<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997
REGISTRATION NO. 333-38301
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
GST TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CANADA
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
NOT APPLICABLE
(I.R.S. EMPLOYER IDENTIFICATION NO.)
GST TELECOMMUNICATIONS, INC.
4317 N.E. THURSTON WAY
VANCOUVER, WASHINGTON 98662
(360) 254-4700 (TELEPHONE)
(360) 260-2075 (TELECOPIER)
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DANIEL L. TRAMPUSH
GST TELECOMMUNICATIONS, INC.
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
4317 N.E. THURSTON WAY
VANCOUVER, WASHINGTON 98662
(360) 254-4700 (TELEPHONE)
(360) 260-2075 (TELECOPIER)
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE FOR REGISTRANT)
------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
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STEPHEN IRWIN, ESQ. JERRY V. ELLIOTT, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP SHEARMAN & STERLING
505 PARK AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 753-7200 (TELEPHONE) (212) 848-4000 (TELEPHONE)
(212) 755-1467 (TELECOPIER) (212) 848-7179 (TELECOPIER)
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold, nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation, or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
PROSPECTUS (Subject to Completion)
Issued November 10, 1997
[GST TELECOMMUNICATIONS LOGO]
$200,000,000
GST Telecommunications, Inc.
% SENIOR SUBORDINATED ACCRUAL NOTES DUE 2007
------------------------
GST TELECOMMUNICATIONS, INC. IS OFFERING $200.0 MILLION PRINCIPAL AMOUNT OF
% SENIOR SUBORDINATED ACCRUAL NOTES DUE 2007. EACH NOTE WILL BEAR INTEREST
AT A RATE OF % PER ANNUM, HOWEVER NO INTEREST WILL BE PAID ON THE NOTES PRIOR
TO , 2003. UNTIL , 2002, INTEREST WILL ACCRUE AND BE COMPOUNDED
SEMI-ANNUALLY ON EACH AND , COMMENCING , 1998,
BUT WILL NOT BE PAYABLE IN CASH. FROM AND AFTER , 2002, INTEREST ON THE
PRINCIPAL AMOUNT AND THE FINAL ACCUMULATED INTEREST AMOUNT OF EACH NOTE WILL BE
PAYABLE SEMI-ANNUALLY.
THE NOTES ARE REDEEMABLE AT THE OPTION OF THE COMPANY, IN WHOLE OR IN PART, AT
ANY TIME ON OR AFTER , 2002, AT THE REDEMPTION PRICES SET FORTH HEREIN.
IN ADDITION, AT ANY TIME PRIOR TO , 2000, UP TO % OF THE
AGGREGATE PRINCIPAL AMOUNT OF THE NOTES MAY BE REDEEMED BY THE COMPANY FROM THE
PROCEEDS OF ONE OR MORE SALES OF ITS CAPITAL STOCK (OTHER THAN REDEEMABLE
STOCK), AT % OF THE SUM OF THEIR PRINCIPAL AMOUNT PLUS THE ACCUMULATED
INTEREST AMOUNT ON THE REDEMPTION DATE; PROVIDED THAT AFTER ANY SUCH REDEMPTION
AT LEAST $ MILLION AGGREGATE PRINCIPAL AMOUNT OF NOTES REMAINS
OUTSTANDING.
CONCURRENT WITH THE DEBT OFFERING, THE COMPANY WILL MAKE A PUBLIC OFFERING OF
7,000,000 OF ITS COMMON SHARES. THE CLOSING OF THE DEBT OFFERING IS CONDITIONED
UPON THE CLOSING OF THE STOCK OFFERING, BUT THE CLOSING OF THE STOCK OFFERING IS
NOT CONDITIONED UPON THE CLOSING OF THE DEBT OFFERING.
THE NOTES WILL BE UNSECURED OBLIGATIONS OF THE COMPANY. THE NOTES WILL BE
SUBORDINATED TO THE EXISTING AND FUTURE SENIOR INDEBTEDNESS OF THE COMPANY AND
EFFECTIVELY SUBORDINATED TO ALL LIABILITIES OF THE COMPANY'S SUBSIDIARIES. AT
JUNE 30, 1997, ON A PRO FORMA BASIS AFTER GIVING EFFECT TO THE DEBT OFFERING AND
THE APPLICATION OF THE NET PROCEEDS THEREFROM, THE COMPANY (EXCLUDING ITS
SUBSIDIARIES) WOULD HAVE HAD APPROXIMATELY $227.1 MILLION OF INDEBTEDNESS
OUTSTANDING, OF WHICH $24.6 MILLION WOULD HAVE BEEN SENIOR INDEBTEDNESS, AND THE
COMPANY'S SUBSIDIARIES WOULD HAVE HAD APPROXIMATELY $596.2 MILLION OF
LIABILITIES, INCLUDING $560.0 MILLION OF INDEBTEDNESS.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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Per Note.............. % % %
Total................. $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from , 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriters."
(3) Before deducting expenses payable by the Company estimated at $550,000.
------------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Notes will be made on or about , 1997 at the offices of Morgan Stanley
& Co. Incorporated, New York, N.Y., against payment therefor in immediately
available funds.
------------------------
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
, 1997
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[Map of Western United States]
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES OFFERED HEREBY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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Enforceability of Civil Liabilities Against Foreign Persons........................... 4
Available Information................................................................. 4
Incorporation of Certain Documents by Reference....................................... 4
Prospectus Summary.................................................................... 5
Risk Factors.......................................................................... 12
Use of Proceeds....................................................................... 25
Capitalization........................................................................ 26
Selected Consolidated Financial Data.................................................. 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 29
Business.............................................................................. 38
Management............................................................................ 55
Certain Transactions.................................................................. 64
Principal Shareholders................................................................ 66
Description of the Notes.............................................................. 67
Description of Certain Indebtedness and Redeemable Preferred Shares................... 95
Certain United States Federal Income Tax Considerations............................... 101
Certain Canadian Tax Considerations................................................... 105
Underwriters.......................................................................... 108
Legal Matters......................................................................... 108
Experts............................................................................... 109
Index to Financial Statements......................................................... F-1
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITERS."
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ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company is incorporated under the laws of Canada. Certain of its
directors and officers, and certain experts named herein, are residents of
Canada and all or a portion of the assets of such persons are located outside of
the United States. As a result, it may be difficult or impossible for United
States noteholders to effect service within the United States upon those
directors, officers or experts who are not residents of the United States, or to
realize in the United States upon judgments of courts of the United States
predicated upon the civil liability of such persons under the Securities Act of
1933, as amended (the "Securities Act") or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), to the extent such judgments exceed such
person's United States assets. It is uncertain whether Canadian courts would (i)
enforce judgments of United States courts obtained against the Company or such
directors, officers or experts predicated solely upon the civil liability
provisions of United States laws or (ii) impose liability in original actions
against the Company or its directors, officers or experts predicated solely upon
United States securities laws.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (herein, together with all
amendments, exhibits and schedules thereto, referred to as the "Registration
Statement") under the Securities Act with respect to the Notes offered hereby.
In accordance with the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and the schedules and exhibits thereto. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete statement
of its provisions. For further information pertaining to the Company and the
Notes, reference is made to such Registration Statement. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, or at its regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at
Seven World Trade Center, Suite 1300, New York, New York 10048. Any interested
party may obtain copies of all or any portion of the Registration Statement and
the exhibits thereto at prescribed rates from the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
Room 1024, Washington, D.C. 20549. In addition, registration statements and
other filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system are publicly available through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Common Shares are
listed on the American Stock Exchange (the "AMEX") and such reports and other
information may also be inspected at the offices of the AMEX, 86 Trinity Place,
New York, New York 10006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, as amended, and Quarterly Reports on Form 10-Q for the
quarters ended December 31, 1996, March 31, 1997, as amended, and June 30, 1997
and Current Reports on Form 8-K dated September 30, 1997, September 9, 1997, May
31, 1997, February 28, 1997 and October 17, 1996 are incorporated by reference
in this Prospectus and shall be deemed to be a part hereof. All documents
subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15 of
the Exchange Act, prior to the termination of the Debt Offering, are deemed to
be incorporated by reference in this Prospectus and shall be deemed to be a part
hereof from the date of filing of such documents.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents. Written requests for such copies should
be directed to GST Telecommunications, Inc. at 4317 N.E. Thurston Way,
Vancouver, Washington 98662, Attention: Chief Financial Officer. Oral requests
should be directed to such individual (telephone number (360) 254-4700).
4
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PROSPECTUS SUMMARY
The following prospectus summary is qualified in its entirety by the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
(i) the term "Company" means the consolidated business operations of GST
Telecommunications, Inc. ("GST") and its subsidiaries; (ii) the terms "fiscal"
and "fiscal year" refer to the Company's fiscal years, including the fiscal year
ended August 31, 1992 ("Fiscal 1992"), the fiscal year ended August 31, 1993
("Fiscal 1993"), the 13 months ended September 30, 1994 ("Fiscal 1994"), the
fiscal year ended September 30, 1995 ("Fiscal 1995"), the fiscal year ended
September 30, 1996 ("Fiscal 1996"), the fiscal year ended September 30, 1997
("Fiscal 1997") and the fiscal year ending December 31, 1998 ("Fiscal 1998");
(iii) the term "1997 Transition Period" refers to the three-month period ending
December 31, 1997; (iv) the term "year" refers to calendar year; and (v) the
information presented assumes that the U.S. underwriters' over-allotment option
in the Stock Offering (as hereinafter defined) is not exercised. Industry
figures were obtained from reports published by the Federal Communications
Commission (the "FCC"), the U.S. Department of Commerce and other industry
sources, which the Company has not independently verified. Certain information
contained in this summary and elsewhere in this Prospectus, including
information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and information with regard to the Company's plans
and strategy for its business and related financing, include forward-looking
statements. See "Risk Factors" for a discussion of important factors that could
cause actual results to differ materially from the forward-looking statements.
THE COMPANY
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
revenues were $41.3 million for Fiscal 1996 and $74.9 million for the nine
months ended June 30, 1997.
The Company's digital networks currently serve 30 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Texas and Washington. In addition, the
Company has networks under construction which, when completed, will serve 12
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 500 route miles and an additional 1,000 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 five high capacity digital switches, has
installed and is currently testing four 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
5
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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. Fixed or special access 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.
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.
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. 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"), a facilities-based
provider of long distance and local services. 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, 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 the fourth
quarter of 1997. 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 providers. Under these agreements, the Company and such data
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, video
conferencing, multimedia networking, frame relay and high capacity access to the
Internet. The Company has one ATM switch commercially operational in each of
Portland and Seattle.
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
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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 improving operating margins by reducing payments to
other carriers for use of their facilities, as well as to lease longhaul
transport capacity to others.
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.
FINANCING PLAN
In order to continue to fund the expansion of its infrastructure, including
the development and construction of additional networks and longhaul fiber optic
facilities, the expansion of its product and service offerings, and to provide
funding for working capital and general corporate purposes, including funding
operating deficits, the Company will offer (the "Debt Offering") $200.0 million
principal amount of its Senior Subordinated Accrual Notes due 2007 (the "Notes")
hereby and the Company will offer (the "Stock Offering" and together with the
Debt Offering, the "Offerings") 7,000,000 Common Shares in a concurrent
offering. The closing of the Debt Offering is conditioned upon the closing of
the Stock Offering. The closing of the Stock Offering is not conditioned upon
the closing of the Debt Offering. See "Description of the Notes" and
"Description of Certain Indebtedness and Redeemable Preferred Shares."
7
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THE DEBT OFFERING
Securities Offered......... $200,000,000 aggregate principal amount of %
Senior Subordinated Accrual Notes due 2007 (the
"Notes"), issued by the Company.
Maturity................... , 2007.
Yield and Interest......... Interest accrues on the Notes at an annual rate of
%, however there will not be any payment of
interest on the Notes prior to ,
2003. Until , 2002 (the "Final
Interest Accrual Date"), interest will accrue and
be compounded semiannually on each
and (each an "Interest Accrual Date"),
commencing , 1998, but will not be
payable in cash. From and after ,
2002, interest on the sum of the principal amount
of each Note and the accrued and unpaid interest
thereon through the Final Interest Accrual Date
(the "Final Accumulated Interest Amount") will be
payable semiannually on and
of each year, commencing
, 2003.
Optional Redemption........ The Notes are redeemable at the option of the
Company, in whole or in part at any time after
2002, at the redemption prices set
forth herein, plus accrued interest. In addition,
at any time prior to , 2000, up to
% of the aggregate principal amount of the
Notes may be redeemed by the Company from the
proceeds of one or more sales of its Capital Stock
(other than Redeemable Stock), at % of the sum
of their principal amount plus the Accumulated
Interest Amount on the redemption date; provided
that after any such redemption at least $
million aggregate principal amount of Notes remains
outstanding. See "Description of the
Notes -- Optional Redemption."
Additional Amounts......... Any payments in respect of the Notes will be made
without withholding or deduction for Canadian taxes
except as required by law or the interpretation or
administration thereof, in which case the Company
will pay such additional amounts as may be
necessary so that the net amount received by the
holders of the Notes after such withholding or
deduction will not be less than the amount that
would have been received in the absence of such
withholding or deduction. See "Description of the
Notes -- Additional Amounts."
Redemption for Changes in
Canadian Withholding
Taxes.................... In the event that, as a result of certain changes
affecting Canadian withholding taxes, the Company
becomes obligated to pay additional amounts in
accordance with the Indenture, the Notes will be
redeemable, as a whole but not in part, at the
option of the Company at any time at 100% of their
principal amount plus accrued interest. See
"Description of the Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
purchase the Notes at a purchase price equal to
101% of the sum of their principal amount and
Accumulated Interest Amount, plus accrued interest
thereon. See "Description of the
Notes -- Repurchase of Notes upon a Change of
Control."
Ranking.................... The Notes will be unsecured, general obligations of
the Company, subordinated in right of payment to
all existing and future Senior
8
<PAGE> 10
Indebtedness of the Company. The Notes will rank
pari passu in right of payment with any future
senior subordinated indebtedness of the Company and
will be senior in right of payment to all future
subordinated indebtedness of the Company. In
addition, the Notes will be effectively
subordinated to all liabilities of the Company's
subsidiaries, including trade payables. At June 30,
1997, on a pro forma basis after giving effect to
the Debt Offering and the application of the net
proceeds therefrom, the Company (excluding its
subsidiaries) would have had approximately $227.1
million of indebtedness outstanding, of which $24.6
million would have been Senior Indebtedness, and
the Company's subsidiaries would have had
approximately $596.2 million of liabilities
(excluding guarantees of the Company's
indebtedness), including $560.0 million of
indebtedness. See "Risk Factors -- Substantial
Indebtedness," "-- Subordination of Notes to
Secured Indebtedness" and "Description of the
Notes -- Ranking."
Certain Covenants.......... The Indenture will contain certain covenants,
including, but not limited to: (i) limitation on
indebtedness; (ii) limitation on senior
subordinated indebtedness; (iii) limitation on
restricted payments; (iv) limitation on dividend
and other payment restrictions affecting restricted
subsidiaries; (v) limitation on the issuance and
sale of capital stock of restricted subsidiaries;
(vi) limitation on issuances of guarantees by
restricted subsidiaries; (vii) limitation on
transactions with shareholders and affiliates;
(viii) limitation on liens; (ix) limitation on
investments; and (x) limitation on asset sales. See
"Description of the Notes -- Certain Covenants."
Use of Proceeds............ The Company intends to use the net proceeds from
the Offerings to fund capital expenditures for the
continued expansion of its infrastructure,
including the development and construction of
additional networks and longhaul fiber optic
facilities, to broaden the scope of the Company's
service offerings and for working capital and other
general corporate purposes, including funding
operating deficits. See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" beginning on page 12 for a discussion of certain factors
relating to the Company, its business and an investment in the Notes.
9
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical financial statements and notes
thereto included elsewhere in this Prospectus. The summary consolidated
financial data for Fiscal 1994, Fiscal 1995 and Fiscal 1996 presented below were
derived from the audited consolidated financial statements of the Company. The
summary consolidated financial data for the nine months ended June 30, 1996 and
1997 presented below were derived from unaudited financial statements of the
Company, which in the opinion of the management of the Company, reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of results for interim periods. Operating results for interim
periods are not necessarily indicative of results to be expected for the full
fiscal year.
<TABLE>
<CAPTION>
THIRTEEN MONTHS YEAR ENDED NINE MONTHS ENDED
ENDED SEPTEMBER 30, JUNE 30,
SEPTEMBER 30, --------------------- -----------------------------------
1994(1) 1995 1996 1996 1997
--------------- -------- --------- ----------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Telecommunication
services............... $ 112 $ 11,118 $ 31,726 $ 19,452 $ 58,738
Telecommunication
products............... 5,889 7,563 9,573 5,772 16,186
------- -------- --------- --------- ---------
Total revenues......... 6,001 18,681 41,299 25,224 74,924
Operating loss.............. (1,337) (11,631) (42,597) (25,278) (54,683)
Other expenses (income):
Interest income........... (254) (303) (5,549) (4,209) (3,377)
Interest expense(2)....... 27 838 21,224 14,801 21,321
Other, net................ 1,877 1,347 2,360 1,534 (6,549)
Income tax expense.......... 502(3) 166(3) 157 31 843
------- -------- --------- --------- ---------
Net loss(4)................. $(3,491) $(11,315) $ (60,378) $ (37,100) $ (67,312)
======= ======== ========= ========= =========
Net loss per Common Share... $ (.35) $ (.82) $ (3.18) $ (2.00) $ (2.87)
======= ======== ========= ========= =========
Weighted average number of
Common Shares
outstanding............... 9,879 13,781 18,988 18,513 23,460
Ratio of earnings to fixed
charges(5)................ -- -- -- -- --
OTHER DATA:
Capital expenditures........ $ 1,486 $ 33,922 $ 97,561 $ 44,018 $ 168,441
EBITDA(6)................... (779) (8,807) (33,936) (19,620) (39,452)
Pro forma interest
expense(7)................ 71,737 55,035
<CAPTION>
AS OF JUNE 30, 1997
AS ADJUSTED
FOR THE STOCK
AND DEBT
ACTUAL OFFERINGS(8)
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments............................... $ 40,665 $ 334,709
Restricted cash and investments...................................... 209,174 209,174
Property and equipment............................................... 314,986 314,986
Accumulated depreciation............................................. 14,630 14,630
Total assets......................................................... 682,026 983,620
Current portion of long-term debt and capital lease obligations...... 8,340 8,340
Long-term debt and capital lease obligations (excluding current
portion)........................................................... 578,832 778,832
Redeemable Preferred Shares.......................................... 52,968 52,968
Common Shares and commitment to issue shares(9)...................... 137,107 238,701
Accumulated deficit.................................................. (143,645) (143,645)
Shareholders' equity (deficit)....................................... (6,538) 95,056
</TABLE>
(footnotes appear on following page)
10
<PAGE> 12
- ------------
(1) The Company changed its fiscal year end to September 30, effective in 1994.
As a result, amounts reported for Fiscal 1994 are for the 13 months ended
September 30, 1994. Results for Fiscal 1994 include the acquisition of 60%
of GST Telecom Inc. ("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 (i) $.3 million for Fiscal 1995, (ii) $2.3
million for Fiscal 1996, (iii) $1.7 million for the nine months ended June
30, 1996 and (iv) $10.4 million for the nine months ended June 30, 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 Financial Accounting Standards Board
("FASB") Statement No. 34 "Capitalization of Interest Costs."
(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, (iv) $.3 million for the nine months ended June 30, 1996 and
(vi) $(.4) million for the nine months ended June 30, 1997.
(5) The ratio of earnings to fixed charges is computed by dividing pretax income
from continuing operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges and
amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized, and that portion of rental
expense the Company believes to be representative of interest. For Fiscal
1995, Fiscal 1996 and the nine months ended June 30, 1996 and 1997, earnings
were insufficient to cover fixed charges by $13.8 million, $62.9 million,
$39.1 million and $76.5 million, respectively. On a pro forma basis giving
effect to the issuance of (i) $265.0 million principal amount of 13 1/4%
Senior Secured Notes due 2007 (the "1997 Notes") by GST Equipment Funding,
Inc. ("GST Funding"), a wholly owned subsidiary of the Company (the "1997
Notes Offering") and (ii) the Notes offered hereby (assuming an effective
annual interest rate of 11%), the Company's earnings would have been
insufficient to cover fixed charges by $122.4 million and $116.1 million for
Fiscal 1996 and the nine months ended June 30, 1997, respectively.
(6) EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and expense. EBITDA is provided because it is
a measure commonly used in the telecommunications 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 Prospectus.
(7) Pro forma interest expense gives effect to the issuance of the 1997 Notes
and the Notes offered hereby (assuming an effective annual interest rate of
11%), as if such transactions had occurred at the beginning of the periods
presented assuming 15% of the interest on the 1997 Notes and the Notes would
have been capitalized under FASB Statement No. 34 "Capitalization of
Interest Costs." For each .25% change in the interest rate on the Notes, pro
forma interest expense would change by $.5 million and $.4 million for
Fiscal 1996 and the nine months ended June 30, 1997, respectively.
(8) Adjusted to give effect to the receipt by the Company of the net proceeds
from the issuance and sale of (i) 7,000,000 Common Shares in the Stock
Offering (at an assumed public offering price of $15 3/8 per share) and (ii)
$200.0 million principal amount of the Notes offered hereby. See "Use of
Proceeds" and "Capitalization."
(9) At June 30, 1997, the Company was committed to issue: (i) 221,838 Common
Shares to the former shareholders of TotalNet Communications Inc.
("TotalNet") in October 1997 and (ii) a number of Common Shares with a
market value of $1.2 million based on the then market value of the Common
Shares and payable at various times in Fiscal 1997 (29,160 Common Shares
were issued on September 19, 1997) and Fiscal 1998, to the former
shareholders of Tri-Star Residential Communications Corp. ("Tri-Star").
11
<PAGE> 13
RISK FACTORS
An investment in the Notes offered hereby involves a high degree of risk.
The following risk factors, together with the other information set forth in
this Prospectus, should be considered when evaluating such an investment.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE EBITDA
The Company has incurred and expects to continue to incur increasing
operating losses and negative EBITDA while it continues to expand its business
and build its customer base. The Company has incurred significant increases in
expenses associated with these activities and there can be no assurance that an
adequate customer base with respect to any or all of its services will be
achieved or sustained. The Company does not expect to achieve a significant
market share for any of its services. The Company had a net loss of
approximately $60.4 million, an operating loss of approximately $42.6 million
and negative EBITDA of $33.9 million for Fiscal 1996 and a net loss of
approximately $67.3 million, an operating loss of approximately $54.7 million
and negative EBITDA of $39.5 million for the nine months ended June 30, 1997.
There can be no assurance that the Company will achieve or sustain profitability
or generate positive EBITDA. In addition, the Company has announced its
intention to explore alternatives for monetizing its 63% interest in NACT.
Without NACT, the Company would have had a net loss of $60.6 million and
negative EBITDA of $35.0 million for Fiscal 1996 and a net loss of $70.4 million
and negative EBITDA of $44.5 million for the nine months ended June 30, 1997.
EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and expenses. EBITDA is provided because it is a
measure commonly used in the telecommunications industry. It is presented to
enhance an understanding of the Company's operating results and is not intended
to represent cash flow or results operations in accordance with generally
accepted accounting principles for the periods indicated. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
At September 30, 1996, the Company had a U.S. net operating loss
carryforward of approximately $45.0 million and a Canadian net operating loss
carryforward of approximately Cdn. $6.8 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 Internal Revenue Code of 1986, as
amended (the "Code"), and the analogous provision of the Income Tax Act (Canada)
(the "Canada Act").
DEVELOPMENT AND EXPANSION RISK AND POSSIBLE INABILITY TO MANAGE GROWTH
The Company is in the early stages of its operations. Certain of its
networks have only recently become commercially operational and the Company has
only recently begun to deploy switches in its networks. The success of the
Company will depend, among other things, upon the Company's ability to assess
potential markets, design fiber backbone routes that provide ready access to a
substantial customer base, secure financing, obtain required rights-of-way,
building access and governmental permits, implement expanded interconnection and
collocation with facilities owned by ILECs and achieve a sufficient customer
base, and upon subsequent developments in state and federal regulations. There
can be no assurance that any networks to be developed or further developed will
be completed on schedule, at a commercially reasonable cost or within the
Company's specifications. In addition, the expansion of the Company's business
has involved and is expected to continue to involve acquisitions, which could
divert the resources and management time of the Company and require integration
with the Company's existing operations. There can be no assurance that any
acquired business will be successfully integrated into the Company's operations
or that any such business will meet the Company's expectations. The Company's
future performance will depend, in part, upon its ability to manage its growth
effectively, which will require it to continue to implement and improve its
operating, financial and accounting systems, to expand, train and manage its
employee base and to effectively manage the integration of acquired businesses.
These factors and others could adversely affect the expansion of the Company's
customer base and service offerings. The Company's inability either to expand in
accordance with
12
<PAGE> 14
its plans or to manage its growth could have a material adverse effect on its
business, financial condition and results of operations. See "Business."
SIGNIFICANT CAPITAL REQUIREMENTS
The Company estimates that its capital expenditures will be approximately
$286.0 million from October 1, 1997 through December 31, 1998. The Company
believes that the net proceeds of the Offerings, together with cash on hand,
including the remaining proceeds from the 1997 Notes Offering (which, other than
the amount pledged to fund the first six interest payments on the 1997 Notes,
will be used to purchase equipment) and borrowings expected to be available
under a credit facility (the "Tomen Facility") with Tomen America, Inc. and its
affiliates ("Tomen") and equipment financing agreements with Siemens Telecom
Networks ("Siemens") and NTFC Capital Corp. ("NTFC"), will provide sufficient
funds for the Company to expand its business as presently planned and to fund
its operating expenses through December 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 the foregoing sources of funds
prove to be insufficient to fund the Company's growth and operations, or if the
Company consummates acquisitions, the Company may be required to seek additional
capital (or seek additional capital sooner than currently anticipated). Sources
of financing may include public or private debt or equity financing by the
Company or its subsidiaries, sales of assets or other financing arrangements.
There can be no assurance that such additional financing would be available to
the Company or, if available, that it could be obtained on acceptable terms or
within the limitations contained in the 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 and expansion plans and expenditures
and could have a material adverse effect on the Company. Such failure could also
limit the ability of the Company to make principal and interest payments on its
outstanding indebtedness, including the Notes. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
SUBSTANTIAL INDEBTEDNESS
At September 30, 1997, after giving effect to the Offerings, the Company
would have had outstanding on a pro forma basis approximately $832.2 million of
indebtedness. In addition, the accretion of original issue discount will cause a
$122.8 million increase in liabilities by December 15, 2000 relating to the
13 7/8% Senior Discount Notes due 2005 of GST USA (the "Senior Notes") and the
13 7/8% Convertible Senior Subordinated Discount Notes due 2005 of GST (the
"Convertible Notes" and together with the Senior Notes, the "1995 Notes") sold
in December 1995 and a $141.6 million increase in liabilities relating to the
Notes by , 2002. The indentures relating to the 1995 Notes (the "1995
Indentures"), the indenture relating to the 1997 Notes (the "1997 Indenture")
and the indenture relating to the Notes (the "Indenture" and together with the
1995 Indentures and the 1997 Indenture, the "Indentures") limit, but do not
prohibit, the incurrence of additional indebtedness by the Company. At September
30, 1997, the Company had $25.0 million of availability under the Tomen Facility
to finance the development and construction of additional networks, if and to
the extent that proposals for funding projects are approved by Tomen. The
Company expects to incur substantial additional indebtedness in the future. The
Company has entered into an agreement with Siemens (the "Siemens Loan
Agreement") that provides for up to an aggregate of $226.0 million in equipment
financing, of which $116.0 million is presently available to the Company (and of
which $5.8 million had been provided at September 30, 1997). The Company may
seek to increase the amount available up to $226.0 million on an as-needed
basis, subject to the negotiation and execution of mutually satisfactory
documentation. The Company also entered into an agreement with NTFC (the "NTFC
Loan Agreement") for up to $50.0 million of additional equipment financing (of
which $44.6 million had been provided at September 30, 1997). There can be no
assurance that any additional financing will be available to the Company on
acceptable terms or at all. See "Description of Certain Indebtedness and
Redeemable Preferred Shares."
13
<PAGE> 15
The level of the Company's indebtedness could have important consequences
to its future prospects, including the following: (i) limiting the ability of
the Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes; (ii)
requiring that a substantial portion of the Company's cash flow from operations,
if any, be dedicated to the payment of principal of and interest on its
indebtedness and other obligations; (iii) limiting its flexibility in planning
for, or reacting to changes in, its business; (iv) the Company will be more
highly leveraged than some of its competitors, which may place it at a
competitive disadvantage; and (v) increasing its vulnerability in the event of a
downturn in its business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
POSSIBLE INABILITY TO SERVICE DEBT
In connection with the buildout of its networks and expansion of CLEC
services, the Company has been experiencing increasing negative EBITDA. The
Company's earnings before fixed charges were insufficient to cover fixed charges
for the nine months ended June 30, 1997, Fiscal 1996 and Fiscal 1995 by $76.5
million, $62.9 million and $13.8 million, respectively, and the Company's EBITDA
minus capital expenditures and interest expense for the nine months ended June
30, 1997 and Fiscal 1996 was negative $229.2 million and negative $152.7
million, respectively. On a pro forma basis after giving effect to the 1997
Notes Offering and the Offerings, the Company's earnings before fixed charges
would have been insufficient to cover fixed charges for the nine months ended
June 30, 1997 and Fiscal 1996 by $116.1 million and $122.4 million,
respectively, and EBITDA minus capital expenditures and interest expense would
have been $262.9 million and $203.2 million, respectively for such periods. In
addition, in the event the Company had monetized its investment in NACT the
Company's earnings before fixed charges would have been insufficient to cover
fixed charges for the nine months ended June 30, 1997 and Fiscal 1996 by $120.6
million and $122.7 million, respectively and its EBITDA minus capital
expenditures and interest expense would have been $263.5 million and $204.0
million, respectively, for such periods. There can be no assurance that the
Company will be able to improve its earnings before fixed charges or EBITDA or
that it will be able to meet its debt service obligations. As the Company does
not currently have a revolving credit facility, if a shortfall occurs,
alternative financing would be necessary in order for the Company to meet its
liquidity requirements and there can be no assurance that such financing would
be available. In such event, the Company could face substantial liquidity
problems. In addition, the Company anticipates that cash flow from operations
will be insufficient to repay the 1995 Notes, the 1997 Notes and the Notes at
maturity and that such indebtedness will need to be refinanced. There can be no
assurance that the Company will be able to effect such refinancings. The ability
of the Company to meet its obligations and to effect such refinancings will be
dependent upon, among other things, the future performance of the Company, which
will be subject to prevailing economic conditions and to financial, business and
other factors, including factors beyond the control of the Company. Failure by
the Company to meet its obligations could result in a default on its
indebtedness, including the 1995 Notes, the 1997 Notes and the Notes, which
would permit the holders of substantially all of the Company's indebtedness to
accelerate the maturity thereof. In such event, the Company may not be able to
meet its obligations on the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Certain
Indebtedness and Redeemable Preferred Shares."
HOLDING COMPANY STRUCTURE; SECURED INDEBTEDNESS; RANKING OF NOTES
GST is a holding company and does not conduct any operations. The principal
assets of GST consist of the common stock of GST USA, GST Call America, Inc.,
TotalNet and GST Action Telecom, Inc. GST must rely upon payments from its
subsidiaries to generate the funds necessary to meet its obligations, including
the payment of principal of and interest on the Notes. The subsidiaries,
however, are legally distinct from GST and such subsidiaries will have no
obligation, contingent or otherwise, to pay amounts due pursuant to the Notes or
to make funds available for such payment. GST's subsidiaries will not guarantee
the Notes. The ability of GST's subsidiaries to make such payments to GST will
be subject to, among other things, the availability of funds, the terms of such
subsidiaries' indebtedness and applicable state laws. Pursuant to credit
agreements under the Tomen Facility, GST's subsidiaries that own and operate the
Southern California, Tucson, Albuquerque and Hawaii networks may not pay any
dividends or make any distributions on their
14
<PAGE> 16
capital stock. Subsequent network financings under the Tomen Facility are
expected to include similar prohibitions.
Claims of creditors of GST's subsidiaries, including trade creditors, will
generally have priority as to the assets of such subsidiaries over the claims of
the holders of GST's indebtedness, including the Notes. Accordingly, the Notes
will be effectively subordinated to the liabilities (including trade payables)
of the subsidiaries of GST. At June 30, 1997, the subsidiaries of GST had
approximately $596.2 million of liabilities (excluding intercompany payables),
including $560.0 million of indebtedness.
ABILITY TO INCUR ADDITIONAL SECURED INDEBTEDNESS
The Notes will be general unsecured, senior subordinated indebtedness of
GST. At September 30, 1997, the Company had an aggregate of approximately $632.2
million of indebtedness outstanding, including $203.3 million accreted value of
Senior Notes, $265.0 million principal amount of 1997 Notes, $69.1 million of
indebtedness under the Tomen Facility and $25.4 million accreted value of
Convertible Notes. GST's subsidiaries that own the Southern California, Tucson,
Albuquerque and Hawaii networks have granted to Tomen a first priority lien on
all of their respective assets and their stock has been pledged to Tomen.
Subsequent financings under the Tomen Facility are expected to be secured in a
similar manner. In addition, pursuant to the terms of the Tomen Facility, the
cash flow from each network Tomen finances will secure each other Tomen network
financing. GST Funding has granted the holders of the 1997 Notes a first
priority lien on all the equipment it has and will purchase with the proceeds of
the 1997 Notes Offering. The Indentures also permit the Company to incur
additional secured indebtedness. See "Descriptions of the Notes -- Covenants"
and "Description of Certain Indebtedness and Redeemable Preferred Shares."
SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
In the event that a default were to occur with respect to any secured
indebtedness incurred by the Company and the holders thereof were to foreclose
on the collateral, the holders of such indebtedness would be entitled to payment
out of the proceeds of their collateral prior to any holders of general
unsecured indebtedness, including the 1995 Notes and the Notes, notwithstanding
the existence of an event of default with respect to the 1995 Notes, the 1997
Notes or the Notes. In the event of any bankruptcy, liquidation or
reorganization of GST, holders of secured indebtedness would have a claim, prior
to the claim of the holders of the 1995 Notes and the Notes, on the assets of
GST securing such indebtedness. In addition, to the extent that the value of
such collateral is insufficient to satisfy such secured indebtedness, holders of
amounts remaining outstanding on such secured indebtedness would be entitled to
share pari passu with holders of the Senior Notes with respect to any other
assets of the Company and prior to the Convertible Notes and the Notes. Assets
remaining after satisfaction of the claims of holders of secured indebtedness
may not be sufficient to pay amounts due on any or all of the 1995 Notes, the
1997 Notes or the Notes then outstanding.
The Notes are subordinated to all senior indebtedness of GST, including the
1995 Notes. In the event of any bankruptcy, liquidation or reorganization of the
Company, the assets of GST will be available to pay obligations on the Notes,
the 1997 Notes (if, and when they are assumed by GST USA and guaranteed by GST)
and the 1995 Notes only after all senior indebtedness of GST has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on the
Notes. See "Description of the Notes -- Ranking."
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL
CONSEQUENCES FOR HOLDERS OF NOTES AND THE COMPANY
Although there will be no periodic payments in cash of interest on the
Notes prior to , 2003, original issue discount (the
difference between the stated redemption price at maturity and the issue price
of the Notes) will accrue from the issue date of the Notes. Original issue
discount will be includable as interest income periodically (including for
periods ending prior to , 2002) in a U.S. Holder's (as
defined in "Certain United States Federal Income Tax
15
<PAGE> 17
Considerations") gross income for United States federal income tax purposes in
advance of receipt of the cash payments to which the income is attributable.
If a bankruptcy case under the U.S. Bankruptcy Code were to be commenced by
or against GST after the issuance of the Notes, the claim of a holder of Notes
with respect to the principal amount thereof may be limited to an amount equal
to the sum of (i) the initial offering price and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest"
for purposes of the U.S. Bankruptcy Code. Any original issue discount that was
not amortized as of the time of any such bankruptcy filing would constitute
"unmatured interest."
FINANCIAL AND OPERATING RESTRICTIONS IMPOSED BY EXISTING INDEBTEDNESS
The Company's financing arrangements impose significant operating and
financial restrictions on the Company. Such restrictions affect, and in certain
cases significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness or to create liens on its assets, sell
assets, engage in mergers or acquisitions or make investments. Failure to comply
with any such covenant could result in a default thereunder, which could result
in an acceleration of such indebtedness. See "Description of Certain
Indebtedness and Redeemable Preferred Shares."
DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
The Company has begun, and plans to continue, to deploy high capacity
digital switches in the cities in which it operates or plans to operate
networks, as well as in certain cities where the Company will rely on ILEC
facilities for transmission. This will enable the Company to offer a variety of
switched access services, enhanced services and local dial tone. 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 and
to permit the Company to purchase only the origination and termination services
it needs, thereby decreasing operating expenses, there can be no assurance that
such unbundling will be effected in a timely manner and result in prices
favorable to the Company. In addition, the Company's ability to successfully
implement its switched and enhanced services will require the negotiation of
resale agreements with ILECs and other CLECs and the negotiation of
interconnection agreements with ILECs, which can take considerable time, effort
and expense.
In August 1996, the FCC released a decision implementing the
interconnection portions of the Telecommunications Act (the "Interconnection
Decision"). The Interconnection Decision establishes rules for negotiating
interconnection agreements and guidelines for review of such agreements by state
public utilities commissions. On July 18, 1997, the United States Court of
Appeals for the Eighth Circuit (the "Eighth Circuit") vacated certain portions
of the Interconnection Decision, including provisions establishing a pricing
methodology for unbundled elements 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 Eighth Circuit decision creates
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. The Company had negotiated a number of interconnection
agreements with ILECs prior to the Eighth Circuit decision. There can be no
assurance that the Company will be able to obtain additional interconnection
agreements on terms acceptable to the Company. The FCC has announced that it
will seek a writ of certiorari from the Supreme Court to review the Eighth
Circuit decision. See "-- Competition." Many new carriers, including the
Company, have experienced certain difficulties with respect to provisioning,
interconnection and the operational support systems used by new carriers to
order and receive network elements and wholesale services from the ILECs. These
systems are
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necessary for new carriers such as the Company to provide local service to
customers on a timely and competitive basis. The FCC has recently created a task
force to examine problems that have slowed the development of local telephone
competition. In addition, the Telecommunications Act creates incentives for
RBOCs to permit access to their facilities by denying such carriers the ability
to provide long distance services until there is adequate competition at the
local level. Certain of the ILECs in the Company's markets are not yet permitted
to offer long distance services and there can be no assurance that these ILECs
will be accommodating to the Company once they are permitted to offer long
distance service. Should the Company be unable to obtain the cooperation of an
ILEC in a region, whether or not such ILEC has been authorized to offer long
distance service, the Company's ability to offer local services in such region
on a timely and cost-effective basis would be adversely affected.
The Company is a recent entrant into the newly created competitive local
telecommunications services industry. The local dial tone services market in
most states was only recently opened to competition due to the passage of the
Telecommunications Act and related regulatory rulings. There are numerous
operating complexities associated with providing these services. The Company
will be required to develop new products, services and systems and will need to
develop new marketing initiatives to sell these services.
The Company's switched services may not be profitable due to, among other
factors, lack of customer demand, inability to secure access to ILEC facilities
at acceptable rates, competition from other CLECs and pricing pressure from the
ILECs. The Company has very limited experience providing switched access and
local dial tone services and there can be no assurance that the Company will be
able to successfully implement its switched and enhanced services strategy. See
"Business -- Telecommunications Services Strategy."
Implementation of the Company's switched and enhanced services is also
subject to the Company's ability to obtain equipment financing for switches and
upon equipment manufacturers' ability to meet the Company's switch deployment
schedule. There can be no assurance that switches will be deployed on the
schedule contemplated by the Company or that, if deployed, such switches will be
utilized to the degree contemplated by the Company.
RECENT COMMENCEMENT OF INTEGRATED MARKETING EFFORT
The Company has only recently begun an integrated marketing effort of its
telecommunication service offerings. Historically, the Company has marketed its
access services primarily to long distance carriers and significant end-users of
telecommunications services, and its long distance services to small businesses
and consumers. Although the Company expects to market a variety of
telecommunications services to all of its customers, there can be no assurance
that the Company will be able to attract and retain new customers or retain and
sell additional services to existing customers.
DEPENDENCE ON KEY CUSTOMERS
The Company's five largest telecommunications services customers accounted
for approximately 22.0%, 46.9% and 26.8% of the Company's consolidated
telecommunications services revenues for the nine months ended June 30, 1997,
Fiscal 1996 and Fiscal 1995, respectively. It is anticipated that during the
early stages of development of individual networks, before obtaining a
sufficient amount of end-user revenues, the Company will be dependent on a
limited number of long distance carriers for a significant portion of its local
revenues. While long distance carriers have high volume requirements and have
utilized CLECs, they generally are more price sensitive than end-users. The five
largest customers of the Company's manufacturing operations accounted for 28.4%,
13.4% and 16.1% of the Company's consolidated product revenues for the nine
months ended June 30, 1997, Fiscal 1996 and Fiscal 1995 respectively. The loss
of, or decrease of business from, one or more significant customers could have a
material adverse effect on the business, financial condition and results of
operations of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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RISKS RELATING TO LONG DISTANCE BUSINESS
For Fiscal 1996 and the nine months ended June 30, 1997, long distance
represented 56.0% and 60.0% of the Company's consolidated telecommunications
services revenues, respectively. The long distance business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline. In addition, the long distance industry has
historically had 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. See "-- Competition." The Company relies on other
carriers to provide transmission and termination services for a majority of its
long distance traffic. The Company has resale agreements with long distance
carriers to provide it with transmission services. Such agreements typically
provide for the resale of long distance services on a per minute basis with
minimum volume commitments. Negotiation of these agreements involves estimates
of future supply and demand for transmission capacity as well as estimates of
the calling pattern and traffic levels of the Company's future customers. In the
event the Company fails to meet its minimum volume commitments, it may be
obligated to pay underutilization charges and in the event it underestimates its
need for transmission capacity, the Company may be required to obtain capacity
through more expensive means. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced largely in-house
with partial reliance on third-party vendors. These systems have generally met
the Company's needs due in part to the low volume of customer billing. As the
Company transitions to the provisioning of local services and as its long
distance and Internet operations continue to expand, the need for sophisticated
billing and information systems will increase significantly. The Company's plans
for the development and implementation of its billing systems rely, for the most
part, on the delivery of products and services by third party vendors.
Similarly, the Company is developing customer call centers to provision service
orders. Information systems are vital to the success of the call centers, and
the information systems for these call centers are largely being developed by
third party vendors. Failure of these vendors to deliver proposed products and
services in a timely and effective manner and at acceptable costs, failure of
the Company to adequately identify all of its information and processing needs,
failure of the Company's related processing or information systems, or the
failure of the Company to upgrade systems as necessary could have a material
adverse effect on the ability of the Company to reach its objectives, its
financial condition and its results of operations.
COMPETITION
The telecommunications industry is highly competitive. In most markets, the
Company's principal competitor for local exchange services is the Regional Bell
Operating Company ("RBOC") or GTE Corporation and its affiliated companies
(collectively, the "GTE Companies"). Other competitors may include other CLECs,
microwave and satellite carriers, wireless telecommunications providers and
private networks built by large end-users. Potential competitors (using similar
or different technologies) include cable television companies, utilities and
RBOCs outside their current local service areas. In addition, the Company
anticipates future competition from large long distance carriers, such as AT&T
Corp. ("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation
("Sprint"), which have begun to offer integrated local and long distance
telecommunications services. 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 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
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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. See
"-- Difficulties in Implementing Local and Enhanced Services." 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. See "Business -- Regulation." 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 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. See
"-- Risks Relating to Long Distance Business." The Company believes that the
principal competitive factors affecting its long distance operations are
pricing, customer service, accurate billing, clear pricing policies and, to a
lesser extent, variety of services. The ability of the Company to compete
effectively will depend upon its continued ability to maintain high quality,
market driven services at prices generally equal to or below those charged by
its competitors. To maintain its competitive posture, the Company believes that
it must be in a position to reduce its prices in order to meet reductions in
rates, if any, by others. Any such reductions could adversely affect the
Company.
The Internet services market is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company's competitors in this market include Internet
service providers, other telecommunications companies, online services providers
and Internet software providers. Many of these competitors have greater
financial, technological and marketing resources than those available to the
Company.
The market for telecommunications products is highly competitive and
subject to rapid technological change. NACT expects competition to increase in
the future from existing competitors in the distributed
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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. See "Business -- Competition" and
"-- Regulation."
GOVERNMENT REGULATION
The Company's networks and the provision of switched and private line
services are subject to significant regulation at the federal, state and local
levels. Delays in receiving required regulatory approvals or the enactment of
new adverse regulation or regulatory requirements may have a material adverse
effect upon the Company. The FCC exercises jurisdiction over the Company with
respect to interstate and international services. Additionally, the Company
files tariffs with the FCC. On October 29, 1996, the FCC approved an order that
eliminates the tariff filing requirements for interstate domestic long distance
service provided by non-dominant carriers such as the Company. On February 13,
1997, the United States Court of Appeals for the District of Columbia Circuit
stayed the FCC order. In addition, the Company must obtain prior FCC
authorization for installation and operation of international facilities and
international long distance services. State regulatory commissions exercise
jurisdiction over the Company to the extent it provides intrastate services. As
such a provider, the Company is required to obtain regulatory authorization
and/or file tariffs at state agencies in most of the states in which it
operates. Local authorities regulate the Company's access to municipal
rights-of-way. The networks are also subject to numerous local regulations such
as building codes and licensing. Such regulations vary on a city by city and
county by county basis. See "Business -- Regulation." There can be no assurance
that the FCC or state commissions will grant required authority or refrain from
taking action against the Company if it is found to have provided services
without obtaining the necessary authorizations. If authority is not obtained or
if tariffs are not filed, or are not updated, or otherwise do not fully comply
with the tariff filing rules of the FCC or state regulatory agencies, third
parties or regulators could challenge these actions. Such challenges could cause
the Company to incur substantial legal and administrative expenses.
The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act remains
subject to judicial review and additional FCC rulemaking, and thus it is
difficult to predict what effect the legislation will have on the Company and
its operations. There are currently many regulatory actions underway and being
contemplated by federal and state authorities regarding interconnection pricing
and other issues that could result in significant changes to the business
conditions in the telecommunications industry. There can be no assurance that
these changes will not have a material adverse effect upon the Company.
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In addition to requirements placed on ILECs, the Telecommunications Act
subjects the Company to certain federal regulatory requirements upon the
Company's provision of local exchange service in a market. All ILECs and CLECs
must interconnect with other carriers, provide nondiscriminatory access to
rights-of-way, offer reciprocal compensation for termination of traffic and
provide dialing parity and telephone number portability. The Telecommunications
Act also requires all telecommunications carriers to ensure that their services
are accessible to and usable by persons with disabilities.
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 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 Company is
currently unable to quantify the amount of these payments that it will be
required to make and 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.
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 are expected to be established sometime
in 1997 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 Eight Circuit where they are currently pending.
In addition, federal regulations impose restrictions on foreign ownership
of communications service providers utilizing radio frequencies, including
microwave radio facilities, and cellular and personal communication service
("PCS") facilities. The operations of GST Telecom Hawaii, Inc. ("GST Hawaii"), a
wholly-owned subsidiary of GST that conducts the Company's business in Hawaii,
use, among other transmission facilities, microwave radio facilities operating
pursuant to FCC licenses granted to Pacwest Network, Inc. ("PNI"), an entity
that is controlled by John Warta, the Company's Chairman of the Board and Chief
Executive Officer. The FCC also has the authority, which it is not presently
exercising, to impose restrictions on foreign ownership of communications
service providers not utilizing radio frequencies. In the event the FCC
exercises such authority, it could have a material adverse effect on the
Company's CLEC and other businesses. See "Business -- Regulation."
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes
in technology, with the Company relying on third parties for the development of
and access to new technology. The effect of
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technological changes on the business of the Company cannot be predicted. The
Company believes its future success will depend, in part, on its ability to
anticipate or adapt to such changes and to offer, on a timely basis, services
that meet customer demands.
The future success of NACT will depend in part upon its ability to keep
pace with advancing technology, evolving industry standards within the
telecommunications industry and changing customer requirements in a
cost-effective manner. There can be no assurance that NACT's products will not
be rendered obsolete by other telecommunications products incorporating
technological advances designed by competitors that NACT is unable to
incorporate into its products in a timely manner.
LITIGATION RISKS
The Company is involved in various legal proceedings. An action was
commenced against NACT alleging that its telephone systems incorporating prepaid
debit card features infringe upon a patent issued in 1987. GST and GST USA were
added as defendants to such action in August 1997. An unfavorable decision in
such action could have a material adverse effect on the Company. Other legal
proceedings that the Company is a party to may have an adverse effect on the
Company. See "Business -- Legal Proceedings."
POSSIBLE INABILITY TO RECOVER PAYMENTS MADE TO MAGNACOM
Magnacom Wireless, LLC ("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, was awarded various PCS licenses. 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 submitted the down payment late and is waiting for the
FCC to rule on Magnacom's 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.
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. Accordingly,
until such time as FCC regulations or administrative action permit the ownership
by foreign nationals of more than 25% of a company that controls another company
holding a radio license, the option by its terms is limited to a 24% interest in
Magnacom.
In February 1997, an affiliate of Magnacom, Guam Net, Inc. ("Guam Net"),
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 Guam Net $.4
million as a prepayment for future PCS services.
In addition, the Company may issue a warrant to purchase up to 4% of the
then outstanding Common Shares in connection with financing for Magnacom. If
such warrant is issued, the Company will record a one-
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time noncash charge, in an amount equal to the value of the warrant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions."
The provision of wireless telecommunications service by Magnacom and Guam
Net 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 Guam
Net 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 Guam Net. See "Certain Transactions."
DEPENDENCE ON KEY PERSONNEL
The efforts of a small number of key management and operating personnel
will largely determine the Company's success and the loss of any of such persons
could adversely affect the Company. The success of the Company also depends in
part upon its ability to hire and retain highly skilled and qualified operating,
marketing, financial and technical personnel. The competition for qualified
personnel in the telecommunications industry is intense and, accordingly, there
can be no assurance that the Company will be able to hire or retain necessary
personnel.
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights-of-way, entry to premises,
franchises and licenses from various private parties, actual and potential
competitors and state and local governments in order to construct and operate
its networks. There can be no assurance that the Company will obtain
rights-of-way and franchise agreements on acceptable terms or that current or
potential competitors will not obtain similar rights-of-way and franchise
agreements that will allow them to compete against the Company. If any of the
existing franchise or license agreements were terminated or not renewed and the
Company were forced to remove its fiber optic cables or abandon its networks in
place, such termination could have a material adverse effect on the Company. See
"Business -- Legal Proceedings" and "-- Regulation."
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the limited revenues and significant expenses associated
with the expansion and development of its networks and services, the Company
anticipates that its operating results could vary significantly from period to
period. In addition, revenues relating to the Company's network businesses are
and may continue to be dependent upon a small number of customers and contracts,
revenues under which are likely to vary significantly from period to period.
RISK OF JOINT INVESTMENTS
The Company has invested in one joint venture and may enter into additional
joint ventures in the future. There are risks in participating in joint
ventures, including the risk that the other joint venture partners may at any
time have economic, business or legal interests or goals that are inconsistent
with those of the joint venture or the Company. The risk is also present that a
joint venture partner may be unable to meet its economic or other obligations to
the joint venture and that the Company may be required to fulfill some or all of
those obligations. In addition, to the extent that the Company participates in
international joint ventures, the operations of such ventures will be subject to
various additional risks not present in domestic joint ventures, such as
fluctuations in currency exchange rates, nationalization or expropriation of
assets, import/export controls, political instability, limitations on foreign
investment, restrictions on the ability to convert currencies and the additional
expenses and risks inherent in conducting operations in geographically distant
locations with customers speaking different languages and having different
cultural approaches to the conduct of business.
At September 30, 1997, the Company had invested approximately $3.7 million
in a publicly-traded Canadian corporation (subsequently renamed GST Global
Telecommunications Inc., "Global") and held approximately 3.6 million shares and
warrants to purchase 750,000 additional shares. On September 30, 1997,
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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 (the "VSE"), in consideration for the transfer by the
Company to Global of its rights in and to a telecommunications project in Mexico
(the "Bestel Project"). Global has also acquired from Cable and Wireless, Inc.
("Cable and Wireless") an 80% interest in Vitacom Corporation ("Vitacom").
Vitacom provides voice, high speed data information and other services and
manufactures and sells VSATs (very small aperture satellite terminals) and other
equipment used to access the Internet. See "Business -- GST Global
Telecommunications Inc."
RISKS OF INVESTMENT IN A CANADIAN CORPORATION
The Company is a Canadian corporation. Certain directors and officers and
certain of the Company's professionals are residents of Canada. As a result, it
may be difficult to effect service of process within the United States upon such
directors, officers and professionals or to collect judgments of U.S. courts
predicated upon civil liability under U.S. federal securities and other laws. It
is uncertain whether Canadian courts would (i) enforce judgments of U.S. courts
obtained against the Company or such directors, officers and professionals
predicated upon the civil liabilities provisions of U.S. laws or (ii) impose
liabilities in original actions against the Company or its directors, officers
and professionals predicated solely upon U.S. laws. In addition, the Company's
status as a Canadian company limits the ability of the Company to hold or
control radio frequency licenses in the United States.
ABSENCE OF PUBLIC MARKET
Prior to the Debt Offering, there has been no public market for the Notes,
and GST does not intend to apply for listing of the Notes on any national
securities exchange or the Nasdaq National Market. Although the Underwriters
currently intend to make a market in the Notes, they are not obligated to do so,
and any such market-making activities may be discontinued at any time without
notice, in their sole discretion. Accordingly, no assurance can be given as to
the liquidity of, or the existence of trading markets for, the Notes. See
"Underwriters." The liquidity of, and trading markets for, the Notes may also be
adversely affected by declines in the market for high yield securities generally
and by the financial performance and prospects of the Company.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements, including statements
regarding the Company's expected financial position, business and financing
plans. These forward-looking statements reflect the Company's views with respect
to future events and financial performance. The words, "believe," "expect,"
"plans" and "anticipate" and similar expressions identify forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from such expectations (the
"Cautionary Statements") are disclosed in this Prospectus, including, without
limitation, in conjunction with the forward-looking statements included in this
Prospectus and under "Risk Factors." All subsequent written and oral
forward-looking statements attributable to the Company, its subsidiaries or
persons acting on the Company's behalf are expressly qualified in their entirety
by the Cautionary Statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligations to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
24
<PAGE> 26
USE OF PROCEEDS
The net proceeds to be received by the Company from the Debt Offering are
estimated to be approximately $192.5 million, after deducting estimated
underwriting discounts and commissions and other expenses payable by the
Company. The net proceeds to be received by the Company from the Stock Offering
are estimated to be approximately $101.6 million (approximately $116.9 million
if the U.S. underwriters' over-allotment option is exercised in full), assuming
a public offering price of $15 3/8 per share, after deducting estimated
underwriting discounts and commissions and other expenses payable by the
Company.
The Company intends to use the net proceeds from the Offerings, together
with cash on hand, including the remaining proceeds from the 1997 Notes Offering
(which, other than the amount pledged to fund the first six interest payments on
the 1997 Notes, will be used to purchase equipment), and borrowings expected to
be available under the Tomen Facility and the equipment financing agreements
with Siemens and NTFC to fund capital expenditures for the continued expansion
of its infrastructure, including the development and construction of additional
networks and longhaul fiber optic facilities, to broaden the scope of the
Company's service offerings and for working capital and other general corporate
purposes, including funding operating deficits. The Company plans to allocate
substantial proceeds to each of the foregoing uses. The precise allocation of
funds among these uses, however, will depend on future technological, regulatory
and other developments affecting the Company's business, the competitive climate
in which the Company operates and the emergence of future opportunities. The
Company plans to make capital expenditures of approximately $286.0 million from
October 1, 1997 through December 31, 1998.
The Company intends to continue to evaluate potential acquisitions. The
Company has no definitive agreement with respect to any acquisition, although
from time to time it has discussions with other companies and assesses
opportunities on an ongoing basis. A portion of the proceeds from the Offerings
may also be used to finance acquisitions.
The Company believes that the net proceeds from the Offerings, together
with cash on hand, including the remaining proceeds from the 1997 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 funds for the Company to expand its business as
presently planned and to fund its operating expenses through December 2000.
Thereafter, the Company expects to require additional financing. The extent of
additional financing will depend upon, among other things, the rate of the
Company's expansion and the success of the Company's businesses. See "Risk
Factors -- Historical and Anticipated, Future Operating Losses and Negative
EBITDA," "-- Significant Capital Requirements," "-- Substantial Indebtedness"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
25
<PAGE> 27
CAPITALIZATION
The following table sets forth the historical cash and capitalization of
the Company as of June 30, 1997, as adjusted to give effect to the sale of the
7,000,000 Common Shares in the Stock Offering (based on an assumed public
offering price of $15 3/8 per share) and the sale of the Notes offered hereby.
The Closing of the Debt Offering is conditioned upon the closing of the Stock
Offering, but the Closing of the Stock Offering is not conditioned upon the
closing of the Debt Offering. This table should be read in conjunction with "Use
of Proceeds," "Selected Consolidated Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
----------------------------
AS ADJUSTED
FOR THE
STOCK AND
ACTUAL DEBT OFFERINGS
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and investments............................. $ 40,665 $ 334,709
========= =========
Restricted cash and investments.................................... 209,174 209,174
========= =========
Current portion of long-term debt and capital lease obligations.... $ 8,340 $ 8,340
Long-term debt and capital lease obligations, less current portion:
Senior Notes, at accreted value............................... 196,503 196,503
Convertible Notes, at accreted value.......................... 24,563 24,563
1997 Notes.................................................... 265,000 265,000
Tomen Facility................................................ 30,781 30,781
NTFC Facility................................................. 44,634 44,634
Notes offered in the Debt Offering............................ -- 200,000
Other long-term debt.......................................... 17,351 17,351
--------- ---------
Total long-term debt and capital lease obligations, less
current portion(1)......................................... 578,832 778,832
--------- ---------
Redeemable Preferred Shares........................................ 52,968 52,968
--------- ---------
Shareholders' equity (deficit):
Common Shares, no par value; unlimited number of shares
authorized, 27,076,169 shares issued and outstanding,
34,076,169 shares issued and outstanding as adjusted(2)...... 132,400 233,994
Commitment to issue shares.................................... 4,707 4,707
Accumulated deficit........................................... (143,645) (143,645)
--------- ---------
Total shareholders' equity (deficit).......................... (6,538) 95,056
--------- ---------
Total capitalization..................................... $ 633,602 $ 935,196
========= =========
</TABLE>
- ------------
(1) At June 30, 1997, the Company had $67.7 million of borrowing capacity
available under the Tomen Facility, of which, in September 1997, Tomen
agreed to provide an additional $40.5 million of financing. In addition,
as of June 30, 1997, the Company had $111.5 million available under the
Siemens Loan Agreement. See "Description of Certain Indebtedness and
Redeemable Preferred Shares."
(2) Based on Common Shares outstanding as of June 30, 1997 and assumes the
U.S. underwriters' over-allotment option in the Stock Offering is not
exercised. Does not include (i) 3,385,349 Common Shares reserved for
issuance upon exercise of outstanding options, with exercise prices
ranging from $3.55 to $10.00 per share, (ii) an aggregate of 1,521,155
Common Shares reserved for issuance upon the exercise of outstanding
warrants, with exercise prices ranging from $6.75 to $13.00 per share,
(iii) 3,247,773 Common Shares reserved for issuance upon conversion of the
Convertible Notes (based on the aggregate accreted value of the
Convertible Notes on June 30, 1997), (iv) 4,656,587 Common Shares reserved
for issuance upon conversion of the Redeemable Preferred Shares (based on
the aggregate accreted value of the Redeemable Preferred Shares at June
30, 1997), (v) 221,838 Common Shares issuable to the former shareholders
of TotalNet in October 1997 and (vi) a number of Common Shares with a
market value of $1.2 million issuable to former shareholders of Tri-Star
(29,160 Common Shares were issued on September 19, 1997). See "Description
of Certain Indebtedness and Redeemable Preferred Shares" and Notes 5 and 6
to the Company's consolidated financial statements included elsewhere in
this Prospectus. In addition, does not include a warrant to purchase up to
4% of the then outstanding Common Shares that may be issued in connection
with financing for Magnacom, a company controlled by John Warta, the
Company's Chairman of the Board and Chief Executive Officer. See "Certain
Transactions."
26
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the historical consolidated financial statements
and the notes thereto included elsewhere in this Prospectus. The selected
consolidated financial data for Fiscal 1992, Fiscal 1993 and Fiscal 1994
presented below were derived from the consolidated financial statements of the
Company, which have been audited by KPMG Peat Marwick Thorne. The selected
consolidated financial data for Fiscal 1995 and Fiscal 1996 presented below were
derived from the consolidated financial statements of the Company, which have
been audited by KPMG Peat Marwick LLP. The selected consolidated financial data
for the nine months ended June 30, 1996 and 1997 is unaudited, but in the
opinion of the management of the Company, reflects all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
results for interim periods. Operating results for interim periods are not
necessarily indicative of results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
THIRTEEN NINE MONTHS ENDED
YEAR ENDED AUGUST MONTHS YEAR ENDED
31, ENDED SEPTEMBER 30, JUNE 30,
------------------- SEPTEMBER 30, --------------------- --------------------
1992(1) 1993 1994(2) 1995 1996 1996 1997
------- ------- ------------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunication services.......... $ -- $ -- $ 112 $ 11,118 $ 31,726 $ 19,452 $ 58,738
Telecommunication products.......... -- -- 5,889 7,563 9,573 5,772 16,186
----- ------- ------- -------- -------- -------- --------
Total revenues............... -- -- 6,001 18,681 41,299 25,224 74,924
Operating loss........................ (57) (418) (1,337) (11,631) (42,597) (25,278) (54,683)
Other expenses (income):
Interest income..................... (5) (35) (254) (303) (5,549) (4,209) (3,377)
Interest expense(3)................. -- -- 27 838 21,224 14,801 21,321
Other, net.......................... -- 439 1,877 1,347 2,360 1,534 (6,549)
Income tax expense.................... -- -- 502(4) 166(4) 157 31 843
----- ------- ------- -------- -------- -------- --------
Net loss(5)........................... $(254)(6) $ (822) $(3,491) $(11,315) $(60,378) $(37,100) $ (67,312)
===== ======= ======= ======== ======== ======== ========
Net loss per Common Share............. $(.11) $ (.22) $ (.35) $ (.82) $ (3.18) $ (2.00) $ (2.87)
===== ======= ======= ======== ======== ======== ========
Weighted average number of Common
Shares outstanding.................. 2,250 3,821 9,879 13,781 18,988 18,513 23,460
Ratio of earnings to fixed
charges(7).......................... -- -- -- -- -- -- --
OTHER DATA:
Capital expenditures.................. $ -- $ 4 $ 1,486 $ 33,922 $ 97,561 $ 44,018 $ 168,441
EBITDA(8)............................. (57) (418) (779) (8,807) (33,936) (19,620) (39,452)
Pro forma interest expense(9)......... 71,737 55,035
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents and
investments......................... $ 63 $ 4,746 $ 5,062 $ 6,895 $ 66,519 $ 40,665
Restricted cash and investments....... -- -- -- -- 16,000 209,174
Property and equipment................ -- 4 4,805 39,583 134,360 314,986
Accumulated depreciation.............. -- -- 221 1,550 6,785 14,630
Investment in joint ventures(10)...... -- 4,616 3,552 2,859 1,364 --
Total assets.......................... 72 9,398 26,769 73,125 301,701 682,026
Current portion of long-term debt and
capital lease obligations........... -- -- -- 959 5,554 8,340
Long term debt and capital lease
obligations (excluding current
portion)............................ -- -- -- 19,746 234,127 578,832
Redeemable Preferred Shares........... -- -- -- -- -- 52,968
Common Shares and commitment to issue
shares(11).......................... 394 10,511 25,075 51,660 98,101 137,107
Accumulated deficit................... (327) (1,149) (4,640) (15,955) (76,333) (143,645)
Shareholders' equity (deficit)........ 67 9,362 20,435 35,705 21,768 (6,538)
</TABLE>
(footnotes appear on following page)
27
<PAGE> 29
- ---------------
(1) The consolidated financial statements of the Company as at and for the
year ended August 31, 1992 have been prepared by the Company's management
in accordance with generally accepted accounting principles in Canada.
Such consolidated financial statements also conform, in all material
respects, with generally accepted accounting principles in the United
States ("U.S. GAAP").
(2) The Company changed its fiscal year end to September 30, effective in
1994. As a result, amounts reported for 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.
(3) Excludes capitalized interest of $.3 million for Fiscal 1995, $2.3 million
for Fiscal 1996 and $1.7 million for the nine months ended June 30, 1996
and $10.4 million for the nine months ended June 30, 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."
(4) 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.
(5) 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, (iv) $.3 million for the nine months ended June
30, 1996 and (v) $(.4) million for the nine months ended June 30, 1997.
(6) Includes $.2 million loss from discontinued operations.
(7) The ratio of earnings to fixed charges is computed by dividing pretax
income from continuing operations before fixed charges (other than
capitalized interest) by fixed charges. Fixed charges consist of interest
charges and amortization of debt expense and discount or premium related
to indebtedness, whether expensed or capitalized and that portion of
rental expense the Company believes to be representative of interest. For
Fiscal 1993, Fiscal 1994, Fiscal 1995, Fiscal 1996 and the nine months
ended June 30, 1996 and 1997, earnings were insufficient to cover fixed
charges by $.8 million, $3.0 million, $13.8 million, $62.9 million, $39.1
million and $76.5 million, respectively. On a pro forma basis giving
effect to the issuance of (i) the 1997 Notes and (ii) the Notes (assuming
an effective annual interest rate of 11%), the Company's earnings would
have been insufficient to cover fixed charges by $122.4 million and $116.1
million for Fiscal 1996 and the nine months ended June 30, 1997,
respectively.
(8) EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and 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 Prospectus.
(9) Pro forma interest expense gives effect to the issuance of the 1997 Notes
and the Notes offered hereby (assuming an effective annual interest rate
of 11%), as if such transactions had occurred at the beginning of the
periods presented assuming 15% of the interest on the 1997 Notes and the
Notes would have been capitalized under FASB Statement No. 34
"Capitalization of Interest Costs." For each .25% change in the interest
rate on the Notes, pro forma interest expense would change by $.5 million
and $.4 million for Fiscal 1996 and the nine months ended June 30, 1997,
respectively.
(10) 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.
(11) At June 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 $1.2
million, based on the then market value of the Common Shares and payable
at various times in Fiscal 1997 (29,160 Common Shares were issued on
September 19, 1997) and Fiscal 1998, to the former shareholders of
Tri-Star.
28
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 30 markets in Arizona, California, Hawaii, Idaho, New Mexico, Texas and
Washington. In addition, the Company has networks under construction which, when
completed, will serve 12 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 500 route miles
and an additional 1,000 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 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. See "Risk Factors -- Development and Expansion Risk and
Possible Inability to Manage Growth," "-- Significant Capital Requirements,"
"-- Dependence on Billing, Customer Services and Information Systems" and
"-- Liquidity and Capital Resources."
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 has made application to the Internal Revenue Service
(the "Service") to change 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. If the application is approved, the Company will
provide to investors audited financial information for the 1997 Transition
Period 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. See "Risk Factors -- Variability
of Quarterly Operating Results."
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 four 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 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
29
<PAGE> 31
result in prices favorable to the Company. See "Risk Factors -- Difficulties in
Implementing Local and Enhanced Services."
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 will be required to pay an
underutilization fee in addition to its monthly bill. See "Risk Factors -- Risks
Relating to Long Distance Business."
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, 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 the fourth
quarter of 1997. 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 providers. Under these agreements, the Company and such data
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
Portland and Seattle.
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. See "Risk Factors -- Significant
Capital Requirements." 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. See "Risk Factors -- Historical and
Anticipated Future Operating Losses and Negative EBITDA." 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.
30
<PAGE> 32
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 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.
See "Certain Transactions." 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 $4.0 million and $5.0 million, depending on the terms of the
warrant.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996
Revenues. Total revenues for the nine months ended June 30, 1997 increased
$49.7 million, or 197.0%, to $74.9 million from $25.2 million for the nine
months ended June 30, 1996. Telecommunications services revenues for the nine
months ended June 30, 1997 increased $39.3 million, or 202.0%, to $58.7 million
from $19.4 million over the comparable period in the previous year. The increase
in telecommunications services revenues resulted from the inclusion of revenues
from strategic acquisitions, including GST Call America and TotalNet, as well as
increased CLEC service revenues generated by the Company's networks. To a lesser
extent, the increase in telecommunications services revenues resulted from
increased Internet, shared tenant and data services. Telecommunications products
revenues for the nine months ended June 30, 1997 increased $10.4 million, or
180.4%, to $16.2 million from $5.8 million over the nine months ended June 30,
1996. The increase in telecommunication products revenues resulted primarily
from the introduction in April 1996 of
31
<PAGE> 33
NACT's STX switch and subsequent increased unit sales. To a lesser extent the
increase in product revenues was due to the inclusion of recently acquired
Action Telcom's sales of network management and fraud protection systems from
May 31, 1997.
Operating Expenses. Total operating expenses for the nine months ended
June 30, 1997 increased $79.1 million, or 156.6%, to $129.6 million from $50.5
million for the nine months ended June 30, 1996. Network expenses, which include
direct local and long distance circuit costs, increased $33.4 million, or
223.3%, to $48.3 million, or 82.1% of telecommunications services revenues for
the nine months ended June 30, 1997, compared to $14.9 million, or 76.7%, for
the comparable period in the previous year. Facilities administration and
maintenance expenses (consisting primarily of costs related to personnel
providing maintenance, monitoring and technical assistance for the Company's
networks) for the nine months ended June 30, 1997 increased $4.0 million, or
69.0%, to $9.8 million, or 16.7% of telecommunications services revenues
compared to $5.8 million, or 29.8% for the comparable period ended June 30,
1996. The primary reason for the increase in network expenses as a percent of
telecommunications services revenues and the decrease in facilities
administration and maintenance expenses as a percent of telecommunications
services revenues was the inclusion of revenue from 1996 strategic acquisitions,
a significant portion of which was generated off-net.
Cost of product revenues, which includes the costs associated with product
revenues of NACT and Action Telcom, increased $2.8 million, or 98.3%, to $5.6
million for the nine months ended June 30, 1997 from $2.8 million for the
comparable period ended June 30, 1996. Cost of product revenues was 34.3% of
telecommunications products revenues for the nine months ended June 30, 1997,
compared to 48.6% for the comparable period ended June 30, 1996. The decrease in
cost of product revenues as a percentage of telecommunications product revenues
resulted primarily from economies of scale related to increased unit sales of
NACT's STX switch. Research and development costs for the nine months ended June
30, 1997 increased $.8 million over the comparable period in the previous year.
The increase was due to the addition of 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 the nine months ended June
30, 1997 increased $28.7 million, or 138.8%, to $49.4 million from $20.7 million
for the nine months ended June 30, 1996. The increase was 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. Selling, general and administrative
expenses were 65.9% of total revenues for the nine months ended June 30, 1997,
compared to 82.0% for the nine months ended June 30, 1996.
Depreciation and amortization for the nine months ended June 30, 1997
increased $9.4 million, or 175.5% to $14.8 million from $5.4 million for the
comparable period in the previous year. 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
longhaul fiber optic facilities and installs additional switches. Depreciation
and amortization was 19.8% of total revenues for the nine months ended June 30,
1997, compared to 21.3% for the nine months ended June 30, 1996.
Other Expenses. For the nine months ended June 30, 1997, net other
expenses decreased $.7 million, or 5.8%, to $11.4 million, or 15.2% of total
revenues, from $12.1 million, or 48.1% of total revenues, for the comparable
period ended June 30, 1996. For the nine months ended June 30, 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,
net other expense for the nine months ended June 30, 1997 would have increased
$6.7 million over the nine months ended June 30, 1996. Such increase primarily
resulted from increased interest expense due to the issuance of $180.0 million
initial accreted value of 1995 Notes in December 1995 and the issuance of $265.0
million principal amount of 1997 Notes in May 1997.
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,
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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. See "Business -- Telecommunications Services Strategy -- Long Distance
Services." Telecommunications products 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 1995
Notes Offering.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues. Revenues for Fiscal 1995 increased $12.7 million, or 211.3%, to
$18.7 million from $6.0 million for Fiscal 1994. The increase resulted from a
$11.0 million increase in telecommunications services revenues and a $1.7
million, or 28.4%, increase in product revenues of NACT. Telecommunications
service revenues increased $10.6 million as a result of wholesale carrier
services revenues generated by WINS and NACT, which began to offer such services
during Fiscal 1995, and long distance and other service revenues of ITG, which
was acquired effective May 1, 1995. In addition, an increase of $.4 million was
the result of revenues generated by the Hawaiian digital microwave and the
Southern California networks. The Southern California networks became
operational in Fiscal 1995. The increase in manufacturing revenues was due to
increased unit sales of telecommunications switching and network management and
billing systems.
Operating Expenses. Total operating expenses for Fiscal 1995 increased
$23.0 million, or 315.0%, to $30.3 million from $7.3 million for Fiscal 1994.
Network expenses for Fiscal 1995 increased $10.0 million to
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$10.1 million from $.1 million for Fiscal 1994 due to expansion of network
operations, the acquisition of ITG and the commencement of wholesale carrier
services at WINS and NACT. Facilities administration and maintenance expenses
totaled $2.1 million for Fiscal 1995, compared to only $26,000 for Fiscal 1994.
The increase was due to significant network expansion in Fiscal 1995, whereas
Fiscal 1994 results included only three months of engineering expenses at the
Company's Hawaiian network.
Cost of product revenues at NACT for Fiscal 1995 increased to $3.1 million,
or 40.9% of product revenues, for Fiscal 1995 from $2.1 million, or 36.3% of
product revenues, for Fiscal 1994. Research and development expenditures of NACT
increased by $.6 million, or 84.4% to $1.3 million for Fiscal 1995 from $.7
million for Fiscal 1994 due to the continuing development of the STX, which was
introduced in Fiscal 1996.
Selling, general and administrative expenses increased $7.4 million to
$11.4 million for Fiscal 1995 from $4.0 million for Fiscal 1994. The increase
was principally the result of higher salary and benefit costs incurred in Fiscal
1995 as the Company added a significant number of sales, marketing and
management employees in connection with network expansion. Also contributing to
the increase in selling, general and administrative expenses were higher
professional fees and travel costs related to expansion of CLEC operations. In
addition, bad debt expense increased $1.3 million in Fiscal 1995 principally due
to a reserve for doubtful accounts for an ITG customer.
Depreciation and amortization increased $2.0 million to $2.4 million for
Fiscal 1995 from $.4 million for Fiscal 1994 as a result of amortization of
intangible assets related to acquisitions and depreciation of newly-operational
networks.
Other Expenses. Other expenses increased $.2 million to $1.9 million for
Fiscal 1995 from $1.7 million for Fiscal 1994. Contributing to the increase was
an $.8 million increase in interest expense resulting from borrowings under the
Tomen Facility and a $.5 million write-off of investments. Offsetting these
increases was a $.4 million decrease in the loss on joint ventures due to
improved operating results at the Phoenix Fiber network. Additionally, in Fiscal
1994 the Company wrote-off $.7 million in pre-operating costs at GST Telecom. No
such losses were realized in Fiscal 1995.
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 $224.0
million, compared to $82.5 million at September 30, 1996. The Company's net cash
used in operating and investing activities was $299.9 million, $139.0 million,
$36.2 million and $11.4 million for the nine months ended June 30, 1997, Fiscal
1996, Fiscal 1995 and Fiscal 1994, respectively. Net cash provided by financing
activities from borrowings and equity issuances to fund capital expenditures,
acquisitions and operating losses was $276.9 million, $194.3 million, $38.0
million and $10.9 million for the nine months ended June 30, 1997, Fiscal 1996,
Fiscal 1995 and Fiscal 1994, respectively.
Capital expenditures for the nine months ended June 30, 1997, Fiscal 1996,
Fiscal 1995 and Fiscal 1994 were $168.4 million, $97.6 million, $33.9 million
and $1.4 million, respectively. The Company estimates that it will make capital
expenditures of approximately $286.0 million from October 1, 1997 through
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 increasing
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, such as economic conditions,
competition, regulatory developments and the availability of capital.
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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). See "Description of Certain
Indebtedness and Redeemable Preferred Shares -- Equipment Financing."
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 for one year from the date of issuance. 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. 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. See "Description of Certain Indebtedness and Redeemable
Preferred Shares."
In February 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 $9.1 million and $18.2 million, respectively.
In May 1997, GST Funding completed the 1997 Notes Offering. Of the $255.8
million of net proceeds from the issuance of the 1997 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 1997 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 1997 Indenture and the 1995 Indentures include
restrictive covenants which, among other items, limit or restrict additional
indebtedness
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incurred by the Company, investment in certain subsidiaries, the sale of assets
and the payment of dividends. See "Description of Certain Indebtedness and
Redeemable Preferred Shares."
As of September 30, 1997, the Company had approximately $632.2 million of
indebtedness outstanding ($832.2 million on a pro forma basis giving effect to
the Debt Offering), including $203.3 million accreted value of Senior Notes,
$25.4 million accreted value of Convertible Notes, $265.0 million principal
amount of 1997 Notes, $69.1 million under the Tomen Facility, $44.6 million
under the NTFC Loan Agreement and $5.8 million under the Siemens Loan Agreement.
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 1995 Notes Offering and the 1997 Notes Offering, the Company will
have significant debt service obligations. The Company will be required to make
principal and interest payments of approximately $56.8 million (of which $35.1
million will be made from funds securing the 1997 Notes), $64.4 million (of
which $35.1 million will be made from funds securing the 1997 Notes), $66.4
million (of which $17.6 million will be made from funds securing the 1997
Notes), $113.5 million and $111.5 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, 1997 Notes and the
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 $224.0
million. The Company believes that the net proceeds of the Offerings, together
with cash on hand (including the remaining proceeds from the 1997 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 funds for the Company to expand its business as
presently planned and to fund its operating expenses through December 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, 1996, the Company had a U.S. net operating loss
carryforward of approximately $45.0 million and a Canadian net operating loss
carryforward of approximately Cdn. $6.8 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
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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 March 1995, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets Disposed Of." SFAS No. 121 provides specific guidance
regarding when impairment of long-lived assets such as plant, equipment and
certain intangibles including goodwill should be recognized and how impairment
losses of such assets should be measured. SFAS No. 121 is effective for fiscal
years beginning after December 15, 1995. The Company adopted SFAS No. 121 on
October 1, 1996. The impact on the Company's Fiscal 1997 statements of
operations is not expected to be material.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which was adopted by the Company on October 1, 1996. As permitted
by FASB SFAS No. 123, the Company has elected not to implement the fair value
based accounting method for employee stock options and will disclose, commencing
in Fiscal 1997, the pro forma net income and earnings per share as if such
method had been used to account for stock-based compensation cost.
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.
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BUSINESS
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. As a facilities-based CLEC, the Company
operates state-of-the-art, digital telecommunications networks that represent an
alternative to 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 30 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Texas and Washington. In addition, the
Company has networks under construction which, when completed will serve 12
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 500 route miles and an additional 1,000 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 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 five high capacity digital switches, has
installed and is currently testing four additional high capacity digital
switches and is planning to deploy an additional five such switches through
early 1998.
TELECOMMUNICATIONS SERVICES MARKET
Based on preliminary statistics released by the FCC, ILECs in the United
States generated approximately $100.7 billion in revenue in 1996 from the
provision of local exchange services. Local exchange services consist of a
number of service components and are defined by specific regulatory
classifications. For 1996, total revenue by service was (i) interstate dedicated
access service (i.e., connecting a customer to a long distance carrier's
facilities) revenues of $3.6 billion; (ii) interstate switched access service
(i.e., originating and terminating calls from a long distance carrier) revenues
of $12.4 billion; (iii) end-user fees (i.e., access charges paid by the consumer
for the use of the ILECs' networks) of $7.3 billion; (iv) basic local service
(including dial tone, local area charges, dedicated point-to-point intraLATA
service and enhanced calling features) revenues of $49.8 billion; (v) intraLATA
toll call revenues of $10.4 billion; (vi) intrastate switched access (i.e.,
local origination and termination for long distance carriers for calls within a
state) revenues of $7.6 billion; and (vii) miscellaneous (including provisions
of directories, billing and collection services and corporate operations)
revenues of $6.8 billion. In addition, the FCC reported that total toll service
revenues in the United States in 1996 were $93.3 billion.
Until recently, the competitive access provider ("CAP")/CLEC industry has
generally been limited to providing special access services and private line
services to corporations and government agencies physically located on the
network of the CAP/CLEC. The Telecommunications Act opens local service markets
to competition by preempting state and local laws, to the extent that they
prevent competitive entry with respect to the provision of any
telecommunications service, and imposes a variety of new duties on ILECs in
order to promote competition in local exchange and access services.
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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. Fixed or special access services involve a fixed
communications link, usually between an end-user and a long distance carrier's
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.
Under federal regulations, the Company is permitted to provide a full range
of interstate switched access as well as enhanced services. In addition, a
switch gives the Company the technological capability to provide a full range of
local telephone services, although state authority may be necessary for certain
intrastate service offerings. See "-- Regulation."
To facilitate its entry into local services, the Company has in service
five high capacity digital switches, has installed and is currently testing four
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 ISDN, Centrex, voice mail and other custom calling
features. See "Risk Factors -- Difficulties in Implementing Local and Enhanced
Services."
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. 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. See "Risk Factors -- Risks Relating to
Long Distance Business."
The Company recently expanded its long distance products and services
through the acquisition of 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, 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
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Company also offers dial-up Internet services to customers in Portland,
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 the fourth quarter of 1997. 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
providers. Under these agreements, the Company and such data 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
ATM, high speed LAN connectivity service, video conferencing, multi-media
networking, frame relay and high capacity access to the Internet. The Company
has one ATM switch commercially operational in each of Portland and Seattle.
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.
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
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<PAGE> 42
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 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 GST Hawaii's network interconnection agreement and pole
attachment and conduit occupancy agreements 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.
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<PAGE> 43
The following table presents information as of September 30, 1997
concerning the Company's networks that are operational and under construction:
<TABLE>
<CAPTION>
CURRENT
OPERATIONAL
DATE COMMERCIALLY ROUTE ESTIMATED APPROXIMATE
LOCATION SERVICE AREA OPERATIONAL(1) MILES(2) ROUTE 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, San September 1997 15 22 1,324,859
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, Goleta 2nd Quarter 1998 17 171,571
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>
- ---------------
(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 on 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.
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.
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<PAGE> 44
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>
CURRENT
OPERATIONAL
DATE COMMERCIALLY ROUTE ESTIMATED
LOCATION OPERATIONAL(1) 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>
- ---------------
(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 switches that are operational or are planned to be
installed:
<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>
- ---------------
(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, produces advanced
telecommunications switching platforms with integrated applications software and
network telemanagement capabilities. As a single source provider, NACT believes
that it is the only company in its market that designs, develops and
manufactures all hardware and software elements necessary for a fully integrated
turnkey telecommunications switching solution. Because NACT provides an
integrated solution, its customers do not require the multiple suppliers of
hardware and value added resellers of software that would otherwise be necessary
to provide a wide range of end-user services and applications. NACT's customers
include long distance carriers, prepaid
43
<PAGE> 45
debit (calling) card and prepaid cellular network operators, international call
back/reorigination providers and other specialty telecommunications service
providers.
NACT's products and services include the STX application switching
platform, the NTS and facilities management services. In May 1996, NACT
introduced the STX, an integrated digital tandem switching system that currently
supports up to 1,024 ports per switch and can be combined with three additional
STXs to provide a total capacity of 4,096 ports per system. The STX includes
proprietary systems software that enables standard applications such as 1+ and
optional advanced applications such as international call/back reorigination,
prepaid debit card and prepaid cellular. NACT has targeted the STX, with its
enhanced features and scaleable capacity, to an expanded group of customers,
including independent telephone companies, CAPs, CLECs, shared tenant service
providers, Fortune 1000 corporations and local telephone companies outside the
United States. NACT believes that the STX offers value added features and
capacity at price points typically lower than those offered by its competitors.
The NTS performs call rating, accounting, switch management, invoicing and
traffic engineering for multiple switches that may be NACT switches or other
industry switches. In conjunction with the sale of a system, NACT offers a
facilities management service whereby NACT will operate and maintain a
customer's switch for a fee. In providing this service, NACT enables its
customers to direct their attention toward marketing their products rather than
focusing on the technical aspects of operating a switch.
The Company and NACT sold one million and two million shares, respectively,
of NACT's common stock in the NACT Offering, 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, which manufactures NAMS, a
UNIX based software and hardware platform providing automated real-time billing
record collection, fraud protection and network design.
CORPORATE ORGANIZATION
[GST CORPORATE ORGANIZATION CHART]
- ---------------
(1) Unless otherwise indicated, the Company owns 100% of the stock of each
company. GST Telecommunications, Inc. is the issuer of the Convertible
Notes. See "Description of Certain Indebtedness and Redeemable Preferred
Shares -- Senior Notes and Convertible Notes."
(2) GST USA owns, directly or indirectly, the stock of all but three of the
Company's operating subsidiaries. GST USA is the issuer of the Senior Notes.
See "Description of Certain Indebtedness and Redeemable Preferred
Shares -- Senior Notes and Convertible Notes."
(3) GST Net and its subsidiaries, together with GST Action Telecom, TotalNet and
GST Call America, conduct the Company's long distance operations.
(4) GST SwitchCo is the owner of certain telecommunications equipment. It has
incurred the indebtedness outstanding under the Siemens Loan Agreement. See
"Description of Certain Indebtedness and Redeemable Preferred
Shares -- Equipment Financing."
(5) GST EquipCo is the owner of certain telecommunications equipment. It has
incurred the indebtedness outstanding under the NTFC Loan Agreement. See
"Description of Certain Indebtedness and Redeemable Preferred
Shares -- Equipment Financing."
(6) GST Funding is the issuer of the 1997 Notes. See "Description of Certain
Indebtedness and Redeemable Preferred Shares -- 1997 Notes."
(7) GST Telecom and its subsidiaries conduct most of the Company's CLEC
operations. Certain of GST Telecom's subsidiaries have incurred indebtedness
under the Tomen Facility. See "Description of Certain Indebtedness and
Redeemable Preferred Shares -- Tomen Facility."
(8) The Company owns 63% of the capital stock of NACT. A public offering of
shares of NACT's capital stock representing 37% of the outstanding capital
stock of NACT was completed in the first quarter of 1997. NACT is the
Company's manufacturing subsidiary.
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<PAGE> 46
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 September 30, 1997, the
Company had 303 sales and marketing employees in 18 cities and utilized 176
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.
As of June 30, 1997, the Company had approximately 39,000 customers,
including approximately 20,000 long distance, 4,700 local dial tone customers
and 14,300 Internet customers (substantially all of whom are dial-up customers).
Approximately 8,000 of such customers purchase more than one of the Company's
services.
COMPETITION
The telecommunications industry is highly competitive. In most markets, the
Company's principal competitor is the RBOC or the GTE Companies. Additional
competitors include other CAPs and CLECs, such as Brooks, Teleport
Communications Group, Inc., MFS, American Communications Services Inc. ("ACSI")
and ICG, and may include 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 ILECs outside their current local service
area. In addition, the Company anticipates future competition from large long
distance carriers, such as AT&T, MCI and Sprint, which have begun to offer
integrated local and long distance telecommunications services as regulations
allow. Consolidation of telecommunications companies and the formation of
strategic alliances within the telecommunications industry as well as the
development of new technologies could give rise to significant new competitors
to the Company. In addition, a continuing trend toward business combinations and
strategic alliances in the telecommunications industry may further enhance
competition. For example, WorldCom acquired MFS and recently announced that it
entered into an agreement to acquire 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 and legislative initiatives allow CLECs such
as the Company to interconnect with ILEC facilities and 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. For example, the FCC granted ILECs
additional flexibility in pricing their interstate special and switched access
services on a central office specific basis. Under this pricing scheme, ILECs
may establish pricing zones based on access traffic density and charge different
prices for central offices in each zone. On
45
<PAGE> 47
February 8, 1997, new FCC rules became effective allowing ILECs to file
streamlined tariffs on 15 days' notice for rate increases and seven days' notice
for rate decreases. Unless the FCC acts during the notice period, such tariffs
become effective at its end.
The long distance telecommunications industry has relatively insignificant
barriers to entry, numerous entities competing for the same customers and a high
average churn rate, as customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. The Company competes with major carriers such as AT&T, MCI and
Sprint, as well as other national and regional long distance carriers and
resellers, many of whom are able to provide services at costs that are lower
than the Company's current costs. Local telephone companies may also enter the
long distance market, subject to certain conditions. As a result of the
Telecommunications Act, the Company believes that RBOCs also will become
competitors in the long distance telecommunications industry. The Company
believes that the principal competitive factors affecting its long distance
operations are pricing, customer service, accurate billing, clear pricing
policies and, to a lesser extent, variety of services. The ability of the
Company to compete effectively will depend upon its continued ability to
maintain high quality market driven services at prices generally equal to or
below those charged by its competitors. The FCC has, on several occasions since
1984, approved or required price reductions by AT&T and, in 1995, the FCC
announced that AT&T will no longer be regulated as a dominant long distance
carrier. This decision increased AT&T's flexibility in competing in the long
distance services market and eliminated the longer tariff notice requirements
previously applicable only to AT&T. Recently, the FCC has adopted rules that
would eliminate the ability or need of long distance carriers to file tariffs
with the FCC. On February 13, 1997, the United States Court of Appeals for the
District of Columbia Circuit stayed the implementation of such rules. To
maintain its competitive posture, the Company believes that it must be in a
position to reduce its prices in order to meet reductions in rates, if any, by
others. Any such reductions could adversely affect the Company.
The Internet services market is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company's competitors in this market include Internet
access providers, other telecommunications companies, online services providers
and Internet software providers.
The market for telecommunications equipment 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. In its manufacturing operations,
the Company, through its subsidiary NACT, competes with a number of lower
capacity switch manufacturers such as CPDI, ITP and 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, which has agreements with software applications
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.
Most of the Company's actual and potential competitors in its local
services, long distance, Internet and data services and manufacturing businesses
have substantially greater financial, technical and marketing resources than the
Company. While the Company believes that it is well positioned to compete
effectively, there can be no assurance that it will be able to do so.
The recent WTO agreement on basic telecommunications services could
increase the Company's competition. 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 as early as January 1, 1998.
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<PAGE> 48
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 18 Eighth Circuit decision. The Eighth Circuit decision
creates 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 announced that it will seek a writ of certiorari from the Supreme
Court to review the July 18 Eighth Circuit decision.
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.
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.
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<PAGE> 49
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 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 Company is
currently unable to quantify the amount of these payments that it will be
required to make and 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.
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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 authority in 43 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.
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
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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 which are expected to be
established sometime in 1997 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%, however while the FCC has proposed rules implementing the WTO policies
there can be no assurance as to when the FCC will change its policy. The
operations of GST Hawaii use among other facilities, microwave radio facilities
operating pursuant to FCC licenses granted to 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 networks 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
carrier radio license in the future, it may be prohibited from obtaining such
license because of the foreign ownership restrictions of the Communications Act.
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 43 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
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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. See " -- Legal Proceedings."
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. A revision to
the original interconnection agreement is currently pending before the HPUC. 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 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.
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.
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 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 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
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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 million, of which
approximately $12.0 million has been paid. The remaining 51% will be 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 approximately 1,100 kilometers
of conduit and 180 kilometers of fiber optic cable has been constructed to date.
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.
EMPLOYEES
As of September 30, 1997, the Company and its subsidiaries had 1,160
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.
FACILITIES
The Company owns a building comprising 60,000 square feet that contains its
principal executive offices located at 4317 N.E. Thurston Way, Vancouver,
Washington 98662. Its telephone number at that address is (360) 254-4700.
The Company recently purchased property comprising approximately 13,000
square feet in Molokai, Hawaii for a total purchase price of approximately
$127,000 as well as property comprising approximately 320 square feet in Hilo,
Hawaii for a total purchase price of approximately $38,000.
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 $4.5 million.
The Company is negotiating leases for spaces in California, Washington and
Texas for an aggregate additional cost expected to be approximately $138,000 per
year.
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 has committed defamation, unfair competition and
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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. Aerotel
recently amended its complaint to include as defendants GST and GST USA as well
as Kyle Love, the former President of NACT and Dr. Thomas E. Sawyer, a director
of GST and NACT and the former Chairman and Chief Executive Officer of NACT. The
amended pleadings allege that GST 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. GST 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.
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 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
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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.
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MANAGEMENT
The following table sets forth certain information concerning the
directors, executive officers and other key personnel of the Company, including
their ages as of October 15, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
John Warta......................... 50 Chairman of the Board and Chief Executive Officer
Stephen Irwin...................... 56 Vice Chairman of the Board and Secretary
Joseph A. Basile, Jr............... 42 President, Chief Operating Officer and Director
Daniel L. Trampush................. 50 Senior Vice President and Chief Financial Officer
Clifford V. Sander................. 60 Senior Vice President and Treasurer
Robert H. Hanson(1)................ 56 Senior Vice President -- Corporate Development and
Director
Thomas E. Sawyer................... 65 Director
Ian Watson(1)...................... 55 Director
Joseph G. Fogg, III(1)(3).......... 50 Director
Mitsuhiro Naoe..................... 64 Director
W. Gordon Blankstein............... 47 Director
Jack G. Armstrong(1)(2)(3)......... 63 Director
Peter E. Legault(2)(3)............. 53 Director
A. Roy Megarry(2).................. 60 Director
Daniel G. Moffat................... 43 Chief Marketing Officer
Kevin Wright....................... 44 Chief Technical Officer
</TABLE>
- ------------
(1) Member of Finance Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
John Warta has been Chairman of the Board of the Company since March 1997
and has been Chief Executive Officer of the Company since March 1995. Mr. Warta
was President and a director of the Company from March 1995 to March 1997. From
June 1994 to April 1995, he was the President and Chief Executive Officer of GST
Telecom. Mr. Warta co-founded Electric Lightwave, Inc. ("ELI") in 1988, which
operates fiber optic competitive access networks in Portland, Oregon, Salt Lake
City, Utah, Sacramento, California, Phoenix, Arizona and Seattle, Washington and
served as its President and Chief Executive Officer from June 1989 to June 1993.
From June 1993 to June 1994, Mr. Warta was developing the competitive access
networks of Pacwest. From December 1986 to January 1988, he was Senior Vice
President, Marketing, Sales and Corporate Development for NorLight, a regional
fiber optic carrier in the Midwest, and from August 1980 to December 1986 he was
Senior Vice President of The American Network Group, Inc., a long distance
carrier. Prior employment included management positions with Pacific Telecom,
Inc. and Electronic Data Systems Corporation. Mr. Warta attended Metropolitan
State College, Denver, Colorado and completed Effective Executive Training at
the Wharton School of Business, University of Pennsylvania. He currently serves
on the Board of Regents, St. Mary's College, California.
Stephen Irwin has been Vice Chairman of the Board and a director of the
Company since September 1995 and has been the Secretary of the Company since
November 1992 and is a director of NACT. Mr. Irwin has been engaged by the
Company under a personal services agreement since October 1, 1995. Mr. Irwin is
an attorney specializing in corporate matters including finance, securities
regulation, international business and mergers and acquisitions, and has been of
counsel to the New York law firm of Olshan Grundman Frome & Rosenzweig LLP since
1990. Mr. Irwin was a senior partner in Greenberg, Irwin and Weisinger, a New
York law firm specializing in securities, business and corporate matters, from
1968 to 1990. He is a graduate of Cornell Law School.
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Joseph A. Basile, Jr. has been President and Chief Operating Officer of the
Company since March 1997 and has been a director of the Company since September
1997. From September 1995 to March 1997, Mr. Basile was Chief Operating Officer
of Cable and Wireless, a diversified telecommunications company, and from
September 1991 to September 1995, he was Senior Vice President -- Systems for
Cable and Wireless. Mr. Basile has over 15 years experience in the
telecommunications industry and has held positions with National Telephone
Services, Inc. and MCI. He holds a B.S. in engineering from the United States
Military Academy and an M.B.A. from Golden Gate University.
Daniel L. Trampush has been Senior Vice President and Chief Financial
Officer of the Company since March 1997. From 1980 to February 1997, Mr.
Trampush was a Partner with the telecommunications consulting practice of Ernst
& Young LLP. Mr. Trampush has over 26 years of experience providing financial
and business advisory services to the telecommunications industry.
Clifford V. Sander has been Senior Vice President and Treasurer of the
Company since March 1995 and is a director of NACT. He has also been the
Executive Vice President and Chief Financial Officer of GST Telecom since June
1994. From 1962 to 1994, Mr. Sander was in private accounting practice in
Portland, Oregon. He was acting Chief Financial Officer of ELI during its
formation in 1988 and continued to provide accounting and financial consulting
services to ELI through 1993. Mr. Sander is a Certified Public Accountant.
Robert H. Hanson has been a director of the Company since February 1993 and
was appointed Senior Vice President -- Corporate Development in October 1993 and
served as Chief Financial Officer of the Company from July 1994 until March
1997. Mr. Hanson has over 20 years of experience in rendering investment banking
services to the telecommunications industry. From 1965 to 1990, Mr. Hanson was
associated with the investment banking and capital markets division of Merrill
Lynch & Co., Inc., since 1971 as Vice President. From 1990 to 1991, he was
affiliated with Dean Witter Reynolds Inc. and from August 1991 until September
1993, he was Vice President and Branch Manager of the Cody, Wyoming office of
D.A. Davidson & Co., a regional securities firm with headquarters in Great
Falls, Montana. Mr. Hanson is a graduate of Yale University.
Thomas E. Sawyer has been a director of the Company since September 1997
and was a director of the Company from August 1995 to June 1997. Dr. Sawyer has
been a director of NACT since April 1997, was the Chairman of the Board Emeritus
of NACT from November 1996 to April 1997, was a director of NACT from 1982 to
November 1996, the Chairman of the Board of NACT from October 1985 to November
1996 and was the Chief Executive Officer of NACT from October 1988 to March
1996. Dr. Sawyer has over 35 years of experience in information technology
industries and 23 years of experience in senior management of four
publicly-traded information technology firms. He holds an undergraduate degree
in engineering from the University of California at Los Angeles, an M.B.A. from
Occidental and a Ph.D. in management from Walden University.
Ian Watson has been a director of the Company since January 1993, was
appointed Chairman of the Board of the Company in January 1993 and President and
Chief Executive Officer in July 1993. In March 1995, he resigned as President
and Chief Executive Officer but retained the position of Chairman of the Board.
In September 1995, he resigned as Chairman of the Board, but remained a Vice
President of GST USA. He is the Vice Chairman of the Board of Global. From 1982
until January 1993, Mr. Watson was engaged as a private investor in various
activities. From 1974 through 1980, he was the Managing Director of Burns Fry
International, an investment bank, based in London, England, and a director of
Burns Fry of Toronto, Ontario and a member of its five person Executive
Committee. Mr. Watson was the Chairman of the Global Board of The Hunger Project
from 1987 to 1994, and serves as director of a number of international
charities.
Joseph G. Fogg, III has been a director of the Company since June 1997. Mr.
Fogg has been the Chairman and Chief Executive Officer of J.G. Fogg & Co.
Incorporated, a private venture capital firm, since 1993. He has been affiliated
with Morgan Stanley & Co. Incorporated since 1970 and has been an Advisory
Director since 1992. Mr. Fogg has been Co-Chairman of the Investment Committee
of Princes Gate since its inception.
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Mitsuhiro Naoe has been a director of the Company since June 1997. Mr. Naoe
has been the Advisor to the President of Tomen Electronics Corporation since
July 1995. He was the President and a director of Areal Technology, Inc. from
December 1992 to July 1994, the General Manager of the Steel Division of Tomen
from March to December 1992, the Vice President and a Director of Coil Center
Corporation from July 1989 to March 1992. From 1957 to 1989, Mr. Naoe was
affiliated with Tomen.
W. Gordon Blankstein has been a director of the Company since January 1994.
He was the Vice Chairman of the Board of the Company from March 1997 to October
1997, was Chairman of the Board of the Company from February 1995 to March 1997
and was a founder of the Company. Mr. Blankstein is a director of NACT and the
Chairman of the Board of Global. He is a founder, past President and Chairman of
the Board and former director of ICG Communications, Inc. Mr. Blankstein holds a
Bachelor's degree and an M.B.A. from the University of British Columbia.
Jack G. Armstrong has been a director of the Company since July 1994. He
has served as a principal of J.G. Armstrong Consulting, Inc., a consulting firm
offering corporate and financial consulting services to corporations,
municipalities and university related agencies since 1987. From 1977 to 1987, he
served as the Senior Vice President in charge of Finance at Alberta Energy
Company Ltd., an energy company. From 1969 to 1977, Mr. Armstrong served as Vice
President, Treasurer and Comptroller of Panarctic Oils Ltd., an oil company, and
from 1958 to 1969, as Chief Accountant of Triad Oil Co. Ltd., the Canadian
exploration arm of the British Petroleum Group. Mr. Armstrong is a chartered
accountant.
Peter E. Legault has been a director of the Company since April 1993. Mr.
Legault has been a director and Vice President of Thomson Kernaghan & Co. Ltd.,
a member firm of the Toronto Stock Exchange (the "TSE") and The Montreal
Exchange (the "ME"), since October 19, 1987. Mr. Legault is also a director of
Global. He is also President of Legault Investment Counsel Inc., a private
company providing research and advice to companies and individuals in the
communications industry. Prior to 1987, Mr. Legault was the President of
Pollitt, Legault & Co., a member of each of the TSE and ME.
A. Roy Megarry has been a director of the Company since September 1997. He
has been the Chairman of The Globe and Mail, Canada's national newspaper since
1993 and was the publisher of The Globe and Mail from 1978 to 1993. Mr. Megarry
is a director of Hewlett-Packard (Canada) Limited, The Bombay Company, Inc.,
Publicitas Globe Media and the Inter American Press Association. He is involved
in Tools for Development, a third-world development program. Mr. Megarry has a
C.M.A. accounting degree and is a Fellow of the Society of Management
Accountants of Canada.
Daniel G. Moffat has been Chief Marketing Officer of the Company since
March 1997. From January 1996 to February 1997, Mr. Moffat was a principal with
the telecommunications consulting firm Cathey, Hutton and Associates where he
was responsible for development of business and marketing strategies for
telecommunications incumbents, new entrants and equipment vendors. From February
1993 to December 1995, Mr. Moffat was President of Access Value Services, a
consulting firm focused on business strategies for telecommunications industry
change. Over the past 20 years, Mr. Moffat has held various senior
telecommunications positions in operations, engineering, marketing and sales
with Tymnet, IBM/ROLM, U S WEST, Pacific Telecom and U.S. Intelco Networks. He
is an instructor in Telecommunications at Marylhurst College. He holds a B.S. in
finance, a M.S. in telecommunications from Golden Gate University and a M.B.A.
from Santa Clara University.
Kevin Wright has been the Chief Technical Officer of the Company since
August 1997. From May 1996 to July 1997, Mr. Wright was Senior Vice President of
engineering and operations for US ONE Communications, a CLEC, where he was
responsible for all network planning, engineering and operations. From September
1994 to March 1996, he was Senior Vice President, Engineering for Qwest
Communications and from May 1993 to September 1994, he was Vice President,
Business and Technology Development with LCI International. Mr. Wright has over
20 years' experience in the telecommunications industry.
Each director holds office until the next annual meeting or until his
successor is duly elected, unless his office is vacated earlier in accordance
with the by-laws of GST. Subject to the terms of applicable employment
agreements, the executive officers of GST serve at the pleasure of the Board of
Directors.
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<PAGE> 59
SUMMARY COMPENSATION TABLE
The following table discloses the compensation paid by the Company and its
subsidiaries during the previous three fiscal years to the Company's Chief
Executive Officer and the six next highest paid executive officers.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES
----------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION(2) GRANTED(#) COMPENSATION
- ----------------------------------- ---- -------- ----- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John M. Warta,..................... 1996 $200,000 -- $ 156,000(3) 200,000 $105,417(4)
President and Chief Executive
Officer 1995 126,667 -- 200,304(5) 85,000 --
1994 30,000 -- -- 40,000 --
Stephen Irwin,..................... 1996 280,000 -- -- 500,000 105,417(4)
Vice Chairman 1995 -- -- -- 100,000 --
1994 -- -- -- 15,000 --
W. Gordon Blankstein,.............. 1996 190,000 -- -- 200,000 105,417(4)
Chairman 1995 125,833 -- 20,000(6) 85,000 --
1994 20,000 -- -- 92,500 --
Clifford V. Sander,................ 1996 120,000 -- 39,000(3) 28,000 5,104(7)
Senior Vice President and
Treasurer 1995 101,667 -- 65,076(8) 35,000 --
1994 25,000 -- -- 20,000 --
Thomas E. Sawyer,.................. 1996 222,556 2,066 5,608(9) 5,000 5,403(10)
Chief Technology Officer 1995 136,000 2,200 172,037(11) 120,000 4,366(12)
1994 131,505 6,723 12,915(9) 35,000 3,455(12)
Robert Hanson,..................... 1996 120,000 -- -- 15,000 --
Senior Vice President 1995 101,667 -- 20,000(6) 50,000 2,734(7)
1994 87,333 -- -- 50,000 --
Ian Watson,........................ 1996 120,000 -- -- -- --
Vice President of GST USA 1995 120,000 -- 20,000(6) -- --
1994 120,000 -- -- 92,500 --
</TABLE>
- ------------
(1) Positions indicated were as of September 30, 1996. See "Management."
(2) Excludes certain perquisites that do not exceed the lesser of $50,000 or
10% of the named individual's aggregate salary and bonus.
(3) Represents a fee for money borrowed and equity purchased under the Tomen
Master Agreement (the "Pacwest Fee").
(4) Represents an accrual of compensation cost for options vesting based on
share price performance.
(5) Includes (i) 5,000 Common Shares valued at $4.00 per share issued as
consideration for such officers' guarantee of certain indebtedness of the
Company, which indebtedness was subsequently repaid ("Guaranty Shares") and
(ii) $180,304 in payments on account of the Pacwest Fee.
(6) Represents Guaranty Shares.
(7) Represents an accrual of compensation cost for options granted at below the
market price of the Common Shares on the date of grant.
(8) Includes the Guaranty Shares and $45,076 in payments on account of the
Pacwest Fee.
(9) Represents payments made pursuant to NACT's profit sharing plan.
(10) Represents (i) $4,492 in matching contributions by NACT to its 401(k) Plan
(the "NACT 401(k) Plan") and (ii) $911 in accrued compensation cost for
options granted at below the market price of Common Shares on the date of
grant.
(11) Represents (i) $151,365 accrued in respect of an annuity purchased for Dr.
Sawyer, which is based upon compensation due to Dr. Sawyer in prior years
and deferred by him at the Company's request and (ii) $20,672 in payments
made pursuant to NACT's profit sharing plan.
(12) Represents matching contributions by NACT to the NACT 401(k) Plan.
58
<PAGE> 60
EMPLOYMENT AND OTHER AGREEMENTS
John Warta is employed by GST USA and GST Telecom pursuant to an employment
agreement dated as of March 1, 1994 and amended effective September 1, 1995, for
a term ending on February 28, 1999. The agreement provides for an initial base
salary of $120,000 annually (which was increased to $275,000 annually effective
April 1, 1997) and incentive compensation as awarded by the Board of Directors
of the Company from time to time. In the event of Mr. Warta's death while
employed by the Company, the agreement provides for a payment of one and a half
times his then current base annual salary, over a period of one and a half
years, to his designated beneficiary. In the event of his disability, Mr. Warta
is to receive the full amount of his base salary for six months. If such six
month period ends prior to February 28, 1999, he is to receive salary at a rate
of one-half his then current base salary for a further period ending on the
earlier of one year thereafter or February 28, 1999. The agreement contains
covenants restricting Mr. Warta's ability to engage in activities competitive
with those of the Company for a period ending on the earlier of two years after
his termination or February 28, 2000. Upon a change of control of the Company
that results in Mr. Warta's removal from the Company's Board of Directors, a
significant change in the conditions of his employment or other breach of the
agreement, he is to receive liquidated damages equal to 2.99 times the "base
amount," as defined in the Code, of his compensation.
Stephen Irwin and GST USA and GST Telecom are parties to a personal
services agreement for a term commencing on October 1, 1995 and ending on
February 28, 1999, providing, among other things, that (i) Mr. Irwin shall
devote approximately one-half of his working time rendering services to the
Company, (ii) in consideration for such services and in lieu of billing legal
services directly or through a law firm, Mr. Irwin shall receive a retainer of
$280,000 per annum or such greater amount as may be determined by the Board of
Directors of the Company, payable in equal semi-monthly installments and (iii)
Mr. Irwin is entitled to such benefits as are available to senior executive
officers of the Company and GST USA and to a payment upon a change of control
and subsequent breach by the Company of the agreement in accordance with the
formula described above for John Warta. In connection therewith, the Company
issued to Mr. Irwin a five year warrant to purchase 300,000 Common Shares at a
price of $6.75 per share. Such warrant became exercisable as to 100,000 Common
Shares on October 1, 1996 and 100,000 Common Shares on October 1, 1997 and will
become exercisable as to the remainder of such Common Shares on October 1, 1998.
Joseph Basile, Jr. is employed by GST USA pursuant to an employment
agreement effective March 11, 1997 for a five-year term. The agreement provides
for a base salary of $250,000 per annum, incentive compensation annually (not to
exceed 60% of base salary) based upon the achievement by the Company of
predetermined performance objectives and the reimbursement of relocation
expenses. The agreement further provides for payments in the event of death or
disability on the same terms as those provided in Mr. Warta's agreement and
restricts Mr. Basile's ability to engage in activities competitive with those of
the Company. Mr. Basile has been granted options to purchase an aggregate of
450,000 Common Shares as follows: (i) the first option, with respect to 150,000
Common Shares (the "Firm Option"), is exercisable in three equal annual
installments commencing one year after grant; (ii) the second option (the
"Trading Price Option"), with respect to 150,000 Common Shares, is exercisable
in one-third increments at such time as the closing price of the Common Shares
exceeds $13.75, $16.50 and $20.00 per share, respectively, for 20 consecutive
trading days, but in no event earlier than the first, second and third
anniversary of the date of grant, respectively, and (iii) the third option (the
"Performance Option"), with respect to 150,000 Common Shares, may be exercised
in the same installments as the Firm Option, provided that the Company has
achieved the predetermined performance objectives referred to above. In the
event of a change of control, (i) the Firm Option and Performance Option become
exercisable in full, and (ii) the Trading Price Option becomes exercisable as to
those portions thereof the exercise of which is predicated upon the attainment
of trading price levels not greater than the valuation accorded the Common
Shares in the transaction resulting in the change of control (and if no value is
accorded the Common Shares in the change of control transaction, the Trading
Price Option becomes exercisable in full). In addition, pursuant to the
agreement, the Company loaned $100,000 to Mr. Basile to enable him to purchase a
new primary residence in the Vancouver, Washington area. See "Certain
Transactions."
59
<PAGE> 61
Daniel Trampush is employed by GST USA and GST Telecom pursuant to an
employment agreement effective March 3, 1997 for a three-year term. The
agreement provides for a base salary of $240,000 per annum, the reimbursement of
relocation expenses and for payments in the event of death or disability on the
same terms as those provided in Mr. Warta's agreement. The agreement restricts
Mr. Trampush's ability to engage in activities competitive with those of the
Company. Mr. Trampush has been granted options to purchase an aggregate of
100,000 Common Shares (the "Initial Option") exercisable in three equal annual
installments commencing one year after grant. He is also eligible for the grant
annually of options (the "Performance Options") with respect to that number of
Common Shares as is determined by the Compensation Committee based upon his
performance under the agreement with respect to criteria set forth in the
agreement. In the event of a change of control, (i) the Initial Option becomes
exercisable in full, and (ii) Mr. Trampush would be eligible to receive
additional Performance Options or a cash payment in lieu thereof.
Clifford V. Sander and GST Telecom entered into an employment agreement
effective as of March 1, 1994, on terms substantially similar to those of Mr.
Warta's employment agreement. Mr. Sander's agreement provides for his employment
by GST Telecom as its Chief Financial Officer at an initial base salary of
$100,000 annually, which was increased to $150,000 effective January 1, 1997.
Robert H. Hanson is employed by GST USA pursuant to an employment agreement
effective as of August 1, 1994 on terms substantially similar to those contained
in Mr. Warta's employment agreement. Mr. Hanson's agreement provides for an
initial base salary of $100,000 annually, which was increased to $150,000
effective June 18, 1997.
Ian Watson is employed by GST USA as a Vice-President pursuant to an
employment agreement effective as of October 1, 1995 for a term ending on
September 30, 1998. The agreement provides for a salary of $120,000 for the
first year of the agreement, $50,000 for the second year of the agreement and
$10,000 for the third year of the agreement. The agreement contains covenants
restricting Mr. Watson's ability to engage in activities competitive with those
of the Company during the term of his employment and for two years thereafter if
he is terminated for "cause" or he voluntarily terminates his employment for any
reason other than a breach by GST USA of the agreement.
The Company is a party to a consulting agreement with Sunwest Ventures Ltd.
("Sunwest"), a private company of which W. Gordon Blankstein, a director of the
Company, is a principal, for a term commencing on December 30, 1994 and ending
on February 28, 1999 pursuant to which Sunwest (through Mr. Blankstein) is to
provide consulting services to the Company, on terms substantially the same as
those contained in Mr. Warta's employment agreement, for an annual base payment
to Sunwest of $190,000, plus increases as determined by the Board.
EMPLOYEE PLANS
In January 1995, the Company adopted its 1995 Stock Option Plan (the "1995
Plan"). The 1995 Plan is administered by a committee (the "Committee") appointed
by the Board of Directors. The Committee is authorized to grant (i) options that
are intended to qualify as incentive stock options ("Incentive Options") within
the meaning of Section 422 of the Code to employees of the Company and its
subsidiaries (as defined therein), and (ii) options not intended to so qualify
("Nonqualified Options," and together with the Incentive Options, the
"Options"). On September 21, 1995, the Board of Directors increased to 1,750,000
the total number of Common Shares for which options may be granted under the
1995 Plan.
The Committee has the power and authority to designate recipients of the
Options, to determine the terms and conditions of the Options and to interpret
the provisions of the 1995 Plan.
The exercise price of all Options granted under the 1995 Plan must be at
least equal to the fair market value of such shares on the trading day
immediately prior to the date of grant. With respect to any recipient who owns
more than 10% of the voting rights of the Company's outstanding capital stock,
the exercise price of any Incentive Option must be not less than 110% of the
fair market value on the date such options are granted. The maximum term of each
Option granted pursuant to the 1995 Plan is five years. Options shall become
60
<PAGE> 62
exercisable at such times and in such installments as the Committee shall
provide in the terms of each individual Option.
On January 5, 1996, the Board of Directors of the Company adopted, and on
February 15, 1996, the Company's shareholders approved, the 1996 Stock Option
Plan (the "1996 Plan"), which is substantially identical to the 1995 Plan. In
January 1997, the Board of Directors increased the number of Common Shares
reserved for issuance under the 1996 Plan from 400,000 to 700,000 shares and, in
March 1997, the Company's shareholders approved such increase. In September
1997, the Board of Directors increased the number of Common Shares reserved for
issuance under the 1996 Plan to 1,000,000, subject to shareholder approval.
At June 30, 1997, options to purchase an aggregate of 1,345,349 Common
Shares were outstanding under the 1995 Plan and 1996 Plan.
In October 1995, the Board of Directors of the Company established, and on
February 15, 1996, the Company's shareholders approved, the 1996 Employee Stock
Purchase Plan (the "Purchase Plan"), pursuant to which, effective July 1, 1996,
employees of the Company may deduct up to 10% of their respective wages over a
six month period (to a maximum of $12,500) to purchase Common Shares. The
maximum number of Common Shares that may be issued pursuant to the Purchase Plan
is 500,000. At June 30, 1997, 76,551 Common Shares had been issued under the
Purchase Plan.
On May 8, 1996, the Compensation Committee of the Board of Directors
adopted two additional stock options plans, the 1996 Senior Executive Officer
Stock Option Plan (the "Executive Plan") and the 1996 Senior Operating Officer
Stock Option Plan (the "Operating Officer Plan"). The Executive Plan provides
for the grant of Options to purchase up to 600,000 Common Shares to senior
executive officers of the Company. The Company has granted six-year Options to
purchase 200,000 Common Shares to each of Messrs. Warta, Irwin and Blankstein at
an exercise price of $10.00 per share. Each of the Options may be exercised as
to one-third of the shares covered thereby following a period of 20 consecutive
trading days during which the closing sale price of the Common Shares on the
AMEX has been at least $13.75, as to a further one-third of such shares
following a period of 20 consecutive trading days during which the closing sale
price of the Common Shares on the AMEX has been at least $16.50, and as to the
remaining one-third of such shares following a period of 20 consecutive trading
days during which the closing sale price of the Common Shares on the AMEX has
been at least $20.00.
The Operating Officer Plan provides for the grant of Options to purchase up
to 900,000 Common Shares to operating management and directors of GST and its
subsidiaries. At June 30, 1997, Options to purchase 685,000 Common Shares were
outstanding under the Operating Officer Plan.
Thomas Sawyer has been granted options to purchase 85,000 shares of the
common stock of NACT at an exercise price of $9.35 per share. Of such options,
60,000 expire on November 25, 2001 and 25,000 expire on April 10, 2002.
DIRECTORS COMPENSATION
Effective February 24, 1997, each director who is not an employee or does
not provide consulting or personal services to the Company is paid a directors
fee of $15,000 per annum, plus $1,500 per board meeting physically attended.
Each such director is also paid an annual fee of $2,500 for membership on each
committee of the board to which he is appointed. In addition, the Company will
grant to each such director options to purchase 15,000 Common Shares (the
"Directors' Initial Options") and options to purchase 10,000 Common Shares (the
"Directors' Additional Options" and together with the Directors' Initial
Options, the "Directors' Options") for each additional year such person serves
as a director of the Company. The Directors' Options will be exercisable at the
closing price of the Common Shares on the AMEX on the trading day immediately
prior to the date of grant. Initial Directors' Options will vest one year from
the date of grant and Additional Directors' Options will vest immediately on the
date of grant.
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<PAGE> 63
OPTION GRANTS
The following table discloses the particulars of Options to purchase Common
Shares granted by the Company during Fiscal 1996 to the Company's Chief
Executive Officer and the six next highest paid executive officers:
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
-----------------------------------------------------------------
MARKET VALUE ASSUMED ANNUAL
% OF TOTAL OF SECURITIES RATES OF STOCK PRICE
SECURITIES OPTIONS UNDERLYING APPRECIATION FOR OPTION
UNDER GRANTED TO EXERCISE OR OPTIONS ON THE TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE DATE OF GRANT EXPIRATION --------------------------------
NAME(1) GRANTED(#) FISCAL YEAR (SECURITY) (SECURITY) DATE 5% 10% 0%(3)
- ------------------------- ---------- ------------ ----------- -------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Warta............... 200,000(4) 10.7% $ 10.00 11.75 05/07/02 $1,149,225 $2,163,168 $350,000
President and Chief
Executive Officer
Stephen Irwin............ 200,000(4) 10.7% 10.00 11.75 05/07/02 1,149,225 2,163,168 350,000
Vice Chairman 300,000(5) 16.1% 6.75 6.75 09/30/00 559,470 1,236,283 --
W. Gordon Blankstein..... 200,000(4) 10.7% 10.00 11.75 05/07/02 $1,149,225 $2,163,168 $350,000
Chairman
Clifford V. Sander....... 28,000(6) 1.5% 10.00 11.75 05/07/02 160,891 302,844 49,000
Senior Vice President
Thomas E. Sawyer......... 5,000(6) 0.3% 10.00 11.75 05/07/02 28,731 54,079 8,750
Chief Technology
Officer
Robert Hanson............ 15,000(6) 0.8% 10.00 11.75 05/07/02 86,192 162,238 26,250
Senior Vice President
</TABLE>
- ---------------
(1) Positions indicated were as of September 30, 1996. See "Management."
(2) The potential realizable portion of the foregoing table illustrates the
value that might be realized upon exercise of Options immediately prior to
the expiration of their term, assuming (for illustrative purposes only) the
specified compounded rates of appreciation of the Common Shares over the
term of the Option. These numbers do not take into account provisions
providing for the termination of the Option following termination of
employment, nontransferability or difference in vesting terms.
(3) Value at grant date market price.
(4) Options vest in one-third increments at such time as the closing price of
the Common Shares exceeds $13.75, $16.50 and $20.00 per share, respectively,
for 20 consecutive trading days.
(5) Represents a warrant to purchase Common Shares that becomes exercisable in
three equal installments on October 1, 1996, 1997 and 1998.
(6) Options vest over four years.
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<PAGE> 64
OPTION EXERCISES
No Options were exercised in Fiscal 1996 by the Company's Chief Executive
Officer or the six next highest paid executive officers. The following table
discloses the particulars of Options held by such persons at the end of Fiscal
1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NO. OF COMMON SHARES UNDERLYING VALUE (2) OF UNEXERCISED IN THE
UNEXERCISED OPTIONS AT FISCAL YEAR- MONEY OPTIONS AT FISCAL YEAR-END
NAME(1) END (#) EXERCISABLE/UNEXERCISABLE ($) EXERCISABLE/UNEXERCISABLE
- ------------------------------------ ----------------------------------- --------------------------------
<S> <C> <C>
John Warta.......................... 125,000/200,000 648,125/275,000
President and Chief Executive
Officer
Stephen Irwin....................... 115,000/500,000 569,375/1,662,500
Vice Chairman
W. Gordon Blankstein................ 177,500/200,000 1,052,188/275,000
Chairman
Clifford V. Sander.................. 55,000/28,000 289,375/38,500
Senior Vice President
Thomas E. Sawyer.................... 155,000/5,000 921,875/6,875
Chief Technology Officer
Robert Hanson....................... 100,000/15,000 587,500/20,625
Senior Vice President
Ian Watson.......................... 92,500/-- 659,963/--
Vice President of GST USA
</TABLE>
- ---------------
(1) Positions indicated were as of September 30, 1996. See "Management."
(2) Represents the total gain that would be realized if all-in-the-money Options
held at September 30, 1996 were exercised, determined by multiplying the
number of Common Shares underlying the Options by the difference between the
per share Option exercise price and the fair market value of $11.38 per
share at September 30, 1996. An Option is in-the-money if the fair market
value of the underlying Common Shares exceeds the exercise price of the
Option.
63
<PAGE> 65
CERTAIN TRANSACTIONS
On June 23, 1994, the Company entered into agreements (the "GST Telecom
Agreements") with Pacwest Network, L.L.C. ("Pacwest") (an entity controlled by
John Warta, now the Company's Chairman of the Board and Chief Executive
Officer), pursuant to which the Company and Pacwest formed a new corporation,
GST Telecom, for the purpose of developing telecommunications networks. Under
the terms of the agreements, Pacwest contributed the stock of GST Pacific, GST
Tucson and GST Hawaii and the Company made certain funding commitments (all of
which were subsequently satisfied) and contributed its 60% interest in GST
Tucson, for which the Company received 60% and Pacwest received 40% of the
capital stock of GST Telecom. Effective June 1, 1995, the Company acquired an
additional 20% ownership interest in GST Telecom from Pacwest in exchange for
1,000,000 Common Shares. Effective October 20, 1995, the Company acquired
Pacwest's remaining 20% interest in GST Telecom for which Pacwest was eligible
to receive up to a maximum of 1,000,000 Common Shares (valued at $10.00 per
Common Share) based upon the fair market value of a 20% interest in GST Telecom,
as determined by independent appraisal. The Company engaged an investment
banking firm to provide such appraisal, which appraisal valued such 20% interest
at not less than $10 million. In November 1996, 1,000,000 Common Shares, which
had been held in escrow since October 20, 1995, were distributed to the
designees of Pacwest, principally Messrs. Warta and Sander.
Prior to his employment with the Company, Mr. Warta served, and continues
to serve, as a consultant to Tomen for which he is paid a fee. Simultaneously
with the execution of the GST Telecom Agreements, Pacwest contracted with the
Company to receive a fee equal to 1% of the aggregate debt and equity financing
provided by Tomen to the Company. Mr. Sander, Senior Vice President and
Treasurer of the Company, is a member of Pacwest and participates in such fees.
Since the beginning of Fiscal 1996 through September 30, 1997, the Company has
incurred approximately $635,000 of such fees to Pacwest.
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.
The operations of the Company's Hawaiian microwave network require radio
licenses from the FCC. PNI, an entity controlled by Mr. Warta, the Company's
Chairman of the Board and Chief Executive Officer, holds the Hawaii microwave
licenses. Under agreements between the Company and PNI, the Company pays a
monthly fee of $3,000 to PNI and PNI pays an offsetting monthly fee to the
Company, in connection with the operation and use of the network. PNI has an
application pending with the FCC to assign the microwave radio licenses to
Pacwest Network Hawaii Inc., an entity controlled by John Warta.
Magnacom, a company 99% owned by PNI, which is in turn controlled by Mr.
Warta, the Company's Chairman of the Board and Chief Executive Officer, holds
various PCS licenses. Magnacom has 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 submitted
the down payment late and is waiting for the FCC to rule on Magnacom's request
for a waiver of the down payment deadline.
Magnacom and the Company have entered into 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 approximately $14.0 million as pre-payments for future PCS
services.
64
<PAGE> 66
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. Accordingly,
until such time as FCC regulations or administrative action permit the ownership
by foreign nationals of more than 25% of a company that controls another company
holding a radio license, the option by its terms is initially limited to a 24%
interest in Magnacom.
In February 1997, an affiliate of Magnacom, Guam Net, 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 Guam Net $.4
million as a pre-payment for future PCS services.
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.
The provision of wireless telecommunications service by Magnacom and Guam
Net 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 Magnacom or Guam Net
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 Guam
Net. See "Risk Factors -- Possible Inability to Recover Payments Made to
Magnacom."
In November 1996, 1,500,000 of the common shares of Global owned by the
Company were purchased at cost from W. Gordon Blankstein, presently a director
of the Company and at that time, Chairman of the Company. 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.
Stephen Irwin, Vice Chairman and Secretary of the Company, is of counsel to
the law firm of Olshan Grundman Frome & Rosenzweig LLP, counsel to the Company.
In connection with such services, such firm received fees of approximately $1.8
million for each of Fiscal 1996 and Fiscal 1997.
Peter E. Legault, a director of the Company, is a director and Vice
President of Thomson Kernaghan & Co. Ltd., which was engaged by the Company
during Fiscal 1996 and Fiscal 1997 to solicit sources of financing for the
Company, and was one of the placement agents for the sale of the Special
Warrants. In connection with such services, such firm received fees of
approximately $500,000 during Fiscal 1997.
On May 5, 1997, the Company loaned $100,000 to Joseph Basile, the
President, Chief Operating Officer and a director of the Company, to enable him
to purchase a new primary residence in the Vancouver, Washington area. The loan
matures on May 4, 2000, accrues interest at a rate of 6% per annum and is to be
prepaid to the extent of the proceeds from the sale of Mr. Basile's former
residence and from the sale of Common Shares acquired upon exercise of options
held by Mr. Basile. Such loan was made pursuant to the terms of his employment
agreement with the Company, which was approved by the Board of Directors of the
Company.
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<PAGE> 67
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of September 30, 1997
with respect to the beneficial ownership of the Common Shares by (i) each person
known to the Company to be the beneficial owner of 5% or more thereof, (ii) each
director of the Company, (iii) the Chief Executive Officer and the six most
highly compensated executive officers of the Company whose compensation exceeded
$100,000 for 1996 and (iv) all executive officers and directors as a group.
Unless otherwise indicated, each of the named persons has sole voting and
investment power with respect to all Common Shares owned by him. All persons
identified below as holding options are deemed beneficial owners of the Common
Shares subject to such options by reason of their right to acquire such shares
within 60 days after September 30, 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS(1)
---------------------------
PRIOR TO FOLLOWING THE
NO. OF THE STOCK STOCK
NAME OF BENEFICIAL OWNER SHARES OFFERING OFFERING
- -------------------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
John Warta.............................................. 1,672,468(2) 6.0% 4.8%
Tomen................................................... 1,826,057(3) 6.6% 5.2%
Clifford V. Sander...................................... 426,100(4) 1.5% 1.2%
Ian Watson.............................................. 385,100 1.4% 1.1%
Stephen Irwin........................................... 376,345(5) 1.3% 1.1%
Thomas E. Sawyer........................................ 290,254(6) 1.0% *
W. Gordon Blankstein.................................... 286,800(7) 1.0% *
Robert H. Hanson........................................ 151,922(8) * *
Peter E. Legault........................................ 129,806(9) * *
Jack G. Armstrong....................................... 52,500(10) * *
Joseph A. Basile, Jr. .................................. -- -- --
Mitsuhiro Naoe.......................................... --(11) -- --
Joseph G. Fogg, III..................................... --(12) -- --
A. Roy Megarry.......................................... -- -- --
Directors and Officers of the Company
as a Group (13 persons)............................... 3,753,295(13) 13.3% 10.6%
</TABLE>
- ---------------
* Less than 1%.
(1) Does not reflect the Redeemable Preferred Shares issued in the Princes Gate
Investment. See "Description of Certain Indebtedness and Redeemable
Preferred Shares."
(2) Includes 125,000 Common Shares issuable upon exercise of options. Does not
include 200,000 Common Shares issuable upon the exercise of options that
are not exercisable until the market price of the Common Shares on the AMEX
reaches certain levels for certain prescribed periods. See
"Management -- Employee Plans."
(3) Includes 246,155 Common Shares issuable upon the exercise of warrants held
by Tomen.
(4) Includes 62,000 Common Shares issuable upon exercise of options.
(5) Includes (i) 100,000 Common Shares issuable upon exercise of options and
(ii) 200,000 Common Shares issuable upon exercise of an outstanding
warrant. Does not include (i) 200,000 Common Shares issuable upon the
exercise of options that are not exercisable until the closing price of the
Common Shares on the AMEX reaches certain levels for certain prescribed
periods. See "Management -- Employee Plans."
(6) Includes 81,250 Common Shares issuable upon exercise of options.
(7) Does not include 200,000 Common Shares issuable upon the exercise of
options that are not exercisable until the closing price of the Common
Shares on the AMEX reaches certain levels for certain prescribed periods.
See "Management -- Employee Plans."
(8) Includes 53,750 Common Shares issuable upon exercise of options.
(9) Includes 43,750 Common Shares issuable upon exercise of options.
(10) Includes 32,500 Common Shares issuable upon exercise of options.
(11) Does not include 1,751,048 Common Shares beneficially owned by Tomen.
(12) Does not include the Redeemable Preferred Shares beneficially owned by
Princes Gate. See "Description of Certain Indebtedness and Redeemable
Preferred Shares."
(13) Includes an aggregate of 698,250 Common Shares issuable upon exercise of
options and warrants. Does not include 600,000 Common Shares issuable upon
the exercise of options that are not exercisable until the market price of
the Common Shares on the AMEX reaches certain levels for certain prescribed
periods.
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<PAGE> 68
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, to be dated as of the
Closing Date between the Company and United States Trust Company of New York,
Trustee (in such capacity, the "Trustee"). A copy of the form of Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act of 1939, as amended. Whenever particular defined terms of the Indenture not
otherwise defined herein are referred to, such defined terms are incorporated
herein by reference.
GENERAL
The Notes will be unsecured, senior subordinated obligations of the
Company, initially limited to $
million aggregate principal amount. Each Note will bear interest at the rate
shown on the front cover of this Prospectus from the Closing Date. Although for
federal income tax purposes a significant amount of original issue discount,
taxable as ordinary income, will be recognized by a Holder as such discount
accrues from the Closing Date, no interest will be paid on the Notes prior to
, 2003. Until , 2002 (the "Final Interest Accrual Date"),
interest will accrue and be compounded semi-annually on each and
(each an "Interest Accrual Date"), commencing , 1998, but
will not be payable in cash. From and after , 2002, interest on the
sum of the principal amount of each Note and the accrued and unpaid interest
thereon through the Final Interest Accrual Date (the "Final Accumulated Interest
Amount") will be payable semiannually (to Holders of record at the close of
business on or immediately preceding the Interest Payment
Date) on and of each year, commencing , 2003. The
Notes will mature, and the principal and accrued interest (including the Final
Accumulated Interest Amount) will be payable, on , 2007.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially will
be the corporate trust office of the Trustee at 114 West 47th Street, New York,
New York 10036-1532); provided that, at the option of the Company, payment of
interest may be made by check mailed to the respective addresses of the Holders
as each such address appears in the Security Register.
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 of principal amount and integral multiples thereof. The
Notes will initially be represented by one or more global Notes (the "Global
Notes") and will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of a nominee of the
Depositary. Except as set forth in "-- Book-Entry; Delivery and Form," owners of
beneficial interests in such Global Note will not be entitled to have Notes
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in definitive form and will not be considered the owners or
Holders thereof under the Indenture. See "-- Book-Entry; Delivery and Form." No
service charge will be made for any registration of transfer or exchange of
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
The Company may, subject to the covenants described below under "Covenants"
and applicable law, issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued would be treated as
a single class for all purposes under the Indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time or from time to time, on or after , 2002 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holder's last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount plus the Final Accumulated Interest Amount), plus accrued
interest thereon to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is on or prior to the Redemption
Date to receive interest due
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<PAGE> 69
on an Interest Payment Date), if redeemed during the 12-month period commencing
of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------- ----------
<S> <C>
2002...................................................... %
2003...................................................... %
2004 and thereafter....................................... 100%
</TABLE>
In addition, at any time prior to , 2000, up to % of the
aggregate principal amount of the Notes may be redeemed by the Company from the
proceeds of one or more sales of its Capital Stock (other than Redeemable
Stock), at % of the sum of their principal amount plus the Accumulated
Interest Amount on the redemption date; provided that after any such redemption
at least $ million aggregate principal amount of Notes remains outstanding.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate; provided that no Note of $1,000 in principal amount or less shall
be redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
The Notes will also be subject to redemption as a whole, but not in part,
at the option of the Company at 100% of their principal amount, together with
accrued interest thereon, to the Redemption Date, in the event the Company has
become or would become obligated to pay, on the next date on which any amount
would be payable with respect to the Notes, any Additional Amounts as a result
of a change in the laws (including any regulations promulgated thereunder) of
Canada (or any political subdivision or taxing authority thereof or therein), or
any change in any official position regarding the application or interpretation
of such laws or regulations, which change is announced or becomes effective on
or after the date of this Prospectus.
RANKING
The Notes will be unsecured, senior subordinated indebtedness of the
Company. The payment of the Senior Subordinated Obligations will, to the extent
set forth in the Indenture, be subordinated in right of payment to the prior
payment in full, in cash or cash equivalents, of all Senior Indebtedness,
including, without limitation, the Company's obligations under its guarantee of
the Senior Notes and the Company's obligations under its guarantee of the
intercompany notes issued by GST USA to GST Funding for the purchase of
equipment. See "Risk Factors -- Substantial Indebtedness," "-- Possible
Inability to Service Debt," "-- Holding Company Structure; Secured Indebtedness;
Ranking of the Notes" and "Capitalization."
"Senior Subordinated Obligations" means any principal of, premium, if any,
or interest on the Notes payable pursuant to the terms of the Notes or upon
acceleration, including any amounts received upon the exercise of rights of
rescission or other rights of action (including claims for damages) or
otherwise, to the extent relating to the purchase of Notes or amounts
corresponding to such principal, premium, if any, or interest on the Notes.
To the extent any payment of Senior Indebtedness (whether by or on behalf
of the Company, as proceeds of security or enforcement of any right of setoff or
otherwise) is declared to be fraudulent or preferential, set aside or required
to be paid to any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then if such payment is recovered by, or paid over
to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person, the Senior Indebtedness or part thereof originally intended to
be satisfied shall be deemed to be reinstated and outstanding as if such payment
had not occurred. To the extent the obligation to repay any Senior Indebtedness
is declared to be fraudulent, invalid, or otherwise set aside under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
the obligation so declared fraudulent, invalid or otherwise set aside (and all
other amounts that would come due with respect thereto had
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<PAGE> 70
such obligation not been so affected) shall be deemed to be reinstated and
outstanding as Senior Indebtedness for all purposes of the Indenture as if such
declaration, invalidity or setting aside had not occurred. Upon any payment or
distribution of assets or securities of the Company of any kind or character,
whether in cash, property or securities, upon any dissolution or winding up or
total or partial liquidation or reorganization of the Company, whether voluntary
or involuntary or in bankruptcy, insolvency, receivership or other proceedings,
all amounts due or to become due upon all Senior Indebtedness (including any
interest accruing subsequent to an event of bankruptcy, whether or not such
interest is an allowed claim enforceable against the debtor under the United
States Bankruptcy Code) shall first be paid in full, in cash or cash
equivalents, before the Holders of the Notes or the Trustee on behalf of the
Holders of the Notes shall be entitled to receive any payment by the Company on
account of Senior Subordinated Obligations, or any payment to acquire any of the
Notes of any cash, property or securities. Before any payment may be made by, or
on behalf of, the Company of any Notes upon any such dissolution, winding up,
liquidation or reorganization, any payment or distribution of assets or
securities of the Company of any kind or character, whether in cash, property or
securities, to which the Holders of the Notes or the Trustee on behalf of the
Holders of the Notes would be entitled, but for the subordination provisions of
the Indenture, shall be made by the Company, or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person making such
payment or distribution or by the Holders of the Notes or the Trustee if
received by them or it, directly to the holders of the Senior Indebtedness (pro
rata to such holders on the basis of the respective amounts of Senior
Indebtedness held by such holders) or their representatives or to any trustee or
trustees under any other indenture pursuant to which any such Senior
Indebtedness may have been issued, as their respective interests appear, to the
extent necessary to pay all such Senior Indebtedness in full, in cash or cash
equivalents after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness.
No direct or indirect payment by or on behalf of the Company of Senior
Subordinated Obligations, whether pursuant to the terms of the Notes or upon
acceleration or otherwise, shall be made if, at the time of such payment, there
exists a default in the payment of all or any portion of the obligations on any
Senior Indebtedness of the Company and such default shall not have been cured or
waived or the benefits of this sentence waived by or behalf of the holders of
such Senior Indebtedness. In addition, during the continuance of any other event
of default with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may be accelerated, upon receipt by the Trustee of written
notice from the trustee or other representative for the holders of such
Designated Senior Indebtedness (or the holders of at least a majority in
principal amount of such Designated Senior Indebtedness then outstanding), no
payment of Senior Subordinated Obligations may be made by or on behalf of the
Company upon or in respect of the Notes for a period (a "Payment Blockage
Period") commencing on the date of receipt of such notice and ending 159 days
thereafter (unless, in each case, such Payment Blockage Period shall be
terminated by written notice to the Trustee from such trustee of, or other
representatives for, such holders). Not more than one Payment Blockage Period
may be commenced with respect to the Notes during any period of 360 consecutive
days. Notwithstanding anything in the Indenture to the contrary, there must be
180 consecutive days in any 360-day period in which no Payment Blockage Period
is in effect. No event of default that existed or was continuing (it being
acknowledged that any subsequent action that would give rise to any event of
default pursuant to any provision under which an event of default previously
existed or was continuing shall constitute a new event of default for this
purpose) on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period shall be, or shall be made, the basis for the commencement of a second
Payment Blockage Period by the representative for, or the holders of, such
Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such event of default shall have been cured or waived
for a period of not less than 90 consecutive days.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of the Company who are not holders of
Senior Indebtedness may recover less, ratably, than holders of Senior
Indebtedness and may recover more, ratably, than Holders of the Notes.
"Senior Indebtedness" means the following obligations of the Company,
whether outstanding on the Closing Date or thereafter Incurred: (i) all
Indebtedness and all other monetary obligations of the Company under its
guarantee of the Senior Notes, (ii) all other Indebtedness of the Company (other
than the
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<PAGE> 71
Convertible Notes), including principal and interest on such Indebtedness,
unless such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, is pari passu with, or
subordinated in right of payment to, the Notes, and (iii) all fees, expenses and
indemnities payable in connection with the Company's guarantee of the Senior
Notes (including any agreement pursuant to which the Senior Notes are issued);
provided that the term "Senior Indebtedness" shall not include (a) any
Indebtedness of the Company that, when Incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code, was without
recourse to the Company, (b) any Indebtedness of the Company to a Subsidiary of
the Company or to a joint venture in which the Company has an interest, (c) any
Indebtedness of the Company to the extent not permitted by the "Limitation on
Indebtedness" covenant or the "Limitation on Senior Subordinated Indebtedness"
covenant described below, (d) any repurchase, redemption or other obligation in
respect of Redeemable Stock, (e) any Indebtedness to any employee of the Company
or any of its Subsidiaries, (f) any liability for federal, state, local or other
taxes owed or owing by the Company or (g) any Trade Payables. Senior
Indebtedness will also include interest accruing subsequent to events of
bankruptcy of the Company and its Subsidiaries at the rate provided for in the
document governing such Senior Indebtedness, whether or not such interest is an
allowed claim enforceable against the debtor in a bankruptcy case under the
federal bankruptcy law.
"Designated Senior Indebtedness" means the Senior Notes and any
Indebtedness constituting Senior Indebtedness that, at the date of
determination, has an aggregate principal amount outstanding of at least $25
million and that is specifically designated by the Company in the instrument
creating or evidencing such Senior Indebtedness as "Designated Senior
Indebtedness."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
terms used herein for which no definition is provided.
"Accumulated Interest Amount" means, as of any date, for each $1,000
principal amount of Notes, the amount of interest accrued on such Notes from the
Closing Date to such date, compounded semi-annually on each Interest Accrual
Date.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person (other than net income attributable to a
Restricted Subsidiary) in which any Person (other than the Company or any of its
Restricted Subsidiaries) has an interest and the net income of any Unrestricted
Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any of its Restricted Subsidiaries
by such other Person, or such Unrestricted Subsidiary, during such period; (ii)
solely for the purposes of calculating the amount of Restricted Payments that
may be made pursuant to clause (C) of the first paragraph of the "Limitation on
Restricted Payments" covenant described below (and in such case, except to the
extent includable pursuant to clause (i) above), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
all or substantially all of the property and assets of such Person are acquired
by the Company or any of its Restricted Subsidiaries; (iii) the net income of
any Restricted Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of such net
income is not at the time permitted by the operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary; (iv) any gains
or losses (on an after-tax basis) attributable to Asset Sales; (v) except for
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below, any amount paid or accrued as dividends on
Preferred Stock of the Company or any Restricted Subsidiary owned by Persons
other than the Company and any of its Restricted Subsidiaries; and (vi) all
extraordinary gains and extraordinary losses.
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<PAGE> 72
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the quarterly or annual consolidated balance
sheet of the Company and its Restricted Subsidiaries, prepared in conformity
with GAAP and most recently filed with the Commission pursuant to the
"Commission Reports and Reports to Holders" covenant described below.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary of the Company or shall be merged into or
consolidated with the Company or any of its Restricted Subsidiaries; provided
that such Person's primary business is related, ancillary or complementary to
the businesses of the Company and its Restricted Subsidiaries on the date of
such investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transactions) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property or assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of the Indenture applicable to mergers, consolidations and sales of assets of
the Company; provided that "Asset Sale" shall not include (A) sales or other
dispositions of inventory, receivables and other current assets or (B) sales or
other dispositions of assets with a fair market value (as certified in an
Officers' Certificate) not in excess of $1 million; or (C) sales or other
dispositions of assets to the extent the Company or a Restricted Subsidiary
receives consideration at least equal to the fair market value of the assets
sold or disposed of, provided that the consideration received consists of
property or assets (other than current assets) of a nature or type or that are
used in a business (or a company having property or assets of a nature or type,
or engaged in a business) similar or related to the nature or type of the
property and assets of, or business of, the Company and its Restricted
Subsidiaries existing on the date of such sale or other disposition.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity
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with GAAP, is required to be capitalized on the balance sheet of such Person;
and "Capitalized Lease Obligations" means the discounted present value of the
rental obligations under such lease.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Stock representing more than 30% of the total voting power of the Voting
Stock of the Company on a fully diluted basis; (ii) individuals who on the
Closing Date constitute the Board of Directors (together with any new directors
whose election by the Board of Directors or whose nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office; or (iii) all
of the Common Stock of GST USA is not beneficially owned by the Company.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to either extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by the Company or any of its Restricted Subsidiaries) and all but the
principal component of rentals in respect of Capitalized Lease Obligations paid,
accrued or scheduled to be paid or to be accrued by the Company and its
Restricted Subsidiaries during such period; excluding, however, (i) any amount
of such interest of any Restricted Subsidiary if the net income of such
Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded from
the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Notes, all
as determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination, shareholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and
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the principal amount of any promissory notes receivable from the sale of Capital
Stock of the Company or any of its Restricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Convertible Notes" means the 13 7/8% Convertible Senior Subordinated
Discount Notes due 2005 of the Company issued pursuant to the Convertible Notes
Indenture.
"Convertible Notes Indenture" means the convertible notes indenture dated
December 19, 1995 among the Company, as issuer, GST USA, as guarantor, and
United States Trust Company of New York.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Development Company" means a Restricted Subsidiary whose primary business
is the development, ownership and operation of alternative access
telecommunications networks.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors of the Company (whose determination shall
be conclusive) and evidenced by a Board Resolution.
"Final Accumulated Interest Amount" means, for each $1,000 principal amount
of Notes, the amount of interest accrued on such Notes from the Closing Date,
compounded semi-annually on each Interest Accrual Date, to the Final Interest
Accrual Date.
"Final Interest Accrual Date" means , 2002.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained in the Indenture
shall be computed in conformity with GAAP applied on a consistent basis, except
that calculations made for purposes of determining compliance with the terms of
the covenants and with other provisions of the Indenture shall be made without
giving effect to (i) the amortization of any expenses incurred in connection
with the offering of the Notes and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by
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bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto), (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services, which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables, (v) all obligations of such
Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
provided (A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with GAAP, (B) money borrowed
and set aside at the time of the Incurrence of any Indebtedness in order to
pre-fund the payment of interest as such Indebtedness shall be deemed not to be
"Indebtedness" and (C) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis as at the date of determination
(the "Transaction Date") to (ii) the Consolidated EBITDA of the Company for the
then most recent four full fiscal quarters for which reports have been filed
pursuant to the "Commission Reports and Report to Holders" covenant described
below (such four full fiscal quarter period being referred to herein as the
"Four Quarter Period"); provided that (x) pro forma effect shall be given to any
Indebtedness Incurred from the beginning of the Four Quarter Period through the
Transaction Date (including any Indebtedness Incurred on the Transaction Date),
to the extent outstanding on the Transaction Date, (y) if during the period
commencing on the first day of such Four Quarter Period through the Transaction
Date (the "Reference Period"), the Company or any of its Restricted Subsidiaries
shall have engaged in any Asset Sale, Consolidated EBITDA for such period shall
be reduced by an amount equal to the EBITDA (if positive), or increased by an
amount equal to the EBITDA (if negative), directly attributable to the assets
which are the subject of such Asset Sale as if such Asset Sale had occurred on
the first day of such Reference Period or (z) if during such Reference Period
the Company or any of the Restricted Subsidiaries shall have made any Asset
Acquisition, Consolidated EBITDA of the Company shall be calculated on a pro
forma basis as if such Asset Acquisition and any Incurrence of Indebtedness to
finance such Asset Acquisition had taken place on the first day of such
Reference Period.
"Interest Accrual Date" means each and , commencing
, 1998.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment) held by the Company
and its Restricted Subsidiaries of any Person that has ceased to be a Restricted
Subsidiary by reason of any transaction permitted by clause (iii) of the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant. For purposes of the definition of "Unrestricted
Subsidiary" and the "Limitation on Restricted Payments" covenant described
below, (i) "Investment" shall include the fair market value of the assets (net
of liabilities to the Company or any of its Restricted Subsidiaries) of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary and
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shall exclude the fair market value of the assets (net of liabilities) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (ii) any property transferred to or from
an Unrestricted Subsidiary shall be valued at its fair market value at the time
of such transfer, in each case as determined by the Board of Directors in good
faith.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
"NACT" means NACT Telecommunications, Inc., a Delaware corporation.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender such Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side thereof
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion thereof; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. On the Payment Date, the Company shall (i) accept
for payment on a pro rata basis Notes or portions thereof tendered pursuant to
an Offer to Purchase; (ii) deposit with the Paying
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Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of an
Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided that such person's primary business is related, ancillary or
complementary to the businesses of the Company and its Restricted Subsidiaries
on the date of such Investment; (ii) a Temporary Cash Investment; (iii) payroll,
travel and similar advances to cover matters that are expected at the time of
such advances ultimately to be treated as expenses in accordance with GAAP; (iv)
loans or advances to employees made in the ordinary course of business that do
not exceed $1 million in the aggregate at any time outstanding; and (v) stock,
obligations or securities received in satisfaction of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, (1) to finance the cost
(including, without limitation, the cost of design, development, construction,
acquisition, installation or integration) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of or within six
months after the later of the acquisition, the completion of construction or the
commencement of full operation of such property or (2) to refinance any
Indebtedness previously so secured, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of stock or
Indebtedness of, any corporation existing at the time such corporation becomes,
or becomes a part of, any Restricted Subsidiary;
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provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are either within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed to protect the
Company or any of its Restricted Subsidiaries from fluctuations in interest
rates or the price of commodities; (xvii) Liens arising out of conditional sale,
title retention, consignment or similar arrangements for the sale of goods
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business in accordance with the past practices of the Company
and its Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on
or sales of receivables.
"Redeemable Preferred Shares" means the Series A Convertible Preference
Shares of the Company outstanding on the Closing Date.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its term or otherwise is (i) required to be redeemed prior to the Stated
Maturity of the Notes, (ii) redeemable at the option of the holder of such class
or series of Capital Stock at any time prior to the Stated Maturity of the Notes
or (iii) convertible into or exchangeable for Capital Stock referred to in
clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to
the Stated Maturity of the Notes; provided that any Capital Stock that would not
constitute Redeemable Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Redeemable Stock if the "asset
sale" or "change of control" provisions applicable to such Capital Stock are no
more favorable to the holders of such Capital Stock than the provisions
contained in "Limitation on Asset Sales" and "Repurchase of Notes upon a Change
of Control" covenants described below and such Capital Stock specifically
provides that such Person will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to the "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Senior Notes" means the 13 7/8% Senior Discount Notes due 2005 of GST USA
issued pursuant to the Senior Notes Indenture.
"Senior Notes Indenture" means the senior notes indenture dated December
19, 1995 among GST USA, as issuer, the Company, as guarantor, and United States
Trust Company of New York.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
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"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker-dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard & Poor's Ratings Services, and (v) securities with maturities of six
months or less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Services or Moody's Investors Service,
Inc.
"Tomen" means Tomen Corporation or its Affiliates.
"Tomen Facility" means, collectively, the Tomen Master Agreement together
with all other agreements (including credit agreements), instruments and
documents executed or delivered pursuant thereto or in connection therewith, in
each case as such agreements, instruments or documents may be amended,
supplemented, extended, renewed, replaced or otherwise modified from time to
time.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) NACT or any other Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary; provided that NACT shall be deemed to
be a Restricted Subsidiary for purposes of the "Limitation on Restricted
Payments" covenant (except that NACT shall be an Unrestricted Subsidiary for
purposes of the limitation on Investments by the Company and its Restricted
Subsidiaries) and the definition of "Asset Sale." The Board of Directors may
designate any Restricted Subsidiary (including any newly acquired or newly
formed Subsidiary), other than GST USA or a Subsidiary Guarantor, to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, the Company or any Restricted
Subsidiary; provided that (A) any Guarantee by the Company or any Restricted
Subsidiary of any Indebtedness of the Subsidiary being so designated shall be
deemed an Incurrence of such Indebtedness and an Investment by the Company or
such Restricted Subsidiary at the time of such designation; (B) either (I) the
Subsidiary to be so designated has total assets of $1,000 or less or (II) if
such Subsidiary has assets greater than $1,000, that such designation would be
permitted under the "Limitation on Restricted Payments" covenant described below
and (C) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (A) above would be permitted under the "Limitation on
Indebtedness" and "Limitation on Restricted Payments" covenants described below.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary of the Company; provided that immediately after giving
effect to such designation (x) the Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation is permitted
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to be Incurred for all purposes of the Indenture and (y) no Default or Event of
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company and GST USA may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness and
the receipt and application of the proceeds therefrom, the Indebtedness to
EBITDA Ratio would be greater than zero and less than 5:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time (including, but not limited to,
Indebtedness under the Tomen Facility) in an aggregate principal amount not to
exceed $320 million, less any amount of Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness (A) to the Company evidenced by a promissory note or (B) to any of
its Restricted Subsidiaries; provided that any subsequent event which results in
any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness, other than Indebtedness
Incurred under clause (i), (ii), (iv), (v), (vii) or (viii) of this paragraph,
and any refinancings thereof in an amount not to exceed the amount so refinanced
or refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the proceeds of which are used to refinance or refund the Notes or
Indebtedness that is pari passu with, or subordinated in right of payment to,
the Notes shall only be permitted under this clause (iii) if (A) in case the
Notes are refinanced in part, or the Indebtedness to be refinanced is pari passu
with the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is outstanding,
is expressly made pari passu with, or subordinate in right of payment to, the
remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated
in right of payment to the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
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Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of the Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (v)
Indebtedness of the Company not to exceed, at any one time outstanding, two
times the Net Cash Proceeds received by the Company after the Closing Date from
the issuance and sale of its Capital Stock (other than Redeemable Stock) to a
Person other than a Subsidiary of the Company to the extent such Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or
clauses (iii), (iv) or (vi) of the second paragraph of the "Limitation on
Restricted Payments" covenant described below to make a Restricted Payment;
provided that such Indebtedness does not mature prior to the Stated Maturity of
the Notes and has an Average Life longer than the Notes; (vi) Indebtedness
Incurred to finance the cost (including, without limitation, the cost of design,
development, construction, acquisition, installation or integration) of network
assets (including, without limitation, equipment and real property and leasehold
improvements that are necessary to install or operate network assets; provided
that in no event shall the cost of any such real property and leasehold
improvements financed hereby exceed 20% of the total cost of the related network
assets) or inventory purchased or leased by the Company or any of its Restricted
Subsidiaries after the Closing Date; (vii) Indebtedness under one or more
revolving credit or working capital facilities in an aggregate principal amount
outstanding at any time not to exceed the lesser of (A) $50 million and (B) 75%
of the consolidated book value of the accounts receivable of the Company and its
Restricted Subsidiaries; and (viii) Indebtedness of the Company or GST USA to
the extent the proceeds thereof are promptly (a) used to purchase Notes tendered
in an Offer to Purchase made as a result of a Change of Control or (b) deposited
to defease the Notes as described below under "Defeasance."
(b) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under the
Tomen Facility on or prior to the Closing Date shall be treated as Incurred
pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant and (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this "Limitation on Indebtedness" covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in the above clauses, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
Limitation on Senior Subordinated Indebtedness
The Company will not Incur any Indebtedness, other than the Notes, that is
expressly made subordinated in right of payment to any Senior Indebtedness
unless such Indebtedness, by its terms and by the terms of any agreement or
instrument pursuant to which such Indebtedness is outstanding is expressly made
pari passu with, or subordinated in right of payment to, the Notes pursuant to
provisions substantially similar to those contained in the Indenture; provided,
however, that the foregoing limitation shall not apply to distinctions between
categories of Senior Indebtedness that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all Senior
Indebtedness.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on its Capital Stock (other than dividends or distributions payable solely in
shares of its or such Restricted Subsidiary's Capital Stock (other than
Redeemable Stock) of the same class held by such holders or in options, warrants
or other rights to acquire such shares of Capital Stock) held by Persons other
than the Company or any of its Restricted Subsidiaries (and other than pro rata
dividends or distributions on Common Stock of Restricted Subsidiaries), (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of the Company (including options, warrants or other
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rights to acquire such shares of Capital Stock) held by Persons other than any
Wholly Owned Restricted Subsidiaries, (iii) make any voluntary or optional
principal payment, or voluntary or optional redemption, repurchase, defeasance,
or other acquisition or retirement for value, of Indebtedness of the Company
that is subordinated in right of payment to the Notes, or (iv) make any
Investment, other than a Permitted Investment, in any Person (such payments or
any other actions described in clauses (i) through (iv) being collectively
"Restricted Payments") if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Default or Event of Default shall have
occurred and be continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant or (C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Board Resolution)
made after the Closing Date shall exceed the sum of (1) 50% of the aggregate
amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated
Net Income is a loss, minus 100% of such amount) (determined by excluding income
resulting from transfers of assets by the Company or a Restricted Subsidiary to
an Unrestricted Subsidiary) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the fiscal
quarter immediately following the Closing Date and ending on the last day of the
last fiscal quarter preceding the Transaction Date for which reports have been
filed pursuant to the "Commission Reports and Reports to Holders" covenant plus
(2) the aggregate Net Cash Proceeds received by the Company after the Closing
Date from the issuance and sale permitted by the Indenture of its Capital Stock
(other than Redeemable Stock) to a Person who is not a Subsidiary of the
Company, or from the issuance to a Person who is not a Subsidiary of the Company
of any options, warrants or other rights to acquire Capital Stock of the Company
(in each case, exclusive of any Redeemable Stock or any options, warrants or
other rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes), in each case except to
the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (v) of the second paragraph of the "Limitation on Indebtedness" covenant,
plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments and reductions in Investments made pursuant
to clause (vi) of the second paragraph of this "Limitation on Restricted
Payments" covenant) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary (except to the
extent any such payment is included in the calculation of Adjusted Consolidated
Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed the amount of Investments previously made by the
Company and its Restricted Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes,
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of the "Limitation on Indebtedness" covenant; (iii) the repurchase,
redemption or other acquisition of Capital Stock of the Company in exchange for,
or out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Redeemable Stock) of the Company; (iv) the acquisition
of Indebtedness of the Company which is subordinated in right of payment to the
Notes, in exchange for, or out of the proceeds of, a substantially concurrent
offering of, shares of the Capital Stock of the Company (other than Redeemable
Stock); (v) payments or distributions, in the nature of satisfaction of
dissenters' rights, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture applicable
to mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company; (vi) Investments in any Person or Persons
(other than an Affiliate (other than a Subsidiary) of the Company), the primary
business of which is related, ancillary or complementary to the business of the
Company and its Restricted Subsidiaries on the date of such Investments, in an
aggregate amount not to exceed $50 million plus, (a) in any fiscal year, an
amount not to exceed 10% of the Company's Consolidated EBITDA (if positive) for
the immediately preceding fiscal year, (b) an amount not to exceed the Net Cash
Proceeds received by the Company after May 13, 1997 from the issuance and sale
permitted by the Indenture of its Capital Stock (other than Redeemable Stock) to
a Person
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that is not a Subsidiary of the Company, except to the extent such Net Cash
Proceeds are used to Incur Indebtedness pursuant to clause (v) under the
"Limitation on Indebtedness" covenant or to make Restricted Payments pursuant to
clause (C)(2) of the first paragraph or clause (iii) or (iv) of this paragraph
of this "Limitation on Restricted Payments" covenant and (c) the net reduction
in Investments in any Person made pursuant to this clause (vi), except to the
extent such reduction is included in the calculation of Adjusted Consolidated
Net Income; provided that the net reduction in any such Investment shall not
exceed the amount of Investments previously made in such Person; (vii)
Investments by the Company or a Restricted Subsidiary made pursuant to the
second paragraph of the "Limitation on Investments" covenant, in an aggregate
amount not to exceed $25 million; and (viii) cash payments in lieu of the
issuance of fractional Common Shares upon conversion (including mandatory
conversion) of the Convertible Notes provided for in the Convertible Notes
Indenture or the Redeemable Preferred Shares; provided that, except in the case
of clauses (i) and (iii), no Default or Event of Default shall have occurred and
be continuing or occur as a consequence of the actions or payments set forth
herein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof and an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof), and the Net Cash Proceeds from any issuance of
Capital Stock referred to in clauses (iii), (iv) and (vi) shall be included in
calculating whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes or Indebtedness that is pari passu with the Notes, then
the Net Cash Proceeds of such issuance shall be included in clause (C) of the
first paragraph of this "Limitation on Restricted Payments" covenant only to the
extent such proceeds are not used for such redemption, repurchase or other
acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreement in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary; (v) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital
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Stock of, or property and assets of, such Restricted Subsidiary; (vi) with
respect to any Development Company, imposed pursuant to or in connection with
any Indebtedness Incurred by such Development Company to finance at least 50% of
the total financing required for the development and construction of all of such
Development Company's alternative access networks or any Indebtedness Incurred
to refinance or replace such Indebtedness; provided that (a) such Indebtedness
(including such refinancing Indebtedness) is permitted to be Incurred under the
"Limitation on Indebtedness" covenant described above, (b) such encumbrances and
restrictions are no more restrictive in any material respect than those
encumbrances and restrictions existing under the Tomen Facility as in effect on
the Closing Date and (c) such encumbrances and restrictions shall only apply to
such Development Company for so long as such Indebtedness (or such refinancing
Indebtedness) remains outstanding; or (vii) with respect to any Development
Company (a "Restricted Development Company"), imposed pursuant to or in
connection with any Indebtedness Incurred by another Development Company to
finance at least 50% of the total financing required for the development and
construction of all of such other Development Company's alternative access
networks or any Indebtedness Incurred to refinance or replace such Indebtedness;
provided that (a) such encumbrances and restrictions shall not apply to such
Restricted Development Company prior to the occurrence of an event of default
under such Indebtedness (or refinancing Indebtedness), (b) such Indebtedness
(including such refinancing Indebtedness) is permitted to be Incurred under the
"Limitation on Indebtedness" covenant, (c) such encumbrances and restrictions
are no more restrictive in any material respect than those contemplated by the
Tomen Facility as in effect on the Closing Date and (d) at least 50% of the
total financing required for the development and construction of all of such
Restricted Development Company's alternative access networks was provided by the
holder of the Indebtedness of such other Development Company.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances or sales to foreign nationals of shares of
Capital Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law; (iii) if, immediately after giving effect to such issuance or
sale, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary; or (iv) a sale of Common Stock of Phoenix Fiber, and in connection
and concurrently with such sale, a sale of Common Stock of GST Tucson Lightwave,
Inc. provided that the proceeds of any such sale under this clause (iv) shall be
applied in accordance with clause (A) or (B) of the first paragraph of the
"Limitation on Asset Sales" covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Under the terms of the Indenture, the Company will not permit any
Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness of
the Company ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; provided that this paragraph shall not be applicable to
any Guarantee of any Restricted Subsidiary that (x) existed at the time such
Person became a Restricted Subsidiary and (y) was not Incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary. If
the Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee
of such Guaranteed Indebtedness shall be pari passu with, or subordinated to,
the
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Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or any
Restricted Subsidiary or with any Affiliate of the Company or any Restricted
Subsidiary, except upon fair and reasonable terms no less favorable to the
Company or such Restricted Subsidiary than could be obtained at the time of such
transaction or, if such transaction is pursuant to a written agreement, at the
time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees (including through the issuance of shares
of Common Stock of the Company or options, warrants or other rights to acquire
such shares) to directors of the Company who are not employees of the Company or
any of its Subsidiaries; (iv) any payments or other transactions pursuant to any
tax-sharing agreement between the Company and any other Person with which the
Company files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction or series of transactions covered by the first
paragraph of this "Limitation on Transactions with Shareholders and Affiliates"
covenant and not covered by clauses (ii) through (vi) of this paragraph, the
aggregate amount of which exceeds $500,000 in value, must be approved or
determined to be fair in the manner provided for in clause (i)(A) or (B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary (collectively, "Protected Property"), without making
effective provision for all of the Notes and all other amounts due under the
Indenture to be directly secured equally and ratably with (or, if the obligation
or liability to be secured by such Lien is subordinated in right of payment to
the Notes, prior to) the obligation or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries securing the Notes or
created in favor of the Trustee or the Holders of the Notes; (iii) Liens with
respect to the assets of a Restricted Subsidiary granted by such Restricted
Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to secure
Indebtedness owing to the Company or such other Restricted Subsidiary; (iv)
Liens securing Indebtedness which is Incurred to refinance secured Indebtedness
which is permitted to be Incurred
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under clause (iii) of the second paragraph of the "Limitation on Indebtedness"
covenant; provided that such Liens do not extend to or cover any property or
assets of the Company or any Restricted Subsidiary other than the property or
assets securing the Indebtedness being refinanced; (v) Liens upon or Capital
Leases with respect to inventory, property or equipment acquired or held by the
Company or any of its Restricted Subsidiaries to secure all or a part of the
purchase price therefor or the Company's or such Restricted Subsidiary's
obligations under such lease; provided that such Liens do not extend to or cover
any property or assets of the Company or any Restricted Subsidiary other than
the inventory, property or equipment acquired; (vi) Liens on assets or property
of, or the Capital Stock of, a Development Company securing Indebtedness
Incurred under clause (i) of the second paragraph of the "Limitation on
Indebtedness" covenant to finance at least 50% of the total financing for the
development and construction of the alternative access networks owned by such
Development Company; provided such Liens do not extend to or cover any other
property or assets of the Company or any of its Restricted Subsidiaries; (vii)
Liens securing Senior Indebtedness permitted to be Incurred under the Indenture;
(viii) Liens on any property or assets of a Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary permitted to be Incurred under the
Indenture; or (ix) Permitted Liens.
Limitation on Investments
The Company will not, and will not permit any Restricted Subsidiary to, (i)
make any Investment in any Person (including an Unrestricted Subsidiary) that
during its most recent fiscal year derived or in its current fiscal year is
expected by the Board of Directors of the Company to derive more than $250,000
in revenues from, or in its most recent fiscal year spent or in its current
fiscal year is expected by the Board of Directors of the Company to spend more
than $250,000 on, operations or activities located outside the continental
United States (other than in the State of Hawaii or between the continental
United States and the State of Hawaii) (an "International Business") or (ii)
acquire or own (directly or indirectly), other than through an Unrestricted
Subsidiary, any entity, business or asset that is primarily located outside the
continental United States (other than in the State of Hawaii) or any right with
respect to any of the foregoing (an "International Asset").
Notwithstanding the foregoing, and subject to the "Limitation on Restricted
Payments" covenant, the Company and its Restricted Subsidiaries may make an
Investment in an Unrestricted Subsidiary which owns, intends to acquire or has
rights with respect to an International Business or International Asset provided
that the aggregate amount of such Investments does not exceed (i) $25 million
plus, (A) in any fiscal year, an amount not to exceed 10% of the Company's
Consolidated EBITDA (if positive) for the immediately preceding fiscal year and
(B) an amount not to exceed the Net Cash Proceeds received by the Company after
May 13, 1997 from the issuance and sale permitted by the Indenture of its
Capital Stock (other than Redeemable Stock) to a Person who is not a Subsidiary
of the Company, less (ii) the amount of any Investments made pursuant to the
first paragraph, or the amount of any Restricted Payment made pursuant to clause
(iii), (iv) or (vi) of the second paragraph, of the "Limitation on Restricted
Payments" covenant; provided that the International Business or International
Assets are related, ancillary or complementary to the primary business of the
Company and its Restricted Subsidiaries on the date of such Investment.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments; provided, however, that clause
(ii) shall not apply to long-term assignments of capacity in a network. In the
event and to the extent that the Net Cash Proceeds received by the Company or
its Restricted Subsidiaries from one or more Asset Sales occurring on or after
the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been prepared), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within 12 months after the
date Net Cash Proceeds so received
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exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount
equal to such excess Net Cash Proceeds to permanently repay Senior Indebtedness
of the Company, Indebtedness of the Company ranking pari passu with the Notes or
Indebtedness of any Restricted Subsidiary, in each case owing to a Person other
than the Company or any of its Restricted Subsidiaries or (B) invest an equal
amount, or the amount not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the date of
such agreement), in property or assets of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) apply (no later than the end of the 12-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5.0 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to the sum of 101% of the principal amount of the
Notes and the Accumulated Interest Amount thereon, plus, in each case, other
accrued interest to the Payment Date.
Repurchase of Notes upon a Change of Control
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to the sum of 101% of the principal amount thereof and
the Accumulated Interest Amount thereon, plus other accrued interest to the
Payment Date. Prior to the mailing of the notice to Holders commencing such
Offer to Purchase, but in any event within 30 days following any Change of
Control, the Company covenants to (i) repay in full all indebtedness of the
Company that would prohibit the repurchase of the Notes pursuant to such Offer
to Purchase or (ii) obtain any requisite consents under instruments governing
any such indebtedness of the Company to permit the repurchase of the Notes. The
Company shall first comply with the covenant in the preceding sentence before it
shall repurchase Notes pursuant to this "Repurchase of Notes upon a Change of
Control" covenant.
Under the terms of the Indenture, if the Company is unable to repay all of
its indebtedness that would prohibit repurchase of the Notes or is unable to
obtain the consents of the holders of indebtedness, if any, of the Company
outstanding at the time of a Change of Control whose consent would be so
required to permit the repurchase of Notes or otherwise fails to purchase any
Notes, then the Company will have breached such covenant. This breach will
constitute an Event of Default under the Indenture if it continues for a period
of 30 consecutive days after written notice is given to the Company by the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes outstanding. In addition, the failure by the Company to repurchase Notes
at the conclusion of an Offer to Purchase will constitute an Event of Default
without any waiting period or notice requirements.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless the consents referred to above are obtained, require the Company to
repay all indebtedness then outstanding which by its terms would prohibit such
Note repurchase, either prior to or concurrently with such Note repurchase.
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Commission Reports and Reports to Holders
Whether or not the Company is then required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by Section
13(a) or 15(d) under the Exchange Act if it were subject thereto. The Company
shall supply the Trustee and each Holder of Notes or shall supply to the Trustee
for forwarding to each Holder, without cost to such Holder, copies of such
reports or other information.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default": (a) default in
the payment of principal of (or premium, if any, on) any Note when the same
becomes due and payable at maturity, upon acceleration, redemption or otherwise;
(b) default in the payment of interest on any Note when the same becomes due and
payable, and such default continues for a period of 30 days; (c) the Company
defaults in the performance of or breaches any other covenant or agreement in
the Indenture or under the Notes and such default or breach continues for a
period of 30 consecutive days after written notice by the Trustee or the Holders
of 25% or more in aggregate principal amount of Notes; (d) there occurs with
respect to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $5 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (e) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $5 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (f) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive days;
or (g) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than an Event of Default specified in clause
(f) or (g) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the outstanding Notes, by written notice to the
Company (and to the Trustee if such notice is given by the Holders), may, and
the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest, on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (d)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (d) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the
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holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(f) or (g) above occurs with respect to the Company the principal of, premium,
if any, and accrued interest, on the Notes then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of at least a majority in
principal amount of the outstanding Notes by written notice to the Company and
to the Trustee, may waive all past Defaults and rescind and annul a declaration
of acceleration and its consequences if (i) all existing Events of Default,
other than the nonpayment of the principal of, premium, if any, and interest on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer and, if requested provide, the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense; (iv) the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity; and (v) during such 60-day period, the
Holders of a majority in aggregate principal amount of the outstanding Notes do
not give the Trustee a direction that is inconsistent with the request. However,
such limitations do not apply to the right of any Holder of a Note to receive
payment of the principal of, premium, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or affected without
the consent of the Holder.
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company under the Indenture
and that the Company has fulfilled all obligations thereunder, or, if there has
been a default in the fulfillment of any such obligation, specifying each such
default and the nature and status thereof. The Company will also be obligated to
notify the Trustee of any default or defaults in the performance of any
covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person (other than a consolidation or
merger with or into a Wholly Owned Restricted Subsidiary with a positive net
worth; provided that, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the surviving Person) shall be issued
or distributed to the stockholders of the Company) or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes, shall have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company or any Person
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becoming the successor obligor of the Notes, could Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; and (v) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with clauses
(iii) and (iv)) and Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies with
this provision and all conditions precedent provided for herein relating to such
transaction have been complied with; provided, however, that clauses (iii) and
(iv) above do not apply if, in the good faith determination of the Board of
Directors of the Company, whose determination shall be evidenced by a Board
Resolution, the principal purpose of such transaction is to change the
jurisdiction of incorporation of the Company to a state of the United States and
any such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes to replace stolen, lost or mutilated Notes, to
maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for United States federal income tax purposes as
a result of the Company's exercise of its option under this "Defeasance"
provision and will be subject to United States federal income tax on the same
amount and in the same manner as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling of the United States Internal
Revenue Service to the same effect unless there has been a change in applicable
United States federal income tax law after the Closing Date such that a ruling
is no longer required or (y) a ruling directed to the Trustee received from the
United States Internal Revenue Service to the same effect as the aforementioned
Opinion of Counsel; (ii) an Opinion of Counsel or a ruling from Revenue Canada,
Customs, Excise & Taxation to the effect that Holders will not recognize income,
gain or loss for Canadian federal, provincial or territorial income tax or other
tax purposes as a result of such deposit and defeasance and will be subject to
Canadian federal or provincial income tax and other tax on the same amounts, in
the same manner and at the same times as would have been the case had such
deposit and defeasance not occurred (and for purposes of such opinion, such
Canadian counsel shall assume that Holders of the Notes include Holders who are
not resident in Canada); and (iii) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment Company Act of
1940 and after the passage of 123 days following the deposit, the trust fund
will not be subject to the effect of Section 547 of the United States Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately
after giving effect to such deposit on a pro forma basis, no Event of Default,
or event that after the giving of notice or lapse of time or both would become
an Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound and (D) if at such time the Notes are listed on a
national securities exchange, the Company has delivered to the Trustee an
Opinion of Counsel to the effect that the Notes will not be delisted as a result
of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that its provisions will no longer be in effect
with respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of
Assets" and all the covenants described herein under "Covenants," clause (c)
under "Events of Default" with respect to such covenants and clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets," and clauses (d) and (e)
under "Events of Default" shall be deemed not to be Events of Default
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upon, among other things, the deposit with the Trustee, in trust, of money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, the satisfaction of the provisions
described in clauses B(iii), (C) and (D) of the preceding paragraph and the
delivery by the Company to the Trustee of an Opinion of Counsel to the effect
that, among other things, the Holders will not recognize income, gain or loss
for United States federal income tax purposes or Canadian federal, provincial or
territorial income tax or other tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
United States federal income tax and Canadian federal or provincial income tax
on the same amount and in the same manner and at the same times as would have
been the case if such deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal of, or premium, if any, or
interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes, or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
ADDITIONAL AMOUNTS
Any payments made by the Company under or with respect to the Notes will be
made free and clear of and without withholding or deduction for or on account of
any present or future tax, duty, levy, impost, assessment or other governmental
charge (including penalties, interest and other liabilities related thereto)
imposed or levied by or on behalf of Government of Canada or of any province or
territory thereof or by any authority or agency therein or thereof having power
to tax (hereinafter, "Taxes"), unless the Company is required to withhold or
deduct Taxes by law or by the interpretation or administration thereof. If the
Company is required to withhold or deduct any amount for or on account of Taxes
from any payment made under or with respect to the Notes, the Company will pay
such additional amounts ("Additional Amounts") as may be necessary, so that the
net amount received by each Holder of Notes (including Additional Amounts) after
such withholding or deduction will not be less than the amount such Holder would
have received if such Taxes had not been withheld or deducted; provided,
however, that no Additional Amounts will be payable with respect to a payment
made to a Holder (an "Excluded Holder") (i) with which the Company does not deal
at arm's length (within the meaning of the Canada Act) at the time of making
such payment, or (ii) which is subject to such Taxes by reason of its being
connected with Canada or any province or territory thereof otherwise than solely
by reason of the Holder's activity in connection with purchasing the Notes, by
the mere holding of Notes or by reason of the receipt of payments thereunder.
The Company will, upon written request of any Holder (other than an Excluded
Holder), reimburse such Holder, for the amount of
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(i) any Taxes so levied or imposed and paid by such Holder as a result of
payments made under or with respect to the Notes and (ii) any Taxes so levied or
imposed with respect to any reimbursement under the foregoing clause (i), but
excluding any such Taxes on such Holder's net income so that the net amount
received by such Holder after such reimbursement will not be less than the net
amount the Holder would have received if Taxes on such reimbursement had not
been imposed.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if the Company will be obligated to pay
Additional Amounts with respect to such payment, the Company will deliver to the
Trustee an Officers' Certificate stating the fact that such Additional Amounts
will be payable and the amounts so payable and will set forth such other
information necessary to enable the Trustee to pay such Additional Amounts to
Holders on the payment date. Whenever either in the Indenture or in this
Prospectus there is mentioned, in any context, the payment of principal (or
premium, if any), Redemption Price, interest or any other amount payable under
or with respect to the Notes, such mention shall be deemed to include mention of
the payment of Additional Amounts to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof.
In the event that the Company has become or would become obligated to pay,
on the next date on which any amount would be payable under or with respect to
the Notes, any Additional Amounts as a result of certain changes affecting
Canadian withholding tax laws, the Company may redeem all, but not less than
all, the Notes at any time at 100% of their principal amount, together with
accrued interest thereon to the redemption date. See "-- Optional Redemption."
CONSENT TO JURISDICTION AND SERVICE
The Company will appoint Olshan Grundman Frome & Rosenzweig LLP, 505 Park
Avenue, New York, New York 10022 as its agent for service of process in any
suit, action or proceeding with respect to the Indenture or the Notes and for
the actions brought under federal or state securities laws brought in any
federal or state court located in The City of New York and will agree to submit
to the jurisdiction of such courts.
ENFORCEABILITY OF JUDGMENTS
The Company is incorporated in Canada. Certain directors and officers, and
certain experts named herein, are residents of Canada. As a result, it may be
difficult or impossible for United States holders of Notes to effect service of
process within the United States upon such directors, officers and experts or to
collect judgments of United States courts predicated upon civil liability under
the United States federal securities and other laws. The Company believes that
there is substantial doubt as to whether Canadian courts would (i) enforce
judgments of United States courts obtained against the Company or such
directors, officers and experts predicated upon the civil liability provisions
of United States laws or (ii) impose liabilities in original actions against the
Company or its directors, officers and experts predicated solely upon United
States securities laws.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be initially represented by one or more global notes (the
"Global Notes") issued in the form of fully registered Global Notes, which will
be deposited with, or on behalf of, the Depositary and registered in the name of
a nominee of the Depositary. Transfers between participants in the Depositary
will be effected in the ordinary way in accordance with the Depositary's rules
and will be settled in same-day funds.
The Depositary has advised the Company and the Underwriters that the
Depositary intends to follow the procedures described below:
The Depositary will act as securities depository for the Global Notes.
The Global Notes will be issued as a fully registered security registered
in the name of Cede & Co. (the Depositary's nominee).
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal
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Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depositary holds
securities that its participants ("Participants") deposit with the
Depositary. The Depositary also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement
of securities certificates. Direct Participants include securities brokers
and dealers, banks, trust companies, clearing corporations, and certain
other organizations ("Direct Participants"). The Depositary is owned by a
number of its Direct Participants and by the New York Stock Exchange, Inc.,
the AMEX and the National Association of Securities Dealers, Inc. Access to
the Depositary's system is also available to others such as securities
brokers and dealers, banks, and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The Rules applicable to
the Depositary and its Participants are on file with the Commission.
Purchases of Notes must be made by or through Direct Participants,
which will receive a credit for the Notes on the Depositary's records. The
ownership interest of each actual purchaser of each Note ("Beneficial
Owner") is in turn recorded on the Direct and Indirect Participant's
records. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Notes, except in the event
that use of the book-entry system for the Notes is discontinued.
Conveyance of Notes and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, the Depositary's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with
respect to the Notes. Under its usual procedures, the Depositary mails an
Omnibus Proxy to the issuer as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those
Direct Participants to whose accounts the Notes are credited on the record
date (identified in a listing attached to the Omnibus Proxy).
Principal, premium (if any), and interest payments on the Notes will
be made to the Depositary. The Depositary's practice is to credit Direct
Participants' accounts on the payable date in accordance with their
respective holdings shown on the Depositary's records unless the Depositary
has reason to believe that it will not receive payment on the payable date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held
for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such Participant and not of the
Depositary, the Paying Agent, or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment to
the Depositary of principal, premium (if any) and interest on the Notes are
the responsibility of the Company or the Paying Agent, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depositary, and disbursement of such payments to the Beneficial Owners
shall be the responsibility of Direct and Indirect Participants.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the case
may be, will be considered the sole owner or Holder of the
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Notes represented by the Global Notes for all purposes under the Indenture.
Except as set forth below, owners of beneficial interests in such Global Notes
will not be entitled to have Notes represented by such Global Notes registered
in their names, will not receive or be entitled to receive physical delivery of
Notes in definitive form and will not be considered the owners or Holders
thereof under the Indenture. Accordingly, each person owning a beneficial
interest in Global Notes must rely on the procedures of the Depositary and, if
such person is not a Participant, those of the Participant through which such
person owns its interests, in order to exercise any rights of a Holder under the
Indenture or such Note.
The Indenture provides that the Depositary, as a Holder, may appoint agents
and otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a Holder
is entitled to give or take under the Indenture, including the right to sue for
payment of principal or interest pursuant to Section 316(b) of the Trust
Indenture Act of 1939, as amended. The Company understands that under existing
industry practices, when the Company requests any action of Holders or when a
Beneficial Owner desires to give or take any action which a Holder is entitled
to give or take under the Indenture, the Depositary generally will give or take
such action, or authorize the relevant Participants to give or take such action,
and such Participants would authorize Beneficial Owners owning through such
Participants to give or take such action or would otherwise act upon the
instructions of Beneficial Owners owning through them.
The Company has been informed by the Depositary that the Depositary will
assist its Participants and their customers (Beneficial Owners) in taking any
action a Holder is entitled to take under the Indenture or exercise any rights
available to Cede & Co., as the holder of record of the Notes and including the
right to demand acceleration of the Notes upon an Event of Default or to
institute suit for the enforcement of payment or interest pursuant to Section
316(b) of the Trust Indenture Act of 1939, as amended. The Depositary has
advised the Company that it will act with respect to such matters upon written
instructions from a Participant to whose account with the Depositary the
relevant beneficial ownership in the Notes is credited. The Company understands
that a Participant will deliver such written instructions to the Depositary upon
itself receiving similar written instructions from either Indirect Participants
or Beneficial Owners, as the case may be. Under Rule 6 of the rules and
procedures filed by the Depositary with the Commission pursuant to Section 17 of
the Exchange Act, Participants are required to indemnify the Depositary against
all liability the Depositary may sustain, without fault on the part of the
Depositary or its nominee, as a result of any action they may take pursuant to
the instructions of the Participant in exercising any such rights.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
the Global Notes.
Principal, premium, if any, and interest payments on Notes registered in
the name of or held by the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner or the
Holder of the Global Notes representing such Notes. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Global Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 60 days or, if an Event of Default under the Indenture has
occurred and is continuing, the Company will issue Notes in definitive
registered form, without coupons, in denominations of $1,000 of principal amount
at maturity and any integral multiple thereof, in exchange for the Global Notes
representing such Notes. In addition, the Company may at any time and in its
sole discretion determine not to have any Notes in registered form represented
by the Global Notes and, in such event, will issue Notes or in definitive
registered form in exchange for the Global Notes representing such Notes. In any
such instance, an owner of a beneficial interest in a Global Note will be
entitled to physical delivery in definitive form of Notes registered in its
name. Upon the exchange of the Global Notes for Notes in definitive form, the
Global Notes will be cancelled by the Trustee.
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NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, shareholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act, incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if the Trustee acquires any conflicting
interest, it must eliminate such conflict or resign.
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DESCRIPTION OF CERTAIN INDEBTEDNESS AND REDEEMABLE PREFERRED SHARES
TOMEN FACILITY
The following summary of the material provisions of the documents
comprising the Tomen Facility does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of such
documents, including the definitions of certain terms therein which are
incorporated by reference in the Registration Statement of which this Prospectus
is a part. Terms used and not defined herein have the meanings given to them in
the documents described herein.
General
The Company, GST Telecom and Pacwest are parties to a Master Agreement
dated October 24, 1994 and amended May 24, 1996 (the "Tomen Master Agreement")
with Tomen pursuant to which Tomen agreed, in its sole discretion on a
project-by-project basis, to make available up to a total of $100.0 million of
financing for telecommunications network projects developed and constructed by
the Company. Under the terms of the Tomen Master Agreement, Tomen has the
exclusive right to review the Company's proposed network projects until Tomen
has extended $100.0 million in debt financing or has refused three projects that
the Company subsequently finances. If Tomen approves a project it would enter
into a credit agreement (in substantially the form of the Credit Agreement
hereinafter described) with the subsidiary of the Company developing the project
(a "Development Company") to provide financing for 75% of the project's costs (a
"Project Loan"). The first 25% of such costs would be contributed as equity by
the Company prior to or at the same time as the receipt of the debt financing.
In connection with each project it finances, Tomen has the right to act as
procurement agent for the network project.
Until amended in May 1996, the Tomen Master Agreement had provided that
Tomen could purchase up to 10% (on a fully diluted basis) of the capital stock
of a Development Company to which it agreed to provide financing and Tomen had
purchased 10% of the equity of GST Pacific for the sum of $615,000. In May 1996,
the Company entered into a series of transactions pursuant to which GST Telecom
purchased the shares of GST Pacific held by Tomen for $1,250,000 and the parties
amended the Tomen Master Agreement to eliminate Tomen's right to purchase 10% of
the shares in Development Companies to which it provides a Project Loan and to
grant to Tomen in connection with each Project Loan the right to purchase a
number of Common Shares the aggregate value of which based on their market price
would equal 10% of the total equity contribution by the Company to the
Development Company. In addition, the parties agreed that in connection with
certain Project Loans, Tomen's purchase of Common Shares would include, for no
additional consideration, a specified number of warrants to purchase additional
Common Shares.
The Tomen Master Agreement provides that each Project Loan will bear
interest at LIBOR plus 3% and will amortize in 24 quarterly installments
beginning after the project's construction period (which may not exceed three
years). An upfront fee of 1.50% of the aggregate principal amount of each
Project Loan and a commitment fee of 0.50% per annum on the unused portion of
each Project Loan is payable to Tomen. In addition, Pacwest, an entity
controlled by Mr. Warta, Chairman of the Board and Chief Executive Officer of
the Company, is entitled to receive a fee equal to 1% of the total debt and
equity financing received by the Company under the Tomen Facility. A Project
Loan may be repaid or refinanced at any time; however, Tomen has a right of
first refusal on any such refinancing and Tomen would be entitled to receive
one-third of the net present value of any interest rate savings that would be
realized by the Development Company in connection with any such refinancing.
Each Project Loan is to be secured by all of the Development Company's
assets and a pledge of all capital stock of the Development Company. In
addition, the Tomen Master Agreement requires that the net cash flow of each
project financed under the Tomen Facility be assigned to secure the repayment of
each other Project Loan. Any management fees payable by the Development Company
are subordinated in right of payment to the repayment of Project Loans.
Pursuant to a stock purchase agreement (the "Tomen Stock Purchase
Agreement") entered into in connection with the Tomen Master Agreement, Tomen
purchased (i) for an aggregate purchase price of
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$2.3 million, 500,000 Common Shares and warrants to purchase 250,000 Common
Shares, which have been exercised, (ii) for an aggregate of $1.2 million,
250,000 Common Shares and warrants to purchase 125,000 Common Shares, which have
been exercised, and (iii) for an aggregate of $2.7 million, 250,000 Common
Shares and warrants to purchase 125,000 Common Shares exercisable until May 23,
1998 at an exercise price of $12.96 per share. Pursuant to an amendment to the
Tomen Master Agreement and the Tomen Stock Purchase Agreement, Tomen purchased
(i) for an aggregate of $800,000, 74,074 Common Shares and warrants to purchase
46,155 Common Shares at an exercise price of $12.96 per share and (ii) for an
aggregate of $1.4 million, 130,828 Common Shares and warrants to purchase 75,000
Common Shares at an exercise price of $12.61 per share. The Company has
registered the resale of an aggregate of 1,620,229 Common Shares that have been
issued or are issuable to Tomen upon exercise of warrants.
Financed Projects
The first two projects financed under the Tomen Master Agreement were the
San Bernardino portion of the Southern California network ("Phase I") and the
Ontario portion of the Southern California network ("Phase II"). Pursuant to the
credit agreement between GST Pacific and Tomen America (the "Credit Agreement"),
Tomen agreed to provide $9.0 million of debt financing to develop Phase I and
$9.5 million of debt financing to develop Phase II. The terms of the Credit
Agreement are substantially the terms contemplated by the Tomen Master
Agreement. In addition, the Credit Agreement contains covenants which, among
other things, restrict or prohibit GST Pacific's ability to incur debt, create
liens, sell assets, make investments, enter into transactions with affiliates,
merge or consolidate, transfer GST Pacific's capital stock and pay dividends to
the Company. Failure to satisfy any of the covenants constitutes an event of
default under the Credit Agreement. The Credit Agreement also contains customary
events of default for project financing, including a cross default to other
indebtedness of GST Pacific. An event of default under the Credit Agreement
would allow Tomen to accelerate the maturity of the Project Loan, foreclose on
the collateral or take possession of and complete the project.
In May 1996, Tomen provided financing with respect to the Tucson and
Albuquerque networks, in the amount of up to $8.0 million each. The terms of the
respective credit agreements between Tomen and GST Tucson and GST New Mexico are
substantially similar to the terms of the Credit Agreement.
On September 30, 1997, 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 the Tomen
Facility, except that the loan will amortize in 22 quarterly installments
beginning March 31, 2000.
EQUIPMENT FINANCING
Siemens Switching Equipment Purchase Agreement and Loan Agreement
The Company, through its indirect subsidiary, GST SwitchCo, Inc. ("GST
SwitchCo"), entered into the Siemens Sales Agreement pursuant to which GST
SwitchCo may purchase switching and related equipment from Siemens. The Siemens
Sales Agreement provides price protection for 10 years for several categories of
Siemens switching equipment and related software. In addition, on the same date,
GST SwitchCo entered into the Siemens Loan Agreement that provides for up to an
aggregate of $226.0 million of loans to finance the purchase of Siemens
equipment and equipment from other suppliers, of which $116.0 million is
presently available to the Company (of which $5.8 million had been provided as
of September 30, 1997). The Company may seek to increase the amount available up
to $226.0 million on an as-needed basis, subject to the negotiation and
execution of mutually satisfactory documentation. Each loan made under the
Siemens Loan Agreement initially bears interest at an interim loan rate of LIBOR
plus 4.5% on the outstanding balance of the loan until the beginning of the
calendar quarter following the original loan advance date, at which time the
outstanding balance of the loan converts to a term loan and begins accruing
interest at a term loan rate of LIBOR plus 3.5%. Repayment of the outstanding
principal amount of each loan is required in quarterly installments commencing
on the last day of the fifth quarter following the original loan advance date
with the
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remaining balance of each outstanding loan being payable in full on the last day
of the 24th quarter following such original loan advance date. GST SwitchCo's
obligations under the Siemens Loan Agreement are secured by the grant to Siemens
of a first priority security interest in all products purchased by GST SwitchCo
with the proceeds of loans by Siemens and are guaranteed in part by GST USA.
Nortel Switching Equipment and Related Financing
The Company, through its wholly-owned subsidiary, GST EquipCo, Inc. ("GST
EquipCo"), entered into the Nortel Purchase Agreement pursuant to which GST
EquipCo may purchase switching and related equipment and software from Nortel.
The Nortel Purchase Agreement provides price protection for 10 years for several
categories of Nortel switching equipment and related products and software and
requires GST EquipCo to purchase at least $50.0 million of equipment, product
and software prior to November 18, 1999.
The Company has entered into the NTFC Loan Agreement that provides for up
to $50.0 million to finance the purchase by GST EquipCo of Nortel equipment and
products (of which $44.6 million had been provided as of September 30, 1997).
Borrowings under the NTFC Loan Agreement may be made through December 31, 1998.
Loans under the NTFC Loan Agreement will bear interest at a floating interest
rate equal to 90 day LIBOR plus 3.5%. GST EquipCo is required to pay interest
only until December 31, 1998 under the NTFC Loan Agreement and the principal
amounts outstanding thereunder will become due and payable in 20 consecutive
quarterly installments following such interest only period. GST EquipCo's
obligations under the NTFC Loan Agreement are secured by the grant to NTFC of a
first priority security interest in all Nortel products purchased by GST EquipCo
with the proceeds of such financing and are guaranteed by GST USA.
SENIOR NOTES AND CONVERTIBLE NOTES
GST USA issued $312.4 million principal amount at maturity of Senior Notes
guaranteed by GST, under a senior notes indenture dated December 19, 1995, among
GST USA, as issuer, GST, as guarantor, and United States Trust Company of New
York, as trustee, and GST issued $39.1 million principal amount at maturity of
the Convertible Notes guaranteed by GST USA, under a convertible notes indenture
dated December 19, 1995, among GST, as issuer, GST USA, as guarantor, and United
States Trust Company of New York, as trustee. The 1995 Notes were issued in
units, with each unit consisting of eight Senior Notes and one Convertible Note.
Cash interest does not accrue on the 1995 Notes prior to December 15, 2000 at
which time the 1995 Notes will have fully accreted to their principal amount at
maturity. From and after December 15, 2000, the 1995 Notes will accrue interest,
payable semiannually in cash, at a rate of 13 7/8% per annum.
The Senior Notes and the Senior Notes guarantee are senior, unsecured
obligations of GST USA and GST, respectively, ranking pari passu in right of
payment with all unsubordinated obligations of GST USA and GST, respectively.
The Convertible Notes and the Convertible Notes guarantee are senior
subordinated, unsecured obligations of GST and GST USA, respectively, ranking
junior in right of payment to all senior obligations of GST and GST USA,
respectively, pari passu with all senior subordinated indebtedness of GST and
GST USA, respectively.
The 1995 Notes may be redeemed at any time on or after December 15, 2000,
in whole or in part, at 106.938% of their principal amount at maturity plus
accrued interest, declining to 100% of their principal amount at maturity plus
accrued interest on and after December 15, 2002. In addition, the 1995 Notes are
redeemable under certain circumstances in the event of certain changes affecting
Canadian withholding taxes.
The Convertible Notes are convertible, at the option of the holders, into
Common Shares at any time after December 19, 1996. The number of Common Shares
issuable upon conversion of Convertible Notes is determined by dividing the
accreted value on the date of conversion of the Convertible Notes being
converted by the conversion price of $7.563, subject to adjustment. In addition,
the Convertible Notes will automatically
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convert under certain circumstances, if the closing price of the Common Shares
on the AMEX during any period described below exceeds the price for such period
for at least 30 consecutive trading days:
<TABLE>
<CAPTION>
12 MONTHS BEGINNING CLOSING PRICE
---------------------------------------------------------------- -------------
<S> <C>
December 15, 1996............................................... $ 16.77
December 15, 1997............................................... $ 19.80
December 15, 1998............................................... $ 22.82
December 15, 1999............................................... $ 25.84
</TABLE>
The 1995 Indentures contain certain covenants that affect and in some cases
significantly restrict or prohibit, among other things, the ability of GST and
its restricted subsidiaries (including GST USA) to incur additional
indebtedness, create liens, engage in sale-leaseback transactions, pay dividends
or make distributions in respect of its capital stock, make investments or
certain other restricted payments, sell assets, create restrictions on the
ability of restricted subsidiaries to make certain payments, issue or sell stock
of restricted subsidiaries, enter into transactions with stockholders or
affiliates and consolidate, merge or sell all or substantially all of their
assets.
Upon the occurrence of a Change of Control (as hereinafter defined), GST
USA will be required to make an offer to purchase the Senior Notes and GST will
be required to make an offer to purchase the Convertible Notes, in each case at
a purchase price equal to 101% of their accreted value on the date of purchase
plus accrued interest, if any. For purposes of the 1995 Indentures, a "Change of
Control" is defined to mean such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act, becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of voting
stock representing more than 30% of the total voting power of the voting stock
of GST on a fully diluted basis; (ii) individuals who on December 19, 1995
constituted the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination for election by GST's
shareholders was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on December 19, 1995 or whose election or nomination for election was
previously approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office; or (iii) all of the common
stock of GST USA is not beneficially owned by GST.
1997 NOTES
GST Funding issued $265.0 million aggregate principal amount of 1997 Notes,
under the 1997 Indenture, dated May 13, 1997, among GST Funding, as issuer, GST
USA, GST, and United States Trust Company of New York, as trustee. The 1997
Notes will mature on May 13, 2007. Interest on the 1997 Notes will be paid in
cash at a rate of 13 1/4% per annum on each May 1 and November 1, commencing
November 1, 1997. Of the net proceeds of the 1997 Notes Offering, as of
September 30, 1997, approximately $91.3 million had been used to finance the
cost of equipment (including $41.5 million used to refinance intercompany
indebtedness incurred in connection with the purchase of equipment),
approximately $93.8 million had been used to purchase securities pledges to fund
the first six scheduled interest payments on the 1997 Notes and the balance will
be used to finance the purchase of equipment such as fiber optic cable, switches
and other related equipment.
The 1997 Notes are senior, secured obligations of GST Funding, and will be
unconditionally and irrevocably assumed by GST USA and guaranteed by GST, on May
13, 2000, or earlier if permitted under the terms of GST USA's and GST's
outstanding indebtedness. Neither GST USA nor GST will be liable on the 1997
Notes until they are assumed by GST USA. There is a substantial risk that GST
USA may be unable to assume the 1997 Notes on or before May 13, 2000. The Notes
are secured by (i) the approximately $93.8 million of U.S. government securities
(the "Pledged Securities") pledged to secure and fund the first six scheduled
interest payments on the 1997 Notes, (ii) a $35.0 million promissory note from
GST USA (the "Initial Note"), guaranteed by GST; provided that the amount of the
Initial Note will be reduced to the extent the principal amount thereof exceeds
the aggregate principal amount of 1997 Notes less (x) the
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aggregate amount of Pledged Securities (other than the Pledged Securities
securing the first six scheduled interest payments on the 1997 Notes), including
accrued interest thereon, and (y) the aggregate principal amount of all
intercompany notes issued by GST USA to GST Funding in payment for the purchase
of equipment ($91.3 million as of September 30, 1997), including the amount of
interest that will accrue on such intercompany notes by May 13, 2000, and (iii)
the remaining proceeds from the 1997 Notes Offering, until such proceeds are
used to purchase equipment to be sold to GST USA for intercompany notes. Once
the 1997 Notes are assumed by GST USA, they will be senior, secured indebtedness
of GST USA and GST USA's obligations under the 1997 Notes will be fully and
unconditionally guaranteed on an unsubordinated basis by GST (the "1997 Note
Guarantee"). The 1997 Note Guarantee will be senior, unsecured indebtedness of
GST.
The 1997 Notes will be redeemable at the option of GST USA, in whole or in
part, at any time or from time to time, on or after May 1, 2002, initially at
106.625% of their principal amount, plus accrued and unpaid interest, declining
ratably to 100% of their principal amount, plus accrued and unpaid interest on
or after May 1, 2004. If on May 13, 2000 GST USA is prohibited by its
outstanding indebtedness from assuming all of the 1997 Notes, GST Funding will
redeem, upon not less than 10 nor more than 30 days' notice, the portion of the
1997 Notes that cannot be assumed, at 101% of their principal amount plus
accrued and unpaid interest to the date of redemption. In addition, upon a
Change of Control (as hereinafter defined), GST Funding or GST USA, as the case
may be, will be required to make an offer to purchase the 1997 Notes at a
purchase price equal to 101% of their principal amount plus accrued interest.
For purposes of the 1997 Indenture, a "Change of Control" is defined to mean
such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act), becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of voting stock representing more
than 30% of the total voting power of the voting stock of GST on a fully diluted
basis; (ii) individuals who on May 13, 1997 constituted the Board of Directors
(together with any new directors whose election by the Board of Directors or
whose nomination for election by GST's shareholders was approved by a vote of at
least two-thirds of the members of the Board of Directors then in office who
either were members of the Board of Directors on May 13, 1997 or whose election
or nomination for election was previously approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office;
or (iii) all of the common stock of GST USA or GST Funding is not beneficially
owned by GST.
The 1997 Indenture contains certain covenants that affect and in some cases
significantly restrict or prohibit, among other things, the ability of GST and
its restricted subsidiaries (including GST USA) to incur additional
indebtedness, create liens, engage in sale-leaseback transactions, pay dividends
or make distributions in respect of its capital stock, make investments or
certain other restricted payments, sell assets, create restrictions on the
ability of restricted subsidiaries to make certain payments, issue or sell stock
of restricted subsidiaries, enter into transactions with stockholders or
affiliates and consolidate, merge or sell all or substantially all of their
assets.
REDEEMABLE PREFERRED SHARES
In the Princes Gate Investment, GST issued 500 Redeemable Preferred Shares.
The Redeemable Preferred Shares will not pay dividends, except to the extent
that cash dividends are paid on the Common Shares. The liquidation and
redemption prices of the Redeemable Preferred Shares will accrete at a semi-
annual rate of 11 7/8%.
The Company is required to redeem the Redeemable Preferred Shares on
February 28, 2004 (the "Mandatory Redemption Date") in cash at a redemption
price of approximately $224,231 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 Preferred Shares have the
option to convert each Redeemable Preferred 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 Preferred Shares in cash and any holder of
Redeemable Preferred 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
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Preferred Shares at any time after February 28, 2000 in cash at a redemption
price per Redeemable Preferred Share equal to the number of Common Shares into
which such Redeemable Preferred Share is then convertible multiplied by the
price at which such Redeemable Preferred Share would become subject to mandatory
conversion. Under the terms of the Redeemable Preferred Shares, the holders
thereof are entitled to designate for election one person to the Board of
Directors of the Company. In June 1997, Joseph G. Fogg III, designee of the
holders of the Redeemable Preferred Shares, was appointed to the Board of
Directors of the Company.
Redeemable Preferred 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 Preferred 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 Preferred Shares into Common Shares upon a change of
control. Further, the Redeemable Preferred 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.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Olshan Grundman Frome & Rosenzweig LLP, the United States
tax counsel to the Company, subject to the limitations set forth herein, the
following is an accurate summary of the material United States federal income
tax consequences of the purchase, ownership and disposition of the Notes. This
summary is based on current provisions of the United States Internal Revenue
Code (the "Code"), applicable final, temporary and proposed Treasury Regulations
("Treasury Regulations"), judicial authority, and current administrative rulings
and pronouncements of the Service and upon the facts concerning the Company as
of the date hereof. There can be no assurance that the Service will not take a
contrary view, and no ruling from the Service has been or will be sought by the
Company. Legislative, judicial, or administrative changes or interpretations may
occur at any time after the issuance of the Notes that could alter or modify the
statements and conclusions set forth herein. Any such changes or interpretations
may or may not be retroactive and could affect the tax consequences to holders.
This summary and the above referenced opinion do not purport to deal with
all aspects of taxation that may be relevant to particular holders of the Notes
in light of their personal investment or tax circumstances, or to certain types
of investors (including insurance companies, financial institutions,
broker-dealers or tax-exempt organizations) subject to special treatment under
the United States federal income tax laws. This discussion does not deal with
special tax situations, such as the holding of other investments, or situations
in which the functional currency of a holder who is a U.S. Holder (as defined
below) is not the United States dollar. In addition, this discussion deals only
with initial purchasers of the Notes who hold the Notes as capital assets within
the meaning of Section 1221 of the Code.
As used in the discussion which follows, the term "U.S. Holder" means
beneficial owner of the Notes that for United States federal income tax purposes
is (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source. The term "Non-U.S. Holder" means an initial holder of
Notes that is, for United States federal income tax purposes, not a U.S. Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
TAX CONSEQUENCES TO U.S. HOLDERS
Original Issue Discount. The amount of original issue discount on a debt
instrument within the meaning of Section 1273 of the Code, is the excess of its
"stated redemption price at maturity" over its "issue price." The "stated
redemption price at maturity" of a debt instrument is the sum of its principal
amount plus all other payments required thereunder, other than payments of
"qualified stated interest" (defined generally as stated interest that is
unconditionally payable in cash or in property (other than the debt instruments
of the issuer), at least annually at a single fixed rate that appropriately
takes into account the length of intervals between payments). The "issue price"
of the Notes in this case will be the offering price to the purchasers (not
including any sales to a bond house, broker, or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler) at
which a substantial amount of the Notes is sold, even if part of the issue is
subsequently sold at a different price. Because interest on the Notes is not
payable until, , 2003, the stated interest on the Notes will not be
treated as qualified stated interest, but will be added to the stated redemption
price at maturity of the Notes. In addition, the Notes will be issued at a price
that is less than their stated redemption price at maturity. As a result, the
Notes will be treated as having been issued with original issue discount equal
to the excess of their stated redemption price at maturity over their issue
price.
Each U.S. Holder of a Note (regardless of whether such U.S. Holder is a
cash or an accrual basis taxpayer) will be required to include original issue
discount in such U.S. Holder's gross income periodically over the term of such
Note even though actual payment of cash or other property with respect to such
income
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<PAGE> 103
is not received until a later date. Original issue discount that is included in
income by a U.S. Holder generally will be considered "passive" income or
"financial services" income, which are treated separately from other types of
income in computing the foreign tax credit allowable to U.S. Holders under U.S.
federal income tax laws so long as the Company is not considered to be engaged
in a U.S. trade or business.
In general, under Section 1272 of the Code, the amount of original issue
discount that a holder of a debt instrument must include in gross income for
United States federal income tax purposes will be the sum of the daily portions
of original issue discount with respect to such debt instrument for each day
during the taxable year or portion of a taxable year in which such holder holds
the debt instrument. The daily portion is determined under a constant yield
method by allocating to each day of an accrual period (generally, a six month
period) a pro rata portion of an amount equal to the "adjusted issue price" of
the debt instrument at the beginning of the accrual period multiplied by the
yield to maturity of the debt instrument. The yield to maturity of a debt
instrument is the discount rate that, when applied to all payments due under the
debt instrument, produces a present value equal to the issue price of the debt
instrument. The "adjusted issue price" is the issue price of the debt instrument
increased by the accrued original issue discount for all prior accrual periods
(and decreased by the amount of cash payments made in all prior accrual periods,
other than qualified stated interest payments).
Acquisition Premium. A U.S. Holder who purchases a Note for an amount that
is greater than the adjusted issue price of such Note, but that is less than or
equal to the sum of all amounts payable on the Note after the purchase date,
will be considered to have purchased such Note at an "acquisition premium."
Under the acquisition premium rules of the Code and the original issue discount
Regulations, the amount of original issue discount which such U.S. Holder must
include in its gross income with respect to such Note for any taxable year will
be reduced for each accrual period by an amount equal to the product of (i) the
amount of original issue discount otherwise includable for the period and (ii) a
fraction, the numerator of which is the acquisition premium and the denominator
of which is the original issue discount remaining from the date the Note was
purchased to its maturity date.
Market Discount. Section 1276 of the Code generally requires a holder of a
debt instrument with "market discount" to treat as ordinary income any gain
realized on the disposition of the instrument to the extent that market discount
has accrued during the holder's period of ownership. A "market discount" bond is
a debt obligation purchased at a discount, subject to a statutory de minimis
exception. For this purpose, a purchase of a debt instrument at a market
discount includes (i) a purchase at original issue at a price below its "issue
price," or (ii) in the case of a debt instrument issued with original issue
discount, a purchase at a price below the "adjusted issue price." The accrued
market discount generally equals a ratable portion of the bond's market
discount, based on the number of days the taxpayer has held the bond at the time
of such disposition, as a percentage of the number of days from the date the
taxpayer acquired the bond to its date of maturity.
Absent an election to include market discount in income as it accrues, a
holder of a market discount bond generally is not required to include accrued
market discount in income until (i) such holder receives a partial principal
payment; (ii) such holder sells or otherwise disposes of such market discount
bond; or (iii) such market discount bond is retired or redeemed by the issuer. A
U.S. Holder who purchased a Note at a market discount and who does not elect to
include market discount in income as it accrues may be required to defer the
deduction of all or a portion of the interest expense on any indebtedness
incurred or maintained by such holder to purchase or carry the Note.
Elections. A U.S. Holder of Notes, subject to certain limitations, may
elect to include all interest and discount on the Notes in gross income under
the constant yield method. For this purpose, interest includes stated and
unstated interest, acquisition discount, original issue discount, de minimis
market discount and market discount, as adjusted by any amortizable bond premium
or acquisition premium. Any such election, if made in respect of a market
discount bond, will constitute an election to include market discount in income
currently on all market discount bonds acquired by such U.S. Holder on or after
the first day of the first taxable year to which the election applies. U.S.
Holders should consult with their tax advisors regarding any tax elections they
intend to make with respect to any Notes.
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<PAGE> 104
Sale or Other Disposition. In general, a U.S. Holder of Notes will
recognize gain or loss upon the sale, exchange, redemption, or other taxable
disposition of such Notes measured by the difference between (i) the amount of
cash and the fair market value of property received (except to the extent
attributable to accrued interest on the Notes previously taken into account) and
(ii) the U.S. Holder's tax basis in the Notes, as increased by any accrued
original issue discount (net of all amortized acquisition premium) and market
discount previously included in income by the U.S. Holder and decreased by
amortizable bond premium, if any, deducted over the term of the Notes. Subject
to the market discount rules discussed above, any such gain or loss will
generally be capital gain or loss, and, with respect to gain, will be taxable at
various preferential rates depending upon the extent to which a U.S. Holder's
holding period exceeds one year.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Subject to the discussion of "backup withholding" below, interest on the
Notes is currently exempt from United States federal income taxes, including
withholding taxes, if paid to a Non-U.S. Holder unless (i) the Non-U.S. Holder
is an insurance company carrying on a United States insurance business to which
the interest is attributable, within the meaning of the Code, or (ii) the
Non-U.S. Holder is an individual or corporation (a) that has an office or other
fixed place of business in the United States to which the interest is
attributable, (b) the interest is derived in the active conduct of a banking,
financing or similar business conducted within the United States or (c) is
received by a corporation the principal business of which is trading in stock or
securities for its own account, and certain other conditions exist.
In addition, subject to the discussion of backup withholding below, a
Non-U.S. Holder generally will not be subject to United States federal income
tax on any gain recognized on the sale, exchange or other disposition of a Note,
unless (i) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder, or (ii) in the case of
a Non-U.S. Holder who is a nonresident alien individual and holds a Note as a
capital asset, (a) such holder is present in the United States for 183 or more
days in the taxable year and certain other circumstances are present or (b) such
holder maintains a "tax home" in the United States as defined in Section
911(d)(3) of the Code.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, certain payments to a non-corporate U.S. Holder of principal
and interest (including original issue discount) on the Notes and the gross
proceeds of a disposition of the Notes may be subject to United States
information reporting requirements. Also, subject to certain exceptions, such
payments may be subject, in general, to United States "backup withholding" tax
at a rate of 31% if the U.S. Holder does not provide a taxpayer identification
number or otherwise establish an exemption.
In general, any such payments to a Non-U.S. Holder that are effected
through a United States office of a custodian or broker or that are otherwise
paid or considered to be paid in the United States (through a paying agent or
otherwise) will be subject to United States information reporting requirements
and, under certain other circumstances, to United States backup withholding tax
at a rate of 31% unless the Non-U.S. Holder certifies its non-U.S. status under
penalties of perjury or otherwise establishes an exemption. In addition,
information reporting requirements will generally apply to such payments made by
a foreign office of a broker that (i) is a U.S. person, (ii) is a U.S.
controlled foreign corporation or (iii) is a foreign person that derived at
least 50% of its gross income from the conduct of a trade or business within the
United States over the three-year period immediately preceding the date of any
payment, in each case unless the broker has documentary evidence in its records
that the holder is a Non-U.S. Holder and certain other conditions are met, or
the Non-U.S. Holder otherwise establishes an exemption.
In October 1997 United States Treasury regulations were issued which alter
the foregoing rules in certain respects and which generally will apply to any
payments (including original issue discount) in respect of a Note or proceeds
from the sale of a Note that are made after December 31, 1998. Among other
things, such regulations expand the number of foreign intermediaries that are
potentially subject to information reporting and address certain documentary
evidence requirements relating to exemption from the general backup withholding
requirements. Holders of the Notes should consult their tax advisors concerning
the possible
103
<PAGE> 105
application of the final regulations to amounts of original issue discount that
they are required to include in income as well as the possible application of
such regulations to any payments made on or with respect to the Notes.
The amount of any backup withholding that is withheld from a payment to a
holder will be allowed as a credit against such holder's United States federal
income tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF SECURITIES IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM FROM
THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES OR OTHER TAX LAWS.
104
<PAGE> 106
CERTAIN CANADIAN TAX CONSIDERATIONS
In the opinion of Thorsteinssons, Canadian tax counsel to the Company, the
following general summary fairly describes the principal Canadian federal income
tax consequences arising under the Canada Act to an investor who acquires the
Notes.
This summary specifically does not apply to an investor that:
(a) is carrying on an insurance business in Canada or elsewhere;
(b) is a non-resident in Canada who holds the Notes in the course of
carrying on business in Canada;
(c) is a Canadian financial institution as defined in the Canada Act;
(d) holds the Notes as mark-to-market property or specified debt
obligations as defined in the Canada Act; or
(e) deals at non-arm's length with GST.
The income tax consequences will not be the same for all purchasers but may
vary depending on a number of factors, including the jurisdiction in which the
purchaser is resident and whether the Notes acquired under the Debt Offering
will be characterized as capital property. The following discussion of the
Canadian federal income tax consequences is, therefore, of a general nature only
and is not intended to constitute a complete analysis of the income tax
consequences and should not be interpreted as legal or tax advice to any
particular purchaser. EACH PROSPECTIVE PURCHASER SHOULD OBTAIN ADVICE FROM HIS
OWN TAX ADVISOR AS TO BOTH THE CANADIAN FEDERAL AND PROVINCIAL INCOME TAX
CONSEQUENCES OF HIS PARTICIPATION IN THE DEBT OFFERING.
This summary is based upon the provisions of the Canada Act in force as of
the date hereof, the regulations thereunder, any proposals to amend the Canada
Act or the regulations announced prior to the date hereof and counsel's
understanding of the current administrative and assessing policies of Revenue
Canada. This description is not exhaustive of all Canadian federal income tax
consequences and does not anticipate any changes in law whether by legislative,
governmental or judicial action other than the passage of the proposed
amendments in their present form, nor does it take into account provincial or
foreign tax considerations.
INTEREST INCOME ON NOTES
Each Note will have a principal amount of $1,000 and will become due in
2007. Until , 2002, interest will accrue on the Notes and be
compounded semi-annually; however, no interest will be paid before ,
2003. Commencing , 2003, interest will be payable semi-annually on
the sum of the principal amount and the interest accrued but unpaid thereon
through , 2002.
A non-resident holder of Notes who deals at arm's length with the Company
will be exempt, by virtue of a specific exemption in the Canadian Act, from
Canadian withholding tax in respect of any interest payable on the Notes. This
exemption generally provides that no Canadian withholding tax is payable in
respect of interest paid or credited on a debt owing to a non-resident where
there is no requirement, other than upon a bona fide event of default or a
conversion of the debt at the option of the holder into common shares of the
issuer, for the issuer to pay more than 25% of the principal amount of the debt
within five years of its issuance.
A Canadian resident holder of Notes who is a corporation, partnership, unit
trust or trust of which a corporation or partnership is a beneficiary, is
required to include in income for each taxation year the amount of interest
accrued or paid on the Note in that year, to the extent such interest was not
included in income for a preceding taxation year. The amounts of accrued but
unpaid interest included in such holder's income will be added to the cost base
of the Notes to the holder.
A Canadian resident holder of Notes who is an individual or a trust (other
than a unit trust) of which no corporation or partnership is a beneficiary is
required to include in income for each taxation year during which interest
accrues but is not paid, the amount of interest accrued on the Note to the
anniversary date of the issue of the Notes which occurs in that year, to the
extent such interest amounts were not included in income for
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<PAGE> 107
preceding taxation year. These accrued but unpaid amounts will be added to the
cost base of the Notes to the holder. For taxation years in which interest is
paid on the Notes, such holders must include in income the amount of interest
paid in the taxation year.
Any bonus or premium payable on Notes held by Canadian residents will be
deemed to be interest and will be required to be included in the holder's
income.
INCOME DENOMINATED IN U.S. CURRENCY
The amount of interest accrued or paid on a Note which a Canadian resident
holder is required to include in income will be the Canadian dollar equivalent
of such interest. The terms of the Notes require interest to be denominated in
U.S. currency. As a result, a Canadian resident holder of Notes whose income
inclusion in respect of accrued interest does not coincide with the stipulated
payment dates for interest, may have a foreign exchange gain or loss when
interest is paid. Any such gain or loss will be included in the holder's income
on income account. Revenue Canada's administrative policy is to accept any
method used to determine foreign exchange gains or losses on income transactions
provided:
(a) the method is in accordance with generally accepted accounting
principles;
(b) the same method is used for financial statement purposes and income tax
purposes; and,
(c) no reserve is claimed in respect of known or anticipated foreign
exchange gains or losses which have occurred or may occur after the end
of a taxation year.
DISPOSITION OF NOTES
A non-resident holder of Notes who does not hold them in connection with a
business carried on in Canada will not be subject to Canadian income tax in
respect of a gain realized from the disposition of the Notes.
A Canadian resident holder of Notes who assigns or transfers the Notes or
whose Notes are redeemed or purchased by GST, will be required to include in
income for the year in which the disposition occurs, the amount of interest
accrued on the Notes to the date of disposition, to the extent such amount has
not been included in income for a preceding year. Where a Canadian resident
holder of a Notes disposes of such Note for proceeds equal to its fair market
value and at the time of disposition the total amount of interest previously
included in the holder's income in respect of the Note exceeds the amount that
was received or became receivable at or prior to that time in respect of such
interest, the holder is entitled to deduct from income an amount equal to the
excess interest which was previously included in income and not received by the
holder or recouped by him on the disposition of the Note.
In addition, a Canadian resident holder of Notes who holds them as capital
property may realize a capital gain (or capital loss) on the disposition of the
Notes equal to the amount by which the proceeds of disposition of such Notes,
net of any cost of disposition, exceeds (or is less than) the adjusted cost base
of the Notes to that holder. Generally, three-quarters of any capital gain
realized on a disposition of the Notes must be included in computing income for
that year as a taxable capital gain. Three-quarters of any capital loss realized
by a Canadian holder of Notes on a disposition of such Notes in a year may be
deducted from the holder's taxable capital gains for that year.
The adjusted cost base of Note to a Canadian resident holder will be the
cost to him of that Note, plus any accrued but unpaid interest which was
included in the holder's income.
Any gain or loss to a Canadian resident who does not hold the Notes as
capital property will be on income account and will be fully included or
deducted from income, as the case may be.
CANADIAN DEFERRED PLANS
The Notes will be qualified investments for registered retirement savings
plans, deferred profit sharing plans and registered retirement income funds
("Registered Plans"). Registered Plans are not generally subject
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<PAGE> 108
to tax in respect of qualified investments; however, a Registered Plan that
holds foreign property with a total cost in excess of 20% of the cost of all
property in the Registered Plan will be subject to a 1% tax on the excess cost
in foreign property.
The Notes will constitute foreign property unless GST employs more than
five full time employees in Canada or it incurred, in Fiscal 1996 or Fiscal
1997, in excess of Cdn $250,000 for services rendered in Canada by employees or
other individuals. GST has declared that, at the time of issuance of the Notes,
it employs more than five full time employees in Canada or has incurred expenses
which exceed the Cdn $250,000 threshold described above. As a result, the Notes
will not be foreign property to any holders which are Registered Plans.
If, at any time, the Notes become foreign property, a Registered Plan will
not have to include the cost of the Notes in calculating its total cost of
foreign property for a period of two years after the Notes became foreign
property. After two years, if the Notes remain foreign property, in order to
avoid the 1% tax in respect of foreign property, the Registered Plan will have
to ensure that the cost of the Notes, plus the cost of any other foreign
property held by the Registered Plan, does not exceed the 20% foreign property
limit.
107
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UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Underwriters
named herein (the "Underwriters") have severally agreed to purchase, and the
Company has agreed to sell to them, the respective principal amount of Notes set
forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NAME NOTES
--------------------------------------------------------------- ------------
<S> <C>
Morgan Stanley & Co. Incorporated.............................. $
Bear, Stearns & Co. Inc. ......................................
Credit Suisse First Boston Corporation.........................
------------
Total................................................ $200,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
Notes offered hereby if any are taken.
The Underwriters propose to offer part of the Notes directly to the public
at the Price to Public set forth on the cover page hereof and part to certain
dealers at a price which represents a concession not in excess of % of the
public offering price for the Notes. Each Underwriter may allow, and such
dealers may reallow, a concession to certain other dealers not in excess of
% of the public offering price for the Notes. After the initial offering of
the Notes, the offering price and other selling terms may from time to time be
varied by the Underwriters.
In order to facilitate the Debt Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot in connection with the Debt
Offering, creating a short position in the Notes for their own account. In
addition, to cover overallotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, Notes in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Notes in the Debt Offering, if the syndicate
purchases previously distributed Notes in transactions to cover syndicate short
positions, in stabilizing transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the Notes above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Notes offered hereby are being
passed upon for the Company by Olshan Grundman Frome & Rosenzweig LLP, New York,
New York, counsel to the Company. Stephen Irwin, Esq. is of counsel to Olshan
Grundman Frome & Rosenzweig LLP. Mr. Irwin, Vice Chairman of the Board and
Secretary of the Company, owns 76,345 Common Shares, and options and warrants to
purchase 600,000 Common Shares. In addition, other attorneys affiliated with
Olshan Grundman Frome & Rosenzweig LLP hold Common Shares and/or options to
purchase Common Shares. Certain regulatory matters are being passed upon for the
Company by Swidler & Berlin, Chartered, Washington D.C. Certain Canadian legal
matters are being passed upon for the Company by O'Neill & Company, Vancouver,
British Columbia. Certain Canadian tax matters are being passed upon for the
Company by Thorsteinssons, Vancouver, British Columbia. Certain legal matters
will be passed upon for the Underwriters by Shearman & Sterling, New York, New
York.
108
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EXPERTS
The consolidated balance sheets of GST Telecommunications, Inc. and its
subsidiaries as of September 30, 1996 and 1995 and the consolidated statements
of operations, shareholders' equity and cash flows for the years ended September
30, 1996 and 1995, have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing. The consolidated
statements of operations, shareholders' equity and cash flows of GST
Telecommunications, Inc. and its subsidiaries for the 13 months ended September
30, 1994 have been included herein in reliance upon the report of KPMG Peat
Marwick Thorne, independent chartered accountants, upon the authority of said
firm as experts in accounting and auditing.
109
<PAGE> 111
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GST TELECOMMUNICATIONS, INC.
Independent Auditors' Report of KPMG Peat Marwick LLP................................. F-2
Auditors' Report of KPMG Peat Marwick Thorne.......................................... F-3
Consolidated Balance Sheets at September 30, 1995, 1996 and June 30, 1997
(unaudited)......................................................................... F-4
Consolidated Statements of Operations for the thirteen months ended September 30,
1994, the years ended September 30, 1995 and 1996 and the nine months ended June 30,
1996 and 1997 (unaudited)........................................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the thirteen months
ended September 30, 1994, the years ended September 30, 1995 and 1996 and the nine
months ended June 30, 1997 (unaudited).............................................. F-6
Consolidated Statements of Cash Flows for the thirteen months ended September 30,
1994, the years ended September 30, 1995 and 1996 and the nine months ended June 30,
1996 and 1997 (unaudited)........................................................... F-7
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
F-1
<PAGE> 112
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GST Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of GST
Telecommunications, Inc. as of September 30, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GST
Telecommunications, Inc. as of September 30, 1995 and 1996, and the results of
its operations and cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States.
Accounting principles generally accepted in the United States vary in
certain significant respects from accounting principles generally accepted in
Canada. Application of accounting principles generally accepted in Canada would
have affected results of operations for the year ended September 30, 1995 and
1996, and shareholders' equity as of September 30, 1995 and 1996, to the extent
summarized in note 10 to the consolidated financial statements.
KPMG Peat Marwick LLP
Portland, Oregon
November 22, 1996
F-2
<PAGE> 113
AUDITORS' REPORT
To the Board of Directors
GST Telecommunications, Inc.
We have audited the consolidated statements of operations, shareholders'
equity, and cash flows of GST Telecommunications, Inc. for the thirteen months
ended September 30, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the results of its operations and cash flows of the
Company for the thirteen months ended September 30, 1994 in accordance with
generally accepted accounting principles in the United States.
Accounting principles generally accepted in the United States vary in
certain significant respects from accounting principles generally accepted in
Canada. Application of accounting principles generally accepted in Canada would
have affected results of operations for the thirteen months ended September 30,
1994 and shareholders' equity as at September 30, 1994, to the extent summarized
in note 10 to the consolidated financial statements.
KPMG Peat Marwick Thorne
Chartered Accountants
Vancouver, Canada
December 8, 1994
F-3
<PAGE> 114
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996 JUNE 30, 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 6,024 $ 61,343 $ 38,350
Restricted investments............................... -- 16,000 128,479
Accounts receivable, net............................. 4,306 9,472 22,212
Investments.......................................... 871 5,176 2,315
Inventory............................................ 387 2,406 2,852
Other current assets................................. 1,252 6,151 11,760
-------- ------- ---------
12,840 100,548 205,968
-------- ------- ---------
Restricted investments................................. -- -- 80,695
Property and equipment, net............................ 38,033 127,575 300,356
Goodwill, net.......................................... 13,004 35,730 38,027
Other assets, net...................................... 9,248 37,848 56,980
-------- ------- ---------
60,285 201,153 476,058
-------- ------- ---------
$ 73,125 $301,701 $ 682,026
======== ======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 9,683 $ 12,443 $ 15,010
Accrued expenses..................................... 3,090 26,743 21,085
Current portion of capital lease obligations......... 223 722 4,640
Current portion of long-term debt.................... 736 4,832 3,700
Other current liabilities............................ 512 726 106
-------- ------- ---------
14,244 45,466 44,541
-------- ------- ---------
Deferred compensation.................................. 151 158 158
Capital lease obligation, less current portion......... 658 1,453 11,427
Long-term debt, less current portion................... 19,088 232,674 567,405
Minority interest...................................... 3,279 182 12,065
Commitments and contingencies
Preference shares:
Authorized -- 10,000,000 no par shares; no shares
issued or outstanding at September 30, 1995 and
1996, 500 issued and outstanding at June 30,
1997 (unaudited)................................ -- -- 52,968
Shareholders' equity (deficit):
Common shares:
Authorized -- unlimited number of no par common
shares; issued and outstanding -- September 30,
1995 -- 18,700,290 shares, September 30,
1996 -- 21,257,697 shares, June 30,
1997 -- 27,076,169 (unaudited).................. 50,166 72,647 132,400
Commitment to issue shares:
September 30, 1995 -- 336,498 shares, September
30, 1996 -- 1,922,007 shares, June 30,
1997 -- 174,906 (unaudited)..................... 1,494 25,454 4,707
Accumulated deficit.................................. (15,955) (76,333) (143,645)
-------- ------- ---------
35,705 21,768 (6,538)
-------- ------- ---------
$ 73,125 $301,701 $ 682,026
======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 115
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
THIRTEEN NINE MONTHS
MONTHS ENDED YEAR ENDED YEAR ENDED ENDED JUNE 30,
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication services............. $ 112 $ 11,118 $ 31,726 $ 19,452 $ 58,738
Product................................ 5,889 7,563 9,573 5,772 16,186
-------- -------- ------- ---------- ----------
Total revenues................. 6,001 18,681 41,299 25,224 74,924
-------- -------- ------- ---------- ----------
Operating costs and expenses:
Network expenses....................... 149 10,103 26,580 14,922 48,250
Facilities administration and
maintenance......................... 26 2,096 10,317 5,793 9,833
Cost of product revenues............... 2,137 3,096 3,974 2,803 5,557
Selling, general and administrative.... 3,953 11,373 33,375 20,689 49,395
Research and development............... 689 1,270 1,352 910 1,739
Depreciation and amortization.......... 384 2,374 8,298 5,385 14,833
-------- -------- ------- ---------- ----------
Total operating costs and
expenses..................... 7,338 30,312 83,896 50,502 129,607
-------- -------- ------- ---------- ----------
Loss from operations........... (1,337) (11,631) (42,597) (25,278) (54,683)
-------- -------- ------- ---------- ----------
Other expenses (income):
Interest income........................ (254) (303) (5,549) (4,209) (3,377)
Interest expense, net of amounts
capitalized......................... 27 838 21,224 14,801 21,321
Loss from joint venture................ 1,099 661 1,495 987 --
Write-off of pre-operating costs....... 691 -- -- -- --
Loss on investments.................... -- 526 26 -- --
Other.................................. 87 160 839 547 (6,549)
-------- -------- ------- ---------- ----------
1,650 1,882 18,035 12,126 11,395
-------- -------- ------- ---------- ----------
Loss before minority interest
in income (loss) of
subsidiary and income tax.... (2,987) (13,513) (60,632) (37,404) (66,078)
-------- -------- ------- ---------- ----------
Income tax expense:
Current................................ 487 70 157 31 843
Deferred............................... 15 96 -- -- --
-------- -------- ------- ---------- ----------
502 166 157 31 843
-------- -------- ------- ---------- ----------
Loss before minority interest
in income (loss) of
subsidiaries................. (3,489) (13,679) (60,789) (37,435) (66,921)
Minority interest in (income) loss of
subsidiaries........................... (2) 2,364 411 335 (391)
-------- -------- ------- ---------- ----------
Loss for the period............ $ (3,491) $ (11,315) $ (60,378) $ (37,100) $ (67,312)
======== ======== ======= ========== ==========
Loss per share........................... $ (.35) $ (.82) $ (3.18) $ (2.00) $ (2.87)
======== ======== ======= ========== ==========
Weighted average common and common
equivalents shares outstanding......... 9,878,704 13,780,796 18,988,127 18,512,988 23,460,468
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 116
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMITMENT TO
ISSUE COMMON
SHARES (NOTE 6) COMMON SHARES TOTAL
--------------------- --------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
---------- -------- ---------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1993....... -- $ -- 9,003,421 $ 10,511 $ (1,149) $ 9,362
Issuance of common stock for
services................... -- -- 48,000 183 -- 183
Issuance of common stock,
net........................ -- -- 2,515,479 10,368 -- 10,368
Issuance of common stock
under option plans......... -- -- 343,750 974 -- 974
Commitment to issues shares
for business
combinations............... 551,536 3,038 -- -- -- 3,038
Net loss..................... -- -- -- -- (3,491) (3,491)
--------- ------- ---------- ------- -------- --------
Balance, September 30, 1994.... 551,536 3,038 11,910,650 22,036 (4,640) 20,434
Issuance of common stock for
services................... -- -- 34,057 150 -- 150
Issuance of common stock in
business combinations...... (551,536) (3,038) 1,719,785 8,785 -- 5,747
Issuance of common stock,
net........................ -- -- 4,593,598 17,965 -- 17,965
Issuance of common stock
under option plans......... -- -- 442,200 1,230 -- 1,230
Commitment to issues shares
for business
combinations............... 336,498 1,494 -- -- -- 1,494
Net loss..................... -- -- -- -- (11,315) (11,315)
--------- ------- ---------- ------- -------- --------
Balance, September 30, 1995.... 336,498 1,494 18,700,290 50,166 (15,955) 35,705
Issuance of common stock for
services................... -- -- 85,627 621 -- 621
Issuance of common stock in
business combinations...... (168,249) (747) 1,200,873 11,097 -- 10,350
Issuance of common stock,
net........................ -- -- 1,189,849 9,672 -- 9,672
Issuance of common stock
under option plans......... -- -- 67,500 293 -- 293
Commitment to issues shares
for business
combinations............... 1,753,758 24,707 -- -- -- 24,707
Issuance of common stock
under employee stock
purchase plan.............. -- -- 13,558 132 -- 132
Accrual of compensation costs
for stock award and option
plans...................... -- -- -- 666 -- 666
Net loss..................... -- -- -- -- (60,378) (60,378)
--------- ------- ---------- ------- -------- --------
Balance, September 30, 1996.... 1,922,007 25,454 21,257,697 72,647 (76,333) 21,768
Issuance of common stock in
business combinations...... (1,747,101) (20,747) 2,792,265 29,195 -- 8,448
Issuance of common stock,
net........................ -- -- 2,595,285 28,330 -- 28,330
Issuance of common stock
under option plans......... -- -- 367,929 1,634 -- 1,634
Issuance of common stock
under employee stock
purchase plan.............. -- -- 62,993 400 -- 400
Accrual of compensation costs
for stock award and option
plans...................... -- -- -- 194 -- 194
Net loss..................... -- -- -- -- (67,312) (67,312)
--------- ------- ---------- ------- -------- --------
Balance, June 30, 1997
(unaudited).................. 174,906 $ 4,707 27,076,169 $132,400 $(143,645) $ (6,538)
========= ======= ========== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 117
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
THIRTEEN NINE MONTHS
MONTHS ENDED YEAR ENDED YEAR ENDED ENDED JUNE 30,
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operations:
Loss for the period......................... $ (3,491) $ (11,315) $ (60,378) $(37,100) $(67,312)
Items not involving cash:
Minority interest in income (loss) of
subsidiary.............................. 2 (2,364) (411) (335) 391
Loss from joint ventures.................. 1,099 661 1,495 -- --
Write-off of pre-operating costs.......... 691 -- -- -- --
Depreciation and amortization............. 557 2,824 9,496 6,218 16,070
Deferred income taxes..................... 15 96 -- -- --
Deferred compensation..................... -- 151 7 -- --
Accretion of interest..................... -- -- 19,978 13,312 13,981
Write-off of other assets................. -- 122 766 486 --
Issuance of stock for compensation........ -- -- 890 -- 446
Issuance of stock for financing
commitment.............................. 183 150 396 396 --
Loss on disposal of fixed assets.......... -- -- 246 -- --
Loss on investments....................... -- 526 26 986 796
Gain on sale of subsidiary shares......... -- (7,424)
Changes in non-cash operating working
capital:
Accounts receivable, net.................. (882) (1,549) (1,066) (1,113) (8,457)
Inventory................................. (163) (13) (2,019) (1,238) 151
Other current and other assets, net....... (120) (417) (5,304) (1,150) (5,435)
Accounts payable and accrued
liabilities............................. 2,350 (190) 2,387 (1,427) 5,698
Other current liabilities................. 53 262 185 233 (370)
-------- -------- --------- --------- --------
Cash provided by (used in)
operations....................... 294 (11,056) (33,306) (20,732) (51,465)
-------- -------- --------- --------- --------
Investments:
Acquisition of subsidiaries, net of cash
acquired................................ (4,235) 207 (1,441) 11 (1,564)
Investment in joint ventures.............. (35) -- -- -- --
Settlement of notes receivable............ (5,107) 3,367 -- -- --
Purchase of investment in affiliate....... -- -- (294) -- --
Purchase of investments................... (843) 848 (9,799) (4,452) (3,065)
Proceeds from sale of investments......... -- -- 5,493 -- 5,176
Purchase of fixed assets.................. (906) (27,730) (76,192) (40,971) (159,736)
Proceeds from sale of fixed assets........ -- -- 8 -- 5,774
Purchase of other assets.................. (580) (1,829) (7,449) (9,025) (12,151)
Change in restricted cash................. -- -- (16,000) -- --
Proceeds from the sales of subsidiary
shares.................................. -- -- -- -- 27,365
Cash and investments restricted for
purchase of fixed assets................ -- -- -- -- (110,203)
-------- -------- --------- --------- --------
Cash used in investing
activities....................... (11,706) (25,137) (105,674) (54,437) (248,404)
-------- -------- --------- --------- --------
Financing:
Proceeds from long-term debt.............. -- 19,857 196,207 193,109 314,850
Principal payments on long-term debt...... (387) (816) (2,112) (1,026) (6,765)
Issuance of common shares, net of issuance
costs................................... 11,342 19,195 10,098 9,918 24,652
</TABLE>
F-7
<PAGE> 118
GST TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THIRTEEN NINE MONTHS
MONTHS ENDED YEAR ENDED YEAR ENDED ENDED JUNE 30,
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, -------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Issuance of preference shares............. -- -- -- -- 50,000
Deferred debt financing costs............. (70) (853) (9,894) (9,330) (11,313)
Issuance of subsidiary shares............. -- 615 -- -- --
Purchase of securities to finance interest
payments................................ -- -- -- -- (94,548)
-------- -------- --------- --------- --------
Cash provided by financing
activities....................... 10,885 37,998 194,299 192,671 276,876
-------- -------- --------- --------- --------
Increase (decrease) in cash and
cash equivalents................. (527) 1,805 55,319 117,502 (22,993)
Cash and cash equivalents, beginning of
period.................................... 4,746 4,219 6,024 6,024 61,343
-------- -------- --------- --------- --------
Cash and cash equivalents, end of period.... $ 4,219 $ 6,024 $ 61,343 $123,526 $ 38,350
======== ======== ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 119
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
SEPTEMBER 30, 1995 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 which include long distance, Internet access and
data services. The Company also manufactures telecommunications switching
equipment.
The consolidated financial statements for the thirteen months ended
September 30, 1994, and the years ended September 30, 1995 and 1996 have been
reported in U.S. dollars, the functional currency of the Company. The Company
changed its fiscal year-end to September 30 effective in 1994 (note 10).
(b) Basis of Consolidation
These consolidated financial statements include the accounts of the Company
and its greater than 50% owned subsidiaries. The Company's investments in
unconsolidated companies owned 20% or more are accounted for using the equity
method. All significant intercompany accounts have been eliminated.
(c) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments with
original maturities of ninety days or less.
(d) Restricted Cash
Pursuant to an agreement between the Company and a vendor relating to a
construction in progress as of September 30, 1996, the Company is required to
maintain $16 million in a restricted account pending the completion of the
project as collateral against payment. Completion of the project is anticipated
in the next fiscal year. At September 30, 1996, the Company is committed to
purchase approximately $20.7 million relating to this project.
(e) Accounts and Notes Receivable
The Company maintains a security interest in the telecommunications systems
it sells until the Company is paid in full. Management provides an allowance for
doubtful accounts and notes based on current customer information and historical
statistics. The allowance for doubtful accounts was $1,401 and $1,264 at
September 30, 1995 and 1996, respectively.
(f) Investments
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (Statement 115) at October 1, 1994. Under Statement 115, the Company
classifies its debt and equity securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold the security until maturity. All other securities not included in
trading or held-to-maturity are classified as available-for-sale.
F-9
<PAGE> 120
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Trading and available-for-sale securities are recorded at fair value. All
of the Company's investments comprised primarily of U.S. Treasury Securities and
commercial paper, are classified as available-for-sale and mature in periods
ranging from 3 to 9 months. Unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of shareholders' equity until realized.
A decline in the market value of any available-for-sale security below cost that
is deemed other than temporary is charged to earnings resulting in the
establishment of new cost basis for the security. Dividend income is recognized
when earned. Realized gains and losses for securities classified as
available-for-sale are included in earnings and are derived using the
specific-identification method for determining the cost of securities sold. The
amortized cost approximated the market value of these securities at September
30, 1995 and 1996.
(g) Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value) and consists of the following:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Raw materials.............................................. $ 317 $ 378
Work in process............................................ 70 346
Finished and refurbished goods............................. -- 1,682
------ ----
Total inventory.................................. $ 387 $2,406
====== ====
</TABLE>
(h) Investments in Affiliates
The Company has a 50% interest in Phoenix Fiber Access, Inc., a competitive
access fiber optic telecommunications network in the Phoenix, Arizona
metropolitan area. The carrying value of this investment, which is included in
other assets in the accompanying consolidated balance sheet, was $2,859 and
$1,364 at September 30, 1995 and 1996, respectively.
The Company has an approximate 40% interest in GST Global
Telecommunications, Inc. (GST Global), a publicly traded corporation on the
Vancouver Stock Exchange which intends to conduct telecommunications operations
on a worldwide basis. The carrying value of this investment, which is included
in other assets in the accompanying consolidated balance sheet, was $3,634 at
September 30, 1996 (see note 2).
(i) Property and Equipment
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over their estimated useful lives, which are as follows:
<TABLE>
<S> <C>
Telecommunications networks...................................... 10 years
Electronic and related equipment................................. 10 years
Leasehold improvements........................................... 10 years
Furniture, office equipment and other............................ 3-7 years
Building......................................................... 40 years
</TABLE>
Construction, engineering and overhead costs directly related to the
development of competitive access networks are capitalized. The Company begins
depreciating these costs when the networks become commercially operational.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets owned.
F-10
<PAGE> 121
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Goodwill
Goodwill, which represents the excess of the purchase price over the fair
value of net assets acquired, is amortized over periods ranging from five to
twenty years using the straight-line method. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
discounted projected future cash flows of the acquired businesses from which the
goodwill arose. Amortization charged to operations was $19, $389 and $1,690 for
the thirteen month period ended September 30, 1994, and the years ended
September 30, 1995 and 1996, respectively.
(k) Revenue Recognition
Telecommunication services revenue is recorded upon placing of calls or
rendering of other related services. Telecommunication product revenue is
recorded upon shipment of product and is presented in the accompanying
consolidated statements of operations net of product returns.
Deferred revenue, of which $373 and $477 are included in other current
liabilities in the accompanying balance sheet at September 30, 1995 and 1996,
respectively, consists of monthly service contract payments received in advance,
warranty payments received in advance and research and development advances.
Advance warranty payments are amortized over the length of warranty on the
system sold, which is typically one year.
(l) Loss Per Share
Loss per share has been calculated using the weighted average number of
common and dilutive common equivalent shares assumed to be outstanding during
the period (using the treasury stock method for dilutive common equivalent
shares). Common equivalent shares consist of options and warrants to purchase
common stock.
Fully diluted loss per share has not been presented for the outstanding
options and warrants as they are anti-dilutive.
(m) Issuance of Subsidiary Stock
Issuances of subsidiary stock are accounted for as capital transactions in
the accompanying consolidated financial statements.
(n) Segmented Information
Segmented information has not been presented as the Company is presently
operating 100% in the telecommunications industry in the United States and all
revenues and operating profits and losses are derived from United States
operations and substantially all assets reside in the United States.
(o) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the future
tax consequences of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in the tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
F-11
<PAGE> 122
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(p) Foreign Currency
The functional currency of all of the Company's operations is the U.S.
dollar. In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation", nonmonetary balance sheet items recorded in
Canadian dollars are remeasured at historical rates and monetary balance sheet
items recorded in Canadian dollars are remeasured at current rates. Exchange
gains and losses from remeasurement of monetary assets and liabilities are
recognized currently in income.
(q) Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, short-term investments, short-term borrowings and
accounts payable and accrued liabilities approximate fair values due to the
short maturity of those instruments.
The carrying amount of the Company's long-term debt approximates its fair
value. The fair value of the Company's long-term debt was determined based on
quoted market prices for similar issues or on current rates available to the
Company for debt of the same remaining maturities and similar terms.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
(r) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(s) Unaudited Interim Financial Information
The consolidated financial data for the nine months ended June 30, 1996 and
1997 is unaudited, but in the opinion of the management of the Company, reflects
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of results for interim periods.
(t) Reclassifications
Certain reclassifications have been made in the accompanying consolidated
financial statements for 1995 and 1994 to conform with the 1996 presentation.
(2) ACQUISITIONS
From September 1, 1993 through September 30, 1996, the Company made the
acquisitions set forth below, each of which was accounted for as a purchase,
except for Canadian Programming Concepts, Inc., which was accounted for as an
equity investment. The consolidated financial statements include the operating
results from the effective date of acquisition.
(a) Call America Business Communications, Inc. (Call America)
In the fourth quarter of 1996, the Company acquired 100% of the outstanding
capital stock of Call America. Call America is a California company that
provides long distance and ancillary communications services. The Company
acquired Call America for consideration of $14,777, consisting of 1,177,692
shares of
F-12
<PAGE> 123
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock valued at $12.50 per share, and $56 in legal fees. An additional
130,000 common shares have been placed in escrow and will be issued to the
former owners of Call America in one year, subject to certain indemnification
clauses contained in the purchase agreement. Up to an additional 114,489 shares
could be issued to the former Call America owners if the market price of the
Company's common stock is less than $12.50 six months after the closing date.
Additionally, $533 in notes receivable due from the former owners of Call
America will be forgiven if certain operating milestones are met over the next
10 years. In connection with this acquisition, the Company recorded $21,166 in
assets, including $9,798 in goodwill, and $6,389 in liabilities.
(b) TotalNet Communications, Inc. (TotalNet)
In the fourth quarter of 1996, the Company acquired 100% of the outstanding
capital stock of TotalNet, a long distance service provider. The Company
acquired TotalNet for consideration of $7,911, consisting of 401,160 common
shares valued at $4,373, a commitment to issue shares valued at $3,498 at the
one year anniversary of the agreement, and $40 in legal fees. The number of
shares issuable at the one year anniversary will be determined by a share price
based on the weighted average market price of the Company's common shares for
the ten days preceding the anniversary providing that in no case will the
anniversary share price be lower than $7.63 or greater than $20. An additional
80,232 common shares will be issued to the former owners of TotalNet at the
anniversary date, subject to certain indemnification clauses contained in the
purchase agreement. In connection with this acquisition, the Company recorded
$10,149 in assets, including $4,700 in goodwill, and $2,239 in liabilities.
(c) GST Telecom, Inc. (GST Telecom)
In the third quarter of 1994, the Company acquired 60% of the shares of GST
Telecom in exchange for contributing 60% of the shares of Tucson Lightwave, Inc.
(Tucson) and a commitment to provide at least $11,024 in equity financing. GST
Telecom develops, constructs, and operates competitive local exchange networks
and other communications systems. The shares of Tucson were acquired from
Pacwest, LLC (Pacwest) (an entity controlled by the Chief Executive Officer of
the Company) in exchange for 100,000 common shares of the Company valued at
$447. The Company has made $132,184 in equity contributions to GST Telecom
through September 30, 1996.
In the third quarter of 1995, the Company acquired an additional 20% of GST
Telecom for 1,000,000 common shares valued at $5 per share.
In the first quarter of 1996, the Company acquired the remaining 20% of GST
Telecom for consideration of up to a maximum of 1,000,000 common shares (valued
at $10.00 per share) based upon the fair market value of a 20% interest in GST
Telecom, which was determined by an independent appraisal during September 1996.
Currently, 1,000,000 common shares are held in escrow pending the release of
such shares. In addition, the parties agreed that the Company has fulfilled all
of its obligations relating to the funding of GST Telecom and its subsidiaries.
In connection with these acquisitions, the Company recorded $40,516 in net
assets, including goodwill of $15,330, and liabilities of $3,478.
(d) National Applied Computers Technologies, Inc. (NACT)
In the fourth quarter of 1993, the Company purchased 52% of the common
shares of NACT. Subsequent to September 1, 1993, at various times, the Company
acquired the remaining 48% interest of NACT. NACT is a Utah manufacturer of
telecommunications switching and network management equipment for the inter-
exchange industry.
F-13
<PAGE> 124
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consideration paid for 100% of NACT's outstanding common shares
consisted of $3,621 in cash, $466 in notes payable, $160 in legal fees and
956,283 common shares valued at $4,832. 15% of the stock acquired from NACT was
purchased from NACT's former President, who is also the Company's Chief
Technology Officer and a Director of the Company, for 384,195 common shares of
the Company. In connection with these acquisitions, the Company recorded $10,122
in net assets, including goodwill of $1,387, and liabilities of $1,203.
(e) International Telemanagement Group, Inc. (ITG)
In the third quarter of 1995, the Company acquired 100% of the outstanding
capital stock of ITG. ITG is an Ohio company that provides a variety of domestic
and international long distance services. The Company acquired ITG for
consideration of $75, the assumption of certain liabilities, and an earn out
provision. In connection with this acquisition, the Company recorded $7,261 in
net assets, including goodwill of $4,025, and liabilities of $7,185.
(f) Others
In May 1996, the Company purchased from Tomen America, Inc. the remaining
10% interest in the GST Pacific Lightwave, Inc., a GST Telecom subsidiary which
operates a fiber optic competitive local exchange network in southern
California. The consideration paid for this acquisition consisted of $1,250 in
cash, which was recorded as goodwill.
In a series of transactions during the third and fourth quarters of 1996,
the Company acquired approximately 40% of Canadian Programming Concepts, Inc.
(CPC), a Canadian corporation which is publicly traded on the Vancouver Stock
Exchange, for consideration of $3,659. As a result of this investment, CPC's
name was changed to GST Global. Concurrent with this investment, four of the
Company's directors and one of the Company's employees were appointed to GST
Global's six member board of directors. The key officers of GST Global are
officers of the Company. Several employees and directors of the Company own
shares in GST Global amounting to approximately 5% of GST Global's outstanding
shares at September 30, 1996. At September 30, 1996, the market value of GST
Global totaled approximately $26,366.
During 1996, the Company acquired the assets of Reservations, Inc. dba
Hawaii Online (HOL), the assets of Texas-Ohio Communications, Inc. (TOC), and
100% of the outstanding capital stock of Tri-Star Residential Communications,
Inc. (Tri-Star). HOL is an Internet service provider; TOC is a long distance
service provider; and Tri-Star provides shared tenant services consisting of
long distance, cable television and security service to tenants of
multi-dwelling apartment units. Consideration paid for these acquisitions
totaled $3,341 and consisted of 32,624 common shares valued at $350, a
commitment to issue common shares valued at $2,115 over the next two years, $599
in accrued payments to be made during 1997, $120 of cash, and $157 in legal
fees. In connection with these acquisitions, the Company recorded $5,529 in
assets, including $1,085 of goodwill, and $2,278 in liabilities.
The pro forma results shown below reflect purchase accounting adjustments
assuming the acquisitions described above occurred as of the beginning of each
of the periods presented:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.......................................... $ 54,762 $ 71,600
Net loss.......................................... (22,918) (65,196)
Net loss per share................................ $ (1.34) $ (3.05)
</TABLE>
F-14
<PAGE> 125
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30
1997
SEPTEMBER 30, SEPTEMBER 30, --------
1995 1996
------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
Telecommunications networks............ $ 9,577 $ 25,551 $ 79,707
Electronic and related equipment....... 10,058 31,547 62,430
Leasehold improvements................. 300 3,619 9,241
Furniture, office equipment and
other................................ 2,201 8,746 13,930
Building............................... 2,134 2,134 3,366
Construction in progress............... 15,313 62,763 146,312
-------- ------- --------
39,583 134,360 314,986
Less accumulated depreciation.......... (1,550) (6,785) (14,630)
-------- ------- --------
$ 38,033 $ 127,575 $300,356
======== ======= ========
</TABLE>
Property and equipment includes $15,313 and $62,763 of equipment which had
not been placed in service at September 30, 1995 and 1996, respectively, and
accordingly, is not being depreciated. During the years ended September 30, 1995
and 1996, and the nine months ended June 30, 1997, $291, $2,316 and $10,387
(unaudited) of interest, respectively, was capitalized as part of
telecommunications networks and networks in progress.
(4) ACCRUED EXPENSES
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Fixed asset purchases............................ $ 796 $14,153
Accrued acquisition costs........................ -- 4,213
Carrier costs.................................... 680 4,057
Other............................................ 1,614 4,320
------- ------
Total.................................. $ 3,090 $26,743
======= ======
</TABLE>
F-15
<PAGE> 126
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) FINANCING ARRANGEMENTS
(a) Debt
The Company's long-term debt at September 30, 1995 and 1996 and June 30,
1997 is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1997
1995 1996 -----------
------- -------- (UNAUDITED)
<S> <C> <C> <C>
Note payable to Tomen, quarterly interest payments
at the LIBOR rate plus 3% (8.7% at September 30,
1996) with quarterly principal payments (together
with interest) beginning in fiscal 1998 through
2005, collateralized by equipment. The Company
has the option to convert the interest rate to a
fixed rate equal to the Treasury index rate plus
3% during the term of the loan................... $16,674 $ 31,771 $ 32,300
Senior discount notes, 13 7/8% effective interest
with semi-annual interest payments due beginning
June 15, 2001 on a total maturity value of
$312,448, principal due December 15, 2005........ -- 177,760 196,503
Convertible senior subordinated discount notes
13 7/8% effective interest with semi-annual
interest payments due beginning June 15, 2001 on
a total maturity value of $39,056, principal due
December 15, 2005................................ -- 22,220 24,563
Senior secured notes, 13 1/4% effective interest
with semi-annual interest payments due beginning
November 1, 1997, principal due May 1, 2007...... -- -- 265,000
Notes payable to NTFC, monthly interest payments at
LIBOR plus 3.5%, quarterly principal payments
beginning January 1, 1999 through October 1,
2003............................................. -- -- 44,634
Other.............................................. 3,150 5,755 8,105
------- -------- --------
19,824 237,506 571,105
Less current portion of long-term debt............. 736 4,832 3,700
------- -------- --------
$19,088 $232,674 $ 567,405
======= ======== ========
</TABLE>
The schedule of future principal payments on long-term debt as of September
30, 1996 is as follows:
<TABLE>
<S> <C> <C>
1997.......................................................... $ 4,832
1998.......................................................... 3,474
1999.......................................................... 4,567
2000.......................................................... 5,438
2001.......................................................... 5,295
Thereafter.................................................... 213,900
--------
$237,506
========
</TABLE>
(b) Issuance of Debt and Convertible Debt Securities
In the first quarter of 1996, the Company issued approximately $180 million
in 39,056 Units (the Units) each consisting of eight 13.875% (effective interest
rate) Senior Discount Notes (the senior notes) and one 13.875% (effective
interest rate) Convertible Senior Subordinated Discount Note (the convertible
notes) maturing on December 15, 2005. The Units were sold at a substantial
discount and there will be no accrual of cash interest prior to December 15,
2000 or payment of interest until June 15, 2001. The Units accrete to a total
principal amount of approximately $351.5 million by December 15, 2000. The
senior notes will rank in
F-16
<PAGE> 127
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
right of payment with all unsubordinated indebtedness of the Company while the
convertible notes will be junior to all senior Company debt. The senior and
convertible notes are subject to certain debt covenants.
Each of the convertible notes is convertible at the option of the holder
into common shares any time after December 15, 1996. The number of shares to be
issued upon conversion is based on an accreted value on the conversion date
divided by $7.563. In addition, after December 15, 1996, all of the convertible
notes may be automatically converted to common shares by the Company if the
Company's common shares sustain certain market value levels for 30 consecutive
trading days.
On or after December 15, 2000, the senior and convertible notes will be
redeemable at the option of the Company.
(c) Tomen America, Inc. Facility
In the first quarter of 1995, the Company entered into a master financing
agreement with Tomen America, Inc. (Tomen). Under the agreement, Tomen will loan
up to $100 million to subsidiaries of the Company for development and
construction of network projects. An upfront fee of 1.50% of the aggregate
principal amount of each project loan and a commitment fee of 0.50% per annum on
the unused portion of each project loan is payable to Tomen. Tomen will evaluate
each network project separately to determine if it will participate in financing
the project. The agreement originally provided Tomen the right to purchase a 10%
equity interest in each network project it financed. Pursuant to such right, in
1995 Tomen purchased a 10% interest in the Company's southern California
project. In May 1996, the Company repurchased the 10% interest in the project
and the agreement was amended to cancel Tomen's right to purchase an equity
interest in funded projects. As of September 30, 1996, Tomen has agreed to
provide a total of $34.45 million in debt financing to the Company's
subsidiaries ($31.8 million of which has been drawn down as of September 30,
1996) for construction and operation of its fiber optic networks in Southern
California, New Mexico, and Arizona. The Tomen financing agreements are subject
to certain debt covenants.
Concurrent with the signings of the master financing agreement and
subsidiary credit agreements, the Company has also signed stock purchase
agreements with Tomen wherein Tomen purchased shares of common stock and
received warrants to purchase additional shares of common stock. Pursuant to
such agreements, through September 30, 1996, Tomen has purchased 1,074,074
shares of common stock at prices ranging from $4.60 to $10.80 per share for
total cash consideration of $6,955. Tomen also holds warrants to purchase up to
546,155 additional shares of common stock at prices ranging from $5.52 to $12.96
per share. Such warrants expire at various times between October 1996 and May
1998. Subsequent to September 30, 1996, Tomen exercised a warrant and purchased
250,000 shares of common stock at $5.52 per share for total cash consideration
of $1,380.
The Company's Chief Executive Officer serves as a consultant to Tomen for
which he is paid a fee. Simultaneous with the execution of the June 21, 1994
purchase of 60% of GST Telecom from Pacwest. Pacwest contracted with the Company
to receive a fee equal to 1% of the aggregate debt and equity financing provided
by Tomen to the Company.
(d) Siemens Stromberg-Carlson Agreement
In the fourth quarter of 1996, the Company entered into a loan and security
agreement with Siemens Stromberg-Carlson (Siemens). Under the terms of the
agreement, Siemens will loan up to $226 million to the Company for the purchase
and installation of telecommunications switching and related equipment. Amounts
borrowed under the agreement will initially bear interest at LIBOR plus 4.5% and
will be secured by the equipment. Such interest will decrease to LIBOR plus 3.5%
at the time each initial loan is converted to a term
F-17
<PAGE> 128
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan, which conversion will occur at the first calendar quarter following the
initial loan. Upon making the first loan request, the Company will be committed
to purchase a minimum of $16.5 million in equipment over 3 years. Amounts
borrowed under the agreement will be repaid in 24 quarterly installments
beginning 5 quarters after the initial loan is converted to a term loan. At
September 30, 1996, no amount had been borrowed pursuant to this agreement.
(e) Northern Telecom, Inc. Purchase Agreement
In the fourth quarter of 1996, the Company entered into a purchase
agreement with Northern Telecom, Inc. (Nortel), pursuant to which the Company is
committed to purchase a minimum of $50 million, of which $1.9 million has been
purchased as of September 30, 1996, in telecommunications switching equipment
over the next three years. The Company is currently negotiating an agreement to
finance such equipment purchases with a third party.
(f) Line of Credit
At September 30, 1996, the Company was contingently liable under repurchase
agreements for a maximum of $1,035 to a financial institution. The financial
institution provides lease financing to NACT customers on a recourse basis. The
Company has established a $1,000 line of credit with the financial institution
to provide funding for payment of these leases, if required. No balance was
outstanding under the line of credit at September 30, 1996.
(6) SHAREHOLDERS' EQUITY
(a) Commitment to Issue Shares
Pursuant to a final agreement dated January 5, 1995, the Company is
committed to issue 168,249 common shares at a fair value of $4.44 per share
($747) to former shareholders of NACT on January 5, 1997. Additionally, pursuant
to the terms of the purchase agreements discussed in note 2, the Company is
committed to issue a minimum of 1,753,758 shares valued at $24,707 at various
times throughout 1997.
(b) Preference Shares
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value (the Preference Shares), in one or more
series and to determine the designations, powers, preferences and relative,
participating, optional or other rights thereof, including without limitation,
the dividend rate (and whether dividends are cumulative), conversion rights,
voting rights, rights and terms of redemption, redemption price and liquidation
preference.
(c) Escrow Agreements
Of the 21,257,697 shares outstanding as of September 30, 1996, 750,000 are
held pursuant to an escrow agreement, their release being subject to the
approval of regulatory authorities. These common shares have been issued by the
Company and have rights equal to those of all other common shares except that
the holders may not exercise voting rights on a resolution to cancel shares, and
have waived their rights to receive dividends or to participate in the assets
and property of the Company on a winding-up or dissolution of the Company. In
accordance with the escrow provisions of this agreement, these shares cannot be
sold or traded by the owner until they are released by the regulatory
authorities in accordance with a formula adopted by the regulatory authorities.
If the Company has not met the conditions set for the release of these shares by
January 16, 2001, these shares will be canceled.
F-18
<PAGE> 129
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the Company acquiring the remaining 20% interest in GST Telecom
during 1996, 1,000,000 common shares were put in escrow pending a valuation of
GST Telecom. An independent appraisal of GST Telecom was received in September
1996 allowing the release of such shares from escrow (see note 2). On November
7, 1996, such shares were released from escrow.
(d) 1996 Employee Stock Purchase Plan
In July 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the Stock Purchase Plan) which provides eligible employees of the Company with
an opportunity to acquire common shares of the Company. It is the intention of
the Company that the Stock Purchase Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code. Under this Stock Purchase
Plan, the Company authorized the issuance of 500,000 common shares to be issued
to employees of the Company.
Employees who own 5% or more of the voting rights of the Company's
outstanding common shares may not participate in the Plan.
(e) Stock Option Plans
Employee Stock Option Plans
In January 1995, the Company created a Stock Option Plan (the 1995 Plan)
which provides for the granting to employees (including officers and employee
directors) of incentive stock options within the meaning of Section 422A of the
Internal Revenue Code of 1986, and for the granting of non-statutory stock
options to employees (including officers and employee directors), directors and
consultants. The options have a term of five years and vest and become
exercisable at the discretion of the Board of Directors. Under the plan, no
options vest until at least six months after the date of grant.
In January 1996, the Company created an additional Stock Option Plan (the
1996 Plan) in which the Board of Directors approved and authorized the issuance
of 400,000 stock options to be granted to employees of the Company. The terms of
the 1996 Plan are identical to those of the 1995 Plan. In January 1996, the
Board of Directors also authorized a 1 million increase in the number of common
shares reserved for issuance under the Company's 1995 Stock Option Plan.
1996 Senior Operating and Executive Officer Stock Option Plans
In May 1996, the Company adopted the 1996 Senior Operating Officer Stock
Option Plan (the Senior Operating Plan) and the 1996 Senior Executive Officer
Stock Option Plan (the Senior Executive Plan) in which the Board of Directors
approved and authorized the issuance of up to 900,000 and 600,000 options,
respectively, to be awarded to senior operating and executive management of the
Company, at a $10 option exercise price. The options have a term of six years
and vest and become exercisable at the discretion of the Board of Directors. All
stock options granted under the Senior Executive Plan as of September 30, 1996
vest upon the achievement of certain milestones as were determined by the Board
of Directors. It is the intention of the Company that certain options granted
pursuant to these Plans shall constitute incentive stock options under Section
422 of the Internal Revenue Code, while certain other options granted pursuant
to these Plans shall be nonqualified stock options.
The exercise price of all incentive stock options granted under these four
Plans must be at least equal to the fair market value of the shares on the date
of grant. With respect to any participant who owns stock possessing more than
10% of the voting rights of the Company's outstanding share capital, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date. The exercise price of all nonqualified
stock options granted under the 1995 and 1996 Plans and the Senior Operating and
Executive Plans must be at least 80% and 50%, respectively, of the fair market
value of the common stock on the date of grant.
F-19
<PAGE> 130
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity under the various stock option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -----------------
<S> <C> <C> <C> <C>
Options outstanding at August 31, 1993..................... 785,250 $1.00 - 3.00
Options:
Granted.................................................. 435,000 4.25 - 5.00
Exercised................................................ (343,750) 1.00 - 3.00
Canceled................................................. -- --
---------
Options outstanding at September 30, 1994.................. 876,500 1.00 - 5.00
Options:
Granted.................................................. 1,190,035 3.55 - 6.75
Exercised................................................ (442,200) 1.00 - 4.25
Canceled................................................. (30,042) 3.55 - 5.00
---------
Options outstanding at September 30, 1995.................. 1,594,293 3.55 - 6.75
Options:
Granted.................................................. 1,563,373 5.00 - 10.00
Exercised................................................ (67,500) 3.55 - 6.75
Canceled................................................. (32,447) 6.75 - 10.00
---------
Options outstanding at September 30, 1996.................. 3,057,719 $3.55 - 10.00
=========
</TABLE>
Of the 3,057,719 options outstanding, 1,208,843 options were vested and
exercisable and 966,089 options were available for future grant.
(f) 1996 Stock Bonus Agreement
In September 1994, the Company's Board of Directors adopted a Stock Award
Plan which provides for the awarding of up to 70,000 common shares of the
Company to a certain member of management upon the achievement of certain
milestones.
(g) Warrants Outstanding
Warrants outstanding and exercisable at September 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES EXERCISE EXERCISE
ISSUABLE PRICE EXPIRATION DATE
- ------------- -------- --------------------
<C> <C> <S>
250,000 $ 5.52 October 23, 1996
125,000 $ 5.62 April 26, 1997
171,155 $12.96 May 23, 1998
50,000 $10.00 April 29, 1999
300,000 $ 6.75 September 30, 2000
</TABLE>
The 546,155 warrants expiring October 23, 1996 through May 23, 1998 were
granted to Tomen in conjunction with the Tomen financing agreements (see note
5), of which the 250,000 warrants expiring October 23, 1996 were exercised
during October 1996. The 50,000 warrants expiring April 29, 1999 were granted in
conjunction with a private placement of common stock during fiscal year ending
1994. The 300,000 warrants expiring September 30, 2000 were granted to a
director of the Company. No value has been assigned to any granted warrants as
the exercise price exceeded the common stock market price at the time of grant.
F-20
<PAGE> 131
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the Canadian statutory income tax rate to net income before taxes as follows:
<TABLE>
<CAPTION>
THIRTEEN
MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Computed expected income tax expense
(benefit) at Canadian statutory rate...... (39)% (39)% (39)%
Expected state/province income tax expense
(benefit)................................. (5) (6) (4)
Increase (decrease) in valuation
allowance................................. 56 38 21
Amortization of goodwill.................... 5 5 1
Minority interest........................... -- (7) --
Effect of difference in United States
statutory rate............................ 6 5 5
Effect of acquisition of new subsidiaries... -- 1 10
Non-deductible interest..................... -- -- 2
Other....................................... (6) 4 4
--- --- ---
Income tax expense (benefit)........... 17% 1% --%
=== === ===
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax asset and liability are
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
United States Federal and state net operating loss
carryforwards........................................ $ 3,325 $16,378
Canadian net operating loss carryforwards............... 2,533 3,065
Non-deductible interest................................. -- 4,608
Canadian non-deductible interest........................ -- 798
Canadian capital loss carryforward...................... -- 128
Other................................................... 1,633 2,063
------- ------
Total gross deferred tax assets................. 7,491 27,040
Less valuation allowance................................ (6,734) (19,429)
------- ------
Deferred tax liabilities:
Furniture, fixtures and equipment, due to differences in
depreciation......................................... 693 2,110
Capitalized software/intangibles........................ 64 5,501
------- ------
Total gross deferred tax liabilities............ 757 7,611
------- ------
Net deferred taxes.............................. $ -- $ --
======= ======
</TABLE>
The valuation allowance for deferred tax assets as of September 1, 1993 was
$593. The net change in total valuation allowance for the thirteen month period
ended September 30, 1994, and the years ended September 30, 1995 and 1996, was
an increase of $1,795, $4,346, and $12,695, respectively.
F-21
<PAGE> 132
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has non-capital losses for income tax purposes of approximately
Canadian $6,811 available to reduce Canadian taxable income of future years,
expiring as follows:
<TABLE>
<S> <C>
1999.............................................. $ 686
2000.............................................. 2,072
2002.............................................. 1,597
2003.............................................. 2,456
------
$6,811
======
</TABLE>
Based on a history of recurring losses, it is questionable whether the
Company will be allowed to utilize these Canadian losses if the tax authority
determines that the Company has no reasonable expectation of profit. As of
September 30, 1996, the Company also has a Canadian net capital loss
carryforward of $389. Net capital losses can be carried forward indefinitely but
can only be utilized to offset taxable capital gain.
The Company has net operating losses for income tax purposes of
approximately $44,985 available to reduce United States taxable income of future
years, expiring as follows:
<TABLE>
<S> <C>
2007............................................. $ 405
2008............................................. 455
2009............................................. 2,717
2010............................................. 4,939
2011............................................. 36,469
-------
$44,985
=======
</TABLE>
For United States income tax purposes, utilization of net operating losses
may be subject to limitation in the event a change in ownership of the Company
has occurred pursuant to IRC Section 382. However, it is the belief of
management that the likelihood of incurring such a change in ownership after the
Company became publicly held in the U.S. in March 1994 is minimal. 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 and
maintains a 100% valuation allowance relating to such deferred tax assets.
(8) LEASES
The Company is obligated under capital leases for equipment which expire at
various dates during the next five years. At September 30, 1995 and 1996, the
gross amounts of equipment and related accumulated amortization recorded under
capital leases were as follows:
<TABLE>
<CAPTION>
1995 1996
---- -------
<S> <C> <C>
Equipment.................................................. $853 $ 2,068
Less accumulated amortization.............................. (67) (291)
-----
--
----
$786 $ 1,777
======= ====
</TABLE>
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $253, $866 and $1,501 for the thirteen month period ended
September 30, 1994, and the years ended September 30, 1995 and 1996,
respectively.
F-22
<PAGE> 133
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable leases (with initial or
remaining lease terms in excess of one year) and future minimum capital lease
payments as of September 30, 1996 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending September 30:
1997................................................... $ 980 $ 2,777
1998................................................... 900 2,902
1999................................................... 494 2,797
2000................................................... 235 1,960
2001................................................... 4 1,493
Thereafter............................................. -- 7,335
------ -------
Total minimum lease payments................... 2,613 $19,264
=======
Less amount representing interest (at rates ranging
from 8.7 to 18.6%).................................. 438
------
Net minimum lease payments..................... 2,175
Less current installments of obligations under capital
leases.............................................. 722
------
Obligations under capital leases, excluding
current installments......................... $ 1,453
======
</TABLE>
Under the terms of two noncancelable subleases, the Company will receive
$220 over the next ten years.
(9) COMMITMENTS AND CONTINGENCIES
(a) Pension and Profit Sharing Plans
In 1995, the Company adopted a defined contribution 401(k) plan (the Plan).
Employees are eligible to participate in the Plan upon commencement of service.
Participants may defer up to 15% of eligible compensation. Currently, the
Company does not provide matching contributions for the Plan.
NACT also sponsors a defined contribution 401(k) plan for employees who
have completed one year of service and attained the age of 21. Participants may
defer up to 15% of eligible compensation. The Company, at its discretion, may
match 50% of participant contributions up to 7.5% of participant compensation.
NACT made employer contributions to this plan of $32, $51 and $60 for the
thirteen month period ended September 30, 1994, and the years ended September
30, 1995 and 1996, respectively.
Through September 30, 1996, NACT provided a discretionary profit sharing
program for full time employees who had completed one full year of employment.
Under the plan, 10% of the increase in profits based on NACT's previous highest
retained earnings balance were allocated among employees determined on length of
employment and salary level at the discretion of the Board of Directors.
Contributions to the program were $105, $171 and $132 for the thirteen month
period ended September 30, 1994, and years ended September 30, 1995 and 1996,
respectively. The program was terminated on September 30, 1996.
(b) Long Distance Carriers
The Company is party to various contracts with long distance carriers
pursuant to which the Company is committed to minimum service fees. The average
monthly minimum commitments range from $1.6 million to $5.1 million per month
over the next three years. The Company must pay the carriers for differences
between the commitment amounts and the actual amounts billed.
F-23
<PAGE> 134
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Legal Proceedings
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") filed a patent infringement suit against NACT alleging that telephone
systems manufactured and sold by NACT incorporate prepaid calling features which
infringe upon a patent issued to Aerotel in November 1987. The complaint further
alleges defamation and unfair competition by NACT and seeks various damages.
NACT has filed an Answer and Counterclaim denying patent infringement,
committing defamation or unfair competition and seeks judgment that the Aerotel
patent is invalid and that Aerotel has misused its patent in violation of
antitrust laws. Based on information currently available, NACT's management is
of the opinion that there will be no material impact of NACT's financial
position or results of operations as a result of this suit. Accordingly, no
provision for loss has been provided in the accompanying financial statements.
On April 24, 1996, C.W. Holdings (formerly Martin Holdings Ltd.) filed a
damages suit against the Company alleging negligence in failing to safely
deliver to C.W. Holdings a share certificate representing 209,738 common shares
of the Company. C.W. Holdings has commenced an action in the Supreme Court of
British Columbia against the Company, the Company's registrar and transfer
agent, and other parties unrelated to the Company. The Company's legal counsel
believes that it is improbable that there will be an outcome unfavorable to the
Company in the legal proceedings.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position.
(d) Employment Agreements
The Company has entered into employment agreements with key members of
management. These agreements provide for payments based upon death, disability
and change of control. The agreements also contain covenants not to compete.
(10) RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE
UNITED STATES AND IN CANADA
These financial statements have been prepared by management in accordance
with generally accepted accounting principles in the United States (U.S. GAAP).
Except for the earnings/loss per share calculations as noted below, these
financial statements also conform, in all material respects, with those
accounting principles that are generally accepted in Canada (Canadian GAAP).
For U.S. GAAP purposes, the 750,000 escrow shares disclosed in note 6 are
considered contingent shares and are not included in the loss per share
calculations. For U.S. GAAP purposes, when these shares are released from
escrow, to the extent their fair market value exceeds their issuance price,
compensation expense will be recognized by the Company. The loss per share
determined in accordance with accounting principles generally accepted in Canada
was $(0.33), $(0.78) and $(3.06) for the thirteen month period ended September
30, 1994, and the years ended September 30, 1995 and 1996, respectively.
F-24
<PAGE> 135
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company changed its fiscal year-end to September 30 effective in 1994.
Accordingly, amounts reported in the consolidated financial statements are for
the thirteen-month period ended September 30, 1994. Selected financial
information as at and for the year ended August 31, 1994 is as follows:
<TABLE>
<S> <C>
Selected information from statement of operations:
Revenues........................................................ $ 5,253
Operating expenses.............................................. 6,147
--------
Loss from operations.................................... 894
Other expenses.................................................. 1,681
--------
Loss before minority interest and income tax............ 2,575
Income tax expense.............................................. 470
--------
Loss before minority interest........................... 3,045
Minority interest in income of subsidiaries..................... 126
--------
Loss for the year....................................... $ 3,171
========
Selected information from statement of cash flows:
Operations:
Loss for the year............................................ $ (3,171)
Items not involving cash..................................... 2,420
Changes in non-cash operating working capital................ (154)
--------
Cash used in operations................................. (905)
Financing....................................................... 14,040
Investing....................................................... (12,846)
--------
Increase in cash and cash equivalents................... 289
Cash and cash equivalents, beginning of year.................... 4,745
--------
Cash and cash equivalents, end of year.......................... $ 5,034
========
</TABLE>
(11) INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
"Cash provided by (used in) operations" includes cash payments for interest
of $24, $364 and $1,813 and cash payments for taxes of $253, $264 and $-0-, for
the thirteen month period ended September 30, 1994 and the years ended September
30, 1995 and 1996, respectively.
Non-Cash Investing and Financing Activities Which Affect the Consolidated
Statements of Cash Flows
Effective May 1, 1995, the Company acquired a 100% interest in ITG. See
note 2 for a discussion of the assets and liabilities acquired.
On January 5, 1995, the Company acquired the remaining 20% of National
Applied Computer Technologies, Inc. (see note 2). As a result of this
transaction, the Company recorded $2,137 in other assets, $521 in liabilities,
$747 in common stock, $1,494 in a commitment to issue common shares and a
reduction of $886 to its non-controlling interest in subsidiaries account.
Effective June 1, 1995, the Company acquired an additional 20% of GST
Telecom (see note 2). The Company recorded $5,000 in common stock, $3,226 in
other assets, and a reduction of $1,774 to its non-controlling interest in
subsidiaries account related to this transaction.
F-25
<PAGE> 136
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of capital contributions made to GST Telecom, Inc. throughout
the year ending September 30, 1995, the Company recorded $4,457 in other assets
and an increase of $4,457 to its non-controlling interest in subsidiaries
account.
During the year ending September 30, 1995, the Company recorded a $200
reduction in notes receivable and a $200 increase to deferred financing costs
pursuant to a loan agreement and promissory note dated July 7, 1994, whereby the
Company loaned $200 to Pacwest Network, L.L.C. (Pacwest) which was repaid in
full by crediting against fees payable to Pacwest in respect of financing
provided by Tomen America, Inc.
Property and equipment includes amounts in accounts payable and accrued
liabilities of $-0-, $4,363 and $18,291 at September 30, 1994, 1995 and 1996,
respectively.
In September 1996, the Company acquired an additional 1.5 million common
shares of GST Global, for consideration of $3,364 (see note 2). The Company
recorded $3,364 in other assets and accrued liabilities relating to this
transaction.
During the year ending September 30, 1996, the Company recorded $45,478 in
assets, $11,665 in liabilities, a reduction of $2,686 to minority interest,
$29,444 in common stock and $5,613 in commitments to issue common stock as a
result of the 1996 acquisitions discussed in note 2.
(12) RELATED PARTY TRANSACTIONS
During the third and fourth quarters of Fiscal 1996, the Company made
payments of $5,997 and $2,970 to Magnacom Wireless, LLC (Magnacom), a company
controlled by the Chief Executive Officer of the Company, as pre-payments for
future PCS services. The $2,970 payment is included as an other current asset in
the accompanying balance sheet, whereas the $5,997 payment is included as an
other asset in the accompanying balance sheet. The Company is in the process of
establishing a non-exclusive twelve year agreement with Magnacom; whereby, the
Company will purchase services relating to such licenses from Magnacom for use
or resale. As consideration for services provided by Magnacom to the Company,
the Company will make lump sum payments to Magnacom in accordance with an agreed
to schedule (with the $5,997 payment being the first of such payments) as
advanced payments for the services to be provided by Magnacom. Subsequent to
September 30, 1996, the Company made an additional payment of $5,426 as a pre-
payment for future PCS services to Magnacom. (See note 14).
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 of $3,000 to PNI to
utilize PNI's licenses for its communications traffic and (2) PNI pays an equal
monthly fee to the Company for the right to utilize the Company's facilities for
other communications traffic using up to 10% of PNI's license capacity.
A bridge loan that was obtained and paid back by the Company during 1995
was guaranteed by five executive officers of the Company. In consideration for
the guarantee, such officers were issued 25,000 shares of common stock of the
Company.
The Company paid approximately $396, $770 and $2,264 in legal fees in 1994,
1995 and 1996, respectively, to a firm having a member who is also a director of
the Company.
Under the Tomen facility, Tomen has the right to act as procurement agent
for each network project it finances. The Company has purchased equipment
through Tomen at competitive prices. (See Note 5(c)).
F-26
<PAGE> 137
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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:
<TABLE>
<CAPTION>
JUNE 30, 1997
SEPTEMBER 30, SEPTEMBER 30, -------------
1995 1996
------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
Current assets......................... $11,415 $ 77,506 $ 180,892
Non-current assets..................... 60,006 168,882 434,996
------- -------- --------
$71,421 $ 246,388 $ 615,888
======= ======== ========
Current liabilities.................... $13,712 $ 34,286 101,487
Non-current liabilities................ 19,646 210,243 551,889
Minority interest...................... 3,279 182 12,066
Share capital.......................... 44,471 66,520 75,009
Accumulated deficit.................... (9,687) (64,843) (124,573)
------- -------- --------
$71,421 $ 246,388 $ 615,888
======= ======== ========
</TABLE>
Selected information from statement of operations:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED YEAR ENDED JUNE 30, 1997
SEPTEMBER 30, SEPTEMBER 30, -------------
1995 1996
------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
Revenues............................... $ 18,681 $ 37,721 $ 47,985
Operating costs and expenses........... (28,942) (77,590) (98,101)
-------- -------- --------
Loss from operations......... (10,261) (39,869) (50,116)
Other expenses......................... (1,384) (15,625) (8,323)
-------- -------- --------
Loss before minority interest
in loss of subsidiaries and
income tax................. (11,645) (55,494) (58,439)
Income tax expense..................... (166) (72) (900)
-------- -------- --------
Loss before minority interest
in loss of subsidiaries.... (11,811) (55,566) (59,339)
Minority interest in loss (income) of
subsidiaries......................... 2,364 411 (391)
-------- -------- --------
Net loss..................... $ (9,447) $ (55,155) $ (59,730)
======== ======== ========
</TABLE>
F-27
<PAGE> 138
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected information from statement of cash flows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
YEAR ENDED YEAR ENDED 1997
SEPTEMBER 30, SEPTEMBER 30, -----------------
1995 1996
------------- ------------- (UNAUDITED)
<S> <C> <C> <C>
Operations:
Loss for the year.............. $ (9,447) $ (55,155) $ (59,730)
Items not involving cash....... 1,590 29,256 17,828
Changes in non-cash operating
working capital............. (3,419) (6,400) (7,815)
--------- -------- ---------
Cash used in
operations........... (11,276) (32,299) (49,717)
Investing...................... (29,684) (105,090) (244,429)
Financing...................... 43,544 174,915 271,835
--------- -------- ---------
Increase in cash and
cash equivalents..... 2,584 37,526 (22,311)
Cash and cash equivalents,
beginning of year........... 1,310 3,894 41,420
--------- -------- ---------
Cash and cash equivalents, end
of year..................... $ 3,894 $ 41,420 $ 19,109
========= ======== =========
</TABLE>
(14) SUBSEQUENT EVENTS
Special Warrants Offering
On October 22, 1996, the Company completed a private placement to non-U.S.
investors of 2,000,000 Special Warrants at a purchase price of U.S. $11.125 per
Special Warrant. The Special Warrants become exercisable by holders for no
additional consideration upon the later to occur of (i) the date upon which
approval for a final Canadian prospectus qualifying the common shares and share
purchase warrants (the Underlying Warrants) issuable upon exercise of the
Special Warrants is received from the securities commission of each of the
Canadian provinces where the Special Warrants were sold and (ii) the date that a
registration statement filed with the Securities and Exchange Commission
registering the resale of the common shares issuable upon exercise of the
Special Warrants and Underlying Warrants is declared effective, but in any
event, no later than September 22, 1997. Each Special Warrant is exercisable for
one common share and one-half of one Underlying Warrant. Each full Underlying
Warrant entitles the holder to purchase one additional common share for a
purchase price of U.S. $13.00 for one year from the date of issuance. In the
event that the requisite regulatory approvals of the Canadian Prospectus are not
received by the Company and the U.S. Registration Statement is not declared
effective, in each case by February 19, 1997, then each Special Warrant will
become exercisable for 1.1 common shares and one-half of one Underlying Warrant.
The Company received U.S. $9.7 million, constituting 50% of the aggregate
purchase price of the Special Warrants (net of placement agency fees and
expenses), on October 22, 1996. The balance of the net purchase price of Special
Warrants (U.S. $11.1 million) is being held in escrow and is payable to the
Company upon the earlier to occur of (x) the date of receipt of final regulatory
approval of a preliminary Canadian Prospectus from the securities commissions of
the applicable Canadian provinces and (y) the initial filing of the U.S.
Registration Statement with the Commission, in each case covering the resale of
the Common Shares issuable upon exercise of the Special Warrants and the
Underlying Warrants.
F-28
<PAGE> 139
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Magnacom Wireless, LLC
Magnacom 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). Subsequent to September
30, 1996, in connection with the Magnacom Reseller Agreement, the Company paid
an additional $5.4 million for a total of approximately $14.4 million as
pre-payments for future PCS services.
In addition, the Company has been granted a conditional option to acquire
up to a 99% interest in Magnacom, 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. Such
option, if and when the condition precedent is met, shall 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. Accordingly, until such time as may be permitted by FCC
regulations or administrative action, the option will be initially limited to a
24% interest in Magnacom.
(15) UNAUDITED DEVELOPMENTS AND SUBSEQUENT EVENTS FOR THE NINE-MONTH PERIOD
ENDED JUNE 30, 1997
(a) ACQUISITION OF REMAINING 50% OF THE PHOENIX FIBER JOINT VENTURE
In the first quarter of Fiscal 1997, the Company acquired the 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)
indemnifying 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.
(b) NACT PUBLIC OFFERING
On February 26, 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%.
(c) NTFC LOAN AGREEMENT
In December 1996, the Company entered into a $50 million equipment loan and
security agreement with NTFC Capital Corporation to finance the purchase of
certain equipment from Nortel. Borrowings under the NTFC Loan Agreement may be
made through December 31, 1998, $44.6 million of which had been borrowed by the
Company at June 30, 1997.
(d) SPECIAL WARRANTS
In January of 1997, the Company filed a registration statement with the
U.S. Securities and Exchange Commission covering the resale of the common shares
issuable upon the exercise of the special warrants, resulting in the $11.125
million held in escrow relating to the sale of the Special Warrants being
released to the Company.
F-29
<PAGE> 140
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) REDEEMABLE PREFERRED SHARES
In February 1997, the Company consummated a private placement of $50.0
million of Redeemable Preferred Shares. The Redeemable Preferred Shares, which
are convertible at any time after February 28, 2000 at an imputed conversion
price of $11.375 per share, will 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 Preferred Shares will accrue
at a semi-annual rate of 11 7/8%. Under certain circumstances, the Redeemable
Preferred Shares will also be subject to mandatory conversion or redemption.
(f) ISSUANCE OF SENIOR SECURED NOTES
In May 1997, the Company issued $265 million in senior secured notes due
May 1, 2007. The notes bear interest at a rate of 13.25% with semi-annual
interest payments due beginning November 1, 1997. Approximately $93.8 million of
the proceeds have been set aside to fund the first six scheduled interest
payments. The remainder of the net proceeds will be used to purchase and install
telecommunications equipment.
(g) ACQUISITION OF ACTION TELCOM, CO.
Effective May 31, 1997, the Company acquired 100% of the outstanding
capital stock of Action Telcom, Co. (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 $12,046, consisting of $8,161 in common shares, $1,290 in cash,
$2,580 in notes payable and $16 in acquisition costs. In connection with this
acquisition, the Company recorded $13,457 of assets, including $4,500 of
purchased software technology and $3,622 of goodwill, and $3,991 in liabilities.
(h) TOMEN FINANCING
On September 30, 1997, Tomen provided the Company with up to an additional
$40.5 million of debt financing (of which $36.8 million was borrowed on such
date) under the Tomen Facility for the Hawaiian inter-island submarine network
and various other terrestrial installations in the Hawaiian Islands.
F-30
<PAGE> 141
[GST TELECOMMUNICATIONS LOGO]
<PAGE> 142
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses (other than selling
commissions and other fees paid to the Underwriters) which will be paid by the
Registrant. With the exception of the SEC registration fee and NASD filing fee,
all amounts shown are estimates: in connection with the issuance and
distribution of the securities being registered, all of which will be paid by
the Registrant, are as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 60,606
NASD filing fee................................................... 20,500
Accounting Fees and Expenses...................................... 50,000
Legal fees and expenses (other than Blue Sky)..................... 125,000
Blue Sky fees and expenses........................................ 10,000
Printing expenses................................................. 150,000
Miscellaneous Expenses............................................ 133,894
--------
Total................................................... $550,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except as hereinafter set forth, there is no statute, charter provision,
by-law, contract or other arrangement under which any controlling person,
director or officer of the Registrant is insured or indemnified in any manner
against liability which he may incur in his capacity as such.
The Registrant's authority to indemnify its directors and officers is
governed by the provisions of Section 124 of the Canada Business Corporations
Act, as follows:
(1) Indemnification. Except in respect of an action by or on behalf
of the corporation or body corporate to procure a judgment in its favor, a
corporation may indemnify a director or officer of the corporation, a
former director or officer of the corporation or a person who acts or acted
at the corporation's request as a director or officer of a body corporate
of which the corporation is or was a shareholder or creditor, and his heirs
and legal representatives, against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgment,
reasonably incurred by him in respect of any civil, criminal or
administrative action or proceeding to which he is made a party by reason
of being or having been a director or officer of such corporation or body
corporate, if
(a) he acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had reasonable
grounds for believing that his conduct was lawful.
(2) Indemnification in derivative actions. A corporation may with the
approval of a court indemnify a person referred to in subsection (1) in
respect of an action by or on behalf of the corporation or body corporate
to procure a judgment in its favor, to which he is made a party by reason
of being or having been a director or an officer of the corporation or body
corporate, against all costs, charges and expenses reasonably incurred by
him in connection with such action if he fulfills the conditions set out in
paragraphs (1)(a) and (b).
(3) Indemnity as of right. Notwithstanding anything in this section,
a person referred to in subsection (1) is entitled to indemnity from the
corporation in respect of all costs, charges and expenses reasonably
incurred by him in connection with the defense of any civil, criminal or
administrative action or proceeding to which he is made a party by reason
of being or having been a director or officer of the corporation or body
corporate, if the person seeking indemnity
II-1
<PAGE> 143
(a) was substantially successful on the merits in his defense of
the action or proceeding, and
(b) fulfills the conditions set out in paragraphs (1)(a) and (b).
(4) Directors' and officers' insurance. A corporation may purchase
and maintain insurance for the benefit of any person referred to subsection
(1) against any liability incurred by him
(a) in his capacity as a director or officer of the corporation,
except where the liability relates to his failure to act honestly and in
good faith with a view to the best interests of the corporation; or
(b) in his capacity as a director or officer of another body
corporate where he acts or acted in that capacity at the corporation's
request, except where the liability relates to his failure to act
honestly and in good faith with a view to the best interests of the body
corporate.
(5) Application to court. A corporation or a person referred to in
subsection (1) may apply to a court for an order approving an indemnity
under this section and the court may so order and make any further order it
thinks fit.
(6) Notice to Director. An applicant under subsection (5) shall give
the Director notice of the application and the Director is entitled to
appear and be heard in person or by counsel.
(7) Other notice. On an application under subsection (5), the court
may order notice to be given to any interested person and such person is
entitled to appear and be heard in person or by counsel.
The Registrant's by-laws provide that every director and officer of the
Registrant and his heirs, executors, administrators and other legal personal
representatives shall be indemnified and held harmless from and against (a) any
liability and all costs, charges and expenses that he sanctions or incurs in
respect of any action, suit or proceeding that is proposed or commenced against
him for or in respect of anything done or permitted by him in respect of the
execution of the duties of his office and (b) all other costs, charges and
expenses that he sustains or incurs in respect of the affairs of the Registrant.
The Registrant maintains a $15,000,000 directors and officers liability
insurance policy.
The Registrant has also agreed to indemnify each director and executive
officer pursuant to an indemnification agreement with each such director and
executive officer from and against any and all expenses, losses, claims, damages
and liability incurred by such director or executive officer for or as a result
of action taken or not taken while such director or executive officer was acting
in his capacity as a director, officer, employee or agent of the Registrant.
ITEM 16. EXHIBITS.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- ------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Indenture by and between GST Telecommunications, Inc. and United States Trust
Company of New York with Form of Note attached.
5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP.
8.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP with respect to certain tax matters
(included in Exhibit 5.1 to this Registration Statement).
8.2 Opinion of Thorsteinssons with respect to certain tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Peat Marwick Thorne.
23.3 Consent of Olshan Grundman Frome & Rosenzweig LLP (included within Exhibit 5).
24.1 Powers of Attorney (included on Page II-4).
25.1 Statement of Eligibility of Trustee.
</TABLE>
II-2
<PAGE> 144
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to which the prospectus is sent or
given, the annual report, to security holders that is incorporated by reference
in the prospectus and furnished to and meeting the requirements of Rule 14a-3
and Rule 14c-3 under the Securities Exchange Act of 1934; and where interim
financial information required to be presented by Article 3 of Regulation S-X is
not set forth in the prospectus, to deliver or cause to delivered to each person
to whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 "Indemnification
of Directors and Officers," above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(2) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 145
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Vancouver, State of Washington on this
6th day of November, 1997.
GST TELECOMMUNICATIONS, INC.
(Registrant)
By: *
------------------------------------
John Warta, Chairman of the Board
POWERS OF ATTORNEY AND SIGNATORIES
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------- -----------------
<C> <S> <C>
* Chairman of the Board, November 6, 1997
- ------------------------------------------ Chief Executive Officer
(John Warta) (Principal Executive
Officer) and Director
* Senior Vice President and November 6, 1997
- ------------------------------------------ Chief Financial Officer
(Daniel L. Trampush) (Principal Financial
Officer)
* Senior Vice President, November 6, 1997
- ------------------------------------------ Treasurer and Chief
(Clifford V. Sander) Accounting Officer
(Principal Accounting
Officer)
/s/ STEPHEN IRWIN Vice Chairman of the November 6, 1997
- ------------------------------------------ Board, Secretary and
(Stephen Irwin) Director
President, Chief Operating
- ------------------------------------------ Officer and Director
(Joseph A. Basile, Jr.)
* Director November 6, 1997
- ------------------------------------------
(W. Gordon Blankstein)
* Director November 6, 1997
- ------------------------------------------
(Robert H. Hanson)
* Director November 6, 1997
- ------------------------------------------
(Ian Watson)
* Director November 6, 1997
- ------------------------------------------
(Peter E. Legault)
</TABLE>
II-4
<PAGE> 146
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------- -----------------
<C> <S> <C>
* Director November 6, 1997
- ------------------------------------------
(Jack G. Armstrong)
* Director November 6, 1997
- ------------------------------------------
(Mitsuhiro Naoe)
Director
- ------------------------------------------
(Joseph G. Fogg, III)
* Director November 6, 1997
- ------------------------------------------
(Thomas E. Sawyer)
* Director November 6, 1997
- ------------------------------------------
(A. Roy Megarry)
The Company's Authorized Representative
in the United States
*
- ------------------------------------------
Daniel L. Trampush
*By /s/ STEPHEN IRWIN
- ------------------------------------------
Stephen Irwin
Attorney-in-fact
</TABLE>
II-5
<PAGE> 147
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Form of Indenture by and between GST Telecommunications, Inc. and United States Trust
Company of New York with Form of Note attached.
5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP.
8.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP with respect to certain tax matters
(included in Exhibit 5.1 to this Registration Statement).
8.2 Opinion of Thorsteinssons with respect to certain tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Peat Marwick Thorne.
23.3 Consent of Olshan Grundman Frome & Rosenzweig LLP (included within Exhibit 5).
24.1 Powers of Attorney (included on Page II-4).
25.1 Statement of Eligibility of Trustee.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
GST TELECOMMUNICATIONS, INC.
[___]% Senior Subordinated Accrual Notes Due 2007
UNDERWRITING AGREEMENT
November [___], 1997
<PAGE> 2
November [___], 1997
Morgan Stanley & Co. Incorporated
Bear, Stearns & Co. Inc.
Credit Suisse First Boston Corporation
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
GST Telecommunications, Inc., a federally chartered Canadian
corporation (the "Company"), proposes to issue and sell to the several
Underwriters named in Schedule I hereto (the "Underwriters") $200.0 million
principal amount of the Company's [__]% Senior Subordinated Accrual Notes due
2007 (the "Notes") to be issued pursuant to the provisions of an Indenture to be
dated as of November [___], 1997 (the "Indenture") between the Company, as
issuer, and United States Trust Company of New York, as trustee (the "Trustee").
Pursuant to an underwriting agreement, dated the date hereof, among
the Company and Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc.,
Credit Suisse First Boston Corporation, Morgan Stanley & Co. International
Limited, Bear, Stearns International Limited and Credit Suisse First Boston
(Europe) Limited, as representatives of the U.S. underwriters and international
underwriters named therein, the Company will issue and sell an aggregate of
7,000,000 of its Common Shares (the "Stock Offering").
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, including a prospectus, relating to
the Notes. The registration statement, as amended at the time it becomes
effective, including the exhibits thereto, the documents incorporated by
reference therein and the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933 (the "Securities Act"), is hereinafter referred to as
the "Original Registration Statement"; any registration statement filed pursuant
to Rule 462(b) under the Securities Act is hereinafter referred to as the "Rule
462(b) Registration Statement"; the Original Registration Statement and any Rule
462(b) Registration Statement are hereinafter referred to collectively as the
"Registration Statement"; and the prospectus in the form first used to confirm
sales of Notes is hereinafter referred to as the "Prospectus". As used herein,
the term "Specified Subsidiaries" means the following subsidiaries of the
Company: GST USA, Inc., a Delaware corporation, GST Telecom Inc., a Delaware
corporation, GST Pacific Lightwave, Inc. a Washington corporation, GST Telecom
Hawaii, Inc., a Hawaii corporation, GST Tucson Lightwave, Inc., an Arizona
corporation, GST Telecom New Mexico, Inc., a New Mexico corporation, GST Telecom
California, Inc., a Delaware corporation, NACT Telecommunications, Inc., a
Delaware corporation, Wasatch International Network Services,
<PAGE> 3
2
Inc., a Utah corporation, GST Net, Inc., a Delaware corporation, International
Telemanagement Group, Inc., an Ohio corporation, TotalNet Communications, Inc.,
a Texas corporation, GST Call America, Inc., a California corporation, Tri-Star
Residential Communications Corp., a Washington corporation, GST Equipco, Inc., a
Washington corporation, GST Internet, Inc., a Delaware corporation, GST
Equipment Funding, Inc., a Delaware corporation and GST Action Telecom, Inc., a
Delaware corporation.
I.
The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) The Original Registration Statement has become effective and, if
the Company has elected to rely upon Rule 462(b) under the Securities Act,
the Rule 462(b) Registration Statement shall have become effective not
later than the earlier of (i) 10:00 p.m. Eastern time on the date hereof
and (ii) the time confirmations are sent or given, as specified by Rule
462(b)(2) under the Securities Act; no stop order suspending the
effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or, to the Company's
knowledge, threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and warranties
set forth in this paragraph (b) do not apply (A) to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein or (B)
to that part of the Registration Statement that constitutes the Statement
of Eligibility and Qualification (Form T-1) under the Trust Indenture Act
of 1939, as amended (the "Trust Indenture Act"), of the Trustee.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has
<PAGE> 4
3
the corporate power and authority to own or lease its property and to
conduct its business as described in the Prospectus and is duly qualified
or licensed to transact business and is in good standing as a foreign
corporation in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification or
licensing, except to the extent that the failure to be so qualified or
licensed or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(d) Each of the Specified Subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own or lease its property and to conduct its business as
described in the Prospectus and is duly qualified or licensed to transact
business and is in good standing as a foreign corporation in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification or licensing, except to
the extent that the failure to be so qualified or licensed or be in good
standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. The only direct subsidiaries of the
Company are GST USA, Inc., GST Call America, Inc., TotalNet
Communications, Inc. and GST Action Telecom, Inc. and the Company owns all
of the outstanding capital stock of such subsidiaries, free and clear of
any claims, liens, pledges or other encumbrances. The total assets and
revenues of the Company's direct and indirect subsidiaries other than the
Specified Subsidiaries, in the aggregate, comprised less than 5% of the
Company's total consolidated assets and revenues, respectively, at and for
the year ended September 30, 1996 and at and for the quarter ended June
30, 1997.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The Indenture has been duly qualified under the Trust Indenture
Act and has been duly authorized, and when executed and delivered by the
Company will be a valid and binding agreement of the Company, enforceable
in accordance with its terms except as (i) the enforceability thereof may
be limited by the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and (ii) rights of acceleration and the availability of
equitable remedies may be limited by equitable principles of general
applicability.
(g) The Notes have been duly authorized and, when executed and
authenticated in accordance with the terms of the Indenture and delivered
to and paid for by the Underwriters in accordance with the terms of this
Agreement, will be entitled to the benefits of the Indenture and will be
valid and binding obligations of the Company, enforceable in accordance
with their terms except as (i) the enforceability thereof may be limited
by the effect of applicable bankruptcy, insolvency, reorganization,
moratorium
<PAGE> 5
4
or similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
(h) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
(including the issuance, sale and delivery of the Notes), the Indenture
and the Notes will not contravene any provision of applicable law or the
articles of incorporation or by-laws of the Company or any agreement or
other instrument binding upon the Company that is material to the Company
and its subsidiaries, taken as a whole, or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over the
Company or any subsidiary, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency is
required for the performance by the Company of its obligations under this
Agreement, the Indenture and the Notes; except such as may be required by
the securities or Blue Sky laws of the various states in connection with
the offer and sale of the Notes.
(i) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(j) There are no legal or governmental proceedings pending or, to
the best of the Company's knowledge, threatened to which the Company or
any of the Specified Subsidiaries is a party or to which any of the
properties of the Company or any of the Specified Subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(k) The Company and the Specified Subsidiaries have all necessary
permits, licenses, authorizations, consents and approvals and have made
all necessary filings required under any federal, state, local or foreign
supranational, national or regional law, regulation or rule, and have
obtained all necessary authorizations, consents and approvals from other
persons, to own, lease, license and use their respective properties and
assets and to conduct its business in the manner described in the
Prospectus, in each case except to the extent that the failure to obtain
such permits, licenses, authorizations, consents or approvals or to make
such filings would not, singly or in the aggregate, have a material
adverse effect on the properties, assets, prospects, condition, financial
or otherwise, businesses or operations of the Company and its
<PAGE> 6
5
subsidiaries, taken as a whole; except as accurately described in all
material respects in the Prospectus, the Company and the Specified
Subsidiaries have not received any notice of proceedings which remain
unresolved relating to revocation or modification of any such permits,
licenses, authorizations, consents or approvals, nor is the Company or any
of the Specified Subsidiaries in violation of, or in default under, any
such license, authorization, consent or approval or any federal, state,
local or foreign supranational, national or regional law, regulation or
rule or any decree, order or judgment applicable to the Company or any of
the Specified Subsidiaries the effect of which could have a material
adverse effect on the properties, assets, prospects, condition, financial
or otherwise, business or operations of the Company and its subsidiaries,
taken as a whole.
(l) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 or Rule 462 under the Securities Act, complied
when so filed in all material respects with the Securities Act and the
rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Notes and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(n) The Company and the Specified Subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure
to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals would not, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(o) The financial statements contained in the Prospectus comply with
the requirements of Regulation S-X of the Commission.
(p) Schedule A to the Certificate of Responsible Officer dated
[_______], 1997 signed by John Warta and delivered in connection with the
opinion of Swidler & Berlin delivered pursuant to Article V(g) hereof
lists all of the telecommunications services provided by the Specified
Subsidiaries (other than NACT Telecommunications, Inc. and Wasatch
International Network Services, Inc.), other than services which are not,
singly or in the aggregate, material to the Company and its subsidiaries,
taken as a whole.
<PAGE> 7
6
II.
The Company hereby agrees to sell to the several Underwriters, and
the Underwriters, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agree, severally
and not jointly, to purchase from the Company the respective principal amount of
Notes set forth in Schedule I hereto opposite their names at [__]% of their
principal amount (the "purchase price"), plus accrued interest, if any, from
[_______], 1997 to the date of payment and delivery.
III.
The Company is advised by you that the Underwriters propose to make
a public offering of their respective portions of the Notes as soon after the
Original Registration Statement and this Agreement have become effective as in
your judgment is advisable. The Company is further advised by you that the Notes
are to be offered to the public initially at [__]% of their principal amount
(the "public offering price"), plus accrued interest, if any, and to certain
dealers selected by you at a price that represents a concession not in excess of
[.__]% of the public offering price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of [.__]% of the public
offering price, to any Underwriter or to certain other dealers.
IV.
Payment for the Notes shall be made in same day funds by wire
transfer to the Company's account at [__________] at a closing to be held at the
offices of Shearman & Sterling, 599 Lexington Avenue, New York, N.Y., at [____]
A.M., local time, on November [__], 1997, or at such other time on the same or
such other date, not later than [_______], 1997, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the Closing Date.
Payment for the Notes shall be made against delivery to you for the
respective accounts of the several Underwriters of the Notes registered in such
names and in such denominations as you shall request in writing not later than
one business day prior to the date of delivery, with any transfer taxes payable
in connection with the transfer of the Notes to the Underwriters duly paid.
<PAGE> 8
7
V.
The obligations of the Company and the several obligations of the
Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than 5:30 p.m. (New York City
time) on the date hereof.
The several obligations of the Underwriters hereunder are subject to
the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date,
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical
rating organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations,
of the Company and its subsidiaries, taken as a whole, from that set
forth in the Registration Statement, that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Notes on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, on behalf of the Company, to the effect set forth in clause
(a)(i) above and to the effect that the representations and warranties of
the Company contained in this Agreement are true and correct in all
material respects as of the Closing Date and that the Company has complied
with all of the agreements and satisfied all of the conditions contained
in this Agreement on its part to be performed or satisfied on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his knowledge as to proceedings threatened.
(c) No stop order suspending the effectiveness of the Registration
Statement shall be in effect and no proceedings for such purpose shall be
pending before or, to the knowledge of the Company or the Underwriters,
threatened by the Commission.
<PAGE> 9
8
(d) You shall have received on the Closing Date an opinion of Olshan
Grundman Frome & Rosenzweig LLP, U.S. counsel for the Company, dated the
Closing Date, in the form attached hereto as Exhibit A.
The opinion of Olshan Grundman Frome & Rosenzweig LLP shall be
rendered to you at the request of the Company and shall so state therein.
(e) You shall have received on the Closing Date an opinion of
O'Neill & Company, Canadian counsel for the Company, dated the Closing
Date, in the form attached hereto as Exhibit B.
The opinion of O'Neill & Company shall be rendered to you at the
request of the Company and shall so state therein.
(f) You shall have received on the Closing Date an opinion of
Thorsteinssons, Canadian tax counsel for the Company, dated the Closing
Date, which shall be to the effect that such counsel is of the opinion
that the statements in the Prospectus under the caption "Certain Canadian
Tax Considerations" are accurate in all material respects and fairly
summarize the matters referred to therein.
(g) You shall have received on the Closing Date an opinion of
Swidler & Berlin, Chartered, special regulatory counsel for the Company,
in the form attached hereto as Exhibit C.
The opinion of Swidler & Berlin, Chartered shall be rendered to you
at the request of the Company and shall so state therein.
(h) You shall have received on the Closing Date opinions from local
regulatory counsel in the forms attached hereto as Exhibit D.
(i) You shall have received on the Closing Date an opinion of
Shearman & Sterling, counsel for the Underwriters, dated the Closing Date,
with respect to the Registration Statement and the Prospectus and such
other related matters as you may reasonably request, and such counsel
shall have received such documents and information as they may reasonably
request to enable them to pass upon such matters.
(j) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from KPMG Peat
Marwick LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus;
<PAGE> 10
9
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier that the date hereof.
(k) The Company shall have complied with the provisions of Article
VI(a) hereof with respect to the furnishing of Prospectuses on the
business day next succeeding the date of this Agreement, in such
quantities as you shall have reasonably requested.
(l) You shall have received such other documents and certificates as
are reasonably requested by you or your counsel.
The obligations of the Underwriters hereunder are also subject to
the concurrent closing of the Stock Offering as described in the Prospectus.
VI.
In further consideration of the agreements of the Underwriters
herein contained, the Company covenants and agrees as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and, during the period mentioned in paragraph
(c) below, as many copies of the Prospectus and any supplements and
amendments thereto or to the Registration Statement as you may reasonably
request. In the case of the Prospectus, to furnish to you copies of the
Prospectus in New York City, prior to 3:00 p.m., on the business day
following the date of this Agreement, in such quantities as you reasonably
request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Notes as in the opinion of your counsel the Prospectus is
required by law to be delivered in connection with sales by an Underwriter
or dealer, any event shall occur or condition shall exist as a result of
which it is necessary in your judgment to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of your counsel, it is necessary to
amend or supplement the Prospectus to comply with applicable law,
forthwith to prepare, file with the Commission and furnish, at its own
<PAGE> 11
10
expense, to the Underwriters and to the dealers (whose names and addresses
you will furnish to the Company) to which Notes may have been sold by you
on behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the statements
in the Prospectus as so amended or supplemented will not, in the light of
the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Notes for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; provided that the Company shall not be required to (A) qualify as
a foreign corporation or as a dealer in securities in any jurisdiction
where it would not otherwise be required to qualify but for this paragraph
(d), (B) file any general consent to service of process or (C) subject
itself to taxation in any such jurisdiction if it is not otherwise so
subject.
(e) If the Company elects to rely on Rule 462(b) under the
Securities Act, the Company shall file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) under the
Securities Act no later than the earlier of (i) 10:00 p.m. Eastern time on
the date hereof and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2) under the Securities Act, and shall pay the
applicable fees in accordance with Rule 111 under the Securities Act.
(f) To make generally available to the Company's security holders
and to you as soon as practicable an earnings statement of the Company
covering the twelve-month period ending December 31, 1998 that satisfies
the provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(g) During the period beginning on the date hereof and continuing to
and including the Closing Date, not to offer, sell, contract to sell or
otherwise dispose of any debt securities of the Company substantially
similar to the Notes (other than (i) the Notes and (ii) commercial paper
issued in the ordinary course of business), without your prior written
consent.
(h) To use the net proceeds received by the Company from the sale of
(i) Notes hereunder and (ii) Common Shares pursuant to the Stock Offering,
in the manner specified in the Prospectus under the caption "Use of
Proceeds."
(i) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under
this Agreement including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's
<PAGE> 12
11
accountants in connection with the registration and delivery of the Notes
under the Securities Act and all other fees or expenses in connection with
the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers,
in the quantities hereinabove specified, (ii) all costs and expenses
related to the transfer and delivery of the Notes to the Underwriters,
including any transfer or other taxes payable thereon, (iii) the cost of
printing and producing any Blue Sky or legal investment memorandum in
connection with the offer and sale of the Notes under state law and all
expenses in connection with the qualification of the Notes for offer and
sale under state law as provided in Section 6(d) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with
the Blue Sky or legal investment memorandum, (iv) all filing fees and the
reasonable fees and disbursements of counsel to the Underwriters incurred
in connection with the review and qualification of the offering of the
Notes by the National Association of Securities Dealers, Inc., (v) any
fees charged by the rating agencies for the rating of the Notes, (vi) the
cost of printing certificates representing the Notes, (vii) the costs and
charges of any trustee, transfer agent, registrar or depositary, (viii)
the costs and expenses of the Company relating to investor presentations
on any "road show" undertaken in connection with the marketing of the
offering of the Notes, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of
any consultants engaged in connection with the road show presentations
with the prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
the cost of any aircraft chartered in connection with the road show, and
(ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise
made in this Article. It is understood, however, that except as provided
in this Article, Article VII, and the last paragraph of Article IX below,
the Underwriters will pay all of their costs and expenses, including fees
and disbursements of their counsel, transfer taxes payable on resale of
any of the Notes by them and any advertising expenses connected with any
offers they may make.
VII.
The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any
<PAGE> 13
12
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Company to such Underwriter,
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to either of the two preceding paragraphs, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to the second preceding paragraph, and by the
Company, in the case of parties indemnified pursuant to the first preceding
paragraph. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from
<PAGE> 14
13
and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
To the extent the indemnification provided for in the first or
second paragraph of this Article VII is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other hand from the offering of the
Notes or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the indemnifying party or parties on the one hand and of the indemnified party
or parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other hand in connection with the
offering of the Notes shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Notes (before deducting expenses)
received by the Company and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate public offering price of the
Notes. The relative fault of the Company on the one hand and of the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Article VII are several in proportion to the respective
principal amounts of Notes they have purchased hereunder, and not joint.
<PAGE> 15
14
The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Article VII were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article VII, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Notes underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Article VII are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this Article
VII and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter or
by or on behalf of the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Notes.
VIII.
This Agreement shall be subject to termination by notice given by
you to the Company, if (a) after the execution and delivery of this Agreement
and prior to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange, the Chicago Board of Trade or the Vancouver Stock Exchange, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses (a)(i) through (iv), such
event singly or together with any other such event makes it, in your judgment,
impracticable to market the Notes on the terms and in the manner contemplated in
the Prospectus.
<PAGE> 16
15
IX.
This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Original Registration Statement by the
Commission.
If, on the Closing Date, any one or more of the Underwriters shall
fail or refuse to purchase Notes that it or they have agreed to purchase
hereunder on such date, and the principal amount of Notes which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total principal amount of the Notes to be purchased on
such date, the other Underwriters shall be obligated severally in the
proportions that the principal amount of Notes set forth opposite their
respective names in Schedule I bears to the principal amount of Notes set forth
opposite the names of all such nondefaulting Underwriters, or in such other
proportions as you may specify, to purchase the Notes which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the principal amount of Notes that any
Underwriter has agreed to purchase pursuant to Article II be increased pursuant
to this Article IX by an amount in excess of one-ninth of such principal amount
of Notes without the written consent of such Underwriter. If, on the Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase Notes and
the aggregate principal amount of Notes with respect to which such default
occurs is more than one-tenth of the principal amount of Notes to be purchased
on such date, and arrangements satisfactory to you and the Company for the
purchase of such Notes are not made within 36 hours after such default, this
Agreement shall terminate without liability on the part of any nondefaulting
Underwriter or the Company. In any such case either you or the Company shall
have the right to postpone the Closing Date but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters, or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
<PAGE> 17
16
This Agreement may be signed in two or more counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
The Company hereby (i) acknowledges that it has irrevocably
designated and appointed Olshan Grundman Frome & Rosenzweig LLP, 505 Park
Avenue, New York, New York 10022, Attention: David J. Adler, Esq. (together with
any successor, the "Process Agent"), as its authorized agent upon which process
may be served in any suit, action or proceeding arising out of or relating to
this Agreement or the transactions contemplated herein, that may be instituted
in any federal or state court in the State of New York, or brought under federal
or state securities laws, and acknowledges that the Process Agent has accepted
such designation, (ii) agrees that service of process upon the Process Agent and
written notice of such service to the Company (mailed or delivered to its Chief
Executive Officer at its principal office at 4317 N.E. Thurston Way, Vancouver,
Washington 98662), shall be deemed in every respect effective service of process
upon the Company in any such suit, action or proceeding and (iii) agrees to take
any and all action, including the execution and filing of any and all such
documents and instruments as may be necessary to continue such designation and
appointment of the Process Agent in full force and effect so long as any of the
Notes shall be outstanding. The Company hereby agrees to submit to the
nonexclusive jurisdiction of any federal or state court in the State of New York
in any such suit, action or proceeding arising out of or relating to this
Agreement or the transactions contemplated herein, the Indenture or the Notes.
To the extent that the Company has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service of notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property, it
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement, the Indenture or the Notes, to the extent permitted by law.
Any notice required or permitted to be given hereunder shall be
given in writing and shall be deemed effective three days after deposit in the
United States mail (certified or registered, return receipt requested), postage
prepaid, or when received if personally delivered, addressed as follows:
To the Underwriters: To the Company:
Morgan Stanley & Co. GST Telecommunications, Inc.
Incorporated 4317 N.E. Thurston Way
1585 Broadway Vancouver, Washington 98662
New York, New York 10036 Attention: Chief Executive Officer
Attention: James Avery
<PAGE> 18
17
with a copy to: with a copy to:
Shearman & Sterling Olshan Grundman Frome &
599 Lexington Avenue Rosenzweig LLP
New York, New York 10022 505 Park Avenue
Attention: Jerry V. Elliott, Esq. New York, New York 10022
Attention: Stephen Irwin, Esq.
or to such other address of which written notice is given to the other.
<PAGE> 19
This Agreement shall be governed by the laws of the State of New
York.
Very truly yours,
GST TELECOMMUNICATIONS, INC.
By______________________________
Name:
Title:
Accepted, November [__], 1997
MORGAN STANLEY & CO.
INCORPORATED
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
CORPORATION
By Morgan Stanley & Co.
Incorporated
By__________________________
Authorized Signatory
<PAGE> 20
SCHEDULE I
Principal Amount
Underwriter To Be Purchased
Morgan Stanley & Co. Incorporated.......................
Bear, Stearns & Co. Inc.................................
Credit Suisse First Boston Corporation..................
Total.............................................. 200,000,000
===========
<PAGE> 21
EXHIBIT A
OPINION OF U.S. COUNSEL FOR THE COMPANY
The opinion of the U.S. counsel for the Company to be delivered
pursuant to Article V(d) of the Underwriting Agreement shall be to the effect
that:
(A) Each Specified Subsidiary has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own or lease its property and to conduct its business as described in
the Prospectus and is duly qualified or licensed to transact business and
is in good standing as a foreign corporation in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification or licensing, except to the extent that the
failure to be so qualified or licensed or be in good standing would not
have a material adverse effect on the properties, assets, prospects,
condition, financial or otherwise, business or operations of the Company
and its subsidiaries, taken as a whole; and to such counsel's knowledge,
after due inquiry (i) the only direct subsidiaries of the Company are GST
USA, Inc., GST Call America, Inc., TotalNet Communications, Inc., and GST
Action Telecom, Inc. and (ii) the Company owns all the outstanding shares
of capital stock of such subsidiaries free and clear of any claims, liens,
pledges, or other encumbrances;
(B) assuming due authorization, execution and delivery by the
Company, the Indenture is a valid and binding agreement of the Company,
enforceable in accordance with its terms except as (a) the enforceability
thereof may be limited by the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and (b) rights of acceleration and the availability of equitable
remedies may be limited by equitable principles of general applicability,
and the Indenture has been duly qualified under the Trust Indenture Act;
(C) assuming due authorization of the Notes, the Notes will, when
executed and authenticated in accordance with the terms of the Indenture
and delivered to and paid for by the Underwriters in accordance with the
terms of the Underwriting Agreement, be entitled to the benefits of the
Indenture and will be valid and binding obligations of the Company,
enforceable in accordance with their terms except as (a) the
enforceability thereof may be limited by the effect of applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and (b) rights of acceleration and
the availability of equitable remedies may be limited by equitable
principles of general applicability;
(D) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, the Underwriting
Agreement (including the issuance, sale and delivery of the Notes), the
Indenture and the Notes will not contravene (i) any provision of
applicable law, (ii) to such counsel's knowledge, any agreement or
<PAGE> 22
A-2
other instrument binding upon the Company that is material to the Company
and its subsidiaries, taken as a whole, or (iii) to such counsel's
knowledge, any judgment, order or decree of any governmental body, agency
or court having jurisdiction over the Company, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Company of its respective
obligations under the Underwriting Agreement, the Indenture and the Notes;
(E) the Registration Statement has become effective under the
Securities Act; and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing
the use of the Prospectus has been issued and no proceedings for that
purpose have been instituted or are threatened by the Securities and
Exchange Commission;
(F) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or any
of the Specified Subsidiaries is a party or to which any of the properties
of the Company or any of the Specified Subsidiaries is subject that are
required to be described in the Registration Statement or Prospectus and
are not so described or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(G) The Company is not and after giving effect to the offering and
sale of the Notes and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
(H) the statements (1) in the Prospectus under the captions
"Management --Employment and Other Agreements," "Certain Transactions,"
"Description of Certain Indebtedness and Redeemable Preferred Shares,"
"Description of the Notes," "Business -- Legal Proceedings," and "Certain
United States Federal Income Tax Considerations" and (2) in the
Registration Statement in Item 15, insofar as such statements constitute a
summary of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such
legal matters, documents and proceedings and summarize in all material
respects the matters referred to therein; and
(I) such counsel (1) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules
and other financial data included therein as to which such counsel need
not express any opinion) comply as to form in all material respects with
the Securities Act and the rules and regulations of the Commission
thereunder, (2) believes that (except for financial statements and
schedules and other financial data included therein and the Statement of
Eligibility and Qualification
<PAGE> 23
A-3
(Form T-1) of the Trustee under the Trust Indenture Act, as to which such
counsel need not express any belief) the Registration Statement and the
prospectus included therein at the time the Registration Statement became
effective did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (3) believes that (except
for financial statements and schedules and other financial data included
therein as to which such counsel need not express any belief) the
Prospectus does not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
With respect to paragraph (I) above, counsel may state that their
opinion and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified.
<PAGE> 24
EXHIBIT B
OPINION OF CANADIAN COUNSEL FOR THE COMPANY
The opinion of Canadian counsel for the Company to be delivered
pursuant to Article V(e) of the Underwriting Agreement shall be to the effect
that:
(A) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and is
duly qualified or licensed to transact business and is in good standing as
a foreign corporation in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification or licensing, except to the extent that the failure to be so
qualified or licensed or be in good standing would not have a material
adverse effect on the properties, assets, prospects, condition, financial
or otherwise, business or operations of the Company and its subsidiaries,
taken as a whole;
(B) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(C) the Notes have been duly authorized and, when executed,
authenticated and delivered to and paid for by the Underwriters in
accordance with the terms of the Indenture and the Underwriting Agreement,
will (a) be valid and binding obligations of the Company enforceable
against the Company in accordance with their terms and (b) be entitled to
the benefits of the Indenture.
(D) the Indenture has been duly authorized, executed and delivered
by the Company;
(E) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, the Underwriting
Agreement (including the issuance, sale and delivery of the Notes), the
Indenture and the Notes will not contravene (i) any provision of
applicable British Columbia or federal Canadian law, (ii) the certificate
of incorporation or by-laws of the Company, (iii) to such counsel's
knowledge, any agreement or other instrument binding upon the Company that
is material to the Company and its subsidiaries, taken as a whole or (iv)
to such counsel's knowledge any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company
and no consent, approval, authorization or order of, or qualification
with, any governmental body or agency in Canada is required for the
performance by the Company of its obligations under the Underwriting
Agreement and the Indenture;
(F) the statements in the Prospectus under the captions "Risk
Factors--Risks of Investment in a Canadian Corporation" and
"Enforceability of Civil Liabilities Against
<PAGE> 25
B-2
Foreign Persons" insofar as such statements constitute summaries of the
legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters referred to
therein;
(G) after due inquiry, such counsel is not aware of any Canadian
legal or governmental proceeding pending or threatened to which the
Company or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject other than
proceedings fairly summarized in all material respects in the Prospectus
and proceedings which are not likely to have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
<PAGE> 26
EXHIBIT C
OPINION OF SPECIAL REGULATORY COUNSEL FOR THE COMPANY
The opinion of special regulatory counsel for the Company to be
delivered pursuant to Article V(g) of the Underwriting Agreement shall be to the
effect that:
(A) The Company and its subsidiaries have all necessary permits,
licenses, authorizations, consents and approvals and have made all
necessary filings required under any federal, state, local or foreign
supranational, national or regional law, regulation or rule, and have
obtained all necessary authorizations, consents and approvals from other
persons, material to the conduct of their respective businesses, in each
case except to the extent that the failure to obtain such permits,
licenses, authorizations, consents or approvals or to make such filings
would not, singly or in the aggregate, have a material adverse effect on
the properties, assets, prospects, condition, financial or otherwise,
business or operations of the Company and its subsidiaries, taken as a
whole; and except as accurately described in all material respects in the
Prospectus, the Company and its subsidiaries have not received any notice
of proceedings which remain unresolved relating to revocation or
modification of any such permits, licenses, authorizations, consents or
approvals, nor is the Company or any of its subsidiaries in violation of,
or in default under, any such license, authorization, consent or approval
or any federal, state, local or foreign supranational, national or
regional law, regulation or rule or any decree, order or judgment
applicable to the Company or any of its subsidiaries the effect of which
could have a material adverse effect on the properties, assets, prospects,
condition, financial or otherwise, business or operations of the Company
and its subsidiaries, taken as a whole; and
(B) the statements in the Prospectus under the captions "Risk
Factors--Government Regulation" and "Business--Regulation", insofar as
such statements constitute a summary of the legal matters, licenses,
documents, procedures or proceedings referred to therein, fairly summarize
the matters referred to therein.
<PAGE> 27
EXHIBIT D
[INSERT LOCAL REGULATORY OPINIONS]
<PAGE> 1
EXHIBIT 4.1
================================================================================
GST TELECOMMUNICATIONS, INC.,
as Issuer
and
UNITED STATES TRUST COMPANY OF NEW YORK,
as Trustee
Indenture
Dated as of November [__], 1997
[__]% Senior Subordinated Accrual Notes due 2007
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
TIA Sections Indenture Sections
- ------------ ------------------
ss. 310(a)(1)........................................... 7.10
(a)(2)............................................. 7.10
(b)................................................ 7.08
ss. 313(c).............................................. 7.06; 12.02
ss. 314(a).............................................. 4.19; 12.02
(a)(4)............................................. 4.18; 12.02
(c)(1)............................................. 12.03
(c)(2)............................................. 12.03
(e)................................................ 12.04
ss. 315(b).............................................. 7.05; 12.02
ss. 316(a)(1)(A)........................................ 6.05
(a)(1)(B).......................................... 6.04
(b)................................................ 6.07
ss. 317(a)(1)........................................... 6.08
(a)(2)............................................. 6.09
ss. 318(a).............................................. 12.01
(c)................................................ 12.01
Note: The Cross-Reference Table shall not for any purpose be deemed to be a part
of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
Page
RECITALS OF THE COMPANY.............................................. 1
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions........................................... 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act..... 19
SECTION 1.03. Rules of Construction................................. 19
ARTICLE TWO
THE SECURITIES
SECTION 2.01. Form and Dating....................................... 20
SECTION 2.02. Execution, Authentication and Denominations........... 20
SECTION 2.03. Registrar and Paying Agent............................ 21
SECTION 2.04. Paying Agent to Hold Money in Trust................... 22
SECTION 2.05. Transfer and Exchange................................. 23
SECTION 2.06. Replacement Securities................................ 24
SECTION 2.07. Outstanding Securities................................ 25
SECTION 2.08. Temporary Securities.................................. 25
SECTION 2.09. Cancellation.......................................... 26
SECTION 2.10. CUSIP Numbers......................................... 26
SECTION 2.11. Defaulted Interest.................................... 26
SECTION 2.12. Issuance of Additional Securities..................... 26
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption................................... 27
SECTION 3.02. Notices to Trustee.................................... 27
SECTION 3.03. Selection of Securities to Be Redeemed................ 28
SECTION 3.04. Notice of Redemption.................................. 28
SECTION 3.05. Effect of Notice of Redemption........................ 29
SECTION 3.06. Deposit of Redemption Price........................... 29
SECTION 3.07. Payment of Securities Called for Redemption........... 29
SECTION 3.08. Securities Redeemed in Part........................... 30
- ----------
Note: The Table of Contents shall not for any purposes be deemed to be a part of
the Indenture.
<PAGE> 4
ii
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Securities................................. 30
SECTION 4.02. Maintenance of Office or Agency....................... 30
SECTION 4.03. Limitation on Indebtedness............................ 31
SECTION 4.04. Limitation on Senior Subordinated Indebtedness........ 33
SECTION 4.05. Limitation on Restricted Payments..................... 33
SECTION 4.06. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.................. 35
SECTION 4.07. Limitation on the Issuance and Sale of Capital Stock
of Restricted Subsidiaries......................... 37
SECTION 4.08. Limitation on Issuances of Guarantees by Restricted
Subsidiaries....................................... 37
SECTION 4.09. Limitation on Transactions with Shareholders and
Affiliates ........................................ 38
SECTION 4.10. Limitation on Liens................................... 39
SECTION 4.11. Limitation on Investments............................. 40
SECTION 4.12. Limitation on Asset Sales............................. 40
SECTION 4.13. Repurchase of Securities upon a Change of Control..... 41
SECTION 4.14. Existence............................................. 41
SECTION 4.15. Payment of Taxes and Other Claims..................... 42
SECTION 4.16. Maintenance of Properties and Insurance............... 42
SECTION 4.17. Notice of Defaults.................................... 42
SECTION 4.18. Compliance Certificates............................... 42
SECTION 4.19. Commission Reports and Reports to Holders............. 43
SECTION 4.20. Waiver of Stay, Extension or Usury Laws............... 43
SECTION 4.21. Additional Amounts.................................... 44
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. Consolidation, Merger and Sale of Assets.............. 45
SECTION 5.02. Successor Substituted................................. 46
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default..................................... 46
SECTION 6.02. Acceleration.......................................... 47
SECTION 6.03. Other Remedies........................................ 47
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Note: The Table of Contents shall not for any purposes be deemed to be a part of
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iii
SECTION 6.04. Waiver of Past Defaults............................... 48
SECTION 6.05. Control by Majority................................... 48
SECTION 6.06. Limitation on Suits................................... 48
SECTION 6.07. Rights of Holders to Receive Payment.................. 49
SECTION 6.08. Collection Suit by Trustee............................ 49
SECTION 6.09. Trustee May File Proofs of Claim...................... 49
SECTION 6.10. Priorities............................................ 50
SECTION 6.11. Undertaking for Costs................................. 50
SECTION 6.12. Restoration of Rights and Remedies.................... 50
SECTION 6.13. Rights and Remedies Cumulative........................ 50
SECTION 6.14. Delay or Omission Not Waiver.......................... 51
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General............................................... 51
SECTION 7.02. Certain Rights of Trustee............................. 51
SECTION 7.03. Individual Rights of Trustee.......................... 52
SECTION 7.04. Trustee's Disclaimer.................................. 52
SECTION 7.05. Notice of Default..................................... 53
SECTION 7.06. Reports by Trustee to Holders......................... 53
SECTION 7.07. Compensation and Indemnity............................ 53
SECTION 7.08. Replacement of Trustee................................ 54
SECTION 7.09. Successor Trustee by Merger, Etc...................... 54
SECTION 7.10. Eligibility........................................... 55
SECTION 7.11. Money Held in Trust................................... 55
SECTION 7.12. Withholding Taxes..................................... 55
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations.................. 55
SECTION 8.02. Defeasance and Discharge of Indenture................. 56
SECTION 8.03. Defeasance of Certain Obligations..................... 58
SECTION 8.04. Application of Trust Money............................ 60
SECTION 8.05. Repayment to the Company.............................. 60
SECTION 8.06. Reinstatement......................................... 61
SECTION 8.07. Insiders.............................................. 61
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Note: The Table of Contents shall not for any purposes be deemed to be a part of
the Indenture.
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iv
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders............................ 61
SECTION 9.02. With Consent of Holders............................... 62
SECTION 9.03. Revocation and Effect of Consent...................... 63
SECTION 9.04. Notation on or Exchange of Securities................. 63
SECTION 9.05. Trustee to Sign Amendments, Etc....................... 63
SECTION 9.06. Conformity with Trust Indenture Act................... 64
ARTICLE TEN
MEETINGS OF HOLDERS
SECTION 10.01. Purposes for Which Meetings May Be Called............ 64
SECTION 10.02. Manner of Calling Meetings........................... 64
SECTION 10.03. Call of Meetings by Company or Holders............... 65
SECTION 10.04. Who May Attend and Vote at Meetings.................. 65
SECTION 10.05. Quorum; Action....................................... 65
SECTION 10.06. Regulations May Be Made by Trustee; Conduct of the
Meeting; Voting Rights; Adjournment................ 66
SECTION 10.07. Voting at the Meeting and Record to Be Kept.......... 67
SECTION 10.08. Exercise of Rights of Trustee or Holders May Not Be
Hindered or Delayed by Call of Meeting............. 67
SECTION 10.09. Procedures Not Exclusive............................. 67
ARTICLE ELEVEN
SUBORDINATION
SECTION 11.01. Securities Subordinated to Senior Indebtedness....... 68
SECTION 11.02. No Payment on Securities in Certain Circumstances.... 68
SECTION 11.03. Payment over Proceeds upon Dissolution, Etc.......... 69
SECTION 11.04. Subrogation.......................................... 71
SECTION 11.05. Obligations of Company Unconditional................. 71
SECTION 11.06. Notice to Trustee.................................... 72
SECTION 11.07. Reliance on Judicial Order or Certificate of Liquidating
Agent.............................................. 73
SECTION 11.08. Trustee's Relation to Senior Indebtedness............ 73
SECTION 11.09. Subordination Rights Not Impaired by Acts or Omissions of
the Company or Holders of Senior Indebtedness...... 73
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v
SECTION 11.10. Holders Authorize Trustee to Effectuate Subordination
of Securities...................................... 73
SECTION 11.11. Not to Prevent Events of Default..................... 74
SECTION 11.12. Trustee's Compensation Not Prejudiced................ 74
SECTION 11.13. No Waiver of Subordination Provisions................ 74
SECTION 11.14. Payments May Be Paid Prior to Dissolution............ 74
SECTION 11.15. Trust Moneys Not Subordinated........................ 75
ARTICLE TWELVE
MISCELLANEOUS
SECTION 12.01. Trust Indenture Act of 1939.......................... 75
SECTION 12.02. Notices.............................................. 75
SECTION 12.03. Certificate and Opinion as to Conditions Precedent... 76
SECTION 12.04. Statements Required in Certificate or Opinion........ 76
SECTION 12.05. Rules by Trustee, Paying Agent or Registrar.......... 77
SECTION 12.06. Payment Date Other Than a Business Day............... 77
SECTION 12.07. Governing Law; Consent to Jurisdiction and Service... 77
SECTION 12.08. No Adverse Interpretation of Other Agreements........ 77
SECTION 12.09. No Recourse Against Others........................... 77
SECTION 12.10. Successors........................................... 77
SECTION 12.11. Duplicate Originals.................................. 78
SECTION 12.12. Separability......................................... 78
SECTION 12.13. Table of Contents, Headings, Etc..................... 78
EXHIBIT A Form of Security............................................A-1
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Note: The Table of Contents shall not for any purposes be deemed to be a part of
the Indenture.
<PAGE> 8
INDENTURE, dated as of November [__], 1997, between GST
TELECOMMUNICATIONS, INC., a federally chartered Canadian corporation (the
"Company") and UNITED STATES TRUST COMPANY OF NEW YORK (the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance initially of up to $200,000,000 aggregate
principal amount of the Company's [__]% Senior Subordinated Accrual Notes due
2007 (the "Securities") issuable as provided in this Indenture.
All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done, and the Company has done
all things necessary to make the Securities, when executed by the Company and
authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company as hereinafter provided.
This Indenture is subject to, and shall be governed by, the
provisions of the Trust Indenture Act of 1939, as amended, that are required to
be a part of and to govern indentures qualified under the Trust Indenture Act of
1939, as amended.
AND THIS INDENTURE FURTHER WITNESSETH
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders, as follows.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Accumulated Interest Amount" means, as of any date, for each $1,000
principal amount of Securities, the amount of interest accrued on such
Securities from the Closing Date to such date, compounded semi-annually on each
Interest Accrual Date.
"Additional Amounts" has the meaning provided in Section 4.21.
"Adjusted Consolidated Net Income" means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than the
Company or any of its Restricted Subsidiaries) has an interest and the net
income of any Unrestricted Subsidiary, except to the extent of the amount of
dividends or other distributions
<PAGE> 9
2
actually paid to the Company or any of its Restricted Subsidiaries by such other
Person, or such Unrestricted Subsidiary, during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of Section 4.05. (and in such
case, except to the extent includable pursuant to clause (i) above), the net
income (or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of Section 4.05., any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount
of assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the quarterly or annual consolidated balance
sheet of the Company and its Restricted Subsidiaries, prepared in conformity
with GAAP and most recently filed with the Commission pursuant to Section 4.19.
"Affiliate" means, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" means any Registrar, Paying Agent, authenticating agent or
co-Registrar.
"Asset Acquisition" means (i) an investment by the Company or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted
<PAGE> 10
3
Subsidiaries that constitute substantially all of a division or line of business
of such Person; provided that the property and assets acquired are related,
ancillary or complementary to the businesses of the Company and its Restricted
Subsidiaries on the date of such acquisition.
"Asset Sale" means any sale, transfer or other disposition
(including by way of merger, consolidation or sale-leaseback transactions) in
one transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property or assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of Article Five; provided that "Asset Sale" shall not include (A) sales or other
dispositions of inventory, receivables and other current assets; or (B) sales or
other dispositions of assets with a fair market value (as certified in an
Officers' Certificate) not in excess of $1 million; or (C) sales or other
dispositions of assets to the extent the Company or a Restricted Subsidiary
receives consideration at least equal to the fair market value of the assets
sold or disposed of, provided that the consideration received consists of
property or assets (other than current assets) of a nature or type or that are
used in a business (or a company having property or assets of a nature or type,
or engaged in a business) similar or related to the nature or type of the
property and assets of, or business of, the Company and its Restricted
Subsidiaries existing on the date of such sale or other disposition.
"Average Life" means, at any date of determination with respect to
any debt security, the quotient obtained by dividing (i) the sum of the products
of (a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee of such Board of Directors duly
authorized to act with respect to this Indenture.
"Board Resolution" means, with respect to any Person, a copy of a
resolution, certified by the Secretary or Assistant Secretary of such Person to
have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day except a Saturday, Sunday or other day
on which commercial banks in The City of New York, or in the city of the
Corporate Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity
<PAGE> 11
4
of such Person, whether now outstanding or issued after the date of this
Indenture, including, without limitation, all Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of
any property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person; and
"Capitalized Lease Obligations" means the discounted present value of the rental
obligations under such lease.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of Voting Stock representing more than 30% of the total voting power of the
Voting Stock of the Company on a fully diluted basis; (ii) individuals who on
the Closing Date constitute the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds of the members of the Board of Directors then in office who either
were members of the Board of Directors on the Closing Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office;
or (iii) all of the Common Stock of GST USA is not beneficially owned by the
Company.
"Closing Date" means the date on which the Securities are originally
issued under this Indenture.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the TIA, then the body performing
such duties at such time.
"Common Shares" means the common shares of the Company.
"Common Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's common stock, whether now
outstanding or issued after the date of this Indenture, including, without
limitation, all series and classes of such common stock.
"Company" means the party named as such in the first paragraph of
this Indenture until a successor replaces it pursuant to Article Five of this
Indenture and thereafter means the successor.
"Company Order" means a written request or order signed in the name
of the Company (i) by its Chairman, a Vice Chairman, its President or a Vice
President and (ii) by its Chief Financial Officer, Treasurer, an Assistant
Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee;
provided, however, that such written request or order may be signed by any two
of the officers or directors listed in clause (i) above in lieu of being
<PAGE> 12
5
signed by one of such officers or directors listed in such clause (i) and one of
the officers listed in clause (ii) above.
"Consolidated EBITDA" means, for any period, the sum of the amounts
for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated
Interest Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to either extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including amortization of
original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Securities, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination,
shareholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than
<PAGE> 13
6
90 days prior to the date of such computation, and which shall not take into
account Unrestricted Subsidiaries), less any amounts attributable to Redeemable
Stock or any equity security convertible into or exchangeable for Indebtedness,
the cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of Capital Stock of the Company or any of its
Restricted Subsidiaries, each item to be determined in conformity with GAAP
(excluding the effects of foreign currency exchange adjustments under Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 52).
"Convertible Notes" means the 137/8% Convertible Senior Subordinated
Discount Notes due 2005 of the Company issued pursuant to the Convertible Notes
Indenture.
"Convertible Notes Indenture" means the convertible notes indenture
dated December 19, 1995 among the Company, as issuer, GST USA, as guarantor, and
United States Trust Company of New York, as trustee.
"Corporate Trust Office" means the office of the Trustee at which
the corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date of this Indenture,
located at 114 West 47th Street, New York, New York 10036-1532.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect the
Company or any of its Restricted Subsidiaries against fluctuations in currency
values to or under which the Company or any of its Restricted Subsidiaries is a
party or a beneficiary on the date of this Indenture or becomes a party or a
beneficiary thereafter.
"Default" means any event that is, or after notice or passage of
time or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees, and
their respective successors.
"Designated Senior Indebtedness" means the Senior Notes and any
Indebtedness constituting Senior Indebtedness that, at the date of
determination, has an aggregate principal amount outstanding of at least $25
million and that is specifically designated by the Company in the instrument
creating or evidencing such Senior Indebtedness as "Designated Senior
Indebtedness."
"Development Company" means a Restricted Subsidiary whose primary
business is the development, ownership and operation of alternative access
telecommunications networks.
"Event of Default" has the meaning provided in Section 6.01.
"Excess Proceeds" has the meaning provided in Section 4.12.
<PAGE> 14
7
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy,
as determined in good faith by the Board of Directors of the Company (whose
determination shall be conclusive) and evidenced by a Board Resolution.
"Final Accumulated Interest Amount" means, for each $1,000 principal
amount of Securities, the amount of interest accrued on such Securities from the
Closing Date, compounded semi-annually on each Interest Accrual Date, to the
Final Interest Accrual Date.
"Final Interest Accrual Date" means [______ __], 2002.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained in this
Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of this Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Securities and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
"Global Securities" has the meaning provided in Section 2.01.
"GST USA" means GST USA, Inc., a Delaware corporation and Wholly
Owned Subsidiary of the Company.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
<PAGE> 15
8
"Guaranteed Indebtedness" has the meaning provided in Section 4.08.
"Holder" or "Securityholder" means the then registered holder of any
Security.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "incurrence" of Indebtedness by reason of a Person
becoming a Restricted Subsidiary; provided that neither the accrual of interest
nor the accretion of original issue discount shall be considered an Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the unamortized
portion of the original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP, (B) money borrowed and set aside
at the time of the Incurrence of any Indebtedness in order to pre-fund the
payment of interest as such Indebtedness shall be deemed not to be
"Indebtedness" and (C) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of
determination, the ratio of (i) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis as at the date
of determination (the "Transaction Date") to (ii) the Consolidated EBITDA of the
Company for the then most recent four full fiscal quarters for which reports
have been filed pursuant to Section 4.19. (such four full fiscal quarter period
being referred to herein as the "Four Quarter Period"); provided that (x) pro
forma effect shall be given to any Indebtedness Incurred from the beginning of
the Four Quarter Period through the Transaction Date (including any Indebtedness
Incurred on the Transaction Date), to the
<PAGE> 16
9
extent outstanding on the Transaction Date, (y) if during the period commencing
on the first day of such Four Quarter Period through the Transaction Date (the
"Reference Period"), the Company or any of its Restricted Subsidiaries shall
have engaged in any Asset Sale, Consolidated EBITDA for such period shall be
reduced by an amount equal to the EBITDA (if positive), or increased by an
amount equal to the EBITDA (if negative), directly attributable to the assets
which are the subject of such Asset Sale as if such Asset Sale had occurred on
the first day of such Reference Period or (z) if during such Reference Period
the Company or any of the Restricted Subsidiaries shall have made any Asset
Acquisition, Consolidated EBITDA of the Company shall be calculated on a pro
forma basis as if such Asset Acquisition and any Incurrence of Indebtedness to
finance such Asset Acquisition had taken place on the first day of such
Reference Period.
"Indenture" means this Indenture as originally executed or as it may
be amended or supplemented from time to time by one or more indentures
supplemental to this Indenture entered into pursuant to the applicable
provisions of this Indenture.
"Interest Accrual Date" means each [______ __] and [______ __],
commencing [______ __], 1998.
"Interest Payment Date" means each semiannual interest payment date
on [___] and [____] of each year, commencing [______], 2003.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement or other similar agreement or
arrangement designed to protect the Company or any of its Restricted
Subsidiaries against fluctuations in interest rates in respect of Indebtedness
to or under which the Company or any of its Restricted Subsidiaries is a party
or a beneficiary on the date of this Indenture or becomes a party or a
beneficiary hereafter; provided that the notional principal amount thereof does
not exceed the principal amount of the Indebtedness of the Company and its
Restricted Subsidiaries that bears interest at floating rates.
"International Asset" has the meaning provided in Section 4.11.
"International Business" has the meaning provided in Section 4.11.
"Investment" in any Person means any direct or indirect advance,
loan or other extension of credit (including, without limitation, by way of
Guarantee or similar arrangement; but excluding advances to customers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, bonds,
notes, debentures or other similar instruments issued by, such Person and shall
include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the fair market value of the Capital Stock (or
<PAGE> 17
10
any other Investment) held by the Company and its Restricted Subsidiaries of any
Person that has ceased to be a Restricted Subsidiary by reason of any
transaction permitted by clause (iii) of Section 4.07. For purposes of the
definition of "Unrestricted Subsidiary" and Section 4.05., (i) "Investment"
shall include the fair market value of the assets (net of liabilities to the
Company or any of its Restricted Subsidiaries) of any Restricted Subsidiary at
the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary and shall exclude the fair market value of the assets (net of
liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined by the
Board of Directors in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof, any sale with
recourse against the seller or any Affiliate of the seller, or any agreement to
give any security interest).
"NACT" means NACT Telecommunications, Inc., a Delaware corporation.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
<PAGE> 18
11
"Offer to Purchase" means an offer to purchase Securities by the
Company from the Holders commenced by mailing a notice to the Trustee and each
Holder stating: (i) the covenant pursuant to which the offer is being made and
that all Securities validly tendered will be accepted for payment on a pro rata
basis; (ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed) (the "Payment Date"); (iii) that any Security not tendered
will continue to accrue interest pursuant to its terms; (iv) that, unless the
Company defaults in the payment of the purchase price, any Security accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest on and
after the Payment Date; (v) that Holders electing to have a Security purchased
pursuant to the Offer to Purchase will be required to surrender such Security,
together with the form entitled "Option of the Holder to Elect Purchase" on the
reverse side thereof completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the Business Day immediately
preceding the Payment Date; (vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the third Business Day immediately preceding the Payment Date, a telegram,
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of Securities delivered for purchase and a statement that such
Holder is withdrawing his election to have such Securities purchased; and (vii)
that Holders whose Securities are being purchased only in part will be issued
new Securities equal in principal amount to the unpurchased portion thereof;
provided that each Security purchased and each new Security issued shall be in a
principal amount of $1,000 or integral multiples thereof. On the Payment Date,
the Company shall (i) accept for payment on a pro rata basis Securities or
portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Securities or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Securities or portions thereof so accepted together with an
Officers' Certificate specifying the Securities or portions thereof accepted for
payment by the Company. The Paying Agent shall promptly mail to the Holders of
Securities so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new Security
equal in principal amount to any unpurchased portion of the Security
surrendered; provided that each Security purchased and each new Security issued
shall be in a principal amount of $1,000 or integral multiples thereof. The
Company will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. The Company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the Company
is required to repurchase Securities pursuant to an Offer to Purchase.
"Officer" means, with respect to any Person, (i) the Chairman of the
Board, the Vice Chairman of the Board, the President, any Vice President, the
Chief Financial Officer, and (ii) the Treasurer or any Assistant Treasurer, or
the Secretary or any Assistant Secretary, in each case of such Person.
"Officers' Certificate" means a certificate signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in clause
(ii) of the definition thereof; provided, however, that any such certificate may
be signed by any two of the Officers listed in
<PAGE> 19
12
clause (i) of the definition thereof in lieu of being signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in clause
(ii) of the definition thereof. Each Officers' Certificate (other than
certificates provided pursuant to TIA Section 314(a)(4)) shall include the
statements provided for in TIA Section 314(e).
"Opinion of Counsel" means a written opinion signed by legal counsel
who may be an employee of or counsel to the Company. Each such Opinion of
Counsel shall include the statements provided for in TIA Section 314(e).
"Paying Agent" has the meaning provided in Section 2.03, except
that, for the purposes of Article Eight, the Paying Agent shall not be the
Company or a Subsidiary of the Company or an Affiliate of any of them. The term
"Paying Agent" includes any additional Paying Agent.
"Payment Date" has the meaning provided in the definition of "Offer
to Purchase."
"Permitted Investment" means (i) an Investment in a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to, the Company or a Restricted
Subsidiary; provided that such person's primary business is related, ancillary
or complementary to the businesses of the Company and its Restricted
Subsidiaries on the date of such Investment; (ii) a Temporary Cash Investment;
(iii) payroll, travel and similar advances to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in accordance
with GAAP; (iv) loans or advances to employees made in the ordinary course of
business that do not exceed $1 million in the aggregate at any time outstanding;
and (v) stock, obligations or securities received in satisfaction of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made; (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (iii) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
or regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the
<PAGE> 20
13
Company or any of its Restricted Subsidiaries; (vi) Liens (including extensions
and renewals thereof) upon real or personal property acquired after the Closing
Date; provided that (a) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with Section 4.03, (1) to finance the cost
(including, without limitation, the cost of design, development, construction,
acquisition, installation or integration) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of or within six
months after the later of the acquisition, the completion of construction or the
commencement of full operation of such property or (2) to refinance any
Indebtedness previously so secured, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of stock or
Indebtedness of, any corporation existing at the time such corporation becomes,
or becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired; (xii) Liens in favor of
the Company or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Company or any Restricted
Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
parameters customary in the industry and incurred in the ordinary course of
business, in each case, securing Indebtedness under Interest Rate Agreements and
Currency Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed to protect the Company or
any of its Restricted Subsidiaries from fluctuations in interest rates or the
price of commodities; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales
of receivables.
"Person" means an individual, a corporation, a partnership, a
limited liability company, an association, a trust or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Phoenix Fiber" means Phoenix Fiber Access, Inc., a subsidiary of
GST USA.
<PAGE> 21
14
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference stock,
whether now outstanding or issued after the date of this Indenture, including,
without limitation, all series and classes of such preferred or preference
stock.
"Principal" of a debt security, including the Securities, means the
principal amount due on the Stated Maturity as shown on such debt security.
"Protected Property" has the meaning provided in Section 4.10.
"Redeemable Preferred Shares" means the Series A Convertible
Preference Shares of the Company outstanding on the Closing Date.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Securities, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Securities or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Securities; provided that any
Capital Stock that would not constitute Redeemable Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Securities shall not
constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in Section 4.12 and Section
4.13 and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Securities as are required to be repurchased
pursuant to Section 4.12 and Section 4.13.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which such Security is to be redeemed pursuant to
this Indenture.
"Registrar" has the meaning provided in Section 2.03.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the [______] or [______] (whether or not a Business Day), as
the case may be, next preceding such Interest Payment Date.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice chairman of the board of directors, the chairman or any
vice chairman of the executive committee of the board of directors, the chairman
of the trust committee, the
<PAGE> 22
15
president, any vice president, any assistant vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and in each case having direct responsibility for the administration of
this Indenture and also means, with respect to a particular corporate trust
matter, any other officer to whom such matter is referred because of his or her
knowledge of and familiarity with the particular subject.
"Restricted Payments" has the meaning provided in Section 4.05.
"Restricted Subsidiary" means any Subsidiary of the Company other
than an Unrestricted Subsidiary.
"Securities" means any of the securities, as defined in the first
paragraph of the recitals hereof, that are authenticated and delivered under
this Indenture. For all purposes of this Indenture, the term "Securities" shall
include the Securities initially issued on the Closing Date and any other
Securities issued after the Closing Date under this Indenture. For purposes of
this Indenture, all Securities shall vote together as one series of Securities
under this Indenture.
"Securities Act" means the Securities Act of 1933.
"Security Register" has the meaning provided in Section 2.03.
"Senior Indebtedness"means the following obligations of the Company,
whether outstanding on the Closing Date or thereafter Incurred: (i) all
Indebtedness and all other monetary obligations of the Company under its
guarantee of the Senior Notes, (ii) all other Indebtedness of the Company (other
than the Convertible Notes), including principal and interest on such
Indebtedness, unless such indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, is pari
passu with, or subordinated in right of payment to, the Securities, and (iii)
all fees, expenses and indemnities payable in connection with the Company's
guarantee of the Senior Notes (including any agreement pursuant to which the
Senior Notes are issued); provided that the term "Senior Indebtedness" shall not
include (a) any Indebtedness of the Company that, when Incurred and without
respect to any election under Section 1111(b) of the United States Bankruptcy
Code, was without recourse to the Company, (b) any Indebtedness of the Company
to a Subsidiary of the Company or to a joint venture in which the Company has an
interest, (c) any Indebtedness of the Company to the extent not permitted by
Section 4.03 or Section 4.04, (d) any repurchase, redemption or other obligation
in respect of Redeemable Stock, (e) any Indebtedness to any employee of the
Company or any of its Subsidiaries, (f) any liability for federal, state, local
or other taxes owed or owing by the Company or (g) any trade payables. Senior
Indebtedness will also include interest accruing subsequent to events of
bankruptcy of the Company and its Subsidiaries at the rate provided for in the
document governing such Senior Indebtedness, whether or not such interest is an
allowed claim enforceable against the debtor in a bankruptcy case under the
federal bankruptcy law.
<PAGE> 23
16
"Senior Notes" means the 137/8% Senior Discount Notes due 2005 of
GST USA issued pursuant to the Senior Notes Indenture.
"Senior Notes Indenture" means the senior notes indenture dated
December 19, 1995 among GST USA, as issuer, the Company, as guarantor, and
United States Trust Company of New York, as trustee.
"Senior Subordinated Obligations" means any principal of, premium,
if any, or interest on the Securities payable pursuant to the terms of the
Securities or upon acceleration, including any amounts received upon the
exercise of rights of rescission or other rights of action (including claims for
damages) or otherwise, to the extent relating to the purchase of Securities or
amounts corresponding to such principal, premium, if any, or interest on the
Securities.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Subsidiary Guarantee" has the meaning provided in Section 4.08.
"Subsidiary Guarantor" means a Restricted Subsidiary that executes
and delivers a Subsidiary Guarantee.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally
<PAGE> 24
17
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker-dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the Company)
organized and in existence under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Services, and (v) securities with
maturities of six months or less from the date of acquisition issued or fully
and unconditionally guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by Standard & Poor's Ratings Services or Moody's
Investors Service, Inc.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of
1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb), as in effect on the date
this Indenture was executed, except as provided in Section 9.06.
"Tomen" means Tomen Corporation or its Affiliates.
"Tomen Facility" means, collectively, the Tomen Master Agreement
together with all other agreements (including credit agreements), instruments
and documents executed or delivered pursuant thereto or in connection therewith,
in each case as such agreements, instruments or documents may be amended,
supplemented, extended, renewed, replaced or otherwise modified from time to
time.
"Tomen Master Agreement" means the Master Agreement dated October
24, 1994, among Tomen America Inc., the Company (formerly known as Greenstar
Telecommunications Inc.), GST Telecom Inc., Pacwest Network, Inc., Pacwest
Network L.L.C. and Pacific Lightwave, Inc.
"Trade Payables" means any accounts payable or any other
indebtedness or monetary obligations to trade creditors created, assumed or
Guaranteed by the Company or any of its Restricted Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services by the Company or its Restricted Subsidiaries.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Trustee" means the party named as such in the first paragraph of
this Indenture until a successor replaces it in accordance with the provisions
of Article Seven of this Indenture and thereafter means such successor.
<PAGE> 25
18
"United States Bankruptcy Code" means the Bankruptcy Reform Act of
1978, as amended and as codified in Title 11 of the United States Code, as
amended from time to time hereafter, or any successor federal bankruptcy law.
"Unrestricted Subsidiary" means (i) NACT or any other Subsidiary of
the Company that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board of Directors in the manner provided below
and (ii) any Subsidiary of an Unrestricted Subsidiary; provided that NACT shall
be deemed to be a Restricted Subsidiary for purposes of Section 4.05 (except
that NACT shall be an Unrestricted Subsidiary for purposes of the limitation on
Investments by the Company and its Restricted Subsidiaries) and the definition
of "Asset Sale." The Board of Directors may designate any Restricted Subsidiary
(including any newly acquired or newly formed Subsidiary), other than GST USA or
a Subsidiary Guarantor, to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any Restricted Subsidiary; provided that (A) any Guarantee by the
Company or any Restricted Subsidiary of any Indebtedness of the Subsidiary being
so designated shall be deemed an Incurrence of such Indebtedness and an
Investment by the Company or such Restricted Subsidiary at the time of such
designation; (B) either (I) the Subsidiary to be so designated has total assets
of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
that such designation would be permitted under Section 4.05 and (C) if
applicable, the Incurrence of Indebtedness and the Investment referred to in
clause (A) above would be permitted under Section 4.03 and Section 4.05. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company; provided that immediately after giving effect to such
designation (x) the Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation are permitted to be Incurred for
all purposes of this Indenture and (y) no Default or Event of Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Securities, and shall also include a depository
receipt issued by a bank or trust company as custodian with respect to any such
U.S. Government Obligation or a specific payment of interest on or principal of
any such U.S. Government Obligation held by such custodian for the account of
the holder of a depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of interest on or principal of the U.S. Government Obligation evidenced by such
depository receipt.
<PAGE> 26
19
"Voting Stock" means with respect to any Person, Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person,
such Subsidiary if all of the outstanding Capital Stock in such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
SECTION 1.02. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Holder or a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
and
"obligor" on the indenture securities means the Company or any other
obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by a rule of the
Commission and not otherwise defined herein have the meanings assigned to them
therein.
SECTION 1.03. Rules of Construction. Unless the context otherwise
requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural, and words in the
plural include the singular;
(v) provisions apply to successive events and transactions;
(vi) "herein," "hereof" and other words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or
other subdivision; and
<PAGE> 27
20
(vii) all references to Sections or Articles refer to Sections or
Articles of this Indenture unless otherwise indicated.
ARTICLE TWO
THE SECURITIES
SECTION 2.01. Form and Dating. The Securities and the Trustee's
certificate of authentication shall be substantially in the form annexed hereto
as Exhibit A with such appropriate insertions, substitutions and other
variations as are required or permitted under this Indenture. The Securities may
have notations, legends or endorsements required by law, stock exchange
agreements to which the Company is subject or usage. The Company shall approve
the form of the Securities and any notation, legend or endorsement on the
Securities. Each Security shall be dated the date of its authentication.
The terms and provisions contained in the form of the Securities
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Indenture. Each of the Company and the Trustee, by its execution
and delivery of this Indenture, expressly agrees to the terms and provisions of
the Securities applicable to it and to be bound thereby.
The Securities shall be issued initially in the form of one or more
global Securities in registered form, substantially in the form set forth in
Exhibit A (the "Global Securities"), deposited with, or on behalf of, the
Depositary, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. Each Global Security shall bear such legend as may be
required or reasonably requested by the Depositary.
The definitive Securities shall be typed, printed, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Securities may be listed, all as determined by the officers executing such
Securities, as evidenced by their execution of such Securities.
SECTION 2.02. Execution, Authentication and Denominations. Subject
to Article Four, the aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is unlimited. Two Officers
shall execute the Securities for the Company by facsimile or manual signature in
the name and on behalf of the Company.
If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee or authenticating agent authenticates the
Security, the Security shall be valid nevertheless.
A Security shall not be valid until the Trustee or authenticating
agent manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
<PAGE> 28
21
At any time and from time to time after the execution of this
Indenture, the Trustee or an authenticating agent shall upon receipt of a
Company Order authenticate for original issue Securities in the aggregate
principal amount specified in such Company Order; provided that the Trustee
shall be entitled to receive an Officers' Certificate and an Opinion of Counsel
of the Company in connection with such authentication of Securities. The Opinion
of Counsel shall, if requested by the Trustee, be to the effect that:
(a) the form and terms of such Securities have been established by
or pursuant to a Board Resolution or, if applicable, an indenture
supplemental hereto in conformity with the provisions of this Indenture;
(b) such supplemental indenture, if any, when executed and delivered
by the Company and the Trustee, will constitute a valid and binding
obligation of the Company;
(c) such Securities, when authenticated and delivered by the Trustee
and issued by the Company in the manner and subject to any conditions
specified in such Opinion of Counsel, will constitute valid and binding
obligations of the Company in accordance with their terms and will be
entitled to the benefits of this Indenture, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equitable principles; and
(d) the Company has been duly incorporated in, and is a validly
existing corporation in good standing under the laws of the jurisdiction
of its incorporation.
Such Company Order shall specify the amount of Securities to be authenticated
and the date on which the original issue of Securities is to be authenticated
and in case of an issuance of Securities pursuant to Section 2.12, shall certify
that such issuance is in compliance with Article Four.
The Trustee may appoint an authenticating agent to authenticate
Securities. An authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such authenticating agent. An authenticating
agent has the same rights as an Agent to deal with the Company or an Affiliate
of the Company. The Trustee shall not be liable for the misconduct or negligence
of any authenticating agent appointed with due care.
The Securities shall be issuable only in registered form without
coupons and only in denominations of $1,000 in principal amount and any integral
multiple of $1,000 in excess thereof.
SECTION 2.03. Registrar and Paying Agent. The Company shall maintain
an office or agency where Securities may be presented for registration of
transfer or for exchange (the "Registrar"), an office or agency where Securities
may be presented for payment (the "Paying Agent") and an office or agency where
notices and demands to or upon the Company
<PAGE> 29
22
in respect of the Securities and this Indenture may be served, which shall be in
the Borough of Manhattan, The City of New York and, in the event the Securities
are listed on the Luxembourg Stock Exchange, in Luxembourg. The Company shall
cause the Registrar to keep a register of the Securities and of their transfer
and exchange (the "Security Register"). The Company may have one or more
co-Registrars and one or more additional Paying Agents.
The Company shall enter into an appropriate agency agreement with
any Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall give
prompt written notice to the Trustee of the name and address of any such Agent
and any change in the address of such Agent. If the Company fails to maintain a
Registrar, Paying Agent and/or agent for service of notices and demands, the
Trustee shall act as such Registrar, Paying Agent and/or agent for service of
notices and demands for so long as such failure shall continue and shall be
entitled to compensation therefor pursuant to Section 7.07. The Company may
remove any Agent upon written notice to such Agent and the Trustee; provided
that no such removal shall become effective until (i) the acceptance of an
appointment by a successor Agent to such Agent as evidenced by an appropriate
agency agreement entered into by the Company and such successor Agent and
delivered to the Trustee or (ii) notification to the Trustee that the Trustee
shall serve as such Agent until the appointment of a successor Agent in
accordance with clause (i) of this proviso. The Company, any Subsidiary of the
Company, or any Affiliate of any of them may act as Paying Agent, Registrar or
co-Registrar, and/or agent for service of notice and demands; provided, however,
that neither the Company, a Subsidiary of the Company nor an Affiliate of any of
them shall act as Paying Agent in connection with the defeasance of the
Securities or the discharge of this Indenture under Article Eight.
The Company initially appoints the Trustee as Registrar, Paying
Agent, authenticating agent and agent for service of notice and demands. The
Trustee shall preserve in as current a form as is reasonably practicable the
most recent list available to it of the names and addresses of Holders and shall
otherwise comply with TIA ss.312(a). If, at any time, the Trustee is not the
Registrar, the Registrar shall make available to the Trustee before each
Interest Payment Date and at such other times as the Trustee may reasonably
request, the names and addresses of the Holders as they appear in the Security
Register.
SECTION 2.04. Paying Agent to Hold Money in Trust. Not later than
11:00 a.m. New York City time on each due date of the principal, premium, if
any, and interest on any Securities, the Company shall deposit, or cause to be
deposited, with the Paying Agent money in immediately available funds sufficient
to pay such principal, premium, if any, and interest so becoming due. The
Company shall require each Paying Agent, if any, other than the Trustee to agree
in writing that such Paying Agent shall hold in trust for the benefit of the
Holders or the Trustee all money held by the Paying Agent for the payment of
principal of, premium, if any, and interest on the Securities (whether such
money has been paid to it by the Company or any other obligor on the
Securities), and that such Paying Agent shall promptly notify the Trustee in
writing of any default by the Company (or any other obligor on the Securities)
in making any such payment. The Company at any time may require a Paying Agent
to pay all money held by it to the Trustee and account for any funds disbursed,
and the Trustee
<PAGE> 30
23
may at any time during the continuance of any payment default, upon written
request to a Paying Agent, require such Paying Agent to pay all money held by it
to the Trustee and to account for any funds disbursed. Upon doing so, the Paying
Agent shall have no further liability for the money so paid over to the Trustee.
If the Company or any Subsidiary of the Company or any Affiliate of any of them
acts as Paying Agent, it will, on or before each due date of any principal of,
premium, if any, or interest on the Securities, segregate and hold in a separate
trust fund for the benefit of the Holders a sum of money sufficient to pay such
principal, premium, if any, or interest so becoming due until such sum of money
shall be paid to such Holders or otherwise disposed of as provided in this
Indenture, and will promptly notify the Trustee in writing of its action or
failure to act as required by this Section 2.04.
SECTION 2.05. Transfer and Exchange. The Securities are issuable
only in registered form. A Holder may transfer a Security by written application
to the Registrar stating the name of the proposed transferee and otherwise
complying with the terms of this Indenture. No such transfer shall be effected
until, and such transferee shall succeed to the rights of a Holder only upon
registration of the transfer by the Registrar in the Security Register. Prior to
the registration of any transfer by a Holder as provided herein, the Company,
the Trustee, and any agent of the Company shall treat the person in whose name
the Security is registered as the owner thereof for all purposes whether or not
the Security shall be overdue, and neither the Company, the Trustee, nor any
such agent shall be affected by notice to the contrary. Furthermore, any Holder
of or beneficial owner of an interest in a Global Security shall, by acceptance
of such Global Security, be deemed to have agreed that transfers of beneficial
interests in such Global Security may be effected only through a book-entry
system maintained by the Depositary (or its agent), and that ownership of a
beneficial interest in the Security shall be required to be reflected in a book
entry. When Securities are presented to the Registrar or a co-Registrar with a
request to register the transfer or to exchange them for an equal principal
amount of Securities of other authorized denominations, the Registrar shall
register the transfer or make the exchange as requested if its requirements for
such transactions are met (including that such Securities are duly endorsed or
accompanied by a written instrument of transfer in form satisfactory to the
Trustee and Registrar duly executed by the Holder thereof or by an attorney who
is authorized in writing to act on behalf of the Holder). To permit
registrations of transfers and exchanges in accordance with the terms,
conditions and restrictions hereof, the Company shall execute and the Trustee
shall authenticate Securities at the Registrar's request. No service charge
shall be made to any Holder for any registration of transfer or exchange or
redemption of the Securities, but the Company may require payment by the Holder
of a sum sufficient to cover any transfer tax or similar governmental charge
payable in connection therewith (other than any such transfer taxes or other
similar governmental charge payable upon transfers, exchanges or redemptions
pursuant to Section 2.08, 3.08, 4.12, 4.13 or 9.04).
The Registrar shall not be required (i) to issue, register the
transfer of or exchange any Security during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Securities selected for redemption under Section 3.03 and ending at the close of
business on the day of such mailing, or (ii) to register the transfer of or
exchange any Security so selected for redemption in whole or in part, except the
unredeemed portion of any Security being redeemed in part.
<PAGE> 31
24
Notwithstanding any other provisions of this Section 2.05, unless
and until it is exchanged in whole or in part for Securities in definitive
registered form, a Global Security representing all or a portion of the
Securities may not be transferred except as a whole by the Depositary to a
nominee of such Depositary or by a nominee of such Depositary to such Depositary
or another nominee of such Depositary or by such Depositary or any such nominee
to a successor Depositary or a nominee of such successor Depositary.
If the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for the Global Securities or if at any time the
Depositary shall no longer be eligible under the next sentence of this
paragraph, the Company shall appoint a successor Depositary with respect to the
Securities. Each Depositary appointed pursuant to this Section 2.05 must, at the
time of its appointment and at all times while it serves as Depositary, be a
clearing agency registered under the Exchange Act and any other applicable
statute or regulation. The Company will execute, and the Trustee, upon receipt
of an authentication order, will authenticate and deliver, Securities in
definitive registered form in any authorized denominations, in an aggregate
principal amount equal to the principal amount of the Global Security or
Securities representing such Securities in exchange for such Global Security or
Securities if (i) the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for the Global Securities or if at any time the
Depositary shall no longer be eligible to serve as Depositary and a successor
Depositary for the Securities is not appointed by the Company within 60 days
after the Company receives such notice or becomes aware of such ineligibility or
(ii) an Event of Default has occurred and is continuing.
The Company may at any time and in its sole discretion determine
that the Securities shall no longer be represented by a Global Security or
Securities. In such event the Company will execute, and the Trustee will, upon
receipt of an authentication order, authenticate and deliver, Securities in
definitive registered form in any authorized denominations, in an aggregate
principal amount equal to the principal amount of the Global Security or
Securities representing such Securities in exchange for such Global Security or
Securities.
Upon the exchange of a Global Security for Securities in definitive
registered form without coupons, in authorized denominations, such Global
Security shall be cancelled by the Trustee. Securities in definitive registered
form issued in exchange for a Global Security pursuant to this Section 2.05
shall be registered in such names and in such authorized denominations as the
Depositary for such Global Security, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Trustee. The Trustee
shall deliver such Securities to or as directed by the Persons in whose names
such Securities are so registered.
All Securities issued upon any transfer or exchange of Securities
shall be valid obligations of the Company, evidencing the same debt, and
entitled to the same benefits under this Indenture, as the Securities
surrendered upon such transfer or exchange.
SECTION 2.06. Replacement Securities. If a mutilated Security is
surrendered to the Trustee or if the Holder claims that the Security has been
lost, destroyed or wrongfully taken, the Company shall issue and the Trustee
shall authenticate a replacement Security of like
<PAGE> 32
25
tenor and principal amount and bearing a number not contemporaneously
outstanding; provided that the requirements of the second paragraph of Section
2.07 are met. If required by the Trustee or the Company, an indemnity bond must
be furnished that is sufficient in the judgment of both the Trustee and the
Company to protect the Company, the Trustee or any Agent from any loss that any
of them may suffer if a Security is replaced. The Company may charge such Holder
for its expenses and the expenses of the Trustee in replacing a Security. In
case any such mutilated, lost, destroyed or wrongfully taken Security has become
or is about to become due and payable, the Company in its discretion may pay the
principal of, premium, if any, and interest accrued on such Security instead of
issuing a new Security in replacement thereof.
Every replacement Security is an additional obligation of the
Company and shall be entitled to the benefits of this Indenture.
SECTION 2.07. Outstanding Securities. Securities outstanding at any
time are all Securities that have been authenticated by the Trustee except for
those cancelled by it, those delivered to it for cancellation and those
described in this Section 2.07 as not outstanding.
If a Security is replaced pursuant to Section 2.06, it ceases to be
outstanding unless and until the Trustee and the Company receive proof
satisfactory to them that the replaced Security is held by a bona fide
purchaser.
If the Paying Agent (other than the Company or an Affiliate of the
Company) holds on the maturity date money sufficient to pay the principal of,
premium, if any, and interest accrued on Securities payable on that date, then
on and after that date such Securities cease to be outstanding and interest on
them shall cease to accrue.
A Security does not cease to be outstanding because the Company or
one of its Affiliates holds such Security, provided, however, that, in
determining whether the Holders of the requisite principal amount of the
outstanding Securities have given any request, demand, authorization, direction,
notice, consent or waiver hereunder, Securities owned by the Company or any
other obligor upon the Securities or any Affiliate of the Company or of such
other obligor shall be disregarded and deemed not to be outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent or waiver, only
Securities which a Responsible Officer of the Trustee knows to be so owned shall
be so disregarded. Securities so owned which have been pledged in good faith may
be regarded as outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or of such other obligor.
SECTION 2.08. Temporary Securities. Until definitive Securities are
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have insertions, substitutions, omissions and
other variations determined to be appropriate by the Officers executing the
temporary Securities, as evidenced by their execution of such temporary
<PAGE> 33
26
Securities. If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities, the temporary Securities shall be
exchangeable for definitive Securities upon surrender of the temporary
Securities at the office or agency of the Company designated for such purpose
pursuant to Section 4.02, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Securities the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a like
principal amount of definitive Securities of authorized denominations. Until so
exchanged, the temporary Securities shall be entitled to the same benefits under
this Indenture as definitive Securities.
SECTION 2.09. Cancellation. The Company at any time may deliver to
the Trustee for cancellation any Securities previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee for cancellation any Securities
previously authenticated hereunder which the Company has not issued and sold.
The Registrar and the Paying Agent shall forward to the Trustee any Securities
surrendered to them for transfer, exchange or payment. The Trustee shall cancel
all Securities surrendered for transfer, exchange, payment or cancellation and
shall destroy them in accordance with its normal procedure. The Company shall
not issue new Securities to replace Securities it has paid in full or delivered
to the Trustee for cancellation.
SECTION 2.10. CUSIP Numbers. The Company in issuing the Securities
may use "CUSIP" or other identification numbers (if then generally in use), and,
if so, the Trustee shall use CUSIP numbers or other identification numbers, as
the case may be, in notices of redemption or exchange as a convenience to
Holders; provided that any such notice shall state that no representation is
made as to the correctness of such numbers either as printed on the Securities
or as contained in any notice of redemption or exchange and that reliance may be
placed only on the other identification numbers printed on the Securities;
provided further that failure to use "CUSIP" or other identification numbers in
any notice of redemption or exchange shall not effect the validity or
sufficiency of such notice.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
payment of interest on the Securities, it shall pay, or shall deposit with the
Paying Agent money in immediately available funds sufficient to pay the
defaulted interest, plus (to the extent lawful) any interest payable on the
defaulted interest, to the Persons who are Holders on a subsequent special
record date. A special record date, as used in this Section 2.11 with respect to
the payment of any defaulted interest, shall mean the 15th day next preceding
the date fixed by the Company for the payment of defaulted interest, whether or
not such day is a Business Day. At least 15 days before the subsequent special
record date, the Company shall mail to each Holder and to the Trustee a notice
that states the subsequent special record date, the payment date and the amount
of defaulted interest to be paid.
SECTION 2.12. Issuance of Additional Securities. The Company may, subject
to Article Four of this Indenture, issue additional Securities under this
Indenture. The Securities issued on the Closing Date and any additional
Securities subsequently issued shall be treated as a single class for all
purposes under this Indenture.
<PAGE> 34
27
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption. (a) The Securities may be
redeemed at the option of the Company in whole or in part, at any time or from
time to time, on or after [____], 2002 and prior to maturity, at the following
Redemption Prices (expressed in percentages of their principal amount plus the
Final Accumulated Interest Amount), plus accrued and unpaid interest to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date) if redeemed during the 12-month period
commencing [_____] of the years set forth below:
Year Redemption Price
---- ----------------
2002 [____]%
2003 [____]%
2004 and thereafter 100.0000%
(b) In addition, up to [___]% of the aggregate principal amount of
the Securities may be redeemed at the option of the Company, at any time prior
to [_______], 2000, from the proceeds of one or more sales of its Capital Stock
(other than Redeemable Stock), at [___]% of the sum of their principal amount
plus the Accumulated Interest Amount on the Redemption Date; provided that after
any such redemption at least $[____] million aggregate principal amount of
Securities remains outstanding.
(c) In addition, the Securities may be redeemed as a whole, but not
in part, at the option of the Company, at 100% of their principal amount on the
Redemption Date, together with accrued interest thereon, if any, to the
Redemption Date, in the event the Company has become or would become obligated
to pay, on the next date on which any amount would be payable with respect to
the Securities, any Additional Amounts as a result of a change in the laws
(including any regulations promulgated thereunder) of Canada (or any political
subdivision or taxing authority thereof or therein), or change in any official
position regarding the application or interpretation of such laws or
regulations, which change is announced or becomes effective on or after November
[___], 1997.
SECTION 3.02. Notices to Trustee. If the Company elects to redeem
Securities pursuant to Section 3.01, the Company shall notify the Trustee in
writing of the Redemption Date and the principal amount of Securities to be
redeemed.
The Company shall give each notice provided for in this Section 3.02
in an Officers' Certificate at least 25 days before mailing the notice to
Holders required pursuant to Section 3.04 (unless a shorter period shall be
satisfactory to the Trustee).
<PAGE> 35
28
SECTION 3.03. Selection of Securities to Be Redeemed. If less than
all of the Securities are to be redeemed at any time pursuant to Section 3.01,
the Trustee shall select the Securities to be redeemed in compliance with the
requirements, as certified to it by the Company, of the principal national
securities exchange, if any, on which the Securities are listed or, if the
Securities are not listed on a national securities exchange, on a pro rata
basis, by lot or by such other method as the Trustee in its sole discretion
shall deem fair and appropriate; provided, however, that no Securities of $1,000
in principal amount or less shall be redeemed in part.
The Trustee shall make the selection from the Securities outstanding
and not previously called for redemption. Securities in denominations of $1,000
in principal amount may only be redeemed in whole. The Trustee may select for
redemption portions (equal to $1,000 in principal amount or any integral
multiple thereof) of Securities that have denominations larger than $1,000 in
principal amount. Provisions of this Indenture that apply to Securities called
for redemption also apply to portions of Securities called for redemption. The
Trustee shall notify the Company and the Registrar promptly in writing of the
Securities or portions of Securities to be called for redemption.
SECTION 3.04. Notice of Redemption. With respect to any redemption
of Securities, at least 30 days but not more than 60 days before a Redemption
Date, the Company shall mail a notice of redemption by first class mail to each
Holder whose Securities are to be redeemed.
The notice shall identify the Securities to be redeemed and shall
state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) the name and address of the Paying Agent;
(d) that Securities called for redemption must be surrendered to the
Paying Agent in order to collect the Redemption Price;
(e) that, unless the Company defaults in making the redemption
payment, interest on Securities called for redemption ceases to accrue on
and after the Redemption Date and the only remaining right of the Holders
is to receive payment of the Redemption Price plus accrued interest to the
Redemption Date upon surrender of the Securities to the Paying Agent;
(f) that, if any Security is being redeemed in part, the portion of
the principal amount (equal to $1,000 in principal amount or any integral
multiple thereof) of such Security to be redeemed and that, on and after
the Redemption Date, upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion thereof
will be reissued; and
<PAGE> 36
29
(g) that, if any Security contains a CUSIP or other identification
number as provided in Section 2.10, no representation is being made as to
the correctness of the CUSIP or other identification number either as
printed on the Securities or as contained in the notice of redemption and
that reliance may be placed only on the other identification numbers
printed on the Securities.
At the Company's request (which request may be revoked by the
Company at any time prior to the time at which the Trustee shall have given such
notice to the Holders), made in writing to the Trustee at least five days before
mailing the notice to Holders referred to in Section 3.01, the Trustee shall
give such notice of redemption in the name and at the expense of the Company.
If, however, the Company gives such notice to the Holders, the Company shall
concurrently deliver to the Trustee an Officers' Certificate stating that such
notice has been given.
SECTION 3.05. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the Redemption Date and at the Redemption Price. Upon surrender of any
Securities to the Paying Agent, such Securities shall be paid at the Redemption
Price, plus accrued interest, if any, to the Redemption Date.
Notice of redemption shall be deemed to be given when mailed,
whether or not the Holder receives the notice. In any event, failure to give
such notice, or any defect therein, shall not affect the validity of the
proceedings for the redemption of Securities held by Holders to whom such notice
was properly given.
SECTION 3.06. Deposit of Redemption Price. Prior to any Redemption
Date, the Company shall deposit, or cause to be deposited, with the Paying Agent
(or, if the Company is acting as its own Paying Agent, shall segregate and hold
in trust as provided in Section 2.04) money sufficient to pay the Redemption
Price of and accrued interest on all Securities to be redeemed on that date
other than Securities or portions thereof called for redemption on that date
that have been delivered by the Company to the Trustee for cancellation.
SECTION 3.07. Payment of Securities Called for Redemption. If notice
of redemption has been given in the manner provided above, the Securities or
portion of Securities specified in such notice to be redeemed shall become due
and payable on the Redemption Date at the Redemption Price stated therein,
together with accrued interest to such Redemption Date, and on and after such
date (unless the Company shall default in the payment of such Securities at the
Redemption Price and accrued interest to the Redemption Date, in which case the
principal and Accumulated Interest Amount, until paid, shall bear interest from
the Redemption Date at the rate prescribed in the Securities), such Securities
shall cease to accrue interest. Upon surrender of any Security for redemption in
accordance with a notice of redemption, such Security shall be paid and redeemed
by the Company at the Redemption Price, together with accrued interest, if any,
to the Redemption Date; provided that installments of interest shall be payable
to the Holders registered as such at the close of business on the relevant
Regular Record Date that is on or prior to the Redemption Date.
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SECTION 3.08. Securities Redeemed in Part. Upon surrender of any
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder a new Security equal in principal
amount to the unredeemed portion of such surrendered Security.
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Securities. The Company shall pay the
principal of, premium, if any, and interest on the Securities on the dates and
in the manner provided in the Securities and this Indenture. An installment of
principal, premium, if any, or interest shall be considered paid on the date due
if the Trustee or Paying Agent (other than the Company, a Subsidiary of the
Company, or any Affiliate of any of them) holds on that date money designated
for and sufficient to pay the installment. If the Company or any Subsidiary of
the Company or any Affiliate of any of them, acts as Paying Agent, an
installment of principal, premium, if any, or interest shall be considered paid
on the due date if the entity acting as Paying Agent complies with the last
sentence of Section 2.04. As provided in Section 6.09, upon any bankruptcy or
reorganization procedure relative to the Company, the Trustee shall serve as the
Paying Agent and conversion agent, if any, for the Securities.
The Company shall pay interest on overdue principal, premium, if
any, and interest on overdue installments of interest, to the extent lawful, at
the rate per annum specified in the Securities.
SECTION 4.02. Maintenance of Office or Agency. The Company will
maintain in the Borough of Manhattan, The City of New York, an office or agency
(which may be an office of the Trustee, Registrar or co-Registrar or any
Affiliate of any of them) where Securities may be surrendered for registration
of transfer or exchange or for presentation for payment and where notices and
demands to or upon the Company in respect of the Securities and this Indenture
may be served. The Company will give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the address of the
Trustee set forth in Section 12.02.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency.
The Company hereby initially designates the Corporate Trust Office
of the Trustee, located in the Borough of Manhattan, The City of New York, as
such office of the Company in accordance with Section 2.03.
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SECTION 4.03. Limitation on Indebtedness. (a) The Company will not,
and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than the Securities and Indebtedness existing on the Closing
Date); provided that the Company and GST USA may Incur Indebtedness if, after
giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Indebtedness to EBITDA Ratio would be
greater than zero and less than 5:1.
Notwithstanding the foregoing, the Company and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(i) Indebtedness outstanding at any time (including, but not limited
to, Indebtedness under the Tomen Facility) in an aggregate principal
amount not to exceed $320 million, less any amount of Indebtedness
permanently repaid as provided under Section 4.12;
(ii) Indebtedness (A) to the Company evidenced by a promissory note
or (B) to any of its Restricted Subsidiaries; provided that any subsequent
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such Indebtedness not
permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness,
other than Indebtedness Incurred under clause (i), (ii), (iv), (v), (vii)
or (viii) of this paragraph, and any refinancings thereof in an amount not
to exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Securities or Indebtedness that
is pari passu with, or subordinated in right of payment to, the Securities
shall only be permitted under this clause (iii) if (A) in case the
Securities are refinanced in part, or the Indebtedness to be refinanced is
pari passu with the Securities, such new Indebtedness, by its terms or by
the terms of any agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made pari passu with, or
subordinate in right of payment to, the remaining Securities, (B) in case
the Indebtedness to be refinanced is subordinated in right of payment to
the Securities, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made subordinate in right of payment to the
Securities at least to the extent that the Indebtedness to be refinanced
is subordinated to the Securities and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced
or refunded, and the Average Life of such new Indebtedness is at least
equal to the remaining Average Life of the Indebtedness to be refinanced
or refunded; and provided further that in no event may Indebtedness of the
Company be refinanced by means of any Indebtedness of any Restricted
Subsidiary pursuant to this clause (iii);
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(iv) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business, (B) under Currency
Agreements and Interest Rate Agreements; provided that such agreements do
not increase the Indebtedness of the obligor outstanding at any time other
than as a result of fluctuations in foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder; and (C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of the Restricted Subsidiaries pursuant
to such agreements, in any case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose
of financing such acquisition), in a principal amount not to exceed the
gross proceeds actually received by the Company or any Restricted
Subsidiary in connection with such disposition;
(v) Indebtedness of the Company not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by the Company after
the Closing Date from the issuance and sale of its Capital Stock (other
than Redeemable Stock) to a Person other than a Subsidiary of the Company
to the extent such Net Cash Proceeds have not been used pursuant to clause
(C)(2) of the first paragraph or clauses (iii), (iv) or (vi) of the second
paragraph of Section 4.05 to make a Restricted Payment; provided that such
Indebtedness does not mature prior to the Stated Maturity of the
Securities and has an Average Life longer than the Securities;
(vi) Indebtedness Incurred to finance the cost (including, without
limitation, the cost of design, development, construction, acquisition,
installation or integration) of network assets (including, without
limitation, equipment and real property and leasehold improvements that
are necessary to install or operate network assets; provided that in no
event shall the cost of any such real property and leasehold improvements
financed hereby exceed 20% of the total cost of the related network
assets) or inventory purchased or leased by the Company or any of its
Restricted Subsidiaries after the Closing Date;
(vii) Indebtedness under one or more revolving credit or working
capital facilities in an aggregate principal amount outstanding at any
time not to exceed the lesser of (A) $50 million and (B) 75% of the
consolidated book value of the accounts receivable of the Company and its
Restricted Subsidiaries; and
(viii) Indebtedness of the Company or GST USA to the extent the
proceeds thereof are promptly (a) used to purchase Securities tendered in
an Offer to Purchase made as a result of a Change of Control or (b)
deposited to defease the Securities under Article Eight.
(b) For purposes of determining any particular amount of
Indebtedness under this Section 4.03, (1) Indebtedness Incurred under the Tomen
Facility on or prior to the Closing Date shall be treated as Incurred pursuant
to clause (i) of the second paragraph of this Section 4.03
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and (2) Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included. For purposes of determining compliance
with this Section 4.03, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
SECTION 4.04. Limitation on Senior Subordinated Indebtedness. The
Company will not Incur any Indebtedness, other than the Securities, that is
expressly made subordinated in right of payment to any Senior Indebtedness
unless such Indebtedness, by its terms and by the terms of any agreement or
instrument pursuant to which such Indebtedness is outstanding is expressly made
pari passu with, or subordinated in right of payment to, the Securities pursuant
to provisions substantially similar to those contained in Article Eleven;
provided, however, that the foregoing limitation shall not apply to distinctions
between categories of Senior Indebtedness that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all Senior
Indebtedness.
SECTION 4.05. Limitation on Restricted Payments. The Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or make any distribution on its Capital Stock
(other than dividends or distributions payable solely in shares of its or such
Restricted Subsidiary's Capital Stock (other than Redeemable Stock) of the same
class held by such holders or in options, warrants or other rights to acquire
such shares of Capital Stock) held by Persons other than the Company or any of
its Restricted Subsidiaries (and other than pro rata dividends or distributions
on Common Stock of Restricted Subsidiaries), (ii) purchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of the Company
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by Persons other than any Wholly Owned Restricted Subsidiaries,
(iii) make any voluntary or optional principal payment, or voluntary or optional
redemption, repurchase, defeasance, or other acquisition or retirement for
value, of Indebtedness of the Company that is subordinated in right of payment
to the Securities, or (iv) make any Investment, other than a Permitted
Investment, in any Person (such payments or any other actions described in
clauses (i) through (iv) being collectively "Restricted Payments") if, at the
time of, and after giving effect to, the proposed Restricted Payment: (A) a
Default or Event of Default shall have occurred and be continuing, (B) the
Company could not Incur at least $1.00 of Indebtedness under the first paragraph
of Section 4.03 or (C) the aggregate amount of all Restricted Payments (the
amount, if other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of such amount) (determined by
excluding income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on the first
day of the fiscal quarter immediately following the Closing Date and ending on
the last day of the last fiscal quarter preceding the Transaction Date for which
reports have been filed pursuant to Section 4.19 plus (2) the aggregate Net Cash
Proceeds received by the Company after the Closing Date from the
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issuance and sale permitted by this Indenture of its Capital Stock (other than
Redeemable Stock) to a Person who is not a Subsidiary of the Company, or from
the issuance to a Person who is not a Subsidiary of the Company of any options,
warrants or other rights to acquire Capital Stock of the Company (in each case,
exclusive of any Redeemable Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Securities), in each case except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause
(v) of the second paragraph of Section 4.03, plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments and
reductions in Investments made pursuant to clause (vi) of the second paragraph
of this Section 4.05) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary (except to the
extent any such payment is included in the calculation of Adjusted Consolidated
Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed the amount of Investments previously made by the
Company and its Restricted Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the Securities, including premium, if any, and accrued and
unpaid interest, with the proceeds of, or in exchange for, Indebtedness
Incurred under clause (iii) of the second paragraph of Section 4.03;
(iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company in exchange for, or out of the proceeds of a
substantially concurrent offering of, shares of Capital Stock (other than
Redeemable Stock) of the Company;
(iv) the acquisition of Indebtedness of the Company which is
subordinated in right of payment to the Securities, in exchange for, or
out of the proceeds of, a substantially concurrent offering of, shares of
the Capital Stock of the Company (other than Redeemable Stock);
(v) payments or distributions, in the nature of satisfaction of
dissenters' rights, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of Article
Five;
(vi) Investments in any Person or Persons (other than an Affiliate
(other than a Subsidiary) of the Company), the primary business of which
is related, ancillary or complementary to the business of the Company and
its Restricted Subsidiaries on the date of such Investments, in an
aggregate amount not to exceed $50 million plus, (a) in any
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fiscal year, an amount not to exceed 10% of the Company's Consolidated
EBITDA (if positive) for the immediately preceding fiscal year, (b) an
amount not to exceed the Net Cash Proceeds received by the Company after
May 13, 1997 from the issuance and sale permitted by this Indenture of its
Capital Stock (other than Redeemable Stock) to a Person that is not a
Subsidiary of the Company, except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (v) under Section 4.03 or to
make Restricted Payments pursuant to clause (C)(2) of the first paragraph
or clause (iii) or (iv) of this paragraph of this Section 4.05 and (c) the
net reduction in Investments in any Person made pursuant to this clause
(vi), except to the extent such reduction is included in the calculation
of Adjusted Consolidated Net Income; provided that the net reduction in
any such Investment shall not exceed the amount of Investments previously
made in such Person;
(vii) Investments by the Company or a Restricted Subsidiary made
pursuant to the second paragraph of Section 4.11, in an aggregate amount
not to exceed $25 million; and
(viii) cash payments in lieu of the issuance of fractional Common
Shares upon conversion (including mandatory conversion) of the Convertible
Notes provided for in the Convertible Notes Indenture or the Redeemable
Preferred Shares;
provided that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth herein.
Each Restricted Payment permitted pursuant to the preceding
paragraph (other than the Restricted Payment referred to in clause (ii) thereof
and an exchange of Capital Stock for Capital Stock or Indebtedness referred to
in clause (iii) or (iv) thereof), and the Net Cash Proceeds from any issuance of
Capital Stock referred to in clauses (iii), (iv) and (vi) shall be included in
calculating whether the conditions of clause (C) of the first paragraph of this
Section 4.05 have been met with respect to any subsequent Restricted Payments.
In the event the proceeds of an issuance of Capital Stock of the Company are
used for the redemption, repurchase or other acquisition of the Securities or
Indebtedness that is pari passu with the Securities, then the Net Cash Proceeds
of such issuance shall be included in clause (C) of the first paragraph of this
Section 4.05 only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
SECTION 4.06. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries. The Company will not, and will not permit any
Restricted Subsidiary to, create or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction of any kind on the ability
of any Restricted Subsidiary to (i) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or
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advances to the Company or any other Restricted Subsidiary or (iv) transfer any
of its property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date in this Indenture or any other
agreement in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the
encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to
the Holders than those encumbrances or restrictions that are then in
effect and that are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or assets
of such Person acquired by the Company or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or
the property or assets of such Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of this
Section 4.06, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by
virtue of any transfer of, agreement to transfer, option or right with
respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by this Indenture or (C)
arising or agreed to in the ordinary course of business, not relating to
any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any
Restricted Subsidiary in any manner material to the Company or any
Restricted Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant to
an agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock of, or property and assets of,
such Restricted Subsidiary;
(vi) with respect to any Development Company, imposed pursuant to or
in connection with any Indebtedness Incurred by such Development Company
to finance at least 50% of the total financing required for the
development and construction of all of such Development Company's
alternative access networks or any Indebtedness Incurred to refinance or
replace such Indebtedness; provided that (a) such Indebtedness (including
such refinancing Indebtedness) is permitted to be Incurred under Section
4.03, (b) such encumbrances and restrictions are no more restrictive in
any material respect than those encumbrances and restrictions existing
under the Tomen Facility as in effect on the Closing Date and (c) such
encumbrances and restrictions shall only apply to such Development Company
for so long as such Indebtedness (or such refinancing Indebtedness)
remains outstanding; or
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(vii) with respect to any Development Company (a "Restricted
Development Company"), imposed pursuant to or in connection with any
Indebtedness Incurred by another Development Company to finance at least
50% of the total financing required for the development and construction
of all of such other Development Company's alternative access networks or
any Indebtedness Incurred to refinance or replace such Indebtedness;
provided that (a) such encumbrances and restrictions shall not apply to
such Restricted Development Company prior to the occurrence of an event of
default under such Indebtedness (or refinancing Indebtedness), (b) such
Indebtedness (including such refinancing Indebtedness) is permitted to be
Incurred under Section 4.03, (c) such encumbrances and restrictions are no
more restrictive in any material respect than those contemplated by the
Tomen Facility as in effect on the Closing Date and (d) at least 50% of
the total financing required for the development and construction of all
of such Restricted Development Company's alternative access networks was
provided by the holder of the Indebtedness of such other Development
Company.
Nothing contained in this Section 4.06 shall prevent the Company or
any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in Section 4.10 or (2) restricting the sale
or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries.
SECTION 4.07. Limitation on the Issuance and Sale of Capital Stock
of Restricted Subsidiaries. The Company will not sell, and will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell any shares of
Capital Stock of a Restricted Subsidiary (including options, warrants or other
rights to purchase shares of such Capital Stock) except
(i) to the Company or a Wholly Owned Restricted Subsidiary;
(ii) issuances or sales to foreign nationals of shares of Capital
Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law;
(iii) if, immediately after giving effect to such issuance or sale,
such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary; or
(iv) a sale of Common Stock of Phoenix Fiber, and in connection and
concurrently with such sale, a sale of Common Stock of GST Tucson
Lightwave, Inc.; provided that the proceeds of any such sale under this
clause (iv) shall be applied in accordance with clause (A) or (B) of the
first paragraph of Section 4.12.
SECTION 4.08. Limitation on Issuances of Guarantees by Restricted
Subsidiaries. The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to this Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Securities by
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such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; provided that this paragraph shall not be applicable to
any Guarantee of any Restricted Subsidiary that (x) existed at the time such
Person became a Restricted Subsidiary and (y) was not Incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary. If
the Guaranteed Indebtedness is (A) pari passu with the Securities then the
Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Securities,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Securities.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company of all of the Company's
and each Restricted Subsidiary's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by this Indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
SECTION 4.09. Limitation on Transactions with Shareholders and
Affiliates. The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Company or any Restricted Subsidiary or with any Affiliate of the Company or any
Restricted Subsidiary, except upon fair and reasonable terms no less favorable
to the Company or such Restricted Subsidiary than could be obtained at the time
of such transaction or, if such transaction is pursuant to a written agreement,
at the time of the execution of the agreement providing therefor, in a
comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees (including through the issuance of shares
of Common Stock of the Company or options, warrants or other rights to acquire
such shares) to directors of the Company who are not employees of the Company or
any of its Subsidiaries; (iv) any payments or other transactions pursuant to any
tax-sharing agreement between the Company and any other Person with which the
Company files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by Section 4.05. Notwithstanding the
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foregoing, any transaction or series of transactions covered by the first
paragraph of this Section 4.09 and not covered by clauses (ii) through (vi) of
this paragraph, the aggregate amount of which exceeds $500,000 in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
SECTION 4.10. Limitation on Liens. The Company will not, and will
not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Lien on any of its assets or properties of any character, or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary
(collectively, "Protected Property"), without making effective provision for all
of the Securities and all other amounts due under this Indenture to be directly
secured equally and ratably with (or, if the obligation or liability to be
secured by such Lien is subordinated in right of payment to the Securities,
prior to) the obligation or liability secured by such Lien.
The foregoing limitation does not apply to
(i) Liens existing on the Closing Date;
(ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries securing the
Securities or created in favor of the Trustee or the Holders of the
Securities;
(iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such
other Restricted Subsidiary;
(iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii)
of the second paragraph of Section 4.03; provided that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets securing the Indebtedness
being refinanced;
(v) Liens upon or Capital Leases with respect to inventory, property
or equipment acquired or held by the Company or any of its Restricted
Subsidiaries to secure all or a part of the purchase price therefor or the
Company's or such Restricted Subsidiary's obligations under such lease;
provided that such Liens do not extend to or cover any property or assets
of the Company or any Restricted Subsidiary other than the inventory,
property or equipment acquired;
(vi) Liens on assets or property of, or the Capital Stock of, a
Development Company securing Indebtedness Incurred under clause (i) of the
second paragraph of Section 4.03 to finance at least 50% of the total
financing for the development and construction of the alternative access
networks owned by such Development Company; provided such Liens do not
extend to or cover any other property or assets of the Company or any of
its Restricted Subsidiaries;
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(vii) Liens securing Senior Indebtedness permitted to be Incurred
under this Indenture;
(viii) Liens on any property or assets of a Restricted Subsidiary
securing Indebtedness of such Restricted Subsidiary permitted to be
Incurred under this Indenture; or
(ix) Permitted Liens.
SECTION 4.11. Limitation on Investments. The Company will not, and
will not permit any Restricted Subsidiary to, (i) make any Investment in any
Person (including an Unrestricted Subsidiary) that during its most recent fiscal
year derived or in its current fiscal year is expected by the Board of Directors
of the Company to derive more than $250,000 in revenues from, or in its most
recent fiscal year spent or in its current fiscal year is expected by the Board
of Directors of the Company to spend more than $250,000 on, operations or
activities located outside the continental United States (other than in the
State of Hawaii or between the continental United States and the State of
Hawaii) (an "International Business") or (ii) acquire or own (directly or
indirectly), other than through an Unrestricted Subsidiary, any entity, business
or asset that is primarily located outside the continental United States (other
than in the State of Hawaii) or any right with respect to any of the foregoing
(an "International Asset").
Notwithstanding the foregoing, and subject to Section 4.05, the
Company and its Restricted Subsidiaries may make an Investment in an
Unrestricted Subsidiary which owns, intends to acquire or has rights with
respect to an International Business or International Asset provided that the
aggregate amount of such Investments does not exceed (i) $25 million plus, (A)
in any fiscal year, an amount not to exceed 10% of the Company's Consolidated
EBITDA (if positive) for the immediately preceding fiscal year and (B) an amount
not to exceed the Net Cash Proceeds received by the Company after May 13, 1997
from the issuance and sale permitted by this Indenture of its Capital Stock
(other than Redeemable Stock) to a Person who is not a Subsidiary of the
Company, less (ii) the amount of any Investments made pursuant to the first
paragraph, or the amount of any Restricted Payment made pursuant to clause
(iii), (iv) or (vi) of the second paragraph, of Section 4.05; provided that the
International Business or International Assets are related, ancillary or
complementary to the primary business of the Company and its Restricted
Subsidiaries on the date of such Investment.
SECTION 4.12. Limitation on Asset Sales. The Company will not, and
will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless
(i) the consideration received by the Company or such Restricted Subsidiary is
at least equal to the fair market value of the assets sold or disposed of and
(ii) at least 85% of the consideration received consists of cash or Temporary
Cash Investments; provided, however, that clause (ii) shall not apply to
long-term assignments of capacity in a network. In the event and to the extent
that the Net Cash Proceeds received by the Company or its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net
Tangible Assets (determined as of the date closest to the commencement of such
12-month period for which a consolidated balance sheet of the Company
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41
and its Subsidiaries has been prepared), then the Company shall or shall cause
the relevant Restricted Subsidiary to (i) within 12 months after the date Net
Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay Senior Indebtedness of the Company, Indebtedness of the Company ranking
pari passu with the Securities or Indebtedness of any Restricted Subsidiary, in
each case owing to a Person other than the Company or any of its Restricted
Subsidiaries or (B) invest an equal amount, or the amount not so applied
pursuant to clause (A) (or enter into a definitive agreement committing to so
invest within 12 months after the date of such agreement), in property or assets
of a nature or type or that are used in a business (or in a company having
property and assets of a nature or type, or engaged in a business) similar or
related to the nature or type of the property and assets of, or the business of,
the Company and its Restricted Subsidiaries existing on the date of such
investment (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) and (ii)
apply (no later than the end of the 12-month period referred to in clause (i))
such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i))
as provided in the following paragraph of this Section 4.12. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount
of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this Section 4.12 totals at least $5.0 million, the Company must commence, not
later than the fifteenth Business Day of such month, and consummate an Offer to
Purchase from the Holders on a pro rata basis an aggregate principal amount of
Securities equal to the Excess Proceeds on such date, at a purchase price equal
to 101% of the principal amount of the Securities plus the Accumulated Interest
Amount, plus, in each case, other accrued interest to the Payment Date.
SECTION 4.13. Repurchase of Securities upon a Change of Control. The
Company must commence, within 30 days of the occurrence of a Change of Control,
and consummate an Offer to Purchase for all Securities then outstanding, at a
purchase price equal to 101% of the principal amount thereof plus the
Accumulated Interest Amount, plus other accrued interest to the Payment Date.
Prior to the mailing of the notice to Holders commencing such Offer to Purchase,
but in any event within 30 days following any Change of Control, the Company
covenants to (i) repay in full all indebtedness of the Company that would
prohibit the repurchase of the Securities pursuant to such Offer to Purchase or
(ii) obtain any requisite consents under instruments governing any such
indebtedness of the Company to permit the repurchase of the Securities. The
Company shall first comply with the covenant in the preceding sentence before it
shall repurchase Securities pursuant to this Section 4.13.
SECTION 4.14. Existence. Subject to compliance with the terms of
Articles Four and Five of this Indenture, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect its
existence and the existence of each of its Restricted Subsidiaries in accordance
with the respective organizational documents of the Company and each such
Subsidiary and the rights (whether pursuant to charter, partnership
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certificate, agreement, statute or otherwise), material licenses and franchises
of the Company and each such Subsidiary; provided that the Company shall not be
required to preserve any such right, license or franchise, or the existence of
any Restricted Subsidiary (other than of the Company), if the maintenance or
preservation thereof is no longer desirable in the conduct of the business of
the Company and its Restricted Subsidiaries taken as a whole.
SECTION 4.15. Payment of Taxes and Other Claims. The Company will
pay or discharge and shall cause each of its Subsidiaries to pay or discharge,
or cause to be paid or discharged, before the same shall become delinquent (i)
all material taxes, assessments and governmental charges levied or imposed upon
(a) the Company or any such Subsidiary, (b) the income or profits of any such
Subsidiary which is a corporation or (c) the property of the Company or any such
Subsidiary and (ii) all material lawful claims for labor, materials and supplies
that, if unpaid, might by law become a lien upon the property of the Company or
any such Subsidiary; provided that the Company shall not be required to pay or
discharge, or cause to be paid or discharged, any such tax, assessment, charge
or claim the amount, applicability or validity of which is being contested in
good faith by appropriate proceedings and for which adequate reserves have been
established.
SECTION 4.16. Maintenance of Properties and Insurance. The Company
will cause all properties used or useful in the conduct of its business or the
business of any of its Restricted Subsidiaries, to be maintained and kept in
reasonable condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the reasonable
business judgment of the Company may be necessary so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times; provided that nothing in this Section 4.16 shall prevent the Company or
any such Subsidiary from discontinuing the use, operation or maintenance of any
of such properties or disposing of any of them, if such discontinuance or
disposal is, in the reasonable business judgment of the Company, desirable in
the conduct of the business of the Company or such Subsidiary.
The Company will provide or cause to be provided, for itself and its
Restricted Subsidiaries, insurance (including appropriate self-insurance)
against loss or damage of the kinds customarily insured against by corporations
similarly situated and owning like properties, including, but not limited to,
products liability insurance and public liability insurance, with reputable
insurers or with the government of the United States of America, or an agency or
instrumentality thereof, in such amounts, with such deductibles and by such
methods as shall be customary for corporations similarly situated in the
industry in which the Company or such Restricted Subsidiary, as the case may be,
is then conducting business.
SECTION 4.17. Notice of Defaults. In the event that the Company
becomes aware of any Default or Event of Default, the Company, promptly after it
becomes aware thereof, will give written notice thereof to the Trustee.
SECTION 4.18. Compliance Certificates. (a) The Company shall deliver
to the Trustee, within 90 days after the end of the Company's fiscal year, an
Officers' Certificate
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stating whether or not the signers know of any Default or Event of Default that
occurred during such fiscal year. Such certificates shall contain a
certification from the principal executive officer, principal financial officer
or principal accounting officer of the Company that a review has been conducted
of the activities of the Company and the Restricted Subsidiaries and the
Company's and the Restricted Subsidiaries' performance under this Indenture and
that, to the best knowledge of such officer, the Company has complied with all
conditions and covenants under this Indenture. For purposes of this Section
4.18, such compliance shall be determined without regard to any period of grace
or requirement of notice provided under this Indenture. If any such officer
knows of such a Default or Event of Default, the certificate shall describe any
such Default or Event of Default and its status.
(b) The Company shall deliver to the Trustee, within 90 days after
the end of its fiscal year, a certificate signed by the Company's independent
certified public accountants stating (i) that their audit examination has
included a review of the terms of this Indenture and the Securities as they
relate to accounting matters, (ii) that they have read the most recent Officers'
Certificate delivered to the Trustee pursuant to paragraph (a) of this Section
4.18 and (iii) whether, in connection with their audit examination, anything
came to their attention that caused them to believe that the Company was not in
compliance with any of the terms, covenants, provisions or conditions of Article
Four and Section 5.01 of this Indenture as they pertain to accounting matters
and, if any Default or Event of Default has come to their attention, specifying
the nature and period of existence thereof; provided that such independent
certified public accountants shall not be liable in respect of such statement by
reason of any failure to obtain knowledge of any such Default or Event of
Default that would not be disclosed in the course of an audit examination
conducted in accordance with generally accepted auditing standards in effect at
the date of such examination.
(c) Within 90 days of the end of each of the Company's fiscal years,
the Company shall deliver to the Trustee a list of all Significant Subsidiaries.
The Trustee shall have no duty with respect to any such list except to keep it
on file and make it available for inspection by the Holders upon reasonable
notice to the Trustee and during normal business hours.
SECTION 4.19. Commission Reports and Reports to Holders. Whether or
not the Company is required to file reports with the Commission, if any
Securities are outstanding, the Company shall file with the Commission all such
reports and other information as it would be required to file with the
Commission by Sections 13(a) or 15(d) under the Exchange Act. The Company shall
supply the Trustee and each Holder of Securities or shall supply to the Trustee
for forwarding to each Holder, without cost to such Holder or the Trustee,
copies of such reports or other information.
SECTION 4.20. Waiver of Stay, Extension or Usury Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury law or other law
that would prohibit or forgive the Company from paying all or any portion of the
principal of, premium, if any, or interest on the Securities as contemplated
herein, wherever enacted, now or at any time hereafter in force, or that may
affect
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the covenants or the performance of this Indenture; and (to the extent that it
may lawfully do so) the Company hereby expressly waives all benefit or advantage
of any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
SECTION 4.21. Additional Amounts. Any payments made by the Company
under or with respect to the Securities will be made free and clear of and
without withholding or deduction for or on account of any present or future tax,
duty, levy, impost, assessment or other governmental charge (including
penalties, interest and other liabilities related thereto) imposed or levied by
or on behalf of the Government of Canada or of any province or territory thereof
or by any authority or agency therein or thereof having power to tax
(hereinafter "Taxes"), unless the Company is required to withhold or deduct
Taxes by law or by the interpretation or administration thereof. If the Company
is required to withhold or deduct any amount for or on account of Taxes from any
payment made under or with respect to the Securities, the Company will pay such
additional amounts ("Additional Amounts") as may be necessary, so that the net
amount received by each Holder of Securities (including Additional Amounts)
after such withholding or deduction will not be less than the amount such Holder
would have received if such Taxes had not been withheld or deducted; provided,
however, that no Additional Amounts will be payable with respect to a payment
made to a Holder (an "Excluded Holder") (i) with which the Company does not deal
at arm's length (within the meaning of the Income Tax Act (Canada)) at the time
of making such payment, or (ii) which is subject to such Taxes by reason of its
being connected with Canada or any province or territory thereof otherwise than
solely by reason of the Holder's activity in connection with purchasing the
Securities, by the mere holding of Securities or by reason of the receipt of
payments thereunder. The Company will, upon written request of any Holder (other
than an Excluded Holder), reimburse such Holder, for the amount of (i) any Taxes
so levied or imposed and paid by such Holder as a result of payments made under
or with respect to the Securities and (ii) any Taxes so levied or imposed with
respect to any reimbursement under the foregoing clause (i), but excluding any
such Taxes on such Holder's net income so that the net amount received by such
Holder after such reimbursement will not be less than the net amount the Holder
would have received if Taxes on such reimbursement had not been imposed.
At least 30 days prior to each date on which any payment under or
with respect to the Securities is due and payable, if the Company will be
obligated to pay Additional Amounts with respect to such payment, the Company
will deliver to the Trustee an Officers' Certificate stating the fact that such
Additional Amounts will be payable and the amounts so payable and will set forth
such other information necessary to enable the Trustee to pay such Additional
Amounts to Holders on the payment date. Whenever in this Indenture there is
mentioned, in any context, the payment of principal (or premium, if any),
Redemption Price, interest or any other amount payable under or with respect to
any Security, such mention shall be deemed to include mention of the payment of
Additional Amounts to the extent that, in such context, Additional Amounts are,
were or would be payable in respect thereof.
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ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. Consolidation, Merger and Sale of Assets. The Company
shall not consolidate with, merge with or into, or sell, convey, transfer, lease
or otherwise dispose of all or substantially all of its property and assets (as
an entirety or substantially an entirety in one transaction or a series of
related transactions) to, any Person (other than a consolidation or merger with
or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided
that, in connection with any such merger or consolidation, no consideration
(other than Common Stock in the surviving Person) shall be issued or distributed
to the stockholders of the Company) or permit any Person to merge with or into
the Company unless:
(i) the Company shall be the continuing Person, or the Person (if
other than the Company) formed by such consolidation or into which the
Company is merged or that acquired or leased such property and assets of
the Company shall be a corporation organized and validly existing under
the laws of the United States of America or any jurisdiction thereof and
shall expressly assume, by a supplemental indenture, executed and
delivered to the Trustee, all of the obligations of the Company on all of
the Securities and under this Indenture;
(ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a pro
forma basis, the Company or any Person becoming the successor obligor of
the Securities shall have a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to such
transaction;
(iv) immediately after giving effect to such transaction on a pro
forma basis the Company or any Person becoming the successor obligor of
the Securities could Incur at least $1.00 of Indebtedness under the first
paragraph of Section 4.03(a); and
(v) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clauses (iii) and (iv)) and Opinion of Counsel, in each case stating that
such consolidation, merger or transfer and such supplemental indenture
complies with this provision and that all conditions precedent provided
for herein relating to such transaction have been complied with; provided,
however, that clauses (iii) and (iv) above do not apply if, in the good
faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal
purpose of such transaction is to change the jurisdiction of incorporation
of the Company to a state in the United States and any such transaction
shall not have as one of its purposes the evasion of the foregoing
limitations.
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SECTION 5.02. Successor Substituted. Upon any consolidation or
merger, or any sale, conveyance, transfer or other disposition of all or
substantially all of the property and assets of the Company in accordance with
Section 5.01 of this Indenture, the successor Person formed by such
consolidation or into which the Company is merged or to which such sale,
conveyance, transfer or other disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company herein; provided that the Company shall not be released from its
obligations to pay the principal of, premium, if any, or interest on the
Securities in the case of a lease of all or substantially all of its property
and assets.
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default. An "Event of Default" shall occur
with respect to the Securities if:
(a) the Company defaults in the payment of principal of (or premium,
if any, on) any Security when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise;
(b) the Company defaults in the payment of interest on any Security
when the same becomes due and payable, and such default continues for a
period of 30 days;
(c) the Company defaults in the performance of or breaches any other
covenant or agreement in this Indenture or under the Securities and such
default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of Securities;
(d) there occurs with respect to any issue or issues of Indebtedness
of the Company or any Significant Subsidiary having an outstanding
principal amount of $5 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or (II) the failure to make a principal payment at
the final (but not any interim) fixed maturity and such defaulted payment
shall not have been made, waived or extended within 30 days of such
payment default;
(e) any final judgment or order (not covered by insurance) for the
payment of money in excess of $5 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against the Company or any Significant Subsidiary and shall not
be paid or discharged, and there shall be any period of 30 consecutive
days following
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entry of the final judgment or order that causes the aggregate amount for
all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of
enforcement of such final judgment or order, by reason of a pending appeal
or otherwise, shall not be in effect;
(f) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant
Subsidiary or for all or substantially all of the property and assets of
the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary
and, in each case, such decree or order shall remain unstayed and in
effect for a period of 30 consecutive days; or
(g) the Company or any Significant Subsidiary (A) commences a
voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents
to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the
Company or any Significant Subsidiary or for all or substantially all of
the property and assets of the Company or any Significant Subsidiary or
(C) effects any general assignment for the benefit of creditors.
SECTION 6.02. Acceleration. If an Event of Default (other than an
Event of Default specified in clause (f) or (g) of Section 6.01 that occurs with
respect to the Company) occurs and is continuing under this Indenture, the
Trustee or the Holders of at least 25% in aggregate principal amount of the
outstanding Securities, by written notice to the Company (and to the Trustee if
such notice is given by the Holders), may, and the Trustee at the request of
such Holders shall, declare the principal of, premium, if any, and accrued
interest, on the Securities to be immediately due and payable. Upon a
declaration of acceleration, such principal, premium, if any, and accrued
interest shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (d) of Section 6.01
has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (d) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (f) or (g) of
Section 6.01 occurs with respect to the Company the principal of, premium, if
any, and accrued interest on the Securities then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
SECTION 6.03. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may, and at the direction of the Holders of not less
than a majority of the outstanding principal amount of the Securities shall,
pursue any available remedy by
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proceeding at law or in equity to collect the payment of principal of, premium,
if any, or interest on the Securities or to enforce the performance of any
provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess
any of the Securities or does not produce any of them in the proceeding.
SECTION 6.04. Waiver of Past Defaults. Subject to Sections 6.02,
6.07 and 9.02, the Holders of at least a majority in principal amount of the
outstanding Securities, by written notice to the Company and to the Trustee, may
waive all past Defaults and Events of Default and rescind and annul a
declaration of acceleration (except a Default in the payment of principal of,
premium, if any, or interest on any Security as specified in clause (a) or (b)
of Section 6.01 or in respect of a covenant or provision of this Indenture which
cannot be modified or amended without the consent of the holder of each
outstanding Security affected) if (i) all existing Events of Default, other than
the nonpayment of principal of, premium, if any, or interest on the Securities
that have become due solely by such declaration of acceleration, have been cured
or waived and (ii) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction. Upon any such waiver, such Default shall
cease to exist, and any Event of Default arising therefrom shall be deemed to
have been cured, for every purpose of this Indenture; but no such waiver shall
extend to any subsequent or other Default or Event of Default or impair any
right consequent thereto.
SECTION 6.05. Control by Majority. The Holders of at least a
majority in aggregate principal amount of the outstanding Securities may direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture, that may involve the Trustee in personal liability, or that
the Trustee determines in good faith may be unduly prejudicial to the rights of
Holders of Securities not joining in the giving of such direction and may take
any other action it deems proper that is not inconsistent with any such
direction received from Holders of Securities pursuant to this Section 6.05.
SECTION 6.06. Limitation on Suits. A Holder may not pursue any
remedy with respect to this Indenture or the Securities unless:
(i) the Holder gives the Trustee written notice of a continuing
Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of
outstanding Securities make a written request to the Trustee to pursue the
remedy;
(iii) such Holder or Holders offer and, if requested provide, the
Trustee indemnity satisfactory to the Trustee against any costs,
liabilities or expenses which may be incurred in compliance with such
request;
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49
(iv) the Trustee does not comply with the request within 60 days
after receipt of the written request and the offer of indemnity; and
(v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Securities do not give the
Trustee a direction that is inconsistent with the request.
For purposes of Section 6.05 of this Indenture and this Section
6.06, the Trustee shall comply with TIA Section 316(a) in making any
determination of whether the Holders of the required aggregate principal amount
of outstanding Securities have concurred in any request or direction of the
Trustee to pursue any remedy available to the Trustee or the Holders with
respect to this Indenture or the Securities or otherwise under the law.
A Holder may not use this Indenture to prejudice the rights of
another Holder or to obtain a preference or priority over such other Holder.
SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder of a Security to
receive payment of the principal of, premium, if any, or interest on such
Security, or to bring suit for the enforcement of any such payment, on or after
the due date expressed in such Security, shall not be impaired or affected
without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of Default in
payment of principal, premium or interest specified in clause (a), (b) or (c) of
Section 6.01 occurs and is continuing, the Trustee may recover judgment in its
own name and as trustee of an express trust against the Company or any other
obligor of the Securities for the whole amount of principal, premium, if any,
and accrued interest remaining unpaid, together with interest on overdue
principal, premium, if any, and, to the extent that payment of such interest is
lawful, interest on overdue installments of interest, in each case at the rate
specified in the Securities, and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07) and the Holders allowed in any judicial proceedings relative to
the Company (or any other obligor of the Securities), its creditors or its
property and shall be entitled and empowered to collect and receive any monies,
securities or other property payable or deliverable upon conversion or exchange
of the Securities or upon any such claims and to distribute the same, and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or other
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due to it for the
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reasonable compensation, expenses, disbursements and advances of the Trustee,
its agent and counsel, and any other amounts due the Trustee under Section 7.07.
Nothing herein contained shall be deemed to empower the Trustee to authorize or
consent to, or accept or adopt on behalf of any Holder, any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 6.10. Priorities. If the Trustee collects any money pursuant
to this Article Six, it shall pay out the money in the following order:
First: to the Trustee for all amounts due under Section 7.07;
Second: to the Holders for amounts then due and unpaid for principal
of, premium, if any, and interest on the Securities in respect of which or
for the benefit of which such money has been collected, ratably, without
preference or priority of any kind, according to the amounts due and
payable on such Securities for principal, premium, if any, and interest,
respectively; and
Third: to the Company or any other obligors of the Securities, as
their interests may appear, or as a court of competent jurisdiction may
direct.
The Trustee, upon prior written notice to the Company, may fix a
record date and payment date for any payment to Holders pursuant to this Section
6.10.
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court may require any party
litigant in such suit to file an undertaking to pay the costs of the suit, and
the court may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section 6.11
does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section
6.07 of this Indenture, or a suit by Holders of more than 10% in principal
amount of the outstanding Securities.
SECTION 6.12. Restoration of Rights and Remedies. If the Trustee or
any Holder has instituted any proceeding to enforce any right or remedy under
this Indenture and such proceeding has been discontinued or abandoned for any
reason, or has been determined adversely to the Trustee or to such Holder, then,
and in every such case, subject to any determination in such proceeding, the
Company, the Trustee and the Holders shall be restored severally and
respectively to their former positions hereunder and thereafter all rights and
remedies of the Company, Trustee and the Holders shall continue as though no
such proceeding had been instituted.
SECTION 6.13. Rights and Remedies Cumulative. Except as otherwise
provided with respect to the replacement or payment of mutilated, destroyed,
lost or wrongfully taken Securities in Section 2.06, no right or remedy herein
conferred upon or reserved to the Trustee
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51
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 6.14. Delay or Omission Not Waiver. No delay or omission of
the Trustee or of any Holder to exercise any right or remedy accruing upon any
Event of Default shall impair any such right or remedy or constitute a waiver of
any such Event of Default or an acquiescence therein. Every right and remedy
given by this Article Six or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General. The duties and responsibilities of the
Trustee shall be as provided by the TIA and as set forth herein. Notwithstanding
the foregoing, no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it. Whether or not herein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Article Seven.
SECTION 7.02. Certain Rights of Trustee. Subject to TIA Sections
315(a) through (d):
(i) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper person. The Trustee need not investigate any fact or matter
stated in the document and may in good faith conclusively rely as to the
truth of the statements and the correctness of the opinions therein;
(ii) before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in
reliance on such certificate, opinion and/or an accountants' certificate;
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(iii) the Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any attorney or
agent appointed with due care;
(iv) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to
the Trustee security or indemnity reasonably satisfactory to it against
the costs, expenses and liabilities that might be incurred by it in
compliance with such request or direction;
(v) the Trustee shall not be liable for any action it takes or omits
to take in good faith that it believes to be authorized or within its
rights or powers or for any action it takes or omits to take in accordance
with the direction of the Holders of a majority in principal amount of the
outstanding Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture; provided that the Trustee's conduct does not constitute
negligence or bad faith;
(vi) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(vii) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company personally or by agent or attorney; and
(viii) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Order and any resolution of
the Board of Directors may be sufficiently evidenced by a Board
Resolution.
SECTION 7.03. Individual Rights of Trustee. The Trustee, in its
individual or any other capacity, may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not the Trustee. Any Agent may do the same with like
rights. However, the Trustee is subject to TIA Sections 310(b) and 311.
SECTION 7.04. Trustee's Disclaimer. The Trustee (i) makes no
representation as to the validity or adequacy of this Indenture or the
Securities, (ii) shall not be accountable for
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the Company's use or application of the proceeds from the Securities and (iii)
shall not be responsible for any statement in the Securities other than its
certificate of authentication.
SECTION 7.05. Notice of Default. If any Default or any Event of
Default occurs and is continuing and if such Default or Event of Default is
known to an officer assigned to administer corporate trust matters of the
Trustee, the Trustee shall mail to each Holder in the manner and to the extent
provided in TIA Section 313(c) notice of the Default or Event of Default within
45 days after it occurs, unless such Default or Event of Default has been cured;
provided, however, that, except in the case of a default in the payment of the
principal of, premium, if any, or interest on any Security, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the interest of the Holders.
SECTION 7.06. Reports by Trustee to Holders. Within 60 days after
each May 15, beginning with May 15, 1998, the Trustee shall mail to each Holder
as provided in TIA Section 313(c) a brief report that complies with TIA Section
313(a) dated as of such May 15, if required by TIA Section 313(a).
SECTION 7.07. Compensation and Indemnity. The Company shall pay to
the Trustee from time to time such compensation as shall be agreed upon in
writing for its services. The compensation of the Trustee shall not be limited
by any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable out-of-pocket expenses
(including costs of collection) and advances incurred or made by the Trustee.
Such expenses shall include the reasonable compensation and expenses of the
Trustee's agents and counsel.
The Company shall indemnify the Trustee for, and hold it harmless
against, any loss or liability or expense incurred by it without negligence or
bad faith on its part in connection with the acceptance or administration of
this Indenture and its duties under this Indenture and the Securities,
including, without limitation, the costs and expenses of defending itself
against any claim or liability and of complying with any process served upon it
or any of its officers in connection with the exercise or performance of any of
its powers or duties under this Indenture and the Securities.
To secure the Company's payment obligations in this Section 7.07,
the Trustee shall have a lien prior to the Securities on all money or property
held or collected by the Trustee, in its capacity as Trustee, except money or
property held in trust to pay principal of, premium, if any, and interest on
particular Securities.
If the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in clause (f) or (g) of Section
6.01, the expenses and the compensation for the services will be intended to
constitute expenses of administration under Title 11 of the United States
Bankruptcy Code or any applicable federal or state law for the relief of
debtors.
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SECTION 7.08. Replacement of Trustee. A resignation or removal of
the Trustee and appointment of a successor Trustee shall become effective only
upon the successor Trustee's acceptance of appointment as provided in this
Section 7.08.
The Trustee may resign at any time by so notifying the Company in
writing at least 30 days prior to the date of the proposed resignation. The
Holders of a majority in principal amount of the outstanding Securities may
remove the Trustee by so notifying the Trustee in writing and may appoint a
successor Trustee with the consent of the Company. The Company may at any time
remove the Trustee, by Company Order given at least 30 days prior to the date of
the proposed removal if: (i) the Trustee is no longer eligible under Section
7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent; (iii) a receiver
or other public officer takes charge of the Trustee or its property; or (iv) the
Trustee becomes incapable of acting.
If the Trustee resigns or is removed, or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the outstanding Securities may appoint a
successor Trustee to replace the successor Trustee appointed by the Company. If
the successor Trustee does not deliver its written acceptance required by the
next succeeding paragraph of this Section 7.08 within 30 days after the retiring
Trustee resigns or is removed, the retiring Trustee, the Company or the Holders
of a majority in principal amount of the outstanding Securities may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after the
delivery of such written acceptance, subject to the lien provided in Section
7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee
to the successor Trustee, (ii) the resignation or removal of the retiring
Trustee shall become effective and (iii) the successor Trustee shall have all
the rights, powers and duties of the Trustee under this Indenture. A successor
Trustee shall mail notice of its succession to each Holder.
If the Trustee is no longer eligible under Section 7.10, any Holder
who satisfies the requirements of TIA Section 310(b) may petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee.
The Company shall give notice of any resignation and any removal of
the Trustee and each appointment of a successor Trustee to all Holders. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 shall continue indefinitely
for the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business
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55
to, another corporation or national banking association, the resulting,
surviving or transferee corporation or national banking association without any
further act shall be the successor Trustee with the same effect as if the
successor Trustee had been named as the Trustee herein.
SECTION 7.10. Eligibility. This Indenture shall always have a
Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee
shall have a combined capital and surplus of at least $25,000,000 as set forth
in its most recent published annual report of condition.
SECTION 7.11. Money Held in Trust. The Trustee shall not be liable
for interest on any money received by it except as the Trustee may agree in
writing with the Company. Money held in trust by the Trustee need not be
segregated from other funds except to the extent required by law and except for
money held in trust under Article Eight of this Indenture.
SECTION 7.12. Withholding Taxes. The Trustee, as agent for the
Company, shall exclude and withhold from each payment of principal and interest
and other amounts due hereunder or under the Securities any and all withholding
taxes applicable thereto as required by law. The Trustee agrees to act as such
withholding agent and, in connection therewith, whenever any present or future
taxes or similar charges are required to be withheld with respect to any amounts
payable in respect of the Securities, to withhold such amounts and timely pay
the same to the appropriate authority in the name of and on behalf of the
holders of the Securities, that it will file any necessary withholding tax
returns or statements when due, and that, as promptly as possible after the
payment thereof, it will deliver to each holder of a Security appropriate
documentation showing the payment thereof, together with such additional
documentary evidence as such holders may reasonably request from time to time.
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations. Except as
otherwise provided in this Section 8.01, the Company may terminate the Company's
obligations under the Securities and this Indenture if:
(i) all Securities previously authenticated and delivered (other
than destroyed, lost or stolen Securities that have been replaced or
Securities that are paid pursuant to Section 4.01 or Securities for whose
payment money or securities have theretofore been held in trust and
thereafter repaid to the Company, as provided in Section 8.05) have been
delivered to the Trustee for cancellation and the Company has paid all
sums payable by it hereunder; or
(ii) (A) the Securities mature within one year or all of them are to
be called for redemption within one year under arrangements satisfactory
to the Trustee for giving the notice of redemption, (B) the Company
irrevocably deposits in trust with the Trustee
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56
during such one-year period, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee, as trust
funds solely for the benefit of the Holders for that purpose, money or
U.S. Government Obligations sufficient (in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee), without consideration of
any reinvestment of any interest thereon, to pay principal, premium, if,
any, and interest on the Securities to maturity or redemption, as the case
may be, and to pay all other sums payable by it hereunder, (C) no Default
or Event of Default with respect to the Securities shall have occurred and
be continuing on the date of such deposit, (D) such deposit will not
result in a breach or violation of, or constitute a default under, this
Indenture or any other agreement or instrument to which the Company is a
party or by which it is bound and (E) the Company has delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, in each case
stating that all conditions precedent provided for herein relating to the
satisfaction and discharge of this Indenture have been complied with.
With respect to the foregoing clause (i), the Company's obligations
under Section 7.07 shall survive. With respect to the foregoing clause (ii), the
Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.11, 4.01,
4.02, 4.21, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Securities
are no longer outstanding. Thereafter, only the Company's obligations in
Sections 7.07, 8.05 and 8.06 shall survive. After any such irrevocable deposit,
the Trustee upon request shall acknowledge in writing the discharge of the
Company's obligations under the Securities and this Indenture except for those
surviving obligations specified above.
SECTION 8.02. Defeasance and Discharge of Indenture. The Company
will be deemed to have paid and the Company will be discharged from any and all
obligations in respect of the Securities on the 123rd day (or, to the extent
applicable under clause (B) below, one year) after the deposit referred to in
clause (A) of this Section 8.02 if:
(A) the Company has irrevocably deposited or caused to be
irrevocably deposited with the Trustee (or another trustee satisfying the
requirements of Section 7.10) and conveyed all right, title and interest
for the benefit of the Holders, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee as trust funds
in trust, specifically pledged to the Trustee for the benefit of the
Holders as security for payment of the principal of, premium, if any, and
interest, if any, on the Securities, and dedicated solely to, the benefit
of the Holders, in and to (1) money in an amount, (2) U.S. Government
Obligations that, through the payment of interest, premium, if any, and
principal in respect thereof in accordance with their terms, will provide,
not later than one day before the due date of any payment referred to in
this clause (A), money in an amount or (3) a combination thereof in an
amount sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, without
consideration of the reinvestment of such interest and after payment of
all federal, state and local taxes or other charges and assessments in
respect thereof payable by the Trustee, the principal of, premium, if any,
and accrued interest on the outstanding
<PAGE> 64
57
Securities at the Stated Maturity of such principal or interest; provided
that the Trustee shall have been irrevocably instructed to apply such
money or the proceeds of such U.S. Government Obligations to the payment
of such principal, premium, if any, and interest with respect to the
Securities;
(B) the Company shall have delivered to the Trustee (i) either (x)
an Opinion of Counsel to the effect that Holders will not recognize
income, gain or loss for United States federal income tax purposes as a
result of the Company's exercise of its option under this Section 8.02 and
will be subject to United States federal income tax on the same amount and
in the same manner and at the same times as would have been the case if
such option had not been exercised, which Opinion of Counsel must be based
upon (and accompanied by a copy of) a ruling of the United States Internal
Revenue Service to the same effect unless there has been a change in
applicable United States federal income tax law after the Closing Date
such that a ruling is no longer required or (y) a ruling directed to the
Trustee received from the United States Internal Revenue Service to the
same effect as the aforementioned Opinion of Counsel; (ii) an Opinion of
Counsel or a ruling from Revenue Canada, Customs, Excise & Taxation to the
effect that Holders will not recognize income, gain or loss for Canadian
federal, provincial or territorial income tax or other tax purposes as a
result of such deposit and defeasance and will be subject to Canadian
federal or provincial income tax and other tax on the same amounts, in the
same manner and at the same times as would have been the case had such
deposit and defeasance not occurred (and for purposes of such opinion,
such Canadian counsel shall assume that Holders of the Securities include
Holders who are not resident in Canada); and (iii) an Opinion of Counsel
to the effect that (x) the creation of the defeasance trust does not
violate the Investment Company Act of 1940 and (y) after the passage of
123 days following the deposit (except, with respect to any trust funds
for the account of any Holder who may be deemed to be an "insider" for
purposes of the United States Bankruptcy Code, after one year following
the deposit), the trust funds will not be subject to the effect of Section
547 of the United States Bankruptcy Code or Section 15 of the New York
Debtor and Creditor Law in a case commenced by or against the Company
under either such statute, and either (I) the trust funds will no longer
remain the property of the Company (and therefore will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally) or (II) if a court
were to rule under any such law in any case or proceeding that the trust
funds remained property of the Company (a) assuming such trust funds
remained in the possession of the Trustee prior to such court ruling to
the extent not paid to the Holders, the Trustee will hold, for the benefit
of the Holders, a valid and perfected security interest in such trust
funds that is not avoidable in bankruptcy or otherwise (except for the
effect of Section 552(b) of the United States Bankruptcy Code on interest
on the trust funds accruing after the commencement of a case under such
statute), (b) the Holders will be entitled to receive adequate protection
of their interests in such trust funds if such trust funds are used in
such case or proceeding and (c) no property, rights in property or other
interests granted to the Trustee or the Holders in exchange for, or with
respect to, such trust funds will be subject to any prior rights of
holders of other Indebtedness of the Company or any of its Subsidiaries;
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(C) immediately after giving effect to such deposit on a pro forma
basis, no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or during the period ending on the
123rd day (or one year) after the date of such deposit, and such deposit
shall not result in a breach or violation of, or constitute a default
under, any other agreement or instrument to which the Company or any of
its respective Subsidiaries is a party or by which the Company or any of
its respective Subsidiaries is bound;
(D) if the Securities are then listed on a national securities
exchange, the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Securities will not be delisted as a result
of such deposit, defeasance and discharge; and
(E) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02 have been complied with.
Notwithstanding the foregoing, prior to the end of the 123-day (or
one year) period referred to in clause (B)(iii)(y) of this Section 8.02, none of
the Company's obligations under this Indenture shall be discharged. Subsequent
to the end of such 123-day (or one year) period with respect to this Section
8.02, the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.11,
4.01, 4.02, 4.21, 7.07, 7.08, 8.05 and 8.06 shall survive until the Securities
are no longer outstanding. Thereafter, only the Company's obligations in
Sections 7.07, 8.05 and 8.06 shall survive. If and when a ruling from the United
States Internal Revenue Service or an Opinion of Counsel referred to in clause
(B)(i) of this Section 8.02 may be provided specifically without regard to, and
not in reliance upon, the continuance of the Company's obligations under Section
4.01, then the Company's obligations under such Section 4.01 shall cease upon
delivery to the Trustee of such ruling or Opinion of Counsel and compliance with
the other conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02.
After any such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Securities and this Indenture except for those surviving obligations in the
immediately preceding paragraph.
SECTION 8.03. Defeasance of Certain Obligations. The Company may
omit to comply with any term, provision or condition set forth in clauses (iii)
and (iv) of Section 5.01 and Sections 4.03 through 4.13, and clause (c) of
Section 6.01 with respect to clauses (iii) and (iv) of Section 5.01 and Sections
4.03 through 4.13, and clauses (d) and (e) of Section 6.01 shall be deemed not
to be Events of Default, in each case with respect to the outstanding Securities
if:
(i) the Company has irrevocably deposited or caused to be
irrevocably deposited with the Trustee (or another trustee satisfying the
requirements of Section 7.10) and conveyed all right, title and interest
to the Trustee for the benefit of the Holders, under the terms of an
irrevocable trust agreement in form and substance satisfactory to the
<PAGE> 66
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Trustee as trust funds in trust, specifically pledged to the Trustee for
the benefit of the Holders as security for payment of the principal of,
premium, if any, and interest, if any, on the Securities, and dedicated
solely to, the benefit of the Holders, in and to (A) money in an amount,
(B) U.S. Government Obligations that, through the payment of interest and
principal in respect thereof in accordance with their terms, will provide,
not later than one day before the due date of any payment referred to in
this clause (i), money in an amount or (C) a combination thereof in an
amount sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, without
consideration of the reinvestment of such interest and after payment of
all federal, state and local taxes or other charges and assessments in
respect thereof payable by the Trustee, the principal of, premium, if any,
and interest on the outstanding Securities on the Stated Maturity of such
principal or interest; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to the payment of such principal, premium, if any,
and interest with respect to the Securities;
(ii) such deposit will not result in a breach or violation of, or
constitute a default under, this Indenture or any other agreement or
instrument to which the Company or any of its respective Subsidiaries is a
party or by which it is bound;
(iii) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit;
(iv) the Company has delivered to the Trustee an Opinion of Counsel
to the effect that (A) the creation of the defeasance trust does not
violate the Investment Company Act of 1940, (B) the Holders have a valid
first-priority security interest in the trust funds, (C) the Holders will
not recognize income, gain or loss for United States federal income tax
purposes as a result of such deposit and the defeasance of the obligations
referred to in the first paragraph of this Section 8.03 and will be
subject to United States federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred, (D) the Holders will not
recognize income, gain or loss for Canadian federal, provincial or
territorial income tax or other tax purposes as a result of such deposit
and the defeasance of the obligations referred to in the first paragraph
of this Section 8.03 and will be subject to Canadian federal or provincial
income tax and other tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance
had not occurred and (E) after the passage of 123 days following the
deposit (except, with respect to any trust funds for the account of any
Holder who may be deemed to be an "insider" for purposes of the United
States Bankruptcy Code, after one year following the deposit), the trust
funds will not be subject to the effect of Section 547 of the United
States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law in a case commenced by or against the Company under either such
statute, and either (1) the trust funds will no longer remain the property
of the Company (and therefore will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors'
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rights generally) or (2) if a court were to rule under any such law in any
case or proceeding that the trust funds remained property of the Company
(x) assuming such trust funds remained in the possession of the Trustee
prior to such court ruling to the extent not paid to the Holders, the
Trustee will hold, for the benefit of the Holders, a valid and perfected
security interest in such trust funds that is not avoidable in bankruptcy
or otherwise (except for the effect of Section 552(b) of the United States
Bankruptcy Code on interest on the trust funds accruing after the
commencement of a case under such statute), (y) the Holders will be
entitled to receive adequate protection of their interests in such trust
funds if such trust funds are used in such case or proceeding and (z) no
property, rights in property or other interests granted to the Trustee or
the Holders in exchange for, or with respect to, such trust funds will be
subject to any prior rights of holders of other Indebtedness of the
Company or any of its Subsidiaries;
(v) if the Securities are then listed on a national securities
exchange, the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that such deposit and defeasance will not cause the
Securities to be delisted;
(vi) such deposit and defeasance is not prohibited by Article
Eleven; and
(vii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.03 have been complied with.
SECTION 8.04. Application of Trust Money. Subject to Section 8.06,
the Trustee or Paying Agent shall hold in trust money or U.S. Government
Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the
case may be, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with the Securities and this Indenture to
the payment of principal of, premium, if any, and interest on the Securities;
but such money need not be segregated from other funds except to the extent
required by law.
SECTION 8.05. Repayment to the Company. Subject to Sections 7.07,
8.01, 8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to the
Company upon request any excess money held by them at any time and thereupon
shall be relieved from all liability with respect to such money. The Trustee and
the Paying Agent shall pay to the Company any money held by them for the payment
of principal, premium, if any, or interest that remains unclaimed for two years;
provided that the Trustee or such Paying Agent before being required to make any
payment may cause to be published at the expense of the Company once in a
newspaper of general circulation in The City of New York and, in the event the
Securities are listed on the Luxembourg Stock Exchange, in Luxembourg or mail to
each Holder entitled to such money at such Holder's address (as set forth in the
Security Register) notice that such money remains unclaimed and that after a
date specified therein (which shall be at least 30 days from the date of such
publication or mailing) any unclaimed balance of such money then remaining will
be repaid to the Company. After payment to the Company, Holders entitled to such
money must look to the Company for payment as general creditors unless an
applicable law
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designates another Person, and all liability of the Trustee and such Paying
Agent with respect to such money shall cease.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with
Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02
or 8.03, as the case may be, until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in accordance
with Section 8.01, 8.02 or 8.03, as the case may be; provided that, if the
Company has made any payment of principal of, premium, if any, or interest on
any Securities because of the reinstatement of its obligations, the Company
shall be subrogated to the rights of the Holders of such Securities to receive
such payment from the money or U.S. Government Obligations held by the Trustee
or Paying Agent.
SECTION 8.07. Insiders. With respect to the determination of the
Persons constituting beneficial owners of Securities and whether any such Person
is an "insider" for purposes of Sections 8.02(B)(iii)(y) and 8.03(iv)(E), the
Trustee may rely on an Officers' Certificate.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders. The Company, when
authorized by resolutions of its Board of Directors, and the Trustee may amend
or supplement this Indenture or the Securities without notice to or the consent
of any Holder:
(a) to cure any ambiguity, defect or inconsistency in this
Indenture; provided that such amendments or supplements shall not
adversely affect the interests of the Holders in any material respect;
(b) to comply with Article Five;
(c) to comply with any requirements of the Commission in connection
with the qualification of this Indenture under the TIA;
(d) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee; or
(e) to make any change that, in the opinion of the Board of
Directors of the Company evidenced by a Board Resolution, does not
materially and adversely affect the rights of any Holder.
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SECTION 9.02. With Consent of Holders. Subject to Sections 6.04 and
6.07 and without prior notice to the Holders, the Company, when authorized by
its Board of Directors (as evidenced by a Board Resolution), and the Trustee may
amend this Indenture and the Securities with the written consent of the Holders
of a majority in aggregate principal amount of the outstanding Securities, and
the Holders of a majority in aggregate principal amount of the outstanding
Securities by written notice to the Trustee may waive future compliance by the
Company with any provision of this Indenture or the Securities.
Notwithstanding the provisions of this Section 9.02, without the
consent of each Holder affected, an amendment or waiver, including a waiver
pursuant to Section 6.04, may not:
(i) change the Stated Maturity of the principal of, or any
installment of interest on, any Security;
(ii) reduce the principal of, or premium, if any, or interest on,
any Security or adversely affect any right of repayment at the option of
any Holder of any Security;
(iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any Security;
(iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any Security;
(v) reduce the percentage of outstanding Securities the consent of
whose Holders is required for any such supplemental indenture or for any
waiver of compliance with certain provisions of this Indenture or certain
Defaults and their consequences provided for in this Indenture;
(vi) waive a default in the payment of principal of, premium, if
any, or interest on the Securities;
(vii) amend or modify the terms of Article Eleven in a manner
materially adverse to the Holders; or
(viii) modify any of the provisions of this Section 9.02, except to
increase any such percentage or to provide that certain other provisions
of this Indenture cannot be modified or waived without the consent of the
Holder of each outstanding Security affected thereby.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
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After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. The Company will
mail supplemental indentures to Holders upon request. Any failure of the Company
to mail such notice, or any defect therein, shall not, however, in any way
impair or affect the validity of any such supplemental indenture or waiver.
SECTION 9.03. Revocation and Effect of Consent. Until an amendment
or waiver becomes effective, a consent to it by a Holder is a continuing consent
by the Holder and every subsequent Holder of a Security or portion of a Security
that evidences the same debt as the Security of the consenting Holder, even if
notation of the consent is not made on any Security. However, any such Holder or
subsequent Holder may revoke the consent as to its Security or portion of its
Security. Such revocation shall be effective only if the Trustee receives the
notice of revocation before the date the amendment, supplement or waiver becomes
effective. An amendment, supplement or waiver shall become effective on receipt
by the Trustee of written consents from the Holders of the requisite percentage
in principal amount of the outstanding Securities.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then, notwithstanding the last
two sentences of the immediately preceding paragraph, those persons who were
Holders at such record date (or their duly designated proxies) and only those
persons shall be entitled to consent to such amendment, supplement or waiver or
to revoke any consent previously given, whether or not such persons continue to
be Holders after such record date. No such consent shall be valid or effective
for more than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it shall
bind every Holder unless it is of the type described in any of clauses (i)
through (viii) of Section 9.02. In case of an amendment or waiver of the type
described in clauses (i) through (viii) of Section 9.02, the amendment or waiver
shall bind each Holder who has consented to it and every subsequent Holder of a
Security that evidences the same indebtedness as the Security of the consenting
Holder.
SECTION 9.04. Notation on or Exchange of Securities. If an
amendment, supplement or waiver changes the terms of a Security, the Trustee may
require the Holder to deliver such Security to the Trustee. At the Company's
expense the Trustee may place an appropriate notation on the Security about the
changed terms and return it to the Holder and the Trustee may place an
appropriate notation on any Security thereafter authenticated. Alternatively, if
the Company or the Trustee so determines, the Company in exchange for the
Security shall issue and the Trustee shall authenticate a new Security that
reflects the changed terms.
SECTION 9.05. Trustee to Sign Amendments, Etc. The Trustee shall be
entitled to receive, and shall be fully protected in relying upon, an Opinion of
Counsel stating that the execution of any amendment, supplement or waiver
authorized pursuant to this Article Nine is
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authorized or permitted by this Indenture. Subject to the preceding sentence,
the Trustee shall sign such amendment, supplement or waiver if the same does not
adversely affect the rights of the Trustee. The Trustee may, but shall not be
obligated to, execute any such amendment, supplement or waiver that affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.06. Conformity with Trust Indenture Act. Every
supplemental indenture executed pursuant to this Article Nine shall conform to
the requirements of the TIA as then in effect.
ARTICLE TEN
MEETINGS OF HOLDERS
SECTION 10.01. Purposes for Which Meetings May Be Called.
A meeting of Holders may be called at any time and from time to time
pursuant to the provisions of this Article Ten for any of the following
purposes:
(a) to give any notice to the Company or to the Trustee, or to give
any directions to the Trustee, or to waive or to consent to the waiving of
any Default or Event of Default hereunder and its consequences, or to take
any other action authorized to be taken by Holders pursuant to any of the
provisions of Article Six;
(b) to remove the Trustee or appoint a successor Trustee pursuant to
the provisions of Article Seven;
(c) to consent to an amendment, supplement or waiver pursuant to the
provisions of Section 9.02; or
(d) to take any other action authorized to be taken by or on behalf
of the Holders of any specified aggregate principal amount of the
Securities under any other provision of this Indenture, or authorized or
permitted by law.
SECTION 10.02. Manner of Calling Meetings.
The Trustee may at any time call a meeting of Holders to take any
action specified in Section 10.01, to be held at such time and at such place in
The City of New York, New York or elsewhere as the Trustee will determine.
Notice of every meeting of Holders, setting forth the time and place of such
meeting and in general terms the action proposed to be taken at such meeting,
will be mailed by the Trustee, first-class postage prepaid, to the Company and
to the Holders at their last addresses as they will appear on the registration
books of the Registrar not less than 10 nor more than 60 days prior to the date
fixed for a meeting.
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Any meeting of Holders will be valid without notice if the Holders
of all outstanding Securities are present in Person or by proxy, or if notice is
waived before or after the meeting by the Holders of all outstanding Securities,
and if the Company and the Trustee are either present by duly authorized
representatives or have, before or after the meeting, waived notice.
SECTION 10.03. Call of Meetings by Company or Holders.
In case at any time the Company, pursuant to a Board Resolution, or
the Holders of not less than 10% in aggregate principal amount of the
outstanding Securities will have requested the Trustee to call a meeting of
Holders to take any action specified in Section 10.01, by written request
setting forth in reasonable detail the action proposed to be taken at the
meeting, and the Trustee will not have mailed the notice of such meeting within
20 days after receipt of such request, then the Company or the Holders of
Securities in the amount above specified may determine the time and place in The
City of New York, New York or elsewhere for such meeting and may call such
meeting for the purpose of taking such action, by mailing or causing to be
mailed notice thereof as provided in Section 10.02, or by causing notice thereof
to be published at least once in each of two successive calendar weeks (on any
Business Day during such week) in a newspaper or newspapers printed in the
English language, customarily published at least five days a week of a general
circulation in The City of New York, State of New York and, in the event the
Securities are listed on the Luxembourg Stock Exchange, in Luxembourg, the first
such publication to be not less than 10 nor more than 60 days prior to the date
fixed for the meeting.
SECTION 10.04. Who May Attend and Vote at Meetings.
To be entitled to vote at any meeting of Holders, a Person will (i)
be a registered Holder of one or more Securities, or (ii) be a Person appointed
by an instrument in writing as proxy for the registered Holder or Holders of
Securities. The only Persons who will be entitled to be present or to speak at
any meeting of Holders will be the Persons entitled to vote at such meeting and
their counsel and any representatives of the Trustee and its counsel and any
representatives of the Company and its counsel.
SECTION 10.05. Quorum; Action.
The Persons entitled to vote a majority in principal amount of the
outstanding Securities shall constitute a quorum. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting shall,
if convened at the request of Holders of Securities, be dissolved. In any other
case the meeting may be adjourned for a period of not less than 10 days as
determined by the chairman of the meeting prior to the adjournment of such
meeting. In the absence of a quorum at any such adjourned meeting, such
adjourned meeting may be further adjourned for a period of not less than 10 days
as determined by the chairman of the meeting prior to the adjournment of such
adjourned meeting. Notice of the reconvening of any adjourned meeting shall be
given as provided in Section 10.02, except that such notice need be given only
once and not less than five days prior to the date on which the meeting is
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scheduled to be reconvened. Notice of the reconvening of an adjourned meeting
shall state expressly the percentage of the principal amount of the outstanding
Securities which shall constitute a quorum.
Subject to the foregoing, at the reconvening of any meeting
adjourned for a lack of a quorum, the Persons entitled to vote 25% in principal
amount of the outstanding Securities at the time shall constitute a quorum for
the taking of any action set forth in the notice of the original meeting.
At a meeting or an adjourned meeting duly reconvened and at which a
quorum is present as aforesaid, any action or matter, except as otherwise
specified herein, shall be effectively passed and decided if passed or decided
by the Persons entitled to vote not less than a majority in principal amount of
outstanding Securities represented and voting at such meeting.
Any action or matter passed or decision taken at any meeting of
Holders of Securities duly held in accordance with this Section 10.05 shall be
binding on all the Holders of Securities, whether or not present or represented
at the meeting.
SECTION 10.06. Regulations May Be Made by Trustee; Conduct of the
Meeting; Voting Rights; Adjournment.
Notwithstanding any other provision of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any action by
or any meeting of Holders, in regard to proof of the holding of Securities and
of the appointment of proxies, and in regard to the appointment and duties of
inspectors of votes, and submission and examination of proxies, certificates and
other evidence of the right to vote, and such other matters concerning the
conduct of the meeting as it will think appropriate. Such regulations may fix a
record date and time for determining the Holders of record of Securities
entitled to vote at such meeting, in which case those and only those Persons who
are Holders of Securities at the record date and time so fixed, or their
proxies, will be entitled to vote at such meeting whether or not they will be
such Holders at the time of the meeting.
The Trustee will, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting will have been called by the Company
or by Holders as provided in Section 10.03, in which case the Company or the
Holders calling the meeting, as the case may be, will in like manner appoint a
temporary chairman. A permanent chairman and a permanent secretary of the
meeting will be elected by vote of the Holders of a majority in principal amount
of the Securities represented at the meeting and entitled to vote.
At any meeting each Holder or proxy will, subject to the provisions
of Section 10.04 hereof, be entitled to one vote for each $1,000 principal
amount of Securities held or represented by him or her; provided, however, that
no vote will be cast or counted at any meeting in respect of any Securities
challenged as not outstanding and ruled by the chairman of the meeting to be not
outstanding. The chairman may adjourn any such meeting if he is unable to
determine whether any Holder or proxy will be entitled to vote at such meeting.
The
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chairman of the meeting will have no right to vote other than by virtue of
Securities held by him or instruments in writing as aforesaid duly designating
him as the proxy to vote on behalf of other Holders. Any meeting of Holders duly
called pursuant to the provisions of Section 10.02 or Section 10.03 may be
adjourned from time to time by vote of the Holders of a majority in aggregate
principal amount of the Securities represented at the meeting and entitled to
vote, and the meeting may be held as so adjourned without further notice.
SECTION 10.07. Voting at the Meeting and Record to Be Kept.
The vote upon any resolution submitted to any meeting of Holders
will be by written ballots on which will be subscribed the signatures of the
Holders of Securities or/of their representatives by proxy and the principal
amount of the Securities voted by the ballot. The permanent chairman of the
meeting will appoint two inspectors of votes, who will count all votes cast at
the meeting for or against any resolution and will make and file with the
secretary of the meeting their verified written reports in duplicate of all
votes cast at the meeting. A record in duplicate of the proceedings of each
meeting of Holders will be prepared by the secretary of the meeting and there
will be attached to such record the original reports of the inspectors of votes
on any vote by ballot taken thereat and affidavits by one or more Persons having
knowledge of the facts, setting forth a copy of the notice of the meeting and
showing that such notice was mailed as provided in Section 10.02. The record
will be signed and verified by the affidavits of the permanent chairman and the
secretary of the meeting and one of the duplicates will be delivered to the
Company and the other to the Trustee to be preserved by the Trustee, the latter
to have attached thereto the ballots voted at the meeting.
Any record so signed and verified will be conclusive evidence of the
matters therein stated.
SECTION 10.08. Exercise of Rights of Trustee or Holders May Not Be
Hindered or Delayed by Call of Meeting.
Nothing contained in this Article Ten will be deemed or construed to
authorize or permit, by reason of any call of a meeting of Holders or any rights
expressly or impliedly conferred hereunder to make such call, any hindrance or
delay in the exercise of any right or rights conferred upon or reserved to the
Trustee or to the Holders under any of the provisions of this Indenture or of
the Securities.
SECTION 10.09. Procedures Not Exclusive.
The procedures set forth in this Article Ten are not exclusive and
the rights and obligations of the Company, the Trustee and the Holders under
other Articles of this Indenture (including, without limitation, Articles Six,
Seven, Eight and Nine) will in no way be limited by the provisions of this
Article Ten.
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ARTICLE ELEVEN
SUBORDINATION
SECTION 11.01. Securities Subordinated to Senior Indebtedness. The
Company and the Trustee each covenants and agrees, and each Holder, by its
acceptance of a Security, likewise covenants and agrees that all Securities
shall be issued subject to the provisions of this Article Eleven; and each
Person holding any Security, whether upon original issue or upon transfer,
assignment or exchange thereof, accepts and agrees that Senior Subordinated
Obligations shall, to the extent and in the manner set forth in this Article
Eleven, be subordinated in right of payment to the prior payment in full, in
cash or cash equivalents acceptable to the holders of Senior Indebtedness, of
all amounts payable under Senior Indebtedness, including, without limitation,
the Company's obligations under its guarantee of the Senior Notes and the
Company's obligations under its guarantee of the intercompany notes issued by
GST USA to GST Equipment Funding, Inc. for the purchase of equipment (including
any interest accruing subsequent to an event specified in Sections 6.01(f) and
6.01(g) of this Indenture, whether or not such interest is an allowed claim
enforceable against the debtor under the United States Bankruptcy Code).
SECTION 11.02. No Payment on Securities in Certain Circumstances.
(a) No direct or indirect payment, redemption, repurchase, retirement,
distribution, acquisition for value (or deposit in connection therewith) by or
on behalf of the Company of Senior Subordinated Obligations, whether pursuant to
the terms of the Securities or upon acceleration or otherwise, shall be made if,
at the time of such payment, there exists a default in the payment of all or any
portion of the obligations of any Senior Indebtedness of the Company, and such
default shall not have been cured or waived or the benefits of this sentence
waived by or on behalf of the holders of such Senior Indebtedness.
(b) During the continuance of any other event of default with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated, upon receipt by the Trustee of written notice from
the trustee or other representative or agent for the holders of such Designated
Senior Indebtedness (or the holders of at least a majority in principal amount
of such Designated Senior Indebtedness then outstanding), no direct or indirect
payment, redemption, repurchase, retirement, distribution, acquisition for value
(or deposit in connection therewith) of or on account of Senior Subordinated
Obligations may be made by or on behalf of the Company upon or in respect of the
Securities for a period (a "Payment Blockage Period") commencing on the date of
receipt of such notice and ending 159 days thereafter (unless, in each case,
such Payment Blockage Period shall be terminated by written notice to the
Trustee from such trustee of, or other representatives or agents for, such
holders or by payment in full in cash or cash equivalents acceptable to the
holders of Senior Indebtedness of such Designated Senior Indebtedness). Not more
than one Payment Blockage Period may be commenced with respect to the Securities
during any period of 360 consecutive days. Notwithstanding anything in this
Indenture to the contrary, there must be 180 consecutive days in any 360-day
period in which no Payment Blockage Period is in effect. For all purposes of
this Section 11.02(b), no event of default that existed or was continuing (it
being acknowledged that any subsequent action that would give rise to an event
of default pursuant to any provision under which an event of default
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previously existed or was continuing shall constitute a new event of default for
this purpose) on the date of the commencement of any Payment Blockage Period
with respect to the Designated Senior Indebtedness initiating such Payment
Blockage Period shall be, or shall be made, the basis for the commencement of a
second Payment Blockage Period by the representative for, or the holders of,
such Designated Senior Indebtedness, whether or not within a period of 360
consecutive days, unless such event of default shall have been cured or waived
for a period of not less than 90 consecutive days.
(c) In the event that, notwithstanding the foregoing, any payment
shall be received by the Trustee or any Holder when such payment is prohibited
by Section 11.02(a) or 11.02(b) of this Indenture, the Trustee shall promptly
notify the holders of Senior Indebtedness of such prohibited payment and such
payment shall be held in trust for the benefit of, and shall be paid over or
delivered to, the holders of Senior Indebtedness or their respective
representatives, or to the trustee or trustees under any indenture pursuant to
which any of such Senior Indebtedness may have been issued, as their respective
interests may appear, but only to the extent that, upon notice from the Trustee
to the holders of Senior Indebtedness that such prohibited payment has been
made, the holders of the Senior Indebtedness (or their representative or agent
or representatives of a trustee) within 30 days of receipt of such notice from
the Trustee notify the Trustee of the amounts then due and owing on the Senior
Indebtedness, if any, and only the amounts specified in such notice to the
Trustee shall be paid to the holders of Senior Indebtedness and any excess above
such amounts due and owing on Senior Indebtedness shall be paid to the Company.
SECTION 11.03. Payment over Proceeds upon Dissolution, Etc. (a) Upon
any payment or distribution of assets or securities of the Company of any kind
or character, whether in cash, property or securities, by set-off or otherwise,
in connection with any dissolution or winding up or total or partial liquidation
or reorganization of the Company, whether voluntary or involuntary, or in
bankruptcy, insolvency, receivership or other proceedings, all amounts due or to
become due upon all Senior Indebtedness (including any interest accruing
subsequent to an event specified in Sections 6.01(f) and 6.01(g) of this
Indenture, whether or not such interest is an allowed claim enforceable against
the debtor under the United States Bankruptcy Code) shall first be paid in full,
in cash or cash equivalents acceptable to the holders of Senior Indebtedness,
before the Holders or the Trustee on their behalf shall be entitled to receive
any payment by the Company on account of Senior Subordinated Obligations, or any
payment to acquire any of the Securities for cash, property or securities, or
any distribution with respect to the Securities of any cash, property or
securities. Before any payment may be made by, or on behalf of, the Company on
any Senior Subordinated Obligations in connection with any such dissolution,
winding up, liquidation or reorganization, any payment or distribution of assets
or securities of the Company of any kind or character, whether in cash, property
or securities, to which the Holders or the Trustee on their behalf would be
entitled, but for the provisions of this Article Eleven, shall be made by the
Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar Person making such payment or distribution, or by the Holders or
the Trustee if received by them or it, directly to the holders of Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders) or their representatives or agents or
to any trustee or trustees under any other
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indenture pursuant to which any such Senior Indebtedness may have been issued,
as their respective interests appear, to the extent necessary to pay all such
Senior Indebtedness in full, in cash or cash equivalents acceptable to the
holders of Senior Indebtedness after giving effect to any concurrent payment,
distribution or provision therefor to or for the holders of such Senior
Indebtedness.
(b) To the extent any payment of Senior Indebtedness (whether by or
on behalf of the Company, as proceeds of security or enforcement of any right of
setoff or otherwise) is declared to be fraudulent or preferential, set aside or
required to be paid to any receiver, trustee in bankruptcy, liquidating trustee,
agent or other similar Person under any bankruptcy, insolvency, receivership,
fraudulent conveyance or similar law, then if such payment is recovered by, or
paid over to, such receiver, trustee in bankruptcy, liquidating trustee, agent
or other similar Person, the Senior Indebtedness or part thereof originally
intended to be satisfied shall be deemed to be reinstated and outstanding as if
such payment had not occurred. To the extent the obligation to repay any Senior
Indebtedness is declared to be fraudulent, invalid, or otherwise set aside under
any bankruptcy, insolvency, receivership, fraudulent conveyance or similar law,
then the obligations so declared fraudulent, invalid or otherwise set aside (and
all other amounts that would come due with respect thereto had such obligation
not been so affected) shall be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes hereof as if such declaration, invalidity or
setting aside had not occurred.
(c) In the event that, notwithstanding the foregoing provision
prohibiting such payment or distribution, any payment or distribution of assets
or securities of the Company of any kind or character, whether in cash, property
or securities, shall be received by the Trustee or any Holder at a time when
such payment or distribution is prohibited by Section 11.03(a) of this Indenture
and before all obligations in respect of Senior Indebtedness are paid in full,
in cash or cash equivalents acceptable to the holders of Senior Indebtedness,
such payment or distribution shall be received and held in trust for the benefit
of, and shall be paid over or delivered to, the holders of Senior Indebtedness
(pro rata to such holders on the basis of such respective amount of Senior
Indebtedness held by such holders) or their representatives or agents, or to the
trustee or trustees under any indenture pursuant to which any such Senior
Indebtedness may have been issued, as their respective interests appear, for
application to the payment of Senior Indebtedness remaining unpaid until all
such Senior Indebtedness has been paid in full, in cash or cash equivalents
acceptable to the holders of Senior Indebtedness, after giving effect to any
concurrent payment, distribution or provision therefor to or for the holders of
such Senior Indebtedness.
(d) For purposes of this Section 11.03, the words "cash, property or
securities" shall not be deemed to include, so long as the effect of this clause
is not to cause the Securities to be treated in any case or proceeding or
similar event described in this Section 11.03 as part of the same class of
claims as the Senior Indebtedness or any class of claims pari passu with, or
senior to, the Senior Indebtedness for any payment or distribution, securities
of the Company or any other corporation provided for by a plan of reorganization
or readjustment that are subordinated, at least to the extent that the
Securities are subordinated, to the payment of all Senior Indebtedness then
outstanding; provided that (1) if a new corporation results from such
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reorganization or readjustment, such corporation assumes the Senior Indebtedness
and (2) the rights of the holders of the Senior Indebtedness are not, without
the consent of such holders, altered by such reorganization or readjustment. The
consolidation of the Company with, or the merger of the Company with or into,
another corporation or the liquidation or dissolution of the Company following
the sale, conveyance, transfer, lease or other disposition of all or
substantially all of its property and assets to another corporation upon the
terms and conditions provided in Article Five of this Indenture shall not be
deemed a dissolution, winding up, liquidation or reorganization for the purposes
of this Section 11.03 if such other corporation shall, as a part of such
consolidation, merger, sale, conveyance, transfer, lease or other disposition,
comply (to the extent required) with the conditions stated in Article Five of
this Indenture.
SECTION 11.04. Subrogation. (a) Upon the payment in full of all
Senior Indebtedness in cash or cash equivalents acceptable to the holders of
Senior Indebtedness, the Holders shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of cash,
property or securities of the Company made on such Senior Indebtedness until the
principal of, premium, if any, and interest on the Securities shall be paid in
full; and, for the purposes of such subrogation, no payments or distributions to
the holders of the Senior Indebtedness of any cash, property or securities to
which the Holders or the Trustee on their behalf would be entitled except for
the provisions of this Article Eleven, and no payment pursuant to the provisions
of this Article Eleven to the holders of Senior Indebtedness by Holders or the
Trustee on their behalf shall, as between the Company, its creditors other than
holders of Senior Indebtedness, and the Holders, be deemed to be a payment by
the Company to or on account of the Senior Indebtedness. It is understood that
the provisions of this Article Eleven are intended solely for the purpose of
defining the relative rights of the Holders, on the one hand, and the holders of
the Senior Indebtedness, on the other hand.
(b) If any payment or distribution to which the Holders would
otherwise have been entitled but for the provisions of this Article Eleven shall
have been applied, pursuant to the provisions of this Article Eleven, to the
payment of all amounts payable under Senior Indebtedness, then, and in such
case, the Holders shall be entitled to receive from the holders of such Senior
Indebtedness any payments or distributions received by such holders of Senior
Indebtedness in excess of the amount required to make payment in full, in cash
or cash equivalents acceptable to the holders of Senior Indebtedness, of such
Senior Indebtedness of such holders.
SECTION 11.05. Obligations of Company Unconditional. (a) Nothing
contained in this Article Eleven or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company and the Holders,
the obligation of the Company, which is absolute and unconditional, to pay to
the Holders the principal of, premium, if any, and interest on the Securities as
and when the same shall become due and payable in accordance with their terms,
or is intended to or shall affect the relative rights of the Holders and
creditors of the Company other than the holders of the Senior Indebtedness, nor
shall anything herein or therein prevent the Holders or the Trustee on their
behalf from exercising all remedies otherwise
<PAGE> 79
72
permitted by applicable law upon default under this Indenture, subject to the
rights, if any, under this Article Eleven of the holders of the Senior
Indebtedness.
(b) Without limiting the generality of the foregoing, nothing
contained in this Article Eleven will restrict the right of the Trustee or the
Holders to take any action to declare the Securities to be due and payable prior
to their Stated Maturity pursuant to Section 6.01 of this Indenture or to pursue
any rights or remedies hereunder; provided, however, that all Senior
Indebtedness then due and payable or thereafter declared to be due and payable
shall first be paid in full, in cash or cash equivalents acceptable to the
holders of Senior Indebtedness, before the Holders or the Trustee are entitled
to receive any direct or indirect payment from the Company of Senior
Subordinated Obligations or the Company is entitled to redeem, repurchase,
retire any of, undertake an acquisition for value (or make a deposit in
connection with any of the foregoing) on account of, any of the Senior
Subordinated Obligations.
SECTION 11.06. Notice to Trustee. (a) The Company shall give prompt
written notice to the Trustee of any fact known to the Company that would
prohibit the making of any payment to or by the Trustee in respect of the
Securities pursuant to the provisions of this Article Eleven. The Trustee shall
not be charged with the knowledge of the existence of any default or event of
default with respect to any Senior Indebtedness or of any other facts that would
prohibit the making of any payment to or by the Trustee unless and until the
Trustee shall have received notice in writing at its Corporate Trust Office to
that effect signed by an Officer of the Company, or by a holder of Senior
Indebtedness or trustee or agent thereof; and prior to the receipt of any such
written notice, the Trustee shall, subject to Article Seven, be entitled to
assume that no such facts exist; provided that, if the Trustee shall not have
received the notice provided for in this Section 11.06 at least two Business
Days prior to the date upon which, by the terms of this Indenture, any monies
shall become payable for any purpose (including, without limitation, the payment
of the principal of, premium, if any, or interest on any Security), then,
notwithstanding anything herein to the contrary, the Trustee shall have full
power and authority to receive any monies from the Company and to apply the same
to the purpose for which they were received, and shall not be affected by any
notice to the contrary that may be received by it on or after such prior date
except for an acceleration of the Securities prior to such application. Nothing
contained in this Section 11.06 shall limit the right of the holders of Senior
Indebtedness to recover payments as contemplated by this Article Eleven. The
foregoing shall not apply if the Payment Agent is the Company. The Trustee shall
be entitled to rely on the delivery to it of a written notice by a Person
representing himself or itself to be a holder of any Senior Indebtedness (or a
trustee on behalf of, or other representative or agent of, such holder) to
establish that such notice has been given by a holder of such Senior
Indebtedness or a trustee or representative or agent on behalf of any such
holder.
(b) In the event that the Trustee determines in good faith that any
evidence is required with respect to the right of any Person as a holder of
Senior Indebtedness to participate in any payment or distribution pursuant to
this Article Eleven, the Trustee may request such Person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such
<PAGE> 80
73
Person under this Article Eleven and, if such evidence is not furnished to the
Trustee, the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment.
SECTION 11.07. Reliance on Judicial Order or Certificate of
Liquidating Agent. Upon any payment or distribution of assets or securities
referred to in this Article Eleven, the Trustee and the Holders shall be
entitled to rely upon any order or decree made by any court of competent
jurisdiction in which bankruptcy, dissolution, winding up, liquidation or
reorganization proceedings are pending, or upon a certificate of the receiver,
trustee in bankruptcy, liquidating trustee, agent or other similar Person making
such payment or distribution, delivered to the Trustee or to the Holders for the
purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other Indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
Eleven.
SECTION 11.08. Trustee's Relation to Senior Indebtedness. (a) The
Trustee and any Paying Agent shall be entitled to all the rights set forth in
this Article Eleven with respect to any Senior Indebtedness that may at any time
be held by it in its individual or any other capacity to the same extent as any
other holder of Senior Indebtedness and nothing in this Indenture shall deprive
the Trustee or any Paying Agent of any of its rights as such holder.
(b) With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article Eleven, and no implied covenants
or obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness (except as provided in
Sections 11.02(c) and 11.03(c) of this Indenture) and shall not be liable to any
such holders if the Trustee shall in good faith mistakenly pay over or
distribute to Holders of Securities or to the Company or to any other person
cash, property or securities to which any holders of Senior Indebtedness shall
be entitled by virtue of this Article Eleven or otherwise.
SECTION 11.09. Subordination Rights Not Impaired by Acts or
Omissions of the Company or Holders of Senior Indebtedness. No right of any
present or future holders of any Senior Indebtedness to enforce subordination as
provided in this Article Eleven will at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act, in good faith, by any such holder, or by any noncompliance by
the Company with the terms of this Indenture, regardless of any knowledge
thereof that any such holder may have or otherwise be charged with. The
provisions of this Article Eleven are intended to be for the benefit of, and
shall be enforceable directly by, the holders of Senior Indebtedness.
SECTION 11.10. Holders Authorize Trustee to Effectuate Subordination
of Securities. Each Holder by his acceptance of any Securities authorizes and
expressly directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article Eleven, and appoints the Trustee his attorney-in-fact for
<PAGE> 81
74
such purposes, including, in the event of any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy, insolvency,
receivership, reorganization or similar proceedings or upon an assignment for
the benefit of creditors or otherwise) tending towards liquidation of the
property and assets of the Company, the filing of a claim for the unpaid balance
of its Securities in the form required in those proceedings. If the Trustee does
not file a proper claim or proof in indebtedness in the form required in such
proceeding at least 30 days before the expiration of the time to file such claim
or claims, each holder of Senior Indebtedness is hereby authorized to file an
appropriate claim for and on behalf of the Holders.
SECTION 11.11. Not to Prevent Events of Default. The failure to make
a payment when due on account of principal of, premium, if any, or interest on
the Securities by reason of any provision of this Article Eleven will not be
construed as preventing the occurrence of an Event of Default.
SECTION 11.12. Trustee's Compensation Not Prejudiced. Nothing in
this Article Eleven will apply to amounts due to the Trustee pursuant to other
sections of this Indenture, including Section 7.07.
SECTION 11.13. No Waiver of Subordination Provisions. Without in any
way limiting the generality of Section 11.09, the holders of Senior Indebtedness
may, at any time and from time to time, without the consent of or notice to the
Trustee or the Holders, without incurring responsibility to the Holders and
without impairing or releasing the subordination provided in this Article Eleven
or the obligations hereunder of the Holders to the holders of Senior
Indebtedness, do any one or more of the following: (a) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Indebtedness or any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding or secured; (b) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (c) release any Person liable in any manner for the collection of
Senior Indebtedness; and (d) exercise or refrain from exercising any rights
against the Company and any other Person.
SECTION 11.14. Payments May Be Paid Prior to Dissolution. Nothing
contained in this Article Eleven or elsewhere in this Indenture shall prevent
(i) the Company except under the conditions described in Section 11.02 or 11.03,
from making payments of principal of, premium, if any, and interest on the
Securities, or from depositing with the Trustee any money for such payments, or
(ii) the application by the Trustee of any money deposited with it for the
purpose of making such payments of principal of, premium, if any, and interest
on the Securities to the Holders entitled thereto unless, at least two Business
Days prior to the date upon which such payment becomes due and payable, the
Trustee shall have received the written notice provided for in Section 11.02(b)
of this Indenture (or there shall have been an acceleration of the Securities
prior to such application) or in Section 11.06 of this Indenture. The Company
shall give prompt written notice to the Trustee of any dissolution, winding up,
liquidation or reorganization of the Company.
<PAGE> 82
75
SECTION 11.15. Trust Moneys Not Subordinated. Notwithstanding
anything contained herein to the contrary, payments from money or the proceeds
of U.S. Government Obligations held in trust under Article Eight by the Trustee
for the payment of principal of, premium, if any, and interest on the Securities
shall not be subordinated to the prior payment of any Senior Indebtedness
(provided that at the time deposited, such deposit did not violate any then
outstanding Senior Indebtedness), and none of the Holders shall be obligated to
pay over any such amount to any holder of Senior Indebtedness.
ARTICLE TWELVE
MISCELLANEOUS
SECTION 12.01. Trust Indenture Act of 1939. Prior to the
effectiveness of the Registration Statement, this Indenture shall incorporate
and be governed by the provisions of the TIA that are required to be part of and
to govern indentures qualified under the TIA. After the effectiveness of the
Registration Statement, this Indenture shall be subject to the provisions of the
TIA that are required to be a part of this Indenture and shall, to the extent
applicable, be governed by such provisions.
SECTION 12.02. Notices. Any notice or communication shall be
sufficiently given if in writing and delivered in person or mailed by first
class mail addressed as follows:
if to the Company:
GST Telecommunications, Inc.
4317 N.E. Thurston Way
Vancouver, Washington 98662
Attention: Chief Executive Officer
if to the Trustee:
United States Trust Company of New York
114 West 47th Street
New York, New York 10036-1532
Attention: Corporate Trust Division
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Holder shall be mailed to
him at his address as it appears on the Security Register by first class mail
and shall be sufficiently given to him if so mailed within the time prescribed.
Copies of any such communication or notice to a Holder shall also be mailed to
the Trustee and each Agent at the same time.
<PAGE> 83
76
Failure to mail a notice or communication to a Holder or any defect
in it shall not affect its sufficiency with respect to other Holders. Except for
a notice to the Trustee, which is deemed given only when received, and except as
otherwise provided in this Indenture, if a notice or communication is mailed in
the manner provided in this Section 12.02, it is duly given, whether or not the
addressee receives it.
Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 12.03. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(ii) an Opinion of Counsel stating that, in the opinion of such
Counsel, all such conditions precedent have been complied with.
SECTION 12.04. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a condition or covenant
provided for in this Indenture shall include:
(i) a statement that each person signing such certificate or opinion
has read such covenant or condition and the definitions herein relating
thereto;
(ii) a brief statement as to the nature and scope of the examination
or investigation upon which the statement or opinion contained in such
certificate or opinion is based;
(iii) a statement that, in the opinion of each such person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(iv) a statement as to whether or not, in the opinion of each such
person, such condition or covenant has been complied with; provided,
however, that, with respect to
<PAGE> 84
77
matters of fact, an Opinion of Counsel may rely on an Officers'
Certificate or certificates of public officials.
SECTION 12.05. Rules by Trustee, Paying Agent or Registrar. The
Trustee may make reasonable rules for action by or at a meeting of Holders. The
Paying Agent or Registrar may make reasonable rules for its functions.
SECTION 12.06. Payment Date Other Than a Business Day. If an
Interest Payment Date, Redemption Date, Payment Date, Stated Maturity or date of
maturity of any Security shall not be a Business Day, then payment of principal
of, premium, if any, or interest on such Security, as the case may be, need not
be made on such date, but may be made on the next succeeding Business Day with
the same force and effect as if made on the Interest Payment Date, Payment Date,
Redemption Date, or at the Stated Maturity or date of maturity of such Security;
provided that no interest shall accrue for the period from and after such
Interest Payment Date, Payment Date, Redemption Date, Stated Maturity or date of
maturity, as the case may be.
SECTION 12.07. Governing Law; Consent to Jurisdiction and Service.
This Indenture and the Securities shall be governed by the laws of the State of
New York. The Company will appoint Olshan Grundman Frome & Rosenzweig LLP, 505
Park Avenue, New York, New York 10022, Attention: David J. Adler, Esq. as its
agent for service of process in any suit, action or proceeding with respect to
this Indenture or the Securities and for actions brought under federal or state
securities laws brought in any federal or state court located in The City of New
York and the Company agrees to submit to the jurisdiction of any such court.
SECTION 12.08. No Adverse Interpretation of Other Agreements. This
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or any of its Subsidiaries. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
SECTION 12.09. No Recourse Against Others. No recourse for the
payment of the principal of, premium, if any, or interest on any of the
Securities, or for any claim based thereon or otherwise in respect thereof, and
no recourse under or upon any obligation, covenant or agreement of the Company
contained in this Indenture, or in any of the Securities, or because of the
creation of any Indebtedness represented thereby, shall be had against any
incorporator or against any past, present or future partner, shareholder, other
equityholder, officer, director, employee or controlling person, as such, of the
Company or of any successor Person, either directly or through the Company or
any successor Person, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise; it being
expressly understood that all such liability is hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this
Indenture and the issue of the Securities.
SECTION 12.10. Successors. All agreements of the Company in this
Indenture and the Securities shall bind their respective successors. All
agreements of the Trustee in this Indenture shall bind its successors.
<PAGE> 85
78
SECTION 12.11. Duplicate Originals. The parties may sign any number
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement.
SECTION 12.12. Separability. In case any provision in this Indenture
or in the Securities shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 12.13. Table of Contents, Headings, Etc. The Table of
Contents, Cross-Reference Table and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms and provisions hereof.
<PAGE> 86
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the date first written above.
GST TELECOMMUNICATIONS, INC.
By:
------------------------------------
Name:
Title:
UNITED STATES TRUST COMPANY
OF NEW YORK
By:
------------------------------------
Name:
Title:
<PAGE> 87
EXHIBIT A
[FACE OF NOTE]
GST TELECOMMUNICATIONS, INC.
[___]% Senior Subordinated Accrual Note due 2007
[CUSIP _______]
No. ____________ $_________
GST TELECOMMUNICATIONS, INC., a federally chartered Canadian
corporation (the "Company") for value received, promises to pay to __________,
or its registered assigns, the principal sum of $__________, and the Final
Accumulated Interest Amount thereon, on [______], 2007.
Interest Accrual Dates: [_____] and [_____], commencing [_____], 1998
Interest Payment Dates: [____] and [______], commencing [_____], 2003
Regular Record Dates: [_____] and [______]
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
<PAGE> 88
A-2
IN WITNESS WHEREOF, the Company has caused this Security to be signed
manually or by facsimile by its duly authorized officer.
Date: ____________ GST TELECOMMUNICATIONS, INC.
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
(Trustee's Certificate of Authentication)
This is one of the [___]% Senior Subordinated Accrual Notes due 2007 described
in the within-mentioned Indenture.
UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
By:
-----------------------------------
Authorized Signatory
<PAGE> 89
A-3
[REVERSE SIDE OF Security]
GST TELECOMMUNICATIONS, INC.
[___]% Senior Subordinated Accrual Notes due 2007
1. Principal and Interest.
The Company will pay the principal and the Final Accumulated
Interest Amount of this Security on [____], 2007.
Until [_____], 2002 (the "Final Interest Accrual Date"), interest
will accrue and be compounded semi-annually on each [____] and [____] (each an
"Interest Accrual Date"), commencing [____], 1998, but will not be payable in
cash. From and after [___], 2002, interest on the sum of the principal amount of
each Security and the accrued and unpaid interest thereon through the Final
Interest Accrual Date (the "Final Accumulated Interest Amount") will be payable
semiannually (to Holders of record at the close of business on [____] or [____]
immediately preceding the Interest Payment Date) on [____] and [____] of each
year, commencing [____], 2003.
After the Final Interest Accrual Date, interest on the principal of,
and Final Accumulated Interest Amount on, the Securities will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the Final Interest Accrual Date; provided that, if there is no
existing default in the payment of interest and this Security is authenticated
between a Regular Record Date referred to on the face hereof and the next
succeeding Interest Payment Date, as the case may be, interest shall accrue from
such Interest Payment Date. Interest will be computed on the basis of a 360-day
year of 12 30-day months.
The Company shall pay interest on overdue principal and premium, if
any, and (to the extent lawful) interest on overdue installments of interest at
the rate per annum borne by the Securities.
2. Method of Payment.
The Company will pay principal and the Final Accumulated Interest
Amount as provided above and, after [______], 2002, interest (except defaulted
interest) on the principal amount of, and the Final Accumulated Interest Amount
on, the Securities as provided above on each [_____] and [_____] to the persons
who are Holders (as reflected in the Security Register at the close of business
on the [______] and [______] immediately preceding the Interest Payment Date),
in each case, even if the Security is cancelled on registration of transfer or
registration of exchange after such record date; provided that, with respect to
the payment of principal and the Final Accumulated Interest Amount, the Company
will not make payment to the Holder unless this Security is surrendered to a
Paying Agent.
<PAGE> 90
A-4
The Company will pay principal, premium, if any, and interest in
money of the United States of America that at the time of payment is legal
tender for payment of public and private debts. If a payment date is a date
other than a Business Day at a place of payment, payment may be made at that
place on the next succeeding day that is a Business Day and no interest shall
accrue for the intervening period.
3. Paying Agent and Registrar.
Initially, the Trustee will act as authenticating agent, Paying
Agent and Registrar. The Company may change any authenticating agent, Paying
Agent or Registrar without notice. The Company, any Subsidiary or any Affiliate
of any of them may act as Paying Agent, Registrar or co-Registrar.
4. Indenture; Limitations.
The Company issued the Securities under an Indenture dated as of
November [___], 1997 (the "Indenture"), between the Company and United States
Trust Company of New York (the "Trustee"). Capitalized terms herein are used as
defined in the Indenture unless otherwise indicated. The terms of the Securities
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act. The Securities are subject to all such
terms, and Holders are referred to the Indenture and the Trust Indenture Act for
a statement of all such terms. To the extent permitted by applicable law, in the
event of any inconsistency between the terms of this Security and the terms of
the Indenture, the terms of the Indenture shall control.
The Securities are unsecured, senior subordinated indebtedness of
the Company, will rank pari passu in right of payment with all existing and
future unsecured, senior subordinated indebtedness of the Company, will be
subordinate in right of payment to all existing and future senior indebtedness
of the Company and will be senior in right of payment to all subordinated
indebtedness of the Company.
5. Redemption.
The Securities will be redeemable, at the Company's option, in whole
or in part, at any time and from time to time on or after [____], 2002 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holders' last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of their
principal amount plus the Final Accumulated Interest Amount), plus accrued and
unpaid interest, if any, to the Redemption Date (subject to the right of Holders
of record on the relevant Regular Record Date that is on or prior to the
Redemption Date to receive interest due on an Interest Payment Date) if redeemed
during the 12-month period commencing on [____] of the applicable year set forth
below:
<PAGE> 91
A-5
Year Redemption Price
---- ----------------
2002 [____]%
2003 [____]%
2004 and thereafter 100.0000%
In addition, up to [___]% of the aggregate principal amount of the
Securities may be redeemed at the option of the Company, at any time prior to
[___], 2000, from the proceeds of one or more sales of its Capital Stock (other
than Redeemable Stock), at [___]% of the sum of their principal amount plus the
Accumulated Interest Amount on the Redemption Date, provided that after any such
redemption at least $[_____] million aggregate principal amount of Securities
remains outstanding.
In addition, the Securities may be redeemed as a whole, but not in
part, at the option of the Company, at 100% of their principal amount on the
Redemption Date, together with accrued interest thereon to the Redemption Date,
in the event the Company has become or would become obligated to pay, on the
next date on which any amount would be payable with respect to the Securities,
any Additional Amounts as a result of a change in the laws (including any
regulations promulgated thereunder) of Canada (or any political subdivision or
taxing authority thereof or therein), or change in any official position
regarding the application or interpretation of such laws or regulations, which
change is announced or becomes effective on or after November [___], 1997.
6. Notice of Redemption.
Notice of any optional redemption will be mailed at least 30 days
but not more than 60 days before the Redemption Date to each Holder of
Securities to be redeemed at such Holder's last address as it appears in the
Security Register. Securities in original denominations larger than $1,000 may
be redeemed in part; provided that Securities will only be issued in
denominations of $1,000 principal amount or integral multiples thereof. On and
after the Redemption Date, interest ceases to accrue on Securities or portions
of Securities called for redemption, unless the Company defaults in the payment
of the Redemption Price.
7. Repurchase upon Change in Control.
Upon the occurrence of any Change of Control, each Holder shall have
the right to require the repurchase of its Securities by the Company in cash
pursuant to the offer described in the Indenture at a purchase price equal to
101% of the sum of principal amount thereof and the Accumulated Interest Amount
thereon, plus other accrued and unpaid interest, if any, to the date of purchase
(the "Change of Control Payment").
A notice of such Change of Control will be mailed within 30 days
after any Change of Control occurs to each Holder at his last address as it
appears in the Security Register. Securities in original denominations larger
than $1,000 may be sold to the Company in part; provided that Securities will
only be issued in denominations of $1,000 principal amount or integral multiples
thereof. On and after the applicable Payment Date, interest ceases to accrue
<PAGE> 92
A-6
on Securities or portions of Securities surrendered for purchase by the Company,
unless the Company defaults in the payment of the Change of Control Payment.
8. Denominations; Transfer; Exchange.
The Securities are in registered form without coupons in
denominations of $1,000 of principal amount and integral multiples thereof. A
Holder may register the transfer or exchange of Securities in accordance with
the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer or exchange of any Securities selected for redemption.
Also, it need not register the transfer or exchange of any Securities for a
period of 15 days before a selection of Securities to be redeemed is made.
9. Persons Deemed Owners.
A Holder shall be treated as the owner of a Security for all
purposes.
10. Unclaimed Money.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay the
money back to the Company. After that, Holders entitled to the money must look
to the Company for payment, unless an applicable law designates another Person,
and all liability of the Trustee and such Paying Agent with respect to such
money shall cease.
11. Discharge Prior to Redemption or Maturity.
If the Company deposits with the Trustee money or U.S. Government
Obligations sufficient to pay the then outstanding principal of, premium, if
any, and accrued interest on the Securities (a) to redemption or maturity, the
Company will be discharged from the Indenture and the Securities, except in
certain circumstances for certain sections thereof, and (b) to the Stated
Maturity, the Company will be discharged from certain covenants set forth in the
Indenture.
<PAGE> 93
A-7
12. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture or the Securities may
be amended or supplemented with the consent of the Holders of at least a
majority in principal amount of the Securities then outstanding, and any
existing default or compliance with any provision may be waived with the consent
of the Holders of at least a majority in principal amount of the Securities then
outstanding. Without notice to or the consent of any Holder, the parties thereto
may amend or supplement the Indenture or the Securities to, among other things,
cure any ambiguity, defect or inconsistency and make any change that does not
materially and adversely affect the rights of any Holder.
13. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of the
Company and its Restricted Subsidiaries, among other things, to incur additional
indebtedness; create liens; pay dividends or make distributions in respect of
their capital stock; make investments or make certain other restricted payments;
sell assets; issue or sell stock of Restricted Subsidiaries; enter into
transactions with stockholders or affiliates; acquire assets or businesses
located outside the continental United States and Hawaii; or, consolidate, merge
or sell all or substantially all of its assets. Within 90 days after the end of
the last quarter of each fiscal year, the Company must report to the Trustee on
compliance with such limitations.
14. Successor Persons.
Generally, when a successor person or other entity assumes all the
obligations of its predecessor under the Securities and the Indenture, the
predecessor person will be released from those obligations.
15. Defaults and Remedies.
The following events constitute "Events of Default" under the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Security when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise; (b) default in the payment of interest on
any Security when the same becomes due and payable, and such default continues
for a period of 30 days; (c) the Company defaults in the performance of or
breaches any other covenant or agreement of the Company in the Indenture or
under the Securities and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Securities; (d) there occurs with
respect to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $5,000,000 or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such
<PAGE> 94
A-8
defaulted payment shall not have been made, waived or extended within 30 days of
such payment default; (e) any final judgment or order (not covered by insurance)
for the payment of money in excess of $5,000,000 in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $5,000,000 during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (f) a
court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Company or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; or (g) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in
clause (f) or (g) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Securities, then outstanding, by written
notice to the Company (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare the
principal amount of, premium, if any, and accrued interest, if any, on the
Securities to be immediately due and payable. If a bankruptcy or insolvency
default with respect to the Company occurs and is continuing, the principal of
the Securities automatically becomes due and payable. Holders may not enforce
the Indenture or the Securities except as provided in the Indenture. The Trustee
may require indemnity satisfactory to it before it enforces the Indenture or the
Securities. Subject to certain limitations, Holders of at least a majority in
principal amount of the Securities then outstanding may direct the Trustee in
its exercise of any trust or power.
16. Additional Amounts.
Any payments by the Company under or with respect to the Securities
may require the payment of Additional Amounts as may become payable under
Section 4.21 of the Indenture.
17. Trustee Dealings with Company.
<PAGE> 95
A-9
The Trustee under the Indenture, in its individual or any other
capacity, may make loans to, accept deposits from and perform services for the
Company or its Affiliates and may otherwise deal with the Company or its
Affiliates as if it were not the Trustee.
18. No Recourse Against Others.
No incorporator or any past, present or future partner, shareholder,
other equity holder, officer, director, employee or controlling person as such,
of the Company or of any successor Person shall have any liability for any
obligations of the Company under the Securities or the Indenture or for any
claim based on, in respect of or by reason of, such obligations or their
creation. Each Holder by accepting a Security waives and releases all such
liability. Such waiver and release are part of the consideration for the
issuance of the Securities.
19. Authentication.
This Security shall not be valid until the Trustee or authenticating
agent signs the certificate of authentication on the other side of this
Security.
21. Abbreviations.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to GST
Telecommunications, Inc., 4317 N.E. Thurston Way, Vancouver, Washington 98662,
Attention: Chief Executive Officer.
<PAGE> 96
A-10
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
_______________________________________________________________________________
Please print or typewrite name and address including zip code of assignee
_______________________________________________________________________________
the within Security and all rights thereunder, hereby irrevocably constituting
and appointing _______________________________________ attorney to transfer said
Security on the books of the Company with full power of substitution in the
premises.
Date: ____________ _____________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of the within-mentioned instrument in every
particular, without alteration or any change
whatsoever.
<PAGE> 97
A-11
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company pursuant
to Section 4.12 or Section 4.13 of the Indenture, check the Box: |_|
If you wish to have a portion of this Security purchased by the
Company pursuant to Section 4.12 or Section 4.13 of the Indenture, state the
amount (in principal amount):
$________________.
Date:
Your Signature:
_______________________________________________________________________________
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee: ______________________________
<PAGE> 1
Exhibit 5.1
November 7, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: GST Telecommunications, Inc.
Gentlemen:
We have acted as counsel to GST Telecommunications, Inc., a
federally chartered Canadian corporation (the "Company"), in connection with its
filing of a registration statement on Form S-3 (the "Registration Statement")
relating to $200 million principal amount of Senior Subordinated Accrual Notes
due 2007 (the "Notes"), as more particularly described in the Registration
Statement.
In our capacity as counsel to the Company, we have examined
the Company's Articles of Incorporation and By-Laws, each as amended to date,
the Registration Statement and such other documents as we have considered
appropriate for purposes of this opinion. With respect to factual matters, we
have relied upon statements and certificates of officers of the Company. We have
also reviewed such other matters of law and examined and relied upon such other
documents, records and certificates as we have deemed relevant hereto. In all
such examinations we have assumed conformity with original documents of all
documents submitted to us as conformed or photostatic copies, the authenticity
of all documents submitted to us as original documents and the genuineness of
all signatures on all documents submitted to us.
<PAGE> 2
November 7, 1997
Page -2-
On the basis of the foregoing, we are of the opinion that the
Notes, upon issuance in accordance with the indenture relating to the Notes,
will have been duly and validly authorized and will, when sold as contemplated
by the Registration Statement, constitute legal, valid and binding obligations
of the Company.
We are members of the Bar of the State of New York and, except
as stated below, we express no opinion as to the laws of any jurisdiction other
than the State of New York and the federal laws of the United States of America.
With respect to the opinion set forth above, we have relied in part upon the
opinion of O'Neill & Company, an association of independent law corporations,
Vancouver, British Columbia.
Our opinion with respect to the material United States federal
income tax consequences of the purchase, ownership and disposition of the Notes
is set forth in full under the caption "Certain United States Federal Income Tax
Considerations" in the Registration Statement.
We advise you that Stephen Irwin, the Vice Chairman of the
Board and Secretary of the Company, is of counsel to this firm. Mr. Irwin owns
76,345 Common Shares of the Company and holds options and warrants to purchase
an aggregate of 600,000 Common Shares. In addition, other attorneys of this
firm hold Common Shares and/or options to purchase Common Shares.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference made to us under the captions
"Legal Matters" and "Certain United States Federal Income Tax Considerations" in
the prospectus constituting part of the Registration Statement.
Very truly yours,
/s/ Olshan Grundman Frome & Rosenzweig LLP
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
<PAGE> 1
Exhibit 8.2
[THORSTEINSSONS LETTERHEAD]
November 3, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: GST TELECOMMUNICATIONS, INC.
----------------------------
Gentlemen:
We have acted as Canadian tax counsel to GST Telecommunications, Inc., a
federally chartered Canadian corporation (the "Company") in connection with its
filing of a registration statement on Form S-3 (the "Registration Statement")
relating to $200 million principal amount of Senior Subordinated Accrual Notes
due 2007 (the "Notes") and more particularly described in the Registration
Statement.
Our opinion with respect to the material Canadian federal income tax
consequences of the purchase, ownership and disposition of the Notes is set
forth in full under the caption "Certain Canadian Tax Considerations" in the
Registration Statement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to us under the captions "Legal
Matters" and "Certain Canadian Tax Considerations" in the prospectus
constituting part of the Registration Statement.
Yours truly,
/s/ S. M. Cook
S. M. Cook
SMC:whd
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report, dated November 22, 1996, included in
the Registration Statement on Form S-3, dated November 10, 1997, of GST
Telecommunications, Inc. and to the references to our firm under the headings
"Selected Consolidated Financial Data" and "Experts" in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
--------------------------------------
Portland, Oregon
November 10, 1997
<PAGE> 1
Exhibit 23.2
ACCOUNTANTS' CONSENT
To the Directors of
GST Telecommunications, Inc.
(formerly Greenstar Telecommunications Inc.)
We consent to the inclusion in the registration statement, filed November
10, 1997 on Form S-3 of GST Telecommunications, Inc. (formerly Greenstar
Telecommunications Inc.) of our report dated December 8, 1994, relating to the
consolidated statements of operations, shareholders' equity and cash flows of
GST Telecommunications, Inc. for the thirteen months ended September 30, 1994
which report appears in the September 30, 1996 annual report on Form 10-K of GST
Telecommunications, Inc., and to the references to our firm under the headings
"Selected Consolidated Financial Data" and "Experts" in the registration
statement.
/s/ KPMG
- ---------------------------------------------------------
Chartered Accountants
Vancouver, Canada
November 10, 1997
<PAGE> 1
Exhibit 25.1
FORM T-1
==============================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
-------
------------------
UNITED STATES TRUST COMPANY OF NEW YORK (Exact
name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification No.)
114 West 47th Street 10036-1532
New York, NY (Zip Code)
(Address of principal
executive offices)
------------------
GST TELECOMMUNICATIONS, INC.
(Exact name of obligor as specified in its charter)
Canada Not Applicable
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
4317 N. E. Thurston Way
Vancouver, Washington 98662
(Address of principal executive offices) (Zip Code)
------------------
% Senior Subordinated Accrual Notes due 2007
(Title of the indenture securities)
==============================================
<PAGE> 2
- 2 -
GENERAL
1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:
GST Telecommunications, Inc. currently is not in default under any of its
outstanding securities for which United States Trust Company of New York is
Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12,
13, 14 and 15 of Form T-1 are not required under General Instruction B.
16. LIST OF EXHIBITS
T-1.1 -- Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a
Trust Company, is incorporated by reference to Exhibit T-1.1
to Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No. 33-
97056).
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
<PAGE> 3
- 3 -
16. LIST OF EXHIBITS
(cont'd)
T-1.4 -- The By-Laws of United States Trust Company of New
York, as amended, is incorporated by reference to
Exhibit T-1.4 to Form T-1 filed on September 15, 1995
with the Commission pursuant to the Trust Indenture
Act of 1939, as amended by the Trust Indenture Reform
Act of 1990 (Registration No. 33-97056).
T-1.6 -- The consent of the trustee required by Section 321(b)
of the Trust Indenture Act of 1939, as amended by the
Trust Indenture Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the
trustee pursuant to law or the requirements of its
supervising or examining authority.
NOTE
As of October 29, 1997, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States Trust
Company of New York and its parent company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
------------------
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 30th day
of October, 1997.
UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee
By: /s/ Louis P. Young
-----------------------------
Louis P. Young
Vice President
<PAGE> 4
EXHIBIT T-1.6
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
January 7, 1997
Securities and Exchange Commission 450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
/s/Gerard F. Ganey
------------------------------
By: Gerard F. Ganey
Senior Vice President
<PAGE> 5
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and Due from Banks $ 83,529
Short-Term Investments 259,746
Securities, Available for Sale 924,165
Loans 1,437,342
Less: Allowance for Credit Losses 13,779
----------
Net Loans 1,423,563
Premises and Equipment 61,515
Other Assets 122,696
----------
TOTAL ASSETS $2,875,214
==========
LIABILITIES
Deposits:
Non-Interest Bearing $ 763,075
Interest Bearing 1,409,017
----------
Total Deposits 2,172,092
Short-Term Credit Facilities 404,212
Accounts Payable and Accrued Liabilities 132,213
----------
TOTAL LIABILITIES $2,708,517
==========
STOCKHOLDER'S EQUITY
Common Stock 14,995
Capital Surplus 49,541
Retained Earnings 100,930
Unrealized Gains (Losses) on Securities
Available for Sale, Net of Taxes 1,231
----------
TOTAL STOCKHOLDER'S EQUITY 166,697
----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $2,875,214
==========
</TABLE>
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.
Richard E. Brinkmann, SVP & Controller
August 7, 1997
