As filed with the Securities and Exchange Commission on December 13, 1996
Registration No. 333-15699
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GST TELECOMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Canada
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(State or other jurisdiction of
incorporation or organization)
N/A
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(IRS Employer
Identification Number)
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4317 N.E. Thurston Way
Vancouver, Washington 98662
(360) 254-4700
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(Address and telephone number of
Registrant's Principal Executive Offices)
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Robert H. Hanson, Senior Vice President
GST Telecommunications, Inc.
1285 Sheridan Street, Suite 245
Cody, Wyoming 82413
(307) 527-6048
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(Name, Address and Telephone Number
of Agent for Service)
Copy to:
David J. Adler, Esq.
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. / /
<PAGE>
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. / /
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The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 13, 1996
5,164,089 COMMON SHARES
GST TELECOMMUNICATIONS, INC.
This Prospectus relates to the issuance of up to 5,164,089 Common
Shares, without par value (the "Common Shares"), of GST Telecommunications, Inc.
(the "Company") upon conversion of the Company's 13-7/8% Convertible Senior
Subordinated Discount Notes due 2005 (the "Convertible Notes"). The Common
Shares that are being registered hereby are issuable upon such conversion
without the payment of any additional consideration by the holders of the
Convertible Notes.
The Convertible Notes are convertible (in denominations of $1,000
principal amount at maturity or integral multiples thereof) into Common Shares,
at the option of the holders of the Convertible Notes, at any time after
December 18, 1996. The number of Common Shares issuable upon conversion of the
Convertible Notes is that number of Common Shares equal to the accreted value
("Accreted Value") of the Convertible Notes being converted (on the date of
conversion) divided by $7.563, subject to adjustment (the "Conversion Ratio").
Accordingly, the number of Common Shares issuable upon conversion of the
Convertible Notes will increase as the Accreted Value of the Convertible Notes
increases. On December 15, 1996, the Convertible Notes would be convertible into
an aggregate of 3,019,598 Common Shares. Immediately prior to maturity in
December 2005, assuming no Convertible Notes have yet been converted, the
Convertible Notes would be convertible into an aggregate of 5,164,089 Common
Shares.
The Company will not receive any cash proceeds from the issuance of
Common Shares upon conversion of the Convertible Notes, but will immediately
retire, without the payment of additional consideration, the debt attributable
to the Convertible Notes converted. All costs, expenses and fees in connection
with the registration of the Common Shares offered by this Prospectus will be
borne by the Company. See "Plan of Distribution."
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AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES
A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 4 HEREOF.
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The Common Shares are traded on the AMEX under the symbol "GST" and on
the VSE under the symbol "GTE.U." On December 12, 1996, the last sale price for
the Common Shares on the AMEX was $8 3/16.
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov. The Common Shares are listed on the
AMEX and such reports and other information may also be inspected at the offices
of the AMEX, 86 Trinity Place, New York, New York 10006.
TABLE OF CONTENTS
AVAILABLE INFORMATION..........................................................2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE................................3
RISK FACTORS...................................................................4
THE COMPANY...................................................................13
MATERIAL CHANGES..............................................................13
USE OF PROCEEDS...............................................................15
PLAN OF DISTRIBUTION..........................................................15
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.......................16
LEGAL MATTERS.................................................................17
EXPERTS .....................................................................17
ADDITIONAL INFORMATION........................................................18
INDEX TO FINANCIAL STATEMENTS................................................F-1
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 20-F for the fiscal year ended
September 30, 1995, as amended; Reports of Foreign Issuer on Form 6-K for the
quarters ended December 31, 1995, as amended, and March 31, 1996; the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; and the
Company's Current Report on Form 8-K dated October 31, 1996 reporting the
acquisition of assets and other events are incorporated by reference in this
Prospectus and shall be deemed to be a part hereof. All subsequent annual
reports filed by the Company on Form 20-F, 40-F, 10-K or otherwise, prior to the
termination of this offering, are deemed to be incorporated by reference in this
prospectus and shall be deemed to be a part hereof from the date of filing of
such documents. All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15 of the Exchange Act, subsequently filed by the Company prior to
the termination of this offering, are deemed to be incorporated by reference in
this Prospectus and shall be deemed to be a part hereof from the date of filing
of such documents.
The Company's Application for Registration of its Common Shares under
Section 12(b) of the Exchange Act filed on March 3, 1994 is incorporated by
reference in this Prospectus and shall be deemed to be a part hereof.
The Company hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents. Written requests for such copies should
be directed to GST Telecommunications, Inc. at 1030-999 West Hastings Street,
Vancouver, British Columbia, Canada V6C 2W2, Attention: Robert M. Blankstein.
Oral requests should be directed to such individual (telephone number (604)
688-0553).
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made hereby, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Selling Shareholders. This Prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, the securities offered
hereby to any person in any state or other jurisdiction in which such offer or
solicitation is unlawful. The delivery of this Prospectus at any time does not
imply that information contained herein is correct as of any time subsequent to
its date.
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RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
BEFORE MAKING AN INVESTMENT DECISION. CERTAIN MATTERS DISCUSSED IN THIS
PROSPECTUS OR WHICH ARE INCORPORATED BY REFERENCE ARE FORWARD-LOOKING STATEMENTS
THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED.
DEVELOPMENT AND EXPANSION RISK AND POSSIBLE INABILITY TO MANAGE GROWTH
The Company is in the early stages of its operations. Certain of its
networks have only recently become commercially operational and the Company has
only recently begun to deploy switches in its networks. The success of the
Company will depend, among other things, upon the Company's ability to assess
potential markets, design fiber backbone routes that provide ready access to a
substantial customer base, secure financing, obtain required rights-of-way,
building access and governmental permits, implement expanded interconnection and
collocation with facilities owned by local exchange telephone companies ("LECs")
and achieve a sufficient customer base, and upon subsequent developments in
state and federal regulations. There can be no assurance that any networks to be
developed or further developed will be completed on schedule, at a commercially
reasonable cost or within the Company's specifications. In addition, the
expansion of the Company's business has involved and is expected to continue to
involve acquisitions, which could divert the resources and management time of
the Company and require integration with the Company's existing operations. The
Company's future performance will depend, in part, upon its ability to manage
its growth effectively, which will require it to continue to implement and
improve its operating, financial and accounting systems, to expand, train and
manage its employee base and to effectively manage the integration of acquired
businesses. These factors and others could adversely affect the Company's
customer base and service offerings. The Company's inability either to expand in
accordance with its plans or to manage its growth could have a material adverse
effect on its business, financial condition and results of operations.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE EBITDA
The Company has incurred and expects to continue to incur increasing
operating losses and negative EBITDA while it expands its business and builds
its customer base. The Company has incurred significant increases in expenses
associated with these activities and there can be no assurance that an adequate
customer base with respect to any or all of its services will be achieved or
sustained. The Company does not expect to achieve a significant market share for
any of its services. The Company had a net loss of approximately $60.4 million
and approximately $11.3 million and negative EBITDA of $33.9 million and $8.8
million for the years ended September 30, 1996 and 1995, respectively. There can
be no assurance that the Company will achieve or sustain profitability or
generate positive EBITDA. At September 30, 1996, the Company had a U.S. net
operating loss carryforward of approximately $45.0 million and Canadian net
operating loss carryforward of approximately $6.8 million. While such loss
carryforwards are available to offset future taxable income of the Company, it
is more likely than not that the Company will not generate sufficient taxable
income so as to utilize all or a substantial portion of such loss carryforwards
prior to their expiration.
SIGNIFICANT CAPITAL REQUIREMENTS
The Company believes that the net proceeds of approximately $192.2
million from private placement offerings consummated in December 1995 ("the
December Offering") and October 1996 (the "October Offering"), together with
cash on hand and borrowings expected to be available under both a $100 million
credit facility (the "Tomen Facility") with Tomen America and its affiliates
("Tomen") and equipment financing currently available and being negotiated, will
provide sufficient funds for the Company to expand its business as presently
planned and to fund its operating expenses through June 1997. Thereafter, the
Company expects to require additional financing. However, in the event that the
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Company's plans or assumptions change or prove to be inaccurate, or the
foregoing sources of funds prove to be insufficient to fund the Company's growth
and operations, or if the Company consummates acquisitions, the Company may be
required to seek additional capital sooner than currently anticipated. Sources
of financing may include public or private equity or debt financing by the
Company or its subsidiaries, sales of assets or other financing arrangements.
There can be no assurance that such additional financing would be available to
the Company or, if available, that it could be obtained on acceptable terms or
within the limitations contained in the Tomen Facility, the indentures relating
to the notes (the "Notes") sold in the December Offering (the "Indentures"),
existing equipment financing facilities or similar facilities under negotiation
or any future financing arrangements. Failure to obtain such financing could
result in the delay or abandonment of some or all of the Company's development
and expansion plans and expenditures and could have a material adverse effect on
the Company's business. Such failure could also limit the ability of the Company
to make principal and interest payments on its outstanding indebtedness, which
would have a material adverse effect on the value of the Common Shares. The
Company has no working capital or other credit facility under which it may
borrow for working capital and other general corporate purposes. There can be no
assurance that such a facility will be available to the Company in the future or
that if such a facility were available, that it would be available on terms and
conditions acceptable to the Company.
SUBSTANTIAL INDEBTEDNESS
At September 30, 1996, the Company had outstanding on a consolidated
basis approximately $239.7 million of indebtedness. The accretion of original
issue discount on the Notes will cause an increase in indebtedness of $151.5
million by December 15, 2000. The Indentures limit, but do not prohibit, the
incurrence of additional indebtedness by the Company. At September 30, 1996, the
Company had $68.2 million of availability under the Tomen Facility to finance
the development and construction of additional networks, if and to the extent
that proposals for funding projects are approved by Tomen. Tomen has recently
agreed in principle to provide the Company with $41.0 million of additional
financing for the Company's Hawaiian interisland network and Hawaiian
terrestrial fiber optic network. The Company expects to incur substantial
additional indebtedness in the future. The Company has entered into a loan
agreement with an equipment manufacturer for $116.0 million in equipment
financing and is negotiating with equipment manufacturers for approximately
$160.0 million of additional equipment financing. There can be no assurance that
any such equipment financing will be available to the Company on acceptable
terms or at all.
The level of the Company's indebtedness could have important
consequences to its future prospects, including the following: (i) the ability
of the Company to obtain any necessary financing in the future for working
capital, capital expenditures, debt service requirements or other purposes may
be limited; (ii) a substantial portion of the Company's cash flow from
operations, if any, must be dedicated to the payment of principal of and
interest on its indebtedness and other obligations and will not be available for
other purposes; (iii) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to changes in, its business; (iv) the
Company will be more highly leveraged than some of its competitors, which may
place it at a competitive disadvantage; and (v) the Company's high level of
indebtedness will make it more vulnerable in the event of a downturn in its
business.
POSSIBLE INABILITY TO SERVICE DEBT
The Company has been experiencing increasing negative EBITDA and the
Company's earnings before fixed charges were insufficient to cover fixed charges
for the years ended September 30, 1996 and 1995 by $62.9 million and $13.8
million, respectively. There can be no assurance that the Company will be able
to improve its earnings before fixed charges or EBITDA or that the Company will
be able to meet its debt service obligations. As the Company does not currently
have a revolving credit facility, if a shortfall occurs, alternative financing
would be necessary in order for the Company to meet its liquidity requirements
and there can be no assurance that such financing would be available. In such
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event, the Company could face substantial liquidity problems. In addition, the
Company anticipates that cash flow from operations may be insufficient to repay
the Notes in full at maturity in which event such indebtedness would need to be
refinanced. There can be no assurance that the Company will be able to effect
such refinancing. The ability of the Company to meet its obligations and to
effect such refinancings will be dependent upon, among other things, the future
performance of the Company, which will be subject to prevailing economic
conditions and to financial, business and other factors, including factors
beyond the control of the Company. Failure by the Company to meet its
obligations could result in a default on its indebtedness, including the Notes,
which would permit the holders of such indebtedness to accelerate the maturity
thereof.
FINANCIAL AND OPERATING RESTRICTIONS IMPOSED BY EXISTING INDEBTEDNESS
The Company's financing agreements impose significant operating and
financial restrictions on the Company. Such restrictions affect, and in certain
cases significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness or to create liens on its assets, sell
assets, engage in mergers or acquisitions or make investments. Failure to comply
with any such covenant could result in a default thereunder, which could result
in an acceleration of such indebtedness.
DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
The Company has begun to deploy and plans to continue to deploy high
capacity, digital switches in the cities in which it operates or plans to
operate networks, as well as in certain cities where the Company will rely on
LEC facilities for transmission. This will enable the Company to offer
interstate switched access services and, intrastate switched access, enhanced
services and local dial tone. The Company expects negative operating margins
from its switched services during the 12 to 18 month period after a switch is
deployed. For switches operating in conjunction with the Company's networks, the
Company expects operating margins to improve as the network is expanded and
larger volumes of traffic are carried on the Company's network. Until such time,
the Company will rely on the LEC to originate and terminate a significant
portion of its switched services traffic. For switches operating in cities where
the Company will rely on LEC facilities for transmission, negative operating
margins are expected under current LEC pricing tariffs. Although under the
Telecommunications Act of 1996 (the "Telecommunications Act"), the LECs will be
required to unbundle local tariffs and permit the Company to purchase only the
origination and termination services it needs, thereby decreasing operating
expenses, there can be no assurance that such unbundling will be effected in a
timely manner and result in prices favorable to the Company. In addition, the
Company's ability to successfully implement its switched and enhanced services
will require the negotiation of resale agreements with LECs and other
competitive local exchange telephone companies ("CLECs") and the negotiation of
interconnection agreements with incumbent LECs.
In August 1996, the Federal Communications Commission (the "FCC")
released a decision implementing the interconnection portions of the
Telecommunications Act (the "Interconnection Decision"). The Interconnection
Decision establishes rules for negotiating interconnection agreements and
guidelines for review of such agreements. In October 1996, the United States
Eighth Circuit Court of Appeals (the "Eighth Circuit") stayed certain portions
of the Interconnection Decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to "pick and choose" among
various provisions of existing interconnection agreements. Although the judicial
stay of the Interconnection Decision does not prevent the Company from
negotiating interconnection agreements with local exchange carriers, it does
create uncertainty about the rules governing pricing, terms and conditions of
interconnection agreements, and could make negotiating such agreements even more
difficult and protracted. On November 12, 1996, the U.S. Supreme Court refused
to vacate the Eighth Circuit's judicial stay. The Eighth Circuit is expected to
hear oral arguments in this case in January 1997 and further appeals are
possible. There can be no assurance that the Company will be able to obtain
interconnection agreements on terms acceptable to the Company.
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The Company's switched services may not be profitable due to, among
other factors, lack of customer demand, competition from other CLECs and pricing
pressure from the LECs. Implementation of the Company's switched and enhanced
services is subject to the Company's ability to obtain equipment financing for
switches and upon equipment manufacturers' ability to meet the Company's switch
deployment schedule. Although the Company has entered into a loan agreement with
an equipment manufacturer for $116.0 million of equipment financing and is
negotiating with equipment manufacturers for approximately $160.0 million of
additional equipment financing, there can be no assurance that all of such
switches will be deployed on the schedule contemplated by the Company or that,
if deployed, such switches will be utilized to the degree contemplated by the
Company. The Company has no experience providing switched access services and
there can be no assurance that the Company will be able to successfully
implement its switched and enhanced services strategy.
RECENT COMMENCEMENT OF MARKETING
The Company has only recently begun marketing certain of its services
and, as a result, the Company has relatively few customers and has generated
limited revenue from its CLEC services. Although the Company actively markets
its products and services, there can be no assurance that the Company will be
able to attract new customers or retain existing customers.
DEPENDENCE ON KEY CUSTOMERS
The Company's five largest telecommunications services customers
accounted for approximately 46.9% and 26.8% of the Company's consolidated
revenues for the years ended September 30, 1996 and 1995, respectively. During
the year ended September 30, 1995, a former customer, which customer is
presently the subject of a bankruptcy proceeding, accounted for 5.3% of the
Company's consolidated revenues. It is anticipated that during the early stages
of development of individual networks, before obtaining a sufficient amount of
end-user revenues, the Company will be dependent on a limited number of long
distance carriers for a significant portion of its revenues. While long distance
carriers have high volume requirements and have utilized CLECs, they generally
are more price sensitive than end-users. The five largest customers of the
Company's manufacturing operations accounted for 13.4% and 16.1% of the
Company's consolidated revenues for the years ended September 30, 1996 and 1995,
respectively. The loss of, or decrease of business from, one or more significant
customers could have a material adverse effect on the business, financial
condition and results of operations of the Company.
COMPETITION
The telecommunications industry is highly competitive. In most markets,
the Company's principal competitor for local exchange services is the Regional
Bell Operating Company ("RBOC") or GTE Corporation and its affiliated companies
(collectively, the "GTE Companies"). Other competitors may include other CLECs,
microwave and satellite carriers, wireless telecommunications providers and
private networks built by large end-users. Potential competitors (using similar
or different technologies) include cable television companies, utilities and
RBOCs outside their current local service areas. In addition, the Company
anticipates future competition from large long distance carriers, such as AT&T
Corp. ("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation
("Sprint"), which have begun to offer integrated local and long distance
telecommunications services as regulations allow. Consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, as well as the development of new technologies,
could give rise to significant new competitors to the Company.
As a recent entrant in the integrated telecommunications services
industry, the Company has not achieved and does not expect to achieve a
significant market share for any of its services. In particular, the RBOCs, the
GTE Companies and other local telephone companies have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially
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greater than those of the Company, have the potential to subsidize
competitiveservices with revenues from a variety of businesses and currently
benefit from certain existing regulations that favor the LECs over the Company
in certain respects. While recent regulatory initiatives, which allow CLECs such
as the Company to interconnect with LEC facilities, provide increased business
opportunities for the Company, such interconnection opportunities have been
accompanied by increased pricing flexibility for and relaxation of regulatory
oversight of the LECs. The Company anticipates that the FCC will grant LECs
increasing pricing flexibility as the number of interconnections and competitors
increases. In addition, the FCC enacted interim pricing rules that restructure
LEC switched transport rates in order to facilitate competition for switched
access. If regulators allow LECs to charge CLECs increased fees in conjunction
with interconnection to their networks, the financial condition of the Company
could be adversely affected. If the LECs lower their rates, the Company and
others providing CLEC and other telecommunications services may be forced by
market conditions to charge less for their services in order to compete. There
can be no assurance that the Company will be able to achieve or maintain
significant revenue or compete effectively in any of its markets.
To the extent the Company interconnects with and uses LEC networks to
service the Company's customers, the Company is dependent upon the technology
and capabilities of the LECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards. The Company will
become increasingly dependent on interconnection with LECs as switched services
become a greater percentage of the Company's business. The Telecommunications
Act imposes interconnection obligations on LECs, but there can be no assurance
that the Company will be able to obtain the services it requires at rates, and
on terms and conditions, that permit the Company to offer switched services at
rates that are both profitable and competitive. In the event that the Company
experiences difficulties in obtaining high quality, reliable and reasonably
priced service from the LECs, the attractiveness of the Company's services to
its customers could be impaired.
The long distance telecommunications industry has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The Company competes with major carriers such as
AT&T, MCI and Sprint, as well as other national and regional long distance
carriers and resellers, many of whom are able to provide services at costs that
are lower than the Company's current costs. In addition, as a result of the
Telecommunications Act, RBOCs also will become competitors in the long distance
telecommunications industry upon the satisfaction of certain conditions. As a
result of the Company's acquisition of Call America (as hereinafter defined),
TotalNet (as hereinafter defined) and certain assets of Texas-Ohio (as
hereinafter defined), the Company's long distance operations will account for a
significant portion of the Company's revenues. See "Material Changes." The
Company believes that the principal competitive factors affecting its long
distance operations are pricing, customer service, accurate billing, clear
pricing policies and, to a lesser extent, variety of services. The ability of
the Company to compete effectively will depend upon its continued ability to
maintain high quality, market driven services at prices generally equal to or
below those charged by its competitors. To maintain its competitive posture, the
Company believes that it must be in a position to reduce its prices in order to
meet reductions in rates, if any, by others. Any such reductions could adversely
affect the Company.
The Internet services market is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company's competitors in this market include Internet
service providers, other telecommunications companies, online services providers
and Internet software providers. Many of these competitors have greater
financial, technological and marketing resources than those available to the
Company.
The market for telecommunications products is highly competitive and
subject to rapid technological change. The Company's manufacturing subsidiary,
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NACT Telecommunications, Inc. ("NACT"), expects competition to increase in the
future from existing competitors in the distributed switching systems market and
from other companies that may enter NACT's existing or future markets, including
major central office switch vendors. NACT currently competes with a number of
lower capacity switch manufacturers such as Communications Product Development,
Inc., Integrated Telephony Products, Inc. and PCS Telecom, Inc. NACT also
competes with providers of open architecture (programmable) hardware switching
platforms that are enhanced by applications providers and value added resellers.
Such competitors include Excel, Inc., which has agreements with software
application providers. As NACT's business develops and it seeks to market its
switches to a broader customer base, NACT's competitors may include larger
switch and telecommunications equipment manufacturers such as Lucent
Technologies Inc., Siemens AG, Alcatel Alsthom Compagnie, L.M. Ericcson and
Northern Telecom, Ltd. Many of NACT's current and potential competitors have
substantially greater financial, technical and marketing resources than NACT.
Increased competition could materially and adversely affect NACT's business,
financial condition and results of operations through price reductions and loss
of market share. There can be no assurance that NACT will be able to continue to
compete successfully with its existing competitors or that it will be able to
compete successfully with new competitors.
GOVERNMENT REGULATION
The Company's networks and the provision of switched and private line
services are subject to significant regulation at the federal, state and local
levels. Delays in receiving required regulatory approvals or the enactment of
new adverse regulation or regulatory requirements may have a material adverse
effect upon the Company.
The FCC exercises jurisdiction over the Company and the Company must
file tariffs with the FCC. In addition, the Company must obtain prior FCC
authorization for domestic and international long distance services. State
regulatory commissions exercise jurisdiction over the Company to the extent it
provides intrastate services. As such a provider, the Company is required to
obtain regulatory authorization and/or file tariffs at state agencies in most of
the states in which it operates. Local authorities control the Company's access
to municipal rights-of-way. The networks are also subject to numerous local
regulations such as building codes and licensing. Such regulations vary on a
city by city and county by county basis. There can be no assurance that state or
federal commissions will grant required authority or refrain from taking action
against the Company, if it is found to have provided services without obtaining
the necessary authorizations. If authority is not obtained or if tariffs are not
filed, or are not updated, or otherwise do not fully comply with the tariff
filing rules of the FCC or state regulatory agencies, third parties or
regulators could challenge these actions. Such challenges could cause the
Company to incur substantial legal and administrative expenses. The
Telecommunications Act provides for a significant deregulation of the domestic
telecommunications industry, including the local exchange, long distance and
cable television industries. The Telecommunications Act remains subject to
judicial review and additional FCC rulemaking, and thus is difficult to predict
what effect the legislation will have on the Company and its operations.
In addition, the FCC imposes restrictions on foreign ownership of
communications service providers utilizing radio frequencies. The operations of
the Company's subsidiary that conducts its business in Hawaii use, among other
transmission facilities, microwave radio facilities operating pursuant to FCC
licenses granted to Pacwest Network, Inc., an entity that is controlled by John
Warta, the Company's President and Chief Executive Officer. The FCC also has the
authority, which it is not presently exercising, to impose restrictions on
foreign ownership of communications service providers not utilizing radio
frequencies (such as the Company). It the FCC exercises such authority, it could
have a material adverse effect on the Company's CLEC and other businesses.
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NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant
changes in technology, with the Company relying on third parties for the
development of and access to new technology. The effect of technological changes
on the business of the Company cannot be predicted. The Company believes its
future success will depend, in part, on its ability to anticipate or adapt to
such changes and to offer, on a timely basis, services that meet customer
demands.
The future success of NACT will depend in part upon its ability to keep
pace with advancing technology, evolving standards within the telecommunications
industry and changing customer requirements in a cost-effective manner. There
can be no assurance that NACT's products will not be rendered obsolete by
telecommunications products incorporating technological advances designed by
competitors that NACT is unable to incorporate into its products in a timely
manner.
POSSIBLE ADVERSE LITIGATION OUTCOME
An action was commenced against NACT alleging that its telephone
systems incorporating prepaid debit card features infringe upon a patent issued
in 1987. An unfavorable decision in this action could have a material adverse
effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The efforts of a small number of key management and operating personnel
will largely determine the Company's success and the loss of any of such persons
could adversely affect the Company. The success of the Company also depends in
part upon its ability to hire and retain highly skilled and qualified operating,
marketing, financial and technical personnel. The competition for qualified
personnel in the telecommunications industry is intense and, accordingly, there
can be no assurance that the Company will be able to hire or retain necessary
personnel.
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights-of-way, entry to premises,
franchises and licenses from various private parties, actual and potential
competitors and state and local governments in order to construct and operate
its networks. There can be no assurance that the Company will obtain
rights-of-way and franchise agreements on acceptable terms or that current or
potential competitors will not obtain similar rights-of-way and franchise
agreements that will allow them to compete against the Company. If any of the
existing franchise or license agreements were terminated or not renewed and the
Company were forced to remove its fiber optic cables or abandon its network in
place, such termination could have a material adverse effect on the Company.
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the limited revenues and significant expenses associated
with the expansion and development of its networks and services, the Company
anticipates that its operating results could vary significantly from period to
period. In addition, revenues relating to the Company's network businesses are
and may continue to be dependent upon a small number of customers and contracts,
revenues under which are likely to vary significantly from period to period.
RISK OF JOINT INVESTMENTS
The Company's Phoenix network is operated by Phoenix Fiber Access, Inc.
("Phoenix Fiber"). The Company currently has a 50% ownership interest in Phoenix
Fiber and is negotiating to acquire the remaining 50% interest. Phoenix Fiber
has been managed by a governing board that the Company does not control. The
risk is present in this joint venture, and in other joint ventures in which the
Company may subsequently determine to participate, that the other joint venture
partners may at any time have economic, business or legal interests or goals
that
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are inconsistent with those of the joint venture or the Company. The risk is
also present that a joint venture partner may be unable to meet its economic or
other obligations to the venture and that the Company may be required to fulfill
some or all of those obligations. In addition, if the Company enters into
international joint ventures, the operations of such ventures will be subject to
various risks not present in the Company's domestic operations, such as
fluctuations in currency exchange rates, nationalization or expropriation of
assets, import/export controls, political instability, limitations on foreign
investment, restrictions on the ability to convert currency and the additional
expenses and risks inherent in conducting operations in geographically distant
locations with customers speaking different languages and having different
cultural approaches to the conduct of business.
VOLATILITY OF MARKET PRICE OF COMMON SHARES
Since the Common Shares have been publicly traded, their market price
has fluctuated over a wide range and may continue to do so in the future. The
market price of the Common Shares could be subject to significant fluctuations
in response to various factors and events, including among other things, the
depth and liquidity of the trading market of the Common Shares, variations in
the Company's operating results and the difference between actual results and
the results expected by investors and analysts. In addition, from time to time
the stock market has experienced broad price and volume fluctuations that have
often been unrelated to the operating performance of companies. These broad
market fluctuations also may adversely affect the market price of the Common
Shares.
RISKS OF INVESTMENT IN A CANADIAN CORPORATION
The Company is a Canadian corporation. Certain directors and officers
and certain of the Company's professionals are residents of Canada. As a result,
it may be difficult for U.S. shareholders to effect service of process within
the United States upon the Company or upon such directors, officers and
professionals or to collect judgments of U.S. courts predicated upon civil
liability under U.S. federal securities and other laws. The Company has been
advised that there is substantial doubt as to whether Canadian courts would (i)
enforce judgements of U.S. courts obtained against the Company or such
directors, officers and professionals predicated upon the civil labilities
provisions of U.S. laws or (ii) impose liabilities in original actions against
the Company or its directors, officers and professionals predicated solely upon
U.S. laws. In addition, the Company's status as a Canadian company limits the
ability of the Company to hold or control common carrier radio frequency
licenses in the United States.
POTENTIAL RESALES OF A SUBSTANTIAL NUMBER OF SHARES; REGISTRATION RIGHTS
At September 30, 1996, the Company had outstanding 21,244,259 Common
Shares. Of these shares, 20,276,210 Common Shares are freely tradeable, except
for (i) any Common Shares held by "affiliates" of the Company within the meaning
of Rule 144 under the Securities Act (2,960,182 of such 20,276,210 shares at
September 30, 1996), which shares will be subject to the resale limitations of
Rule 144 and an aggregate of 750,000 Common Shares subject to escrow under
regulations of the VSE. The remaining 967,929 Common Shares are "restricted
securities," as that term is defined in Rule 144 and may only be sold pursuant
to a registration statement under the Securities Act or an applicable exemption
from registration thereunder, including pursuant to Rule 144. Of such 967,929
shares, the Company is contractually obligated to register for resale an
aggregate of 26,624 shares. In addition, at September 30, 1996, (i) 3,057,719
Common Shares were reserved for issuance upon exercise of outstanding stock
options (the "Outstanding Options"), with exercise prices ranging from $3.55 to
$10.00 per share, (ii) 896,155 Common Shares were reserved for issuance upon
exercise of outstanding warrants (the "Outstanding Warrants"), with exercise
prices ranging from $5.52 to $12.96 per share, (iii) 3,019,598 Common Shares
were reserved for issuance upon conversion of the convertible notes sold in the
December Offering (the "Convertible Notes") (based on the aggregate accreted
value of Convertible Notes on December 15, 1996). In addition, 3,200,000 Common
Shares were reserved for issuance upon exercise of the warrants sold in the
October Offering (the "October Warrants"). The Company has registered or is
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obligated to register the resale of the Common Shares issuable upon exercise of
the Outstanding Options and the Outstanding Warrants. The Company is also
obligated to register the issuance of the Common Shares issuable upon conversion
of the Convertible Notes and upon exercise of the October Warrants. The future
sale or the expectation of future sales of Common Shares in the public market
could adversely affect the prevailing market prices for the Common Shares and
could impair the Company's ability to raise capital through the sale of Common
Shares.
POTENTIAL ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value (the "Preference Shares"), in one or more
series and to determine the designations, powers, preferences and relative,
participating, optional or other rights thereof, including without limitation,
the dividend rate (and whether dividends are cumulative), conversion rights,
voting rights, rights and terms of redemption, redemption price and liquidation
preference. Although the Company has no current plans to issue any Preference
Shares, the rights of the holders of Common Shares would be subject to, and may
be adversely affected by, the rights of the holders of any Preference Shares
that may be issued in the future. Issuance of Preference Shares could have the
effect of delaying, deterring or preventing a change in control of the Company,
including the imposition of various procedural and other requirements that could
make it more difficult for holders of Common Shares to effect certain corporate
actions, including the ability to replace incumbent directors and to accomplish
transactions opposed by the incumbent Board of Directors.
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THE COMPANY
The Company provides a broad range of integrated telecommunications
products and services, primarily to customers located in the western continental
United States and Hawaii. Since inception as a facilities-based competitive
access provider ("CAP"), the Company has constructed and operated
state-of-the-art, digital telecommunications networks that provide an
alternative to incumbent LECs. The Company has expanded beyond the scope of
traditional CAP operations into CLEC services and currently provides a range of
enhanced telecommunications services that include long distance, Internet
access, frame relay and asynchronous transfer mode services. In addition, the
Company provides switched access and recently began to offer local dial tone
services to complement its existing telecommunications service offerings. The
Company also provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities through
its wholly-owned subsidiary, NACT.
MATERIAL CHANGES
DECEMBER 1995 OFFERING
In the December Offering, the Company sold $20,000,187 137/8%
Convertible Senior Subordinated Discount Notes due 2005 in December 1995 and its
wholly owned subsidiary, GST USA, Inc. ("GST USA") sold $160,001,496 137/8%
Senior Discount Notes due 2005 in a private placement. Of the net proceeds of
the December Offering, $2.0 million was applied to the repayment of short-term
indebtedness, and the balance has been and will be used for capital expenditures
and to fund future operating deficits and for working capital purposes.
CALL AMERICA ACQUISITION
In the fourth quarter of 1996, the Company entered into an agreement
and plan of merger with Call America Business Communications Corporation and
certain of its affiliates (collectively, "Call America"), pursuant to which the
Company is to acquire 100% of Call America by means of a merger, for a purchase
price of 1,307,692 Common Shares, subject to a post closing adjustment of
additional Common Shares if, 180 days after the effective time of the merger,
the sales price of the Common Shares is less than $12.50 per share. The maximum
number of additional Common Shares to be issued pursuant to the post closing
adjustment is 114,489. The consummation of the merger is contingent upon
obtaining required regulatory approvals. Call America, which is based in San
Luis Obispo, California, is a facilities-based reseller of domestic and
international long distance services, as well as a provider of operator
services.
NORTHERN TELECOM NETWORK PRODUCTS PURCHASE AGREEMENT
The Company, through its indirect subsidiary, GST EquipCo, Inc. ("GST
EquipCo"), entered into a Network Products Purchase Agreement ("Nortel Purchase
Agreement") dated August 23, 1996 with Northern Telecom Inc. ("Nortel") pursuant
to which GST EquipCo may from time to time purchase switching and related
equipment from Nortel. The Nortel Purchase Agreement, among other terms,
provides GST EquipCo with price protection for 10 years for several categories
of Nortel switching equipment and related software.
SIEMENS SWITCHING EQUIPMENT PURCHASE AGREEMENT AND LOAN AGREEMENT
The Company, through its indirect subsidiary, GST SwitchCo, Inc. ("GST
SwitchCo."), entered into a Switching Products Sales Agreement (the "Siemens
Sales Agreement") dated September 4, 1996 with Siemens Stromberg-Carlson
("Siemens") pursuant to which GST SwitchCo may from time to time purchase
switching and related equipment from Siemens. The Siemens Sales Agreement, among
other terms, provides GST SwitchCo a credit of up to $8.0 million for certain
Siemens software and price protection for 10 years for several categories of
Siemens switching equipment and related software.
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In addition, on the same date, GST SwitchCo entered into a Loan and
Security Agreement (the "Siemens Loan Agreement") with Siemens that provides for
loans by Siemens of up to an aggregate of $116.0 million to finance the purchase
of Siemens equipment and equipment from other suppliers. Each loan made by
Siemens under the Siemens Loan Agreement initially earns interest at an interim
loan rate of LIBOR plus 4.5% on the outstanding balance of the loan until the
beginning of the calendar quarter following the original loan advance date, at
which time the outstanding balance of the loan converts to a term loan and
begins accruing interest at a term loan rate of LIBOR plus 3.5% Repayment of the
outstanding principal amount of each loan is required in quarterly installments
commencing on the last day of the fifth quarter following the original loan
advance date with the remaining balance of each outstanding loan being payable
in full on the last day of the 24th quarter following such original loan advance
date. GST SwitchCo's obligations to Siemens under the Siemens Loan Agreement are
secured by the grant to Siemens of a first priority security interest in all
product purchased by GST SwitchCo with the proceeds of loans by Siemens and are
guaranteed in part by GST USA.
TOTALNET COMMUNICATIONS, INC.
In the fourth quarter of 1996, the Company entered into an agreement
(the "Merger Agreement") to acquire TotalNet Communications Inc. by means of a
merger (the "TotalNet Merger"). On October 17, 1996, the Company acquired
TotalNet in the TotalNet Merger for a purchase price payable entirely in Common
Shares.
In consideration for the acquisition of TotalNet, a purchase price of
approximately $8.7 million is payable in Common Shares to the former
shareholders of TotalNet in two installments. Sixty percent of the purchase
price (approximately $5.2 million), for a total of 481,391 Common Shares valued
at $10.90 per share, was paid at the closing of the TotalNet Merger on October
17, 1996 and the remaining 40% of the purchase price (approximately $3.5
million) is payable in Common Shares on October 17, 1997, based on the then
current market value of the Common Shares at such time but in no event less than
$7.63 per share, or more than $20.00 per share. TotalNet, which is based in
Houston, Texas, is both a facilities-based carrier and a switchless reseller of
long distance services.
OCTOBER OFFERING
On October 22, 1996, the Company completed a private placement to
non-U.S. investors of 2,000,000 special warrants (the "Special Warrants") at a
purchase price of US $11.125 per Special Warrant. The Special Warrants become
exercisable by holders for no additional consideration upon the later to occur
of (i) the date upon which approval for a final Canadian prospectus (the
"Canadian Prospectus") qualifying the Common Shares and share purchase warrants
(the "Underlying Warrants") issuable upon exercise of the Special Warrants is
received from the securities commission of each of the Canadian provinces where
the Special Warrants were sold and (ii) the date that the registration statement
of which this prospectus forms a part (the "U.S. Registration Statement") filed
with the Commission registering the resale of the Common Shares issuable upon
exercise of the Special Warrants and Underlying Warrants is declared effective,
but in any event, no later that September 22, 1997. Each Special Warrant is
exercisable for one Common Share and one-half of one Underlying Warrant. Each
full Underlying Warrant entitles the holder to purchase one additional Common
Share for a purchase price of U.S. $13.00 for one year from the date of
issuance. In the event that the requisite regulatory approvals for the Canadian
Prospectus are not received by the Company and the U.S. Registration Statement
is not declared effective, in each case by February 19, 1997, then each Special
Warrant will become exercisable for 1.1 Common Shares and one-half of one
Underlying Warrant.
The Company received U.S. $9,690,000, constituting 50% of the aggregate
purchase price of the Special Warrants (net of placement agency fees and
expenses), on October 22, 1996. The balance of the net purchase price of Special
Warrants (U.S. $11,125,000) is being held in escrow and is payable to the
Company upon the earlier to occur of (x) the date of receipt of final regulatory
approval of a preliminary Canadian Prospectus from the securities commissions of
the
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applicable Canadian provinces and (y) the initial filing of the U.S.
Registration Statement with the Commission, in each case covering the resale of
the Common Shares issuable upon exercise of the Special Warrants and the
Underlying Warrants. First Marathon Securities Limited and Thomson Kernaghan &
Co. Ltd. served as the Company's placement agents in the private placement.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the issuance of
the Common Shares upon conversion of the Convertible Notes. The Company will
bear all expenses in connection with the preparation of this Prospectus.
PLAN OF DISTRIBUTION
The Convertible Notes are convertible (in denominations of $1,000
principal amount at maturity or integral multiples thereof), at the option of
the holders of the Convertible Notes, into Common Shares, at any time after
December 18, 1996. The number of Common Shares issuable upon conversion of the
Convertible Notes will be determined by application of a ratio equal to the
Accreted Value on the date of conversion of the Convertible Notes being
converted divided by $7.563, subject to adjustment. The Accreted Value is, for
any Specified Date (as such term is defined in the Indenture relating to the
Convertible Notes), the amount provided for each $1,000 principal amount at
maturity of the Convertible Notes as follows:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set forth
below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
June 15, 1996.................................. $ 546.80
December 15, 1996.............................. 584.73
June 15, 1997.................................. 625.30
December 15, 1997.............................. 668.68
June 15, 1998.................................. 715.07
December 15, 1998.............................. 764.68
June 15, 1999.................................. 817.72
December 15, 1999.............................. 874.45
June 15, 2000.................................. 935.12
December 15, 2000.............................. $1,000.00
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price and
(b) an amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less the original issue price multiplied by (2) a
fraction, the numerator of which is the number of days from the Closing Date to
the Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days elapsed from the Closing Date to the
first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b) an
amount equal to the product of (1) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator
of which is the number of days from the immediately preceding Semi-Annual
Accrual Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences to beneficial owners from the conversion of Convertible
Notes into Common Shares and the ownership and disposition of the Common Shares.
This discussion is based on current provisions of the Internal Revenue Code,
applicable final, temporary and proposed Treasury Regulations, judicial
authorities, and current administrative rulings and pronouncements of the
Internal Revenue Service (the "Service"), and upon the facts concerning the
Company and its subsidiaries as of the date hereof. There can be no assurance
that the Service will not take a contrary view, and no ruling from the Service
has been or will be sought by the Company. Legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
This discussion does not address all aspects of United States federal
income taxation that may be relevant to particular holders of the Convertible
Notes or the Common Shares in light of their personal investment or tax
circumstances, or to certain types of investors (including insurance companies,
financial institutions, broker-dealers or tax-exempt organizations) subject to
special treatment under the United States federal income tax laws. In addition,
this discussion deals only with Convertible Notes and Common Shares held as
capital assets within the meaning of Section 1221 of the Code. This discussion
does not deal with foreign, state and local consequences that may be relevant to
non-U.S. Holders in light of their personal or individual circumstances.
As used in the discussion which follows, the term "U.S. Holder" means a
beneficial owner of Convertible Notes or Common Shares, as applicable, that for
United States federal income tax purposes is (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
subdivision thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source. The term
"Non-U.S. Holder" means a Holder of Convertible Notes or Common Shares, as
applicable, that is, for United States federal income tax purposes, not a U.S.
Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF CONVERTING THE CONVERTIBLE NOTES INTO COMMON
SHARES AND HOLDING AND DISPOSING OF THE COMMON SHARES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
TAX CONSEQUENCES TO U.S. HOLDERS
EXERCISE OF CONVERSION RIGHT
No gain or loss will be recognized for United States federal income tax
purposes by a U.S. Holder of the Convertible Notes upon the conversion thereof
in exchange for Common Shares (except to the extent of cash, if any, received in
lieu of the issuance of fractional shares of Common Shares). A U.S. Holder's tax
basis in the Common Shares will equal the sum of the adjusted tax basis in the
Convertible Notes reduced by the portion of adjusted tax basis allocated to any
fractional Common Shares exchanged for cash. The adjusted tax basis in the
Convertible Notes is the purchase price of such Convertible Notes to the U.S.
Holder as increased by any accrued original issue discount (net of all amortized
acquisition premiums) and market discount previously included in income by the
U.S. Holder and decreased by amortizable bond premiums, if any, deducted over
the term of the Convertible Notes. The holding period of the Common Shares
received on the conversion of the Convertible Notes will include the period
during which the Convertible Notes were held by such U.S. Holder, except that
the holding period of Common Shares allocable to accrued original issue discount
may commence on a later date. If any cash is received in lieu of fractional
shares, the U.S. Holder will recognize gain or loss, and the character and the
amount of such gain
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or loss will be determined as if the U.S. Holder had received such fractional
shares and then immediately sold them for cash.
SALE OF COMMON SHARES
Gain or loss will generally be recognized upon a sale of the Common
Shares received upon conversion of Convertible Notes in an amount equal to the
difference between the amount realized on the transfer and the holder's adjusted
tax basis in the Common Shares. Such gain or loss will be capital gain or loss,
provided the Common Shares are held as a capital asset, and will be long-term
capital gain or loss with respect to Common Shares held for more than one year.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
EXERCISE OF CONVERSION RIGHT
No gain or loss will be recognized for United States federal income tax
purposes by non-U.S. Holders of the Convertible Notes upon the conversion
thereof in exchange for full shares of Common Shares. To the extent any cash is
received in lieu of the issuance of fractional shares of Common Shares, the
rules applicable to gain from a sale of Common Shares, as summarized below, will
apply.
GAIN ON DISPOSITION OF COMMON SHARES
A Non-U.S. Holder generally will not be subject to United States
federal income tax with respect to gain recognized on a sale or other
disposition of Common Shares.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Shares
offered hereby have been passed upon for the Company by Messrs. Olshan Grundman
Frome & Rosenzweig LLP, 505 Park Avenue, New York, New York 10022. Stephen
Irwin, counsel to Olshan Grundman Frome & Rosenzweig LLP, is an officer and
director of the Company and holds 61,345 Common Shares and has been granted
options and warrants to purchase an additional 615,000 Common Shares. In
addition, other attorneys of this firm hold options to purchase Common Shares.
EXPERTS
The consolidated balance sheets of GST Telecommunications, Inc. and its
subsidiaries as of September 30, 1996 and 1995 and the consolidated statements
of operations, shareholders' equity and cash flows for the years ended September
30, 1996 and 1995, have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing. The consolidated
statements of operations, shareholders' equity and cash flows of GST
Telecommunications, Inc. and its subsidiaries for the 13 months ended September
30, 1994 has been included herein in reliance upon the report of KPMG Peat
Marwick Thorne, independent chartered accountants, upon the authority of said
firm as experts in accounting and auditing. The audited financial statements of
International Telemanagement Group, Inc. as of December 31, 1994 and 1993 and
for the year ended December 31, 1994 and the period January 23, 1993 (date of
inception) through December 31, 1993 have been included herein in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
and upon the authority of said firm as experts in accounting and auditing. The
financial statements of the IntelCom-Greenstar Joint Venture for the years ended
September 30, 1994 and 1993 have been incorporated by reference herein upon
reliance upon the report of KPMG Peat Marwick Thorne, independent chartered
accountants, and upon authority of said firm as experts in accounting and
auditing. The combined financial statements of Call America Business
Communications Corporation and Affiliates for the years ended December 31, 1995
and 1994 have been included herein in reliance upon the report of Glenn,
Burdette, Phillips & Bryson, independent certified public accountants, and upon
the authority of said firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act with respect to the Shares offered hereby. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
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INDEX TO FINANCIAL STATEMENTS
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Page(s)
GST TELECOMMUNICATIONS, INC.
Independent Auditors' Reports...................................................................................F-2
Consolidated Balance Sheets at
September 30, 1996 and 1995...................................................................................F-4
Consolidated Statements of Operations for the years ended September 30, 1996 and
1995 and the thirteen months ended
September 30, 1994............................................................................................F-5
Consolidated Statements of
Shareholders' Equity at
September 30, 1994, 1995 and 1996.............................................................................F-7
Consolidated Statements of Cash Flows for the years ended September 30, 1996 and
1995 and the thirteen months ended
September 30, 1994............................................................................................F-8
Notes to Consolidated Financial Statements......................................................................F-9
Proforma Condensed Consolidated Financial
Information (unaudited)......................................................................................F-42
Proforma Condensed Consolidated Statement
of Operations for
the year ended September 30, 1996 (unaudited)................................................................F-43
Notes to Proforma Consolidated
Financial Statements (unaudited).............................................................................F-44
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION AND AFFILIATES
Independent Auditors' Report...................................................................................F-45
Combined Balance Sheets at December 31, 1995 and 1994..........................................................F-46
Combined Statements of Income for the six months ended
June 30, 1996 (unaudited) and the years ended
December 31, 1995 and 1994...................................................................................F-48
Combined Statements of Changes in Stockholders' Equity (Deficiency) for the six
months ended June 30, 1996 (unaudited) and the
years ended December 31, 1995 and 1994.......................................................................F-49
Combined Statements of Cash Flows for the six months ended
June 30, 1996 and the years ended December 31, 1995 and 1994.................................................F-50
Notes to Financial Statements..................................................................................F-52
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Independent Auditors' Report.....................................................................................F-61
Balance Sheets at December 31, 1994 and 1993 ....................................................................F-62
Statements of Operations for the four months ended April 30, 1995, the year
ended December 31, 1994 and for the period January 23, 1993 (date of inception)
through December 31, 1993 .......................................................................................F-63
Statements of Stockholders' Deficit for the four months ended April 30, 1995,
the year ended December 31, 1994 and for the period January 23, 1993 (date of
inception) through December 31, 1993.............................................................................F-64
Statements of Cash Flow for the four months ended April 30, 1995, the year ended
December 31, 1994 and for the period January 23, 1993 (date of inception)
through December 31, 1993........................................................................................F-65
Notes to Financial Statements....................................................................................F-66
</TABLE>
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GST Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of GST
Telecommunications, Inc. as of September 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity , and cash flows for
the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GST
Telecommunications, Inc. as of September 30, 1996 and 1995, and the results of
its operations and cash flows for the years 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, 1996 and 1995,
and shareholders' equity as of September 30, 1996 and 1995, to the extent
summarized in note 10 to the consolidated financial statements.
KPMG PEAT MARWICK LLP
Portland, Oregon
November 22, 1996
F - 2
<PAGE>
KPMG
Chartered Accountants Telephone (604) 691-3000
Box 10426, 777 Dunsmuir Street Telefax (604) 691-3031
Vancouver, BC V7Y 1K3 Canada
AUDITORS' REPORT
To the Board of Directors
GST Telecommunications, Inc.
We have audited the consolidated statements of operations, shareholders equity,
and cash flows of GST Telecommunications, Inc. for the thirteen months ended
September 30, 1994. 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 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 results of operations and cash flows of the Company for
the thirteen months ended September 30, 1994 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 shareholders' equity as at September 30, 1994, to the extent summarized in
note 9 to the consolidated financial statements.
KPMG Peat Marwick Thorne
Chartered Accountants
Vancouver, Canada
December 8, 1994
F - 3
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
September 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
--------- ---------
(In U.S. Dollars)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,343 $ 6,024
Restricted cash 16,000 --
Accounts receivable, net 9,472 4,306
Investments 5,176 871
Inventory 2,406 387
Other current assets 6,151 1,252
--------- ---------
100,548 12,840
--------- ---------
Property and equipment, net 127,575 38,033
Goodwill, net 38,003 13,587
Other assets, net 35,575 8,665
--------- ---------
201,153 60,285
--------- ---------
$ 301,701 $ 73,125
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,443 $ 9,683
Accrued expenses 26,743 3,090
Current portion of capital lease obligations 722 223
Current portion of long-term debt 4,832 736
Other current liabilities 726 512
--------- ---------
45,466 14,244
--------- ---------
Deferred compensation 158 151
Capital lease obligation, less current portion 1,453 658
Long-term debt, less current portion 232,674 19,088
Minority interest 182 3,279
Commitments and contingencies
Shareholders' equity:
Preference shares:
Authorized - 10,000,000 no par shares; none issued or outstanding -- --
Common shares:
Authorized - unlimited number of no par common shares; issued and
outstanding - September 30, 1996 - 21,257,697 shares,
September 30, 1995 - 18,700,290 shares 72,647 50,166
Commitment to issue shares:
September 30, 1996 - 1,922,007 shares,
September 30, 1995 - 336,498 shares 25,454 1,494
Accumulated deficit (76,333) (15,955)
--------- ---------
21,768 35,705
--------- ---------
$ 301,701 $ 73,125
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share and share amounts)
Years ended September 30, 1996 and 1995 and
thirteen months ended September 30, 1994
<TABLE>
<CAPTION>
Thirteen
Year ended Year ended months ended
September 30, September 30, September 30,
1996 1995 1994
-------- -------- --------
(In U.S. Dollars)
<S> <C> <C> <C>
Revenues:
Telecommunication services $ 31,726 $ 11,118 $ 112
Product 9,573 7,563 5,889
-------- -------- --------
Total revenues 41,299 18,681 6,001
-------- -------- --------
Operating costs and expenses:
Network expenses 26,580 10,103 149
Facilities administration and maintenance 10,317 2,096 26
Cost of product revenues 3,974 3,096 2,137
Selling, general and administrative 33,375 11,373 3,953
Research and development 1,352 1,270 689
Depreciation and amortization 8,298 2,374 384
-------- -------- --------
Total operating costs and expenses 83,896 30,312 7,338
-------- -------- --------
Loss from operations (42,597) (11,631) (1,337)
-------- -------- --------
Other expenses (income):
Interest income (5,549) (303) (254)
Interest expense, net of amounts capitalized 21,224 838 27
Loss from joint venture 1,495 661 1,099
Write-off of pre-operating costs -- -- 691
Loss on investments 26 526 --
Other 839 160 87
-------- -------- --------
18,035 1,882 1,650
-------- -------- --------
Loss before minority interest in
income (loss) of subsidiary
and income tax (60,632) (13,513) (2,987)
-------- -------- --------
</TABLE>
(Continued)
F - 5
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations, Continued
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Thirteen
Year ended Year ended months ended
September 30, September 30, September 30,
1996 1995 1994
-------- -------- --------
(In U.S. Dollars)
<S> <C> <C> <C>
Income tax expense:
Current $ 157 $ 70 $ 487
Deferred -- 96 15
-------- -------- --------
157 166 502
-------- -------- --------
Loss before minority interest
in income (loss) of subsidiaries (60,789) (13,679) (3,489)
Minority interest in (income) loss
of subsidiaries 411 2,364 (2)
-------- -------- --------
Loss for the period $(60,378) (11,315) (3,491)
======== ======== ========
Loss per share $ (3.18) $ (0.82) $ (0.35)
======== ======== ========
Weighted average common and common
equivalents shares outstanding 18,988,127 13,780,796 9,878,704
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Shareholders' Equity
(In thousands, except per share amounts)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Commitment to
issue common
shares (Note 6) Common shares Total
------------------------- ------------------------ Accumulated shareholders'
Shares Amount Shares Amount deficit equity
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1993 -- $ -- 9,003,421 $ 10,511 $ (1,149) $ 9,362
Issuance of common stock for
services -- -- 48,000 183 -- 183
Issuance of common stock, net -- -- 2,515,479 10,368 -- 10,368
Issuance of common stock under
option plans -- -- 343,750 974 -- 974
Commitment to issues shares for
business combinations 551,536 3,038 -- -- -- 3,038
Net loss -- -- -- -- (3,491) (3,491)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1994 551,536 3,038 11,910,650 22,036 (4,640) 20,434
Issuance of common stock for
services -- -- 34,057 150 -- 150
Issuance of common stock in
business combinations (551,536) (3,038) 1,719,785 8,785 -- 5,747
Issuance of common stock, net -- -- 4,593,598 17,965 -- 17,965
Issuance of common stock under
option plans -- -- 442,200 1,230 -- 1,230
Commitment to issues shares for
business combinations 336,498 1,494 -- -- -- 1,494
Net loss -- -- -- -- (11,315) (11,315)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1995 336,498 1,494 18,700,290 50,166 (15,955) 35,705
Issuance of common stock for
services -- -- 85,627 621 -- 621
Issuance of common stock in
business combinations (168,249) (747) 1,200,873 11,097 -- 10,350
Issuance of common stock, net -- -- 1,189,849 9,672 -- 9,672
Issuance of common stock under
option plans -- -- 67,500 293 -- 293
Commitment to issues shares for
business combinations 1,753,758 24,707 -- -- -- 24,707
Issuance of common stock under
employee stock purchase plan -- -- 13,558 132 -- 132
Accrual of compensation costs for
stock award and option plans -- -- -- 666 -- 666
Net loss -- -- -- -- (60,378) (60,378)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1996 1,922,007 $ 25,454 21,257,697 $ 72,647 $ (76,333) $ 21,768
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F - 7
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Years ended September 30, 1996 and 1995 and
thirteen months ended September 30, 1994
<TABLE>
<CAPTION>
Thirteen
Year ended Year ended months ended
September 30, September 30, September 30,
1996 1995 1994
-------- -------- --------
(In U.S. Dollars)
<S> <C> <C> <C>
Operations:
Loss for the period $(60,378) $(11,315) $ (3,491)
Items not involving cash:
Minority interest in income (loss) of subsidiary (411) (2,364) 2
Loss from joint ventures 1,495 661 1,099
Write-off of pre-operating costs -- -- 691
Depreciation and amortization 9,496 2,824 557
Deferred income taxes -- 96 15
Deferred compensation 7 151 --
Accretion of interest 19,978 -- --
Write-off of other assets 766 122 --
Issuance of stock for compensation 890 -- --
Issuance of stock for financing commitment 396 150 183
Loss on disposal of fixed assets 246 -- --
Loss on investments 26 526 --
Changes in non-cash operating working capital:
Accounts receivable, net (1,066) (1,549) (882)
Inventory (2,019) (13) (163)
Other current and other assets, net (5,304) (417) (120)
Accounts payable and accrued liabilities 2,387 (190) 2,350
Other current liabilities 185 262 53
-------- -------- --------
Cash provided by (used in) operations (33,306) (11,056) 294
-------- -------- --------
Investments:
Acquisition of subsidiaries, net of cash acquired (1,441) 207 (4,235)
Investment in joint ventures -- -- (35)
Settlement of notes receivable -- 3,367 (5,107)
Purchase of investment in affiliate (294) -- --
Purchase of investments (9,799) 848 (843)
Proceeds from sale of investments 5,493 -- --
Purchase of fixed assets (76,192) (27,730) (906)
Proceeds from sale of fixed assets 8 -- --
Purchase of other assets (7,449) (1,829) (580)
Change in restricted cash (16,000) -- --
-------- -------- --------
Cash used in investing activities (105,674) (25,137) (11,706)
-------- -------- --------
Financing:
Proceeds from long-term debt 196,207 19,857 --
Principal payments on long-term debt (2,112) (816) (387)
Issuance of common shares, net of issuance costs 10,098 19,195 11,342
Deferred debt financing costs (9,894) (853) (70)
Issuance of subsidiary shares -- 615 --
-------- -------- --------
Cash provided by financing activities 194,299 37,998 10,885
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 55,319 1,805 (527)
Cash and cash equivalents, beginning of period 6,024 4,219 4,746
-------- -------- --------
Cash and cash equivalents, end of period $ 61,343 $ 6,024 $ 4,219
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 8
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
September 30, 1996 and 1995
(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 providing competitive local exchange services primarily in
the western United States. In addition, the Company provides a range of
telecommunications services which include long distance, Internet
access and data services. The Company also manufactures
telecommunications switching equipment.
The consolidated financial statements for the years ended September 30,
1996 and 1995, and the thirteen months ended September 30, 1994 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 10).
(b) BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the
Company and its greater than 50% owned subsidiaries. The Company's
investments in unconsolidated companies owned 20% or more are accounted
for using the equity method. All significant intercompany accounts have
been eliminated.
(c) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
original maturities of ninety days or less.
(d) RESTRICTED CASH
Pursuant to an agreement between the Company and a vendor relating to a
construction in progress as of September 30, 1996, the Company is
required to maintain $16 million in a restricted account pending the
completion of the project as collateral against payment. Completion of
the project is anticipated in the next fiscal year. At September 30,
1996, the Company is committed to purchase approximately $20.7 million
relating to this project.
(Continued)
F - 9
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(e) ACCOUNTS AND NOTES RECEIVABLE
The Company maintains a security interest in the telecommunications
systems it sells until the Company is paid in full. Management provides
an allowance for doubtful accounts and notes based on current customer
information and historical statistics. The allowance for doubtful
accounts was $1,264 and $1,401 at September 30, 1996 and 1995,
respectively.
(f) INVESTMENTS
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 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.
Trading and available-for-sale securities are recorded at fair value.
All of the Company's investments comprised primarily of U.S. Treasury
Securities and commercial paper, are classified as available-for-sale
and mature in periods ranging from 3 to 9 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 shareholders' 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, 1996 and 1995.
(Continued)
F - 10
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(g) INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market (net realizable value) and consists of the following:
1996 1995
------ ------
Raw materials $ 378 $ 317
Work in process 346 70
Finished and refurbished goods 1,682 --
------ ------
Total inventory $2,406 $ 387
====== ======
(h) INVESTMENTS IN AFFILIATES
The Company has a 50% interest in Phoenix Fiber Access, Inc., a
competitive access fiber optic telecommunications network in the
Phoenix, Arizona metropolitan area. The carrying value of this
investment, which is included in other assets in the accompanying
consolidated balance sheet was $1,364 and $2,859 at September 30, 1996,
and 1995, respectively.
The Company has an approximate 40% interest in GST Global
Telecommunications, Inc. (GST Global), a publicly traded corporation on
the Vancouver Stock Exchange which intends to conduct
telecommunications operations on a worldwide basis. The carrying value
of this investment, which is included in other assets in the
accompanying consolidated balance sheet, was $3,634 at September 30,
1996 (see note 2).
(i) 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 3 - 7 years
Building 40 years
Construction, engineering and overhead costs directly related to the
development of competitive access networks are capitalized. The Company
begins depreciating these costs when the networks become commercially
operational. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets owned.
(Continued)
F - 11
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(j) 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 $1,690, $389, and $19 for the years ended
September 30, 1996 and 1995, and the thirteen month period ended
September 30, 1994, respectively.
(k) 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
product and is presented in the accompanying consolidated statements of
operations net of product returns.
Deferred revenue, of which $477 and $373 are included in other current
liabilities in the accompanying balance sheet at September 30, 1996 and
1995, respectively, 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.
(l) 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.
(m) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital transactions
in the accompanying consolidated financial statements.
(Continued)
F - 12
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(n) 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.
(o) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in the tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
(p) FOREIGN 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.
(q) FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, short-term investments, short-term borrowings
and accounts payable and accrued liabilities approximate fair values
due to the short maturity of those instruments.
The carrying amount of the Company's long-term debt approximates its
fair value. The fair value of the Company's long-term debt was
determined based on quoted market prices for similar issues or on
current rates available to the Company for debt of the same remaining
maturities and similar terms.
(Continued)
F - 13
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
(r) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(s) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1995 and 1994 to conform with the
1996 presentation.
(2) ACQUISITIONS
From September 1, 1993 through September 30, 1996, the Company made the
acquisitions set forth below, each of which was accounted for as a
purchase, except for Canadian Programming Concepts, Inc., which was
accounted for as an equity investment. The consolidated financial
statements include the operating results from the effective date of
acquisition.
(a) CALL AMERICA BUSINESS COMMUNICATIONS, INC. (CALL AMERICA)
In the fourth quarter of 1996, the Company acquired 100% of the
outstanding capital stock of Call America. Call America is a California
company that provides long distance and ancillary communications
services. The Company acquired Call America for consideration of
$14,777, consisting of 1,177,692 shares of common stock valued at
$12.50 per share, and $56 in legal fees. An additional 130,000 common
shares have been placed in escrow and will be issued to the former
owners of Call America in one year, subject to certain indemnification
clauses contained in the purchase agreement. Up to an additional
114,489 shares could be issued to the former Call America owners if the
market price of the Company's common stock is less than $12.50 six
months after the closing date. Additionally, $533 in notes receivable
due from the former owners of Call America will be forgiven if certain
operating milestones are met over the next 10 years. In connection with
this acquisition, the Company recorded $21,166 in assets, including
$9,798 in goodwill, and $6,389 in liabilities.
(Continued)
F - 14
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(b) TOTALNET COMMUNICATIONS, INC. (TOTALNET)
In the fourth quarter of 1996, the Company acquired 100% of the
outstanding capital stock of TotalNet, a long distance service
provider. The Company acquired TotalNet for consideration of $7,911,
consisting of 401,160 common shares valued at $4,373, a commitment to
issue shares valued at $3,498 at the one year anniversary of the
agreement, and $40 in legal fees. The number of shares issuable at the
one year anniversary will be determined by a share price based on the
weighted average market price of the Company's common shares for the
ten days preceding the anniversary providing that in no case will the
anniversary share price be lower than $7.63 or greater than $20. An
additional 80,232 common shares will be issued to the former owners of
TotalNet at the anniversary date, subject to certain indemnification
clauses contained in the purchase agreement. In connection with this
acquisition, the Company recorded $10,149 in assets, including $4,700
in goodwill, and $2,239 in liabilities.
(c) GST TELECOM, INC. (GST TELECOM)
In the third quarter of 1994, the Company acquired 60% of the shares of
GST Telecom in exchange for contributing 60% of the shares of Tucson
Lightwave, Inc. (Tucson) and a commitment to provide at least $11,024
in equity financing. GST Telecom develops, constructs, and operates
competitive local exchange networks and other communications systems.
The shares of Tucson were acquired from Pacwest, LLC (Pacwest) (an
entity controlled by the Chief Executive Officer of the Company) in
exchange for 100,000 common shares of the Company valued at $447. The
Company has made $132,184 in equity contributions to GST Telecom
through September 30, 1996.
In the third quarter of 1995, the Company acquired an additional 20% of
GST Telecom for 1,000,000 common shares valued at $5 per share.
In the first quarter of 1996, the Company acquired the remaining 20% of
GST Telecom 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, which was determined by an independent
appraisal during September 1996. Currently, 1,000,000 common shares are
held in escrow pending the release of such shares. In addition, the
parties agreed that the Company has fulfilled all of its obligations
relating to the funding of GST Telecom and its subsidiaries.
In connection with these acquisitions, the Company recorded $40,516 in
net assets, including goodwill of $15,330, and liabilities of $3,478.
(Continued)
F - 15
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) NATIONAL APPLIED COMPUTERS TECHNOLOGIES, INC. (NACT)
In the fourth quarter of 1993, the Company purchased 52% of the common
shares of NACT. Subsequent to September 1, 1993, at various times, the
Company acquired the remaining 48% interest of NACT. NACT is a Utah
manufacturer of telecommunications switching and network management
equipment for the inter-exchange industry.
The consideration paid for 100% of NACT's outstanding common shares
consisted of $3,621 in cash, $466 in notes payable, $160 in legal fees
and 956,283 common shares valued at $4,832. 15% of the stock acquired
from NACT was purchased from NACT's former President, who is also the
Company's Chief Technology Officer and a Director of the Company, for
384,195 common shares of the Company. In connection with these
acquisitions, the Company recorded $10,122 in net assets, including
goodwill of $1,387, and liabilities of $1,203.
(e) INTERNATIONAL TELEMANAGEMENT GROUP, INC. (ITG)
In the third quarter of 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 $75, the assumption of
certain liabilities, and an earn out provision. In connection with this
acquisition, the Company recorded $7,261 in net assets, including
goodwill of $4,025, and liabilities of $7,185.
(f) OTHERS
In May 1996, the Company purchased from Tomen America, Inc. the
remaining 10% interest in the GST Pacific Lightwave, Inc., a GST
Telecom subsidiary which operates a fiber optic competitive local
exchange network in southern California. The consideration paid for
this acquisition consisted of $1,250 in cash, which was recorded as
goodwill.
(Continued)
F - 16
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
In a series of transactions during the third and fourth quarters of
1996, the Company acquired approximately 40% of Canadian Programming
Concepts, Inc. (CPC), a Canadian corporation which is publicly traded
on the Vancouver Stock Exchange, for consideration of $3,659. As a
result of this investment, CPC's name was changed to GST Global.
Concurrent with this investment, four of the Company's directors and
one of the Company's employees were appointed to GST Global's six
member board of directors. The key officers of GST Global are officers
of the Company. Several employees and directors of the Company own
shares in GST Global amounting to approximately 5% of GST Global's
outstanding shares at September 30, 1996. At September 30, 1996, the
market value of GST Global totaled approximately $26,366.
During 1996, the Company acquired the assets of Reservations, Inc. dba
Hawaii Online (HOL), the assets of Texas-Ohio Communications, Inc.
(TOC), and 100% of the outstanding capital stock of Tri-Star
Residential Communications, Inc. (Tri-Star). HOL is an Internet service
provider; TOC is a long distance service provider; and Tri-Star
provides shared tenant services consisting of long distance, cable
television and security service to tenants of multi-dwelling apartment
units. Consideration paid for these acquisitions totaled $3,341 and
consisted of 32,624 common shares valued at $350, a commitment to issue
common shares valued at $2,115 over the next two years, $599 in accrued
payments to be made during 1997, $120 of cash, and $157 in legal fees.
In connection with these acquisitions, the Company recorded $5,529 in
assets, including $1,085 of goodwill, and $2,278 in liabilities.
The pro forma results shown below reflect purchase accounting
adjustments assuming the acquisitions described above occurred as of the
beginning of each of the periods presented:
Year Year
ended ended
September 30, September 30,
1996 1995
---- ----
Revenues $ 71,600 54,762
Net loss (65,196) (22,918)
Net loss per share (3.05) (1.34)
The pro forma results are not necessarily indicative of what actually
would have occurred had the acquisitions been in effect for the entire
periods presented. In addition, they are not intended to be a
projection of future results that may be achieved from the combined
operations.
(Continued)
F - 17
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(3) PROPERTY AND EQUIPMENT
September 30, September 30,
1996 1995
--------- ---------
Telecommunications networks $ 25,551 $ 9,577
Electronic and related equipment 31,547 10,058
Leasehold improvements 3,619 300
Furniture, office equipment and other 8,746 2,201
Building 2,134 2,134
Construction in progress 62,763 15,313
--------- ---------
134,360 39,583
Less accumulated depreciation (6,785) (1,550)
--------- ---------
$ 127,575 $ 38,033
========= =========
Property and equipment includes $62,763 and $15,313 of equipment which had
not been placed in service at September 30, 1996 and 1995, respectively,
and accordingly, is not being depreciated. During the year ended September
30, 1996 and 1995, $2,316 and $291 of interest, respectively, was
capitalized as part of telecommunications networks and networks in
progress.
(4) ACCRUED EXPENSES
September 30, September 30,
1996 1995
--------- ---------
Fixed asset purchases $ 14,153 796
Accrued acquisition costs 4,213 --
Carrier costs 4,057 680
Other 4,320 1,614
--------- ---------
Total $ 26,743 3,090
========= =========
(Continued)
F - 18
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(5) FINANCING ARRANGEMENTS
(a) DEBT
The Company's long-term debt at September 30, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to Tomen, quarterly interest payments at the LIBOR
rate plus 3% (8.7% at September 30, 1996) with quarterly
principal payments (together with interest) beginning in
fiscal 1998 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 $ 31,771 16,674
Senior discount notes, 13-7/8% effective interest with
semi-annual interest payments due beginning June 15,
2001 on a total maturity value of $312,448, principal
due December 15, 2005 177,760 --
Convertible senior subordinated discount notes 13-7/8%
effective interest with semi-annual interest payments
due beginning June 15, 2001 on a total maturity value
of $39,056, principal due December 15, 2005 22,220 --
Other 5,755 3,150
-------- --------
237,506 19,824
Less current portion of long-term debt 4,832 736
-------- --------
$232,674 19,088
======== ========
</TABLE>
(Continued)
F - 19
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The schedule of future principal payments on long-term debt is as
follows:
1997 $ 4,832
1998 3,474
1999 4,567
2000 5,438
2001 5,295
Thereafter 213,900
-------------
$ 237,506
=============
(b) ISSUANCE OF DEBT AND CONVERTIBLE DEBT SECURITIES
In the first quarter of 1996, the Company issued approximately $180
million in 39,056 Units (the Units) each consisting of eight 13.875%
(effective interest rate) Senior Discount Notes (the senior notes) and
one 13.875% (effective interest rate) 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 cash 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, 2000. 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. The senior and convertible notes are
subject to certain debt covenants.
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 by the Company if the Company's common shares sustain
certain market value levels for 30 consecutive trading days.
On or after December 15, 2000, the senior and convertible notes will be
redeemable at the option of the Company.
(Continued)
F - 20
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(c) TOMEN AMERICA, INC. FACILITY
In the first quarter of 1995, 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. An
upfront fee of 1.50% of the aggregate principal amount of each project
loan and a commitment fee of 0.50% per annum on the unused portion of
each project loan is payable to Tomen. Tomen will evaluate each network
project separately to determine if it will participate in financing the
project. The agreement originally provided Tomen the right to purchase
a 10% equity interest in each network project it financed. Pursuant to
such right, in 1995 Tomen purchased a 10% interest in the Company's
southern California project. In May 1996, the Company repurchased the
10% interest in the project and the agreement was amended to cancel
Tomen's right to purchase an equity interest in funded projects. As of
September 30, 1996, Tomen has agreed to provide a total of $34.45
million in debt financing to the Company's subsidiaries ($31.8 million
of which has been drawn down as of September 30, 1996) for construction
and operation of its fiber optic networks in Southern California, New
Mexico, and Arizona. The Tomen financing agreements are subject to
certain debt covenants. Subsequent to September 30, 1996, Tomen has
agreed to provide an additional $41 million in debt financing for the
Company's Hawaiian network.
Concurrent with the signings of the master financing agreement and
subsidiary credit agreements, the Company has also signed stock
purchase agreements with Tomen wherein Tomen purchased shares of common
stock and received warrants to purchase additional shares of common
stock. Pursuant to such agreements, through September 30, 1996, Tomen
has purchased 1,074,074 shares of common stock at prices ranging from
$4.60 to $10.80 per share for total cash consideration of $6,955. Tomen
also holds warrants to purchase up to 546,155 additional shares of
common stock at prices ranging from $5.52 to $12.96 per share. Such
warrants expire at various times between October 1996 and May 1998.
Subsequent to September 30, 1996, Tomen exercised a warrant and
purchased 250,000 shares of common stock at $5.52 per share for total
cash consideration of $1,380.
The Company's Chief Executive Officer serves as a consultant to Tomen
for which he is paid a fee. Simultaneous with the execution of the June
21, 1994 purchase of 60% of GST Telecom from Pacwest. Pacwest
contracted with the Company to receive a fee equal to 1% of the
aggregate debt and equity financing provided by Tomen to the Company.
(Continued)
F - 21
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) SIEMENS STROMBERG-CARLSON AGREEMENT
In the fourth quarter of 1996, the Company entered into a loan and
security agreement with Siemens Stromberg-Carlson (Siemens). Under the
terms of the agreement, Siemens will loan up to $226 million to the
Company for the purchase and installation of telecommunications
switching and related equipment. Amounts borrowed under the agreement
will initially bear interest at LIBOR plus 4.5% and will be secured by
the equipment. Such interest will decrease to LIBOR plus 3.5% at the
time each initial loan is converted to a term loan, which conversion
will occur at the first calendar quarter following the initial loan.
Upon making the first loan request, the Company will be committed to
purchase a minimum of $16.5 million in equipment over 3 years. Amounts
borrowed under the agreement will be repaid in 24 quarterly
installments beginning 5 quarters after the initial loan is converted
to a term loan. At September 30, 1996, no amount had been borrowed
pursuant to this agreement.
(e) NORTHERN TELECOM, INC. PURCHASE AGREEMENT
In the fourth quarter of 1996, the Company entered into a purchase
agreement with Northern Telecom, Inc. (Nortel), pursuant to which the
Company is committed to purchase a minimum of $50 million, of which
$1.9 million has been purchased as of September 30, 1996, in
telecommunications switching equipment over the next three years. The
Company is currently negotiating an agreement to finance such equipment
purchases with a third party.
(f) LINE OF CREDIT
At September 30, 1996, the Company was contingently liable under
repurchase agreements for a maximum of $1,035 to a financial
institution. The financial institution provides lease financing to NACT
customers on a recourse basis. The Company has established a $1,000
line of credit with the financial institution to provide funding for
payment of these leases, if required. No balance was outstanding under
the line of credit at September 30, 1996.
(Continued)
F - 22
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(6) SHAREHOLDERS' EQUITY
(a) COMMITMENT TO ISSUE SHARES
Pursuant to a final agreement dated January 5, 1995, the Company is
committed to issue 168,249 common shares at a fair value of $4.44 per
share ($747) to former shareholders of NACT on January 5, 1997.
Additionally, pursuant to the terms of the purchase agreements
discussed in note 2, the Company is committed to issue a minimum of
1,753,758 shares valued at $24,707 at various times throughout 1997.
(b) PREFERENCE SHARES
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value (the Preference Shares), in one or
more series and to determine the designations, powers, preferences and
relative, participating, optional or other rights thereof, including
without limitation, the dividend rate (and whether dividends are
cumulative), conversion rights, voting rights, rights and terms of
redemption, redemption price and liquidation preference.
(c) ESCROW AGREEMENTS
Of the 21,257,697 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 in accordance with a formula adopted by the regulatory
authorities. If the Company has not met the conditions set for the
release of these shares by January 16, 2001, these shares will be
canceled.
Pursuant to the Company acquiring the remaining 20% interest in GST
Telecom during 1996, 1,000,000 common shares were put in escrow pending
a valuation of GST Telecom. An independent appraisal of GST Telecom was
received in September 1996 allowing the release of such shares from
escrow (see note 2). On November 7, 1996, such shares were released
from escrow.
(Continued)
F - 23
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) 1996 EMPLOYEE STOCK PURCHASE PLAN
In July 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the Stock Purchase Plan) which provides eligible employees of the
Company with an opportunity to acquire common shares of the Company. It
is the intention of the Company that the Stock Purchase Plan qualify as
an "Employee Stock Purchase Plan" under Section 423 of the Internal
Revenue Code. Under this Stock Purchase Plan, the Company authorized
the issuance of 500,000 common shares to be issued to employees of the
Company.
Employees who own 5% or more of the voting rights of the Company's
outstanding common shares may not participate in the Plan.
(e) STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLANS
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.
In January 1996, the Company created an additional Stock Incentive Plan
(the 1996 Plan) in which the Board of Directors approved and authorized
the issuance of 400,000 stock options to be granted to employees of the
Company. The terms of the 1996 Plan are identical to that of the 1995
Plan. In January 1996, the Board of Directors also authorized a 1
million increase in the number of common shares reserved for issuance
under the Company's 1995 Stock Option Plan.
(Continued)
F - 24
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
1996 SENIOR OPERATING AND EXECUTIVE OFFICER STOCK OPTION PLANS
In May 1996, the Company adopted the 1996 Senior Operating Officer
Stock Option Plan (the Senior Operating Plan) and the 1996 Senior
Executive Officer Stock Option Plan (the Senior Executive Plan) in
which the Board of Directors approved and authorized the issuance of up
to 900,000 and 600,000 options, respectively, to be awarded to senior
operating and executive management of the Company, at a $10 option
exercise price. The options have a term of six years and vest and
become exercisable at the discretion of the Board of Directors. All
stock options granted under the Senior Executive Plan as of September
30, 1996 vest upon the achievement of certain milestones as were
determined by the Board of Directors. It is the intention of the
Company that certain options granted pursuant to these Plans shall
constitute incentive stock options under Section 422 of the Internal
Revenue Code, while certain other options granted pursuant to these
Plans shall be nonqualified stock options.
The exercise price of all incentive stock options granted under these
four Plans must be at least equal to the fair market 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 nonqualified stock options
granted under the 1995 and 1996 Plans and the Senior Operating and
Executive Plans must be at least 80% and 50%, respectively, of the fair
market value of the common stock on the date of grant.
(Continued)
F - 25
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Activity under the various stock option plans is as follows:
Number of Price
Shares Range
---------- ---------------
Options outstanding at August 31, 1993 785,250 $ 1.00 - 3.00
Options:
Granted 435,000 4.25 - 5.00
Exercised (343,750) 1.00 - 3.00
Canceled - -
---------- ---------------
Options outstanding at September 30, 1994 876,500 1.00 - 5.00
Options:
Granted 1,190,035 3.55 - 6.75
Exercised (442,200) 1.00 - 4.25
Canceled (30,042) 3.55 - 5.00
---------- ----------------
Options outstanding at September 30, 1995 1,594,293 3.55 - 6.75
Options:
Granted 1,563,373 5.00 - 10.00
Exercised (67,500) 3.55 - 6.75
Canceled (32,447) 6.75 - 10.00
---------- ----------------
Options outstanding at September 30, 1996 3,057,719 $ 3.55 - 10.00
========== ================
Of the 3,057,719 options outstanding, 1,208,843 options were vested and
exercisable and 966,089 options were available for future grant.
(f) 1996 STOCK BONUS AGREEMENT
In September 1994, the Company's Board of Directors adopted a Stock
Award Plan which provides for the awarding of up to 70,000 common
shares of the Company to a certain member of management upon the
achievement of certain milestones.
(Continued)
F - 26
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(g) WARRANTS OUTSTANDING
Warrants outstanding and exercisable at September 30, 1996:
Number of
common shares Exercise Exercise
Issuable Price Expiration Date
-------- ----- ---------------
250,000 $5.52 October 23, 1996
125,000 $5.62 April 26, 1997
171,155 $12.96 May 23, 1998
50,000 $10.00 April 29, 1999
300,000 $6.75 September 30, 2000
The 546,155 warrants expiring October 23, 1996 through May 23, 1998
were granted to Tomen in conjunction with the Tomen financing
agreements (see note 5), of which the 250,000 warrants expiring October
23, 1996 were exercised during October 1996. The 50,000 warrants
expiring April 29, 1999 were granted in conjunction with a private
placement of common stock during fiscal year ending 1994. The 300,000
warrants expiring September 30, 2000 were granted to a director of the
Company. 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 - 27
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(7) 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 as follows:
Thirteen
month
Year ended Year ended period ended
September 30, September 30, September 30,
1996 1995 1994
--- --- ---
Computed expected income tax
expense (benefit) at Canadian
statutory rate (39)% (39)% (39)%
Expected state/province income tax
expense (benefit) (4) (6) (5)
Increase (decrease) in valuation
allowance 21 38 56
Amortization of goodwill 1 5 5
Minority interest -- (7) --
Effect of difference in United
States statutory rate 5 5 6
Effect of acquisition of new subsidiaries 10 1 --
Non-deductible interest 2 -- --
Other 4 4 (6)
--- --- ---
Income tax expense (benefit) - % 1% 17%
=== === ===
(Continued)
F - 28
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(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,
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
United States Federal and state
net operating loss carryforwards $ 16,378 $ 3,325
Canadian net operating loss carryforwards 3,065 2,533
Non-deductible interest 4,608 --
Canadian non-deductible interest 798 --
Canadian capital loss carryforward 128 --
Other 2,063 1,633
-------- --------
Total gross deferred tax assets 27,040 7,491
Less valuation allowance (19,429) (6,734)
-------- --------
Deferred tax liabilities:
Furniture, fixtures and equipment,
due to differences in depreciation 2,110 693
Capitalized software/intangibles 5,501 64
-------- --------
Total gross deferred tax liabilities 7,611 757
-------- --------
Net deferred taxes $ -- $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of September 1, 1993
was $593. The net change in total valuation allowance for the years ended
September 30, 1996 and 1995, and the thirteen month period ended September
30, 1994 was an increase of $12,695, $4,346, and $1,795 respectively.
(Continued)
F - 29
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The Company has non-capital losses for income tax purposes of
approximately Canadian $6,811 available to reduce Canadian taxable income
of future years, expiring as follows:
1999 $ 686
2000 2,072
2002 1,597
2003 2,456
------
$6,811
======
Based on a history of recurring losses, it is questionable whether the
Company will be allowed to utilize these Canadian losses if the tax
authority determines that the Company has no reasonable expectation of
profit. As of September 30, 1996, the Company also has a Canadian net
capital loss carryforward of $389. Net capital losses can be carried
forward indefinitely but can only be utilized to offset taxable capital
gain.
The Company has net operating losses for income tax purposes of
approximately $44,985 available to reduce United States taxable income of
future years, expiring as follows:
2007 $ 405
2008 455
2009 2,717
2010 4,939
2011 36,469
-------
$44,985
=======
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.
(Continued)
F - 30
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(8) LEASES
The Company is obligated under capital leases for equipment which expire
at various dates during the next five years. At September 30, 1996 and
1995, the gross amounts of equipment and related accumulated amortization
recorded under capital leases were as follows:
1996 1995
------- -------
Equipment $ 2,068 853
Less accumulated amortization (291) 67
------- -------
$ 1,777 786
======= =======
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $1,501, $866 and $253 for the years ended September
30, 1996 and 1995, and the thirteen month period ended September 30, 1994,
respectively.
(Continued)
F - 31
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Future minimum lease payments under noncancelable leases (with initial or
remaining lease terms in excess of one year) and future minimum capital
lease payments as of September 30, 1996 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- -------
<S> <C> <C>
Year ending September 30:
1997 $ 980 2,777
1998 900 2,902
1999 494 2,797
2000 235 1,960
2001 4 1,493
Thereafter -- 7,335
------- -------
Total minimum lease payments 2,613 $19,264
=======
Less amount representing interest (at rates ranging
from 8.7 to 18.6%) 438
-------
Net minimum lease payments 2,175
Less current installments of obligations under capital leases 722
-------
Obligations under capital leases, excluding
current installments $ 1,453
=======
</TABLE>
Under the terms of two noncancelable subleases, the Company will receive
$220 over the next ten years.
(Continued)
F - 32
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(9) COMMITMENTS AND CONTINGENCIES
(a) PENSION AND PROFIT SHARING PLANS
In 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.
NACT also sponsors a defined contribution 401(k) plan for employees who
have completed one year of service and attained the age of 21.
Participants may defer up to 15% of eligible compensation. The Company,
at its discretion, may match 50% of participant contributions up to
7.5% of participant compensation. NACT made employer contributions to
this plan of $60, $51 and $32 in the years ending September 30, 1996,
1995 and 1994, respectively.
Through September 30, 1996, NACT provided a discretionary profit
sharing program for full time employees who had completed one full year
of employment. Under the plan, 10% of the increase in profits based on
NACT's previous highest retained earnings balance were allocated among
employees determined on length of employment and salary level at the
discretion of the Board of Directors. Contributions to the program were
$132, $171 and $105 for the years ended September 30, 1996 and 1995,
and the thirteen month period ended September 30, 1994, respectively.
The program was terminated on September 30, 1996.
(b) LONG DISTANCE CARRIERS
The Company is party to various contracts with long distance carriers
pursuant to which the Company is committed to minimum service fees. The
average monthly minimum commitments range from $1.6 million to $5.1
million per month over the next three years. The Company must pay the
carriers for differences between the commitment amounts and the actual
amounts billed.
(Continued)
F - 33
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(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. Based on information currently available,
NACT's management is of the opinion that there will be no material
impact of NACT's financial position or results of operations as a
result of this suit. Accordingly, no provision for loss has been
provided in the accompanying financial statements.
On April 24, 1996, C.W. Holdings (formerly Martin Holdings Ltd.) filed
a damages suit against the Company alleging negligence in failing to
safely deliver to C.W. Holdings a share certificate representing
209,738 common shares of the Company. C.W. Holdings has commenced an
action in the Supreme Court of British Columbia against the Company,
the Company's registrar and transfer agent, and other parties unrelated
to the Company. The Company's legal counsel believes that it is
improbable that there will be an outcome unfavorable to the Company in
the legal proceedings.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material effect on the Company's financial position.
(d) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key members of
management. These agreements provide for payments based upon death,
disability and change of control. The agreements also contain covenants
not to compete.
(10) 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 as noted below,
these financial statements also conform, in all material respects, with
those accounting principles that are generally accepted in Canada
(Canadian GAAP).
(Continued)
F - 34
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
For U.S. GAAP purposes, the 750,000 escrow shares disclosed in note 6 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 in accordance with accounting principles generally
accepted in Canada is $(3.06), $(0.78) and $(0.33) for the years ended
September 30, 1996, 1995 and the thirteen month period ended September 30,
1994, respectively.
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:
Selected information from statement of operations:
Revenues $ 5,253
Operating expenses 6,147
--------
Loss from operations 894
Other expenses 1,681
--------
Loss before minority interest and income tax 2,575
Income tax expense 470
--------
Loss before minority interest 3,045
Minority interest in income of subsidiaries 126
--------
Loss for the year $ 3,171
========
Selected information from statement of cash flows:
Operations:
Loss for the year (3,171)
Items not involving cash 2,420
Changes in non-cash operating working capital (154)
--------
Cash used in operations (905)
Financing 14,040
Investing (12,846)
--------
Increase in cash and cash equivalents 289
Cash and cash equivalents, beginning of year 4,745
--------
Cash and cash equivalents, end of year $ 5,034
========
(Continued)
F - 35
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(11) INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
"Net cash provided (used) by operating activities" includes cash payments
for interest of $1,813, $364 and $24 and cash payments for taxes of $-0-,
$264 and $253, for the years ended September 30, 1996 and 1995, and the
thirteen month period ended September 30, 1994, respectively.
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 2 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 in other assets, $521 in
liabilities, $747 in common stock, $1,494 in a commitment to issue common
shares and a reduction of $886 to its non-controlling interest in
subsidiaries account.
Effective June 1, 1995, the Company acquired an additional 20% of GST
Telecom (see note 2). The Company recorded $5,000 in common stock, $3,226
in other assets, and a reduction of $1,774 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 $4,457 in other
assets and an increase of $4,457 to its non-controlling interest in
subsidiaries account.
During the year ending September 30, 1995, the Company recorded a $200
reduction in notes receivable and a $200 increase to deferred financing
costs pursuant to a loan agreement and promissory note dated July 7, 1994,
whereby the Company loaned $200 to Pacwest Network, L.L.C. (Pacwest) which
was repaid in full by crediting against fees payable to Pacwest in respect
of financing provided by Tomen America, Inc.
Property and equipment includes amounts in accounts payable and accrued
liabilities of $18,291, $4,363 and $-0- at September 30, 1996, 1995 and
1994, respectively.
(Continued)
F - 36
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
In September 1996, the Company acquired an additional 1.5 million common
shares of GST Global, for consideration of $3,364 (see note 2). The
Company recorded $3,364 in other assets and accrued liabilities relating
to this transaction.
During the year ending September 30, 1996, the Company recorded $45,478 in
assets, $11,665 in liabilities, a reduction of $2,686 to minority
interest, $29,444 in common stock and $5,613 in commitments to issue
common stock as a result of the 1996 acquisitions discussed in note 2.
(12) RELATED PARTY TRANSACTIONS
During the third and fourth quarters of 1996, the Company made payments of
$5,997 and $2,970 to the FCC for 5 PCS licenses on behalf of Magnacom
Wireless, LLC (Magnacom), a company controlled by the Chief Executive
Officer of the Company. The $2,970 payment is included as an other current
asset in the accompanying balance sheet, whereas the $5,997 payment is
included as an other asset in the accompanying balance sheet. The Company
is in the process of establishing a non-exclusive twelve year agreement
with Magnacom; whereby, the Company will purchase services relating to
such licenses from Magnacom for use or resale. As consideration for
services provided by Magnacom to the Company, the Company will make annual
lump sum payments to Magnacom in accordance with an agreed to schedule
(with the $5,997 payment being the first of such payments) as advanced
payments for the services to be provided by Magnacom. Subsequent to
September 30, 1996, the Company made an additional payment of $5,426 to
the FCC on behalf of Magnacom.
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.
(Continued)
F - 37
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The Company paid approximately $2,264, $770 and $396 in legal fees in
1996, 1995 and 1994, respectively, to a firm having a member who is also a
director of the Company.
Under the Tomen facility, Tomen has the right to act as procurement agent
for each network project it finances. The Company has purchased equipment
through Tomen at competitive prices.
(13) 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 years ended September 30,
1996 and 1995 are as follows:
Selected balance sheet information:
Year Year
ended ended
September 30, September 30,
1996 1995
--------- ---------
Current assets $ 77,506 $ 11,415
Non-current assets 168,882 60,006
--------- ---------
$ 246,388 $ 71,421
========= =========
Current liabilities $ 34,286 $ 13,712
Non-current liabilities 210,243 19,646
Minority interest 182 3,279
Share capital 66,520 44,471
Accumulated deficit (64,843) (9,687)
--------- ---------
$ 246,388 $ 71,421
========= =========
(Continued)
F - 38
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Selected information from statement of operations:
Year Year
ended ended
September 30, September 30,
1996 1995
--------- ---------
Revenues $ 37,721 $ 18,681
Operating costs and expenses (77,590) (28,942)
--------- ---------
Loss from operations (39,869) (10,261)
Other expenses 15,625 (1,384)
--------- ---------
Loss before minority interest in loss
of subsidiaries and income tax (55,494) (11,645)
Income tax expense (72) (166)
--------- ---------
Loss before minority interest in loss
of subsidiaries (55,566) (11,811)
Minority interest in loss of subsidiaries 411 2,364
--------- ---------
Net loss $ (55,155) (9,447)
========= =========
(Continued)
F - 39
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Selected information from statement of cash flows:
Year Year
ended ended
September 30, September 30,
1996 1995
--------- ---------
Operations:
Loss for the year $ (55,155) $ (9,447)
Items not involving cash 29,256 1,590
Changes in non-cash operating working capital (6,400) (3,419)
--------- ---------
Cash used in operations (32,299) (11,276)
Investing (105,090) (29,684)
Financing 174,915 43,544
--------- ---------
Increase in cash and cash equivalent s 37,526 2,584
Cash and cash equivalents, beginning of year 3,894 1,310
--------- ---------
Cash and cash equivalents, end of year $ 41,420 $ 3,894
========= =========
(Continued)
F - 40
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(14) SUBSEQUENT EVENTS
SPECIAL WARRANTS OFFERING
On October 22, 1996, the Company completed a private placement to non-U.S.
investors of 2,000,000 Special Warrants at a purchase price of U.S.
$11.125 per Special Warrant. The Special Warrants become exercisable by
holders for no additional consideration upon the later to occur of (i) the
date upon which approval for a final Canadian prospectus qualifying the
common shares and share purchase warrants (the Underlying Warrants)
issuable upon exercise of the Special Warrants is received from the
securities commission of each of the Canadian provinces where the Special
Warrants were sold and (ii) the date that a registration statement filed
with the Securities and Exchange Commission registering the resale of the
common shares issuable upon exercise of the Special Warrants and
Underlying Warrants is declared effective, but in any event, no later than
September 22, 1997. Each Special Warrant is exercisable for one common
share and one-half of one Underlying Warrant. Each full Underlying Warrant
entitles the holder to purchase one additional common share for a purchase
price of U.S. $13.00 for one year from the date of issuance. In the event
that the requisite regulatory approvals of the Canadian Prospectus are not
received by the Company and the U.S. Registration Statement is not
declared effective, in each case by February 19, 1997, then each Special
Warrant will become exercisable for 1.1 common shares and one-half of one
Underlying Warrant.
The Company received U.S. $9,690,000, constituting 50% of the aggregate
purchase price of the Special Warrants (net of placement agency fees and
expenses), on October 22, 1996. The balance of the net purchase price of
Special Warrants (U.S. $11,125,000) is being held in escrow and is payable
to the Company upon the earlier to occur of (x) the date of receipt of
final regulatory approval of a preliminary Canadian Prospectus from the
securities commissions of the applicable Canadian provinces and (y) the
initial filing of the U.S. Registration Statement with the Commission, in
each case covering the resale of the Common Shares issuable upon exercise
of the Special Warrants and the Underlying Warrants.
NACT PUBLIC OFFERING
The Board of Directors of NACT has authorized the filing of a registration
statement with the Securities and Exchange Commission permitting NACT to
sell shares of its common stock to the public.
F - 41
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial statements
have been prepared to reflect the pro forma effects of the acquisition of Call
America. The unaudited pro forma condensed consolidated statements of operations
of the Company for Fiscal 1996 gives effect to the acquisition of Call America
as if it had occurred at October 1, 1995. The pro forma adjustments are based
upon available information and certain assumptions that the Company believes are
reasonable under the circumstances. These unaudited pro forma condensed
consolidated financial statements and notes thereto are provided for
informational purposes only and do not purport to be indicative of the results
that would have actually been attained had the acquisition of Call America been
completed on the date indicated or that may be expected to occur in the future.
F - 42
<PAGE>
GST TELECOMMUNICATIONS, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDING SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
GST CALL AMERICA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENT PRO FORMA
<TABLE>
<CAPTION>
GST Call America Pro Forma
Historical Historical Adjustment Pro Forma
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Telecommunication services $ 31,726 $ 15,624 $ 47,350
Telecommunication products 9,573 9,573
------------ ------------ ------------ ------------
41,299 15,624 56,923
------------ ------------ ------------ ------------
Operating costs and expenses
Network expenses 26,580 7,501 34,081
Facilitities administration and maintenance 10,317 10,317
Cost of product revenues 3,973 3,973
Selling, general and administrative 33,375 6,062 39,437
Research and development 1,352 1,352
Depreciation and amortization 8,299 554 $ 2,483(1) 11,336
------------ ------------ ------------ ------------
100,496
Income (loss) from operations (42,597) 1,507 (2,483) (43,573)
Other expense (income):
Interest expense, net of amounts capitalized 21,224 423 21,647
Minority interest in loss of subsidiaries (411) (411)
Other (3,032) 328 (2,704)
------------ ------------ ------------ ------------
Net income (loss) for the period $ (60,378) $ 756 $ (2,483) $ (62,105)
============ ============ ============ ============
Net loss per share $ (3.18) $ (3.11)
============ ============
Weighted average common
and common equivalent shares
outstanding 18,988,127 19,968,978(2)
============ ============
</TABLE>
F - 43
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) The additional amortization over 3 years of $6,000 of customer lists and
additional amortization over 10 years of $9,798 of goodwill resulting from
the purchase of Call America.
Purchase price:
1,177,692 shares at $12.50 per share $ 14,721
Legal fees 56
--------
Total $ 14,777
========
Allocation of purchase price:
Book value of tangible assets acquired 5,368
Liabilities assumed (6,389)
Customer Lists 6,000
Goodwill 9,798
--------
$ 14,777
========
(2) Pro forma weighted average shares include an additional 980,851 weighted
average shares to reflect the shares to be issued for the acquisition of
Call America.
F - 44
<PAGE>
GLENN BURDETTE, PHILLIPS & BRYON
CERTIFIED PUBLIC ACCOUNTANTS
1150 PALM STREET
SAN LUIS OBISPO, CA 93401
(805) 544-1441
(805) 805-4351 (FAX)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Call America Business Communications Corporation
San Luis Obispo, CA
We have audited the accompanying combined balance sheets of Call America
Business Communications Corporation (a California corporation) and affiliates as
of December 31, 1995 and 1994, and the related combined statements of income,
changes in stockholders' equity (deficiency), and cash flows for the years then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Call America
Business Communications Corporation and affiliates as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Glenn, Burdette, Phillips & Bryson
- - --------------------------------------
Glenn, Burdette, Phillips & Bryson
Certified Public Accountants
A Professional Corporation
June 25, 1996
F - 45
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED BALANCE SHEETS JUNE 30, 1996 (unaudited)
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current Assets
- - --------------
Cash and cash equivalents $ 1,497 $ 125 $ 125
Accounts receivable, net of allowance for
doubtful accounts of $50,000 and $49,093,
at 1994 and 1995, respectively 1,590,955 1,762,671 2,145,419
Income taxes receivable 104,568 40,745 40,745
Equipment deposits 45,493 42,237
Other current assets 5,297 36,843 107,192
Deferred income taxes 76,500 55,000 55,000
------------- ------------- -------------
Total current assets 1,778,817 1,940,877 2,390,718
Equipment and leasehold improvements, net
- - -----------------------------------------
of accumulated depreciation of $3,181,678
-----------------------------------------
and $3,799,282, at 1994 and 1995, 1,447,837 1,846,768 2,457,715
--------------------------------- ------------- ------------- -------------
respectively
------------
Other Assets
- - ------------
Investment, at cost 23,000 23,000 23,000
Notes receivable from stockholders 416,803 532,954 532,954
Notes receivable from related party 205,285 0
Miscellaneous deposits 23,936 23,212 15,000
Deferred income taxes 17,650 25,650 25,650
Goodwill 640,410 621,731
------------- ------------- -------------
Total other assets 481,389 1,450,511 1,218,335
------------- ------------- -------------
Total Assets $3,708,043 $5,238,156 $6,066,768
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 46
<PAGE>
<TABLE>
<CAPTION>
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
- - -------------------
<S> <C> <C> <C>
Accounts payable $1,417,192 $1,284,893 $1,854,252
Accrued expenses 567,109 631,507 929,536
Bank overdrafts 162,531 254,234 3,290
Line of credit 273,413 100,000 --
Current portion of notes payable 342,363 450,368 400,512
Current portion of capital lease obligations 185,033 309,911 309,911
---------- ---------- ----------
Total current liabilities 2,947,641 3,030,913 3,497,501
---------- ---------- ----------
Long-Term Liabilities
- - ---------------------
Notes payable, less current portion 905,137 2,194,129 1,910,738
Capitalized lease obligations, less
current portion 471,346 824,544 1,026,747
---------- ---------- ----------
Total long-term liabilities 1,376,483 3,018,673 2,937,485
---------- ---------- ----------
Commitments and Contingencies
- - -----------------------------
Minority Interest (26,396)
- - ----------------- ----------
Stockholders' Equity (Deficiency)
- - ---------------------------------
Common stock 26,262 25,696 25,696
Retained earnings (deficit) (837,126) (837,126) (393,914)
---------- ---------- ----------
Total stockholders' equity (deficiency) (811,430) (811,430) (368,218)
---------- ---------- ----------
Total Liabilities and Stockholders' Equity
(Deficiency) $3,708,043 $5,238,156 $6,066,768
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 47
<PAGE>
<TABLE>
<CAPTION>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
Six Months Ended
------------------
1994 1995 June 30, 1996
---- ---- --------------
(Unaudited)
-----------
<S> <C> <C> <C>
Net sales and services $14,383,649 $16,239,943 $9,679,930
Cost of goods and services 7,858,285 8,355,332 4,731,863
------------- ------------ -----------
Gross profit 6,525,364 7,884,611 4,948,067
Selling, general, and administrative expenses 6,992,670 7,431,568 4,041,493
------------- ------------ -----------
Income (loss) from operations (467,306) 453,043 906,574
- - -----------------------------
Other income and expense
- - ------------------------
Interest income 85,287 54,249
Interest expense (210,813) (397,851) (222,962)
------------- ------------ -----------
Net income (loss) before provision for income taxes (592,832) 109,441 683,612
- - ---------------------------------------------------
Provision for income taxes expense (benefit) (24,180) 95,200 240,400
------------- -------------- -----------
Net income (loss) $ (568,652) $ 14,241 $ 443,212
- - ----------------- ============= ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 48
<PAGE>
<TABLE>
<CAPTION>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
Retained
--------
Earnings Common
-------- ------
(Deficit) Stock Total
--------- ----- -----
<S> <C> <C> <C>
Balance, December 31, 1993 $ (47,295) $26,262 $ (21,033)
- - --------------------------
Net loss (568,652) (568,652)
--------- ------- ---------
Balance, December 31, 1994 (615,947) 26,262 (589,685)
- - --------------------------
Net income 14,241 14,241
Purchase of minority interest (deficit) (26,396) (26,396)
Purchase of common stock (209,024) (566) (209,590)
--------- ------- ---------
Balance, December 31, 1995 (837,126) 25,696 (811,430)
- - --------------------------
Net income for six months ended June 30, 1996
(Unaudited) 443,212 443,212
--------- ------- ---------
Balance, June 30, 1996 (Unaudited) $ (393,914) $25,696 $ (368,218)
- - ----------------------------------- =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 49
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Cash Flows From Operating Activities
- - ------------------------------------
Net income (loss) $ (568,652) $ 14,241 $ 443,212
----------- ----------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 562,404 635,633 367,943
Litigation settlement 132,639
Gain on disposal of assets (5,066)
Minority interest in net loss 24,021
(Increase) decrease in accounts receivable 5,808 (171,716) (515,387)
Decrease in income taxes receivable 63,823
(Increase) decrease in equipment deposits (45,493) 3,256
(Increase) decrease in other current assets 26,840 (31,546) (70,349)
Decrease in miscellaneous deposits 865 724 8,212
(Increase) decrease in deferred income taxes (27,900) 13,500
Increase (decrease) in accounts payable 265,389 (132,299) 569,359
Increase in accrued expenses 43,474 64,398 298,029
Increase (decrease) in bank overdrafts 162,531 91,703 (250,944)
----------- ----------- ------------
Total adjustments 1,063,432 483,661 42,172
----------- ----------- ------------
Net cash provided by operating activities 494,780 497,902 985,970
Cash Flows From Investing Activities
- - ------------------------------------
Purchases of equipment (579,745) (285,169) (658,622)
Proceeds from sale of equipment 5,600
Investment in stock (23,000)
----------- ----------- ------------
Net cash used in investing activities (602,745) (279,569) (658,622)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 50
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1994
PAGE 2
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1995 1996
---- ---- ----
(Unaudited)
Cash Flows from Financing Activities
- - ------------------------------------
<S> <C> <C> <C>
Advances under notes receivable from related party $ $(205,285) $
Advances under notes receivable from stockholders (121,669) (256,918)
Reduction in notes receivable from stockholders 140,767 205,285
Proceeds from line of credit 600,000 600,000
Payments on line of credit (326,587) (773,413) (100,000)
Proceeds from notes payable 437,542 908,492
Principal payments on notes payable (171,766) (186,507) (333,247)
Principal payments on stockholder notes payable (135,071) (174,988)
Principal payments on capitalized leases (315,858) (271,853) (99,386)
---------- -------- ---------
Net cash used in financing activities (33,409) (219,705) (327,348)
---------- -------- ---------
Net decrease in cash and cash equivalents (141,374) (1,372) -
Cash and Cash Equivalents, Beginning of Period 142,871 1,497 125
- - ---------------------------------------------- ---------- -------- ----------
Cash and Cash Equivalents, End of Period $ 1,497 $ 125 $ 125
- - ---------------------------------------- ============ ========= ==========
Supplemental Disclosures of Cash Flow Information
- - -------------------------------------------------
Interest $ 210,961 $ 346,311 $ 264,894
Income taxes $ 2,400 2,400
Noncash Financing and Investing Activities
- - ------------------------------------------
Assets acquired under capital lease $ 167,297 $ 749,929 $ 301,589
Acquisition of common stock, for note payable $ 209,590
Increase in goodwill from purchase
of common stock for not payable $ 640,410
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 51
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
Note 1 - Summary of Significant Accounting Policies
- - ---------------------------------------------------
A. Organization and Nature of Business
-----------------------------------
Call America Business Communications Corporation (CA) was organized in
1986 and incorporated under the laws of California. CA owns 100% of
Private Exchange Network (PXN), Inc., dba Call America Salinas (CAS). CA's
three equal shareholders also own 100% of Call America Business
Communications of Fresno, Inc., (CAF) and Call America Business
Communications of Bakersfield, Inc. (CAB). The financial statements of CA
and it's affiliates CAF and CAB have been combined (the Company) in the
accompanying financial statements. The Company's principle business
activity is providing long-distance telephone and ancillary communication
services to businesses and the general public. The Company grants credit
to customers on open account, substantially all of whom are located in
California.
B. Fixed Assets
------------
Fixed assets are shown at cost and are being depreciated or amortized over
their estimated useful lives of five to thirty- nine years, using
accelerated and straight line methods of depreciation.
C. Allowance for Doubtful Accounts
-------------------------------
Bad debts are provided on the allowance method based on receivables that
have been outstanding for more than 120 days. The allowance for doubtful
accounts is $49,093 and $50,000, at December 31, 1995 and 1994,
respectively.
D. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
E. Combined Presentation
---------------------
The combined financial statements include the consolidated balances of CA
and its wholly owned subsidiary, Private Exchange Network (PXN), Inc. All
material balances and transactions have been eliminated in consolidation.
At December 31, 1994, CA only owned 75% of PXN. The remaining 25% has been
shown as minority interest (deficit).
The consolidated balances of CA have been combined with CAF and CAB. All
intercompany transactions and balances have been eliminated in the
combination.
F - 52
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 2
Note 1 - Summary of Significant Accounting Policies (continued)
- - ---------------------------------------------------------------
F. Revenue Recognition
-------------------
Income from services is recognized when the contracted service is
rendered.
G. Common Stock
------------
CA has 500,000 common shares authorized without nominal or par value.
Total shares issued and outstanding are 300,000 common shares with a
balance of $24,000 at December 31, 1995 and 1994. CAB has 500,000 common
shares authorized without nominal or par value. Total shares issued and
outstanding are 300 and 400 common shares with a balance of $1,568 and
$2,091 at December 31, 1995 and 1994, respectively. CAF has 500,000 common
shares authorized without nominal or par value. Total shares issued and
outstanding are 300 and 400 common shares with a balance of $128 and $171
at December 31, 1995 and 1994, respectively.
H. Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers
interest bearing investments due on demand to be cash equivalents.
Note 2 - Equipment and Leasehold Improvements
- - ---------------------------------------------
The major categories of assets and the related accumulated depreciation for the
years ending December 31, 1995 and 1994 are as follows:
1994 1995
---- ----
Office equipment, furniture & fixtures $ 411,300 $ 412,801
Leasehold improvements 162,603 173,163
Equipment 3,993,592 4,992,175
Vehicles 62,020 67,911
----------- ----------
4,629,515 5,646,050
Less: accumulated depreciation (3,181,678) (3,799,282)
$ 1,447,837 $ 1,846,768
=========== ===========
F - 53
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 3
Note 2 - Equipment and Leasehold Improvements (continued)
- - ---------------------------------------------------------
Included in equipment and leasehold improvements are assets acquired under
capital lease totaling $1,986,039 and $1,236,110 with accumulated depreciation
of $1,036,292 and $731,493 at December 31, 1995 and 1994, respectively.
Depreciation expense for assets acquired under capital lease totaled $304,799
and $265,658 at December 31, 1995 and 1994, respectively.
Note 3 - Investment
- - -------------------
In October 1994, the Company purchased 230,000 shares of a California
corporation, which provides a broad range of wide area electronic mail services.
The cost of the shares was $23,000, subject to a repurchase option.
The Company has a service agreement with the corporation whereby, the Company
agrees to provide discounted telecommunications services, Internet connectivity
and customer billing administration, in consideration for integrated E-mail
services and the related E-mail services the corporation offers to its customers
for use and resale. The service agreement will continue in force until
terminated by either party upon a six month written notice. If the agreement is
terminated within the first three years, the corporation can repurchase a
portion of the shares at the original purchase price.
Note 4 - Related Party Transactions
- - -----------------------------------
During 1994 and 1995, much of the communications traffic generated by CA and its
affiliates was centralized by routing through CA in San Luis Obispo. In
addition, customers billing and many accounting and administrative duties were
moved to CA. As a result, certain costs incurred by CA were allocated to the
affiliates.
At December 31, 1994, the Company had notes receivable from stockholders of
$416,803. During the year ended December 31, 1995, $140,767 were written off as
uncollectible. The balance of notes receivable from stockholders' at December
31, 1995, was $532,954. The notes bear interest at 7% per year.
During the year ended December 31, 1995, the Company advanced $205,285 to a
corporation, whose shareholders include those of the Company's.
Included in notes payable at December 31, 1995 and 1994, were notes totaling
$1,255,862 and $525,383, respectively, that are due to one of the stockholders
of the Company. (See Note 6)
F - 54
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 4
Note 5 - Line of Credit
- - -----------------------
The Company has a line of credit with a bank that allows for maximum borrowings
of $400,000. The line carries a variable interest rate, which was 10.5% at
December 31, 1995 and 1994. The outstanding balance at December 31, 1995 and
1994, was $100,000 and $273,413, respectively.
Note 6 - Long-Term Notes Payable
- - --------------------------------
<TABLE>
<CAPTION>
Long-term notes payable consisted of the following as of December 31:
1994 1995
---- ----
<S> <C> <C>
Notes payable, issued for repurchase of common stock (see Note 9), with an interest
rate of 10%, payable in monthly installments totaling of $18,060, due April, 2000. $ $ 759,582
Note payable, unsecured, with an interest rate of 11%, payable in monthly
installments of $2,489, due April, 1995. 9,850
Note payable, secured by equipment and guaranteed by stockholders, with an interest
rate of 9.26%, payable in monthly installments of $6,132, due May, 1995. 24,061
Note payable, secured by an automobile, with an interest rate of 10.50%, payable in
monthly installments of $238, due November, 1995. 2,844
Note payable to a stockholder, unsecured, with an interest rate of 10%, payable in
monthly installments of $8,605, due August, 1999. 333,519 281,886
Note payable to a stockholder, unsecured, with an interest rate of 15%, payable in
monthly installments of $9,648, due July, 1997. 191,864 133,976
Note payable, secured by equipment and guaranteed by stockholders, with an
interest rate of 8.22%, payable in monthly installments of $2,283, due January,
1999.
94,745 78,017
Note payable, secured by equipment and fixtures and guaranteed by stockholders,
with an interest rate of 8.22%, payable in monthly installments of $2,650, due
February, 1999. 111,857 92,772
Note payable, secured by equipment and fixtures and guaranteed by stockholders,
with an interest rate of 9.43%, payable in monthly installments of $262, due
June,
1998. 9,340 7,112
Note payable, secured by equipment and fixtures and guaranteed by stockholders,
with an interest rate of 10.50%, payable in monthly installments of $5,881, due
October, 1999. 269,420 227,373
</TABLE>
F - 55
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 5
<TABLE>
<CAPTION>
Note 6 - Long-Term Notes Payable (Continued)
- - --------------------------------------------
<S> <C> <C>
Note payable, secured by equipment, with a variable interest rate of 10.25%,
payable in monthly installments of $2,333, due March, 1997. $ $ 32,662
Note payable to a stockholder, unsecured, interest only payable in monthly
installments at 11%, due February 15, 1998. 840,000
Note payable, secured by automobiles, with an interest rate of 8.25%, payable in
monthly installments of $510, due August, 2000. 23,633
Note payable, secured by equipment, with an interest rate of 7%, payable in
monthly installments of $5,000, due May, 1997.
200,000 167,484
--------- ----------
1,247,500 2,644,497
Less: current portion (342,363) (450,368)
--------- ----------
$ 905,137 $2,194,129
========= ==========
Maturities of notes payable are as follows:
1996 $ 450,368
1997 540,671
1998 1,234,704
1999 349,567
2000 69,187
-----------
$2,644,497
</TABLE>
Note 7 - Lease Obligations
- - --------------------------
Capital Leases
- - --------------
The Company leases certain switching, operator service and billing equipment
under long-term, noncancelable leases as described below:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Capital lease, with an interest rate of 13%, payable in
monthly installments of $16,088, due March, 1995. $ 31,694 $
Capital lease, with an interest rate of 7.42%, payable in
monthly installments of $535, due January, 1999. 22,573 17,658
Capital lease, with an interest rate of 9.50%, payable in
monthly installments of $351, due June, 1998. 12,249 9,616
</TABLE>
F - 56
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 6
<TABLE>
<CAPTION>
Note 7 - Lease Obligations (Continued)
- - --------------------------------------
Capital Leases (Continued)
- - --------------------------
<S> <C> <C>
Capital lease, with an interest rate of 8.74%, payable in
monthly installments of $1,883, due January, 1998. $ 56,529 $ 39,742
Capital lease, with a variable interest rate of 11%, payable in
monthly installments of $15,986, due March, 1998. 488,290 373,697
Capital lease, with an interest rate of 18.64%, payable in
monthly installments of $620, due May, 1998. 18,693 14,382
Capital lease, with an interest rate of 17.55%, payable in
monthly installments of $166, due June, 1996. 2,490 797
Capital lease, with an interest rate of 15.39%, payable in
monthly installments of $224, due June, 1995. 1,702
Capital lease, with a variable interest rate of 13.90%, payable
in monthly installments of $11,581, due December, 2000. 459,569
Capital lease, with an interest rate of 11.91%, payable in
monthly installments of $4,278, due March, 1999. 143,980
Capital lease, with an interest rate of 17.05%, payable in
monthly installments of $428, due December, 1998. 12,247 9,246
Capital lease, with an interest rate of 13.67%, payable in
monthly installments of $428, due May, 1997. 9,912 5,879
Capital lease, with an interest rate of 15.17%, payable in
monthly installments of $2,411, due May, 1998. 59,889
----------- ----------
656,379 1,134,455
Less: current portion (185,033) (309,911)
----------- ----------
$ 471,346 $ 824,544
=========== ===========
</TABLE>
Future minimum lease commitments at December 31, 1995, under capital leases are
as follows:
1996 $ 452,170
1997 449,354
1998 263,565
1999 161,426
2000 76,937
-----------
1,403,452
Less interest portion (268,997)
--------
$1,134,455
==========
F - 57
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 7
Operating Leases
- - ----------------
The Company leases office space and equipment under various operating leases.
Minimum payments under operating leases are as follows:
1996 $235,479
1997 202,388
1998 169,520
1999 154,944
--------
$762,331
========
Rent expense for the years ended December 31, 1995 and 1994, was $260,180 and
$244,979, respectively.
Note 8 - Income Taxes
- - ---------------------
The provision for federal and state income taxes at December 31, 1995 and 1994,
consisted of the following:
1994 1995
---- ----
Federal income tax current $ $ 74,627
Federal income tax deferred (5,000) (6,000)
State income tax current 3,200 7,073
State income tax deferred (22,380) 19,500
---------- --------
$ (24,180) $ 95,200
========== ========
The deferred tax assets are comprised of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1994 1995
-------------------------------- -------------------------------
Current Long-Term Current Long-Term
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Deferred tax assets:
Federal $ 113,500 $ 36,000 $ 42,500 $ 42,500
State 33,500 7,900 12,500 9,400
------ ----- ------- -------
147,000 43,900 55,000 51,900
Deferred tax assets valuation
allowance (70,500) (26,250) (26,250)
-------- ------- -------- --------
$ 76,500 $ 17,650 $ 55,000 $ 25,650
========= ========= ======== ========
</TABLE>
F - 58
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 8
The above tax assets consist of the following at December 31, 1995 and 1994:
1994 1995
---- ----
Accrued vacation $ 36,000 $ 38,000
State taxes 500 1,000
Allowance for bad debts 19,500 16,000
Net operating loss carryforward 134,900 51,900
------- ------
Gross deferred tax asset 190,900 106,900
Deferred tax asset valuation (96,750) (26,250)
--------- --------
$ 94,150 $ 80,650
========= ========
The provision for income tax differs from the amount of income tax determined by
applying the federal statutory rate of 35% due to state taxes net of federal
benefit, alternative minimum tax, the effect of graduated tax rates, and certain
nondeductible expenses, including officers' life insurance, penalties and
political contributions.
CA and its subsidiary did not file a consolidated tax return prior to the year
ending December 31, 1995. Its subsidiary has net operating losses that can only
be used to offset future subsidiary revenue. Those net operating losses expire
as follows:
Federal State
------- -----
December 31:
1998 $ $21,000
2002 29,000
December 31:
64,000
2007 41,000
2008 55,000
2010 ------ -------
$160,000 $50,000
======== =======
Note 9 - Sale of Stock
- - ----------------------
During the year ended December 31, 1995, CA's subisdiary purchased 25% of its
outstanding stock by issuing a note payable for $640,410. This transaction made
CA the 100% owner of its subsidiary. This transaction was accounted for using
the purchase method for business combinations and resulted in goodwill of
$640,410, which the Company is amortizing over 40 years using the straight line
method.
F - 59
<PAGE>
CALL AMERICA BUSINESS COMMUNICATIONS CORPORATION
AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PAGE 9
Note 9 - Sale of Stock (Continued)
- - ---------------------------------
In addition, CAF and CAB each purchased 25% of their outstanding shares of
common stock by each issuing a note payable for $104,795.
Note 10 - Litigation Gains and Losses
- - -------------------------------------
During the year ended December 31, 1995 and 1994, the Company was involved in a
lawsuit with a software vendor for a product that did not perform. At December
31, 1994, the outcome was not known and the Company had accrued $45,000 as a
possible loss contingency. At December 31, 1995 the Company determined that no
loss contingency was necessary and the accrual was reversed. Subsequent to year
end, the Company received a favorable settlement of $132,639.
Note 11 - Contingent Liability
- - ------------------------------
The Company has a provision in the employment contract for one of its officers
in which it agrees to pay the officer his current salary for life in the event
he should become disabled.
Note 12 - Subsequent Event
- - --------------------------
Subsequent to December 31, 1995, the Company entered into negotiations with GST
Telecom, Inc. (GST Net), for a corporate combination. As of the report date, no
formal agreement had been reached.
F - 60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
International Telemanagement Group, Inc.:
We have audited the accompanying balance sheets of International Telemanagement
Group, Inc. (the Company), as of December 31, 1994 and 1993, and the related
statements of operations, stockholders' deficit, and cash flows for the year
ended December 31, 1994, and for the period January 23, 1993 (date of inception)
through December 31 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Telemanagement
Group, Inc., as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the year ended December 31, 1994 and for the period
January 23, 1993 (date of inception) through December 31, 1993 in conformity
with generally accepted accounting principles.
As discussed in note 2, effective May 1, 1995, the Company was acquired by GST
Telecom, Inc.
/S/ KPMG PEAT MARWICK LLP
Detroit, Michigan
July 21, 1995
F - 61
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Balance Sheets
December 31, 1994 and 1993
<TABLE>
<CAPTION>
Assets 1994 1993
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 702,392 71,309
Trade accounts receivable, less allowance for doubtful accounts of $164,000
and $52,000, at 1994 and 1993, respectively 1,167,346 370,643
Due from officers and employees - 48,690
Other receivables 9,152 5,000
Prepaid expenses and other current assets 80,713 115,805
------------ ------------
Total current assets 1,959,603 611,447
Property and equipment, net (note 3) 1,318,870 1,175,495
--------- ---------
$ 3,278,473 1,786,942
============ =========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current installments of notes payable to related parties (note 5) $ 368,380 95,520
Current installments of long-term debt (note 4) 98,185 -
Current installments of capital lease obligations (note 7) 175,668 144,897
Accounts payable and accrued line charges, net 3,735,260 1,107,141
Due to affiliates - 4,417
Other accrued expenses and liabilities 157,789 22,049
Deferred revenues 23,982 22,363
------------ ------------
Total current liabilities 4,559,264 1,396,387
--------- ---------
Notes payable to related parties, less current installments (note 5) 246,040 -
Long-term debt, less current installments (note 4) 131,945 -
Capital lease obligations, less current installments (note 7) 747,227 890,913
------------ ------------
Total liabilities 5,684,476 2,287,300
--------- ---------
Commitments and contingencies (notes 7, 9, and 10)
Stockholders' deficit:
Common stock, no par value, 750 shares authorized, 200 issued and
outstanding 1,000 1,000
Additional paid-in capital 598,630 332,678
Accumulated deficit (2,973,765) (834,036)
--------- ------------
(2,374,135) (500,358)
Less: Treasury stock, at cost of 88 shares (31,868) -
------------ -----------
Net stockholders' deficit (2,406,003) (500,358)
--------- ------------
$ 3,278,473 1,786,942
============ =========
</TABLE>
See accompanying notes to financial statements.
F - 62
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Statements of Operations
<TABLE>
<CAPTION>
For the Period
January 23,
1993
(Date of
Four Months Year Ended Inception) through
Ended April 30, 1995 December 31, December 31,
(Unaudited) 1994 1993
-------------------- ------------ -------------------
<S> <C> <C> <C>
Net sales and services $ 5,010,908 12,202,063 1,494,943
Cost of goods and services 4,766,433 11,788,135 1,735,717
--------- ---------- ---------
Gross profit (loss) 244,475 413,928 (240,774)
Selling, general, and administrative expenses 988,203 2,014,635 507,824
------------ -------------- ------------
Loss from operations (743,728) (1,600,707) (748,598)
Other income (expense):
Interest expense (53,373) (140,338) (16,503)
Other expense, net - (398,684) (68,935)
------------ -------------- ------------
Net loss $ (797,101) (2,139,729) (834,036)
============ ========== ============
</TABLE>
See accompanying notes to financial statements.
F - 63
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
For the Period January 23, 1993 (Date of Inception)
Through December 31, 1993
--------------------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated Treasury Stockholders'
Stock Capital Deficit Stock Deficit
----- ------- ------- ----- -------
<S> <C> <C> <C> <C>
Balances at inception $ - - - - -
Issuance of common stock 1,000 332,678 - - 332,678
Net loss - - (834,036) - (834,036)
------ ---------- ------- - -------
Balances at end of period $ 1,000 332,678 (834,036) - (500,358)
===== ======= ======= = =======
Year Ended December 31, 1994
--------------------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated Treasury Stockholders'
Stock Capital Deficit Stock Deficit
----- ------- ------- ----- -------
Balances at beginning of period $ 1,000 332,678 (834,036) - (500,358)
Capital contributions - 272,000 - - 272,000
Distributions to shareholder - (6,048) - - (6,048)
Repurchase of shares - - - (31,868) (31,868)
Net loss - - (2,139,729) - (2,139,729)
------ ---------- --------- --------- ---------
Balances at end of period $ 1,000 598,630 (2,973,765) (31,868) (2,406,003)
===== ======= ========= ====== =========
Four Months Ended April 30, 1995 (Unaudited)
--------------------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated Treasury Stockholders'
Stock Capital Deficit Stock Deficit
----- ------- ------- ----- -------
Balances at beginning of period $ 1,000 598,630 (2,973,765) (31,868) (2,406,003)
Capital contributions - 10,600 - - 10,600
Repurchase of shares - - - (2,050) (2,050)
Net loss - - (797,101) - (797,101)
------ ---------- ------------ --------- ------------
Balances at end of period $ 1,000 609,230 (3,770,866) (33,918) (3,194,554)
===== ======= ========= ====== =========
</TABLE>
See accompanying notes to financial statements.
F - 64
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period
January 23,
1993 (Date of
Four Months Inception)
Ended April 30, Year Ended through
1995 December 31, December 31,
(Unaudited) 1994 1993
----------- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (797,101) (2,139,729) (834,036)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 114,773 318,926 57,859
Changes in assets and liabilities:
Trade accounts receivable (165,145) (796,703) (370,643)
Due from officers and employees -- 48,690 (48,690)
Other receivables 6,652 (4,152) (5,000)
Prepaid expenses and other current assets (13,000) 35,092 (115,805)
Accounts payable and accrued line charges 912,626 2,808,920 1,107,141
Due to affiliates -- (4,417) 4,417
Other accrued expenses and liabilities 35,127 135,740 22,049
Deferred revenues 92,129 1,619 22,363
---------- ---------- ----------
Net cash provided by (used in) operating
activities 186,061 403,986 (160,345)
---------- ---------- ----------
Cash flows from investing activities - capital (60,550) (462,301) (1,233,354)
expenditures for property and equipment -- -- --
Net cash used in investing activities (60,550) (462,301) (1,233,354)
---------- ---------- ----------
Cash flows from financing activities:
Repayment of long-term debt (369,121) 49,329
Net borrowings on revolving note payable to related
parties -- 265,000 95,520
Net repayments on notes payable to officers and
employees -- 253,900 --
Repurchase of treasury stock (2,050) (31,868) --
Payments made under capital leases -- (112,915) 1,035,810
Additional paid in capital 10,600 272,000 --
Distributions to shareholder -- (6,048) --
Proceeds from stock issuance -- -- 333,678
---------- ---------- ----------
Net cash provided by financing activities (360,571) 689,398 1,465,008
---------- ---------- ----------
Net increase (decrease) in cash (235,060) 631,083 71,309
Cash at beginning of year 702,392 71,309 --
---------- ---------- ----------
Cash at end of year $ 467,322 702,392 71,309
========== ========== ==========
Supplemental disclosures of cash flow information -
cash paid during the year for interest $ 44,025 132,073 9,513
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F - 65
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements
December 31, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
International Telemanagement Group, Inc. (the Company), is a domestic and
international interexchange carrier offering long distance, 800, private
line, and other services to its customers. ITG was incorporated in January
1993 under the laws of the state of Ohio.
(a) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property
and equipment is provided principally on a straight-line basis over
the estimated useful lives of the related assets. Assets recorded
under capital leases are amortized over the terms of the leases.
(b) INCOME TAXES
The stockholders of the Company have elected to be treated as an S
corporation, whereby taxable income and/or losses are allocated to the
stockholder rather than to the Company. Accordingly, the accompanying
financial statements do not include provisions for federal and state
taxes on income earned by the Company.
(c) REVENUE RECOGNITION
Income from services is recognized when the contracted service is
rendered.
(d) GENERAL CREDIT RISK
The Company grants credit to customers on open account, substantially
all of whom are in the telecommunications industry.
(2) SUBSEQUENT EVENT
On May 1, 1995, the Company entered into a purchase agreement with GST
Telecom, Inc. (GST Net), in which all outstanding stock of the Company
was sold for cash. GST Net has indicated its intention to fully fund the
operations of the Company and maintain the Company operations principally
in the lines of business in which it currently operates.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at December 31, 1994 and 1993, consisted of:
1994 1993
---- ----
<S> <C>
Leasehold improvements $ 6,243 6,243
Machinery and equipment 1,689,412 1,227,111
--------- ---------
1,695,655 1,233,354
Less accumulated depreciation and amortization (376,785) (57,859)
------------ ------------
Property and equipment, net $ 1,318,870 1,175,495
=========== =========
</TABLE>
F - 66
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements, Continued
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt at December 31, 1994 and 1993, consists of the following:
1994 1993
---- ----
<S> <C> <C>
Note payable to customer, 0% interest, monthly payments of $6,944, $ 215,278 -
Note payable to supplier, 7% interest, monthly payments of $14,939,
including interest, due February 1995 14,852 -
---------- -
Total long-term debt 230,130 -
Less current installments (98,185) -
---------- -
Long-term debt, less current installments $ 131,945 -
======= =
</TABLE>
In addition, the Company has incurred borrowings from related parties (see
note 5).
As of December 31, 1994, the maturities of long-term debt are as follows:
Year Ended
December 31,
------------
1995 $ 98,185
1996 83,333
1997 48,612
------------
$ 230,130
============
(5) RELATED PARTY TRANSACTIONS
The Company has entered into numerous transactions with its principal
stockholder and other related entities controlled by its stockholders.
F - 67
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements, Continued
(5) RELATED PARTY TRANSACTIONS, CONTINUED
The Company's principal stockholder or entities controlled by the
stockholder have obtained financing from two financial institutions. These
funds were, in turn, loaned to the Company. The unwritten agreement between
the Company and the related parties is that the Company will make all
necessary payments under the stated bank terms. The terms are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Note payable, bearing interest at 8.25%, payable in monthly
installments of $8,615, due in full September 1997 $ 349,420 95,520
Note payable, bearing interest at 1% over the prime rate, due in
full December 12, 1994. On March 9, 1995, the loan was renewed
by the bank 265,000 -
------- --------
Total notes payable related parties 614,420 95,520
Less current installments 368,380 95,520
------- ------
Notes payable to related parties, less current
installments $ 246,040 -
======= ========
</TABLE>
The Company rents office space and telecommunications equipment from
related parties on a month-to-month basis. Rental expense for the periods
ended December 31, 1994 and 1993, totaled $248,572 and $96,057,
respectively.
(6) COMMON STOCK
During 1994, the Company repurchased common shares from its stockholders at
a cost of $31,868.
(7) LEASES
The Company leases telecommunications and computer equipment under capital
leases. Additionally, certain communications equipment is leased under
operating leases. Lease terms include per-minute charges and minimum fee
levels.
F - 68
<PAGE>
INTERNATIONAL TELEMANAGEMENT GROUP, INC.
Notes to Financial Statements, Continued
(7) LEASES, CONTINUED
Future minimum lease payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
1994 1993
--------------------------- --------------------------
Capital Operating Capital Operating
Leases Leases Leases Leases
------ ------ ------ ------
<S> <C> <C> <C> <C>
Year ending December 31:
1994 $ - - 196,988 23,924
1995 261,464 143,544 283,555 143,544
1996 283,555 143,544 283,555 143,544
1997 276,751 143,544 283,555 143,544
1998 268,714 119,620 276,650 119,620
1999 44,183 - 44,183 -
------------ --------- ------------- --------
Total lease payments 1,134,667 550,252 1,368,486 574,176
======= =======
Less amount representing interest
(211,772) (332,676)
------------ -------------
Total obligations under
capital leases 922,895 1,035,810
Current installments of capital
lease obligations 175,668 144,897
----------- -------------
Capital lease obligations,
less current installments $ 747,227 890,913
========== =======
</TABLE>
Total rental expense under operating leases for the periods ended December
31, 1994 and 1993, totaled $23,900 and $4,500, respectively.
The Company also leases certain equipment and office space from related
parties (see note 5).
(8) MAJOR CUSTOMERS
Gross revenues of approximately $3,000,000 were derived from two major
customers for the year ended December 31, 1994.
(9) SERVICE CONTRACTS
The Company has entered into service contracts with telecommunication
providers which require a minimum service fee on a monthly basis. The
Company has committed to minimum revenues of $350,000 per month by May
1995, and must pay one-half of any shortfall.
(10) CONTINGENCIES
The Company is a party to a number of lawsuits and claims relating to
service liability. While the ultimate results of lawsuits or other
proceedings against the Company cannot be predicted with certainty,
management does not expect that the settlement of these matters will have a
material adverse effect on the financial position of the Company.
F - 69
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered, all of which will be paid by the Registrant, are as
follows:
SEC Registration Fee..................................... $15,453.15
Accounting Fees and Expenses............................. 7,500.00
Legal Fees and Expenses.................................. 10,000.00
Blue Sky Fees and Expenses............................... 550.00
Miscellaneous Expenses................................... 496.85
-----------
Total.................................................... $ 34,000.00
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Except as hereinafter set forth, there is no statute, charter
provision, by-law, contract or other arrangement under which any controlling
person, director or officer of the Company is insured or indemnified in any
manner against liability which he may incur in his capacity as such.
The Company's authority to indemnify its directors and
officers is governed by the provisions of Section 124 of the Canada Business
Corporations Act, as follows:
(1) INDEMNIFICATION. Except in respect of an action by or on
behalf of the corporation or body corporate to procure a judgment in its favor,
a corporation may indemnify a director or officer of the corporation, a former
director or officer of the corporation or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of which the
corporation is or was a shareholder or creditor, and his heirs and legal
representatives, against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of being or having been a director or officer of
such corporation or body corporate, if
(a) he acted honestly and in good faith with a view to
the best interests of the corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he
had reasonable grounds for believing that his conduct
was lawful.
(2) INDEMNIFICATION IN DERIVATIVE ACTIONS. A corporation may
with the approval of a court indemnify a person referred to in subsection (1) in
respect of an action by or on behalf of the corporation or body corporate to
procure a judgment in its favor, to which he is made a party by reason of being
or having been a director or an officer of the corporation or body corporate,
against all costs, charges and expenses reasonably incurred by him in connection
with such action if he fulfills the conditions set out in paragraphs (1)(a) and
(b).
(3) INDEMNITY AS OF RIGHT. Notwithstanding anything in this
section, a person referred to in subsection (1) is entitled to indemnity from
the corporation in respect of all costs, charges and expenses reasonably
incurred by him in connection with the defense of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of
being or having
<PAGE>
been a director or officer of the corporation or body corporate, if the person
seeking indemnity
(a) was substantially successful on the merits in his
defense of the action or proceeding, and
(b) fulfills the conditions set out in paragraphs (1)(a)
and (b).
(4) DIRECTORS' AND OFFICERS' INSURANCE. A corporation may
purchase and maintain insurance for the benefit of any person referred to
subsection (1) against any liability incurred by him
(a) in his capacity as a director or officer of the
corporation, except where the liability relates to
his failure to act honestly and in good faith with a
view to the best interests of the corporation; or
(b) in his capacity as a director or officer of another
body corporate where he acts or acted in that
capacity at the corporation's request, except where
the liability relates to his failure to act honestly
and in good faith with a view to the best interests
of the body corporate.
(5) APPLICATION TO COURT. A corporation or a person referred
to in subsection (1) may apply to a court for an order approving an indemnity
under this section and the court may so order and make any further order it
thinks fit.
(6) NOTICE TO DIRECTOR. An applicant under subsection (5)
shall give the Director notice of the application and the Director is entitled
to appear and be heard in person or by counsel.
(7) OTHER NOTICE. On an application under subsection (5), the
court may order notice to be given to any interested person and such person is
entitled to appear and be heard in person or by counsel.
The Company's by-laws provide that every director and officer
of the Company and his heirs, executors, administrators and other legal personal
representatives shall be indemnified and held harmless from and against (a) any
liability and all costs, charges and expenses that he sanctions or incurs in
respect of any action, suit or proceeding that is proposed or commenced against
him for or in respect of anything done or permitted by him in respect of the
execution of the duties of his office and (b) all other costs, charges and
expenses that he sustains or incurs in respect of the affairs of the Company.
The Company maintains a $5,000,000 directors and officers
liability insurance policy.
ITEM 16. EXHIBITS.
EXHIBIT INDEX
EXHIBIT
- - -------
5 Opinion of Olshan Grundman Frome & Rosenzweig LLP
with respect to the securities registered hereunder.
*23(a) Consent of KPMG Peat Marwick LLP.
*23(b) Consent of KPMG Peat Marwick Thorne.
*23(c) Consent of KPMG Peat Marwick LLP.
II-2
<PAGE>
*23(d) Consent of KPMG Peat Marwick Thorne.
*23(e) Consent of Glenn, Burdette, Phillips & Bryson.
23(f) Consent of Olshan Grundman Frome & Rosenzweig LLP (included
within Exhibit 5).
24(a) Powers of Attorney (included on Page II-4).
- - -------------
* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
a. To file, during any period in which offers or
sales are being made, a post-effective amendment to this registration statement
to include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
b. That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
c. To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against each such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Vancouver, Province of British Columbia, Country of
Canada on this 13th day of December, 1996.
GST TELECOMMUNICATIONS, INC.
-----------------------------------------
(Registrant)
By: *
--------------------------------------
W. Gordon Blankstein, Chairman
of the Board
SIGNATORIES
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board
- - ----------------------------------------
(W. Gordon Blankstein) December 13, 1996
* President, Chief Executive Officer
- - ----------------------------------------
(John Warta) (Principal Executive Officer) and December 13, 1996
Director
* Senior Vice President - Corporate
- - ----------------------------------------
(Robert H. Hanson) Development, Chief Financial December 13, 1996
Officer (Principal Financial
Officer) and Director
* Senior Vice President, Treasurer December 13, 1996
- - ----------------------------------------
(Clifford V. Sander) and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Stephen Irwin Vice Chairman of the Board,
- - ----------------------------------------
(Stephen Irwin) Secretary and Director December 13, 1996
* Director
- - ----------------------------------------
(Ian Watson) December 13, 1996
* Director
- - ----------------------------------------
(Peter E. Legault) December 13, 1996
* Director
- - ----------------------------------------
(Jack G. Armstrong) December 13, 1996
* Director
- - ----------------------------------------
(Takashi Yoshida) December 13, 1996
* Director
- - ----------------------------------------
(Thomas E. Sawyer) December 13, 1996
The Company's Authorized Representative
in the United States
*
- - -------------------------
Robert H. Hanson December 13, 1996
*By: /s/ Stephen Irwin
---------------------
Stephen Irwin
Attorney-in-Fact
</TABLE>
II-4
EXHIBIT 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report included herein dated November 22, 1996 in
the Registration Statement on Form S-3, dated December 13, 1996, of GST
Telecommunications, Inc. and to the references to our firm under the "Experts"
heading in the prospectus.
KPMG PEAT MARWICK LLP
Portland, Oregon
December 13, 1996
EXHIBIT 23(b)
KPMG PEAT MARWICK THORNE Telephone No. (604) 691-3000
CHARTERED ACCOUNTANTS (604) 691-3031
BOX 10426
777 DUNSMUIR STREET
VANCOUVER, BC V7Y 1K3
CANADA
ACCOUNTANTS' CONSENT
To the Directors of
GST Telecommunications, Inc.
(formerly Greenstar Telecommunications Inc.)
We consent to the inclusion in the registration statement filed on December 13,
1996 on Form S-3 of GST Telecommunications, Inc. (formerly Greenstar
Telecommunications Inc.) of our report dated December 8, 1994, relating to the
consolidated balance sheets of GST Telecommunications, Inc. as of September 30,
1994 and the related consolidated statements of operations and deficit and cash
flows for the thirteen months ended September 30, 1994 and for the year ended
August 31, 1993, and to the reference to our firm as experts in the registration
statement.
KPMG
Chartered Accountants
Vancouver, Canada
December 13, 1996
Member Firm of
Klynveld Peat Marwick Goerdeler
EXHIBIT 23(c)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report over the financial statements of
International Telemanagement Group, Inc. included herein, dated July 21, 1995 in
the Registration Statement on Form S-3, dated December 13, 1996, of GST
Telecommunications, Inc. and to the references to our firm under the "Experts"
heading in the prospectus.
KPMG PEAT MARWICK LLP
Detroit Michigan
December 13, 1996
EXHIBIT 23(d)
KPMG PEAT MARWICK THORNE Telephone No. (604) 691-3000
CHARTERED ACCOUNTANTS (604) 691-3031
BOX 10426
777 DUNSMUIR STREET
VANCOUVER, BC V7Y 1K3
CANADA
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST Telecommunications, Inc.
We consent to the use of our reports dated November 11, 1994 and January 12,
1994 except for note 4 which is as of January 21, 1994, relating to the balance
sheets of IntelCom-Greenstar Joint Venture as of September 30, 1994 and 1993,
respectively and the related statements of operations and participants' equity,
and financial position for the years ended September 30, 1994 and 1993
respectively included in Form 20-F, incorporated herein by reference in the
Registration Statement of Form S-3, dated December 13, 1996, of GST
Telecommunications, Inc. and to the references to our firm under the "Experts"
heading in the prospectus.
KPMG
Chartered Accountants
Edmonton, Canada
December 13, 1996
EXHIBIT 23(e)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report over the financial statements of Call
America Business Communications Corporation and Affiliates included herein,
dated June 25, 1996 in the Registration Statement on Form S-3, dated December
13, 1996 of GST Telecommunications, Inc. and to the references to our firm under
the "Experts" heading in the prospectus.
GLENN, BURDETTE PHILLIPS & BRYSON
San Luis Obispo, California
December 13, 1996
