<PAGE>
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, 1999
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
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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
--- ---
<PAGE>
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At August 10, 1999,
there were outstanding 20 shares of common stock, no par value per share, of the
Registrant.
<PAGE>
GST USA, INC.
INDEX
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets - June 30,
1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations - Three and
Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial
Statements 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE) 7-9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11-13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
</TABLE>
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<PAGE>
GST USA, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1999 DECEMBER 31, 1998 (1)
-------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 44,973 $ 85,884
Restricted investments 35,272 34,107
Accounts receivable, net 42,042 32,935
Investments 46 46
Inventory, net 1,454 1,485
Prepaid and other current assets 21,038 11,316
--------------------- -------------------
Total current assets 144,825 165,773
--------------------- -------------------
Restricted investments 119,710 247,257
Property and equipment 825,215 678,374
less accumulated depreciation (82,919) (62,522)
--------------------- -------------------
742,296 615,852
Other assets 136,872 138,773
less accumulated amortization (47,592) (38,877)
--------------------- -------------------
89,280 99,896
--------------------- -------------------
Total assets $ 1,096,111 $ 1,128,778
--------------------- -------------------
--------------------- -------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 29,301 $ 26,229
Accrued expenses 39,623 36,621
Payable to parent 360,297 354,679
Deferred revenue 16,163 6,030
Current portion of capital lease obligations 6,539 5,649
Current portion of long-term debt 13,533 12,127
--------------------- -------------------
Total current liabilities 465,456 441,335
--------------------- -------------------
Capital lease obligations, less current portion 17,051 19,741
Long-term debt, less current portion 948,172 919,075
Shareholders' deficit:
Common shares 78,462 78,462
Accumulated deficit (413,030) (329,835)
--------------------- -------------------
(334,568) (251,373)
--------------------- -------------------
Total liabilities and shareholders' deficit $ 1,096,111 $ 1,128,778
--------------------- -------------------
--------------------- -------------------
</TABLE>
(1) The information in this column was derived from GST USA's audited financial
statements as of December 31, 1998.
See notes to condensed consolidated financial statements.
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<PAGE>
GST USA, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 51,214 $ 37,737 $ 99,938 $ 66,917
Construction, facility sales and other 19,551 756 25,427 756
Product 1,157 1,034 2,239 1,898
------------- ------------ ------------ ------------
Total revenues 71,922 39,527 127,604 69,571
------------- ------------ ------------ ------------
Operating costs and expenses:
Network expenses 32,776 25,825 64,475 46,953
Facilities administration and maintenance 4,265 3,701 9,400 7,656
Cost of construction revenues 6,954 200 9,468 200
Cost of product revenues 655 707 1,350 1,396
Selling, general and administrative 28,161 23,943 54,407 43,907
Depreciation and amortization 16,639 11,069 33,610 19,730
------------- ------------ ------------ ------------
Total operating costs and expenses 89,450 65,445 172,710 119,842
------------- ------------ ------------ ------------
Loss from operations (17,528) (25,918) (45,106) (50,271)
------------- ------------ ------------ ------------
Other expenses (income):
Interest income (2,614) (6,785) (6,472) (11,718)
Interest expense, net of amounts capitalized 21,211 19,256 43,077 34,688
Gain on sale of subsidiary shares --- --- --- (61,266)
Other 1,291 492 1,484 494
------------- ------------ ------------ ------------
19,888 12,963 38,089 (37,802)
------------- ------------ ------------ ------------
Loss before income taxes (37,416) (38,881) (83,195) (12,469)
------------- ------------ ------------ ------------
Income tax expense --- --- --- ---
------------- ------------ ------------ ------------
Net loss $ (37,416) $ (38,881) $ (83,195) $ (12,469)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
GST USA, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------------
1999 1998
-------------- ----------------
<S> <C> <C>
Operations:
Net loss $ (83,195) $ (12,469)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 36,111 22,144
Accretion and accrual of interest 23,377 16,490
Non-cash stock compensation and other expense 1,434 1,123
Loss on disposal of assets 1,755 38
Gain on sale of subsidiary shares --- (61,266)
Changes in non-cash operating working capital:
Accounts receivable, net (9,276) (6,575)
Inventory 31 (137)
Prepaid, other current and other assets,
net (9,722) 1,289
Accounts payable and accrued liabilities 14,297 (6,250)
Deferred revenue 10,133 6
-------------- ----------------
Cash used in operations (15,055) (45,607)
-------------- ----------------
Investments:
Acquisition of subsidiaries, net of cash acquired --- (35,471)
Proceeds from sale of investments --- 328
Purchase of property and equipment (150,232) (80,458)
Proceeds from sale of property and equipment --- 3,562
Purchase of other assets (177) (2,053)
Change in investments restricted for the
purchase of property and equipment 110,231 (254,335)
Proceeds from the sale of subsidiary shares, net --- 85,048
Cash disposed of in sale of subsidiary --- (5,252)
-------------- ----------------
Cash used in investing activities (40,178) (288,631)
-------------- ----------------
Financing:
Proceeds from long-term debt 1,040 299,874
Principal payments on long-term debt and capital
leases (7,053) (4,526)
Increase in payable to parent 4,184 10,776
Deferred debt financing costs --- (12,701)
Change in investments restricted to finance
interest payments 16,151 17,703
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Cash provided by financing activities 14,322 311,126
-------------- ----------------
Decrease in cash and cash
equivalents (40,911) (23,112)
Cash and cash equivalents, beginning of period 85,884 198,870
-------------- ----------------
Cash and cash equivalents, end of period $ 44,973 $ 175,758
-------------- ----------------
-------------- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying financial statements 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 GST USA's audited consolidated
financial statements for the fiscal year ended December 31, 1998 as included in
GST USA's annual report on Form 10-K/A.
2. TRANSFER OF SUBSIDIARIES
Effective January 1, 1999, GST USA's parent, GST Telecommunications,
Inc. ("GST"), transferred the ownership of GST Action Telcom, Inc. (the
"Transferred Subsidiary") to GST USA. The condensed consolidated financial
statements included herein give effect to such transfer as if the Transferred
Subsidiary was consolidated into GST USA as of the date of acquisition of the
Transferred Subsidiary by GST.
3. BASIC AND DILUTED NET LOSS PER SHARE
GST USA does not have equity instruments that are considered common
stock equivalents, and, as weighted average common shares total only 20
for both June 30, 1999 and December 31, 1998, all of which are owned by
GST, income (loss) per share data is meaningless and is not presented in the
accompanying condensed financial statements.
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<PAGE>
GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------
1999 1998
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<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24,079 $ 27,336
Cash paid for income taxes --- ---
Supplemental schedule of non-cash investing and
financing activities:
Recorded in business combinations:
Assets --- 45,719
Liabilities --- 10,248
Disposition of subsidiary:
Assets (1,373) 35,480
Liabilities 216 4,218
Minority interest --- 12,732
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at end of period 27,220 23,770
Assets acquired through capital leases 1,194 6,043
</TABLE>
5. ACCRUED SEVERANCE
In the fourth quarter of 1998, GST USA accrued $1,113 in severance
related costs. The following table details activity related to the severance
accrual.
<TABLE>
<S> <C>
Accrual at December 31, 1998 $1,113
Payments (737)
Adjustments (61)
------
Accrual at June 30, 1999 $ 315
------
------
</TABLE>
6. ADOPTION OF NEW ACCOUNTING STANDARD
In June 1999, the FASB issued Interpretation No. 43, "Real Estate
Sales," an interpretation of FASB Statement No. 66, "Accounting for Sales of
Real Estate." Interpretation No. 43 clarifies that the phrase ALL REAL ESTATE
SALES, from Paragraph 1 of Statement No. 66, includes sales of real estate
with property improvements or integral equipment that cannot be removed and
used separately from the real estate without incurring significant costs.
This Interpretation applies to all sales of real estate with property
improvements or integral equipment entered into after June 30, 1999. GST USA
is currently evaluating Interpretation No. 43 to determine the impact it will
have on its financial statements.
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 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 GST USA's filings with the
Securities and Exchange Commission, including Amendment No. 5 to Form S-4, as
filed on August 4, 1999 and GST USA's Form 10-K/A for the fiscal year ended
December 31, 1998. 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 Telecommunications, Inc.
("GST"). GST USA was formed to hold the capital stock of the consolidated
operating subsidiaries of GST. GST USA, through its subsidiaries, provides a
broad range of integrated telecommunications products and services, including
enhanced data and Internet services and comprehensive voice services throughout
the United States, with a robust presence in California and the West. GST USA
continues to focus on its western regional strategy by anchoring its next
generation networks in local markets and connecting them via long haul fiber
networks. GST USA's products include local dial tone, long distance, Internet,
data transmission and private line services.
The following table highlights key statistical information about GST USA, as of
June 30, 1999:
<TABLE>
<CAPTION>
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<S> <C>
Access Lines, sold this quarter 52,173
- ------------------------------------------------------- -----------------------------------------------------
Access Lines, installed this quarter 30,696
- ------------------------------------------------------- -----------------------------------------------------
Cities Served 48
- ------------------------------------------------------- -----------------------------------------------------
Route Miles, total 6,823 (87% owned, 13% leased)
- ------------------------------------------------------- -----------------------------------------------------
Fiber Miles, total 307,382 (97% owned, 3% leased)
- ------------------------------------------------------- -----------------------------------------------------
Collocations 92
- ------------------------------------------------------- -----------------------------------------------------
Buildings On-Net 715
- ------------------------------------------------------- -----------------------------------------------------
Class 4/5 Switches Operational 15
- ------------------------------------------------------- -----------------------------------------------------
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<PAGE>
- ------------------------------------------------------- -----------------------------------------------------
Frame Relay Switches Operational 24
- ------------------------------------------------------- -----------------------------------------------------
ATM Switches Operational 35
- ------------------------------------------------------- -----------------------------------------------------
Customers 107,425
- ------------------------------------------------------- -----------------------------------------------------
Interconnection Agreements 13
- ------------------------------------------------------- -----------------------------------------------------
Employees 1,258
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three month and six month periods
ended June 30, 1999 increased $32.4 million, or 82.0%, and $58.0 million, or
83.4%, respectively, over the comparable three and six month periods ended
June 30, 1998. Telecommunications services revenues for the three and six
month periods ended June 30, 1999 increased $13.5 million, or 35.7%, and
$33.0 million, or 49.3%, respectively, over the comparable three and six
month periods ended June 30, 1998. The increase in telecommunications
services revenues resulted from increased local, long distance, data, and
Internet services revenue as GST USA launched new products and entered new
markets. GST USA is bundling these products to provide better access and
services to its customers. In addition, for the six-month period ended June
30, 1999, the increase was also attributable to 1998 strategic acquisitions,
including the acquisition of ICON Communications, Corp. Reciprocal
compensation, which GST USA recognizes based on interconnection agreements,
totaled $1.5 million and $2.2 million for the three and six month periods
ended June 30, 1999, respectively, as compared to $0 for both the three and
six month periods ended June 30, 1998. Construction, facility sales and other
revenue for the three and six month periods ended June 30, 1999 increased
$18.8 million and $24.7 million, respectively, over the comparable three and
six month periods ended June 30, 1998. The increase in construction, facility
sales and other revenue was attributable to revenue from several agreements
to sell or lease conduit and fiber capacity to other carriers. GST USA
anticipates it will record approximately $75.0 million in revenue, related to
three significant transactions, in the third and fourth quarters of 1999.
Product revenue for the three and six month periods ended June 30, 1999
increased $.1 million, or 11.9%,and $.3 million, or 18.0%, respectively, over
the three and six month periods ended June 30, 1998.
OPERATING EXPENSES. Total operating expenses for the three and six
month periods ended June 30, 1999 increased $24.0 million, or 36.7%, and
$52.9 million, or 44.1%, respectively, over the comparable three and six
month periods ended June 30, 1998. Network expenses, which include direct
local and long distance circuit costs, were 64.0% and 64.5%, respectively, of
telecommunications services revenues for the three and six month periods
ended June 30, 1999 compared to 68.4% and 70.2% for the comparable periods in
the previous year. The decrease in network expenses as a percentage of
telecommunications services revenue resulted primarily from an increase in
traffic carried on GST USA's network. Facilities administration
and maintenance expenses for the three and six month periods ended June 30,
1999 were 8.3% and 9.4%, respectively, of telecommunications services
revenues compared to 9.8% and 11.4% for the comparable periods ended June 30,
1998. The decrease in these expenses as a percentage of telecommunications
services revenues primarily results from the inclusion of revenues from
strategic acquisitions, substantially all of which are not generated on GST
USA's networks.
Cost of construction revenues for the three and six month periods
ended June 30, 1999 were $7.0 million and $9.5 million, respectively, an
increase of $6.8 million and $9.3 million over the comparable periods in the
previous year. The increase was caused by the increase in construction,
facility sales and other revenue. For the three and six month periods ended
June 30, 1999, cost of construction revenues were 35.6% and 37.2%,
respectively, of construction revenues, compared to 26.5% for both the three
and six month periods ended June 30, 1998.
Consistent with the comparable periods in 1998, cost of product
revenues for the three and six month periods ended June 30, 1999 were $.7
million and $1.4 million, respectively. For the three and six month periods
ended June 30, 1999 cost of product revenues were 56.6% and 60.3%,
respectively, of product revenues, compared to 68.4% and 73.6% for the
comparable three and six month periods ended June 30, 1998.
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<PAGE>
Selling, general and administrative expenses for the three and six
month periods ended June 30, 1999 increased $4.2 million, or 17.6%, and $10.5
million, or 23.9%, respectively, as compared to the three and six month
periods ended June 30, 1998. The increase is due primarily to the expansion
of GST USA's local and enhanced services operations, which resulted in
additional marketing, management information and sales staff, and to selling,
general and administrative expenses related to companies acquired in 1998. In
addition, GST USA had increased litigation costs related to its legal
proceedings. See "Legal Proceedings" in "Part II: Other Information." As a
percentage of total revenue, selling, general and administrative expenses for
the three and six months ended June 30, 1999 were 39.2% and 42.6%,
respectively, compared to 60.6% and 63.1%, respectively, for the three and
six months ended June 30, 1998.
Depreciation and amortization for the three and six month periods ended
June 30, 1999 increased $5.6 million, or 50.3%, and $13.9 million, or 70.3%,
respectively, as compared to the three and six months periods ended June 30,
1998. The increase is attributable to newly-constructed networks and related
equipment being placed into service and to the amortization of intangible assets
related to companies acquired by GST USA in 1998. 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 23.1% and 26.3% of total revenue for the three and six
months ended June 30, 1999 compared to 28.0% and 28.4% for the comparable three
and six month periods ended June 30, 1998.
OTHER EXPENSES/INCOME. For the three and six month periods ended
June 30, 1999, GST USA recorded net other expense of $19.9 million and $38.1
million, respectively, compared to net other expense of $13.0 million and net
other income of $37.8 million for the comparable three and six month periods
ended June 30, 1998, respectively. For the six months ended June 30, 1998,
net other income includes a $61.3 million gain resulting from GST USA's sale
of its remaining 63% interest in NACT Telecommunications, Inc. (the "Nact
Sale"). Excluding such gain, net other expense would have increased $14.6
million for the six month period ended June 30, 1999 as compared to the same
period in the previous year. The increase in net other expense related
primarily to increased interest expense resulting from the issuance in May,
1998 of $500.0 million principle amount at maturity of 10.5% senior secured
discount notes.
NET INCOME/LOSS. Net loss for the three month period ended June 30,
1999 decreased $1.5 million, or 3.8%, to $37.4 million from $38.9 million for
the three months ended June 30, 1998. Net loss for the six month period ended
June 30, 1999 increased $70.7 million, or 567.2%, to $83.2 million from $12.5
million for the six month period ended June 30, 1998. Excluding the $61.3
million gain on the NACT Sale, net loss would have increased $9.4 million for
the six months ended June 30, 1999 as compared to the six months ended June
30, 1998. Such increase primarily relates to increased interest expense.
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<PAGE>
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK - GST USA has fixed income investments consisting
of cash equivalents, short-term investments in U.S. government debt
instruments, certificates of deposit and commercial paper.
Interest income earned on GST USA's investment portfolio is affected by
changes in the general level of U.S. interest rates. GST USA believes that
it is not exposed to significant changes in fair value because such
investments are classified as available-for-sale and held-to-maturity and
are recorded at amortized cost. The fair value of each investment
approximates its amortized cost, and long-term securities have maturities
of less than two years.
The following table provides information about GST USA's risk exposure
associated with changing interest rates. Currently, GST USA does not use
derivative financial instruments to manage its interest rate risk.
<TABLE>
<CAPTION>
EXPECTED MATURITY
(in thousands of dollars)
-------------------------------------------------------------------------------------------------------
Market
Value at
June 30,
1999 2000 2001 2002 2003 Thereafter Total 1999 (1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate $ 30 $1,077,448 (2) $1,077,478 (2) $1,017,903
Average interest rate 10.0% 12.275%
Variable rate $ 6,189 $17,122 $19,733 $20,427 $21,295 $ 17,087 $ 101,853
Average interest rate
(LIBOR plus) 3.38% 3.26% 3.28% 3.33% 3.34% 3.15%
Capital Leases:
Fixed rate $ 3,161 $ 5,501 $ 2,272 $ 1,833 $ 1,863 $ 8,960 $ 23,590
Average interest rate 12.36% 12.36% 12.36% 12.36% 12.36% 12.36%
</TABLE>
(1) Based on quoted market prices at June 30, 1999
(2) Includes $217.6 million of unaccreted discount
MARKET PRICE RISK - GST USA's risk exposure associated with market price is
limitied to its long-term debt that is publicly traded. Such debt is
recorded at book value, which could vary from current market prices.
-10-
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GST AND GST TELECOM V. GLOBAL LIGHT TELECOMMUNICATIONS, INC., ET AL.
On October 20, 1998, GST Telecommunications, Inc. ("GST") and GST USA's
subsidiary, GST Telecom, Inc. ("GST Telecom") (collectively, the "GST
Companies") filed a complaint in the Superior Court of California, County of
Santa Clara, No. CV777408, against GST Global Telecommunications, Inc., now
known as Global Light Telecommunications, Inc. ("Global") and six former GST
officers and directors. The complaint includes claims for fraud, negligent
misrepresentation, unjust enrichment, and unfair competition primarily related
to the alleged misappropriation of a Mexican business opportunity. The complaint
seeks an accounting, a constructive trust, and restitution of the GST Companies'
interest in the opportunity and also seeks unspecified exemplary and punitive
damages and reimbursement of attorneys' fees.
In particular, the complaint alleges that Global and the individual
defendants misappropriated the GST Companies' joint venture interest in Bestel,
the owner of a 2,270 kilometer fiber optic telecommunications network in Mexico.
The lawsuit alleges that the individual defendants caused the GST Companies' 49%
interest in Bestel to be transferred to Global, then a shell corporation in
which the individuals, had secretly invested. No written agreement validated the
transfer. The GST Companies therefore seek return of the asset and monetary
compensation to remedy the loss arising from the wrongful transfer.
On December 23, 1998, the defendants filed a motion to stay or dismiss
the action on grounds of inconvenient forum. The Superior Court granted the
defendants' motion to stay the proceedings on February 5, 1999, and the GST
Companies filed a notice of appeal on February 9, 1999.
On July 12, 1999, the GST Companies entered into a tentative settlement
with Global Light Telecommunications, W. Gordon Blankstein, Ian Watson, and
Peter E. Legault (the "Global Parties"). Pursuant to the terms of that
settlement, the Global Parties will dismiss with prejudice all claims asserted
against GST, its affiliates, officers and directors, and the GST Companies will
dismiss with prejudice all claims against the Global Parties with the exception
of the claims asserted in GST v. Gordon Blankstein, et al. relating to the
allegedly wrongful release of escrowed shares. In consideration of the GST
Companies' dismissals, the Global Parties will pay the GST Companies the sum of
US$27 million on September 15, 1999. Additionally, if the average closing price
of Global Light Telecommunications stock on the American Stock Exchange for the
twenty trading days preceding September 15, 1999, equals or exceeds US$10 per
share, the Global parties shall, on September 15, 1999, make an additional
payment of US$3 million.
The settlement agreement is subject to the preparation and execution of
customary settlement agreements, regulatory approvals, and the funding and
payment of the settlement amount by the Global Parties.
WARTA V. GST, GST USA AND GST TELECOM AND COUNTERCLAIMS
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<PAGE>
On January 25, 1999, John Warta filed a complaint in the Superior Court
of Washington, King County, No. 99-2-02287-4SEA, against GST, GST USA, and GST
Telecom (collectively, the "GST Companies"). The complaint, which relates to the
circumstances under which Mr. Warta ceased to serve as an officer and director
of the GST Companies, includes claims for breach of employment agreement, breach
of the covenant of good faith and fair dealing, violation of wage statutes, and
indemnity.
On February 23, 1999, the GST Companies answered by denying all
liability and filed counterclaims against Mr. Warta, Global and five other
former officers and directors for liability with respect to the matters leading
to the termination of Mr. Warta's employment. In particular, the GST Companies
seek recovery under Washington law for breaches committed with respect to the
wrongful use of the GST Companies' funds for the purchase of telecommunications
licenses by Mr. Warta through companies he owns and other matters.
See "GST and GST Telecom v. Global Light Telecommunications,
Inc., et al." for a discussion of a tentative settlement as it relates to
the counterclaims against Global and Messrs. Blankstein, Watson and Legault.
GST V. SANDER
On February 9, 1999, GST filed a complaint in the Superior Court for
the State of Washington, Clark County, No. 99-2-00573-6, against Clifford
Sander, the former treasurer of GST. The complaint, which is based on Mr.
Sander's alleged misconduct as an officer of GST, includes claims for fraud,
breach of fiduciary duty, unjust enrichment, and unfair business practices, and
seeks an accounting, imposition of a constructive trust, compensatory damages,
costs of suit, attorneys' fees, and treble damages. In particular, the complaint
seeks relief based on Mr. Sander's misuse of insider information in the purchase
of stock, wrongful disbursements to third parties, and involvement in a
fraudulent release of stock from escrow to three former directors and/or
officers of GST. Mr. Sander has not yet responded to the complaint. On May 5,
1999, the court transferred this action to King County, Superior Court in
Seattle.
GLOBAL AND MEXTEL V. GST AND GST TELECOM
On January 27, 1999, Global and GST Mextel, Inc. ("Mextel") filed a
complaint in the Supreme Court of British Columbia, No. C990449, against GST and
GST Telecom (collectively, the "GST Companies"). The complaint, which arises
from the same matters for which GST and GST Telecom brought suit against Global
et al. in the Superior Court of California, includes claims for declaratory and
injunctive relief to confirm the ownership of the Mexican business opportunity
by Global, and unspecified general and special damages. In particular, Global
seeks a declaration from the court that it is entitled to retain the equity
interest in Bestel, or at least a judicial determination of the amount Global
owes the GST Companies. The GST Companies have denied all liability and have
asserted counterclaims for damages and for a constructive trust in the Bestel
opportunity.
See "GST and GST Telecom v. Global Light Telecommunications, Inc., et
al." for a discussion of a tentative settlement.
IRWIN ET AL. V. GST ET AL.
-12-
<PAGE>
On January 28, 1999, Messrs. Stephen Irwin, Robert Hanson, Peter
Legault, Clifford Sander, and John Warta, all former GST officers or directors,
filed a complaint in the Supreme Court of British Columbia, No. C990488, against
GST, GST Telecom, and four current GST directors (collectively, the "GST
Parties"). The complaint, which arises from the same matters for which GST and
GST Telecom brought suit against Global et al. in the Superior Court of
California, includes claims for oppression and declaratory relief, and seeks
unspecified actual and punitive damages, cost, and attorneys' fees. In
particular, the plaintiffs have asked the court to declare that the plaintiffs
may retain the Global stock they purchased while fiduciaries of GST and seek to
have the Canadian court enjoin the GST Parties from pursuing its claims against
them. The GST Parties will vigorously dispute the allegations in the complaint.
See "GST and GST Telecom v. Global Light Telecommunications, Inc., et al."
for a discussion of a tentative settlement as it relates to Mr. Legault and
the GST Parties.
GST V. GORDON BLANKSTEIN, ET AL
On June 4, 1999, GST commenced an action in the Supreme Court of British
Columbia, No. C992879, against Gordon Blankstein, Robert Blankstein, Ian Watson
and Clifford Sander seeking a constructive trust over the proceeds of 750,000
shares of GST stock wrongfully removed from an escrow account by Messrs.
Blankstein, Blankstein and Watson, with the assistance of Mr. Sander. The
defendants have not responded yet to the lawsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
-13-
<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 16, 1999 GST USA, INC.
(Registrant)
/s/ Daniel L. Trampush
-------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief Financial
Officer)
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from GST USA's
Form 10-Q for the quarter ended June 30,1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 44,973,000
<SECURITIES> 35,272,000
<RECEIVABLES> 45,085,000
<ALLOWANCES> (3,043,000)
<INVENTORY> 1,454,000
<CURRENT-ASSETS> 144,825,000
<PP&E> 825,215,000
<DEPRECIATION> (82,919,000)
<TOTAL-ASSETS> 1,096,111,000
<CURRENT-LIABILITIES> 465,456,000
<BONDS> 824,607,000
65,603,000
0
<COMMON> 240,212,000
<OTHER-SE> (334,568,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,096,111,000
<SALES> 127,604,000
<TOTAL-REVENUES> 127,604,000
<CGS> 75,293,000
<TOTAL-COSTS> 172,710,000
<OTHER-EXPENSES> (4,988,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,077,000
<INCOME-PRETAX> (83,195,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (83,195,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,195,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
