<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 September 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
- --------------------------------------------------------------------------------
(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 November 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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PART I: FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets - September 30,
1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations - Three Months
Ended September 30, 1999 and 1998 and Nine Months Ended
September 30, 1999 and 1998
3
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 1999 and 1998
4
Notes to Condensed Consolidated Financial
Statements 5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE 9-13
NARRATIVE)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15-16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
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<PAGE>
GST USA, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998 (1)
-------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 44,861 $ 85,884
Restricted investments 36,496 34,107
Accounts receivable, net 72,161 32,935
Investments 46 46
Inventory, net 1,204 1,485
Prepaid and other current assets 25,133 11,316
--------------------- -------------------
Total current assets 179,901 165,773
--------------------- -------------------
Restricted investments 56,105 247,257
Property and equipment 904,963 678,374
less accumulated depreciation (96,943) (62,522)
--------------------- -------------------
808,020 615,852
Other assets 136,663 138,773
less accumulated amortization (53,009) (38,877)
--------------------- -------------------
83,654 99,896
--------------------- -------------------
Total assets $ 1,127,680 $ 1,128,778
===================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 25,207 $ 26,229
Accrued expenses 60,606 36,621
Payable to parent 359,810 354,679
Deferred revenue 14,614 6,030
Current portion of capital lease obligations 5,887 5,649
Current portion of long-term debt 15,461 12,127
--------------------- -------------------
Total current liabilities 481,585 441,335
--------------------- -------------------
Capital lease obligations, less current portion 16,052 19,741
Long-term debt, less current portion 961,642 919,075
Shareholders' deficit:
Common shares 78,462 78,462
Accumulated deficit (410,061) (329,835)
--------------------- -------------------
(331,599) (251,373)
--------------------- -------------------
Total liabilities and shareholders' deficit $ 1,127,680 $ 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)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 50,424 $ 39,091 $ 150,362 $ 106,008
Construction, facility sales and other 45,555 3,250 70,982 4,006
Product 1,342 1,493 3,581 3,391
------------- ------------ ------------ ------------
Total revenues 97,321 43,834 224,925 113,405
------------- ------------ ------------ ------------
Operating costs and expenses:
Network expenses 32,295 27,933 96,770 74,886
Facilities administration and maintenance 5,348 4,201 14,748 11,857
Cost of construction revenues 16,722 300 26,190 500
Cost of product revenues 689 810 2,039 2,207
Selling, general and administrative 29,340 23,981 83,747 67,887
Depreciation and amortization 18,669 12,414 52,279 32,144
------------- ------------ ------------ ------------
Total operating costs and expenses 103,063 69,639 275,773 189,481
------------- ------------ ------------ ------------
Loss from operations (5,742) (25,805) (50,848) (76,076)
------------- ------------ ------------ ------------
Other expenses (income):
Interest income (2,035) (7,483) (8,507) (19,201)
Interest expense, net of amounts capitalized 21,255 21,649 64,332 56,337
Gain on sale of subsidiary shares --- --- --- (61,266)
Other (27,931) 16,294 (26,447) 16,788
------------- ------------ ------------ ------------
(8,711) 30,460 29,378 (7,342)
------------- ------------ ------------ ------------
Income (loss) before income taxes 2,969 (56,265) (80,226) (68,734)
------------- ------------ ------------ ------------
Income tax expense --- --- --- ---
------------- ------------ ------------ ------------
Net income (loss) $ 2,969 $ (56,265) $ (80,226) $ (68,734)
============= ============ ============ ============
</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>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------------
1999 1998
-------------- ----------------
<S> <C> <C>
Operations:
Net loss $ (80,226) $ (68,734)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization 56,457 36,087
Accretion and accrual of interest 34,671 25,360
Non-cash stock compensation and other expense 1,662 1,123
Loss on disposal of assets 3,430 38
Gain on sale of subsidiary shares --- (61,266)
Reserve on long term assets --- 15,668
Changes in non-cash operating working capital:
Accounts receivable, net (39,395) (15,165)
Inventory 281 (508)
Prepaid, other current and other assets,
net (14,307) 2,013
Accounts payable and accrued liabilities 32,526 6,526
Deferred revenue 8,584 6,326
-------------- ----------------
Cash provided by (used in) operations 3,683 (52,532)
-------------- ----------------
Investments:
Acquisition of subsidiaries, net of cash acquired --- (35,471)
Proceeds from sale of investments --- 327
Purchase of property and equipment (227,858) (146,672)
Proceeds from sale of assets 1,500 3,562
Purchase of other assets (340) (2,688)
Change in investments restricted for the
purchase of property and equipment 173,148 (237,685)
Proceeds from the sale of subsidiary shares, net --- 85,048
Cash disposed of in sale of subsidiary --- (5,252)
-------------- ----------------
Cash used in investing activities (53,550) (338,831)
-------------- ----------------
Financing:
Proceeds from long-term debt 1,782 300,562
Principal payments on long-term debt and capital
leases (12,022) (21,421)
Increase in payable to parent 3,469 12,764
Deferred debt financing costs --- (12,614)
Change in investments restricted to finance
interest payments 15,615 16,682
-------------- ----------------
Cash provided by financing activities 8,844 295,973
-------------- ----------------
Decrease in cash and cash
equivalents (41,023) (95,390)
Cash and cash equivalents, beginning of period 85,884 198,870
-------------- ----------------
Cash and cash equivalents, end of period $ 44,861 $ 103,480
============== ================
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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 ("GAAP") 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
September 30, 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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<PAGE>
GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 27,462 $ 30,556
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 2,579 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 28,560 24,560
Assets acquired through capital leases 1,590 9,347
</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 September 30, 1999
$315
=======
</TABLE>
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<PAGE>
GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. While
GST USA is still evaluating the full effect of the new interpretation, it
anticipates that FIN 43 will impact revenue recognition for all dark fiber
and conduit lease and sale transactions entered into after June 30, 1999.
7. RECENT DEVELOPMENTS
A. The following table details a measurement and reporting structure
recently adopted by GST USA's chief operating decision makers for the three
and nine month periods ended September 30, 1999 and 1998.
Revenues and Adjusted EBITDA by Operational Category
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
------------------------------ ------------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Core ICP $ 26,158 $ 1,245 $ 10,116 $ (5,493)
Acquisition and legacy 24,572 (3,053) 29,562 (2,633)
Product and facility sales 46,591 29,001 4,156 2,969
Corporate overhead costs --- (13,663) --- (7,904)
------------- ------------- ------------ ------------
Total $ 97,321 $ 13,530 $ 43,834 $ (13,061)
============= ============= ============ ============
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
----------------------------- -----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Core ICP $ 66,649 $ (705) $ 25,462 $ (14,960)
Acquisition and legacy 84,844 (3,517) 80,896 (8,317)
Product and facility sales 73,432 45,087 7,047 4,301
Corporate overhead costs --- (36,647) --- (22,752)
------------- ------------ ------------ ------------
Total $ 224,925 $ 4,218 $ 113,405 $ (41,728)
============= ============ ============ ============
</TABLE>
-7-
<PAGE>
GST USA categorizes its operations as follows: 1) Core ICP
operations (also known as "CLEC cities"); 2) Acquisition and Legacy; 3)
Product and Facility Sales; and 4) Corporate Overhead Costs. Core ICP
operations includes those markets where GST USA has both switching and
network assets deployed. The acquisition and legacy category encompasses
those business operations acquired by GST USA that do not prominently feature
facilities-based service. Product and facility sales are attributable to
several agreements to lease, construct or sell conduit and fiber to other
carriers. Corporate overhead costs include costs related to engineering,
information management, sales, marketing, management and other support
functions.
Adjusted EBITDA consists of loss before interest, income taxes,
depreciation and amortization, minority interest, gains and losses on the
disposition of assets and non-cash charges. Management believes that Adjusted
EBITDA provides a meaningful measure of operating cash flow (without the
effects of working capital changes) for the continuing operations of GST USA
by excluding the effects of non-cash expenses and non-operating activities.
However, Adjusted EBITDA should not be used as an alternative to operating
loss and net loss as determined in accordance with GAAP.
B. Reference is made to "Recent Developments" in "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
GST USA's annual report on Form 10-K/A for the fiscal year ended December 31,
1998 in which GST USA disclosed potential technical violations of certain debt
covenants. On September 16, 1999, GST USA received $30.0 million from Global
Light Telecommunications, Inc. and others in connections with the settlement
of various lawsuits. See "Legal Proceedings" in Part II: Other Information.
As a result, GST USA believes that there is currently no basis on which the
noteholders could declare a default under the indentures relating to GST
USA's debt issuances.
-8-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains "forward-looking statements" within
the meaning of the securities laws. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond GST
USA's control. All statements included in this Quarterly Report, other than
statements of historical facts, are forward-looking statements, including the
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding GST USA's strategy, future operations,
financial position, projected costs, prospects, plans and objectives of
management.
Certain statements contained in this Quarterly Report, including
without limitation, statements containing the words "will," "anticipate,"
"believe," "intend," "estimate," "expect," "project" and words of similar
import, constitute forward-looking statements, although not all
forward-looking statements contain such identifying words. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause GST USA's actual results, performance or
achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other factors include, among others, the following:
- - the significant amount of GST USA's indebtedness;
- - GST USA's limited operating history and expectation of operating losses;
- - the availability and terms of the significant additional capital required
to fund GST USA's expansion;
- - the extensive competition GST USA expects to face in each of its markets;
- - GST USA's dependence on sophisticated information and processing systems;
- - GST USA's ability to manage growth;
- - GST USA's ability to access markets and obtain any required governmental
authorizations, franchises and permits, in a timely manner, at reasonable
costs and on satisfactory terms and conditions;
- - technological change; and
- - changes in, or the failure to comply with, existing government regulations.
All forward-looking statements speak only as of the date of this Quarterly
Report. GST USA does not undertake any obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise. Although GST USA believes that its plans, intentions and
expectations reflected in or suggested by the forward-looking statements made in
this Quarterly Report are reasonable, GST USA can give no assurance that such
plans, intentions or expectations will be achieved. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements.
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<PAGE>
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
September 30, 1999:
<TABLE>
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<S> <C>
Access Lines, sold this quarter 38,712
- ---------------------------------------------------------------------------------------
Access Lines, installed this quarter 30,887
- ---------------------------------------------------------------------------------------
Cities Served 49
- ---------------------------------------------------------------------------------------
Route Miles, total 6,808 (87% owned, 13% leased)
- ---------------------------------------------------------------------------------------
Fiber Miles, total 389,162 (98% owned, 2% leased)
- ---------------------------------------------------------------------------------------
Collocations 98
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Class 4/5 Switches Operational 15
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Frame Relay Switches Operational 23
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ATM Switches Operational 37
- ---------------------------------------------------------------------------------------
Customers 96,527
- ---------------------------------------------------------------------------------------
Interconnection Agreements 12
- ---------------------------------------------------------------------------------------
Employees 1,297
- ---------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three month and nine month periods
ended September 30, 1999 increased $53.5 million, or 122.0%, and $111.5
million, or 98.3%, respectively, over the comparable three and nine month
periods ended September 30, 1998. Telecommunications services revenues for
the three and nine month periods ended September 30, 1999 increased $11.3
million, or 29.0%, and $44.4 million, or 41.8%, respectively, over the
comparable three and nine month periods ended September 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 bundles these products to
provide better access and services to its customers. In addition, for the
nine month period ended September 30, 1999, the increase was also
attributable to 1998 strategic acquisitions, including the acquisition of
ICON Communications Corporation. Reciprocal compensation, which GST USA
recognizes based on interconnection agreements, totaled $3.0 million and $5.2
million for the three and nine month periods September 30, 1999,
respectively, as compared to $0 for both the three and nine month periods
ended September 30, 1998. Construction, facility sales and other revenue for
the three and nine month periods ended September 30, 1999 increased $42.3
million and $67.0 million, respectively, over the comparable three and nine
month periods ended September 30, 1998. The increase in construction,
facility sales and other revenue was attributable to revenue from several
agreements to sell, construct or lease conduit and fiber to other carriers.
GST USA anticipates it will
-10-
<PAGE>
record approximately $40.0 million in revenue, related to three separate
transactions, in the fourth quarter of 1999 and the first quarter of 2000.
Product revenue for the three and nine month periods ended September 30, 1999
decreased $.2 million, or 10.1%,and increased $.2 million, or 5.6%,
respectively, over the three and nine month periods ended September 30, 1998.
OPERATING EXPENSES. Total operating expenses for the three and nine
month periods ended September 30, 1999 increased $33.4 million, or 48.0%, and
$86.3 million, or 45.5%, respectively, over the comparable three and nine
month periods ended September 30, 1998. Network expenses, which include
direct local and long distance circuit costs, were 64.0% and 64.4%,
respectively, of telecommunications services revenues for the three and nine
month periods ended September 30, 1999 compared to 71.5% and 70.4% 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 nine month periods
ended September 30, 1999 were 10.6% and 9.8%, respectively, of
telecommunications services revenues compared to 10.7% and 11.2% for the
comparable periods ended September 30, 1998. The decrease in these expenses
as a percentage of telecommunications services revenues for the nine month
period primarily resulted from the inclusion of revenues from strategic
acquisitions, substantially all of which were not generated on GST USA's
networks.
Cost of construction revenues for the three and nine month periods
ended September 30, 1999 were $16.7 million and $26.2 million, respectively, an
increase of $16.4 million and $25.4 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 nine month periods ended September
30, 1999, cost of construction revenues were 36.7% and 36.9%, respectively, of
construction revenues, compared to 9.2% and 19.9% for the three and nine month
periods ended September 30, 1998.
Cost of product revenues for the three and nine month periods ended
September 30, 1999 were $.7 million and $2.0 million, respectively, as compared
with $.8 million and $2.2 million for the three and nine month periods ended
September 30, 1998. For the three and nine month periods ended September 30,
1999 cost of product revenues were 51.3% and 56.9 %, respectively, of product
revenues, compared to 54.3% and 65.1% for the comparable three and nine month
periods ended September 30, 1998.
Selling, general and administrative expenses for the three and nine
month periods ended September 30, 1999 increased $5.4 million, or 22.3%, and
$15.9 million, or 23.4%, respectively, as compared to the three and nine
month periods ended September 30, 1998. The increase is primarily due to: 1)
the expansion of GST USA's local and enhanced services operations, which
resulted in additional marketing, management information and sales staff; 2)
selling, general and administrative expenses related to companies acquired in
1998; 3) increased bad debt expense related to reserves recorded for certain
ISP and carrier customers; and 4) increased bonuses related to the GST USA's
Variable Incentive Plan. In addition, GST USA had increased litigation costs
related to its legal proceedings described in "Legal Proceedings" in "Part
II: Other Information." As a percentage of total revenue, selling, general
and administrative expenses for the three and nine months ended September 30,
1999 were 30.1% and 37.2%, respectively, compared to 54.7% and 59.9%,
respectively, for the three and nine months ended September 30, 1998. The
decrease in selling, general and administrative expenses as a percentage of
total revenue relates primarily to increased construction, facility sales and
other revenue.
Depreciation and amortization for the three and nine month periods
ended September 30, 1999 increased $6.3 million, or 50.4%, and $20.1 million, or
62.6%, respectively, as compared to
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<PAGE>
the three and nine month periods ended September 30, 1998. The increase is
attributable to newly-constructed networks and related equipment being placed
into service. The nine month period increase is also attributable 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 19.2% and 23.2% of total revenue for
the three and nine months ended September 30, 1999 compared to 28.3% for both
the comparable three and nine month periods ended September 30, 1998.
OTHER EXPENSES/INCOME. For the three and nine month periods ended
September 30, 1999, the Company recorded net other income of $8.7 million and
net other expense of $29.4 million, respectively, compared to net other
expense of $30.5 million and net other income of $7.3 million for the
comparable three and nine month periods ended September 30, 1998,
respectively. For the three and nine months ended September 30, 1999, net
other income/expense includes a $28.0 million gain (net) resulting from a
payment received from Global Light Telecommunications in connection with the
settlement of various lawsuits (the "Global Settlement"). Excluding such
gain, net other expense would have decreased $11.2 million for the three
months ended September 30, 1999. Such decrease relates primarily to a $15.7
million loss reserve recorded in September 1998 for amounts paid to Magnacom
Wireless, LLC ("Magnacom"). For the nine months ended September 30, 1998, net
other income includes a $61.3 million gain resulting from the Company's sale
of its remaining 63% interest in NACT Telecommunications, Inc. (the "NACT
Sale"). Excluding the gain on the Global Settlement in 1999 and the gain on
the NACT Sale in 1998 , net other income would have increased $3.4 million
for the nine month period ended September 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 principal amount at maturity of 10.5% senior secured
discount notes and the $15.7 million loss reserve recorded related to
Magnacom.
NET INCOME/LOSS. Net loss for the three month period ended September
30, 1999 decreased $59.2 million, or 105.3%, to net income of $3.0 million
from net loss $56.3 million for the three months ended September 30, 1998.
Net loss for the nine month period ended September 30, 1999 increased $11.5
million, or 16.7%, to $80.2 million from $68.7 million for the nine month
period ended September 30, 1998. Excluding the $28.0 million gain (net) on
the Global Settlement, net loss would have decreased $31.3 million for the
three months ended September 30, 1999. Such decrease in net loss primarily
related to increased construction and facility sales. Excluding the $28.0
million gain (net) on the Global Settlement in 1999 and $61.3 million gain on
the NACT Sale in 1998, net loss would have decreased $21.8 million for the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998. Such decrease primarily relates to increased construction
and facility sales.
The following table details a measurement and reporting structure
recently adopted by GST USA's chief operating decision makers for the three
and nine month periods ended September 30, 1999 and 1998.
Revenues and Adjusted EBITDA by Operational Category
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
------------------------------ ------------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Core ICP $ 26,158 $ 1,245 $ 10,116 $ (5,493)
Acquisition and legacy 24,572 (3,053) 29,562 (2,633)
Product and facility sales 46,591 29,001 4,156 2,969
Corporate overhead costs --- (13,663) --- (7,904)
------------- ------------- ------------ ------------
Total $ 97,321 $ 13,530 $ 43,834 $ (13,061)
============= ============= ============ ============
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
----------------------------- -----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Core ICP $ 66,649 $ (705) $ 25,462 $ (14,960)
Acquisition and legacy 84,844 (3,517) 80,896 (8,317)
Product and facility sales 73,432 45,087 7,047 4,301
Corporate overhead costs --- (36,647) --- (22,752)
------------- ------------ ------------ ------------
Total $ 224,925 $ 4,218 $ 113,405 $ (41,728)
============= ============ ============ ============
</TABLE>
GST USA categorizes its operations as follows: 1) Core ICP
operations (also known as CLEC cities); 2) Acquisition and Legacy; 3) Product
and Facility Sales; and 4) Corporate Overhead Costs. Core ICP operations
includes those markets where GST USA has both switching and network assets
deployed. The acquisition and legacy category encompasses those business
operations acquired by GST USA that do not prominently feature
facilities-based service. Product and facility sales are attributable to
several agreements to lease, construct or sell conduit and fiber to other
carriers. Corporate overhead costs include costs related to engineering,
information management, sales, marketing, management and other support
functions.
Adjusted EBITDA consists of loss before interest, income taxes,
depreciation and amortization, minority interest, gains and losses on the
disposition of assets and non-cash charges. Management believes that Adjusted
EBITDA provides a meaningful measure of operating cash flow (without the
effects of working capital changes) for the continuing operations of GST USA
by excluding the effects of non-cash expenses and non-operating activities.
However, Adjusted EBITDA should not be used as an alternative to operating
loss and net loss as determined in accordance with GAAP.
Core ICP revenue for the three and nine month periods ended
September 30, 1999 increased $16.0 million, or 158.6%, and $41.2 million, or
161.7%, respectively, over the three and nine months ended September 30,
1998. Core ICP adjusted EBITDA for the three and nine month periods ended
September 30, 1999 increased $6.7 million, or 122.7%, and $14.3 million, or
95.3% respectively, over the three and nine months ended September 30, 1998.
The improvement in revenues and adjusted EBITDA resulted primarily from
increased local and data services, and increased reciprocal compensation
revenue, recorded at GST USA's CLEC cities operations.
Acquisition and legacy revenue for the three months ended September
30, 1999 decreased $5.0 million, or 16.9%, compared to the three months ended
September 30, 1998 and adjusted EBITDA for the three months ended September
30, 1999 decreased $.4 million, or 16.0%, compared to the three months ended
September 30, 1998. This decline in revenues and adjusted EBITDA resulted
from the sale of GST USA's Guam operations and the sale of a portion of GST
USA's shared tenant services operations in August and April 1999,
respectively, and a decrease in resold long distance revenue. Acquisition and
legacy revenue for the nine months ended September 30, 1999 increased $3.9
million, or 4.9%, compared to the nine months ended September 30, 1998, and
adjusted EBITDA for the nine months ended September 30, 1999 improved $4.8
million or 57.7%, compared to the nine months ended September 30, 1998. This
increase in revenues and improvement in adjusted EBITDA resulted from
acquisitions of KLP, Inc. (d/b/a Call America Phoenix) and the assets of Whole
Earth Networks, LLC in March 1999 and the acquisition of Icon Communications,
Corp. in April 1999.
Product and facility sales revenue for the three and nine month
periods ended September 30, 1999 increased $42.4 million and $66.4 million,
respectively, over the three and nine month periods ended September 30, 1998.
Product and facility sales adjusted EBITDA for the three and nine months
ended September 30, 1999 increased $26.0 million and $40.8 million,
respectively, over the three and nine months ended September 30, 1998. This
increase in revenues and adjusted EBITDA resulted primarily from revenues
related to agreements to sell, construct or lease fiber and conduit to other
carriers.
Adjusted EBITDA from corporate overhead costs for the three and nine
month periods ended September 30, 1999 decreased $5.6 million, or 70.9%, and
$13.9 million, or 61.8%, respectively, over the three and nine months ended
September 30, 1998. Such decrease resulted from an increase in corporate
overhead costs related to increased marketing and management information
staff as well as increased litigation costs related to legal proceedings.
-13-
<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)
-------------------------------------------------------
1999 2000 2001 2002 2003
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate $ 200
Average interest rate 10.0%
Variable rate $3,267 $ 17,142 $19,813 $20,510 $ 21,386
Average interest rate (LIBOR plus) 3.38% 3.26% 3.28% 3.34% 3.34%
Capital Leases:
Fixed rate $1,306 $ 5,603 $ 2,361 $ 1,836 $ 1,866
Average interest rate 12.36% 12.36% 12.36% 12.36% 12.36%
<CAPTION>
EXPECTED MATURITY
(In thousands of dollars)
---------------------------------------------------
Market
Value at
September 30,
Thereafter Total 1999 (1)
---------------------------------------------------
Long-term Debt:
Fixed rate $1,077,448 (2) $1,077,648 (2) $ 913,140
Average interest rate 12.275%
Variable rate $ 17,385 $ 99,503
Average interest rate (LIBOR plus) 3.16%
Capital Leases:
Fixed rate $ 8,966 $ 21,938
Average interest rate 12.36%
</TABLE>
(1) Based on quoted market prices at September 30, 1999
(2) Includes $200.0 million of unaccreted discount
MARKET PRICE RISK - GST USA's risk exposure associated with market price is
limited to its long-term debt that is publicly traded. These bonds are recorded
at book value, which could vary from current market prices.
-14-
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GST AND GST TELECOM V. GLOBAL LIGHT TELECOMMUNICATIONS, INC., ET AL.
Reference is made to Part II, Item 1. "Legal Proceedings" of GST USA's
Report on Form 10-Q for period ended June 30, 1999, and to the Form 8-K dated
September 21, 1999, and to the descriptions therein of the action commenced on
October 20, 1998 by GST Telecommunications, Inc. and GST USA's subsidiary, GST
Telecom, Inc. (collectively, the "GST Companies") against GST Global
Telecommunications, Inc., now known as Global Light Telecommunications, Inc.
("Global Light") and six former officers and directors of GST.
On September 16, 1999, the GST Companies received $30 million
from Global Light and others in connection with the settlement of various
lawsuits, including this lawsuit, between the GST Companies, Global Light, GST
Mextel, Inc., W. Gordon Blankstein, Ian Watson, and Peter E. Legault. Pursuant
to the settlement, all claims among these parties have been dismissed with the
exception of the claims discussed below as "GST v. Gordon Blankstein et al." The
GST Companies' claims against the nonsettling parties are unaffected by this
settlement.
WARTA V. GST, GST USA AND GST TELECOM AND COUNTERCLAIMS
Reference is made to Part II, Item 1. "Legal Proceedings" of GST USA's
Report on Form 10-Q for period ended June 30, 1999, and to the Form 8-K dated
September 21, 1999, and to the descriptions therein of the action commenced on
January 25, 1999 by John Warta, a former officer and director of GST, against
GST, GST USA and GST Telecom (collectively, the "GST Companies") and the
counterclaim filed on February 23, 1999 by the GST Companies against Mr. Warta,
Global Light and five other former GST officers and directors. In August 1999,
the GST Companies amended the counterclaim to drop all parties other than Mr.
Warta and Clifford Sander as counterclaim defendants in this action. The amended
counterclaim seeks damages with respect to the transfer of funds to certain PCS
companies owned by Mr. Warta. Following an unsuccessful motion by Messrs. Warta
and Sander to dismiss the counterclaims, the matter is now in discovery.
GST V. SANDER
Reference is made to Part II, Item 1. "Legal Proceedings" of GST USA's
Report on Form 10-Q for period ended June 30, 1999 and to the description
therein of the action commenced on February 9, 1999 against Clifford Sander, the
former treasurer of GST. This action has been consolidated with "Warta v. GST,
GST USA and GST Telecom and Counterclaims", discussed above.
-15-
<PAGE>
GLOBAL AND MEXTEL V. GST AND GST TELECOM
Reference is made to Part II, Item 1. "Legal Proceedings" of GST USA's
Report on Form 10-Q for period ended June 30, 1999, and to the Form 8-K dated
September 21, 1999, and to the descriptions therein of the action commenced on
January 27, 1999 by Global Light and GST Mextel, Inc. against GST and GST
Telecom (collectively, the "GST Companies"). Pursuant to the settlement
discussed above at "GST and GST Telecom v. Global Light Telecommunications,
Inc.," all claims against the GST Companies have been dismissed. The remaining
claims involve the GST Companies' counterclaims against Messrs. Warta, Irwin,
Hanson, and Sander relating to the Bestel transaction.
IRWIN ET AL. V. GST ET AL.
Reference is made to Part II, Item 1. "Legal Proceedings" of GST USA's
Report on Form 10-Q for period ended June 30, 1999, and to the Form 8-K dated
September 21, 1999, and to the descriptions therein of the action commenced on
January 28, 1999 by Stephen Irwin, Robert Hanson, Peter Legault, Clifford
Sander, and John Warta, all former officers or directors of GST, against GST,
GST Telecom and four current directors of the Company, all members of the GST
Litigation Committee (collectively, the "GST Parties").
Pursuant to the settlement discussed above as "GST and GST Telecom
v. Global Light Telecommunications, Inc., et al," Mr. Legault has dismissed
all claims asserted in this lawsuit on his behalf.
On October 6, 1999, the Court dismissed all claims asserted by the
plaintiffs against the members of the GST Litigation Committee. The Court
allowed the plaintiffs to replead a claim against GST for failure to provide
indemnity, and denied the application of the plaintiffs to enjoin GST from
pursuing breach of fiduciary duty claims against the plaintiffs in other
courts.
GST V. GORDON BLANKSTEIN, ET AL
Reference is made to Part II, Item 1. "Legal Proceedings" of GST USA's
Report on Form 10-Q for period ended June 30, 1999 and to the description
therein of the action commenced on June 4, 1999 by GST against Gordon
Blankstein, Robert Blankstein, Ian Watson and Clifford Sander. The defendants
have denied liability.
-16-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Reference is made to the report on Form 8-K filed as of
September 21, 1999, on which GST USA reported the following:
On September 16, 1999, GST and GST USA announced, in a press
release that it received $30 million from Global Light Telecommunications,
Inc. and others in connection with the settlement of various lawsuits
between the Registrants, Global Light, GST Mextel, Inc., W. Gordon
Blankstein, Ian Watson, and Peter E. Legault.
On September 20, 1999, GST and GST USA announced, in a press
release, that it estimated reduced losses per share due to the receipt
of $30.0 million in connection with the Global Light settlement, and also
announced estimates of total revenues and adjusted EBITDA for the quarter
ending September 30, 1999.
-17-
<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: NOVEMBER 15, 1999 GST USA, INC.
----------------- (Registrant)
/s/ Daniel L. Trampush
--------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
-18-
<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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 44,861,000
<SECURITIES> 36,496,000
<RECEIVABLES> 66,833,000
<ALLOWANCES> (5,328,000)
<INVENTORY> 1,204,000
<CURRENT-ASSETS> 179,901,000
<PP&E> 904,963,000
<DEPRECIATION> (96,943,000)
<TOTAL-ASSETS> 1,127,680,000
<CURRENT-LIABILITIES> 481,585,000
<BONDS> 877,400,000
78,462,000
0
<COMMON> 0
<OTHER-SE> (410,061,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,127,680,000
<SALES> 224,925,000
<TOTAL-REVENUES> 224,925,000
<CGS> 124,999,000
<TOTAL-COSTS> 275,773,000
<OTHER-EXPENSES> (34,954,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,332,000
<INCOME-PRETAX> (80,226,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (80,226,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80,226,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
