<PAGE> 1
EXHIBIT 99.2
GST TELECOMMUNICATIONS, 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 Shareholders' (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> 2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GST Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of GST
Telecommunications, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, shareholders' deficit, 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
Telecommunications, 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 ended 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.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in note 16(c) and (d)
to the consolidated financial statements, on May 17, 2000 the Company filed for
protection from its creditors under Chapter 11 of the U.S. Bankruptcy Laws.
Subsequent to this filing, the Company conducted an auction under the
supervision of the Bankruptcy Court that has resulted in a definitive agreement
to sell a substantial portion of the Company's assets to Time Warner Telecom
Inc. These actions raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Portland, Oregon
March 17, 2000, except for note 16(c) and (d), as to
which the date is September 21, 2000
F-2
<PAGE> 3
GST TELECOMMUNICATIONS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
ASSETS 1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,983 $ 86,070
Restricted investments 19,828 34,107
Trade accounts receivable, net 45,244 32,935
Construction contracts receivable 26,823 3,338
Investments 44,596 16,246
Prepaid and other current assets 8,562 9,601
----------- -----------
Total current assets 188,036 182,297
----------- -----------
Restricted investments 9,848 247,257
Property and equipment, net 832,047 615,852
Goodwill, net 41,409 51,091
Other assets, net 41,289 54,786
----------- -----------
Total assets $ 1,112,629 $ 1,151,283
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 30,579 $ 26,411
Accrued expenses 49,759 37,445
Deferred revenue 10,066 6,030
Current portion of capital lease obligations 6,693 5,649
Current portion of long-term debt 17,466 13,417
----------- -----------
Total current liabilities 114,563 88,952
----------- -----------
Long-term interest payable 43,134 21,377
Capital lease obligations, less current portion 16,813 19,741
Long-term debt, less current portion 1,151,778 1,092,959
Commitments and contingencies
Redeemable preference shares:
Authorized - 10,000,000 no par shares; 500 shares
issued and outstanding at December 31, 1999
and 1998 69,688 61,741
Shareholders' deficit:
Common shares:
Authorized - unlimited number of no par common shares; issued and
outstanding - December 31, 1999 - 37,734,507
shares, December 31, 1998 - 36,264,066 shares 238,626 234,267
Accumulated deficit (566,523) (383,954)
Accumulated other comprehensive income 44,550 16,200
----------- -----------
(283,347) (133,487)
----------- -----------
Total liabilities and shareholders' deficit $ 1,112,629 $ 1,151,283
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 4
GST TELECOMMUNICATIONS, INC.
Consolidated Statement of Operations
(In thousands, except per share and 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 $ 82,593
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 36,258 105,967
------------ ------------ ------------ ------------
Operating costs and expenses:
Network expenses 129,761 104,320 19,127 66,250
Facilities administration and maintenance 21,074 16,703 3,511 12,304
Cost of construction revenues 74,940 1,424 300 --
Cost of product revenues 2,484 2,999 3,102 7,990
Selling, general and administrative 122,974 96,506 22,428 72,046
Research and development -- -- 781 2,316
Depreciation and amortization 70,973 45,957 8,864 24,159
Special charges -- 30,580 -- 7,445
------------ ------------ ------------ ------------
Total operating costs and expenses 422,206 298,489 58,113 192,510
------------ ------------ ------------ ------------
Loss from operations (100,284) (135,172) (21,855) (86,543)
------------ ------------ ------------ ------------
Other expenses (income):
Interest income (9,736) (24,145) (4,101) (7,026)
Interest expense, net of amounts capitalized 115,481 101,648 18,948 37,665
Gain on sale of subsidiary shares -- (61,266) -- (7,376)
Other (23,460) 3,281 1,569 2,017
------------ ------------ ------------ ------------
82,285 19,518 16,416 25,280
------------ ------------ ------------ ------------
Loss before minority interest in income
of subsidiaries and income tax (182,569) (154,690) (38,271) (111,823)
------------ ------------ ------------ ------------
Income tax expense:
Current -- -- 758 1,802
Deferred -- -- 92 (899)
------------ ------------ ------------ ------------
-- -- 850 903
------------ ------------ ------------ ------------
Loss before minority interest in income
of subsidiaries (182,569) (154,690) (39,121) (112,726)
Minority interest in income of subsidiaries -- -- (472) (612)
------------ ------------ ------------ ------------
Net loss (182,569) (154,690) (39,593) (113,338)
Accretion of preference shares 7,948 7,106 3,145 2,969
------------ ------------ ------------ ------------
Net loss to common shareholders $ (190,517) $ (161,796) $ (42,738) $ (116,307)
============ ============ ============ ============
Net loss per share, basic and dilutive $ (5.11) $ (4.52) $ (1.39) $ (4.71)
============ ============ ============ ============
Weighted average common shares, basic
and diluted 37,270,710 35,834,196 30,804,376 24,702,870
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 5
GST TELECOMMUNICATIONS, INC.
Consolidated Statement of Shareholders' Deficit
(In thousands, except share amounts)
<TABLE>
<CAPTION>
COMMITMENT TO ISSUE
COMMON SHARES COMMON SHARES
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances, September 30, 1996 21,257,697 $ 72,647 1,988,230 $ 25,454
Issuance of shares for services 25,000 221 -- --
Issuance of shares in business
combinations 3,132,854 29,394 (1,700,169) (21,049)
Issuances of shares and
warrants, net 2,505,882 32,666 -- --
Issuance of shares under option
plans 643,016 3,309 -- --
Issuance of shares under employee
share purchase plan 62,993 400 -- --
Accrual of compensation costs for
share awards and option plans -- 9,807 -- --
Accretion of redeemable
preference shares -- (2,969) -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances, September 30, 1997 27,627,442 145,475 288,061 4,405
Issuance of shares in business
combinations 246,392 3,801 (237,174) (3,801)
Issuance of shares, net 6,440,000 73,092 -- --
Issuance of shares under option
plans 158,209 1,107 -- --
Issuance of shares under employee
share purchase plan 75,198 463 -- --
Accrual of compensation costs for
share awards and option plans -- 179 -- --
Accretion of redeemable
preference shares -- (3,145) -- --
Conversion of senior subordinated
discount notes 17,657 133 -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balances, December 31, 1997 34,564,898 221,105 50,887 604
Issuance of shares for business
combinations 57,632 2,952 (50,887) (604)
Issuance of shares under option
plans 429,350 3,258 -- --
Issuance of shares for warrant
exercise 991,343 12,852 -- --
Issuance of shares under employee
share purchase plan 220,843 1,563 -- --
Accrual of compensation costs for
share awards and option plans -- (357) -- --
Accretion of redeemable
preference shares -- (7,106) -- --
Net loss -- -- -- --
Other comprehensive income -
unrealized gain on securities -- -- -- --
---------- ---------- ---------- ----------
Comprehensive loss
Balances, December 31, 1998 36,264,066 234,267 -- --
Issuance of shares under option
plans 989,504 7,495 -- --
Issuance of shares under employee
share purchase plan 348,610 1,876 -- --
Accrual of compensation costs for
share awards and option plans 30,000 2,161 -- --
Accretion of redeemable
preference shares -- (7,948) -- --
Conversion of senior subordinated
discount notes 102,327 775 -- --
Net loss -- -- -- --
Other comprehensive income -
unrealized gain on securities -- -- -- --
---------- ---------- ---------- ----------
Comprehensive loss
Balances, December 31, 1999 37,734,507 $ 238,626 -- $ --
========== ========== ========== ==========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
LOSS DEFICIT INCOME DEFICIT
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balances, September 30, 1996 $ -- $ (76,333) $ -- $ 21,768
Issuance of shares for services -- -- -- 221
Issuance of shares in business
combinations -- -- -- 8,345
Issuances of shares and
warrants, net -- -- -- 32,666
Issuance of shares under option
plans -- -- -- 3,309
Issuance of shares under employee
share purchase plan -- -- -- 400
Accrual of compensation costs for
share awards and option plans -- -- -- 9,807
Accretion of redeemable
preference shares -- -- -- (2,969)
Net loss (113,338) (113,338) -- (113,338)
--------- --------- --------- ---------
Comprehensive loss (113,338)
---------
Balances, September 30, 1997 -- (189,671) -- (39,791)
Issuance of shares in business
combinations -- -- -- --
Issuance of shares, net -- -- -- 73,092
Issuance of shares under option
plans -- -- -- 1,107
Issuance of shares under employee
share purchase plan -- -- -- 463
Accrual of compensation costs for
share awards and option plans -- -- -- 179
Accretion of redeemable
preference shares -- -- -- (3,145)
Conversion of senior subordinated
discount notes -- -- -- 133
Net loss (39,593) (39,593) -- (39,593)
--------- --------- --------- ---------
Comprehensive loss (39,593)
---------
Balances, December 31, 1997 -- (229,264) -- (7,555)
Issuance of shares for business
combinations -- -- -- 2,348
Issuance of shares under option
plans -- -- -- 3,258
Issuance of shares for warrant
exercise -- -- -- 12,852
Issuance of shares under employee
share purchase plan -- -- -- 1,563
Accrual of compensation costs for
share awards and option plans -- -- -- (357)
Accretion of redeemable
preference shares -- -- -- (7,106)
Net loss (154,690) (154,690) -- (154,690)
Other comprehensive income -
unrealized gain on securities 16,200 -- 16,200 16,200
--------- --------- --------- ---------
Comprehensive loss $(138,490)
=========
Balances, December 31, 1998 (383,954) 16,200 (133,487)
Issuance of shares under option
plans -- -- -- 7,495
Issuance of shares under employee
share purchase plan -- -- -- 1,876
Accrual of compensation costs for
share awards and option plans -- -- -- 2,161
Accretion of redeemable
preference shares -- -- -- (7,948)
Conversion of senior subordinated
discount notes -- -- -- 775
Net loss (182,569) (182,569) -- (182,569)
Other comprehensive income -
unrealized gain on securities 28,350 -- 28,350 28,350
--------- --------- --------- ---------
Comprehensive loss $(154,219)
=========
Balances, December 31, 1999 $(566,523) $ 44,550 $(283,347)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 6
GST TELECOMMUNICATIONS, 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 $(182,569) $(154,690) $ (39,593) $(113,338)
Adjustments to reconcile net loss to net cash used
in operations:
Minority interest in income of subsidiary -- -- 472 612
Depreciation and amortization 77,086 51,328 10,115 26,634
Deferred income taxes -- -- 92 (899)
Accretion and accrual of interest 73,894 59,783 8,276 19,236
Non-cash stock compensation and other expense 2,161 (253) 374 2,583
Loss on disposal of assets 4,160 239 -- 679
Non-cash special charges -- 29,467 -- 7,445
Equity in losses of investments and joint venture -- 593 1,286 1,482
Gain on sale of subsidiary shares -- (61,266) -- (7,376)
Changes in non-cash operating working capital:
Trade accounts receivable, net (13,573) (15,321) (3,547) (11,284)
Construction contracts receivable (23,485) (3,338) -- --
Prepaid, other current and other assets, net (507) 3,859 (585) (7,627)
Accounts payable and accrued liabilities 26,368 (754) (18,177) 24,970
Other liabilities 4,036 6,430 707 (119)
--------- --------- --------- ---------
Cash used in operations (32,429) (83,923) (40,580) (57,002)
--------- --------- --------- ---------
Investments:
Acquisition of subsidiaries, net of cash acquired -- (35,471) (2,105) (1,618)
Purchase of investments -- -- (4,297) (3,247)
Proceeds from sale of investments -- 327 -- 5,176
Purchase of property and equipment (259,965) (219,129) (45,970) (222,001)
Proceeds from sale of property and equipment 6,514 3,589 -- 5,774
Purchase of other assets (1,684) (3,014) (1,866) (14,058)
Change in investments restricted for the
purchase of property and equipment 218,878 (170,288) 11,143 (58,701)
Proceeds from the sale of subsidiary shares, net -- 85,048 141 27,105
Cash disposed of in sale of subsidiary -- (5,252) -- --
--------- --------- --------- ---------
Cash used in investing activities (36,257) (344,190) (42,954) (261,570)
--------- --------- --------- ---------
Financing:
Proceeds from long-term debt 1,782 300,955 151,420 353,257
Issuance of redeemable preference shares, net -- -- -- 48,679
Principal payments on long-term debt and capital leases (18,364) (23,769) (10,101) (7,455)
Issuance of common shares, net of issuance costs 9,371 17,673 74,629 27,692
Deferred debt financing costs -- (13,103) (5,380) (12,033)
Change in investments restricted to finance interest
payments 32,810 33,374 16,157 (97,049)
--------- --------- --------- ---------
Cash provided by financing activities 25,599 315,130 226,725 313,091
--------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents (43,087) (112,983) 143,191 (5,481)
Cash and cash equivalents, beginning of period 86,070 199,053 55,862 61,343
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 42,983 $ 86,070 $ 199,053 $ 55,862
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 48,802 $ 50,315 $ 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 -- 7,900 500 4,369
Common shares -- 2,348 -- 8,161
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
Unrealized gain on securities 28,350 16,200 -- --
Accretion of redeemable preference shares 7,948 7,106 3,145 2,969
Assets acquired through capital leases 5,068 10,079 480 21,765
Debt converted to equity 775 -- 133 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 7
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
GST Telecommunications, Inc., a Canadian company, and its U.S.
subsidiaries collectively, (the Company or GST), 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, and constructs
telecommunications network segments for other providers, and
produces telecommunications software.
The consolidated financial statements for the years ended December
31, 1999 and 1998, the three-month period ended December 31, 1997
and the year ended September 30, 1997 have been reported in U.S.
dollars, the functional currency of the Company. These
consolidated financial statements are prepared in conformity with
generally accepted accounting principles in the United States. The
Company also prepares separate consolidated financial statements
in accordance with Canadian generally accepted accounting
principles.
(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............................................. (17,988)
Other expenses, net.............................................. (4,646)
Net loss......................................................... (22,634)
Loss per share, basic and diluted................................ (1.02)
</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 exercise 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.
(d) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments
with original maturities of ninety days or less.
F-7 (Continued)
<PAGE> 8
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 total
$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 is 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 consists
of balances due from three customers.
F-8 (Continued)
<PAGE> 9
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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.
Unrestricted available-for-sale investments consist of the
Company's approximate 14% equity interest in Global Light
Telecommunications, Inc. (Global) at December 31, 1999 and U.S.
Government securities and certificates of deposit at December 31,
1998. An unrealized gain of $28,350 related to the Company's
interest in Global, which is carried at fair value, is included in
comprehensive income for the year ended December 31, 1999. See
note 16 for a discussion of the sale of the Company's investment
in Global.
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 ........................... 44,596 16,246
</TABLE>
(g) INVESTMENTS IN FORMER AFFILIATE
At December 31, 1997, the Company held a greater than 20% equity
interest in Global, a publicly-traded corporation listed on the
Vancouver Stock Exchange, which conducts telecommunications
operations on a worldwide basis. The carrying value of this
investment at December 31, 1997 totaled $593 and was included in
other assets in the accompanying consolidated balance sheet. At
both December 31, 1998 and 1999, the Company held a less than 20%
interest in Global. See note 1(f), note 11(a) for a discussion of
litigation with Global and note 16 for a discussion of the sale of
the Company's investment in Global subsequent to year-end.
F-9 (Continued)
<PAGE> 10
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(h) 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.
(i) 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 $14,985 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.
(j) GOODWILL
Goodwill is amortized using the straight-line method over periods
ranging from five to ten years. Amortization charged to operations
was $6,785, $6,218, $1,054 and $4,044 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-10 (Continued)
<PAGE> 11
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(k) 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 $10,320,
$11,183, $1,945 and $5,630 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
$4,613, $3,873, $669 and $1,495 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.
(l) 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-11 (Continued)
<PAGE> 12
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(m) REVENUE RECOGNITION
Telecommunication 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 Financial Accounting Standards Board (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
Basic and diluted net loss per share is computed using the
weighted average number of common shares outstanding during the
period. Common equivalent shares, consisting of options, warrants
and convertible securities, were antidilutive for all periods
presented and were not included in determining diluted weighted
average shares outstanding. If the Company had reported net income
for the periods presented, the weighted average number of common
equivalent shares used to determine diluted net loss per share
would have increased by 11,245,435, 10,411,640, 9,741,498 and
8,186,050 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.
Net loss per share is increased for redeemable preference shares'
accretion totaling $7,948, $7,106, $3,145 and $2,969 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.
(o) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital
transactions in the accompanying consolidated financial
statements.
F-12 (Continued)
<PAGE> 13
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 the end of each reporting period.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the period 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. For the years ended December
31, 1999 and 1998, comprehensive loss includes a $28,350 and
$16,200 unrealized gain on available-for-sale securities. There
are no differences between net loss and comprehensive loss for all
other periods presented.
(r) USE OF ESTIMATES
The preparation of 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 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-13 (Continued)
<PAGE> 14
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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, the Company 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. The Company
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.
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-14 (Continued)
<PAGE> 15
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 ......................................... (155,236) (39,655) (115,266)
Net loss per share ............................... (4.33) (1.29) (4.67)
</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-15 (Continued)
<PAGE> 16
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 9,272
Payroll and related liabilities .................. 5,694 5,252
Other ............................................ 16,016 8,484
------- -------
Total .............................. $49,759 $37,445
======= =======
</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
13.875% Convertible Senior Subordinated Discount
Notes, due December 15, 2005 ...................... 33,295 29,884
12.75% Senior Subordinated Accrual Notes due
November 15, 2007 ................................. 144,000 144,000
Other ................................................. -- 1,466
---------- ----------
1,169,244 1,106,376
Less current portion of long-term debt ................ 17,466 13,417
---------- ----------
$1,151,778 $1,092,959
========== ==========
</TABLE>
F-16 (Continued)
<PAGE> 17
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 90,143
2002 ......................................... 20,511 88,265
2003 ......................................... 21,388 130,919
2004 ......................................... 11,582 155,636
Thereafter ................................... 1,265,105(a) 373,200
----------- -----------
Less unaccreted discount ..................... (186,622) --
----------- -----------
$ 1,169,244 $ 881,430
=========== ===========
</TABLE>
(a) Includes $500,000, $312,448 and $37,856 of 10.5% Senior
Secured Notes, 13.875% Senior Discount Notes and 13.875%
Convertible Senior Subordinated 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-17 (Continued)
<PAGE> 18
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 AND CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES
In December 1995, the Company issued approximately $160,000 in 13.875%
Senior Discount Notes (the Senior Notes) and $20,000 in 13.875%
Convertible Senior Subordinated Discount Notes (the Convertible Notes)
maturing on December 15, 2005 (together the Notes). The 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 Notes accrete to a total principal amount, due December 15, 2005, of
approximately $350,304 by December 15, 2000. The Senior Notes rank in
right of payment with all unsubordinated indebtedness of the Company
while the Convertible Notes are junior to all senior Company debt.
Each of the Convertible Notes is convertible at the option of the holder
into common shares. The number of shares to be issued upon conversion is
based on an accreted value on the conversion date divided by $7.563. In
addition, all of the Convertible Notes may be automatically converted to
common shares by the Company if the Company's common shares sustain
certain market value levels for thirty consecutive
F-18 (Continued)
<PAGE> 19
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
trading days. On or after December 15, 2000, the Notes will be redeemable
at the option of the Company. The Notes are subject to certain debt
covenants.
F-19 (Continued)
<PAGE> 20
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
SENIOR SUBORDINATED ACCRUAL NOTES
In November and December 1997, the Company issued $144,000 in 12.75%
Senior Subordinated Accrual Notes (the Accrual Notes). Cash interest on
the Accrual Notes will not be paid until May 15, 2003. The Accrual Notes
are subordinated to all senior indebtedness, including the Notes.
The Accrual Notes are redeemable at the option of the Company, in whole
or in part after November 15, 2002. Prior to November 15, 2000, up to
one-third of the aggregate principal amount of the Accrual Notes may be
redeemed by the Company from the proceeds of one or more sales of the
Company's common shares. The Accrual 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 Senior Secured Notes, the Senior Secured Discount Notes,
the Senior Notes, the Convertible Notes and the Accrual 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 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> 21
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(6) REDEEMABLE PREFERENCE SHARES
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value, in one or more series and to
determine the designations, powers, preferences and relative,
participating, optional or other rights thereof, including, without
limitation, the dividend rate (and whether dividends are cumulative),
conversion rights, voting rights, rights and terms of redemption,
redemption price and liquidation preference.
In February 1997, the Company consummated a private placement of $50,000
of 500 Redeemable Preference Shares. The Redeemable Preference Shares do
not pay dividends in cash, except to the extent such dividends are paid
on Common Shares. In addition, the liquidation, conversion and redemption
prices of the Redeemable Preference Shares accrete semiannually at a rate
of 11.875%.
The Company is required to redeem the Redeemable Preference Shares on
February 28, 2004 (the Mandatory Redemption Date) in cash at a redemption
price of approximately $224,000 per share (the Mandatory Redemption
Price); provided that to the extent the Company is prohibited from paying
such redemption price in cash, the holders of Redeemable Preference
Shares have the option to convert each Redeemable Preference Share into a
number of Common Shares equal to the Mandatory Redemption Price divided
by 95% of the then market price for Common Shares.
In the event the Company is prevented from paying the redemption price
for Redeemable Preference Shares in cash and any holder of Redeemable
Preference Shares does not exercise such conversion option, the Company
has the option of extending the Mandatory Redemption Date to August 28,
2007. The Company has the option of redeeming the Redeemable Preference
Shares at any time after February 2000 in cash at a redemption price per
Redeemable Preference Share equal to the number of Common Shares into
which such Redeemable Preference Share is then convertible multiplied by
the price at which such Redeemable Preference Share would become subject
to mandatory conversion.
Redeemable Preference Shares are convertible at the option of the holders
into Common Shares at any time after February 28, 2000 or earlier upon a
change of control of the Company. The holders of Redeemable Preference
Shares have the right to require the Company to repurchase their shares
upon a change of control of the Company after February 28, 2002; prior to
that time, holders have a right to convert their Redeemable Preference
Shares into Common Shares upon a change of control. Further, the
Redeemable Preference Shares are subject to mandatory conversion into
Common Shares if the market price of Common Shares exceeds $15.925 per
share (subject to adjustment) for a specified period after February 28,
2000.
F-21 (Continued)
<PAGE> 22
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(7) SHAREHOLDERS' (DEFICIT) EQUITY
(a) STOCK-BASED COMPENSATION
The Company has six stock-based compensation plans, which are
described below. The Company follows SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). In accordance with SFAS 123,
the Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, compensation cost is
generally not recognized for options awarded in the 1995 and 1996
Stock Incentive Plans, the Employee Stock Purchase Plan and fixed
stock option awards under the Senior Operating and Executive
Officer Stock Option Plans. Compensation cost recognized in the
statements of operations 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 totaled $2,161, $(357), $149 and
$9,747, respectively. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes
option-pricing model assuming no dividend yield and the following
weighted average assumptions for grants 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 are as follows:
<TABLE>
<CAPTION>
OPTION AWARDS
----------------------------------------------
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1999 1998 1997 1997
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Expected volatility .............................. 70% 62% 58% 56%
Risk free interest rate .......................... 5.6% 5.2% 5.4% 6.3%
Expected life (in years) ......................... 3.5 3.5 3.5 3.5
</TABLE>
<TABLE>
<CAPTION>
EMPLOYEE STOCK PURCHASE PLAN
----------------------------------------------
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1999 1998 1997 1997
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Expected volatility .............................. 70% 62% 58% 56%
Risk free interest rate .......................... 5.0% 4.8% 5.3% 5.4%
Expected life (in years) ......................... .5 .5 .5 .5
</TABLE>
(Continued)
F-22
<PAGE> 23
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The weighted average fair value of stock awards granted under the various
plans 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>
Stock option awards ................ $ 5.41 $ 6.50 $ 6.17 $ 4.68
Employee Stock Purchase
Plan ........................... 5.04 2.16 1.81 1.81
</TABLE>
Had compensation cost for the Company's six stock-based
compensation plans been determined pursuant to SFAS 123, the
Company's net loss and net loss per common share would have been
increased to the pro forma amounts indicated below:
<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>
Net loss to common shareholders:
As reported ............................. $ (190,517) $ (161,796) $ (42,738) $ (116,307)
Pro forma ............................... (200,460) (170,184) (44,487) (119,183)
Net loss per share, basic and diluted:
As reported ........................... $ (5.11) $ (4.52) $ (1.39) $ (4.71)
Pro forma ............................. (5.38) (4.75) (1.44) (4.82)
</TABLE>
Pro forma net loss reflects only options granted since October 1,
1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS 123 is not reflected in the pro forma
net loss amounts presented above because compensation cost is
reflected over the options' vesting period and compensation cost
for options granted prior to September 30, 1995 is not considered.
(b) STOCK OPTION AWARDS
Under the 1995, 1996, 1997 and 1999 Stock Option Plans (the
Plans), the Company has authorized the issuance of 1,750,000,
1,000,000, 1,000,000 and 2,000,000 common shares, respectively.
The Plans provide for the granting of incentive stock options and
non-statutory stock options to employees, officers and employee
directors and consultants at an exercise price no less than 100%
of the market value on the last trading day prior to the date of
grant. The 1995, 1996 and 1997 options have a maximum term of five
years and the 1999 options have a maximum term of ten years and
become exercisable at such times and in such installments, for
each individual option, as determined by the Board of Directors.
F-23 (Continued)
<PAGE> 24
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
In addition, the Company grants fixed option awards under the 1996
Senior Operating Officer Stock Option Plan (Operating Officer
Plan). These options have a term of six years and become
exercisable at such time and in such installments for each
individual option, as determined by the Board of Directors.
Under the Operating Officer Plan and the 1996 Senior Executive
Officer Stock Option Plan (Executive Plan), the Company may grant
stock options to purchase up to 900,000 and 600,000 common shares,
respectively, to selected individuals. The options have a maximum
term of six years.
A summary of the status of the Company's fixed and
performance-based stock option awards as of December 31, 1999,
1998, 1997 and September 30, 1997 and the changes during the
period of years ended on those dates is presented below:
<TABLE>
<CAPTION>
STOCK OPTIONS AWARDS
------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding at September 30, 1996 ................ 3,061,205 $ 7.68
Granted .......................................... 1,490,000 9.91
Exercised ........................................ (643,016) 5.15
Canceled ......................................... (83,655) 8.89
----------
Outstanding at September 30, 1997 ................ 3,824,534 8.95
Granted .......................................... 175,000 10.29
Exercised ........................................ (158,209) 7.00
Canceled ......................................... (236,218) 10.94
----------
Outstanding at December 31, 1997 ................. 3,605,107 8.97
Granted .......................................... 2,927,357 11.02
Exercised ........................................ (429,350) 7.58
Canceled ......................................... (1,807,987) 12.20
----------
Outstanding at December 31, 1998 ................. 4,295,127 9.15
Granted .......................................... 3,116,343 10.02
Exercised ........................................ (989,504) 7.57
Canceled ......................................... (1,565,370) 10.57
----------
Outstanding at December 31, 1999 ................. 4,856,596 9.57
==========
</TABLE>
F-24 (Continued)
<PAGE> 25
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
STOCK OPTIONS AWARDS
-----------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Number of options exercisable
at end of period ........................ 1,690,821 $ 9.27
=========
</TABLE>
F-25 (Continued)
<PAGE> 26
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OF SHARES CONTRACTUAL EXERCISE OF SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.00 - 5.99 125,000 9.3 years $ 5.88 41,667 $ 5.88
6.00 - 8.99 2,593,721 2.5 years 7.90 936,905 7.96
9.00 - 11.99 1,406,115 5.9 years 10.86 603,593 10.47
12.00 - 14.99 469,787 8.7 years 12.81 -- --
15.00 - 16.4375 261,973 3.5 years 15.08 108,656 15.10
</TABLE>
On December 14, 1998, options to purchase 1,197,830 shares were
repriced from prices ranging between $8.25 and $15.00 per share,
to $7.15 per share. The vesting terms for the repriced options
were extended from three to four years from the original date of
grant. Options for directors, officers and key executives were not
repriced.
(c) EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Company amended the 1996 Employee Stock
Purchase Plan (the Purchase Plan), to authorize the issuance of an
additional 600,000 common shares. The total shares authorized
since adoption of the Plan is 1,100,000. The Purchase Plan allows
eligible employees of the Company to purchase common shares of the
Company at a price equal to 85% of the lower of the fair market
value at the beginning or end of the six-month offering period.
Fair market value is calculated as the lesser of (i) the closing
price of the Company's common shares on the last trading day
immediately before the date of determination, or (ii) the weighted
average trading price for such shares for the five trading days
immediately before the date of determination. Employees who own 5%
or more of the voting rights of the Company's outstanding common
shares may not participate in the Purchase Plan. Employees
purchased 260,317, 220,843, 75,198 and 62,993 shares under the
purchase plan 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.
In April 1999, the Company adopted the 1999 Supplemental Employee
Stock Purchase Plan (the Supplemental Plan). The Supplemental Plan
allowed employees participating in the Purchase Plan for the
October 1998 to March 1999 offering period rights to shares that
were not available in the Purchase Plan due to a shortfall in
available shares. The Supplemental Plan authorized 150,000 common
shares at $4.83 per share of which 88,293 were granted and
subsequently 61,707 were cancelled. The related compensation cost
recognized in the statement of operations for the year ended
December 31, 1999 was $700.
F-26 (Continued)
<PAGE> 27
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(d) WARRANTS OUTSTANDING
At December 31, 1999, a warrant to purchase 300,000 common shares
at $6.75 per share was outstanding and exercisable. The warrant
was granted to a former director and expires in September 2000.
(e) DIVIDEND RESTRICTIONS
The indentures related to the Secured Notes, the Senior Secured
Discount Notes, the Notes and the Accrual Notes prohibit the
payment of dividends.
F-27 (Continued)
<PAGE> 28
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(8) INCOME TAXES
The provision for income taxes differs from the amount computed by
applying the Canadian 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
Canadian statutory rate ...................... (39)% (39)% (39)% (39)%
Expected state/province
income tax benefit ........................... (5) (5) (4) (4)
Increase in valuation
allowance .................................... 37 41 37 30
Amortization of goodwill ......................... 1 1 1 1
Effect of difference in United
States statutory rate ........................ 5 5 5 5
Effect of acquisition of new
subsidiaries ................................. -- 1 -- 2
Non-deductible interest .......................... -- -- 2 2
Other ............................................ 1 (4) -- 4
--- --- --- ---
Income tax expense ............................... --% --% 2% 1%
=== === === ===
</TABLE>
F-28 (Continued)
<PAGE> 29
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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:
United States Federal and state net
operating loss carryforwards ............... $ 96,520 $ 76,241
Canadian net operating loss
carryforwards .............................. 28,291 15,975
Non-deductible interest ...................... 66,046 39,199
Canadian non-deductible interest ............. 7,044 5,269
Canadian capital loss carryforward ........... 128 128
Other ........................................ 4,174 3,361
--------- ---------
Total deferred tax assets .......... 202,203 140,173
Less valuation allowance ..................... (197,488) (129,757)
--------- ---------
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
$19,429. 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
$67,731, $61,787, $14,490 and $34,051, respectively.
F-29 (Continued)
<PAGE> 30
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The Company has non-capital losses for income tax purposes of
approximately $60,826 available to reduce Canadian taxable income of
future years, expiring as follows:
<TABLE>
<S> <C>
2001............................................................................ $ 1,574
2002............................................................................ 1,877
2003............................................................................ 3,079
2004............................................................................ 2,909
2005............................................................................ 23,755
2006............................................................................ 27,632
--------
$ 60,826
========
</TABLE>
Based on a history of recurring losses, it is questionable whether the
Company will be allowed to utilize these Canadian losses if the tax
authority determines that the Company has no reasonable expectation of
profit. As of December 31, 1999, the Company also has a Canadian net
capital loss carryforward of $280. Net capital losses can be carried
forward indefinitely but can only be utilized to offset taxable capital
gain.
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-30 (Continued)
<PAGE> 31
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(9) 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 five 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-31 (Continued)
<PAGE> 32
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 leases 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-32 (Continued)
<PAGE> 33
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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, costs 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, Inc. (GST USA) and GST Telecom
filed a Complaint in the United 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-33 (Continued)
<PAGE> 34
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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-34 (Continued)
<PAGE> 35
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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.
On June 4, 1999, the Company filed a Complaint in the Supreme
Court of British Columbia, against three former directors and the
former treasurer seeking a constructive trust over the proceeds of
750,000 common shares of GST which the Company believes were
wrongfully removed from an escrow account. The defendants have
denied liability. The matter is currently in discovery.
F-35 (Continued)
<PAGE> 36
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(e) CLASS ACTION SECURITIES LAWSUITS
On October 21, 1999, the first of several class action lawsuits
was filed in the United States District Court for the Western
District of Washington against GST, certain former officers and
directors and in one lawsuit against Global Light
Telecommunications, Inc. No current director or officer of GST is
named as a defendant. The Complaint claims that the Company and
the other defendants committed securities fraud by failing to make
disclosures concerning a transaction with Global regarding the
Company's joint venture in Bestel, S.A. de C.V., the owner of a
2,270 kilometer fiber optic telecommunications network in Mexico,
that is the subject of 11(a) discussed above. The Complaints do
not specify the amount of damages sought. A single consolidated
complaint was filed by the plaintiffs on March 14, 2000. The
Company denies liability, and will vigorously dispute the
allegations of the Complaint.
(f) FORMER EMPLOYEE OF MAGNACOM
In February 1999, a former employee of Magnacom Wireless, LLC
filed suit in Oregon state court against the Company. It 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 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
by 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.
F-36 (Continued)
<PAGE> 37
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The transactions with Magnacom form the basis for certain of the
legal proceedings described in notes 11(b), 11(c) and 11(d), and
11(f).
F-37 (Continued)
<PAGE> 38
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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) GLOBAL
In a series of transactions during the third and fourth quarters
of 1996, the Company acquired 3,600,000 shares of Canadian
Programming Concepts, Inc. (CPC), a Canadian corporation which is
publicly traded on the Vancouver Stock Exchange, for consideration
of $3,659. CPC's name was subsequently changed to Global. The
Company's shares constitute approximately 14% of Global's total
outstanding shares at December 31, 1999. As noted in note 11(a),
the Company has reached a settlement of the litigation with
Global, and as described in note 16, has disposed of its shares in
Global.
(d) 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.
(e) OTHER
The Company 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.
The Company paid approximately $264 in compensation, in addition
to director fees, for the year ended December 31, 1999 to the
Company's non-employee Chairman of the Board.
Prior to June 1997, the Company's former Chairman and Chief
Executive Officer served as a paid consultant to Tomen.
Additionally, Pacwest Network LLC 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.
F-38 (Continued)
<PAGE> 39
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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 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-39 (Continued)
<PAGE> 40
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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>
<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-40 (Continued)
<PAGE> 41
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and 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-41 (Continued)
<PAGE> 42
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet 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 and redeemable preference shares at December 31,
1999 (the financial instruments for which carrying value and estimated
fair value differ at December 31, 1999 and 1998):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 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
Convertible Senior Subordinated
Discount Notes, 13.875% .................... 33,295 27,635 29,884 28,406
Senior Subordinated Accrual
Notes, 12.75% .............................. 144,000 136,800 144,000 133,920
Redeemable preference shares, 11.875% ............ 69,688 70,675 61,741 54,950
</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. The fair value
of redeemable preference shares is estimated based upon rates available
to the Company for redeemable preferred equity with similar maturities
and features.
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-42 (Continued)
<PAGE> 43
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(16) SUBSEQUENT EVENTS
(a) PRESIDENT AND CHIEF EXECUTIVE OFFICER RESIGNATION
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.
(b) SALE OF GLOBAL INVESTMENT
In a series of transactions in February 2000, the Company sold its
investment in Global described in note 1 for $56,534 in cash, resulting
in a realized gain of the same amount.
(c) BANKRUPTCY
On May 17, 2000, the Company filed a voluntary petition for bankruptcy
under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court of the District of Delaware. Pursuant to the bankruptcy
filing, the Company has remained in possession of the Company's assets
and properties, and all business and affairs will continue to be managed
by the Company's directors.
(d) DISPOSITION OF ASSETS
On September 21, 2000, the U.S. District Court for the District of
Delaware approved the agreement between the Company and Time Warner
Telecom Inc. ("Time Warner Telecom") for Time Warner Telecom to purchase
substantially all of the assets of the Company, excluding certain
operations in Hawaii and certain non-core businesses, for $690 million.
The Court approved the definitive purchase agreement between the Company
and Time Warner Telecom following an auction for the Company's assets
that concluded on August 25, 2000. Closing of the purchase is subject to
regulatory approvals and other customary terms and conditions.
F-43
<PAGE> 44
ITEM 1. FINANCIAL STATEMENTS
GST TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999(1)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,392 $ 42,983
Restricted investments 150 19,828
Accounts receivable, net 40,708 45,244
Construction contracts receivable 35,127 26,823
Investments 910 44,596
Prepaid and other current assets 9,884 8,562
------------ ------------
Total current assets 116,171 188,036
------------ ------------
Restricted investments 3,457 9,848
Property and equipment 994,929 944,410
less accumulated depreciation (151,169) (112,363)
------------ ------------
843,760 832,047
Other assets 130,289 139,262
less accumulated amortization (56,187) (56,564)
------------ ------------
74,102 82,698
------------ ------------
Total assets $ 1,037,490 $ 1,112,629
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities not subject to compromise:
Accounts payable $ 7,780 $ 30,579
Accrued expenses 19,058 49,759
Deferred revenue 11,733 10,066
Current portion of capital lease obligations -- 6,693
Current portion of long-term debt -- 17,466
------------ ------------
Total current liabilities not subject to compromise 38,571 114,563
------------ ------------
Liabilities subject to compromise (see Note 3) 1,319,713 --
Long-term liabilities not subject to compromise:
Long-term interest payable -- 43,134
Capital lease obligations, less current portion -- 16,813
Long-term debt, less current portion -- 1,151,778
Other liabilities 5,460 --
Redeemable preference shares 74,008 69,688
Shareholders' deficit:
Common shares 251,112 238,626
Accumulated deficit (651,374) (566,523)
Accumulated other comprehensive income -- 44,550
------------ ------------
Total shareholders' deficit (400,262) (283,347)
------------ ------------
Total liabilities and shareholders' deficit $ 1,037,490 $ 1,112,629
============ ============
</TABLE>
----------
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1999.
See notes to condensed consolidated financial statements.
1
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<PAGE> 45
GST TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 53,236 $ 51,214 $ 107,690 $ 99,938
Construction, facility sales and other 3,586 34,518 12,598 45,287
Product -- 1,157 205 2,239
------------ ------------ ------------ ------------
Total revenues 56,822 86,889 120,493 147,464
------------ ------------ ------------ ------------
Operating costs and expenses:
Network expenses 32,175 32,776 66,446 64,475
Facilities administration and maintenance 6,453 4,265 12,229 9,400
Cost of construction revenues 2,428 20,027 8,483 25,865
Cost of product revenues 2 655 307 1,350
Selling, general and administrative 31,180 29,996 66,813 57,969
Depreciation and amortization 23,627 16,646 45,494 33,624
------------ ------------ ------------ ------------
Total operating costs and expenses 95,865 104,365 199,772 192,683
------------ ------------ ------------ ------------
Loss from operations (39,043) (17,476) (79,279) (45,219)
------------ ------------ ------------ ------------
Other expenses (income):
Interest income (615) (2,622) (1,530) (6,483)
Interest expense, net of amounts capitalized
(contractual interest of $18,293 not recorded for
the three- and six-month periods ended
June 30, 2000) 17,304 27,776 50,038 56,036
Other (1,932) 1,293 (47,534) 1,492
------------ ------------ ------------ ------------
14,757 26,447 974 51,045
------------ ------------ ------------ ------------
Loss before reorganization expenses and income tax
expense (53,800) (43,923) (80,253) (96,264)
------------ ------------ ------------ ------------
Reorganization expenses (see Note 6) 4,598 -- 4,598 --
------------ ------------ ------------ ------------
Loss before income tax expense (58,398) (43,923) (84,851) (96,264)
------------ ------------ ------------ ------------
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (58,398) $ (43,923) $ (84,851) $ (96,264)
============ ============ ============ ============
Net loss per share, basic and diluted(1) $ (1.57) $ (1.28) $ (2.29) $ (2.71)
============ ============ ============ ============
Weighted average shares outstanding 39,957,139 37,341,335 38,990,703 36,903,627
============ ============ ============ ============
</TABLE>
----------
(1) Net loss per share is increased for preference shares' accretion totaling
$4,320 and $3,862 for the three- and six-month periods ended June 30, 2000
and 1999, respectively.
See notes to condensed consolidated financial statements.
2
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<PAGE> 46
GST TELECOMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operations:
Net loss $ (84,851) $ (96,264)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 45,994 36,464
Accretion and accrual of interest 32,798 35,945
Non-cash stock compensation and other expense 224 1,434
(Gain) loss on disposal of assets (1,275) 1,755
Gain on sale of investments (42,349) --
Changes in non-cash operating working capital:
Accounts receivable, net 4,123 (9,276)
Construction contracts receivable (1,230) --
Prepaid, other current and other assets, net 942 (9,728)
Accounts payable and accrued liabilities, prior to reorganization (4,453) 14,149
Post-petition accounts payable and accrued liabilities 20,042 --
Pre-petition accounts payable and accrued liabilities, authorized by the court (8,695) --
Deferred revenue 1,835 10,133
Deferred revenue from construction contracts 5,460 --
------------ ------------
Cash used in operations (31,435) (15,388)
------------ ------------
Investments:
Proceeds from sale of investments 56,580
Purchase of property and equipment (58,981) (151,803)
Proceeds from sale of assets 5,966 --
Purchase of other assets 396 (169)
Change in investments restricted for the purchase of property and equipment 6,391 110,231
------------ ------------
Cash provided by (used in) investing activities 10,352 (41,741)
------------ ------------
Financing:
Proceeds from long-term debt 2,311 1,040
Principal payments on long-term debt and capital leases, prior to reorganization (12,149) (8,343)
Issuance of common shares, net of issuance costs 1,273 7,599
Deferred debt financing costs (1,135) --
Change in investments restricted to finance interest payments 17,192 16,151
------------ ------------
Cash provided by financing activities 7,492 16,447
------------ ------------
Decrease in cash and cash equivalents (13,591) (40,682)
Cash and cash equivalents, beginning of period 42,983 86,070
------------ ------------
Cash and cash equivalents, end of period $ 29,392 $ 45,388
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
-------------------------------------------------------------------------------
<PAGE> 47
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BANKRUPTCY PROCEEDINGS
On May 17, 2000, GST Telecommunications, Inc. ("GST" or the "Company"), and
its subsidiaries filed voluntary petitions for protection from creditors under
Chapter 11 of the United States Bankruptcy Code in the District of Delaware. The
Company and its subsidiaries (collectively the "Debtors") are currently
operating as debtors-in-possession under the supervision of the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
Chapter 11 cases have been consolidated for the purpose of joint administration
under Case No. 00-1982 (GMS).
On May 17, 2000, the Debtors also commenced ancillary proceedings under the
Companies' Creditors Arrangement Act in Canada in the Ontario Superior Court of
Justice.
Under the proceedings, substantially all liabilities, litigation and claims
pending against the Debtors in existence at the filing date are stayed unless
the stay is modified or lifted or payment has been otherwise authorized by the
Bankruptcy Court.
On May 11, 2000, we obtained a commitment letter from Heller Financial, Inc.
("Heller") which will provide us, subject to satisfying certain conditions,
debtor-in-possession financing for $50 million and the potential for up to an
additional $75 million in cash. On May 26, 2000, the Bankruptcy Court entered an
order approving the initial $30 million of this financing. On July 26, 2000, the
Bankruptcy Court entered an order providing a superpriority interest for Heller
over the secured debt of existing bondholders, upon the consent of a majority of
the secured bondholders, which will in turn permit Heller to provide
approximately $40 million of the $50 million in financing mentioned above. Based
upon current unencumbered assets, the additional $10 million is available
without the consent of the bondholders. To date, we have not drawn on the Heller
credit facility.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders may be substantially altered. At this time, it is not
possible to predict the outcome of the Chapter 11 cases in general or the effect
of the cases on our business, or on the interests of creditors and shareholders.
Management believes that it is highly unlikely that current equity security
holders will receive any distribution under any reorganization or liquidation of
our assets.
On May 16, 2000, we signed a letter of intent with Time Warner Telecom,
Inc., for the sale of substantially all of our assets for $450 million in cash.
On June 12, 2000, we announced that the letter of intent with Time Warner
Telecom, Inc., for the sale of substantially all of our assets would not be
proceeding.
On June 13, 2000, we opened the bidding procedures, with the approval of the
Bankruptcy Court, in an auction format for substantially all of our assets.
After an extension of the original bid and auction dates, qualified buyers were
required to submit their bids on or prior to August 11, 2000. The bids are
currently being evaluated. An auction will occur on August 22, 2000, and if such
auction results in a bid or series of bids for the assets of GST satisfactory to
the Company and its creditors, then we anticipate a Bankruptcy Court hearing on
August 25, 2000 to result in an order confirming a sale, with such sale expected
to close prior to the end of the year. If such a sale is consummated, it is
highly unlikely that our current equity security holders would receive any
distribution upon our subsequent liquidation and the interest of both secured
creditors and unsecured creditors may be substantially impaired. If a sale of
all or a portion of the Company's assets is not completed, we will either
reorganize our remaining operations or liquidate the unsold assets.
4
--------------------------------------------------------------------------------
<PAGE> 48
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year or for subsequent periods. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the fiscal year ended December 31, 1999, as included in
the Company's annual report on Form 10-K.
3. LIABILITIES SUBJECT TO COMPROMISE
As of June 30, 2000, liabilities subject to compromise consist of the
following:
<TABLE>
<S> <C>
Trade payables $ 44,367
Accrued liabilities 12,808
Current portion, long-term debt 20,030
Current portion, capital lease obligations 5,994
Long-term debt, less current portion 1,156,453
Capital lease obligations, less current portion 13,869
Long-term interest payable 52,007
Other long-term liabilities 14,185
------------
Total $ 1,319,713
============
</TABLE>
4. BASIC AND DILUTED NET LOSS PER SHARE
For the three- and six-month periods ended June 30, 2000 and 1999, common
stock equivalents were antidilutive and were not included in diluted weighted
average shares outstanding. If the Company had reported net income for the
periods presented, the weighted average number of common equivalent shares used
to determine diluted net loss per share would have increased by 5,144 and
971,580 for the three- and six-month periods ended June 30, 2000, respectively,
compared to 10,391,271 and 10,828,979 for the three- and six-month periods ended
June 30, 1999.
5. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
<S> <C> <C>
Common shares, no par value 39,962,283 37,734,507
</TABLE>
5
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<PAGE> 49
6. REORGANIZATION EXPENSES
For the three- and six-month periods ended June 30, 2000, reorganization
expenses totaled $4,598, consisting of $2,564 for professional services and
$2,034 for a retention bonus accrual. The retention bonus accrual is pursuant to
a Bankruptcy Court-approved plan to retain our employees through the bankruptcy
process.
7. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company accounts for comprehensive income under Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as changes in stockholders' equity exclusive of
transactions with owners such as capital contributions and dividends. The change
in the Company's accumulated other comprehensive income is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Balance, beginning of period $ 44,550 $ 36,675
Change in unrealized gain on available-for-sale investment sold during the period (44,550) 7,875
------------ ------------
Balance, end of period $ -- $ 44,550
</TABLE>
The balance as of June 30, 2000 is $0 because the Company sold its
investment in Global Light Telecommunications, Inc. during the three months
ended March 31, 2000 (see Note 11).
8. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Pre-petition cash paid for interest $ 22,808 $ 24,079
Cash paid for income taxes -- --
Supplemental schedule of non-cash investing and financing activities:
Disposition of subsidiary:
Assets (4,182) (1,373)
Liabilities (266) 216
Amounts in accounts payable and accrued liabilities for the purchase of
fixed assets at end of period 1,846 27,220
Assets acquired through capital leases -- 1,194
Conversion of debt to equity 15,309 774
Long term debt and capital leases reclassified to "Liabilities subject to compromise" 1,196,346 --
</TABLE>
6
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<PAGE> 50
9. CAPITALIZATION OF INTEREST
The Company capitalized interest of $2,739 and $8,488 as a part of property
and equipment for the three- and six-month periods ended June 30, 2000,
respectively, compared to $8,728 and $16,371 for the three- and six-month
periods ended June 30, 1999, respectively.
10. ACCRUED SEVERANCE
In the fourth quarter of 1998, the Company accrued $1,113 in
severance-related costs. The following table details activity related to the
severance accrual.
<TABLE>
<S> <C>
Accrual at December 31, 1998 $ 1,113
Payments (737)
Adjustments (61)
--------
Accrual at June 30, 2000 $ 315
========
</TABLE>
11. SALE OF GLOBAL INVESTMENT
In a series of transactions during the three months ended March 31, 2000,
the Company sold its investment in Global Light Telecommunications, Inc.
("Global"). The Company was accounting for the investment as available-for-sale
under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." The after-tax net gain as a result of the transactions was $42,349.
12. DEBT SERVICE REQUIREMENTS
At May 16, 2000, the Company had $1,196,346 of indebtedness outstanding
along with $74,008 of manditorily redeemable preference shares. As a result of
filing for protection under bankruptcy law, the Company is not permitted to make
any payments of the debt service requirements. All of these obligations are
subject to discharge in bankruptcy upon the completion of all proceedings.
13. IMPAIRMENT OF ASSETS
The bidding and auction processes described above could ultimately result in
the sale of substantially all of the Company's assets. Although the Company and
its creditors are not required to accept any offer, it is possible that the
Company's creditors would accept an offer or offers to purchase substantially
all of the Company's assets for less than the current book value of those
assets. Such a transaction could result in an impairment of assets. Until the
auction has been completed, the Company cannot predict the values of the final
bid(s) or whether those bids will be acceptable to the creditors. The Company
has determined that pursuant to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," no impairment of
assets existed as of June 30, 2000.
14. APOPTION OF NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 43 ("FIN 43"), "Real Estate Sales, an interpretation of FASB
Statement No. 66." The interpretation is effective for sales of real estate with
property improvements or integral equipment
7
--------------------------------------------------------------------------------
<PAGE> 51
entered into after June 30, 1999. Under this interpretation, conduit is
considered integral equipment and dark fiber will likely be considered integral
equipment. Accordingly, title must transfer to a lessee in order for a lease
transaction to be accounted for as a sales-type lease. For contracts entered
into after June 30, 1999, sales-type lease accounting will no longer be
appropriate for conduit and dark fiber leases and, therefore, these transactions
will be accounted for as operating leases unless title transfers to the lessee.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation," an interpretation of APB
Opinion No. 25. This Interpretation clarifies the application of Opinion 25 for
certain issues: a) the definition of employee for purposes of applying Opinion
25, b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and d) the accounting for
an exchange of stock compensation awards in a business combination. Generally,
this Interpretation is effective July 1, 2000. We do not expect the adoption of
this Interpretation to have a material effect on our financial position or on
the results of operations.
8
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