) (29,942)
Deferred revenues 18,410 84,003
--------- ---------
Net cash used in operating activities (139,143) (86,020)
--------- ---------
Cash flows from investing activities:
(Increase) decrease in short-term investments, net (2,174) 25,110
Increase in investments in unconsolidated entities (42,925) --
Net proceeds from sale of marketable equity securities 80,132 --
Purchase of property and equipment (195,489) (75,851)
Deposit on FCC license auction (85,000) --
Acquisitions, net of cash acquired, including licenses (4,985) (9,368)
--------- ---------
Net cash used in investing activities (250,441) (60,109)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt, net 99,703 104,788
Net proceeds from Series G preferred stock offering 888,376 --
Net proceeds from common stock offering -- 166,326
Net proceeds from exercise of warrants 37,513 --
Net proceeds from other equity transactions 4,773 11,681
Payment of capital lease obligations (31,637) (18,136)
Other, net -- 3,114
--------- ---------
Net cash provided by financing activities 998,728 267,773
--------- ---------
Net increase in cash and cash equivalents 609,144 121,644
Cash and cash equivalents at beginning of period 93,331 208,257
--------- ---------
Cash and cash equivalents at end of period 702,475 329,901
Short-term investments at end of period 154,814 79,663
--------- ---------
Cash, cash equivalents and short-term investments
at end of period $ 857,289 $ 409,564
========= =========
</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. We offer a comprehensive
set 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 60 major markets in the United States,
including each of the top 30 U.S. markets. 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 Securities." Unrealized gains and losses on
marketable securities are reflected as a component of accumulated other
comprehensive income (loss).
7
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 March 31, 2000, the statements of
operations for the three months ended March 31, 2000 and 1999, the statements of
cash flows for the three months ended March 31, 2000 and 1999, and the statement
of stockholders' equity for the three months ended March 31, 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 months ended March 31, 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 consolidated financial statements have
been restated to give effect to the stock dividend.
4. Investments
In March 2000, we acquired 85,000 shares of Class E Convertible Preferred
Stock of Wam!Net Inc., a Minnesota corporation and a leading 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.
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. During the three months ended
March 31, 2000 this gain was reclassified to other income in our condensed
consolidated statements of operations for the three months ended March 31, 2000.
5. 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
8
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
of $900.0 million. The net proceeds received were approximately $888.4 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.
6. Long-Term Debt
In April 2000, we engaged in a series of transactions relating to our
outstanding notes. 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 $635.5 million of 12 3/4% Senior Notes due 2010
o $451.0 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
9
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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
$670.0 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 $650.0 million. The remaining
portion of the new notes, which have not yet been issued, will be issued in
exchange for a substantial majority of our 14 1/4% Series C Senior Cumulative
Exchangeable Preferred Stock Due 2007, which has a current liquidation
preference of approximately $240.0 million. We have entered into definitive
agreements for that exchange and expect it to be effected in the second quarter
of this year. 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 will be 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 will be accounted for as a debt
modification; and the redemption contemplated by the exchange of our 14 1/4%
Series C Senior Cumulative Exchangeable Preferred Stock Due 2007 will be
accounted for as a redemption of the Series C Preferred Stock. We anticipate
that these transactions will have the following non-recurring impact on our
results of operations for the three months ended June 30, 2000: (1) an increase
in interest expense of approximately $8.0 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 $109.0 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 $29.0 million charge associated with the redemption of
the Series C Preferred Stock.
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 $635.5 million
(including the notes to be issued in exchange for our Series C Preferred Stock).
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
10
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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
$451.0, with a principal amount at maturity of $920.6 million (including the
notes to be issued in exchange for our Series C Preferred Stock). 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 $920.6
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$192.0 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. 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.
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 all of the loans outstanding
under our then existing facility with Lucent Technologies, a majority of which
had been syndicated to and held by one of the banks party to this new credit
facility. 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.
11
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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. No
amounts have been borrowed under this new facility as of the date of this
report. 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.
7. Condensed Financial Information of Winstar Equipment Corp. and Winstar
Equipment II Corp.
Our wholly-owned subsidiaries, Winstar Equipment Corp. and Winstar
Equipment II Corp. ("WEC" and "WEC II", respectively), each of which is a
special purpose corporation which was formed to facilitate the financing and
purchase of telecommunications equipment and related property ("Designated
Equipment"), received $200.0 million and $50.0 million in gross proceeds,
respectively, from the issuance and sale of 12 1/2% Guaranteed Senior Secured
Notes ("the WEC and WEC II Notes") in placements of debt in March and August of
1997, respectively. All of the proceeds of the WEC and WEC II Notes were used to
purchase Designated Equipment. WEC and WEC II have no independent operations
other than to hold Designated Equipment to lease to our other telecommunications
subsidiaries. The WEC II Notes were all tendered and paid off in the second
quarter of 2000 and virtually all of the WEC Notes were tendered and paid off in
the second quarter of 2000, as discussed in Note 6.
12
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Summary financial information for WEC and WEC II, which are included in
our condensed consolidated financial statements, are as follows (in thousands):
Balance sheet information as of March 31, 2000 is as follows:
WEC WEC II
--- ------
Current assets $ 11,629 $ 3,821
Long-term assets 223,813 37,016
Current liabilities (1,291) (261)
Long- term debt (200,000) (50,000)
Due to parent (80,164) (1,900)
--------- ---------
Stockholders' deficit $ (46,013) $ (11,324)
========= =========
Statements of operations information for WEC and WEC II for the periods
presented below are as follows (in thousands):
WEC WEC II
------------------ ------------------
Three Months Ended Three Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
Rental revenues from other
Winstar subsidiaries ............ $ 1,010 $ 1,174 $ 127 $ 125
Interest income from other
Winstar subsidiaries ............ 3,608 3,367 824 473
Interest income - investments ...... -- 20 -- 1
Selling, general and
Administrative expenses ......... (1,638) (1,637) (253) (383)
Interest expense ................... (6,505) (6,507) (1,630) (1,630)
------- ------- ------- -------
Net loss ........................... $(3,525) $(3,583) $ (932) $(1,414)
======= ======= ======= =======
We have not presented separate financial statements for WEC or WEC II because we
have determined that such information would not provide any material information
that is not already presented in our condensed consolidated financial
statements.
8. 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
13
<PAGE>
Winstar Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 March 31, 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 cations Reportable Expenses
Services Services Services Segments and Assets Total
-------- -------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
March 31, 2000
External revenue $ 133,461 $ 24,401 $ 4,926 $ 162,788 $ -- $ 162,788
Segment operating (loss) income (90,660) 4,144 1,329 (85,187) (37,420) (122,607)
EBITDA (1) (26,809) 5,124 2,217 (19,468) (37,165) (56,633)
Segment assets 2,950,695 76,932 32,687 3,060,314 1,004,056 4,064,370
For the three months ended
March 31, 1999
External revenue $ 68,587 $ 12,231 $ 7,275 $ 88,093 $ -- $ 88,093
Segment operating (loss) income (70,705) (396) 494 (70,607) (37,646) (108,253)
EBITDA (1) (43,893) 257 1,382 (42,254) (37,516) (79,770)
Segment assets 1,444,557 56,721 39,132 1,540,410 488,821 2,029,231
</TABLE>
(1) EBITDA represents losses before interest, income taxes, depreciation and
amortization, and other income (expense).
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We provide our customers with broadband services. 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. This market is projected to grow from $178.0 billion in 1999
to approximately $360.0 billion by 2009. We presently serve 60 major markets in
the United States, including each of the top 30 U.S. markets. 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 revenues to
decline over time through normal loss, or churn, of this customer base.
15
<PAGE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Results of Operations
Revenues from our operating business lines are as follows (in millions):
Three Months Ended
March 31,
------------------
2000 1999
------ ------
Operating revenue:
Broadband services ................................... $133.5 $ 68.6
Other ................................................ 29.3 19.5
------ ------
Total operating revenue ................................ $162.8 $ 88.1
====== ======
Revenue
Total revenue increased by $74.7 million, or 84.8%, to $162.8 million for
the three months ended March 31, 2000, from $88.1 million for the three months
ended March 31, 1999. This increase was principally attributable to the growth
in our broadband services.
Broadband Services Revenue
Revenue from broadband services increased by $64.9 million, or 94.6%, to
$133.5 million for the three months ended March 31, 2000, from $68.6 million for
the three months ended March 31, 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 $61.0 million for the three months ended March 31, 2000,
compared to $15.9 million for the three months ended March 31, 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 $1.2 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 $9.8 million, or 50.3%, to $29.3
million for the three months ended March 31, 2000, from $19.5 million for the
three months ended March 31, 1999. This increase was due primarily to improved
revenue from our radio business resulting from expanded programming offerings
and broadcast license sales, offset by the anticipated
16
<PAGE>
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 $28.6 million, or 42.1%, to $96.5 million for
the three months ended March 31, 2000, from $67.9 million for the three months
ended March 31, 1999. As a percentage of revenue, cost of revenue for the three
months ended March 31, 2000 was 59.3%, compared with 77.1% for the three months
ended March 31, 1999. The improvement in the cost of revenue percentage is the
result of the increase in sales of higher margin large account solutions, the
larger number of customers taking multiple services, and the increased volumes
and larger percentages of traffic being provisioned on our local and long haul
networks.
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $23.0 million, or
23.0%, to $122.9 million for the three months ended March 31, 2000, from $99.9
million for the three months ended March 31, 1999. As a percentage of revenues,
selling, general and administrative expenses declined from 113.4% for the three
months ended March 31, 1999 to 75.5% for the three months ended March 31, 2000.
During the three months ended March 31, 2000, we increased our advertising
support for Office.com, A Service From Winstar, and we incurred approximately
$12.0 million of incremental advertising expenses. Additionally, we continued to
hire sales, marketing, network and related support personnel in connection with
the expansion of our core markets and services, both domestically and
internationally. We had approximately 4,100 employees at March 31, 2000, as
compared with 2,900 employees at March 31, 1999.
Depreciation and Amortization Expense
Depreciation and amortization expense increased by $37.5 million, or
131.6%, to $66.0 million for the three months ended March 31, 2000, from $28.5
million for the three months ended March 31, 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 and amortization
for the three months ended March 31, 2000 also included approximately $4.4
million relating to the promotion and advertising contributed by CBS Corporation
relating to its equity interest in Office.com. This is not a cash-based
transaction and therefore is amortized to depreciation and amortization as it is
provided by CBS. We expect that depreciation and amortization expense will
continue to increase as we increase our investment in the build out of our
broadband network.
17
<PAGE>
Operating Loss
For the reasons noted above, the operating loss for the three months ended
March 31, 2000 was $122.6 million, compared with an operating loss of $108.3
million for the three months ended March 31, 1999.
Interest Expense
Interest expense increased by $12.2 million, or 24.1%, for the three
months ended March 31, 2000, to $62.8 million, from $50.6 million for the three
months ended March 31, 1999. This increase was principally attributable to the
issuance of $450.0 million of debt in the first quarter of 1999, aggregate
borrowings of $1,076.5 million under the Lucent Facility and capital lease
obligations of $242.9 million under our agreements with Williams Communications,
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 $62.8 million of interest expense incurred for
the three months ended March 31, 2000, $31.8 million represented non-cash
interest and amortization of deferred financing costs.
Interest Income
Interest income increased by $5.7 million, or 113.8%, to $10.7 million for
the three months ended March 31, 2000, from $5.0 million for the three months
ended March 31, 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) went from other expense of $0.1 million to other
income of $24.2 million, primarily due to the $19.9 million gain on the sale of
shares of Advanced Radio Telecom Corp. during the three months ended March 31,
2000. Other income for the three months ended March 31, 2000 also includes CBS's
minority interest share of losses of Office.com of approximately $4.4 million.
Net Loss Before Preferred Stock Dividends
For the reasons noted above, we reported a net loss before preferred stock
dividends of $148.9 million for the three months ended March 31, 2000, compared
to a net loss before preferred stock dividends of $152.9 million for the three
months ended March 31, 1999.
Preferred Stock Dividends
For the three months ended March 31, 2000, we incurred dividend
obligations of $27.1 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.
18
<PAGE>
For the three months ended March 31, 1999, such obligations amounted to $12.2
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.
Net Loss Applicable to Common Stockholders
For the reasons noted above, we reported a net loss applicable to common
stockholders of $176.0 million for the three months ended March 31, 2000,
compared to a net loss applicable to common stockholders of $165.1 million for
the three months ended March 31, 1999.
Liquidity and Capital Resources
At March 31, 2000, we had $857.3 million of cash, cash equivalents and
short-term investments. During the three months ended March 31, 2000, net cash
provided by financing activities was $998.7 million. In February 2000, we
received net proceeds of $888.4 million from the sale of 900,000 shares of our
Series G Preferred Stock. In addition, during the three months ended March 31,
we borrowed approximately $248.6 million under our then existing Lucent credit
facility, and received $37.5 million of net proceeds from the exercise of
warrants to purchase 2.3 million shares of our common stock.
In April 2000, we engaged in a series of transactions relating to our
outstanding notes. 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 $635.5 million of 12 3/4% Senior Notes due 2010
o $451.0 million 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 to be
effected in the second quarter of 2000. 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 expressly permit 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 all of the loans outstanding
under our then existing facility with Lucent Technologies, a majority of which
had been syndicated and held by one of the banks party to this new credit
facility. 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 at any one time for the purchase of
network equipment and related services. No amounts have been borrowed as of the
date of this report. The new debt and credit facilities are further discussed in
Note 6 to our condensed consolidated financial statements.
Cash provided by financing activities is net of $31.6 million of payments
under capital lease obligations, primarily to Williams related to the delivery
of certain dark fiber assets and
19
<PAGE>
specified fixed circuits. At March 31, 2000, we had capital lease obligations
with Williams totaling $242.9 million. We expect to pay Williams an additional
$378.0 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 three months ended March 31, 2000, we used $139.1 million of
cash in operating activities. Net cash used by operating activities is primarily
due to losses from continuing operations and changes in working capital items,
offset by non-cash interest expense and depreciation and amortization.
Cash used to fund negative EBITDA during the three months ended March 31,
2000 was approximately $56.6 million. EBITDA represents losses from continuing
operations before interest, income taxes, depreciation and amortization 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 $250.4 million during the three
months ended March 31, 2000. Cash used in investing activities for the three
months ended March 31, 2000 primarily consists of cash used to purchase property
and equipment of $195.5 million. Purchases of property and equipment during the
three months ended March 31, 2000 were approximately $279.6 million, of which
$72.8 million were financed collectively through the Lucent Facility and our
arrangements with Williams and various other equipment vendors.
During the three months ended March 31, 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 three months ended March 31, 2000, we deposited $85.0 million
with the FCC in order to be able to bid in the 38 GHz license auction. At the
close of the auction in May 2000, we were the high bidder for 931 licenses
covering an additional 679 million channel pops. The aggregate amount to be paid
for these licenses will be approximately $161.0 million. The balance of $76.0
million payable for these licenses will be due when the licenses are issued by
the FCC, which is expected to be 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
20
<PAGE>
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 $750.0 million on capital expenditures for the remainder of this
year, 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. In addition, we will have an
additional $1.0 billion available under the Lucent facility as portions of the
initial $1.0 billion are syndicated. 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, is effective for
fiscal years beginning after September 15, 2000. We currently do not use
derivative instruments as defined by SFAS No. 133. If we continue to not use
these derivative instruments by the effective date of SFAS No. 133, the adoption
of this statement will have no 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
21
<PAGE>
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(Service Mark) 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.
22
<PAGE>
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 March 31, 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 are subject to foreign currency exchange risk relating to the
interest and principal payments on these notes. We do not consider our foreign
currency exchange risk relating to these notes to be material.
We have not entered into any foreign currency forward exchange contracts
or other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates. We will continue to evaluate
risk management strategies in order to limit our foreign currency exchange risk
in the future.
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.
23
<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 March 31, 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>
900,000 shares of our Microsoft $900.0 million Section 4(2) Convertible at The proceeds of
Series G Senior Corp., less certain the option of the this issue are
Cumulative Credit fees and holder into being used for
Participating Suisse First expenses common stock of working capital
Convertible Preferred Boston Winstar at a and general
Stock Equity conversion price corporate
Partners, of $45.00 per purposes,
L.P. and share including
certain retirement of
affiliates outstanding debt.
Welsh,
Carson
Anderson &
Stowe VIII, L.P.
and certain
affiliates, and
Cascade
Partners
$325.0 million 121/2% Various $493.3 million and Section 4(2) and Not applicable The proceeds of
Senior Notes due 2008, institutions (euro)200.0 million Rule 144A these issues
$530,463,000 123/4% issued for cash, were used to
Senior Notes due 2010, and $662,920,448 consummate the
$613,916,000 principal issued in cash tender
amount at maturity exchange for offers for
($300,757,448 issue certain of Winstar's
amount) of 143/4% Senior Winstar's Senior existing senior
Discount Notes due 2010 Subordinated notes. Some of
and (euro)200.0 million Notes, less the notes were
Euro Senior Notes due certain discounts also issued in
2010 and expenses exchange for
Winstar's
existing senior
subordinated
notes
1,071,429 shares of Wam!Net, Inc. 50,000 shares of Section 4(2) Not applicable We did not
Winstar common stock Class E receive cash
Convertible proceeds for
Preferred Stock these shares
of Wam!Net, Inc.
256,911 shares of Various Shares issued as Section 4(2) Not applicable We did not
Winstar common stock individuals consideration in receive cash
various proceeds for
acquisitions these shares
</TABLE>
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K. We filed the following reports on Form 8-K during the
three months ended March 31, 2000:
(1) Current report on Form 8-K dated December 15, 1999, which was filed
on January 3, 2000, relating to our agreement to sell 900,000 shares
of our Series G Preferred Stock to a group of purchasers for $900.0
million.
(2) Current report on Form 8-K dated February 1, 2000, which was filed
on February 11, 2000, relating to the completion of the sale of our
Series G Preferred Stock.
(3) Current report on Form 8-K dated February 14, 2000, which was filed
on March 7, 2000, relating to the initiation of a series of
transactions relating to our outstanding indebtedness.
25
<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 Officer) Dated: May 15, 2000
By: /s/ Joseph P. Dwyer
- ----------------------------------------
Joseph P. Dwyer
Senior Vice President, Finance
(Principal Accounting Officer) Dated: May 15, 2000
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF WINSTAR COMMUNICATIONS AND SUBSIDIARIES FOR
THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 702,475
<SECURITIES> 154,814
<RECEIVABLES> 152,520<F1>
<ALLOWANCES> 0
<INVENTORY> 30,681
<CURRENT-ASSETS> 1,227,030
<PP&E> 2,020,191<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,064,370
<CURRENT-LIABILITIES> 412,172
<BONDS> 2,428,933
439,400
58
<COMMON> 888
<OTHER-SE> 400,804
<TOTAL-LIABILITY-AND-EQUITY> 4,064,370
<SALES> 0
<TOTAL-REVENUES> 162,788
<CGS> 0
<TOTAL-COSTS> 96,491
<OTHER-EXPENSES> 188,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,775
<INCOME-PRETAX> (150,517)
<INCOME-TAX> (1,641)
<INCOME-CONTINUING> (148,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (148,876)
<EPS-BASIC> (2.06)
<EPS-DILUTED> (2.06)
<FN>
<F1>
Receivables are net of allowance for doubtful accounts
<F2>
PP&E are net of acumulated depreciation
</FN>
</TABLE>
