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GST USA INC
10-Q, 2000-11-14
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 2000

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

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GST USA, INC.
(Exact name of Registrant as Specified in its Charter)

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)

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    THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY.

    Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

    Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At November 14, 2000, there were outstanding 20 shares of common stock, without par value, of the Registrant.

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GST USA, INC.
INDEX

				Page(s)
PART I: Financial Information
ITEM 1.		FINANCIAL STATEMENTS:
		Condensed Consolidated Balance Sheets —September 30, 2000 and December 31, 1999		2
		Condensed Consolidated Statements of Operations —Three and Nine Months Ended September 30, 2000 and 1999		3
		Condensed Consolidated Statements of Cash Flows —Nine Months Ended September 30, 2000 and 1999		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 NARRATIVE)		9-13
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		14
PART II: Other Information
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K		15
SIGNATURES				16

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ITEM 1. FINANCIAL STATEMENTS
GST USA, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)

				September 30, 2000			December 31, 1999(1)
ASSETS
Current assets:
	Cash and cash equivalents			$	30,685		$	42,721
	Restricted investments				10,152			19,828
	Accounts receivable, net				43,881			45,244
	Construction contracts receivable				37,625			26,823
	Investments				910			46
	Intercompany receivable from parent				1,102			—
	Prepaid and other current assets				8,518			8,544
		Total current assets			132,873			143,206
Restricted investments					3,510			9,848
Property, plant and equipment, net					652,158			832,047
Other assets, net					2,661			77,419
		Total assets		$	791,202		$	1,062,520
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities not subject to compromise:
	Accounts payable			$	677		$	30,250
	Accrued expenses				52,297			48,457
	Payable to parent				—			360,118
	Deferred revenue				12,307			10,066
	Current portion of capital lease obligations				—			6,693
	Current portion of long-term debt				—			17,466
		Total current liabilities not subject to compromise			65,281			473,050
Liabilities subject to compromise (see Note 3)					1,448,848
Long-term liabilities not subject to compromise:
	Capital lease obligations, less current portion				—			16,813
	Long-term debt, less current portion				—			974,483
	Deferred revenue from construction contracts				25,460			—
Shareholder's deficit:
	Common shares				134,996			78,462
	Accumulated deficit				(883,383	)		(480,288	)
		Total shareholder's deficit			(748,387	)		(401,826	)
		Total liabilities and shareholder's deficit		$	791,202		$	1,062,520

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(1)

The information in this column was derived from GST USA's audited financial statements as of December 31, 1999.

See notes to condensed consolidated financial statements.

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GST USA, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)

				Three Months Ended September 30,						Nine Months Ended September 30,
				2000			1999			2000			1999
Revenues:
	Telecommunications services			$	52,533		$	50,424		$	160,223		$	150,362
	Construction, facility sales and other				11,965			53,692			24,563			98,979
	Product				—			1,342			205			3,581
		Total revenues			64,498			105,458			184,991			252,922
Operating costs and expenses:
	Network expenses				28,085			32,295			94,531			96,770
	Facilities administration and maintenance				7,046			5,348			19,275			14,748
	Cost of construction revenues				8,098			37,203			16,581			63,068
	Cost of product revenues				—			689			307			2,039
	Selling, general and administrative				27,379			31,102			87,636			87,401
	Depreciation and amortization				22,068			18,669			67,549			52,279
	Impairment of assets (see Note 10)				256,037			—			256,037			—
		Total operating costs and expenses			348,713			125,306			541,916			316,305
		Loss from operations			(284,215	)		(19,848	)		(356,925	)		(63,383	)
Other expenses (income):
	Interest income				(587	)		(2,035	)		(2,114	)		(8,507	)
	Interest expense, net of amounts capitalized (contractual interest of $32,332 and $61,013 not recorded for the three- and nine-month periods ended September 30, 2000)				1,440			21,255			40,910			64,332
	Other				(212	)		(27,931	)		(5,403	)		(26,447	)
					641			(8,711	)		33,393			29,378
Loss before reorganization expenses and income tax expense					(284,852	)		(11,137	)		(390,318	)		(92,761	)
Reorganization expenses (see Note 5)					8,179			—			12,777			—
		Net loss		$	(293,035	)	$	(11,137	)	$	(403,095	)	$	(92,761	)

See notes to condensed consolidated financial statements.

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GST USA, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

							Nine Months Ended September 30,
							2000			1999
Operations:
	Net loss						$	(403,095	)	$	(92,761	)
	Adjustments to reconcile net loss to net cash used in operations:
		Depreciation and amortization						68,605			56,457
		Accretion and accrual of interest						22,525			34,671
		Non-cash stock compensation and other expense						224			1,662
		(Gain) loss on disposal of assets						(1,409	)		3,430
		Loss on impairment of assets						256,037			—
		Changes in non-cash operating working capital:
			Accounts receivable, net					950			(39,395	)
			Construction contracts receivable					(3,728	)		—
			Prepaid, other current and other assets, net					(7,538	)		(14,026	)
			Accounts payable and accrued liabilities, prior to reorganization					(1,132	)		32,526
			Post-petition accounts payable and accrued liabilities					43,744			—
			Pre-petition accounts payable and accrued liabilities, authorized by the court					(3,522	)		—
			Deferred revenue					2,409			8,584
			Deferred revenue from construction contracts					25,460			—
				Cash used in operations				(470	)		(8,852	)
Investments:
	Proceeds from sale of investments							56,580			—
	Purchase of property and equipment							(80,644	)		(215,323	)
	Proceeds from sale of assets							5,966			1,500
	Purchase of other assets							175			(340	)
	Change in investments restricted for the purchase of property and equipment							6,338			173,148
				Cash used in investing activities				(11,760	)		(41,015	)
Financing:
	Proceeds from long-term debt							2,311			1,782
	Principal payments on long-term debt and capital leases, prior to reorganization							(13,915	)		(12,022	)
	(Increase) decrease in payable to parent							(5,394	)		3,469
	Change in investments restricted to finance interest payments							17,192			15,615
				Cash provided by financing activities				194			8,844
					Decrease in cash and cash equivalents			(12,036	)		(41,023	)
Cash and cash equivalents, beginning of period								42,721			85,844
Cash and cash equivalents, end of period							$	30,685		$	44,861

See notes to condensed consolidated financial statements.

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GST USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

1. BANKRUPTCY PROCEEDINGS

    On May 17, 2000, GST Telecommunications, Inc. ("GST" or the "Company"), and its subsidiaries, including GST USA, Inc. ("GST USA"), filed voluntary petitions for protection from creditors under Chapter 11 of the United States Bankruptcy Code in the District of Delaware ("Bankruptcy Code"). The Company and its subsidiaries (collectively the "Debtors") are currently operating as debtors-in-possession under the supervision of the United States District Court for the District of Delaware (the "Bankruptcy Court"). The Chapter 11 cases have been consolidated for the purpose of joint administration under Case No. 00-1982 (GMS).

    On May 17, 2000, the Debtors also commenced ancillary proceedings under the Companies' Creditors Arrangement Act in Canada in the Ontario Superior Court of Justice.

    Under the proceedings, substantially all liabilities, litigation and claims pending against the Debtors in existence at the filing date are stayed unless the stay is modified or lifted or payment has been otherwise authorized by the Bankruptcy Court.

    On May 11, 2000, we obtained a commitment letter from Heller Financial, Inc. ("Heller") which will provide us, subject to satisfying certain conditions, debtor-in-possession financing for $50,000 and the potential for up to an additional $75,000 in cash. On May 26, 2000, the Bankruptcy Court entered an order approving the initial $30,000 of this financing. On July 26, 2000, the Bankruptcy Court entered an order providing a superpriority interest for Heller over the secured debt of existing bondholders, upon the consent of a majority of the secured bondholders, which will in turn permit Heller to provide approximately $40,000 of the $50,000 in financing mentioned above. Based upon current unencumbered assets, the additional $10,000 is available without the consent of the bondholders. To date, we have not drawn on the Heller credit facility, or sought bondholder consent.

    On June 13, 2000, we opened the bidding procedures with the approval of the Bankruptcy Court in an auction format for substantially all of our assets. After an extension of the original bid and auction dates, qualified buyers were required to submit their bids as of August 11, 2000. On September 11, 2000, the Company and Time Warner Telecom Inc. executed a definitive asset purchase agreement which provides for the purchase of substantially all of the Company's assets, excluding certain assets in Hawaii and certain non-core businesses, for $690,000. On September 21, 2000 the Bankruptcy Court approved the definitive asset purchase agreement between the Company and Time Warner Telecom Inc. Closing of the sale is anticipated in the last quarter of 2000, or first quarter of 2001, subject to regulatory approvals and other customary terms and conditions. In addition, the Company is seeking purchasers for certain of its remaining assets.

    Under the Bankruptcy Code, the rights and treatment of pre-petition creditors and shareholders may be substantially altered. At this time, it is not possible to predict the outcome of the Chapter 11 cases in general or the effect of the cases on our business, or on the interests of creditors.

2. BASIS OF PRESENTATION

    The accompanying condensed, consolidated 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

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(which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented. The statements also include an impairment of assets charge (see Note 10). 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, 1999, as included in GST USA's annual report on Form 10-K.

3. LIABILITIES SUBJECT TO COMPROMISE

    As of September 30, 2000, liabilities subject to compromise consist of the following:

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 for both September 30, 2000, and December 31, 1999, all of which are owned by GST, income (loss) per share data is meaningless and is not presented in the accompanying financial statements.

5. REORGANIZATION EXPENSES

    For the three- and nine-month periods ended September 30, 2000, reorganization expenses totaled $8,179 and $12,777, respectively. This consisted of $3,543 and $6,107 for professional expenses, $4,066 and $6,100 for a retention bonus accrual, and $570 and $0 in other reorganization expenses for the three- and nine-months ended September 30, 2000, respectively. The retention bonus accrual is pursuant to a Bankruptcy Court-approved plan to retain our employees through the bankruptcy process. For the three- and nine-months ended September 30, 2000, cash expended for reorganization costs totaled $3,355, consisting of $206 for professional expenses and $3,149 for retention bonuses. At September 30, 2000, we had accrued $3,860 for professional expenses, $2,951 related to the retention bonus plan, and $570 for other reorganization expenses.

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6. SUPPLEMENTAL CASH FLOW INFORMATION

7. CAPITALIZATION OF INTEREST

    GST USA capitalized interest of $0 and $8,488 as a part of property and equipment for the three- and nine-month periods ended September 30, 2000, respectively, compared to $9,884 and $29,001 for the three- and nine-month periods ended September 30, 1999, respectively.

8. 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.

9. DEBT SERVICE REQUIREMENTS

    At September 30, 2000, GST USA had $1,031,194 of indebtedness outstanding. As a result of filing for protection under bankruptcy law, GST USA is not permitted to make any payments of the debt service requirements with the exception of certain capital lease obligations. All of these obligations are subject to discharge in bankruptcy upon the completion of all proceedings.

10. IMPAIRMENT OF ASSETS

    As a result of entering into the definitive asset purchase agreement with Time Warner Telecom Inc. in the amount of $690,000 and anticipated proceeds from the sale or sales of all remaining assets, GST USA recorded an impairment charge, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," of $256,000 during the three-months ended September 30, 2000.

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11. ADOPTION OF NEW ACCOUNTING STANDARDS

    In June 1999, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 43 ("FIN 43"), "Real Estate Sales, an interpretation of FASB Statement No. 66." The interpretation is effective for sales of real estate with property improvements or integral equipment entered into after June 30, 1999. Under this interpretation, conduit is considered integral equipment and dark fiber will likely be considered integral equipment. Accordingly, title must transfer to a lessee in order for a lease transaction to be accounted for as a sales-type lease. For contracts entered into after June 30, 1999, sales-type lease accounting will no longer be appropriate for conduit and dark fiber leases and, therefore, these transactions will be accounted for as operating leases unless title transfers to the lessee.

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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 our 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, Inc.'s ("GST USA" or the "Company") 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 our 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:

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the uncertainty of our future as a result of filing for protection under bankruptcy law;



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the significant amount of our indebtedness;



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our limited operating history and expectation of operating losses;



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the availability and terms of the significant additional capital required to fund our expansion;



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the extensive competition we expect to face in each of our markets;



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our dependence on sophisticated information and processing systems;



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our ability to manage growth;



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our 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;



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technological change; and



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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. We do 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 we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements made in this Quarterly Report are reasonable, we 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.

Overview

    We are, through our subsidiaries, a facilities-based integrated communications provider ("ICP"), offering a broad range of telecommunications products and services, primarily to business customers located in California and other western states. We own and operate a converged network capable of carrying both voice and data traffic—offering our customers an alternative to incumbent local exchange carriers. Our current products include data transport, high-speed Internet access, voice services (including a bundled offering of local and long distance services), and wholesale services, including dark fiber and conduit rights.

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    As an ICP, we have one reportable operating segment. While our chief decision-maker monitors the revenue streams of various services, operations are managed and financial performance is evaluated based upon the delivery of multiple services over a common network and facilities. The various revenue streams generate many shared expenses. As a result, we believe that any allocation of the expenses to multiple revenue streams would be impractical and arbitrary. For that reason, we do not currently make such allocations internally. Furthermore, substantially all of our revenue is attributable to customers in the United States and all significant operating assets are located within the United States.

    The chief decision-maker does, however, monitor revenue streams consolidated at a more detailed level than those depicted in our historical general purpose financial statements. The following table presents revenues by service type (in thousands):

			Three months ended September 30,						Nine months ended September 30,
			2000			1999			2000			1999
Local service			$	21,682		$	17,822		$	62,872		$	52,763
Long distance services(1)				11,724			16,648			39,169			52,639
Data services				7,460			5,349			21,764			14,757
Internet services				1,434			2,335			4,057			7,379
Long-haul services(2)				9,922			7,856			31,255			20,799
Product				—			1,345			205			3,577
Other				311			411			1,106			2,029
Construction and facility sales				11,965			53,692			24,563			98,979
Total revenues			$	64,498		$	105,458		$	184,991		$	252,922

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(1)

Long distance services represents revenue from toll charge calls outside the customers local calling area.

(2)

Long-haul services represents revenue from point-to-point line services.

Recent Developments

    On May 13, 2000, GST USA completed the assumption of GST Equipment Funding, Inc.'s 13¹/4% Senior Secured Notes due 2007. This assumption was required by the indentures governing the 13¹/4% notes.

    On May 17, 2000, we filed voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware. We are currently operating as debtors-in-possession under the supervision of the United States District Court for the District of Delaware (the "Bankruptcy Court"). The Chapter 11 cases have been consolidated for the purpose of joint administration under Case No. 00-1982 (GMS).

    On May 17, 2000, we also commenced ancillary proceedings under the Companies' Creditors Arrangement Act in Canada in the Ontario Superior Court of Justice.

    Under the proceedings, substantially all liabilities, litigation and claims pending against the Debtors in existence at the filing date are stayed unless the stay is modified or lifted or payment has been otherwise authorized by the Bankruptcy Court.

    On May 11, 2000, we obtained a commitment letter from Heller Financial, Inc. ("Heller") which will provide us, subject to satisfying certain conditions, debtor-in-possession financing for $50.0 million and the potential for up to an additional $75.0 million in cash. On May 26, 2000, the Bankruptcy Court entered an order approving the initial $30.0 million of this financing. On July 26, 2000, the Bankruptcy Court entered an order providing a superpriority interest for Heller over the secured debt of existing

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bondholders, upon the consent of a majority of the secured bondholders, which will in turn permit Heller to provide approximately $40.0 million of the $50.0 million in financing mentioned above. Based upon the current unencumbered assets, the additional $10.0 million is available without the consent of the bondholders. To date, we have not drawn on the Heller credit facility, or sought bondholder consent.

    On June 13, 2000, we opened the bidding procedures with the approval of the Bankruptcy Court, in an auction format for substantially all of our assets. After an extension of the original bid and auction dates, qualified buyers were required to submit their bids as of August 11, 2000. On September 11, 2000, the Company and Time Warner Telecom Inc. executed a definitive asset purchase agreement which provides for the purchase of substantially all of the Company's assets, excluding certain assets in Hawaii and certain non-core businesses for $690.0 million. On September 21, 2000 the Bankruptcy Court approved the definitive asset purchase agreement between the Company and Time Warner Telecom Inc. Closing of the sale is anticipated in the last quarter of 2000, or first quarter of 2001, subject to regulatory approvals and other customary terms and conditions. In addition, the Company is seeking purchasers for certain of its remaining assets.

    On July 26, 2000, the Bankruptcy Court approved the modification of existing construction and capacity contracts between us and 360networks, Level (3) Communications ("Level (3)"), and Williams Communications ("Williams"). We agreed to assume certain of our contracts with the three companies within the meaning of the Bankruptcy Code and to make other commitments, in return for which 360networks, Level (3), and Williams agreed to various changes in their relationships with us. The commitments by 360networks, Level (3), and Williams resulted in the acceleration of cash paid to us for our provision of conduits or fiber to the three companies and reduced the near-term cash paid by us for certain construction obligations, resulting in a net cash flow benefit of approximately $26.0 million, of which approximately $20.0 million had been realized as of September 30, 2000. These modifications, in addition to the Heller credit facility, should enable us to finance our operations pending disposition of our assets.

    Under the Bankruptcy Code, the rights and treatment of pre-petition creditors and shareholders may be substantially altered. At this time, it is not possible to predict the outcome of the Chapter 11 cases in general or the effect of the cases on our business, or on the interests of creditors.

Results of Operations

    Revenues.  Total revenue for the three- and nine-month periods ended September 30, 2000, decreased $41.0 million, or 38.8%, and $67.9 million, or 26.9%, respectively, to $64.5 million from $105.5 million and $185.0 million from $252.9 million, respectively, for the three- and nine-month periods ended September 30, 1999.

    Telecommunications and other services revenues for the three- and nine-month periods ended September 30, 2000, increased $2.1 million, or 4.2%, and $9.8 million, or 6.6%, respectively, to $52.5 million from $50.4 million, and $160.2 million from $150.4 million, respectively, for the three- and nine-month periods ended September 30, 1999. The increase in telecommunications and other services revenues resulted from increased local, data and long-haul services, and from an increase in reciprocal compensation. We bundle these products to provide better access and services to our customers. Reciprocal compensation, which we recognize based on interconnection agreements and other agreements with ILECs, totaled $4.5 million and $13.4 million for the three- and nine-month periods ended September 30, 2000, compared to $3.0 million and $5.2 million, respectively, for the three- and nine-month periods ended September 30, 1999. These increases were partially offset by decreases in long distance and internet revenues.

    Construction, facility sales and other revenue for all periods presented is primarily derived from three contracts to sell or lease fiber and conduit systems throughout California and the Pacific

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Northwest. The bulk of the revenue for these contracts was recognized in 1999. As a result, construction, facility sales and other revenue for the three- and nine-month periods ended September 30, 2000, decreased $41.7 million and $74.4 million, respectively, to $12.0 million from $53.7 million and $24.6 million from $99.0 million, respectively, for the three- and nine-month periods ended September 30, 1999. Because fiber and conduit systems are a limited resource and because non-recurring transactions significantly impact construction, facility sales and other revenue, we anticipate that such revenues will continue to fluctuate in the future. In addition, the adoption of FIN 43 will impact the amounts of revenue related to lease transactions (see "Note 11 in Item 1").

    Product revenue for the three- and nine-month periods ended September 30, 2000, decreased to $0 and $.2 million from $1.3 million and $3.6 million, respectively, in the three- and nine-month periods ended September 30, 1999. The decrease in product revenue was due to the divestitures of Texas-based Action Telecom, Inc.'s ("Action Telecom") product sales division relating to long distance interconnection equipment in October 1999, and Action Telecom's product sales division relating to Network Analysis Management Systems ("NAMS") in March 2000.

    Operating Expenses.  Total operating expenses for the three-month period ended September 30, 2000, increased $224.0 million, or 178.7%, to $349.3 million from $125.3 million for the three-month period ended September 30, 1999. Total operating expenses for the nine-month period ended September 30, 2000, increased $226.2 million, or 71.5%, to $542.5 million from $316.3 million for the nine-month period ended September 30, 1999.

    Network expenses, which include direct local and long distance circuit costs, were 53.5% and 59.0%, respectively of telecommunications services revenues for the three- and nine-month periods ended September 30, 2000, compared to 64.0% and 64.4% for the comparable periods in the previous year. The decrease in network expenses as a percentage of revenue resulted from an increase in revenues for traffic carried on our network as a percentage of total telecommunications services revenues.

    Facilities administration and maintenance expenses for the three- and nine-month periods ended September 30, 2000, were 13.4% and 12.0%, respectively, of telecommunications services revenues compared to 10.6% and 9.8%, respectively, of telecommunications services revenues for the three- and nine-month periods ended September 30, 1999. The increase is attributable to: 1) a decrease in capitalized labor and overhead and 2) an increase in cable locate services.

    Cost of construction revenues for the three- and nine-month periods ended September 30, 2000, were $8.1 million and $16.6 million, respectively, a decrease of $29.1 million and $46.5 million over the comparable periods in the previous year. The decrease corresponded to the decrease in construction, facility sales and other revenue. For the three- and nine-month periods ended September 30, 2000, cost of construction revenues was 67.7% and 67.5% of construction revenues, compared to 69.3% and 63.7% for the three- and nine-month periods ended September 30, 1999.

    Cost of product revenues for the three- and nine-month periods ended September 30, 2000, were $0 and $.3 million, respectively, a decrease of $.7 million and $1.7 million, respectively, over the three- and nine-month periods ended September 30, 1999. The decrease in cost of product revenues relates to the divestiture of the NAMS product division.

    Selling, general and administrative expenses for the three- and nine-month periods ended September 30, 2000, decreased $3.7 million, or 12.0%, and increased $.2 million, or .3%, respectively, to $27.4 million from $31.1 million and $87.6 million from $87.4 million, respectively for the three- and nine-month periods ended September 30, 1999. The decrease for the three-month period was primarily related to: 1) a decrease in payroll expenses related to a decrease in the number of employees; 2) a decrease in bonuses related to our variable incentive plan; and 3) a decrease in litigation costs. Such decrease was partially offset by an accrual of $5.8 million related to settlements and likely settlements

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of disputed items raised in the course of the bankruptcy. The increase for the nine-month period is primarily related to: 1) an increase in severance related to a reduction in workforce; 2) an increase in property taxes; and 3) a $5.8 million accrual related to settlements and likely settlements of disputed items raised in the course of the bankruptcy. Such increase was partially offset by a decrease in litigation costs. As a percentage of total revenue, selling, general and administrative expenses for the three- and nine-month periods ended September 30, 2000, were 43.3% and 47.7%, respectively, compared to 29.5% and 34.6% for the comparable periods in the previous year.

    Depreciation and amortization for the three- and nine- month periods ended September 30, 2000, increased $3.4 million, or 18.2%, and $15.3 million, or 29.2%, respectively, as compared to the three- and nine-month periods ended September 30, 1999. The increase is attributable to newly-constructed networks and related equipment being placed into service and to the amortization of intangible assets related to our acquisitions. Depreciation and amortization expense was 34.2% and 36.5% of total revenue for the three- and nine-month periods ended September 30, 2000, compared to 17.7% and 20.7%, respectively, for the comparable three- and nine-month periods ended September 30, 1999.

    As a result of the acceptance and approval of the definitive asset purchase agreement with Time Warner Telecom Inc. in the amount of $690.0 million and anticipated proceeds from the sale or sales of all remaining assets, we recorded an impairment charge, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," of $256.0 million during the three-months ended September 30, 2000 (see Note 10 in Item 1).

    Other Expenses/Income.  For the three- and nine-month periods ended September 30, 2000, we recorded net other expense of $.6 million and $33.4 million, respectively, compared to net other income of $8.7 million and net other expense of $29.4 million for the three- and nine-month periods ended September 30, 1999, respectively. For the three- and nine-month periods ending September 30, 1999, we realized a net gain of $28.0 million from the settlement of various lawsuits (the "Global Settlement"). Excluding the Global Settlement, net other expense would have decreased $18.6 million for the three- month period ended September 30, 2000, as compared to the three-month period ended September 30, 1999. Excluding such transactions, net other expense would have decreased $24.0 million for the nine-month period ended September 30, 2000, as compared to the nine-month period ended September 30, 1999. Such decrease was related to a decrease in interest expense that resulted from our Chapter 11 filing. Under Chapter 11, all of our debt was reclassified to liabilities subject to compromise and we are no longer recording interest expense on such debt, with the exception of certain capital leases.

    Reorganization Expenses.  For the three- and nine-month periods ended September 30, 2000, reorganization expenses totaled $8.2 million and $12.8 million, respectively. This consisted of $3.5 million and $6.1 million for professional expenses, $4.1 million and $6.1 million for a retention bonus accrual, and $.6 million and $0.0 million in other reorganization expenses for the three- and nine-months ended September 30, 2000, respectively. The retention bonus accrual is pursuant to a Bankruptcy Court-approved plan to retain our employees during the bankruptcy process. For the three- and nine-months ended September 30, 2000, cash expended for reorganization costs totaled $3.4 million, consisting of $.2 million for professional expenses and $3.1 million for retention bonuses. At September 30, 2000, we had accrued $3.9 million for professional expenses, $3.0 million related to the retention bonus plan, and $.6 million for other reorganization expenses.

    Net Loss.  Net loss for the three-month period ended September 30, 2000, increased $281.9 million to $293.0 million from $11.1 million for the three-month period ended September 30, 1999. Net loss for the nine-month period ended September 30, 2000, increased $310.3 million to $403.1 million from $92.7 million for the nine-month period ended September 30, 1999. Excluding the $256.0 million impairment of assets charge recorded in the three-months ended September 30, 2000, and the $28.0 million gain on the Global Settlement recorded in the three-months ended September 30, 1999, the net loss would have been $37.0 million and $147.1 million for the three- and nine- months ended September 30, 2000, compared to a loss of $39.1 million and $120.8 million for the three- and nine-months ended September 30, 1999.

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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.

    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.

				EXPECTED MATURITY (In thousands of dollars)
				2000			2001			2002			2003			2004			Thereafter			Total			Market Value at September 30, 2000
Long-term Debt:
	Fixed rate																		$	1,077,448	(1)	$	1,077,448	(1)	$	609,943	(2)
		Average interest rate																		12,275	%
	Variable rate			$	9,829		$	20,021		$	20,834		$	21,740		$	11,951		$	5,172		$	89,547
		Average interest rate (LIBOR plus)			3.25	%		3.28	%		3.34	%		3.35	%		3.22	%		3.17	%
Capital Leases:
	Fixed rate			$	2,315		$	3,206		$	1,847		$	1,840		$	1,974		$	7,199		$	18,381
		Average interest rate			11.89	%		11.89	%		11.89	%		11.89	%		11.89	%		11.89	%

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(1)

Includes $153,899 of unaccreted discount.

(2)

Based on quoted market prices at September 30, 2000.

    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.

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Part II—Other Information

Item 6. Exhibits and Reports on Form 8-K.

(a)

Exhibits

2 (a)		Asset Purchase Agreement by and among Time Warner Telecom Inc., GST Telecommunications, Inc., GST USA, Inc. and other parties identified therein, dated September 11, 2000, incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated September 12, 2000.
27		Financial Data Schedule (filed herewith)

(b)

Reports on Form 8-K

    Reference is made to the report on Form 8-K filed on September 12, 2000, on which we reported the following:

    On September 11, 2000, the Company and Time Warner Telecom Inc. executed a definitive asset purchase agreement which provides for the purchase of substantially all of the Company's assets, excluding certain assets in Hawaii and certain non-core businesses for $690 million.

    Reference is made to the report on Form 8-K filed on October 4, 2000, on which we reported the following:

    On September 21, 2000, the Company announced the U.S. District Court for the District of Delaware approved the definitive asset purchase agreement between the Company and Time Warner Telecom Inc. Closing of the purchase is subject to regulatory approvals and other customary terms and conditions.

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on the behalf of the undersigned thereunto duly authorized.

Date: November 14, 2000		GST USA, INC. (Registrant)
		By:		/s/ DONALD A. BLOODWORTH    Donald A. Bloodworth (Senior Vice President and Chief Financial Officer)

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QuickLinks

GST USA, INC. INDEX
ITEM 1. FINANCIAL STATEMENTS GST USA, Inc. Condensed Consolidated Balance Sheets (In thousands) (Unaudited)
GST USA, Inc. Condensed Consolidated Statements of Operations (In thousands, except share and per share amounts) (Unaudited)
GST USA, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
GST USA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
SIGNATURES

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