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, 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.
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(Exact name of Registrant as Specified in its Charter)
Delaware 83-0310464
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(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 MAIN STREET, VANCOUVER, WA 98663
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 906-7100
--------------
N/A
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(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 May 11, 1998, there were outstanding 10 shares of common
stock, no par value per share, of the Registrant.
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<PAGE>
GST USA, INC.
INDEX
PAGE(S)
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheet - March 31, 1998 3
(unaudited) and December 31, 1997
Consolidated Condensed Statements of Operations 4
- Three Months Ended March 31, 1998 and 1997
(unaudited)
Consolidated Condensed Statements of Cash Flows 5
- Three Months Ended March 31, 1998 and 1997
(unaudited)
Notes to Consolidated Condensed Financial 6-7
Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8-10
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
<PAGE>
GST USA, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
1998 1997
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 236,717 197,299
Restricted cash and investments 32,184 31,731
Accounts receivable, net 16,556 26,212
Receivable from parent 964 964
Investments 308 7,554
Inventories -- 2,823
Prepaid expenses and other current assets 11,899 12,940
--------- ---------
Total current assets 298,628 279,523
--------- ---------
Restricted investments 103,013 112,719
Property, plant and equipment 472,241 433,109
less accumulated depreciation (31,456) (26,670)
--------- ---------
440,785 406,439
Other assets 105,935 99,961
less accumulated amortization (18,868) (19,698)
--------- ---------
87,067 80,263
--------- ---------
$ 929,493 $ 878,944
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 16,312 14,531
Accrued liabilities 42,057 29,776
Payable to parent 343,435 327,140
Current portion of capital lease obligations 4,128 6,286
Current portion of long term debt 3,690 3,212
Other current liabilities 304 994
--------- ---------
Total current liabilities 409,926 381,939
--------- ---------
Other liabilities -- 1,409
Capital lease obligation, less current portion 17,264 13,993
Long term debt, less current portion 598,052 591,814
Minority interest in subsidiaries -- 12,732
Shareholder's deficit:
Common shares 78,462 78,462
Deficit (174,211) (201,405)
--------- ---------
Total shareholder's deficit (95,749) (122,943)
--------- ---------
$ 929,493 $ 878,944
========= =========
See accompanying notes to consolidated condensed financial statements.
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GST USA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
Three Months
Ended March 31,
--------------------
1998 1997
------- -------
Revenue:
Telecommunication services $ 27,522 $ 19,621
Telecommunication products -- 5,073
-------- --------
27,522 24,694
-------- --------
Operating costs and expenses:
Network expenses 20,089 16,931
Facilities administration and maintenance 3,374 2,875
Cost of product revenues -- 1,863
Selling, general and administrative 19,273 15,243
Research and development -- 616
Depreciation and amortization 8,319 4,478
-------- --------
51,055 42,006
-------- --------
Loss from operations (23,533) (17,312)
-------- --------
Other expenses (income):
Interest income (4,909) (383)
Interest expense 15,430 4,513
Other (61,248) (7,492)
-------- --------
(50,727) (3,362)
-------- --------
Income (loss) before income taxes
and minority interest 27,194 (13,950)
-------- --------
Income taxes -- (118)
Minority interest in income of subsidiary -- (40)
-------- --------
-- (158)
-------- --------
Net income (loss) $ 27,194 $(14,108)
======== ========
See accompanying notes to consolidated condensed financial statements.
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GST USA, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
--------- ---------
<S> <C> <C>
Net income (loss) $ 27,194 $ (14,108)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Minority interest in income of subsidiary 0 40
Accretion of interest 5,870 4,031
Depreciation and amortization 8,967 4,809
Gain on sale of subsidiary shares (61,292) (7,424)
Stock compensation 943 0
Gain on sale of fixed assets (239) 0
Changes in non-cash operating working capital:
Receivables (2,888) 678
Inventory 0 (182)
Prepaid expenses and other 1,827 (1,159)
Accounts payable and accrued liabilities 12,671 (2,783)
Other liabilities (100) (208)
--------- ---------
Net cash used in operating activities (7,047) (16,306)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash acquired (12,418) 0
Proceeds from sale of subsidiary shares, net 85,074 27,365
Cash disposed of in sale of subsidiary (5,252) 0
Purchase of marketable securities 0 (2,000)
Change in investments restricted for fixed asset purchases 8,011 0
Purchase of fixed assets (39,847) (57,436)
Purchase of other assets (115) (864)
Proceeds from the sale of fixed assets 750 0
--------- ---------
Net cash used in investing activities 36,203 (32,935)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt 0 15,916
Principal payments on long term debt and capital leases (2,457) (2,076)
Deferred financing costs (1,527) (76)
Change in investments restricted to finance interest payments 1,242 0
Increase in payable to parent 13,004 53,801
--------- ---------
Net cash provided by financing activities 10,262 67,565
--------- ---------
Net increase (decrease) in cash and cash equivalents 39,418 18,324
Cash and cash equivalents at beginning of period 197,299 3,372
--------- ---------
Cash and cash equivalents at end of period $ 236,717 $ 21,696
========= =========
</TABLE>
See accompanying 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 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 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 give effect to such
transfer as if the Transferred Subsidiaries were consolidated into GST USA
during all periods presented.
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
Three Months
Ended March 31,
-----------------------
1998 1997
---- ----
Cash Transactions:
Cash paid for interest 4,191 1,605
Cash paid for income taxes - 105
Non-Cash Transactions:
Recorded in business combinations:
Assets 17,378 -
Liabilities 4,960 -
Disposed of in sale of subsidiary:
Assets 35,480 -
Liabilities 4,218 -
Minority interest 12,732 -
Assets acquired through capital leases 3,289 -
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at period end 20,027 15,305
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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 adoption of
SFAS No. 130 did not materially impact the presentation of the accompanying
financial statements, and as such, no additional disclosure is included.
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
approximately $23.8 million in cash.
In May 1998, GST Network Funding, Inc., a wholly-owned subsidiary of 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 $288.5 million are
restricted for the purchase of telecommunications equipment and network
infrastructure.
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<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 subsidiary, GST
Equipment Funding, Inc. ("GST Funding") and leases such equipment to the
operating subsidiaries of GST and GST USA. GST USA is obligated to assume GST
Funding's 13.25% Senior Secured Notes due 2007 (the "Secured Notes") as soon as
GST USA is permitted to do so pursuant to the terms of the indenture relating to
the Senior Notes. At such time, GST is obligated to guarantee the Secured 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 March
31, 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
such payment of $16.4 million having been made in November 1997) and
approximately $115.7 million had been used to purchase telecommunications
equipment ($41.5 million of which was used to refinance intercompany
indebtedness).
GST provides a broad range of integrated telecommunications products
and services, primarily to business customers located in the western continental
United States and Hawaii. 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 40 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Texas and Washington. In addition, GST
has networks under construction which, when completed, will expand its regional
footprint to Oregon. GST also constructs, markets and manages longhaul fiber
optic facilities in Arizona, California and Hawaii. GST's longhaul fiber optic
facilities currently extend over 900 miles and approximately 1,700 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
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larger addressable market, the interconnection of its networks is expected to
allow the GST to a 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.
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three months ended March 31, 1998
increased $2.8 million, or 11.5%, to $27.5 million from $24.7 million for the
three months ended March 31, 1997. Telecommunications services revenue for the
three months ended March 31, 1998 increased $7.9 million, or 40.3%, to $27.5
million from $19.6 million for the three months ended March 31, 1997. The
increase in telecommunications services revenue resulted primarily from
increased local service revenue generated by GST USA's networks and from
increased long distance service revenue. To a lesser extent, the increase in
telecommunications services revenue resulted from the acquisition of the Guam
operations of Sprint Corporation ("Sprint") in October 1997. Product revenue for
the three months ended March 31, 1998 was $0 compared to $5.1 million for the
three months ended March 31, 1997 due to the sale of GST USA's remaining 63%
interest in NACT Telecommunications, Inc. ("NACT").
OPERATING EXPENSES. Total operating expenses for the three months ended
March 31, 1998 increased $9.1 million, or 21.5%, to $51.1 million from $42.0
million for the three months ended March 31, 1997. Network expenses, which
include direct local and long distance circuit costs, increased $3.2 million, or
18.7%, to $20.1 million, or 73.0% of telecommunications services revenue for the
three months ended March 31, 1998 compared to $16.9 million, or 86.3% of
telecommunications services revenue for the three months ended March 31, 1997.
The primary reason for the decrease in network expenses as a percent of revenue
is the increase in revenues for traffic carried on GST USA's networks as a
percent of total revenues. Facilities administration and maintenance expenses
(consisting primarily of costs related to personnel providing maintenance,
monitoring and technical assistance for the GST USA's networks) for the three
months ended March 31, 1998 increased $.5 million, or 17.4%, to $3.4 million, or
12.3% of telecommunications services revenue, compared to $2.9 million, or 14.7%
of telecommunications services revenue, for the three months ended March 31,
1997.
Cost of product revenues and research and development costs were both
$0 for the three months ended March 31, 1998 due to the sale of NACT.
Selling, general and administrative expenses for the three months ended
March 31, 1998 increased $4.1 million, or 26.4%, to $19.3 million from $15.2
million for the three months ended March 31, 1997. The increase is due to the
expansion of GST USA's CLEC and enhanced services operations, the acquisition of
three companies between October 1997 and March 1998 and the hiring of a
significant number of marketing, management information and sales personnel to
implement the GST USA's integrated services strategy. Such increases were offset
by a decrease of $1.2 million resulting from the disposition of NACT.
Depreciation and amortization for the three months ended March 31, 1998
increased $3.8 million, or 85.8%, to $8.3 million from $4.5 million for the
three months ended March 31, 1997. Depreciation and amortization was 30.2% of
total revenue for the three months ended March 31, 1998 compared to 18.1% for
the three months ended March 31, 1997. The increase was
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attributable to newly-constructed networks becoming operational and 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.
OTHER INCOME/EXPENSE. For the three months ended March 31, 1998, net
other income increased $47.5 million to $50.7 million from $3.2 million for the
three months ended March 31, 1997. The primary reason for the increase was a
$61.3 million gain from the sale of GST USA's remaining interest in NACT. Such
increase was partially offset by increased interest expense resulting from the
issuance of the Secured Notes in May 1997. For the three months ended March 31,
1998, minority interest and income tax expense were $0 due to the disposition of
NACT.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 descriptions therein of an action commenced by US WEST Communications,
Inc. ("US WEST") against members of the Arizona Corporation Commission (the
"ACC"), the ACC, American Communications Services Inc., Brooks Fiber Properties
Inc. and GST in the United States District Court in Arizona. On March 31, 1998,
several other CLEC defendants' motions to dismiss the US WEST complaint were
granted in their entirety. Many of the counts in the US WEST complaint against
the Registrant are identical to those dismissed by the court in the other CLEC
defendants' cases. GST is negotiating with US WEST to determine how to give
effect to this order of dismissal in GST's related case. Should US WEST prevail
in its suit, it could have an adverse impact on GST's operations in Arizona.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2* Agreement and Plan of Merger dated April 14, 1998,
by and among GST Telecommunications, Inc., GST
Merger Sub, Inc. and ICON Communications Corp.
Exhibit 27 Financial Data Schedule
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*Incorporated by reference to Exhibit 2 to the Form 10-Q for the three months
ended March 31, 1998 of GST Telecommunications, Inc.
(b) Reports on Form 8-K
On January 6, 1998, the Registrant reported on Form 8-K in "Item
5. Other Events," the announcement of an agreement for the sale by the
Registrant of its interest in NACT Telecommunications, Inc. ("NACT").
On February 27, 1998, the Registrant reported on Form 8-K in "Item
2. Acquisition or Disposition of Assets," the consummation of the sale by the
Registrant of 5,113,712 shares of the common stock of NACT, representing
approximately 63% of the outstanding common stock of NACT.
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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: May 14, 1998 GST USA, INC.
(Registrant)
/s/ Daniel L. Trampush
-------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GST USA'S
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 236,716,717
<SECURITIES> 32,491,651
<RECEIVABLES> 19,869,611
<ALLOWANCES> (3,313,256)
<INVENTORY> 0
<CURRENT-ASSETS> 298,628,146
<PP&E> 472,240,874
<DEPRECIATION> 31,455,688
<TOTAL-ASSETS> 929,492,696
<CURRENT-LIABILITIES> 409,926,405
<BONDS> 482,382,832
<COMMON> 78,462,464
0
0
<OTHER-SE> (174,211,866)
<TOTAL-LIABILITY-AND-EQUITY> 929,492,696
<SALES> 27,522,077
<TOTAL-REVENUES> 27,522,077
<CGS> 20,089,153
<TOTAL-COSTS> 51,054,970
<OTHER-EXPENSES> (66,156,273)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,429,773
<INCOME-PRETAX> 27,193,607
<INCOME-TAX> 0
<INCOME-CONTINUING> 27,193,607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,193,607
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
