<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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) 356-7100
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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At November 13,
1998, there were outstanding 10 shares of common stock, no par value per share,
of the Registrant.
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GST USA, INC.
INDEX
PAGE(S)
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets - September 30,
1998 (unaudited) and December 31, 1997 2
Consolidated Condensed Statements of Operations
- Three Months Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997
(unaudited) 3
Consolidated Condensed Statements of Cash Flows
- Nine Months Ended September 30, 1998 and 1997
(unaudited) 4
Notes to Consolidated Condensed Financial
Statements (unaudited) 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE) 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
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GST USA, Inc.
Consolidated Condensed Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 (1)
------------------ --------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 103,044 $ 197,373
Restricted cash and investments 33,430 31,731
Accounts receivable, net 31,761 26,212
Receivable from parent -- 964
Investments -- 7,554
Prepaid expenses and other current assets 10,724 15,763
----------- -----------
Total current assets 178,959 279,597
----------- -----------
Restricted investments 332,024 112,719
Property, plant and equipment 606,001 433,110
less accumulated depreciation (45,442) (26,670)
----------- -----------
560,559 406,440
Other assets 142,513 99,961
less accumulated amortization (43,807) (19,701)
----------- -----------
98,706 80,260
$ 1,170,248 $ 879,016
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities
Accounts payable $ 31,260 $ 14,531
Accrued liabilities 37,067 29,850
Payable to parent 344,027 327,138
Current portion of capital lease obligations 6,180 6,286
Current portion of long term debt 4,016 3,212
Other current liabilities 6,799 994
----------- -----------
Total current liabilities 429,349 382,011
----------- -----------
Other liabilities -- 1,409
Capital lease obligations, less current portion 19,301 13,994
Long term debt, less current portion 910,952 591,813
Minority interest in subsidiaries -- 12,732
Shareholder's deficit
Common shares 78,462 78,462
Accumulated deficit (267,816) (201,405)
----------- -----------
Total shareholder's deficit (189,354) (122,943)
----------- -----------
$ 1,170,248 $ 879,016
=========== ===========
</TABLE>
(1) The information in this column was derived from the GST USA's audited
financial statements as of December 31, 1997 as filed on Form 10-K, as amended.
See notes to consolidated condensed financial statements.
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GST USA, Inc.
Consolidated Condensed Statement of Operations
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Telecommunication and other services $ 40,699 $ 22,069 $ 105,150 $ 61,797
Telecommunication products -- 6,391 -- 17,203
--------- --------- --------- ---------
40,699 28,460 105,150 79,000
--------- --------- --------- ---------
Operating costs and expenses:
Network expenses 27,100 16,873 72,108 49,007
Facilities administration and maintenance 3,397 1,950 9,829 8,318
Cost of product revenues -- 1,903 -- 5,313
Selling, general and administrative 23,170 21,212 65,733 54,255
Research and development -- 556 -- 1,879
Depreciation and amortization 12,079 8,978 31,130 18,991
--------- --------- --------- ---------
65,746 51,472 178,800 137,763
--------- --------- --------- ---------
Loss from operations (25,047) (23,012) (73,650) (58,763)
--------- --------- --------- ---------
Other expenses (income):
Interest income (7,462) (3,500) (19,123) (5,622)
Interest expense 21,649 15,402 56,332 29,561
Other 16,303 651 (44,448) (7,074)
--------- --------- --------- ---------
30,490 12,553 (7,239) 16,865
--------- --------- --------- ---------
Loss before income taxes
and minority interest (55,537) (35,565) (66,411) (75,628)
--------- --------- --------- ---------
Income taxes -- 16 -- (831)
Minority interest in loss of subsidiaries -- (221) -- (665)
--------- --------- --------- ---------
-- (205) -- (1,496)
--------- --------- --------- ---------
Net loss $ (55,537) $ (35,770) $ (66,411) $ (77,124)
========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
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GST USA, Inc.
Consolidated Condensed Statement of Cash Flows
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (66,411) $ (77,124)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interest in income of subsidiary -- 665
Depreciation and amortization 33,897 20,383
Deferred income taxes -- (899)
Accretion of interest 25,636 13,083
Stock compensation 1,123 2,521
Loss on disposal of assets 38 679
Gain on sale of subsidiary shares (61,292) (7,376)
Loss reserve on long term assets 15,668 --
Changes in non-cash operating working capital:
Accounts receivable (15,259) (6,726)
Prepaids expenses and other current assets 1,993 (934)
Accounts payable and accrued liabilities 6,306 40,929
Other liabilities 6,326 45
--------- ---------
Net cash used in operating activities (51,975) (14,754)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash acquired (35,471) --
Proceeds from sale of investments 308 --
Purchase of investments -- (2,841)
Purchase of fixed assets (147,918) (175,684)
Purchase of other assets (2,659) (8,551)
Proceeds from sale of subsidiary shares, net 85,074 27,105
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 (237,685) (66,234)
--------- ---------
Net cash used in investing activities (340,041) (220,431)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt 300,562 326,317
Principal payments on long term debt and capital leases (21,325) (4,077)
Deferred financing costs (12,614) (11,404)
Change in investments restricted to finance interest payments 16,682 (95,975)
Increase in payable to parent 14,382 70,077
--------- ---------
Net cash provided by financing activities 297,687 284,938
--------- ---------
Net increase (decrease) in cash and cash equivalents (94,329) 49,753
Cash and cash equivalents at beginning of period 197,373 4,943
--------- ---------
Cash and cash equivalents at end of period $ 103,044 $ 54,696
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
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GST USA, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared by GST USA, Inc. ("GST USA"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. 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 such rules and regulations. 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 GST USA's audited consolidated financial statements for the three months
ended December 31, 1997, as included in GST USA's Transition Report on Form 10-K
for the three month transition period ended December 31, 1997, as amended.
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
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1998 1997
------ ------
<S> <C> <C>
Cash Transactions:
Cash paid for interest 30,556 4,188
Cash paid for income taxes -- 638
</TABLE>
5
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<TABLE>
<S> <C> <C>
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 9,347 21,241
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at period end 24,560 19,718
</TABLE>
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 on GST USA's financial statements resulting from the
adoption of SFAS No. 130 as GST USA has no non-owner changes in equity.
7. RECENT DEVELOPMENTS
(a) On October 28, 1998, Magnacom Wireless, LLC ("Magnacom"), a company
controlled by GST USA's former Chairman and Chief Executive Officer, filed a
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code. As of September 30, 1998, GST USA had paid Magnacom approximately $14.6
million as prepayments for future PCS services and had recorded approximately
$1.1 million in other receivables from Magnacom. For the three months ended
September 30, 1998, GST USA recorded a loss reserve of $15.7 million for the
full amount of the prepayments and receivables related to Magnacom.
(b) GST USA and its parent, GST Telecommunications, Inc. ("GST"), are
investigating certain matters with respect to compliance with covenants
contained in the indentures relating to certain of GST's and its subsidiaries'
outstanding notes. See Item 5 of Part II hereof.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE)
Certain information included in this Quarterly Report may be deemed to
include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that involve risk and uncertainty, such as information
relating to expected capital expenditures and expected trends in operating
losses and cash flows, as well as any statements preceded by, followed by, or
that include the words "intends," "estimates," "believes," "expects,"
"anticipates," "should," "could," or similar expressions, and other statements
contained herein regarding matters that are not historical facts. Although GST
USA, Inc. ("GST USA") believes that its expectations are based on reasonable
assumptions, it can give no assurance that its expectations will be achieved.
The important factors that could cause actual results to differ materially from
those in the forward-looking statements herein (the "Cautionary Statements")
include, without limitation, risks associated with GST USA's operating losses,
risks relating to GST USA's development and expansion and possible inability to
manage growth, risks relating to the GST USA's significant capital requirements,
substantial indebtedness and possible inability to service its debt, risks
relating to competition and regulatory developments, risks relating to
implementing local and enhanced services, risks relating to its long distance
business, as well as other risks referenced from time to time in filings with
the Securities and Exchange Commission by GST USA and GST Telecommunications,
Inc. ("GST"), including Amendment No. 2 to GST's Form S-4 as filed on October 7,
1998 and GST USA's Form 10-K for the transition period ended December 31, 1997.
All subsequent written and oral forward-looking statements attributable to GST
USA or persons acting on its behalf are expressly qualified in their entirety by
the Cautionary Statements. GST USA does not undertake any obligation to release
publicly any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
GST USA is a wholly-owned subsidiary of GST which was formed to hold the
capital stock of the consolidated operating subsidiaries of GST. In December
1995, GST USA issued $312.4 million principal amount at maturity of 13.875%
senior discount notes due 2005 (the "Senior Notes"), which are unconditionally
guaranteed by GST, and GST issued $39.1 million principal amount at maturity of
13.875% convertible senior subordinated discount 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 $265.0
million of 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 September 30,
1998 approximately $93.8
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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 September 30, 1998) and approximately $162.9
million had been used to purchase telecommunications equipment ($41.5 million of
which was used to refinance intercompany indebtedness). GST Network issued
$500.0 million principal amount at maturity of 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. Of such proceeds, $6.3 million had been used to purchase
telecommunications equipment as of September 30, 1998.
GST USA is a party to a registration rights agreement relating to the 1998
Notes whereby it has agreed to consummate an exchange offer for the 1998 Notes
pursuant to an effective registration statement or cause the 1998 Notes to be
registered under the Securities Act of 1933, as amended, pursuant to a shelf
registration statement by November 4, 1998. Although GST USA has filed a
registration statement on Form S-4 with respect to an exchange offer for the
1998 Notes, it has not yet been declared effective. Therefore, in accordance
with the terms of the registration rights agreement, interest (in addition to
the accrual of original issue discount and interest otherwise due on the 1998
Notes after such date) on the 1998 Notes will accrue, at an annual rate of 0.5%,
from November 4, 1998 and be payable in cash semiannually in arrears, on each
May 1 and November 1, commencing May 1, 1999 until such exchange offer is
consummated or a shelf registration statement is declared effective.
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 integrated
communications provider ("ICP"), 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 42 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 and intends to market and manage similar facilities in Oregon. 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 GST to 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,
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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 nine month periods ended
September 30, 1998 increased $12.2 million, or 43.0%, and $26.2 million, or
33.1%, respectively, over the comparable three and nine month periods ended
September 30, 1997. Telecommunications and other services revenues for the three
and nine month periods ended September 30, 1998 increased $18.6 million, or
84.4%, and $43.4 million, or 70.2%, 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 ICON Communications, Corp. ("ICON") in April 1998 and the Guam
operations of Sprint Corporation in October 1997, 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
interest in NACT Telecommunications, Inc. ("NACT"), telecommunications products
revenues were $0 in each of the three and nine month periods ended September 30,
1998 compared to $6.4 million and $17.2 million for the comparable periods in
1997.
Operating Expenses. Total operating expenses for the three and nine month
periods ended September 30, 1998 increased $14.3 million, or 27.7%, and $41.0
million, or 29.8%, respectively, over the three and nine month periods ended
September 30, 1997. Network expenses, which include direct local and long
distance circuit costs, were 66.6% and 68.6%, respectively, of
telecommunications and other services revenues for the three and nine month
periods ended September 30, 1998, compared to 76.5% and 79.3% 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
revenues from 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 nine month periods
ended September 30, 1998 were 8.3% and 9.3%, respectively, of telecommunications
and other services revenues compared to 8.8% and 13.5% for the comparable
periods ended September 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 nine month periods ended September 30, 1998 due to the
sale of NACT.
Selling, general and administrative expenses for the three and nine month
periods ended September 30, 1998 increased $2.0 million, or 9.2%, and $11.5
million, or 21.2%, respectively, over the three and nine months ended September
30, 1997. The increase is due to the expansion of GST USA's local 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 nine month periods ended September 30,
1998 were 56.9 % and 62.5%, respectively, compared to 74.5% and 68.7% for the
comparable periods ended September 30, 1997.
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Depreciation and amortization for the three and nine month periods ended
September 30, 1998 increased $3.1 million and $12.1 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 29.7% and 29.6% of total revenue for the three and nine
month periods ended September 30, 1998 compared to 31.5% and 24.0% for the
comparable periods ended September 30, 1997.
Other Expenses/Income. For the three and nine months ended September 30,
1998, GST USA recorded net other expense of $30.5 million and net other income
of $7.2 million, respectively, compared to net other expense of $12.8 million
and $18.4 million for the comparable periods ended September 30, 1997. For the
nine month period ended September 30, 1998, net other income includes a $61.3
million gain resulting from the sale of NACT. Excluding such gain, net other
expense would have increased $35.7 million for the nine months ended September
30, 1998 as compared to the same period in the previous year. The increase in
net other expenses primarily relate to increased interest expense resulting from
the issuance in May 1998 of $500.0 million principal amount at maturity of 10.5%
senior secured discount notes (the "1998 Notes"), and from a $15.7 million loss
reserve recorded in September 1998 for amounts paid to Magnacom Wireless, LLC
("Magnacom"), a company controlled by GST USA's former Chairman and Chief
Executive Officer. As of September 30, 1998, GST USA had paid Magnacom
approximately $14.6 million as prepayments for future PCS services and had
recorded approximately $1.1 million in other receivables from Magnacom. Magnacom
filed a petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in October 1998.
Net Loss. Net loss for the three months ended September 30, 1998 increased
$19.8 million, or 55.3%, to $55.5 million from $35.8 million for the three
months ended September 30, 1997. Net loss for the nine months ended September
30, 1998 decreased $10.7 million, or 13.9%, to $66.4 million from $77.1 million
for the nine months ended Setember 30, 1997. Excluding the $61.3 million gain
on the sale of NACT and the $15.7 million loss reserve for amounts paid to
Magnacom, net loss would have been $112.0 million for the nine months ended
September 30, 1998, an increase of $34.9 million as compared to the nine months
ended September 30, 1997.
OTHER MATTERS
GST USA and its parent, GST Telecommunications, Inc. ("GST") are
investigating certain matters with respect to compliance with covenants
contained in the indentures relating to certain of GST's and its subsidiaries'
outstanding notes. See Item 5 of Part II hereof.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) Reference is made to Item 3. "Legal Proceedings" of the Registrant's
Transition Report on Form 10-K for the three months ended December 31,
1997, and to the Registrant's Form 8-K dated July 9, 1998, and to the
descriptions therein of an action for alleged patent infringement (the
"Aerotel Action") commenced by Aerotel, Ltd. and Aerotel U.S.A. Inc.
(collectively "Aerotel") against NACT Telecommunications, Inc. ("NACT"), a
former subsidiary of the Registrant and GST Telecommunications, Inc.
(GST"). On October 26, 1998, the Registrant, GST, World Access, Inc. and
Aerotel entered into a settlement agreement relating to the Aerotel
Action. The Registrant and GST's portion of the settlement is
approximately $2.9 million.
(b) On October 20, 1998, the Registrant's parent, GST and GST Telecom, Inc.,
a subsidiary of the Registrant, filed a complaint in the Superior Court of
California, Santa Clara County, against GST Global Telecommunications,
Inc. (subsequently renamed Global Light Telecommunications, Inc.), current
GST directors Stephen Irwin and Peter E. Legault, and former GST directors
W. Gordon Blankstein, Robert H. Hanson, John Warta, and Ian Watson. The
complaint seeks the restitution of all legal and equitable interests in
Bestel S.A. de C.V., a Mexican telecommunications opportunity. No trial
date has been set and the Company cannot predict the outcome of the
litigation.
ITEM 5. OTHER INFORMATION
The following matters are related to the indentures respectively governing the
13-7/8% Senior Discount Notes due 2005, the 13-7/8% Convertible Senior
Subordinated Discount Notes due 2005, the 12-3/4% Senior Subordinated Accrual
Notes due 2007, the 13-1/4% Senior Secured Notes due 2007 and the 10-1/2%
Senior Secured Discount Notes due 2008, in respect of each of which GST USA, a
subsidiary, or its parent, GST Telecommunications, Inc. ("the Company"), is an
obligor.
In connection with the Company's preparation of the California Superior Court
litigation:
The Company has reviewed the transfer of its interest in a
telecommunications project to be developed in Mexico, to Global Light
Telecommunications, Inc. ("GLT") (formerly known as GST Global
Telecommunications, Inc.) which transfer forms the basis for certain claims in
that litigation. As a result of the transfer GLT was engaged in business outside
the continental United States, and because it did not meet certain other
technical requirements specified in the indentures, the Company has been advised
that this transfer may constitute a violation of indenture covenants limiting
investments in entities that conduct business outside the continental United
States and Hawaii. Furthermore, this transfer was one for which the Company has
not yet received any consideration, which may also constitute a violation of
indenture covenants respecting consideration to be received from sales to
affiliated entities. The litigation has been instituted to recover this asset or
its fair market value.
The Company has become aware of certain transactions occurring in 1997
which may have comprised an investment of approximately $.4 million in a
business entity that conducted business operations in Guam and the Northern
Mariana Islands. The Company has been advised that these transactions may have
constituted violations of indenture covenants limiting investments in entities
that conduct business outside of the continental United States and Hawaii.
The Company has reviewed its acquisition in 1998 of certain operating
assets located in Guam, purchased for $2.0 million of cash and $.5 million of
liabilities for future services to be provided to the seller in that
transaction. Because this activity is conducted outside the continental United
States it should have been placed in an "unrestricted subsidiary." In the
absence of such a subsidiary, the Company has been advised that this transaction
may constitute a violation of indenture covenants respecting its activities
outside the continental United States and Hawaii. The Company intends to
transfer this activity to an unrestricted subsidiary.
The Company has provided notice to the indenture trustee respecting
these matters and correcting earlier annual reports required by the indenture
in these respects.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On July 9, 1998, the Registrant reported on Form 8-K under "Item 5,
Other Events," that it had entered into a Memorandum of Understanding
to settle the Aerotel Action.
11
<PAGE> 14
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: November 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 SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<SECURITIES> 33,430,180
<RECEIVABLES> 35,804,092
<ALLOWANCES> (4,042,842)
<INVENTORY> 0
<CURRENT-ASSETS> 178,958,577
<PP&E> 606,001,287
<DEPRECIATION> (45,442,439)
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<BONDS> 810,300,540
0
0
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<OTHER-EXPENSES> (63,574,137)
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<INTEREST-EXPENSE> 56,334,961
<INCOME-PRETAX> (66,411,260)
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