<PAGE> 1
EXHIBIT 99.5
GST TELECOMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
PART I: Financial Information
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
--September 30, 2000 and December 31, 1999 2
Condensed Consolidated Statements of Operations
--Three and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Statements of Cash Flows
--Nine Months Ended September 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 16
PART II: Other Information
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
1
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<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
GST Telecommunications, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999(1)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,740 $ 42,983
Restricted investments 10,152 19,828
Accounts receivable, net 43,881 45,244
Construction contracts receivable 37,625 26,823
Investments 910 44,596
Prepaid and other current assets 8,519 8,562
-------------- --------------
Total current assets 131,827 188,036
-------------- --------------
Restricted investments 3,510 9,848
Property and equipment, net 652,158 832,047
Other assets, net 2,661 82,698
-------------- --------------
Total assets $ 790,156 $ 1,112,629
-------------- --------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities not
subject to compromise:
Accounts payable $ 1,214 $ 30,579
Accrued expenses 56,443 49,759
Deferred revenue 12,307 10,066
Current portion of capital lease
obligations -- 6,693
Current portion of long-term debt -- 17,466
-------------- --------------
Total current liabilities not
subject to compromise 69,964 114,563
-------------- --------------
Liabilities subject to compromise
(see Note 3) 1,322,642 --
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
Deferred revenue from construction
contracts 25,460 --
Redeemable preference shares 74,008 69,688
Shareholders' deficit:
Common shares 251,575 238,626
Accumulated deficit (953,493) (566,523)
Accumulated other comprehensive
income -- 44,550
-------------- --------------
Total shareholders' deficit (701,918) (283,347)
-------------- --------------
Total liabilities and
shareholders' deficit $ 790,156 $ 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.
2
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<PAGE> 3
GST Telecommunications, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications
services $ 52,533 $ 50,424 $ 160,223 $ 150,362
Construction, facility
sales and other 11,965 53,692 24,563 98,979
Product -- 1,342 205 3,581
------------ ------------ ------------ ------------
Total revenues 64,498 105,458 184,991 252,922
------------ ------------ ------------ ------------
Operating costs and
expenses:
Network expenses 28,085 32,295 94,531 96,770
Facilities
administration and
maintenance 7,046 5,348 19,275 14,748
Cost of construction
revenues 8,098 37,203 16,581 63,068
Cost of product
revenues -- 689 307 2,039
Selling, general and
administrative 30,567 32,590 97,380 90,559
Depreciation and
amortization 22,075 18,676 67,569 52,300
Impairment of assets
(see Note 13) 260,827 -- 260,827 --
------------ ------------ ------------ ------------
Total operating
costs and expenses 356,698 126,801 556,470 319,484
------------ ------------ ------------ ------------
Loss from operations (292,200) (21,343) (371,479) (66,562)
------------ ------------ ------------ ------------
Other expenses (income):
Interest income (587) (2,037) (2,117) (8,520)
Interest expense, net
of amounts capitalized
(contractual interest
of $40,306 and $75,903
not recorded for the
three- and nine-month
periods ended
September 30, 2000) 2,538 28,022 52,576 84,058
Other (211) (27,898) (47,745) (26,406)
------------ ------------ ------------ ------------
1,740 (1,913) 2,714 49,132
------------ ------------ ------------ ------------
Loss before
reorganization expenses
and income tax expense (293,940) (19,430) (374,193) (115,694)
Reorganization expenses
(see Note 6) 8,179 -- 12,777 --
------------ ------------ ------------ ------------
Net loss $ (302,119) $ (19,430) $ (386,970) $ (115,694)
------------ ------------ ------------ ------------
Net loss per share,
basic and diluted(1) $ (7.56) $ (.52) $ (9.95) $ (3.22)
------------ ------------ ------------ ------------
Weighted average
shares outstanding 39,983,569 37,550,357 39,324,074 37,121,573
------------ ------------ ------------ ------------
</TABLE>
---------
(1) Net loss per share is increased for preference shares' accretion totaling
$0 for the three-month periods ended September 30, 2000 and 1999, and
$4,320 and $3,862 for the nine-month periods ended September 30, 2000 and
1999, respectively.
See notes to condensed consolidated financial statements.
3
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<PAGE> 4
GST Telecommunications, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operations:
Net loss $(386,970) $(115,694)
Adjustments to reconcile net loss to net
cash used in operations:
Depreciation and amortization 70,019 56,990
Accretion and accrual of interest 32,798 53,832
Non-cash stock compensation and other
expense 224 1,662
(Gain) loss on disposal of assets (1,411) 3,430
Gain on sale of investments (42,349) --
Loss on impairment of assets 260,827 --
Changes in non-cash operating working
capital:
Accounts receivable, net 950 (39,395)
Construction contracts receivable (3,728) 281
Prepaid, other current and other
assets, net (7,310) (14,318)
Accounts payable and accrued
liabilities, prior to reorganization (4,453) 32,328
Post-petition accounts payable and
accrued liabilities 50,861 --
Pre-petition accounts payable and
accrued liabilities, authorized by the
court (3,537) --
Deferred revenue 2,409 8,584
Deferred revenue from construction
contracts 25,460 --
--------- ---------
Cash used in operations (6,210) (12,300)
--------- ---------
Investments:
Proceeds from sale of investments 56,580 --
Purchase of property and equipment (80,643) (215,323)
Proceeds from sale of assets 5,966 1,500
Purchase of other assets -- (333)
Change in investments restricted for the
purchase of property and equipment 6,338 173,148
--------- ---------
Cash used in investing activities (11,759) (41,008)
--------- ---------
Financing:
Proceeds from long-term debt 2,311 1,782
Principal payments on long-term debt and
capital leases, prior to reorganization (13,915) (13,312)
Issuance of common shares, net of
issuance costs 1,273 8,357
Deferred debt financing costs (1,135) --
Change in investments restricted to
finance interest payments 17,192 15,615
--------- ---------
Cash provided by financing
activities 5,726 12,442
--------- ---------
Decrease in cash and cash
equivalents (12,243) (40,866)
Cash and cash equivalents, beginning of
period 42,983 86,070
--------- ---------
Cash and cash equivalents, end of period $ 30,740 $ 45,204
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
4
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<PAGE> 5
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
("Bankruptcy Code"). The Company and its subsidiaries (collectively the
"Debtors") are currently operating as debtors-in-possession under the
supervision of the United States District Court for the District of Delaware
(the "Bankruptcy Court"). The Chapter 11 cases have been consolidated for the
purpose of joint administration under Case No. 00-1982 (GMS).
On May 17, 2000, the Debtors also commenced ancillary proceedings under the
Companies' Creditors Arrangement Act in Canada in the Ontario Superior Court of
Justice.
Under the proceedings, substantially all liabilities, litigation and claims
pending against the Debtors in existence at the filing date are stayed unless
the stay is modified or lifted or payment has been otherwise authorized by the
Bankruptcy Court.
On May 11, 2000, we obtained a commitment letter from Heller Financial, Inc.
("Heller") which will provide us, subject to satisfying certain conditions,
debtor-in-possession financing for $50,000 and the potential for up to an
additional $75,000 in cash. On May 26, 2000, the Bankruptcy Court entered an
order approving the initial $30,000 of this financing. On July 26, 2000, the
Bankruptcy Court entered an order providing a superpriority interest for Heller
over the secured debt of existing bondholders, upon the consent of a majority of
the secured bondholders, which will in turn permit Heller to provide
approximately $40,000 of the $50,000 in financing mentioned above. Based upon
current unencumbered assets, the additional $10,000 is available without the
consent of the bondholders. To date, we have not drawn on the Heller credit
facility, or sought bondholder consent.
On June 13, 2000, we opened the bidding procedures with the approval of the
Bankruptcy Court in an auction format for substantially all of our assets. After
an extension of the original bid and auction dates, qualified buyers were
required to submit their bids as of August 11, 2000. On September 11, 2000, the
Company and Time Warner Telecom Inc. executed a definitive asset purchase
agreement which provides for the purchase of substantially all of the Company's
assets, excluding certain assets in Hawaii and certain non-core businesses, for
$690,000. On September 21, 2000, the Bankruptcy Court approved the definitive
asset purchase agreement between the Company and Time Warner Telecom Inc.
Closing of the sale is anticipated in the last quarter of 2000, or first quarter
of 2001, subject to regulatory approvals and other customary terms and
conditions. In addition, the Company is seeking purchasers for certain of its
remaining assets.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders may be substantially altered. At this time, it is not
possible to predict the outcome of the Chapter 11 cases in general or the effect
of the cases on our business, or on the interests of creditors 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.
2. BASIS OF PRESENTATION
The accompanying condensed, consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. However,
certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed, or omitted, pursuant to the rules and regulations of the
Securities and
5
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<PAGE> 6
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 statements
also include an impairment of assets charge (see "Note 13"). 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 September 30, 2000, liabilities subject to compromise consist of the
following:
<TABLE>
<S> <C>
Trade payables $ 43,837
Accrued liabilities 18,495
Current portion, long-term debt 20,030
Current portion, capital lease 4,331
obligations
Long-term debt, less current portion 1,155,990
Capital lease obligations, less 13,767
current portion
Long-term interest payable 52,007
Other long-term liabilities 14,185
-----------
Total $ 1,322,642
-----------
</TABLE>
4. BASIC AND DILUTED NET LOSS PER SHARE
For the three- and nine-month periods ended September 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 39,911 and
699,406 for the three- and nine-month periods ended September 30, 2000,
respectively, compared to 14,693,507 and 15,122,291 for the three- and
nine-month periods ended September 30, 1999.
5. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Common shares, no par value 40,023,480 37,734,507
</TABLE>
6. REORGANIZATION EXPENSES
For the three- and nine-month periods ended September 30, 2000,
reorganization expenses totaled $8,179 and $12,777, respectively. This consisted
of $3,543 and $6,107 for professional expenses, and $4,066 and $6,100 for a
retention bonus accrual, and $570 and $0 in other reorganization expenses for
the three- and nine-months ended September 30, 2000, respectively. The retention
bonus accrual is pursuant to a Bankruptcy Court-approved plan to retain our
employees through the bankruptcy process. For the three- and nine-months ended
September 30, 2000, cash expended for reorganization costs totaled $3,355,
consisting of $206 for professional expenses and $3,149 for retention bonuses.
At September 30, 2000, we had accrued $3,860 for professional expenses, $2,951
related to the retention bonus plan, and $570 for other reorganization expenses.
6
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<PAGE> 7
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>
September 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 September 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>
Nine Months
Ended September 30,
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Supplemental disclosure of cash flow
information:
Pre-petition cash paid for interest $ 22,808 $ 27,143
Post-petition cash paid for interest 228 --
Supplemental schedule of non-cash investing
and financing activities:
Disposition of subsidiary:
Assets (4,182) 2,579
Liabilities (266) (216)
Amounts in accounts payable and accrued
liabilities for the purchase of fixed
assets at end of period -- 28,560
Assets acquired through capital leases -- 1,590
Conversion of debt to equity 15,772 774
Long-term debt and capital leases
reclassified to "Liabilities subject to
compromise" 1,194,118 --
</TABLE>
9. CAPITALIZATION OF INTEREST
The Company capitalized interest of $0 and $8,488 as a part of property and
equipment for the three- and nine-month periods ended September 30, 2000,
respectively, compared to $9,884 and $29,001 for the three- and nine-month
periods ended September 30, 1999, respectively.
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 September 30, 2000 $ 315
-------
</TABLE>
7
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<PAGE> 8
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 these transactions was $42,349.
12. DEBT SERVICE REQUIREMENTS
At September 30, 2000, the Company had $1,194,118 of indebtedness
outstanding along with $74,008 of mandatorily 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 with the
exception of certain capital lease obligations. All of these obligations are
subject to discharge in bankruptcy upon the completion of all proceedings.
13. IMPAIRMENT OF ASSETS
As a result of entering into the definitive asset purchase agreement with
Time Warner Telecom Inc. in the amount of $690,000 and anticipated proceeds from
the sale or sales of all remaining assets, the Company recorded an impairment
charge, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long Lived Assets to be Disposed of," of $260,800 during the
three-months ended September 30, 2000.
14. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 43 ("FIN 43"), "Real Estate Sales, an interpretation of FASB
Statement No. 66." The interpretation is effective for sales of real estate with
property improvements or integral equipment entered into after June 30, 1999.
Under this interpretation, conduit is considered integral equipment and dark
fiber will likely be considered integral equipment. Accordingly, title must
transfer to a lessee in order for a lease transaction to be accounted for as a
sales-type lease. For contracts entered into after June 30, 1999, sales-type
lease accounting will no longer be appropriate for conduit and dark fiber leases
and, therefore, these transactions will be accounted for as operating leases
unless title transfers to the lessee.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation," an interpretation of
Accounting Principles Board 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. This Interpretation became effective July 1, 2000. The adoption of
this Interpretation has not had a material effect on our financial position or
on the results of operations.
8
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<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report contains "forward-looking statements" within the
meaning of the securities laws. These forward-looking statements are subject to
a number of risks and uncertainties, many of which are beyond GST
Telecommunications, Inc.'s ("GST" or the "Company") control. All statements
included in this Quarterly Report, other than statements of historical facts,
are forward-looking statements, including the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding our strategy, future operations, financial position, projected costs,
prospects, plans and objectives of management.
Certain statements contained in this Quarterly Report, including without
limitation, statements containing the words "will," "anticipate," "believe,"
"intend," "estimate," "expect," "project" and words of similar import,
constitute forward-looking statements, although not all forward-looking
statements contain such identifying words. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the Company's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
factors include, among others, the following:
. the uncertainty of our future as a result of filing for
protection under bankruptcy law;
. the significant amount of our indebtedness;
. our limited operating history and expectation of operating
losses;
. the availability and terms of the significant additional capital
required to fund our expansion;
. the extensive competition we expect to face in each of our
markets;
. our dependence on sophisticated information and processing
systems;
. our ability to manage growth;
. our ability to access markets and obtain any required governmental
authorizations, franchises and permits, in a timely manner, at
reasonable costs and on satisfactory terms and conditions;
. technological change; and
. changes in, or the failure to comply with, existing government
regulations.
All forward-looking statements speak only as of the date of this Quarterly
Report. We do not undertake any obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Although we believe that our plans, intentions and
expectations reflected in or suggested by the forward-looking statements made in
this Quarterly Report are reasonable, we can give no assurance that such plans,
intentions or expectations will be achieved. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements.
Overview
We are, through our subsidiaries, a facilities-based integrated
communications provider ("ICP"), offering a broad range of telecommunications
products and services, primarily to business customers located in California and
other western states. We own and operate a converged network capable of carrying
both voice and data traffic--offering our customers an alternative to incumbent
local exchange carriers. Our current products include data transport, high-speed
Internet access, voice services (including a bundled offering of local and long
distance services), and wholesale services, including dark fiber and conduit
rights.
9
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<PAGE> 10
As an ICP, we have one reportable operating segment. While our chief
decision-maker monitors the revenue streams of various services, operations are
managed and financial performance is evaluated based upon the delivery of
multiple services over a common network and facilities. The various revenue
streams generate many shared expenses. As a result, we believe that any
allocation of the expenses to multiple revenue streams would be impractical and
arbitrary. For that reason, we do not currently make such allocations
internally. Furthermore, substantially all of our revenue is attributable to
customers in the United States and all significant operating assets are located
within the United States.
The chief decision-maker does, however, monitor revenue streams consolidated at
a more detailed level than those depicted in our historical general purpose
financial statements. The following table presents revenues by service type (in
thousands):
<TABLE>
<CAPTION>
Three months
ended Nine months ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Local service $ 21,682 $ 17,822 $ 62,872 $ 52,763
Long distance
services(1) 11,724 16,648 39,169 52,639
Data services 7,460 5,349 21,764 14,757
Internet services 1,434 2,335 4,057 7,379
Long-haul
services(2) 9,922 7,856 31,255 20,799
Product -- 1,345 205 3,577
Other 311 411 1,106 2,029
Construction and
facility sales 11,965 53,692 24,563 98,979
-------- -------- -------- --------
Total revenues $ 64,498 $105,458 $184,991 $252,922
-------- -------- -------- --------
</TABLE>
---------
(1) Long distance services represents revenue from toll charge calls outside
the customers local calling area.
(2) Long-haul services represents revenue from point-to-point line
services.
Recent Developments
On May 17, 2000, GST and its subsidiaries filed voluntary petitions for
protection under Chapter 11 of the U.S. Bankruptcy Code in the District of
Delaware. We are currently operating as debtors-in-possession under the
supervision of the United States District Court for the District of Delaware
(the "Bankruptcy Court"). The Chapter 11 cases have been consolidated for the
purpose of joint administration under Case No. 00-1982 (GMS).
On May 17, 2000, we also commenced ancillary proceedings under the
Companies' Creditors Arrangement Act in Canada in the Ontario Superior Court of
Justice.
Under the proceedings, substantially all liabilities, litigation and claims
pending against the Debtors in existence at the filing date are stayed unless
the stay is modified or lifted or payment has been otherwise authorized by the
Bankruptcy Court.
On May 11, 2000, we obtained a commitment letter from Heller Financial, Inc.
("Heller") which will provide us, subject to satisfying certain conditions,
debtor-in-possession financing for $50.0 million and the potential for up to an
additional $75.0 million in cash. On May 26, 2000, the Bankruptcy Court entered
an order approving the initial $30.0 million of this financing. On July 26,
2000, the Bankruptcy Court entered an order providing a superpriority interest
for Heller over the secured debt of existing bondholders, upon the consent of a
majority of the secured bondholders, which will in turn permit Heller to provide
approximately $40.0 million of the $50.0 million in financing mentioned above.
Based upon the current unencumbered assets, the additional $10.0 million is
available without the consent of
10
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<PAGE> 11
the bondholders. To date, we have not drawn on the Heller credit facility, or
sought bondholder consent.
On June 13, 2000, we opened the bidding procedures with the approval of the
Bankruptcy Court in an auction format for substantially all of our assets. After
an extension of the original bid and auction dates, qualified buyers were
required to submit their bids as of August 11, 2000. On September 11, 2000, the
Company and Time Warner Telecom Inc. executed a definitive asset purchase
agreement which provides for the purchase of substantially all of the Company's
assets, excluding certain assets in Hawaii and certain non-core businesses for
$690.0 million. On September 21, 2000 the Bankruptcy Court approved the
definitive asset purchase agreement between the Company and Time Warner Telecom
Inc. Closing of the sale is anticipated in the last quarter of 2000, or first
quarter of 2001, subject to regulatory approvals and other customary terms and
conditions. In addition, the Company is seeking purchasers for certain of its
remaining assets.
On July 26, 2000, the Bankruptcy Court approved the modification of existing
construction and capacity contracts between us and 360networks, Level (3)
Communications ("Level (3)"), and Williams Communications ("Williams"). We
agreed to assume certain of our contracts with the three companies within the
meaning of the Bankruptcy Code and to make other commitments, in return for
which 360networks, Level (3), and Williams agreed to various changes in their
relationships with us. The commitments by 360networks, Level (3), and Williams
resulted in the acceleration of cash paid to us for our provision of conduits or
fiber to the three companies and reduced the near-term cash paid by us for
certain construction obligations, resulting in a net cash flow benefit of
approximately $26.0 million, of which approximately $20.0 million had been
realized as of September 30, 2000. These modifications, in addition to the
Heller credit facility, should enable us to finance our operations pending
disposition of our assets.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders may be substantially altered. At this time, it
is not possible to predict the outcome of the Chapter 11 cases in general or the
effect of the cases on our business, or on the interests of creditors 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.
Results of Operations
Revenues. Total revenue for the three- and nine-month periods ended
September 30, 2000, decreased $41.0 million, or 38.8%, and $67.9 million, or
26.9%, respectively, to $64.5 million from $105.5 million and $185.0 million
from $252.9 million, respectively, for the three-and nine-month periods ended
September 30, 1999.
Telecommunications and other services revenues for the three- and nine-month
periods ended September 30, 2000, increased $2.1 million, or 4.2%, and $9.8
million, or 6.6%, respectively, to $52.5 million from $50.4 million, and $160.2
million from $150.4 million, respectively, for the three- and nine-month periods
ended September 30, 1999. The increase in telecommunications and other services
revenues resulted from increased local, data and long-haul services, and from an
increase in reciprocal compensation. We bundle these products to provide better
access and services to our customers. Reciprocal compensation, which we
recognize based on interconnection agreements and other agreements with ILECs,
totaled $4.5 million and $13.4 million for the three- and nine-month periods
ended September 30, 2000, compared to $3.0 million and $5.2 million,
respectively, for the three- and nine-month periods ended September 30, 1999.
These increases were partially offset by decreases in long distance and internet
revenues.
Construction, facility sales and other revenue for all periods presented is
primarily derived from three contracts to sell or lease fiber and conduit
systems throughout California and the Pacific Northwest. The bulk of the revenue
for these contracts was recognized in 1999. As a result,
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<PAGE> 12
construction, facility sales and other revenue for the three- and nine-month
periods ended September 30, 2000, decreased $41.7 million and $74.4 million,
respectively, to $12.0 million from $53.7 million and $24.6 million from $99.0
million, respectively, for the three- and nine-month periods ended September 30,
1999. Because fiber and conduit systems are a limited resource and because
non-recurring transactions significantly impact construction, facility sales and
other revenue, we anticipate that such revenues will continue to fluctuate in
the future. In addition, the adoption of FIN 43 will impact the amounts of
revenue related to lease transactions (see "Note 14 in Item 1").
Product revenue for the three- and nine-month periods ended September 30,
2000 decreased to $0 and $.2 million from $1.3 million and $3.6 million,
respectively, in the three- and nine-month periods ended September 30, 1999. The
decrease in product revenue was due to the divestitures of Texas-based Action
Telecom, Inc.'s ("Action Telecom") product sales division relating to long
distance interconnection equipment in October 1999, and Action Telecom's product
sales division relating to Network Analysis Management Systems ("NAMS") in March
2000.
Operating Expenses. Total operating expenses for the three-month period
ended September 30, 2000, increased $230.5 million, or 181.8%, to $357.3 million
from $126.8 million for the three-month period ended September 30, 1999. Total
operating expenses for the nine-month period ended September 30, 2000, increased
$237.6 million, or 74.4%, to $557.0 million from $319.5 million for the
nine-month period ended September 30, 1999.
Network expenses, which include direct local and long distance circuit
costs, were 53.5% and 59.0%, respectively of telecommunications services
revenues for the three- and nine-month periods ended September 30, 2000,
compared to 64.0% and 64.4% for the comparable periods in the previous year. The
decrease in network expenses as a percentage of revenue resulted from an
increase in revenues for traffic carried on our network as a percentage of total
telecommunications services revenues.
Facilities administration and maintenance expenses for the three- and
nine-month periods ended September 30, 2000, were 13.4% and 12.0%, respectively,
of telecommunications services revenues compared to 10.6% and 9.8%,
respectively, of telecommunications services revenues for the three- and
nine-month periods ended September 30, 1999. The increase is attributable to: 1)
a decrease in capitalized labor and overhead and 2) an increase in cable locate
services.
Cost of construction revenues for the three- and nine-month periods ended
September 30, 2000, were $8.1 million and $16.6 million, respectively, a
decrease of $29.1 million and $46.5 million over the comparable periods in the
previous year. The decrease corresponded to the decrease in construction,
facility sales and other revenue. For the three- and nine-month periods ended
September 30, 2000, cost of construction revenues was 67.7% and 67.5% of
construction revenues, compared to 69.3% and 63.7% for the three- and nine-month
periods ended September 30, 1999.
Cost of product revenues for the three- and nine-month periods ended
September 30, 2000, were $0 and $.3 million, respectively, a decrease of $.7
million and $1.7 million, respectively, over the three- and nine-month periods
ended September 30, 1999. The decrease in cost of product revenues relates to
the divestiture of the NAMS product division.
Selling, general and administrative expenses for the three- and nine-month
periods ended September 30, 2000, decreased $2.0 million, or 6.2%, and increased
$6.8 million, or 7.5%, respectively, to $30.6 million from $32.6 million and
$97.4 million from $90.6 million, respectively for the three- and nine-month
periods ended September 30, 1999. The decrease for the three-month period is
primarily related to: 1) a decrease in payroll expenses related to a decrease in
the number of employees; 2) a decrease in bonuses related to our variable
incentive plan; and 3) a decrease in litigation costs. Such decrease was
partially offset by an accrual of $5.8 million related to settlements and likely
settlements of disputed items raised in the course of the banktruptcy. The
increase for the nine-month period was
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primarily related to: 1) an increase in severance related to a reduction in
workforce; 2) an increase in property taxes; and 3) a $5.8 million accrual
related to settlements and likely settlements of disputed items raised in the
course of the bankruptcy. Such increase was partially offset by a decrease in
litigation costs. As a percentage of total revenue, selling, general and
administrative expenses for the three- and nine-month periods ended September
30, 2000 were 48.3% and 52.9%, respectively, compared to 31.0% and 35.8% for the
comparable periods in the previous year.
Depreciation and amortization for the three- and nine- month periods ended
September 30, 2000, increased $3.4 million, or 18.2%, and $15.3 million, or
29.2%, respectively, as compared to the three- and nine-month periods ended
September 30, 1999. The increase is attributable to newly-constructed networks
and related equipment being placed into service and to the amortization of
intangible assets related to our acquisitions. Depreciation and amortization
expense was 34.2% and 36.5% of total revenue for the three- and nine-month
periods ended September 30, 2000, compared to 17.7% and 20.7%, respectively, for
the comparable three- and nine-month periods ended September 30, 1999.
As a result of entering into the definitive asset purchase agreement with
Time Warner Telecom Inc. in the amount of $690.0 million and anticipated
proceeds from the sale or sales of all remaining assets, we recorded an
impairment charge, pursuant to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed of," of $260.8
million during the three-months ended September 30, 2000 (see "Note 13 in Item
1").
Other Expenses/Income. For the three- and nine-month periods ended September
30, 2000, we recorded net other expense of $1.7 million and $2.7 million,
respectively, compared to net other income of $1.9 million and net other expense
of $49.1 million for the three- and nine-month periods ended September 30, 1999,
respectively. For the nine-month period ended September 30, 2000, net other
expense includes a $42.3 million net gain resulting from the sale of 3.6 million
shares of common stock in Global Light Telecommunications, Inc. (the "Global
Sale"). For the three- and nine-month periods ending September 30, 1999, we
realized a net gain of $28.0 million from the settlement of various lawsuits
(the "Global Settlement"). Excluding such transactions, net other expense would
have decreased $24.3 million for the three-month period ended September 30,
2000, as compared to the three-month period ended September 30, 1999. Excluding
such transactions, net other expense would have decreased $32.1 million for the
nine-month period ended September 30, 2000, as compared to the nine-month period
ended September 30, 1999. Such decrease was related to a decrease in interest
expense that resulted from our Chapter 11 filing. Under Chapter 11, all of our
debt was reclassified to liabilities subject to compromise and we are no longer
recording interest expense on such debt, with the exception of certain capital
leases.
Reorganization Expenses. For the three- and nine-month periods ended
September 30, 2000, reorganization expenses totaled $8.2 million and $12.8
million, respectively. This consisted of $3.5 million and $6.1 million for
professional expenses, $4.1 million and $6.1 million for a retention bonus
accrual, and $.6 million and $0 in other reorganization expenses for the three-
and nine-months ended September 30, 2000, respectively. The retention bonus
accrual is pursuant to a Bankruptcy Court-approved plan to retain our employees
during the bankruptcy process. For the three- and nine-months ended September
30, 2000, cash expended for reorganization costs totaled $3.4 million,
consisting of $.2 million for professional expenses and $3.1 million for
retention bonuses. At September 30, 2000, we had accrued $3.9 million for
professional expenses, $3.0 million related to the retention bonus plan, and $.6
million for other reorganization expenses.
Net Loss. Net loss for the three-month period ended September 30, 2000,
increased $282.7 million to $302.1 million from $19.4 million for the
three-month period ended September 30, 1999. Net loss for the nine-month period
ended September 30, 2000, increased $271.3 million to $387.0 million from $115.7
million for the nine-month period ended September 30, 1999. Excluding the $260.8
million impairment of assets charge recorded in the three-months ended September
30, 2000,
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and the $28.0 million gain in the Global Settlement recorded in the three-months
ended September 30, 1999, the net loss would have been $37.0 million for the
three-months ended September 30, 2000, compared to a loss of $39.1 million for
the three-months ended September 30, 1999. Excluding the $260.8 million
impairment of assets charge and $42.3 million gain on the Global Sale recorded
in the nine-months ended September 30, 2000, and the $28.0 million gain on the
Global Settlement recorded in the three-months ended September 30, 1999, the net
loss would have been $168.4 million for the nine-months ended September 30,
2000, compared to a loss of $143.7 million for the nine-months ended September
30, 1999.
Liquidity and Capital Resources
We have incurred significant operating and net losses as a result of the
development and operation of our networks. As a result of this, we have filed
for protection under Chapter 11 of the U.S. Bankruptcy Code in the District of
Delaware. We expect that our operating losses will continue as we operate as a
debtor-in-possession under bankruptcy law. Cash provided by our operations may
not be sufficient to fund the continuation of daily operations of the business
through the conclusion of the bankruptcy process.
At September 30, 2000, we had approximately $1,194.1 million of indebtedness
outstanding and $74.0 million of 11.875% mandatorily redeemable preference
shares. As a result of filing for protection under bankruptcy law, we will not
be able to make any of our debt service requirements that are outstanding as of
May 17, 2000 with the exception of certain capital lease obligations. We have
significant debt service obligations, most of which will not be met under
bankruptcy law. These amounts are principal and interest payments of
approximately $33.7 million, $113.3 million, $110.5 million, $153.7 million and
$168.5 million in the remainder of 2000 and in 2001, 2002, 2003 and 2004,
respectively. All of these amounts may be discharged in bankruptcy, subject to
distribution of proceeds from the sale of our assets. There can be no assurance
that any amounts owed to unsecured creditors will be paid.
At September 30, 2000, we had cash and cash equivalents of approximately
$30.7 million. On May 11, 2000, we obtained a commitment letter from Heller
Financial, Inc. ("Heller") which will provide us, subject to satisfying certain
conditions, debtor-in-possession financing for $50.0 million and the potential
for up to an additional $75.0 million in cash. On May 26, 2000, the Bankruptcy
Court entered an order approving the initial $30.0 million of this financing. On
July 26, 2000, the Bankruptcy Court entered an order providing a superpriority
interest for Heller over the secured debt of existing bondholders upon the
consent of a majority of the secured bondholders, which will in turn permit
Heller to provide approximately $40.0 million of the $50.0 million in financing
mentioned above. Based upon current unencumbered assets, the additional $10.0
million is available without the consent of the bondholders. To date, we have
not drawn on the Heller credit facility, or sought bondholder consent.
On July 26, 2000, the Bankruptcy Court approved the modification of existing
construction and capacity contracts between the Company and 360networks, Level
(3), and Williams. We agreed to assume certain of our contracts with the three
companies within the meaning of the Bankruptcy Code and to make other
commitments, in return for which 360networks, Level (3), and Williams agreed to
various changes in their relationships with us. The commitments by 360networks,
Level (3), and Williams resulted in the acceleration of cash paid to us for our
provision of conduits or fiber to the three companies and reduced the near-term
cash paid by us for certain construction obligations, resulting in a net cash
flow benefit of approximately $26.0 million, of which approximately $20.0
million had been realized as of September 30, 2000. These modifications, in
addition to the Heller credit facility, should enable us to finance our
operations from September 30, 2000 through the disposition of our assets.
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<PAGE> 15
If a sale of our assets to Time Warner Telecom Inc. is not completed, we
will either reorganize our operations or liquidate the affected assets. To the
degree we are unable to sell our remaining assets, the unsold assets will be
liquidated. The extent of additional financing will depend on, among other
things, the outcome of our bankruptcy proceedings. In the event that our plans
or assumptions change or prove to be inaccurate, we incur significant unexpected
expenses, or our cash resources, together with borrowings under the current
financing arrangements, prove to be insufficient to fund operations, we may be
required to seek additional sources of capital (or seek additional capital
sooner than currently anticipated).
Our net cash used in operating activities was $6.2 million and $12.3 million
for the nine-months ended September 30, 2000 and 1999, respectively, and net
cash used in investing activities was $11.8 million and $41.0 million for the
nine-months ended September 30, 2000 and 1999, respectively. For the nine-months
ended September 30, 2000, net cash used in investing activities included $56.6
million of proceeds from the Global Sale and $6.3 million from the sale of
restricted investments. For the nine-months ended September 30, 1999, net cash
used in investing activities included $173.1 million from the sale of restricted
investments. Excluding such proceeds and transfers, net cash used in investing
activities would have decreased $80.6 million for the nine-months ended
September 30, 2000, as compared with the nine-months ended September 30, 1999.
Net cash provided by financing activities from borrowings and equity issuances
to fund capital expenditures, acquisitions and operating losses was $5.7 million
and $12.4 million for the nine-months ended September 30, 2000 and 1999,
respectively.
Capital expenditures for the nine-months ended September 30, 2000 and 1999,
were $79.4 million and $222.0 million, respectively, including $8.5 million and
$25.9 million of capitalized interest. Capital expenditures between September
30, 2000 and the close of sale of assets to Time Warner Telecom Inc. are
expected to be approximately $20.1 million.
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<PAGE> 16
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK--The Company has fixed income investments
consisting of cash equivalents, short-term investments in U.S. government debt
instruments, certificates of deposit and commercial paper.
Interest income earned on the Company's investment portfolio is affected by
changes in the general level of U.S. interest rates. The Company believes that
it is not exposed to significant changes in fair value because such investments
are classified as available-for-sale and held-to-maturity and are recorded at
amortized cost. The fair value of each investment approximates its amortized
cost.
The following table provides information about the Company's risk exposure
associated with changing interest rates. Currently, the Company does not use
derivative financial instruments to manage its interest rate risk.
<TABLE>
<CAPTION>
Expected Maturity
----------------------------------------------------------------------------
Market Value
at
September 30,
2000 2001 2002 2003 2004 Thereafter Total 2000
------ ------- ------- ------- -------- ---------- ---------- -------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term
Debt:
Fixed rate $1,097,906(1) $1,097,906(1) $618,316(2)
Average
interest
rate 12.275%
Variable
rate $9,829 $20,021 $20,834 $21,740 $ 11,951 $ 5,172 $ 89,547
Average
interest
rate
(LIBOR
plus) 3.25% 3.28% 3.34% 3.35% 3.22% 3.17%
Capital
Leases:
Fixed rate $2,315 $ 3,206 $ 1,847 $ 1,840 $ 1,974 7,199 $ 18,381
Average
interest
rate 11.89% 11.89% 11.89% 11.89% 11.89% 11.89%
Redeemable
Preferred
Stock:
Fixed rate $ 112,000 $ 112,000
Average
interest
rate 11.88%
</TABLE>
---------
(1) Includes $155,433 of unaccreted discount. Excludes $144,000 in long-term
debt related to the Company's 12.75% Senior Subordinated Accrual Notes (the
"Accrual Notes") for which no market quotes were available as of September
30, 2000.
(2) Based on quoted market prices at September 30, 2000. Excludes market value
for the Accrual Notes for which no market quotes were available as of
September 30, 2000.
MARKET PRICE RISK--The Company's risk exposure associated with market price
is limited to its long-term debt that is publicly traded. These bonds are
recorded at book value, which could vary from current market prices.
FOREIGN CURRENCY MARKET RISK--Although the Company conducts some business in
Canada, the international operations were not material to the Company's
consolidated financial position. Accordingly, the Company was not subject to
material foreign currency exchange rate risk from the effects that exchange rate
movements of foreign currencies would have on the Company's future costs or on
future cash flows it would receive.
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