<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 March 31, 1999
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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) 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
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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 May 12, 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:
Consolidated Condensed Balance Sheets - March 31,
1999 and December 31, 1998 2
Consolidated Condensed Statements of Operations
- Three Months Ended March 31, 1999 and
1998 3
Consolidated Condensed Statements of Cash Flows
- Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Condensed Financial
Statements 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE) 7-11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13-14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
</TABLE>
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GST USA, Inc.
Consolidated Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1999 DECEMBER 31, 1998
-------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 48,348 $ 85,884
Restricted investments 34,681 34,107
Accounts receivable, net 39,037 32,935
Investments 46 46
Inventory, net 1,554 1,166
Prepaid and other current assets 17,801 11,635
--------------------- -------------------
Total current assets 141,467 165,773
--------------------- -------------------
Restricted investments 185,571 247,257
Property and equipment 754,806 678,374
less accumulated depreciation (74,266) (62,522)
--------------------- -------------------
680,540 615,852
Other assets 138,671 138,773
less accumulated amortization (44,251) (38,877)
--------------------- -------------------
94,420 99,896
--------------------- -------------------
Total assets $ 1,101,998 $ 1,128,778
===================== ===================
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 22,621 $ 26,229
Accrued expenses 41,470 36,621
Payable to parent 355,890 354,679
Deferred revenue 7,864 6,030
Current portion of capital lease obligations 5,271 5,649
Current portion of long-term debt 11,935 12,127
--------------------- -------------------
Total current liabilities 445,051 441,335
--------------------- -------------------
Capital lease obligations, less current portion 18,934 19,741
Long-term debt, less current portion 935,165 919,075
Shareholder's deficit:
Common shares 78,462 78,462
Accumulated deficit (375,614) (329,835)
--------------------- -------------------
(297,152) (251,373)
--------------------- -------------------
Total liabilities and shareholder's deficit $ 1,101,998 $ 1,128,778
===================== ===================
</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
GST USA, Inc.
Consolidated Condensed Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------------------
1999 1998
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<S> <C> <C>
Revenues:
Telecommunications services $ 48,724 $ 29,180
Construction, facility sales and other 5,876 ---
Product 1,082 864
----------------- ----------------
Total revenues 55,682 30,044
----------------- ----------------
Operating costs and expenses:
Network expenses 31,699 21,128
Facilities administration and maintenance 5,135 3,955
Cost of construction revenues 2,514 ---
Cost of product revenues 695 689
Selling, general and administrative 26,246 19,964
Depreciation and amortization 16,971 8,661
----------------- ----------------
Total operating costs and expenses 83,260 54,397
----------------- ----------------
Loss from operations (27,578) (24,353)
----------------- ----------------
Other expenses (income):
Interest income (3,858) (4,933)
Interest expense, net of amounts capitalized 21,866 15,432
Gain on sale of subsidiary shares --- (61,266)
Other 193 28
----------------- ----------------
18,201 (50,739)
----------------- ----------------
(Loss) income before income taxes (45,779) 26,386
Income tax expense --- ---
----------------- ----------------
Net (loss) income $ (45,779) $ 26,386
================= ================
</TABLE>
See notes to consolidated condensed financial statements.
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GST USA, Inc.
Consolidated Condensed Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------------------
1999 1998
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<S> <C> <C>
Operations:
Net (loss) income $ (45,779) $ 26,386
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 18,225 9,684
Accretion and accrual of interest 11,789 5,870
Non-cash stock compensation and other expense 156 943
Loss (gain) on disposal of assets 359 (239)
Gain on sale of subsidiary shares --- (61,266)
Changes in non-cash operating working capital:
Accounts receivable, net (6,102) (2,788)
Inventory (388) (190)
Prepaid, other current and other assets,
net (6,166) 1,841
Accounts payable and accrued liabilities 4,823 12,871
Deferred revenue 1,834 (100)
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Cash used in operations (21,249) (6,988)
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Investments:
Acquisition of subsidiaries, net of cash acquired --- (12,418)
Purchase of property and equipment (75,908) (39,385)
Proceeds from sale of property and equipment --- 750
Purchase of other assets (147) (89)
Change in investments restricted for the
purchase of property and equipment 61,897 8,011
Proceeds from the sale of subsidiary shares, net --- 85,048
Cash disposed of in sale of subsidiary --- (5,252)
-------------- ----------------
Cash (used in) provided by
investing activities (14,158) 36,665
-------------- ----------------
Financing:
Proceeds from long-term debt 316 ---
Principal payments on long-term debt and capital
leases (2,715) (2,470)
Deferred debt financing costs --- (1,527)
Change in investments restricted to finance
interest payments (785) 1,242
Increase in payable to parent 1,055 13,321
-------------- ----------------
Cash (used in) provided by financing
activities (2,129) 10,566
-------------- ----------------
(Decrease) increase in cash and cash
equivalents (37,536) 40,243
Cash and cash equivalents, beginning of period 85,884 198,796
-------------- ----------------
Cash and cash equivalents, end of period $ 48,348 $ 239,039
============== ================
</TABLE>
See notes to consolidated condensed financial statements.
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GST USA, INC.
NOTES TO CONSOLIDATED CONDENSED 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.
2. TRANSFER OF SUBSIDIARY
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 consolidated condensed 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 and 10 for
March 31, 1999 and December 31, 1998, respectively, 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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GST USA, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 1998
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<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,538 $ 4,191
Cash paid for income taxes --- ---
Supplemental schedule of non-cash investing and
financing activities:
Recorded in business combinations:
Assets --- 17,378
Liabilities --- 4,960
Disposition of subsidiary:
Assets --- 35,480
Liabilities --- 4,218
Minority interest --- 12,732
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at end of period 22,363 20,027
Assets acquired through capital leases 543 3,289
</TABLE>
5. ADOPTION OF NEW ACCOUNTING STANDARD
GST USA adopted Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (SOP 98-5) on January 1, 1999. SOP 98-5 requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred and that previously capitalized costs related to such
activities be expensed as cumulative effect of a change in accounting
principle upon adoption. Adoption of SOP 98-5 did not have a material effect
on results of operations for the three month period ended March 31, 1999.
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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. 3 to GST's Form S-4
as filed on May 3, 1999 and GST USA's Form 10-K 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") and 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, primarily
to business customers located in California, Hawaii and other western
continental states. As a facilities-based integrated communications provider
("ICP"), GST USA operates state-of-the-art, digital telecommunications
networks that represent an alternative to incumbent local exchange carriers
("ILECs"). GST USA's full line of products, which offer a "one-stop"
customer-focused solution to the telecommunications services requirements of
its customers, include local dial tone, long distance, Internet, data
transmission and private line services. With the turn-up of its Virtual
Integrated Transport and Access ("VITA") network in the fiscal year ended
December 31, 1998 ("Fiscal 1998"), GST USA became one of the first ICPs to
develop and deploy a converged network. At March 31, 1999, the VITA network
was operational in 18 of the Company's markets, positioning GST USA for
deployment of advanced Internet Protocol ("IP") services in those markets.
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three month period ended March 31, 1999
increased $25.7 million, or 85.3%, to $55.7 million from $30.0 million for the
comparable three months ended March 31, 1998. Telecommunications services
revenues for the three month period ended March 31, 1999 increased $19.5
million, or 67.0%, to $48.7 million from $29.2 million for the comparable
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<PAGE>
three months ended March 31, 1998. The increase in telecommunications
services revenues resulted primarily from strategic acquisitions, including
the acquisition of ICON Communications Corp. in April 1998, and from
increased local service revenue generated by GST USA's networks. To a lesser
extent, the increase in telecommunications services revenues resulted from
increased long distance, Internet, and data services. Construction, facility
sales and other revenue was $5.9 million and $0 for the three month periods
ended March 31, 1999 and 1998, respectively. The increase was attributable to
revenue from the construction of network and fiber systems. Product revenue
for the three month period ended March 31, 1999 increased $0.2 million, or
25.2%, to $1.1 million from $0.9 million for the three month period ended
March 31, 1998.
OPERATING EXPENSES. Total operating expenses for the three month
period ended March 31, 1999 increased $28.9 million, or 53.1%, to $83.3
million from $54.4 million for the three month period ended March 31, 1998.
Network expenses, which include direct local and long distance circuit costs,
increased $10.6 million, or 50.0%, to $31.7 million, or 65.1% of
telecommunications services revenues for the three month period ended March
31, 1999 compared to $21.1 million, or 72.4% for the comparable three month
period ended March 31, 1998. The decrease in network expenses as a percentage
of telecommunications services revenue resulted from the inclusion of
strategic acquisitions and an increase in revenues for traffic carried on GST
USA's network. Facilities administration and maintenance expenses for the
three month period ended March 31, 1999 increased $1.1 million, or 29.8%, to
$5.1 million, or 10.5% of telecommunications services revenues compared to
$4.0 million, or 13.6% for the comparable three month period ended March 31,
1998. The decrease in these expenses as a percentage of telecommunications
services revenues resulted from the inclusion of revenues from strategic
acquisitions, substantially all of which are not generated on GST USA's
networks.
Cost of construction revenue was $2.5 million and $0 for the three
month periods ended March 31, 1999 and 1998, respectively. The increase was
attributable to new construction of network and fiber systems.
Cost of product revenues was $0.7 million in each of the three month
periods ended March 31, 1999 and 1998. For the three month period ended March
31, 1999 cost of product revenues were 64.2% of product revenues, compared to
79.7% for the comparable three month period ended March 31, 1998.
Selling, general and administrative expenses for the three month period
ended March 31, 1999 increased $6.2 million, or 31.5%, to $26.2 million from
$20.0 million for the three month period ended March 31, 1998. The increase is
due 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. As a percentage of total revenue, selling, general and administrative
expenses for the three months ended March 31, 1999 were 47.1%, compared to 66.4%
for the three months ended March 31, 1998.
Depreciation and amortization for the three month period ended March
31, 1999 increased $8.3 million, or 95.9%, to $17.0 million from $8.7 million
for the three months ended March 31, 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 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 30.5% of total
revenue for the three months ended March 31, 1999 compared to 28.8% for the
comparable three month period ended March 31, 1998.
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OTHER EXPENSES/INCOME. For the three month period ended March 31,
1999, GST USA recorded net other expense of $18.2 million, compared to net
other income of $50.7 million for the comparable three month period ended
March 31, 1998. For the three months ended March 31, 1998, net other income
includes a $61.3 million gain resulting from the sale of the Company majority
interest in NACT (the "NACT Sale"). Excluding such gain, net other expense
would have increased $7.7 million for the three month period ended March 31,
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 $500.00 million principal amount at maturity of
10.5% senior secured discount notes (the "1998 Notes").
NET INCOME/LOSS. Net income (loss) for the three months ended March
31, 1999 decreased $72.2 million, or 273.5%, to ($45.8) million from $26.4
million for the three months ended March 31, 1998. Excluding the $61.3
million gain on the NACT Sale, net loss would have been $34.9 million for the
three months ended March 31, 1998. Excluding the gain on the NACT Sale, net
loss would have increased $10.9 million for the three months ended March 31,
1999 as compared to the three months ended March 31, 1998. Such increase in
net loss resulted primarily from a $6.4 million increase in interest expense
and a $28.9 million increase in operating expenses and was partially offset
by a $25.7 million increase in revenues.
LIQUIDITY AND CAPITAL RESOURCES
GST, GST USA, GST Network Funding, Inc. and GST Equipment Funding,
Inc. (collectively, the "GST Companies") are parties to certain indentures
and have issued or guaranteed notes governed by those indentures. In November
1998, the GST Companies notified United States Trust Company of New York, as
trustee under the indentures, that certain actions by GST and its
subsidiaries may not have been in compliance with the technical requirements
of certain restrictive covenants contained in the indentures. In particular,
the GST Companies disclosed that a series of transactions involving Global
may have resulted in technical non-compliances with the indentures. The GST
Companies are currently conducting a review of the relevant transactions and
intends to vigorously pursue any necessary action to cure the potential
non-compliances. GST has initiated litigation against Global and others in an
effort to cure any technical covenant violations that may have resulted from
the transactions involving Global. See Item 1, "Legal Proceedings."
In February 1999, the trustee informed the note holders of the
potential violations. Pursuant to the definitions contained within the
indentures of each of the notes described above, no default has been declared
and no event of default has occurred. GST USA has not classified the related
debt obligations as current in its consolidated financial statements because
management believes it is probable that, in the event that the holders
declared a default, GST USA would be able to take corrective actions to cure
any objectively determinable violations within the prescribed grace period.
While GST USA believes that any non-compliances can be cured, GST
USA cannot offer any assurance that the litigation will be successful or that
any other potential cures will be effected in a timely manner or be
sufficient. In the event that the GST Companies have violated its indentures
and does not cure the violations, the holders of the notes issued under the
indentures could demand repayment of the notes, discontinue disbursements of
cash proceeds of the most recent notes and assert other remedies against the
GST Companies. If any of these events occurred, the GST Companies would not
have sufficient liquid assets to repay the notes.
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Other discussion of Liquidity and Capital Resources is omitted
pursuant to "General Instruction H(1)(a) and (b) of Form 10-Q."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments,
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including certain derivative instruments embedded in other contracts. Under
SFAS No. 133, entities are now required to carry all derivative instruments in
the balance sheet at fair value. The accounting for changes in fair value (i.e.,
gains and losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. GST USA must adopt SFAS No. 133 by January 1, 2000. GST
USA has not determined the impact that SFAS No. 133 will have on its financial
statements and believes that such determination will not be meaningful until
closer to the date of initial adoption.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 and certificates of deposit.
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 composed of U.S. Government debt instruments, certificates of
deposit and commercial paper and the maturities are predominantly short-term.
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
March 31,
1999 2000 2001 2002 2003 Thereafter Total 1999 (1)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate 185 $1,077,448(2) $1,077,633(2) $955,714
Average interest rate 8.5% 12.275%
Variable rate $ 9,106 $17,072 $19,631 $20,318 $21,179 $ 16,739 $ 104,045
Average interest rate (LIBOR plus) .37% 3.26% 3.28% 3.33% 3.34% 3.15%
Capital Leases:
Fixed rate $ 4,925 $ 5,499 $ 2,383 $ 1,974 $ 1,981 $ 7,434 $ 24,196
Average interest rate 12.36% 12.36% 12.36% 12.36% 12.36% 12.36%
</TABLE>
(1) Based on quoted market prices at March 31, 1999
(2) Includes $234.6 million of unaccreted discount
MARKET PRICE RISK - GST USA has risk exposure associated with the market
price on its publicly traded long-term debt. These bonds are recorded at book
value, which could vary from current market prices.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GST TELECOMMUNICATIONS, INC. AND GST TELECOM, INC. V. GLOBAL LIGHT
TELECOMMUNICATIONS, INC., ET AL.
On October 20, 1998, GST and GST Telecom 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 GST's 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 GST's 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 Company's 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. GST therefore seeks return of the asset and monetary
compensation to remedy the loss arising from the wrongful transfer.
On December 23, 1998, Defendants filed a motion to stay or dismiss the
action on grounds of inconvenient forum, and four of the individual defendants
filed a motion to dismiss the action for lack of personal jurisdiction. The
Superior Court granted Defendants' motion to stay the proceedings on February 5,
1999, and GST and GST Telecom filed a notice of appeal on February 9, 1999.
WARTA V. GST, GST USA, AND GST TELECOM AND COUNTERCLAIMS
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. The Complaint, which relates to the circumstances under
which Mr. Warta ceased to serve as an officer and director of GST, 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, GST 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, GST seeks recovery
under Washington law for matters described in GST AND TELECOM V. GLOBAL, ET.
AL, above, as well as for breaches committed with respect to the wrongful use
of GST funds for the purchase of telecommunications licenses by Mr. Warta
through companies he owns.
GST, GST USA AND GST TELECOM V. IRWIN AND OLSHAN
On December 16, 1998, GST, GST USA and Telecom filed a Complaint in the
United States District Court, Southern District of New York, No. 98 CIV. 8865,
against Stephen Irwin
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and the law firm of Olshan Grundman Frome & Rosenzweig LLP ("Olshan"). The
Complaint, which relates to Mr. Irwin and Olshan's representation of GST, GST
USA and GST Telecom in various matters, includes claims for professional
negligence, breach of fiduciary duty, and breach of contract, and seeks
compensatory damages and reimbursement of attorneys' fees.
On February 12, 1999, Mr. Irwin filed his Answer to the Complaint.
Olshan filed its Answer and Counterclaims to the Complaint on February 17, 1999.
Olshan counterclaimed against GST, GST USA and GST Telecom for breach of
contract, unjust enrichment, quantum meruit, and "account stated," based on
invoices submitted to GST of approximately $250,000. No trial date has been set.
GST V. SANDER
On February 9, 1999, the 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. By order of the Court, this
lawsuit will be transferred to King County, Washington, Superior Court. Mr.
Sander has not yet responded to the Complaint.
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. 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 GST. GST intends to vigorously
dispute the allegations in the Complaint.
IRWIN ET AL. V. GST ET AL.
On January 28, 1999, 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. 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
GST from pursuing its claims against them. GST and its directors will
vigorously dispute the allegations in the Complaint.
-14-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
-15-
<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: MAY 17, 1999 GST USA, INC.
------------ (Registrant)
/s/ DANIEL L. TRAMPUSH
--------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
16
<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 March 31, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 48,347,806
<SECURITIES> 34,681,190
<RECEIVABLES> 41,451,117
<ALLOWANCES> (2,607,431)
<INVENTORY> 1,554,117
<CURRENT-ASSETS> 141,467,441
<PP&E> 754,806,240
<DEPRECIATION> (74,266,447)
<TOTAL-ASSETS> 1,101,998,228
<CURRENT-LIABILITIES> 445,050,546
<BONDS> 842,869,044
0
0
<COMMON> 0
<OTHER-SE> (297,151,404)
<TOTAL-LIABILITY-AND-EQUITY> 1,101,998,228
<SALES> 55,681,876
<TOTAL-REVENUES> 55,681,876
<CGS> 34,908,592
<TOTAL-COSTS> 83,259,737
<OTHER-EXPENSES> (3,665,606)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,866,372
<INCOME-PRETAX> (45,778,627)
<INCOME-TAX> 0
<INCOME-CONTINUING> (45,778,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,778,627)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
