<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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 333-02260-01
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.
FORM 10-Q/A
INDEX
THIS REPORT ON FORM 10-Q/A CONSTITUTES AMENDMENT NO. 1 TO THE REGISTRANT'S
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999, AND AMENDS, IN
ITS ENTIRETY, PART I, ITEMS 1 AND 2, AND PART II, ITEM 6 OF SUCH REPORT AS
ORIGINALLY FILED NOVEMBER 15, 1999. SEE NOTE 2 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR A DISCUSSION OF THE BASIS FOR SUCH AMENDMENTS.
<TABLE>
<CAPTION>
Page(s)
-------
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)
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
-1-
<PAGE>
GST USA, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998 (1)
-------------------- -------------------
(As Restated)
<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 892,428 678,374
less accumulated depreciation (96,943) (62,522)
--------------------- -------------------
795,485 615,852
Other assets 136,663 138,773
less accumulated amortization (53,009) (38,877)
--------------------- -------------------
83,654 99,896
--------------------- -------------------
Total assets $ 1,115,145 $ 1,128,778
===================== ===================
LIABILITIES AND SHAREHOLDER'S 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
Shareholder's deficit:
Common shares 78,462 78,462
Accumulated deficit (422,596) (329,835)
--------------------- -------------------
(344,134) (251,373)
--------------------- -------------------
Total liabilities and shareholder's deficit $ 1,115,145 $ 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.
-2-
<PAGE>
GST USA, Inc.
Condensed Consolidated Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 50,424 $ 39,091 $ 150,362 $ 106,008
Construction, facility sales and other 53,692 3,250 98,979 4,006
Product 1,342 1,493 3,581 3,391
------------- ------------ ------------ ------------
Total revenues 105,458 43,834 252,922 113,405
------------- ------------ ------------ ------------
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 37,203 300 63,068 500
Cost of product revenues 689 810 2,039 2,207
Selling, general and administrative 31,102 23,981 87,401 67,887
Depreciation and amortization 18,669 12,414 52,279 32,144
------------- ------------ ------------ ------------
Total operating costs and expenses 125,306 69,639 316,305 189,481
------------- ------------ ------------ ------------
Loss from operations (19,848) (25,805) (63,383) (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)
------------- ------------ ------------ ------------
Loss before income taxes (11,137) (56,265) (92,761) (68,734)
------------- ------------ ------------ ------------
Income tax expense --- --- --- ---
------------- ------------ ------------ ------------
Net Loss $ (11,137) $ (56,265) $ (92,761) $ (68,734)
============= ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
GST USA, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------------
1999 1998
-------------- ----------------
<S> <C> (As Restated) <C>
Operations:
Net loss $ (92,761) $ (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 used in operations (8,852) (52,532)
-------------- ----------------
Investments:
Acquisition of subsidiaries, net of cash acquired --- (35,471)
Proceeds from sale of investments --- 327
Purchase of property and equipment (215,323) (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 (41,015) (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. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR PRIOR PERIODS
The Company has restated its results for the three and nine month periods
ended September 30, 1999 to reflect the following three changes:
1) For a certain construction contract involving both monetary and
non-monetary events, the Company is restating construction revenue, cost of
construction revenues and property and equipment to comply with Emerging
Issues Task Force 86-29, "Nonmonetary Transactions". The Company had
previously accounted for only the value of the net cash impact and
believes that recording all portions of the contract on their relative
fair values is a more appropriate treatment.
2) The Company is restating its cost of construction revenues related to
conduit transactions in which it leases or sells certain conduits while
retaining others for its own use. The Company believes that using a
weighted average conduit cost for each conduit in the system, whether
retained or sold/leased, is more appropriate than the incremental cost of
the sold/leased conduits previously used.
3) The Company determined that certain software and development costs were
more apporpriately expensed in accordance with American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use."
The effect of the restatment is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------------------------ ------------------------------------
(As Reported) (As Restated) (As Reported) (As Restated)
<S> <C> <C> <C> <C>
Construction, facility sales and other revenue $ 45,555 $ 53,692 $ 70,982 $ 98,979
Cost of construction revenues 16,722 37,203 26,190 63,068
Selling, general and administrative expenses 29,340 31,102 83,747 87,401
Net income (loss) 2,969 (11,137) (80,226) (92,761)
Property and equipment 904,963 892,428 904,963 892,428
Accumulated deficit as September 30, 1999 (410,061) (422,596) (410,061) (422,596)
</TABLE>
3. 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.
4. 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
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.
-5-
<PAGE>
GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------
1999 1998
------------- -------------
(As Restated)
<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>
6. 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>
-6-
<PAGE>
GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. 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.
8. RECENT DEVELOPMENTS
A. The following table details a measurement and reporting structure
recently adopted by GST USA's chief operating decision maker 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
------------- ------------- ------------ ------------
(As Restated) (As Restated)
<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 54,728 16,657 4,156 2,969
Corporate overhead costs --- (15,425) --- (7,904)
------------- ------------- ------------ ------------
Total $ 105,458 $ (576) $ 43,834 $ (13,061)
============= ============= ============ ============
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
----------------------------- -----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------ ------------ ------------
(As Restated) (As Restated)
<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 101,429 36,206 7,047 4,301
Corporate overhead costs --- (40,301) --- (22,752)
------------- ------------ ------------ ------------
Total $ 252,922 $ (8,317) $ 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.
-9-
<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>
- ---------------------------------------------------------------------------------------
<S> <C>
Access Lines, sold this quarter 38,712
- ---------------------------------------------------------------------------------------
Access Lines, installed this quarter 30,887
- ---------------------------------------------------------------------------------------
Cities Served 49
- ---------------------------------------------------------------------------------------
Route Miles, total 6,048 (86% owned, 14% leased)
- ---------------------------------------------------------------------------------------
Fiber Miles, total 362,600 (97% owned, 3% leased)
- ---------------------------------------------------------------------------------------
Collocations 98
- ---------------------------------------------------------------------------------------
Class 4/5 Switches Operational 15
- ---------------------------------------------------------------------------------------
Frame Relay Switches Operational 23
- ---------------------------------------------------------------------------------------
ATM Switches Operational 37
- ---------------------------------------------------------------------------------------
Customers 96,527
- ---------------------------------------------------------------------------------------
Interconnection Agreements 12
- ---------------------------------------------------------------------------------------
Employees 1,297
- ---------------------------------------------------------------------------------------
</TABLE>
We recently discovered errors in previous disclosures of fiber miles and
route miles. We are currently reviewing our network records and these
numbers reflect our best estimate based on our review to date. These numbers
reflect a downward restatement of approximately 760 route miles and 26,562
fiber miles.
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three month and nine month periods
ended September 30, 1999 increased $61.6 million, or 140.6%, and $139.5
million, or 123.0%, 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 $50.4
million and $95.0 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.
-10-
<PAGE>
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 $55.7 million, or 80.0%, and
$126.8 million, or 66.9%, 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 $37.2 million and $63.1 million, respectively, an
increase of $36.9 million and $62.6 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 69.3% and 63.7%, 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 $7.1 million, or 29.7%, and
$19.5 million, or 28.7%, 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 revenues, selling, general
and administrative expenses for the three and nine months ended September 30,
1999 were 29.5% and 34.6%, 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
-11-
<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 17.7% and 20.7% 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 $45.2 million, or 80.2%, to net loss of $11.1 million from
net loss of $56.3 million for the three months ended September 30, 1998. Net
loss for the nine month period ended September 30, 1999 increased $24.1
million, or 35.0%, to $92.8 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 $17.2 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 $9.3 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 maker 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
------------- ------------- ------------ ------------
(As Restated) (As Restated)
<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 54,728 16,657 4,156 2,969
Corporate overhead costs --- (15,425) --- (7,904)
------------- ------------- ------------ ------------
Total $ 105,458 $ (576) $ 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
------------- ------------ ------------ ------------
(As Restated) (As Restated)
<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 101,429 36,206 7,047 4,301
Corporate overhead costs --- (40,301) --- (22,752)
------------- ------------ ------------ ------------
Total $ 252,922 $ (8,317) $ 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 $50.6 million and $94.4 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 $13.7 million and $31.9 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 $7.5 million, or 95.2%, and
$17.5 million, or 77.1%, 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>
PART II: OTHER INFORMATION
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 Nextel,
Inc., W. Gordon Blankstein, Dan Watson, and Peter P. 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: MARCH 29, 2000 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 10,1999 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> 892,428,000
<DEPRECIATION> (96,943,000)
<TOTAL-ASSETS> 1,115,145,000
<CURRENT-LIABILITIES> 481,585,000
<BONDS> 877,400,000
78,452,000
0
<COMMON> 0
<OTHER-SE> (422,596,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,115,145,000
<SALES> 252,922,000
<TOTAL-REVENUES> 252,922,000
<CGS> 161,877,000
<TOTAL-COSTS> 316,305,000
<OTHER-EXPENSES> (34,964,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,332,000
<INCOME-PRETAX> (92,761,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (92,761,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (92,761,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
