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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999.
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
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GST USA, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 83-0310464
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
4001 Main Street, Vancouver, Washington 98663
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (360) 356-7100
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(A) AND
(B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: At March 27, 2000,
there were outstanding 20 shares of the Registrant's common stock, no par value
per share.
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TABLE OF CONTENTS
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PART I Item 1. Business ............................................................... 3
Item 2. Properties ............................................................. 3
Item 3. Legal Proceedings ...................................................... 3
PART II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .................................................... 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 6
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .............. 16
Item 8. Financial Statements and Supplementary Data ............................ 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................................... 17
PART III
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ............................................................... 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .....................................................F-1
SIGNATURES
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ITEM 1. BUSINESS.
OVERVIEW
GST USA, Inc. (GST USA or the Company) is a wholly-owned subsidiary of
GST Telecommunications, Inc. (GST) We are a facilities-based integrated
communications provider, or ICP, offering voice, data and Internet services
throughout the western United States. By providing service over our own
network facilities, we are able to lower and control our costs while also
developing flexible products to meet the needs of both small and large
business customers. 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.
ITEM 2. PROPERTIES.
Our corporate headquarters are located in Vancouver, Washington. We own a
building that consists of approximately 60,000 square feet in Vancouver,
Washington, and contains our executive offices and network control center. We
also lease a building consisting of approximately 50,000 square feet, which is
located at 4001 Main Street, Vancouver, Washington and contains the majority of
our centralized operational functions. The remainder of our corporate functions
are conducted from a leased building consisting of approximately 27,000 square
feet in Vancouver, Washington. In addition to our corporate offices, our
subsidiaries lease space in a number of locations, primarily for sales offices,
storage warehouses and network equipment installations. Such locations include
California, Arizona, Hawaii, New Mexico, Oregon, Washington, Texas and Idaho.
The various leases expire in years ranging from 2000 to 2020. Additional space
will be leased as required by expansion of our operations and networks.
ITEM 3. LEGAL PROCEEDINGS.
GST AND GST TELECOM V. GLOBAL LIGHT TELECOMMUNICATIONS, INC., ET AL.
On October 20, 1998, we filed a complaint in the Superior Court of
California, County of Santa Clara, No. CV777408, against GST Global
Telecommunications, Inc., now known as Global Light Telecommunications, Inc., or
Global, and six former GST officers and directors. The complaint includes claims
for fraud, negligent misrepresentation, unjust enrichment, and unfair
competition primarily related to the alleged misappropriation of a Mexican
business opportunity, referred to as the Bestel transaction. The complaint seeks
an accounting, a constructive trust and restitution of our interest in the
opportunity and also seeks unspecified exemplary and punitive damages and
reimbursement of attorneys' fees.
The Superior Court granted the defendants' motion to stay the proceedings
on February 5, 1999, and we filed a notice of appeal on February 9, 1999.
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On September 16, 1999, we received $30 million in cash from Global and
others in connection with the settlement of various lawsuits, including this
lawsuit, between GST, Global, 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." Our claims against the nonsettling parties are
unaffected by this settlement. With regard to the status of claims by and
against Mr. Irwin, see "GST v. Irwin and Olshan" below.
GLOBAL AND MEXTEL V. GST AND GST TELECOM
On January 27, 1999, Global and GST Mextel, Inc., or Mextel, filed a
complaint in the Supreme Court of British Columbia, No. C990449, against us. The
complaint, which arises from the same matters for which we brought suit against
Global ET AL. in the Superior Court of California, as described above, includes
claims for declaratory and injunctive relief to confirm the ownership of the
Mexican business opportunity by Global, and unspecified general and special
damages. We answered by denying liability and asserting counterclaims.
Pursuant to the settlement discussed above at "GST and GST Telecom v.
Global Light Telecommunications, Inc.," all claims against us have been
dismissed. The remaining claims involve our counterclaims against Messrs.
Warta, Irwin, Hanson, and Sander relating to the Bestel transaction, as well
as claims by such individuals presented in companion case No. C990488 seeking
affirmative relief against us and certain members of our Board of Directors
on grounds of oppression and breach of duty with respect to our pursuit of a
remedy on the Bestel transaction. On October 6, 1999, the court ordered all
claims against those directors struck out, and further stayed the remaining
claims of the individuals against us. Messrs. Warta, et al., have appealed
the October 6, 1999 ruling of the Court. With regard to the status of claims
by and against Mr. Irwin, see "GST v. Irwin and Olshan" below. No trial date
has been set with regard to any of the matters pending in British Columbia.
WARTA V. GST, GST USA AND GST TELECOM AND COUNTERCLAIMS
On January 25, 1999, John Warta filed a complaint in the Superior Court of
Washington, King County, No. 99-2-02287-4SEA, against us. The complaint, which
relates to the circumstances under which Mr. Warta ceased to serve as an officer
and director of GST, includes claims for breach of an employment agreement,
breach of the covenant of good faith and fair dealing, violation of wage
statutes, and indemnity.
We have denied all liability, and have counterclaimed against Mr. Warta and
Clifford Sander, a former officer of GST, for damages we incurred with respect
to the transfer of corporate funds to Magnacom LLC, a company owned by Mr.
Warta, and to Mr. Warta for a PCS license position in Guam. The matter is
currently in discovery. Although we believe we have strong defenses, litigation
is inherently unpredictable and there is no guarantee we will prevail.
GST, GST USA AND GST TELECOM V. IRWIN AND OLSHAN
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On December 16, 1998, we filed a complaint in the United States District
Court, Southern District of New York, No. 98 CIV. 8865, against Stephen Irwin
and the law firm of Olshan Grundman Frome & Rosenzweig LLP ("Olshan"). The
complaint, which relates to Mr. Irwin and Olshan's representation of GST in
various matters, includes claims for professional negligence, breach of
fiduciary duty, and breach of contract, and seeks compensatory damages and
reimbursement of attorneys' fees.
On March 10, 2000, the parties entered into a settlement pursuant to which,
among other things, GST will dismiss or discontinue with prejudice all claims
and counterclaims asserted against Mr. Irwin and the Olshan firm in this
litigation and in the litigation entitled GST Telecommunications, et al v. GST
Global Telecommunications, et al, now on appeal in the California Court of
Appeals (6th District, Case No. H019681), Global Light Telecommunications, et al
v. GST Telecommunications, et al (Case No. C99049, Supreme Court of British
Columbia), and Stephen Irwin et al v. GST Telecommunications, et al (Case No.
990488, Supreme Court of British Columbia). Mr. Irwin and the Olshan firm will
dismiss or discontinue with prejudice all their claims and counterclaims against
GST in the above-referenced actions. In addition, Mr. Irwin will release GST
from certain indemnity claims in connection with the above-referenced litigation
and other pending matters. The settlement is subject to the preparation and
execution of customary settlement agreements and the funding and payment of the
settlement amount by Olshan.
COREY FORD V. GST, ET AL.
Corey Ford, a former employee of Magnacom Wireless, LLC, a company which
was controlled by John Warta former Chairman and Chief Executive Officer,
filed suit in Oregon state court in February, 1999, Case No. 9902-01746,
against GST, Pacwest Network LLC, John Warta, and Stephen Irwin, for breach of
contract and various other claims involving Mr. Ford's employment relationship
with Magnacom. See Item 1, "Business--Magnacom" for further discussion
relating to Magnacom. The case subsequently was moved to federal court, Case
No. 00-160-HU in the U.S. District Court, District of Oregon. Among other
things, Mr. Ford has claimed that we should be liable for Magnacom's
obligations to him on the basis that we functioned as the corporate "alter
ego" to Magnacom. We have denied liability to Mr. Ford, and the matter is in
discovery. Trial has been scheduled for September 5, 2000. Although we believe
we have strong defenses, litigation is inherently unpredictable and there is
no guarantee we will prevail. Failure to resolve this case in a manner that is
favorable to us could harm our business.
OTHER MATTERS
We are a party to various other claims and legal actions arising in the
ordinary course of business. While the results of these proceedings cannot be
predicted with certainty, we do not anticipate that these matters will
materially impact our business. We are also a party to various proceedings
before the public utilities commissions of the states in which we provide or
propose to provide telecommunications services. These proceedings typically
relate to licensure and the regulation of the provision of telecommunications
service.
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for GST USA's common equity.
All of the issued and outstanding shares of such common equity are owned by GST
Telecommunications, Inc.
ITEM 6. SELECTED FINANCIAL DATA.
Not required.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Annual 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 Annual 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 our strategy, future operations, financial position, projected costs,
prospects, plans and objectives of management.
Certain statements contained in this Annual 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:
- - the significant amount of our indebtedness;
- - our limited operating history and expectation of operating losses;
- - the availability and terms of the significant additional capital required
to fund our expansion;
- - the extensive competition we expect to face in each of our markets;
- - our dependence on sophisticated information and processing systems;
- - our ability to manage growth;
- - 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
- - changes in, or the failure to comply with, existing government regulations.
All forward-looking statements speak only as of the date of this Annual
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 Annual Report are reasonable, we can give you no assurance that we
will achieve such plans, intentions or expectations.
OVERVIEW
We are a facilities-based integrated communications provider, or 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.
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 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 consolidated financial statements. The following table
presents revenues by service type (in thousands):
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THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
------------------------------ DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
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Local service ........... $ 93,620 $ 48,859 $ 7,034 $ 16,993
Long distance
services .............. 65,590 65,701 12,609 44,981
Data services ........... 19,843 8,770 1,100 2,000
Internet services ....... 9,601 8,404 1,013 3,006
Long-haul services ...... 11,603 14,673 3,395 12,057
Product ................. 4,089 4,708 8,706 23,374
Other ................... 2,429 3,376 913 3,556
Construction and facility
sales ................. 115,147 8,826 1,488 --
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Total revenues ...... $321,922 $163,317 $ 36,258 $105,967
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RECENT DEVELOPMENTS
On January 25, 2000, we announced that Joseph A. Basile, Jr. had resigned
as President and Chief Executive Officer of GST. Mr. Basile continues to serve
as a director. We appointed Thomas Malone, the Chief Operating Officer of GST,
as Acting Chief Executive Officer.
On March 23, 2000, we announced that Daniel L. Trampush resigned as
Senior Vice President and Chief Financial Officer of GST. His successor has
been appointed and is expected to assume his duties in early April. Mr.
Trampush will remain in office until that time.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
For the purpose of making quarter-over-quarter comparisons, see GST USA's
restated quarterly results for 1999 in amendments to Form 10-Q for the periods
ending March 31, June 30 and September 30, 1999. These changes relate primarily
to construction revenues and cost of construction revenues.
REVENUES. Total revenue for Fiscal 1999 increased $158.6 million, or 97.1%,
to $321.9 million from $163.3 million for Fiscal 1998.
Telecommunications and other services revenues for Fiscal 1999 increased
$52.9 million, or 35.3%, to $202.7 million from $149.8 million for Fiscal 1998.
The increase in telecommunications and other services revenues resulted from
increased local, data and Internet services. We bundle these products to provide
better access and services to our customers. To a lesser extent, the increase
was attributable to 1998 strategic acquisitions, including the acquisition of
ICON Communications Corporation in April 1998. Reciprocal compensation, which we
recognize based on interconnection agreements and other agreements with ILECs,
totaled $11.2 million for 1999 compared to $.1 million for 1998.
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Construction, facility sales and other revenue for 1999 increased $106.3
million, to $115.1 million from $8.8 million for 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.
Product revenue for Fiscal 1999 decreased $.6 million, or 13.1%, to $4.1
million from $4.7 million in Fiscal 1998. The decrease in product revenue was
primarily due to the divestiture of the portion of Texas-based Action Telcom's
product sales division relating to long distance interconnection equipment, in
October 1999
OPERATING EXPENSES. Total operating expenses for Fiscal 1999 increased
$122.2 million, or 41.4%, to $417.2 million from $295.0 million for Fiscal 1998.
Network expenses, which include direct local and long distance circuit
costs, increased $25.4 million, or 24.4%, to $129.8 million, or 64.0% of
telecommunications services revenues for Fiscal 1999 compared to $104.3
million, or 69.6% of telecommunications services revenues for Fiscal 1998. 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 Fiscal 1999
increased $4.4 million, or 26.2%, to $21.1 million, or 10.4 % of
telecommunications services revenues compared to $16.7 million, or 11.2% of
telecommunications services revenues for Fiscal 1998. The primary reason for
the decrease in these expenses as a percentage of telecommunications and
other services revenues is the inclusion of revenues from acquisitions,
substantially all of which are not generated on our networks.
Cost of construction revenues for Fiscal 1999 was $74.9 million, an
increase of $73.5 million over Fiscal 1998. The increase was caused by the
increase in construction, facility sales and other revenue.
Cost of product revenues for Fiscal 1999 decreased $.5 million, or 17.2%,
to $2.5 million from $3.0 million for Fiscal 1998. For Fiscal 1999, cost of
product revenues was 60.7% of product revenues compared to 63.7% for Fiscal
1998.
Selling, general and administrative expenses for Fiscal 1999 increased
$25.0 million, or 26.8%, to $118.0 million from $93.1 million for Fiscal 1998.
The increase is primarily due to: (1) the expansion of our 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 ICP and carrier customers; and (4) increased
bonuses related to our Variable Incentive Plan. In addition we had increased
litigation costs related to the legal proceedings described in Part 1, Item 3,
"Legal Proceedings." As a percentage of total revenue, selling, general and
administrative expenses for Fiscal 1999 were 36.7%, compared to 57.0% for Fiscal
1998.
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Depreciation and amortization for Fiscal 1999 increased $25.0 million, or
54.5%, to $70.9 million from $45.9 million for Fiscal 1998. The increase is
attributable to newly-constructed networks and related equipment being placed
into service and to the amortization of intangible assets related to our
acquisitions. We expect that depreciation will continue to increase as we expand
our network and long-haul fiber-optic facilities. Depreciation and amortization
expense was 22.0% of total revenue for Fiscal 1999 compared to 28.1% for Fiscal
1998.
There were no special charges recorded for Fiscal 1999. Special charges for
Fiscal 1998 consist of the following (in thousands):
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Write-off of amounts paid to Magnacom pursuant
to a reseller agreement .................... $14,600
Write-off of operating advances paid to Magnacom 1,068
Write-off of costs related to abandoned projects 9,918
Impairment of assets ........................... 3,881
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Non-cash special charges ......... 29,467
Accrual of severance-related costs ............. 1,113
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Total special charges ............ $30,580
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In 1998, we changed our strategic direction to focus on our core,
domestic business. In conjunction with the change, management identified
certain in-process network construction projects no longer considered
compatible due to geographic location or technology changes. The write-off
totaled $9.9 million and represented the entire amount of the costs related
to these in-process projects, including the costs of fiber-optic networks and
electronic equipment. These assets had never been placed in service and, as
such, were not an integral part of our ongoing operations. While the
historical cost of these assets has been written-off of our consolidated
balance sheets, we continue to hold these assets for disposal.
In conjunction with the change in strategic direction, management halted
further development of, and investment in, shared tenant services. The
decision resulted in an impairment charge of $2.7 million for property, plant
and equipment, and $1.2 million for customer lists associated with such
services. At December 31, 1998, we held our shared tenant services assets to
sell and sold 80% of such assets during 1999. We anticipate that we will sell
the remaining operations and assets during 2000. The impairment loss was
measured as the amount by which the carrying amount of these assets exceeded
the estimated fair value of the assets, which was determined based on current
market prices for similar assets. The loss reserve was recorded by increasing
accumulated depreciation for the property, plant and equipment, and
accumulated amortization for the customer lists. The amount of the write-off
of customer lists represents the remaining unamortized balance of such lists,
which were related to the 1996 acquisition of Tri-Star Residential
Communications, Inc., or Tri-Star, a shared-tenant service provider. No
goodwill had been recorded in conjunction with the acquisition of Tri-Star.
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In the fourth quarter of 1998, management consummated a plan to
involuntarily terminate approximately 40 employees, including former members
of management, and to pay termination benefits to such employees. The
employees worked in a variety of functions and operations throughout GST. At
December 31, 1998, we had accrued $1.1 million in severance-related costs.
The majority of these costs relate to the termination plan and all but
$.3 million were paid out in Fiscal 1999.
In 1996, GST and Magnacom Wireless LLC, or Magnacom, a company which was
controlled by the Company's former Chairman and Chief Executive Officer,
entered into a reseller agreement pursuant to which (i) we were to become a
reseller of PCS services in markets in which Magnacom had obtained FCC
licenses, and (ii) Magnacom was to use us to provide switched local and long
distance services in markets where we had operational networks. Pursuant to
such agreement, we paid Magnacom $-0-, $.2 million, $-0- and $8.4 million
during the years ended December 31, 1999 and 1998, the three-months ended
December 31, 1997 and the year ended September 30, 1997, respectively. In
addition, we made operating advances to Magnacom of $-0-, $.9 million, $.1
million and $.1 million during the years ended December 31, 1999 and 1998,
the three-months ended December 31, 1997 and the year ended September 30,
1997, respectively.
In October 1998, Magnacom filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. As a result, we wrote-off
all amounts previously paid to Magnacom in the third quarter of 1998. The
total write-off of approximately $15.7 million is included in special charges
in the accompanying consolidated statement of operations for the year ending
December 31, 1998. We have not asserted a claim in the bankruptcy matter,
which has been converted to a case under Chapter 7 of the United States
Bankruptcy Code in July 1999.
Of the special charges recorded for the year ended December 31, 1998, only
the severance costs are recorded as an accrued liability on our balance sheet as
of December 31, 1999.
OTHER EXPENSES/INCOME. For Fiscal 1999, we recorded net other expense of
$55.2 million, compared to net other income of $4.9 million for Fiscal 1998. For
Fiscal 1999, net other 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"). See Part I, Item
3, Legal Proceedings--GST and GST Telecom v. Global Light Telecommunications,
Inc., et al.," For Fiscal 1998, net other expense includes a $61.3 million gain
resulting from the sale of our remaining 63% interest in NACT
Telecommunications, Inc. (the "NACT Sale"). Excluding such gains, net other
expense would have increased $26.8 million for Fiscal 1999 as compared to Fiscal
1998. Such increase related primarily to increased interest expense resulting
from the issuance in May 1998 of the 1998 Notes ("1998 Notes" means the 10 1/2%
Senior Secured Discount Notes due 2008 of GST Network Funding issued pursuant to
the indenture dated as of May 4, 1998 between GST, GST USA , GST Network Funding
and United States Trust Company of New York) and decreased interest income due
to lower cash and restricted cash balances.
NET LOSS. Net loss for Fiscal 1999 increased $23.7 million, or 18.7%, to
$150.5 million from $126.8 million for Fiscal 1998. Excluding the $28.0 million
gain (net) on the Global Settlement in Fiscal 1999 and the $61.3 million gain on
the NACT Sale in Fiscal 1998, net loss would have been $178.5 million and $188.0
million for Fiscal 1999 and 1998, respectively.
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FISCAL 1998 COMPARED TO THE UNAUDITED YEAR ENDED DECEMBER 31, 1997
REVENUES. Total revenues for Fiscal 1998 increased $44.3 million, or 37.2%,
to $163.3 million from $119.0 million for the comparable twelve months ended
December 31, 1997. Telecommunications services revenues for Fiscal 1998
increased $59.6 million, or 66.0%, to $149.8 million from $90.2 million for the
twelve months ended December 31, 1997. The increase in telecommunications
services revenues resulted primarily from strategic acquisitions, including the
acquisitions of ICON Communications Corp., or ICON, in April 1998, and from
increased local service revenue generated by our networks. To a lesser extent,
the increase in telecommunications services revenues resulted from increased
long distance, Internet and data services. Construction, facility sales and
other revenues for Fiscal 1998 increased $7.3 million to $8.8 million from $1.5
million for the twelve months ended December 31, 1997. The increase primarily
resulted from the construction and sale of long-haul network facilities in
California. Telecommunications products revenues for Fiscal 1998 decreased $22.6
million, or 82.8%, to $4.7 million from $27.3 million for the twelve months
ended December 31, 1997. The decrease in product revenues resulted from the sale
of our 63% interest in NACT Telecommunications, Inc., or NACT.
OPERATING EXPENSES. Total operating expenses for Fiscal 1998 increased
$95.0 million, or 47.5%, to $295.0 million from $200.0 million for the 12 months
ended December 31, 1997. Network expenses, which included direct local and long
distance circuit costs, were 69.7% of telecommunications and other services
revenues for Fiscal 1998 compared to 78.2% for the comparable period in the
previous year. The decrease in network expenses as a percentage of revenue
resulted from the inclusion of strategic acquisitions and an increase in
revenues for traffic carried on our network as a percentage of total
telecommunications revenues. Facilities administration and maintenance expenses
for Fiscal 1998 were 10.5% of telecommunications and other services revenues
compared to 13.8% for the comparable period ended December 31, 1997. The primary
reason for the decrease in these expenses as a percentage of telecommunications
and other services revenues was the inclusion of revenues from strategic
acquisitions, substantially all of which were not generated on our networks.
Cost of product revenues for Fiscal 1998 decreased $6.3 million, or 67.7%,
to $3.0 million from $9.3 million for the twelve months ended December 31, 1997.
For Fiscal 1998, cost of product revenues were 63.7% of products revenues
compared to 34.0% for the comparable period ended December 31, 1997. The
decrease in the dollar amount of cost of product revenues and the increase in
cost of product revenues as a percent of product sales resulted from the sale of
NACT. Research and development costs reported in the twelve months ended
December 31, 1997 were related to activities at NACT.
Cost of construction revenues for Fiscal 1998 increased $1.1 million to
$1.4 million from $.3 million for the twelve months ended December 31, 1997. The
increase resulted from an increase in construction, facility sales and other
revenues.
Selling, general and administrative expenses for Fiscal 1998 increased
$16.8 million, or 22.1%, to $93.1 million from $76.2 million for the twelve
months ended December 31, 1997. The increase was
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due to the expansion of our local and enhanced services operations, which had
resulted in additional marketing, management information and sales staff, and to
selling, general and administrative expenses related to strategic acquisitions.
As a percentage of total revenue, selling, general and administrative expenses
for Fiscal 1998 were 57.0%, compared to 64.0% for the comparable period ended
December 31, 1997.
Depreciation and amortization for Fiscal 1998 increased $17.6 million, or
62.3%, to $45.9 million from $28.3 million for the twelve months ended December
31, 1997. The increase was 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 28.1% of total revenue for Fiscal 1998 compared to 23.8% for the
comparable period ended December 31, 1997.
See this section, "Fiscal 1999 compared to Fiscal 1998," above for a
discussion of special charges incurred in 1998.
OTHER EXPENSES AND INCOME. For Fiscal 1998, we recorded net other income of
$4.9 million, compared to net other expense of $29.1 million for the comparable
period ended December 31, 1997. For Fiscal 1998, net other income included a
$61.3 million gain resulting from the NACT Sale. Excluding such gain, net other
expense would have increased $27.3 million for Fiscal 1998 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 the 1998 Notes.
NET LOSS. Net loss for Fiscal 1998 increased $13.8 million, or 12.2%, to
$126.8 million from $113.0 million for the twelve months ended December 31,
1997. Excluding the $61.3 million gain on the sale of NACT, net loss would have
been $188.1 million for Fiscal 1998, an increase of $75.1 million as compared to
the twelve months ended December 31, 1997. Such increase in net loss resulted
primarily from a $32.4 million increase in interest expense and a $50.7 million
increase in operating loss.
THE THREE MONTHS ENDED DECEMBER 31, 1997 ("1997 THREE MONTH PERIOD)
COMPARED TO THE UNAUDITED THREE MONTHS ENDED DECEMBER 31, 1996 ("1996
THREE MONTH PERIOD")
REVENUES. Total revenue for the 1997 Three Month Period increased $13.1
million, or 56.2%, to $36.3 million from $23.2 million for the 1996 Three Month
Period. Telecommunications services revenue for the 1997 Three Month Period
increased $7.6 million, or 41.4%, to $26.1 million from $18.4 million for the
1996 Three Month Period. The increase in telecommunications services revenue
resulted primarily from increased local service revenue generated by our
networks and from increased long distance service revenue. To a lesser extent,
the increase in revenue resulted from the acquisitions of Action Telcom, Inc. in
May 1997 and the Guam operations of Sprint in October 1997. Product revenue for
the 1997 Three Month Period increased $3.9 million, or 56.2%, to $8.7 million
from $4.8 million for the 1996 Three Month Period. The increase in product
revenues resulted from increased unit sales of NACT's STX switch and, to a
lesser extent, the inclusion of Action Telcom's sales of its network management
system, called NAMS. Excluding NACT, product revenue totaled $1.4 million and $0
for
-13-
<PAGE>
the 1997 Three Month Period and the 1996 Three Month Period, respectively.
During the 1997 Three Month Period, we completed a $1.5 million long-haul
conduit sale.
OPERATING EXPENSES. Total operating expenses for the 1997 Three Month
Period increased $17.0 million, or 42.0%, to $57.7 million from $40.7 million
for the 1996 Three Month Period. Network expenses, which include direct local
and long distance circuit costs, increased $4.3 million, or 29.0%, to $19.1
million, or 73.4% of telecommunications services revenue for the 1997 Three
Month Period compared to $14.8 million, or 80.4% of telecommunications services
revenue for the 1996 Three Month Period. The primary reason for the decrease in
network expenses as a percent of revenue was the increase in on-net revenues
generated for traffic carried on our network as a percent of total revenues.
Facilities administration and maintenance expenses (consisting primarily of
costs related to personnel providing maintenance, monitoring and technical
assistance for our networks) for the 1997 Three Month Period decreased $.4
million, or 12.7%, to $3.5 million, or 12.7% of telecommunications services
revenue, compared to $3.1 million, or 16.9 % of telecommunications services
revenue, for the 1996 Three Month Period.
Cost of product revenue, which included the costs associated with product
revenue of NACT and Action Telcom, increased $1.3 million, or 70.4%, to $3.1
million for the 1997 Three Month Period from $1.8 million for the 1996 Three
Month Period. Cost of product revenue was 35.6% of product revenue for the 1997
Three Month Period compared to 38.1% for the 1996 Three Month Period. The
decrease in cost of product revenue as a percentage of product revenue resulted
primarily from economies of scale related to increased unit sales of NACT's STX
switch. Excluding NACT, cost of product revenue totaled $.8 million and $0 for
the 1997 Three Month Period and the 1996 Three Month Period, respectively.
Research and development costs for the 1997 Three Month Period increased $.4
million, or 90.5%, to $.8 million from $.4 million for the 1996 Three Month
Period. The increase was due to the addition of personnel to enhance NACT's
switch product line and to facilitate the development of new switching products
and applications.
Cost of construction revenue for the 1997 Three Month Period related to the
sale of a long-haul conduit system.
Selling, general and administrative expenses for the 1997 Three Month
Period increased $6.2 million, or 39.4%, to $22.0 million from $15.8 million for
the 1996 Three Month Period. The increase was due to the expansion of our CLEC
and enhanced services operations, the acquisition of two companies between May
and October 1997 and the hiring of a significant number of marketing, management
information and sales personnel to implement our integrated services strategy.
Selling, general and administrative expenses were 60.8% of total revenue for the
1997 Three Month Period compared to 68.0% of total revenue for the 1996 Three
Month Period.
Depreciation and amortization for the 1997 Three Month Period increased
$4.2 million, or 89.2%, to $8.9 million from $4.7 million for the 1996 Three
Month Period. The increase was attributable to newly-constructed networks
becoming operational and to the amortization of intangible assets related to our
acquisitions. Depreciation and amortization was 24.4% of total revenue for the
1997 Three Month
-14-
<PAGE>
Period compared to 20.2% for the 1996 Three Month Period.
OTHER EXPENSES/INCOME. For the 1997 Three Month Period, net other expenses
increased $8.0 million, or 198.5%, to $12.0 million, or 33.2% of total revenue,
from $4.0 million, or 17.4% of total revenue, for the 1996 Three Month Period.
The primary reason for the increase was the inclusion of interest expense
associated with the Secured Notes ("Secured Notes" means the 13 1/4% Senior
Secured Discount Notes due 2007 of GST Equipment Funding issued pursuant to the
indenture dated as of May 13, 1997 among GST, GST USA, GST Equipment Funding and
United States Trust Company of New York). The increase in interest expense was
partially offset by interest income earned on the investment of a portion of the
proceeds of the sale of such notes. To a lesser extent, net other expenses
increased due to NACT's income tax expense as well as minority interest in the
income of NACT.
NET LOSS. Net loss for the 1997 Three Month Period increased $13.4 million,
or 62.6%, to $34.8 million from $21.4 million for the 1996 Three Month Period.
The increase in net loss resulted primarily from a $4.0 million increase in
operating loss and a $11.2 million increase in interest expense.
YEAR 2000 PROGRAM
Having completed our planned remediation and testing of all systems
identified as business-critical during the third quarter of 1999, we focused on
refining our contingency plans during the fourth quarter. To date, we have had
no reported system failures attributable to the year 2000 date conversion.
The total amount expended on the project through December 31, 1999 was
approximately $2.8 million. The total cost of the year 2000 project was
estimated to be $3.3 million, including $.3 million in internal staffing costs,
$1.8 million in external staffing costs and $1.2 million in hardware and
software upgrade costs. We do not anticipate future material costs related to
the year 2000 project.
-15-
<PAGE>
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK - We have 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 our investment portfolio is affected by changes in the
general level of U.S. interest rates. We believe that we are 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 our risk exposure associated
with changing interest rates. Currently, we do not use derivative financial
instruments to manage our interest rate risk.
<TABLE>
<CAPTION>
EXPECTED MATURITY
(In thousands)
-----------------------------------------------------------------------------------------
Market
Value at
December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999 (1)
------- ------- -------- -------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate $895,387 (2) $895,387 (2) $862,671
Average interest rate 12.275%
Variable rate $17,466 $19,814 $ 20,511 $ 21,388 $ 11,582 $ 5,801 $ 96,562
Average interest rate (LIBOR plus) 3.27% 3.28% 3.33% 3.34% 3.21% 3.06%
Capital Leases:
Fixed rate $ 6,697 $ 3,221 $ 1,864 $ 1,859 $ 1,996 $ 7,869 $ 23,506
Average interest rate 12.36% 12.36% 12.36% 12.36% 12.36% 12.36%
</TABLE>
(1) Based on quoted market prices at December 31, 1999
(2) Includes $182.1 million of unaccreted discount
MARKET PRICE RISK - Our risk exposure associated with market price is
limited to our long-term debt that is publicly traded. These bonds are
recorded at book value, which could vary from current market prices.
-16-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements: see the Index to Financial Statements.
<TABLE>
<CAPTION>
EXHIBITS:
<S> <C>
*3(a) Certificate of Incorporation of GST USA, as amended.
*3(b) By-Laws of GST USA.
**4(a) Indenture dated as of May 13, 1997, by and among GST Funding, GST, GST
USA and United States Trust Company of New York.
***4(b) Senior Notes Indenture dated as of December 19, 1995, by and among
GST, GST USA and United States Trust Company of New York.
***4(c) Convertible Notes Indenture dated as of December 19, 1995, by and
among GST, GST USA and United States Trust Company of New York.
#4(d) Indenture dated as of May 4, 1998 by and among GST Telecommunications,
GST USA, Inc., GST Network Funding, Inc. and the United States Trust
Company of New York, as trustee.
##10(a) Stock Purchase Agreement dated December 31, 1997 by and among GST
Telecommunications, Inc., GST USA, Inc. and World Access, Inc.,
incorporated by reference to Exhibit 99.2 to GST's
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS:
<S> <C>
Form 8-K dated January 6, 1997.
#10(b) Placement Agreement dated April 29, 1998 by and among GST
Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc.,
and several Placement Agents named in Schedule I thereto.
#10(c) Registration Rights Agreement dated May 4, 1998 by and among GST
Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc. and
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc., Credit
Suisse First Boston Corporation and SBC Warburg Dillon Read Inc.
#10(d) Collateral Pledge and Security Agreement dated as of May 4, 1998 from
GST Network Funding, Inc. to United States Trust Company of New York,
as trustee.
#10(e) Reimbursement and Commitment Fee Agreement dated May 4, 1998 among GST
Telecommunications, Inc., GST USA, Inc. and GST Network Funding, Inc.
###27 Financial Data Schedule.
- ----------------------------------
* Incorporated by reference to GST USA's Registration Statement on Form
S-4 (No. 333-33601-02).
** Incorporated by reference to GST's Quarterly Report on Form 10-Q for
the period ended June 30, 1997.
*** Incorporated by reference to GST's Annual Report on Form 20-F for the
fiscal year ended September 30, 1995.
# Incorporated by reference to GST's Form 8-K filed May 19, 1998.
## Incorporated by reference to Exhibit 99.2 to GST's Form 8-K dated
January 6, 1998.
### Filed herewith.
</TABLE>
(b) Reports on Form 8-K: None.
-18-
<PAGE>
GST USA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.................................................... F - 2
Consolidated Balance Sheets at December 31, 1999 and 1998....................... F - 3
Consolidated Statements of Operations for the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997......................................................... F - 4
Consolidated Statements of Shareholder's (Deficit) Equity for the years ended
December 31, 1999 and 1998, the three-month period ended December 31, 1997
and the year ended September 30, 1997...................................... F - 5
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997......................................................... F - 6
Notes to Consolidated Financial Statements...................................... F - 7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GST USA, Inc.:
We have audited the accompanying consolidated balance sheets of GST USA,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholder's (deficit) equity, and
cash flows for each of the years in the two-year period ended December 31,
1999, the three-month period ended December 31, 1997, and for the year ended
September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GST USA,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and cash flows for each of the years in the two-year period
December 31, 1999, the three-month period ended December 31, 1997, and for
the year ended September 30, 1997 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Portland, Oregon
March 17, 2000
F-2
<PAGE>
GST USA, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,721 $ 85,884
Restricted investments 19,828 34,107
Accounts receivable, net 45,244 32,935
Construction contracts receivable 26,823 3,338
Investments 46 46
Prepaid and other current assets 8,544 9,463
----------- -----------
143,206 165,773
Restricted investments 9,848 247,257
Property and equipment, net 832,047 615,852
Goodwill, net 41,314 50,879
Other assets, net 36,105 49,017
----------- -----------
Total assets $ 1,062,520 $ 1,128,778
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 30,250 $ 26,229
Accrued expenses 48,457 36,621
Payable to parent 360,118 354,679
Deferred revenue 10,066 6,030
Current portion of capital lease obligations 6,693 5,649
Current portion of long-term debt 17,466 12,127
----------- -----------
473,050 441,335
----------- -----------
Capital lease obligations, less current portion 16,813 19,741
Long-term debt, less current portion 974,483 919,075
Commitments and contingencies
Shareholder's deficit:
Common shares:
200 shares authorized, no par value, 20
and 10 shares issued and outstanding, as of
December 31, 1999 and 1998, respectively 78,462 78,462
Accumulated deficit (480,288) (329,835)
----------- -----------
(401,826) (251,373)
----------- -----------
Total liabilities and shareholder's deficit $ 1,062,520 $ 1,128,778
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GST USA, INC.
Consolidated Statements of Operations
(In thousands, except share amounts)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
------------------------ DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications and other services $ 202,686 $ 149,783 $ 26,064 $ 82,596
Construction, facility sales and other 115,147 8,826 1,488 --
Product 4,089 4,708 8,706 23,374
--------- --------- --------- ---------
Total revenues 321,922 163,317 36,258 105,970
--------- --------- --------- ---------
Operating costs and expenses:
Network expenses 129,761 104,320 19,126 66,247
Facilities administration and maintenance 21,074 16,703 3,510 12,304
Cost of construction revenues 74,940 1,424 300 --
Cost of product revenues 2,484 2,999 3,103 7,990
Selling, general and administrative 118,009 93,059 22,026 69,992
Research and development -- -- 781 2,316
Depreciation and amortization 70,945 45,928 8,855 24,123
Special charges -- 30,580 -- --
--------- --------- --------- ---------
Total operating costs and expenses 417,213 295,013 57,701 182,972
--------- --------- --------- ---------
Loss from operations (95,291) (131,696) (21,443) (77,002)
--------- --------- --------- ---------
Other expenses (income):
Interest income (9,722) (24,134) (4,096) (6,332)
Interest expense, net of amounts capitalized 88,821 77,814 15,855 34,171
Gain on sale of subsidiary shares -- (61,266) -- (7,376)
Other (23,937) 2,670 284 584
--------- --------- --------- ---------
55,162 (4,916) 12,043 21,047
--------- --------- --------- ---------
Loss before minority interest in income
of subsidiaries and income tax (150,453) (126,780) (33,486) (98,049)
--------- --------- --------- ---------
Income tax expense:
Current -- -- 758 1,802
Deferred -- -- 92 (899)
--------- --------- --------- ---------
-- -- 850 903
--------- --------- --------- ---------
Loss before minority interest in income
of subsidiaries (150,453) (126,780) (34,336) (98,952)
Minority interest in income of subsidiaries -- -- (472) (612)
--------- --------- --------- ---------
Net loss $(150,453) $(126,780) $ (34,808) $ (99,564)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GST USA, INC.
Consolidated Statements of Shareholder's (Deficit) Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
TOTAL
COMMON SHARES SHAREHOLDER'S
----------------- ACCUMULATED (DEFICIT)
SHARES AMOUNT DEFICIT EQUITY
------ --------- -------- ---------
<S> <C> <C> <C> <C>
Balances, September 30, 1996 10 $ 69,957 (68,683) $ 1,274
Capital transaction,
sale of subsidiary shares -- 8,416 -- 8,416
Net loss -- -- (99,564) (99,564)
---- --------- -------- ---------
Balances, September 30, 1997 10 78,373 (168,247) (89,874)
Exercise of subsidiary stock
options -- 89 -- 89
Net loss -- -- (34,808) (34,808)
---- --------- -------- ---------
Balances, December 31, 1997 10 78,462 (203,055) (124,593)
Net loss -- -- (126,780) (126,780)
---- --------- -------- ---------
Balances, December 31, 1998 10 78,462 (329,835) (251,373)
Capital transaction,
issuance of shares for
transfer of stock from Parent 10 -- -- --
Net loss -- -- (150,453) (150,453)
---- --------- -------- ---------
Balances, December 31, 1999 20 $ 78,462 (480,288) $(401,826)
==== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GST USA, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
----------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operations:
Net loss $(150,453) $(126,780) $ (34,808) $ (99,564)
Adjustments to reconcile net loss to net cash used
in operations:
Minority interest in income of subsidiary -- -- 472 612
Depreciation and amortization 76,392 50,649 9,887 26,720
Deferred income taxes -- -- 92 (899)
Accretion and accrual of interest 47,952 35,627 5,767 17,099
Non-cash stock compensation and other expense 2,161 (433) 374 2,521
Loss on disposal of assets 4,160 221 -- 679
Non-cash special charges -- 29,467 -- --
Gain on sale of subsidiary shares -- (61,266) -- (7,376)
Changes in non-cash operating working capital:
Accounts receivable, net (13,573) (11,983) (3,547) (9,783)
Construction contracts receivable (23,485) (3,338) -- --
Prepaid, other current and other assets, net (627) 486 (2,621) (6,959)
Accounts payable and accrued liabilities 25,743 (911) (18,593) 25,162
Other liabilities 4,036 5,557 708 (119)
--------- --------- --------- ---------
Cash used in operations (27,694) (82,704) (42,269) (51,907)
--------- --------- --------- ---------
Investments:
Acquisition of subsidiaries, net of cash acquired -- (35,471) (2,105) (673)
Purchase of investments -- -- (4,307) (3,247)
Proceeds from sale of investments -- 327 10 5,177
Purchase of property and equipment (259,965) (217,088) (46,355) (223,867)
Proceeds from sale of property and equipment 6,514 3,567 141 5,774
Purchase of other assets (1,692) (3,278) (1,861) (11,072)
Change in investments restricted for the
purchase of property and equipment 218,878 (170,288) -- (59,776)
Proceeds from the sale of subsidiary shares, net -- 85,048 12,217 27,105
Cash disposed of in sale of subsidiary -- (5,252) -- --
--------- --------- --------- ---------
Cash used in investing activities (36,265) (342,435) (42,260) (260,579)
--------- --------- --------- ---------
Financing:
Proceeds from long-term debt 1,782 300,955 7,729 353,258
Principal payments on long-term debt and capital leases (17,074) (22,476) (10,101) (6,723)
Proceeds of debt payable to parent 3,278 12,921 215,473 87,691
Deferred debt financing costs -- (12,621) (87) (12,004)
Change in investments restricted to finance interest
payments 32,810 33,374 15,083 (95,974)
--------- --------- --------- ---------
Cash provided by financing activities 20,796 312,153 228,097 326,248
--------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents (43,163) (112,986) 143,568 13,762
Cash and cash equivalents, beginning of period 85,884 198,870 55,302 41,540
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 42,721 $ 85,884 $ 198,870 $ 55,302
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 48,583 $ 50,213 $ 21,684 $ 4,982
Cash paid for income taxes -- -- 1,038 638
Supplemental schedule of non-cash investing and
financing activities:
Recorded in business combinations:
Assets -- 45,719 2,605 14,148
Liabilities -- 10,248 500 4,369
Disposition of subsidiaries:
Assets 8,096 35,480 -- --
Liabilities (213) 4,218 -- --
Minority interest -- 12,732 -- --
Amounts in accounts payable and accrued liabilities
for the purchase of fixed assets at end of period 28,880 25,945 19,029 19,718
Assets acquired through capital leases 5,068 10,079 480 21,765
</TABLE>
F-6
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
GST USA, Inc. and its subsidiaries (the Company or GST USA), a
wholly-owned subsidiary of GST Telecommunications, Inc. (GST), a
Canadian company, is in the business of providing integrated
telecommunications products and services primarily in the western
United States. The Company provides a range of telecommunications
services, including local, long distance, Internet and data services,
constructs telecommunications network segments for other providers and
produces telecommunications software. Upon formation of the Company
in August of 1994, GST transferred all of its operating subsidiaries
and equity investments to the Company.
Effective January 1, 1998, GST transferred to the Company the
businesses of Call America Business Communications, Corp.
(Call America) and TotalNet Communications, Inc. (TotalNet) and,
effective January 1, 1999, GST transferred to the Company the business
of Action Telcom, Inc. (Action Telcom). The consolidated financial
statements included herein have been restated to reflect the
operations of Call America, TotalNet and Action Telcom from the dates
such subsidiaries were acquired by GST. The consolidated financial
statements have been restated in order to conform with GST's
presentation as the entities are under common control.
(b) CHANGE IN FISCAL YEAR-END
In 1997, the Company changed its fiscal year-end from September 30 to
December 31. Included in the accompanying audited consolidated
financial statements are the results of operations for the three-month
transition period ended December 31, 1997. Unaudited results of
operations for the comparable three-month period ended December 31,
1996 are summarized below:
<TABLE>
<S> <C>
Revenues ..................... $ 23,217
Loss from operations ......... (17,432)
Other expenses, net .......... (4,034)
Net loss ..................... (21,413)
</TABLE>
(c) BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the
Company and its greater than 50% owned subsidiaries. The Company's
investments in unconsolidated companies owned 20% or more or where
the Company exercises significant influence are accounted for using
the equity method. At December 31, 1999, the Company held no
investments accounted for pursuant to the equity method. All
significant intercompany accounts have been eliminated.
F-7 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(d) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
original maturities of ninety days or less.
F-8 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(e) ACCOUNTS AND NOTES RECEIVABLE
Gross trade accounts receivable total $52,518 and $38,209 at December
31, 1999 and 1998, respectively. Notes receivable totaled $268 and
$208 at December 31, 1999 and 1998, respectively. Management provides
an allowance for doubtful accounts and customer credits based on
current customer information and historical statistics. The allowance
was $7,542 and $5,482 at December 31, 1999 and 1998, respectively.
Valuation and qualifying accounts for the allowance for doubtful
accounts and customer credits are as follows:
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
------------------------ DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------- ------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period .... $ 5,482 $ 3,956 $ 3,582 $ 1,264
Charged to bad debt expense ....... 8,629 4,776 1,541 5,737
Charged to revenue ................ 1,500 -- -- --
Written off ....................... (8,069) (3,250) (1,167) (3,419)
------- ------- ------- -------
Balance at end of period .......... $ 7,542 $ 5,482 $ 3,956 $ 3,582
======= ======= ======= =======
</TABLE>
Results of operations are derived from United States operations and
substantially all assets reside in the United States. The Company is
exposed to concentration of credit risk principally from accounts
receivable. The Company's five largest telecommunications and other
services customers accounted for approximately 11.3%, 16.4%, 16.8% and
20.8% of the Company's consolidated telecommunications and other
services revenue for the years ended December 31, 1999 and 1998, the
three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively.
In certain cities, the Company relies on incumbent local exchange
carriers for the provision of local telephone service. In addition,
the Company relies on other carriers to provide transmission and
termination services for a majority of its long distance traffic. The
inability of any of these companies or carriers to fulfill service
delivery requirements could impact the Company's future results.
Construction contracts receivable consists of costs in excess of
billings on certain contracts and amounts due from joint construction
partners. Construction contracts receivable consist of balances due
from three customers.
F-9 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(f) RESTRICTED AND UNRESTRICTED INVESTMENTS
Restricted investments classified as available-for-sale consist
primarily of U.S. Treasury securities maturing between one and eight
months which are restricted for the purchase and installation of
network assets. Held-to-maturity investments consist of U.S. Treasury
securities and certificates of deposit maturing between four months
and eighteen months which are primarily restricted for interest
payments. Restricted investments are recorded at amortized cost, which
approximates fair value for all periods presented.
Under Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Company classifies its
investments as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Restricted investments:
Available-for-sale .... $ 9,848 $230,014
Held-to-maturity ...... 19,828 51,350
Unrestricted investments:
Available-for-sale .... 46 46
</TABLE>
F-10 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(g) MINORITY INTEREST
In March 1997, the Company's then wholly-owned subsidiary, NACT
Telecommunications, Inc. (NACT), completed an initial public offering
of its common stock, pursuant to which the Company and NACT sold one
and two million shares, respectively, of NACT's common stock,
resulting in net proceeds of approximately $9,000 and $18,100,
respectively. As a result of the offering, the Company's ownership was
reduced to 63%. Minority interest represents the non-Company owned
shareholder interest in NACT's equity resulting from the 1997
offering.
In February 1998, the Company sold its remaining interest in NACT for
net proceeds of $85,048, which resulted in a gain of $61,266.
(h) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on the
straight-line basis over their estimated useful lives, which are as
follows:
<TABLE>
<S> <C>
Telecommunications networks...................... 20 years
Electronic and related equipment................. 10 years
Leasehold improvements........................... 10 years
Computer equipment, office equipment and other... 3 - 7 years
Buildings........................................ 40 years
</TABLE>
Construction, engineering and overhead costs directly related to the
development of the Company's networks are capitalized. The Company
capitalizes internal information systems costs in accordance with
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. The amount
capitalized under SOP 98-1 was $13,075, and $621 of amortization was
charged to operations for the year ended December 31, 1999. These
amounts are included in Property and Equipment. The Company begins
depreciating these costs when the assets become operational.
Depreciation expense totaled $55,368, $30,056, $6,240 and $14,975 for
the years ended December 31, 1999 and 1998, the three-month period
ended December 31, 1997 and for the year ended September 30, 1997,
respectively.
(i) GOODWILL
Goodwill is amortized using the straight-line method over periods
ranging from five to ten years. Amortization charged to operations was
$6,758, $6,191, $1,047 and $4,017 for the years ended December 31,
1999 and 1998, the three-month period ended December 31, 1997 and for
the year ended September 30, 1997, respectively.
F-11 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(j) OTHER ASSETS
Other assets consists primarily of customer lists, software
development costs and deferred financing costs. These assets are
amortized using the straight-line method over periods ranging from
three to ten years. Amortization charged to operations for customer
lists and software development costs was $10,319, $11,181, $1,943 and
$5,631 for the years ended December 31, 1999 and 1998, the three-month
period ended December 31, 1997 and for the year ended September 30,
1997, respectively. Amortization charged to interest expense for
deferred financing costs was $3,940, $3,173, $548 and $1,350 for the
years ended December 31, 1999 and 1998, the three-month period ended
December 31, 1997 and for the year ended September 30, 1997,
respectively.
(k) ASSET IMPAIRMENT
The Company reviews long-lived assets, goodwill and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
During 1998, the Company recorded a non-cash special charge of $3,881
related to the impairment of certain long-lived assets associated with
the Company's shared tenant services operations. The impaired assets
primarily consist of customer lists and electronic and related
equipment. As the projected future cash flows were less than the
assets' carrying value, an impairment loss was recognized. The
impairment loss was measured as the amount by which the carrying
amount of the assets exceeded the estimated fair value of the assets,
which was determined based on current market prices for similar
assets.
As discussed in note 14, the Company also recorded a non-cash special
charge of $15,668 during 1998 related to the impairment of a prepaid
reseller agreement and advances to Magnacom Wireless LLC.
F-12 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(l) REVENUE RECOGNITION
Telecommunications services revenue is recognized monthly as services
are provided. Amounts billed in advance of the service month are
recorded as deferred revenue. Product revenue is recorded upon
installation of products and is presented in the accompanying
consolidated statements of operations net of product returns.
Network construction services revenue is recognized using the
percentage of completion method. Accordingly, the Company recognizes
revenues and expenses as construction progresses. Cost of construction
revenue is estimated using weighted average allocations of the total
costs of constructing the specific phase of the network.
The Company treats certain long term fiber and conduit lease contracts
entered into prior to June 30, 1999 as sales-type leases and
recognizes revenue under the percentage of completion method. In June
1999, the FASB issued Interpretation No. 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 is no longer
appropriate for dark fiber and conduit leases and therefore, these
transactions will be accounted for as operating leases unless title
transfers to the lessee.
(n) NET LOSS PER SHARE
The Company does not have any equity instruments which are considered
common stock equivalents and weighted average common shares
total only twenty at December 31, 1999 and ten for all prior
periods presented. Therefore, for all periods, loss per share
information is not meaningful and is not presented in the accompanying
consolidated financial statements.
(o) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital
transactions in the accompanying consolidated financial statements.
F-13 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(p) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax
basis of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in the tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
(q) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, on
January 1, 1998. Comprehensive income is defined as changes in
stockholders' equity exclusive of transactions with owners such as
capital contributions and dividends. There are no differences between
net loss and comprehensive loss for any periods presented.
(r) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(s) ADVERTISING COSTS
The Company expenses advertising costs as incurred.
(t) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for prior periods to conform with
the December 31, 1999 presentation.
F-14 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(2) ACQUISITIONS
The Company has made the acquisitions set forth below, each of which was
accounted for using the purchase method of accounting. The consolidated
financial statements include the operating results from the effective date
of acquisition.
(a) ICON COMMUNICATIONS CORP. (ICON)
In April 1998, the Company acquired 100% of the outstanding capital
stock of ICON, a Washington company which provides long distance and
ancillary communications services. Consideration paid for this
acquisition consisted of $23,916 in cash. Goodwill of $15,957 was
recorded as a result of this acquisition.
(b) KLP, INC. (D/B/A CALL AMERICA) (CALL AMERICA PHOENIX)
In March 1998, the Company acquired 100% of the outstanding capital
stock of Call America Phoenix, an Arizona company which provides long
distance services. Consideration paid for this acquisition consisted
of $3,838 in cash. Goodwill of $2,405 was recorded as a result of this
acquisition.
(c) WHOLE EARTH NETWORKS, LLC (WHOLE EARTH)
In March 1998, the Company acquired the assets of Whole Earth, a
California Internet services provider. Consideration paid for this
acquisition consisted of $9,053 in cash and the assumption of $1,273
in liabilities. Goodwill of $3,293 was recorded as a result of this
acquisition.
(d) ACTION TELCOM CO. (ACTION TELCOM)
In May 1997, GST acquired 100% of the outstanding capital stock of
Action Telcom, a Texas company which provides long distance and
ancillary telecommunications services, and produces software used in
the telecommunications industry. GST acquired Action Telcom for
consideration of 903,000 common shares valued at $8,161, $1,290 in
cash and $2,580 in notes payable. Goodwill of $3,863 was recorded as a
result of this acquisition. Effective January 1, 1999, GST transferred
the ownership of Action Telcom to the Company.
In October 1999, the Company sold the assets of the long distance
portion of Action Telcom for $4,895 in cash. A loss of $163 was
recognized as a result of this divestiture.
(e) GUAM OPERATIONS OF SPRINT COMMUNICATIONS COMPANY L.P. (SPRINT)
In October 1997, the Company purchased the assets of the Guam
operations of Sprint which provide long distance and ancillary
services in Guam. Consideration paid for this acquisition consisted of
$2,000 in cash and $500 in liabilities for services to be provided to
Sprint.
In July 1999, the Company sold the assets of its Guam operations for
$1,500 in cash. A gain of $294 was recognized as a result of this
divestiture.
F-15 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
The unaudited pro forma results shown below reflect results of
operations as if the 1998 and 1997 acquisitions described above
occurred as of the beginning of each of the periods presented.
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
Revenues ............ $ 167,556 $ 40,521 $ 133,958
Net loss ............ (127,325) (34,872) (101,490)
</TABLE>
The pro forma results are not necessarily indicative of what actually
would have occurred had the acquisitions been in effect for the entire
periods presented. In addition, they are not intended to be a
projection of future results that may be achieved from the combined
operations.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Telecommunications networks ......... $ 264,229 $ 178,008
Electronic and related equipment .... 314,880 181,270
Leasehold improvements .............. 28,708 24,509
Computer equipment, office
equipment and other ............. 55,820 40,585
Buildings ........................... 2,808 2,803
Construction in progress ............ 277,965 251,199
--------- ---------
944,410 678,374
Less accumulated depreciation ....... (112,363) (62,522)
--------- ---------
$ 832,047 $ 615,852
========= =========
</TABLE>
Property and equipment includes $277,965 and $251,199 of equipment which
had not been placed in service at December 31, 1999 and 1998, respectively,
and accordingly, is not being depreciated. During the years ended December
31, 1999 and 1998, the three-month period ended December 31, 1997 and the
year ended September 30, 1997, $32,133, $25,920, $3,726 and $15,170 of
interest, respectively, was capitalized as part of property and equipment.
F-16 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(4) ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Fixed asset purchases ......... $ 6,012 $ 9,552
Carrier costs ................. 13,814 4,885
Interest payable .............. 8,223 9,098
Payroll and related liabilities 5,694 5,252
Other ......................... 14,714 7,834
------- -------
$48,457 $36,621
======= =======
</TABLE>
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
13.25% Senior Secured Notes due May 1, 2007... $265,000 $265,000
10.5% Senior Secured Discount Notes
due May 1, 2008 ....................... 355,587 320,997
Note payable to Tomen, LIBOR plus 3.0%
(9.0% at December 31, 1999) ........... 42,187 45,262
Note payable to NTFC, LIBOR plus 3.5%
(9.5% at December 31, 1999) ........... 44,375 50,000
Note payable to Siemens, LIBOR plus 3.5%
(9.5% at December 31, 1999) ........... 10,000 9,463
13.875% Senior Discount Notes due
December 15, 2005 ..................... 274,800 240,304
Other ..................................... -- 176
-------- --------
991,949 931,202
Less current portion of long-term debt .... 17,466 12,127
-------- --------
$974,483 $919,075
======== ========
</TABLE>
F-17 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
The schedule of future debt service payments is as follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
----------- ---------
<S> <C> <C>
Year ending December 31:
2000................................. $ 17,466 $ 43,267
2001................................. 19,814 84,890
2002................................. 20,511 83,013
2003................................. 21,388 107,306
2004................................. 11,582 132,024
Thereafter........................... 1,083,249 (a) 315,162
---------- ---------
Less unaccreted discount............. (182,061) --
---------- ---------
$ 991,949 $ 765,662
========== =========
</TABLE>
(a) Includes $500,000 and $312,448 of 10.5% Senior Secured Notes and
13.875% Senior Discount Notes, respectively, due at maturity.
SENIOR SECURED NOTES
In May 1997, the Company issued $265,000 in Senior Secured Notes (the Secured
Notes) due May 1, 2007. The Secured Notes bear interest at a rate of 13.25% with
semiannual interest payments due beginning November 1, 1997. Approximately
$93,790 of the proceeds were set aside to fund the first six scheduled interest
payments. The remainder of the net proceeds were restricted to finance the cost
of design, development, construction, acquisition, installation and integration
of telecommunications equipment. The Secured Notes are secured by the assets
financed with the proceeds and are subject to certain debt covenants.
SENIOR SECURED DISCOUNT NOTES
In May 1998, the Company issued $300,000 in 10.5% Senior Secured Discount Notes
(the Senior Secured Discount Notes) maturing on May 1, 2008. The Senior Secured
Discount Notes sold at a substantial discount and there will be no accrual of
cash interest prior to May 1, 2003, or payment of interest until November 1,
2003. The Senior Secured Discount Notes accrete to a total principal amount, due
May 1, 2008, of approximately $500,000. The net proceeds from the sale of the
Senior Secured Discount Notes are restricted to finance the cost of design,
development, construction, acquisition, installation and integration of
telecommunications equipment. The Senior Secured Discount Notes are secured by
the assets financed with the proceeds and are subject to certain debt covenants.
F-18 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
TOMEN FACILITY
In October 1994, the Company entered into a master financing agreement with
Tomen. Under the agreement, Tomen will loan up to $100,000 to subsidiaries of
the Company for development and construction of network projects. As of December
31, 1999, Tomen had provided a total of $69,468 (of which $42,187 was
outstanding at December 31, 1999) in debt financing to the Company's
subsidiaries for construction and operation of fiber optic networks in southern
California, New Mexico, Arizona and Hawaii. The Tomen financing is secured by
equipment at the funded network locations and is subject to certain debt
covenants. Although, Tomen has the right of first refusal to finance fiber optic
projects for the Company, management does not believe that it is likely that
they will finance any additional projects.
NTFC CAPITAL CORPORATION (NTFC) AGREEMENT
In March 1997, the Company entered into a $50,000 ($44,375 of which was
outstanding at December 31, 1999) loan and security agreement with NTFC to
finance the purchase of certain equipment from Northern Telecom, Inc. Amounts
borrowed under the agreement bear interest at LIBOR plus 3.5% and will be repaid
in twenty quarterly installments which began in March 1999. The loan is secured
by the equipment purchased with the proceeds and subject to certain debt
covenants.
SIEMENS TELECOM NETWORKS (SIEMENS) AGREEMENT
In September 1996, the Company entered into a loan and security agreement with
Siemens. Under the terms of the agreement, Siemens will loan up to $226,000 to
the Company for the purchase and installation of telecommunications switching
and related equipment. At December 31, 1999, $116,000 was available to the
Company and $10,000 was outstanding. Amounts borrowed under the agreement
initially bear interest at LIBOR plus 4.5% and are secured by the equipment.
Such interest decreases to LIBOR plus 3.5% at the time each initial loan is
converted to a term loan, which conversion occurs at the first calendar quarter
following the initial loan. Amounts borrowed under the agreement will be repaid
in twenty-four quarterly installments beginning five quarters after the initial
loan is converted to a term loan. The loan is subject to certain debt covenants.
SENIOR DISCOUNT NOTES
In December 1995, the Company issued approximately $160,000 in 13.875% Senior
Discount Notes (the Senior Notes) maturing on December 15, 2005. The Senior
Notes were sold at a substantial discount and there will be no accrual of cash
interest prior to December 15, 2000 or payment of interest until June 15, 2001.
The Senior Notes accrete to a total principal amount, due December 15, 2005, of
approximately $312,400 by December 15, 2000. The Senior Notes rank in right of
payment with all unsubordinated indebtedness of the Company. On or after
December 15, 2000, the Senior Notes will be redeemable at the option of the
Company. The Senior Notes are subject to certain debt covenants and are
guaranteed by GST.
F-19 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
GUARANTEE OF PARENT'S DEBT
The Company has guaranteed GST's Convertible Senior Subordinated Discount Notes
(the Convertible Notes) totaling approximately $33,295 at December 31, 1999. The
Convertible Notes accrete to a total principal amount, due December 15, 2005, of
approximately $37,856 by December 15, 2000. On or after December 15, 2000, the
Convertible Notes will be redeemable at the option of the Company and GST. The
Convertible Notes are subject to certain debt covenants.
DEBT COVENANTS AND CLASSIFICATION OF LONG-TERM DEBT
In November 1998, the Company informed the trustee who represents the holders
of the Secured Notes, the Senior Secured Discount Notes, the Senior Notes and
the Convertible Notes that it may have violated certain technical covenants
contained in the indentures related to each of the aforementioned debt
issuances. In particular, the Company advised the trustee that the transfer
to Global Light Telecommunications, Inc. (Global) of its interest in a
telecommunications project to be developed in Mexico may have constituted a
violation of certain provisions in the indentures. In February 1999, the
trustee informed the noteholders of the potential violations. The noteholders
did not declare a default, as defined within the indentures of each of the
notes.
On September 16, 1999, the Company received $30,000 in cash from Global and
others in connections with the settlement of various lawsuits and has taken
other actions to cure the potential technical violations. As a result, the
Company believes that there is currently no basis on which the noteholders could
declare a default under the indentures relating to the Company's debt issuances.
Accordingly, the Company has classified the related debt obligations as
non-current in the accompanying consolidated balance sheets.
F-20 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(6) SHAREHOLDER'S (DEFICIT) EQUITY
COMMON STOCK
Since inception, GST has owned all of the outstanding shares of the
Company.
NON-CASH CONTRIBUTIONS FROM PARENT
Non-cash contributions from parent consist primarily of GST stock issued
in connection with the Company's acquisition of certain subsidiaries.
STOCK-BASED COMPENSATION
Certain employees of the Company are eligible for stock option and stock
bonus awards of GST's common stock. Pursuant to performance-based awards,
compensation cost recognized in the statement of operations for the years
ended December 31, 1999 and 1998, the three-month period ended December
31, 1997 and the year ended September 30, 1997 totaled $2,161, $(433),
$374, and $2,521, respectively.
F-21 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(7) INCOME TAXES
The provision for income taxes differs from the amount computed by
applying the statutory income tax rate to net income before taxes for the
years ended December 31, 1999 and 1998, the three-month period ended
December 31, 1997 and the year ended September 30, 1997 as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Computed expected income
tax benefit at
statutory rate.......... (34)% (34)% (34)% (34)%
Expected state income tax
benefit........ (4) (4) (4) (4)
Increase in valuation
allowance................ 36 38 37 36
Amortization of goodwill..... 1 1 1 1
Effect of acquisition of new
subsidiaries............. -- 1 -- --
Non-deductible interest...... -- -- 2 2
Other........................ 1 (2) 1 --
---------------- ---------------- ---------------- ----------------
Income tax expense........... --% --% 3% 1%
================ ================ ================ ================
</TABLE>
F-22 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant items comprising the Company's
deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Federal and state net
operating loss carryforwards..................... $ 96,520 $ 76,221
Non-deductible interest.............................. 66,046 39,199
Other................................................ 4,176 3,363
-------------------- --------------------
Total deferred tax assets.................. 166,742 118,783
Less valuation allowance............................. (162,027) (108,367)
-------------------- --------------------
Total gross deferred tax assets............ 4,715 10,416
-------------------- --------------------
Deferred tax liabilities:
Furniture, fixtures and equipment, due to
differences in depreciation........................ 4,071 6,217
Capitalized software/intangibles..................... 644 4,199
-------------------- --------------------
Total gross deferred
tax liabilities.......................... 4,715 10,416
-------------------- --------------------
Net deferred tax liabilities............... $ -- $ --
==================== ====================
</TABLE>
The valuation allowance for deferred tax assets as of October 1, 1996 was
$15,386. The net change in total valuation allowance for the years ended
December 31, 1999 and 1998, the three-month period ended December 31,
1997 and for the year ended September 30, 1997 was an increase of
$53,660, $48,794, $10,125 and $34,062, respectively.
F-23 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
The Company has net operating losses for income tax purposes of
approximately $264,506 available to reduce United States taxable income
of future years, expiring as follows:
<TABLE>
<S> <C>
2006............................................................................ $ 405
2007............................................................................ 537
2008............................................................................ 2,800
2009............................................................................ 5,020
2010............................................................................ 36,922
2011............................................................................ 64,283
2017............................................................................ 36,601
2018............................................................................ 61,039
2019............................................................................ 56,899
--------------------
$ 264,506
====================
</TABLE>
Approximately 58% of these net operating losses may be utilized for state
income tax purposes.
For United States income tax purposes, utilization of net operating
losses may be subject to limitation in the event of certain substantial
stock ownership changes pursuant to IRC Section 382 and referred to
hereinafter as an ownership change. An ownership change would limit the
utilization of any net operating losses incurred prior to the change in
ownership date. The Company has completed an analysis under IRC Section
382 and has determined that no ownership change has occurred.
F-24 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(8) LEASES
The Company is obligated under capital lease agreements for equipment
which expire at various dates during the next twenty years. Certain of
these agreements contain clauses which allow the lessor to cancel the
agreement upon twelve-month written notice. However, the Company believes
that the likelihood of such clauses being exercised is remote. Gross
amounts of equipment and related accumulated amortization recorded under
capital leases were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Network facilities and equipment......................... $ 38,608 $ 33,540
Less accumulated amortization............................ (15,864) (9,307)
-------------------- --------------------
$ 22,744 $ 24,233
==================== ====================
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next ten years. Rental expense under
operating leases was $7,582, $6,281, $1,114 and $3,385 for the years
ended December 31, 1999 and 1998, the three-month period ended December
31, 1997 and for the year ended September 30, 1997, respectively.
F-25 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
Future minimum lease payments under noncancelable leases (with initial or
remaining lease terms in excess of one year) and future minimum capital
lease payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------------------- --------------------
<S> <C> <C>
Year ending December 31:
2000................................................. $ 9,202 $ 6,942
2001................................................. 5,333 6,147
2002................................................. 3,672 5,814
2003................................................. 3,431 5,423
2004................................................. 3,320 4,583
Thereafter........................................... 14,064 9,243
-------------------- --------------------
Total minimum lease payments............... 39,022 $ 38,152
====================
Less amount representing interest (at rates
ranging from 9% to 17%).............................. 15,516
--------------------
Net minimum lease payments................. 23,506
Current portion of capital lease obligations............. 6,693
--------------------
Capital lease obligations, less current
portion.................................. $ 16,813
====================
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
(a) PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution 401(k) plan (the Plan).
Employees are eligible to participate in the Plan upon
commencement of service. Participants may defer up to 15% of
eligible compensation. In October 1999, the Company amended the
Plan to provide matching contributions of 50% on the first 6% of
employee deferrals. The matching contributions vest over five
years. Company contributions were $272 for the year ended December
31, 1999.
(b) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key
members of management. These agreements provide for certain
payments in the event of death, disability and change of control.
The agreements also contain covenants not to compete.
(c) CONSTRUCTION CONTRACTS
The Company is party to various construction contracts arising in
the ordinary course of business.
F-26 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(11) LEGAL PROCEEDINGS
(a) GLOBAL AND CURRENT AND FORMER OFFICERS AND DIRECTORS
On October 20, 1998, the Company and GST Telecom, filed a
Complaint in the Superior Court of California, County of Santa
Clara, against Global and six former GST officers and directors
(the Defendants). The Complaint included claims for fraud,
negligent misrepresentation, unjust enrichment, and unfair
competition primarily related to the alleged misappropriation of a
Mexican business opportunity. The Complaint sought an accounting,
a constructive trust, and restitution of GST's interest in the
opportunity and also sought unspecified exemplary and punitive
damages and attorneys' fees.
On January 27, 1999, Global and GST Mextel, Inc. (Mextel) filed a
Complaint in the Supreme Court of British Columbia, against GST
and GST Telecom. The Complaint, which arose from the same matters
for which GST and GST Telecom filed its complaint against Global,
et al, in the Superior Court of California, included claims for
declaratory and injunctive relief and unspecified general and
special damages.
On January 28, 1999, five former GST officers or directors filed a
Complaint in the Supreme Court of British Columbia against the
Company, GST Telecom and four current GST directors. The
Complaint, which arose from the same matters for which GST and GST
Telecom filed its complaint against Global, et al, in the Superior
Court of California, included claims for oppression and
declaratory relief, and seeks unspecified actual and punitive
damages, cost, and attorneys' fees.
On September 16, 1999, the Company received $30,000 in cash from
Global and others in connection with the settlement of various
lawsuits, including the above lawsuits between GST, Global, Mextel
and three of the former directors. Pursuant to the settlement, all
claims against these parties have been dismissed with the
exception of the claim discussed in 11(d) below. The Company
claims against the non-settling parties are unaffected by this
settlement.
(b) FORMER DIRECTOR AND COUNSEL
On December 16, 1998, GST, GST USA and GST Telecom filed a
Complaint in the Unites States District Court, Southern District
of New York, against a former director and a law firm which
previously represented the Company as general counsel. The
Complaint includes claims for professional negligence, breach of
fiduciary duty, and breach of contract, and seeks compensatory
damages and attorneys' fees.
On February 12, 1999, the former director filed his Answer to the
Complaint. The law firm filed its Answer and Counterclaims to the
Complaint on February 17, 1999. The law firm counterclaimed
against GST, GST USA and GST Telecom for breach of contract,
unjust enrichment, quantum meruit, and "account stated," based on
invoices submitted to GST of approximately $250.
F-27 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
On March 10, 2000, the parties entered into a settlement of the
Complaint and certain of the proceedings described in 11(a)
and (c). The settlement is subject to the execution of a final
agreement and payment by the law firm.
F-28 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(c) FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
On January 25, 1999, the Company's former Chairman and Chief
Executive Officer, filed a Complaint in the Superior Court of
Washington, King County, against GST, GST USA and GST Telecom. The
Complaint, which relates to the circumstances under which the
former Chairman and Chief Executive Officer ceased to serve as an
officer and director of GST, includes claims for breach of
employment agreement, breach of the covenant of good faith and
fair dealing, violation of wage statutes, and indemnity.
On February 23, 1999, the Company answered by denying all
liability and filed counterclaims against the former Chairman and
Chief Executive Officer, Global and five other former officers and
directors for liability with respect to the matters leading to the
termination of the former Chairman and Chief Executive Officer's
employment. In particular, GST seeks recovery under Washington law
for matters described in note 11(a), above, as well as for
breaches committed with respect to the wrongful use of GST funds
for the purchase of telecommunications licenses. The matter is
currently in discovery.
(d) FORMER TREASURER AND FORMER DIRECTORS
On February 9, 1999, the Company filed a Complaint in the Superior
Court for the State of Washington, Clark County, against the
former treasurer of the Company. The Complaint is based on alleged
misconduct and includes claims for fraud, breach of fiduciary
duty, unjust enrichment, and unfair business practices, and seeks
an accounting, imposition of a constructive trust, compensatory
damages, costs of suit, attorneys' fees, and treble damages. In
particular, the Complaint seeks relief based on misuse of insider
information in the purchase of stock, wrongful disbursements to
third parties, and involvement in a fraudulent release of stock
from escrow. This claim has been consolidated with the claim
against the Former Chairman and Chief Executive Officer described
in note 11(c), above.
(e) FORMER EMPLOYEE OF MAGNACOM
In February 1999, a former employee of Magnacom Wireless, LLC
filed suit in Oregon State Court against the Company. The case
has subsequently been transferred to federal court. The suit
claims that the Company should be liable for Magnacom's
obligations on the basis that the Company was involved in many
functions of Magnacom. The Company has denied liability and the
matter is currently in discovery.
Pursuant to the guidance set forth in SFAS 5, ACCOUNTING FOR
CONTINGENCIES, the Company has accrued loss provisions related to
certain of the legal proceedings detailed above. In the opinion of
management, the ultimate disposition of such matters will not have
a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company is also involved in various other claims and legal
actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not
have a
F-29 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
material effect on the Company's consolidated financial position,
results of operations or cash flows.
(12) RELATED PARTY TRANSACTIONS
(a) MAGNACOM WIRELESS, LLC (MAGNACOM)
In 1996, the Company and Magnacom, a company which was controlled
the Company's former Chairman and Chief Executive Officer, entered
into a reseller agreement pursuant to which (i) the Company was to
become a reseller of PCS services in markets in which Magnacom had
obtained FCC licenses, and (ii) Magnacom was to use the Company to
provide switched local and long distance services in markets where
the Company had operational networks. Pursuant to such agreement,
the Company paid Magnacom $-0-, $200, $-0- and $8,403 during the
years ended December 31, 1999 and 1998, the three-months ended
December 31, 1997 and the year ended September 30, 1997,
respectively. In addition, the Company made operating advances to
Magnacom of $-0-, $925, $91 and $52 during the years ended
December 31, 1999 and 1998, the three-months ended December 31,
1997 and the year ended September 30, 1997, respectively.
In October 1998, Magnacom filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. As a
result, the Company wrote-off all amounts previously paid to
Magnacom in the third quarter of 1998. The total write-off of
approximately $15,668 is included in special charges in the
accompanying consolidated statement of operations for the years
ending December 31, 1998. The transactions with Magnacom form the
basis for certain of the legal proceedings described in notes
11(b), 11(c), 11(d), and 11(e).
F-30 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(b) PACWEST NETWORK, INC. (PNI)
The operations of the Company's Hawaiian microware network require
the use of radio licenses from the FCC. Such licenses are owned by
PNI, a company controlled by the Company's former Chairman and the
former treasurer. Under agreements between the Company and PNI,
(1) the Company pays a monthly fee to PNI to utilize PNI's
licenses for its communications traffic and (2) PNI pays an equal
monthly fee to the Company for the right to utilize the Company's
facilities for other communications traffic using up to 10% of
PNI's license capacity.
(c) TOMEN
Under the Tomen facility, Tomen has the right to act as
procurement agent for each network project it finances. The
Company has purchased equipment through Tomen at competitive
prices. Additionally, an upfront fee of 1.50% of the aggregate
principal amount of each project loan advanced and a commitment
fee of .50% per annum on the unused portion of each project loan
is payable to Tomen.
Pursuant to the Tomen agreements, Tomen has purchased 1,586,595
shares of common stock for total cash consideration of $10,400.
(d) OTHER
The Company and GST paid approximately $0, $1,929, $104, and
$2,066 in legal fees during the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and the year
ended September 30, 1997, respectively, to a firm having a member
who was also a director of the Company.
Prior to June 1997, the Company's former Chairman and Chief
Executive Officer served as a paid consultant to Tomen.
Additionally, Pacwest received a fee equal to 1% of the aggregate
debt and equity financing provided by Tomen to the Company through
October 1997. Such fees incurred by the Company totaled $437
during the year ended September 30, 1997.
Receivables from parent are primarily comprised of expenses paid
by the Company on behalf of GST.
Payables to parent represent advances from GST to be used in
constructing and operating the Company's telecommunications
networks and the fair value of net assets transferred in certain
business combinations.
F-31 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(13) SEGMENTS
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. As an integrated communications
provider, the Company has one reportable operating segment. While the
Company's 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 common network and
facilities. This allows the Company to leverage its network costs in an
effort to maximize return. As a result, there are many shared expenses
generated by the various revenue streams; because management believes
that any allocation of the expenses to multiple revenue streams would be
impractical and arbitrary, management does not currently make such
allocations internally. The chief decision-maker does, however, monitor
revenue streams at a more detailed level than those depicted in the
Company's historical general purpose consolidated financial statements.
The following table presents revenues by service type:
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
--------------------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Local service............ $ 93,620 $ 48,859 $ 7,034 $ 16,993
Long distance
services............. 65,590 65,701 12,609 44,981
Data services............ 19,843 8,770 1,100 2,000
Internet services........ 9,601 8,404 1,013 3,006
Longhaul services........ 11,603 14,673 3,395 12,057
Product.................. 4,089 4,708 8,706 23,374
Other.................... 2,429 3,376 913 3,556
Construction and facility
sales................ 115,147 8,826 1,488 --
--------------- --------------- ----------------- -------------------
Total revenues..... $ 321,922 $ 163,317 $ 36,258 $ 105,967
=============== =============== ================= ===================
</TABLE>
Substantially all of the Company's revenue is attributable to customers
in the United States. Additionally, all significant operating assets are
located within the United States.
F-32 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(14) SPECIAL CHARGES
There were no special charges for the year ended December 31, 1999.
Special charges for the year ended December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
<S> <C>
Write-off of amounts paid to Magnacom pursuant
to a reseller agreement.................................................... $ 14,600
Write-off of operating advances paid to Magnacom............................... 1,068
Write-off of costs related to abandoned projects............................... 9,918
Impairment of assets........................................................... 3,881
--------------------
Non-cash special charges......................................... 29,467
Accrual of severance-related costs............................................. 1,113
--------------------
Total special charges............................................ $ 30,580
====================
</TABLE>
In 1998, the Company changed its strategic direction to focus on its
core, domestic business. In conjunction with the change, management
identified certain in-process network construction projects no longer
considered compatible due to geographic location or technology changes.
The write-off totaled $9,918 and represented the entire amount of the
costs related to these in-process projects, including the costs of fiber
optic networks and electronic equipment. These assets had never been
placed in service and, as such, were not an integral part of the
Company's ongoing operations. While the historical cost of these assets
has been written-off of the accompanying consolidated balance sheets, the
Company holds these assets for disposal.
In conjunction with the change in strategic direction, management halted
further development of and investment in shared tenant services. The
decision resulted in an impairment charge of $2,728 for property, plant
and equipment, and $1,153 for customer lists associated with such
services. At December 31, 1998, the Company held its shared tenant
services assets for sale and sold approximately 80% of such assets in
1999 for $207. The impairment loss was measured as the amount by which
the carrying amount of these assets exceeded the estimated fair value of
the assets, which was determined based on current market prices for
similar assets. The loss reserve was recorded by increasing accumulated
depreciation for the property, plant and equipment, and accumulated
amortization for the customer lists. The amount of the write-off of
customer lists represents the remaining unamortized balance of such
lists, which were related to the 1996 acquisition of Tri-Star Residential
Communications, Inc. (Tri-Star) a shared-tenant service provider. No
goodwill had been recorded in conjunction with the acquisition of
Tri-Star.
F-33 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
In the fourth quarter of 1998, management consummated a plan to
involuntarily terminate approximately 40 employees, including former
members of management, and to pay termination benefits to such employees.
The employees worked in a variety of functions and operations throughout
the Company. The termination of those employees did not have a material
impact on the Company's business functions. At December 31, 1998, the
Company had accrued $1,113 in severance-related costs. The majority of
these costs relate to the termination plan and all but $315 were paid out
in 1999. The following table details 1999 activity related to the
severance accrual:
<TABLE>
<S> <C>
Accrual at December 31, 1998................................................... $ 1,113
Payments....................................................................... (737)
Adjustments.................................................................... (61)
--------------------
Accrual at December 31, 1999................................................... $ 315
====================
</TABLE>
See footnote 12 for a discussion of the amounts paid to Magnacom.
Special charges for the year ended September 30, 1997 relate to a $7,445
non-cash compensation charge incurred when 750,000 common shares were
released from escrow to former members of management. This transaction is
part of the litigation described in note 11(d).
F-34 (Continued)
<PAGE>
GST USA, INC.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except share amounts)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts and notes receivable, investments,
accounts payable and accrued expenses approximate fair values due to the
short-term maturities of those instruments. The carrying amounts for
current and non-current restricted investments approximate fair value due
to the composition of such investments and the related maturities. The
carrying amount of unrestricted investments is based upon fair value as
determined by quoted market prices.
The following table details the carrying amounts and estimated fair
values of long-term debt at December 31, 1999 and 1998 (the financial
instruments for which carrying value and estimated fair value differ at
December 31, 1999 and 1998):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Long-term debt:
Senior Secured Notes, 13.25%................. $ 265,000 $ 262,350 $ 265,000 $ 273,933
Senior Secured Discount Notes, 10.5%......... 355,587 242,500 320,997 239,555
Senior Discount Notes, 13.875%............... 274,800 228,087 240,304 228,415
</TABLE>
The fair value of publicly traded long-term debt is estimated based on
quoted market prices. For substantially all other long-term obligations,
carrying amounts approximate fair values as incremental borrowings
available to the Company are at similar rates and terms.
Fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters
of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly impact the
estimates.
F-35 (Continued)
<PAGE>
(16) SUBSEQUENT EVENTS
On January 25, 2000, the President and Chief Executive Officer of the
Company resigned. The Company has appointed the Chief Operating Officer
as Acting Chief Executive Officer until a permanent appointment is made.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on the 30th day of March, 2000.
GST USA, INC.
By: /s/ Robert A. Ferchat
-------------------------------
Robert A. Ferchat
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert A. Ferchat and Thomas M. Malone
his true and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities on March 30, 2000.
SIGNATURE TITLE
/s/ Robert A.Ferchat Chairman of the Board and Director
- ---------------------------
(Robert A. Ferchat)
/s/ Thomas M. Malone Acting President and Chief Executive
- ----------------------------- Officer (Principal Executive
(Thomas M. Malone) Officer) and Director
/s/ George B. Cobbe Director
- ------------------------------
(George B. Cobbe)
/s/ Daniel L.Trampush Senior Vice President and Chief
- ------------------------------ Financial Officer (Principal
(Daniel L. Trampush) Financial Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT
*3(a) Certificate of Incorporation of GST USA, as amended.
*3(b) By-Laws of GST USA.
**4(a) Indenture dated as of May 13, 1997, by and among GST Funding, GST,
GST USA and United States Trust Company of New York.
***4(b) Senior Notes Indenture dated as of December 19, 1995, by and among
GST, GST USA and United States Trust Company of New York.
***4(c) Convertible Notes Indenture dated as of December 19, 1995, by and
among GST, GST USA and United States Trust Company of New York.
#4(d) Indenture dated as of May 4, 1998 by and among GST
Telecommunications, GST USA, Inc., GST Network Funding, Inc. and the
United States Trust Company of New York, as trustee.
##10(a) Stock Purchase Agreement dated December 31, 1997 by and among GST
Telecommunications, Inc., GST USA, Inc. and World Access, Inc.,
incorporated by reference to Exhibit 99.2 to GST's Form 8-K dated
January 6, 1997.
#10(b) Placement Agreement dated April 29, 1998 by and among GST
Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc.,
and several Placement Agents named in Schedule I thereto.
#10(c) Registration Rights Agreement dated May 4, 1998 by and among GST
Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc.
and Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc.,
Credit Suisse First Boston Corporation and SBC Warburg Dillon Read
Inc.
#10(d) Collateral Pledge and Security Agreement dated as of May 4, 1998
from GST Network Funding, Inc. to United States Trust Company of New
York, as trustee.
#10(e) Reimbursement and Commitment Fee Agreement dated May 4, 1998 among
GST Telecommunications, Inc., GST USA, Inc. and GST Network Funding,
Inc.
###27 Financial Data Schedule.
- ------------------------------
* Incorporated by reference to GST USA's Registration Statement on Form
S-4 (No. 333-33601-02).
** Incorporated by reference to GST's Quarterly Report on Form 10-Q for
the period ended June 30, 1997.
*** Incorporated by reference to GST's Annual Report on Form 20-F for the
fiscal year ended September 30, 1995.
# Incorporated by reference to GST's Form 8-K filed May 19, 1998.
## Incorporated by reference to Exhibit 99.2 to GST's Form 8-K dated
January 6, 1998.
### Filed herewith.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GST USA'S
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 42,721,000
<SECURITIES> 46,000
<RECEIVABLES> 79,591,000
<ALLOWANCES> (7,542,000)
<INVENTORY> 0
<CURRENT-ASSETS> 143,206,000
<PP&E> 944,410,000
<DEPRECIATION> (112,363,000)
<TOTAL-ASSETS> 1,062,520
<CURRENT-LIABILITIES> 473,050,000
<BONDS> 895,387
0
0
<COMMON> 0
<OTHER-SE> (401,826,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,062,520
<SALES> 321,922,000
<TOTAL-REVENUES> 321,922,000
<CGS> 207,185,000
<TOTAL-COSTS> 417,213,000
<OTHER-EXPENSES> (33,659,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,821,000
<INCOME-PRETAX> (150,453,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (150,453,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (150,453,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
