As filed with the Securities and Exchange Commission on November 6, 1996
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
GST TELECOMMUNICATIONS, INC.
------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Canada
------------------------------------------------------------
(State or other jurisdiction of
incorporation or organization)
N/A
------------------------------------------------------------
(IRS Employer
Identification Number)
---------------------------
4317 N.E. Thurston Way
Vancouver, Washington 98662
(360) 254-4700
------------------------------------------------------------
(Address and telephone number of
Registrant's Principal Executive Offices)
---------------------------
Robert H. Hanson, Senior Vice President
GST Telecommunications, Inc.
1285 Sheridan Street, Suite 245
Cody, Wyoming 82413
(307) 527-6048
------------------------------------------------------------
(Name, Address and Telephone Number
of Agent for Service)
Copy to:
David J. Adler, Esq.
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
---------------------------
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. / /
<PAGE>
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Maximum
Aggregate Amount of
Title of Shares to be Registered Offering Price(1) Registration Fee
- --------------------------------------------------------------------------------
Common Shares, without par value,
issuable upon conversion of
Convertible Notes $50,995,467.75 $15,453.15
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act, based upon $9.875, the per
Share average of high and low sale prices of the Registrant's Common Shares as
reported by the American Stock Exchange (the "AMEX") for trading on October 30,
1996.
----------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1996
5,164,089 COMMON SHARES
GST TELECOMMUNICATIONS, INC.
This Prospectus relates to the issuance of up to 5,164,089 Common
Shares, without par value (the "Common Shares"), of GST Telecommunications, Inc.
(the "Company") upon conversion of the Company's 13-7/8% Convertible Senior
Subordinated Discount Notes due 2005 (the "Convertible Notes"). The Common
Shares that are being registered hereby are issuable upon such conversion
without the payment of any additional consideration by the holders of the
Convertible Notes.
The Convertible Notes are convertible (in denominations of $1,000
principal amount at maturity or integral multiples thereof) into Common Shares,
at the option of the holders of the Convertible Notes, at any time after
December 18, 1996. The number of Common Shares issuable upon conversion of the
Convertible Notes is that number of Common Shares equal to the accreted value
("Accreted Value") of the Convertible Notes being converted (on the date of
conversion) divided by $7.563, subject to adjustment (the "Conversion Ratio").
Accordingly, the number of Common Shares issuable upon conversion of the
Convertible Notes will increase as the Accreted Value of the Convertible Notes
increases. On December 15, 1996, the Convertible Notes would be convertible into
an aggregate of approximately 3,020,000 Common Shares. Immediately prior to
maturity in December 2005, assuming no Convertible Notes have yet been
converted, the Convertible Notes would be convertible into an aggregate of
5,164,089 Common Shares.
The Company will not receive any cash proceeds from the issuance of
Common Shares upon conversion of the Convertible Notes, but will immediately
retire, without the payment of additional consideration, the debt attributable
to the Convertible Notes converted. All costs, expenses and fees in connection
with the registration of the Common Shares offered by this Prospectus will be
borne by the Company. See "Plan of Distribution."
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES
A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 4 HEREOF.
- --------------------------------------------------------------------------------
The Common Shares are traded on the AMEX under the symbol "GST" and on
the VSE under the symbol "GTE.U." On October 31, 1996, the last sale price for
the Common Shares on the AMEX was $10.375.
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is , 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov. The Common Shares are listed on the
AMEX and such reports and other information may also be inspected at the offices
of the AMEX, 86 Trinity Place, New York, New York 10006.
TABLE OF CONTENTS
AVAILABLE INFORMATION..........................................................2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................3
RISK FACTORS...................................................................4
THE COMPANY...................................................................13
MATERIAL CHANGES..............................................................13
USE OF PROCEEDS...............................................................15
PLAN OF DISTRIBUTION..........................................................15
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.......................16
LEGAL MATTERS.................................................................17
EXPERTS .....................................................................17
ADDITIONAL INFORMATION........................................................18
INDEX TO FINANCIAL STATEMENTS................................................F-1
-2-
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 20-F for the fiscal year ended
September 30, 1995, as amended; Reports of Foreign Issuer on Form 6-K for the
quarters ended December 31, 1995, as amended, and March 31, 1996; the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; and the
Company's Current Report on Form 8-K dated October 31, 1996 reporting the
acquisition of assets and other events are incorporated by reference in this
Prospectus and shall be deemed to be a part hereof. All subsequent annual
reports filed by the Company on Form 20-F, 40-F, 10-K or otherwise, prior to the
termination of this offering, are deemed to be incorporated by reference in this
prospectus and shall be deemed to be a part hereof from the date of filing of
such documents. All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15 of the Exchange Act, subsequently filed by the Company prior to
the termination of this offering, are deemed to be incorporated by reference in
this Prospectus and shall be deemed to be a part hereof from the date of filing
of such documents.
The Company's Application for Registration of its Common Shares under
Section 12(b) of the Exchange Act filed on March 3, 1994 is incorporated by
reference in this Prospectus and shall be deemed to be a part hereof.
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents. Written requests for such copies should
be directed to GST Telecommunications, Inc. at 1030-999 West Hastings Street,
Vancouver, British Columbia, Canada V6C 2W2, Attention: Robert M. Blankstein.
Oral requests should be directed to such individual (telephone number (604)
688-0553).
-----------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made hereby, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Selling Shareholders. This Prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, the securities offered
hereby to any person in any state or other jurisdiction in which such offer or
solicitation is unlawful. The delivery of this Prospectus at any time does not
imply that information contained herein is correct as of any time subsequent to
its date.
-3-
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
BEFORE MAKING AN INVESTMENT DECISION. CERTAIN MATTERS DISCUSSED IN THIS
PROSPECTUS OR WHICH ARE INCORPORATED BY REFERENCE ARE FORWARD-LOOKING STATEMENTS
THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED.
DEVELOPMENT AND EXPANSION RISK AND POSSIBLE INABILITY TO MANAGE GROWTH
The Company is in the early stages of its operations. Certain of its
networks have only recently become commercially operational and the Company has
only recently begun to deploy switches in its networks. The continued expansion
and development of the Company's networks and the success of the Company's
switched and enhanced services will depend, among other things, upon the
Company's ability to assess potential markets, design fiber backbone routes that
provide ready access to a substantial customer base, secure financing, obtain
required rights-of-way, building access and governmental permits, implement
expanded interconnection and collocation with facilities owned by local exchange
telephone companies ("LECs") and achieve a sufficient customer base, and upon
subsequent changes in state and federal regulations. There can be no assurance
that any networks to be developed or further developed will be completed on
schedule, at a commercially reasonable cost or within the Company's
specifications. In addition, the expansion of the Company's business has
involved and is expected to continue to involve acquisitions, which could divert
the resources and management time of the Company and could require integration
with the Company's existing networks and services. The Company's future
performance will depend, in part, upon its ability to manage its growth
effectively, which will require it to continue to implement and improve its
operating, financial and accounting systems, to expand, train and manage its
employee base and to effectively manage the integration of acquired businesses.
These factors and others could adversely affect the expansion of the customer
base and service offerings of the Company's existing networks, as well as
commencement of operations of new networks. The Company's inability either to
expand in accordance with its plans or to manage its growth could have a
material adverse effect on its business, financial condition and results of
operations.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE EBITDA
The Company has incurred and expects to continue to incur increasing
operating losses and negative EBITDA while it expands its business and builds
its customer base. The Company has incurred significant increases in expenses
associated with these activities and there can be no assurance that an adequate
customer base with respect to any or all of its services will be achieved or
sustained. The Company does not expect to achieve a significant market share for
any of its services. The Company had a net loss of approximately $37.1 million
and negative EBITDA of $19.9 million for the nine months ended June 30, 1996.
The Company had a net loss of approximately $11.3 million and negative EBITDA of
$8.8 million for the year ended September 30, 1995 and a net loss of
approximately $3.5 million and negative EBITDA of $0.8 million for the 13 months
ended September 30, 1994. There can be no assurance that the Company will
achieve or sustain profitability or generate positive EBITDA. At September 30,
1995, the Company had a U.S. net operating loss carryforward of approximately
$8.5 million and Canadian net operating loss carryforward of approximately $5.8
million. While such loss carryforwards are available to offset future taxable
income of the Company, it is more likely than not that the Company will not
generate sufficient taxable income so as to utilize all or a substantial portion
of such loss carryforwards prior to their expiration.
SIGNIFICANT CAPITAL REQUIREMENTS
The Company believes that the net proceeds of approximately $192.2
million from private placement offerings consummated in December 1995 ("the
December Offering") and October 1996 (the "October Offering"), together with
cash on hand and borrowings expected to be available under both a $100 million
credit facility
-4-
<PAGE>
with Tomen America and its affiliates ("Tomen") (the "Tomen Facility") and
equipment financing currently available and being negotiated, will provide
sufficient funds for the Company to expand its business as presently planned and
to fund its operating expenses through June 1997. Thereafter, the Company
expects to require additional financing. However, in the event that the
Company's plans or assumptions change or prove to be inaccurate, or its cash on
hand, net proceeds from the December Offering and October Offering and
borrowings under the Tomen Facility and the equipment financing currently
available and being negotiated, prove to be insufficient to fund the Company's
growth and operations, or if the Company consummates acquisitions, or if the
Company's operating cash flow does not increase substantially, the Company may
be required to seek additional capital sooner than currently anticipated.
Sources of financing may include public or private equity or debt financings by
the Company or its subsidiaries, sales of non-strategic assets or other
financing arrangements. The Company has been discussing with Tomen the
possibility of modifying the Tomen Facility to provide additional financing for
the Hawaiian inter-island network. There can be no assurance that additional
financing under the Tomen Facility or otherwise will be available to the Company
or, if available, that it can be obtained on acceptable terms or within the
limitations contained in the indentures relating to the notes (the "Notes") sold
in the December Offering (the "Indentures") in any future financing arrangement.
Failure to obtain such financing could result in the delay or abandonment of
some or all of the Company's development and expansion plans and expenditures
and could have a material adverse effect on the Company's business. Such failure
could also limit the ability of the Company to make principal and interest
payments on its outstanding indebtedness, which would have a material adverse
effect on the value of the Common Shares.
The Company has no working capital or other credit facility under which
it may borrow for working capital and other general corporate purposes. There
can be no assurance that such a facility will be available to the Company in the
future or that if such a facility were available, that it would be available on
terms and conditions acceptable to the Company.
SUBSTANTIAL INDEBTEDNESS
At June 30, 1996, the Company had outstanding on a consolidated basis
approximately $225.3 million of indebtedness. The accretion of original issue
discount on the Notes will cause an increase in indebtedness of $158.7 million
by December 15, 2000. The Indentures limit, but do not prohibit, the incurrence
of additional indebtedness by the Company. The Company anticipates that it will
incur substantial additional indebtedness in the future. At June 30, 1996, the
Company had $70.9 million of availability under the Tomen Facility to finance
the development and construction of additional networks, if and to the extent
that proposals for funding projects are approved by Tomen. Since June 30, 1996,
approximately $2.2 million was borrowed under the Tomen Facility. The Company
has entered into a loan agreement with an equipment manufacturer for $116.0
million in equipment financing and is negotiating with equipment manufacturers
for approximately $360.0 million of additional equipment financing.
The level of the Company's indebtedness could have important
consequences to its future prospects, including the following: (i) the ability
of the Company to obtain any necessary financing in the future for working
capital, capital expenditures, debt service requirements or other purposes may
be limited; (ii) a substantial portion of the Company's cash flow from
operations, if any, must be dedicated to the payment of principal of and
interest on its indebtedness and other obligations and will not be available for
other purposes; (iii) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to changes in, its business; (iv) the
Company will be more highly leveraged than some of its competitors, which may
place it at a competitive disadvantage; and (v) the Company's high level of
indebtedness will make it more vulnerable in the event of a downturn in its
business.
-5-
<PAGE>
POSSIBLE INABILITY TO SERVICE DEBT
The Company has been experiencing increasing negative EBITDA and the
Company's earnings before fixed charges were insufficient to cover fixed charges
for the nine months ended June 30, 1996, the year ended September 30, 1995 and
the 13 months ended September 30, 1994 by $38.4 million, $13.8 million and $3.0
million, respectively. There can be no assurance that the Company will be able
to improve its earnings before fixed charges or EBITDA or that the Company will
be able to meet its debt service obligations. As the Company does not currently
have a revolving credit facility, if a shortfall occurs, alternative financing
would be necessary in order for the Company to meet its liquidity requirements
and there can be no assurance that such financing would be available. In such
event, the Company could face substantial liquidity problems. In addition, the
Company anticipates that cash flow from operations may be insufficient to repay
the Notes in full at maturity in which event such indebtedness would need to be
refinanced. There can be no assurance that the Company will be able to effect
such refinancing. The ability of the Company to meet its obligations and to
effect such refinancings will be dependent upon, among other things, the future
performance of the Company, which will be subject to prevailing economic
conditions and to financial, business and other factors, including factors
beyond the control of the Company. Failure by the Company to meet its
obligations could result in a default on its indebtedness, including the Notes,
which would permit the holders of such indebtedness to accelerate the maturity
thereof.
FINANCIAL AND OPERATING RESTRICTIONS IMPOSED BY EXISTING INDEBTEDNESS
The Indentures and the Tomen Facility impose significant operating and
financial restrictions on the Company. Such restrictions affect, and in certain
cases significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness or to create liens on its assets, pay
dividends, sell assets, engage in mergers or acquisitions or make investments.
Failure to comply with any such covenant could result in a default thereunder,
which could result in an acceleration of such indebtedness.
DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
The Company plans to deploy high capacity, digital switches in the
cities in which it operates or plans to operate networks, as well as in certain
cities where the Company will rely on LEC facilities for transmission. This will
enable the Company to offer interstate switched access services and, as
regulatory conditions permit, intrastate switched access, enhanced services and
local dial tone. The Company expects negative operating margins from its
switched services, during the 12 to 18 month period after a switch is deployed.
For switches operating in conjunction with the Company's networks, the Company
expects operating margins to improve as the network is expanded and larger
volumes of traffic are carried on the Company's network. Until such time, the
Company will rely on the LEC to originate and terminate a significant portion of
its switched services traffic. For switches operating in cities where the
Company will rely on LEC facilities for transmission, negative operating margins
are expected under current LEC pricing tariffs. Although under the
Telecommunications Act of 1996 (the "Telecommunications Act"), the LECs will be
required to unbundle local tariffs and permit the Company to purchase only the
origination and termination services it needs, thereby decreasing operating
expenses, there can be no assurance that such unbundling will be effected in a
timely manner and result in prices favorable to the Company. In addition, the
Company's ability to successfully implement its switched and enhanced services
will require the negotiation of resale agreements with LECs and other
competitive local exchange telephone companies ("CLECs") and the negotiation of
interconnection agreements with incumbent LECs. In October 1996, U.S. Court of
Appeals for the Eighth Judicial Circuit (the "Eighth Circuit") stayed certain
aspects of the Federal Communications Commission's (the "FCC") order adopting
rules to implement the interconnection portions of the Telecommunications Act
(the "Interconnection Decision"). On October 24, 1996, the FCC asked the U.S.
Supreme Court to vacate the Eighth Circuit's stay of portions of the
Interconnection Decision. Although there is no time limit for the Supreme Court
to respond, because the issue is time sensitive, it is expected that the Supreme
Court will render a decision on
-6-
<PAGE>
the Eighth Circuit's stay before the middle of November 1996. The stay creates
uncertainty regarding the rules governing price, terms, and conditions of
interconnection agreements, and therefore may affect the Company's negotiation
of interconnection agreements with incumbent LECs. The Company's switched
services may not be profitable due to, among other factors, lack of customer
demand, competition from other CLECs and pricing pressure from the LECs.
Implementation of the Company's switched and enhanced services is subject to the
Company's ability to obtain equipment financing for switches and upon equipment
manufacturers' ability to meet the Company's switch deployment schedule.
Although the Company has entered into a loan agreement with an equipment
manufacturer for $116.0 million of equipment financing and the Company has
negotiated with equipment manufacturers for approximately $360.0 million of
additional equipment financing, there can be no assurance that all of such
switches will be deployed or that, if deployed, such switches will be utilized
to the degree contemplated by the Company. The Company has no experience
providing switched access services and there can be no assurance that the
Company will be able to successfully implement its switched and enhanced
services strategy.
RECENT COMMENCEMENT OF MARKETING
The Company has only recently begun marketing the services of certain
of its networks and, as a result, the Company has relatively few customers and
has generated limited revenue from its CLEC services. Although the Company
actively markets its products and services, there can be no assurance that the
Company will be able to attract new customers or retain existing customers.
DEPENDENCE ON KEY CUSTOMERS
The Company's five largest telecommunications services customers
accounted for approximately 45.1%, 26.8% and 0.7% of the Company's consolidated
revenues for the nine months ended June 30, 1996, the year ended September 30,
1995 and the 13 months ended September 30, 1994, respectively. During the year
ended September 30, 1995, a former customer of the Company's wholly-owned
subsidiary, International Telemanagement Group, Inc., which customer is
presently the subject of a bankruptcy proceeding, accounted for 5.3% of the
Company's consolidated revenues. It is anticipated that during the early stages
of development of individual networks, before obtaining a sufficient amount of
end-user revenues, the Company will be dependent on a limited number of long
distance carriers for a significant portion of its revenues. While long distance
carriers have high volume requirements and have utilized CLECs, they generally
are more price sensitive than end-users. The five largest customers of the
Company's manufacturing operations accounted for 4.6%, 16.1% and 22.2% of the
Company's consolidated revenues for the nine months ended June 30, 1996, the
year ended September 30, 1995 and the 13 months ended September 30, 1994,
respectively. The loss of, or decrease of business from, one or more significant
customers could have a material adverse effect on the business, financial
condition and results of operations of the Company.
COMPETITION
The telecommunications industry is highly competitive. In most markets,
the Company's principal competitor for local exchange services is the Regional
Bell Operating Company ("RBOC") or GTE Corporation ("GTE"). Other competitors
may include other CLECs, microwave and satellite carriers, wireless
telecommunications providers and private networks built by large end-users.
Potential competitors (using similar or different technologies) include cable
television companies, utilities and local telephone companies outside their
current local service areas. In addition, the Company anticipates future
competition from large long distance carriers, such as AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI") and Sprint Corporation ("Sprint"), which have
announced plans to offer integrated local and long distance telecommunications
services as regulations allow. Consolidation of telecommunications companies and
the formation of strategic alliances within the telecommunications industry, as
well as the development of new technologies, could give rise to significant new
competitors to the Company.
-7-
<PAGE>
As a recent entrant in the integrated telecommunications services
industry, the Company has not achieved and does not expect to achieve a
significant market share for any of its services. In particular, the RBOCs, GTE
and other local telephone companies have long-standing relationships with their
customers, have financial, technical and marketing resources substantially
greater than those of the Company, have the potential to subsidize competitive
services with revenues from a variety of businesses and currently benefit from
certain existing regulations that favor the LECs over the Company in certain
respects. While recent regulatory initiatives, which allow CLECs such as the
Company to interconnect with LEC facilities, provide increased business
opportunities for the Company, such interconnection opportunities have been
accompanied by increased pricing flexibility for and relaxation of regulatory
oversight of the LECs. For example, the FCC granted LECs additional flexibility
in pricing their interstate special and switched access services on a central
office specific basis. Under this pricing scheme, LECs may establish pricing
zones based on access traffic density and charge different prices for central
offices in each zone. The Company anticipates that the FCC will grant LECs
increasing pricing flexibility as the number of interconnections and competitors
increases. In addition, the FCC enacted interim pricing rules that restructure
LEC switched transport rates in order to facilitate competition for switched
access. If regulators allow LECs to charge CLECs increased fees in conjunction
with interconnection to their networks, the financial condition of the Company
could be adversely affected. If the LECs lower their rates, the Company and
others providing CLEC and other telecommunications services may be forced by
market conditions to charge less for their services in order to compete. There
can be no assurance that the Company will be able to achieve or maintain
significant revenue or compete effectively in any of its markets.
To the extent the Company interconnects with and uses LEC networks to
service the Company's customers, the Company is dependent upon the technology
and capabilities of the LECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards. The Company will
become increasingly dependent on interconnection with LECs as switched services
become a greater percentage of the Company's business. The Telecommunications
Act imposes interconnection obligations on LECs, but there can be no assurance
that the Company will be able to obtain the services it requires at rates, and
on terms and conditions, that permit the Company to offer switched services at
rates that are both profitable and competitive. Moreover, as described above,
certain provisions of the FCC's August 1996 Interconnection Decision
implementing the interconnection portions of the Telecommunications Act have
been stayed by the Eighth Circuit. The stayed provisions relate to pricing and
the rules that would have permitted new entrants to "pick and choose" among
various provisions of existing interconnection agreements. Although the stay
does not prevent the Company from negotiating interconnection agreements, it
does create uncertainty about the rules governing negotiating, pricing, terms
and conditions of interconnection agreements. In the event that the Company
experiences difficulties in obtaining high quality, reliable and reasonably
priced service from the LECs, the attractiveness of the Company's services to
its customers could be impaired.
The long distance telecommunications industry has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The Company competes with major carriers such as
AT&T, MCI and Sprint, as well as other national and regional long distance
carriers and resellers, many of whom are able to provide services at costs that
are lower than the Company's current costs. In addition, as a result of the
Telecommunications Act, RBOCs also will become competitors in the long distance
telecommunications industry upon the satisfaction of certain conditions. The
Company believes that the principal competitive factors affecting its long
distance operations are pricing, customer service, accurate billing, clear
pricing policies and, to a lesser extent, variety of services. The ability of
the Company to compete effectively will depend upon its continued ability to
maintain high quality, market driven services at prices generally equal to or
below those charged by its competitors. The FCC has, on several occasions since
1984, approved or required price
-8-
<PAGE>
reductions by AT&T. The FCC has announced a decision pursuant to which AT&T will
no longer be regulated as a dominant long distance carrier. This decision
removes AT&T from price-cap regulations with respect to its long distance
services as well as other regulatory and reporting requirements that previously
only applied to AT&T as the sole carrier designated by the FCC as dominant in
the long distance market. This decision, which is subject to certain other
commitments and undertakings agreed to by AT&T, is expected to increase AT&T's
flexibility in competing in the long distance services market and, in
particular, will eliminate the longer tariff notice requirements previously
applicable only to AT&T. To maintain its competitive posture, the Company
believes that it must be in a position to reduce its prices in order to meet
reductions in rates, if any, by others. Any such reductions could adversely
affect the Company.
The Internet services market is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company's competitors in this market include Internet
service providers, other telecommunications companies, online services providers
and Internet software providers. Many of these competitors have greater
financial, technological and marketing resources than those available to the
Company.
The Company's wholly-owned subsidiary, National Applied Computer
Technologies, Inc. ("NACT"), competes with other lower to medium capacity switch
manufacturers and software providers. As its business develops and new switches
are introduced, NACT's competitors may include larger switch and
telecommunications equipment manufacturers such as Lucent Technologies Inc.,
Harris Corp., Siemens AG, Alcatel Alsthom Compagnie Generale D'Electricite,
Telefonaktiebolaget L.M. Ericsson and Northern Telecom, Ltd. Most of NACT's
potential competitors have substantially greater financial, technical and
marketing resources than NACT and may threaten the viability of NACT if such
other companies commence efforts to compete in the segment of the switch
manufacturing market in which NACT operates.
GOVERNMENT REGULATION
The Company's networks and the provision of switched and private line
services are subject to significant regulation at the federal, state and local
levels. Delays in receiving required regulatory approvals or the enactment of
new adverse regulation or regulatory requirements may have a material adverse
effect upon the Company.
The FCC exercises jurisdiction over the Company to the extent its
services involve the provision, origination and termination of interstate or
international telecommunications, including resale of long distance services. As
such a provider, the Company must file tariffs with the FCC. In addition, the
Company must obtain prior FCC authorization for domestic and international long
distance services. State regulatory commissions exercise jurisdiction over the
Company to the extent it provides intrastate services. As such a provider, the
Company is required to obtain regulatory authorization and/or file tariffs at
state agencies in most of the states in which it operates. Local authorities
control the Company's access to municipal rights-of-way. The networks are also
subject to numerous local regulations such as building codes and licensing. Such
regulations vary on a city by city and county by county basis. There can be no
assurance that state or federal commissions will grant required authority or
refrain from taking action against the Company, if it is found to have provided
services without obtaining the necessary authorizations. If authority is not
obtained or if tariffs are not filed, or are not updated, or otherwise do not
fully comply with the tariff filing rules of the FCC or state regulatory
agencies, third parties or regulators could challenge these actions. Such
challenges could cause the Company to incur substantial legal and administrative
expenses. The recently enacted Telecommunications Act provides for a significant
deregulation of the domestic telecommunications industry, including the local
exchange, long distance and cable television industries. The Telecommunications
Act, enacted in February 1996, remains subject to judicial review and additional
FCC rulemaking, and thus is difficult to predict what effect the legislation
will have on the Company and its operations. In particular, the FCC's
implementation
-9-
<PAGE>
of the interconnection provisions of the Telecommunications Act has been
challenged. The FCC released in August 1996 its Interconnection Decision
establishing rules for negotiation of interconnection agreements and providing
guidelines for the FCC and the state public utility commissions to evaluate
interconnection agreements with LECs. In September 1996, in response to various
petitions, the FCC issued a decision reconsidering certain aspects of its
Interconnection Decision. Moreover, as described above, in October 1996, the
Eighth Circuit stayed certain provisions of the FCC's Interconnection Decision,
pending a decision on the merits. Although this court stay does not prevent the
Company from negotiating interconnection agreements, it does create uncertainty
about the rules governing negotiating, pricing, terms and conditions of
interconnection agreements. Moreover, the Company cannot predict the eventual
outcome of the interconnection provisions or other aspects of the
Telecommunications Act.
In addition, the FCC imposes restrictions on foreign ownership of
communications service providers utilizing radio frequencies. The operations of
the Company's Hawaiian network use, among other transmission facilities,
microwave radio facilities operating pursuant to FCC licenses granted to Pacwest
Network, Inc., an entity that is controlled by John Warta, the Company's
President and Chief Executive Officer. The FCC also has the authority, which it
is not presently exercising, to impose restrictions on foreign ownership of
communications service providers not utilizing radio frequencies, which could
have a material adverse effect on the Company's CLEC and other businesses.
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant
changes in technology, with the Company relying on third parties for the
development of and access to new technology. The effect of technological
changes, including changes to wireline and wireless transmission technologies,
on the business of the Company cannot be predicted. The Company believes its
future success will depend, in part, on its ability to anticipate or adapt to
such changes and to offer, on a timely basis, services that meet customer
demands.
The future success of NACT will depend in part upon its ability to keep
pace with advancing technology and standards within the switch manufacturing
industry. There can be no assurance that NACT's products will not be rendered
obsolete by switch products incorporating technological advances designed by
competitors that are not available to NACT.
POSSIBLE ADVERSE LITIGATION OUTCOME
An action was commenced against NACT alleging that its telephone
systems incorporating prepaid calling features infringe upon a patent issued in
1987. An unfavorable decision in this action could have a material adverse
effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The efforts of a small number of key management and operating personnel
will largely determine the Company's success and the loss of any of such persons
could adversely affect the Company. The success of the Company also depends in
part upon its ability to hire and retain highly skilled and qualified operating,
marketing, financial and technical personnel. The competition for qualified
personnel in the telecommunications industry is intense and, accordingly, there
can be no assurance that the Company will be able to hire or retain necessary
personnel.
-10-
<PAGE>
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights-of-way, entry to premises,
franchises and licenses from various private parties, actual and potential
competitors and state and local governments in order to construct and operate
its networks. There can be no assurance that the Company will obtain
rights-of-way and franchise agreements on acceptable terms or that current or
potential competitors will not obtain similar rights-of-way and franchise
agreements that will allow them to compete against the Company. If any of the
existing franchise or license agreements were terminated or not renewed and the
Company were forced to remove its fiber optic cables or abandon its network in
place, such termination could have a material adverse effect on the Company.
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the limited revenues and significant expenses associated
with the expansion and development of its networks and services, the Company
anticipates that its operating results could vary significantly from period to
period. In addition, revenues relating to the Company's network businesses are
and may continue to be dependent upon a small number of customers and contracts,
revenues under which are likely to vary significantly from period to period.
RISK OF JOINT INVESTMENTS
The Company's Phoenix network is operated by Phoenix Fiber Access, Inc.
("Phoenix Fiber"). The Company currently has a 50% ownership interest in Phoenix
Fiber and has agreed in principle to acquire the remaining 50% interest. Phoenix
Fiber has been managed by a governing board that the Company does not control.
The risk is present in this joint venture, and in other joint ventures in which
the Company may subsequently determine to participate, that the other joint
venture partners may at any time have economic, business or legal interests or
goals that are inconsistent with those of the joint venture or the Company. The
risk is also present that a joint venture partner may be unable to meet its
economic or other obligations to the venture and that the Company may be
required to fulfill some or all of those obligations. In addition, if the
Company enters into international joint ventures, the operations of such
ventures will be subject to various risks not present in the Company's domestic
operations, such as fluctuations in currency exchange rates, nationalization or
expropriation of assets, import/export controls, political instability,
limitations on foreign investment, restrictions on the ability to convert
currency and the additional expenses and risks inherent in conducting operations
in geographically distant locations with customers speaking different languages
and having different cultural approaches to the conduct of business.
VOLATILITY OF MARKET PRICE OF COMMON SHARES
Since the Common Shares have been publicly traded, their market price
has fluctuated over a wide range and may continue to do so in the future. The
market price of the Common Shares could be subject to significant fluctuations
in response to various factors and events, including among other things, the
depth and liquidity of the trading market of the Common Shares, variations in
the Company's operating results and the difference between actual results and
the results expected by investors and analysts. In addition, from time to time
the stock market has experienced broad price and volume fluctuations that have
often been unrelated to the operating performance of companies. These broad
market fluctuations also may adversely affect the market price of the Common
Shares.
RISKS OF INVESTMENT IN A CANADIAN CORPORATION
The Company is a Canadian corporation. Certain directors and officers
and certain of the Company's professionals are residents of Canada. As a result,
it may be difficult for U.S. shareholders to effect service of process within
the United States upon the Company or upon such directors, officers and
professionals or to collect judgments of U.S. courts predicated upon civil
liability under U.S. federal securities and other laws. The Company has been
advised that there is substantial doubt as to whether Canadian courts would (i)
enforce judgements of
-11-
<PAGE>
U.S. courts obtained against the Company or such directors, officers and
professionals predicated upon the civil labilities provisions of U.S. laws or
(ii) impose liabilities in original actions against the Company or its
directors, officers and professionals predicated solely upon U.S. laws. In
addition, the Company's status as a Canadian company limits the ability of the
Company to hold or control common carrier radio frequency licenses in the United
States.
POTENTIAL RESALES OF A SUBSTANTIAL NUMBER OF SHARES; REGISTRATION RIGHTS
At September 30, 1996, the Company had outstanding 21,244,259 Common
Shares. Of these shares, 20,276,210 Common Shares are freely tradeable, except
for (i) any Common Shares held by "affiliates" of the Company within the meaning
of Rule 144 under the Securities Act (2,960,182 of such 20,276,210 shares at
September 30, 1996), which shares will be subject to the resale limitations of
Rule 144, and an aggregate of 750,000 Common Shares subject to escrow under
regulations of the VSE. The remaining 967,929 Common Shares are "restricted
securities," as that term is defined in Rule 144 and may only be sold pursuant
to a registration statement under the Securities Act or an applicable exemption
from registration thereunder, including pursuant to Rule 144. Of such 967,929
shares, the Company is contractually obligated to register for resale an
aggregate of 26,624 shares. In addition, at September 30, 1996, (i) 3,098,623
Common Shares were reserved for issuance upon exercise of outstanding stock
options (the "Outstanding Options"), with exercise prices ranging from $3.55 to
$10.00 per share, (ii) 896,155 Common Shares were reserved for issuance upon
exercise of outstanding warrants (the "Outstanding Warrants"), with exercise
prices ranging from $5.52 to $12.96 per share, and (iii) 3,019,598 Common Shares
were reserved for issuance upon conversion of the Convertible Notes (based on
the aggregate Accreted Value of Convertible Notes on December 15, 1996). In
addition, 3,200,000 Common Shares were reserved for issuance upon exercise of
the warrants sold in the October Offering (the "October Warrants"). The Company
has registered or is obligated to register the resale of the Common Shares
issuable upon exercise of the Outstanding Options and the Outstanding Warrants.
The Company is registering the issuance of the Common Shares issuable upon
conversion of the Convertible Notes in the registration statement of which this
Prospectus is a part. The future sale or the expectation of future sales of
Common Shares in the public market could adversely affect the prevailing market
prices for the Common Shares and could impair the Company's ability to raise
capital through the sale of Common Shares.
POTENTIAL ANTI-TAKEOVER PROVISIONS
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 (the "Preference Shares"), 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. Although the Company has no current plans to issue any Preference
Shares, the rights of the holders of Common Shares would be subject to, and may
be adversely affected by, the rights of the holders of any Preference Shares
that may be issued in the future. Issuance of Preference Shares could have the
effect of delaying, deterring or preventing a change in control of the Company,
including the imposition of various procedural and other requirements that could
make it more difficult for holders of Common Shares to effect certain corporate
actions, including the ability to replace incumbent directors and to accomplish
transactions opposed by the incumbent Board of Directors.
-12-
<PAGE>
THE COMPANY
The Company provides a broad range of integrated telecommunications
products and services, primarily to customers located in the western continental
United States and Hawaii. Since inception as a facilities-based competitive
access provider, the Company has constructed and operates state-of-the-art,
digital telecommunications networks that provide an alternative to incumbent
LECs. The Company has expanded beyond the scope of traditional competitive
access provider operations into CLEC services and currently provides a range of
enhanced telecommunications services that include long distance, Internet
access, and data services. In addition, the Company expects to offer switched
access and local dial tone services to complement its existing
telecommunications service offerings. The Company also manufactures
telecommunications switching equipment and network management and billing
systems through its wholly-owned subsidiary, NACT.
MATERIAL CHANGES
DECEMBER 1995 OFFERING
In the December Offering, the Company sold $20,000,187 137-/8%
Convertible Senior Subordinated Discount Notes due 2005 in December 1995 and its
wholly owned subsidiary, GST USA, Inc. ("GST USA") sold $160,001,496 13-7/8%
Senior Discount Notes due 2005 in a private placement. Of the net proceeds of
the December Offering, $2.0 million was applied to the repayment of short-term
indebtedness, and the balance has been and will be used for capital expenditures
and to fund future operating deficits and for working capital purposes.
CALL AMERICA ACQUISITION
On September 26, 1996, the Company entered into an agreement and plan
of merger with Call America Business Communications Corporation and certain of
its affiliates (collectively, "Call America"), pursuant to which the Company is
to acquire 100% of Call America by means of a merger, for a purchase price of
1,307,692 Common Shares, subject to a post closing adjustment of additional
Common Shares if, 180 days after the effective time of the merger, the sales
price of the Common Shares is less than $12.50 per share. The maximum number of
additional Common Shares to be issued pursuant to the post closing adjustment is
114,489. The consummation of the merger is contingent upon obtaining required
regulatory approvals. Call America, which is based in San Luis Obispo,
California, is a facilities-based reseller of domestic and international long
distance services, as well as a provider of operator services.
NORTHERN TELECOM NETWORK PRODUCTS PURCHASE AGREEMENT
The Company, through its indirect subsidiary, GST EquipCo, Inc. ("GST
EquipCo"), entered into a Network Products Purchase Agreement ("Nortel Purchase
Agreement") dated August 23, 1996 with Northern Telecom Inc. ("Nortel") pursuant
to which GST EquipCo may from time to time purchase switching and related
equipment from Nortel. The Nortel Purchase Agreement, among other terms,
provides GST EquipCo with price protection for 10 years for several categories
of Nortel switching equipment and related software.
SIEMENS SWITCHING EQUIPMENT PURCHASE AGREEMENT AND LOAN AGREEMENT
The Company, through its indirect subsidiary, GST SwitchCo, Inc. ("GST
SwitchCo."), entered into a Switching Products Sales Agreement (the "Siemens
Sales Agreement") dated September 4, 1996 with Siemens Stromberg-Carlson
("Siemens") pursuant to which GST SwitchCo may from time to time purchase
switching and related equipment from Siemens. The Siemens Sales Agreement, among
other terms, provides GST SwitchCo a credit of up to $8.0 million for certain
Siemens software and price protection for 10 years for several categories of
Siemens switching equipment and related software.
In addition, on the same date, GST SwitchCo entered into a Loan and
Security Agreement (the "Siemens Loan Agreement") with Siemens that provides for
-13-
<PAGE>
loans by Siemens of up to an aggregate of $116.0 million to finance the purchase
of Siemens equipment and equipment from other suppliers. Each loan made by
Siemens under the Siemens Loan Agreement initially earns interest at an interim
loan rate of LIBOR plus 4.5% on the outstanding balance of the loan until the
beginning of the calendar quarter following the original loan advance date, at
which time the outstanding balance of the loan converts to a term loan and
begins accruing interest at a term loan rate of LIBOR plus 3.5% Repayment of the
outstanding principal amount of each loan is required in quarterly installments
commencing on the last day of the fifth quarter following the original loan
advance date with the remaining balance of each outstanding loan being payable
in full on the last day of the 24th quarter following such original loan advance
date. GST SwitchCo's obligations to Siemens under the Siemens Loan Agreement are
secured by the grant to Siemens of a first priority security interest in all
product purchased by GST SwitchCo with the proceeds of loans by Siemens and are
guarantied in part by GST USA.
TOTALNET COMMUNICATIONS, INC.
On September 27, 1996 the Company entered into an agreement (the
"Merger Agreement") to acquire TotalNet Communications Inc. by means of a merger
(the "TotalNet Merger"). On October 17, 1996, the Company acquired TotalNet in
the TotalNet Merger for a purchase price payable entirely in Common Shares.
In consideration for the acquisition of TotalNet, a purchase price of
approximately $8.7 million is payable in Common Shares to the former
shareholders of TotalNet in two installments. Sixty percent of the purchase
price (approximately $5.2 million), for a total of 481,391 Common Shares valued
at $10.90 per share, was paid at the closing of the TotalNet Merger on October
17, 1996 and the remaining 40% of the purchase price (approximately $3.5
million) is payable in Common Shares on October 17, 1997, based on the then
current market value of the Common Shares at such time but in no event less than
$7.63 per share, or more than $20.00 per share. TotalNet, which is based in
Houston, Texas, is both a facilities-based carrier and a switchless reseller of
long distance services.
OCTOBER OFFERING
On October 22, 1996, the Company completed a private placement to
non-U.S. investors of 2,000,000 special warrants (the "Special Warrants") at a
purchase price of US $11.125 per Special Warrant. The Special Warrants become
exercisable by holders for no additional consideration upon the later to occur
of (i) the date upon which approval for a final Canadian prospectus (the
"Canadian Prospectus") qualifying the Common Shares and share purchase warrants
(the "Underlying Warrants") issuable upon exercise of the Special Warrants is
received from the securities commission of each of the Canadian provinces where
the Special Warrants were sold and (ii) the date that the registration statement
of which this prospectus forms a part (the "U.S. Registration Statement") filed
with the Commission registering the resale of the Common Shares issuable upon
exercise of the Special Warrants and Underlying Warrants is declared effective,
but in any event, no later that September 22, 1997. Each Special Warrant is
exercisable for one Common Share and one-half of one Underlying Warrant. Each
full Underlying Warrant entitles the holder to purchase one additional Common
Share for a purchase price of U.S. $13.00 for one year from the date of
issuance. In the event that the requisite regulatory approvals for the Canadian
Prospectus are not received by the Company and the U.S. Registration Statement
is not declared effective, in each case by February 19, 1997, then each Special
Warrant will become exercisable for 1.1 Common Shares and one-half of one
Underlying Warrant.
The Company received U.S. $9,690,000, constituting 50% of the aggregate
purchase price of the Special Warrants (net of placement agency fees and
expenses), on October 22, 1996. The balance of the net purchase price of Special
Warrants (U.S. $11,125,000) is being held in escrow and is payable to the
Company upon the earlier to occur of (x) the date of receipt of final regulatory
approval of a preliminary Canadian Prospectus from the securities commissions of
the applicable Canadian provinces and (y) the initial filing of the U.S.
Registration Statement with the Commission, in each case covering the resale of
the Common
-14-
<PAGE>
Shares issuable upon exercise of the Special Warrants and the Underlying
Warrants. First Marathon Securities Limited and Thomson Kernaghan & Co. Ltd.
served as the Company's placement agents in the private placement.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the issuance of
the Common Shares upon conversion of the Convertible Notes. The Company will
bear all expenses in connection with the preparation of this Prospectus.
PLAN OF DISTRIBUTION
The Convertible Notes are convertible (in denominations of $1,000
principal amount at maturity or integral multiples thereof), at the option of
the holders of the Convertible Notes, into Common Shares, at any time after
December 18, 1996. The number of Common Shares issuable upon conversion of the
Convertible Notes will be determined by application of a ratio equal to the
Accreted Value on the date of conversion of the Convertible Notes being
converted divided by $7.563, subject to adjustment. The Accreted Value is, for
any Specified Date (as such term is defined in the Indenture relating to the
Convertible Notes), the amount provided for each $1,000 principal amount at
maturity of the Convertible Notes as follows:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set forth
below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
June 15, 1996.................................. $ 546.80
December 15, 1996.............................. 584.73
June 15, 1997.................................. 625.30
December 15, 1997.............................. 668.68
June 15, 1998.................................. 715.07
December 15, 1998.............................. 764.68
June 15, 1999.................................. 817.72
December 15, 1999.............................. 874.45
June 15, 2000.................................. 935.12
December 15, 2000.............................. $1,000.00
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price and
(b) an amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less the original issue price multiplied by (2) a
fraction, the numerator of which is the number of days from the Closing Date to
the Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days elapsed from the Closing Date to the
first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b) an
amount equal to the product of (1) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator
of which is the number of days from the immediately preceding Semi-Annual
Accrual Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
-15-
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences to beneficial owners from the conversion of Convertible
Notes into Common Shares and the ownership and disposition of the Common Shares.
This discussion is based on current provisions of the Internal Revenue Code,
applicable final, temporary and proposed Treasury Regulations, judicial
authorities, and current administrative rulings and pronouncements of the
Internal Revenue Service (the "Service"), and upon the facts concerning the
Company and its subsidiaries as of the date hereof. There can be no assurance
that the Service will not take a contrary view, and no ruling from the Service
has been or will be sought by the Company. Legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
This discussion does not address all aspects of United States federal
income taxation that may be relevant to particular holders of the Convertible
Notes or the Common Shares in light of their personal investment or tax
circumstances, or to certain types of investors (including insurance companies,
financial institutions, broker-dealers or tax-exempt organizations) subject to
special treatment under the United States federal income tax laws. In addition,
this discussion deals only with Convertible Notes and Common Shares held as
capital assets within the meaning of Section 1221 of the Code. This discussion
does not deal with foreign, state and local consequences that may be relevant to
non-U.S. Holders in light of their personal or individual circumstances.
As used in the discussion which follows, the term "U.S. Holder" means a
beneficial owner of Convertible Notes or Common Shares, as applicable, that for
United States federal income tax purposes is (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
subdivision thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source. The term
"Non-U.S. Holder" means a Holder of Convertible Notes or Common Shares, as
applicable, that is, for United States federal income tax purposes, not a U.S.
Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF CONVERTING THE CONVERTIBLE NOTES INTO COMMON
SHARES AND HOLDING AND DISPOSING OF THE COMMON SHARES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
TAX CONSEQUENCES TO U.S. HOLDERS
Exercise Of Conversion Right
No gain or loss will be recognized for United States federal income tax
purposes by a U.S. Holder of the Convertible Notes upon the conversion thereof
in exchange for Common Shares (except to the extent of cash, if any, received in
lieu of the issuance of fractional shares of Common Shares). A U.S. Holder's tax
basis in the Common Shares will equal the sum of the adjusted tax basis in the
Convertible Notes reduced by the portion of adjusted tax basis allocated to any
fractional Common Shares exchanged for cash. The adjusted tax basis in the
Convertible Notes is the purchase price of such Convertible Notes to the U.S.
Holder as increased by any accrued original issue discount (net of all amortized
acquisition premiums) and market discount previously included in income by the
U.S. Holder and decreased by amortizable bond premiums, if any, deducted over
the term of the Convertible Notes. The holding period of the Common Shares
received on the conversion of the Convertible Notes will include the period
during which the Convertible Notes were held by such U.S. Holder, except that
the holding period of Common Shares allocable to accrued original issue discount
may commence on a later date. If any cash is received in lieu of fractional
shares, the U.S. Holder will recognize gain or loss, and the character and the
amount of such gain
-16-
<PAGE>
or loss will be determined as if the U.S. Holder had received such fractional
shares and then immediately sold them for cash.
Sale Of Common Shares
Gain or loss will generally be recognized upon a sale of the Common
Shares received upon conversion of Convertible Notes in an amount equal to the
difference between the amount realized on the transfer and the holder's adjusted
tax basis in the Common Shares. Such gain or loss will be capital gain or loss,
provided the Common Shares are held as a capital asset, and will be long-term
capital gain or loss with respect to Common Shares held for more than one year.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Exercise Of Conversion Right
No gain or loss will be recognized for United States federal income tax
purposes by non-U.S. Holders of the Convertible Notes upon the conversion
thereof in exchange for full shares of Common Shares. To the extent any cash is
received in lieu of the issuance of fractional shares of Common Shares, the
rules applicable to gain from a sale of Common Shares, as summarized below, will
apply.
Gain On Disposition Of Common Shares
A Non-U.S. Holder generally will not be subject to United States
federal income tax with respect to gain recognized on a sale or other
disposition of Common Shares.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Shares
offered hereby have been passed upon for the Company by Messrs. Olshan Grundman
Frome & Rosenzweig LLP, 505 Park Avenue, New York, New York 10022. Stephen
Irwin, counsel to Olshan Grundman Frome & Rosenzweig LLP, is an officer and
director of the Company and holds 61,345 Common Shares and has been granted
options and warrants to purchase an additional 615,000 Common Shares. In
addition, other attorneys of this firm hold options to purchase Common Shares.
EXPERTS
The consolidated balance sheet of GST Telecommunications, Inc. and its
subsidiaries as of September 30, 1995 and the consolidated statements of
operations and deficit and cash flows for the year ended September 30, 1995,
have been incorporated by reference herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing. The consolidated
balance sheet of GST Telecommunications, Inc. and its subsidiaries as of
September 30, 1994 and the consolidated statements of operations and deficit and
cash flows for the 13 months ended September 30, 1994 and year ended August 31,
1993 have been incorporated by reference herein in reliance upon the report of
KPMG Peat Marwick Thorne, independent chartered accountants, upon the authority
of said firm as experts in accounting and auditing. The audited financial
statements of International Telemanagement Group, Inc. as of December 31, 1994
and 1993 and for the year ended December 31, 1994 and the period January 23,
1993 (date of inception) through December 31, 1993 have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing. The financial statements of the IntelCom-Greenstar Joint Venture for
the years ended September 30, 1994 and 1993 have been incorporated by reference
herein upon reliance upon the report of KPMG Peat Marwick Thorne, independent
chartered accountants, and upon authority of said firm as experts in accounting
and auditing. The combined financial statements of Call America Business
Communications Corporation and Affiliates for the years ended December 31, 1995
and 1994 have been included herein in reliance upon the report of Glenn,
-17-
<PAGE>
Burdette, Phillips & Bryson, independent certified public accountants, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act with respect to the Shares offered hereby. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
-18-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Independent Auditors' Report....................................................................F-2
Balance Sheets at December 31, 1994 and 1993 ...................................................F-3
Statements of Operations for the four months ended April 30, 1995, the year
ended December 31, 1994 and for the period January 23, 1993 (date of inception)
through December 31, 1993 ......................................................................F-4
Statements of Stockholders' Deficit for the four months ended April 30, 1995,
the year ended December 31, 1994 and for the period January 23, 1993 (date of
inception)
through December 31, 1993.......................................................................F-5
Statements of Cash Flow for the four months ended April 30, 1995, the year ended
December 31, 1994 and for the period January 23, 1993 (date of inception)
through December 31, 1993.......................................................................F-6
Notes to Financial Statements...................................................................F-7
GST TELECOMMUNICATIONS, INC.
Proforma Condensed Financial
Information (unaudited)......................................................................F-11
Proforma Consolidated Balance
Sheet as of June 30, 1996 (unaudited)........................................................F-12
Proforma Consolidated Statement
of Operations and Deficit for
the nine months ended June 30, 1996 (unaudited)..............................................F-13
Proforma Consolidated Statement
of Operations and Deficit for
the year ended September 30, 1995 (unaudited)................................................F-14
Notes to Proforma Consolidated
Financial Statements (unaudited).............................................................F-15
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION AND AFFILIATES
Independent Auditors' Report...................................................................F-16
Combined Balance Sheets at December 31, 1995 and 1994..........................................F-17
Combined Statements of Income for the six months ended
June 30, 1996 (unaudited) and the years ended
December 31, 1995 and 1994...................................................................F-19
Combined Statements of Changes in Stockholders' Equity (Deficiency) for the six
months ended June 30, 1996 (unaudited) and the
years ended December 31, 1995 and 1994.......................................................F-20
Combined Statements of Cash Flows for the six months ended
June 30, 1996 and the years ended December 31, 1995 and 1994.................................F-21
Notes to Financial Statements..................................................................F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
International Telemanagement Group, Inc.:
We have audited the accompanying balance sheets of International Telemanagement
Group, Inc. (the Company), as of December 31, 1994 and 1993, and the related
statements of operations, stockholders' deficit, and cash flows for the year
ended December 31, 1994, and for the period January 23, 1993 (date of inception)
through December 31 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of International Telemanagement
Group, Inc., as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the year ended December 31, 1994 and for the period
January 23, 1993 (date of inception) through December 31, 1993 in conformity
with generally accepted accounting principles.
As discussed in note 2, effective May 1, 1995, the Company was acquired by GST
Telecom, Inc.
/S/ KPMG PEAT MARWICK LLP
Detroit, Michigan
July 21, 1995
F-2
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
Assets 1994 1993
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 702,392 71,309
Trade accounts receivable, less allowance for doubtful accounts of $164,000
and $52,000, at 1994 and 1993, respectively 1,167,346 370,643
Due from officers and employees - 48,690
Other receivables 9,152 5,000
Prepaid expenses and other current assets 80,713 115,805
------------ ------------
Total current assets 1,959,603 611,447
Property and equipment, net (note 3) 1,318,870 1,175,495
--------- ---------
$ 3,278,473 1,786,942
============ =========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current installments of notes payable to related parties (note 5) $ 368,380 95,520
Current installments of long-term debt (note 4) 98,185 -
Current installments of capital lease obligations (note 7) 175,668 144,897
Accounts payable and accrued line charges, net 3,735,260 1,107,141
Due to affiliates - 4,417
Other accrued expenses and liabilities 157,789 22,049
Deferred revenues 23,982 22,363
------------ ------------
Total current liabilities 4,559,264 1,396,387
--------- ---------
Notes payable to related parties, less current installments (note 5) 246,040 -
Long-term debt, less current installments (note 4) 131,945 -
Capital lease obligations, less current installments (note 7) 747,227 890,913
------------ ------------
Total liabilities 5,684,476 2,287,300
--------- ---------
Commitments and contingencies (notes 7, 9, and 10)
Stockholders' deficit:
Common stock, no par value, 750 shares authorized, 200 issued and
outstanding 1,000 1,000
Additional paid-in capital 598,630 332,678
Accumulated deficit (2,973,765) (834,036)
--------- ------------
(2,374,135) (500,358)
Less: Treasury stock, at cost of 88 shares (31,868) -
------------ -----------
Net stockholders' deficit (2,406,003) (500,358)
--------- ------------
$ 3,278,473 1,786,942
============ =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Statements of Operations
<TABLE>
<CAPTION>
For the Period
January 23,
1993
(Date of
Four Months Year Ended Inception) through
Ended April 30, 1995 December 31, December 31,
(Unaudited) 1994 1993
-------------------- ------------ -------------------
<S> <C> <C> <C>
Net sales and services $ 5,010,908 12,202,063 1,494,943
Cost of goods and services 4,766,433 11,788,135 1,735,717
--------- ---------- ---------
Gross profit (loss) 244,475 413,928 (240,774)
Selling, general, and administrative expenses 988,203 2,014,635 507,824
------------ -------------- ------------
Loss from operations (743,728) (1,600,707) (748,598)
Other income (expense):
Interest expense (53,373) (140,338) (16,503)
Other expense, net - (398,684) (68,935)
------------ -------------- ------------
Net loss $ (797,101) (2,139,729) (834,036)
============ ========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
For the Period January 23, 1993 (Date of Inception)
Through December 31, 1993
--------------------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated Treasury Stockholders'
Stock Capital Deficit Stock Deficit
----- ------- ------- ----- -------
<S> <C> <C> <C> <C>
Balances at inception $ - - - - -
Issuance of common stock 1,000 332,678 - - 332,678
Net loss - - (834,036) - (834,036)
------ ---------- ------- - -------
Balances at end of period $ 1,000 332,678 (834,036) - (500,358)
===== ======= ======= = =======
Year Ended December 31, 1994
--------------------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated Treasury Stockholders'
Stock Capital Deficit Stock Deficit
----- ------- ------- ----- -------
Balances at beginning of period $ 1,000 332,678 (834,036) - (500,358)
Capital contributions - 272,000 - - 272,000
Distributions to shareholder - (6,048) - - (6,048)
Repurchase of shares - - - (31,868) (31,868)
Net loss - - (2,139,729) - (2,139,729)
------ ---------- --------- --------- ---------
Balances at end of period $ 1,000 598,630 (2,973,765) (31,868) (2,406,003)
===== ======= ========= ====== =========
Four Months Ended April 30, 1995 (Unaudited)
--------------------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated Treasury Stockholders'
Stock Capital Deficit Stock Deficit
----- ------- ------- ----- -------
Balances at beginning of period $ 1,000 598,630 (2,973,765) (31,868) (2,406,003)
Capital contributions - 10,600 - - 10,600
Repurchase of shares - - - (2,050) (2,050)
Net loss - - (797,101) - (797,101)
------ ---------- ------------ --------- ------------
Balances at end of period $ 1,000 609,230 (3,770,866) (33,918) (3,194,554)
===== ======= ========= ====== =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period
January 23,
1993 (Date of
Four Months Inception)
Ended April 30, Year Ended through
1995 December 31, December 31,
(Unaudited) 1994 1993
----------- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (797,101) (2,139,729) (834,036)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 114,773 318,926 57,859
Changes in assets and liabilities:
Trade accounts receivable (165,145) (796,703) (370,643)
Due from officers and employees -- 48,690 (48,690)
Other receivables 6,652 (4,152) (5,000)
Prepaid expenses and other current assets (13,000) 35,092 (115,805)
Accounts payable and accrued line charges 912,626 2,808,920 1,107,141
Due to affiliates -- (4,417) 4,417
Other accrued expenses and liabilities 35,127 135,740 22,049
Deferred revenues 92,129 1,619 22,363
---------- ---------- ----------
Net cash provided by (used in) operating
activities 186,061 403,986 (160,345)
---------- ---------- ----------
Cash flows from investing activities - capital (60,550) (462,301) (1,233,354)
expenditures for property and equipment -- -- --
Net cash used in investing activities (60,550) (462,301) (1,233,354)
---------- ---------- ----------
Cash flows from financing activities:
Repayment of long-term debt (369,121) 49,329
Net borrowings on revolving note payable to related
parties -- 265,000 95,520
Net repayments on notes payable to officers and
employees -- 253,900 --
Repurchase of treasury stock (2,050) (31,868) --
Payments made under capital leases -- (112,915) 1,035,810
Additional paid in capital 10,600 272,000 --
Distributions to shareholder -- (6,048) --
Proceeds from stock issuance -- -- 333,678
---------- ---------- ----------
Net cash provided by financing activities (360,571) 689,398 1,465,008
---------- ---------- ----------
Net increase (decrease) in cash (235,060) 631,083 71,309
Cash at beginning of year 702,392 71,309 --
---------- ---------- ----------
Cash at end of year $ 467,322 702,392 71,309
========== ========== ==========
Supplemental disclosures of cash flow information -
cash paid during the year for interest $ 44,025 132,073 9,513
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements
December 31, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
International Telemanagement Group, Inc. (the Company), is a domestic and
international interexchange carrier offering long distance, 800, private
line, and other services to its customers. ITG was incorporated in January
1993 under the laws of the state of Ohio.
(a) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property
and equipment is provided principally on a straight-line basis over
the estimated useful lives of the related assets. Assets recorded
under capital leases are amortized over the terms of the leases.
(b) INCOME TAXES
The stockholders of the Company have elected to be treated as an S
corporation, whereby taxable income and/or losses are allocated to the
stockholder rather than to the Company. Accordingly, the accompanying
financial statements do not include provisions for federal and state
taxes on income earned by the Company.
(c) REVENUE RECOGNITION
Income from services is recognized when the contracted service is
rendered.
(d) GENERAL CREDIT RISK
The Company grants credit to customers on open account, substantially
all of whom are in the telecommunications industry.
(2) SUBSEQUENT EVENT
On May 1, 1995, the Company entered into a purchase agreement with GST
Telecom, Inc. (GST Net), in which all outstanding stock of the Company
was sold for cash. GST Net has indicated its intention to fully fund the
operations of the Company and maintain the Company operations principally
in the lines of business in which it currently operates.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at December 31, 1994 and 1993, consisted of:
1994 1993
---- ----
<S> <C>
Leasehold improvements $ 6,243 6,243
Machinery and equipment 1,689,412 1,227,111
--------- ---------
1,695,655 1,233,354
Less accumulated depreciation and amortization (376,785) (57,859)
------------ ------------
Property and equipment, net $ 1,318,870 1,175,495
=========== =========
</TABLE>
F-7
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements, Continued
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt at December 31, 1994 and 1993, consists of the following:
1994 1993
---- ----
<S> <C> <C>
Note payable to customer, 0% interest, monthly payments of $6,944, $ 215,278 -
Note payable to supplier, 7% interest, monthly payments of $14,939,
including interest, due February 1995 14,852 -
---------- -
Total long-term debt 230,130 -
Less current installments (98,185) -
---------- -
Long-term debt, less current installments $ 131,945 -
======= =
</TABLE>
In addition, the Company has incurred borrowings from related parties (see
note 5).
As of December 31, 1994, the maturities of long-term debt are as follows:
Year Ended
December 31,
------------
1995 $ 98,185
1996 83,333
1997 48,612
------------
$ 230,130
============
(5) RELATED PARTY TRANSACTIONS
The Company has entered into numerous transactions with its principal
stockholder and other related entities controlled by its stockholders.
F-8
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements, Continued
(5) RELATED PARTY TRANSACTIONS, CONTINUED
The Company's principal stockholder or entities controlled by the
stockholder have obtained financing from two financial institutions. These
funds were, in turn, loaned to the Company. The unwritten agreement between
the Company and the related parties is that the Company will make all
necessary payments under the stated bank terms. The terms are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Note payable, bearing interest at 8.25%, payable in monthly
installments of $8,615, due in full September 1997 $ 349,420 95,520
Note payable, bearing interest at 1% over the prime rate, due in
full December 12, 1994. On March 9, 1995, the loan was renewed
by the bank 265,000 -
------- --------
Total notes payable related parties 614,420 95,520
Less current installments 368,380 95,520
------- ------
Notes payable to related parties, less current
installments $ 246,040 -
======= ========
</TABLE>
The Company rents office space and telecommunications equipment from
related parties on a month-to-month basis. Rental expense for the periods
ended December 31, 1994 and 1993, totaled $248,572 and $96,057,
respectively.
(6) COMMON STOCK
During 1994, the Company repurchased common shares from its stockholders at
a cost of $31,868.
(7) LEASES
The Company leases telecommunications and computer equipment under capital
leases. Additionally, certain communications equipment is leased under
operating leases. Lease terms include per-minute charges and minimum fee
levels.
F-9
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements, Continued
(7) LEASES, CONTINUED
Future minimum lease payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
1994 1993
--------------------------- --------------------------
Capital Operating Capital Operating
Leases Leases Leases Leases
------ ------ ------ ------
<S> <C> <C> <C> <C>
Year ending December 31:
1994 $ - - 196,988 23,924
1995 261,464 143,544 283,555 143,544
1996 283,555 143,544 283,555 143,544
1997 276,751 143,544 283,555 143,544
1998 268,714 119,620 276,650 119,620
1999 44,183 - 44,183 -
------------ --------- ------------- --------
Total lease payments 1,134,667 550,252 1,368,486 574,176
======= =======
Less amount representing interest
(211,772) (332,676)
------------ -------------
Total obligations under
capital leases 922,895 1,035,810
Current installments of capital
lease obligations 175,668 144,897
----------- -------------
Capital lease obligations,
less current installments $ 747,227 890,913
========== =======
</TABLE>
Total rental expense under operating leases for the periods ended December
31, 1994 and 1993, totaled $23,900 and $4,500, respectively.
The Company also leases certain equipment and office space from related
parties (see note 5).
(8) MAJOR CUSTOMERS
Gross revenues of approximately $3,000,000 were derived from two major
customers for the year ended December 31, 1994.
(9) SERVICE CONTRACTS
The Company has entered into service contracts with telecommunication
providers which require a minimum service fee on a monthly basis. The
Company has committed to minimum revenues of $350,000 per month by May
1995, and must pay one-half of any shortfall.
(10) CONTINGENCIES
The Company is a party to a number of lawsuits and claims relating to
service liability. While the ultimate results of lawsuits or other
proceedings against the Company cannot be predicted with certainty,
management does not expect that the settlement of these matters will have a
material adverse effect on the financial position of the Company.
F-10
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial statements
have been prepared to reflect the acquisition of Call America and the
acquisition of ITG. The unaudited pro forma condensed consolidated statements of
operations of the Company for Fiscal 1995 gives effect to each of the Pro Forma
Transactions as if they had occurred at October 1, 1994. The unaudited pro forma
condensed consolidated statements of operations of the Company for the nine
months ended June 30, 1996 gives effect to the Call America acquisition as if it
had occurred at October 1, 1995. The unaudited condensed consolidated balance
sheet of the Company at June 30, 1996 gives effect to the Call America as if it
had occurred June 30, 1996. The pro forma adjustments are based upon available
information and certain assumptions that the Company believes are reasonable
under the circumstances.
The unaudited pro forma condensed consolidated financial statements and notes
thereto should be read in conjunction with "Use of Proceeds", "Management
Discussion and Analysis", the historical financial statements and notes thereto
included elsewhere in this Prospectus. These unaudited pro forma condensed
consolidated financial statements and notes thereto are provided for
informational purposes only and do not purport to be indicative of the results
that would have actually been attained had the Pro Forma Transactions been
completed on the dates indicated or that may be expected to occur in the future.
F-11
<PAGE>
GST TELECOMMUNICATIONS, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GST CALL AMERICA
HISTORICAL HISTORICAL (6) ADJUSTMENTS PRO FORMA
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 123,526 123,526
Receivables 11,447 2,204 13,651
Investments 5,323 5,323
Other current assets 3,432 204 3,636
-------- -------- -------- --------
143,728 2,408 146,136
Investment in joint ventures 1,872 1,872
Property and equipment, net 73,816 2,458 76,274
Other assets, net 22,261 1,203 16,670(7) 40,134
Deferred financing costs, net 9,933 9,933
-------- -------- -------- --------
251,611 6,069 16,670 274,350
======== ======== ======== ========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Current liabilities 16,145 3,455 19,600
Deferred compensation 151 151
Capital lease obligations, 600 1,027 1,627
less current portion
Long term debt, less 222,629 1,911 224,540
current portion
Minority interest in subsidiaries 3,167 3,167
Shareholders' equity 8,919 (324) 16,346(7) 25,265
-------- -------- -------- --------
324(7)
--------
251,611 6,069 16,670 274,350
======== ======== ======== ========
</TABLE>
F-12
<PAGE>
GST TELECOMMUNICATIONS, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDING JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GST CALL AMERICA
HISTORICAL HISTORICAL (6) ADJUSTMENTS PRO FORMA
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Telecommunication services 19,453 13,934 33,387
Telecommunication products 5,771 5,771
----------- ----------- ----------- -----------
25,224 13,934 0 39,158
----------- ----------- ----------- -----------
Cost of revenues:
Telecommunication services 20,715 6,686 27,401
Telecommunication products 2,803 2,803
----------- ----------- ----------- -----------
23,518 6,686 0 30,204
----------- ----------- ----------- -----------
Gross profit 1,706 7,248 0 8,954
----------- ----------- ----------- -----------
Operating expenses
Sales, general and administration 20,689 5,298 25,987
Research and development 910 910
Depreciation and amortization 5,385 486 2,347 (3) 8,218
----------- ----------- ----------- -----------
Income (loss) from operations (25,278) 1,464 2,347 (26,161)
----------- ----------- ----------- -----------
Other expenses (income):
Interest income (4,209) (4,209)
Interest expense 14,801 388 15,189
Other, net 1,564 324 1,888
Minority interest in loss
of subsidiaries (334) (334)
----------- ----------- ----------- -----------
Net income (loss) (37,100) 752 (2,347) (38,695)
=========== =========== =========== ===========
Loss per share $ (2.00) (1.95)
=========== ===========
Weighted average common and
common equivalent shares
outstanding 18,512,988 19,820,680 (5)
=========== ===========
Pro forma ratio of earnings
to fixed charges
</TABLE>
F-13
<PAGE>
GST TELECOMMUNICATIONS, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDING SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GST CALL AMERICA ITG
HISTORICAL HISTORICAL (1) HISTORICAL (2) ADJUSTMENTS PRO FORMA
------------ ---------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication services 11,118 16,240 8,299 35,657
Telecommunication products 7,563 7,563
----------- ----------- ----------- ----------- -----------
18,681 16,240 8,299 43,220
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Telecommunication services 12,198 8,355 8,186 28,739
Telecommunication products 3,096 3,096
----------- ----------- ----------- ----------- -----------
15,294 8,355 8,186 31,835
----------- ----------- ----------- ----------- -----------
Gross profit 3,387 7,885 113 11,385
----------- ----------- ----------- ----------- -----------
Operating expenses
Sales, general and administration 11,373 6,796 1,567 19,736
Research and development 1,271 1,271
Depreciation and amortization 2,374 636 280 3,129 (3) 6,638
----------- ----------- ----------- -----------
219 (4)
-----------
Income (loss) from operations (11,631) 453 (1,734) (3,348) (16,260)
----------- ----------- ----------- ----------- -----------
Other expenses (income):
Interest income (303) (54) (357)
Interest expense 838 398 95 1,331
Other, net 1,513 95 258 1,866
Minority interest in loss
of subsidiaries (2,364) (2,364)
----------- ----------- ----------- ----------- -----------
Net income (loss) (11,315) 14 (2,087) (3,348) (16,736)
=========== =========== =========== =========== ===========
Loss per share (0.82) (1.11)
=========== ===========
Weighted average common and
common equivalent shares
outstanding 13,780,796 15,088,488 (5)
=========== ===========
</TABLE>
F-14
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(1) Results are for the year ended December 31, 1995.
(2) Results are for the seven months ended April 30, 1995 as ITG was purchased
effective May 1, 1995.
(3) Reflects the amortization over 3 years of $6,000 of customer lists and the
amortization over 10 years of $11,290 of goodwill resulting from the
purchase of Call America.
Purchase price:
1,307,692 shares at $12.50 per share $16,346
=======
Allocation of purchase price:
Book value of tangible assets acquired 5,449
Liabilities assumed (6,393)
Customer Lists 6,000
Goodwill 11,290
------
$16,346
=======
(4) Reflects the additional amortization over 10 years of $3,758 in goodwill
resulting from the purchase of ITG for the seven months ended April 30,
1995.
Purchase price:
Cash and legal fees $ 74
=======
Allocation of purchase price
Book value of assets acquired $ 3,235
Liabilities assumed (6,919)
Goodwill 3,758
------
$ 74
=======
(5) Pro forma weighted average shares outstanding includes the 1,307,692 shares
to be issued for the acquisition of Call America.
(6) The revenues and expenses shown for Call America are the historical amounts
for the nine months ended June 30, 1996. Because the accompanying pro forma
Fiscal 1995 statement of operations includes Call America's historical
operating results for its fiscal year ended December 31, 1995, Call
America's operating results for the three months ended December 31, 1995
are included in both accompanying pro forma statements of operations. Call
America's summary financial information for the three month period ended
December 31, 1995 are as follows:
Revenues $ 4,236
Costs and expenses 3,747
Income from operations 489
Non-operating expense 224
------
Net income $ 265
=======
(7) Reflects the issuance of 1,307,692 common shares at $12.50 per share for
the purchase of Call America, the elimination of Call America's net equity
of $(324), and the allocation of the excess purchase price over the net
book value of the assets acquired to customer lists and goodwill.
F-15
<PAGE>
GLENN BURDETTE, PHILLIPS & BRYON
CERTIFIED PUBLIC ACCOUNTANTS
1150 PALM STREET
SAN LUIS OBISPO, CA 93401
(805) 544-1441
(805) 805-4351 (FAX)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Call America Business Communications Corporation
San Luis Obispo, CA
We have audited the accompanying combined balance sheets of Call America
Business Communications Corporation (a California corporation) and affiliates as
of December 31, 1995 and 1994, and the related combined statements of income,
changes in stockholders' equity (deficiency), and cash flows for the years then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Call America
Business Communications Corporation and affiliates as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Glenn, Burdette, Phillips & Bryson
- --------------------------------------
Glenn, Burdette, Phillips & Bryson
Certified Public Accountants
A Professional Corporation
June 25, 1996
F-16
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED BALANCE SHEETS JUNE 30, 1996 (unaudited)
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current Assets
- --------------
Cash and cash equivalents $ 1,497 $ 125 $ 125
Accounts receivable, net of allowance for
doubtful accounts of $50,000 and $49,093,
at 1994 and 1995, respectively 1,590,955 1,762,671 2,145,419
Income taxes receivable 104,568 40,745 40,745
Equipment deposits 45,493 42,237
Other current assets 5,297 36,843 107,192
Deferred income taxes 76,500 55,000 55,000
------------- ------------- -------------
Total current assets 1,778,817 1,940,877 2,390,718
Equipment and leasehold improvements, net
- -----------------------------------------
of accumulated depreciation of $3,181,678
-----------------------------------------
and $3,799,282, at 1994 and 1995, 1,447,837 1,846,768 2,457,715
--------------------------------- ------------- ------------- -------------
respectively
------------
Other Assets
- ------------
Investment, at cost 23,000 23,000 23,000
Notes receivable from stockholders 416,803 532,954 532,954
Notes receivable from related party 205,285 0
Miscellaneous deposits 23,936 23,212 15,000
Deferred income taxes 17,650 25,650 25,650
Goodwill 640,410 621,731
------------- ------------- -------------
Total other assets 481,389 1,450,511 1,218,335
------------- ------------- -------------
Total Assets $3,708,043 $5,238,156 $6,066,768
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
<TABLE>
<CAPTION>
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
- -------------------
<S> <C> <C> <C>
Accounts payable $1,417,192 $1,284,893 $1,854,252
Accrued expenses 567,109 631,507 929,536
Bank overdrafts 162,531 254,234 3,290
Line of credit 273,413 100,000 --
Current portion of notes payable 342,363 450,368 400,512
Current portion of capital lease obligations 185,033 309,911 309,911
---------- ---------- ----------
Total current liabilities 2,947,641 3,030,913 3,497,501
---------- ---------- ----------
Long-Term Liabilities
- ---------------------
Notes payable, less current portion 905,137 2,194,129 1,910,738
Capitalized lease obligations, less
current portion 471,346 824,544 1,026,747
---------- ---------- ----------
Total long-term liabilities 1,376,483 3,018,673 2,937,485
---------- ---------- ----------
Commitments and Contingencies
- -----------------------------
Minority Interest (26,396)
- ----------------- ----------
Stockholders' Equity (Deficiency)
- ---------------------------------
Common stock 26,262 25,696 25,696
Retained earnings (deficit) (837,126) (837,126) (393,914)
---------- ---------- ----------
Total stockholders' equity (deficiency) (811,430) (811,430) (368,218)
---------- ---------- ----------
Total Liabilities and Stockholders' Equity
(Deficiency) $3,708,043 $5,238,156 $6,066,768
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
<TABLE>
<CAPTION>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
Six Months Ended
------------------
1994 1995 June 30, 1996
---- ---- --------------
(Unaudited)
-----------
<S> <C> <C> <C>
Net sales and services $14,383,649 $16,239,943 $9,679,930
Cost of goods and services 7,858,285 8,355,332 4,731,863
------------- ------------ -----------
Gross profit 6,525,364 7,884,611 4,948,067
Selling, general, and administrative expenses 6,992,670 7,431,568 4,041,493
------------- ------------ -----------
Income (loss) from operations (467,306) 453,043 906,574
- -----------------------------
Other income and expense
- ------------------------
Interest income 85,287 54,249
Interest expense (210,813) (397,851) (222,962)
------------- ------------ -----------
Net income (loss) before provision for income taxes (592,832) 109,441 683,612
- ---------------------------------------------------
Provision for income taxes expense (benefit) (24,180) 95,200 240,400
------------- -------------- -----------
Net income (loss) $ (568,652) $ 14,241 $ 443,212
- ----------------- ============= ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
<TABLE>
<CAPTION>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
Retained
--------
Earnings Common
-------- ------
(Deficit) Stock Total
--------- ----- -----
<S> <C> <C> <C>
Balance, December 31, 1993 $ (47,295) $26,262 $ (21,033)
- --------------------------
Net loss (568,652) (568,652)
--------- ------- ---------
Balance, December 31, 1994 (615,947) 26,262 (589,685)
- --------------------------
Net income 14,241 14,241
Purchase of minority interest (deficit) (26,396) (26,396)
Purchase of common stock (209,024) (566) (209,590)
--------- ------- ---------
Balance, December 31, 1995 (837,126) 25,696 (811,430)
- --------------------------
Net income for six months ended June 30, 1996
(Unaudited) 443,212 443,212
--------- ------- ---------
Balance, June 30, 1996 (Unaudited) $ (393,914) $25,696 $ (368,218)
- ----------------------------------- =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash Flows From Operating Activities
- ------------------------------------
Net income (loss) $ (568,652) $ 14,241 $ 443,212
----------- ----------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 562,404 635,633 367,943
Litigation settlement 132,639
Gain on disposal of assets (5,066)
Minority interest in net loss 24,021
(Increase) decrease in accounts receivable 5,808 (171,716) (515,387)
Decrease in income taxes receivable 63,823
(Increase) decrease in equipment deposits (45,493) 3,256
(Increase) decrease in other current assets 26,840 (31,546) (70,349)
Decrease in miscellaneous deposits 865 724 8,212
(Increase) decrease in deferred income taxes (27,900) 13,500
Increase (decrease) in accounts payable 265,389 (132,299) 569,359
Increase in accrued expenses 43,474 64,398 298,029
Increase (decrease) in bank overdrafts 162,531 91,703 (250,944)
----------- ----------- ------------
Total adjustments 1,063,432 483,661 42,172
----------- ----------- ------------
Net cash provided by operating activities 494,780 497,902 985,970
Cash Flows From Investing Activities
- ------------------------------------
Purchases of equipment (579,745) (285,169) (658,622)
Proceeds from sale of equipment 5,600
Investment in stock (23,000)
----------- ----------- ------------
Net cash used in investing activities (602,745) (279,569) (658,622)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
PAGE 2
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
Cash Flows from Financing Activities
- ------------------------------------
<S> <C> <C> <C>
Advances under notes receivable from related party $ $(205,285) $
Advances under notes receivable from stockholders (121,669) (256,918)
Reduction in notes receivable from stockholders 140,767 205,285
Proceeds from line of credit 600,000 600,000
Payments on line of credit (326,587) (773,413) (100,000)
Proceeds from notes payable 437,542 908,492
Principal payments on notes payable (171,766) (186,507) (333,247)
Principal payments on stockholder notes payable (135,071) (174,988)
Principal payments on capitalized leases (315,858) (271,853) (99,386)
---------- -------- ---------
Net cash used in financing activities (33,409) (219,705) (327,348)
---------- -------- ---------
Net decrease in cash and cash equivalents (141,374) (1,372) -
Cash and Cash Equivalents, Beginning of Period 142,871 1,497 125
- ---------------------------------------------- ---------- -------- ----------
Cash and Cash Equivalents, End of Period $ 1,497 $ 125 $ 125
- ---------------------------------------- ============ ========= ==========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Interest $ 210,961 $ 346,311 $ 264,894
Income taxes $ 2,400 2,400
Noncash Financing and Investing Activities
- ------------------------------------------
Assets acquired under capital lease $ 167,297 $ 749,929 $ 301,589
Acquisition of common stock, for note payable $ 209,590
Increase in goodwill from purchase
of common stock for not payable $ 640,410
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
A. Organization and Nature of Business
-----------------------------------
Call America Business Communications Corporation (CA) was organized in
1986 and incorporated under the laws of California. CA owns 100% of
Private Exchange Network (PXN), Inc., dba Call America Salinas (CAS). CA's
three equal shareholders also own 100% of Call America Business
Communications of Fresno, Inc., (CAF) and Call America Business
Communications of Bakersfield, Inc. (CAB). The financial statements of CA
and it's affiliates CAF and CAB have been combined (the Company) in the
accompanying financial statements. The Company's principle business
activity is providing long-distance telephone and ancillary communication
services to businesses and the general public. The Company grants credit
to customers on open account, substantially all of whom are located in
California.
B. Fixed Assets
------------
Fixed assets are shown at cost and are being depreciated or amortized over
their estimated useful lives of five to thirty- nine years, using
accelerated and straight line methods of depreciation.
C. Allowance for Doubtful Accounts
-------------------------------
Bad debts are provided on the allowance method based on receivables that
have been outstanding for more than 120 days. The allowance for doubtful
accounts is $49,093 and $50,000, at December 31, 1995 and 1994,
respectively.
D. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
E. Combined Presentation
---------------------
The combined financial statements include the consolidated balances of CA
and its wholly owned subsidiary, Private Exchange Network (PXN), Inc. All
material balances and transactions have been eliminated in consolidation.
At December 31, 1994, CA only owned 75% of PXN. The remaining 25% has been
shown as minority interest (deficit).
The consolidated balances of CA have been combined with CAF and CAB. All
intercompany transactions and balances have been eliminated in the
combination.
F-23
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 2
Note 1 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
F. Revenue Recognition
-------------------
Income from services is recognized when the contracted service is
rendered.
G. Common Stock
------------
CA has 500,000 common shares authorized without nominal or par value.
Total shares issued and outstanding are 300,000 common shares with a
balance of $24,000 at December 31, 1995 and 1994. CAB has 500,000 common
shares authorized without nominal or par value. Total shares issued and
outstanding are 300 and 400 common shares with a balance of $1,568 and
$2,091 at December 31, 1995 and 1994, respectively. CAF has 500,000 common
shares authorized without nominal or par value. Total shares issued and
outstanding are 300 and 400 common shares with a balance of $128 and $171
at December 31, 1995 and 1994, respectively.
H. Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers
interest bearing investments due on demand to be cash equivalents.
Note 2 - Equipment and Leasehold Improvements
- ---------------------------------------------
The major categories of assets and the related accumulated depreciation for the
years ending December 31, 1995 and 1994 are as follows:
1994 1995
---- ----
Office equipment, furniture & fixtures $ 411,300 $ 412,801
Leasehold improvements 162,603 173,163
Equipment 3,993,592 4,992,175
Vehicles 62,020 67,911
----------- ----------
4,629,515 5,646,050
Less: accumulated depreciation (3,181,678) (3,799,282)
$ 1,447,837 $ 1,846,768
=========== ===========
F-24
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 3
Note 2 - Equipment and Leasehold Improvements (continued)
- ---------------------------------------------------------
Included in equipment and leasehold improvements are assets acquired under
capital lease totaling $1,986,039 and $1,236,110 with accumulated depreciation
of $1,036,292 and $731,493 at December 31, 1995 and 1994, respectively.
Depreciation expense for assets acquired under capital lease totaled $304,799
and $265,658 at December 31, 1995 and 1994, respectively.
Note 3 - Investment
- -------------------
In October 1994, the Company purchased 230,000 shares of a California
corporation, which provides a broad range of wide area electronic mail services.
The cost of the shares was $23,000, subject to a repurchase option.
The Company has a service agreement with the corporation whereby, the Company
agrees to provide discounted telecommunications services, Internet connectivity
and customer billing administration, in consideration for integrated E-mail
services and the related E-mail services the corporation offers to its customers
for use and resale. The service agreement will continue in force until
terminated by either party upon a six month written notice. If the agreement is
terminated within the first three years, the corporation can repurchase a
portion of the shares at the original purchase price.
Note 4 - Related Party Transactions
- -----------------------------------
During 1994 and 1995, much of the communications traffic generated by CA and its
affiliates was centralized by routing through CA in San Luis Obispo. In
addition, customers billing and many accounting and administrative duties were
moved to CA. As a result, certain costs incurred by CA were allocated to the
affiliates.
At December 31, 1994, the Company had notes receivable from stockholders of
$416,803. During the year ended December 31, 1995, $140,767 were written off as
uncollectible. The balance of notes receivable from stockholders' at December
31, 1995, was $532,954. The notes bear interest at 7% per year.
During the year ended December 31, 1995, the Company advanced $205,285 to a
corporation, whose shareholders include those of the Company's.
Included in notes payable at December 31, 1995 and 1994, were notes totaling
$1,255,862 and $525,383, respectively, that are due to one of the stockholders
of the Company. (See Note 6)
F-25
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 4
Note 5 - Line of Credit
- -----------------------
The Company has a line of credit with a bank that allows for maximum borrowings
of $400,000. The line carries a variable interest rate, which was 10.5% at
December 31, 1995 and 1994. The outstanding balance at December 31, 1995 and
1994, was $100,000 and $273,413, respectively.
Note 6 - Long-Term Notes Payable
- --------------------------------
<TABLE>
<CAPTION>
Long-term notes payable consisted of the following as of December 31:
1994 1995
---- ----
<S> <C> <C>
Notes payable, issued for repurchase of common stock (see Note 9), with an interest
rate of 10%, payable in monthly installments totaling of $18,060, due April, 2000. $ $ 759,582
Note payable, unsecured, with an interest rate of 11%, payable in monthly
installments of $2,489, due April, 1995. 9,850
Note payable, secured by equipment and guaranteed by stockholders, with an interest
rate of 9.26%, payable in monthly installments of $6,132, due May, 1995. 24,061
Note payable, secured by an automobile, with an interest rate of 10.50%, payable in
monthly installments of $238, due November, 1995. 2,844
Note payable to a stockholder, unsecured, with an interest rate of 10%, payable in
monthly installments of $8,605, due August, 1999. 333,519 281,886
Note payable to a stockholder, unsecured, with an interest rate of 15%, payable in
monthly installments of $9,648, due July, 1997. 191,864 133,976
Note payable, secured by equipment and guaranteed by stockholders, with an
interest rate of 8.22%, payable in monthly installments of $2,283, due January,
1999.
94,745 78,017
Note payable, secured by equipment and fixtures and guaranteed by stockholders,
with an interest rate of 8.22%, payable in monthly installments of $2,650, due
February, 1999. 111,857 92,772
Note payable, secured by equipment and fixtures and guaranteed by stockholders,
with an interest rate of 9.43%, payable in monthly installments of $262, due
June,
1998. 9,340 7,112
Note payable, secured by equipment and fixtures and guaranteed by stockholders,
with an interest rate of 10.50%, payable in monthly installments of $5,881, due
October, 1999. 269,420 227,373
</TABLE>
F-26
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 5
<TABLE>
<CAPTION>
Note 6 - Long-Term Notes Payable (Continued)
- --------------------------------------------
<S> <C> <C>
Note payable, secured by equipment, with a variable interest rate of 10.25%,
payable in monthly installments of $2,333, due March, 1997. $ $ 32,662
Note payable to a stockholder, unsecured, interest only payable in monthly
installments at 11%, due February 15, 1998. 840,000
Note payable, secured by automobiles, with an interest rate of 8.25%, payable in
monthly installments of $510, due August, 2000. 23,633
Note payable, secured by equipment, with an interest rate of 7%, payable in
monthly installments of $5,000, due May, 1997.
200,000 167,484
--------- ----------
1,247,500 2,644,497
Less: current portion (342,363) (450,368)
--------- ----------
$ 905,137 $2,194,129
========= ==========
Maturities of notes payable are as follows:
1996 $ 450,368
1997 540,671
1998 1,234,704
1999 349,567
2000 69,187
-----------
$2,644,497
</TABLE>
Note 7 - Lease Obligations
- --------------------------
Capital Leases
- --------------
The Company leases certain switching, operator service and billing equipment
under long-term, noncancelable leases as described below:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Capital lease, with an interest rate of 13%, payable in
monthly installments of $16,088, due March, 1995. $ 31,694 $
Capital lease, with an interest rate of 7.42%, payable in
monthly installments of $535, due January, 1999. 22,573 17,658
Capital lease, with an interest rate of 9.50%, payable in
monthly installments of $351, due June, 1998. 12,249 9,616
</TABLE>
F-27
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 6
<TABLE>
<CAPTION>
Note 7 - Lease Obligations (Continued)
- --------------------------------------
Capital Leases (Continued)
- --------------------------
<S> <C> <C>
Capital lease, with an interest rate of 8.74%, payable in
monthly installments of $1,883, due January, 1998. $ 56,529 $ 39,742
Capital lease, with a variable interest rate of 11%, payable in
monthly installments of $15,986, due March, 1998. 488,290 373,697
Capital lease, with an interest rate of 18.64%, payable in
monthly installments of $620, due May, 1998. 18,693 14,382
Capital lease, with an interest rate of 17.55%, payable in
monthly installments of $166, due June, 1996. 2,490 797
Capital lease, with an interest rate of 15.39%, payable in
monthly installments of $224, due June, 1995. 1,702
Capital lease, with a variable interest rate of 13.90%, payable
in monthly installments of $11,581, due December, 2000. 459,569
Capital lease, with an interest rate of 11.91%, payable in
monthly installments of $4,278, due March, 1999. 143,980
Capital lease, with an interest rate of 17.05%, payable in
monthly installments of $428, due December, 1998. 12,247 9,246
Capital lease, with an interest rate of 13.67%, payable in
monthly installments of $428, due May, 1997. 9,912 5,879
Capital lease, with an interest rate of 15.17%, payable in
monthly installments of $2,411, due May, 1998. 59,889
----------- ----------
656,379 1,134,455
Less: current portion (185,033) (309,911)
----------- ----------
$ 471,346 $ 824,544
=========== ===========
</TABLE>
Future minimum lease commitments at December 31, 1995, under capital leases are
as follows:
1996 $ 452,170
1997 449,354
1998 263,565
1999 161,426
2000 76,937
-----------
1,403,452
Less interest portion (268,997)
--------
$1,134,455
==========
F-28
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 7
Operating Leases
- ----------------
The Company leases office space and equipment under various operating leases.
Minimum payments under operating leases are as follows:
1996 $235,479
1997 202,388
1998 169,520
1999 154,944
--------
$762,331
========
Rent expense for the years ended December 31, 1995 and 1994, was $260,180 and
$244,979, respectively.
Note 8 - Income Taxes
- ---------------------
The provision for federal and state income taxes at December 31, 1995 and 1994,
consisted of the following:
1994 1995
---- ----
Federal income tax current $ $ 74,627
Federal income tax deferred (5,000) (6,000)
State income tax current 3,200 7,073
State income tax deferred (22,380) 19,500
---------- --------
$ (24,180) $ 95,200
========== ========
The deferred tax assets are comprised of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1994 1995
-------------------------------- -------------------------------
Current Long-Term Current Long-Term
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Deferred tax assets:
Federal $ 113,500 $ 36,000 $ 42,500 $ 42,500
State 33,500 7,900 12,500 9,400
------ ----- ------- -------
147,000 43,900 55,000 51,900
Deferred tax assets valuation
allowance (70,500) (26,250) (26,250)
-------- ------- -------- --------
$ 76,500 $ 17,650 $ 55,000 $ 25,650
========= ========= ======== ========
</TABLE>
F-29
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 8
The above tax assets consist of the following at December 31, 1995 and 1994:
1994 1995
---- ----
Accrued vacation $ 36,000 $ 38,000
State taxes 500 1,000
Allowance for bad debts 19,500 16,000
Net operating loss carryforward 134,900 51,900
------- ------
Gross deferred tax asset 190,900 106,900
Deferred tax asset valuation (96,750) (26,250)
--------- --------
$ 94,150 $ 80,650
========= ========
The provision for income tax differs from the amount of income tax determined by
applying the federal statutory rate of 35% due to state taxes net of federal
benefit, alternative minimum tax, the effect of graduated tax rates, and certain
nondeductible expenses, including officers' life insurance, penalties and
political contributions.
CA and its subsidiary did not file a consolidated tax return prior to the year
ending December 31, 1995. Its subsidiary has net operating losses that can only
be used to offset future subsidiary revenue. Those net operating losses expire
as follows:
Federal State
------- -----
December 31:
1998 $ $21,000
2002 29,000
December 31:
64,000
2007 41,000
2008 55,000
2010 ------ -------
$160,000 $50,000
======== =======
Note 9 - Sale of Stock
- ----------------------
During the year ended December 31, 1995, CA's subisdiary purchased 25% of its
outstanding stock by issuing a note payable for $640,410. This transaction made
CA the 100% owner of its subsidiary. This transaction was accounted for using
the purchase method for business combinations and resulted in goodwill of
$640,410, which the Company is amortizing over 40 years using the straight line
method.
F-30
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 9
Note 9 - Sale of Stock (Continued)
- ---------------------------------
In addition, CAF and CAB each purchased 25% of their outstanding shares of
common stock by each issuing a note payable for $104,795.
Note 10 - Litigation Gains and Losses
- -------------------------------------
During the year ended December 31, 1995 and 1994, the Company was involved in a
lawsuit with a software vendor for a product that did not perform. At December
31, 1994, the outcome was not known and the Company had accrued $45,000 as a
possible loss contingency. At December 31, 1995 the Company determined that no
loss contingency was necessary and the accrual was reversed. Subsequent to year
end, the Company received a favorable settlement of $132,639.
Note 11 - Contingent Liability
- ------------------------------
The Company has a provision in the employment contract for one of its officers
in which it agrees to pay the officer his current salary for life in the event
he should become disabled.
Note 12 - Subsequent Event
- --------------------------
Subsequent to December 31, 1995, the Company entered into negotiations with GST
Telecom, Inc. (GST Net), for a corporate combination. As of the report date, no
formal agreement had been reached.
F-31
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered, all of which will be paid by the Registrant, are as
follows:
SEC Registration Fee............................... $15,453.15
Accounting Fees and Expenses....................... 7,500.00
Legal Fees and Expenses............................ 10,000.00
Blue Sky Fees and Expenses......................... 550.00
Miscellaneous Expenses............................. 496.85
-------------
Total.............................................. $ 34,000.00
=============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Except as hereinafter set forth, there is no statute, charter
provision, by-law, contract or other arrangement under which any controlling
person, director or officer of the Company is insured or indemnified in any
manner against liability which he may incur in his capacity as such.
The Company's authority to indemnify its directors and
officers is governed by the provisions of Section 124 of the Canada Business
Corporations Act, as follows:
(1) INDEMNIFICATION. Except in respect of an action by or on
behalf of the corporation or body corporate to procure a judgment in its favor,
a corporation may indemnify a director or officer of the corporation, a former
director or officer of the corporation or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of which the
corporation is or was a shareholder or creditor, and his heirs and legal
representatives, against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of being or having been a director or officer of
such corporation or body corporate, if
(a) he acted honestly and in good faith with a view to
the best interests of the corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he
had reasonable grounds for believing that his conduct
was lawful.
(2) INDEMNIFICATION IN DERIVATIVE ACTIONS. A corporation may
with the approval of a court indemnify a person referred to in subsection (1) in
respect of an action by or on behalf of the corporation or body corporate to
procure a judgment in its favor, to which he is made a party by reason of being
or having been a director or an officer of the corporation or body corporate,
against all costs, charges and expenses reasonably incurred by him in connection
with such action if he fulfills the conditions set out in paragraphs (1)(a) and
(b).
(3) INDEMNITY AS OF RIGHT. Notwithstanding anything in this
section, a person referred to in subsection (1) is entitled to indemnity from
the corporation in respect of all costs, charges and expenses reasonably
incurred by him in connection with the defense of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of
being or having
II-1
<PAGE>
been a director or officer of the corporation or body corporate, if the person
seeking indemnity
(a) was substantially successful on the merits in his
defense of the action or proceeding, and
(b) fulfills the conditions set out in paragraphs (1)(a)
and (b).
(4) DIRECTORS' AND OFFICERS' INSURANCE. A corporation may
purchase and maintain insurance for the benefit of any person referred to
subsection (1) against any liability incurred by him
(a) in his capacity as a director or officer of the
corporation, except where the liability relates to
his failure to act honestly and in good faith with a
view to the best interests of the corporation; or
(b) in his capacity as a director or officer of another
body corporate where he acts or acted in that
capacity at the corporation's request, except where
the liability relates to his failure to act honestly
and in good faith with a view to the best interests
of the body corporate.
(5) APPLICATION TO COURT. A corporation or a person referred
to in subsection (1) may apply to a court for an order approving an indemnity
under this section and the court may so order and make any further order it
thinks fit.
(6) NOTICE TO DIRECTOR. An applicant under subsection (5)
shall give the Director notice of the application and the Director is entitled
to appear and be heard in person or by counsel.
(7) OTHER NOTICE. On an application under subsection (5), the
court may order notice to be given to any interested person and such person is
entitled to appear and be heard in person or by counsel.
The Company's by-laws provide that every director and officer
of the Company and his heirs, executors, administrators and other legal personal
representatives shall be indemnified and held harmless from and against (a) any
liability and all costs, charges and expenses that he sanctions or incurs in
respect of any action, suit or proceeding that is proposed or commenced against
him for or in respect of anything done or permitted by him in respect of the
execution of the duties of his office and (b) all other costs, charges and
expenses that he sustains or incurs in respect of the affairs of the Company.
The Company maintains a $5,000,000 directors and officers
liability insurance policy.
ITEM 16. EXHIBITS.
EXHIBIT INDEX
EXHIBIT
5 Opinion of Olshan Grundman Frome & Rosenzweig LLP with respect
to the securities registered hereunder.
23(a) Consent of KPMG Peat Marwick LLP.
23(b) Consent of KPMG Peat Marwick Thorne.
23(c) Consent of KPMG Peat Marwick LLP.
II-2
<PAGE>
23(d) Consent of KPMG Peat Marwick Thorne.
23(e) Consent of Glenn, Burdette, Phillips & Bryson.
23(f) Consent of Olshan Grundman Frome & Rosenzweig LLP (included
within Exhibit 5).
24(a) Powers of Attorney (included on Page II-4).
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
a. To file, during any period in which offers
or sales are being made, a post-effective
amendment to this registration statement to
include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
b. That, for the purpose of determining any
liability under the Securities Act of 1933,
each such post-effective amendment shall be
deemed to be a new registration statement
relating to the securities offered therein,
and the offering of such securities at that
time shall be deemed to be the initial bona
fide offering thereof.
c. To remove from registration by means of a
post-effective amendment any of the
securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against each such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Vancouver, Province of British Columbia, Country of
Canada on this 6th day of November, 1996.
GST TELECOMMUNICATIONS, INC.
---------------------------------------------
(Registrant)
By: /S/ W. GORDON BLANKSTEIN
------------------------------------------
W. Gordon Blankstein, Chairman
of the Board
POWERS OF ATTORNEY AND SIGNATORIES
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated. Each of the undersigned officers and
directors of GST Telecommunications, Inc. hereby constitutes and appoints W.
Gordon Blankstein, John Warta, Stephen Irwin and Robert H. Hanson and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him in his name in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and to prepare any and all exhibits thereto, and other documents in
connection therewith, and to make any applicable state securities law or blue
sky filings, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done to enable GST Telecommunications, Inc. to comply with the provisions
of the Securities Act of 1933, as amended, and all requirements of the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ W. GORDON BLANKSTEIN Chairman of the Board
- ----------------------------------------
(W. Gordon Blankstein) November 6, 1996
/S/ JOHN WARTA President, Chief Executive Officer
- ---------------------------------------- (Principal Executive Officer) and
(John Warta) Director November 6, 1996
/S/ ROBERT H. HANSON Senior Vice President - Corporate
- ---------------------------------------- Development, Chief Financial
(Robert H. Hanson) Officer (Principal Financial November 6, 1996
Officer) and Director
/S/ CLIFFORD V. SANDER Senior Vice President, Treasurer November 6, 1996
- ---------------------------------------- and Chief Accounting Officer
(Clifford V. Sander) (Principal Accounting Officer)
/S/ STEPHEN IRWIN Vice Chairman of the Board,
- ---------------------------------------- Secretary and Director
(Stephen Irwin) November 6, 1996
/S/ IAN WATSON Director
- ----------------------------------------
(Ian Watson) November 6, 1996
/S/ PETER E. LEGAULT Director
- ----------------------------------------
(Peter E. Legault) November 6, 1996
/S/ JACK G. ARMSTRONG Director
- ----------------------------------------
(Jack G. Armstrong) November 6, 1996
/S/ TAKASHI YOSHIDA Director
- ----------------------------------------
(Takashi Yoshida) November 6, 1996
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ THOMAS E. SAWYER Director
- ----------------------------------------
(Thomas E. Sawyer) November 6, 1996
The Company's Authorized Representative
in the United States
/S/ ROBERT H. HANSON
- ----------------------------------------
Robert H. Hanson November 6, 1996
</TABLE>
II-5
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
505 PARK AVENUE, NEW YORK, NEW YORK 10022
(212) 753-7200
November 6, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: GST Telecommunications, Inc. -
REGISTRATION STATEMENT ON FORM S-3
Gentlemen:
Reference is made to the Registration Statement on Form S-3
dated the date hereof (the "Registration Statement"), filed with the Securities
and Exchange Commission by GST Telecommunications, Inc., a federally chartered
Canadian corporation (the "Company"). The Registration Statement relates to the
issuance of 5,164,089 Common Shares, without par value, of the Company (the
"Shares") to be issued by the Company in connection with the conversion of the
Company's 13-7/8% Convertible Senior Subordinated Discount Notes due 2005 (the
"Convertible Notes").
We advise you that we have examined originals or copies
certified or otherwise identified to our satisfaction of the Articles of
Incorporation and By-laws of the Company, minutes of meetings of the Board of
Directors and shareholders of the Company and such other documents, instruments
and certificates of officers and representatives of the Company and public
officials, and we have made such examination of law, as we have deemed
appropriate as the basis for the opinion hereinafter expressed. In making such
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals, and the conformity to original
documents of documents submitted to us as certified or photostatic copies.
Based upon the foregoing, we are of the opinion that the
Common Shares, when issued in accordance with the terms of the
<PAGE>
Securities and Exchange Commission
November 6, 1996
Page -2-
indenture relating to the Convertible Notes, will be duly and validly issued,
fully paid and non-assessable.
We are members of the Bar of the State of New York and, except
as stated below, we express no opinion as to the laws of any jurisdiction other
than the State of New York and the federal laws of the United States of America.
With respect to the opinion set forth above, we have relied exclusively upon the
opinion of O'Neill & Company, an association of independent law corporations,
Vancouver, British Columbia.
We advise you that Stephen Irwin, the Vice Chairman of the
Board and Secretary of the Company, is of counsel to this firm. Mr. Irwin owns
61,345 Common Shares of the Company and holds options and warrants to purchase
an aggregate of 615,000 Shares. In addition, other attorneys of this firm hold
options to purchase Common Shares.
We consent to the reference to this firm under the caption
"Legal Matters" in the Prospectus.
Very truly yours,
/S/ OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
------------------------------------------
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
EXHIBIT 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report dated November 17, 1995 except for note
12(b) and (c) which are as of December 19, 1995 and November 20, 1995,
respectively, incorporated by reference herein in the Registration Statement on
Form S-3, dated November 6, 1996, of GST Telecommunications, Inc. and to
the references to our firm under the "Experts" heading in the prospectus.
KPMG PEAT MARWICK LLP
Portland, Oregon
November 6, 1996
EXHIBIT 23(b)
KPMG PEAT MARWICK THORNE Telephone No. (604) 691-3000
CHARTERED ACCOUNTANTS (604) 691-3031
BOX 10426
777 DUNSMUIR STREET
VANCOUVER, BC V7Y 1K3
CANADA
ACCOUNTANTS' CONSENT
To the Directors of
GST Telecommunications, Inc.
(formerly Greenstar Telecommunications Inc.)
We consent to incorporation by reference in the registration statement filed on
November 6, 1996 on Form S-3 of GST Telecommunications, Inc. (formerly Greenstar
Telecommunications Inc.) of our report dated December 8, 1994, relating to the
consolidated balance sheets of GST Telecommunications, Inc. as of September 30,
1994 and the related consolidated statements of operations and deficit and cash
flows for the thirteen months ended September 30, 1994 and for the year ended
August 31, 1993, which report appears in the September 30, 1995 Annual Report on
Form 20-F of GST Telecommunications, Inc., and to the reference to our firm as
experts in the registration statement.
KPMG
Chartered Accountants
Vancouver, Canada
November 6, 1996
Member Firm of
Klynveld Peat Marwick Goerdeler
EXHIBIT 23(c)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report over the financial statements of
International Telemanagement Group, Inc. included herein, dated July 21, 1995 in
the Registration Statement on Form S-3, dated November 6, 1996, of GST
Telecommunications, Inc. and to the references to our firm under the "Experts"
heading in the prospectus.
KPMG PEAT MARWICK LLP
Detroit Michigan
November 6, 1996
EXHIBIT 23(d)
KPMG PEAT MARWICK THORNE Telephone No. (604) 691-3000
CHARTERED ACCOUNTANTS (604) 691-3031
BOX 10426
777 DUNSMUIR STREET
VANCOUVER, BC V7Y 1K3
CANADA
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST Telecommunications, Inc.
We consent to the use of our reports dated November 11, 1994 and January 12,
1994 except for note 4 which is as of January 21, 1994, relating to the balance
sheets of IntelCom-Greenstar Joint Venture as of September 30, 1994 and 1993,
respectively and the related statements of operations and participants' equity,
and financial position for the years ended September 30, 1994 and 1993
respectively included in Form 20-F, incorporated herein by reference in the
Registration Statement of Form S-3, dated November 6, 1996, of GST
Telecommunications, Inc. and to the references to our firm under the "Experts"
heading in the prospectus.
KPMG
Chartered Accountants
Edmonton, Canada
November 6, 1996
EXHIBIT 23(e)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report over the financial statements of Call
America Business Communications Corporation and Affiliates included herein,
dated November 6, 1996 in the Registration Statement on Form S-3, dated November
6, 1996 of GST Telecommunications, Inc. and to the references to our firm under
the "Experts" heading in the prospectus.
GLENN, BURDETTE PHILLIPS & BRYSON
San Luis Obispo, California
November 6, 1996