SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 1-12866
GST TELECOMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Canada N/A
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
4001 Main Street, Vancouver, Washington 98663
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (360) 906-7100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Shares, without par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 / /
<PAGE>
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value at December 22, 1997 of the
Registrant's Common Shares, without par value (based upon the closing price of
$11.625 per share of such Shares on the American Stock Exchange), held by
non-affiliates of the Company was approximately $366,209,924.60. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At December
22, 1997, there were outstanding 34,547,147 of the Registrant's Common Shares,
without par value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy
statement to be filed not later than January 28, 1998 pursuant to Regulation 14A
are incorporated by reference in Items 10 through 13 of Part III of this Annual
Report on Form 10-K.
<PAGE>
ITEM 1. BUSINESS
OVERVIEW
GST Telecommunications, Inc. (the "Company") provides a broad range of
integrated telecommunications products and services, primarily to business
customers located in the western continental United States and Hawaii. As a
facilities-based competitive local exchange carrier ("CLEC"), the Company
operates state-of-the-art, digital telecommunications networks that represent an
alternative to incumbent local exchange carriers ("ILECs"). The Company's full
line of products, which offer a "one-stop" solution to customers'
telecommunications services requirements, include long distance, Internet, data
transmission and private line services, and local dial tone services, which were
recently introduced.
The Company's digital networks currently serve 39 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Texas and Washington. In addition, the
Company has networks under construction which, when completed, will serve three
additional markets and expand its regional footprint to Oregon. The Company also
constructs, markets and manages longhaul fiber optic facilities, principally in
Arizona, California and Hawaii. The Company's longhaul fiber optic facilities
currently extend approximately 600 route miles and an additional 1,100 route
miles are expected to become operational over the next 12 months.
Management believes that the Company has an opportunity to leverage its
existing network infrastructure and service capabilities to provide customers
with an integrated telecommunications package. The Telecommunications Act of
1996 (the "Telecommunications Act") and state regulatory initiatives have
substantially changed the telecommunications regulatory environment in the
United States. As a result of these regulatory changes, the Company is permitted
in certain states to provide local dial tone in addition to its existing
telecommunications service offerings. In order to capitalize on these
opportunities, the Company has accelerated the development of additional
networks and longhaul fiber optic facilities within its region while
significantly expanding its product and service offerings, primarily with
respect to the provision of local services. To facilitate its entry into local
services, the Company has in service seven high capacity digital switches, has
installed and is currently testing two additional high capacity digital switches
and is planning to deploy an additional five such switches through early 1998.
TELECOMMUNICATIONS SERVICES STRATEGY
In conjunction with its network expansion, the Company has developed a
strategy to leverage its existing facilities and infrastructure, customer base
and experience by providing a broad range of integrated telecommunications
services to meet the voice and data needs of its end-user customers. The Company
focuses on small to medium-sized businesses that have significant
telecommunications requirements. The Company, through its established sales
channels, offers: (i) bundled local and long distance services; (ii) flexible
pricing and customized products and services; and (iii) an enhanced level of
customer service. To meet its customers' needs, the Company offers a number of
telecommunications services, including:
LOCAL SERVICES
Where regulatory conditions permit, the Company offers both switched
and dedicated local service. Dedicated local services involve a fixed
communications link, usually between an end-user and a long distance carrier's
point-of presence ("POP"). With a switch, it is possible for the Company to
direct traffic to any end-user or long distance carrier provided that the
Company has an interconnection agreement with the connecting carriers.
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To facilitate its entry into local services, the Company has in service
seven high capacity digital switches, has installed and is currently testing two
additional high capacity digital switches and is planning to deploy an
additional five such switches through early 1998. As demand warrants, the
Company plans to continue to install switching equipment in its operational
networks, in markets where it is constructing networks and in certain other
cities where the Company will rely on ILEC facilities for transmission. Once a
switch is operational, where regulatory conditions and interconnection
agreements permit, the Company intends to offer local dial tone, in addition to
enhanced services such as integrated services digital network ("ISDN"), Centrex,
voice mail and other custom calling features.
LONG DISTANCE SERVICES
Under federal regulations, the Company is permitted to provide a full
range of interstate switched access as well as enhanced services. The Company
offers basic and enhanced long distance services, such as toll free, calling
card, prepaid calling card and international call back services, targeting
primarily business customers purchasing between $200 and $15,000 of services per
month as well as resellers and other carriers. The Company purchases long
distance capacity under agreements with certain major long distance carriers
that provide the Company capacity at rates that vary with the monthly traffic
generated by the Company.
The Company recently expanded its long distance products and services
through the acquisition of Action Telcom Co. ("Action Telcom") for an aggregate
of 903,000 Common Shares valued at approximately $8.2 million, and $3.9 million
in cash, payable in three equal installments at closing and on the first and
second anniversary dates thereof. Additional Common Shares may be issued to the
former shareholders of Action Telcom on each of the first and second
anniversaries of the closing date of the merger if the average closing sale
price of a Common Share on the AMEX (or the Company's then principal trading
market) does not exceed $10.00 for the 10 consecutive trading days ending three
trading days prior to each such anniversary. Action Telcom is a facilities-based
telecommunications company located in Abilene, Texas that operates its own
network and switching equipment, originating and terminating its own traffic
principally in Texas. The Company intends to continue to pursue acquisitions of
long distance carriers.
INTERNET SERVICES
The Company presently offers Internet-related services in most of its
markets, such as dedicated Internet services, World Wide Web ("Web") site
development and hosting, provides access and upstream transport for local
Internet Service Providers ("ISPs"), electronic data interchange ("EDI") and
electronic commerce services and is in the process of developing various
Internet software applications. The Company also offers dial-up Internet
services to customers in Portland (Oregon), Vancouver (Washington), the State of
Hawaii and select markets in California and intends to begin offering such
services in the Los Angeles, San Francisco and Houston metropolitan areas in
1998. Management believes that these services will become an important component
of the Company's overall product offerings and intends to continue to expand its
Internet access and service business to other markets.
DATA SERVICES
The Company offers national and international frame relay services on
its own frame relay network and through interconnection agreements with data
service providers. Under these agreements, the Company and such data service
providers have agreed to link their data networks and terminate one another's
traffic. The Company has deployed Cascade Communications frame relay switches in
21 markets in the western United States. Such switches can provide both frame
relay and Internet services. The Company plans to offer data networking services
such as asynchronous transfer mode ("ATM"), high speed LAN connectivity service,
video conferencing, multi-media networking, frame relay and high capacity
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access to the Internet. The Company has one ATM switch commercially operational
in each of Los Angeles and Ontario, California.
The Company offers its customers monthly network management reports
that allow users to track the performance of their virtual private network.
Customer network management support will permit customers to monitor and tailor
their virtual private network as desired with a communication link into the
Company's network management systems.
SHARED TENANT SERVICES
The Company offers shared tenant services to large apartment and
residential communities in Idaho, New Mexico, Oregon, Utah and Washington.
Shared tenant services bundle local, long distance, Internet access, cable
television and home alarm service.
The Company provides local dial tone service to its shared tenant
customers through on-site PBX telephone systems located within each apartment
complex that are connected to the ILEC. As the Company expands its network and
central office switching facilities, PBXs will be replaced with central office
access nodes originating from the Company's own dial tone facilities, which the
Company expects to provide significant cost savings and customer feature
capability. In addition, the Company is in the process of connecting apartment
communities to its own fiber network, thereby permitting the Company to realize
additional cost savings for transport.
The Company is expanding its telecommunications services business
through internal development and will continue to explore opportunities for
further expansion by acquisitions and joint ventures.
TELECOMMUNICATIONS NETWORK STRATEGY
The Company's network strategy is to continue to develop and expand its
network infrastructure to ultimately assemble, through a combination of owned
and leased facilities and joint ventures, an integrated regional network for the
on-net provision of CLEC services including local, long distance, Internet
access and data services. The Company will continue to focus on the western
United States in order to take advantage of its strategically advantageous
position in California and Hawaii and the substantial telecommunications traffic
that exists among the western United States, Mexico, the Pacific Rim and western
Canada. Key elements in this strategy include:
INITIAL DEPLOYMENT. The Company has identified attractive markets in
its region and has sought to be one of the first CLECs to obtain the necessary
permits, rights-of-way and licenses to construct and operate networks in its
targeted markets. Initial network deployment is designed to provide connectivity
among the Company's facilities, selected long distance carriers' POPs, the
ILEC's central offices and the market's primary business centers. In addition,
the Company may deploy network facilities in markets where it achieves a
critical mass of customers using resold or leased facilities.
EXPANSION. Subsequent to initial network deployment, the Company seeks
to expand its network in a geographic area to efficiently address a large number
of significant users of telecommunications services. To facilitate this
expansion, the Company has entered into strategic agreements with a number of
gas and electric utilities. These arrangements have enabled the Company to
obtain access to and use of rights-of-way, conduit and transmission and
distribution facilities in a timely and cost-effective manner.
INTERCONNECTION. Management believes that the formation of an
integrated regional network through the interconnection of the Company's
individual networks will provide significant advantages. In addition to
providing the Company with a larger addressable market, the interconnection of
its networks is expected to allow the Company to carry its intra-regional
telecommunications traffic on-net, thereby
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improving operating margins by reducing payments to other carriers for use of
their facilities, as well as to lease longhaul transport capacity to others.
The Company's network strategy is best evidenced in the States of
California and Hawaii. In California, the Company holds two Certificates of
Public Convenience and Necessity ("CPCNs") from the California Public Utilities
Commission ("CPUC"), which allows the Company to install its fiber optic cable
along existing public utility corridors, and has a statewide pole attachment
agreement, which enables the Company to expand its infrastructure without the
delays typically experienced in obtaining individual licenses and rights-of-way.
In Hawaii, the Company operates a digital microwave network and is
supplementing its microwave network with terrestrial fiber optic facilities. The
Company has also constructed an inter-island fiber network to extend its
services throughout the State. The Hawaii Public Utilities Commission (the
"HPUC") has approved the network interconnection agreement and pole attachment
and conduit occupancy agreements of GST Telecom Hawaii, Inc. ("GST Hawaii") with
GTE Hawaiian Telephone Company ("GTE"). The Company is in the process of
completing its connections to GTE's Hawaiian network and installing necessary
facilities and equipment. GST Hawaii has also received the HPUC's approval of a
master license/lease agreement with Hawaiian Electric Company and its
subsidiaries to place fiber optic cable on poles and in certain facilities on
all islands other than Kauai.
The Company recently began to construct, market and manage longhaul
fiber optic facilities and plans to ultimately assemble an integrated regional
network for the on-net provision of services and to lease longhaul capacity to
others.
TELECOMMUNICATIONS NETWORKS AND FACILITIES
The Company's networks comprise fiber optic cables, microwave or other
wireless facilities, integrated switching facilities, advanced electronics, data
switching equipment, transmission equipment and associated wiring and equipment.
The Company typically designs its networks with a ring architecture with
connectivity to the ILEC's central offices, POPs of long distance carriers and
large concentrations of telecommunication intensive end-users.
The following table presents information as of September 30, 1997
concerning the Company's networks that are operational and under construction:
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<TABLE>
<CAPTION>
CURRENT
DATE OPERATIONAL ESTIMATED
COMMERCIALLY ROUTE ROUTE APPROXIMATE
LOCATION SERVICE AREA OPERATIONAL(1) MILES(2) MILES(3) POPULATION(4)
-------- --------------- ------------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Arizona................. Phoenix February 1994(5) 12 984,403
Tucson September 1995 27 405,390
California
Northern California... Concord, Oakland, September 1997 15 22 1,324,859
San Francisco,
Walnut Creek,
Livermore
Hayward, San Ramon September 1997 11 146,801
Mare Island January 1997 12 3 1,000
Pleasanton August 1996 8 50,553
Southern California.... Loma Linda, Rialto, April 1995 106 541,195
Riverside, San
Bernardino, Monterey
Park
City of Industry, August 1995 46 133,779
Ontario
Los Angeles December 1996 --(6) 3,485,398
Palm Springs 2nd Quarter 1998(7) 10 40,181
Pasadena 1st Quarter 1998 11 131,591
San Joaquin Valley..... Fresno, Bakersfield November 1996 44 6 529,022
Central Coast........ San Luis Obispo 4th Quarter 1997 5 41,958
Santa Barbara, 2nd Quarter 1998 17 171,571
Goleta
Hawaii.................. Honolulu (Oahu) February 1997 20 365,272
Idaho................... Boise May 1997 4 1 125,738
New Mexico.............. Albuquerque January 1996 67 5 384,736
Oregon.................. Portland 1st Quarter 1998 54 437,319
Texas................... Abilene June 1997 1 106,654
Washington.............. Spokane September 1996 3 177,196
Vancouver November 1996 6 8 46,380
</TABLE>
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(1) Refers to the month during which the Company's network became
commercially operational or the quarter during which the Company
expects a network under construction to become operational. The Company
deems a network to be commercially operational when its fiber optic
cable and related electronics permit the Company to provide service.
(2) Includes owned and leased miles utilized by the networks that have
become commercially operational.
(3) Represents the planned owned and leased miles that will comprise the
network under construction at the time the network is expected to
become commercially operational or miles under construction for
networks that have become commercially operational.
(4) Based upon U.S. Census Bureau data.
(5) The Company acquired 100% ownership of Phoenix Fiber, the owner and
operator of the Phoenix Network, in October 1996. Prior thereto, the
Company held a 50% interest in and did not manage this network.
(6) The network in Los Angeles interconnects longhaul traffic with the POPs
of other carriers.
(7) The fiber lease and fiber are in place, however the system is not
operational and no lease payments are being made on account of a
dispute between Southern California Edison Company ("SCE") and various
property owners regarding SCE's power line right-of-way.
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The Company's decision to construct a network in a particular locale is
preceded by a review of the area's demographic, economic and competitive
characteristics and telecommunications requirements. The characteristics
examined include location and concentration of potential business, governmental
and academic end-users, the locale's economic prospects, information regarding
demand for the various services offered by the Company and actual and potential
ILEC, CLEC and other competitors. Market demand is estimated using market
research conducted by the Company and from information such as demand sets
provided by interexchange carriers ("IXCs").
The Company's networks are monitored by its network control center
located at the Company's corporate headquarters in Vancouver, Washington. The
control center is staffed by 28 employees and provides network monitoring 24
hours a day, seven days a week. Advanced monitoring systems allow personnel to
diagnose and resolve problems, generally before customers detect a meaningful
deterioration in service quality.
The Company plans to continue to develop and expand its network
infrastructure to ultimately assemble, through a combination of owned and leased
facilities and joint ventures, an integrated regional network for the on-net
provision of CLEC services.
The following table presents information as of September 30, 1997
concerning the Company's longhaul fiber optic facilities that are operational
and under construction:
<TABLE>
<CAPTION>
DATE CURRENT
COMMERCIALLY OPERATIONAL ESTIMATED
LOCATION OPERATIONAL(1) ROUTE MILES(2) ROUTE MILES(3)
- -------- -------------- -------------- --------------
<S> <C> <C> <C>
Rialto to Oakland.................................... 1st Quarter 1998 556
Los Angeles to San Luis Obispo....................... 3rd Quarter 1998 367
Ontario to Anaheim to Los Angeles.................... March 1997 83
Rialto to Palm Springs............................... 2nd Quarter 1998(4) 54
Taft to Bakersfield.................................. May 1997 39
Coalinga to Fresno................................... November 1996 44
Taft to Coalinga..................................... 1st Quarter 1998 102
Phoenix to Tucson.................................... 4th Quarter 1997 217
Hawaii Fiber connecting Kauai, Hawaii, Oahu,
Molokai, Maui & Lanai............................. June 1997 344
</TABLE>
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(1) Refers to the month the facilities became commercially operational or
the quarter during which the Company expects the facilities under
construction to become operational. The Company deems the facilities to
be commercially operational when its fiber optic cable and related
electronics permit the Company to provide service.
(2) Includes owned and leased miles of facilities that have become
commercially operational.
(3) Represents the planned owned and leased miles that will comprise the
facilities under construction at the time the facilities are expected
to become commercially operational.
(4) The fiber lease and fiber are in place, however, the system is not
operational and no lease payments are being made on account of a
dispute between SCE and various property owners regarding SCE's power
line right-of-way.
The following table presents information as of September 30, 1997
concerning the Company's high capacity digital switches that are operational or
are planned to be installed:
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<TABLE>
<CAPTION>
DATE COMMERCIALLY
LOCATION OPERATIONAL(1)
-------- ---------------------------
<S> <C> <C>
Arizona Phoenix.................................................. August 1997
Tucson................................................... September 1997
California Fresno................................................... 1st Quarter 1998
Los Angeles.............................................. 1st Quarter 1998
Riverside................................................ July 1997
San Francisco............................................ 1st Quarter 1998
San Luis Obispo.......................................... 4th Quarter 1997
Walnut Creek............................................. 4th Quarter 1997
Hawaii Honolulu................................................. February 1997
Idaho Boise.................................................... 4th Quarter 1997
New Mexico Albuquerque.............................................. September 1997
Oregon Portland (Vancouver, Washington)......................... 1st Quarter 1998
Texas Houston.................................................. 1st Quarter 1998
Washington Spokane.................................................. 4th Quarter 1997
</TABLE>
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(1) Refers to the month during which the switch became operational or the
quarter during which the Company expects the switch to become
operational.
MANUFACTURING
The Company, through its equipment subsidiary, NACT Telecommunications,
Inc. ("NACT"), produces advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT's
customers include long distance carriers, prepaid debit (calling) card and
prepaid cellular network operators, international callback/reorigination
providers and other specialty telecommunications service providers. NACT's
products and services include the STX application switching platform (the
"STX"), the NTS telemanagement and billing system (the "NTS") and facilities
management services. The Company acquired the stock of NACT over a 19-month
period commencing in September 1993 for aggregate consideration of approximately
$8.9 million, consisting of cash and Common Shares. In March 1997, NACT
completed an initial public offering of its common stock (the "NACT Offering"),
pursuant to which the Company and NACT sold one million and two million shares,
respectively, of NACT's common stock, resulting in gross proceeds to the Company
and NACT of $10 million and $20 million, respectively. As a result of the NACT
Offering, the Company's interest in NACT has been reduced to approximately 63%.
On September 30, 1997, the Company announced that it had retained Hambrecht &
Quist LLC to explore alternatives for monetizing its 63% interest in NACT,
including a potential sale of some or all of its shares of NACT's capital stock
to one or more strategic investors.
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 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. AT&T also has announced its intention to offer
local services using a new wireless technology. Consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, as well as the development
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of new technologies, could give rise to significant new competitors to the
Company. In addition, a continuing trend toward business combinations and
strategic alliances in the telecommunications industry may further enhance
competition. For example, WorldCom Inc. ("WorldCom") acquired MFS Communications
Company, Inc. ("MFS") and recently announced that it entered into an agreement
to acquire Brooks Fiber Properties Inc. ("Brooks"), each of which compete with
the Company in several of the markets in which the Company operates. The Company
cannot determine what effect such acquisitions will have on the Company's
business, financial condition and results of operations.
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 greater than those of the Company, have the potential to
subsidize competitive services with revenues from a variety of businesses and
currently benefit from certain existing regulations that favor the ILECs over
the Company in certain respects. While recent regulatory initiatives, which
allow CLECs such as the Company to interconnect with ILEC 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 ILECs.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs 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 ILECs as switched services
become a greater percentage of the Company's business. The Telecommunications
Act imposes interconnection obligations on ILECs, but there can be no assurance
that the Company will be able to obtain the interconnection it requires at
rates, and on terms and conditions, that permit the Company to offer switched
services at rates that are simultaneously competitive and profitable. In the
event that the Company experiences difficulties in obtaining high quality,
reliable and reasonably priced service from the ILECs, 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, Sprint and WorldCom, 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. Many of these competitors
have greater financial, technological and marketing resources than the Company.
In addition, as a result of the Telecommunications Act, the RBOCs are expected
to become competitors in the long distance telecommunications industry both
outside of their service territory and upon the satisfaction of certain
conditions, within their service territory. SBC Communications Corporation
("SBC") has challenged the constitutionality of the provisions conditioning RBOC
entry into in-region long distance service. As a result of the Company's
acquisition of Action Telcom, Call America Business Communications Corp. and
certain of its affiliated companies (collectively, "GST Call America"), TotalNet
Communications, Inc. ("TotalNet") and the business of Texas-Ohio Communications,
Inc. and affiliated companies (collectively, "Texas-Ohio"), the Company's long
distance operations will account for a significant portion of the Company's
revenues. 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.
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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. 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. ("CPDI"), Integrated Telephony Products, Inc. ("ITP") and PCS
Telecom, Inc. ("PCS Telecom"). 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. ("Excel"), 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.,
Harris Corporation, Siemens AG, Alcatel Alsthom, Telefonaktiebolaget, L.M.
Ericsson 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.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the Company's competition for
telecommunication services both domestically and internationally. Under this
agreement, the United States and other members of the WTO committed themselves
to opening their telecommunications markets to competition and foreign ownership
and to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telephone companies, effective in some
cases as early as January 1, 1998.
SALES CHANNELS AND CUSTOMER SUPPORT
The Company markets its services through five sales channels including
a direct sales force, an inside sales (telemarketing) group, alternate channels
including referral partners, independent agents and resellers, a government
systems group and a wholesale carrier group. As of December 1, 1997, the Company
had 309 sales and marketing employees in 18 cities and utilized 214 agents and
independent contractors.
The Company's direct sales personnel offer the Company's full line of
products including long distance, private line, Internet, local and data
transmission services. Sales compensation is incentive-based and designed to
facilitate both the acquisition and retention of customers.
Teams of sales engineers and local service experts are available to
support the sales force in complex or more technical applications. The inside
sales and telemarketing group and referral partner programs generate leads for
the direct sales force. These groups also focus on smaller customers that may
use the full array of products but do not require extensive technical or on-site
support.
Local customer service representatives are assigned to particular
customers and are supplemented by local technical sales support personnel and a
centralized group of customer service representatives located in call centers
who respond to after-hours customer inquiries and perform account maintenance.
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As of December 1, 1997, the Company had approximately 56,000 customers,
including approximately 28,000 long distance, 6,600 local dial tone customers
and 14,500 Internet customers (substantially all of whom are dial-up customers).
Approximately 11,000 of such customers purchase more than one of the Company's
services.
REGULATION
The Company's telecommunications services business is subject to
varying degrees of federal, state and local regulation.
FEDERAL REGULATION
The FCC regulates interstate and international telecommunications
services. The Company provides service either on a private carrier basis or on a
common carrier basis. In the interstate market, the primary distinguishing
factor between private carriers and common carriers is that the former provide
customized services to select customers pursuant to individually negotiated
contracts. Common carriers, on the other hand, hold themselves out to serve the
public generally. The FCC imposes certain regulations on common carriers such as
the RBOCs that have some degree of market power. The FCC imposes less regulation
on common carriers without market power including, to date, CAPs/CLECs. The FCC
requires common carriers to receive an authorization to construct and operate
telecommunications facilities between the United States and international
points.
In August 1996, the FCC released its Interconnection Decision. The
Interconnection Decision establishes rules implementing the Telecommunications
Act requirements that ILECs negotiate interconnection agreements and provides
guidelines for review of such agreements by state public utilities commissions.
On July 18, 1997, the Eighth Circuit vacated 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 between ILECs and
their competitors. On October 14, 1997, the Eighth Circuit issued a decision
vacating additional FCC rules that will likely have the effect of increasing the
cost of obtaining the use of combinations of an ILEC's unbundled network
elements. The Company had negotiated a number of interconnection agreements with
ILECs prior to the July 18th Eighth Circuit decision. The Eighth Circuit
decisions create uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. There can be no assurance that the Company
will be able to obtain or enforce interconnection agreements on terms acceptable
to the Company. The FCC has sought a writ of certiorari from the Supreme Court
for review of the Eighth Circuit decisions.
In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate services. This order
applies to all non-dominant interstate carriers, including AT&T. The order does
not apply to the RBOCs or other local exchange providers. The FCC order was
issued pursuant to authority granted to the FCC in the Telecommunications Act to
"forbear" from regulating any telecommunications services provider if the FCC
determines that the public interest will be served. After a nine-month
transition period, relationships between interstate carriers and their customers
will be set by contract. At that point long distance companies may no longer
file with the FCC tariffs for interstate, domestic, interexchange services.
Carriers have the option to immediately cease filing tariffs. Several parties
have filed notices for reconsideration of the FCC order and other parties
appealed the decision. On February 13, 1997, the United States Court of Appeals
for the District of Columbia Circuit stayed the implementation of the FCC order.
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If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company, will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services. The obligation to provide non-discriminatory, just and reasonable
prices remains unchanged under the Communications Act of 1934, as amended (the
"Communications Act"). While tariffs provided a means of providing notice of
prices, terms and conditions, the Company has always relied primarily on its
sales force and direct marketing to provide such information to its customers
and expects to continue to do so in the future.
The Telecommunications Act is intended to increase competition. The act
opens the local services market by requiring ILECs to permit interconnection to
their networks and establishing ILEC obligations with respect to:
RECIPROCAL COMPENSATION. Requires all ILECs and CLECs to complete calls
originated by competing carriers under reciprocal arrangements at prices based
on a reasonable approximation of incremental cost or through mutual exchange of
traffic without explicit payment.
RESALE. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or conditions. In
addition, ILECs are required to offer wholesale versions of all retail services
to other telecommunications carriers for resale at discounted rates, based on
the costs avoided by the ILEC in the wholesale offering.
INTERCONNECTION. Requires all ILECs and CLECs to permit their
competitors to interconnect with their facilities. Requires all ILECs to permit
interconnection at any technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost (which may include a reasonable
profit). At the option of the carrier seeking interconnection, collocation of
the requesting carrier's equipment in the ILECs' premises must be offered,
except where the ILEC can demonstrate space limitations or other technical
impediments to collocation.
UNBUNDLED ACCESS. Requires all ILECs to provide nondiscriminatory
access to unbundled network elements (including, network facilities, equipment,
features, functions, and capabilities) at any technically feasible point within
their networks, on nondiscriminatory terms, at prices based on cost (which may
include a reasonable profit).
NUMBER PORTABILITY. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
DIALING PARITY. Requires all ILECs and CLECs to provide "1+" equal
access to competing providers of telephone exchange service and toll service,
and to provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable dialing
delays.
ACCESS TO RIGHTS-OF-WAY. Requires all ILECs and CLECs to permit
competing carriers access to poles, ducts, conduits and rights-of-way at
regulated prices.
ILECs are required to negotiate in good faith with carriers requesting
any or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal telecommunications subsidy regime. For example, the FCC
established new subsidies for services
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provided to qualifying schools and libraries with an annual cap of $2.25 billion
and for services provided to rural health care providers with an annual cap of
$400 million. The FCC also expanded the federal subsidies to low-income
consumers. Providers of interstate telecommunications service, such as the
Company, as well as certain other entities, must pay for these programs. The
Company's share of these federal subsidy funds will be based on its share of
certain defined telecommunications end-user revenues. Although the FCC order
describes a method for determining the amount the Company must contribute to
support these subsidies, the FCC has only provided the contribution factors for
first quarter 1998 Universal Service Fund contributions. The revised factors are
3.19% for the high cost and low income fund and 0.72% for the schools, libraries
and health care fund. The amounts contributed may be billed to customers. The
Company is currently unable to predict the effect that these required payments
will have on its financial condition. In the May 8th order, the FCC also
announced that it will soon revise its rules for subsidizing service provided to
consumers in high cost areas. Several parties have appealed the May 8th order.
Such appeals have been consolidated and transferred to the United States Court
of Appeals for the Fifth Circuit where they are currently pending. In addition,
on July 3, 1997, several ILECs filed a petition for stay of the May 8th order
with the FCC. That petition is pending.
The Telecommunications Act also codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the AT&T
Antitrust Consent Decree (and similar antitrust restrictions on the GTE
Companies) restricting the RBOCs from providing long distance services and
engaging in telecommunications equipment manufacturing. These provisions permit
a RBOC to enter the long distance market in its traditional service area if it
satisfies several procedural and substantive requirements, including obtaining
FCC approval upon a showing that facilities-based competition is present in its
market, that the RBOC has entered into interconnection agreements in those
states in which it seeks long distance relief, the interconnection agreements
satisfy a 14-point "checklist" of competitive requirements, and the FCC is
satisfied that the RBOC's entry into long distance markets is in the public
interest. SBC, the RBOC serving some of the states served by the Company,
applied to the FCC for such authority which was denied. SBC has appealed the
denial and has sought to have the provisions declared unconstitutional. The
Telecommunications Act permits the RBOCs to enter the out-of-region long
distance market immediately upon its enactment.
Under the Telecommunications Act, any entity, including cable
television companies and electric and gas utilities, may enter any
telecommunications market, subject to reasonable state regulation of safety,
quality and consumer protection. Because implementation of the
Telecommunications Act is subject to numerous federal and state policy
rulemaking proceedings and judicial review there is still uncertainty as to what
impact such legislation will have on the Company.
Pursuant to authority granted by the FCC, the Company resells the
international telecommunications services of other common carriers between the
United States and international points. In connection with such authority,
certain of the Company's subsidiaries have filed tariffs stating the rates,
terms and conditions for their international services. The FCC has determined
that call reorigination service using uncompleted call signaling does not
violate United States or international law, but has held that United States
companies providing such services must comply with the laws of the countries in
which they operate as a condition of such companies' Section 214 authorizations.
With respect to its domestic service offerings, various subsidiaries of
the Company have filed tariffs with the FCC stating the rates, terms and
conditions for their interstate services. To the extent that such subsidiaries
provide intrastate services, they may be required to obtain authority from state
regulatory authorities prior to providing such services. Such subsidiaries have
been granted intrastate toll authority in 44 states and the District of Columbia
and the Company is applying for such authority in the remaining states,
excluding Alaska. There can be no assurance that such state authorizations will
be granted. In
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addition, the Company has obtained authority to provide local exchange services
on a resale or facilities- based basis in 10 states and the Northern Marianas
Islands.
NACT is authorized by the FCC to provide international
telecommunications services. Any intrastate telecommunications services provided
by NACT may require authority from state regulatory agencies and any interstate
services require NACT to file an FCC tariff. There can be no assurance that such
authorizations will be granted.
Except in certain designated geographically competitive zones, the
current policy of the FCC for most special access services dictates that ILECs
charge all customers the same price for the same service. Thus, the ILECs
generally cannot lower prices to those customers likely to contract for their
services without also lowering charges for the same service to all customers in
the same geographic area, including those whose telecommunications requirements
would not justify the use of such lower prices. The FCC may, however, alleviate
this constraint on the ILECs and permit them to offer special rate packages to
very large customers, as it has done in few cases, or permit other forms of rate
flexibility. The FCC has adopted proposals that significantly lessen the
regulation of ILECs that are subject to competition in their service areas and
provide such ILECs with additional flexibility in pricing their interstate
switched and special access on a central office specific basis.
In a combined Report and Order and Notice of Proposed Rulemaking
released on December 24, 1996, the FCC made changes and proposed further changes
in the interstate access charge structure. In the Report and Order, the FCC
removed restrictions on ILECs' ability to lower access prices and relaxed the
regulation of new switched access services in those markets where there are
other providers of access services. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on the Company's ability to compete in providing interstate access
services. On May 16, 1997, the FCC released an order revising its access charge
rate structure. The new rules substantially increase the costs that ILECs
subject to the FCC's price cap rules ("price cap LECs") recover through monthly,
non-traffic sensitive access charges and substantially decrease the costs that
price cap LECs recover through traffic sensitive access charges. In the May 16th
order, the FCC also announced its plan to bring interstate access rate levels
more in line with cost. The plan will include rules that grant price cap LECs
increased pricing flexibility upon demonstrations of increased competition (or
potential competition) in relevant markets. The manner in which the FCC
implements this approach to lowering access charge levels could have a material
effect on the Company's ability to compete in providing interstate access
services. Several parties have appealed the May 16th order. Those appeals have
been consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.
Under the Communications Act and other federal regulations, foreign
nationals may not own more than 20% of a company, or have more than a 20% voting
interest in a company, that directly holds a common carrier radio license. The
Communications Act also prohibits foreign nationals from owning 25% or more of a
company which, in turn, controls a company holding a radio license, if the FCC
finds that such alien participation would not serve the public interest. Under
the WTO agreement, the United States agreed to increase the foreign ownership up
to 100%. On November 25, 1997, the FCC adopted rules implementing the WTO
policies for WTO member states to acquire up to a 100% indirect interest in a
U.S. radio license. Prior approval will still be required, however the
application process is streamlined. The operations of GST Hawaii use among other
facilities, microwave radio facilities operating pursuant to FCC licenses
granted to Pacwest Network, Inc. ("PNI"), an entity controlled by John Warta,
the Chairman of the Board and Chief Executive Officer of the Company. The FCC
also has the authority, which it is not presently exercising, to impose
restrictions on foreign ownership of communications service providers not
utilizing radio frequencies, which if exercised could have a material adverse
effect on the Company's business. In addition, the Company may subsequently need
to obtain radio licenses to "fill in" certain customers in the networks that are
not practical to reach by wire. Should the Company require a common
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carrier radio license in the future, the FCC's new rules should increase the
ability of the Company to acquire such a license.
STATE REGULATION
The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecommunications Act is subject to numerous state rulemaking proceedings on
these issues, it is currently difficult to predict how quickly full competition
for local services, including local dial tone, will be introduced.
State regulatory agencies have regulatory jurisdiction when Company
facilities and services are used to provide intrastate services. A portion of
the Company's current traffic may be classified as intrastate and therefore
subject to state regulation. The Company expects that it will offer more
intrastate services (including intrastate switched services) as its business and
product lines expand and state regulations are modified to allow increased local
services competition. To provide intrastate services, the Company generally must
obtain a CPCN from the state regulatory agency and comply with state
requirements for telecommunications utilities, including state tariffing
requirements. The Company has obtained CPCNs for its subsidiaries to provide
intrastate toll service in 44 states and the District of Columbia and has
applied for such authority in the remaining states, excluding Alaska. In
addition, the Company has obtained authority to provide local exchange services
on a resale or facilities-based basis in 10 states and the Northern Marianas
Islands.
ARIZONA. In Arizona, the Tucson and Phoenix networks and alternate
access transmission services, to the extent that they provide the transmission
of messages or telephone service within Arizona, could be deemed public service
corporations and subject to the jurisdiction of the Arizona Corporation
Commission (the "ACC") for certain purposes. GST Net (AZ), Inc. ("GST Net (AZ)")
has received a Certificate of Convenience and Necessity ("CCN") from the ACC to
provide jurisdictionally intrastate special access, private line and/or local
exchange services in Arizona. GST Tucson Lightwave, Inc. ("GST Tucson") has
entered into a license agreement with Pima County (the county in which Tucson is
located) which was officially recorded on July 16, 1996, to construct, install,
maintain and operate a fiber optics communication system in the public
right-of-way.
CALIFORNIA. Both GST Pacific Lightwave, Inc. ("GST Pacific") and GST
Telecom California, Inc. ("GST California") have been granted authority to
provide both facilities-based and resale local exchange services in the areas
served by Pacific Bell and GTE California Incorporated ("GTE California"). GST
California and GST Pacific have entered into an interconnection agreement with
GTE California which became effective October 17, 1996. GST California and GST
Pacific have entered into an interconnection agreement with Pacific Bell for the
State of California which became effective December 30, 1996.
HAWAII. The HPUC has granted GST Hawaii a CPCN as a carrier of voice
and data on a point to point basis in Hawaii. Under the HPUC's rules governing
competition in telecommunication services, an application by GST Hawaii for an
expanded CPCN is no longer necessary. GST Hawaii must file an application for
any proposed, modified, or new tariffed service, unless ordered otherwise by the
HPUC. GST Hawaii's CLEC tariff became effective on September 4, 1996. The HPUC
has also approved GST Hawaii's interconnection agreement with GTE and an
amendment to the original interconnection agreement was approved in October
1997. GST Hawaii is in the process of completing its connections to GTE's
Hawaiian network.
IDAHO. GST Telecom Idaho, Inc. ("GST Idaho") has authority from the
Idaho Public Utilities Commission (the "Idaho Commission") to provide
telecommunications services on a statewide basis to
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business customers with six or more lines. GST Idaho has also been granted
authority from the Idaho Commission to provide telecommunications services to
customers with fewer than six lines in the GTE Companies and U S WEST
Communications, Inc. ("U S WEST") exchanges.
NEVADA. GST Telecom Nevada, Inc. was granted CLEC and resale authority
on September 27, 1996, by the issuance of a CPCN by the Public Service
Commission of Nevada.
NEW MEXICO. On October 23, 1995, GST Telecom New Mexico, Inc. was
granted a CPCN from the New Mexico State Corporation Commission to provide
intrastate, non-switched private line services. Its authority to provide resold
interexchange services was approved on January 6, 1997 and its statewide CLEC
authority was granted on May 30, 1997.
OREGON. On March 5, 1997, GST Telecom Oregon, Inc. was granted CLEC
authority in competitive zones.
TEXAS. The Texas Public Utilities Commission on August 9, 1996 approved
the application of GST Telecom Texas, Inc. ("GST Texas") for a certificate of
operating authority on a statewide basis to resell telecommunications services.
GST Texas' authority was expanded to include facilities-based services on June
4, 1997.
UTAH. GST Telecom Utah, Inc. obtained competitive local exchange
authority in December 1996 to provide services statewide, with the exception of
exchanges with fewer than 5,000 access lines owned or controlled by an ILEC with
fewer than 30,000 access lines within the State.
WASHINGTON. GST Telecom Washington, Inc. ("GST Washington") is
currently authorized to provide both resold and facilities-based services,
including local exchange services, message toll, operator services and carrier
access services. GST Washington's request for competitive status was approved
June 11, 1997.
LOCAL REGULATION
The networks are subject to numerous local regulations such as building
codes and licensing. Such regulations vary on a city by city and county by
county basis. The Company needs to obtain rights-of-way over private and
publicly owned land to permit the installation of the fiber optic
telecommunication equipment.
GST GLOBAL TELECOMMUNICATIONS INC.
At September 30, 1997, the Company has invested approximately $3.7
million in GST Global Telecommunications Inc. ("Global") and held approximately
3.6 million common shares and warrants to purchase 750,000 additional shares. On
September 30, 1997, Global had approximately 14.1 million shares outstanding.
Global is to issue to the Company additional common shares of Global, subject to
approval of the Vancouver Stock Exchange ("VSE"), in consideration for the
transfer by the Company to Global of its rights in and to the Bestel Project. In
addition, certain executive officers and directors hold an aggregate of 553,896
common shares of Global and options and warrants to purchase 224,500 additional
common shares of Global. Global employs its own operating management and has
raised capital required for its proposed activities. As of September 30, 1997,
Global had raised approximately $21.0 million through private placements of its
common shares and $37.8 million through private placements of long term debt.
Global has subscribed, through a subsidiary, GST Mextel, Inc., a
Delaware corporation, for 49% of the outstanding shares of Bestel, S.A. de C.V.
("Bestel"). The total consideration is approximately $13.7
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million, of which approximately $12.0 million has been paid. The remaining 51%
is held by Occidental Telecommunicacion, S.A. de C.V. ("Occidental"). In
addition, Global has agreed to loan an aggregate of up to $36.0 million to
Bestel, of which $26.0 million has been advanced to date. Bestel plans to
construct and operate a 2,270 kilometer fiber optic telecommunications network
in Mexico to become a facilities-based long distance carrier, of which as of
September 30, 1997 approximately 1,100 kilometers of conduit and 180 kilometers
of fiber optic cable has been constructed.
Global has also acquired from Cable and Wireless an 80% interest in
Vitacom, for a purchase price of $1.5 million. The remaining 20% is held by
Cable and Wireless, which can require Global to purchase such interest in 1999.
Vitacom is engaged in the provision of voice, high speed data information and
other services and the manufacture and sale of VSAT (very small aperture
satellite terminal) and other equipment used to access the Internet.
MAGNACOM
Magnacom Wireless, L.L.C. ("Magnacom"), a company 99% owned by PNI,
which is in turn controlled by John Warta, the Company's Chairman of the Board
and Chief Executive Officer, has acquired various PCS licenses at auction and
through purchase. Magnacom holds 30 MHz (C Block) PCS licenses for 11 markets in
Arizona, Arkansas, New Mexico, Oregon and Utah. Magnacom won 10 MHz licenses in
the FCC's F Block in 13 markets in Hawaii, Idaho, Oregon and Washington in an
FCC auction. Such licenses have not yet been issued because Magnacom did not
timely submit the required down payment. Magnacom is awaiting FCC action on its
request for a waiver of the down payment deadline.
Magnacom and the Company have entered into a 12-year reseller agreement
(the "Magnacom Reseller Agreement") pursuant to which (i) the Company has been
designated a non-exclusive reseller of PCS telephone services in the markets in
which Magnacom has obtained licenses, and (ii) Magnacom has agreed to use the
Company on an exclusive basis to provide switched local and long distance
services and other enhanced telecommunications services, to all of Magnacom's
resellers in markets where the Company has operational networks. Magnacom agreed
to sell PCS minutes to the Company at $.05 per minute, subject to downward
adjustment to equal the most favorable rates offered to Magnacom's other
resellers (but in no event less than Magnacom's cost). In connection with the
Magnacom Reseller Agreement, as of September 30, 1997, the Company had paid
Magnacom approximately $14.0 million as prepayments for future PCS services.
Magnacom and the Company are presently in negotiations with respect to modifying
the Magnacom Reseller Agreement to reflect certain regulatory requirements and
to provide clarification as to the basis upon which the Company and Magnacom
will provide such services.
In addition, the Company has been granted a conditional option to
acquire up to PNI's entire interest in Magnacom (currently 99%), conditioned
upon Magnacom and the Company entering into an agreement for the construction
and/or operation of Magnacom's facilities. If and when the condition precedent
is met, the exercise of the option will be subject to compliance with all
applicable FCC regulations relating to prior approval of any transfer of control
of PCS licenses, including those relating to foreign ownership or control and
requirements regarding the ownership of C and F block licenses. Accordingly,
until such time as FCC regulations or administrative action permit the Company
to own in excess of 25% of Magnacom, the option by its terms is limited to a 24%
interest in Magnacom.
In February 1997, an affiliate of Magnacom, PCS Plus Pacific, Inc.
formerly known as Guam Net, Inc. ("PCS Plus Pacific"), acquired from Poka Lambro
Telephone Cooperative, Inc. a 30 MHz (A Block) PCS license from the FCC in the
market consisting of Guam and the Northern Marianas Islands. Concurrently, the
Company entered into a reseller agreement on terms substantially similar to the
Magnacom Reseller Agreement and paid PCS Plus Pacific approximately $.4 million
as a prepayment for future PCS services.
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See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of a warrant to purchase up to 4% of the
then outstanding Common Shares that may be issued in connection with financing
for Magnacom.
The provision of wireless telecommunications service by Magnacom and
PCS Plus Pacific will be dependent upon their ability to obtain the financing
necessary to make payments to the FCC under the terms of their licenses, to
obtain working capital and to build the required facilities, including the
purchase of telecommunications equipment. There can be no assurance that
Magnacom or PCS Plus Pacific will obtain such financing or be able to provide
PCS services. In such event, the Company would likely be unable to recover its
payments to Magnacom and PCS Plus Pacific.
EMPLOYEES
As of December 10, 1997, the Company and its subsidiaries had 1,115
full-time employees. None of such employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be satisfactory.
RECENT DEVELOPMENTS
On September 30, 1997, an affiliate of Tomen Corporation (together with
its affiliates, "Tomen") agreed to provide the Company with up to $40.5 million
of debt financing for the Company's Hawaiian inter-island submarine network and
various other terrestrial installations. In connection with such financing, the
Company entered into a credit agreement with Tomen containing substantially
similar terms as those previously entered into under an existing facility (the
"Tomen Facility"), except that the loan will amortize in 22 quarterly
installments beginning March 31, 2000.
In November 1997, the Company completed a public offering (the "1997
Offering") of 6,440,000 Common Shares at $12.00 per share and $144 million of 12
3/4% Senior Subordinated Accrual Notes due 2007 (the "Accrual Notes"). The
Accrual Notes bear interest at a rate of 12 3/4% per annum, however no interest
will be paid thereon prior to May 15, 2003. Until November 15, 2002, interest
will accrue and be compounded semi-annually on each May 15 and November 15,
commencing May 15, 1998, but will not be payable in cash. From and after
November 15, 2002, interest on the principal amount and the final accumulated
interest amount of the Accrual Notes will be payable semi-annually. The Accrual
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after November 15, 2002. In addition, at any time prior to November
15, 2000, up to 33 1/3% of the aggregate principal amount of the Accrual Notes
may be redeemed by the Company from the proceeds of one or more sales of its
capital stock (other than redeemable stock); provided that after any such
redemption at least $83.3 million aggregate principal amount of Notes remains
outstanding. The Company intends to use the net proceeds from such offerings,
aggregating approximately $211.2 million, to fund the expansion of its
infrastructure, the expansion of its products and service offerings and for
working capital and general corporate purposes.
ITEM 2. PROPERTIES.
The Company owns a building comprising 60,000 square feet in Vancouver,
Washington. The Company leases space containing its principal executive offices
at 4001 Main Street, Vancouver, Washington 98663. Its telephone number at that
address is (360) 906-7100.
The Company leases offices elsewhere in the United States, in
Vancouver, British Columbia and in Japan, pursuant to leases which expire on
various dates through December 31, 2007. The Company's current aggregate annual
rental expense is approximately $4.6 million. The Company is negotiating leases
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for spaces in California and Washington for an aggregate additional cost
expected to be approximately $112,000 per year.
ITEM 3. LEGAL PROCEEDINGS.
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc.
(collectively, "Aerotel") commenced an action against NACT and a customer of
NACT in the United States District Court, Southern District of New York,
alleging that telephone systems manufactured and sold by NACT incorporating
prepaid debit card features infringe upon Aerotel's patent which was issued in
November 1987 (the "Aerotel Patent"). The initial complaint further alleged
defamation and unfair competition as a result of a Special Report disseminated
by NACT to its customers and tortious interference with prospective business
relations, alleging that NACT induced third parties to abandon licensing
negotiations with Aerotel. Aerotel sought injunctive relief, damages in an
unspecified amount, damages of up to three times the damages found for willful
infringement of the Aerotel Patent and an order requiring NACT to publish a
written apology to Aerotel. NACT filed an answer and Counterclaim in which it
denied infringement of the Aerotel Patent and sought judgment that the Aerotel
Patent is invalid and unenforceable and that Aerotel has misused its patent in
violation of antitrust laws. NACT also denied that it had committed defamation,
unfair competition or tortious interference with prospective business relations.
On May 3, 1996, NACT served its motion for summary judgment. The Court has
indicated it will deny such motion, although the actual ruling has not yet been
received. In August 1997, Aerotel amended its complaint to include as defendants
the Company and GST USA, Inc. ("GST USA") as well as Kyle Love, the former
President of NACT and Dr. Thomas E. Sawyer, a director of the Company and NACT
and the former Chairman and Chief Executive Officer of NACT. The amended
pleadings seek in excess of $18.7 million in damages and allege that the Company
and GST USA have infringed the Aerotel patent, aided and abetted infringement by
others, including NACT, and participated in, and aided and abetted, alleged
tortious conduct by NACT. The Company, GST USA, Dr. Sawyer and Mr. Love have
served answers denying all material allegations and intend to defend vigorously.
Pretrial discovery has commenced and is scheduled to be completed in 1998. The
case is not expected to be tried until late 1998 at the earliest. NACT's patent
counsel believes that NACT has valid defenses to the Aerotel claims. If upheld,
these defenses would also be valid for all defendants. An unfavorable decision
in this action could have a material adverse effect on the Company.
On July 5, 1994, the Tucson City Council (the "Council") awarded GST
Tucson a non-exclusive fiber optic communication license that permits GST
Tucson, for a period of 25 years, to conduct, maintain and operate in and across
designated portions of city-owned rights-of-way. On June 12, 1995, the Council
approved the City of Tucson Competitive Telecommunications Code (the "Tucson
Code"), which was subsequently amended on July 10, 1995. The Tucson Code now
provides, among other things, (i) that the City of Tucson grant licenses for a
period of 15 years, (ii) for an increase from 2% to 5 1/2% of gross revenues to
be paid by licensees and (iii) for cancellation of a license in certain events.
The Council subsequently refused to permit GST Tucson to modify the route plans
previously approved in order to construct connections between its customers and
the network, asserting that GST Tucson's existing license does not permit such
action and requiring GST Tucson to receive an amended license under the Tucson
Code to modify its route plans. After trying to negotiate a settlement with the
City of Tucson with respect to its license, GST Tucson commenced an action in
the Superior Court of Arizona, County of Pima, against the City of Tucson. The
Court ruled in favor of the City that the City Engineer does not have the
authority to grant modifications from the route map, that such route
modifications must be approved by the Council and that the City could condition
GST Tucson's application for a franchise for intrastate service on a
relinquishment of GST Tucson's existing license. GST Tucson appealed the
Superior Court's rulings and subsequently filed a petition for review in the
Arizona Supreme Court. On May 13, 1996, GST Tucson instituted an action in the
United States District Court for the District of Arizona against the City of
Tucson seeking a declaratory judgment and injunctive relief arising out of the
City of Tucson's failure to manage its public rights-of-way in a competitively
neutral and nondiscriminatory manner in violation of the Telecommunications Act.
The Court dismissed GST Tucson's action. GST Tucson filed a Notice of Appeal
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to the United States Court of Appeals for the Ninth Circuit on January 16, 1997.
On August 5, 1997, the Tucson City Council approved a settlement agreement that
resolves the Superior Court action. Under the terms of the settlement agreement,
GST Tucson has agreed to pay the City the annual license fee called for by the
Tucson Code that amounts to 5 1/2% of gross revenues, and the City has permitted
GST Tucson to modify its current route map and to serve customers throughout the
City limits. While dismissing the pending state court appeal, the parties agreed
to allow the United States Court of Appeals for the Ninth Circuit to decide the
pending legal issue relating to whether companies like GST Tucson enjoy a
private right of action to assert right-of-way claims under Section 253(c) of
the Telecommunications Act in the United States District Courts.
On or about February 25, 1997, U S WEST filed a declaratory judgment
action against members of the ACC, the ACC, ACSI, Brooks and the Company in the
United States District Court in Arizona. The Company understands that one or
more substantially similar lawsuits have been filed against other CLECs,
including MFS, Sprint, MCI and AT&T. U S WEST alleges that the ACC has entered
into an interconnection order that unlawfully requires U S WEST to resell
services below cost, imposes resale restrictions and denies U S WEST recovery
for construction and implementation costs, unlawfully treats the cost recovery
of access revenues for interim number portability, requires U S WEST to obtain
additional rights of way or build additional facilities solely to provide access
to the Company, and amounts to a taking of U S WEST's property without just
compensation. U S WEST seeks a declaratory judgment stating that the ACC has
violated the Telecommunications Act and that the ACC has taken U S WEST's
property without providing just compensation. U S WEST also seeks an injunction
prohibiting all defendants, including the Company, from taking any action to
enforce any of the order's allegedly unlawful provisions. The Company's time to
answer or move against the complaint has been extended indefinitely by U S WEST,
pending a decision with respect to a motion filed by MFS to dismiss the
complaint. Should U S WEST prevail in its suit, it could have an adverse impact
on the Company's operations in Arizona.
On or about April 8, 1997, U S WEST filed a state court proceeding
against the ACC, individual members of the ACC, and GST Net (AZ), which holds a
CCN to provide local exchange service in Arizona. In its complaint appealing the
ACC's February 6, 1997 decision and order granting GST Net (AZ) its CCN, U S
WEST alleges that the ACC's action violates certain requirements of the Arizona
Constitution relating to rate of return regulation, carrier of last resort
obligations, and equal protection. The appeal seeks to subject GST Net (AZ) and
U S WEST to identical forms of regulation, treating both carriers as either
traditional monopoly carriers or as co-equal competitive companies. GST Net (AZ)
answered U S WEST's complaint on August 6, 1997, alleging, among other things,
that U S WEST's complaint is preempted by the Telecommunications Act. Should U S
WEST prevail in its appeal, it could have an adverse impact on the Company's
operations in Arizona; however, the magnitude thereof is uncertain at this time.
The Company is not a party to any other material legal proceedings,
nor, to the knowledge of the Company, are any material legal proceedings
threatened against the Company. The Company is a party to various proceedings
before the public utilities commissions of the states in which it provides or
proposes to provide telecommunications services. These proceedings typically
relate to licensure of the Company or others and to the regulation of the
provision of telecommunications service.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Shares, without par value, are traded on the
American Stock Exchange (the "AMEX") (ticker symbol: GST) and on the Toronto
Stock Exchange (the "TSE") and the Vancouver Stock Exchange (the "VSE") (ticker
symbol: GTE.U).
The Common Shares have been listed on the AMEX since March 11, 1994 and
trade under the symbol "GST," and have been listed on the TSE since August 26,
1997 and on the VSE since February 28, 1991 and trade under the symbol "GTE.U."
The following table sets forth, for two most recent fiscal years, the
high and low closing prices of the Common Shares as reported on the AMEX and the
TSE.
<TABLE>
<CAPTION>
AMEX TSE(1)
-------------------- ---------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
CALENDAR YEAR 1995
<S> <C> <C> <C> <C>
Fourth Quarter................................ $7 3/16 $5 9/16 -- --
CALENDAR YEAR 1996
First Quarter................................. 8 11/16 5 15/16 -- --
Second Quarter................................ 5 1/4 8 1/8 -- --
Third Quarter................................. 13 1/2 9 1/4 -- --
Fourth Quarter................................ 11 1/4 7 3/4 -- --
CALENDAR YEAR 1997
First Quarter................................. 10 3/8 7 3/8 -- --
Second Quarter................................ 10 7/16 6 1/2 -- --
Third Quarter................................. 13 11/16 9 11/16 $13.95 $10.00
Fourth Quarter (through December 22).......... 17 11 7/16 17.40 11.00
</TABLE>
- --------------------------------------
(1) The Common Shares have been listed on the TSE since August 26, 1997.
DIVIDENDS
The Company has never declared or paid any dividends on the Common
Shares and does not presently intend to pay dividends on the Common Shares in
the foreseeable future. The Company's Board of Directors intends to retain
future earnings, if any, to finance the development and expansion of its
business. Future declaration and payment of dividends, if any, will be
determined in light of the then current conditions, including the Company's
earnings, operations, capital requirements, financial condition, restrictions in
financing arrangements and other factors deemed relevant by the Board of
Directors. The Company's ability to declare or pay cash dividends, if any, will
be dependent upon the ability of the Company's subsidiaries to declare and pay
dividends or otherwise transfer funds to the Company, because the Company
conducts its operations entirely through subsidiaries. Pursuant to credit
agreements under the Tomen Facility, the Company's subsidiaries that own and
operate the Southern California, Tucson, Albuquerque and Hawaiian networks may
not pay any dividends or make any distributions on their capital stock to their
shareholder, GST Telecom. Subsequent network financings under the Tomen Facility
are expected to include similar prohibitions. In addition, indentures (the
"Indentures") relating to the 13 7/8%
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Senior Discount Notes due 2005 (the "Senior Notes") of GST USA, the 13 7/8%
Convertible Senior Subordinated Discount Notes due 2005 of the Company (the
"Convertible Notes" and together with the Senior Notes, the "1995 Notes"), the
13 1/4% Senior Secured Notes due 2007 (the "Secured Notes") of GST Equipment
Funding, Inc., a wholly owned subsidiary of GST USA ("GST Funding") and the 12
3/4% Senior Subordinated Accrual Notes due 2007 of the Company (the "Accrual
Notes") limit, and, for the foreseeable future, effectively prohibit, the
ability of the Company to declare or pay cash dividends.
NUMBER OF SHAREHOLDERS
As of December 23, 1997, there were 256 holders of record of the
Company's Common Shares. The Company believes that there are in excess of 3,500
beneficial owners of the Company's Common Shares additional to such holders of
record.
RECENT SALES OF UNREGISTERED SECURITIES
On September 19, 1997, the Company issued an aggregate of 29,160 Common
Shares to four individuals as an installment payment in consideration for the
Company's acquisition in September 1996 of Tri-Star Residential Communications
Corp.
On September 30, 1997, the Company issued an aggregate of 130,828
Common Shares and Warrants to purchase an aggregate of an additional 75,000
Common Shares to Tomen for a purchase price of $1,375,000 in connection with a
financing under the Tomen Facility.
There were no underwriters involved in any of the foregoing issuances
of equity securities and such issuances were exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, as transactions not
involving a public offering.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
THIRTEEN
MONTHS YEAR ENDED
YEAR ENDED ENDED SEPTEMBER 30,
AUGUST 31, SEPTEMBER 30, ----------------------------------------
1993 1994(1) 1995 1996 1997
---------- ------------- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C>
Telecommunications services.. $ -- $ 112 $ 11,118 $ 31,726 $ 82,593
Telecommunications products.. -- 5,889 7,563 9,573 23,374
----- ------- ------- ------- -------
Total revenues...... -- 6,001 18,681 41,299 105,967
Operating loss........................ (418) (1,337) (11,631) (42,597) (86,543)
Other expenses (income):
Interest income.............. (35) (254) (303) (5,549) (7,026)
Interest expense(2).......... -- 27 838 21,224 37,665
Other, net................... 439 1,877 1,347 2,360 (5,359)
Income tax expense.................... -- 502(3) 166(3) 157 903
------ ------ ------ ------ ------
Net loss(4)........................... $ (822) $(3,491) $(11,315) $(60,378) $(113,338)
======= ======== ========= ========= ==========
Net loss per Common Share............. $ (.22) $(.35) $(.82) $(3.18) $(4.59)
====== ====== ====== ======= =======
Weighted average number of Common
Shares outstanding........... 3,821 9,879 13,781 18,988 24,703
Ratio of earnings to fixed charges.... -- -- -- -- --
OTHER DATA:
Capital expenditures.................. $ 4 $ 1,486 $ 33,922 $ 97,561 $225,743
EBITDA(5)............................. (418) (779) (8,807) (33,936) (51,881)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents and investments $ 4,746 $ 5,062 $ 6,895 $66,519 $59,184
Restricted cash and investments....... -- -- -- 16,000 171,750
Property and equipment................ 4 4,805 39,583 134,714 385,252
Accumulated depreciation.............. -- 221 1,550 7,139 (20,738)
Investment in joint ventures(6)....... 4,616 3,552 2,859 1,364 --
Total assets.......................... 9,398 26,769 73,125 301,701 728,405
Current portion of long-term debt and
capital lease obligations.... -- -- 959 5,554 10,656
Long term debt and capital lease -- -- 19,746 234,127 628,043
obligations (excluding current
portion).....................
Redeemable Preferred Shares........... -- -- -- -- 51,756
Common Shares and commitment to issue
Common Shares(7)............. 10,511 25,075 51,660 98,101 149,880
Accumulated deficit................... (1,149) (4,640) (15,955) (76,333) (189,671)
Shareholders' equity (deficit)........ 9,362 20,435 35,705 21,768 (39,791)
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
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(1) The Company changed its fiscal year end to September 30, effective in
1994. As a result, amounts reported for the thirteen months ended
September 30, 1994 ("Fiscal 1994") are for the 13 months ended
September 30, 1994. Results for Fiscal 1994 include the acquisition of
60% of GST Telecom, the Company's subsidiary that owned and operated
each of the Company's networks, and, at various times during Fiscal
1994, an aggregate of 80% of NACT.
(2) Excludes capitalized interest of $.3 million for the fiscal year ended
September 30, 1995 ("Fiscal 1995"), $2.3 million for the fiscal year
ended September 30, 1996 ("Fiscal 1996") and $15.2 million for the
fiscal year ended September 30, 1997 ("Fiscal 1997"). During the
construction of the Company's networks, the interest costs related to
construction expenditures are considered to be assets qualifying for
interest capitalization under FASB Statement No. 34 "Capitalization of
Interest Cost."
(3) During Fiscal 1994 and the first eight months of Fiscal 1995, the
Company owned less than 80% of GST Telecom and was therefore unable to
deduct for tax purposes the losses incurred by GST Telecom.
(4) Includes minority interest in (income) loss of subsidiaries of (i)
$(2,000) for Fiscal 1994, (ii) $2.4 million for Fiscal 1995, (iii) $.4
million for Fiscal 1996 and (iv) $(.6) million Fiscal 1997.
(5) EBITDA consists of loss before interest, income taxes, depreciation and
amortization, other income and non-cash expense. EBITDA is provided
because it is a measure commonly used in the industry. It is presented
to enhance an understanding of the Company's operating results and is
not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles for the
periods indicated. See the Company's consolidated financial statements
and notes thereto included elsewhere in this Annual Report.
(6) Represents principally the Company's then 50% ownership interest in
Phoenix Fiber Access, Inc. ("Phoenix Fiber"), the owner and operator of
the Phoenix network. The Company acquired the remaining 50% interest in
Phoenix Fiber effective as of October 1, 1996.
(7) At September 30, 1997, the Company was committed to issue the
following: (i) 221,838 Common Shares to the former shareholders of
TotalNet in October 1997 and (ii) a number of Common Shares with a
market value of $.9 million, based on the then market value of the
Common Shares and payable at various times in the fiscal year ending
December 31, 1998 ("Fiscal 1998") to the former shareholders of
Tri-Star.
ITEM 7. 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
The Company provides a broad range of integrated telecommunications
products and services, primarily to business customers located in the western
continental United States and Hawaii. The Company's digital networks currently
serve 39 markets in Arizona, California, Hawaii, Idaho, New Mexico, Texas and
Washington. In addition, the Company has networks under construction which, when
completed, will serve three additional markets and expand its regional footprint
to Oregon. The Company also constructs, markets and manages longhaul fiber optic
facilities, principally in Arizona, California and Hawaii. The Company's
longhaul fiber optic facilities currently extend approximately 600 route miles
and an additional 1,100 route miles are expected to become operational over the
next 12 months. The Company's full line of products, which offer a "one-stop"
solution to customers' telecommunications services requirements, include long
distance, Internet, data transmission, and private line services, and local dial
tone services, which were recently introduced.
The Company has invested significant capital and effort in developing
its telecommunications business. This capital has been invested in the
development of the Company's networks and longhaul fiber optic facilities, for
the hiring and development of an experienced management team, the development
and installation of operating systems, the introduction of services, marketing
and sales efforts and for
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acquisitions. The Company expects to make increasing capital expenditures to
expand its networks and longhaul fiber optic facilities and broaden its service
offerings and may consummate additional acquisitions. Proper management of the
Company's growth will require the Company to maintain quality control over its
services and to expand the Company's internal management, technical and
accounting systems, all of which will require substantial investment.
Effective in 1994, the Company changed its fiscal year end to September
30th, in order to conform more closely to the reporting periods of its
subsidiaries. The Company is changing its fiscal year to December 31st in order
to align financial reporting with regulatory reporting and to the reporting of
others in the Company's industry sector. The Company will provide to investors
audited financial information for the three month transition period ending
December 31, 1997 and for the subsequent 12-month periods ending December 31st.
As a result of the limited revenues and significant expenses associated with the
expansion and development of its networks and services, the Company's operating
results could vary significantly from period to period.
LOCAL SERVICES. To facilitate its entry into local services, the
Company has in service five high capacity digital switches, has installed and is
currently testing seven additional high capacity digital switches and is
planning to deploy an additional two such switches through early 1998. As demand
warrants, the Company plans to continue to install switching equipment in its
operational networks, in markets where it is constructing networks and in
certain other cities where the Company will rely on ILEC facilities for
transmission. Once a switch is operational, where regulatory conditions permit,
the Company intends to offer local dial tone, in addition to enhanced services
such as ISDN, Centrex, voice mail and other custom calling features.
The Company expects negative EBITDA from its switched services during
the 24 to 36 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. For switches operating in cities where the Company
will rely on ILEC facilities for transmission, the Company will experience lower
or negative operating margins under current ILEC pricing tariffs. Although under
the Telecommunications Act the ILECs will be required to unbundle local tariffs,
permitting 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.
LONG DISTANCE SERVICES. The Company offers basic and enhanced long
distance services, such as toll free, calling card, prepaid calling card and
international call back services, targeting primarily business customers
purchasing between $200 and $15,000 of services per month as well as resellers
and other carriers. As part of its strategy, the Company has acquired a number
of long distance carriers and intends to continue to pursue acquisitions of long
distance carriers in the future. The Company purchases long distance capacity
under agreements with certain major long distance carriers that provide the
Company capacity at rates that vary with the monthly traffic generated by the
Company. The Company is obligated to satisfy certain minimum monthly usage
requirements of an aggregate of $1.6 million per month as of October 1, 1997,
increasing to a maximum of $6.1 million per month over the next three years. If
such requirements are not satisfied, the Company may be required to pay an
underutilization fee in addition to its monthly bill.
INTERNET SERVICES. The Company presently offers Internet-related
services in most of its markets, such as dedicated Internet services, Web site
development and hosting, provides access and upstream transport for local ISPs,
EDI and electronic commerce services and is in the process of developing various
Internet software applications. The Company also offers dial-up Internet
services to customers in Portland (Oregon), Vancouver (Washington), the State of
Hawaii and select markets in California and intends to begin offering such
services in the Los Angeles, San Francisco and Houston metropolitan areas in
1998.
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<PAGE>
Management believes that these services will become an important component of
the Company's overall product offerings and intends to continue to expand its
Internet access and service business to other markets.
DATA SERVICES. The Company offers national and international frame
relay services on its own frame relay network and through interconnection
agreements with other data service providers. Under these agreements, the
Company and such data service providers have agreed to link their data networks
and terminate one another's traffic. The Company has deployed Cascade
Communications frame relay switches in 21 markets in the western United States.
Such switches can provide both frame relay and Internet services.
The Company is leveraging its infrastructure and network experience to
offer data networking services such as ATM, high speed LAN connectivity, video
conferencing, multimedia networking, frame relay and high capacity access to the
Internet. The Company has one ATM switch commercially operational in each of Los
Angeles and Ontario, California.
NETWORK OPERATIONS. The development, construction and expansion of the
Company's networks requires significant capital, a large portion of which is
invested before any revenue is generated. The Company has experienced, and
expects to continue to experience, increasing negative EBITDA and losses while
it expands its network operations and builds its customer base. None of the
Company's existing networks is generating EBITDA. Based on its experience to
date and that of its competitors, the Company estimates that a new network will
generate EBITDA within 30 to 36 months after commencement of commercial
operations. Construction periods and operating results will vary from network to
network. There can be no assurance that the Company will be able to establish a
sufficient revenue-generating customer base or achieve EBITDA in any particular
market or on a consolidated basis.
Management estimates that the total costs associated with the purchase
and installation of fiber optic cable and high-speed electronic transmission
equipment, including capitalized engineering costs, will range from $10.0
million to $25.0 million per network, depending upon the size of the market
served and the scope and complexity of the network. Actual costs may vary
significantly from this range. The amounts and timing of these expenditures are
subject to a variety of factors that may vary significantly by the geographic
and demographic characteristics of each market. In addition to capital
expenditure requirements, upon commencement of the construction phase of a
network, the Company begins to incur direct operating costs for such items as
salaries and rent. As network construction progresses, the Company incurs
rights-of-way costs and increased sales and marketing expenses. Certain direct
preoperating costs for new networks are capitalized until the network becomes
operational and are thereafter expensed as incurred.
The initial development of a network may take as long as six months,
depending upon the size and complexity of the network and a variety of factors,
including the time required to obtain rights-of-way and other governmental
approvals, such as franchise agreements. Once actual construction commences, it
may take from two to six months to complete the initial backbone segment of a
network. The time required during the construction phase is significantly
influenced by the number of route miles involved, the mix of aerial versus
underground fiber deployment, possible delays in receiving fiber optic cable,
electronic equipment and required permits and other factors.
MANUFACTURING. In September 1993, the Company purchased a 52% interest
in NACT, which produces advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. During
Fiscal 1994, the Company acquired in a series of transactions an additional 28%
interest in NACT. The aggregate consideration paid for the Company's 80%
interest in NACT was $5.8 million, consisting of $3.2 million in cash and
451,536 Common Shares. On January 5, 1995, the Company purchased the remaining
20% interest in NACT for consideration consisting
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of $.9 million in cash and notes payable and 504,747 Common Shares (valued at
$2.2 million). In the third quarter of Fiscal 1996, NACT introduced the STX, the
first of a new generation of switches. In the NACT Offering, the Company and
NACT sold one million and two million shares, respectively, of NACT's common
stock, resulting in gross proceeds to the Company and NACT of $10.0 million and
$20.0 million, respectively. As a result of the NACT Offering, the Company's
interest in NACT has been reduced to approximately 63%. On September 30, 1997,
the Company announced that it had retained Hambrecht & Quist LLC to explore
alternatives for monetizing its 63% interest in NACT, including a potential sale
of some or all of its shares of NACT's capital stock to one or more strategic
investors.
In May 1997, the Company acquired Action Telcom, a facilities-based
telecommunications company located in Abilene, Texas that operates its own
network and switching equipment, originating and terminating its own traffic
principally in Texas. Action Telcom manufactures the Network Analysis Management
System ("NAMS"), a UNIX based software and hardware platform that provides
automated real-time billing record collection, fraud protection and network
design.
The Company has entered into a 12-year reseller agreement with
Magnacom, a company 99% owned by PNI, which is in turn controlled by John Warta,
the Company's Chairman of the Board and Chief Executive Officer, pursuant to
which the Company has paid Magnacom approximately $14.0 million as prepayments
for future PCS services. The Company has been granted a conditional option to
acquire up to PNI's entire interest in Magnacom, subject to compliance with FCC
regulations.
Magnacom is currently negotiating with a telecommunications equipment
vendor to provide equipment and other financing and to invest in Magnacom. The
terms of any such transaction may include the issuance by the Company to such
vendor of a warrant to purchase up to 4% of the then outstanding Common Shares.
If such warrant is issued, the Company will record a one-time noncash charge in
an amount equal to the value of the warrant. Although there can be no assurance,
the Company believes that the value of such a warrant could be between $3.0
million and $4.0 million, depending on the terms of the warrant.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Total revenue for Fiscal 1997 increased $64.7 million, or
156.6%, to $106.0 million from $41.3 million for Fiscal 1996. Telecommunications
services revenue for Fiscal 1997 increased $50.9 million, or 160.3%, to $82.6
million from $31.7 million for Fiscal 1996. The increase in telecommunications
services revenue resulted from the inclusion of a full year of revenue from
strategic acquisitions, including GST Call America and TotalNet, as well as
increased CLEC service revenue generated by the Company's networks. To a lesser
extent, the increase in telecommunications services revenue resulted from
increased Internet, shared tenant and data services. Product revenue for Fiscal
1997 increased $13.8 million, or 144.2%, to $23.4 million from $9.6 million for
Fiscal 1996. The increase in product revenue resulted primarily from the
introduction in April 1996 of NACT's STX switch and subsequent increased unit
sales. To a lesser extent the increase in product revenue is due to the
inclusion of Action Telcom's sales of network management and fraud protection
systems which was acquired May 31, 1997.
OPERATING EXPENSES. Total operating expenses for Fiscal 1997 increased
$108.6 million, or 129.5%, to $192.5 million from $83.9 million for Fiscal 1996.
Network expenses, which include direct local and long distance circuit costs,
increased $39.7 million, or 149.2%, to $66.3 million, or 80.2% of
telecommunications services revenue for Fiscal 1997 compared to $26.6 million,
or 83.8% of telecommunications services revenue for Fiscal 1996. Facilities
administration and maintenance expenses (consisting primarily of costs related
to personnel providing maintenance, monitoring and technical assistance for the
Company's networks) for Fiscal 1997 increased $2.0 million, or 19.3%, to $12.3
million,
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or 14.9% of telecommunications services revenue, compared to $10.3 million, or
32.5% of telecommunications services revenue, for Fiscal 1996. The primary
reason for the increase in network expenses as a percent of telecommunications
services revenue and the decrease in facilities administration and maintenance
expenses as a percent of telecommunications services revenue was the inclusion
of revenue from 1996 strategic acquisitions, a significant portion of which was
generated off-net.
Cost of product revenue, which includes the costs associated with
product revenue of NACT and Action Telcom, increased $4.0 million, or 101.1%, to
$8.0 million for Fiscal 1997 from $4.0 for Fiscal 1996. Cost of product revenue
was 34.2% of product revenue for Fiscal 1997 compared to 41.5% for Fiscal 1996.
The decrease in cost of product revenue as a percentage of product revenue
resulted primarily from economies of scale related to increased unit sales of
NACT's STX switch. Research and development costs for Fiscal 1997 increased $1.0
million, or 71.3%, to $2.3 million from $1.3 million for Fiscal 1996. The
increase was due to the addition of NACT personnel to enhance the current switch
product line and to facilitate the development of new switching products and
applications.
Selling, general and administrative expenses for Fiscal 1997 increased
$46.1 million, or 138.2%, to $79.5 million from $33.4 million for Fiscal 1996.
The increase is due to the expansion of the Company's CLEC and enhanced services
operations, the acquisition of four companies from September 1996 to May 1997
and the hiring of a significant number of marketing, management information and
sales personnel to implement the Company's integrated services strategy. In
addition, the increase in selling, general and administrative expense was
partially attributable to a one-time $7.4 million non-cash charge recorded in
Fiscal 1997 when 750,000 Common Shares were released from escrow upon the
resolution of a contingency. Selling, general and administrative expenses were
75.0% of total revenue for Fiscal 1997 compared to 80.8% of total revenue for
Fiscal 1996.
Depreciation and amortization for Fiscal 1997 increased $15.9 million,
or 191.1%, to $24.2 million from $8.3 million for Fiscal 1996. The increase was
attributable to newly-constructed networks becoming operational and to the
amortization of intangible assets related to the Company's acquisitions. The
Company expects that depreciation will continue to increase as it expands its
networks and long haul fiber optic facilities and installs additional switches.
Depreciation and amortization was 22.8% of total revenue for Fiscal 1997
compared to 20.1% for Fiscal 1996.
OTHER EXPENSES/INCOME. For Fiscal 1997, net other expenses increased
$9.0 million, or 50.7%, to $26.8 million, or 25.3% of total revenue, from $17.8
million, or 43.1% of total revenue, for Fiscal 1996. Fiscal 1997 net other
expenses included a $7.4 million gain recognized on the sale of one million of
the Company's shares of NACT in February 1997. If the gain had been excluded,
other expenses for Fiscal 1997 would have increased $16.4 million over Fiscal
1996. Such increase primarily resulted from increased interest expense due to
the issuance of the 1995 Notes in December 1995 and the issuance of the Secured
Notes in May 1997. The Company expects that interest expense will increase due
to the issuance and sale of the Secured Notes and the Accrual Notes. To a lesser
extent, other expenses increased due to income tax expense attributable to
income of NACT, which as of March 1, 1997 is no longer consolidated for tax
purposes.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Total revenues for Fiscal 1996 increased $22.6 million, or
121.0%, to $41.3 million from $18.7 million for Fiscal 1995. Telecommunications
services revenues for Fiscal 1996 increased $20.6 million, or 185%, to $31.7
million from $11.1 million for Fiscal 1995. The increase in telecommunications
services revenues resulted from the continuing growth of long distance
(including revenues associated with Fiscal 1995 and 1996 acquisitions), local,
Internet and data services. Acquisitions (primarily the acquisition of ITG but
also the acquisitions of GST Call America and the businesses of Hawaii On Line
and Texas-Ohio) accounted for $15.1 million of the increase in such revenues.
Telecommunications products
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<PAGE>
revenues for Fiscal 1996 increased $2.0 million, or 26.6%, over Fiscal 1995. The
increase in telecommunications products revenues resulted from the introduction
by NACT of the STX product line in the third quarter of Fiscal 1996.
OPERATING EXPENSES. Total operating expenses for Fiscal 1996 increased
$53.6 million, or 176.8%, to $83.9 million from $30.3 million for Fiscal 1995.
Network expenses, which include direct local and long distance circuit costs,
increased $16.5 million to $26.6 million from $10.1 million for Fiscal 1995, due
to an expanded customer base and increased usage. As a percentage of
telecommunications services revenues, network expenses decreased from 90.9% for
Fiscal 1995 to 83.8% for Fiscal 1996. Facilities administration and maintenance
expenses for Fiscal 1996 increased $8.2 million to $10.3 million from $2.1
million for Fiscal 1995. As a percentage of telecommunications services
revenues, facilities administration and maintenance expenses increased from
18.9% for Fiscal 1995 to 32.5% for Fiscal 1996. The increase related to
additional personnel and facility costs required by continuing network
expansion, a substantial portion of which are incurred before the realization of
revenues.
Cost of product revenues at NACT for Fiscal 1996 increased $.9 million
to $4.0 million from $3.1 million for Fiscal 1995. As a percentage of
telecommunications products revenues for Fiscal 1996, cost of product revenues
increased nominally as compared to Fiscal 1995 due to initial lower margins
resulting from the discontinuance of NACT's former switch product line as it
began to offer the new STX to existing customers. Research and development costs
increased nominally for Fiscal 1996 relative to Fiscal 1995 as the Company moved
to more rapidly develop an improved billing system product and to maintain
ongoing research and development of the Company's existing hardware and software
product lines.
Selling, general and administrative expenses increased $22.0 million,
or 193.5%, to $33.4 million from $11.4 million for Fiscal 1995. The increase was
due to the expansion of the Company's CLEC and enhanced services operations, and
to a lesser extent, the acquisitions during Fiscal 1996 of GST Call America and
Tri-Star and the businesses of Hawaii On Line and Texas-Ohio. The implementation
of the Company's integrated services strategy has resulted in additional
marketing, management information and sales staff.
Depreciation and amortization for Fiscal 1996 increased $5.9 million to
$8.3 million from $2.4 million for Fiscal 1995 due to increased depreciation
resulting from newly constructed networks becoming operational. To a lesser
extent, the increase in depreciation and amortization was also due to increased
amortization of intangible assets resulting from acquisitions.
OTHER EXPENSES. Other expenses for Fiscal 1996 increased $16.1 million
to $18.0 million from $1.9 million for Fiscal 1995. The increase was principally
the result of additional interest expense associated with the 1995 Notes, offset
by interest income resulting from the investment of the proceeds of the sale of
the 1995 Notes (the "1995 Notes Offering").
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. Cash provided by operations will not be sufficient to fund the expansion
of its networks, longhaul fiber optic facilities and services.
At September 30, 1997, the Company had cash, cash equivalents, and
investments, including restricted cash and investments, of approximately $230.9
million, compared to $82.5 million at September 30, 1996. The Company's net cash
used in operating and investing activities was $321.8 million, $139.0 million,
$35.6 million for Fiscal 1997, Fiscal 1996 and Fiscal 1995, respectively. Net
cash provided by
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<PAGE>
financing activities from borrowings and equity issuances to fund capital
expenditures, acquisitions and operating losses was $316.4 million, $194.3
million and $37.4 million for Fiscal 1997, Fiscal 1996 and Fiscal 1995,
respectively.
Capital expenditures for Fiscal 1997, Fiscal 1996 and Fiscal 1995 were
$225.7 million, $97.6 million and $33.9 million, respectively. The Company
estimates capital expenditures of approximately $286 million from October 1,
1997 to December 31, 1998. The majority of these expenditures is expected to be
made for the construction of network and longhaul fiber optic facilities and the
purchase of switches and related equipment to facilitate the offering of the
Company's services. Continued significant capital expenditures are expected to
be made thereafter. In addition, the Company expects to continue to incur
operating losses while it expands its business and builds its customer base.
Actual capital expenditures and operating losses will depend on numerous
factors, including the extent of future expansion, acquisition opportunities and
other factors beyond the Company's control, including economic conditions,
competition, regulatory developments and the availability of capital.
In addition to the Company's capital expenditures in Fiscal 1996, the
Company acquired the business of Texas-Ohio for a purchase price of $.6 million
and the assumption of certain liabilities. All other acquisitions consummated by
the Company in Fiscal 1996 (Hawaii On Line, Tri-Star, Call America and TotalNet)
were in consideration of Common Shares. In the first quarter of Fiscal 1997, the
Company acquired the remaining 50% interest in Phoenix Fiber owned by ICG
Telecom Group, Inc. ("ICG") in consideration of (i) the repayment to ICG at
closing of approximately $2.1 million of intercompany indebtedness and the
repayment, under certain circumstances, of up to an additional $2.0 million of
such intercompany indebtedness and (ii) the indemnification of ICG in respect of
all indebtedness of Phoenix Fiber to the Company and third parties, other than
certain liabilities of Phoenix Fiber that were assumed by ICG. Prior to the
acquisition of the remaining 50% interest, the Company had contributed an
aggregate of $5.0 million to Phoenix Fiber. In May 1997, the Company acquired
Action Telcom for 903,000 Common Shares valued at $8.2 million, and $3.9 million
in cash, payable in three equal installments at closing and on the first and
second anniversaries thereof. Additional Common Shares may be issued to the
former shareholders of Action Telcom on such anniversaries if the then market
price of the Common Shares does not exceed $10.00 per share.
In September 1996, the Company entered into the Siemens Loan Agreement,
which provides for loans by Siemens of up to an aggregate of $226.0 million to
finance the purchase of Siemens equipment and certain equipment from other
suppliers. At September 30, 1997, $116.0 million of such facility was available
to the Company (of which $5.8 million had been provided). The Company may seek
to increase the amount of such facility up to $226.0 million on an as needed
basis, subject to the negotiation and execution of mutually satisfactory
documentation. In December 1996, the Company entered into the NTFC Loan
Agreement, which provides for $50.0 million of equipment financing to finance
the purchase of equipment and products from Nortel (of which $44.6 million had
been provided as of September 30, 1997).
In October 1996, the Company completed a private placement of 2,000,000
special warrants (the "Special Warrants") at a purchase price of $11 1/8 per
Special Warrant. Each Special Warrant is exercisable for one Common Share and
one-half of one underlying warrant to purchase one additional Common Share for a
purchase price of $13, expiring February 1998. The Company received $20.8
million in net proceeds in conjunction with the sale of the Special Warrants.
In February 1997, the Company consummated a private placement (the
"Princes Gate Investment"), of $50.0 million of Series A Preference Shares (the
"Redeemable Preferred Shares") with an affiliate of Princes Gate Investors II,
L.P. ("Princes Gate"). Princes Gate is a limited partnership consisting of an
affiliate of Morgan Stanley and certain private investors. The Redeemable
Preferred Shares, which are convertible at any time after February 28, 2000 at
an imputed price of $11 3/8 per share, will not pay dividends in cash, except to
the extent cash dividends are paid on Common Shares.
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In addition, the liquidation and redemption prices of the Redeemable Preferred
Shares will accrete at a semi-annual rate of 11 7/8%. On February 28, 2004, and
under certain circumstances, the Redeemable Preferred Shares will also be
subject to mandatory conversion or redemption, provided that to the extent the
Company is prohibited from paying the redemption price in cash, holders of the
Redeemable Preferred Shares may elect to convert such shares into Common Shares
and if such election is not made, the Company may extend the mandatory
redemption date to August 28, 2007.
In March 1997, NACT completed an initial public offering of its common
stock pursuant to which the Company and NACT sold one million and two million
shares, respectively, of NACT's common stock, resulting in net proceeds to the
Company and NACT of approximately $9.0 million and $18.1 million, respectively.
In May 1997, GST Equipment Funding, Inc. ("GST Funding") completed the
sale (the "Secured Notes Offering") of $265.0 million principal amount of
Secured Notes. Of the $255.8 million of net proceeds from the issuance of the
Secured Notes, as of September 30, 1997 approximately $93.8 million had been
used to purchase securities pledged to fund the first six interest payments on
the Secured Notes and approximately $91.3 million had been used to purchase
equipment, including approximately $41.5 million that had been used to refinance
indebtedness of GST USA incurred to purchase equipment. The Indentures include
restrictive covenants which, among other items, limit or restrict additional
indebtedness incurred by the Company, investment in certain subsidiaries, the
sale of assets and the payment of dividends.
In November 1997, the Company completed a public offering of 6,440,000
Common Shares at $12 per share and $144.0 million of Accrual Notes. The Accrual
Notes accrete to a total principal value of $266.9 million in November 2002 with
semi-annual cash interest payments beginning May 2003. The Company will use the
net proceeds of such offering, approximately $211.2 million in the aggregate, to
fund the expansion of its infrastructure, the expansion of its products and
service offerings and for working capital and general corporate purposes.
As of September 30, 1997, the Company had approximately $638.7 million
of indebtedness outstanding. In addition, as of September 30, 1997, the Company
had $25.0 million of availability under the Tomen Facility, $110.2 million of
availability under the Siemens Loan Agreement and $5.4 million of availability
under the NTFC Loan Agreement. Although the Company's liquidity was
substantially improved as a result of the proceeds received from the sale of the
1995 Notes, the Secured Notes and the Accrual Notes, the Company will have
significant debt service obligations. The Company will be required to make
principal and interest payments of approximately $58.4 million (of which $35.1
million will be made from funds securing the Secured Notes), $65.8 million (of
which $35.1 million will be made from funds securing the Secured Notes), $67.7
million (of which $17.6 million will be made from funds securing the Secured
Notes), $114.7 million and $112.6 million in 1998, 1999, 2000, 2001 and 2002,
respectively. However, the Company will need to refinance a substantial amount
of such indebtedness. In addition, the Company anticipates that cash flow from
operations will be insufficient to repay the 1995 Notes, the Secured Notes and
the Accrual Notes in full and that such notes will need to be refinanced. The
ability of the Company to effect such refinancings will be dependent upon 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. There can be no assurance that the Company
will be able to improve its earnings before fixed charges or that the Company
will be able to meet its debt service obligations.
At September 30, 1997, the Company had cash, cash equivalents, and
investments, including restricted cash and investments, of approximately $230.9
million. The Company believes that the net proceeds of the 1997 Offering,
together with cash on hand (including the remaining proceeds from the Secured
Notes Offering available to purchase equipment), and borrowings expected to be
available under the Tomen Facility and the equipment financing agreements with
Siemens and NTFC will provide sufficient
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<PAGE>
funds for the Company to expand its business as presently planned and to fund
its operating expenses through March 2000. Thereafter, the Company expects to
require additional financing. 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 current financing arrangements prove to be
insufficient to fund the Company's growth and operations, or if the Company
consummates additional acquisitions, the Company may be required to seek
additional sources of capital (or seek additional capital sooner than currently
anticipated). The Company may also seek to raise additional capital to take
advantage of favorable conditions in the capital markets. There can be no
assurance that additional financing will be available to the Company or, if
available, that it can be concluded on terms acceptable to the Company or within
the limitations contained within the Company's financing arrangements. Failure
to obtain such financing could result in the delay or abandonment of some or all
of the Company's development or expansion plans and could have 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. The Company has no material 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.
INCOME TAXES AND ADOPTION OF NEW ACCOUNTING STANDARDS
At September 30, 1997, the Company had a U.S. net operating loss
carryforward of approximately $110.5 million and a Canadian net operating loss
carryforward of approximately Cdn. $9.2 million. While such loss carryforwards
are available to offset future taxable income of the Company, the Company does
not expect to generate sufficient taxable income so as to utilize all or a
substantial portion of such loss carryforwards prior to their expiration.
Further, the utilization of net operating loss carryforwards against future
taxable income is subject to limitation if the Company experiences an "ownership
change" as defined in Section 382 of the Code and the analogous provision of the
Canada Act.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("SFAS 128"). This statement establishes a different method of computing net
income per share than is currently required under the provisions of Accounting
Principles Board Opinion No. 15. Under SFAS 128, the Company will be required to
present both basic net income per share and diluted net income per share.
Because of the Company's net loss position, both basic and dilutive net loss per
share are expected to be comparable to the currently presented net loss per
share. The Company expects to adopt SFAS 128 in the first quarter of Fiscal 1998
and, at that time, all historical net income per share data presented will be
restated to conform to the provisions of SFAS 128.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131"), which changes the
way public companies report information about operating segments. SFAS No. 131,
which is based on the management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenue.
Management has not yet evaluated the effects of this change on its reporting of
segment information. The Company will adopt SFAS No. 131 in Fiscal 1998.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1.
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 ("Regulation 14A").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement to be filed not later than January 28,
1998 pursuant to Regulation 14A.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements: see the Index to Consolidated
Financial Statements.
(2) Financial Statement Schedules: see the Index to Consolidated Financial
Statements.
(3) Exhibits:
3(a) Certificate of Incorporation of the Company, as amended to date,
incorporated by reference to Exhibit 3(a) to the Company's Form 10-K
for the fiscal year ended September 30, 1996, as amended (the "1996
Form 10-K").
3(b) By-Laws of the Company as amended to date, incorporated by reference to
Exhibit 3.1 to the Company's Form S-3 (No. 333-38091) (the "Form S-3").
4(a) Senior Notes Indenture dated as of December 19, 1995, by and among GST
USA, Inc., the Company and United States Trust Company of New York,
incorporated by reference to Exhibit 2.3 to the Company's Form 20-F for
the fiscal year ended September 30, 1995 (the "1995 Form 20- F").
4(b) Convertible Notes Indenture dated as of December 19, 1995, by and among
the Company, GST USA, Inc. and United States Trust Company of New York,
incorporated by reference to Exhibit 2.4 to the 1995 Form 20-F.
4(c) Indenture dated as of May 13, 1997, by and among GST Equipment Funding,
Inc., the Company, GST USA, Inc. and United States Trust Company of New
York, incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the period ended June 30, 1997 (the "June 1997 10- Q").
4(d) Indenture dated as of November 19, 1997, by and between the Company and
United States Trust Company of New York, incorporated by reference to
Exhibit 4.1 to the Company's Form S-3 (No. 333-38301) (the "Debt Form
S-3").
*10(a) 1995 Stock Option Plan of the Company, as amended to date.
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*10(b) 1996 Stock Option Plan of the Company, as amended to date.
*10(c) 1996 Employee Stock Purchase Plan of the Company.
*10(d) 1996 Senior Executive Officer Stock Option Plan of the Company.
*10(e) 1996 Senior Operating Officer Stock Option Plan of the Company.
10(f) Amended and Restated Credit Agreement dated as of April 26, 1995, by
and between GST Pacific Lightwave, Inc. and Tomen America Inc.,
incorporated by reference to Exhibit 1.2 to the 1995 Form 20-F.
10(g) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
and among GST Equipment Funding, Inc., United States Trust Company of
New York and the holders of the Notes as defined therein, incorporated
by reference to Exhibit 10.4 to the June 1997 Form 10-Q.
10(h) Agreement and Plan of Merger, dated September 27, 1996 (the "Merger
Agreement"), by and among TotalNet Communications Inc. ("TotalNet"),
GST Newco of Texas, Inc. and the Company, incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K dated October 17, 1996 (the
"October Form 8-K")
10(i) Letter dated October 17, 1996 amending the Merger Agreement among the
Company, GST Newco of Texas, Inc., and TotalNet, incorporated by
reference to Exhibit 2.2 to the October Form 8-K
10(j) Amended and Restated Master Agreement dated as of May 24, 1996, by and
among Tomen America Inc., the Company, GST Telecom Inc., GST Pacific
Lightwave, Inc., Pacwest Network L.L.C., Pacwest Network Inc., GST
Tucson Lightwave, Inc. and GST New Mexico Lightwave, Inc., incorporated
by reference to Exhibit 10(l) to the 1996 Form 10-K.
10(k) Amendment No. 2 to GST Telecommunications, Inc. Common Stock Purchase
Agreement dated as of May 24, 1996, by and among the Company, Tomen
America Inc. and Tomen Corporation, incorporated by reference to
Exhibit 10(m) to the 1996 Form 10-K.
10(l) Credit Agreement dated as of May 24, 1996, by and between GST New
Mexico Lightwave, Inc. and TM Communications LLC, incorporated by
reference to Exhibit 10(n) to the 1996 Form 10-K.
10(m) Credit Agreement dated as of May 24, 1996, by and between GST Tucson
Lightwave, Inc. and TM Communications LLC, incorporated by reference to
Exhibit 10(o) to the 1996 Form 10-K.
10(n) Amended and Restated Consulting Agreement dated as of September 1,
1995, by and between Sunwest Ventures, Inc. and GST USA, Inc. and GST
Telecom, incorporated by reference to Exhibit 10(p) to the 1996 Form
10-K.
10(o) Personal Services Agreement dated as of October 1, 1995, by and between
GST USA, Inc. and GST Telecom Inc. and Stephen Irwin, incorporated by
reference to Exhibit 10(q) to the 1996 Form 10-K.
10(p) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and John Warta,
incorporated by reference to Exhibit 10(r) to the 1996 Form 10-K.
10(q) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Robert H.
Hanson, incorporated by reference to Exhibit 10(s) to the 1996 Form
10-K.
10(r) Amended and Restated Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Clifford V.
Sander, incorporated by reference to Exhibit 10(t) to the 1996 Form
10-K.
10(s) Employment Agreement dated March 11, 1997, by and between GST USA, Inc.
and Joseph Basile, Jr, incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ended March 31, 1997 (the "March
1997 10-Q").
10(t) Employment Agreement dated February 10, 1997, by and between GST USA,
Inc. and GST Telecom Inc. and Daniel L. Trampush, incorporated by
reference to Exhibit 10.2 to the March 1997 Form 10-Q.
10(u) Reseller Agreement dated as of October 30, 1996, by and between
Magnacom Wireless, L.L.C., and GST Telecom Inc., incorporated by
reference to Exhibit 10(z) to the 1996 Form 10-K.
10(v) Agreement and Plan of Merger dated as of September 26, 1996 by and
among Call America Business Communications Corporation, Call America
Business Communications of Fresno, Inc.,
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<PAGE>
Call America Business Communications of Bakersfield, Inc., the
shareholders of such companies, GST Newco of California, Inc., and the
Company, incorporated by reference to Exhibit 10(u) to the 1996 Form
10-K.
10(w) Agreement and Plan of Merger dated as of May 31, 1997, by and among
Action Telcom Co., Britt E. Bilberry, Timothy Harding Bilberry, Paul S
Bilberry, GST Action Telecom, Inc. and the Company, incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated May 31, 1997.
10(x) Equipment Loan and Security Agreement dated December 19, 1996 by and
between NTFC Capital Corporation and GST Equipco, incorporated by
reference to Exhibit 10(v) to the 1996 Form 10-K.
10(y) Loan and Security Agreement dated as of September 4, 1996 by and
between Siemens Stromberg-Carlson ("Siemens") and GST Switchco, Inc.
("GST Switchco"), incorporated by reference to Exhibit 10(d) to the
Company's Form 10-Q for the period ended December 31, 1996 (the
"December 1996 Form 10-Q").
10(z) Unconditional Continuing Guaranty dated as of September 4, 1996 by and
between Siemens and GST USA, Inc., incorporated by reference to Exhibit
10(e) to the December 1996 Form 10-Q.
10(aa) Unconditional Limited Guaranty Agreement dated as of December 19, 1996
made by GST USA, Inc., in favor of NTFC Capital Corporation,
incorporated by reference to Exhibit 10(f) to the December 1996 Form
10-Q.
10(bb) Securities Purchase Agreement, dated as of February 28, 1997, between
the Company and Ocean Horizon SRL, incorporated by reference to Exhibit
4.1 to the Company's Form 8-K dated February 28, 1997 (the "February
Form 8-K").
10(cc) Securityholders Agreement, dated as of February 28, 1997, between the
Registrant and Ocean Horizon SRL, incorporated by reference to Exhibit
4.2 to the Company's February Form 8-K.
10(dd) Credit Agreement dated as of September 30, 1997 by and between GST
Telecom Hawaii, Inc. and TM Communications Hawaii LLC, incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K dated September 30,
1997 (the "September 8-K").
10(ee) Service Agreement dated as of September 30, 1997 by and between Pacwest
Network, Inc. and GST Telecom Hawaii, Inc, incorporated by reference to
Exhibit 99.2 to the September 8-K.
10(ff) Management Agreement dated as of September 30, 1997 by and between
Pacwest Network, Inc. and GST Telecom Hawaii, Inc., incorporated by
reference to Exhibit 99.3 to the September 8-K.
10(gg) Agreement dated as of September 30, 1997 by and among GST Telecom
Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc., incorporated
by reference to Exhibit 99.4 to the September 8-K.
*21 Subsidiaries of the Company.
*23 Consent to the incorporation by reference in the Company's Registration
Statements on Forms S-3 and S-8 of the independent auditors' report
included herein.
*27 Financial Data Schedule.
- -----------------------------------------------------
* Filed herewith.
(b) Reports on Form 8-K: The Registrant filed the following Current Reports
on Form 8-K during the fourth quarter of Fiscal 1997: (i) Form 8-K
dated September 9, 1997, reporting under Item 8 thereof the change in
its fiscal year end from September 30 to December 31; and (ii) Form 8-K
dated September 30, 1997, reporting under Item 5 thereof the
consummation of a $40.5 million financing with affiliates of Tomen
Corporation.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on the 23rd day of December, 1997.
GST TELECOMMUNICATIONS, INC.
By: /S/ JOHN WARTA
-------------------------------
John Warta,
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Warta, Stephen Irwin, Robert H.
Hanson, Daniel Trampush and Clifford V. Sander his true and lawful
attorney-in-fact, each acting alone, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes, each acting alone, may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ JOHN WARTA Chairman of the Board, Chief Executive December 23, 1997
- -------------------------- Officer (Principal Executive Officer) and
(John Warta) Director
/S/ DANIEL L. TRAMPUSH Senior Vice President and Chief Financial December 23, 1997
- -------------------------- Officer (Principal Financial Officer)
(Daniel L. Trampush)
/S/ CLIFFORD V. SANDER Senior Vice President, Treasurer and Chief December 23, 1997
- -------------------------- Accounting Officer (Principal Accounting
(Clifford V. Sander) Officer)
/S/ STEPHEN IRWIN Vice Chairman of the Board, Secretary and December 23, 1997
- -------------------------- Director
(Stephen Irwin)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ JOSEPH A. BASILE, JR. President, Chief Operating Officer and December 23, 1997
- -------------------------- Director
(Joseph A. Basile, Jr.)
/S/ ROBERT H. HANSON Director December 23, 1997
- --------------------------
(Robert H. Hanson)
/S/ IAN WATSON Director December 23, 1997
- --------------------------
(Ian Watson)
- --------------------------- Director
(W. Gordon Blankstein)
- --------------------------- Director
(Peter E. Legault)
/S/ JACK G. ARMSTRONG Director December 23, 1997
- --------------------------
(Jack G. Armstrong)
/S/ MITSUHIRO NAOE
- -------------------------- Director December 23, 1997
(Mitsuhiro Naoe)
/S/ JOSEPH G. FOGG, III Director December 23, 1997
- --------------------------
(Joseph G. Fogg, III)
/S/ THOMAS E. SAWYER Director December 23, 1997
- --------------------------
(Thomas E. Sawyer)
/S/ A. ROY MEGARRY Director December 23, 1997
- --------------------------
(A. Roy Megarry)
The Company's Authorized December 23, 1997
Representative
in the United States
/S/ DANIEL L. TRAMPUSH
- --------------------------
Daniel L. Trampush
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page(s)
GST TELECOMMUNICATIONS, INC.
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheets at
September 30, 1997 and 1996................................................F-3
Consolidated Statements of Operations for the
years ended September 30, 1997, 1996
and 1995...................................................................F-4
Consolidated Statements of
Shareholders' (Deficit) Equity at
September 30, 1997, 1996 and 1995..........................................F-5
Consolidated Statements of Cash Flows for the
years ended September 30, 1997, 1996
and 1995...................................................................F-6
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Financial Statements
September 30, 1997 and 1996
(With Independent Auditors' Report Thereon)
<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. and subsidiaries as of September 30, 1997 and 1996, and
the related consolidated statements of operations, shareholders' (deficit)
equity, and cash flows for each of the years in the three-year period ended
September 30, 1997. 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. and subsidiaries as of September 30, 1997 and 1996, and
the results of its operations and cash flows for each of the years in the
three-year period ended September 30, 1997, 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 and shareholders' (deficit) equity for each of
the years in the three-year period ended September 30, 1997, to the extent
summarized in note 11 to the consolidated financial statements.
/s/ KPMG PEAT MARWICK LLP
-------------------------
KPMG PEAT MARWICK LLP
Portland, Oregon
November 26, 1997
F - 2
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1997 1996
---- -----
(In U.S. Dollars)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 55,862 $ 61,343
Restricted cash and investments 50,039 16,000
Accounts receivable, net 22,373 9,472
Investments 3,322 5,176
Inventory, net 3,458 2,406
Other current assets 12,588 6,151
---------- ---------
147,642 100,548
---------- ---------
Restricted investments 121,711 -
Property and equipment, net 364,514 127,575
Goodwill, net 36,936 35,730
Other assets, net 57,602 37,848
---------- ---------
Total assets $ 728,405 $ 301,701
========== =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 21,707 $ 12,443
Accrued expenses 42,131 26,743
Current portion of capital lease obligations 6,423 722
Current portion of long-term debt 4,233 4,832
Other current liabilities 607 726
---------- ---------
75,101 45,466
---------- ---------
Other liabilities 1,088 158
Capital lease obligations, less current portion 15,340 1,453
Long-term debt, less current portion 612,703 232,674
Minority interest 12,208 182
Commitments and contingencies
Redeemable preference shares:
Authorized - 10,000,000 no par shares; 500 shares issued and outstanding at
September 30, 1997, no shares issued or outstanding at September 30, 1996 51,756 -
Shareholders' (deficit) equity:
Common shares:
Authorized - unlimited number of no par common shares; issued and outstanding -
September 30, 1997 - 27,627,442 shares, September 30, 1996 - 21,257,697 shares 145,475 72,647
Commitment to issue common shares:
September 30, 1997 - 288,061 shares, September 30, 1996 - 1,988,230 shares 4,405 25,454
Accumulated deficit (189,671) (76,333)
---------- ---------
(39,791) 21,768
---------- ---------
Total liabilities and shareholders' (deficit) equity $ 728,405 $ 301,701
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
(In U.S. Dollars)
<S> <C> <C> <C>
Revenues:
Telecommunication services $ 82,593 $ 31,726 $ 11,118
Product 23,374 9,573 7,563
------------ -------- -----------
Total revenues 105,967 41,299 18,681
---------- -------- ---------
Operating costs and expenses:
Network expenses 66,250 26,580 10,103
Facilities administration and maintenance 12,304 10,317 2,096
Cost of product revenues 7,990 3,974 3,096
Selling, general and administrative 79,491 33,375 11,373
Research and development 2,316 1,352 1,270
Depreciation and amortization 24,159 8,298 2,374
---------- -------- ---------
Total operating costs and expenses 192,510 83,896 30,312
---------- -------- ---------
Loss from operations (86,543) (42,597) (11,631)
---------- ------ ------
Other expenses (income):
Interest income (7,026) (5,549) (303)
Interest expense, net of amounts capitalized 37,665 21,224 838
Loss from joint venture and investments 1,482 1,521 1,187
Other (6,841) 839 160
---------- ------ -------
25,280 18,035 1,882
---------- -------- ---------
Loss before minority interest in (income)
loss of subsidiary and income tax (111,823) (60,632) (13,513)
------- ------ ------
Income tax expense:
Current 1,802 157 70
Deferred (899) - 96
----------- ------- --------
903 157 166
---------- -------- ---------
Loss before minority interest in (income)
loss of subsidiaries (112,726) (60,789) (13,679)
Minority interest in (income) loss of subsidiaries (612) 411 2,364
---------- -------- ---------
Net loss $ (113,338) $ (60,378) $ (11,315)
========== ====== =========
Net loss per share $ (4.59) $ (3.18) $ (0.82)
========= ======== =========
Weighted average common and common
equivalents shares outstanding 24,702,870 18,988,127 13,780,796
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Shareholders' (Deficit) Equity
(In thousands, except share amounts)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Commitment to
issue common Total
Common Shares shares (note 7) shareholders'
--------------------------- ---------------------- Accumulated (deficit)
Shares Amount Shares Amount deficit Equity
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 11,910,650 $ 22,036 551,536 $ 3,038 $ (4,640) $ 20,434
Issuance of common stock for
services 34,057 150 - - - 150
Issuance of common stock in
business combinations 1,719,785 8,785 (551,536) (3,038) - 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 18,700,290 50,166 336,498 1,494 (15,955) 35,705
Issuance of common stock for
services 85,627 621 - - - 621
Issuance of common stock in
business combinations 1,200,873 11,097 (168,249) (747) - 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 - - 1,819,981 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 21,257,697 72,647 1,988,230 25,454 (76,333) 21,768
Issuance of common stock for
services 25,000 221 - - - 221
Issuance of common stock in
business combinations 3,132,854 29,394 (1,700,169) (21,049) - 8,345
Issuance of common stock and
warrants, net 2,505,882 32,774 - - - 32,774
Issuance of common stock under
option plans 643,016 3,309 - - - 3,309
Issuance of common stock under
employee stock purchase plan 62,993 400 - - - 400
Accrual of compensation costs
for stock award and option
plans - 9,807 - - - 9,807
Accretion of redeemable
preference shares - (3,077) - - - (3,077)
Net loss - - - - (113,338) (113,338)
---------- -------- ------- ---------- --------- --------
Balance, September 30, 1997 27,627,442 $145,475 288,061 $ 4,405 $(189,671) $ (39,791)
========== ======== ======= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
(In U.S. Dollars)
<S> <C> <C> <C>
Operations:
Net loss $(113,338) $(60,378) $ (11,315)
Adjustments to reconcile net loss to net cash used in operations:
Minority interest in income (loss) of subsidiary 612 (411) (2,364)
Depreciation and amortization 26,634 9,496 2,824
Deferred income taxes (899) - 96
Deferred compensation - 7 151
Accretion of interest 19,236 19,978 -
Stock compensation and other expense 10,028 1,286 150
Loss on disposal of assets 679 1,012 122
Loss on investments and joint venture 1,482 1,521 1,187
Gain on sale of subsidiary shares (7,376) - -
Changes in non-cash operating working capital:
Accounts receivable, net (11,284) (1,066) (1,549)
Inventory (455) (2,019) (13)
Other current and other assets, net (7,172) (5,304) (417)
Accounts payable and accrued liabilities 24,970 2,387 (190)
Other current liabilities (119) 185 262
---------- ---------- --------
Cash used in operations (57,002) (33,306) (11,056)
---------- ---------- ------
Investments:
Acquisition of subsidiaries, net of cash acquired (1,618) (1,441) 207
Settlement of notes receivable - - 3,367
Purchase of investments (3,247) (9,799) 848
Proceeds from sale of investments 5,176 5,493 -
Purchase of fixed assets (222,001) (76,192) (27,730)
Proceeds from sale of fixed assets 5,774 8 -
Purchase of other assets (14,058) (7,743) (1,829)
Change in cash and investments restricted for the
purchase of property and equipment (61,960) (16,000) -
Proceeds from the sale of subsidiary shares, net 27,105 - 615
---------- ---------- --------
Cash used in investing activities (264,829) (105,674) (24,522)
------- ----------- --------
Financing:
Proceeds from long-term debt 353,257 196,207 19,857
Issuance of redeemable preferred stock, net 48,679 - -
Principal payments on long-term debt and capital leases (7,455) (2,112) (816)
Issuance of common shares, net of issuance costs 27,692 10,098 19,195
Deferred debt financing costs (12,033) (9,894) (853)
Purchase of restricted securities to finance interest payments (93,790) - -
---------- ----------- ------
Cash provided by financing activities 316,350 194,299 37,383
---------- ---------- --------
(Decrease) increase in cash and cash equivalents (5,481) 55,319 1,805
Cash and cash equivalents, beginning of year 61,343 6,024 4,219
---------- ---------- --------
Cash and cash equivalents, end of year $ 55,862 $ 61,343 $ 6,024
========== ========== ========
</TABLE>
(Continued)
F - 6
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows, Continued
(In thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1997 1996 1995
---- ---- ----
(In U.S. Dollars)
Supplemental disclosure of cash flow information:
<S> <C> <C> <C>
Cash paid for interest $ 4,982 $ 1,813 $ 364
Cash paid for income taxes 638 - 264
Supplemental schedule of non-cash investing and
financing activities:
Recorded in business combinations:
Assets 14,148 45,477 17,081
Liabilities 4,369 11,665 7,706
Minority interest - (2,686) 1,797
Commitment to issue shares - 5,613 1,494
Common stock 8,161 29,444 5,747
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at year-end 19,718 18,291 4,363
Accretion of redeemable preferred share costs
into common stock 3,077 - -
Assets acquired through capital leases 21,765 - 128
</TABLE>
See accompanying notes to consolidated financial statements.
F - 7
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
September 30, 1997 and 1996
(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, including long distance, Internet access and
data services, and produces telecommunications switching equipment and
software.
The consolidated financial statements for the years ended September 30,
1997, 1996 and 1995 have been reported in U.S. dollars, the functional
currency of the Company.
(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) 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 $3,582 and $1,264 at September 30, 1997 and 1996,
respectively.
(Continued)
F - 8
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(e) RESTRICTED CASH AND INVESTMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Accordingly, the Company classifies its investments,
consisting of $170,675 in U.S. Treasury securities and $1,075 in
certificates of deposit, as available-for-sale and held-to-maturity.
Held-to-maturity investments, recorded at amortized cost, totaling
$97,049 and maturing between one and three years, are restricted for
interest payments. Available-for-sale investments, totaling $74,701 and
maturing between one month and two years, are restricted for equipment
purchases. Available-for-sale securities are recorded at amortized cost
which approximates the market value of such securities at September 30,
1997.
(f) INVENTORY, NET
Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value) and consists of the following:
1997 1996
---- ----
Raw materials $ 1,290 $ 378
Work in process 499 346
Finished and refurbished goods 1,669 1,682
--------- ---------
Inventory, net $ 3,458 $ 2,406
========= =========
(g) INVESTMENTS IN AFFILIATES
The Company has an approximate 25% interest in GST Global
Telecommunications, Inc. (GST Global), a publicly traded corporation on
the Vancouver Stock Exchange which conducts 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 $1,879 at September 30, 1997.
(Continued)
F - 9
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(h) MINORITY INTEREST
In March 1997, the Company's then wholly-owned subsidiary, NACT
Telecommunications, Inc. (NACT), completed an initial public offering of
its common stock, pursuant to which the Company and NACT sold one and two
million shares, respectively, of NACT's common stock, resulting in net
proceeds of approximately $9,000 and $18,100, respectively. As a result
of the offering, the Company's ownership was reduced to 63%.
Minority interest represents the non-Company owned shareholder interest
in NACT's equity resulting from the 1997 offering.
(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 20 years
Electronic and related equipment 10 years
Leasehold improvements 10 years
Furniture, office equipment and other 3 - 7 years
Buildings 40 years
Construction, engineering and overhead costs directly related to the
development of the Company's networks are capitalized. The Company begins
depreciating these costs when the networks become commercially
operational.
(j) GOODWILL
Goodwill is amortized, using the straight-line method, over periods
ranging from five to twenty years. The Company assesses the carrying
amount of goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Measurement of any impairment would include a comparison of estimated
future operating cash flows anticipated to be generated during the
remaining life of the goodwill to the net carrying value. Amortization
charged to operations was $4,044, $1,690 and $389 for the years ended
September 30, 1997, 1996 and 1995, respectively.
(Continued)
F - 10
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(k) REVENUE RECOGNITION
Telecommunication services revenue is recorded upon placing of calls or
rendering of other related services. Product revenue is recorded upon
shipment of product and is presented in the accompanying consolidated
statements of operations net of product returns.
Deferred revenue consists of monthly service contract payments received
in advance, warranty payments received in advance and research and
development advances and is included in other current liabilities in the
accompanying consolidated balance sheets. 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). Common equivalent
shares consist of options and warrants to purchase common stock.
(m) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital transactions
in the accompanying consolidated financial statements.
(n) CONCENTRATION OF CREDIT RISK
For purposes of segment reporting, the Company is presently operating
100% in the telecommunications industry in the United States and results
of operations are derived from United States operations and substantially
all assets reside in the United States. The Company is exposed to
concentration of credit risk principally from accounts receivable. The
Company's five largest telecommunications services customers accounted
for approximately 20.8%, 46.9% and 26.8% of the Company's consolidated
telecommunications services revenue for the years ended September 30,
1997, 1996 and 1995, respectively.
(Continued)
F - 11
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(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) FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, 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.
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.
(q) 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.
(Continued)
F - 12
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(r) ADVERTISING COSTS
The Company expenses advertising costs as incurred.
(s) NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of SFAS No. 128, "Earnings per Share" (SFAS 128). This
statement establishes a different method of computing net income per
share than is currently required under the provisions of Accounting
Principles Board (APB) Opinion No. 15. Under SFAS 128, the Company is
required to present both basic net income per share and diluted net
income per share. The Company will adopt SFAS 128 in the period ended
December 31, 1997 and will restate all prior earnings per share
presentations to conform to the provisions of SFAS 128. Management does
not expect loss per share under SFAS 128 to be materially different from
currently reported loss per share under APB Opinion No. 15.
(t) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying consolidated
financial statements for 1996 to conform with the 1997 presentation.
(2) ACQUISITIONS
The Company has made the acquisitions set forth below, each of which was
accounted for as a purchase. The consolidated financial statements
include the operating results from the effective date of acquisition.
(a) ACTION TELECOM, CO. (ACTION)
In the third quarter of 1997, the Company acquired 100% of the
outstanding capital stock of Action, a Texas company which provides long
distance and ancillary telecommunications services, and produces software
used in the telecommunications industry. The Company acquired Action for
consideration of 903,000 common shares valued at $8,161, $1,290 in cash
and $2,580 in notes payable. The purchase agreement provides for an
additional payment of up to 150,000 common shares over the next two
years, contingent on future market values of the Company's common shares.
Goodwill of $3,689 was recorded as a result of this acquisition.
(Continued)
F - 13
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(b) PHOENIX FIBER ACCESS, INC.
In the first quarter of 1997, the Company paid $2,000 in cash to acquire
the remaining 50% of Phoenix Fiber Access, Inc., previously 50% owned by
the Company through a joint venture with ICG Telecom Group, Inc. (ICG).
In addition, the Company assumed the repayment of up to $2,000 of
intercompany indebtedness, under certain circumstances, and indemnified
ICG in respect of all indebtedness of Phoenix Fiber to the Company and
third parties, other than certain liabilities of Phoenix Fiber that were
assumed by ICG. Phoenix Fiber Access, Inc. is an Arizona company engaged
in providing competitive local exchange services in the Phoenix
metropolitan area.
(c) 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, a California company that
provides long distance and ancillary communications services. The Company
acquired Call America for consideration of 1,313,505 common shares valued
at $14,905. An additional 130,000 common shares have been placed in
escrow and will be issued to the former owners of Call America in 1998,
subject to certain indemnification clauses contained in the purchase
agreement. 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 ten years. Goodwill of $10,175 was recorded as a
result of this acquisition.
(d) 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 401,160 common shares
valued at $4,373 and a commitment to issue 221,838 common shares valued
at $3,498 in November 1997. An additional 80,232 common shares were
released from escrow to the former owners of TotalNet in November 1997,
subject to certain indemnification clauses contained in the purchase
agreement. Goodwill of $4,774 was recorded as a result of this
acquisition.
(e) GST TELECOM, INC. (GST TELECOM)
In a series of transactions between 1994 and 1996, the Company purchased
100% of the outstanding shares of GST Telecom, which develops, constructs
and operates competitive local exchange networks and other communications
systems. Consideration paid for GST Telecom consisted of 2,100,000 common
shares valued at $15,447, which shares were paid to Pacwest, LLC
(Pacwest), an entity controlled by the Chief Executive Officer of the
Company. Goodwill of $15,330 was recorded as a result of this
acquisition.
(Continued)
F - 14
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(f) OTHERS
In the third quarter of 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.
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 consisted of 175,333 common shares valued at
$1,559, a commitment to issue approximately 66,223 common shares valued
at $907 over the next year, and $719 of cash. Goodwill of $1,103 was
recorded as a result of these acquisitions.
The pro forma results shown below reflect results of operations as if the
acquisitions described above occurred as of the beginning of each of the
periods presented:
Year Year
ended ended
September 30, September 30,
1997 1996
---- ----
(Unaudited)
Revenues $ 115,342 $ 85,323
Net loss (113,271) (67,949)
Net loss per share (4.48) (3.05)
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 - 15
<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,
1997 1996
---- ----
Telecommunications networks $ 95,447 $ 25,551
Electronic and related equipment 60,050 31,547
Leasehold improvements 9,201 3,619
Furniture, office equipment and other 14,643 8,746
Buildings 3,366 2,134
Construction in progress 202,545 63,117
---------- ----------
385,252 134,714
Less accumulated depreciation (20,738) (7,139)
---------- ----------
$ 364,514 $ 127,575
========== ==========
Property and equipment includes $202,545 and $63,117 of equipment which
had not been placed in service at September 30, 1997 and 1996,
respectively, and accordingly, is not being depreciated. During the three
years ended September 30, 1997, 1996 and 1995, $15,170, $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,
1997 1996
---- ----
Fixed asset purchases $ 11,531 $ 14,153
Accrued acquisition costs - 4,213
Carrier costs 2,113 4,057
Accrued interest payable 18,076 430
Payroll and related liabilities 3,278 1,747
Other 7,133 2,143
-------- -----------
Total $ 42,131 $ 26,743
======== ===========
(Continued)
F - 16
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
Senior secured notes, 13.25%, due May 1, 2007 $ 265,000 $ -
Note payable to Tomen, LIBOR plus 3% (8.8%
at September 30, 1997) 69,137 31,771
Note payable to NTFC, LIBOR plus 3.5%
(9.3% at September 30, 1997) 44,634 -
Note payable to Siemens, LIBOR plus 4.5%
(10.3% at September 30, 1997) 5,846 -
Senior discount notes, 13.875%, due December 15,
2005 203,280 177,760
Convertible senior subordinated discount notes,
13.875%, due December 15, 2005 25,410 22,220
Other 3,629 5,755
---------- ------------
616,936 237,506
Less current portion of long-term debt 4,233 4,832
---------- ------------
$ 612,703 $ 232,674
========= =============
</TABLE>
The schedule of future principal payments on long-term debt is as
follows:
Year ended September 30:
1998 $ 4,233
1999 14,107
2000 19,185
2001 21,943
2002 22,001
Thereafter 535,467
-------------
$ 616,936
=============
(Continued)
F - 17
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(a) SENIOR SECURED NOTES
In the third quarter of 1997, the Company issued $265,000 in senior
secured notes due May 1, 2007. The notes bear interest at a rate of
13.25% with semiannual interest payments due beginning November 1, 1997.
Approximately $93,790 of the proceeds are restricted to fund the first
six scheduled interest payments. The remainder of the net proceeds are
restricted to the purchase and installation of telecommunications
equipment. The notes are secured by the equipment purchased with the
proceeds and are subject to certain debt covenants.
(b) 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 $100,000 to subsidiaries of the Company for development
and construction of network projects. As of September 30, 1997, Tomen has
agreed to provide a total of $74,950 in debt financing to the Company's
subsidiaries for construction and operation of its fiber optic networks
in Southern California, New Mexico, Arizona and Hawaii. The Tomen
financing is secured by the equipment purchased with the proceeds and
subject to certain debt covenants.
(c) NTFC CAPITAL CORPORATION AGREEMENT
In the first quarter of 1997, the Company entered into a $50,000 loan and
security agreement with NTFC Capital Corporation (NTFC) to finance the
purchase of certain equipment from Northern Telecom, Inc. Amounts
borrowed under the agreement bear interest at LIBOR plus 3.5% and will be
repaid in twenty quarterly installments beginning in January 1999. The
loan is secured by the equipment purchased with the proceeds and subject
to certain debt covenants.
(Continued)
F - 18
<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 $226,000 to the Company
for the purchase and installation of telecommunications switching and
related equipment. At September 30, 1997, $116,000 was available to the
Company. Amounts borrowed under the agreement initially bear interest at
LIBOR plus 4.5% and are secured by the equipment. Such interest decreases
to LIBOR plus 3.5% at the time each initial loan is converted to a term
loan, which conversion occurs at the first calendar quarter following the
initial loan. The Company is committed to purchase a minimum of $16,500
in equipment over three years. Amounts borrowed under the agreement will
be repaid in twenty-four quarterly installments beginning five quarters
after the initial loan is converted to a term loan. The loan is subject
to certain debt covenants.
(e) SENIOR DISCOUNT NOTES AND CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES
In the first quarter of 1996, the Company issued approximately $160,000
in 13.875% Senior Discount Notes (the senior notes) and $20,000 in
13.875% Convertible Senior Subordinated Discount Notes (the convertible
notes) maturing on December 15, 2005 (together the Notes). The Notes 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 Notes accrete to a total principal amount, due December 15,
2005, of approximately $351,500 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.
Each of the convertible notes is convertible at the option of the holder
into common shares. The number of shares to be issued upon conversion is
based on an accreted value on the conversion date divided by $7.563. In
addition, 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 thirty consecutive trading days.
On or after December 15, 2000, the senior and convertible notes will be
redeemable at the option of the Company.
The senior and convertible notes are subject to certain debt covenants.
(Continued)
F - 19
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(6) REDEEMABLE 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, 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.
In February 1997, the Company consummated a private placement of $50,000
of 500 Redeemable Preference Shares. The Redeemable Preference Shares do
not pay dividends in cash, except to the extent such dividends are paid
on Common Shares. In addition, the liquidation, conversion and redemption
prices of the Redeemable Preference Shares accrete semiannually at a rate
of 11.875%.
The Company is required to redeem the Redeemable Preference Shares on
February 28, 2004 (the Mandatory Redemption Date) in cash at a redemption
price of approximately $224 per share (the Mandatory Redemption Price);
provided that to the extent the Company is prohibited from paying such
redemption price in cash, the holders of Redeemable Preference Shares
have the option to convert each Redeemable Preference Share into a number
of Common Shares equal to the Mandatory Redemption Price divided by 95%
of the then market price for Common Shares. In the event the Company is
prevented from paying the redemption price for Redeemable Preference
Shares in cash and any holder of Redeemable Preference Shares does not
exercise such conversion option, the Company has the option of extending
the Mandatory Redemption Date to August 28, 2007. The Company has the
option of redeeming the Redeemable Preference Shares at any time after
February 28, 2000 in cash at a redemption price per Redeemable Preference
Share equal to the number of Common Shares into which such Redeemable
Preference Share is then convertible multiplied by the price at which
such Redeemable Preference Share would become subject to mandatory
conversion.
Redeemable Preference Shares are convertible at the option of the holders
into Common Shares at any time after February 28, 2000 or earlier upon a
change of control of the Company. The holders of Redeemable Preference
Shares have the right to require the Company to repurchase their shares
upon a change of control of the Company after February 28, 2002; prior to
that time, holders have a right to convert their Redeemable Preference
Shares into Common Shares upon a change of control. Further, the
Redeemable Preference Shares are subject to mandatory conversion into
Common Shares if the market price of Common Shares exceeds $15.925 per
share (subject to adjustment) for a specified period after February 28,
2000.
(Continued)
F - 20
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(7) SHAREHOLDERS' (DEFICIT) EQUITY
(a) COMMITMENT TO ISSUE SHARES
Pursuant to the terms of the purchase agreements discussed in note 2, the
Company is committed to issue approximately 288,061 shares valued at
$4,405 at various times over the next year.
(b) STOCK-BASED COMPENSATION
The Company has five stock-based compensation plans, which are described
below. The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with SFAS 123, the Company
applies APB Opinion No. 25 and related Interpretations in accounting for
its plans. Accordingly, compensation cost is generally not recognized for
options awarded in the 1995 and 1996 Stock Incentive Plans, the Employee
Stock Purchase Plan and fixed stock option awards under the Senior
Operating and Executive Officer Stock Option Plans. Compensation cost
recognized in the statements of operations for the years ended September
30, 1997 and 1996 totaled approximately $9,747 and $665, respectively,
for performance-based awards. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes option-pricing
model assuming no dividend yield and the following weighted average
assumptions for grants in 1997 and 1996:
<TABLE>
<CAPTION>
Employee
Fixed option Performance stock purchase
awards awards plan
------------ ----------- --------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected volatility 56% 60% 56% 60% 56% 60%
Risk free interest rate 6.3% 6.1% 6.3% 6.1% 5.4% 5.3%
Expected life (in years) 3.5 3.5 5.0 5.0 .5 .5
</TABLE>
The weighted average fair value of option awards granted under the
various plans are as follows:
1997 1996
---- ----
Fixed stock option awards $ 4.61 $ 4.41
Performance-based option awards 4.97 5.18
Employee stock purchase plan 1.81 2.85
(Continued)
F - 21
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Had compensation cost for the Company's five stock-based compensation
plans been determined pursuant to SFAS 123, the Company's net loss and
net loss per common and common equivalent share would have been increased
to the pro forma amounts indicated below:
September 30, September 30,
1997 1996
---- ----
Net loss:
As reported $ (113,338) $ (60,378)
Pro forma (116,214) (61,949)
Net loss per common and common
equivalent share:
As reported $ (4.59) $ (3.18)
Pro forma (4.70) (3.24)
The effects of applying SFAS 123 for providing pro-forma disclosure for
1997 and 1996 are not likely to be representative of the effects on
reported net loss and loss per share for future periods since options
vest over several years and additional awards may be made.
FIXED STOCK OPTION AWARDS
Under the 1995 Stock Incentive Plan (1995 Plan) and the 1996 Stock
Incentive Plan (1996 Plan), the Company has authorized the issuance of
1,750,000 and 700,000 common shares, respectively. The 1995 Plan and 1996
Plan provide for the granting of incentive stock options and
non-statutory stock options to employees, officers and employee directors
and consultants at an exercise price no less than 100% of the market
value on the last trading day prior to the date of grant. The options
have a maximum term of five years and become exercisable at such times
and in such installments, for each individual option, as determined by
the Board of Directors; however, no option vests until at least six
months after the date of grant.
In addition, the Company grants fixed option awards under the 1996 Senior
Operating Office Plan (Operating Officer Plan). These options have a term
of five years and become exercisable ratably over a four-year vesting
period.
(Continued)
F - 22
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
A summary of the status of the Company's fixed stock option awards as of
September 30, 1997, 1996 and 1995 and the changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ---------------------- ----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 2,461,205 $ 7.11 1,605,553 $ 5.81 876,500 $ 3.55
Granted 1,190,000 9.89 963,373 9.07 1,186,035 6.33
Exercised (643,016) 5.15 (67,500) 4.33 (442,200) 2.78
Forfeited (83,655) 8.89 (40,221) 6.54 (14,782) 4.69
----------- ----------- -----------
Outstanding at
end of year 2,924,534 8.62 2,461,205 7.11 1,605,553 5.81
=========== =========== ===========
Number of options
exercisable at
end of year 955,933 1,208,908 1,078,600
</TABLE>
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of of shares contractual exercise of shares exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 3.55-5.00 199,076 1.4 years $ 4.82 117,942 $ 4.86
6.75-7.06 910,708 3.1 years 6.76 655,241 6.75
9.94-10.00 1,814,750 4.7 years 9.98 182,750 10.00
</TABLE>
(Continued)
F - 23
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
PERFORMANCE-BASED STOCK OPTION AWARDS
Under the 1996 Senior Operating Officer Stock Option Plan (Operating
Officer Plan) and the 1996 Senior Executive Officer Stock Option Plan
(Executive Plan), the Company grants stock options to purchase up to
900,000 and 600,000 common shares, respectively, to selected individuals.
Vesting for these performance-based awards is based upon the achievement
of certain Company operating and common share price milestones. The
options have a maximum term of six years.
A summary of the status of the Company's performance-based stock option
awards as of September 30, 1997 and 1996 and the changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------- --------------------
Weighted Weighted
average average
exercise exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year: 600,000 $ 10.00 - $ -
Granted 300,000 10.00 600,000 10.00
Exercised - - - -
Forfeited - - - -
--------- ---------
Outstanding at end of year 900,000 10.00 600,000 10.00
========= =========
</TABLE>
At September 30, 1997, the exercise price and weighted average remaining
contractual life of outstanding options was $10.00 and 4.5 years,
respectively. No options were exercisable at September 30, 1997 and 1996.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), the
Company has authorized the issuance of 500,000 common shares which allows
eligible employees of the Company to purchase common shares of the
Company at 85% of the market value on the date of grant. Employees who
own 5% or more of the voting rights of the Company's outstanding common
shares may not participate in the Purchase Plan. Employees purchased
62,993 and 13,558 shares under the purchase plan in 1997 and 1996,
respectively.
(Continued)
F - 24
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(c) WARRANTS OUTSTANDING
Warrants outstanding and exercisable at September 30, 1997:
Number of
common shares Exercise Exercise
issuable price expiration date
-------- ----- ---------------
171,155 $12.96 May 1998
75,000 $12.61 September 1999
50,000 $10.00 April 1999
300,000 $6.75 September 2000
1,000,000 $13.00 February 1998
The 246,155 warrants expiring in May 1998 and September 1999 were granted
to Tomen in conjunction with the Tomen financing agreements. The 50,000
warrants expiring on April 1999 were granted in conjunction with a
private placement of common stock during 1994. The 300,000 warrants
expiring in September 2000 were granted to a director of the Company. The
1,000,000 warrants expiring in February 1998 were granted in conjunction
with a stock offering during fiscal year 1997.
(Continued)
F - 25
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(8) 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed expected income tax expense
(benefit) at Canadian statutory rate (39)% (39)% (39)%
Expected state/province income tax expense
(benefit) (4) (4) (6)
Increase (decrease) in valuation allowance 30 21 38
Amortization of goodwill 1 1 5
Minority interest - - (7)
Effect of difference in United States
statutory rate 5 5 5
Effect of acquisition of new subsidiaries 2 10 1
Non-deductible interest 2 2 -
Other 4 4 4
-- -- --
Income tax expense 1% -% 1%
=== === ==
</TABLE>
(Continued)
F - 26
<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,
1997 1996
------------- -------------
Deferred tax assets:
<S> <C> <C>
United States Federal and state net
operating loss carryforwards $ 40,303 $ 16,378
Canadian net operating loss carryforwards 4,162 3,065
Non-deductible interest 13,757 4,608
Canadian non-deductible interest 1,875 798
Canadian capital loss carryforward 128 128
Other 3,828 2,063
------------ --------
Total gross deferred tax assets 64,053 27,040
Less valuation allowance (53,480) (19,429)
------------ ---------
Deferred tax liabilities:
Furniture, fixtures and equipment,
due to differences in depreciation 4,960 2,110
Capitalized software/intangibles 5,956 5,501
------------ ---------
Total gross deferred tax liabilities 10,916 7,611
------------ ---------
Net deferred tax liabilities $ (343) $ -
============ ========
</TABLE>
The valuation allowance for deferred tax assets as of October 1, 1994 was
$2,388. The net change in total valuation allowance for the years ended
September 30, 1997, 1996 and 1995 was an increase of $34,051, $12,695 and
$4,346, respectively.
(Continued)
F - 27
<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 $9,249 available to reduce Canadian taxable income of future years,
expiring as follows:
1999 $ 676
2000 2,043
2001 -
2002 1,574
2003 1,877
2004 3,079
-----------
$ 9,249
===========
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, 1997, the Company also has a Canadian net
capital loss carryforward of $280. 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 $110,577 available to reduce United States taxable income
of future years, expiring as follows:
2007 $ 405
2008 537
2009 2,800
2010 5,020
2011 36,922
2012 64,893
----------
$ 110,577
=========
For United States income tax purposes, utilization of net operating
losses may be subject to limitation in the event of certain substantial
stock ownership changes having occurred pursuant to IRC Section 382 and
referred to hereinafter as an ownership change. The Company may have
incurred an ownership change under IRC Section 382. This potential
ownership change would limit the utilization of any net operating losses
incurred prior to the change in ownership date. The Company intends to
complete an analysis under IRC Section 382 to determine if an ownership
change has occurred.
(Continued)
F - 28
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(9) LEASES
The Company is obligated under capital leases for equipment which expire
at various dates during the next five years. At September 30, 1997 and
1996, the gross amounts of equipment and related accumulated amortization
recorded under capital leases were as follows:
1997 1996
---- ----
Equipment $ 26,793 $ 2,068
Less accumulated amortization (4,835) (291)
--------- -------
$ 21,958 $ 1,777
========= =======
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $3,385, $1,501 and $866 for the years ended
September 30, 1997, 1996 and 1995, respectively.
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, 1997 are:
Capital Operating
Leases Leases
------ ------
Year ending September 30:
1998 $ 8,856 $ 4,150
1999 4,436 3,697
2000 3,089 3,121
2001 3,168 2,355
2002 2,772 2,211
Thereafter 13,148 7,045
------- ----------
Total minimum lease payments 35,469 $ 22,579
======= =========
Less amount representing interest (at rates
ranging from 8.7% to 17.0%) 13,706
-------
Net minimum lease payments 21,763
Less current installments of obligations under
capital leases 6,423
-------
Obligations under capital leases, excluding
current installments $15,340
=======
(Continued)
F - 29
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(10) 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.
(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 $1,600 to $6,100 per month
over the next three years. The Company may be required to pay the
carriers for differences between the commitment amounts and the actual
amounts billed.
(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.
On May 3, 1996, NACT served its motion for summary judgment, which the
Court has not yet ruled upon. Aerotel amended its complaint to include as
defendants the Company and GST USA. The amended pleadings allege that the
Company and GST USA have infringed the Aerotel patent, aided and abetted
infringement by others, including NACT, and participated in, and aided
and abetted alleged tortious conduct by NACT. The Company and GST USA
have served answers denying all material allegations and intend to defend
vigorously. Pretrial discovery has commenced and is scheduled to be
completed in 1998. The case is not expected to be tried until late 1998
at the earliest. NACT's patent counsel believes that NACT has valid
defenses to the Aerotel claims. If upheld, these defenses would also be
valid for all defendants. An unfavorable decision in this action could
have a material adverse effect on the Company. Based on information
currently available, the Company's management is of the opinion that
there will be no material impact of the Company's financial position,
results of operations, or cash flows as a result of this suit.
Accordingly, no provision for loss has been provided in the accompanying
consolidated financial statements.
(Continued)
F - 30
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
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 consolidated financial position, results of operations or
cash flows.
(d) REPURCHASE AGREEMENT
NACT is guarantor for financing transactions executed under a repurchase
agreement with Zions Credit Corporation (Zions) for a maximum of $3,482
at September 30, 1997. Zions provides lease financing to NACT customers
on a recourse basis.
(e) 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.
(11) 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 compensation expense and loss per share
calculations noted below, these statements also conform, in all material
respects, with those accounting principles that are generally accepted in
Canada (Canadian GAAP).
(Continued)
F - 31
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
From October 1994 to September 1997, 750,000 common shares were held in
escrow, their release subject to the approval of regulatory authorities.
In September 1997, such common shares were released from escrow. For U.S.
GAAP purposes: (i) the Company recorded compensation expense of $7,446
which is the amount by which their market value exceeded their issuance
price, and (ii) the shares were not included in the loss per share
calculations until September 5, 1997. Under Canadian GAAP: (i)
compensation expense is not recorded, and (ii) the shares are included in
the loss per share calculations for all periods. The Company's results of
operations under Canadian GAAP are summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss $ (105,892) $ (60,378) $ (11,315)
Loss per share $ (4.13) $ (3.06) $ (0.78)
Weighted average common
and common equivalent
shares outstanding 25,609,676 $19,738,127 14,530,796
</TABLE>
(12) RELATED PARTY TRANSACTIONS
(a) MAGNACOM WIRELESS, LLC (MAGNACOM)
Magnacom, a company 99% owned by Pacwest Network, Inc. (PNI), which is in
turn controlled by the Chief Executive Officer of the Company, and the
Company have entered into a twelve-year reseller agreement (the Magnacom
Reseller Agreement) pursuant to which (i) the Company has been designated
a non-exclusive reseller of PCS telephone services in the markets in
which Magnacom has obtained licenses, and (ii) Magnacom has agreed to use
the Company on an exclusive basis to provide switched local and long
distance services, and other enhanced telecommunications services, to all
of Magnacom's resellers in markets where the Company has operational
networks. Magnacom agreed to sell PCS minutes to the Company at five
cents per minute, subject to downward adjustment to equal the most
favorable rates offered to Magnacom's other resellers (but in no event
less than Magnacom's cost). In connection with the Magnacom Reseller
Agreement, the Company has paid a total of approximately $14,000 as
pre-payments for future PCS services.
(Continued)
F - 32
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
In addition, the Company has been granted a conditional option to acquire
up to PNI's entire interest in Magnacom (currently 99%), conditioned upon
Magnacom and the Company entering into an agreement for the construction
and/or operation of Magnacom's facilities. The condition precedent to
such option has not yet been met. If and when the condition precedent is
met, the exercise of the option will be subject to compliance with all
applicable FCC regulations relating to prior approval of any transfer of
control of PCS licenses, including those relating to foreign ownership or
control and requirements regarding the ownership of C and F block
licenses. Accordingly, until such time as FCC regulations or
administrative action permit the Company to own in excess of 25% of
Magnacom, the option by its terms is limited to a 24% interest in
Magnacom.
(b) PACWEST NETWORK, INC. (PNI)
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.
(c) GST GLOBAL
In a series of transactions during the third and fourth quarters of 1996,
the Company acquired 3,600,000 shares of Canadian Programming Concepts,
Inc. (CPC), a Canadian corporation which is publicly traded on the
Vancouver Stock Exchange, for consideration of $3,659. CPC's name was
subsequently changed to GST Global. The Company's shares constitute
approximately 25% of GST Global's total outstanding shares at September
30, 1997. Several officers and directors of the Company own shares in GST
Global amounting to approximately 4% of GST Global's outstanding shares
at September 30, 1997. GST Global owes the Company $627, at September 30,
1997, for reimbursement of expenses made by the Company on behalf of GST
Global.
GST Global is to issue to the Company additional common shares of GST
Global, subject to regulatory approval, in consideration for the transfer
by the Company to GST Global of its rights in and to a telecommunications
project in Mexico.
(Continued)
F - 33
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) TOMEN
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. Additionally, an upfront fee of
1.50% of the aggregate principal amount of each project loan advanced and
a commitment fee of .50% per annum on the unused portion of each project
loan is payable to Tomen.
Pursuant to the Tomen agreements, Tomen has purchased 1,579,902 shares of
common stock for total cash consideration of $10,400 and holds warrants
to purchase an additional 246,155 shares of common stock at prices
ranging from $12.61 to $12.96 per share. Such warrants expire at various
times between May 1998 and September 1999.
(d) OTHER
The Company paid approximately $2,066, $2,264 and $770 in legal fees in
1997, 1996 and 1995, respectively, to a firm having a member who is also
a director of the Company.
The Company's Chief Executive Officer serves as a consultant to Tomen for
which he is paid a fee. Additionally, Pacwest receives a fee equal to 1%
of the aggregate debt and equity financing provided by Tomen to the
Company. Such fees incurred by the Company totaled $437, $195 and $221 in
1997, 1996 and 1995, respectively.
(Continued)
F - 34
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(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 is as follows:
Selected balance sheet information:
September 30, September 30,
1997 1996
------------- -------------
Current assets $ 138,029 $ 77,506
Non-current assets 543,631 168,882
---------- ----------
$ 681,660 $ 246,388
========== ==========
Current liabilities $ 151,692 $ 34,286
Non-current liabilities 600,836 210,243
Minority interest 12,208 182
Share capital 74,936 69,957
Accumulated deficit (158,012) (68,280)
----------- ----------
$ 681,660 $ 246,388
========== ==========
(Continued)
F - 35
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Selected information from statements of operations:
<TABLE>
<CAPTION>
Years ended
September 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 66,548 $ 37,721 $ 18,681
Operating costs and expenses (138,083) (77,590) (28,942)
------- ------ ------
Loss from operations (71,535) (39,869) (10,261)
Other expenses 20,119 15,625 1,384
---------- --------- ---------
Loss before minority interest in
(income) loss of subsidiaries
and income tax (91,654) (55,494) (11,645)
Income tax expense (903) (72) (166)
---------- --------- ---------
Loss before minority interest in
loss of subsidiaries (92,557) (55,566) (11,811)
Minority interest in (income) loss of
subsidiaries (612) 411 2,364
---------- ------ -----------
Net loss $ (93,169) $ (55,155) $ (9,447)
========== ====== =========
</TABLE>
(Continued)
F - 36
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Selected information from statements of cash flows:
<TABLE>
<CAPTION>
Year ended
September 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
Operations:
<S> <C> <C> <C>
Loss for the year $ (93,169) $ (55,155) $ (9,447)
Items not involving cash 29,584 29,256 1,590
Changes in non-cash operating
working capital 9,002 (6,400) (3,419)
---------- ---------- ---------
Cash used in operations (54,583) (32,299) (11,276)
Investing (259,723) (105,090) (29,684)
Financing 327,543 174,915 43,544
------------ ---------- -----------
Increase in cash and
cash equivalents 13,237 37,526 2,584
Cash and cash equivalents, beginning
of year 41,420 3,894 1,310
---------- ---------- ----------
Cash and cash equivalents, end of year $ 54,657 $ 41,420 $ 3,894
========== =========== ============
</TABLE>
(14) SUBSEQUENT EVENTS
In November 1997, the Company completed a public offering of 6,440,000 of
its common shares at $12 per share. Proceeds of the stock offering, net
of offering expenses, were approximately $72,766. Concurrent with such
stock offering, the Company issued $144,000 in 12.75% senior accrual
notes due November 2007. The notes accrete to a total principal amount of
$266,885 by November 2002 with semiannual interest payments beginning May
2003. Proceeds from the issuance of such notes, net of offering expenses,
were approximately $138,410.
The Company has announced that it has retained Hambrecht & Quist LLC to
explore alternatives for monetizing its 63% interest in NACT, including a
potential sale of some or all of its shares of NACT's capital stock to
one or more strategic investors.
F - 37
<PAGE>
EXHIBIT INDEX
EXHIBIT
3(a) Certificate of Incorporation of the Company, as amended to date,
incorporated by reference to Exhibit 3(a) to the Company's Form 10-K
for the fiscal year ended September 30, 1996, as amended (the "1996
Form 10-K").
3(b) By-Laws of the Company as amended to date, incorporated by reference to
Exhibit 3.1 to the Company's Form S-3 (No. 333-38091) (the "Form S-3").
4(a) Senior Notes Indenture dated as of December 19, 1995, by and among GST
USA, Inc., the Company and United States Trust Company of New York,
incorporated by reference to Exhibit 2.3 to the Company's Form 20-F for
the fiscal year ended September 30, 1995 (the "1995 Form 20-F").
4(b) Convertible Notes Indenture dated as of December 19, 1995, by and among
the Company, GST USA, Inc. and United States Trust Company of New York,
incorporated by reference to Exhibit 2.4 to the 1995 Form 20-F.
4(c) Indenture dated as of May 13, 1997, by and among GST Equipment Funding,
Inc., the Company, GST USA, Inc. and United States Trust Company of New
York, incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the period ended June 30, 1997 (the "June 1997 10-Q").
4(d) Indenture dated as of November 19, 1997, by and between the Company and
United States Trust Company of New York, incorporated by reference to
Exhibit 4.1 to the Company's Form S-3 (No. 333- 38301) (the "Debt Form
S-3").
*10(a) 1995 Stock Option Plan of the Company, as amended to date.
*10(b) 1996 Stock Option Plan of the Company, as amended to date.
*10(c) 1996 Employee Stock Purchase Plan of the Company.
*10(d) 1996 Senior Executive Officer Stock Option Plan of the Company.
*10(e) 1996 Senior Operating Officer Stock Option Plan of the Company.
10(f) Amended and Restated Credit Agreement dated as of April 26, 1995, by
and between GST Pacific Lightwave, Inc. and Tomen America Inc.,
incorporated by reference to Exhibit 1.2 to the 1995 Form 20-F.
10(g) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
and among GST Equipment Funding, Inc., United States Trust Company of
New York and the holders of the Notes as defined therein, incorporated
by reference to Exhibit 10.4 to the June 1997 Form 10-Q.
10(h) Agreement and Plan of Merger, dated September 27, 1996 (the "Merger
Agreement"), by and among TotalNet Communications Inc. ("TotalNet"),
GST Newco of Texas, Inc. and the Company, incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K dated October 17, 1996 (the
"October Form 8-K")
10(i) Letter dated October 17, 1996 amending the Merger Agreement among the
Company, GST Newco of Texas, Inc., and TotalNet, incorporated by
reference to Exhibit 2.2 to the October Form 8-K
10(j) Amended and Restated Master Agreement dated as of May 24, 1996, by and
among Tomen America Inc., the Company, GST Telecom Inc., GST Pacific
Lightwave, Inc., Pacwest Network L.L.C., Pacwest Network Inc., GST
Tucson Lightwave, Inc. and GST New Mexico Lightwave, Inc., incorporated
by reference to Exhibit 10(l) to the 1996 Form 10-K.
10(k) Amendment No. 2 to GST Telecommunications, Inc. Common Stock Purchase
Agreement dated as of May 24, 1996, by and among the Company, Tomen
America Inc. and Tomen Corporation, incorporated by reference to
Exhibit 10(m) to the 1996 Form 10-K.
10(l) Credit Agreement dated as of May 24, 1996, by and between GST New
Mexico Lightwave, Inc. and TM Communications LLC, incorporated by
reference to Exhibit 10(n) to the 1996 Form 10-K.
10(m) Credit Agreement dated as of May 24, 1996, by and between GST Tucson
Lightwave, Inc. and TM Communications LLC, incorporated by reference to
Exhibit 10(o) to the 1996 Form 10-K.
10(n) Amended and Restated Consulting Agreement dated as of September 1,
1995, by and between Sunwest Ventures, Inc. and GST USA, Inc. and GST
Telecom, incorporated by reference to Exhibit 10(p) to the 1996 Form
10-K.
10(o) Personal Services Agreement dated as of October 1, 1995, by and between
GST USA, Inc. and GST Telecom Inc. and Stephen Irwin, incorporated by
reference to Exhibit 10(q) to the 1996 Form 10-K.
<PAGE>
10(p) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and John Warta,
incorporated by reference to Exhibit 10(r) to the 1996 Form 10-K.
10(q) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Robert H.
Hanson, incorporated by reference to Exhibit 10(s) to the 1996 Form
10-K.
10(r) Amended and Restated Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Clifford V.
Sander, incorporated by reference to Exhibit 10(t) to the 1996 Form
10-K.
10(s) Employment Agreement dated March 11, 1997, by and between GST USA, Inc.
and Joseph Basile, Jr, incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ended March 31, 1997 (the "March
1997 10-Q").
10(t) Employment Agreement dated February 10, 1997, by and between GST USA,
Inc. and GST Telecom Inc. and Daniel L. Trampush, incorporated by
reference to Exhibit 10.2 to the March 1997 Form 10-Q.
10(u) Reseller Agreement dated as of October 30, 1996, by and between
Magnacom Wireless, L.L.C., and GST Telecom Inc., incorporated by
reference to Exhibit 10(z) to the 1996 Form 10-K.
10(v) Agreement and Plan of Merger dated as of September 26, 1996 by and
among Call America Business Communications Corporation, Call America
Business Communications of Fresno, Inc., Call America Business
Communications of Bakersfield, Inc., the shareholders of such
companies, GST Newco of California, Inc., and the Company, incorporated
by reference to Exhibit 10(u) to the 1996 Form 10-K.
10(w) Agreement and Plan of Merger dated as of May 31, 1997, by and among
Action Telcom Co., Britt E. Bilberry, Timothy Harding Bilberry, Paul S
Bilberry, GST Action Telecom, Inc. and the Company, incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated May 31, 1997.
10(x) Equipment Loan and Security Agreement dated December 19, 1996 by and
between NTFC Capital Corporation and GST Equipco, incorporated by
reference to Exhibit 10(v) to the 1996 Form 10-K.
10(y) Loan and Security Agreement dated as of September 4, 1996 by and
between Siemens Stromberg-Carlson ("Siemens") and GST Switchco, Inc.
("GST Switchco"), incorporated by reference to Exhibit 10(d) to the
Company's Form 10-Q for the period ended December 31, 1996 (the
"December 1996 Form 10-Q").
10(z) Unconditional Continuing Guaranty dated as of September 4, 1996 by and
between Siemens and GST USA, Inc., incorporated by reference to Exhibit
10(e) to the December 1996 Form 10-Q.
10(aa) Unconditional Limited Guaranty Agreement dated as of December 19, 1996
made by GST USA, Inc., in favor of NTFC Capital Corporation,
incorporated by reference to Exhibit 10(f) to the December 1996 Form
10-Q.
10(bb) Securities Purchase Agreement, dated as of February 28, 1997, between
the Company and Ocean Horizon SRL, incorporated by reference to Exhibit
4.1 to the Company's Form 8-K dated February 28, 1997 (the "February
Form 8-K").
10(cc) Securityholders Agreement, dated as of February 28, 1997, between the
Registrant and Ocean Horizon SRL, incorporated by reference to Exhibit
4.2 to the Company's February Form 8-K.
10(dd) Credit Agreement dated as of September 30, 1997 by and between GST
Telecom Hawaii, Inc. and TM Communications Hawaii LLC, incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K dated September 30,
1997 (the "September 8-K").
10(ee) Service Agreement dated as of September 30, 1997 by and between Pacwest
Network, Inc. and GST Telecom Hawaii, Inc, incorporated by reference to
Exhibit 99.2 to the September 8-K.
10(ff) Management Agreement dated as of September 30, 1997 by and between
Pacwest Network, Inc. and GST Telecom Hawaii, Inc., incorporated by
reference to Exhibit 99.3 to the September 8-K.
10(gg) Agreement dated as of September 30, 1997 by and among GST Telecom
Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc., incorporated
by reference to Exhibit 99.4 to the September 8-K.
*21 Subsidiaries of the Company.
*23 Consent to the incorporation by reference in the Company's Registration
Statements on Forms S-3 and S-8 of the independent auditors' report
included herein.
*27 Financial Data Schedule.
- ------------------------------
* Filed herewith.
As Amended Through
September 10, 1997
GST TELECOMMUNICATIONS, INC.
1995 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
This 1995 Stock Option Plan (the "Plan") is intended as an
incentive, to retain in the employ of and as consultants and advisors to GST
TELECOMMUNICATIONS, INC., a Canadian corporation with its principal office at
4317 N.E. Thurston Way, Vancouver, Washington 98662 (the "Company") and any
Subsidiary of the Company, within the meaning of Section 425(f) of the United
States Internal Revenue Code of 1986, as amended (the "Code"), persons of
training, experience and ability, to attract new employees, directors, advisors
and consultants whose services are considered valuable, to encourage the sense
of proprietorship and to stimulate the active interest of such persons in the
development and financial success of the Company and its Subsidiaries.
It is further intended that certain options granted pursuant to
the Plan shall constitute incentive stock options within the meaning of Section
422 of the Code (the "Incentive Options") while certain other options granted
pursuant to the Plan shall be nonqualified stock options (the "Nonqualified
Options"). Incentive Options and Nonqualified Options are hereinafter referred
to collectively as "Options."
The Company intends that the Plan meet the requirements of Rule
16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company pursuant to the Plan will be exempt from the operation of Section
16(b) of the Exchange Act. In all cases, the terms, provisions, conditions and
limitations of the Plan shall be construed and interpreted consistent with the
Company's intent as stated in this Section 1.
2. ADMINISTRATION OF THE PLAN.
The Board of Directors of the Company (the "Board") shall appoint
and maintain as administrator of the Plan a Committee (the "Committee")
consisting of two or more Non-Employee Directors (as such term is defined in
Rule 16b-3), which shall serve at the pleasure of the Board. The Committee ,
subject to Sections 3 and 5 hereof, shall have full power and authority to
designate recipients of Options, to determine the terms and conditions of
<PAGE>
respective Option agreements (which need not be identical) and to interpret the
provisions and supervise the administration of the Plan. The Committee shall
have the authority, without limitation, to designate which Options granted under
the Plan shall be Incentive Options and which shall be Nonqualified Options. To
the extent any Option does not qualify as an Incentive Option, it shall
constitute a separate Nonqualified Option.
Subject to the provisions of the Plan, the Committee shall
interpret the Plan and all Options granted under the Plan, shall make such rules
as it deems necessary for the proper administration of the Plan, shall make all
other determinations necessary or advisable for the administration of the Plan
and shall correct any defects or supply any omission or reconcile any
inconsistency in the Plan or in any Options granted under the Plan in the manner
and to the extent that the Committee deems desirable to carry into effect the
Plan or any Options. The act or determination of a majority of the Committee
shall be the act or determination of the Committee and any decision reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority at a meeting duly held. Subject
to the provisions of the Plan, any action taken or determination made by the
Committee pursuant to this and the other Sections of the Plan shall be
conclusive on all parties.
In the event that for any reason the Committee is unable to act
or if the Committee at the time of any grant, award or other acquisition under
the Plan of Options or Stock does not consist of two or more Non-Employee
Directors, then any such grant, award or other acquisition may be approved or
ratified in any other manner contemplated by subparagraph (d) of Rule 16b-3.
3. DESIGNATION OF OPTIONEES.
The persons eligible for participation in the Plan as recipients
of Options (the "Optionees") shall include employees, officers and directors of,
and consultants and advisors to, the Company or any Subsidiary; provided that
Incentive Options may only be granted to employees of the Company and the
Subsidiaries. In selecting Optionees, and in determining the number of shares to
be covered by each Option granted to Optionees, the Committee may consider the
office or position held by the Optionee or the Optionee's relationship to the
Company, the Optionee's degree of responsibility for and contribution to the
growth and success of the Company or any Subsidiary, the Optionee's length of
service, age, promotions, potential and any other factors that the Committee may
consider relevant. An Optionee who has been granted an Option hereunder may be
granted an additional Option or Options, if the Committee shall so determine.
-2-
<PAGE>
4. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Section 7 hereof, a total of
1,750,000 shares of the Company's Common Shares (the "Stock") shall be subject
to the Plan. The shares of Stock subject to the Plan shall consist of unissued
shares or previously issued shares held by any Subsidiary of the Company, and
such amount of shares of Stock shall be and is hereby reserved for such purpose.
Any of such shares of Stock that may remain unsold and that are not subject to
outstanding Options at the termination of the Plan shall cease to be reserved
for the purposes of the Plan, but until termination of the Plan the Company
shall at all times reserve a sufficient number of shares of Stock to meet the
requirements of the Plan. Should any Option expire or be cancelled prior to its
exercise in full or should the number of shares of Stock to be delivered upon
the exercise in full of an Option be reduced for any reason, the shares of Stock
theretofore subject to such Option may be subject to future Options under the
Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Options granted under the Plan shall be subject to the following
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The purchase price of each share of
Stock purchasable under an Option shall be determined by the Committee at the
time of grant, but shall not be less than 100% of the Fair Market Value (as
defined below) of such share of Stock on the last trading day prior to the date
the Option is granted; PROVIDED, HOWEVER, that with respect to an Optionee who,
at the time an Incentive Option is granted, owns (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or of any Subsidiary, the purchase price per
share of Stock shall be at least 110% of the Fair Market Value per share of
Stock on the last trading day prior to the date of grant. The exercise price for
each Option shall be subject to adjustment as provided in Section 7 below. Fair
Market Value means the closing price of publicly traded shares of Stock on the
principal United States securities exchange on which shares of Stock are listed
(if the shares of Stock are so listed), or on the NASDAQ Stock Market (if the
shares of Stock are regularly quoted on the NASDAQ Stock Market), or, if not so
listed or regularly quoted, the mean between the closing bid
-3-
<PAGE>
and asked prices of publicly traded shares of Stock in the over-the-counter
market, or, if such bid and asked prices shall not be available, as reported by
any nationally recognized quotation service selected by the Company, or as
determined by the Committee in a manner consistent with the provisions of the
Code. Anything in this Section 5(a) to the contrary notwithstanding, in no event
shall the purchase price of a share of Stock be less than the minimum price
permitted under rules and policies of the American Stock Exchange, the Toronto
Stock Exchange or the Vancouver Stock Exchange, so long as the Common Shares are
listed on any such exchange.
(b) OPTION TERM. The term of each Option shall be fixed by
the Committee, but no Option shall be exercisable more than five years after the
date such Option is granted.
(c) EXERCISABILITY. Subject to Section 5(j) hereof,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at the time of grant.
(d) METHOD OF EXERCISE. Options to the extent then
exercisable may be exercised in whole or in part at any time during the option
period, by giving written notice to the Company specifying the number of shares
of Stock to be purchased, accompanied by payment in full of the purchase price,
in cash, by check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of Stock owned by
the Optionee (based on the Fair Market Value of the Stock on the trading day
before the Option is exercised). An Optionee shall have the right to dividends
and other rights of a stockholder with respect to shares of Stock purchased upon
exercise of an Option after (i) the Optionee has given written notice of
exercise and has paid in full for such shares and (ii) becomes a stockholder of
record with respect thereto.
(e) NON-TRANSFERABILITY OF OPTIONS. Options are not
transferable and may be exercised solely by the Optionee during his lifetime or
after his death by the person or persons entitled thereto under his will or the
laws of descent and distribution. Any attempt to transfer, assign, pledge or
otherwise dispose of, or to subject to execution, attachment or similar process,
any Option contrary to the provisions hereof shall be void and ineffective and
shall give no right to the purported transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised, to the extent then exercisable (or on such accelerated
basis as the
-4-
<PAGE>
Committee shall determine at or after grant), by the legal representative of the
estate or by the legatee of the Optionee under the will of the Optionee, for a
period of one year after the date of such death or until the expiration of the
stated term of such Option as provided under the Plan, whichever period is
shorter.
(g) TERMINATION BY REASON OF DISABILITY. Unless otherwise
determined by the Committee at grant, if any Optionee's employment with or
service to the Company or any Subsidiary terminates by reason of total and
permanent disability, any Option held by such Optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised after 30 days after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 30 day period, any unexercised Option held by such
Optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year after the date of such
death or for the stated term of such Option, whichever period is shorter.
(h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise
determined by the Committee at grant, if any Optionee's employment with or
service to the Company or any Subsidiary terminates by reason of Normal or Early
Retirement (as such terms are defined below), any Option held by such Optionee
may thereafter be exercised to the extent it was exercisable at the time of such
Retirement (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised after 30 days after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 30 day period, any unexercised Option held by such
Optionee shall thereafter be exercisable, to the extent to which it was
exercisable at the time of death, for a period of one year after the date of
such death or for the stated term of such Option, whichever period is shorter.
For purposes of this paragraph (h), Normal Retirement shall mean
retirement from active employment with the Company or any Subsidiary on or after
the normal retirement date specified in the applicable Company or Subsidiary
pension plan or if no such pension plan, age 65. Early Retirement shall mean
retirement from active employment with the Company or any Subsidiary pursuant to
the early retirement provisions of the applicable Company or Subsidiary pension
plan or if no such pension plan, age 55.
(i) OTHER TERMINATION. Unless otherwise determined by the
Committee at grant, if any Optionee's employment with or
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<PAGE>
service to the Company or any Subsidiary terminates for any reason other than
death, Disability or Normal or Early Retirement, the Option shall thereupon
terminate, except that the portion of any Option that was exercisable on the
date of such termination of employment may be exercised for the lesser of 30
days after the date of termination or the balance of such Option's term if the
Optionee's employment or service with the Company or any Subsidiary is
terminated by the Company or such Subsidiary without cause (the determination as
to whether termination was for cause to be made by the Committee). The transfer
of an Optionee from the employ of the Company to a Subsidiary, or vice versa, or
from one Subsidiary to another, shall not be deemed to constitute a termination
of employment for purposes of the Plan.
(j) LIMIT ON VALUE OF INCENTIVE OPTION. The aggregate Fair
Market Value, determined as of the date the Incentive Option is granted, of
Stock for which Incentive Options are exercisable for the first time by any
Optionee during any calendar year under the Plan (and/or any other stock option
plans of the Company or any Subsidiary) shall not exceed $100,000.
(k) TRANSFER OF INCENTIVE OPTION SHARES. The stock option
agreement evidencing any Incentive Options granted under this Plan shall provide
that if the Optionee makes a disposition, within the meaning of Section 424(c)
of the Code and regulations promulgated thereunder, of any share or shares of
Stock issued to him upon exercise of an Incentive Option granted under the Plan
within the two-year period commencing on the day after the date of the grant of
such Incentive Option or within a one-year period commencing on the day after
the date of transfer of the share or shares to him pursuant to the exercise of
such Incentive Option, he shall, within 10 days after such disposition, notify
the Company thereof and immediately deliver to the Company any amount of United
States federal income tax withholding required by law.
(l) LIMITATION ON OPTIONS HELD BY ONE PERSON. The
aggregate number of shares of Stock subject to options held by any one person
shall not exceed that number of shares as equals 5% of the outstanding shares of
the Company.
6. TERM OF PLAN.
No Option shall be granted pursuant to the Plan on or after
January 10, 2005, but Options theretofore granted may extend beyond that date.
7. CAPITAL CHANGE OF THE COMPANY.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of
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<PAGE>
shares reserved for issuance under the Plan and in the number and option price
of shares subject to outstanding Options granted under the Plan, to the end that
after such event each Optionee's proportionate interest shall be maintained as
immediately before the occurrence of such event.
8. PURCHASE FOR INVESTMENT.
Unless the Options and shares covered by the Plan have been
registered under the United States Securities Act of 1933, as amended (the
"Securities Act"), or the Company has determined that such registration is
unnecessary, each person exercising an Option under the Plan may be required by
the Company to give a representation in writing that he is acquiring the shares
for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof.
9. TAXES.
The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options granted under the
Plan with respect to the withholding of any United States or Canadian taxes or
any other tax matters.
10. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on January 10, 1995, provided however
that the Plan shall subsequently be approved by majority vote of the Company's
shareholders not later than January 9, 1996.
11. AMENDMENT AND TERMINATION.
The Board may amend, suspend, or terminate the Plan, except that
no amendment shall be made that would impair the rights of any Optionee under
any Option theretofore granted without his consent, and except that no amendment
shall be made which, without the approval of the shareholders of the Company
would:
(a) materially increase the number of shares that may be
issued under the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to the
Optionees under the Plan;
(c) materially modify the requirements as to eligibility
for participation in the Plan;
(d) decrease the exercise price of an Incentive Option to
less than 100% of the Fair Market Value per share of Stock on the last
trading day prior to the date of grant thereof; or
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<PAGE>
(e) extend the term of any Option beyond that provided for
in Section 5(b).
The Committee may amend the terms of any Option theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Optionee without his consent. The Committee may also substitute
new Options for previously granted Options, including options granted under
other plans applicable to the participant and previously granted Options having
higher option prices, upon such terms as the Committee may deem appropriate.
12. GOVERNMENT REGULATIONS.
The Plan, and the grant and exercise of Options hereunder, and
the obligation of the Company to sell and deliver shares under such Options,
shall be subject to all applicable laws, rules and regulations, and to such
approvals by any governmental agencies or national securities exchanges
(including the American Stock Exchange, the Toronto Stock Exchange or the
Vancouver Stock Exchange, so long as the Common Shares are listed on any such
exchange) as may be required.
13. GENERAL PROVISIONS.
(a) CERTIFICATES. All certificates for shares of Stock
delivered under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities and Exchange Commission, or other
securities commission having jurisdiction, any applicable Federal, provincial or
state securities law, any stock exchange upon which the Stock is then listed and
the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(b) EMPLOYMENT MATTERS. The adoption of the Plan shall not
confer upon any Optionee of the Company or any Subsidiary, any right to
continued employment or, in the case of an Optionee who is a director, continued
service as a director, with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or any Subsidiary to
terminate the employment of any of its employees, the service of any of its
directors or the retention of any of its consultants or advisors at any time.
(c) LIMITATION OF LIABILITY. No member of the Board or the
Committee, or any officer or employee of the Company acting on behalf of the
Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board or the Committee and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted by
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<PAGE>
law, be fully indemnified and protected by the Company in respect of any such
action, determination or interpretation.
(d) REGISTRATION OF STOCK. Notwithstanding any other
provision in the Plan, no Option may be exercised unless and until the Stock to
be issued upon the exercise thereof has been registered under the Securities Act
and applicable state securities laws, or are, in the opinion of counsel to the
Company, exempt from such registration in the United States or exempt from the
prospectus and registration requirements under applicable provincial
legislation. The Company shall not be under any obligation to register under
applicable federal or state securities laws any Stock to be issued upon the
exercise of an Option granted hereunder, or to comply with an appropriate
exemption from registration under such laws or the laws of any province in order
to permit the exercise of an Option and the issuance and sale of the Stock
subject to such Option however, the Company may in its sole discretion register
such Stock at such time as the Company shall determine. If the Company chooses
to comply with such an exemption from registration, the Stock issued under the
Plan may, at the direction of the Committee, bear an appropriate restrictive
legend restricting the transfer or pledge of the Stock represented thereby, and
the Committee may also give appropriate stop transfer instructions to the
Company's transfer agents.
GST TELECOMMUNICATIONS, INC.
-9-
As Amended Through
September 10, 1997
GST TELECOMMUNICATIONS, INC.
1996 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
This 1996 Stock Option Plan (the "Plan") is intended as an
incentive, to retain in the employ of and as consultants and advisors to GST
TELECOMMUNICATIONS, INC., a Canadian corporation with its principal office at
4317 N.E. Thurston Way, Vancouver, Washington 98662 (the "Company") and any
Subsidiary of the Company, within the meaning of Section 425(f) of the United
States Internal Revenue Code of 1986, as amended (the "Code"), persons of
training, experience and ability, to attract new employees, directors, advisors
and consultants whose services are considered valuable, to encourage the sense
of proprietorship and to stimulate the active interest of such persons in the
development and financial success of the Company and its Subsidiaries.
It is further intended that certain options granted pursuant to
the Plan shall constitute incentive stock options within the meaning of Section
422 of the Code (the "Incentive Options") while certain other options granted
pursuant to the Plan shall be nonqualified stock options (the "Nonqualified
Options"). Incentive Options and Nonqualified Options are hereinafter referred
to collectively as "Options."
The Company intends that the Plan meet the requirements of Rule
16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company pursuant to the Plan will be exempt from the operation of Section
16(b) of the Exchange Act. In all cases, the terms, provisions, conditions and
limitations of the Plan shall be construed and interpreted consistent with the
Company's intent as stated in this Section 1.
2. ADMINISTRATION OF THE PLAN.
The Board of Directors of the Company (the "Board") shall appoint
and maintain as administrator of the Plan a Committee (the "Committee")
consisting of two or more Non-Employee Directors (as such term is defined in
Rule 16b-3), which shall serve at the pleasure of the Board. The Committee,
subject to Sections 3 and 5 hereof, shall have full power and authority to
designate recipients of Options, to determine the terms and conditions of
respective
<PAGE>
Option agreements (which need not be identical) and to interpret the provisions
and supervise the administration of the Plan. The Committee shall have the
authority, without limitation, to designate which Options granted under the Plan
shall be Incentive Options and which shall be Nonqualified Options. To the
extent any Option does not qualify as an Incentive Option, it shall constitute a
separate Nonqualified Option.
Subject to the provisions of the Plan, the Committee shall
interpret the Plan and all Options granted under the Plan, shall make such rules
as it deems necessary for the proper administration of the Plan, shall make all
other determinations necessary or advisable for the administration of the Plan
and shall correct any defects or supply any omission or reconcile any
inconsistency in the Plan or in any Options granted under the Plan in the manner
and to the extent that the Committee deems desirable to carry into effect the
Plan or any Options. The act or determination of a majority of the Committee
shall be the act or determination of the Committee and any decision reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority at a meeting duly held. Subject
to the provisions of the Plan, any action taken or determination made by the
Committee pursuant to this and the other Sections of the Plan shall be
conclusive on all parties.
In the event that for any reason the Committee is unable to act
or if the Committee at the time of any grant, award or other acquisition under
the Plan of Options or Stock does not consist of two or more Non-Employee
Directors, then any such grant, award or other acquisition may be approved or
ratified in any other manner contemplated by subparagraph (d) of Rule 16b-3.
3. DESIGNATION OF OPTIONEES.
The persons eligible for participation in the Plan as recipients
of Options (the "Optionees") shall include employees, officers and directors of,
and consultants and advisors to, the Company or any Subsidiary; provided that
Incentive Options may only be granted to employees of the Company and the
Subsidiaries. In selecting Optionees, and in determining the number of shares to
be covered by each Option granted to Optionees, the Committee may consider the
office or position held by the Optionee or the Optionee's relationship to the
Company, the Optionee's degree of responsibility for and contribution to the
growth and success of the Company or any Subsidiary, the Optionee's length of
service, age, promotions, potential and any other factors that the Committee may
consider relevant. An Optionee who has been granted an Option hereunder may be
granted an additional Option or Options, if the Committee shall so determine.
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<PAGE>
4. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Section 7 hereof, a total of
1,000,000 shares of the Company's Common Shares (the "Stock") shall be subject
to the Plan. The shares of Stock subject to the Plan shall consist of unissued
shares or previously issued shares held by any Subsidiary of the Company, and
such amount of shares of Stock shall be and is hereby reserved for such purpose.
Any of such shares of Stock that may remain unsold and that are not subject to
outstanding Options at the termination of the Plan shall cease to be reserved
for the purposes of the Plan, but until termination of the Plan the Company
shall at all times reserve a sufficient number of shares of Stock to meet the
requirements of the Plan. Should any Option expire or be cancelled prior to its
exercise in full or should the number of shares of Stock to be delivered upon
the exercise in full of an Option be reduced for any reason, the shares of Stock
theretofore subject to such Option may be subject to future Options under the
Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Options granted under the Plan shall be subject to the following
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The purchase price of each share of
Stock purchasable under an Option shall be determined by the Committee at the
time of grant, but shall not be less than 100% of the Fair Market Value (as
defined below) of such share of Stock on the last trading day prior to the date
the Option is granted; PROVIDED, HOWEVER, that with respect to an Optionee who,
at the time an Incentive Option is granted, owns (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or of any Subsidiary, the purchase price per
share of Stock shall be at least 110% of the Fair Market Value per share of
Stock on the last trading day prior to the date of grant. The exercise price for
each Option shall be subject to adjustment as provided in Section 7 below. Fair
Market Value means the closing price of publicly traded shares of Stock on the
principal United States securities exchange on which shares of Stock are listed
(if the shares of Stock are so listed), or on the NASDAQ Stock Market (if the
shares of Stock are regularly quoted on the NASDAQ Stock Market), or, if not so
listed or regularly quoted, the mean between the closing bid and asked prices of
publicly traded shares of Stock in the over-the-counter market, or, if such bid
and asked prices shall not be available, as reported by any nationally
recognized quotation service selected by the Company, or as determined by the
Committee in a manner consistent with the provisions of the Code. Anything in
this Section 5(a) to the contrary notwithstanding, in no event shall the
purchase price of a share of Stock be less than the
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<PAGE>
minimum price permitted under rules and policies of the American Stock Exchange,
the Toronto Stock Exchange or the Vancouver Stock Exchange, so long as the
Common Shares are listed on any such exchange.
(b) OPTION TERM. The term of each Option shall be fixed by
the Committee, but no Option shall be exercisable more than five years after the
date such Option is granted.
(c) EXERCISABILITY. Subject to Section 5(j) hereof,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at the time of grant.
(d) METHOD OF EXERCISE. Options to the extent then
exercisable may be exercised in whole or in part at any time during the option
period, by giving written notice to the Company specifying the number of shares
of Stock to be purchased, accompanied by payment in full of the purchase price,
in cash, by check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of Stock owned by
the Optionee (based on the Fair Market Value of the Stock on the trading day
before the Option is exercised). An Optionee shall have the right to dividends
and other rights of a stockholder with respect to shares of Stock purchased upon
exercise of an Option after (i) the Optionee has given written notice of
exercise and has paid in full for such shares and (ii) becomes a stockholder of
record with respect thereto.
(e) NON-TRANSFERABILITY OF OPTIONS. Options are not
transferable and may be exercised solely by the Optionee during his lifetime or
after his death by the person or persons entitled thereto under his will or the
laws of descent and distribution. Any attempt to transfer, assign, pledge or
otherwise dispose of, or to subject to execution, attachment or similar process,
any Option contrary to the provisions hereof shall be void and ineffective and
shall give no right to the purported transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised, to the extent then exercisable (or on such accelerated
basis as the Committee shall determine at or after grant), by the legal
representative of the estate or by the legatee of the Optionee under the will of
the Optionee, for a period of one year after the date of such death or until the
expiration of the stated term of such Option as provided under the Plan,
whichever period is shorter.
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<PAGE>
(g) TERMINATION BY REASON OF DISABILITY. Unless otherwise
determined by the Committee at grant, if any Optionee's employment with or
service to the Company or any Subsidiary terminates by reason of total and
permanent disability, any Option held by such Optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised after 30 days after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 30 day period, any unexercised Option held by such
Optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year after the date of such
death or for the stated term of such Option, whichever period is shorter.
(h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise
determined by the Committee at grant, if any Optionee's employment with or
service to the Company or any Subsidiary terminates by reason of Normal or Early
Retirement (as such terms are defined below), any Option held by such Optionee
may thereafter be exercised to the extent it was exercisable at the time of such
Retirement (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised after 30 days after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 30 day period, any unexercised Option held by such
Optionee shall thereafter be exercisable, to the extent to which it was
exercisable at the time of death, for a period of one year after the date of
such death or for the stated term of such Option, whichever period is shorter.
For purposes of this paragraph (h), Normal Retirement shall mean
retirement from active employment with the Company or any Subsidiary on or after
the normal retirement date specified in the applicable Company or Subsidiary
pension plan or if no such pension plan, age 65. Early Retirement shall mean
retirement from active employment with the Company or any Subsidiary pursuant to
the early retirement provisions of the applicable Company or Subsidiary pension
plan or if no such pension plan, age 55.
(i) OTHER TERMINATION. Unless otherwise determined by the
Committee at grant, if any Optionee's employment with or service to the Company
or any Subsidiary terminates for any reason other than death, Disability or
Normal or Early Retirement, the Option shall thereupon terminate, except that
the portion of any Option that was exercisable on the date of such termination
of employment may be exercised for the lesser of 30 days after the date of
termination or the balance of such Option's term if the Optionee's employment or
service with the Company or any Subsidiary
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<PAGE>
is terminated by the Company or such Subsidiary without cause (the determination
as to whether termination was for cause to be made by the Committee). The
transfer of an Optionee from the employ of the Company to a Subsidiary, or vice
versa, or from one Subsidiary to another, shall not be deemed to constitute a
termination of employment for purposes of the Plan.
(j) LIMIT ON VALUE OF INCENTIVE OPTION. The aggregate Fair
Market Value, determined as of the date the Incentive Option is granted, of
Stock for which Incentive Options are exercisable for the first time by any
Optionee during any calendar year under the Plan (and/or any other stock option
plans of the Company or any Subsidiary) shall not exceed $100,000.
(k) TRANSFER OF INCENTIVE OPTION SHARES. The stock option
agreement evidencing any Incentive Options granted under this Plan shall provide
that if the Optionee makes a disposition, within the meaning of Section 424(c)
of the Code and regulations promulgated thereunder, of any share or shares of
Stock issued to him upon exercise of an Incentive Option granted under the Plan
within the two-year period commencing on the day after the date of the grant of
such Incentive Option or within a one-year period commencing on the day after
the date of transfer of the share or shares to him pursuant to the exercise of
such Incentive Option, he shall, within 10 days after such disposition, notify
the Company thereof and immediately deliver to the Company any amount of United
States federal income tax withholding required by law.
(l) LIMITATION ON OPTIONS HELD BY ONE PERSON. The
aggregate number of shares of Stock subject to options held by any one person
shall not exceed that number of shares as equals 5% of the outstanding shares of
the Company.
6. TERM OF PLAN.
No Option shall be granted pursuant to the Plan on or after
January 5, 2006, but Options theretofore granted may extend beyond that date.
7. CAPITAL CHANGE OF THE COMPANY.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the Plan
and in the number and option price of shares subject to outstanding Options
granted under the Plan, to the end that after such event each Optionee's
proportionate interest shall be maintained as immediately before the occurrence
of such event.
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<PAGE>
8. PURCHASE FOR INVESTMENT.
Unless the Options and shares covered by the Plan have been
registered under the United States Securities Act of 1933, as amended (the
"Securities Act"), or the Company has determined that such registration is
unnecessary, each person exercising an Option under the Plan may be required by
the Company to give a representation in writing that he is acquiring the shares
for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof.
9. TAXES.
The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options granted under the
Plan with respect to the withholding of any United States or Canadian taxes or
any other tax matters.
10. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on January 5, 1996, provided however
that the Plan shall subsequently be approved by majority vote of the Company's
shareholders not later than January 4, 1997.
11. AMENDMENT AND TERMINATION.
The Board may amend, suspend, or terminate the Plan, except that
no amendment shall be made that would impair the rights of any Optionee under
any Option theretofore granted without his consent, and except that no amendment
shall be made which, without the approval of the shareholders of the Company
would:
(a) materially increase the number of shares that may be
issued under the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to the
Optionees under the Plan;
(c) materially modify the requirements as to eligibility
for participation in the Plan;
(d) decrease the exercise price of an Incentive Option to
less than 100% of the Fair Market Value per share of Stock on the last
trading day prior to the date of grant thereof; or
(e) extend the term of any Option beyond that provided for
in Section 5(b).
The Committee may amend the terms of any Option theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Optionee without his consent. The Committee may also substitute
new Options for
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<PAGE>
previously granted Options, including options granted under other plans
applicable to the participant and previously granted Options having higher
option prices, upon such terms as the Committee may deem appropriate.
12. GOVERNMENT REGULATIONS.
The Plan, and the grant and exercise of Options hereunder, and
the obligation of the Company to sell and deliver shares under such Options,
shall be subject to all applicable laws, rules and regulations, and to such
approvals by any governmental agencies or national securities exchanges
(including the American Stock Exchange, the Toronto Stock Exchange or the
Vancouver Stock Exchange, so long as the Common Shares are listed on any such
exchange) as may be required.
13. GENERAL PROVISIONS.
(a) CERTIFICATES. All certificates for shares of Stock
delivered under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities and Exchange Commission, or other
securities commission having jurisdiction, any applicable Federal, provincial or
state securities law, any stock exchange upon which the Stock is then listed and
the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(b) EMPLOYMENT MATTERS. The adoption of the Plan shall not
confer upon any Optionee of the Company or any Subsidiary, any right to
continued employment or, in the case of an Optionee who is a director, continued
service as a director, with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or any Subsidiary to
terminate the employment of any of its employees, the service of any of its
directors or the retention of any of its consultants or advisors at any time.
(c) LIMITATION OF LIABILITY. No member of the Board or the
Committee, or any officer or employee of the Company acting on behalf of the
Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board or the Committee and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted by
law, be fully indemnified and protected by the Company in respect of any such
action, determination or interpretation.
(d) REGISTRATION OF STOCK. Notwithstanding any other
provision in the Plan, no Option may be exercised unless and until the Stock to
be issued upon the exercise thereof has been
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<PAGE>
registered under the Securities Act and applicable state securities laws, or
are, in the opinion of counsel to the Company, exempt from such registration in
the United States or exempt from the prospectus and registration requirements
under applicable provincial legislation. The Company shall not be under any
obligation to register under applicable federal or state securities laws any
Stock to be issued upon the exercise of an Option granted hereunder, or to
comply with an appropriate exemption from registration under such laws or the
laws of any province in order to permit the exercise of an Option and the
issuance and sale of the Stock subject to such Option however, the Company may
in its sole discretion register such Stock at such time as the Company shall
determine. If the Company chooses to comply with such an exemption from
registration, the Stock issued under the Plan may, at the direction of the
Committee, bear an appropriate restrictive legend restricting the transfer or
pledge of the Stock represented thereby, and the Committee may also give
appropriate stop transfer instructions to the Company's transfer agents.
GST TELECOMMUNICATIONS, INC.
-9-
As Amended Through
September 10, 1997
GST TELECOMMUNICATIONS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following are the provisions of the 1996 Employee Stock
Purchase Plan of GST Telecommunications, Inc.
1. PURPOSE. The purpose of the Plan is to provide eligible
employees of the Company and its Designated Subsidiaries with an opportunity to
share in the fortunes of the Company by acquiring or increasing their holdings
of the Common Shares of the Company, at a discount, through accumulated payroll
deductions. The Plan is also designed to encourage eligible employees to remain
in the employ of the Company. It is the intention of the Company that the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend or limit
participation in a manner consistent with the requirements of Section 423 of the
Code.
2. DEFINITIONS.
(a) "Board" shall mean the Board of Directors of the
Company or a committee thereof duly authorized to administer the Plan in
accordance with Section 13 hereof.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Shares" shall mean the Common Shares of the
Company as more fully described in Section 25 hereof.
(d) "Company" shall mean GST Telecommunications, Inc., a
federally chartered Canadian corporation, with its principal offices at 4317
N.E. Thurston Way, Vancouver, Washington
(e) "Compensation" shall mean all regular gross earnings,
including payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses, commissions or other compensation.
(f) "Continuous Status as an Employee" shall mean the
absence of any interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case of a leave
of absence agreed to in writing by the Company, provided that such leave is for
a period of not
<PAGE>
more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "Designated Subsidiaries" shall mean the Subsidiaries
that have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(h) "Dollars" or "$" shall mean U.S. Dollars.
(i) "Employee" shall have the meaning set forth in Section
3 hereof.
(j) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(k) "Exercise Date" shall mean the last day of each
Offering Period of the Plan if such date is a regular business day or the first
regular business day thereafter. A different date may be set by resolution of
the Board.
(l) "Fair Market Value" of the Common Shares on a given
date shall mean the average daily high and low trading prices of the Common
Shares for the five trading days immediately preceding such date on the
principal United States securities exchange on which the Common Shares are
listed (if the Common Shares are so listed), or on the Nasdaq Stock Market (if
the Common Shares are regularly quoted on the Nasdaq Stock Market), or, if not
so listed or regularly quoted, the mean between the closing bid and asked prices
of publicly traded Common Shares in the over-the-counter market, or, if such bid
and asked prices shall not be available, as reported by any nationally
recognized quotation service selected by the Company, or as determined by the
Board in a manner consistent with the provisions of the Code.
(m) "Offering Date" shall mean the first day of each
Offering Period of the Plan if such date is a regular business day or the first
regular business day thereafter. A different date may be set by resolution of
the Board.
(n) "Offering Period" shall have the meaning set forth in
Section 4 hereof.
(o) "Option" shall mean an option granted to a Participant
to purchase Common Shares under the Plan.
(p) "Participant" shall mean an Employee who participates
in this Plan in accordance with Section 5 hereof.
(q) "Plan" shall mean the 1996 Employee Stock Purchase Plan
of the Company.
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<PAGE>
(r) "Reserves" shall have the meaning set forth in Section
18 hereof.
(s) "SEC" shall mean the Securities and Exchange
Commission.
(t) "Securities Act" shall mean the Securities Act of 1933,
as amended.
(u) "Subsidiary" shall mean a corporation of which not less
than 50% of the voting shares are held by the Company or a Subsidiary, whether
or not such corporation now exists or is hereafter organized or acquired by the
Company or a Subsidiary.
3. ELIGIBILITY.
(a) Any person who is regularly in the employ of the
Company (an "Employee") or any of its Designated Subsidiaries is eligible to
receive Options except (a) employees whose customary employment is less than 20
hours per week and (b) employees whose customary employment is not more than
five months in any calendar year.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an Option (i) if, immediately
after the grant, such Employee (or any other person whose stock would be
attributed to such Employee pursuant to Section 425(d) of the Code) would own
stock and/or hold outstanding Options to purchase stock possessing 5% or more of
the total combined voting power or value of all classes of stock of the Company
or of any subsidiary of the Company, or (ii) that permits his rights to purchase
stock under all employee stock purchase plans (as described in Section 423 of
the Code) of the Company and its subsidiaries to accrue at a rate that exceeds
$25,000 of Fair Market Value of such stock (determined at the time such Option
is granted) for each calendar year in which such Option is outstanding at any
time.
4. OFFERING PERIODS.
(a) The Plan shall be implemented by one offering during
each six-month period (each an "Offering Period"). Offering Periods shall
commence on or about April 1 and October 1 of each year as determined by the
Board; PROVIDED, HOWEVER, that the first Offering Period under the Plan may be
less than six months.
(b) The Board shall have the power to change the duration
of Offering Periods with respect to future offerings without shareholder
approval if such change is announced at least 15 days prior to the scheduled
beginning of the first Offering Period to be affected.
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<PAGE>
5. PARTICIPATION.
(a) An Employee may become a Participant in the Plan by
completing a subscription agreement authorizing payroll deduction on the form
provided by the Company and filing it with the Company's Human Resources Manager
on or prior to an Offering Date or such other date as may be specified by the
Board.
(b) Payroll deductions for a Participant shall commence on
the first payroll following the Offering Date and shall end on the Exercise Date
of the Offering Period to which such authorization is applicable, unless sooner
terminated by the Participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
(a) At the time a Participant files his subscription
agreement, he shall elect to have payroll deductions made on each payday during
the Offering Period in an amount not exceeding 10% of the Compensation that he
receives on each payday during the Offering Period, and the aggregate of such
payroll deductions during the Offering Period shall not exceed 10% of his
aggregate Compensation during such Offering Period.
(b) The total number of Common Shares purchased by any
Participant shall in no event exceed, in any Offering Period, the number of
Common Shares that $12,500 could purchase at the Fair Market Value of a Common
Share on the Offering Date.
(c) All payroll deductions made by a Participant shall be
credited to his account under the Plan. A Participant may not make any
additional payments into such account.
(d) A Participant may discontinue his participation in the
Plan as provided in Section 10 hereof, or may decrease (but not increase) the
rate of his payroll deductions one time during the Offering Period by completing
or filing with the Human Resources Manager of the Company a new authorization
for payroll deduction. The change in rate shall be effective 15 days following
the Company's receipt of the new authorization. If a Participant decreases the
rate of his payroll deductions more than one time during an Offering Period,
such Participant will be deemed to have terminated his participation in the Plan
in accordance with Section 10 hereof.
7. GRANT OF OPTION.
(a) On the Offering Date of each Offering Period, each
Participant shall be granted an Option to purchase (at the per share Option
price) up to a number of Common Shares determined by dividing such Participant's
payroll deductions to be accumulated during such Offering Period (not to exceed
an amount equal to 10%
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<PAGE>
of his Compensation as of the date of the commencement of the applicable
Offering Period) by 85% of the Fair Market Value of a Common Share on the
Offering Date, provided that in no event shall an Employee be permitted to
purchase during any Offering Period more than a number of Common Shares
determined by dividing $12,500 by the Fair Market Value of a Common Share on the
Offering Date, and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. Fair Market Value of a
share of the Company's Common Shares shall be determined as provided in Section
2(l) hereof.
(b) The option price per Common Share of the Shares
offered in a given Offering Period shall be 85% of the Fair Market Value of a
Common Share on the Offering Date.
8. EXERCISE OF OPTION. Unless a Participant withdraws from the
Plan as provided in Section 10 hereof, his Option shall be exercised
automatically on the Exercise Date of the Offering Period and the maximum number
of full Common Shares subject to such Option shall be purchased for him at the
applicable option price with the accumulated payroll deductions in his account.
The Common Shares purchased upon exercise of an Option hereunder shall be deemed
to be transferred to the Participant on the Exercise Date. During his lifetime,
an Option to purchase Common Shares hereunder is exercisable only by the
Participant to whom such Option is granted.
9. DELIVERY. Common Shares purchased upon exercise of the
Participants' Options shall be represented by one or more global certificates
registered in the name of a custodian from time to time selected by the
Committee. Beneficial interests in the global certificate(s) will be shown on,
and transfers thereof will be effected through records maintained by the Human
Resources Manager of the Company. Upon request of a Participant, the Company
shall arrange for the delivery to such Participant of a certificate representing
the number of Common Shares requested by such participant; provided that such
Participant has purchased at least that number of Common Shares pursuant to the
Plan. Certificated Common Shares delivered to a Participant shall not constitute
a portion of the global certificates. In the case of a Participant who has
requested that certificated Common Shares be delivered to him, any cash
remaining to the credit of such Participant's account that is insufficient to
purchase a full share of a Common Share of the Company shall be returned to said
Participant. In addition, no fractional Common Shares shall be delivered to such
Participant; he shall instead receive the cash value of such fractional Common
Shares.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) An employee's participation in the Plan may be
terminated by signing and delivering to the Human Resources Manager of the
Company a notice of withdrawal from the Plan. Such
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<PAGE>
withdrawal may be elected at any time prior to the Exercise Date of the
applicable Offering Period.
(b) Any withdrawal from a given Offering Period
automatically terminates the Participant's interest in that offering. A
Participant withdrawing from an offering must wait at least 90 days until
executing a subscription agreement for subsequent offerings.
(c) A Participant may withdraw all but not less than all
the payroll deductions credited to his account under the Plan at any time prior
to the Exercise Date of the Offering Period by giving written notice to the
Company. All of the Participant's payroll deductions credited to his account
shall be paid to him promptly after receipt of his notice of withdrawal and his
Option for the current period shall be automatically terminated, and no further
payroll deductions for the purchase of Common Shares shall be made during the
Offering Period.
(d) Upon termination of the Participant's Continuous
Status as an Employee prior to the Exercise Date of the Offering Period for any
reason, including retirement or death, the payroll deductions credited to his
account shall be returned to him or, in the case of his death, to the person or
persons entitled thereto under Section 14, and his Option shall be automatically
terminated.
(e) In the event an Employee fails to remain in Continuous
Status as an Employee of the Company for at least 20 hours per week during the
Offering Period in which the employee is a Participant, he shall be deemed to
have elected to withdraw from the Plan and the payroll deductions credited to
his account shall be returned to him and his Option terminated.
(f) A Participant may discontinue his participation in the
Plan, and may decrease but not increase the rate of payroll deductions one time
during the Offering Period. Payroll deductions commence on the first payday
following the beginning of the employee's participation in the Offering Period,
and continue at the same rate until terminated or decreased.
11. INTEREST. No interest shall accrue on the payroll
deductions of a Participant in the Plan.
12. STOCK.
(a) The maximum number of Common Shares that shall be made
available for sale under the Plan shall be 500,000, subject to adjustment upon
changes in capitalization of the Company as provided in Section 18 hereof. If
the total number of Common Shares that would otherwise be subject to Options
granted pursuant to Section 7(a) hereof on the Offering Date of an Offering
Period
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<PAGE>
exceeds the number of Common Shares then available under the Plan (after
deduction of all Common Shares for which Options have been exercised or are then
outstanding), the Company shall make a pro rata allocation of the Common Shares
remaining available for Option grants in as uniform a manner as shall be
practicable and as it shall determine to be equitable. In such event, the
Company shall give written notice of such reduction of the number of Common
Shares subject to the Option to each Participant affected thereby and shall
similarly reduce the rate of payroll deductions, if necessary.
(b) The Participant shall have no interest or voting right
in Common Shares covered by his Option until such Option has been exercised.
(c) Common Shares to be delivered to a Participant under
the Plan shall be registered in the form of one or more global certificates in
the name of the Committee. Upon request of a Participant, Common Shares shall be
registered in the name of the Participant or in the name of the Participant and
his spouse, in which event they shall no longer be evidenced by the global
certificates.
13. ADMINISTRATION. The Plan shall be administered by the
Board or a committee of members of the Board appointed by the Board. The
administration, interpretation or application of the Plan by the Board or its
committee shall be final, conclusive and binding upon all Participants. Members
of the Board who are eligible Employees are permitted to participate in the
Plan, provided that:
(a) Members of the Board who are eligible to participate
in the Plan may not vote on any matter affecting the administration of the Plan
or the grant of any Option.
(b) If a Committee is established to administer the Plan,
no member of the Board who is eligible to participate in the Plan may be a
member of the Committee.
14. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a
beneficiary who is to receive any Common Shares and cash, if any, from the
Participant's account under the Plan in the event of such Participant's death
subsequent to the end of the Offering Period but prior to entry of such Common
Shares on the records maintained by the Company's Human Resources Manager and
delivery to him of such cash. In addition, a Participant may file a written
designation of a beneficiary who is to receive any cash from the Participant's
account under the Plan in the event of such Participant's death prior to the
Exercise Date of the Offering Period.
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<PAGE>
(b) Such designation of beneficiary may be changed by the
Participant at any time by written notice. In the event of the death of a
Participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such Participant's death, the Company shall
deliver such Common Shares and/or cash to the executor or administrator of the
estate of the Participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its discretion, may
deliver such Common Shares and/or cash to the spouse or to any one or more
dependents or relatives of the Participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a
Participant's account, nor any rights with regard to the exercise of an Option,
may be assigned, transferred, pledged or otherwise disposed of in any way (other
than by will, the laws of descent and distribution or as provided in Section 14
hereof) by the Participant. Any such attempt at assignment, transfer, pledge or
other disposition shall be without affect, except that the Company may treat
such act as an election to withdraw funds in accordance with Section 10 hereof.
16. USE OF FUNDS. All payroll deductions received or held by
the Company under the Plan may be used by the Company for any corporate purpose,
and the Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts shall be maintained for each
Participant. Statements of account shall be given to Participants promptly
following the Exercise Date, which statements shall set forth the amounts of
payroll deductions, the per share purchase price, the number of Common Shares
purchased and the remaining cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the shareholders of the Company, the number of Common Shares
covered by each Option that has not yet been exercised and the number of Common
Shares that have been authorized for issuance under the Plan but have not yet
been placed under option (collectively, the "Reserves"), as well as the price
per Common Share covered by each Option that has not yet been exercised, shall
be proportionately adjusted for any increase or decrease in the number of issued
Common Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Shares, or any other increase or
decrease in the number of Common Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as
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<PAGE>
expressly provided herein, no issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Shares subject to an Option.
19. EFFECT OF LIQUIDATION, DISSOLUTION, SALE OF ASSETS OR
MERGER. In the event of the proposed dissolution or liquidation of the Company,
all Options shall terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that all Options
shall terminate as of a date fixed by the Board and give each Participant the
right to exercise his Option as to all or any part thereof, including shares as
to which an Option would not otherwise be exercisable. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, an Option shall be
assumed or an equivalent Option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation. In the
event that such successor corporation refuses to assume the Options or to
substitute an equivalent option, the Board shall, in lieu of such assumption or
substitution, provide for the Participant to have the right to exercise the
Options in full, including as to Common Shares that would not otherwise then be
purchasable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the Board
shall notify the Participant that the Option shall be fully exercisable for a
period of 30 days after the date of such notice, and the Option shall terminate
upon the expiration of such period.
The Board may, if it so determines in the exercise of its sole
discretion, also make provisions for adjusting the Reserves, as well as the
price per Common Share covered by each outstanding Option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of its outstanding Common Shares, and in the
event of the Company being consolidated with or merged into any other
corporation.
20. AMENDMENT OR TERMINATION. The Board may at any time
terminate or amend the Plan. Except as provided in Section 18, no such
termination can affect Options previously granted, nor may an amendment make any
change in any Option theretofore granted which adversely affects the rights of
any Participant, nor may an amendment be made without prior approval of the
shareholders of the Company (obtained in a manner consistent with the provisions
of the Code and all other applicable law) if such amendment would:
(a) Increase the number of Common Shares that may be
issued under the Plan;
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<PAGE>
(b) Permit payroll deductions at a rate in excess of 10%
of the Participant's Compensation;
(c) Change the designation of the employees (or class of
employees) eligible for participation in the Plan; or
(d) If the Company has a class of equity securities
registered under Section 12 of the Exchange Act at the time of such amendment,
materially increase the benefits that may accrue to Participants under the Plan.
(e) To the extent necessary and desirable to comply with
Rule 16b-3 under the Exchange Act, or with Section 423 of the Code (or any other
applicable law or regulation, including requirements of the NASD or any
established stock exchange), the Company shall obtain stockholder approval of
any amendment to the Plan in the requisite manner.
21. NOTICES. All notices or other communications by a
Participant to the Company under or in connection with the Plan shall be deemed
to have been duly given when received in the form specified by the Company at
the location, or by the person, designated by the Company for the receipt
thereof.
22. SHAREHOLDER APPROVAL. The Plan was approved by the
affirmative vote of the holders of a majority of the outstanding Common Shares
at the Company's Annual Meeting of Shareholders held on February 15, 1996.
23. CONDITIONS UPON ISSUANCE OF COMMON SHARES. Common Shares
shall not be issued with respect to an Option unless the exercise of such Option
and the issuance and delivery of such Common Shares pursuant thereto shall
comply with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act, the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
upon which the Common Shares may then be listed, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Common Shares are being purchased only for
investment and without any present intention to sell or distribute such Common
Shares if, in the opinion of counsel for the Company, such a representation is
required by any of the aforementioned applicable provisions of law.
24. RESTRICTIONS ON RESALE. Certain officers and directors of
the Company may be deemed to be "affiliates" of the Company as that term is
defined under the Securities Act. Common Shares acquired under the Plan by an
affiliate may only be re-
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<PAGE>
offered or resold pursuant to an effective registration statement or pursuant to
Rule 144 promulgated under the Securities Act or another exemption from the
registration requirements of the Securities Act. Such reoffers or resales may
not be made in reliance on the Registration Statement filed in connection with
the offer to Participants of the Common Shares issuable hereunder.
25. SECURITIES TO BE PURCHASED. The security to be purchased
under the Plan is Common Shares, without par value, of the Company. Each Common
Share entitles the holder to one vote on matters submitted to a vote of the
stockholders, a PRO RATA share of such dividends as may be declared on the
Common Shares and a PRO RATA share of assets remaining available for
distribution to stockholders upon a liquidation of the Company. The Common
Shares are not convertible and have no preemptive rights. The Board has the
authority, within certain limitations, to issue shares of preference stock that
would have one or more preferences over the Common Shares and 500 shares of
preference stock is currently outstanding.
26. TERM OF PLAN. The Plan became effective on February 15,
1996 and shall continue in effect for a term of 20 years unless sooner
terminated under Section 20.
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As Amended Through
September 10, 1997
GST TELECOMMUNICATIONS, INC.
SENIOR EXECUTIVE OFFICER STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
This Senior Executive Officer Stock Option Plan (the "Plan") is
intended as an incentive, to retain in the employ of GST TELECOMMUNICATIONS,
INC., a federally chartered Canadian corporation with its principal office at
4317 N.E. Thurston Way, Vancouver, Washington 98662 (the "Company") and any
Subsidiary of the Company, within the meaning of Section 424(f) of the United
States Internal Revenue Code of 1986, as amended (the "Code"), as senior
executive officers, persons of training, experience and ability, to attract new
senior executive officers whose services are considered valuable, to encourage
the sense of proprietorship and to stimulate the active interest of such persons
in the development and financial success of the Company and its Subsidiaries.
It is further intended that certain options granted pursuant to the
Plan shall constitute incentive stock options within the meaning of Section 422
of the Code (the "Incentive Options"), while certain other options granted
pursuant to the Plan shall be nonqualified stock options (the "Nonqualified
Options"). Incentive Options and Nonqualified Options are hereinafter referred
to collectively as "Options."
The Company intends that the Plan meet the requirements of Rule
16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company pursuant to the Plan will be exempt from the operation of Section
16(b) of the Exchange Act. In all cases, the terms, provisions, conditions and
limitations of the Plan shall be construed and interpreted consistent with the
Company's intent as stated in this Section 1.
2. ADMINISTRATION OF THE PLAN.
The Board of Directors of the Company (the "Board") shall appoint
and maintain as administrator of the Plan a Committee (the "Committee")
consisting of two or more Non-Employee Directors (as such term is defined in
Rule 16b-3), which shall serve at the pleasure of the Board. The Committee,
subject to Sections 3 and 5 hereof, shall have full power and authority to
designate recipients
<PAGE>
of Options, to determine the terms and conditions of respective Option
agreements (which need not be identical) and to interpret the provisions and
supervise the administration of the Plan. The Committee shall have the
authority, without limitation, to designate which Options granted under the Plan
shall be Incentive Options and which shall be Nonqualified Options. To the
extent any Option does not qualify as an Incentive Option, it shall constitute a
separate Nonqualified Option.
Subject to the provisions of the Plan, the Committee shall interpret
the Plan and all Options granted under the Plan, shall make such rules as it
deems necessary for the proper administration of the Plan, shall make all other
determinations necessary or advisable for the administration of the Plan and
shall correct any defects or supply any omission or reconcile any inconsistency
in the Plan or in any Options granted under the Plan in the manner and to the
extent that the Committee deems desirable to carry into effect the Plan or any
Options. The act or determination of a majority of the Committee shall be the
act or determination of the Committee and any decision reduced to writing and
signed by all of the members of the Committee shall be fully effective as if it
had been made by a majority at a meeting duly held. Subject to the provisions of
the Plan, any action taken or determination made by the Committee pursuant to
this and the other Sections of the Plan shall be conclusive on all parties.
In the event that for any reason the Committee is unable to act or
if the Committee at the time of any grant, award or other acquisition under the
Plan of Options or Stock does not consist of two or more Non-Employee Directors,
then any such grant, award or other acquisition may be approved or ratified in
any other manner contemplated by subparagraph (d) of Rule 16b-3.
3. DESIGNATION OF OPTIONEES.
The persons eligible for participation in the Plan as recipients of
Options (the "Optionees") shall comprise senior executive officers of the
Company or any Subsidiary; provided that Incentive Options may only be granted
to senior executive officers who are employees of the Company and the
Subsidiaries. In selecting Optionees, and in determining the number of shares to
be covered by each Option granted to Optionees, the Committee may consider the
office or position held by the Optionee or the Optionee's relationship to the
Company, the Optionee's degree of responsibility for and contribution to the
growth and success of the Company or any Subsidiary, the Optionee's length of
service, age, promotions, potential and any other factors that the Committee may
consider relevant. An Optionee who has been granted an Option hereunder may be
granted an additional Option or Options, if the Committee shall so determine.
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<PAGE>
4. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Section 7 hereof, a total of
600,000 of the Company's Common Shares (the "Stock") shall be subject to the
Plan. The shares of Stock subject to the Plan shall consist of unissued shares
or previously issued shares held by any Subsidiary of the Company, and such
amount of shares of Stock shall be and is hereby reserved for such purpose. Any
of such shares of Stock that may remain unsold and that are not subject to
outstanding Options at the termination of the Plan shall cease to be reserved
for the purposes of the Plan, but until termination of the Plan the Company
shall at all times reserve a sufficient number of shares of Stock to meet the
requirements of the Plan. Should any Option expire or be cancelled prior to its
exercise in full or should the number of shares of Stock to be delivered upon
the exercise in full of an Option be reduced for any reason, the shares of Stock
theretofore subject to such Option may be subject to future Options under the
Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Options granted under the Plan shall be subject to the following
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The purchase price of each share of
Stock purchasable under an Option shall be determined by the Committee at the
time of grant, but shall not be less than 100% of the Fair Market Value (as
defined below) of such share of Stock on the last trading day prior to the date
the Option is granted; PROVIDED, HOWEVER, that with respect to an Optionee who,
at the time an Incentive Option is granted, owns (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or of any Subsidiary, the purchase price per
share of Stock shall be at least 110% of the Fair Market Value per share of
Stock on the last trading day prior to the date of grant. The exercise price for
each Option shall be subject to adjustment as provided in Section 7 below. Fair
Market Value means the closing price of publicly traded shares of Stock on the
principal United States securities exchange on which shares of Stock are listed
(if the shares of Stock are so listed), or on the NASDAQ Stock Market (if the
shares of Stock are regularly quoted on the NASDAQ Stock Market), or, if not so
listed or regularly quoted, the mean between the closing bid and asked prices of
publicly traded shares of Stock in the over-the-counter market, or, if such bid
and asked prices shall not be available, as reported by any nationally
recognized quotation service selected by the Company, or as determined by the
Committee in a manner consistent with the provisions of the Code. Anything in
this Section 5(a) to the contrary notwithstanding, in no event shall the
purchase price of a share of Stock be less than the
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minimum price permitted under rules and policies of the American Stock Exchange,
the Toronto Stock Exchange or the Vancouver Stock Exchange, so long as the
Common Shares are listed on any such exchange.
(b) OPTION TERM. The term of each Option shall be
fixed by the Committee, but no Option shall be exercisable more than six years
after the date such Option is granted.
(c) EXERCISABILITY. Subject to Section 5(j) hereof,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at the time of grant. No
option may be exercised to the extent that such exercise will cause the Company
to issue, upon exercise of options to purchase shares of Stock granted by the
Company without shareholder approval, that number of shares of Stock as equals
or exceeds (i) 5% of the number of outstanding shares of Stock in any 12-month
period, or (ii) 10% of the number of outstanding shares of Stock in any
five-year period.
(d) METHOD OF EXERCISE. Options to the extent then
exercisable may be exercised in whole or in part at any time during the option
period, by giving written notice to the Company specifying the number of shares
of Stock to be purchased, accompanied by payment in full of the purchase price,
in cash, by check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of Stock owned by
the Optionee (based on the Fair Market Value of the Stock on the trading day
before the Option is exercised). An Optionee shall have the right to dividends
and other rights of a stockholder with respect to shares of Stock purchased upon
exercise of an Option after (i) the Optionee has given written notice of
exercise and has paid in full for such shares and (ii) becomes a stockholder of
record with respect thereto.
(e) NON-TRANSFERABILITY OF OPTIONS. Options are not
transferable and may be exercised solely by the Optionee during his lifetime or
after his death by the person or persons entitled thereto under his will or the
laws of descent and distribution. Any attempt to transfer, assign, pledge or
otherwise dispose of, or to subject to execution, attachment or similar process,
any Option contrary to the provisions hereof shall be void and ineffective and
shall give no right to the purported transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined
by the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised, to the extent then exercisable (or on such accelerated
basis as the Committee shall determine at or after grant), by the legal
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<PAGE>
representative of the estate or by the legatee of the
Optionee under the will of the Optionee, for a period of one year after the date
of such death or until the expiration of the stated term of such Option as
provided under the Plan, whichever period is shorter.
(g) TERMINATION BY REASON OF DISABILITY. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of total
and permanent disability, any Option held by such Optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised after 30 days after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 30 day period, any unexercised Option held by such
Optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year after the date of such
death or for the stated term of such Option, whichever period is shorter.
(h) TERMINATION BY REASON OF RETIREMENT. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of Normal
or Early Retirement (as such terms are defined below), any Option held by such
Optionee may thereafter be exercised to the extent it was exercisable at the
time of such Retirement (or on such accelerated basis as the Committee shall
determine at or after grant), but may not be exercised after 30 days after the
date of such termination of employment or service or the expiration of the
stated term of such Option, whichever period is shorter; provided, however,
that, if the Optionee dies within such 30 day period, any unexercised Option
held by such Optionee shall thereafter be exercisable, to the extent to which it
was exercisable at the time of death, for a period of one year after the date of
such death or for the stated term of such Option, whichever period is shorter.
For purposes of this paragraph (h), Normal Retirement shall
mean retirement from active employment with the Company or any Subsidiary on or
after the normal retirement date specified in the applicable Company or
Subsidiary pension plan or if no such pension plan, age 65. Early Retirement
shall mean retirement from active employment with the Company or any Subsidiary
pursuant to the early retirement provisions of the applicable Company or
Subsidiary pension plan or if no such pension plan, age 55.
(i) OTHER TERMINATION. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates for any reason
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<PAGE>
other than death, Disability or Normal or Early Retirement, the Option shall
thereupon terminate, except that the portion of any Option that was exercisable
on the date of such termination of employment may be exercised for the lesser of
30 days after the date of termination or the balance of such Option's term if
the Optionee's employment or service with the Company or any Subsidiary is
terminated by the Company or such Subsidiary without cause (the determination as
to whether termination was for cause to be made by the Committee). The transfer
of an Optionee from the employ of the Company to a Subsidiary, or vice versa, or
from one Subsidiary to another, shall not be deemed to constitute a termination
of employment for purposes of the Plan.
(j) LIMIT ON VALUE OF INCENTIVE OPTIONS. The
aggregate Fair Market Value, determined as of the date the Incentive Option is
granted, of Stock for which Incentive Options are exercisable for the first time
by any Optionee during any calendar year under the Plan (and/or any other stock
option plans of the Company or any Subsidiary) shall not exceed $100,000.
(k) TRANSFER OF INCENTIVE OPTION SHARES. The stock
option agreement evidencing any Incentive Options granted under this Plan shall
provide that if the Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any share or
shares of Stock issued to him upon exercise of an Incentive Option granted under
the Plan within the two-year period commencing on the day after the date of the
grant of such Incentive Option or within a one-year period commencing on the day
after the date of transfer of the share or shares to him pursuant to the
exercise of such Incentive Option, he shall, within 10 days after such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of United States federal income tax withholding required by law.
(l) LIMITATION ON OPTIONS HELD BY ONE PERSON. The
aggregate number of shares of Stock subject to options held by any one person
shall not exceed that number of shares as equals 5% of the outstanding shares of
the Company.
6. TERM OF PLAN.
No Option shall be granted pursuant to the Plan on or after May 21,
2006, but Options theretofore granted may extend beyond that date.
7. CAPITAL CHANGE OF THE COMPANY.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the Plan
and in the number and
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option price of shares subject to outstanding Options granted under the Plan, to
the end that after such event each Optionee's proportionate interest shall be
maintained as immediately before the occurrence of such event.
8. PURCHASE FOR INVESTMENT.
Unless the Options and shares covered by the Plan have been
registered under the United States Securities Act of 1933, as amended (the
"Securities Act"), or the Company has determined that such registration is
unnecessary, each person exercising an Option under the Plan may be required by
the Company to give a representation in writing that he is acquiring the shares
for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof.
9. TAXES.
The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options granted under the
Plan with respect to the withholding of any United States or Canadian taxes or
any other tax matters.
10. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on May 22, 1996.
11. AMENDMENT AND TERMINATION.
The Board may amend, suspend, or terminate the Plan, except that no
amendment shall be made that would impair the rights of any Optionee under any
Option theretofore granted without his consent, and except that no amendment
shall be made which, without the approval of the shareholders of the Company
would:
(a) materially increase the number of shares that may
be issued under the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to the
Optionees under the Plan;
(c) materially modify the requirements as to
eligibility for participation in the Plan;
(d) decrease the exercise price of an Incentive
Option to less than 100% of the Fair Market Value per share of Stock on
the last trading day prior to the date of grant thereof; or
(e) extend the term of any Option beyond that
provided for in Section 5(b).
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<PAGE>
The Committee may amend the terms of any Option theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Optionee without his consent. The Committee may also substitute
new Options for previously granted Options, including options granted under
other plans applicable to the participant and previously granted Options having
higher option prices, upon such terms as the Committee may deem appropriate.
12. GOVERNMENT REGULATIONS.
The Plan, and the grant and exercise of Options hereunder, and the
obligation of the Company to sell and deliver shares under such Options, shall
be subject to all applicable laws, rules and regulations, and to such approvals
by any governmental agencies or national securities exchanges (including the
American Stock Exchange, the Toronto Stock Exchange or the Vancouver Stock
Exchange, so long as the Common Shares are listed on any such exchange) as may
be required.
13. GENERAL PROVISIONS.
(a) CERTIFICATES. All certificates for shares of
Stock delivered under the Plan shall be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission, or
other securities commission having jurisdiction, any applicable Federal,
provincial or state securities law, any stock exchange upon which the Stock is
then listed and the Committee may cause a legend or legends to be placed on any
such certificates to make appropriate reference to such restrictions.
(b) EMPLOYMENT MATTERS. The adoption of the Plan
shall not confer upon any Optionee of the Company or any Subsidiary, any right
to continued employment or, in the case of an Optionee who is a director,
continued service as a director, with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or any
Subsidiary to terminate the employment of any of its employees, the service of
any of its directors or the retention of any of its consultants or advisors at
any time.
(c) LIMITATION OF LIABILITY. No member of the Board
or the Committee, or any officer or employee of the Company acting on behalf of
the Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board or the Committee and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted by
law, be fully indemnified and protected by the Company in respect of any such
action, determination or interpretation.
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<PAGE>
(d) REGISTRATION OF STOCK. Notwithstanding any other
provision in the Plan, no Option may be exercised unless and until the Stock to
be issued upon the exercise thereof has been registered under the Securities Act
and applicable state securities laws, or are, in the opinion of counsel to the
Company, exempt from such registration in the United States or exempt from the
prospectus and registration requirements under applicable provincial
legislation. The Company shall not be under any obligation to register under
applicable federal or state securities laws any Stock to be issued upon the
exercise of an Option granted hereunder, or to comply with an appropriate
exemption from registration under such laws or the laws of any province in order
to permit the exercise of an Option and the issuance and sale of the Stock
subject to such Option however, the Company may in its sole discretion register
such Stock at such time as the Company shall determine. If the Company chooses
to comply with such an exemption from registration, the Stock issued under the
Plan may, at the direction of the Committee, bear an appropriate restrictive
legend restricting the transfer or pledge of the Stock represented thereby, and
the Committee may also give appropriate stop transfer instructions to the
Company's transfer agents.
GST TELECOMMUNICATIONS, INC.
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As Amended Through
September 10, 1997
GST TELECOMMUNICATIONS, INC.
SENIOR OPERATING OFFICER STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
This Senior Operating Officer Stock Option Plan (the "Plan") is
intended as an incentive, to retain in the employ of GST TELECOMMUNICATIONS,
INC., a federally chartered Canadian corporation with its principal office at
4317 N.E. Thurston Way, Vancouver, Washington 98662 (the "Company") and any
Subsidiary of the Company, within the meaning of Section 424(f) of the United
States Internal Revenue Code of 1986, as amended (the "Code"), as senior
operating officers, operating officers, senior executive officers, other
officers, employees and directors, persons of training, experience and ability,
to attract new senior operating officers, operating officers, senior executive
officers, other officers, employees and directors whose services are considered
valuable, to encourage the sense of proprietorship and to stimulate the active
interest of such persons in the development and financial success of the Company
and its Subsidiaries.
It is further intended that certain options granted pursuant to the
Plan shall constitute incentive stock options within the meaning of Section 422
of the Code (the "Incentive Options"), while certain other options granted
pursuant to the Plan shall be nonqualified stock options (the "Nonqualified
Options"). Incentive Options and Nonqualified Options are hereinafter referred
to collectively as "Options."
The Company intends that the Plan meet the requirements of Rule
16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company pursuant to the Plan will be exempt from the operation of Section
16(b) of the Exchange Act. In all cases, the terms, provisions, conditions and
limitations of the Plan shall be construed and interpreted consistent with the
Company's intent as stated in this Section 1.
<PAGE>
2. ADMINISTRATION OF THE PLAN.
The Board of Directors of the Company (the "Board") shall appoint
and maintain as administrator of the Plan a Committee (the "Committee")
consisting of two or more Non-Employee Directors (as such term is defined in
Rule 16b-3), which shall serve at the pleasure of the Board. The Committee,
subject to Sections 3 and 5 hereof, shall have full power and authority to
designate recipients of Options, to determine the terms and conditions of
respective Option agreements (which need not be identical) and to interpret the
provisions and supervise the administration of the Plan. The Committee shall
have the authority, without limitation, to designate which Options granted under
the Plan shall be Incentive Options and which shall be Nonqualified Options. To
the extent any Option does not qualify as an Incentive Option, it shall
constitute a separate Nonqualified Option.
Subject to the provisions of the Plan, the Committee shall interpret
the Plan and all Options granted under the Plan, shall make such rules as it
deems necessary for the proper administration of the Plan, shall make all other
determinations necessary or advisable for the administration of the Plan and
shall correct any defects or supply any omission or reconcile any inconsistency
in the Plan or in any Options granted under the Plan in the manner and to the
extent that the Committee deems desirable to carry into effect the Plan or any
Options. The act or determination of a majority of the Committee shall be the
act or determination of the Committee and any decision reduced to writing and
signed by all of the members of the Committee shall be fully effective as if it
had been made by a majority at a meeting duly held. Subject to the provisions of
the Plan, any action taken or determination made by the Committee pursuant to
this and the other Sections of the Plan shall be conclusive on all parties.
In the event that for any reason the Committee is unable to act or
if the Committee at the time of any grant, award or other acquisition under the
Plan of Options or Stock does not consist of two or more Non-Employee Directors,
then any such grant, award or other acquisition may be approved or ratified in
any other manner contemplated by subparagraph (d) of Rule 16b-3.
3. DESIGNATION OF OPTIONEES.
The persons eligible for participation in the Plan as recipients of
Options (the "Optionees") shall comprise senior operating officers, operating
officers, senior executive officers, other officers, employees and directors of
the Company or any Subsidiary; provided that Incentive Options may only be
granted to senior operating officers, operating officers, senior executive
officers, other officers, employees and directors who are employees of the
Company and the Subsidiaries. In selecting Optionees, and in determining the
number of shares to be covered by each Option
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<PAGE>
granted to Optionees, the Committee may consider the office or position held by
the Optionee or the Optionee's relationship to the Company, the Optionee's
degree of responsibility for and contribution to the growth and success of the
Company or any Subsidiary, the Optionee's length of service, age, promotions,
potential and any other factors that the Committee may consider relevant. An
Optionee who has been granted an Option hereunder may be granted an additional
Option or Options, if the Committee shall so determine.
4. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Section 7 hereof, a total of
900,000 of the Company's Common Shares (the "Stock") shall be subject to the
Plan. The shares of Stock subject to the Plan shall consist of unissued shares
or previously issued shares held by any Subsidiary of the Company, and such
amount of shares of Stock shall be and is hereby reserved for such purpose. Any
of such shares of Stock that may remain unsold and that are not subject to
outstanding Options at the termination of the Plan shall cease to be reserved
for the purposes of the Plan, but until termination of the Plan the Company
shall at all times reserve a sufficient number of shares of Stock to meet the
requirements of the Plan. Should any Option expire or be cancelled prior to its
exercise in full or should the number of shares of Stock to be delivered upon
the exercise in full of an Option be reduced for any reason, the shares of Stock
theretofore subject to such Option may be subject to future Options under the
Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Options granted under the Plan shall be subject to the following
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The purchase price of each share of
Stock purchasable under an Option shall be determined by the Committee at the
time of grant, but shall not be less than 100% of the Fair Market Value (as
defined below) of such share of Stock on the last trading day prior to the date
the Option is granted; PROVIDED, HOWEVER, that with respect to an Optionee who,
at the time an Incentive Option is granted, owns (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company or of any Subsidiary, the purchase price per
share of Stock shall be at least 110% of the Fair Market Value per share of
Stock on the last trading day prior to the date of grant. The exercise price for
each Option shall be subject to adjustment as provided in Section 7 below. Fair
Market Value means the closing price of publicly traded shares of Stock on the
principal United States securities exchange on which shares of Stock are listed
(if the shares of Stock are so listed), or on the NASDAQ Stock Market (if the
shares of
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<PAGE>
Stock are regularly quoted on the NASDAQ Stock Market), or, if not so listed or
regularly quoted, the mean between the closing bid and asked prices of publicly
traded shares of Stock in the over-the-counter market, or, if such bid and asked
prices shall not be available, as reported by any nationally recognized
quotation service selected by the Company, or as determined by the Committee in
a manner consistent with the provisions of the Code. Anything in this Section
5(a) to the contrary notwithstanding, in no event shall the purchase price of a
share of Stock be less than the minimum price permitted under rules and policies
of the American Stock Exchange, the Toronto Stock Exchange or the Vancouver
Stock Exchange, so long as the Common Shares are listed on any such exchange.
(b) OPTION TERM. The term of each Option shall be
fixed by the Committee, but no Option shall be exercisable more than six years
after the date such Option is granted.
(c) EXERCISABILITY. Subject to Section 5(j) hereof,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at the time of grant. No
option may be exercised to the extent that such exercise will cause the Company
to issue, upon exercise of options to purchase shares of Stock granted by the
Company without shareholder approval, that number of shares of Stock as equals
or exceeds (i) 5% of the number of outstanding shares of Stock in any 12-month
period, or (ii) 10% of the number of outstanding shares of Stock in any
five-year period.
(d) METHOD OF EXERCISE. Options to the extent then
exercisable may be exercised in whole or in part at any time during the option
period, by giving written notice to the Company specifying the number of shares
of Stock to be purchased, accompanied by payment in full of the purchase price,
in cash, by check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of Stock owned by
the Optionee (based on the Fair Market Value of the Stock on the trading day
before the Option is exercised). An Optionee shall have the right to dividends
and other rights of a stockholder with respect to shares of Stock purchased upon
exercise of an Option after (i) the Optionee has given written notice of
exercise and has paid in full for such shares and (ii) becomes a stockholder of
record with respect thereto.
(e) NON-TRANSFERABILITY OF OPTIONS. Options are not
transferable and may be exercised solely by the Optionee during his lifetime or
after his death by the person or persons entitled thereto under his will or the
laws of descent and distribution. Any attempt to transfer, assign, pledge or
otherwise dispose of, or
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<PAGE>
to subject to execution, attachment or similar process, any Option contrary to
the provisions hereof shall be void and ineffective and shall give no right to
the purported transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined
by the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised, to the extent then exercisable (or on such accelerated
basis as the Committee shall determine at or after grant), by the legal
representative of the estate or by the legatee of the Optionee under the will of
the Optionee, for a period of one year after the date of such death or until the
expiration of the stated term of such Option as provided under the Plan,
whichever period is shorter.
(g) TERMINATION BY REASON OF DISABILITY. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of total
and permanent disability, any Option held by such Optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised after 30 days after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 30 day period, any unexercised Option held by such
Optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year after the date of such
death or for the stated term of such Option, whichever period is shorter.
(h) TERMINATION BY REASON OF RETIREMENT. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of Normal
or Early Retirement (as such terms are defined below), any Option held by such
Optionee may thereafter be exercised to the extent it was exercisable at the
time of such Retirement (or on such accelerated basis as the Committee shall
determine at or after grant), but may not be exercised after 30 days after the
date of such termination of employment or service or the expiration of the
stated term of such Option, whichever period is shorter; provided, however,
that, if the Optionee dies within such 30 day period, any unexercised Option
held by such Optionee shall thereafter be exercisable, to the extent to which it
was exercisable at the time of death, for a period of one year after the date of
such death or for the stated term of such Option, whichever period is shorter.
For purposes of this paragraph (h), Normal Retirement shall
mean retirement from active employment with the Company or
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<PAGE>
any Subsidiary on or after the normal retirement date specified in the
applicable Company or Subsidiary pension plan or if no such pension plan, age
65. Early Retirement shall mean retirement from active employment with the
Company or any Subsidiary pursuant to the early retirement provisions of the
applicable Company or Subsidiary pension plan or if no such pension plan, age
55.
(i) OTHER TERMINATION. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates for any reason other than death, Disability
or Normal or Early Retirement, the Option shall thereupon terminate, except that
the portion of any Option that was exercisable on the date of such termination
of employment may be exercised for the lesser of 30 days after the date of
termination or the balance of such Option's term if the Optionee's employment or
service with the Company or any Subsidiary is terminated by the Company or such
Subsidiary without cause (the determination as to whether termination was for
cause to be made by the Committee). The transfer of an Optionee from the employ
of the Company to a Subsidiary, or vice versa, or from one Subsidiary to
another, shall not be deemed to constitute a termination of employment for
purposes of the Plan.
(j) LIMIT ON VALUE OF INCENTIVE OPTIONS. The
aggregate Fair Market Value, determined as of the date the Incentive Option is
granted, of Stock for which Incentive Options are exercisable for the first time
by any Optionee during any calendar year under the Plan (and/or any other stock
option plans of the Company or any Subsidiary) shall not exceed $100,000.
(k) TRANSFER OF INCENTIVE OPTION SHARES. The stock
option agreement evidencing any Incentive Options granted under this Plan shall
provide that if the Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any share or
shares of Stock issued to him upon exercise of an Incentive Option granted under
the Plan within the two-year period commencing on the day after the date of the
grant of such Incentive Option or within a one-year period commencing on the day
after the date of transfer of the share or shares to him pursuant to the
exercise of such Incentive Option, he shall, within 10 days after such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of United States federal income tax withholding required by law.
(l) LIMITATION ON OPTIONS HELD BY ONE PERSON. The
aggregate number of shares of Stock subject to options held by any one person
shall not exceed that number of shares as equals 5% of the outstanding shares of
the Company.
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6. TERM OF PLAN.
No Option shall be granted pursuant to the Plan on or after May 21,
2006, but Options theretofore granted may extend beyond that date.
7. CAPITAL CHANGE OF THE COMPANY.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the Plan
and in the number and option price of shares subject to outstanding Options
granted under the Plan, to the end that after such event each Optionee's
proportionate interest shall be maintained as immediately before the occurrence
of such event.
8. PURCHASE FOR INVESTMENT.
Unless the Options and shares covered by the Plan have been
registered under the United States Securities Act of 1933, as amended (the
"Securities Act"), or the Company has determined that such registration is
unnecessary, each person exercising an Option under the Plan may be required by
the Company to give a representation in writing that he is acquiring the shares
for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof.
9. TAXES.
The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options granted under the
Plan with respect to the withholding of any United States or Canadian taxes or
any other tax matters.
10. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on May 22, 1996.
11. AMENDMENT AND TERMINATION.
The Board may amend, suspend, or terminate the Plan, except that no
amendment shall be made that would impair the rights of any Optionee under any
Option theretofore granted without his consent, and except that no amendment
shall be made which, without the approval of the shareholders of the Company
would:
(a) materially increase the number of shares that may
be issued under the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to the
Optionees under the Plan;
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(c) materially modify the requirements as to
eligibility for participation in the Plan;
(d) decrease the exercise price of an Incentive
Option to less than 100% of the Fair Market Value per share of Stock on
the last trading day prior to the date of grant thereof; or
(e) extend the term of any Option beyond that
provided for in Section 5(b).
The Committee may amend the terms of any Option theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Optionee without his consent. The Committee may also substitute
new Options for previously granted Options, including options granted under
other plans applicable to the participant and previously granted Options having
higher option prices, upon such terms as the Committee may deem appropriate.
12. GOVERNMENT REGULATIONS.
The Plan, and the grant and exercise of Options hereunder, and the
obligation of the Company to sell and deliver shares under such Options, shall
be subject to all applicable laws, rules and regulations, and to such approvals
by any governmental agencies or national securities exchanges (including the
American Stock Exchange, the Toronto Stock Exchange or the Vancouver Stock
Exchange, so long as the Common Shares are listed on any such exchange) as may
be required.
13. GENERAL PROVISIONS.
(a) CERTIFICATES. All certificates for shares of Stock
delivered under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations
and other requirements of the Securities and Exchange Commission, or other
securities commission having jurisdiction, any applicable Federal, provincial or
state securities law, any stock exchange upon which the Stock is then listed and
the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(b) EMPLOYMENT MATTERS. The adoption of the Plan shall not
confer upon any Optionee of the Company or any Subsidiary, any right to
continued employment or, in the case of an Optionee who is a director, continued
service as a director, with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or any Subsidiary to
terminate the employment of any of its employees, the
-8-
<PAGE>
service of any of its directors or the retention of any of its consultants or
advisors at any time.
(c) LIMITATION OF LIABILITY. No member of the Board or the
Committee, or any officer or employee of the Company acting on behalf of the
Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board or the Committee and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted by
law, be fully indemnified and protected by the Company in respect of any such
action, determination or interpretation.
(d) REGISTRATION OF STOCK. Notwithstanding any other provision
in the Plan, no Option may be exercised unless and until the Stock to be issued
upon the exercise thereof has been registered under the Securities Act and
applicable state securities laws, or are, in the opinion of counsel to the
Company, exempt from such registration in the United States or exempt from the
prospectus and registration requirements under applicable provincial
legislation. The Company shall not be under any obligation to register under
applicable federal or state securities laws any Stock to be issued upon the
exercise of an Option granted hereunder, or to comply with an appropriate
exemption from registration under such laws or the laws of any province in order
to permit the exercise of an Option and the issuance and sale of the Stock
subject to such Option however, the Company may in its sole discretion register
such Stock at such time as the Company shall determine. If the Company chooses
to comply with such an exemption from registration, the Stock issued under the
Plan may, at the direction of the Committee, bear an appropriate restrictive
legend restricting the transfer or pledge of the Stock represented thereby, and
the Committee may also give appropriate stop transfer instructions to the
Company's transfer agents.
GST TELECOMMUNICATIONS, INC.
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GST TELECOMMUNICATIONS,INC.
SIGNIFICANT SUBSIDIARIES AS OF 9/30/97
GST USA, Inc., a Delaware corporation.
GST Telecom Inc., a Delaware corporation.
GST Pacific Lightwave, Inc., a Washington corporation.
Exhibit 23
----------
Independent Auditors' Consent
-----------------------------
The Board of Directors
GST Telecommunications, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
33-94072, 333-07237) on Forms S-8 (Nos. 33-95324, 33-97096 and 333-1538) on
Forms F-3 and (Nos. 333-15699, 333-16141, 333-32137, 333-21729 and 333-19339) on
Forms S-3 of GST Telecommunications, Inc. of our report dated November 26, 1997
relating to the consolidated balance sheets of GST Telecommunications, Inc. as
of September 30, 1997 and 1996, and the related consolidated statements of
operations, shareholders' (deficit) equity, and cash flows for each of the years
in the three year period ended September 30, 1997 which report appears in the
September 30, 1997 annual report on Form 10K of GST Telecommunications, Inc.
/s/ KPMG Peat Marwick LLP
------------------------------
KPMG Peat Marwick LLP
Portland, Oregon
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-K for the quarter ended September 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<PERIOD-START> OCT-01-1996
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 55,861,779
<SECURITIES> 89,765,743
<RECEIVABLES> 29,536,337
<ALLOWANCES> (3,581,623)
<INVENTORY> 3,458,373
<CURRENT-ASSETS> 187,369,014
<PP&E> 385,251,661
<DEPRECIATION> 20,737,789
<TOTAL-ASSETS> 728,404,762
<CURRENT-LIABILITIES> 75,100,985
<BONDS> 493,690,260
<COMMON> 145,475,071
51,756,138
0
<OTHER-SE> 4,404,546
<TOTAL-LIABILITY-AND-EQUITY> 728,404,762
<SALES> 105,966,502
<TOTAL-REVENUES> 105,966,502
<CGS> 74,240,026
<TOTAL-COSTS> 192,509,710
<OTHER-EXPENSES> (11,771,659)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,664,518
<INCOME-PRETAX> (112,436,067)
<INCOME-TAX> 902,392
<INCOME-CONTINUING> (113,338,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,338,459)
<EPS-PRIMARY> (4.59)
<EPS-DILUTED> (4.59)
</TABLE>
