SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12866
GST TELECOMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Canada N/A
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
4317 N.E. Thurston Way, Vancouver, Washington 98662
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (360) 254-4700
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Shares, without par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months
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(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes /X/ No/ /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
The aggregate market value at December 27, 1996 of the
Registrant's Common Shares, without par value (based upon the closing price of
$8 5/16 per share of such Shares on the American Stock Exchange), held by
non-affiliates of the Registrant was approximately $158,925,416. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination or an admission by the Registrant that such individuals are, in
fact, affiliates of the Registrant.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At December
20, 1996, there were outstanding 22,045,638 of the Registrant's Common Shares,
without par value.
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ITEM 1. BUSINESS
OVERVIEW
GST Telecommunications, Inc. (the "Company") provides a broad range of
integrated telecommunications products and services, primarily to customers
located in the western continental United States and Hawaii. Since inception as
a facilities-based competitive access provider ("CAP"), the Company has
constructed and operated digital interconnected telecommunications networks that
provide an alternative to local exchange carriers ("LECs"). The Company has
expanded beyond the scope of traditional CAP operations into competitive local
exchange carrier ("CLEC") services and currently provides, through its
established sales channels, a range of enhanced telecommunications services that
include long distance, Internet access and data services. In addition, the
Company provides switched access and recently began to offer local dial tone
services to complement its existing telecommunications service offerings. The
Company also provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities through
its subsidiary, NACT Telecommunications, Inc. ("NACT").
The Company's fiber optic networks currently serve 24 cities in
Arizona, California, New Mexico and Washington and its digital microwave
networks serve four of the Hawaiian Islands. In addition, the Company has 18
networks under construction and other networks in various stages of development.
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
and construction of additional networks within its region. In addition, to
facilitate the provision of local services, the Company has deployed four high
capacity digital switches and intends to deploy additional switches in the first
half of 1997.
TELECOMMUNICATIONS NETWORKS
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.
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 a ring architecture with connectivity to LEC
central offices, points-of-presence ("POPs") of long distance carriers and large
concentrations of telecommunication intensive end-users.
At December 15, 1996, (i) in California, the Company had operational
networks in Northern California (Concord, Hayward, Pleasanton, San Ramon, Mare
Island and Walnut Creek), Southern California (Bloomington, Loma Linda, Rialto,
Riverside, San Bernardino, City of Industry, Monterey Park, Anaheim and Ontario)
and the San Joaquin Valley (Coalinga, Fresno, Bakersfield and Taft); (ii) in
Hawaii, the Company had operational networks on Hawaii, Maui, Molokai and Oahu;
(iii) in Arizona, the Company had an operational network in Tucson and owned 50%
of Phoenix Fiber Access, Inc. ("Phoenix Fiber") which had an operational network
in Phoenix; (iv) in New Mexico, the Company had an operational
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network in Albuquerque; and (v) in Washington, the Company had operational
networks in Spokane and Vancouver. In addition, the Company is constructing an
inter-island fiber optic network that will connect six of the Hawaiian Islands
and fiber optic networks on the islands of Hawaii, Maui and Oahu.
The Company's decision to construct a network in a particular locale is
preceded by a review of the area's demographic, economic, competitive and
telecommunications requirements. The characteristics examined include location
and concentration of potential business, governmental and institutional
end-users, the locale's economic prospects, information regarding demand for the
various services offered by the Company and actual and potential LECs, 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").
If the locale's characteristics are deemed to warrant development
activities, the Company, with the assistance of engineering consultants, designs
a network that will connect the largest practicable concentration of potential
end-users, IXCs, POPs and LEC central offices. The Company initiates discussions
simultaneously with municipal officials, rights-of-way providers, IXCs and
potential end-users and prepares estimates of the costs of fiber optic cable,
transmission, switching and other electronic equipment, engineering design and
construction, rights-of-way and structural access. Concurrently, estimates of
potential network revenues and profitability are prepared and are compared with
estimated costs to determine whether the projected rate of return justifies
construction. If the projected rate of return meets the Company's guidelines, a
detailed financial and business plan is prepared.
The construction of a network requires that the Company obtain
municipal franchise and other permits. These rights are frequently the subject
of non-exclusive agreements of finite duration providing for the payment of
fees. In addition, the Company must secure rights-of-way and other access which
are typically provided under non-exclusive multi-year agreements, which
generally contain renewal options. Generally, these rights are obtained from
utilities, LECs, other CLECs, railroads and IXCs. The Telecommunications Act
requires most utilities to afford access to rights-of-way to CLECs on
non-discriminatory terms and conditions and at reasonable costs.
The Company's requirements for a planned network are communicated to an
engineering firm that finalizes the route and completes the network's design.
Independent construction and installation contractors are selected through a
competitive bidding process. The Company's own personnel supervise the
construction, negotiate required contracts, and test and verify the network
components. Cable, equipment and supplies required for the networks are
available from a variety of sources at competitive rates.
The construction period of a new network varies depending upon such
factors as the number of backbone route miles to be installed, the initial
number of buildings targeted for connection to the network backbone and the
general deployment of the network backbone. Construction is planned to allow
revenue-generating operations to commence prior to the completion of the entire
network backbone. After installing the network backbone, extensions to
additional buildings and expansions to other regions of a metropolitan area are
evaluated, based on detailed assessments of market potential. Based upon the
Company's experience with its operational networks, the Company believes that
generally a new fiber optic network can be commercially operational within four
to five months after construction commences.
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The successful implementation of 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. The Company has begun to interconnect each of its
operational California and Hawaiian networks to allow the on-net provision of
the Company's services throughout each State. In Hawaii, the Company operates a
digital microwave network and has recently entered into a network
interconnection agreement with GTE Hawaiian Telephone Company ("GTE"), the
dominant service provider in the Hawaiian Islands, that is subject to regulatory
approval. The Company is the only authorized provider of statewide full local
dial tone services other than GTE. The Company is also supplementing its
microwave network with terrestrial fiber optic facilities and has begun
deployment of an inter-island fiber network to extend its services throughout
the State. The Hawaii Public Utilities Commission (the "HPUC") has authorized a
subsidiary of the Company to expand its authority to include local exchange
services in competition with GTE. Deployment of local exchange services on other
than a resale basis or through the purchase from GTE of unbundled network
elements are dependent upon HPUC approval of the interconnection agreement
recently entered into between the Company and GTE and the installation of
necessary facilities and equipment. The Company has also recently completed pole
attachment and audit occupancy agreements with GTE. The Company recently
completed a rights-of-way agreement with Hawaiian Electric Company relating to
all islands other than Kauai, which will facilitate this network deployment.
TELECOMMUNICATIONS SERVICES
In conjunction with its network expansion, the Company has developed a
strategy to leverage its existing infrastructure by providing a wide range of
integrated local and long distance telecommunications services to meet the voice
and data needs of its end-user customers. The Company intends to continue to
primarily focus on business, government and academic end-users within its region
that have significant telecommunications requirements. To meet these customers'
needs, the Company offers a number of CLEC services including:
LOCAL SERVICES
Local services involve the transmission of voice, video or data to long
distance carrier-specified or end- user-specified termination sites (by manually
or electronically dialing a telephone number). By contrast, the special access
services currently provided by the Company and other CLECs involve a fixed
communications link or "pipe," usually between a specific end-user and a
specific long distance carrier's POP. With a switch, it is possible for the
Company to direct a long distance carrier's traffic to any end-user whether or
not the end-user is connected to the Company's network. Under current federal
regulations, the Company is permitted to provide a full range of interstate
switched access and enhanced services. In addition, a switch gives the Company
the technological capability to provide the full range of local telephone
services, although state authority may be necessary for intrastate service
offerings.
To facilitate the provision of local services, the Company has deployed
four switches for switched access as well as local dial tone and enhanced
services and intends to deploy additional switches in the first half of 1997.
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 LEC facilities for transmission. Once each
switch is operational, the Company expects to begin providing, where regulatory
conditions permit, local dial tone, in addition to enhanced services such as
ISDN, Centrex, voice mail and other custom calling features.
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LONG DISTANCE SERVICES
The Company offers enhanced long distance services, such as toll free,
private line, calling card, prepaid calling card and international call back
services to end-users, agents and other carriers. The Company supplies long
distance services pursuant to resale agreements that enable it to utilize the
network facilities of major long distance carriers such as AT&T Corp. ("AT&T")
and MCI Communications Corporation ("MCI"). The Company's current customer base
encompasses primarily business customers purchasing between $200 and $15,000 of
service per month. The Company has recently expanded its long distance products
and services through the acquisition of Call America Business Communications
Corporation and its affiliated companies (collectively "Call America"), TotalNet
Communications Inc. ("TotalNet") and certain assets of Texas-Ohio
Communications, Inc. and affiliated companies (collectively, "Texas-Ohio").
CALL AMERICA. The Company has entered into an agreement and plan of
merger with Call America, pursuant to which the Company would acquire 100% of
Call America by means of a merger, for a purchase price of 1,307,692 common
shares with no par value of the Company (the "Common Shares"), subject to a post
closing adjustment of additional Common Shares if, 180 days after the effective
time of the merger, the market price of the Common Shares is less than $12.50
per share. The maximum number of additional Common Shares to be issued pursuant
to the post closing adjustment is 114,489. The consummation of the merger is
contingent upon obtaining certain required consents and approvals, including
regulatory approvals, which are expected to be received by the end of 1996. Call
America, which is based in San Luis Obispo, California, is a facilities-based
long distance reseller that provides switched long distance, voice mail,
operator services, paging, Internet access, wireless messaging, e-mail and other
services to approximately 8,000 customers in the three-county area of San Luis
Obispo, Santa Barbara and Ventura counties.
TOTALNET. The Company acquired TotalNet for a purchase price of
approximately $8.7 million, payable entirely in Common Shares to the former
shareholders of TotalNet in two installments. Sixty percent of the purchase
price (approximately $5.2 million), for a total of 481,391 Common Shares valued
at $10.90 per share, was paid on October 17, 1996 and the remaining 40% of the
purchase price (approximately $3.5 million) is payable in Common Shares on
October 17, 1997, based on the market value of the Common Shares at such time
but in no event less than $7.63 per share, or more than $20.00 per share.
TotalNet, which is based in Houston, Texas, is both a facilities-based carrier
and a switchless reseller of long distance services. TotalNet provides 1+,
toll-free "800," operator-assisted and calling card services to approximately
3,500 small to medium sized businesses in the Houston metropolitan area.
TEXAS-OHIO. The Company acquired certain assets of Texas-Ohio in
exchange for $589,704 and the assumption of certain liabilities. Texas-Ohio is a
full-service long distance reseller that provides its customers with 1+,
toll-free "800," operator-assisted and calling card services. Texas-Ohio
specializes in enhanced calling card services. Texas Ohio provides its long
distance services to 26 agents and resellers nationwide who market these
products to over 2,500 customers. Texas Ohio's electronic order entry system is
unique to the industry and allows agents to enroll and service its customers
on-line. Additionally, the Company has an experienced customer service
department that is fully operational 24 hours a day, seven days a week.
INTERNET SERVICES
In March 1996, the Company acquired Reservations, Inc. d/b/a Hawaii On
Line ("Hawaii On Line"), the largest Internet access provider in Hawaii, and has
since increased the number of Hawaii On Line's customers from approximately
4,900 to approximately 12,000. The Company is also presently providing Internet
services to customers in Portland and Vancouver (Washington). In addition to
providing Internet access, the Company offers electronic interchange services
through its recently acquired LightYear
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division, WorldWide Web development and hosting and other Internet services and
is also developing various Internet software applications. Management believes
that these services will become an important component of the Company's overall
product offerings and will permit the Company to leverage its existing
infrastructure. The Company 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 an interconnection agreement with
Intermedia Communications Inc. ("Intermedia"). Under this agreement, the Company
and Intermedia have agreed to link their data networks and terminate one
another's traffic. The Company currently offers frame relay services in most
major markets in the United States, with a focus on the markets located in the
western part of the country.
The Company is developing metropolitan area networks leveraging off its
fiber, wireless, microwave and other transport facilities. These networks will
be used to offer services such as high speed LAN connectivity service with
access rates ranging from 10 to 100 Mbps, video conferencing, multi-media
networking and high capacity access to the Internet.
The Company's data networks are monitored by its network control
center, 24 hours a day, 7 days a week. The Company intends to provide its
customers monthly network management reports that would allow users to track the
performance of their virtual private network. Customer network management
support will permit customers to monitor and tailor their virtual network as
desired with a communication link into the Company's network management systems.
National and international frame relay connectivity are achieved with
individual network-to-network interface ("NNI") agreements with Intermedia and
other telecommunications carriers. In addition to dedicated local loop access to
the Company's frame relay network, the Company has established frame relay NNIs
with PacBell, U S West Communications, Inc. ("U S West"), SBC Communications
Corporation and GTE Corporation and its affiliated companies (collectively, the
"GTE Companies") to provide frame relay services.
SHARED TENANT SERVICES
The Company offers shared tenant services to large apartment
communities in New Mexico, Oregon, Utah and Washington. Shared tenant services
include resold dial tone, long distance, voice mail, calling features, calling
cards, cable television, home alarm service and Internet access. The Company
recently expanded its shared tenant services business through the acquisition of
Tri-Star Residential Communication Corp. ("Tri-Star"), a Washington-based shared
tenant services provider. The Company acquired Tri-Star on September 19, 1996
for a purchase price of $2,417,150, payable entirely in Common Shares, in eight
quarterly installments.
The Company provides dial tone service through on-site PBX telephone
systems located within each apartment complex that are connected to the LEC. 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, thereby resulting in significant cost savings to the
Company. In addition, the Company is in the process of connecting apartment
communities to its own fiber network.
MANUFACTURING
The Company, through its subsidiary, NACT, provides advanced
telecommunications switching platforms with integrated applications software and
network telemanagement capabilities. As a single
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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 a complete 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 services and applications.
NACT's customers include long distance carriers, prepaid debit card and prepaid
cellular network operators, international call back/reorigination providers and
other specialty 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. 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.
COMPETITION
The telecommunications industry is highly competitive. In most markets,
the Company's networks' principal competitor is the Regional Bell Operating
Company ("RBOC") or the GTE Companies. Additional competitors may include other
CAPs, 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 LECs 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 Corporation ("Sprint"), which have announced plans to
offer integrated local and long distance telecommunications services as
regulations allow. Consolidation of telecommunications companies and the
formation of strategic alliances within the telecommunications industry as well
as the development of new technologies could give rise to significant new
competitors to the Company.
As a recent entrant in the integrated telecommunications services
industry, the Company has not achieved and does not expect to achieve a
significant market share for any of its services. In particular, the RBOCs, the
GTE Companies and other local telephone companies have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially 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 LECs over the
Company in certain respects. While recent regulatory and legislative initiatives
allow CLECs such as the Company to interconnect with LEC 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 LECs. Local telephone companies also
may enter the long distance market, subject to certain conditions. For example,
the Federal Communications Commission (the "FCC") granted LECs additional
flexibility in pricing their interstate special and switched access services on
a central office
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specific basis. Under this pricing scheme, LECs may establish pricing zones
based on access traffic density and charge different prices for central offices
in each zone.
In California, the Company has selected cities where it was or expects
to be the first entrant into a market. Although the Company expects that other
CLECs will develop networks in cities where the Company is developing or
operating networks, currently the Company's only competitors in its California
markets are the LECs, although Brooks Fiber Properties ("Brooks") has begun to
construct networks in Fresno and Bakersfield.
Currently, in Hawaii, the Company is the only authorized provider of
statewide full local dial tone services other than GTE.
In Tucson, the Company competes with the LEC, U S West, and two other
companies that also have a license agreement with the City of Tucson. These
companies, Brooks Fiber Communications of Tucson, Inc. and American
Communications Services Inc. ("ACSI") and the Company have entered into
agreements with Tucson Electric Power Company ("TEP") for pole attachment and
access to TEP's facilities rights-of-way.
In Phoenix, Phoenix Fiber competes with the LEC. In addition to the
LEC, four other companies (Electric Lightwave, Inc., MFS Communications Company,
MCI and Teleport Communications Group, Inc.) have constructed or intend to
construct fiber optic telecommunication transmission networks in the Phoenix
area. Such companies are expected to offer services that will compete with some
or all of the services to be offered by Phoenix Fiber.
In addition to the Company, ASCI and Brooks have franchise agreements
with the city of Albuquerque.
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. 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 is expected to increase AT&T's flexibility in competing
in the long distance services market and, in particular, eliminates the longer
tariff notice requirements previously applicable only to AT&T. Most recently the
FCC has adopted rules that will eliminate the ability or need of long distance
carriers to file tariffs with the FCC. 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.
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The market for telecommunications products is highly competitive and
subject to rapid technological change. NACT expects competition to increase 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 Communications Product Development, Inc., Integrated
Telephony Products, Inc. and PCS Telecom, Inc. NACT also competes with providers
of open architecture (programmable) hardware switching platforms that are
enhanced by applications providers and value added resellers. Such competitors
include Excel, Inc., which has agreements with software application providers,
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 Compagnie, Generale D'Electricite, Telefonaktiebolaget, L.M.
Ericcson and Northern Telecom, Ltd.
Most of the Company's actual and potential competitors in its switched
access, 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.
MARKETING
The Company markets its telecommunications service offerings through
the use of direct mail, print, radio and television advertising, attendance at
trade shows and open houses, press conferences, newsletters and media releases.
The Company has developed two primary channels of distribution: commercial
channels, which include commercial sales offices, telemarketing and product
specific sales, and target-specific channels, which include carrier sales,
government systems, alternate channels marketing and vertical markets. The
Company has sales offices in 18 cities in which it operates networks.
The Company's commercial distribution channels focus on end-users,
including business customers with telecommunication-intensive needs. The
Company's direct sales agents work in conjunction with its agent and
telemarketing groups to sell value-added services to medium and large business
end-users. The telemarketing group generates qualified leads and schedules
appointments for the Company's regional sales agents as well as consummates
sales to long distance and Internet customers in cities where the Company does
not operate a network. The Company's product specific sales channels market
prepaid debit cards to retail stores and the collector's market.
The Company's target-specific channels focus on customers with more
complex telecommunications requirements. Long distance sales constitute the
largest source of revenues to the Company. The Company takes advantage of
opportunities created by the large IXCs and is working to identify and address
smaller carriers. Larger carriers use the Company's services to augment their
networks and enhance their service offerings, while smaller carriers rely on the
Company to provide services as well as methods to sell services.
REGULATION
The Company's telecommunications services business is subject to
varying degrees of federal, state and local regulation.
FEDERAL REGULATION
The FCC regulates interstate and international telecommunication
transmissions. The allocation of jurisdiction between federal and state
regulators over dedicated circuits that carry both interstate and
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intrastate traffic (including private line and special access services) creates
definitional issues. The FCC, however, has noted that private line, non-switched
telecommunications services can be classified as jurisdictionally interstate
(subject to FCC jurisdiction) if at least 10% of the transmissions are
interstate in nature. The FCC has not ruled specifically as to the
jurisdictional nature of the traffic of the Company's networks.
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 private carriers
provide customized services to select customers pursuant to individually
negotiated contracts and do not file tariffs with the FCC but common carriers
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 telecommunication lines between the
United States and international points.
The FCC requires that local telephone companies having annual revenues
exceeding $100.0 million (for example, the RBOCs and the GTE Companies) permit
the interconnection of their facilities with those of CLECs. Interconnection is
the ability of an entity to connect its network to local telephone companies'
central offices, which requires the cooperation of the local telephone company
and facilitates the carrying on of business by CLECs. This requirement aids
CLECs in competing in the interstate, switched and special access service
markets. It allows CLECs to reach a much larger customer base without
significantly increasing their own physical network.
In August 1996, the FCC released its decision implementing the
interconnection portions of the Telecommunications Act (the "Interconnection
Decision"). The Interconnection Decision establishes rules implementing the
Telecommunications Act requirements that incumbent local exchange carriers
negotiate interconnection agreements and provides guidelines for review of such
agreements by state public utilities commissions. In October 1996, the Eighth
Circuit stayed effectiveness of 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 or negotiated interconnection agreements. Although the judicial stay
of the Interconnection Decision does not prevent the Company from negotiating
interconnection agreements with local exchange carriers, it does create
uncertainty about the rules governing pricing, terms and conditions of
interconnection agreements, and could make negotiating such agreements more
difficult and protracted. On November 12, 1996, the U.S. Supreme Court refused
to vacate the Eighth Circuit's judicial stay. The Eighth Circuit is expected to
hear oral arguments in this case in January 1997 and further appeals are
possible. There can be no assurance that the Company will be able to obtain
interconnection agreements on terms acceptable to the Company.
On October 29, 1996, the FCC adopted an order (the "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.
The 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 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 motions for reconsideration of the Order and MCI has filed a motion
for the FCC to stay the Order. MCI and others have also filed appeals in the
U.S. Court of Appeals for the District of Columbia.
Except in certain designated geographically competitive zones, the
current policy of the FCC for most special access services dictates that LECs
charge all customers the same price for the same service.
-9-
<PAGE>
Thus, the LECs 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 LECs and permit them to
offer special rate packages to very large customers, as it has done in a few
cases, or permit other forms of regulatory rate flexibility. The FCC has adopted
proposals that significantly lessen the regulation of LECs that are subject to
competition in their service areas and provide such LECs with additional
flexibility in pricing their interstate switched and special access on a central
office specific basis.
The Telecommunications Act is intended to increase competition. Because
implementation of the Telecommunications Act is subject to numerous federal and
state policy rulemaking proceedings, it is unknown at this time what impact such
legislation will have on the Company.
Pursuant to authority granted by the FCC, the Company resells the
international message communications 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 ruled
international call back services to be legal where the specific countries from
which such calls are placed do not have laws that specifically make call back
illegal. The FCC has stated that it will take action against United States
carriers that violate another country's call back prohibition if that country
has been unable to insure compliance.
With respect to its domestic service offerings, International
Telemanagement Group, Inc. ("ITG"), a subsidiary of the Company, has filed
tariffs with the FCC stating the rates, terms and conditions for its interstate
rates. To the extent that ITG provides intrastate services, it may be required
to obtain authority from state regulatory authorities prior to providing such
services, as well as certificates authorizing ITG to transact business in these
states. There can be no assurance that such state authorizations will be
granted.
To the extent NACT provides international or interstate
telecommunications services, it is required to obtain regulatory authority from
the FCC. Any intrastate telecommunications services provided by NACT may require
authority from state regulatory agencies.
Under the Communications Act of 1934, as amended (the "Communications
Act"), 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, unless the FCC permits such alien participation based on a showing of
public interest. The operations of the Company's Hawaiian microwave network
require the use of radio licenses from the FCC. Pacific Network, Inc., an entity
controlled by John Warta, the President and Chief Executive Officer of the
Company holds the licenses for the Hawaii microwave facilities. 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 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's networks require a common carrier radio
license in the future, they may be prohibited from obtaining such license
because of the foreign ownership restrictions of the Communications Act.
In addition, under the FCC's foreign ownership rules, the Company
cannot hold Personal Communications Services ("PCS") licenses directly. Magnacom
Wireless, LLC ("Magnacom"), a company controlled by John M. Warta, the Chief
Executive Officer of the Company, has applied for various PCS licenses. The
Company is in the process of establishing a non-exclusive 12 year agreement with
-10-
<PAGE>
Magnacom whereby the Company will purchase services relating to such licenses
from Magnacom for use or resale.
STATE REGULATION
State regulatory agencies have regulatory jurisdiction when Company
facilities and services are used to provide intrastate services. In particular,
state regulation determines which local telephone services the Company may
offer. Several states, including California and Arizona, have adopted
initiatives that allow competition in various aspects of the local exchange
market. A portion of the Company's current traffic may be classified as
intrastate and therefore subject to state regulation. To provide intrastate
services, the Company generally must obtain a certificate of public convenience
and necessity from the state regulatory agency and comply with state
requirements for telecommunications utilities.
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. The Company has applied for a
Certificate of Convenience and Necessity from the ACC to provide
jurisdictionally intrastate special access, private line and/or local exchange
services in Arizona. A hearing is currently scheduled for December 20, 1996. The
Company has entered into a license agreement with Pima County (the county in
which Tucson is located) which was officially recorded on July 16, 1996, to
construct, install, maintain and operate a fiber optics communication system in
the public right-of-way.
CALIFORNIA. As of January 1, 1995, the CPUC permits competition on an
interLATA and intraLATA interexchange basis for all toll services. The CPUC has
authorized facilities based local competition as of January 1, 1996 and local
resales as of March 1, 1996. On November 1, 1996, two subsidiaries of the
Company, were granted permanent authority to provide both facilities-based and
resale local exchange services and were certified by the CPUC to provide
interLATA service and certain intraLATA services within the State of California
(specifically including intraLATA interexchange service on a 10XXX access basis
and intraLATA non-switched services at speeds of 1.544 Mbps and above).
HAWAII. In Hawaii, the HPUC has broad jurisdictional powers to regulate
public utility companies that own, control, operate or manage any plant or
equipment or furnish facilities, directly or indirectly for public use, for the
conveyance or transmission of telecommunications messages between points within
Hawaii. The Company is subject to the jurisdiction of the HPUC, which has
granted the Company a CPCN as a carrier of voice and data on a point to point
basis in Hawaii. On June 3, 1996, the HPUC promulgated new rules governing
"Competition in Telecommunication Services." Under the HPUC's new rules, an
application by the Company for an expanded CPCN is no longer necessary. GST
Hawaii, as a telecommunications carrier granted a CPCN before the effective date
of the new rules, files a separate tariff for any proposed, modified, or new
service, unless ordered otherwise by the HPUC. The Hawaii basic CLEC tariff was
filed and became effective on September 4, 1996. The HPUC has allowed the
Company to expand its authority to include local exchange services in
competition with GTE. Deployment of local exchange services on other than a
resale basis or through the purchase of unbundled network elements from GTE are
dependent upon HPUC approval of the interconnection agreement recently entered
into between the Company and GTE (as well as the placement of necessary
facilities and equipment).
NEW MEXICO. In October 1995, the Company was granted a CPCN from the
New Mexico State Corporation Commission to provide intrastate, non-switched
private line services. GST New Mexico is the first CLEC authorized to provide
such services in New Mexico.
WASHINGTON. The Company has applied to the Washington Utilities and
Transportation Commission for registration and "competitive carrier" status in
Washington. The Company's application to register as
-11-
<PAGE>
a telecommunications provider was approved on March 27, 1996 and its application
for competitive carrier status is pending.
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 networks need 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 the date hereof, the Company had invested approximately Cdn. $4.9
million in a publicly traded Canadian corporation (subsequently renamed GST
Global Telecommunications, Inc. and hereinafter referred to as "Global") and
held approximately 32% of Global's outstanding shares. Global is to issue to the
Company up to an additional 5,000,000 of its common shares (on a fully diluted
basis), subject to approval of the Vancouver Stock Exchange ("VSE"), in
consideration for the transfer by the Company to Global of its rights in and to
the Bestel project described below. The Company's designees comprise a majority
of the members of Global's Board of Directors. The Company intends to conduct
certain of its international activities through Global. Global is to employ its
own operating management and raise in the capital markets the equity and debt
financing required for its proposed activities. At the date hereof, Global had
raised approximately Cdn $22 million through private placements of its common
shares.
Global has the right to subscribe, pursuant to a Subscription Agreement
dated August 20, 1996, for an interest (expected to be approximately 25%) in
Bestel, S.A. de C.V. ("Bestel") for a total consideration of $3,920,000. Bestel
will be a facilities-based CAP that proposes to construct and operate a fiber
optic telecommunications network consisting of approximately 1,375 route miles
connecting certain cities in Mexico, including Nuevo Laredo, Monterrey, Mexico
City, Guadalajara and Manzanillo.
Global has also entered into an Agreement to acquire from a subsidiary
of Cable & Wireless Holding Plc an 80% interest in Vitacom Corporation
("Vitacom"), for a purchase price of $1,500,000 payable in cash. 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. Consummation of the
transaction is subject to the receipt of regulatory approvals.
MAGNACOM
Magnacom has been granted 30mhz (C Block) Personal Communications
Services ("PCS") licenses from the FCC for the following cities: Albuquerque and
Santa Fe, New Mexico; Tucson, Arizona; Eugene and Salem, Oregon; and
Guam/Saipan. Magnacom also has submitted bids in the FCC's 10mhz (D, E and F
block) PCS license auctions for the cities of Honolulu, Hilo, Lihue and Kahului,
Hawaii; Portland, Medford and Roseburg, Oregon; Longview, Yakima, Kennewick,
Walla Walla and Spokane, Washington; and Boise and Lewiston, Idaho.
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.
-12-
<PAGE>
The provision of wireless telecommunications service by Magnacom will
be dependent upon its ability to obtain the financing necessary to make payments
to the FCC under the terms of its licenses, to obtain working capital, and to
build the required facilities, including the purchase of telecommunications
equipment. There can be no assurance Magnacom 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.
EMPLOYEES
As of November 15, 1996, the Company and its subsidiaries had 686
full-time employees, of which 246 were employed in engineering and operations,
23 in research and development, 154 in sales and marketing, 29 in customer
service, 73 in management, 153 in administration and finance and eight in legal
and regulatory. None of such employees is covered by a collective bargaining
agreement. The Company considers its relationship with its employees to be
satisfactory.
RECENT DEVELOPMENTS
On October 22, 1996, the Company completed a private placement to
non-U.S. investors of 2,000,000 special warrants (the "Special Warrants") at a
purchase price of $11.125 per Special Warrant (the "Special Warrant Offering").
Each Special Warrant is exercisable for one Common Share and one-half of one
underlying warrant (each an "Underlying Warrant"). Each Underlying Warrant
entitles the holder to purchase one additional Common Share for a purchase price
of $13.00 for one year from the date of issuance. The Special Warrants become
exercisable by holders for no additional consideration upon the later to occur
of (i) the date upon which approval for a final Canadian prospectus (the
"Canadian Prospectus") qualifying the Common Shares and 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 (the "U.S. Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
registering the resale of the Common Shares issuable upon exercise of the
Special Warrants and Underlying Warrants is declared effective, but in any event
no later that September 22, 1997. In the event that the requisite regulatory
approvals for the Canadian Prospectus are not received by the Company and the
U.S. Registration Statement is not declared effective, in each case by February
19, 1997, then each Special Warrant will become exercisable for 1.1 Common
Shares and one-half of one Underlying Warrant.
-13-
<PAGE>
The Company received $9,690,000, constituting 50% of the aggregate
purchase price of the Special Warrants (net of placement agency fees and
expenses), on October 22, 1996. The balance of the net purchase price of Special
Warrants ($11,125,000) is being held in escrow and is payable to the Company
upon the earlier to occur of (x) the date of receipt of final regulatory
approval of a preliminary Canadian Prospectus from the securities commissions of
the applicable Canadian provinces and (y) the initial filing of the U.S.
Registration Statement with the Commission, in each case covering the resale of
the Common Shares issuable upon exercise of the Special Warrants and the
Underlying Warrants.
On December 12, 1996, NACT filed a registration statement in respect of
an initial public offering of its common stock (the "NACT Offering") pursuant to
which the Company and NACT will sell one million and two million shares,
respectively, thereby reducing the Company's interest in NACT to approximately
63%.
-14-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements: see the Index to
Consolidated Financial Statements.
(2) Financial Statement Schedules: see the Index to Consolidated
Financial Statements.
(3) Exhibits:
3(a) Certificate of Incorporation of the Company, as amended to
date.
3(b) By-Laws of the Company as amended to date.
4(a) Senior Notes Indenture dated as of December 19, 1995, by and
among GST USA, Inc., the Company and United States Trust
Company of New York, incorporated by reference to Exhibit 2.3
to the Company's Form 20-F for the fiscal year ended September
30, 1995 (the "1995 Form 20-F").
4(b) Convertible Notes Indenture dated as of December 19, 1995, by
and among the Company, GST USA, Inc. and United States Trust
Company of New York, incorporated by reference to Exhibit 2.4
to the 1995 Form 20-F.
10(a) 1995 Stock Option Plan of the Company, as amended to date.
10(b) 1996 Stock Option Plan of the Company, as amended to date.
10(c) 1996 Employee Stock Purchase Plan of the Company.
10(d) 1996 Senior Executive Officer Stock Option Plan of the
Company.
10(e) 1996 Senior Operating Officer Stock Option Plan of the
Company.
10(f) Amended and Restated Credit Agreement dated as of April 26,
1995, by and between GST Pacific Lightwave, Inc. and Tomen
America Inc., incorporated by reference to Exhibit 1.2 to the
1995 Form 20-F
10(g) Stock Purchase Agreement dated as of May 1, 1995, by and
between GST Net, Inc. and Stanley M. Nolte, incorporated by
reference to Exhibit 2.1 to the 1995 Form 20-F
10(h) Senior Notes Registration Rights Agreement dated December 19,
1995, by and among GST USA, Inc., the Company, the Specified
Subsidiaries named therein and Morgan Stanley & Co.
Incorporated, incorporated by reference to Exhibit 2.5 to the
1995 Form 20-F
10(i) Convertible Notes Registration Rights Agreement dated December
19, 1995, by and among GST USA, Inc., the Company, the
Specified Subsidiaries named therein and Morgan Stanley & Co.
Incorporated, incorporated by reference to Exhibit 2.6 to the
1995 Form 20-F
10(j) Agreement and Plan of Merger, dated September 27, 1996 (the
"Merger Agreement"), by and among TotalNet Communications Inc.
("TotalNet"), GST Newco of Texas, Inc. and the Company,
incorporated by reference to
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<PAGE>
Exhibit 2.1 to the Company's Form 8-K dated October 17, 1996
(the "Form 8-K")
10(k) Letter dated October 17, 1996 amending the Merger Agreement
among the Company, GST Newco of Texas, Inc., and TotalNet,
incorporated by reference to Exhibit 2.2 to the Form 8-K
10(l) Amended and Restated Master Agreement dated as of May 24,
1996, by and among Tomen America Inc., the Company, GST
Telecom Inc., GST Pacific Lightwave, Inc., Pacwest Network
L.L.C., Pacwest Network Inc., GST Tucson Lightwave, Inc. and
GST New Mexico Lightwave, Inc.
10(m) Amendment No. 2 to GST Telecommunications, Inc. Common Stock
Purchase Agreement dated as of May 24, 1996, by and among the
Company, Tomen America Inc. and Tomen Corporation.
10(n) Credit Agreement dated as of May 24, 1996, by and between GST
New Mexico Lightwave, Inc. and TM Communications LLC.
10(o) Credit Agreement dated as of May 24, 1996, by and between GST
Tucson Lightwave, Inc. and TM Communications LLC.
10(p) Amended and Restated Consulting Agreement dated as of
September 1, 1995, by and between Sunwest Ventures, Inc. and
GST USA, Inc. and GST Telecom.
10(q) Personal Services Agreement dated as of October 1, 1995, by
and between GST USA, Inc. and GST Telecom Inc. and Stephen
Irwin.
10(r) Restated and Amended Employment Agreement dated as of
September 1, 1995, by and between GST USA, Inc. and GST
Telecom Inc. and John Warta.
10(s) Restated and Amended Employment Agreement dated as of
September 1, 1995, by and between GST USA, Inc. and GST
Telecom Inc. and Robert H. Hanson.
10(t) Amended and Restated Employment Agreement dated as of
September 1, 1995, by and between GST USA, Inc. and GST
Telecom Inc. and Clifford V. Sander.
10(u) Agreement and Plan of Merger dated as of September 26, 1996 by
and among Call America Business Communications Corporation,
Call America Business Communications of Fresno, Inc., Call
America Business Communications of Bakersfield, Inc., the
shareholders of such companies, GST Newco of California, Inc.,
and the Company.
10(v) Equipment Loan and Security Agreement dated December 19, 1996
by and between NTFS Capital Corporation and GST Equipco.
10(w) Restated and Amended Usage Agreement dated June 21, 1994,
restated as of November 1, 1995, by and between Pacwest
Network, Inc. and GST Pacwest Telecom Hawaii, Incorporated.
10(x) Restated and Amended Traffic Agreement dated June 21, 1994,
restated as of November 1, 1995, by and between Pacwest
Network, Inc. and GST Telecom Inc.
-16-
<PAGE>
10(y) Letter Agreement, dated December 1, 1995, by and among Pacwest
Network, Inc., GST Telecom Inc. and GST Pacwest Telecom
Hawaii, Incorporated.
10(z) Reseller Agreement dated as of October 30, 1996, by and
between Magancom Wireless, L.L.C., and GST Telecom Inc.
21 Subsidiaries of the Company.
23 Consent to the incorporation by reference in the Company's
Registration Statements on Forms S-3 and S-8 of the
independent auditors' report included herein.
*27 Financial Data Schedule.
- -----------------------------------------------------
* Filed herewith.
(b) Reports on Form 8-K: The Registrant filed a Current Report on Form 8-K
dated October 31, 1996 reporting under Item 2 thereof the acquisition
by merger of TotalNet and under Item 5 thereof the Special Warrant
Offering.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on the 3rd day of October, 1997.
GST TELECOMMUNICATIONS, INC.
By: *
-----------------------------------
John Warta,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*
- ------------------------------- Chairman of the Board, Chief Executive October 3, 1997
(John Warta) Officer (Principal Executive Officer) and
Director
*
- ------------------------------- Senior Vice President, Treasurer and Chief
(Clifford V. Sander) Accounting Officer (Principal Accounting October 3, 1997
Officer)
/S/ DANIEL TRAMPUSH
- ------------------------------- Senior Vice President and Chief Financial October 3, 1997
(Daniel Trampush) Officer (Principal Financial Officer)
*
- ------------------------------- Vice Chairman of the Board October 3, 1997
(W. Gordon Blankstein) and Director
/S/ STEPHEN IRWIN
- ------------------------------- Vice Chairman of the Board, Secretary and October 3, 1997
(Stephen Irwin) Director
- ------------------------------- President, Chief Operating Officer and October 3, 1997
(Joseph Basile) Director
*
- ------------------------------- Director October 3, 1997
(Robert H. Hanson)
*
- ------------------------------- Director October 3, 1997
(Ian Watson)
- ------------------------------ Director October 3, 1997
(Peter E. Legault)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
* Director October 3, 1997
- -------------------------------
(Jack G. Armstrong)
* Director October 3, 1997
- -------------------------------
(Thomas E. Sawyer)
- ------------------------------- Director October 3, 1997
(Mitsuhiro Naoe)
- ------------------------------- Director October 3, 1997
(Roy Megarry)
- ------------------------------- Director October 3, 1997
(Joseph G. Fogg, III)
*By: /S/ STEPHEN IRWIN October 3, 1997
---------------------------
Stephen Irwin
Attorney-in-fact
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page(s)
GST TELECOMMUNICATIONS, INC.
Independent Auditors' Reports................................................F-2
Consolidated Balance Sheets at
September 30, 1996 and 1995................................................F-4
Consolidated Statements of Operations for the
years ended September 30, 1996 and
1995 and the thirteen months ended
September 30, 1994.........................................................F-5
Consolidated Statements of
Shareholders' Equity at
September 30, 1994, 1995 and 1996..........................................F-7
Consolidated Statements of Cash Flows for the
years ended September 30, 1996 and
1995 and the thirteen months ended
September 30, 1994.........................................................F-8
Notes to Consolidated Financial Statements...................................F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GST Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of GST
Telecommunications, Inc. as of September 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity , and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GST
Telecommunications, Inc. as of September 30, 1996 and 1995, and the results of
its operations and cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Canada.
Application of accounting principles generally accepted in Canada would have
affected results of operations for the year ended September 30, 1996 and 1995,
and shareholders' equity as of September 30, 1996 and 1995, to the extent
summarized in note 10 to the consolidated financial statements.
KPMG PEAT MARWICK LLP
Portland, Oregon
November 22, 1996
F - 2
<PAGE>
KPMG
Chartered Accountants Telephone (604) 691-3000
Box 10426, 777 Dunsmuir Street Telefax (604) 691-3031
Vancouver, BC V7Y 1K3 Canada
AUDITORS' REPORT
To the Board of Directors
GST Telecommunications, Inc.
We have audited the consolidated statements of operations, shareholders equity,
and cash flows of GST Telecommunications, Inc. for the thirteen months ended
September 30, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of the Company for
the thirteen months ended September 30, 1994 in accordance with generally
accepted accounting principles in the United States.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Canada.
Application of accounting principles generally accepted in Canada would have
affected results of operations for the thirteen months ended September 30, 1994
and shareholders' equity as at September 30, 1994, to the extent summarized in
note 9 to the consolidated financial statements.
KPMG Peat Marwick Thorne
Chartered Accountants
Vancouver, Canada
December 8, 1994
F - 3
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
September 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
--------- ---------
(In U.S. Dollars)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,343 $ 6,024
Restricted cash 16,000 --
Accounts receivable, net 9,472 4,306
Investments 5,176 871
Inventory 2,406 387
Other current assets 6,151 1,252
--------- ---------
100,548 12,840
--------- ---------
Property and equipment, net 127,575 38,033
Goodwill, net 38,003 13,587
Other assets, net 35,575 8,665
--------- ---------
201,153 60,285
--------- ---------
$ 301,701 $ 73,125
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,443 $ 9,683
Accrued expenses 26,743 3,090
Current portion of capital lease obligations 722 223
Current portion of long-term debt 4,832 736
Other current liabilities 726 512
--------- ---------
45,466 14,244
--------- ---------
Deferred compensation 158 151
Capital lease obligation, less current portion 1,453 658
Long-term debt, less current portion 232,674 19,088
Minority interest 182 3,279
Commitments and contingencies
Shareholders' equity:
Preference shares:
Authorized - 10,000,000 no par shares; none issued or outstanding -- --
Common shares:
Authorized - unlimited number of no par common shares; issued and
outstanding - September 30, 1996 - 21,257,697 shares,
September 30, 1995 - 18,700,290 shares 72,647 50,166
Commitment to issue shares:
September 30, 1996 - 1,922,007 shares,
September 30, 1995 - 336,498 shares 25,454 1,494
Accumulated deficit (76,333) (15,955)
--------- ---------
21,768 35,705
--------- ---------
$ 301,701 $ 73,125
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share and share amounts)
Years ended September 30, 1996 and 1995 and
thirteen months ended September 30, 1994
<TABLE>
<CAPTION>
Thirteen
Year ended Year ended months ended
September 30, September 30, September 30,
1996 1995 1994
-------- -------- --------
(In U.S. Dollars)
<S> <C> <C> <C>
Revenues:
Telecommunication services $ 31,726 $ 11,118 $ 112
Product 9,573 7,563 5,889
-------- -------- --------
Total revenues 41,299 18,681 6,001
-------- -------- --------
Operating costs and expenses:
Network expenses 26,580 10,103 149
Facilities administration and maintenance 10,317 2,096 26
Cost of product revenues 3,974 3,096 2,137
Selling, general and administrative 33,375 11,373 3,953
Research and development 1,352 1,270 689
Depreciation and amortization 8,298 2,374 384
-------- -------- --------
Total operating costs and expenses 83,896 30,312 7,338
-------- -------- --------
Loss from operations (42,597) (11,631) (1,337)
-------- -------- --------
Other expenses (income):
Interest income (5,549) (303) (254)
Interest expense, net of amounts capitalized 21,224 838 27
Loss from joint venture 1,495 661 1,099
Write-off of pre-operating costs -- -- 691
Loss on investments 26 526 --
Other 839 160 87
-------- -------- --------
18,035 1,882 1,650
-------- -------- --------
Loss before minority interest in
income (loss) of subsidiary
and income tax (60,632) (13,513) (2,987)
-------- -------- --------
</TABLE>
(Continued)
F - 5
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations, Continued
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Thirteen
Year ended Year ended months ended
September 30, September 30, September 30,
1996 1995 1994
-------- -------- --------
(In U.S. Dollars)
<S> <C> <C> <C>
Income tax expense:
Current $ 157 $ 70 $ 487
Deferred -- 96 15
-------- -------- --------
157 166 502
-------- -------- --------
Loss before minority interest
in income (loss) of subsidiaries (60,789) (13,679) (3,489)
Minority interest in (income) loss
of subsidiaries 411 2,364 (2)
-------- -------- --------
Loss for the period $(60,378) (11,315) (3,491)
======== ======== ========
Loss per share $ (3.18) $ (0.82) $ (0.35)
======== ======== ========
Weighted average common and common
equivalents shares outstanding 18,988,127 13,780,796 9,878,704
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Shareholders' Equity
(In thousands, except per share amounts)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Commitment to
issue common
shares (Note 6) Common shares Total
------------------------- ------------------------ Accumulated shareholders'
Shares Amount Shares Amount deficit equity
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1993 -- $ -- 9,003,421 $ 10,511 $ (1,149) $ 9,362
Issuance of common stock for
services -- -- 48,000 183 -- 183
Issuance of common stock, net -- -- 2,515,479 10,368 -- 10,368
Issuance of common stock under
option plans -- -- 343,750 974 -- 974
Commitment to issues shares for
business combinations 551,536 3,038 -- -- -- 3,038
Net loss -- -- -- -- (3,491) (3,491)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1994 551,536 3,038 11,910,650 22,036 (4,640) 20,434
Issuance of common stock for
services -- -- 34,057 150 -- 150
Issuance of common stock in
business combinations (551,536) (3,038) 1,719,785 8,785 -- 5,747
Issuance of common stock, net -- -- 4,593,598 17,965 -- 17,965
Issuance of common stock under
option plans -- -- 442,200 1,230 -- 1,230
Commitment to issues shares for
business combinations 336,498 1,494 -- -- -- 1,494
Net loss -- -- -- -- (11,315) (11,315)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1995 336,498 1,494 18,700,290 50,166 (15,955) 35,705
Issuance of common stock for
services -- -- 85,627 621 -- 621
Issuance of common stock in
business combinations (168,249) (747) 1,200,873 11,097 -- 10,350
Issuance of common stock, net -- -- 1,189,849 9,672 -- 9,672
Issuance of common stock under
option plans -- -- 67,500 293 -- 293
Commitment to issues shares for
business combinations 1,753,758 24,707 -- -- -- 24,707
Issuance of common stock under
employee stock purchase plan -- -- 13,558 132 -- 132
Accrual of compensation costs for
stock award and option plans -- -- -- 666 -- 666
Net loss -- -- -- -- (60,378) (60,378)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1996 1,922,007 $ 25,454 21,257,697 $ 72,647 $ (76,333) $ 21,768
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F - 7
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Years ended September 30, 1996 and 1995 and
thirteen months ended September 30, 1994
<TABLE>
<CAPTION>
Thirteen
Year ended Year ended months ended
September 30, September 30, September 30,
1996 1995 1994
-------- -------- --------
(In U.S. Dollars)
<S> <C> <C> <C>
Operations:
Loss for the period $(60,378) $(11,315) $ (3,491)
Items not involving cash:
Minority interest in income (loss) of subsidiary (411) (2,364) 2
Loss from joint ventures 1,495 661 1,099
Write-off of pre-operating costs -- -- 691
Depreciation and amortization 9,496 2,824 557
Deferred income taxes -- 96 15
Deferred compensation 7 151 --
Accretion of interest 19,978 -- --
Write-off of other assets 766 122 --
Issuance of stock for compensation 890 -- --
Issuance of stock for financing commitment 396 150 183
Loss on disposal of fixed assets 246 -- --
Loss on investments 26 526 --
Changes in non-cash operating working capital:
Accounts receivable, net (1,066) (1,549) (882)
Inventory (2,019) (13) (163)
Other current and other assets, net (5,304) (417) (120)
Accounts payable and accrued liabilities 2,387 (190) 2,350
Other current liabilities 185 262 53
-------- -------- --------
Cash provided by (used in) operations (33,306) (11,056) 294
-------- -------- --------
Investments:
Acquisition of subsidiaries, net of cash acquired (1,441) 207 (4,235)
Investment in joint ventures -- -- (35)
Settlement of notes receivable -- 3,367 (5,107)
Purchase of investment in affiliate (294) -- --
Purchase of investments (9,799) 848 (843)
Proceeds from sale of investments 5,493 -- --
Purchase of fixed assets (76,192) (27,730) (906)
Proceeds from sale of fixed assets 8 -- --
Purchase of other assets (7,449) (1,829) (580)
Change in restricted cash (16,000) -- --
-------- -------- --------
Cash used in investing activities (105,674) (25,137) (11,706)
-------- -------- --------
Financing:
Proceeds from long-term debt 196,207 19,857 --
Principal payments on long-term debt (2,112) (816) (387)
Issuance of common shares, net of issuance costs 10,098 19,195 11,342
Deferred debt financing costs (9,894) (853) (70)
Issuance of subsidiary shares -- 615 --
-------- -------- --------
Cash provided by financing activities 194,299 37,998 10,885
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 55,319 1,805 (527)
Cash and cash equivalents, beginning of period 6,024 4,219 4,746
-------- -------- --------
Cash and cash equivalents, end of period $ 61,343 $ 6,024 $ 4,219
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 8
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
September 30, 1996 and 1995
(In U.S. Dollars)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
GST Telecommunications, Inc. (the Company) is a Canadian company in the
business of providing competitive local exchange services primarily in
the western United States. In addition, the Company provides a range of
telecommunications services which include long distance, Internet
access and data services. The Company also manufactures
telecommunications switching equipment.
The consolidated financial statements for the years ended September 30,
1996 and 1995, and the thirteen months ended September 30, 1994 have
been reported in U.S. dollars, the functional currency of the Company.
The Company changed its fiscal year-end to September 30 effective in
1994 (note 10).
(b) BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the
Company and its greater than 50% owned subsidiaries. The Company's
investments in unconsolidated companies owned 20% or more are accounted
for using the equity method. All significant intercompany accounts have
been eliminated.
(c) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
original maturities of ninety days or less.
(d) RESTRICTED CASH
Pursuant to an agreement between the Company and a vendor relating to a
construction in progress as of September 30, 1996, the Company is
required to maintain $16 million in a restricted account pending the
completion of the project as collateral against payment. Completion of
the project is anticipated in the next fiscal year. At September 30,
1996, the Company is committed to purchase approximately $20.7 million
relating to this project.
(Continued)
F - 9
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(e) ACCOUNTS AND NOTES RECEIVABLE
The Company maintains a security interest in the telecommunications
systems it sells until the Company is paid in full. Management provides
an allowance for doubtful accounts and notes based on current customer
information and historical statistics. The allowance for doubtful
accounts was $1,264 and $1,401 at September 30, 1996 and 1995,
respectively.
(f) INVESTMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES (Statement 115) at October 1, 1994. Under Statement
115, the Company classifies its debt and equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the
security until maturity. All other securities not included in trading
or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
All of the Company's investments comprised primarily of U.S. Treasury
Securities and commercial paper, are classified as available-for-sale
and mature in periods ranging from 3 to 9 months. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate
component of shareholders' equity until realized. A decline in the
market value of any available-for-sale security below cost that is
deemed other than temporary is charged to earnings resulting in the
establishment of new cost basis for the security. Dividend income is
recognized when earned. Realized gains and losses for securities
classified as available-for-sale are included in earnings and are
derived using the specific-identification method for determining the
cost of securities sold. The amortized cost approximated the market
value of these securities at September 30, 1996 and 1995.
(Continued)
F - 10
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(g) INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
market (net realizable value) and consists of the following:
1996 1995
------ ------
Raw materials $ 378 $ 317
Work in process 346 70
Finished and refurbished goods 1,682 --
------ ------
Total inventory $2,406 $ 387
====== ======
(h) INVESTMENTS IN AFFILIATES
The Company has a 50% interest in Phoenix Fiber Access, Inc., a
competitive access fiber optic telecommunications network in the
Phoenix, Arizona metropolitan area. The carrying value of this
investment, which is included in other assets in the accompanying
consolidated balance sheet was $1,364 and $2,859 at September 30, 1996,
and 1995, respectively.
The Company has an approximate 40% interest in GST Global
Telecommunications, Inc. (GST Global), a publicly traded corporation on
the Vancouver Stock Exchange which intends to conduct
telecommunications operations on a worldwide basis. The carrying value
of this investment, which is included in other assets in the
accompanying consolidated balance sheet, was $3,634 at September 30,
1996 (see note 2).
(i) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over their estimated useful lives, which are as
follows:
Telecommunications networks 10 years
Electronic and related equipment 10 years
Leasehold improvements 10 years
Furniture, office equipment and other 3 - 7 years
Building 40 years
Construction, engineering and overhead costs directly related to the
development of competitive access networks are capitalized. The Company
begins depreciating these costs when the networks become commercially
operational. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets owned.
(Continued)
F - 11
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(j) GOODWILL
Goodwill, which represents the excess of the purchase price over the
fair value of net assets acquired, is amortized over periods ranging
from five to twenty years using the straight-line method. The Company
assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining
life can be recovered through discounted projected future cash flows of
the acquired businesses from which the goodwill arose. Amortization
charged to operations was $1,690, $389, and $19 for the years ended
September 30, 1996 and 1995, and the thirteen month period ended
September 30, 1994, respectively.
(k) REVENUE RECOGNITION
For telecommunication services revenue, revenue is recorded upon
placing of calls or rendering of other related services. For
telecommunication product revenue, revenue is recorded upon shipment of
product and is presented in the accompanying consolidated statements of
operations net of product returns.
Deferred revenue, of which $477 and $373 are included in other current
liabilities in the accompanying balance sheet at September 30, 1996 and
1995, respectively, consists of monthly service contract payments
received in advance, warranty payments received in advance and research
and development advances. Advance warranty payments are amortized over
the length of warranty on the system sold, which is typically one year.
(l) LOSS PER SHARE
Loss per share has been calculated using the weighted average number of
common and dilutive common equivalent shares assumed to be outstanding
during the period (using the treasury stock method for dilutive common
equivalent shares). Common equivalent shares consist of options and
warrants to purchase common stock.
Fully diluted loss per share has not been presented for the outstanding
options and warrants as they are anti-dilutive.
(m) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital transactions
in the accompanying consolidated financial statements.
(Continued)
F - 12
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(n) SEGMENTED INFORMATION
Segmented information has not been presented as the Company is
presently operating 100% in the telecommunications industry in the
United States and all revenues and operating profits and losses are
derived from United States operations and substantially all assets
reside in the United States.
(o) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax
bases of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in the tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
(p) FOREIGN CURRENCY
The functional currency of all of the Company's operations is the U.S.
dollar. In accordance with Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation", nonmonetary balance sheet items
recorded in Canadian dollars are remeasured at historical rates and
monetary balance sheet items recorded in Canadian dollars are
remeasured at current rates. Exchange gains and losses from
remeasurement of monetary assets and liabilities are recognized
currently in income.
(q) FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, short-term investments, short-term borrowings
and accounts payable and accrued liabilities approximate fair values
due to the short maturity of those instruments.
The carrying amount of the Company's long-term debt approximates its
fair value. The fair value of the Company's long-term debt was
determined based on quoted market prices for similar issues or on
current rates available to the Company for debt of the same remaining
maturities and similar terms.
(Continued)
F - 13
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
(r) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(s) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for 1995 and 1994 to conform with the
1996 presentation.
(2) ACQUISITIONS
From September 1, 1993 through September 30, 1996, the Company made the
acquisitions set forth below, each of which was accounted for as a
purchase, except for Canadian Programming Concepts, Inc., which was
accounted for as an equity investment. The consolidated financial
statements include the operating results from the effective date of
acquisition.
(a) CALL AMERICA BUSINESS COMMUNICATIONS, INC. (CALL AMERICA)
In the fourth quarter of 1996, the Company acquired 100% of the
outstanding capital stock of Call America. Call America is a California
company that provides long distance and ancillary communications
services. The Company acquired Call America for consideration of
$14,777, consisting of 1,177,692 shares of common stock valued at
$12.50 per share, and $56 in legal fees. An additional 130,000 common
shares have been placed in escrow and will be issued to the former
owners of Call America in one year, subject to certain indemnification
clauses contained in the purchase agreement. Up to an additional
114,489 shares could be issued to the former Call America owners if the
market price of the Company's common stock is less than $12.50 six
months after the closing date. Additionally, $533 in notes receivable
due from the former owners of Call America will be forgiven if certain
operating milestones are met over the next 10 years. In connection with
this acquisition, the Company recorded $21,166 in assets, including
$9,798 in goodwill, and $6,389 in liabilities.
(Continued)
F - 14
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(b) TOTALNET COMMUNICATIONS, INC. (TOTALNET)
In the fourth quarter of 1996, the Company acquired 100% of the
outstanding capital stock of TotalNet, a long distance service
provider. The Company acquired TotalNet for consideration of $7,911,
consisting of 401,160 common shares valued at $4,373, a commitment to
issue shares valued at $3,498 at the one year anniversary of the
agreement, and $40 in legal fees. The number of shares issuable at the
one year anniversary will be determined by a share price based on the
weighted average market price of the Company's common shares for the
ten days preceding the anniversary providing that in no case will the
anniversary share price be lower than $7.63 or greater than $20. An
additional 80,232 common shares will be issued to the former owners of
TotalNet at the anniversary date, subject to certain indemnification
clauses contained in the purchase agreement. In connection with this
acquisition, the Company recorded $10,149 in assets, including $4,700
in goodwill, and $2,239 in liabilities.
(c) GST TELECOM, INC. (GST TELECOM)
In the third quarter of 1994, the Company acquired 60% of the shares of
GST Telecom in exchange for contributing 60% of the shares of Tucson
Lightwave, Inc. (Tucson) and a commitment to provide at least $11,024
in equity financing. GST Telecom develops, constructs, and operates
competitive local exchange networks and other communications systems.
The shares of Tucson were acquired from Pacwest, LLC (Pacwest) (an
entity controlled by the Chief Executive Officer of the Company) in
exchange for 100,000 common shares of the Company valued at $447. The
Company has made $132,184 in equity contributions to GST Telecom
through September 30, 1996.
In the third quarter of 1995, the Company acquired an additional 20% of
GST Telecom for 1,000,000 common shares valued at $5 per share.
In the first quarter of 1996, the Company acquired the remaining 20% of
GST Telecom for consideration of up to a maximum of 1,000,000 common
shares (valued at $10.00 per share) based upon the fair market value of
a 20% interest in GST Telecom, which was determined by an independent
appraisal during September 1996. Currently, 1,000,000 common shares are
held in escrow pending the release of such shares. In addition, the
parties agreed that the Company has fulfilled all of its obligations
relating to the funding of GST Telecom and its subsidiaries.
In connection with these acquisitions, the Company recorded $40,516 in
net assets, including goodwill of $15,330, and liabilities of $3,478.
(Continued)
F - 15
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) NATIONAL APPLIED COMPUTERS TECHNOLOGIES, INC. (NACT)
In the fourth quarter of 1993, the Company purchased 52% of the common
shares of NACT. Subsequent to September 1, 1993, at various times, the
Company acquired the remaining 48% interest of NACT. NACT is a Utah
manufacturer of telecommunications switching and network management
equipment for the inter-exchange industry.
The consideration paid for 100% of NACT's outstanding common shares
consisted of $3,621 in cash, $466 in notes payable, $160 in legal fees
and 956,283 common shares valued at $4,832. 15% of the stock acquired
from NACT was purchased from NACT's former President, who is also the
Company's Chief Technology Officer and a Director of the Company, for
384,195 common shares of the Company. In connection with these
acquisitions, the Company recorded $10,122 in net assets, including
goodwill of $1,387, and liabilities of $1,203.
(e) INTERNATIONAL TELEMANAGEMENT GROUP, INC. (ITG)
In the third quarter of 1995, the Company acquired 100% of the
outstanding capital stock of ITG. ITG is an Ohio company that provides
a variety of domestic and international long distance services. The
Company acquired ITG for consideration of $75, the assumption of
certain liabilities, and an earn out provision. In connection with this
acquisition, the Company recorded $7,261 in net assets, including
goodwill of $4,025, and liabilities of $7,185.
(f) OTHERS
In May 1996, the Company purchased from Tomen America, Inc. the
remaining 10% interest in the GST Pacific Lightwave, Inc., a GST
Telecom subsidiary which operates a fiber optic competitive local
exchange network in southern California. The consideration paid for
this acquisition consisted of $1,250 in cash, which was recorded as
goodwill.
(Continued)
F - 16
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
In a series of transactions during the third and fourth quarters of
1996, the Company acquired approximately 40% of Canadian Programming
Concepts, Inc. (CPC), a Canadian corporation which is publicly traded
on the Vancouver Stock Exchange, for consideration of $3,659. As a
result of this investment, CPC's name was changed to GST Global.
Concurrent with this investment, four of the Company's directors and
one of the Company's employees were appointed to GST Global's six
member board of directors. The key officers of GST Global are officers
of the Company. Several employees and directors of the Company own
shares in GST Global amounting to approximately 5% of GST Global's
outstanding shares at September 30, 1996. At September 30, 1996, the
market value of GST Global totaled approximately $26,366.
During 1996, the Company acquired the assets of Reservations, Inc. dba
Hawaii Online (HOL), the assets of Texas-Ohio Communications, Inc.
(TOC), and 100% of the outstanding capital stock of Tri-Star
Residential Communications, Inc. (Tri-Star). HOL is an Internet service
provider; TOC is a long distance service provider; and Tri-Star
provides shared tenant services consisting of long distance, cable
television and security service to tenants of multi-dwelling apartment
units. Consideration paid for these acquisitions totaled $3,341 and
consisted of 32,624 common shares valued at $350, a commitment to issue
common shares valued at $2,115 over the next two years, $599 in accrued
payments to be made during 1997, $120 of cash, and $157 in legal fees.
In connection with these acquisitions, the Company recorded $5,529 in
assets, including $1,085 of goodwill, and $2,278 in liabilities.
The pro forma results shown below reflect purchase accounting
adjustments assuming the acquisitions described above occurred as of the
beginning of each of the periods presented:
Year Year
ended ended
September 30, September 30,
1996 1995
(Unaudited) (Unaudited)
---- ----
Revenues $ 71,600 54,762
Net loss (65,196) (22,918)
Net loss per share (3.05) (1.34)
The pro forma results are not necessarily indicative of what actually
would have occurred had the acquisitions been in effect for the entire
periods presented. In addition, they are not intended to be a
projection of future results that may be achieved from the combined
operations.
(Continued)
F - 17
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(3) PROPERTY AND EQUIPMENT
September 30, September 30,
1996 1995
--------- ---------
Telecommunications networks $ 25,551 $ 9,577
Electronic and related equipment 31,547 10,058
Leasehold improvements 3,619 300
Furniture, office equipment and other 8,746 2,201
Building 2,134 2,134
Construction in progress 62,763 15,313
--------- ---------
134,360 39,583
Less accumulated depreciation (6,785) (1,550)
--------- ---------
$ 127,575 $ 38,033
========= =========
Property and equipment includes $62,763 and $15,313 of equipment which had
not been placed in service at September 30, 1996 and 1995, respectively,
and accordingly, is not being depreciated. During the year ended September
30, 1996 and 1995, $2,316 and $291 of interest, respectively, was
capitalized as part of telecommunications networks and networks in
progress.
(4) ACCRUED EXPENSES
September 30, September 30,
1996 1995
--------- ---------
Fixed asset purchases $ 14,153 796
Accrued acquisition costs 4,213 --
Carrier costs 4,057 680
Other 4,320 1,614
--------- ---------
Total $ 26,743 3,090
========= =========
(Continued)
F - 18
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(5) FINANCING ARRANGEMENTS
(a) DEBT
The Company's long-term debt at September 30, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to Tomen, quarterly interest payments at the LIBOR
rate plus 3% (8.7% at September 30, 1996) with quarterly
principal payments (together with interest) beginning in
fiscal 1998 through 2005, collateralized by equipment. The
Company has the option to convert the interest rate to a
fixed rate equal to the Treasury index rate
plus 3% during the term of the loan $ 31,771 16,674
Senior discount notes, 13-7/8% effective interest with
semi-annual interest payments due beginning June 15,
2001 on a total maturity value of $312,448, principal
due December 15, 2005 177,760 --
Convertible senior subordinated discount notes 13-7/8%
effective interest with semi-annual interest payments
due beginning June 15, 2001 on a total maturity value
of $39,056, principal due December 15, 2005 22,220 --
Other 5,755 3,150
-------- --------
237,506 19,824
Less current portion of long-term debt 4,832 736
-------- --------
$232,674 19,088
======== ========
</TABLE>
(Continued)
F - 19
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The schedule of future principal payments on long-term debt is as
follows:
1997 $ 4,832
1998 3,474
1999 4,567
2000 5,438
2001 5,295
Thereafter 213,900
-------------
$ 237,506
=============
(b) ISSUANCE OF DEBT AND CONVERTIBLE DEBT SECURITIES
In the first quarter of 1996, the Company issued approximately $180
million in 39,056 Units (the Units) each consisting of eight 13.875%
(effective interest rate) Senior Discount Notes (the senior notes) and
one 13.875% (effective interest rate) Convertible Senior Subordinated
Discount Note (the convertible notes) maturing on December 15, 2005.
The Units were sold at a substantial discount and there will be no
accrual of cash interest prior to December 15, 2000 or payment of
interest until June 15, 2001. The Units accrete to a total principal
amount of approximately $351.5 million by December 15, 2000. The senior
notes will rank in right of payment with all unsubordinated
indebtedness of the Company while the convertible notes will be junior
to all senior Company debt. The senior and convertible notes are
subject to certain debt covenants.
Each of the convertible notes is convertible at the option of the
holder into common shares any time after December 15, 1996. The number
of shares to be issued upon conversion is based on an accreted value on
the conversion date divided by $7.536. In addition, after December 15,
1996, all of the convertible notes may be automatically converted to
common shares by the Company if the Company's common shares sustain
certain market value levels for 30 consecutive trading days.
On or after December 15, 2000, the senior and convertible notes will be
redeemable at the option of the Company.
(Continued)
F - 20
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(c) TOMEN AMERICA, INC. FACILITY
In the first quarter of 1995, the Company entered into a master
financing agreement with Tomen America, Inc. (Tomen). Under the
agreement, Tomen will loan up to $100 million to subsidiaries of the
Company for development and construction of network projects. An
upfront fee of 1.50% of the aggregate principal amount of each project
loan and a commitment fee of 0.50% per annum on the unused portion of
each project loan is payable to Tomen. Tomen will evaluate each network
project separately to determine if it will participate in financing the
project. The agreement originally provided Tomen the right to purchase
a 10% equity interest in each network project it financed. Pursuant to
such right, in 1995 Tomen purchased a 10% interest in the Company's
southern California project. In May 1996, the Company repurchased the
10% interest in the project and the agreement was amended to cancel
Tomen's right to purchase an equity interest in funded projects. As of
September 30, 1996, Tomen has agreed to provide a total of $34.45
million in debt financing to the Company's subsidiaries ($31.8 million
of which has been drawn down as of September 30, 1996) for construction
and operation of its fiber optic networks in Southern California, New
Mexico, and Arizona. The Tomen financing agreements are subject to
certain debt covenants. Subsequent to September 30, 1996, Tomen has
agreed to provide an additional $41 million in debt financing for the
Company's Hawaiian network.
Concurrent with the signings of the master financing agreement and
subsidiary credit agreements, the Company has also signed stock
purchase agreements with Tomen wherein Tomen purchased shares of common
stock and received warrants to purchase additional shares of common
stock. Pursuant to such agreements, through September 30, 1996, Tomen
has purchased 1,074,074 shares of common stock at prices ranging from
$4.60 to $10.80 per share for total cash consideration of $6,955. Tomen
also holds warrants to purchase up to 546,155 additional shares of
common stock at prices ranging from $5.52 to $12.96 per share. Such
warrants expire at various times between October 1996 and May 1998.
Subsequent to September 30, 1996, Tomen exercised a warrant and
purchased 250,000 shares of common stock at $5.52 per share for total
cash consideration of $1,380.
The Company's Chief Executive Officer serves as a consultant to Tomen
for which he is paid a fee. Simultaneous with the execution of the June
21, 1994 purchase of 60% of GST Telecom from Pacwest. Pacwest
contracted with the Company to receive a fee equal to 1% of the
aggregate debt and equity financing provided by Tomen to the Company.
(Continued)
F - 21
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) SIEMENS STROMBERG-CARLSON AGREEMENT
In the fourth quarter of 1996, the Company entered into a loan and
security agreement with Siemens Stromberg-Carlson (Siemens). Under the
terms of the agreement, Siemens will loan up to $226 million to the
Company for the purchase and installation of telecommunications
switching and related equipment. Amounts borrowed under the agreement
will initially bear interest at LIBOR plus 4.5% and will be secured by
the equipment. Such interest will decrease to LIBOR plus 3.5% at the
time each initial loan is converted to a term loan, which conversion
will occur at the first calendar quarter following the initial loan.
Upon making the first loan request, the Company will be committed to
purchase a minimum of $16.5 million in equipment over 3 years. Amounts
borrowed under the agreement will be repaid in 24 quarterly
installments beginning 5 quarters after the initial loan is converted
to a term loan. At September 30, 1996, no amount had been borrowed
pursuant to this agreement.
(e) NORTHERN TELECOM, INC. PURCHASE AGREEMENT
In the fourth quarter of 1996, the Company entered into a purchase
agreement with Northern Telecom, Inc. (Nortel), pursuant to which the
Company is committed to purchase a minimum of $50 million, of which
$1.9 million has been purchased as of September 30, 1996, in
telecommunications switching equipment over the next three years. The
Company is currently negotiating an agreement to finance such equipment
purchases with a third party.
(f) LINE OF CREDIT
At September 30, 1996, the Company was contingently liable under
repurchase agreements for a maximum of $1,035 to a financial
institution. The financial institution provides lease financing to NACT
customers on a recourse basis. The Company has established a $1,000
line of credit with the financial institution to provide funding for
payment of these leases, if required. No balance was outstanding under
the line of credit at September 30, 1996.
(Continued)
F - 22
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(6) SHAREHOLDERS' EQUITY
(a) COMMITMENT TO ISSUE SHARES
Pursuant to a final agreement dated January 5, 1995, the Company is
committed to issue 168,249 common shares at a fair value of $4.44 per
share ($747) to former shareholders of NACT on January 5, 1997.
Additionally, pursuant to the terms of the purchase agreements
discussed in note 2, the Company is committed to issue a minimum of
1,753,758 shares valued at $24,707 at various times throughout 1997.
(b) PREFERENCE SHARES
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value (the Preference Shares), in one or
more series and to determine the designations, powers, preferences and
relative, participating, optional or other rights thereof, including
without limitation, the dividend rate (and whether dividends are
cumulative), conversion rights, voting rights, rights and terms of
redemption, redemption price and liquidation preference.
(c) ESCROW AGREEMENTS
Of the 21,257,697 shares currently outstanding, 750,000 are held
pursuant to an escrow agreement, their release being subject to the
approval of regulatory authorities. These common shares have been
issued by the Company and have rights equal to those of all other
common shares except that the holders may not exercise voting rights on
a resolution to cancel shares, and have waived their rights to receive
dividends or to participate in the assets and property of the Company
on a winding-up or dissolution of the Company. In accordance with the
escrow provisions of this agreement, these shares cannot be sold or
traded by the owner until they are released by the regulatory
authorities in accordance with a formula adopted by the regulatory
authorities. If the Company has not met the conditions set for the
release of these shares by January 16, 2001, these shares will be
canceled.
Pursuant to the Company acquiring the remaining 20% interest in GST
Telecom during 1996, 1,000,000 common shares were put in escrow pending
a valuation of GST Telecom. An independent appraisal of GST Telecom was
received in September 1996 allowing the release of such shares from
escrow (see note 2). On November 7, 1996, such shares were released
from escrow.
(Continued)
F - 23
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) 1996 EMPLOYEE STOCK PURCHASE PLAN
In July 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the Stock Purchase Plan) which provides eligible employees of the
Company with an opportunity to acquire common shares of the Company. It
is the intention of the Company that the Stock Purchase Plan qualify as
an "Employee Stock Purchase Plan" under Section 423 of the Internal
Revenue Code. Under this Stock Purchase Plan, the Company authorized
the issuance of 500,000 common shares to be issued to employees of the
Company.
Employees who own 5% or more of the voting rights of the Company's
outstanding common shares may not participate in the Plan.
(e) STOCK OPTION PLANS
EMPLOYEE STOCK OPTION PLANS
In January 1995, the Company created a Stock Incentive Plan (the 1995
Plan) which provides for the granting to employees (including officers
and employee directors) of incentive stock options within the meaning
of Section 422A of the Internal Revenue Code of 1986, and for the
granting of non-statutory stock options to employees (including
officers and employee directors), directors and consultants. The
options have a term of five years and vest and become exercisable at
the discretion of the Board of Directors. Under the plan, no options
vest until at least six months after the date of grant.
In January 1996, the Company created an additional Stock Incentive Plan
(the 1996 Plan) in which the Board of Directors approved and authorized
the issuance of 400,000 stock options to be granted to employees of the
Company. The terms of the 1996 Plan are identical to that of the 1995
Plan. In January 1996, the Board of Directors also authorized a 1
million increase in the number of common shares reserved for issuance
under the Company's 1995 Stock Option Plan.
(Continued)
F - 24
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
1996 SENIOR OPERATING AND EXECUTIVE OFFICER STOCK OPTION PLANS
In May 1996, the Company adopted the 1996 Senior Operating Officer
Stock Option Plan (the Senior Operating Plan) and the 1996 Senior
Executive Officer Stock Option Plan (the Senior Executive Plan) in
which the Board of Directors approved and authorized the issuance of up
to 900,000 and 600,000 options, respectively, to be awarded to senior
operating and executive management of the Company, at a $10 option
exercise price. The options have a term of six years and vest and
become exercisable at the discretion of the Board of Directors. All
stock options granted under the Senior Executive Plan as of September
30, 1996 vest upon the achievement of certain milestones as were
determined by the Board of Directors. It is the intention of the
Company that certain options granted pursuant to these Plans shall
constitute incentive stock options under Section 422 of the Internal
Revenue Code, while certain other options granted pursuant to these
Plans shall be nonqualified stock options.
The exercise price of all incentive stock options granted under these
four Plans must be at least equal to the fair market value of the
shares on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting rights of the Company's
outstanding share capital, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the
grant date. The exercise price of all nonqualified stock options
granted under the 1995 and 1996 Plans and the Senior Operating and
Executive Plans must be at least 80% and 50%, respectively, of the fair
market value of the common stock on the date of grant.
(Continued)
F - 25
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Activity under the various stock option plans is as follows:
Number of Price
Shares Range
---------- ---------------
Options outstanding at August 31, 1993 785,250 $ 1.00 - 3.00
Options:
Granted 435,000 4.25 - 5.00
Exercised (343,750) 1.00 - 3.00
Canceled - -
---------- ---------------
Options outstanding at September 30, 1994 876,500 1.00 - 5.00
Options:
Granted 1,190,035 3.55 - 6.75
Exercised (442,200) 1.00 - 4.25
Canceled (30,042) 3.55 - 5.00
---------- ----------------
Options outstanding at September 30, 1995 1,594,293 3.55 - 6.75
Options:
Granted 1,563,373 5.00 - 10.00
Exercised (67,500) 3.55 - 6.75
Canceled (32,447) 6.75 - 10.00
---------- ----------------
Options outstanding at September 30, 1996 3,057,719 $ 3.55 - 10.00
========== ================
Of the 3,057,719 options outstanding, 1,208,843 options were vested and
exercisable and 966,089 options were available for future grant.
(f) 1996 STOCK BONUS AGREEMENT
In September 1994, the Company's Board of Directors adopted a Stock
Award Plan which provides for the awarding of up to 70,000 common
shares of the Company to a certain member of management upon the
achievement of certain milestones.
(Continued)
F - 26
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(g) WARRANTS OUTSTANDING
Warrants outstanding and exercisable at September 30, 1996:
Number of
common shares Exercise Exercise
Issuable Price Expiration Date
-------- ----- ---------------
250,000 $5.52 October 23, 1996
125,000 $5.62 April 26, 1997
171,155 $12.96 May 23, 1998
50,000 $10.00 April 29, 1999
300,000 $6.75 September 30, 2000
The 546,155 warrants expiring October 23, 1996 through May 23, 1998
were granted to Tomen in conjunction with the Tomen financing
agreements (see note 5), of which the 250,000 warrants expiring October
23, 1996 were exercised during October 1996. The 50,000 warrants
expiring April 29, 1999 were granted in conjunction with a private
placement of common stock during fiscal year ending 1994. The 300,000
warrants expiring September 30, 2000 were granted to a director of the
Company. No value has been assigned to any granted warrants as the
exercise price exceeded the common stock market price at the time of
grant.
(Continued)
F - 27
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(7) INCOME TAXES
The provision for income taxes differs from the amount computed by
applying the Canadian statutory income tax rate to net income before
taxes as follows:
Thirteen
month
Year ended Year ended period ended
September 30, September 30, September 30,
1996 1995 1994
--- --- ---
Computed expected income tax
expense (benefit) at Canadian
statutory rate (39)% (39)% (39)%
Expected state/province income tax
expense (benefit) (4) (6) (5)
Increase (decrease) in valuation
allowance 21 38 56
Amortization of goodwill 1 5 5
Minority interest -- (7) --
Effect of difference in United
States statutory rate 5 5 6
Effect of acquisition of new subsidiaries 10 1 --
Non-deductible interest 2 -- --
Other 4 4 (6)
--- --- ---
Income tax expense (benefit) - % 1% 17%
=== === ===
(Continued)
F - 28
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's deferred tax asset
and liability are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
United States Federal and state
net operating loss carryforwards $ 16,378 $ 3,325
Canadian net operating loss carryforwards 3,065 2,533
Non-deductible interest 4,608 --
Canadian non-deductible interest 798 --
Canadian capital loss carryforward 128 --
Other 2,063 1,633
-------- --------
Total gross deferred tax assets 27,040 7,491
Less valuation allowance (19,429) (6,734)
-------- --------
Deferred tax liabilities:
Furniture, fixtures and equipment,
due to differences in depreciation 2,110 693
Capitalized software/intangibles 5,501 64
-------- --------
Total gross deferred tax liabilities 7,611 757
-------- --------
Net deferred taxes $ -- $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of September 1, 1993
was $593. The net change in total valuation allowance for the years ended
September 30, 1996 and 1995, and the thirteen month period ended September
30, 1994 was an increase of $12,695, $4,346, and $1,795 respectively.
(Continued)
F - 29
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The Company has non-capital losses for income tax purposes of
approximately Canadian $6,811 available to reduce Canadian taxable income
of future years, expiring as follows:
1999 $ 686
2000 2,072
2002 1,597
2003 2,456
------
$6,811
======
Based on a history of recurring losses, it is questionable whether the
Company will be allowed to utilize these Canadian losses if the tax
authority determines that the Company has no reasonable expectation of
profit. As of September 30, 1996, the Company also has a Canadian net
capital loss carryforward of $389. Net capital losses can be carried
forward indefinitely but can only be utilized to offset taxable capital
gain.
The Company has net operating losses for income tax purposes of
approximately $44,985 available to reduce United States taxable income of
future years, expiring as follows:
2007 $ 405
2008 455
2009 2,717
2010 4,939
2011 36,469
-------
$44,985
=======
For United States income tax purposes, utilization of net operating losses
may be subject to limitation in the event a change in ownership of the
Company has occurred pursuant to IRC Section 382. 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.
(Continued)
F - 30
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(8) LEASES
The Company is obligated under capital leases for equipment which expire
at various dates during the next five years. At September 30, 1996 and
1995, the gross amounts of equipment and related accumulated amortization
recorded under capital leases were as follows:
1996 1995
------- -------
Equipment $ 2,068 853
Less accumulated amortization (291) 67
------- -------
$ 1,777 786
======= =======
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $1,501, $866 and $253 for the years ended September
30, 1996 and 1995, and the thirteen month period ended September 30, 1994,
respectively.
(Continued)
F - 31
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Future minimum lease payments under noncancelable leases (with initial or
remaining lease terms in excess of one year) and future minimum capital
lease payments as of September 30, 1996 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- -------
<S> <C> <C>
Year ending September 30:
1997 $ 980 2,777
1998 900 2,902
1999 494 2,797
2000 235 1,960
2001 4 1,493
Thereafter -- 7,335
------- -------
Total minimum lease payments 2,613 $19,264
=======
Less amount representing interest (at rates ranging
from 8.7 to 18.6%) 438
-------
Net minimum lease payments 2,175
Less current installments of obligations under capital leases 722
-------
Obligations under capital leases, excluding
current installments $ 1,453
=======
</TABLE>
Under the terms of two noncancelable subleases, the Company will receive
$220 over the next ten years.
(Continued)
F - 32
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(9) COMMITMENTS AND CONTINGENCIES
(a) PENSION AND PROFIT SHARING PLANS
In 1995, the Company adopted a defined contribution 401(k) plan (the
Plan). Employees are eligible to participate in the Plan upon
commencement of service. Participants may defer up to 15% of eligible
compensation. Currently, the Company does not provide matching
contributions for the Plan.
NACT also sponsors a defined contribution 401(k) plan for employees who
have completed one year of service and attained the age of 21.
Participants may defer up to 15% of eligible compensation. The Company,
at its discretion, may match 50% of participant contributions up to
7.5% of participant compensation. NACT made employer contributions to
this plan of $60, $51 and $32 in the years ending September 30, 1996,
1995 and 1994, respectively.
Through September 30, 1996, NACT provided a discretionary profit
sharing program for full time employees who had completed one full year
of employment. Under the plan, 10% of the increase in profits based on
NACT's previous highest retained earnings balance were allocated among
employees determined on length of employment and salary level at the
discretion of the Board of Directors. Contributions to the program were
$132, $171 and $105 for the years ended September 30, 1996 and 1995,
and the thirteen month period ended September 30, 1994, respectively.
The program was terminated on September 30, 1996.
(b) LONG DISTANCE CARRIERS
The Company is party to various contracts with long distance carriers
pursuant to which the Company is committed to minimum service fees. The
average monthly minimum commitments range from $1.6 million to $5.1
million per month over the next three years. The Company must pay the
carriers for differences between the commitment amounts and the actual
amounts billed.
(Continued)
F - 33
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(c) LEGAL PROCEEDINGS
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc.
(collectively, "Aerotel") filed a patent infringement suit against NACT
alleging that telephone systems manufactured and sold by NACT
incorporate prepaid calling features which infringe upon a patent
issued to Aerotel in November 1987. The complaint further alleges
defamation and unfair competition by NACT and seeks various damages.
NACT has filed an Answer and Counterclaim denying patent infringement,
committing defamation or unfair competition and seeks judgment that the
Aerotel patent is invalid and that Aerotel has misused its patent in
violation of antitrust laws. Based on information currently available,
NACT's management is of the opinion that there will be no material
impact of NACT's financial position or results of operations as a
result of this suit. Accordingly, no provision for loss has been
provided in the accompanying financial statements.
On April 24, 1996, C.W. Holdings (formerly Martin Holdings Ltd.) filed
a damages suit against the Company alleging negligence in failing to
safely deliver to C.W. Holdings a share certificate representing
209,738 common shares of the Company. C.W. Holdings has commenced an
action in the Supreme Court of British Columbia against the Company,
the Company's registrar and transfer agent, and other parties unrelated
to the Company. The Company's legal counsel believes that it is
improbable that there will be an outcome unfavorable to the Company in
the legal proceedings.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material effect on the Company's financial position.
(d) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key members of
management. These agreements provide for payments based upon death,
disability and change of control. The agreements also contain covenants
not to compete.
(10) RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
IN THE UNITED STATES AND IN CANADA
These financial statements have been prepared by management in accordance
with generally accepted accounting principles in the United States (U.S.
GAAP). Except for the earnings/loss per share calculations as noted below,
these financial statements also conform, in all material respects, with
those accounting principles that are generally accepted in Canada
(Canadian GAAP).
(Continued)
F - 34
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
For U.S. GAAP purposes, the 750,000 escrow shares disclosed in note 6 are
considered contingent shares and are not included in the loss per share
calculations. For U.S. GAAP purposes, when these shares are released from
escrow, to the extent their fair market value exceeds their issuance
price, compensation expense will be recognized by the Company. The loss
per share determined in accordance with accounting principles generally
accepted in Canada is $(3.06), $(0.78) and $(0.33) for the years ended
September 30, 1996, 1995 and the thirteen month period ended September 30,
1994, respectively.
The Company changed its fiscal year-end to September 30 effective in 1994.
Accordingly, amounts reported in the consolidated financial statements are
for the thirteen-month period ended September 30, 1994. Selected financial
information as at and for the year ended August 31, 1994 is as follows:
Selected information from statement of operations:
Revenues $ 5,253
Operating expenses 6,147
--------
Loss from operations 894
Other expenses 1,681
--------
Loss before minority interest and income tax 2,575
Income tax expense 470
--------
Loss before minority interest 3,045
Minority interest in income of subsidiaries 126
--------
Loss for the year $ 3,171
========
Selected information from statement of cash flows:
Operations:
Loss for the year (3,171)
Items not involving cash 2,420
Changes in non-cash operating working capital (154)
--------
Cash used in operations (905)
Financing 14,040
Investing (12,846)
--------
Increase in cash and cash equivalents 289
Cash and cash equivalents, beginning of year 4,745
--------
Cash and cash equivalents, end of year $ 5,034
========
(Continued)
F - 35
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(11) INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
"Net cash provided (used) by operating activities" includes cash payments
for interest of $1,813, $364 and $24 and cash payments for taxes of $-0-,
$264 and $253, for the years ended September 30, 1996 and 1995, and the
thirteen month period ended September 30, 1994, respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES WHICH AFFECT THE
CONSOLIDATED STATEMENTS OF CASH FLOWS
Effective May 1, 1995, the Company acquired a 100% interest in ITG. See
note 2 for a discussion of the assets and liabilities acquired.
On January 5, 1995, the Company acquired the remaining 20% of National
Applied Computer Technologies, Inc. (see note 2). As a result of this
transaction, the Company recorded $2,137 in other assets, $521 in
liabilities, $747 in common stock, $1,494 in a commitment to issue common
shares and a reduction of $886 to its non-controlling interest in
subsidiaries account.
Effective June 1, 1995, the Company acquired an additional 20% of GST
Telecom (see note 2). The Company recorded $5,000 in common stock, $3,226
in other assets, and a reduction of $1,774 to its non-controlling interest
in subsidiaries account related to this transaction.
As a result of capital contributions made to GST Telecom, Inc. throughout
the year ending September 30, 1995, the Company recorded $4,457 in other
assets and an increase of $4,457 to its non-controlling interest in
subsidiaries account.
During the year ending September 30, 1995, the Company recorded a $200
reduction in notes receivable and a $200 increase to deferred financing
costs pursuant to a loan agreement and promissory note dated July 7, 1994,
whereby the Company loaned $200 to Pacwest Network, L.L.C. (Pacwest) which
was repaid in full by crediting against fees payable to Pacwest in respect
of financing provided by Tomen America, Inc.
Property and equipment includes amounts in accounts payable and accrued
liabilities of $18,291, $4,363 and $-0- at September 30, 1996, 1995 and
1994, respectively.
(Continued)
F - 36
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
In September 1996, the Company acquired an additional 1.5 million common
shares of GST Global, for consideration of $3,364 (see note 2). The
Company recorded $3,364 in other assets and accrued liabilities relating
to this transaction.
During the year ending September 30, 1996, the Company recorded $45,478 in
assets, $11,665 in liabilities, a reduction of $2,686 to minority
interest, $29,444 in common stock and $5,613 in commitments to issue
common stock as a result of the 1996 acquisitions discussed in note 2.
(12) RELATED PARTY TRANSACTIONS
During the third and fourth quarters of 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.
(Continued)
F - 37
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The Company paid approximately $2,264, $770 and $396 in legal fees in
1996, 1995 and 1994, respectively, to a firm having a member who is also a
director of the Company.
Under the Tomen facility, Tomen has the right to act as procurement agent
for each network project it finances. The Company has purchased equipment
through Tomen at competitive prices. (See Note 5(c)).
(13) GST USA
In August 1994, the Company formed a wholly-owned subsidiary, GST USA, and
transferred all U.S. assets, liabilities and operations into GST USA.
Selected financial information as at and for the years ended September 30,
1996 and 1995 are as follows:
Selected balance sheet information:
Year Year
ended ended
September 30, September 30,
1996 1995
--------- ---------
Current assets $ 77,506 $ 11,415
Non-current assets 168,882 60,006
--------- ---------
$ 246,388 $ 71,421
========= =========
Current liabilities $ 34,286 $ 13,712
Non-current liabilities 210,243 19,646
Minority interest 182 3,279
Share capital 66,520 44,471
Accumulated deficit (64,843) (9,687)
--------- ---------
$ 246,388 $ 71,421
========= =========
(Continued)
F - 38
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Selected information from statement of operations:
Year Year
ended ended
September 30, September 30,
1996 1995
--------- ---------
Revenues $ 37,721 $ 18,681
Operating costs and expenses (77,590) (28,942)
--------- ---------
Loss from operations (39,869) (10,261)
Other expenses 15,625 (1,384)
--------- ---------
Loss before minority interest in loss
of subsidiaries and income tax (55,494) (11,645)
Income tax expense (72) (166)
--------- ---------
Loss before minority interest in loss
of subsidiaries (55,566) (11,811)
Minority interest in loss of subsidiaries 411 2,364
--------- ---------
Net loss $ (55,155) (9,447)
========= =========
(Continued)
F - 39
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Selected information from statement of cash flows:
Year Year
ended ended
September 30, September 30,
1996 1995
--------- ---------
Operations:
Loss for the year $ (55,155) $ (9,447)
Items not involving cash 29,256 1,590
Changes in non-cash operating working capital (6,400) (3,419)
--------- ---------
Cash used in operations (32,299) (11,276)
Investing (105,090) (29,684)
Financing 174,915 43,544
--------- ---------
Increase in cash and cash equivalent s 37,526 2,584
Cash and cash equivalents, beginning of year 3,894 1,310
--------- ---------
Cash and cash equivalents, end of year $ 41,420 $ 3,894
========= =========
(Continued)
F - 40
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(14) SUBSEQUENT EVENTS
SPECIAL WARRANTS OFFERING
On October 22, 1996, the Company completed a private placement to non-U.S.
investors of 2,000,000 Special Warrants at a purchase price of U.S.
$11.125 per Special Warrant. The Special Warrants become exercisable by
holders for no additional consideration upon the later to occur of (i) the
date upon which approval for a final Canadian prospectus qualifying the
common shares and share purchase warrants (the Underlying Warrants)
issuable upon exercise of the Special Warrants is received from the
securities commission of each of the Canadian provinces where the Special
Warrants were sold and (ii) the date that a registration statement filed
with the Securities and Exchange Commission registering the resale of the
common shares issuable upon exercise of the Special Warrants and
Underlying Warrants is declared effective, but in any event, no later than
September 22, 1997. Each Special Warrant is exercisable for one common
share and one-half of one Underlying Warrant. Each full Underlying Warrant
entitles the holder to purchase one additional common share for a purchase
price of U.S. $13.00 for one year from the date of issuance. In the event
that the requisite regulatory approvals of the Canadian Prospectus are not
received by the Company and the U.S. Registration Statement is not
declared effective, in each case by February 19, 1997, then each Special
Warrant will become exercisable for 1.1 common shares and one-half of one
Underlying Warrant.
The Company received U.S. $9,690,000, constituting 50% of the aggregate
purchase price of the Special Warrants (net of placement agency fees and
expenses), on October 22, 1996. The balance of the net purchase price of
Special Warrants (U.S. $11,125,000) is being held in escrow and is payable
to the Company upon the earlier to occur of (x) the date of receipt of
final regulatory approval of a preliminary Canadian Prospectus from the
securities commissions of the applicable Canadian provinces and (y) the
initial filing of the U.S. Registration Statement with the Commission, in
each case covering the resale of the Common Shares issuable upon exercise
of the Special Warrants and the Underlying Warrants.
NACT PUBLIC OFFERING
The Board of Directors of NACT has authorized the filing of a registration
statement with the Securities and Exchange Commission permitting NACT to
sell shares of its common stock to the public.
F - 41
<PAGE>
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.
F - 42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S 10-K FOR THE PERIOD ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIREY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> $77,342,947
<SECURITIES> 5,176,576
<RECEIVABLES> 11,696,845
<ALLOWANCES> (1,263,683)
<INVENTORY> 2,406,399
<CURRENT-ASSETS> 100,548,268
<PP&E> 134,714,597
<DEPRECIATION> (7,139,536)
<TOTAL-ASSETS> 301,701,198
<CURRENT-LIABILITIES> 45,465,548
<BONDS> 199,979,706
0
0
<COMMON> 72,647,099
<OTHER-SE> 25,453,939
<TOTAL-LIABILITY-AND-EQUITY> 301,701,198
<SALES> 41,299,486
<TOTAL-REVENUES> 41,299,486
<CGS> 0
<TOTAL-COSTS> 53,342,501
<OTHER-EXPENSES> (3,188,654)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,224,350
<INCOME-PRETAX> (60,632,411)
<INCOME-TAX> 157,100
<INCOME-CONTINUING> (60,632,411)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,378,168)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
