SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-8807
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GST TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Canada Not Applicable
- ---------------------------- ----------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4317 NE Thurston Way, Vancouver, WA 98662
- --------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 254-4700
--------------
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At August
2, 1996 there were outstanding 21,171,048 Common Shares, without par value, of
the Registrant.
<PAGE>
GST TELECOMMUNICATIONS, INC.
INDEX
Page(s)
------
PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Condensed Balance Sheet - June 30, 1996 (unaudited)
and September 30, 1995 2
Consolidated Statements of Operations and Deficit- Three Months
Ended June 30, 1996 and 1995, Nine Months ended June 30, 1996 and
1995 (unaudited) 3
Consolidated Statements of Cash Flows - Nine
Months Ended June 30, 1996 and 1995 (unaudited) 4
Notes to Consolidated Condensed Financial
Statements (unaudited) 5-9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
Part I. Financial Information
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1996 AND SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995 (1)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 123,525,660 $ 6,024,334
Accounts receivable, net 4,603,343 4,305,666
Other receivables 6,015,357 --
Notes receivable 828,541 606,670
Investments 5,322,559 870,624
Inventories 1,625,574 387,089
Prepaid expenses and other current assets 1,807,364 645,223
------------- -------------
Total current assets 143,728,398 12,839,606
------------- -------------
Notes receivable 371,391 216,912
Investment in joint venture 1,872,571 2,859,017
Property, plant and equipment, net 73,815,827 36,405,639
Deferred financing costs, net 9,933,108 1,122,204
Other assets, net 21,889,525 19,681,496
------------- -------------
$ 251,610,820 $ 73,124,874
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 12,640,704 $ 12,911,076
Deferred revenue 633,371 372,630
Current portion of capital lease obligations 229,154 223,242
Current portion of long term debt 2,641,356 735,517
------------- -------------
Total current liabilities 16,144,585 14,242,465
------------- -------------
Deferred compensation 151,365 151,365
Capital lease obligation, less current portion 599,672 658,012
Long term debt, less current portion 222,629,125 19,088,407
Minority interest in subsidiaries 3,166,957 3,279,188
------------- -------------
Shareholders' equity
Common shares 61,227,083 50,166,289
Commitment to issue shares 747,026 1,494,051
Deficit (53,054,993) (15,954,903)
------------- -------------
Total shareholders' equity 8,919,116 35,705,437
------------- -------------
$ 251,610,820 $ 73,124,874
============= =============
</TABLE>
(1) The information in this column was derived from the Company's audited
financial statements as of September 30, 1995.
See notes to Consolidated Condensed Financial Statements.
2
<PAGE>
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND DEFICIT
JUNE 30, 1996 AND SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Telecommunication services $ 7,918,222 $ 4,516,744 $ 19,452,627 $ 5,897,701
Telecommunication products 2,443,558 1,828,753 5,771,530 5,635,174
------------ ------------ ------------ ------------
10,361,780 6,345,497 25,224,157 11,532,875
------------ ------------ ------------ ------------
Cost of revenues:
Telecommunication services 8,625,731 4,576,269 20,715,246 6,247,753
Telecommunication products 1,104,963 1,050,046 2,802,829 2,349,896
------------ ------------ ------------ ------------
9,730,694 5,626,315 23,518,075 8,597,649
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Gross margin 631,086 719,182 1,706,082 2,935,226
------------ ------------ ------------ ------------
Operating expenses
Sales and marketing 1,417,585 592,300 3,814,297 1,595,024
General and administrative 7,528,149 3,033,624 16,875,022 5,426,983
Research and development 310,036 296,692 909,689 855,013
Depreciation and amortization 2,135,028 580,293 5,385,145 1,304,545
------------ ------------ ------------ ------------
11,390,798 4,502,909 26,984,153 9,181,565
------------ ------------ ------------ ------------
Loss from operations (10,759,712) (3,783,727) (25,278,071) (6,246,339)
------------ ------------ ------------ ------------
Other expenses (income)
Interest income (1,811,741) (77,794) (4,208,499) (223,017)
Interest expense 6,832,436 269,896 14,800,724 338,300
Loss from joint venture 383,139 195,995 986,446 501,606
Other 510,868 (11,670) 546,528 195,210
------------ ------------ ------------ ------------
5,914,702 376,427 12,125,199 812,099
------------ ------------ ------------ ------------
Loss before income taxes
and minority interest (16,674,414) (4,160,154) (37,403,270) (7,058,438)
------------ ------------ ------------ ------------
Income tax (expense)benefit (13,470) -- (31,386) 37,779
Minority interest in loss of subsidiaries 95,538 908,806 334,566 1,597,811
------------ ------------ ------------ ------------
Net loss $(16,592,346) $ (3,251,348) $(37,100,090) $ (5,422,848)
============ ============ ============ ============
Net loss per common and common
equivalent share $ (0.86) $ (0.23) $ (2.00) $ (0.42)
============ ============ ============ ============
Weighted average common and common
equivalent shares outstanding 19,220,694 13,851,622 18,512,988 12,794,329
============ ============ ============ ============
</TABLE>
See notes to Consolidated Condensed Financial Statements.
3
<PAGE>
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
JUNE 30, 1996 AND JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
------------------------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (37,100,090) $ (5,422,848)
Items not involving cash:
Write off of fixed and other assets 486,000 31,920
Minority interest in loss of subsidiaries (334,566) (1,597,811)
Loss from joint venture 986,446 501,606
Amortization of deferred financing costs 518,742 --
Accretion of interest 13,311,749 --
Amortization and depreciation 5,698,809 1,586,881
Issuance of stock for financing commitments 396,088 --
Changes in non-cash operating working capital:
Receivables (1,113,292) (1,796,728)
Inventory (1,238,485) 4,943
Prepaid expenses and other (1,150,197) (453,147)
Accounts payable and accrued liabilities (1,426,791) 4,002,608
Deferred revenue 233,079 456,886
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (20,732,508) (2,685,690)
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to related party (5,576,092) --
Acquisition of subsidiaries, net of cash acquired 11,102 206,510
Purchase of investments (4,451,935) (897,884)
Acquisition of property and equipment (40,971,085) (24,686,791)
Purchase of other assets (3,448,571) (615,754)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (54,436,581) (25,993,919)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of subsidiary stock -- 615,000
Principal payments on capital leases (52,428) --
Advances on notes receivable -- 4,396,432
Issuance of common shares 9,917,681 8,275,337
Deferred financing costs (9,329,646) (357,819)
Proceeds from long term debt 193,109,084 14,705,123
Principal payments on long term debt (974,276) --
------------- -------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 192,670,415 27,634,073
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 117,501,326 (1,045,536)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,024,334 4,218,593
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,525,660 $ 3,173,057
============= =============
</TABLE>
See notes to Consolidated Condensed Financial Statements.
4
<PAGE>
GST Telecommunications, Inc.
Notes to Consolidated Condensed Financial Statements
(In thousands except share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements for the year ended September 30, 1995, as included in the Company's
1995 Annual Report to Shareholders.
2. NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares assumed
to be outstanding during the period. Common equivalent shares consist of options
and warrants to purchase common shares.
3. INVENTORIES
Inventories, net of reserves, stated at the lower of cost or market
consist of:
June 30, 1996 September 30, 1995
------------- ------------------
Raw Material $ 436,933 $ 316,940
Work in Progress 278,093 70,149
Finished Goods 910,548 -
-------- -------
Total Inventories $ 1,625,574 $ 387,089
========= =======
4. SHAREHOLDERS' EQUITY
Shares authorized and outstanding are as follows:
June 30, 1996 September 30, 1995
------------- ------------------
Common Shares, no par value 21,170,923 18,700,290
Unlimited number of common
shares authorized
5. JOINT VENTURE
Summary financial information for the Company's 50% proportionate share
of the joint venture's revenue and expenses for the nine months ended June 30,
1996 and June 30, 1995, are as follows:
Nine Months Ended Nine Months Ended
June 30, 1996 June 30, 1995
------------- -------------
Revenue $ 763 $ 187
Costs and expenses 1,750 739
----- ----
Net Income/(loss) $ (987) $ (552)
====== ====
5
<PAGE>
6. RELATED PARTY RECEIVABLE
Other receivables includes a $5.6 million receivable from Magnacom
Wireless, LLC, a limited liability company that is 99% owned by Pacwest Network
Inc., a company that is 100% owned by the Company's Chief Executive Officer, and
1% owned by the Company's Chief Executive Officer.
7. SUPPLEMENTAL CASH FLOW INFORMATION
As a result of acquisitions, the Company recorded $1,406,436 in assets,
$1,184,081 in liabilities, and $222,355 in minority interest for the nine months
ended June 30, 1996. Due to acquisitions and step-acquisitions, the Company
recorded $15,521,422 in assets, $7,440,100 in liabilities, $7,241,077 in common
shares and commitments to issue common shares, and net minority interest of
$504,873 for the nine months ended June 30, 1995.
8. RECENT DEVELOPMENTS
In December 1995, the Company issued $180.0 million in debt securities
consisting of $160.0 million in senior discount notes and $20.0 million in
convertible senior subordinated discount notes (together, the "Senior Notes").
The Senior Notes accrete to a total value of $351.5 million by December 2001.
Payment of interest does not begin until June 15, 2001, and the Senior Notes
mature on December 15, 2005. Each of the convertible notes is convertible at the
option of the holder into common shares at any time after December 15, 1996. The
convertible notes may be automatically converted to common shares if the
Company's common shares sustain certain market value levels for 30 consecutive
trading days.
In May 1996, the Company amended its debt agreement with Tomen America,
Inc. (Tomen) and eliminated Tomen's right to purchase a 10% equity interest in
the development projects to which Tomen provides a project loan. The Company
re-purchased Tomen's 10% interest in the Company's San Gabriel Valley,
California network for $1.25 million in cash. In connection with future
development projects that are funded by Tomen, the Company granted Tomen the
right to purchase a number of common shares the aggregate value of which based
on their market price would equal 10% of the Company's equity contributions to
such development project. In addition, Tomen agreed to provide $16.0 million in
debt financing for the Company's Tucson and Albuquerque projects.
6
<PAGE>
GST USA, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND DEFICIT
FOR THE PERIOD ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(STATED IN U.S. DOLLARS)
9. GST USA, INC.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 10,361,780 $ 6,345,497 $ 25,224,157 $ 11,532,875
Cost of revenue 9,730,694 5,626,315 23,518,075 8,597,649
------------ ------------ ------------ ------------
Gross margin 631,086 719,182 1,706,082 2,935,226
------------ ------------ ------------ ------------
Operating expenses 9,930,593 3,978,009 25,038,544 8,137,015
------------ ------------ ------------ ------------
Loss from operations (9,299,507) (3,258,827) (23,332,462) (5,201,789)
------------ ------------ ------------ ------------
Other expenses 5,064,651 369,607 10,426,573 630,298
Loss before income taxes
------------ ------------ ------------ ------------
and minority interest (14,364,158) (3,628,434) (33,759,035) (5,832,087)
------------ ------------ ------------ ------------
Income tax (expense) benefit (27,762) -- (27,762) 37,779
------------ ------------ ------------ ------------
Loss before minority interest (14,391,920) (3,628,434) (33,786,797) (5,794,308)
------------ ------------ ------------ ------------
Minority interest 95,538 908,806 334,566 1,597,811
------------ ------------ ------------ ------------
Net loss $(14,296,382) $ (2,719,628) $(33,452,231) $ (4,196,497)
============ ============ ============ ============
</TABLE>
7
<PAGE>
GST USA, INC. (A)
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1996 AND SEPTEMBER 30, 1995
(UNAUDITED)
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Current assets $123,865,378 $ 11,414,372
Long term assets 105,892,662 60,006,467
------------ ------------
TOTAL ASSETS $229,758,040 $ 71,420,839
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 15,372,112 $ 13,711,809
Long term liabilities 201,900,892 19,645,505
Minority interest 3,166,957 3,279,188
------------ ------------
Total liabilities 220,439,961 36,636,502
------------ ------------
------------ ------------
Total stockholders' equity 9,318,079 34,784,337
------------ ------------
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $229,758,040 $ 71,420,839
============ ============
</TABLE>
(A) GST USA, Inc. ("GUS") is a wholly-owned subsidiary of the Company. The
summarized financial information of GUS is for the nine months ended June 30,
1996 and the comparable 1995 period. The total outstanding indebtedness of GUS
includes its senior discount notes with an accreted value of $ 171,834,162
million as of June 30, 1996, which the Company fully and unconditionally has
guaranteed. Separate financial statements and other disclosures concerning GUS
are not presented because management has determined that they would not be
material to investors.
8
<PAGE>
GST USA, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
Operations:
<S> <C> <C>
Loss for the period $ (34,034,952) $ (4,196,497)
Items not involving cash 19,135,910 517,696
Changes in working capital (3,744,203) 2,011,757
------------- -------------
Cash used in operations (18,643,245) (1,667,044)
------------- -------------
Cash used in investing activities (53,945,059) (25,976,513)
------------- -------------
Cash provided by financing activities 172,474,657 29,193,336
------------- -------------
Increase in cash and cash equivalents 99,886,353 1,549,779
Cash and cash equivalents, beginning of period 3,893,676 1,309,788
------------- -------------
Cash and cash equivalents, end of period $ 103,780,029 $ 2,859,567
============= =============
</TABLE>
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors discussed herein.
OVERVIEW
GST Telecommunications, Inc. (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 operates state-of-the-art, digital telecommunications networks
that provide an alternative to incumbent local exchange companies. The Company
has expanded beyond the scope of traditional CAP operations into competitive
local exchange carrier ("CLEC") services and currently provides a range of
enhanced telecommunications services that include long distance, Internet access
and data services. In addition, the Company expects to offer switched access and
local dial tone services to complement its existing telecommunications service
offerings. The Company also manufactures telecommunications switching equipment
and network management and billing systems through its wholly owned subsidiary,
National Applied Computer Technologies, Inc. ("NACT").
The Company's fiber optic networks currently serve 12 cities in
California, Arizona and New Mexico and its digital microwave network serves four
of the Hawaiian Islands. In addition, the Company has networks in various stages
of development that would serve 23 additional cities in California, Washington,
Idaho, Utah, Nevada, Texas, two additional Hawaiian Islands and Mexico.
The Telecommunications Act of 1996 and several state regulatory
initiatives have substantially changed the telecommunications regulatory
environment in the United States. As a result of these regulatory changes, the
Company will be permitted to provide local dial tone in addition to interstate
and intrastate switched access services. Management believes that the Company
has an opportunity to leverage its network infrastructure and service
capabilities to expand the Company's addressable market and improve its
opportunity to participate, on a regional basis, in both the local and long
distance telecommunications markets in the United States. In order to capitalize
on these opportunities, the Company has accelerated the development and
construction of additional networks within its region and intends to install
nine high capacity digital switches in the latter part of 1996.
RESULTS OF OPERATIONS
REVENUES. Total revenues for the three and nine month periods ended
June 30, 1996 increased $4.0 million, or 63.3%, and $13.7 million, or 118.7%,
respectively, over the comparable three and nine month periods ended June 30,
1995. Telecommunications services revenues for the three and nine month periods
ended June 30, 1996 increased $3.4 million, or 75.3%, and $13.6 million, or
229.8%, respectively, over the comparable periods in the previous year.
Telecommunications services revenues increased primarily as a result of
wholesale and long distance service revenues, including
10
<PAGE>
revenues from International Telemanagement Group, Inc., which was acquired
May 1, 1995. The increase in telecommunications services revenues also was
attributable to increased CLEC service revenues generated by the Company's
networks. Telecommunications products revenues for the three and nine month
periods ended June 30, 1996 increased $.6 million, or 33.6%, and $.1 million, or
2.4%, respectively, over the comparable periods in the previous year. The
increases in telecommunications product revenues resulted from the introduction
of NACT's new switch in April 1996. The Company anticipates that its
telecommunications services revenues will continue to represent an increasingly
larger percentage of the Company's consolidated revenues as the Company
continues to expand its networks and broaden its service offerings.
COST OF REVENUES. Total cost of revenues for the three and nine month
periods ended June 30, 1996 increased $4.1 million, or 73.0%, and $14.9 million,
or 173.5%, respectively, over the comparable three and nine month periods ended
June 30, 1995. Cost of telecommunications services revenues was 108.9% and
106.5% of telecommunications services revenues for the three and nine months
ended June 30, 1996 compared to 101.3% and 105.9% of telecommunications services
revenues for the comparable periods in the previous year. The Company expects
that cost of telecommunication services revenues will decrease as the Company
expands its telecommunications services businesses and builds its customer base.
Telecommunications products cost of revenues was 45.2% and 48.6% of
telecommunications products revenues for the three and nine month periods ended
June 30, 1996 compared to 46.1% and 41.7% for the comparable periods of the
previous year. The increase in products cost of revenues for the nine months
ended June 30, 1996 as compared to the same period in the previous year resulted
from a delay in the introduction of NACT's new switch. Telecommunications
products gross margins improved in the third quarter of 1996 as a result of the
introduction of the new switch.
OPERATING EXPENSES. Total operating expenses for the three and nine
month periods ended June 30, 1996 increased $6.9 million, or 153.0%, and $17.8
million, or 193.9%, respectively, over the comparable three and nine month
periods ended June 30, 1995. The increases are primarily the result of higher
salary and benefit costs incurred as the Company continues to add a significant
number of sales, marketing and management personnel; general and administrative
expenses for the three and nine months ended June 30, 1996 increased $4.5
million, or 148.2% and $11.4 million, or 210.0%, respectively, over the
comparable periods in the previous year while sales and marketing costs
increased $.8 million, or 139.3%, and $2.2 million, or 139.1%, over the same
periods. The Company expects salary and benefit costs to continue to increase as
it expands its network operations. Depreciation and amortization for the three
and nine month periods ended June 30, 1996 increased $1.6 million, or 267.9%,
and $4.1 million, or 312.8%, respectively, over the comparable prior year
periods principally due to increased depreciation resulting from newly
constructed networks becoming operational. The Company expects that depreciation
will continue to increase as it expands its networks and broadens its customer
base. Research and development costs incurred at NACT increased slightly due to
the development of the new switch.
OTHER EXPENSES. Other expenses for the three and nine month periods
ended June 30, 1996 increased $5.5 million, or 1,471.3%, and $11.3 million, or
1,393.1%, respectively, over the comparable three and nine month periods ended
June 30, 1995. The increase is principally the result of additional interest
expense associated with the Senior Notes issued in December 1995. To a lesser
extent, the increase is also the result of increased losses from joint ventures
attributable to the operations of Phoenix Fiber Access, Inc. These increases
were partially offset by the interest income resulting from the investment of
the proceeds of the Senior Notes.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a
result of the development and operation of its networks. The Company expects
that such losses will continue to increase as the Company emphasizes the
development, construction and expansion of its networks and builds its customer
base and that cash provided by operations will not be sufficient to fund the
expansion of its networks and services. The Company has financed, and expects to
continue to finance, its capital expenditures, acquisitions and working capital
requirements primarily through the sale of equity and debt securities.
The Company completed a $180.0 million debt offering in December 1995,
consisting of $160.0 million in senior discount notes and $20.0 million in
convertible senior subordinated discount notes. The net proceeds from the
issuance of the notes, $171.3 million, are being used to fund network
development, capital expenditures and working capital requirements. The
indentures governing the Senior Notes include restrictive covenants which, among
other items, limit or restrict additional indebtedness incurred by the Company,
investment in certain subsidiaries and the payment of dividends.
In October 1994, the Company and Tomen America, Inc. (together with its
affiliates, "Tomen") entered into agreements (the "Tomen Facility") pursuant to
which Tomen agreed to make available up to a total of $100.0 million of
financing for competitive access network construction and development. Tomen has
a right of first refusal to finance each network project up to the limit of the
Tomen Facility. To date, Tomen has provided, or agreed to provide, $34.5 million
in debt financing under the Tomen Facility for the Company's network projects in
Southern California, Tucson and Albuquerque. Approximately $42 million of
additional financing proposals have been submitted to Tomen for approval. On May
24, 1996, Tomen purchased 1,074,074 common shares and warrants to purchase
546,155 additional common shares.
Net cash used by operating activities for the nine months ended June
30, 1996, $20.7 million, primarily results from the development and operation of
the Company's networks. With the exception of NACT, the Company does not
generate positive EBITDA from its operating activities. The Company intends to
retain the cash flow derived from NACT'S operations to fund NACT's expanded
research and development, manufacturing, sales and marketing.
Net cash used by investing activities for the nine months ended June
30, 1996, $54.4 million, relates primarily to the development and construction
of the Company's networks.
Net cash provided by financing activities for the nine months ended
June 30, 1996, $192.7 million, primarily results from the proceeds of the Senior
Notes and borrowings under the Tomen Facility, offset by $9.3 million in
financing costs. Additionally, equity issuances of $9.9 million contributed to
cash provided by financing activities.
Capital expenditures for the nine months ended June 30, 1996 and 1995
were $44.0 million and $23.5 million, respectively. The Company estimates
capital expenditures of $125.0 million, $225.0 million and $50.0 million for the
fiscal years ending September 30, 1996, 1997, and 1998, respectively. These
expenditures will be utilized for the expansion, development and construction of
the Company's networks, the acquisition and deployment of switches and related
equipment to facilitate the offering of advanced telecommunications services and
internal
12
<PAGE>
management and accounting systems. Continued significant capital expenditures
are expected to be made thereafter. In addition, the Company expects to continue
to incur increasing operating losses while it expands its business and builds
its customer base. Actual capital expenditures and operating losses will depend
on numerous factors beyond the Company's control, including the nature of future
expansion and acquisition opportunities, economic conditions, competition,
regulatory developments and the availability of capital.
The Company is in the process of negotiating with equipment
manufacturers for approximately $315.0 million of financing. There can be no
assurance that any such equipment financing will be available to the Company on
acceptable terms or at all.
At June 30, 1996, the Company had cash, cash equivalents and
investments of $128.8 million, compared to $6.9 million at September 30, 1995.
Management believes that the cash on hand and borrowings expected to be
available under both the Tomen Facility and the equipment financing 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.
Subject to market conditions, the Company expects to raise additional capital in
1996 through the sale of equity and/or debt securities. In the event that the
Company's plans or assumptions change or prove to be inaccurate, or its cash
resources, together with borrowings under the Tomen Facility and other financing
arrangements prove to be insufficient to fund the Company's growth and
operations, or if financing under the Tomen Facility or such other financing is
not available or if the Company successfully consummates any acquisitions, the
Company may be required to seek additional sources of capital sooner than
currently anticipated. There can be no assurance that the Tomen Facility or
other financing will be available to the Company or, if available, that it can
be concluded on terms acceptable to the Company. Failure to obtain such
financing would result in the delay or abandonment of some or all of the
Company's development or expansion plans, which could have material adverse
effect on the Company's business.
The Company's ability to declare or pay cash dividends, if any, is
dependent upon the ability of the Company's present and future subsidiaries to
declare and pay dividends or otherwise transfer funds to the Company, because
the Company conducts its operations entirely through subsidiaries. Pursuant to a
credit agreement under the Tomen Facility, the Company's subsidiaries that own
and operate the San Gabriel Valley, California, Tucson, Arizona and Albuquerque,
New Mexico competitive access networks may not pay any dividends or make any
distributions on its capital stock to its shareholders. Subsequent network
financings under the Tomen Facility are expected to include similar
prohibitions.
13
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to ITEM 3. LEGAL PROCEEDINGS of the Company's Annual
Report on Form 20-F for the fiscal year ended September 30, 1995, and to the
description therein of an action commenced by Aerotel, Ltd. and Aerotel U.S.A.,
Inc. against the Registrant's wholly-owned subsidiary, National Applied Computer
Technologies, Inc. ("NACT") and a customer of NACT in the United States District
Court, Southern District of New York. On May 3, 1996, NACT served a motion for
summary judgment. No date has been set by the court for hearing thereon.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
GST TELECOMMUNICATIONS, INC.
(Registrant)
/s/ Robert H. Hanson
--------------------------------
Robert H. Hanson,
(Senior Vice President and Chief
Financial Officer)
Date: August 13, 1996
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Company's Form 10-Q for the quarter ended June 30, 1996 and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 123,525,660
<SECURITIES> 0
<RECEIVABLES> 12,198,225
<ALLOWANCES> (750,984)
<INVENTORY> 1,625,574
<CURRENT-ASSETS> 143,728,398
<PP&E> 78,811,572
<DEPRECIATION> (4,995,745)
<TOTAL-ASSETS> 251,610,820
<CURRENT-LIABILITIES> 16,144,585
<BONDS> 193,313,433
0
0
<COMMON> 61,227,083
<OTHER-SE> 747,026
<TOTAL-LIABILITY-AND-EQUITY> 251,610,820
<SALES> 25,224,157
<TOTAL-REVENUES> 25,224,157
<CGS> 23,518,075
<TOTAL-COSTS> 50,502,228
<OTHER-EXPENSES> (2,675,525)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,800,724
<INCOME-PRETAX> (37,403,276)
<INCOME-TAX> 31,386
<INCOME-CONTINUING> (37,371,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,100,090)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
