SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________________________
Commission file number 333-8807
GST TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
CANADA NOT APPLICABLE
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 MAIN STREET, VANCOUVER, WA 98663
------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 906-7100
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At August
11, 1998, there were outstanding 36,075,758 Common Shares, without par value, of
the Registrant.
<PAGE>
GST TELECOMMUNICATIONS, INC.
INDEX
PAGE(S)
-------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets - June 30,
1998 (unaudited) and December 31, 1997 3
Consolidated Condensed Statements of Operations
- Three Months Ended June 30, 1998 and
1997 and Six Months Ended June 30, 1998 and 1997
(unaudited) 4
Consolidated Condensed Statements of Cash Flows
- Six Months Ended June 30, 1998 and 1997
(unaudited) 5
Notes to Consolidated Condensed Financial
Statements (unaudited) 6-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
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GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 (1)
----------------- ----------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 176,692 $ 199,053
Restricted cash and investments 32,888 31,731
Accounts receivable, net 24,188 27,324
Investments 55 7,619
Prepaid expenses and other current assets 13,510 16,539
-------------- --------------
Total current assets 247,333 282,266
-------------- --------------
Restricted investments 348,195 112,719
Property, plant and equipment 529,568 433,680
less accumulated depreciation (37,770) (26,785)
-------------- --------------
491,798 406,895
Other assets 159,512 117,908
less accumulated amortization (27,759) (21,614)
-------------- --------------
131,753 96,294
$ 1,219,079 $ 898,174
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 25,990 $ 14,798
Accrued liabilities 29,806 30,869
Current portion of capital lease obligations 5,201 6,286
Current portion of long term debt 5,992 4,579
Other current liabilities 478 993
------------- -------------
Total current liabilities 67,467 57,525
------------- -------------
Other liabilities 11,466 3,551
Capital lease obligations, less current portion 18,430 13,994
Long term debt, less current portion 1,081,335 763,292
Minority interest in subsidiaries - 12,732
Preference shares 58,088 54,635
Shareholders' deficit:
Common shares 237,649 221,105
Commitment to issue shares - 604
Deficit (255,356) (229,264)
------------- -------------
Total shareholders' deficit (17,707) (7,555)
------------- -------------
$ 1,219,079 $ 898,174
============= =============
</TABLE>
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1997.
See notes to consolidated condensed financial statements.
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GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------------- ----------------------------------
1998 1997 1998 1997
-------- --------- ------------ -------------
Revenue:
<S> <C> <C> <C> <C>
Telecommunication and other services $ 38,493 $ 20,682 $ 67,673 $ 40,301
Telecommunication products 1,034 6,333 1,898 11,406
----------- --------- ----------- -------------
39,527 27,015 69,571 51,707
----------- --------- ----------- -------------
Operating costs and expenses:
Network expenses 26,025 15,593 47,153 32,522
Facilities administration and maintenance 3,701 3,388 7,656 6,508
Cost of product revenues 707 1,873 1,397 3,736
Selling, general and administrative 24,651 18,772 45,061 34,163
Research and development - 713 - 1,329
Depreciation and amortization 11,075 5,663 19,744 10,144
----------- --------- ------------ -------------
66,159 46,002 121,011 88,402
----------- --------- ------------ -------------
Loss from operations (26,632) (18,987) (51,440) (36,695)
----------- --------- ------------ -------------
Other expenses (income):
Interest income (6,793) (2,000) (11,728) (2,538)
Interest expense 25,250 10,503 46,525 15,887
Other 492 271 (60,145) (6,657)
----------- --------- ------------ -------------
18,949 8,774 (25,348) 6,692
----------- --------- ------------ -------------
Loss before income taxes
and minority interest (45,581) (27,761) (26,092) (43,387)
----------- --------- ------------ -------------
Income taxes - (729) - (847)
Minority interest in income of subsidiaries - (404) - (444)
----------- --------- ------------ -------------
- (1,133) - (1,291)
Net loss $ (45,581) $ (28,894) $ (26,092) $ (44,678)
=========== ========= ============ =============
Net loss per common and common
equivalent share (1) $ (1.36) $ (1.27) $ (0.83) $ (1.94)
=========== ========== ============ =============
Weighted average common and common
equivalent shares outstanding 35,966,492 25,164,628 35,606,617 24,577,047
=========== ========== ============ =============
</TABLE>
(1) Net loss per share is increased for preference shares' accretion totaling
$3,453 and $2,969 for the three and six-month periods ended June 30, 1998
and 1997, respectively.
See notes to consolidated condensed financial statements.
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GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998 1997
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(26,092) $ (44,678)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interest in income of subsidiary - 444
Depreciation and amortization 22,717 10,992
Accretion of interest 18,120 9,692
Stock compensation 1,213 381
Equity in loss of affiliate 593 773
Loss on disposal of assets 56 -
Gain on sale of subsidiary shares (61,292) (7,424)
Changes in non-cash operating working capital:
Accounts receivable (6,574) (4,804)
Prepaids expenses and other current assets 1,051 (5,030)
Accounts payable and accrued liabilities (6,719) 6,579
Other liabilities 8,383 (457)
------------------ -----------
Net cash used in operating activities (48,544) (33,532)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash acquired (35,471) (892)
Proceeds from sale of investments 318 -
Purchase of investments - (3,065)
Purchase of fixed assets (80,458) (99,636)
Purchase of other assets (1,991) (2,980)
Proceeds from sale of subsidiary shares, net 85,074 27,365
Cash disposed of in sale of subsidiary (5,252) -
Proceeds from the sale of fixed assets 3,584 5,774
Change in investments restricted for fixed asset purchases (254,335) (110,203)
------------------ -----------
Net cash used in investing activities (288,531) (183,637)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt 299,874 288,138
Principal payments on long term debt and capital leases (5,819) (3,837)
Issuance of common shares, net 15,832 13,463
Issuance of preferred shares - 48,679
Deferred financing costs (12,876) (9,739)
Change in investments restricted to finance interest payments 17,703 (94,548)
------------------ -----------
Net cash provided by financing activities 314,714 242,156
------------------ -----------
Net increase (decrease) in cash and cash equivalents (22,361) 24,987
Cash and cash equivalents at beginning of period 199,053 13,363
------------------ -----------
Cash and cash equivalents at end of period $176,692 $ 38,350
================== ===========
</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year or for subsequent periods. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the three months ended December 31, 1997, as included
in the Company's Transition Report on Form 10-K for the three month transition
period ended December 31, 1997.
2. NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares assumed
to be outstanding during the period. Common equivalent shares consist of options
and warrants to purchase common stock and convertible securities. Common stock
equivalents were antidilutive for all periods presented and were not included in
diluted weighted average common and common equivalent shares outstanding.
3. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Common shares, no par value 35,991,787 34,564,898
Unlimited number of
common shares authorized
4. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS
ENDED JUNE 30,
-----------------------
1998 1997
---- ----
Cash Transactions:
Cash paid for interest 27,461 1,802
Cash paid for income taxes - 62
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<PAGE>
Non-Cash Transactions:
Recorded in business combinations:
Assets 45,719 12,151
Liabilities 7,900 3,990
Common shares 2,348 8,161
Disposition of subsidiary:
Assets 35,480 -
Liabilities 4,218 -
Minority interest 12,732 -
Assets acquired through capital
leases 6,043 15,052
Amounts in accounts payable and
accrued liabilities for the
purchase of fixed assets at
period end 23,770 10,988
5. DISPOSAL OF SUBSIDIARY
In February 1998, the Company completed the sale of its remaining 63%
interest in NACT Telecommunications, Inc. for net proceeds of approximately
$85.0 million and recorded a gain of approximately $61.3 million on such sale.
6. ADOPTION OF NEW ACCOUNTING STANDARD
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The
objective of SFAS No. 130 is to report all changes in equity that result from
transactions and economic events other than from transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. There was no effect from the adoption of SFAS No. 130.
7. RECENT DEVELOPMENTS
In April 1998, the Company acquired ICON Communications Corp., a
switch-based reseller of long distance and local services located in Seattle,
Washington, for $23.8 million in cash.
In May 1998, the Company completed a private placement of $500.0
million principal amount at maturity of 10.5% senior secured discount notes due
2008 (the "1998 Notes"). The 1998 Notes will fully accrete to face value on May
1, 2003. From and after May 1, 2003, the 1998 Notes will bear interest, which
will be payable in cash, at a rate of 10.5% per annum on each May 1 and November
1, commencing November 1, 2003. The net proceeds from the sale of the 1998 Notes
of approximately $288.9 million are restricted for the purchase of
telecommunications equipment and network infrastructure.
-7-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors discussed herein.
OVERVIEW
GST Telecommunications, Inc. (the "Company") provides a broad range of
integrated telecommunications products and services, primarily to business
customers located in California, Hawaii and other western continental states. As
a facilities-based competitive local exchange carrier ("CLEC"), the Company
operates state-of-the-art, digital telecommunications networks that provide an
alternative to incumbent local exchange carriers. The Company's full line of
products, which offer a "one-stop" solution to customers' telecommunications
services requirements, include local dial tone, long distance, Internet, data
transmission and private line services.
The Company's digital networks currently serve 41 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Oregon, Texas and Washington. The Company
also constructs, markets and manages longhaul fiber optic facilities in Arizona,
California and Hawaii. The Company's longhaul fiber optic facilities currently
extend over 1,300 miles and approximately 1,800 route miles are under
construction and expected to become operational over the next 12 months.
Management believes that the formation of an integrated regional
network through the interconnection of the Company's individual networks with
the longhaul fiber optic facilities will provide significant competitive and
economic advantages. In addition to providing the Company with a larger
addressable market, the interconnection of its networks is expected to allow the
Company to carry a portion of its intra-regional telecommunications traffic
on-net, thereby improving operational margins by reducing payments to other
carriers for use of their facilities. In addition, increasing demand for high
bandwidth capacity has created opportunities for the Company to sell or lease
capacity on its network to other communications carriers.
The Company plans to build specific network segments or to lease
capacity as economically justified and as the demands of its customers warrant.
Management believes that pursuing the "smart-build" approach should permit the
Company to provide for ongoing capital expenditures on a "success basis" and
allow the Company to build its customer base through an increased focus on
sales, marketing and operations support systems. "Smart-builds" also provide the
Company with the ability to address attractive service areas selectively
throughout its targeted markets.
RESULTS OF OPERATIONS
REVENUES. Total revenues for the three and six month periods ended June
30, 1998 increased $12.5 million, or 46.3%, and $17.9 million, or 34.5%,
respectively, over the comparable three and six month periods ended June 30,
1997. Telecommunications and other services revenues for the three and six month
periods ended June 30, 1998 increased $17.8 million, or 86.1%, and $27.4
million, or 67.9%, respectively, over the comparable periods in the previous
year. The increase in telecommunications and other services revenues resulted
primarily from strategic acquisitions, including the acquisitions of Action
Telcom Co. ("Action Telcom") in May 1997, the Guam operations of Sprint
Corporation in October 1997, and ICON Communications, Corp. ("ICON") in April
-8-
<PAGE>
1998, and from increased local service revenue generated by the Company's
networks. To a lesser extent, the increase in telecommunications and other
services revenues resulted from increased long distance, Internet and data
services and from revenues generated by the sale of network conduit systems.
Telecommunications products revenues for the three and six month periods ended
June 30, 1998 decreased $5.3 million, or 83.7%, and $9.5 million, or 83.4%,
respectively, over the three and six months ended June 30, 1997. The decrease in
product revenues resulted from the sale of the Company's 63% interest in NACT
Telecommunications, Inc. ("NACT").
OPERATING EXPENSES. Total operating expenses for the three and six
month periods ended June 30, 1998 increased $20.2 million, or 43.8%, and $32.6
million, or 36.9%, respectively, over the three and six month periods ended June
30, 1997. Network expenses, which include direct local and long distance circuit
costs, were 67.6% and 69.7%, respectively, of telecommunications and other
services revenues for the three and six month periods ended June 30, 1998,
compared to 75.4% and 80.7% for the comparable periods in the previous year. The
decrease in network expenses as a percentage of revenue resulted from the
inclusion of strategic acquisitions and an increase in revenues for traffic
carried on the Company's network as a percentage of total telecommunications and
other services revenues. Facilities administration and maintenance expenses for
the three and six month periods ended June 30, 1998 were 9.6% and 11.3%,
respectively, of telecommunications and other services revenues compared to
16.4% and 16.1% for the comparable periods ended June 30, 1997. The primary
reason for the decrease in these expenses as a percent of telecommunications and
other services revenues is the inclusion of revenues from strategic
acquisitions, substantially all of which are not generated on the Company's
networks.
Cost of product revenues decreased $1.2 million, or 62.3%, and $2.3
million, or 62.6%, respectively, over the three and six month periods ended June
30, 1997. For the three and six month periods ended June 30, 1998 cost of
product revenues were 68.4% and 73.6%, respectively, of telecommunications
products revenues, compared to 29.6% and 32.8% for the comparable periods ended
June 30, 1997. The decrease in the dollar amount of cost of product revenues and
the increase in cost of product revenues as a percent of product sales resulted
from the sale of NACT. Research and development costs reported in the three and
six month periods ended June 30, 1997 were related to activities at NACT.
Selling, general and administrative expenses for the three and six
month periods ended June 30, 1998 increased $5.9 million, or 31.3%, and $10.9
million, or 31.9%, respectively, over the three and six months ended June 30,
1997. The increase is due to the expansion of the Company's CLEC and enhanced
services operations, which has resulted in additional marketing, management
information and sales staff, and to selling, general and administrative expenses
related to strategic acquisitions. As a percentage of total revenue, selling,
general and administrative expenses for the three and six month periods ended
June 30, 1998 were 62.4% and 64.8%, respectively, compared to 69.5% and 66.1%
for the comparable periods ended June 30, 1997.
Depreciation and amortization for the three and six month periods ended
June 30, 1998 increased $5.4 million and $9.6 million, respectively, over the
comparable periods in the previous year. The increase is attributable to
newly-constructed networks becoming operational and to the amortization of
intangible assets related to the Company's acquisitions. The Company expects
that depreciation will continue to increase as it expands its networks and
longhaul fiber optic facilities and installs additional switches. Depreciation
and amortization expense was 28.0% and 28.4% of total revenue for the three and
six month periods ended June 30, 1998 compared to 21.0% and 19.6% for the
comparable periods ended June 30, 1997.
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<PAGE>
OTHER EXPENSES/INCOME. For the three and six months ended June 30,
1998, the Company recorded net other expense of $18.9 million and net other
income of $25.3 million, respectively, compared to net other expense of $9.9
million and $8.0 million for the comparable periods ended June 30, 1997. For the
three month period ended June 30, 1998, the primary reason for the increase in
net other expenses as compared to the same period in 1997 was increased interest
expense resulting from the issuance in November 1997 of $144.0 million in senior
subordinated accrual notes (the "Accrual Notes") and the issuance in May 1998 of
$500.0 million principal amount at maturity of senior secured discount notes
(the "1998 Notes"). For the six month period ended June 30, 1998, net other
income includes a $61.3 million gain resulting from the sale of NACT.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a
result of the development and operation of its networks. The Company expects
that such losses will continue as the Company emphasizes the development,
construction and expansion of its networks and builds its customer base. Cash
provided by the Company's operations will not be sufficient to fund the
expansion of its networks, longhaul fiber optic facilities and services.
The Company's net cash used in operating and investing activities was
$337.1 million and $217.2 million for the six months ended June 30, 1998 and
1997, respectively. Net cash provided by financing activities from borrowings
and equity issuances to fund capital expenditures, acquisitions and operating
losses was $314.7 million and $242.2 million for the six months ended June 30,
1998 and 1997, respectively.
Capital expenditures for the six months ended June 30, 1998 and 1997
were $97.5 million and $110.4 million, respectively. The Company estimates
capital expenditures for fiscal 1998 and fiscal 1999 of approximately $325
million and $300 million, respectively. The majority of these expenditures is
expected to be made for the construction of network and longhaul fiber optic
facilities and the purchase of switches and related equipment to facilitate the
offering of the Company's services. Continued significant capital expenditures
are expected to be made thereafter. In addition, the Company expects to continue
to incur operating losses while it expands its business and builds its customer
base. Actual capital expenditures and operating losses will depend on numerous
factors, including the extent of future expansion, acquisition opportunities and
other factors beyond the Company's control, including economic conditions,
competition, regulatory developments and the availability of capital.
In addition to the Company's capital expenditures, in March 1998, the
Company acquired KLP, Inc. (d/b/a Call America), a Phoenix-based reseller of
long distance, for approximately $3.8 million in cash and the business of Whole
Earth Networks, LLC, a San Francisco-based Internet service provider, for
approximately $9.0 million in cash and the assumption of certain liabilities. In
April 1998, the Company acquired ICON, a switch-based reseller of long distance
and local services located in Seattle, for approximately $23.8 million in cash.
In May 1998, the Company completed a private placement of $500.0
million principal amount at maturity of the 1998 Notes. The 1998 Notes will
fully accrete to face value on May 1, 2003. From and after May 1, 2003, the
notes will bear interest, which will be payable in cash, at a rate of 10.5% per
annum on each May 1 and November 1, commencing November 1, 2003. The net
proceeds from the sale of the 1998 Notes of approximately $288.9 million are
restricted for the purchase of telecommunications equipment and network
infrastructure. The indenture related to the 1998 Notes, and the indentures
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<PAGE>
associated with previously issued notes, include restrictive covenants which,
among other items, limit or restrict additional indebtedness incurred by the
Company, investment in certain subsidiaries, the sale of assets and the payment
of dividends.
At June 30, 1998, the Company had approximately $1,111.0 million of
indebtedness outstanding and $58.1 million of mandatorily redeemable preference
shares. In addition, as of June 30, 1998, the Company had $30.5 million of
availability under a credit facility with Tomen America Inc. (the "Tomen
Facility") and $107.4 million of availability under a loan agreement with
Siemens Telecom Networks (the "Siemens Loan Agreement"). Although the Company's
liquidity was substantially improved as a result of proceeds received from the
sale of senior and convertible notes in December 1995 (collectively, the "1995
Notes"), the sale of senior secured notes in May 1997 (the "Secured Notes"), the
Accrual Notes and the 1998 Notes, the Company will have significant debt service
obligations. The Company will be required to make principal and interest
payments of approximately $30.6 million (of which $17.6 million will be made
from funds securing the Secured Notes), $64.6 million (of which $35.1 million
will be made from funds securing the Secured Notes), $67.6 million (of which
$17.6 million will be made from funds securing the Secured Notes), $116.3
million and $114.7 million in the remainder of 1998 and in 1999, 2000, 2001 and
2002, respectively. In addition, the Company anticipates that cash flow from
operations will be insufficient to pay interest in cash on the 1995 Notes when
such interest becomes payable in June 2001 and on the Secured Notes starting in
November 2000 once the amount pledged to fund the first six interest payments on
the Secured Notes is paid and to repay the 1995 Notes, the Secured Notes and the
Accrual Notes in full and that such notes will need to be refinanced. The
ability of the Company to effect such refinancings will be dependent upon the
future performance of the Company, which will be subject to prevailing economic
conditions and to financial, business and other factors beyond the control of
the Company. There can be no assurance that the Company will be able to improve
its operating results or that the Company will be able to meet its debt service
obligations.
At June 30, 1998, the Company had cash, cash equivalents, and
investments, including restricted cash and investments, of approximately $557.8
million. The Company believes that the amounts on hand and borrowings expected
to be available under the Tomen Facility and the Siemens Loan Agreement, will
provide sufficient funds for the Company to expand its business as presently
planned and to fund its operating expenses through October 1999. Thereafter, the
Company expects to require additional financing. The extent of additional
financing will depend on, among other things, the rate of the Company's
expansion and the success of the Company's businesses. In the event that the
Company's plans or assumptions change or prove to be inaccurate, or its cash
resources, together with borrowings under the current financing arrangements
prove to be insufficient to fund the Company's growth and operations, or if the
Company consummates additional acquisitions, the Company may be required to seek
additional sources of capital (or seek additional capital sooner than currently
anticipated). The Company may also seek to raise additional capital to take
advantage of favorable conditions in the capital markets. There can be no
assurance that additional financing will be available to the Company or, if
available, that it can be concluded on terms acceptable to the Company or within
the limitations contained within the Company's financing arrangements. Failure
to obtain such financing could result in the delay or abandonment of some or all
of the Company's development or expansion plans and could have a material
adverse effect on the Company's business. Such failure could also limit the
ability of the Company to make principal and interest payments on its
outstanding indebtedness. The Company has no material working capital or other
credit facility under which it may borrow for working capital and other general
corporate purposes. There can be no assurance that such a facility will be
available to the Company in the future or that if such a facility were
available, that it would be available on terms and conditions acceptable to the
Company.
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<PAGE>
YEAR 2000 PROGRAM
Many computer systems will experience difficulty processing dates
beyond the year 1999 and will need to be modified prior to the year 2000.
Failure to make such modifications could result in system failures or
miscalculations causing disruptions of operations, including among other things
an inability to process transactions, send invoices or engage in normal business
activities. The Company's core internal systems that have been recently
implemented are year 2000 compliant. The remaining core internal systems are
scheduled to be replaced by the second quarter of 1999 and are expected to be
year 2000 compliant when installed. The Company is also completing a preliminary
assessment of year 2000 issues not related to its core systems, including issues
surrounding systems that interface with those operated by unrelated parties.
Based on its initial evaluation, the Company does not believe that the cost of
remedial actions will have a material adverse effect on the Company's results of
operations and financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of changes as the program progresses, and failure to implement
such changes could have an adverse effect on future results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES
(SOP 98-5). SOP 98-5 requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred and that previously
capitalized costs related to such activities be expensed as a cumulative effect
of a change in accounting principle upon adoption. The Company will adopt the
provisions of SOP 98-5 at the beginning of 1999 and has not yet determined the
effect that such adoption will have on its future results of operations.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
1. On June 19, 1998, the Registrant issued an aggregate of 26,064
Common Shares to four individuals as an installment payment in consideration for
the Registrant's acquisition in September 1996 of Tri-Star Residential
Communications Corp.
There were no underwriters involved in the foregoing issuance of
equity securities and such issuance was exempt from registration under Section
4(2) of the Securities Act of 1933, as amended, as transactions not involving a
public offering.
ITEM 5. OTHER INFORMATION
In accordance with recent amendments to the proxy rules under the
Securities Exchange Act of 1934, as amended, the Registrant's shareholders are
notified that the deadline for providing the Registrant timely notice of any
shareholder proposal to be submitted outside of the Rule 14a-8 process for
consideration at the Registrant's 1999 Annual Meeting of Shareholders will be
December 15, 1998. As to all such matters as to which the Registrant does not
have notice on or prior to December 15, 1998, discretionary authority shall be
granted to the designated persons in the Registrant's proxy for such Annual
Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On May 4, 1998, the Registrant reported on Form 8-K in "Item 5.
Other Events," the completion of a private placement by GST Network Funding,
Inc., an indirect wholly-owned subsidiary of the Registrant, of $500 million
principal amount at maturity of senior secured discount notes.
On June 15, 1998, the Registrant reported on Form 8-K in "Item 5.
Other Events," the retirement of John Warta, formerly the Chairman of the Board
and Chief Executive Officer of the Registrant.
-13-
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Date: AUGUST 13, 1998 GST TELECOMMUNICATIONS, INC.
(Registrant)
/S/ DANIEL L. TRAMPUSH
---------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 176,691,528
<SECURITIES> 32,943,894
<RECEIVABLES> 27,922,375
<ALLOWANCES> (3,734,573)
<INVENTORY> 734,656
<CURRENT-ASSETS> 247,333,032
<PP&E> 529,567,937
<DEPRECIATION> (37,770,201)
<TOTAL-ASSETS> 1,219,078,642
<CURRENT-LIABILITIES> 67,467,814
<BONDS> 966,579,964
<COMMON> 237,648,634
58,087,902
0
<OTHER-SE> (255,356,958)
<TOTAL-LIABILITY-AND-EQUITY> 1,219,078,642
<SALES> 69,571,078
<TOTAL-REVENUES> 69,571,078
<CGS> 48,549,911
<TOTAL-COSTS> 121,010,958
<OTHER-EXPENSES> (71,873,595)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,525,548
<INCOME-PRETAX> (26,091,832)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,091,832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,091,832)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> 0
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