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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________________
Commission file number 333-33601-02
GST USA, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware 83-0310464
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 MAIN STREET, VANCOUVER, WA 98663
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 906-7100
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY.
Indicate by check mark 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 / /
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At August
12, 1998, there were outstanding 10 shares of common stock, no par value per
share, of the Registrant.
<PAGE>
GST USA, INC.
INDEX
PAGE(S)
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets - June 30,
1998 (unaudited) and December 31, 1997 3
Consolidated Condensed Statements of Operations
- Three Months Ended June 30, 1998 and 1997 and
Six Months Ended June 30, 1998 and 1997
(unaudited) 4
Consolidated Condensed Statements of Cash Flows
- Six Months Ended June 30, 1998 and 1997
(unaudited) 5
Notes to Consolidated Condensed Financial
Statements (unaudited) 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE) 8-10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
-2-
<PAGE>
GST USA, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997(1)
------------------------- ------------------------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 172,427 $ 197,373
Restricted cash and investments 32,888 31,731
Accounts receivable, net 23,516 26,212
Receivable from parent - 964
Investments - 7,554
Prepaid expenses and other current assets 12,511 15,763
--------------- -------------
Total current assets 241,342 279,597
--------------- -------------
Restricted investments 348,195 112,719
Property, plant and equipment 529,878 433,110
less accumulated depreciation (37,500) (26,670)
--------------- -------------
492,378 406,440
Other assets 141,953 99,961
less accumulated amortization (23,916) (19,701)
--------------- -------------
118,037 80,260
$ 1,199,952 $ 879,016
=============== =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 25,599 $ 14,531
Accrued liabilities 29,175 29,850
Payable to parent 340,831 327,138
Current portion of capital lease obligations 5,201 6,286
Current portion of long term debt 4,665 3,212
Other current liabilities 479 994
--------------- -------------
Total current liabilities 405,950 382,011
--------------- -------------
Other liabilities - 1,409
Capital lease obligations, less current portion 18,430 13,994
Long term debt, less current portion 909,389 591,813
Minority interest in subsidiaries - 12,732
Shareholders' deficit
Common shares 78,462 78,462
Deficit (212,279) (201,405)
--------------- -------------
Total shareholders' deficit (133,817) (122,943)
--------------- -------------
$ 1,199,952 $ 879,016
=============== =============
</TABLE>
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1997 as filed on form 10-K/A.
See notes to consolidated condensed financial statements.
-3-
<PAGE>
GST USA, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------- -------------------------------------
1998 1997 1998 1997
--------------- ------------ ------------- -------------------
Revenue:
<S> <C> <C> <C> <C>
Telecommunication and other services $ 36,929 $ 20,107 $ 64,451 $ 39,728
Telecommunication products - 5,739 - 10,812
--------------- ------------ ------------- -------------
36,929 25,846 64,451 50,540
--------------- ------------ ------------- --------------
Operating costs and expenses:
Network expenses 24,919 15,203 45,008 32,134
Facilities administration and maintenance 3,058 4,172 6,432 7,047
Cost of product revenues - 1,547 - 3,410
Selling, general and administrative 23,290 17,800 42,563 33,043
Research and development - 707 - 1,323
Depreciation and amortization 10,732 5,535 19,051 10,013
--------------- ------------ ------------- --------------
61,999 44,964 113,054 86,970
--------------- ------------ ------------- --------------
Loss from operations (25,070) (19,118) (48,603) (36,430)
--------------- ------------ ------------- --------------
Other expenses (income):
Interest income (6,752) (1,739) (11,661) (2,122)
Interest expense 19,253 9,646 34,683 14,159
Other 497 (912) (60,751) (8,404)
--------------- ------------ ------------- --------------
12,998 6,995 (37,729) 3,633
--------------- ------------ ------------- --------------
Loss before income taxes
and minority interest (38,068) (26,113) (10,874) (40,063)
--------------- ------------ ------------- --------------
Income taxes - (729) - (847)
Minority interest in income of subsidiaries - (404) - (444)
--------------- ------------ ------------- --------------
- (1,133) - (1,291)
Net loss $ (38,068) $ (27,246) $ (10,874) $ (41,354)
=============== ============ ============= ==============
</TABLE>
See notes to consolidated condensed financial statements.
-4-
<PAGE>
GST USA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(10,874) $(41,354)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interest in income of subsidiary - 444
Depreciation and amortization 20,664 10,639
Accretion of interest 16,660 8,615
Stock compensation 1,123 -
Loss on disposal of assets 38 -
Gain on sale of subsidiary shares (61,292) (7,424)
Changes in non-cash operating working capital:
Accounts receivable (7,014) (4,760)
Prepaid expenses and other 1,274 (5,146)
Accounts payable and accrued liabilities (6,455) 7,141
Other liabilities 6 (457)
--------------------------------
Net cash used in operating activities (45,870) (32,302)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash acquired (35,471) -
Proceeds from sale of investments 318 -
Purchase of investments - (3,065)
Purchase of fixed assets (81,449) (100,139)
Purchase of other assets (2,025) (3,031)
Proceeds from sale of subsidiary shares, net 85,074 27,365
Cash disposed of in sale of subsidiary (5,252) -
Proceeds from the sale of fixed assets 3,562 5,774
Change in investments restricted for fixed asset purchases (254,335) (110,203)
--------------------------------
Net cash used in investing activities (289,578) (183,299)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt 299,874 288,138
Principal payments on long term debt and capital leases (4,430) (3,627)
Deferred financing costs (12,701) (9,661)
Change in investments restricted to finance interest payments 17,703 (94,548)
Increase in payable to parent 10,056 51,229
--------------------------------
Net cash provided by financing activities 310,502 231,531
--------------------------------
Net increase (decrease) in cash and cash equivalents (24,946) 15,930
Cash and cash equivalents at beginning of period 197,373 3,372
--------------------------------
Cash and cash equivalents at end of period $172,427 $ 19,302
================================
</TABLE>
See notes to consolidated condensed financial statements.
-5-
<PAGE>
GST USA, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements of GST USA, Inc. ("GST USA") have
been prepared in conformity with generally accepted accounting principles.
However, certain information or footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the statements include all adjustments necessary (which are of a
normal and recurring nature) for the fair presentation of the results of the
interim periods presented. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the full fiscal
year or for subsequent periods. These financial statements should be read in
conjunction with the GST USA's audited consolidated financial statements for the
three months ended December 31, 1997, as included in the GST USA's Transition
Report on Form 10-K, as amended for the three month transition period ended
December 31, 1997.
2. TRANSFER OF SUBSIDIARIES
Effective January 1, 1998, GST USA's parent, GST Telecommunications, Inc.
("GST"), transferred the ownership of GST Call America, Inc. and TotalNet
Communications, Inc. (together the "Transferred Subsidiaries") to GST USA. The
consolidated condensed financial statements included herein have been restated
to reflect the operations of the Transferred Subsidiaries from the dates such
subsidiaries were acquired by GST. The financial statements have been restated
in order to conform with GST's presentation as the entities are under common
control.
3. NET INCOME (LOSS) PER SHARE AND SHAREHOLDER'S EQUITY
GST USA does not have any equity instruments that are considered common
stock equivalents, and, as weighted average common shares total only ten for the
periods presented, all of which are owned by GST, income (loss) per share data
is meaningless and is not presented in the accompanying consolidated condensed
financial statements.
4. SUPPLEMENTAL CASH FLOW INFORMATION
Six Months
ENDED JUNE 30,
1998 1997
---- ----
Cash Transactions:
Cash paid for interest 27,336 1,802
Cash paid for income taxes - 62
-6-
<PAGE>
Non-Cash Transactions:
Recorded in business combinations:
Assets 45,719 -
Liabilities 10,248 -
Disposed of in sale of subsidiary:
Assets 35,480 -
Liabilities 4,218 -
Minority interest 12,732 -
Assets acquired through capital leases 6,043 15,052
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at period end 23,770 10,988
5. DISPOSITION OF SUBSIDIARY
In February 1998, GST USA completed the sale of its remaining 63% interest
in NACT Telecommunications, Inc. for net proceeds of approximately $85.0 million
and recorded a gain of approximately $61.3 million on such sale.
6. ADOPTION OF NEW ACCOUNTING STANDARD
GST USA has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The objective of
SFAS No. 130 is to report all changes in equity that result from transactions
and economic events other than from transactions with owners. Comprehensive
income is the total of net income and all other non-owner changes in equity.
There was no effect from the adoption of SFAS No. 130.
7. RECENT DEVELOPMENTS
In April 1998, GST USA acquired ICON Communications Corp., a switch-based
reseller of long distance and local services located in Seattle, Washington, for
$23.8 million in cash.
In May 1998, the GST USA completed a private placement of $500.0 million
principal amount at maturity of 10.5% senior secured discount notes due 2008
(the "1998 Notes"). The 1998 Notes will fully accrete to face value on May 1,
2003. From and after May 1, 2003, the 1998 Notes will bear interest, which will
be payable in cash, at a rate of 10.5% per annum on each May 1 and November 1,
commencing November 1, 2003. The net proceeds from the sale of the 1998 Notes of
approximately $288.9 million are restricted for the purchase of
telecommunications equipment and network infrastructure.
-7-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE NARRATIVE)
The following narrative contains forward looking statements that
involve risks and uncertainties. GST USA, Inc.'s actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors discussed herein.
OVERVIEW
GST USA, Inc. ("GST USA") is a wholly-owned subsidiary of GST
Telecommunications, Inc. ("GST"). GST USA was formed to hold the capital stock
of the consolidated operating subsidiaries of GST. In December 1995, GST USA
issued in a private placement its 13.875% Senior Discount Notes due 2005 (the
"Senior Notes"), which are unconditionally guaranteed by GST, and GST issued its
13.875% Convertible Senior Subordinated Notes due 2005 (together with the Senior
Notes, the "1995 Notes"), which are unconditionally guaranteed by GST USA. The
net proceeds from the sale of the 1995 Notes were used to fund capital
expenditures and for working capital.
GST USA also purchases equipment from its wholly-owned subsidiaries,
GST Equipment Funding, Inc. ("GST Funding") and GST Network Funding, Inc. ("GST
Network") and leases such equipment to the operating subsidiaries of GST. GST
USA is obligated to assume GST Funding's 13.25% Senior Secured Notes due 2007
(the "Secured Notes") and GST Network's 10.5% Senior Secured Discount Notes due
2008 (the "1998 Notes") as soon as GST USA is permitted to do so pursuant to the
terms of its outstanding indebtedness. At such time, GST is obligated to
guarantee the Secured Notes and the 1998 Notes. GST Funding issued the Secured
Notes in a private placement in May 1997. Of the $255.8 million of net proceeds
from the sale of the Secured Notes, as of June 30, 1998 approximately $93.8
million had been used to purchase securities pledged to fund the first six
interest payments on the Secured Notes (the first two payments totaling $33.9
million having been made as of June 30, 1998) and approximately $145.9 million
had been used to purchase telecommunications equipment ($41.5 million of which
was used to refinance intercompany indebtedness). GST Network issued the 1998
Notes in a private placement in May 1998. The $288.9 million in net proceeds
from the sale of the 1998 Notes is restricted for the purchase of
telecommunications equipment and network infrastructure. None of such proceeds
had been used as of June 30, 1998.
GST provides a broad range of integrated telecommunications products
and services, primarily to business customers located in California, Hawaii and
other western continental states. As a facilities-based competitive local
exchange carrier ("CLEC"), GST operates state-of-the-art, digital
telecommunications networks that provide an alternative to incumbent local
exchange carriers. GST's full line of products, which offer a "one-stop"
solution to customers' telecommunications services requirements, include local
dial tone, long distance, Internet, data transmission and private line services.
GST's digital networks currently serve 41 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Oregon, Texas and Washington. GST also
constructs, markets and manages longhaul fiber optic facilities in Arizona,
California and Hawaii. GST's longhaul fiber optic facilities currently extend
over 1,300 miles and approximately 1,800 route miles are under construction and
expected to become operational over the next 12 months.
Management believes that the formation of an integrated regional
network through the interconnection of the GST's individual networks with the
longhaul fiber optic facilities will provide significant competitive and
economic advantages. In addition to providing GST with a larger addressable
market, the interconnection of its networks is expected to allow the GST to
-8-
<PAGE>
carry a portion of its intra-regional telecommunications traffic on-net, thereby
improving operational margins by reducing payments to other carriers for use of
their facilities. In addition, increasing demand for high bandwidth capacity has
created opportunities for GST to sell or lease capacity on its network to other
communications carriers.
GST plans to build specific network segments or to lease capacity as
economically justified and as the demands of its customers warrant. Management
believes that pursuing the "smart-build" approach should permit GST to provide
for ongoing capital expenditures on a "success basis" and allow GST to build its
customer base through an increased focus on sales, marketing and operations
support systems. "Smart-builds" also provide GST with the ability to address
attractive service areas selectively throughout its targeted markets.
RESULTS OF OPERATIONS
REVENUES. Total revenues for the three and six month periods ended
June 30, 1998 increased $11.1 million, or 42.9%, and $13.9 million, or 27.5%,
respectively, over the comparable three and six month periods ended June 30,
1997. Telecommunications and other services revenues for the three and six month
periods ended June 30, 1998 increased $16.8 million, or 83.7%, and $24.7
million, or 62.2%, respectively, over the comparable periods in the previous
year. The increase in telecommunications and other services revenues resulted
primarily from strategic acquisitions, including the acquisitions of the Guam
operations of Sprint Corporation in October 1997 and ICON Communications, Corp.
("ICON") in April 1998, and from increased local service revenue generated by
GST USA's networks. To a lesser extent, the increase in telecommunications and
other services revenues resulted from increased long distance, Internet and data
services and from revenues generated from the sale of network conduit systems.
Due to the sale of GST USA's remaining 63% interest in NACT Telecommunications,
Inc. ("NACT"), telecommunications products revenues were $0 in each of the three
and six month periods ended June 30, 1998 compared to $5.7 million and $10.8
million for the comparable periods in 1997.
OPERATING EXPENSES. Total operating expenses for the three and six
month periods ended June 30, 1998 increased $17.0 million, or 37.9%, and $26.1
million, or 30.0%, respectively, over the three and six month periods ended June
30, 1997. Network expenses, which include direct local and long distance circuit
costs, were 67.5% and 69.8%, respectively, of telecommunications and other
services revenues for the three and six month periods ended June 30, 1998,
compared to 75.6% and 80.9% for the comparable periods in the previous year. The
decrease in network expenses as a percent of telecommunications and other
services revenues resulted from the inclusion of strategic acquisitions and an
increase in revenues for traffic carried on GST USA's network as a percent of
total revenues. Facilities administration and maintenance expenses for the three
and six month periods ended June 30, 1998 were 8.3% and 10.0%, respectively, of
telecommunications and other services revenues compared to 20.7% and 17.7% for
the comparable periods ended June 30, 1997. The primary reason for the decrease
in these expenses as a percent of telecommunications and other services revenues
is the inclusion of revenue from strategic acquisitions, substantially all of
which are not generated on GST USA's networks.
Cost of product revenues and research and development costs were
both $0 for each of the three and six month periods ended June 30, 1998 due to
the sale of NACT.
-9-
<PAGE>
Selling, general and administrative expenses for the three and six
month periods ended June 30, 1998 increased $5.5 million, or 30.8%, and $9.5
million, or 28.8%, respectively, over the three and six months ended June 30,
1997. The increase is due to the expansion of GST USA's CLEC and enhanced
services operations, which has resulted in additional marketing, management
information and sales staff, and to selling, general and administrative expenses
of strategic acquisitions. As a percent of total revenue, selling, general and
administrative expenses for the three and six month periods ended June 30, 1998
were 63.1% and 66.0%, respectively, compared to 68.9% and 65.4% for the
comparable periods ended June 30, 1997.
Depreciation and amortization for the three and six month periods
ended June 30, 1998 increased $5.2 million and $9.0 million, respectively, over
the comparable periods in the previous year. The increase is attributable to
newly-constructed networks becoming operational and to the amortization of
intangible assets related to GST USA's acquisitions. GST USA expects that
depreciation will continue to increase as it expands its networks and longhaul
fiber optic facilities and installs additional switches. Depreciation and
amortization expense was 29.1% and 29.6% of total revenue for the three and six
month periods ended June 30, 1998 compared to 21.4% and 19.8% for the comparable
periods ended June 30, 1997.
OTHER EXPENSES/INCOME. For the three and six months ended June 30,
1998, GST USA recorded net other expense of $13.0 million and net other income
of $37.7 million, respectively, compared to net other expense of $8.1 million
and $4.9 million for the comparable periods ended June 30, 1997. For the three
month period ended June 30, 1998 the primary reason for the increase in net
other expenses as compared to the same period in 1997 was increased interest
expense resulting from the issuance in May 1997 of the Secured Notes and the
issuance in May 1998 of the 1998 Notes. For the six month period ended June 30,
1998, net other income includes a $61.3 million gain resulting from the sale of
NACT.
-10-
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On May 4, 1998, the Registrant reported on Form 8-K in "Item 5.
Other Events," the completion of a private placement by GST Network Funding,
Inc., a wholly-owned subsidiary of the Registrant, of $500 million principal
amount at maturity of senior secured discount notes.
-11-
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Date: AUGUST 13, 1998 GST USA, INC.
(Registrant)
/S/ DANIEL L. TRAMPUSH
-----------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GST USA'S
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 172,426,621
<SECURITIES> 32,888,410
<RECEIVABLES> 27,238,824
<ALLOWANCES> (3,723,154)
<INVENTORY> 0
<CURRENT-ASSETS> 241,341,672
<PP&E> 529,877,978
<DEPRECIATION> (37,499,899)
<TOTAL-ASSETS> 1,199,951,711
<CURRENT-LIABILITIES> 405,951,080
<BONDS> 794,634,358
<COMMON> 78,462,464
0
0
<OTHER-SE> (212,278,653)
<TOTAL-LIABILITY-AND-EQUITY> 1,199,951,711
<SALES> 64,451,131
<TOTAL-REVENUES> 64,451,131
<CGS> 45,008,999
<TOTAL-COSTS> 113,054,026
<OTHER-EXPENSES> (72,411,784)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,682,863
<INCOME-PRETAX> (10,873,975)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,873,975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,873,975)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
