SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A-3
(Mark One)
/ / Registration statement pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934 Fee Required or
/X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 Fee Required
For the fiscal year ended September 30, 1995 or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 No Fee Required
For the transition period from _____________ to _______________
Commission file number
GST TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
CANADA
- --------------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
1030-999 West Hastings Street
Vancouver, British Columbia, Canada V6C 2W2
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Shares, without American Stock Exchange
par value
Securities registered or to be registered pursuant to Section 12(g) of the Act:
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
- --------------------------------------------------------------------------------
(Title of Class)
<PAGE>
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report.
18,700,290 Common Shares
------------------------
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / / .
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 / / Item 18 /X/
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes / / No / / .
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F/A
TABLE OF CONTENTS
Page
----
PART II
Item 18. Financial Statements 4
Item 19. Financial Statements and Exhibits 5
SIGNATURES 7
-2-
<PAGE>
CURRENCY EXCHANGE RATES
All dollar amounts stated in this Form 20-F are in U.S. dollars, except
where otherwise specifically indicated. The following table sets forth the rates
at the end of the indicated period, the average rate during the indicated period
based on the last day of each month in the indicated period and the high and low
rates for the indicated period, for the Canadian dollar per one U.S. dollar,
each expressed in Canadian dollars and based on the noon buying rate in New York
City for cable transfers in Canadian dollars as certified for customs purposes
by the Federal Reserve Bank of New York:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Rate at end of period 1.3655 1.4028 1.3275 1.2714 1.1558
Average rate during the period 1.3687 1.3659 1.2898 1.2143 1.1460
High for the period 1.4267 1.4028 1.3480 1.2885 1.1645
Low for the period 1.3275 1.3273 1.2403 1.1420 1.1203
</TABLE>
On December 29, 1995, the noon buying rate in New York City for cable
transfers in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York was C$1.3655= U.S.$1.00.
-3-
<PAGE>
PART II
ITEM 18. FINANCIAL STATEMENTS
List of financial statements filed as part of the annual report:
CONSOLIDATED FINANCIAL STATEMENTS OF GST TELECOMMUNICATIONS,
INC. FOR THE YEAR ENDED SEPTEMBER 30, 1995, THE THIRTEEN
MONTHS ENDED SEPTEMBER 30, 1994 AND THE YEAR ENDED AUGUST 31,
1993.
(i) Auditors' Report
(ii) Consolidated Balance Sheets as at September 30, 1995 and
1994
(iii) Consolidated Statements of Operations and Accumulated
Deficit for the year ended September 30, 1995, the thirteen
months ended September 30, 1994 and the year ended August
31, 1993
(iv) Consolidated Statements of Changes in Cash Flows for year
ended September 30, 1995, the thirteen months ended
September 30, 1994 and the year ended August 31, 1993
(v) Notes to Financial Statements
AUDITED FINANCIAL STATEMENTS OF INTELCOM-GREENSTAR JOINT
VENTURE
(i) Auditor's Report
(ii) Balance Sheet at September 30, 1994, with comparative
figures for 1993
(iii) Statement of Operations for the year ended September 30,
1994, with comparative figures for period from September 29,
1992 to September 30, 1993
(iv) Statement of Changes in Financial Position for the year
ended September 30, 1994, with comparative figures for
period from September 30, 1992 to September 30, 1993
(v) Notes to Financial Statements
(vi) Auditor's Report
(vii) Balance Sheet at September 30, 1993
-4-
<PAGE>
(viii) Statement of Operations and Accumulated Deficit from the
date of inception on September 29, 1992 to September 30,
1993
(ix) Statement of Changes in Financial Position from the date
of inception on September 29, 1992 to September 30, 1993
(x) Notes to Financial Statements
UNAUDITED FINANCIAL STATEMENTS OF INTELCOM-GREENSTAR JOINT
VENTURE
(i) Balance Sheet at September 30, 1995, with
comparative figures for 1994
(ii) Statement of Operations for the year ended
September 30, 1995, with comparative figures
for 1994
(iii) Statement of Changes in Financial Position
for the year ended September 30, 1995, with
comparative figures for 1994
(iv) Notes to Financial Statements
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
List of exhibits filed as part of the annual report.
1.1 Bylaws of the Registrant, as amended to date.
1.2 Amended and Restated Credit Agreement dated as of April
26, 1995, by and between GST Pacific Lightwave, Inc. and
Tomen America Inc.
1.3 Restated and Amended Shareholder Agreement, effective as
of June 21, 1994, restated and amended as of June 1,
1995, by and among the Registrant, GST USA, Inc.,
Pacwest Network L.L.C., John Warta, Clifford V. Sander
and GST Telecom Inc.
2.1 Stock Purchase Agreement dated as of May 1, 1995, by and
between GST Net, Inc. and Stanley M. Nolte.
2.2 Placement Agreement dated December 14, 1995, by and among
the Registrant, GST USA, Inc., the Specified Subsidiaries
named therein and Morgan Stanley and Co.
Incorporated.
2.3 Senior Notes Indenture dated as of December 19, 1995, by and
among GST USA, Inc., the Registrant and United States Trust
Registrant of New York.
2.4 Convertible Notes Indenture dated as of December 19,
1995, by and among the Registrant, GST USA, Inc. and
United States Trust Registrant of New York.
2.5 Senior Notes Registration Rights Agreement dated
December 19, 1995, by and among GST USA, Inc., the
Registrant, the Specified Subsidiaries named therein and
Morgan Stanley & Co. Incorporated.
2.6 Convertible Notes Registration Rights Agreement dated
December 19, 1995, by and among GST USA, Inc., the
Registrant, the Specified Subsidiaries named therein and
Morgan Stanley & Co. Incorporated.
*2.7 Consent of KPMG Peat Marwick LLP.
-5-
<PAGE>
*2.8 Consent of KPMG Peat Marwick Thorne.
*2.9 Consent of KPMG Peat Marwick Thorne.
- -----------------
* Filed herewith
See Item 18 "Financial Statements" for list of the Registrant's
Financial Statements filed herewith.
-6-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing this Form 20-F/A-3 and has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GST TELECOMMUNICATIONS, INC.
----------------------------
(Registrant)
/s/ Robert H. Hanson
--------------------
(Signature)
Date: May 13, 1996 Robert H. Hanson
-------------------------
Chief Financial Officer
-7-
<PAGE>
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF GST
TELECOMMUNICATIONS, INC.
Auditors' Reports.......................................................F-2
Consolidated Balance Sheets as at
September 30, 1995 and 1994.............................................F-4
Consolidated Statements of Operations and
Accumulated Deficit for the year ended
September 30, 1995, the thirteen months
ended September 30, 1994 and the year
ended August 31, 1993...................................................F-5
Consolidated Statements of Changes in Cash
Flows for the year ended September
30, 1995, the thirteen months
ended September 30, 1994 and the
year ended August 31, 1993..............................................F-7
Notes to Consolidated Financial Statements..............................F-8
AUDITED FINANCIAL STATEMENTS OF INTELCOM-GREENSTAR JOINT VENTURE
Auditor's Report........................................................F-36
Balance Sheet at September 30, 1994, with comparative
figures for 1993........................................................F-37
Statement of Operations for the year
ended September 30, 1994, with comparative
figures for period from September 29, 1992
to September 30, 1993...................................................F-38
Statement of Changes in Financial Position
for the year ended September 30, 1994,
with comparative figures for period from
September 29, 1992 to September 30, 1993................................F-39
Notes to Financial Statements...........................................F-40
Auditor's Report........................................................F-45
Balance Sheet at September 30, 1993.....................................F-46
Statement of Operations and Accumulated Deficit
from the date of inception on September 29, 1992
to September 30, 1993...................................................F-47
Statement of Changes in Financial Position from
the date of inception on September 29, 1992 to
September 30, 1993......................................................F-48
Notes to Financial Statements...........................................F-49
UNAUDITED FINANCIAL STATEMENTS OF INTELCOM-GREENSTAR JOINT VENTURE
Balance Sheet at September 30, 1995, with comparative figures for 1994..F-52
Statement of Operations for the year ended September 30, 1995,
with comparative figures for 1994.......................................F-53
Statement of Changes in Financial Position for the year ended
September 30, 1995, with comparative figures for 1994...................F-54
Notes to Financial Statements...........................................F-55
F-1
<PAGE>
KPMG PEAT MARWICK LLP
Suite 2000
1211 South West Fifth Avenue
Portland, OR 97204
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GST Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheet of GST
Telecommunications, Inc. as of September 30, 1995, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GST
Telecommunications, Inc. as of September 30, 1995, and the results of its
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles in the United States.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Canada.
Application of accounting principles generally accepted in Canada would have
affected results of operations for the year ended September 30, 1995, and
shareholders' equity as of September 30, 1995, to the extent summarized in note
13 to the consolidated financial statements.
/S/ KPMG PEAT MARWICK LLP
Portland, Oregon
November 17, 1995, except for
note 12(b) and (c) which are
as of December 19, 1995 and
November 20, 1995, respectively
F-2
<PAGE>
KPMG PEAT MARWICK THORNE Telephone No. (604) 691-3000
CHARTERED ACCOUNTANTS (604) 691-3031
BOX 10426
777 DUNSMUIR STREET
VANCOUVER, BC V7Y 1K3
CANADA
AUDITORS' REPORT
To the Board of Directors
GST Telecommunications, Inc.
We have audited the consolidated balance sheet of GST Telecommunications, Inc.
as at September 30, 1994, and the consolidated statements of operations and
accumulated deficit, and cash flows for the thirteen months ended September 30,
1994 and the year ended August 31, 1993. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
1994 and the results of its operations and cash flows for the thirteen months
ended September 30, 1994 and the year ended August 31, 1993 in accordance with
generally accepted accounting principles in the United States.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Canada.
Application of accounting principles generally accepted in Canada would have
affected results of operations for the thirteen months ended September 30, 1994
and the year ended August 31, 1993, and the shareholders' equity as at September
30, 1994, to the extent summarized in note 13 to the consolidated financial
statements.
/S/ KPMG PEAT MARWICK THORNE
Chartered Accountants
Vancouver, Canada
December 8, 1994
Member Firm of
Klynveld Peat Marwick Goerdeler
F-3
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Balance Sheets
September 30, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
(In U.S. Dollars)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,024,334 $ 4,218,593
Accounts receivable, net (note 3(c)) 4,305,666 1,421,314
Notes receivable (note 3) 606,670 5,211,828
Marketable securities 870,624 842,608
Inventory (note 1(e)) 387,089 374,512
Prepaid expenses 645,223 134,781
--------------- --------------
12,839,606 12,203,636
--------------- --------------
Notes receivable (note 3) 216,912 326,529
Investment in joint ventures (note 4) 2,859,017 3,551,590
Property and equipment, net (note 5) 36,405,639 4,583,618
Other assets (note 6) 19,681,496 6,034,444
Deferred financing costs, net 1,122,204 69,649
--------------- --------------
60,285,268 14,565,830
--------------- --------------
$ 73,124,874 $ 26,769,466
============== ==============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 9,682,718 $ 1,790,674
Accrued liabilities 3,089,673 1,147,807
Deferred revenue (note 1(i)) 372,630 133,939
Current portion of capital lease obligations (note 10) 223,242 -
Current portion of long-term debt (note 7) 735,517 -
Income taxes payable (note 9) 138,685 -
--------------- -------------
14,242,465 3,072,420
--------------- --------------
Deferred income taxes (note 9) - 31,401
Deferred compensation (note 11(d)) 151,365 -
Capital lease obligation, less current portion (note 10) 658,012 -
Long-term debt, less current portion (note 7) 19,088,407 -
Minority interest 3,279,188 3,231,128
Commitments and contingencies (notes 8, 10 and 11)
Shareholders' equity:
Share capital (note 8):
Authorized - unlimited number of no par common shares; issued and
outstanding - September 30, 1995 - 18,700,290 shares,
September 30, 1994 - 11,910,650 shares 50,166,289 22,036,392
Commitment to issue shares (note 8):
September 30, 1995 - 336,498 shares,
September 30, 1994 - 551,536 shares 1,494,051 3,038,324
Accumulated deficit (15,954,903) (4,640,199)
---------- --------------
35,705,437 20,434,517
--------------- --------------
$ 73,124,874 $ 26,769,466
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations
and Accumulated Deficit
Year ended September 30, 1995, thirteen
months ended September 30, 1994 and
year ended
August 31, 1993
<TABLE>
<CAPTION>
Thirteen
Year ended months ended Year ended
September 30, September 30, August 31,
1995 1994 1993
---- ---- ----
(In U.S. Dollars)
<S> <C> <C> <C>
Revenues:
Telecommunication services $ 11,118,373 $ 111,673 $ -
Product 7,563,087 5,889,699 -
-------------- ------------ -----------
Total revenues 18,681,460 6,001,372 -
-------------- ------------ -----------
Cost of goods sold:
Telecommunication services 12,198,610 175,699 -
Product 3,095,679 2,137,107 -
-------------- ------------ -----------
Total cost of goods sold 15,294,289 2,312,806 -
-------------- ------------ -----------
Gross profit 3,387,171 3,688,566 -
-------------- ------------ -----------
Operating expenses:
General and administration 8,880,162 2,936,373 229,384
Marketing, travel and promotion 2,493,159 1,016,224 188,941
Research and development 1,270,590 688,966 -
Depreciation and amortization 2,373,912 383,749 -
-------------- ------------ -----------
Loss from operations (11,630,652) ( 1,336,746) (418,325)
---------- ------------ ------------
Other expenses (income):
Interest income (302,605) (254,087) (34,570)
Interest expense 837,850 27,445 -
Foreign exchange loss 7,365 109,811 54,690
Loss from joint ventures 660,653 1,099,479 383,578
Write-off of pre-operating costs (note 2(b)) - 691,131 -
Loss on investments 526,548 - -
Miscellaneous 152,657 (23,232) -
---------- ---------- -----
1,882,468 1,650,547 403,698
-------------- ------------ ------------
Loss before minority interest in
income (loss) of subsidiary
and income tax (13,513,120) (2,987,293) (822,023)
---------- --------- ------------
</TABLE>
(Continued)
F-5
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations
and Accumulated Deficit, Continued
<TABLE>
<CAPTION>
Thirteen
Year ended months ended Year ended
September 30, September 30, August 31,
1995 1994 1993
---- ---- ----
(In U.S. Dollars)
<S> <C> <C> <C>
Income tax expense (note 9):
Current $ 70,000 $ 487,233 $ -
Deferred 96,015 14,610 -
-------------- ------------ -----------
166,015 501,843 -
-------------- ------------ -----------
Loss before minority
interest in income (loss) of
subsidiaries (13,679,135) (3,489,136) (822,023)
Minority interest in (income) loss
of subsidiaries 2,364,431 (2,423) -
------------ --------- -----
Loss for the period (11,314,704) (3,491,559) (822,023)
Accumulated deficit, beginning of period (4,640,199) ( 1,148,640) (326,617)
-------------- ------------ ------------
Accumulated deficit, end of period $ (15,954,903) $ ( 4,640,199) $ (1,148,640)
========== ============ =========
Loss per share $ (0.82) $ (0.35) $ (0.22)
======== ======== =========
Weighted average common and common
equivalents shares outstanding 13,780,796 9,878,704 3,820,780
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
Year ended September 30,
1995, thirteen months
ended September 30, 1994
and year ended
August 31, 1993
<TABLE>
<CAPTION>
Thirteen
Year ended months ended Year ended
September 30, September 30, August 31,
1995 1994 1993
---- ---- ----
(In U.S. Dollars)
<S> <C> <C> <C>
Operations:
Loss for the period $(11,314,704) $ (3,491,559) $ (822,023)
Items not involving cash:
Minority interest in income (loss)
of subsidiary (2,364,431) 2,423 --
Loss from joint ventures 660,653 1,099,479 383,578
Write-off of pre-operating costs -- 691,131 --
Depreciation and amortization 2,823,945 557,269 --
Deferred income taxes 96,015 14,610 --
Deferred compensation 151,365 -- --
Write-off of other assets 122,160 -- --
Issuance of stock for financing commitment 100,000 -- --
Loss on investments 526,548 -- --
Changes in non-cash operating working capital:
Accounts receivable, net (1,549,358) (882,275) (12,557)
Inventory (12,577) (163,320) --
Prepaid expenses (416,729) (120,167) (10,804)
Accounts payable and accrued liabilities 4,173,246 2,349,968 31,718
Income taxes payable 138,685 16,791 --
Deferred revenue 122,580 37,066 --
------------ ------------ ------------
Cash provided by (used in) operations (6,742,602) 111,416 (430,088)
------------ ------------ ------------
Investments:
Acquisition of subsidiaries, net of cash acquired 206,510 (7,274,089) --
Investment in joint ventures -- (34,647) (5,000,000)
Settlement of notes receivable 3,367,276 (5,107,457) --
(Purchase) sale of marketable securities 848,017 (842,608) --
Purchase of fixed assets (32,093,091) (906,650) (3,630)
Purchase of other assets (1,829,214) (579,853) --
------------ ------------ ------------
Cash used in investing activities (29,500,502) (14,745,304) (5,003,630)
------------ ------------ ------------
Financing:
Proceeds from long-term debt 19,856,663 -- --
Principal payments on long-term debt (814,810) (387,300) --
Issuance of share capital, net of issuance costs 19,244,547 14,563,820 10,116,606
Deferred debt financing costs (852,555) (69,649) --
Issuance of subsidiary shares 615,000 -- --
------------ ------------ ------------
Cash provided by financing activities 38,048,845 14,106,871 10,116,606
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,805,741 (527,017) 4,682,888
Cash and cash equivalents, beginning of period 4,218,593 4,745,610 62,722
------------ ------------ ------------
Cash and cash equivalents, end of period $ 6,024,334 $ 4,218,593 $ 4,745,610
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
September 30, 1995 and 1994
(In U.S. Dollars)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
GST Telecommunications, Inc. (the Company) is a Canadian company in the
business of developing, installing, marketing and operating fiber optic
and microwave telecommunications networks in the western United States.
In addition, the Company provides domestic and international long
distance services and manufactures telecommunications switching
equipment.
The consolidated financial statements for the year ended September 30,
1995, the thirteen months ended September 30, 1994 and the year ended
August 31, 1993 have been reported in U.S. dollars, the functional
currency of the Company. The Company changed its fiscal year-end to
September 30 effective in 1994 (note 13).
(b) BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, GST USA, Inc., GST Net, Inc.,
National Applied Computer Technologies, Inc. (NACT) and International
Telemanagement Group, Inc. (ITG), and its 80%-owned subsidiary, GST
Telecom, Inc. (GST Telecom). All significant intercompany accounts have
been eliminated. (See note 12.)
(c) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
original maturities of ninety days or less.
(d) MARKETABLE SECURITIES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (Statement 115) at October 1, 1994. Under Statement 115, the
Company classifies its debt and marketable equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the
security until maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
(Continued)
F-8
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Trading and available-for-sale securities are recorded at fair value. All
of the Company's marketable securities, comprised primarily of U.S.
Treasury Securities, are classified as available-for-sale and mature in
periods ranging from 14 to 21 months. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities
are excluded from earnings and are reported as a separate component of
stockholder's equity until realized. A decline in the market value of any
available-for-sale security below cost that is deemed other than
temporary is charged to earnings resulting in the establishment of new
cost basis for the security. Dividend income is recognized when earned.
Realized gains and losses for securities classified as available-for-sale
are included in earnings and are derived using the
specific-identification method for determining the cost of securities
sold. The amortized cost approximated the market value of these
securities at September 30, 1995.
Marketable securities at September 30, 1994 are stated at amortized cost
of $842,608.
(e) INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value) and consists of the following:
1995 1994
---- ----
Raw materials $316,940 $247,139
Work in process 70,149 46,508
Finished goods -- 80,865
-------- --------
Total inventory $387,089 $374,512
======== ========
(f) Investments in Joint Ventures
Investments in joint ventures are recorded on the equity basis.
(g) Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over their estimated useful lives, which are as
follows:
Telecommunications networks 10 years
Electronic and related equipment 10 years
Leasehold improvements 10 years
Furniture, office equipment and other 5 - 7 years
Building 40 years
(Continued)
F-9
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Construction, engineering and overhead costs related to the development
of competitive access networks are capitalized. The Company begins
depreciating these costs when the networks become commercially
operational. Depreciation will be provided using the straight-line method
over the estimated useful lives of the assets owned.
(h) OTHER ASSETS
Goodwill - Goodwill, which represents the excess of the purchase price
over the fair value of net assets acquired, is amortized over periods
ranging from five to twenty years using the straight-line method. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through discounted projected future cash
flows of the acquired businesses from which the goodwill arose.
Amortization charged to operations was $388,569, $18,846, and $-0- for
the year ended September 30, 1995, the thirteen month period ended
September 30, 1994 and the year ended August 31, 1995, respectively.
Software Development Costs - The Company capitalizes software development
costs incurred in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed, in which software development costs
are capitalized upon the establishment of technological feasibility for
the product. These capitalized costs are amortized over the estimated
economic life of the software, not exceeding five years, computed on a
straight-line basis.
Purchased Technology, In conjunction with the purchase of NACT,
$1,970,586 of the purchase price has been allocated to the internally
developed software technology used in NACT's switch products. This
software technology is being amortized using the straight-line method
over five years. During 1995, the Company determined that $90,204 of this
software technology no longer had economic value and wrote the amount off
as a charge to cost of goods sold.
The Company capitalized certain software development costs of $169,025
during the year ended September 30, 1995. There was no amortization
related to capitalized software costs during 1995, 1994 or 1993.
Capital Development Costs - Amortization of capital development costs
will be provided over the estimated useful lives once the switch services
are deployed and become commercially operational.
Product Support Contracts - Customer support contracts are being
amortized on the straight-line basis over their estimated useful lives of
five years.
(Continued)
F-10
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Licenses and Franchise Agreements - Licenses and franchise agreements are
being amortized on the straight-line basis over their estimated useful
life of ten to forty years.
Organizational Costs - Amortization of organizational costs will be
provided over the estimated useful lives once the competitive access
networks become commercially operational.
(i) REVENUE RECOGNITION
For telecommunication services revenue, revenue is recorded upon placing
of calls or rendering of other related services. For telecommunication
product revenue, revenue is recorded upon shipment of merchandise and is
presented in the accompanying consolidated statements of operations net
of merchandise returns.
Deferred revenue consists of monthly service contract payments received
in advance, warranty payments received in advance and research and
development advances. Advance warranty payments are amortized over the
length of warranty on the system sold, which is typically one year.
(j) LOSS PER SHARE
Loss per share has been calculated using the weighted average number of
common and dilutive common equivalent shares assumed to be outstanding
during the period (using the treasury stock method for dilutive common
equivalent shares). Common equivalent shares consist of options and
warrants to purchase common stock.
Fully diluted loss per share has not been presented for the outstanding
options and warrants as they are anti-dilutive.
(k) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital transactions
in the accompanying consolidated financial statements.
(l) SEGMENTED INFORMATION
Segmented information has not been presented as the Company is presently
operating 100% in the telecommunications industry in the United States
and all revenues and operating profits and losses are derived from United
States operations and substantially all assets reside in the United
States.
(Continued)
F-11
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(m) DEFERRED FINANCING COSTS
Deferred financing costs are amortized to interest expense over the lives
of the financing arrangements to which they relate.
(n) COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform with
the basis of presentation adopted in the current period.
(o) INCOME TAXES
Effective September 1, 1993, the Company adopted Statement of Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Under the asset
and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under SFAS No. 109, the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(p) FOREIGN CURRENCY
During the year ended August 31, 1993, the Company changed the reporting
currency of the consolidated financial statements from Canadian dollars
to U.S. dollars. The change was accounted for retroactively as if the
U.S. dollar was always the reporting currency.
The functional currency of all of the Company's operations is the U.S.
dollar. In accordance with Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation", nonmonetary balance sheet items
recorded in Canadian dollars are remeasured at historical rates and
monetary balance sheet items recorded in Canadian dollars are remeasured
at current rates. Exchange gains and losses from remeasurement of
monetary assets and liabilities are recognized currently in income.
(2) ACQUISITIONS
(a) NATIONAL APPLIED COMPUTER TECHNOLOGIES
Effective September 1, 1993, the Company purchased from the treasury of
NACT 52% of the post-issuance common shares outstanding. NACT is a
privately-owned Utah manufacturer of telecommunications switching and
network management equipment for the inter-exchange industry. Subsequent
to September 1, 1993, at various times, the Company acquired the
remaining 48% interest in NACT.
(Continued)
F-12
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
The consideration paid for 100% of NACT's outstanding common shares
consisted of $3,620,813 in cash, $466,194 in notes payable, 67,341 common
shares of the Company at fair value of $4.81 per share, 384,195 common
shares of the Company at fair value of $5.90 and 504,747 common shares of
the Company at fair value of $4.44 per share. 15% of the stock acquired
from NACT was purchased from NACT's President, who is also the Company's
Chief Technology Officer and a Director of the Company, for 384,195
common shares of the Company. These acquisitions have been accounted for
by the purchase method with the results of operations of NACT included in
these financial statements from the dates of acquisition.
Details of the acquisition are as follows:
Net assets acquired, at assigned values:
All assets, except goodwill $ 8,841,943
Goodwill, amortized over twenty years 1,279,564
--------------
10,121,507
Less:
Total liabilities 1,202,763
Consideration paid $ 8,918,744
==============
Consideration paid includes $160,395 of legal costs.
(b) GST TELECOM, INC.
Effective June 21, 1994, the Company acquired 60% of the shares of GST
Telecom, Inc. in exchange for contributing 60% of the shares of Tucson
Lightwave, Inc. (Tucson) and a commitment to provide at least $11,024,156
in equity financing. GST Telecom is a Delaware company incorporated for
the purpose of developing, constructing, and operating competitive access
networks and other communications systems. The shares of Tucson were
acquired from Pacwest, L.L.C. (Pacwest) (an entity controlled by the
Chief Executive Officer of the Company) in exchange for 100,000 common
shares of the Company at a fair value of $447,494 (Canadian $6 per
share). Additionally, the Company has made $22,654,584 in equity
contributions to GST Telecom, Inc. through September 30, 1995.
Effective June 1, 1995, the Company acquired an additional 20% of GST
Telecom, Inc. for 1,000,000 shares of common stock at a deemed value of
$5 per share. In October 1995, the Company acquired the remaining 20% of
GST Telecom, Inc. See note 13 for further discussion.
(Continued)
F-13
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
The acquisition has been accounted for by the purchase method with the
results of operations of GST included in these financial statements from
the date of acquisition.
Details of the acquisition are as follows:
Net assets acquired, at assigned values:
All assets, except goodwill $ 25,185,888
Goodwill, amortized over ten years 8,369,588
--------------
33,555,476
Less:
Total liabilities 3,478,324
Non-controlling interest 1,773,657
--------------
Consideration paid $ 28,303,495
==============
Consideration paid includes $201,417 of finders fees and legal costs.
Pre-operating costs aggregating $691,131 were charged to operations in
the thirteen month period ended September 30, 1994.
(c) INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Effective May 1, 1995, the Company acquired 100% of the outstanding
capital stock of ITG. ITG is an Ohio company that provides a variety of
domestic and international long distance services. The Company acquired
ITG for consideration of $74,761, the assumption of certain liabilities,
and an earn out provision. Under the earn out provision, the seller may
also be paid a percentage (ranging from zero to 10%, depending upon the
amount of funding provided to ITG by the Company) of the fair market
value of ITG at November 30, 1997. The acquisition was accounted for by
the purchase method with the results of operations of ITG included in
these financial statements from the date of acquisition.
(Continued)
F-14
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Details of the acquisition are as follows:
Net assets acquired, at assigned values:
All assets, except goodwill $ 3,235,243
Goodwill, amortized over ten years 3,758,393
------------
6,993,636
Less:
Total liabilities 6,918,875
------------
Consideration paid $ 74,761
============
Consideration paid includes $74,561 in legal costs.
The pro forma results listed below reflect purchase accounting
adjustments assuming the acquisitions of 100% of NACT, 80% of GST Telecom
and 100% of ITG occurred as of the beginning of each of the periods
presented:
Thirteen
month
Year ended period ended
September 30, September 30,
1995 1994
---- ----
(unaudited)
Revenues $ 26,980,000 16,125,000
Net loss (15,681,000) (6,530,000)
Net loss per share (1.12) (0.57)
The pro forma results above are not necessarily indicative of what
actually would have occurred had the acquisitions been in effect for the
entire periods presented. In addition, they are not intended to be a
projection of future results that may be achieved from combined
operations.
(Continued)
F-15
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(3) ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
---- ----
<S> <C> <C>
Starcom International Optics Corporation
(Starcom):
Principal (a) $ - $ 4,223,129
Accrued interest - 297,210
---------- ------------
- 4,520,339
Pacwest Network, L.L.C. (b) - 202,622
Customer notes receivable (c) 823,582 815,396
---------- ------------
823,582 5,538,357
Less current portion 606,670 5,211,828
---------- ------------
Notes receivable $ 216,912 $ 326,529
========== ============
</TABLE>
(a) At September 30, 1994, the Company had made various loans to Starcom
International Optics Corp. (Starcom) totaling $4,520,339 in principal
and accrued interest relating to a proposed joint venture to construct
a fiber optic telecommunications network between Vancouver, British
Columbia and Seattle, Washington. Under the various agreements, the
Company was granted options to acquire a total of 833,334 shares at
Canadian $0.36 per share and 833,334 warrants to acquire shares of
Starcom at a price of Canadian $0.36 per share. In March 1995, the
Company and Starcom concluded a settlement agreement under which the
Company relinquished its rights in the proposed network, canceled its
options and warrants and forgave the loans to Starcom in exchange for
approximately $3,341,000 in cash and common stock of IntelCom Group,
Inc. with a value at issuance of $1,147,499.
(Continued)
F-16
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(b) Pursuant to a loan agreement and promissory note dated July 7, 1994,
the Company loaned $200,000 to Pacwest Network, L.L.C. (Pacwest). The
note bore interest at a rate of 5.63% per annum. The loan was repaid
in full, with interest, in installments on October 31, 1994 and April
30, 1995, by crediting against fees payable to Pacwest in respect of
financing provided by Tomen America, Inc.
(c) The Company maintains a security interest in the telecommunications
systems it sells until the Company is paid in full. If economic
conditions or other unforeseen events were to negatively impact the
Company's customer base, the risk of loss associated with accounts and
notes receivable could exceed the current allowance for doubtful
accounts. The allowance for doubtful accounts was $1,401,550 and
$59,795 at September 30, 1995 and 1994, respectively.
(4) INVESTMENT IN JOINT VENTURES
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
---- ----
<S> <C> <C>
Phoenix Fiber Joint Venture $ 5,000,000 $ 5,000,000
Cumulative share of loss (2,140,983) (1,483,057)
--------- ---------
2,859,017 3,516,943
Other - 34,647
---------- ------------
Investment in joint venture $ 2,859,017 $ 3,551,590
========== ============
</TABLE>
Effective October 9, 1992, the Company established a joint venture with an
unrelated third party. The joint venture operates a competitive access
fiber optic telecommunications network in the Phoenix, Arizona metropolitan
area. The Company has invested $5 million in this project, in consideration
for its 50% interest, with its joint venture partner responsible to provide
the balance of the project's estimated $16.2 million cost. Any costs in
excess of $16.2 million would be borne equally by the Company and the joint
venture partner. The Company has agreed that it will allow the joint
venture to use both the network and the Company's interest therein, or
provide subordination agreements and guarantees, in order to secure the
financing for the balance of the project's cost.
(Continued)
F-17
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Summary financial information of the Company's 50% proportionate share of
the joint venture's revenue, expenses, as of September 30, 1995 and 1994
and August 31, 1993 and assets and liabilities as of September 30, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
Period ending Period ending Period ending
September 30, September 30, August 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue $ 337,000 $ 56,000 $ -
Costs and expenses 998,000 1,155,000 384,000
--------------- ------------ ------------
Loss before income taxes $ 661,000 $ 1,099,000 $ 384,000
=============== ============ ============
September 30, September 30,
1995 1994
---- ----
Assets $ 10,272,000 $ 2,822,000
Liabilities 1,549,000 1,210,000
--------------- ------------
$ 8,723,000 $ 1,612,000
=============== ============
</TABLE>
Included in the joint venture costs and expenses above are management
fees paid to the joint venture partner of $150,000, $662,500 and $387,500
for the periods ending September 30, 1995 and 1994 and August 31, 1993.
(5) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
<S> <C> <C>
Telecommunications networks $ 9,576,981 $ 717,777
Electronic and related equipment 10,058,514 1,103,927
Leasehold improvements 300,281 --
Furniture, office equipment and other 2,200,570 607,625
Building 2,133,697 --
Networks in progress 13,686,119 2,376,157
------------ ------------
37,956,162 4,805,486
Less accumulated depreciation (1,550,523) (221,868)
------------ ------------
$ 36,405,639 $ 4,583,618
============ ============
</TABLE>
(Continued)
F-18
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Property and equipment includes $13,686,119 of equipment which had not been
placed in service at September 30, 1995 and, accordingly, is not being
depreciated. During the year ended September 30, 1995, $290,678 of interest
was capitalized as part of telecommunications networks and networks in
progress.
(6) OTHER ASSETS
September 30, September 30,
1995 1994
---- ----
Goodwill $ 13,496,884 $ 670,644
Purchased technology 1,880,382 1,516,235
Software development costs 169,025 --
Capital development costs 1,627,379 --
Product support contracts 2,348,868 1,896,759
Licenses and franchise
agreements 1,796,850 1,796,850
Organizational costs 113,081 113,081
Other 151,365 447,923
------------ ------------
21,583,834 6,441,492
Less accumulated amortization (1,902,338) (407,048)
------------ ------------
$ 19,681,496 $ 6,034,444
============ ============
(Continued)
F-19
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(7) Financing Arrangements
(a) Debt
The Company's long-term debt at September 30, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to Tomen, quarterly interest payments at
the LIBOR rate plus 3% (8.8% at September 30, 1995)
with quarterly principal payments (together with
interest) beginning in fiscal 1999 through 2005,
collateralized by equipment. The Company has the
option to convert the interest rate to a fixed rate
equal to the Treasury index rate plus 3%
during the term of the loan $ 16,673,536 -
Note payable for building, collateralized by
the building, 15 payments of $15,448
(includes interest at 10%), with a balloon
payment of $1,602,293 due December 1,
1996. The note is subject to loan covenants
for which the Company is in compliance 1,628,530 -
Notes payable to banks, partially collateralized by
equipment, bearing interest ranging from 1% over the
prime rate (8.75% at September 30, 1995) to 8.25%,
due in varying amounts through September 1997 882,990 -
Notes payable to former shareholders of NACT,
10% interest, due in equal installments on
January 5, 1996 and 1997 466,194 -
Other 172,674 -
--------------- -------------
19,823,924 -
Less current portion of long-term debt 735,517 -
--------------- -------------
$ 19,088,407 -
=============== =============
</TABLE>
The schedule of future principal payments on long-term debt is
as follows:
1996 $ 735,517
1997 2,118,246
1998 192,427
1999 2,243,659
2000 2,778,923
Thereafter 11,755,152
--------------
$ 19,823,924
=================
(Continued)
F-20
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(b) TOMEN AMERICA, INC. FACILITY
On October 24, 1994, the Company entered into a master financing
agreement with Tomen America, Inc. (Tomen). Under the agreement, Tomen
will loan up to $100 million to subsidiaries of the Company for
development and construction of network projects. Tomen will evaluate
each network project separately to determine if it will participate in
financing the project. During 1995, Tomen agreed to provide a total of up
to $18.45 million in debt financing to a subsidiary of GST Telecom under
the agreement ($16.7 million of which has been drawn down as of September
30, 1995) for construction and operation of its fiber optic networks in
San Bernadino, Ontario, City of Industry and Monterey Park, California
and purchased 10% of the common stock of the subsidiary.
Concurrent with the signing of the master financing agreement, the
Company also signed a stock purchase agreement with Tomen. Pursuant to
the stock purchase agreement, the Company sold 500,000 common shares from
the treasury at $4.60 per share to Tomen for total cash consideration of
$2,300,000. Each share includes a warrant to purchase one-half of a
share, exercisable at any time before October 23, 1996. Two warrants
entitle the holder to acquire an additional share of the Company at an
exercise price of $5.52 per share. The Company also granted Tomen an
option to acquire up to 500,000 shares, with an exercise price to be
equal to the average per share closing prices for the Company's common
shares for thirty market trading days preceding the closing of the
funding, of the Company exercisable up to the initial funding of the
second and third network projects undertaken by the Company. Pursuant to
this option, in 1995 Tomen exercised its option to purchase 250,000
shares, relating to the second network project, of the Company at $4.62
per share. Each share includes a warrant to purchase one-half of a share,
exercisable at any time before April 25, 1997. Two warrants entitle the
holder to acquire an additional share of the Company at an exercise price
of $5.62 per share.
The Company's Chief Executive Officer serves as a consultant to Tomen for
which he is paid a fee. Simultaneously with the execution of the June 21,
1994 purchase of 60% of GST Telecom from Pacwest, LLC (an entity
controlled by the Chief Executive Officer of the Company) Pacwest LLC
contracted with the Company to receive a fee equal to 1% of the aggregate
debt and equity financing provided by Tomen to the Company.
(c) LINE OF CREDIT
NACT has established a $1,500,000 line of credit with Zions Credit
Corporation (Zions) to provide funding for payment of customer leases, if
required. At September 30, 1995, NACT was contingently liable under
repurchase agreements for a maximum of $681,569 to Zions. Zions provides
lease financing to NACT customers on a recourse basis.
(Continued)
F-21
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(8) SHARE CAPITAL
(a) Issued
Issued share capital consists of the following:
<TABLE>
<CAPTION>
Shares Amount
<S> <C> <C>
Balance, September 1, 1992 (U.S. dollars) 2,250,000 $ 394,290
For cash consideration:
Exercise of stock options at prices ranging from
Canadian $0.33 to Canadian $1.57 per share 561,500 427,828
Exercise of warrants at prices ranging from
Canadian $1.52 to Canadian $3.05 per share 846,965 1,047,733
Issuance of common shares at $.058 per share 1,096,270 632,876
Issuance of common shares at Canadian $1.52 per share,
net of issuance costs 1,348,685 1,581,487
Issuance of common shares at Canadian $3.05 per share,
net of issuance costs 2,350,000 5,140,800
Issuance of common shares at Canadian $3.30 per share 550,001 1,285,882
--------- ----------
Balance, August 31, 1993 9,003,421 10,510,896
For cash consideration:
Exercise of stock options at prices ranging from
Canadian $1.30 to Canadian $4.10 per share 343,750 974,694
Exercise of warrants at prices ranging from
Canadian $1.52 to Canadian $3.48 per share 453,679 705,783
Issuance of common shares at Canadian $5.00 per share,
net of issuance costs 200,000 748,783
Issuance of common shares at Canadian $7.00 per share,
net of issuance costs 1,861,800 9,182,058
For services rendered:
Issuance of common shares at Canadian $5.00 per share 10,000 37,569
Issuance of common shares at Canadian $4.45 per share 20,000 67,094
Issuance of common shares at Canadian $6.00 per share 18,000 78,233
Less share issuance costs - (268,718)
--------- ----------
Balance, September 30, 1994 11,910,650 22,036,392
For cash consideration:
Exercise of stock options at prices ranging from Canadian
$3.01 to U.S. $4.68 per share 692,200 2,399,897
Exercise of warrants at prices ranging from Canadian $3.48
to Canadian $5.50 per share 2,016,389 5,187,383
Issuance of common shares at U.S. $4.60 per share, net of
issuance costs 500,000 2,259,149
Issuance of common shares at U.S. $5.50 per share, net of
issuance costs 1,827,209 9,348,304
For acquisitions of subsidiaries:
Issuance of common shares at Canadian $6.00 per share 100,000 447,494
Issuance of common shares at U.S. $4.81 per share 67,341 324,079
Issuance of common shares at U.S. $5.90 per share 384,195 2,266,751
Issuance of common shares at U.S. $4.44 per share 168,249 747,026
Issuance of common shares at U.S. $5.00 per share 1,000,000 5,000,000
For services rendered:
Issuance of common shares at U.S. $5.50 per share 9,057 49,814
Issuance of common shares at U.S. $4.00 per share 25,000 100,000
--------- ----------
Balance, September 30, 1995 18,700,290 $ 50,166,289
========== ==========
</TABLE>
(Continued)
F-22
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(b) COMMITMENT TO ISSUE SHARES
Pursuant to a final agreement dated January 5, 1995, the Company is
committed to issue 336,498 common shares at a fair value of $4.44 per
share ($1,494,051) to former shareholders of NACT in two equal
installments on January 5, 1996 and January 5, 1997.
(c) ESCROW AGREEMENT
Of the 18,700,290 shares currently outstanding, 750,000 are held pursuant
to an escrow agreement, their release being subject to the approval of
regulatory authorities. These common shares have been issued by the
Company and have rights equal to those of all other common shares except
that the holders may not exercise voting rights on a resolution to cancel
shares, and have waived their rights to receive dividends or to
participate in the assets and property of the Company on a winding-up or
dissolution of the Company. In accordance with the escrow provisions of
this agreement, these shares cannot be sold or traded by the owner until
they are released by the regulatory authorities. The release being
determined by future cash flows of the Company. If the Company has not
met the conditions set for the release of these shares by January 16,
2001, these shares will be canceled.
(d) 1995 STOCK OPTION PLAN
In January 1995, the Company created a Stock Incentive Plan (the 1995
Plan) which provides for the granting to employees (including officers
and employee directors) of incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, and for the granting
of non-statutory stock options to employees (including officers and
employee directors), directors and consultants. The options have a term
of five years and vest and become exercisable at the discretion of the
Board of Directors. Under the plan, no options vest until at least six
months after the date of grant.
The exercise price of all incentive stock options granted under the 1995
Plan must be at least equal to the fair marker value of the shares on the
date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting rights of the Company's outstanding share
capital, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date. The
exercise price of all non-statutory stock options granted under the 1995
Plan must be at least 80% of the fair market value of the common stock on
the date of grant.
(Continued)
F-23
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(e) STOCK OPTIONS OUTSTANDING
Employees, officers and directors' stock options outstanding at September
30, 1995:
Exercise
Number Exercise expiration
of shares price (U.S.) date
--------- ------------ ----------
374,400 $4.25 June 23, 1997
10,000 $4.50 October 3, 1997
40,000 $4.38 February 21, 1998
133,241 $5.00 February 28, 1999
60,000 $5.00 February 28, 1999
40,881 $3.55 January 4, 2000
925,000 $6.75 September 20, 2000
Of the 1,583,522 options outstanding, 539,795 options were vested and
exercisable and 825,000 options were available for future grant.
(f) WARRANTS OUTSTANDING
Warrants outstanding and exercisable at September 30, 1995:
Exercise
Number Exercise expiration
of shares price date
--------- ------------ ----------
50,000 Canadian $5.50 October 25, 1995
930,900 Canadian $10.00 March 31, 1996
187,500 U.S. $5.52 October 23, 1996
62,500 U.S. $5.52 October 23, 1996
125,000 U.S. $5.62 April 26, 1997
The 375,000 warrants expiring October 23, 1996 through April 26, 1997
were granted to Tomen in conjunction with the Master financing agreement
(See Note 7(b)). The 980,900 warrants expiring October 25, 1995 through
March 31, 1996 were granted in conjunction with private placements of
common stock during fiscal 1994. No value has been assigned to any
granted warrants as the exercise price exceeded the common stock market
price at the time of grant.
(Continued)
F-24
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(9) INCOME TAXES
As discussed in note 1, the Company adopted SFAS No. 109, effective
September 1, 1993. SFAS No. 109 supersedes Accounting Principles Board
(APB) Opinion No. 11. Prior years' financial statements have not been
restated to apply the provisions of SFAS No. 109. There was no cumulative
effect with the adoption of SFAS No. 109. Prior to September 1, 1993, the
Company had accounted for income taxes using APB Opinion No. 11,
"Accounting for Income Taxes".
The provision for income taxes differs from the amount computed by applying
the Canadian statutory income tax rate to net income before taxes are as
follows:
<TABLE>
<CAPTION>
Thirteen
month
Year ended period ended Year ended
September 30, September 30, August 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Computed expected income tax
expense (benefit) at Canadian
statutory rate (39)% (39)% (39)%
Expected state/province income tax
expense (benefit) (6) (5) -
Increase (decrease) in valuation
allowance 38 56 39
Amortization of goodwill 5 5 -
Minority interest (7) - -
Effect of difference in United
States statutory rate 5 6 -
Other 5 (6) -
--- --- ----
Income tax expense (benefit) 1% 17% - %
=== === -===
</TABLE>
(Continued)
F-25
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's deferred tax asset
and liability are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
<S> <C> <C>
Deferred tax assets:
United States Federal and state
net operating loss carryforwards $ 3,325,190 346,141
Canadian net operating loss carryforwards 2,532,643 1,674,981
Capitalized organizational costs 779,782 232,873
Donations 484 -
Unearned deposits 5,925 33,413
Accrued warranties 58,653 51,567
Deferred compensation 59,789 -
Bad debt allowance 562,838 23,021
Accrued vacation 94,620 26,325
Legal settlement costs 71,320 -
------------ -----------
Total gross deferred tax assets 7,491,244 2,388,321
Less valuation allowance (6,733,910) (2,388,321)
------------ ------------
Deferred tax liabilities:
Furniture, fixtures and equipment,
due to differences in depreciation 693,334 31,401
Capitalized software 64,000 -
------------ -----------
Total gross deferred tax liabilities 757,334 31,401
------------ ------------
Net deferred taxes $ - 31,401
============ ============
</TABLE>
The valuation allowance for deferred tax assets as of September 1, 1993
was $593,385. The net change in total valuation allowance for the year
ended September 30, 1995 and the thirteen month period ended September
30, 1994 was an increase of $4,345,589 and $1,794,936, respectively.
(Continued)
F-26
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
The Company has non-capital losses for income tax purposes of approximately
Canadian $5,756,000 available to reduce Canadian taxable income of future
years, expiring as follows:
1999 $ 934,000
2000 2,822,000
2001 2,000,000
------------
$ 5,756,000
============
The Company has net operating losses for income tax purposes of
approximately $8,516,000 available to reduce United States taxable income
of future years, expiring as follows:
2007 $ 405,000
2008 455,000
2009 2,717,000
2010 4,939,000
------------
$ 8,516,000
============
For United States income tax purposes, utilization of net operating losses
may be subject to limitation in the event a change in ownership of the
Company has occurred pursuant to IRC Section 382. No analysis has been
performed by the Company to determine whether such ownership change has
occurred.
(10) LEASES
The Company is obligated under capital leases for equipment which expire at
various dates during the next five years. At September 30, 1995 and 1994,
the gross amounts of equipment and related accumulated amortization
recorded under capital leases were as follows:
1995 1994
---- ----
Equipment $ 852,654 -
Less accumulated amortization 66,890 -
---------- ---------
$ 785,764 -
========== =========
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $749,492, $170,200 and $47,050 for the year end
September 30, 1995, the thirteen month period ended September 30, 1994 and
the year ended August 31, 1993, respectively.
(Continued)
F-27
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of September 30, 1995 are:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------ ------
<S> <C> <C>
Year ending September 30:
1996 $ 312,259 $ 716,790
1997 312,259 625,250
1998 308,834 631,733
1999 115,023 526,071
2000 15,048 123,520
------------ ------------
Total minimum lease payments 1,063,423 $ 2,623,364
============
Less amount representing interest (at
rates ranging from 8.9% to 11.0%) 182,169
------------
Minimum lease payments 881,254
Current installments of obligations under
capital leases 223,242
------------
Obligations under capital leases,
excluding current installments $ 658,012
============
</TABLE>
Under the terms of a noncancelable sublease, the Company will receive
$47,400 over the next two years.
(11) COMMITMENTS AND CONTINGENCIES
(a) PENSION AND PROFIT SHARING PLANS
NACT has a deferred contribution with an employer matching pension plan,
a salary reduction profit sharing plan and an additional profit sharing
plan covering all employees over 21 years of age who have completed one
year of employment. All contributions made to the deferred contribution
pension and profit sharing plans through December 31, 1986 vest 100% with
plan participants. Thereafter, contributions vest to plan participants as
follows: (i) plan participant contributions to the deferred contribution
plan vest 100% immediately with employer matching contributions vesting
100% after one year, and (ii) contributions to the salary reduction
profit sharing plan vest to plan participants ratably over a period of
seven years.
(Continued)
F-28
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Employer matching contributions to the deferred contribution pension plan
are 50% of an employee's contribution to a maximum of 5% of the qualified
employees' annual compensation.
In addition to the two qualified plans, NACT also shares profits based on
its previous highest retained earnings balance determined in accordance
with generally accepted accounting principles in the United States. 10%
of the increase is divided among employees based on length of employment
and salary level. Full-time employees are eligible after one full year of
employment.
During the year ended September 30, 1995, the Company adopted a defined
contribution 401(k) plan (the Plan). Employees are eligible to
participate in the Plan upon commencement of service. Participants may
defer up to 15% of eligible compensation. Currently, the Company does not
provide matching contributions for the Plan.
Employer contributions to all Plans were $223,346, $138,873 and $14,834
for the year ended September 30, 1995, the thirteen months ended
September 30, 1994 and the year ended August 31, 1993, respectively.
(b) LONG DISTANCE CARRIERS
NACT has entered into a two and a three-year contract with two different
long distance carriers for carrying its international and domestic long
distance traffic, respectively, related to NACT's service bureau
business. The contract with NACT's international carrier commits NACT to
a $50,000 per month payment with a six-month "ramp up" period. The
contract with NACT's domestic carrier commits NACT to a $200,000 per
month payment with a twelve-month "ramp up" period. Amounts will be
recorded when determinable.
GST Net has entered into a three year contract with a long distance
carrier for carrying its traffic and its 800 and private line services
which require a minimum service fee on a monthly basis. For long distance
carrier service, GST Net is committed to minimum revenues of $295,000 per
month. For 800 services, GST Net is committed to minimum revenues of
$180,000 per month. For private line services, GST Net is committed to
minimum revenues of $2,100,000 per six-month period. GST Net must pay the
full shortfall for long distance carrier services and 800 services and
one-half of the shortfall for private line services.
(Continued)
F-29
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(c) LEGAL PROCEEDINGS
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") filed a patent infringement suit against NACT alleging that
telephone systems manufactured and sold by NACT incorporate prepaid
calling features which infringe upon a patent issued to Aerotel in
November 1987. The complaint further alleges defamation and unfair
competition by NACT and seeks various damages. NACT has filed an Answer
and Counterclaim denying patent infringement, committing defamation or
unfair competition and seeks judgment that the Aerotel patent is invalid
and that Aerotel has misused its patent in violation of antitrust laws.
NACT's patent counsel believes that NACT has valid defenses to the
Aerotel claims.
(d) DEFERRED COMPENSATION
In September, 1995, the Company signed an amended employment agreement
with the Chief Executive Officer of NACT providing for guaranteed,
irrevocable and unconditional payment of consulting fees of $6,000 per
month for a period of 24 months beginning October 1, 1995.
(12) SUBSEQUENT EVENTS
(a) ACQUISITION OF MINORITY INTEREST IN GST TELECOM
Effective October 20, 1995, the Company acquired the remaining 20% of GST
Telecom from Pacwest for consideration of up to a maximum of 1,000,000
common shares (valued at $10.00 per share) based upon the fair market
value of a 20% interest in GST Telecom, to be determined by an
independent appraisal, as of May 31, 1997 (which date could be
accelerated, or postponed to May 31, 1998, under certain circumstances).
Currently, 1,000,000 common shares are held in escrow pending such
valuation. In addition, the parties agreed that the Company has fulfilled
all of its obligations relating to the funding of GST Telecom and its
subsidiaries.
(b) ISSUANCE OF DEBT AND CONVERTIBLE DEBT SECURITIES
On December 19, 1995, the Company issued approximately $180 million in
39,056 Units (the Units) each consisting of eight 13.875% Senior Discount
Notes (the senior notes) and one 13.875% Convertible Senior Subordinated
Discount Note (the convertible notes) maturing on December 15, 2005. The
Units were sold at a substantial discount and there will be no accrual of
interest prior to December 15, 2000 or payment of interest until June 15,
2001. The Units accrete to a total principal amount of approximately
$351.5 million by December 15, 2001. The senior notes will rank in right
of payment with all unsubordinated indebtedness of the Company while the
convertible notes will be junior to all senior Company debt.
(Continued)
F-30
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Each of the convertible notes is convertible at the option of the holder
into common shares any time after December 15, 1996. The number of shares
to be issued upon conversion is based on an accreted value on the
conversion date divided by $7.536. In addition, after December 15, 1996,
all of the convertible notes may be automatically converted to common
shares if the Company's common shares sustain certain market value levels
for 30 consecutive trading days.
(c) BRIDGE LOAN
On November 20, 1995, Quest Capital Corporation (Quest) loaned the
Company $2 million for working capital needs. The loan bears interest at
12% and is repayable on the earlier of February 15, 1996 or the
completion of the offering discussed in (b). Pursuant to the terms of the
agreement, the Company is obligated to issue 33,760 common shares to
Quest.
(13) RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
IN THE UNITED STATES AND IN CANADA
These financial statements have been prepared by management in accordance
with generally accepted accounting principles in the United States (U.S.
GAAP). Except for the earnings/loss per share calculations and deferred
income taxes as noted below, these financial statements also conform, in
all material respects, with those accounting principles that are generally
accepted in Canada (Canadian GAAP).
For U.S. GAAP purposes, the 750,000 escrow shares disclosed in note 9 are
considered contingent shares and are not included in the loss per share
calculations. For U.S. GAAP purposes, when these shares are released from
escrow, to the extent their fair market value exceeds their issuance price,
compensation expense will be recognized by the Company. The loss per share
determined accordance with accounting principles generally accepted in
Canada is $(0.78), $(0.33) and $(0.18) for the year ended September 30,
1995, the thirteen month period ended September 30, 1994 and the year ended
August 31, 1993.
For U.S. GAAP purposes, deferred tax assets are recognized if realization
of the future benefit is more likely than not. Canadian GAAP only allows
the recognition of deferred tax assets if the amounts offset future taxable
amounts that are virtually certain.
For U.S. GAAP purposes, purchased technology and software development costs
are amortized into "Cost of Goods" sold. Canadian GAAP allows these costs
to be amortized to "Depreciation and Amortization" in the accompanying
statements of operations.
For U.S. GAAP purposes, the Company's marketable securities are classified
as available for sale under Statement of Financial Accounting Standards No.
115. Pursuant to the statement, unrealized holding gains, which were not
material for the fiscal year ending September 30, 1995, are excluded from
earnings and are reported as a separate component of stockholder's equity
until realized.
(Continued)
F-31
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
The Company changed its fiscal year-end to September 30 effective in 1994.
Accordingly, amounts reported in the consolidated financial statements are
for the thirteen-month period ended September 30, 1994. Selected financial
information as at and for the year ended August 31, 1994 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Selected balance sheet information:
Current assets $ 12,688,400
Non-current assets 12,584,372
----------
$ 25,272,772
==========
Current liabilities 1,425,102
Deferred income taxes 30,260
Non-controlling interest in subsidiaries 3,129,929
Shareholders' equity 25,007,622
Deficit (4,320,141)
----------
$ 25,272,772
==========
Selected information from statement of operations and deficit:
Sales 5,253,073
Cost of goods sold/service 1,761,709
---------
3,491,364
Operating expenses 3,895,752
---------
Loss from operations before depreciation
and amortization 404,388
Depreciation and amortization 490,096
---------
Loss from operations 894,484
Other expenses 1,681,241
---------
Loss before non-controlling interest
and income tax 2,575,725
Income tax expense 469,968
---------
Loss before non-controlling interest 3,045,693
Non-controlling interest in income of
subsidiaries 125,808
---------
Loss for the year 3,171,501
Deficit, beginning of year 1,148,640
---------
Deficit, end of year $ 4,320,141
=========
Selected information from statement of changes in financial position:
Operations:
Loss for the year (3,171,501)
Items not involving cash 2,420,204
Changes in non-cash operating working capital (153,944)
---------
Cash used in operations (905,241)
Financing 14,039,933
Investing (12,846,066)
----------
Increase in cash and cash equivalents 288,626
Cash and cash equivalents, beginning of year 4,745,610
---------
Cash and cash equivalents, end of year $ 5,034,236
=========
</TABLE>
(Continued)
F-32
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(14) INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
"Net cash provided (used) by operating activities" includes cash payments
for interest of $363,807, $23,998 and $-0- and cash payments for taxes of
$263,735, $252,821, and $-0- for the year ended September 30, 1995, the
thirteen month period ended September 30, 1994 and the year ended August
31, 1993, repetitively.
NON-CASH INVESTING AND FINANCING ACTIVITIES WHICH AFFECT THE
CONSOLIDATED STATEMENTS OF CASH FLOWS
Effective May 1, 1995, the Company acquired a 100% interest in ITG. See
note 4 for a discussion of the assets and liabilities acquired.
On January 5, 1995, the Company acquired the remaining 20% of National
Applied Computer Technologies, Inc. (see note 2). As a result of this
transaction, the Company recorded $2,137,244 in other assets, $521,225 in
liabilities, $747,026 in common stock, $1,494,051 in a commitment to issue
common shares and a reduction of $885,669 to its non-controlling interest
in subsidiaries account.
Effective June 1, 1995, the Company acquired an additional 20% of GST
Telecom (see note 3). The Company recorded $5,000,000 in common stock,
$3,226,342 in other assets, and a reduction of $1,773,658 to its
non-controlling interest in subsidiaries account related to this
transaction.
As a result of capital contributions made to GST Telecom, Inc. throughout
the year ending September 30, 1995, the Company recorded $4,456,817 in
other assets and an increase of $4,456,817 to its non-controlling interest
in subsidiaries account.
During the year ending September 30, 1995, the Company recorded a $200,000
reduction in notes receivable and a $200,000 increase to deferred financing
costs due to the transaction described in note 5(b).
(Continued)
F-33
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(15) RELATED PARTY TRANSACTIONS
The operations of the Company's Hawaiian microwave network require the use
of radio licenses from the FCC. Such licenses are owned by PNI, a company
controlled by the Company's Chief Executive Officer. Under agreements
between the Company and PNI, (1) the Company pays a monthly fee to PNI to
utilize PNI's licenses for its communications traffic and (2) PNI pays an
equal monthly fee to the Company for the right to utilize the Company's
facilities for other communications traffic using up to 10% of PNI's
license capacity.
A bridge loan that was obtained and paid back by the Company during 1995
was guaranteed by five executive officers of the Company. In consideration
for the guarantee, such officers were issued 25,000 shares of common stock
of the Company.
(16) GST USA
In August 1994, the Company formed a wholly-owned subsidiary, GST USA, and
transferred all U.S. assets, liabilities and operations into GST USA.
Selected financial information as at and for the year ended September 30,
1995 is as follows:
Selected balance sheet information:
Current assets $ 11,414,372
Non-current assets 60,006,067
--------------
$ 71,420,839
==============
Current liabilities $ 13,711,809
Non-current liabilities 19,645,505
Minority interest 3,279,188
Share capital 44,470,992
Accumulated deficit (9,686,655)
--------------
$ 71,420,839
==============
(Continued)
F-34
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In U.S. Dollars)
<TABLE>
<CAPTION>
<S> <C>
Selected information from statement of operations and deficit:
Revenues $ 18,681,460
Cost of goods sold/services (15,294,289)
----------
3,387,171
Operating expenses (13,648,750)
----------
Loss from operations (10,261,579)
Other expenses (1,384,003)
----------
Loss before minority interest
in loss of subsidiaries and income tax (11,645,582)
Income tax expense (166,015)
----------
Loss before minority interest in loss
of subsidiaries (11,811,597)
Minority interest in loss of subsidiaries 2,364,431
-----------
Net loss (9,447,166)
Deficit, beginning of year (239,489)
----------
Deficit, end of year $ (9,686,655)
===========
Selected information from statement of cash flows:
Operations:
Loss for the year $ (9,447,166)
Items not involving cash 1,589,707
Changes in non-cash operating working capital 944,462
-----------
Cash used in operations (6,912,997)
Investing (34,047,194)
Financing 43,544,079
----------
Increase in cash and cash equivalents 2,583,888
Cash and cash equivalents, beginning of year 1,309,788
-----------
Cash and cash equivalents, end of year $ 3,893,676
===========
</TABLE>
F-35
<PAGE>
KPMG
KPMG Peat Marwick Thorne 3000-10104-103 Avenue Telephone (403) 429-7300
Chartered Accountants Edmonton Alberta T5J 3VB Telefax (403) 429-7379
AUDITORS' REPORT
To the Participants of IntelCom-Greenstar Joint Venture
We have audited the balance sheet of IntelCom-Greenstar Joint Venture as at
September 30, 1994 and the statements of operations, participants' equity and
changes in financial position for the year then ended. These financial
statements are the responsibility of the management of the Joint Venture. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Joint Venture as at September 30, 1994
and the results of its operations and the changes in its financial position for
the year then ended in accordance with generally accepted accounting principles
in Canada.
/S/ KPMG PEAT MARWICK THORNE
Chartered Accountants
Edmonton, Canada
November 11, 1994
Member Firm of
Klynveld Peat Marwick Goerdeler
F-36
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Balance Sheet
(In U.S. Dollars)
September 30, 1994, with comparative figures for 1993
<TABLE>
<CAPTION>
===============================================================================================================
1994 1993
- ---------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash $ 1,954,406 $ 3,895,937
Revenue earned, but unbilled 73,314 -
Prepaid expenses 16,561 91,910
- ---------------------------------------------------------------------------------------------------------------
2,044,281 3,987,847
Equipment (note 2) 3,618,161 1,109,522
Less accumulated depreciation (130,907) -
- ---------------------------------------------------------------------------------------------------------------
3,487,254 1,109,522
Other:
Construction in progress, at cost 98,213 -
Deposits and franchise costs 14,477 -
- ---------------------------------------------------------------------------------------------------------------
$ 5,644,225 $ 5,097,369
===============================================================================================================
Liabilities and Participants' Equity
Current liabilities:
Accounts payable:
Trade $ 726,934 $ 387,258
Other IntelCom Group, Inc., non-interest
bearing and without fixed terms of
repayment 1,149,239 -
Accrued liabilities 42,100 35,133
Current portion of capital lease obligations (note 3) 190,925 177,874
- ---------------------------------------------------------------------------------------------------------------
2,109,198 600,265
Capital lease obligations, net of current portion (note 3) 211,747 378,361
- ---------------------------------------------------------------------------------------------------------------
2,320,945 978,626
Participants' equity:
Contributed capital 6,185,000 5,000,000
Accumulated deficit (2,861,720) (881,257)
- ---------------------------------------------------------------------------------------------------------------
3,323,280 4,118,743
- ---------------------------------------------------------------------------------------------------------------
$ 5,644,225 $ 5,097,369
===============================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Statement of Operations
(In U.S. Dollars)
Year ended September 30, 1994, with comparative figures for period from
September 29, 1992 to September 30, 1993
<TABLE>
<CAPTION>
===============================================================================================================
1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 111,398 $ -
Cost of sales 108,689 -
- ---------------------------------------------------------------------------------------------------------------
Gross margin 2,709 -
Expenses:
Management fee (note 4) 1,325,000 775,000
Selling, general and administrative (note 4) 513,698 106,257
Depreciation 130,907 -
Interest on capital lease obligations 55,792 -
- ---------------------------------------------------------------------------------------------------------------
2,025,397 881,257
Other income 42,225 -
- ---------------------------------------------------------------------------------------------------------------
Loss for the period $ (1,980,463) $ (881,257)
===============================================================================================================
Allocated to:
IntelCom Group, Inc. $ (990,231) $ (440,629)
Greenstar Telecommunications Inc. (990,232) (440,628)
- ---------------------------------------------------------------------------------------------------------------
$ (1,980,463) $ (881,257)
===============================================================================================================
Statement of Participants' Equity
(In U.S. Dollars)
Year ended September 30, 1994, with comparative figures for period from
September 29, 1992 to September 30, 1993
===============================================================================================================
IntelCom Greenstar
Group, Telecommunications
Inc. Inc. 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Balance, beginning
of period $ (440,629) $ 4,559,372 $ 4,118,743 $ -
Contributions 1,185,000 - 1,185,000 5,000,000
- ---------------------------------------------------------------------------------------------------------------
744,371 4,559,372 5,303,743 5,000,000
Loss for the period (990,231) (990,232) (1,980,463) (881,257)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of period $ (245,860) $ 3,569,140 $ 3,323,280 $ 4,118,743
===============================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Statement of Changes in Financial Position
(In U.S. Dollars)
Year ended September 30, 1994 with comparative figures for period from September
29, 1992 to September 30, 1993
<TABLE>
<CAPTION>
===============================================================================================================
1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Cash flows from operating activities:
Loss for the period $ (1,980,463) $ (881,257)
Depreciation 130,907 -
Adjustments to reconcile loss for the period to net cash used by operating
activities:
Increase in revenue earned, but unbilled (73,314) -
Decrease (increase) in prepaid expenses 75,349 (91,910)
Increase in accounts payable, trade 339,676 387,258
Increase in accrued liabilities 6,967 35,133
- ---------------------------------------------------------------------------------------------------------------
(1,500,878) (550,776)
Cash flows from investing activities:
Equipment purchases (2,508,639) (1,109,522)
Other assets (112,690) -
- ---------------------------------------------------------------------------------------------------------------
(2,621,329) (1,109,522)
Cash flows from financing activities:
Capital contributions 1,185,000 5,000,000
Proceeds of capital leases 69,980 556,235
Capital lease repayments (223,543) -
Accounts payable, IntelCom Group, Inc. 1,149,239 -
- ---------------------------------------------------------------------------------------------------------------
2,180,676 5,556,235
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (1,941,531) 3,895,937
Cash, beginning of period 3,895,937 -
- ---------------------------------------------------------------------------------------------------------------
Cash, end of period $ 1,954,406 $ 3,895,937
===============================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements
(In U.S. Dollars)
For the year ended September 30, 1994
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Organization and basis of financial statement presentation:
By agreement (the "Joint Venture agreement") dated October 9, 1992,
with effect commencing September 29, 1992, IntelCom Group, Inc.,
(formerly Intertel Communications Inc.) and Greenstar
Telecommunications Inc., (formerly Greenstar Resources Ltd.) (the
"participants") entered into a joint venture. The Joint Venture
agreement provides for the design, construction and operation in
various urban centres throughout the United States, of fibre optic
telecommunications transmission networks (the "networks"). The networks
will provide various telecommunications services including alternate
access services and other telecommunication services pursuant to the
rules and regulations of the Federal Communications Commission of the
United States, state public utility commissions, and other regulatory
and legislative bodies having appropriate jurisdiction (the
"services").
The Joint Venture participants were each to own a fifty percent (50%)
interest, through a nominee corporation, in each network subject to
certain conditions, as defined, the most significant of which was the
provision of financing by specific dates, as defined. The Joint Venture
was to carry out the design and construction of the network and the
provision of the services.
By agreement (the "initial network agreement") dated January 28, 1993,
the Participants established the first network in Phoenix, Arizona (the
"initial network") in accordance with the terms of the Joint Venture
agreement and the initial network agreement. The initial network
operates on behalf of the Participants through Phoenix Fiber Access,
Inc. (the "nominee Company") with the Joint Venture participants owning
one hundred percent (100%) of the issued shares of the nominee Company.
The initial network agreement stipulates that Greenstar
Telecommunications Inc. ("Greenstar") as consideration for its fifty
percent (50%) interest in the initial network provide $5,000,000 by the
Greenstar Deposit Date, a defined term. Greenstar contributed the
$5,000,000 and accordingly earned its equity interest in the Joint
Venture.
IntelCom Group, Inc. ("IntelCom") and Greenstar have agreed that the
budgeted costs of the initial network shall not exceed $15,000,000.
IntelCom, to earn its fifty percent (50%) interest, shall provide
equity or debt financing in an amount up to $10,000,000 by the IntelCom
Financing Date, a defined term. The IntelCom Financing Date is January
24, 1994 or as mutually amended by the participants. Effective January
21, 1994, IntelCom advised the Joint Venture, and more specifically,
Greenstar, that the required financing pursuant to the agreement had
been arranged. IntelCom will provide financing, by cash calls or third
party financing, up to $10,000,000, as required by the Joint Venture.
Accordingly, IntelCom has earned its interest in the Joint Venture.
F-40
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES, continued:
(a) Organization and basis of financial statement presentation, continued:
By amending agreement dated July 11, 1994, the Participants' agreed
that the Joint Venture will relate solely to the design, construction
and operation of the Phoenix Network previously referred to as "the
initial network". In addition, IntelCom agreed to contribute $1,185,000
of additional capital to the Joint Venture.
The financial statements of the Joint Venture include the assets,
liabilities, revenues and expenses of the one hundred percent (100%)
interest held by the Company as nominee. All significant transactions
between the Company and the Joint Venture have been eliminated. The
Joint Venture commenced operations during the first quarter of the
fiscal year ended September 30, 1994.
(b) Equipment:
Equipment is recorded at cost and primarily consists of fiber-optic
cable and related equipment used for the transmission of electronic
signals to end users. Equipment under capital leases is initially
recorded at the present value of minimum lease payments at the
inception of the lease.
Depreciation is provided on the straight-line basis using the following
annual rates:
================================================================================
Fiber-optic transmission system 15 - 30 years
Machinery and equipment 7 years
Office furniture and fixtures 5 - 7 years
================================================================================
Since initial operations did not commence until the first quarter of
the fiscal year ended September 30, 1994, depreciation was not provided
in 1993.
(c) Income taxes:
No provision has been recorded for income taxes, as any taxable income
or loss is reported in the tax returns of the Participants.
F-41
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES, continued:
(d) Revenue recognition:
The Joint Venture provides access services under long-term contracts.
The revenue related to the non-cancelable portion of the contract,
which is a minimum of one year on a two year or longer contract, is
recognized at the inception of the contract and upon activation of
service to the subscriber to the extent of direct installation and
selling expenses incurred in obtaining the subscriber. Revenue
recognized in excess of normal monthly billings during this period is
limited to an amount which does not exceed such installation and
selling expenses and is recorded as revenue earned, but unbilled in the
accompanying financial statements. The balance of the revenue under the
contract is recognized ratably over the remaining non-cancelable
portion of the contract.
2. EQUIPMENT:
<TABLE>
<CAPTION>
==============================================================================================================
1994 1993
- --------------------------------------------------------------------------------------------------------------
Accumulated Net book Net book
Cost depreciation value value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiber-optic transmission
system $ 2,268,662 $ 38,531 $ 2,230,131 $ 269,215
Machinery and
equipment 680,096 13,533 666,563 273,976
Office furniture and
fixtures 43,188 3,599 39,589 10,096
Property under capital leases:
Machinery and equipment 626,215 75,244 550,971 556,235
- --------------------------------------------------------------------------------------------------------------
$ 3,618,161 $ 130,907 $ 3,487,254 $ 1,109,522
==============================================================================================================
</TABLE>
F-42
<PAGE>
3. CAPITAL LEASE OBLIGATION:
At September 30, 1994, the Joint Venture is obligated under a capital lease
for equipment. The future required payments under the capital lease
obligation subsequent to September 30, 1994 are as follows:
===============================================================================
Year ending September 30
- -------------------------------------------------------------------------------
1995 $ 217,402
1996 177,416
1997 18,500
1998 18,500
1999 16,958
- -------------------------------------------------------------------------------
448,776
Less portion representing interest (at rates ranging
from 8.2% to 11.6%) (46,104)
- --------------------------------------------------------------------------------
402,672
Less current portion (190,925)
- --------------------------------------------------------------------------------
$ 211,747
================================================================================
4. MANAGEMENT FEE:
For the period ended September 30, 1993, the Joint Venture paid a
management fee to IntelCom in exchange for assistance in the design,
development and construction of the fiber-optic transmission network owned
by Phoenix Fiber Access, Inc. At September 30, 1993, the amounts to be paid
under the agreement had not been finalized between the Participants. By
agreement dated July 11, 1994, the Participants agreed on a management fee
of $100,000 (basic fee) for each month for the 21 month period from
inception of the Joint Venture to September 30, 1994. The management fee is
for the provision of personnel, services and facilities and other direct
and indirect expenses related to the Joint Venture.
Commencing October 1, 1994, the Joint Venture will pay $25,000 each month
for the remaining term of the Joint Venture. Details of the management fees
for each of the periods ended September 30 are as follows:
===============================================================================
1994 1993
- -------------------------------------------------------------------------------
Basic management fee $ 1,325,000 $ 775,000
Selling, general and administrative
Personnel 184,302 43,446
Other - 46,148
- -------------------------------------------------------------------------------
$ 1,509,302 $ 864,594
===============================================================================
F-43
<PAGE>
5. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
There are no material differences between Canadian generally accepted
accounting principles relating to the determination of net loss with
generally accepted accounting principles in the United States.
F-44
<PAGE>
KPMG
KPMG Peat Marwick Thorne 3000-10104-103 Avenue Telephone (403) 429-7300
Chartered Accountants Edmonton Alberta T5J 3VB Telefax (403) 429-7379
AUDITORS' REPORT
To the Ventures of IntelCom-Greenstar Joint Venture
We have audited the balance sheet of IntelCom-Greenstar Joint Venture as at
September 30, 1993 and the statements of operations and accumulated deficit and
changes in financial position from the date of inception on September 29, 1992
to September 30, 1993. These financial statements are the responsibility of the
management of the Joint Venture. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Joint Venture as at September 30, 1993
and the results of its operations and the changes in its financial position from
the date of inception on September 29, 1992 to September 30, 1993 in accordance
with generally accepted accounting principles in Canada.
/S/ KPMG PEAT MARWICK THORNE
Chartered Accountants
Edmonton, Canada
January 12, 1994
January 21, 1994 as to note 4
Member Firm of
Klynveld Peat Marwick Goerdeler
F-45
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Balance Sheet
(In U.S. Dollars)
September 30, 1993
==============================================================================
Assets
Current assets:
Cash $ 3,895,937
Prepaid expenses 91,910
- ------------------------------------------------------------------------------
3,987,847
Equipment:
Fiber-optic transmission system 562,331
Machinery and equipment 537,095
Office furniture and fixtures 10,096
- ------------------------------------------------------------------------------
1,109,522
- ------------------------------------------------------------------------------
$ 5,097,369
==============================================================================
Liabilities and Venturers' Equity
Current Liabilities:
Accounts payable $ 387,258
Accrued liabilities 35,133
Current portion of capital lease obligation (note 2) 177,874
- ------------------------------------------------------------------------------
600,265
Capital lease obligation, less current portion (note 2) 378,361
- ------------------------------------------------------------------------------
978,626
Venturers' equity:
Contributed capital 5,000,000
Accumulated deficit (881,257)
- ------------------------------------------------------------------------------
4,118,743
Subsequent event (note 4)
- ------------------------------------------------------------------------------
$ 5,097,369
==============================================================================
See accompanying notes to financial statements.
F-46
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Statement of Operations and Accumulated Deficit
(In U.S. Dollars)
From the date of inception on September 29, 1992 to September 30, 1993
==============================================================================
Expenses:
Management fee (note 3) $ 775,000
Selling, general and administrative expense 106,257
- ------------------------------------------------------------------------------
Net loss for the period, being deficit, end of period $ (881,257)
==============================================================================
See accompanying notes to financial statements.
F-47
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Statement of Changes in Financial Position
(In U.S. Dollars)
From the date of inception on September 29, 1992 to September 30, 1993
==============================================================================
Cash flows from operating activities:
Operations:
Net loss for the period $ (881,257)
Adjustments to reconcile net loss for the period to
net cash used by operating activities:
Increase in prepaid expenses (91,910)
Increase in accounts payable 387,258
Increase in accrued liabilities 35,133
- ------------------------------------------------------------------------------
Net cash used by operating activities (550,776)
Cash flows from investing activity - acquisition of equipment (1,109,522)
Cash flows from financing activity - capital contribution 5,000,000
- capital lease 556,235
- ------------------------------------------------------------------------------
Net increase in cash 3,895,937
Cash, beginning of period -
- ------------------------------------------------------------------------------
Cash, end of period $ 3,895,937
==============================================================================
See accompanying notes to financial statements.
F-48
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements
(In U.S. Dollars)
For the period ended September 30, 1993
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Organization and basis of financial statement presentation:
By agreement (the "Joint Venture agreement") dated October 9, 1992,
with effect commencing September 29, 1992, IntelCom Group Inc.,
(formerly Intertel Communications Inc.) and Greenstar
Telecommunications Inc., (formerly Greenstar Resources Ltd.) (the
"participants") entered into a joint venture. The Joint Venture
agreement provides for the design, construction and operation in
various urban centres throughout the United States, of fibre optic
telecommunications transmission networks (the "networks"). The networks
will provide various telecommunications services including alternate
access services and other telecommunication services pursuant to the
rules and regulations of the Federal Communications Commission of the
United States, state public utility commissions, and other regulatory
and legislative bodies having appropriate jurisdiction (the
"services").
The Joint Venture will form a separate corporation to carry out the
design and construction of the network and the provision of the
services. Each participant will own a fifty percent (50%) interest in
each network subject to certain conditions, as defined, the most
significant of which is the provision of financing by specific dates,
as defined.
By agreement (the "initial network agreement") dated January 28, 1993,
the participants established the first network in Phoenix, Arizona (the
"initial network") in accordance with the terms of the Joint Venture
agreement and the initial network agreement. The initial network
operates as Phoenix Fiber Access, Inc. (the "Company") with the Joint
Venture owning one hundred percent (100%) of the issued shares of the
Company.
The initial network agreement stipulates that Greenstar
Telecommunications Inc. ("Greenstar") as consideration for its fifty
percent (50%) interest in the initial network provide $5,000,000 by the
Greenstar Deposit Date, a defined term. Greenstar contributed the
$5,000,000 and accordingly earned its equity interest in the Joint
Venture.
IntelCom Group Inc. ("IntelCom") and Greenstar have agreed that the
budgeted costs of the initial network shall not exceed $15,000,000.
IntelCom, to earn its fifty percent (50%) interest, shall provide
equity or debt financing in an amount up to $10,000,000 by the IntelCom
Financing Date, a defined term. The IntelCom Financing Date is January
24, 1994 or as mutually amended by the participants. Accordingly, as at
September 30, 1993, IntelCom had not earned its interest in the Joint
Venture. Should IntelCom fail to provide the debt or equity financing
by the IntelCom Financing date, and in absence of the participants
mutually agreeing to extend the date, then IntelCom's right to its
interest may be forfeited to Greenstar.
F-49
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements
(In U.S. Dollars)
For the period ended September 30, 1993
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES, continued:
(a) Organization and basis of financial statement presentation, continued:
The Company has not commenced the provision of the services and as at
September 30, 1993 is in the development stage.
The financial statements of the Joint Venture include the accounts of
its one hundred percent (100%) interest in the Company. All significant
transactions between the Company and the Joint Venture have been
eliminated.
(b) Equipment:
Equipment is recorded at cost and primarily consists of fiber-optic
cable and related equipment used for the transmission of electronic
signals to the end users. As none of the equipment had been placed in
service, no depreciation was recorded for the period through September
30, 1993.
(c) Income taxes:
No provision has been recorded for income taxes, as any taxable income
or loss is reported in the tax returns of the Venturers rather than the
Joint Venture.
2. CAPITAL LEASE OBLIGATION:
At September 30, 1993, the Joint Venture is obligated under a capital lease
for equipment. The future required payments under the capital lease
obligation subsequent to September 30, 1993 are as follows:
==============================================================================
Year ending September 30
- ------------------------------------------------------------------------------
1994 $ 216,984
1995 216,984
1996 216,984
- ------------------------------------------------------------------------------
650,952
Less portion representing interest (94,717)
- ------------------------------------------------------------------------------
556,235
Less current portion (177,874)
- ------------------------------------------------------------------------------
$ 378,361
==============================================================================
F-50
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements
(In U.S. Dollars)
For the period ended September 30, 1993
- --------------------------------------------------------------------------------
3. MANAGEMENT FEE
The Joint Venture pays a management fee to IntelCom in exchange for
assistance in the design, development, construction and operation of the
Fiber-optic transmission network owned by Phoenix Fiber Access, Inc. The
amounts paid under this arrangement have not been finalized between the
participants. A reduction of the amount, if any, has not been determined.
4. SUBSEQUENT EVENT:
Effective January 21, 1994, IntelCom advised the Joint Venture, and more
specifically Greenstar, that the required financing pursuant to the
agreement had been arranged. IntelCom will provide financing by cash calls
up to $10,000,000, as required by the Joint Venture.
5. RECONCILIATION BETWEEN CANADIAN AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
There are no material differences between Canadian generally accepted
accounting principles relating to the determination of net loss with
generally accepted accounting principles in the United States.
F-51
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Balance Sheet
(In U.S. Dollars)
Unaudited
September 30, 1995, with comparative figures for 1994
================================================================================
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,637,119 $ 1,954,406
Accounts receivable, less allowance of $9,220 204,930 -
Revenue earned, but unbilled 164,229 73,314
Prepaid expenses - 16,561
- -------------------------------------------------------------------------------------------------------------------
2,006,278 2,044,281
Capital assets (note 2) 5,927,394 3,618,161
Less accumulated depreciation (411,328) (130,907)
- -------------------------------------------------------------------------------------------------------------------
5,516,066 3,487,254
Other:
Construction in progress, at cost 2,734,994 98,213
Deposits and franchise costs 14,790 14,477
- -------------------------------------------------------------------------------------------------------------------
$ 10,272,128 $ 5,644,225
===================================================================================================================
LIABILITIES AND PARTICIPANTS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 442,337 $ 726,934
Other IntelCom Group, Inc., non-interest
bearing and without fixed terms of
repayment 446,322 1,149,239
Accrued liabilities 258,286 42,100
Current portion of capital lease obligations (note 3) 306,122 190,925
- -------------------------------------------------------------------------------------------------------------------
1,453,067 2,109,198
Capital lease obligations (note 3) 96,237 211,747
Note payable (note 4) 6,882,285 -
- -------------------------------------------------------------------------------------------------------------------
8,431,589 2,320,945
Participants' equity:
Contributed capital 6,185,000 6,185,000
Accumulated deficit (4,344,461) (2,861,720)
- -------------------------------------------------------------------------------------------------------------------
1,840,539 3,323,280
- -------------------------------------------------------------------------------------------------------------------
$ 10,272,128 $ 5,644,225
===================================================================================================================
See accompanying notes to financial statements.
</TABLE>
F-52
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Statement of Operations
(In U.S. Dollars)
Unaudited
Year ended September 30, 1995, with comparative figures for 1994
================================================================================
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 679,289 $ 111,398
Cost of sales 611,318 108,689
- -------------------------------------------------------------------------------------------------------------------
Gross margin 67,971 2,709
Expenses:
Management fee (note 5) 300,000 1,325,000
Selling, general and administrative 560,764 329,396
Depreciation 280,474 130,907
Interest and finance charges:
Capital leases 197,693 47,420
Note payable 142,167 -
Other 27,500 8,372
- -------------------------------------------------------------------------------------------------------------------
1,508,598 1,841,095
Other expense net (note 5) 42,114 142,077
- -------------------------------------------------------------------------------------------------------------------
Loss for the year $ (1,482,741) $ (1,980,463)
===================================================================================================================
Allocated to:
IntelCom Group, Inc. $ (741,371) $ (990,231)
GST Telecommunications, Inc. (741,370) (990,232)
- -------------------------------------------------------------------------------------------------------------------
$ (1,482,741) $ (1,980,463)
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Statement of Participants' Equity
(In U.S. Dollars)
Unaudited
Year ended September 30, 1995, with comparative figures for 1994
================================================================================
IntelCom GST
Group, Telecommunications,
Inc. Inc. 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of year $ (245,860) $ 3,569,140 $ 3,323,280 $ 4,118,743
Contributions - - - 1,185,000
- -------------------------------------------------------------------------------------------------------------------
(245,860) 3,569,140 3,323,280 5,303,743
Loss for the year (741,371) (741,370) (1,482,741) (1,980,463)
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (987,231) $ 2,827,770 $ 1,840,539 $ 3,323,280
===================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Statement of Changes in Financial Position
(In U.S. Dollars)
Unaudited
Year ended September 30, 1995, with comparative figures for 1994
================================================================================
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Cash flows from operating activities:
Loss for the year $ (1,482,741) $ (1,980,463)
Depreciation 280,474 130,907
Adjustments to reconcile loss for the year to net cash used by operating
activities:
Accounts receivable (204,930) -
Revenue earned, but unbilled (90,915) (73,314)
Prepaid expenses 16,561 75,349
Accounts payable, trade (284,597) 339,676
Accrued liabilities 216,186 6,967
- -------------------------------------------------------------------------------------------------------------------
(1,549,962) (1,500,878)
Cash flows from investing activities:
Equipment purchases (4,946,067) (2,508,639)
Other assets (313) (112,690)
- -------------------------------------------------------------------------------------------------------------------
(4,946,380) (2,621,329)
Cash flows from financing activities:
Capital contributions - 1,185,000
Proceeds of capital leases 75,051 69,980
Capital lease repayments (75,364) (223,543)
Intelcom Group Inc.:
Account payable (702,917) 1,149,239
Note payable 6,882,285 -
- -------------------------------------------------------------------------------------------------------------------
6,179,055 2,180,676
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (317,287) (1,941,531)
Cash, beginning of year 1,954,406 3,895,937
- -------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 1,637,119 $ 1,954,406
===================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements
(In U.S. Dollars)
Unaudited
For the year ended September 30, 1995
================================================================================
1. Significant accounting policies:
(a) Organization and basis of financial statement presentation:
By agreement (the "Joint Venture agreement") dated October 9, 1992,
with effect commencing September 29, 1992, IntelCom Group, Inc.,
(formerly Intertel Communications Inc.) and GST Telecommunications
Inc., (formerly Greenstar Resources Ltd. and Greenstar
Telecommunications Inc.) (the "participants") entered into a joint
venture. The Joint Venture agreement provides for the design,
construction and operation in various urban centres throughout the
United States, of fibre optic telecommunications transmission networks
(the "networks"). The networks will provide various telecommunications
services including alternate access services and other
telecommunication services pursuant to the rules and regulations of the
Federal Communications Commission of the United States, state public
utility commissions, and other regulatory and legislative bodies having
appropriate jurisdiction (the "services").
The Joint Venture participants were each to own a fifty percent (50%)
interest, through a nominee corporation, in each network subject to
certain conditions, as defined, the most significant of which was the
provision of financing by specific dates, as defined. The Joint Venture
was to carry out the design and construction of the network and the
provision of the services.
By agreement (the "initial network agreement") dated January 28, 1993,
the Participants established the first network in Phoenix, Arizona (the
"initial network") in accordance with the terms of the Joint Venture
agreement and the initial network agreement. The initial network
operates on behalf of the Participants through Phoenix Fiber Access,
Inc. (the "nominee Company") with the Joint Venture participants owning
one hundred percent (100%) of the issued shares of the nominee Company.
The initial network agreement stipulates that Greenstar
Telecommunications Inc. ("Greenstar") as consideration for its fifty
percent (50%) interest in the initial network provide $5,000,000 by the
Greenstar Deposit Date, a defined term. Greenstar contributed the
$5,000,000 and accordingly earned its equity interest in the Joint
Venture.
IntelCom Group, Inc. ("IntelCom") and Greenstar have agreed that the
budgeted costs of the initial network shall not exceed $15,000,000.
IntelCom, to earn its fifty percent (50%) interest, shall provide
equity or debt financing in an amount up to $10,000,000 by the IntelCom
Financing Date, a defined term. The IntelCom Financing Date is January
24, 1994 or as mutually amended by the participants. Effective January
21, 1994, IntelCom advised the Joint Venture, and more specifically,
Greenstar, that the required financing pursuant to the agreement had
been arranged. IntelCom will provide financing, by cash calls or third
party financing, up to $10,000,000, as required by the Joint Venture.
Accordingly, IntelCom has earned its interest in the Joint Venture.
F-55
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements, continued
(In U.S. Dollars)
Unaudited
For the year ended September 30, 1995
================================================================================
1. Significant accounting policies, continued:
(a) Organization and basis of financial statement presentation, continued:
By amending agreement dated July 11, 1994, the Participants' agreed
that the Joint Venture will relate solely to the design, construction
and operation of the Phoenix Network previously referred to as "the
initial network". In addition, IntelCom agreed to contribute $1,185,000
of additional capital to the Joint Venture.
The financial statements of the Joint Venture include the assets,
liabilities, revenues and expenses of the one hundred percent (100%)
interest held by the Company as nominee. All significant transactions
between the Company and the Joint Venture have been eliminated. The
Joint Venture commenced operations during the first quarter of the
fiscal year ended September 30, 1994.
(b) Equipment:
Equipment is recorded at cost and primarily consists of fiber-optic
cable and related equipment used for the transmission of electronic
signals to end users. Equipment under capital leases is initially
recorded at the present value of minimum lease payments at the
inception of the lease.
Depreciation is provided on the straight-line basis using the following
annual rates:
======================================================================
Fiber-optic transmission system 15 - 30 years
Machinery and equipment 7 years
Office furniture and fixtures 5 - 7 years
Switch equipment 30 years
Fiber-optic equipment 15 years
======================================================================
(c) Income taxes:
No provision has been recorded for income taxes, as any taxable income
or loss is reported in the tax returns of the Participants.
F-56
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements, continued
(In U.S. Dollars)
Unaudited
For the year ended September 30, 1995
================================================================================
1. Significant accounting policies, continued:
(d) Revenue recognition:
The Joint Venture provides access services under long-term contracts.
The revenue related to the non-cancelable portion of the contract,
which is a minimum of one year on a two year or longer contract, is
recognized at the inception of the contract and upon activation of
service to the subscriber to the extent of direct installation and
selling expenses incurred in obtaining the subscriber. Revenue
recognized in excess of normal monthly billings during this period is
limited to an amount which does not exceed such installation and
selling expenses and is recorded as revenue earned, but unbilled in the
accompanying financial statements. The balance of the revenue under the
contract is recognized ratably over the remaining non-cancelable
portion of the contract.
2. Capital assets:
<TABLE>
<CAPTION>
===================================================================================================================
1995 1994
- -------------------------------------------------------------------------------------------------------------------
Accumulated Net book Net book
Cost depreciation value value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiber-optic transmission
system $ 3,246,723 $ 123,358 $ 3,123,365 $ 2,230,131
Machinery and
equipment 573,063 157,110 415,953 666,563
Office furniture and
fixtures 109,610 17,818 91,792 39,589
Switch equipment 259,712 784 258,928 -
Fiber-optic equipment 1,738,286 112,258 1,626,028 550,971
- -------------------------------------------------------------------------------------------------------------------
5,927,394 411,328 5,516,066 3,487,254
Construction in progress 2,734,994 - 2,734,994 98,213
- -------------------------------------------------------------------------------------------------------------------
$ 8,662,388 $ 411,328 $ 8,251,060 $ 3,585,467
===================================================================================================================
</TABLE>
Capital assets include equipment under capital leases at cost of $701,000
(1994 - $626,000).
F-57
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements, continued
(In U.S. Dollars)
Unaudited
For the year ended September 30, 1995
================================================================================
3. Capital lease obligation:
At September 30, 1995, the Joint Venture is obligated under a capital lease
for equipment. The future required payments under the capital lease
obligation subsequent to September 30, 1995 are as follows:
===========================================================================
Year ending September 30
---------------------------------------------------------------------------
1996 $ 362,679
1997 41,779
1998 39,737
1999 36,065
---------------------------------------------------------------------------
480,260
Less portion representing interest (at rates ranging
from 8.2% to 11.6%) 77,902
---------------------------------------------------------------------------
402,358
Less current portion 306,122
---------------------------------------------------------------------------
$ 96,236
===========================================================================
4. Note payable:
The note payable is non-interest bearing and without fixed terms of
repayment except for approximately $2.3 million that bears interest at 8%.
Since the note holder does not intend to demand payment within one year the
note has been classified as long-term.
F-58
<PAGE>
INTELCOM-GREENSTAR JOINT VENTURE
Notes to Financial Statements, continued
(In U.S. Dollars)
Unaudited
For the year ended September 30, 1995
================================================================================
5. Related party transactions:
By agreement dated July 11, 1994, the Participants agreed on a management
fee of $100,000 (basic fee) for each month for the 21 month period from
inception of the Joint Venture to September 30, 1995. The management fee is
for the provision of personnel, services and facilities and other direct
and indirect expenses related to the Joint Venture.
Commencing October 1, 1994, the Joint Venture will pay $25,000 each month
for the remaining term of the Joint Venture. Details of the management fees
for each of the periods ended September 30 are as follows:
===========================================================================
1995 1994
---------------------------------------------------------------------------
Basic management fee $ 300,000 $ 1,325,000
Selling, general and administrative:
Personnel 62,000 184,302
Other 142,167 -
---------------------------------------------------------------------------
$ 504,167 $ 1,509,302
===========================================================================
6. Reconciliation between Canadian and United States
Generally Accepted Accounting Principles
There are no material differences between Canadian generally accepted
accounting principles relating to the determination of net loss with
generally accepted accounting principles in the United States.
F-59
<PAGE>
GST TELECOMMUNICATIONS, INC.
------------------------------------
EXHIBITS
FILED WITH
THE ANNUAL REPORT
ON FORM 20-F
UNDER THE
SECURITIES EXCHANGE ACT OF 1934
<PAGE>
EXHIBIT INDEX
Exhibit
No. Page
------- -----
1.1 Bylaws of the Registrant, as amended to
date.
1.2 Amended and Restated Credit Agreement dated
as of April 26, 1995, by and between GST
Pacific Lightwave, Inc. and Tomen America
Inc.
1.3 Restated and Amended Shareholder Agreement,
effective as of June 21, 1994, restated and
amended as of June 1, 1995, by and among
the Registrant, GST USA, Inc., Pacwest
Network L.L.C., John Warta, Clifford V.
Sander and GST Telecom Inc.
2.1 Stock Purchase Agreement dated as of May 1,
1995, by and between GST Net, Inc. and
Stanley M. Nolte.
2.2 Placement Agreement dated December 14,
1995, by and among the Registrant, GST USA,
Inc., the Specified Subsidiaries named
therein and Morgan Stanley and Co.
Incorporated.
2.3 Senior Notes Indenture dated as of December
19, 1995, by and among GST USA, Inc., the Registrant
and United States Trust Registrant of New York.
2.4 Convertible Notes Indenture dated as of
December 19, 1995, by and among the
Registrant, GST USA, Inc. and United States
Trust Registrant of New York.
2.5 Senior Notes Registration Rights Agreement
dated December 19, 1995, by and among GST
USA, Inc., the Registrant, the Specified
Subsidiaries named therein and Morgan
Stanley & Co. Incorporated.
2.6 Convertible Notes Registration Rights Agreement
dated December 19, 1995, by and among GST USA, Inc.,
the Registrant, the Specified Subsidiaries named
therein and Morgan Stanley & Co. Incorporated.
*2.7 Consent of KPMG Peat Marwick LLP.
*2.8 Consent of KPMG Peat Marwick Thorne.
*2.9 Consent of KPMG Peat Marwick Thorne.
* Filed herewith.
<PAGE>
Exhibit 2.7
Independent Auditors' Consent
The Board of Directors
GST Telecommunications, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
33-94072, 33-95324, 33-97096 and 333-1538) on Forms S-8 and F-3 of GST
Telecommunications, Inc. 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, relating to the consolidated balance sheet of GST
Telecommunications, Inc. as of September 30, 1995, and the related consolidated
statements of operations and accumulated deficit, and cash flows for the year
ended September 30, 1995, which report appears in September 30, 1995 annual
report on Form 20-F of GST Telecommunications, Inc.
/S/ KPMG PEAT MARWICK LLP
Portland, Oregon
May 13, 1996
<PAGE>
Exhibit 2.8
KPMG
KPMG PEAT MARWICK THORNE Telephone (604) 691-3000
CHARTERED ACCOUNTANTS Telefax (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 the incorporation by reference in the registration statements on
Form F-3 and Form S8 (#33-95324, #33-97096, #333-1538 and #33-94072,
respectively) 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 August 31, 1993 and the related consolidated statements of operations
and deficit and changes in cash flows for the thirteen months ended September
30, 1994 and for the years ended August 31, 1993 and 1992, which report appears
in the September 30, 1995 annual report on Form 20-F of GST Telecommunications,
Inc.
/S/ KPMG PEAT MARWICK THORNE
Chartered Accountants
Vancouver, Canada
May 13, 1996
Member Firm of
Klynveld Peat Marwick Goerdeler
<PAGE>
Exhibit 2.9
KPMG
KPMG PEAT MARWICK THORNE Telephone (403) 429-7300
CHARTERED ACCOUNTANTS Telefax (403) 429-7379
3000-10104-103 Avenue
Edmonton Alberta T5J 3V8
CANADA
Independent Auditors' Consent
The Board of Directors
GST Telecommunications, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
33-94072, 33-95324, 33-97096 and 333-1538) on Forms S-8 and F-3 of GST
Telecommunications, Inc. 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, which reports appear in the September 30, 1995 annual report on
Form 20-F of GST Telecommunications, Inc.
/S/ KPMG PEAT MARWICK THORNE
Edmonton, Alberta
May 13, 1996
Member Firm of
Klynveld Peat Marwick Goerdeler
