SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended__________________
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from October 1, 1997 to December 31, 1997
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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)
4001 Main Street, Vancouver, Washington 98663
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (360) 906-7100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Shares, without par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value at March 10, 1998 of the Registrant's Common
Shares, without par value (based upon the closing price of $15 per share of such
Shares on the American Stock Exchange), held by non-affiliates of the Company
was $500,419,635. 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 March 10, 1998,
there were outstanding 35,752,483 of the Registrant's Common Shares, without par
value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement filed
with the Securities and Exchange Commission (the "Commission") on January 28,
1998 pursuant to Regulation 14A are incorporated by reference in Items 10
through 12 of Part III of this Transition Report on Form 10-K.
<PAGE>
ITEM 1. BUSINESS
OVERVIEW
GST Telecommunications, Inc. (the "Company") provides a broad range of
integrated telecommunications products and services, primarily to business
customers located in the western continental United States and Hawaii. As a
facilities-based competitive local exchange carrier ("CLEC"), the Company
operates state-of-the-art, digital telecommunications networks that represent an
alternative to incumbent local exchange carriers ("ILECs"). The Company's full
line of products, which offer a "one-stop" solution to customers'
telecommunications services requirements, include long distance, Internet, data
transmission and private line services, and local dial tone services, which were
recently introduced.
The Company's digital networks currently serve 40 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Texas, Washington and Guam. In addition,
the Company has networks under construction which, when completed, will serve
two additional markets and expand its regional footprint to Oregon. The Company
also constructs, markets and manages longhaul fiber optic facilities,
principally in Arizona, California and Hawaii. The Company's longhaul fiber
optic facilities currently extend approximately 700 route miles and an
additional 1,600 route miles are expected to become operational over the next 12
months.
Management believes that the Company has an opportunity to leverage its
existing network infrastructure and service capabilities to provide customers
with an integrated telecommunications package. The Telecommunications Act of
1996 (the "Telecommunications Act") and state regulatory initiatives have
substantially changed the telecommunications regulatory environment in the
United States. As a result of these regulatory changes, the Company is permitted
in certain states to provide local dial tone in addition to its existing
telecommunications service offerings. In order to capitalize on these
opportunities, the Company has accelerated the development of additional
networks and longhaul fiber optic facilities within its region while
significantly expanding its product and service offerings, primarily with
respect to the provision of local services. To facilitate its entry into local
services, the Company has in service eight high capacity digital switches and
has installed and is currently testing six additional high capacity digital
switches that are expected to become operational by the end of the first quarter
of 1998.
TELECOMMUNICATIONS SERVICES STRATEGY
In conjunction with its network expansion, the Company has developed a
strategy to leverage its existing facilities and infrastructure, customer base
and experience by providing a broad range of integrated telecommunications
services to meet the voice and data needs of its end-user customers. The Company
focuses on small to medium-sized businesses that have significant
telecommunications requirements. The Company, through its established sales
channels, offers: (i) bundled local and long distance services; (ii) flexible
pricing and customized products and services; and (iii) an enhanced level of
customer service. To meet its customers' needs, the Company offers a number of
telecommunications services, including:
LOCAL SERVICES
Where regulatory conditions permit, the Company offers both switched
and dedicated local service. Dedicated local services involve a fixed
communications link, usually between an end-user and a long distance carrier's
point-of presence ("POP"). With a switch, it is possible for the Company to
direct traffic to any end-user or long distance carrier provided that the
Company has an interconnection agreement with the connecting carriers.
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To facilitate its entry into local services, the Company has in service
eight high capacity digital switches and has installed and is currently testing
six additional high capacity digital switches that are expected to become
operational by the end of the first quarter of 1998. As demand warrants, the
Company plans to continue to install switching equipment in its operational
networks, in markets where it is constructing networks and in certain other
cities where the Company will rely on ILEC facilities for transmission. Once a
switch is operational, where regulatory conditions and interconnection
agreements permit, the Company intends to offer local dial tone, in addition to
enhanced services such as integrated services digital network ("ISDN"), Centrex,
voice mail and other custom calling features.
LONG DISTANCE SERVICES
Under federal regulations, the Company is permitted to provide a full
range of interstate switched access as well as enhanced services. The Company
offers basic and enhanced long distance services, such as toll free, calling
card, prepaid calling card and international call back services, targeting
primarily business customers purchasing between $200 and $15,000 of services per
month as well as resellers and other carriers. The Company purchases long
distance capacity under agreements with certain major long distance carriers
that provide the Company capacity at rates that vary with the monthly traffic
generated by the Company.
During the fiscal year ended September 30, 1997 ("Fiscal 1997"), the
Company expanded its long distance products and services through the acquisition
of Action Telcom Co. ("Action Telcom") for an aggregate of 903,000 Common Shares
valued at approximately $8.2 million, and $3.9 million in cash, payable in three
equal installments at closing and on the first and second anniversary dates
thereof. Additional Common Shares may be issued to the former shareholders of
Action Telcom on each of the first and second anniversaries of the closing date
of the merger if the average closing sale price of a Common Share on the AMEX
(or the Company's then principal trading market) does not exceed $10.00 for the
10 consecutive trading days ending three trading days prior to each such
anniversary. Action Telcom is a facilities-based telecommunications company
located in Abilene, Texas that operates its own network and switching equipment,
originating and terminating its own traffic principally in Texas. The Company
intends to continue to pursue acquisitions of long distance carriers.
INTERNET SERVICES
The Company presently offers Internet-related services in most of its
markets, such as dedicated Internet services, World Wide Web ("Web") site
development and hosting, provides access and upstream transport for local
Internet Service Providers ("ISPs"), electronic data interchange ("EDI") and
electronic commerce services and is in the process of developing various
Internet software applications. The Company also offers dial-up Internet
services to customers in Portland (Oregon), Vancouver (Washington), the State of
Hawaii and select markets in California and intends to begin offering such
services in the Los Angeles, San Francisco and Houston metropolitan areas in
1998. Management believes that these services will become an important component
of the Company's overall product offerings and intends to continue to expand its
Internet access and service business to other markets.
DATA SERVICES
The Company offers national and international frame relay services on
its own frame relay network and through interconnection agreements with data
service providers. Under these agreements, the Company and such data service
providers have agreed to link their data networks and terminate one another's
traffic. The Company has deployed Cascade Communications frame relay switches in
21 markets in the western United States. Such switches can provide both frame
relay and Internet services. The Company plans to offer data networking services
such as asynchronous transfer mode ("ATM"), high speed LAN connectivity service,
video conferencing, multi-media networking, frame relay and high capacity
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access to the Internet. The Company has one ATM switch commercially operational
in each of Los Angeles and Ontario, California.
The Company offers its customers monthly network management reports
that allow users to track the performance of their virtual private network.
Customer network management support will permit customers to monitor and tailor
their virtual private network as desired with a communication link into the
Company's network management systems.
SHARED TENANT SERVICES
The Company offers shared tenant services to large apartment and
residential communities in Arizona, Idaho, New Mexico, Oregon, Utah and
Washington. Shared tenant services bundle local, long distance, Internet access,
cable television and home alarm service.
The Company provides local dial tone service to its shared tenant
customers through on-site PBX telephone systems located within each apartment
complex that are connected to the ILEC. As the Company expands its network and
central office switching facilities, PBXs will continue to be replaced with
central office access nodes originating from the Company's own dial tone
facilities, which the Company expects to provide significant cost savings and
customer feature capability. In addition, the Company is in the process of
connecting apartment communities to its own fiber network, thereby permitting
the Company to realize additional cost savings for transport.
The Company is expanding its telecommunications services business
through internal development and will continue to explore opportunities for
further expansion by acquisitions and joint ventures.
TELECOMMUNICATIONS NETWORK STRATEGY
The Company's network strategy is to continue to develop and expand its
network infrastructure to ultimately assemble, through a combination of owned
and leased facilities and joint ventures, an integrated regional network for the
on-net provision of CLEC services including local, long distance, Internet
access and data services. The Company will continue to focus on the western
United States in order to take advantage of its strategically advantageous
position in California and Hawaii and the substantial telecommunications traffic
that exists among the western United States, Mexico, the Pacific Rim and western
Canada. Key elements in this strategy include:
INITIAL DEPLOYMENT. The Company has identified attractive markets in
its region and has sought to be one of the first CLECs to obtain the necessary
permits, rights-of-way and licenses to construct and operate networks in its
targeted markets. Initial network deployment is designed to provide connectivity
among the Company's facilities, selected long distance carriers' POPs, the
ILEC's central offices and the market's primary business centers. In addition,
the Company may deploy network facilities in markets where it achieves a
critical mass of customers using resold or leased facilities.
EXPANSION. Subsequent to initial network deployment, the Company seeks
to expand its network in a geographic area to efficiently address a large number
of significant users of telecommunications services. To facilitate this
expansion, the Company has entered into strategic agreements with a number of
gas and electric utilities. These arrangements have enabled the Company to
obtain access to and use of rights-of-way, conduit and transmission and
distribution facilities in a timely and cost-effective manner.
INTERCONNECTION. Management believes that the formation of an
integrated regional network through the interconnection of the Company's
individual networks will provide significant advantages. In addition to
providing the Company with a larger addressable market, the interconnection of
its networks is expected to allow the Company to carry its intra-regional
telecommunications traffic on-net, thereby
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improving operating margins by reducing payments to other carriers for use of
their facilities, as well as to lease longhaul transport capacity to others.
The Company's network strategy is best evidenced in the States of
California and Hawaii. In California, the Company holds two Certificates of
Public Convenience and Necessity ("CPCNs") from the California Public Utilities
Commission ("CPUC"), which allows the Company to install its fiber optic cable
along existing public utility corridors, and has a statewide pole attachment
agreement, which enables the Company to expand its infrastructure without the
delays typically experienced in obtaining individual licenses and rights-of-way.
In Hawaii, the Company operates a digital microwave network and is
supplementing its microwave network with terrestrial fiber optic facilities. The
Company has also constructed an inter-island fiber network to extend its
services throughout the State. The Hawaii Public Utilities Commission (the
"HPUC") has approved the network interconnection agreement and pole attachment
and conduit occupancy agreements of GST Telecom Hawaii, Inc. ("GST Hawaii") with
GTE Hawaiian Telephone Company ("GTE"). The Company is in the process of
completing its connections to GTE's Hawaiian network and installing necessary
facilities and equipment. GST Hawaii has also received the HPUC's approval of a
master license/lease agreement with Hawaiian Electric Company and its
subsidiaries to place fiber optic cable on poles and in certain facilities on
all islands other than Kauai.
The Company recently began to construct, market and manage longhaul
fiber optic facilities and plans to ultimately assemble an integrated regional
network for the on-net provision of services and to lease longhaul capacity to
others.
TELECOMMUNICATIONS NETWORKS AND FACILITIES
The Company's networks comprise fiber optic cables, microwave or other
wireless facilities, integrated switching facilities, advanced electronics, data
switching equipment, transmission equipment and associated wiring and equipment.
The Company typically designs its networks with a ring architecture with
connectivity to the ILEC's central offices, POPs of long distance carriers and
large concentrations of telecommunication intensive end-users.
The following table presents information as of December 31, 1997
concerning the Company's networks that are operational and under construction:
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<TABLE>
<CAPTION>
CURRENT
DATE OPERATIONAL ESTIMATED
COMMERCIALLY ROUTE ROUTE APPROXIMATE
LOCATION SERVICE AREA OPERATIONAL(1) MILES(2) MILES(3) POPULATION(4)
-------- ------------ ----------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Arizona.................... Phoenix February 1994(5) 12 984,403
Tucson September 1995 27 405,390
California
Northern California...... Concord, Oakland, September 1997 33 14 1,324,859
San Francisco,
Walnut Creek,
Livermore
Hayward, San September 1997 11 146,801
Ramon
Mare Island January 1997 12 3 1,000
Pleasanton August 1996 42 50,553
Southern California...... Loma Linda, Rialto, April 1995 106 541,195
Riverside, San
Bernardino, Monterey
Park
City of Industry, August 1995 46 133,779
Ontario
Los Angeles December 1996 --(6) 3,485,398
Palm Springs 2nd Quarter 10 40,181
1998(7)
Pasadena 1st Quarter 1998 11 131,591
San Joaquin Valley....... Fresno, Bakersfield November 1996 44 6 529,022
Central Coast............ San Luis Obispo 1st Quarter 1998 5 41,958
Santa Barbara, 2nd Quarter 1998 17 171,571
Goleta
Hawaii..................... Honolulu (Oahu) February 1997 20 22 365,272
Kauai December 1997 10 51,177
Idaho...................... Boise May 1997 4 1 125,738
New Mexico................. Albuquerque January 1996 67 5 384,736
Oregon..................... Portland 1st Quarter 1998 54 437,319
Texas...................... Abilene June 1997 1 106,654
Washington................. Spokane September 1996 3 177,196
Vancouver November 1996 6 8 46,380
</TABLE>
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(1) Refers to the month during which the Company's network became
commercially operational or the quarter during which the Company
expects a network under construction to become operational. The Company
deems a network to be commercially operational when its fiber optic
cable and related electronics permit the Company to provide service.
(2) Includes owned and leased miles utilized by the networks that have
become commercially operational.
(3) Represents the planned owned and leased miles that will comprise the
network under construction at the time the network is expected to
become commercially operational or miles under construction for
networks that have become commercially operational.
(4) Based upon U.S. Census Bureau data.
(5) The Company acquired 100% ownership of Phoenix Fiber, the owner and
operator of the Phoenix Network, in October 1996. Prior thereto, the
Company held a 50% interest in and did not manage this network.
(6) The network in Los Angeles interconnects longhaul traffic with the POPs
of other carriers.
(7) The fiber lease and fiber are in place, however the system is not
operational and no lease payments are being made on account of a
dispute between Southern California Edison Company ("SCE") and various
property owners regarding SCE's power line right-of-way.
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The Company's decision to construct a network in a particular locale is
preceded by a review of the area's demographic, economic and competitive
characteristics and telecommunications requirements. The characteristics
examined include location and concentration of potential business, governmental
and academic end-users, the locale's economic prospects, information regarding
demand for the various services offered by the Company and actual and potential
ILEC, CLEC and other competitors. Market demand is estimated using market
research conducted by the Company and from information such as demand sets
provided by interexchange carriers ("IXCs").
The Company's networks are monitored by its network control center
located at the Company's corporate headquarters in Vancouver, Washington. The
control center is staffed by 28 employees and provides network monitoring 24
hours a day, seven days a week. Advanced monitoring systems allow personnel to
diagnose and resolve problems, generally before customers detect a meaningful
deterioration in service quality.
The Company plans to continue to develop and expand its network
infrastructure to ultimately assemble, through a combination of owned and leased
facilities and joint ventures, an integrated regional network for the on-net
provision of CLEC services.
The following table presents information as of December 31, 1997
concerning the Company's longhaul fiber optic facilities that are operational
and under construction:
<TABLE>
<CAPTION>
CURRENT
DATE COMMERCIALLY OPERATIONAL ESTIMATED
LOCATION OPERATIONAL(1) ROUTE MILES(2) ROUTE MILES(3)
- -------- -------------- ------------------ -----------------
<S> <C> <C> <C>
San Francisco to Walnut Creek................... 3rd Quarter 1999 34
Walnut Creek to Fresno.......................... 3rd Quarter 1999 194
Fresno to Bakersfield........................... December 1997 163
Bakersfield to Ontario.......................... 3rd Quarter 1999 201
Los Angeles to San Luis Obispo.................. 3rd Quarter 1998 212
Ontario to Anaheim to Los Angeles............... March 1997 83
Rialto to Palm Springs.......................... 2nd Quarter 1998(4) 54
Taft to Bakersfield............................. May 1997 39
Coalinga to Fresno.............................. November 1996 44
Taft to Coalinga................................ 1st Quarter 1998 102
Phoenix to Tucson............................... 1st Quarter 1998 217
Hawaii Fiber connecting Kauai, Hawaii,
Oahu, Molokai, Maui & Lanai.................. June 1997 344
Coalinga to San Luis Obispo..................... 4th Quarter 1998 120
Sylmar to Ventura............................... 2nd Quarter 1998 69
Los Angeles to Sylmar to Santa Monica........... 2nd Quarter 1998 67
Santa Monica to Los Angeles..................... 2nd Quarter 1998 19
Los Angeles to Palmdale......................... 1st Quarter 1998 72
Palmdale to Las Vegas........................... 1st Quarter 1998 320
Las Vegas to Phoenix............................ 1st Quarter 1998 306
</TABLE>
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(1) Refers to the month the facilities became commercially operational or
the quarter during which the Company expects the facilities under
construction to become operational. The Company deems the facilities to
be commercially operational when its fiber optic cable and related
electronics permit the Company to provide service.
(2) Includes owned and leased miles of facilities that have become
commercially operational.
(3) Represents the planned owned and leased miles that will comprise the
facilities under construction at the time the facilities are expected
to become commercially operational.
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(4) The fiber lease and fiber are in place, however, the system is not
operational and no lease payments are being made on account of a
dispute between SCE and various property owners regarding SCE's power
line right-of-way.
The following table presents information as of December 31, 1997
concerning the Company's high capacity digital switches that are operational or
are installed and currently being tested:
<TABLE>
<CAPTION>
Date Commercially
Location Operational(1)
-------- -------------------------
<S> <C> <C>
Arizona Phoenix.................................................. August 1997
Tucson................................................... September 1997
California Fresno................................................... 1st Quarter 1998
Los Angeles.............................................. 1st Quarter 1998
Riverside................................................ July 1997
San Francisco............................................ 1st Quarter 1998
San Luis Obispo.......................................... December 1997
Walnut Creek............................................. November 1997
Hawaii Honolulu................................................. February 1997
Idaho Boise.................................................... 1st Quarter 1998
New Mexico Albuquerque.............................................. September 1997
Oregon Portland (Vancouver, Washington)......................... 1st Quarter 1998
Texas Houston.................................................. 1st Quarter 1998
Washington Spokane.................................................. December 1997
</TABLE>
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(1) Refers to the month during which the switch became operational or the
quarter during which the Company expects the switch to become
operational.
MANUFACTURING
The Company, through its equipment subsidiary, NACT Telecommunications,
Inc. ("NACT"), produces advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT's
customers include long distance carriers, prepaid debit (calling) card and
prepaid cellular network operators, international callback/reorigination
providers and other specialty telecommunications service providers. NACT's
products and services include the STX application switching platform (the
"STX"), the NTS telemanagement and billing system (the "NTS") and facilities
management services.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" for a description relating to the Company's
recent sale of its interest in NACT.
COMPETITION
The telecommunications industry is highly competitive. In most markets,
the Company's principal competitor for local exchange services is the Regional
Bell Operating Company ("RBOC") or GTE Corporation and its affiliated companies
(collectively, the "GTE Companies"). Other competitors may include other CLECs,
microwave and satellite carriers, wireless telecommunications providers and
private networks built by large end-users. Potential competitors (using similar
or different technologies) include cable television companies, utilities and
RBOCs outside their current local service areas. In addition, the Company
anticipates competition from large long distance carriers, such as AT&T Corp.
("AT&T"), MCI Communications Corporation ("MCI") and Sprint Corporation
("Sprint"), which have begun to offer integrated local and long distance
telecommunications services. AT&T also has announced its intention to offer
local services using a new wireless technology. Consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, as well as the development
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of new technologies, could give rise to significant new competitors to the
Company. In addition, a continuing trend toward business combinations and
strategic alliances in the telecommunications industry may further enhance
competition. For example, WorldCom Inc. ("WorldCom") acquired MFS Communications
Company, Inc. ("MFS") and Brooks Fiber Properties Inc. ("Brooks") and recently
announced that it entered into an agreement to acquire MCI, each of which
compete with the Company in several of the markets in which the Company
operates. The Company cannot determine what effect such acquisitions will have
on the Company's business, financial condition and results of operations.
As a recent entrant in the integrated telecommunications services
industry, the Company has not achieved and does not expect to achieve a
significant market share for any of its services. In particular, the RBOCs, the
GTE Companies and other local telephone companies have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than those of the Company, have the potential to
subsidize competitive services with revenues from a variety of businesses and
currently benefit from certain existing regulations that favor the ILECs over
the Company in certain respects. While recent regulatory initiatives, which
allow CLECs such as the Company to interconnect with ILEC facilities, provide
increased business opportunities for the Company, such interconnection
opportunities have been accompanied by increased pricing flexibility for and
relaxation of regulatory oversight of the ILECs.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards. The Company will
become increasingly dependent on interconnection with ILECs as switched services
become a greater percentage of the Company's business. The Telecommunications
Act imposes interconnection obligations on ILECs, but there can be no assurance
that the Company will be able to obtain the interconnection it requires at
rates, and on terms and conditions, that permit the Company to offer switched
services at rates that are simultaneously competitive and profitable. In the
event that the Company experiences difficulties in obtaining high quality,
reliable and reasonably priced service from the ILECs, the attractiveness of the
Company's services to its customers could be impaired.
The long distance telecommunications industry has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The Company competes with major carriers such as
AT&T, MCI, Sprint and WorldCom, as well as other national and regional long
distance carriers and resellers, many of whom are able to provide services at
costs that are lower than the Company's current costs. Many of these competitors
have greater financial, technological and marketing resources than the Company.
In addition, as a result of the Telecommunications Act, the RBOCs are expected
to become competitors in the long distance telecommunications industry both
outside of their service territory and upon the satisfaction of certain
conditions, within their service territory. SBC Communications Corporation
("SBC") has challenged the constitutionality of the provisions conditioning RBOC
entry into in-region long distance service. As a result of the Company's
acquisition of Action Telcom, Call America Business Communications Corp. and
certain of its affiliated companies (collectively, "GST Call America"), TotalNet
Communications, Inc. ("TotalNet") and the business of Texas-Ohio Communications,
Inc. and affiliated companies (collectively, "Texas-Ohio"), the Company's long
distance operations will account for a significant portion of the Company's
revenues. The Company believes that the principal competitive factors affecting
its long distance operations are pricing, customer service, accurate billing,
clear pricing policies and, to a lesser extent, variety of services. The ability
of the Company to compete effectively will depend upon its continued ability to
maintain high quality, market driven services at prices generally equal to or
below those charged by its competitors. To maintain its competitive posture, the
Company believes that it must be in a position to reduce its prices in order to
meet reductions in rates, if any, by others. Any such reductions could adversely
affect the Company.
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The Internet services market is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company's competitors in this market include Internet
service providers, other telecommunications companies, online services providers
and Internet software providers. Many of these competitors have greater
financial, technological and marketing resources than those available to the
Company.
On February 25, 1998, U S WEST Communications, Inc. ("U S WEST")
petitioned the Federal Communications Commission (the "FCC") to allow it to
build and operate packet-and call-switched data networks across LATA boundaries,
to permit it to carry interLATA data traffic incident to its provision of
digital subscriber line services, to not require it to make those data services
available on a discounted resale basis and to not require it to make the
non-bottleneck elements of such services available on an unbundled basis. The
Company provides certain services with which U S WEST proposed services would
compete if such services are approved by the FCC.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the Company's competition for
telecommunication services both domestically and internationally. Under this
agreement, the United States and other members of the WTO committed themselves
to opening their telecommunications markets to competition and foreign ownership
and to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telephone companies, effective in some
cases as early as January 1, 1998.
SALES CHANNELS AND CUSTOMER SUPPORT
The Company markets its services through five sales channels including
a direct sales force, an inside sales (telemarketing) group, alternate channels
including referral partners, independent agents and resellers, a government
systems group and a wholesale carrier group. As of December 31, 1997, the
Company had 305 sales and marketing employees in 18 cities and utilized 233
agents and independent contractors.
The Company's direct sales personnel offer the Company's full line of
products including long distance, private line, Internet, local and data
transmission services. Sales compensation is incentive-based and designed to
facilitate both the acquisition and retention of customers.
Teams of sales engineers and local service experts are available to
support the sales force in complex or more technical applications. The inside
sales and telemarketing group and referral partner programs generate leads for
the direct sales force. These groups also focus on smaller customers that may
use the full array of products but do not require extensive technical or on-site
support.
Local customer service representatives are assigned to particular
customers and are supplemented by local technical sales support personnel and a
centralized group of customer service representatives located in call centers
who respond to after-hours customer inquiries and perform account maintenance.
As of December 1, 1997, the Company had approximately 56,000 customers,
including approximately 28,000 long distance, 6,600 local dial tone customers
and 14,500 Internet customers (substantially all of whom are dial-up customers).
Approximately 11,000 of such customers purchase more than one of the Company's
services.
REGULATION
The Company's telecommunications services business is subject to
varying degrees of federal, state and local regulation.
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FEDERAL REGULATION
The FCC regulates interstate and international telecommunications
services. The Company provides service either on a private carrier basis or on a
common carrier basis. In the interstate market, the primary distinguishing
factor between private carriers and common carriers is that the former provide
customized services to select customers pursuant to individually negotiated
contracts. Common carriers, on the other hand, hold themselves out to serve the
public generally. The FCC imposes certain regulations on common carriers such as
the RBOCs that have some degree of market power. The FCC imposes less regulation
on common carriers without market power including, to date, CAPs/CLECs. The FCC
requires common carriers to receive an authorization to construct and operate
telecommunications facilities between the United States and international
points.
In August 1996, the FCC released a decision implementing the
interconnection portions of the Telecommunications Act (the "Interconnection
Decision"). The Interconnection Decision establishes rules implementing the
Telecommunications Act requirements that ILECs negotiate interconnection
agreements and provides guidelines for review of such agreements by state public
utilities commissions. On July 18, 1997, the United States Court of Appeals for
the Eighth Circuit (the "Eighth Circuit") vacated certain portions of the
Interconnection Decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to "pick and choose" among
various provisions of existing interconnection agreements between ILECs and
their competitors. On October 14, 1997, the Eighth Circuit issued a decision
vacating additional FCC rules that will likely have the effect of increasing the
cost of obtaining the use of combinations of an ILEC's unbundled network
elements. The Company had negotiated a number of interconnection agreements with
ILECs prior to the July 18th Eighth Circuit decision. The Eighth Circuit
decisions create uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. There can be no assurance that the Company
will be able to obtain or enforce interconnection agreements on terms acceptable
to the Company. The Supreme Court has accepted for review the Eighth Circuit
decisions.
In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate services. This order
applies to all non-dominant interstate carriers, including AT&T. The order does
not apply to the RBOCs or other local exchange providers. The FCC order was
issued pursuant to authority granted to the FCC in the Telecommunications Act to
"forbear" from regulating any telecommunications services provider if the FCC
determines that the public interest will be served. After a nine-month
transition period, relationships between interstate carriers and their customers
will be set by contract. At that point long distance companies may no longer
file with the FCC tariffs for interstate, domestic, interexchange services.
Carriers have the option to immediately cease filing tariffs. Several parties
have filed notices for reconsideration of the FCC order and other parties
appealed the decision. On February 13, 1997, the United States Court of Appeals
for the District of Columbia Circuit stayed the implementation of the FCC order.
If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services. The obligation to provide non-discriminatory, just and reasonable
prices remains unchanged under the Communications Act of 1934, as amended (the
"Communications Act"). While tariffs provided a means of providing notice of
prices, terms and conditions, the Company has always relied primarily on its
sales force and direct marketing to provide such information to its customers
and expects to continue to do so in the future.
The Telecommunications Act is intended to increase competition. The act
opens the local services market by requiring ILECs to permit interconnection to
their networks and establishing ILEC obligations with respect to:
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RECIPROCAL COMPENSATION. Requires all ILECs and CLECs to complete calls
originated by competing carriers under reciprocal arrangements at prices based
on a reasonable approximation of incremental cost or through mutual exchange of
traffic without explicit payment.
RESALE. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or conditions. In
addition, ILECs are required to offer wholesale versions of all retail services
to other telecommunications carriers for resale at discounted rates, based on
the costs avoided by the ILEC in the wholesale offering.
INTERCONNECTION. Requires all ILECs and CLECs to permit their
competitors to interconnect with their facilities. Requires all ILECs to permit
interconnection at any technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost (which may include a reasonable
profit). At the option of the carrier seeking interconnection, collocation of
the requesting carrier's equipment in the ILECs' premises must be offered,
except where the ILEC can demonstrate space limitations or other technical
impediments to collocation.
UNBUNDLED ACCESS. Requires all ILECs to provide nondiscriminatory
access to unbundled network elements (including, network facilities, equipment,
features, functions, and capabilities) at any technically feasible point within
their networks, on nondiscriminatory terms, at prices based on cost (which may
include a reasonable profit).
NUMBER PORTABILITY. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
DIALING PARITY. Requires all ILECs and CLECs to provide "1+" equal
access to competing providers of telephone exchange service and toll service,
and to provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable dialing
delays.
ACCESS TO RIGHTS-OF-WAY. Requires all ILECs and CLECs to permit
competing carriers access to poles, ducts, conduits and rights-of-way at
regulated prices.
ILECs are required to negotiate in good faith with carriers requesting
any or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal telecommunications subsidy regime. For example, the FCC
established new subsidies for services provided to qualifying schools and
libraries with an annual cap of $2.25 billion and for services provided to rural
health care providers with an annual cap of $400 million. The FCC also expanded
the federal subsidies to low-income consumers. Providers of interstate
telecommunications service, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be based on its share of certain defined telecommunications
end-user revenues. The Company is currently unable to predict the effect that
these required payments will have on its financial condition. In the May 8th
order, the FCC also announced that it will soon revise its rules for subsidizing
service provided to consumers in high cost areas. Several parties have appealed
the May 8th order. Such appeals have been consolidated and transferred to the
United States Court of Appeals for the Fifth Circuit where they are currently
pending. In addition, on July 3, 1997, several ILECs filed a petition for stay
of the May 8th order with the FCC. That petition is pending.
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The Telecommunications Act also codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the AT&T
Antitrust Consent Decree (and similar antitrust restrictions on the GTE
Companies) restricting the RBOCs from providing long distance services and
engaging in telecommunications equipment manufacturing. These provisions permit
a RBOC to enter the long distance market in its traditional service area if it
satisfies several procedural and substantive requirements, including obtaining
FCC approval upon a showing that facilities-based competition is present in its
market, that the RBOC has entered into interconnection agreements in those
states in which it seeks long distance relief, the interconnection agreements
satisfy a 14-point "checklist" of competitive requirements, and the FCC is
satisfied that the RBOC's entry into long distance markets is in the public
interest. SBC, the RBOC serving some of the states served by the Company,
applied to the FCC for such authority which was denied. SBC has appealed the
denial and has sought to have the provisions declared unconstitutional. The
Telecommunications Act permits the RBOCs to enter the out-of-region long
distance market immediately upon its enactment.
Under the Telecommunications Act, any entity, including cable
television companies and electric and gas utilities, may enter any
telecommunications market, subject to reasonable state regulation of safety,
quality and consumer protection. Because implementation of the
Telecommunications Act is subject to numerous federal and state policy
rulemaking proceedings and judicial review there is still uncertainty as to what
impact such legislation will have on the Company.
Pursuant to authority granted by the FCC, the Company resells the
international telecommunications services of other common carriers between the
United States and international points. In connection with such authority,
certain of the Company's subsidiaries have filed tariffs stating the rates,
terms and conditions for their international services. The FCC has determined
that call reorigination service using uncompleted call signaling does not
violate United States or international law, but has held that United States
companies providing such services must comply with the laws of the countries in
which they operate as a condition of such companies' Section 214 authorizations.
With respect to its domestic service offerings, various subsidiaries of
the Company have filed tariffs with the FCC stating the rates, terms and
conditions for their interstate services. To the extent that such subsidiaries
provide intrastate services, they may be required to obtain authority from state
regulatory authorities prior to providing such services. Such subsidiaries have
been granted intrastate toll authority in 45 states and the District of Columbia
and the Company is applying for such authority in the remaining states,
excluding Alaska. There can be no assurance that such state authorizations will
be granted. In addition, the Company has obtained authority to provide local
exchange services on a resale or facilities- based basis in 10 states and the
Northern Marianas Islands.
Except in certain designated geographically competitive zones, the
current policy of the FCC for most special access services dictates that ILECs
charge all customers the same price for the same service. Thus, the ILECs
generally cannot lower prices to those customers likely to contract for their
services without also lowering charges for the same service to all customers in
the same geographic area, including those whose telecommunications requirements
would not justify the use of such lower prices. The FCC may, however, alleviate
this constraint on the ILECs and permit them to offer special rate packages to
very large customers, as it has done in few cases, or permit other forms of rate
flexibility. The FCC has adopted proposals that significantly lessen the
regulation of ILECs that are subject to competition in their service areas and
provide such ILECs with additional flexibility in pricing their interstate
switched and special access on a central office specific basis.
In a combined Report and Order and Notice of Proposed Rulemaking
released on December 24, 1996, the FCC made changes and proposed further changes
in the interstate access charge structure. In the Report and Order, the FCC
removed restrictions on ILECs' ability to lower access prices and relaxed
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the regulation of new switched access services in those markets where there are
other providers of access services. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on the Company's ability to compete in providing interstate access
services. On May 16, 1997, the FCC released an order revising its access charge
rate structure. The new rules substantially increase the costs that ILECs
subject to the FCC's price cap rules ("price cap LECs") recover through monthly,
non-traffic sensitive access charges and substantially decrease the costs that
price cap LECs recover through traffic sensitive access charges. In the May 16th
order, the FCC also announced its plan to bring interstate access rate levels
more in line with cost. The plan will include rules that grant price cap LECs
increased pricing flexibility upon demonstrations of increased competition (or
potential competition) in relevant markets. The manner in which the FCC
implements this approach to lowering access charge levels could have a material
effect on the Company's ability to compete in providing interstate access
services. Several parties have appealed the May 16th order. Those appeals have
been consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.
Under the Communications Act and other federal regulations, foreign
nationals may not own more than 20% of a company, or have more than a 20% voting
interest in a company, that directly holds a common carrier radio license. The
Communications Act also prohibits foreign nationals from owning 25% or more of a
company which, in turn, controls a company holding a radio license, if the FCC
finds that such alien participation would not serve the public interest. Under
the WTO agreement, the United States agreed to permit foreign nationals to own
up to 100% of a company that directly holds a common carrier radio license. On
November 25, 1997, the FCC adopted rules implementing the WTO policies for WTO
member states to acquire up to a 100% indirect interest in a U.S. radio license.
Prior approval will still be required, however the application process is
streamlined. The operations of GST Hawaii use among other facilities, microwave
radio facilities operating pursuant to FCC licenses granted to Pacwest Network,
Inc. ("PNI"), an entity controlled by John Warta, the Chairman of the Board and
Chief Executive Officer of the Company. The Company is currently examining the
procedures that could be utilized to transfer such licenses to the Company
without compensation to PNI. The FCC also has the authority, which it is not
presently exercising, to impose restrictions on foreign ownership of
communications service providers not utilizing radio frequencies, which if
exercised could have a material adverse effect on the Company's business. In
addition, the Company may subsequently need to obtain radio licenses to "fill
in" certain customers in the networks that are not practical to reach by wire.
Should the Company require a common carrier radio license in the future, the
FCC's new rules should increase the ability of the Company to acquire such a
license.
STATE REGULATION
The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecommunications Act is subject to numerous state rulemaking proceedings on
these issues, it is currently difficult to predict how quickly full competition
for local services, including local dial tone, will be introduced.
State regulatory agencies have regulatory jurisdiction when Company
facilities and services are used to provide intrastate services. A portion of
the Company's current traffic may be classified as intrastate and therefore
subject to state regulation. The Company expects that it will offer more
intrastate services (including intrastate switched services) as its business and
product lines expand and state regulations are modified to allow increased local
services competition. To provide intrastate services, the Company generally must
obtain a CPCN from the state regulatory agency and comply with state
requirements for telecommunications utilities, including state tariffing
requirements. The Company has obtained CPCNs for its subsidiaries to provide
intrastate toll service in 44 states and the District of
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Columbia and has applied for such authority in the remaining states, excluding
Alaska. In addition, the Company has obtained authority to provide local
exchange services on a resale or facilities-based basis in 10 states and the
Northern Marianas Islands.
ARIZONA. In Arizona, the Tucson and Phoenix networks and alternate
access transmission services, to the extent that they provide the transmission
of messages or telephone service within Arizona, could be deemed public service
corporations and subject to the jurisdiction of the Arizona Corporation
Commission (the "ACC") for certain purposes. GST Net (AZ), Inc. ("GST Net (AZ)")
has received a Certificate of Convenience and Necessity ("CCN") from the ACC to
provide jurisdictionally intrastate special access, private line and/or local
exchange services in Arizona. GST Tucson Lightwave, Inc. ("GST Tucson") has
entered into a license agreement with Pima County (the county in which Tucson is
located) which was officially recorded on July 16, 1996, to construct, install,
maintain and operate a fiber optics communication system in the public
right-of-way.
CALIFORNIA. Both GST Pacific Lightwave, Inc. ("GST Pacific") and GST
Telecom California, Inc. ("GST California") have been granted authority to
provide both facilities-based and resale local exchange services in the areas
served by Pacific Bell and GTE California Incorporated ("GTE California"). GST
California and GST Pacific have entered into an interconnection agreement with
GTE California which became effective October 17, 1996. GST California and GST
Pacific have entered into an interconnection agreement with Pacific Bell for the
State of California which became effective December 30, 1996.
HAWAII. The HPUC has granted GST Hawaii a CPCN as a carrier of voice
and data on a point to point basis in Hawaii. Under the HPUC's rules governing
competition in telecommunication services, an application by GST Hawaii for an
expanded CPCN is no longer necessary. GST Hawaii must file an application for
any proposed, modified, or new tariffed service, unless ordered otherwise by the
HPUC. GST Hawaii's CLEC tariff became effective on September 4, 1996. The HPUC
has also approved GST Hawaii's interconnection agreement with GTE and an
amendment to the original interconnection agreement was approved in October
1997. GST Hawaii is in the process of completing its connections to GTE's
Hawaiian network.
IDAHO. GST Telecom Idaho, Inc. ("GST Idaho") has authority from the
Idaho Public Utilities Commission (the "Idaho Commission") to provide
telecommunications services on a statewide basis to business customers with six
or more lines. GST Idaho has also been granted authority from the Idaho
Commission to provide telecommunications services to customers with fewer than
six lines in the GTE Companies and U S WEST exchanges.
NEVADA. GST Telecom Nevada, Inc. was granted CLEC and resale authority
on September 27, 1996, by the issuance of a CPCN by the Public Service
Commission of Nevada.
NEW MEXICO. On October 23, 1995, GST Telecom New Mexico, Inc. was
granted a CPCN from the New Mexico State Corporation Commission to provide
intrastate, non-switched private line services. Its authority to provide resold
interexchange services was approved on January 6, 1997 and its statewide CLEC
authority was granted on May 30, 1997.
OREGON. On March 5, 1997, GST Telecom Oregon, Inc. was granted CLEC
authority in competitive zones. An application was filed on February 5, 1998 to
expand CLEC authority to all authorized exchanges in Oregon.
TEXAS. The Texas Public Utilities Commission on August 9, 1996 approved
the application of GST Telecom Texas, Inc. ("GST Texas") for a certificate of
operating authority on a statewide basis to resell telecommunications services.
GST Texas' authority was expanded to include facilities-based services on June
4, 1997.
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UTAH. GST Telecom Utah, Inc. obtained competitive local exchange
authority in December 1996 to provide services statewide, with the exception of
exchanges with fewer than 5,000 access lines owned or controlled by an ILEC with
fewer than 30,000 access lines within the State.
WASHINGTON. GST Telecom Washington, Inc. ("GST Washington") is
currently authorized to provide both resold and facilities-based services,
including local exchange services, message toll, operator services and carrier
access services. GST Washington's request for competitive status was approved
June 11, 1997.
LOCAL REGULATION
The networks are subject to numerous local regulations such as building
codes and licensing. Such regulations vary on a city by city and county by
county basis. The Company needs to obtain rights-of-way over private and
publicly owned land to permit the installation of the fiber optic
telecommunication equipment.
GST GLOBAL TELECOMMUNICATIONS INC.
As of December 31, 1997, the Company had invested approximately $3.7
million in GST Global Telecommunications Inc. ("Global") and held approximately
3.6 million common shares and warrants to purchase 750,000 additional shares. On
December 31, 1997, Global had approximately 14.6 million shares outstanding.
Global is to issue to the Company additional common shares of Global, subject to
approval of the Vancouver Stock Exchange (the "VSE"), in consideration for the
transfer by the Company to Global of its rights in and to a telecommunications
project in Mexico. Global employs its own operating management and has raised
capital required for its proposed activities.
Global has subscribed, through a subsidiary, GST Mextel, Inc., a
Delaware corporation, for 49% of the outstanding shares of Bestel, S.A. de C.V.
("Bestel") for approximately $13.7 million. The remaining 51% is held by
Occidental Telecommunicacion, S.A. de C.V. ("Occidental"). In addition, Global
has agreed to loan an aggregate of up to $36.0 million to Bestel, all of which
has been advanced to date. Bestel is in the process of constructing a 2,270
kilometer fiber optic telecommunications network in Mexico which, when operable
will provide capability for Bestel to become a facilities-based long distance
carrier.
Global has also acquired from Cable and Wireless an 80% interest in
Vitacom, for a purchase price of $1.5 million. The remaining 20% is held by
Cable and Wireless, which can require Global to purchase such interest in 1999.
Vitacom is engaged in the provision of voice, high speed data information and
other services and the manufacture and sale of VSAT (very small aperture
satellite terminal) and other equipment used to access the Internet. Global
recently announced it has entered into an agreement to transfer its 80% interest
in Vitacom to Highpoint Capital Corporation, a company which, pursuant to the
agreement, will be controlled by Global.
MAGNACOM
Magnacom Wireless, L.L.C. ("Magnacom"), a company 99% owned by PNI,
which is in turn controlled by John Warta, the Company's Chairman of the Board
and Chief Executive Officer, has acquired various PCS licenses at auction and
through purchase. Magnacom holds 30 MHz (C Block) PCS licenses for 11 markets in
Arizona, Arkansas, New Mexico, Oregon and Utah. Magnacom was the winning bidder
for 10 MHz licenses in the FCC's F Block in 13 markets in Hawaii, Idaho, Oregon
and Washington in an FCC auction. Magnacom currently has an application on file
with the FCC requesting authority to effect a reorganization with PCS Plus
Holdings Corporation ("PCS Plus Holdings"), another company controlled by Mr.
Warta (the "Reorganization"). Pursuant to the Reorganization, each of the
members of Magnacom will contribute their interests in exchange for shares of
PCS Plus Holdings. PCS Plus Holdings will in turn contribute such interests,
along with the assets and licenses of Magnacom, to PCS Plus, Inc., a wholly
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owned subsidiary of PCS Plus Holdings ("PCS Plus"), which in turn will
downstream such assets and licenses to its wholly owned subsidiaries.
Magnacom and the Company have entered into a 12-year reseller agreement
(the "Magnacom Reseller Agreement") pursuant to which (i) the Company has been
designated a non-exclusive reseller of PCS telephone services in the markets in
which Magnacom has obtained licenses, and (ii) Magnacom has agreed to use the
Company on an exclusive basis to provide switched local and long distance
services and other enhanced telecommunications services, to all of Magnacom's
resellers in markets where the Company has operational networks. Magnacom agreed
to sell PCS minutes to the Company at $.05 per minute, subject to downward
adjustment to equal the most favorable rates offered to Magnacom's other
resellers (but in no event less than Magnacom's cost). In connection with the
Magnacom Reseller Agreement, as of December 31, 1997, the Company had paid
Magnacom approximately $14.0 million as prepayments for future PCS services.
Magnacom and the Company are presently in negotiations with respect to modifying
the Magnacom Reseller Agreement to reflect certain regulatory requirements and
to provide clarification as to the basis upon which the Company and Magnacom
will provide such services.
In addition, the Company has been granted a conditional option to
acquire up to PNI's entire interest in Magnacom (currently 99%), conditioned
upon Magnacom and the Company entering into an agreement for the construction
and/or operation of Magnacom's facilities. If and when the condition precedent
is met, the exercise of the option will be subject to compliance with all
applicable FCC regulations relating to prior approval of any transfer of control
of PCS licenses, including those relating to foreign ownership or control and
requirements regarding the ownership of C and F block licenses and interests in
C and F block licenses. Accordingly, until such time as FCC regulations or
administrative action permit the Company to own in excess of 25% of Magnacom,
the option by its terms is limited to a 24% interest in Magnacom. The Company,
Magnacom and PNI are in negotiations with respect to modifying the option in
order to provide, among other things, that the Company own no more than a 25%
interest in Magnacom or PCS Plus Holdings upon exercise of such option.
In February 1997, an affiliate of Magnacom, PCS Plus Pacific, Inc.
formerly known as Guam Net, Inc. ("PCS Plus Pacific"), acquired from Poka Lambro
Telephone Cooperative, Inc. a 30 MHz (A Block) PCS license from the FCC in the
market consisting of Guam and the Northern Marianas Islands. Concurrently, the
Company entered into a reseller agreement on terms substantially similar to the
Magnacom Reseller Agreement and paid PCS Plus Pacific approximately $.4 million
as a prepayment for future PCS services. PCS Plus Pacific currently has an
application on file with the FCC requesting authority for a pro forma transfer
of control pursuant to which PCS Plus Pacific would become a wholly owned
subsidiary of PCS Plus.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of a warrant to purchase up to 4% of the
then outstanding Common Shares that may be issued in connection with financing
for Magnacom.
The provision of wireless telecommunications service by Magnacom and
PCS Plus Pacific will be dependent upon their ability to obtain the financing
necessary to make payments to the FCC under the terms of their licenses, to
obtain working capital and to build the required facilities, including the
purchase of telecommunications equipment. There can be no assurance that
Magnacom or PCS Plus Pacific will obtain such financing or be able to provide
PCS services. In such event, the Company would likely be unable to recover its
payments to Magnacom and PCS Plus Pacific.
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EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries had 1,100
full-time employees. None of such employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be satisfactory.
ITEM 2. PROPERTIES.
The Company owns a building comprising 60,000 square feet in Vancouver,
Washington. The Company leases space containing its principal executive offices
at 4001 Main Street, Vancouver, Washington 98663. Its telephone number at that
address is (360) 906-7100.
The Company leases offices elsewhere in the United States, in
Vancouver, British Columbia and in Japan, pursuant to leases which expire on
various dates through December 31, 2007. The Company's current aggregate annual
rental expense is approximately $4.6 million. The Company is negotiating leases
for spaces in California and Washington for an aggregate additional cost
expected to be approximately $112,000 per year.
ITEM 3. LEGAL PROCEEDINGS.
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc.
(collectively, "Aerotel") commenced an action against NACT and a customer of
NACT in the United States District Court, Southern District of New York,
alleging that telephone systems manufactured and sold by NACT incorporating
prepaid debit card features infringe upon Aerotel's patent which was issued in
November 1987 (the "Aerotel Patent"). The initial complaint further alleged
defamation and unfair competition as a result of a Special Report disseminated
by NACT to its customers and tortious interference with prospective business
relations, alleging that NACT induced third parties to abandon licensing
negotiations with Aerotel. Aerotel sought injunctive relief, damages in an
unspecified amount, damages of up to three times the damages found for willful
infringement of the Aerotel Patent and an order requiring NACT to publish a
written apology to Aerotel. NACT filed an answer and Counterclaim in which it
denied infringement of the Aerotel Patent and sought judgment that the Aerotel
Patent is invalid and unenforceable and that Aerotel has misused its patent in
violation of antitrust laws. NACT also denied that it had committed defamation,
unfair competition or tortious interference with prospective business relations.
On May 3, 1996, NACT served its motion for summary judgment. The Court has
indicated it will deny such motion, although the actual ruling has not yet been
received. In August 1997, Aerotel amended its complaint to include as defendants
the Company and GST USA, Inc. ("GST USA") as well as Kyle Love, the former
President of NACT and Dr. Thomas E. Sawyer, a director of the Company and NACT
and the former Chairman and Chief Executive Officer of NACT. The amended
pleadings seek in excess of $18.7 million in damages and allege that the Company
and GST USA have infringed the Aerotel patent, aided and abetted infringement by
others, including NACT, and participated in, and aided and abetted, alleged
tortious conduct by NACT. The Company, GST USA, Dr. Sawyer and Mr. Love have
served answers denying all material allegations and intend to defend vigorously.
Concurrent with the Company's sale of NACT, the Company and NACT
entered into an agreement whereby the Company generally will bear 50% of any
damages in the action, including reasonable attorneys fees, losses, liabilities,
claims and assessments, royalties and license fees. Under the agreement,
subsequent to a determination, if any, by a court that the Aerotel Patent is
valid and that it has been infringed, the Company's liability associated with
royalties, license fees, refunds and cost of product replacement or modification
is limited to $2.0 million.
Pretrial discovery has commenced and is scheduled to be completed in
1998. The case is not expected to be tried until late 1998 at the earliest.
NACT's patent counsel believes that NACT has valid
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defenses to the Aerotel claims. If upheld, these defenses would also be valid
for all defendants. An unfavorable decision in this action could have a material
adverse effect on the Company.
On or about February 25, 1997, U S WEST filed a declaratory judgment
action against members of the ACC, the ACC, ACSI, Brooks and the Company in the
United States District Court in Arizona. The District Court consolidated a
number of similar lawsuits filed by U S WEST against other CLECs, including MFS,
Sprint, MCI and AT&T. U S WEST alleges that the ACC has entered into an
interconnection order that unlawfully requires U S WEST to resell services below
cost, imposes resale restrictions and denies U S WEST recovery for construction
and implementation costs, unlawfully treats the cost recovery of access revenues
for interim number portability, requires U S WEST to obtain additional rights of
way or build additional facilities solely to provide access to the Company, and
amounts to a taking of U S WEST's property without just compensation. U S WEST
seeks a declaratory judgment stating that the ACC has violated the
Telecommunications Act and that the ACC has taken U S WEST's property without
providing just compensation. U S WEST also seeks an injunction prohibiting all
defendants, including the Company, from taking any action to enforce any of the
order's allegedly unlawful provisions. The Company's time to answer or move
against the complaint has been extended indefinitely by U S WEST, pending a
decision with respect to motions filed by all other defendants to dismiss the
complaint. Should U S WEST prevail in its suit, it could have an adverse impact
on the Company's operations in Arizona.
On or about April 8, 1997, U S WEST filed a state court proceeding
against the ACC, individual members of the ACC, and GST Net (AZ), which holds a
CCN to provide local exchange service in Arizona. In its complaint appealing the
ACC's February 6, 1997 decision and order granting GST Net (AZ) its CCN, U S
WEST alleges that the ACC's action violates certain requirements of the Arizona
Constitution relating to rate of return regulation, carrier of last resort
obligations, and equal protection. The appeal seeks to subject GST Net (AZ) and
U S WEST to identical forms of regulation, treating both carriers as either
traditional monopoly carriers or as co-equal competitive companies. The state
court consolidated the case with a number of substantially similar lawsuits
filed against other CLECs, including MFS, Sprint, MCI and AT&T. GST Net (AZ)
answered U S WEST's complaint on August 6, 1997, alleging, among other things,
that U S WEST's complaint is preempted by the Telecommunications Act. On
February 27, 1998, GST Net(AZ) joined in the other CLECs' motions to dismiss.
Should U S WEST prevail in its appeal, it could have an adverse impact on the
Company's operations in Arizona; however, the magnitude thereof is uncertain at
this time.
The Company is not a party to any other material legal proceedings,
nor, to the knowledge of the Company, are any material legal proceedings
threatened against the Company. The Company is a party to various proceedings
before the public utilities commissions of the states in which it provides or
proposes to provide telecommunications services. These proceedings typically
relate to licensure of the Company or others and to the regulation of the
provision of telecommunications service.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Shares, without par value, are traded on the
American Stock Exchange (the "AMEX") (ticker symbol: GST) and on the Toronto
Stock Exchange (the "TSE") and the VSE (ticker symbol: GTE.U).
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The Common Shares have been listed on the AMEX since March 11, 1994 and
trade under the symbol "GST," and have been listed on the TSE since August 26,
1997 and on the VSE since February 28, 1991 and trade under the symbol "GTE.U."
The following table sets forth, for two most recent fiscal years, the
high and low closing prices of the Common Shares as reported on the AMEX and the
TSE.
<TABLE>
<CAPTION>
AMEX TSE(1)
-------------------------- -----------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR 1995
Fourth Quarter........................................ $ 7 3/16 $ 5 9/16 -- --
CALENDAR YEAR 1996
First Quarter......................................... 8 11/16 5 15/16 -- --
Second Quarter........................................ 15 1/4 8 1/8 -- --
Third Quarter......................................... 13 1/2 9 1/4 -- --
Fourth Quarter........................................ 11 1/4 7 3/4 -- --
CALENDAR YEAR 1997
First Quarter......................................... 10 3/8 7 3/8 -- --
Second Quarter........................................ 10 7/16 6 1/2 -- --
Third Quarter......................................... 13 11/16 9 11/16 $13.95 $10.00
Fourth Quarter ....................................... 17 11 7/16 17.40 11.00
</TABLE>
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(1) The Common Shares have been listed on the TSE since August 26, 1997.
DIVIDENDS
The Company has never declared or paid any dividends on the Common
Shares and does not presently intend to pay dividends on the Common Shares in
the foreseeable future. The Company's Board of Directors intends to retain
future earnings, if any, to finance the development and expansion of its
business. Future declaration and payment of dividends, if any, will be
determined in light of the then current conditions, including the Company's
earnings, operations, capital requirements, financial condition, restrictions in
financing arrangements and other factors deemed relevant by the Board of
Directors. The Company's ability to declare or pay cash dividends, if any, will
be dependent upon the ability of the Company's subsidiaries to declare and pay
dividends or otherwise transfer funds to the Company, because the Company
conducts its operations entirely through subsidiaries. Pursuant to credit
agreements under a credit facility (the "Tomen Facility") with Tomen America,
Inc. and its affiliates ("Tomen"), the Company's subsidiaries that own and
operate the Southern California, Tucson, Albuquerque and Hawaiian networks may
not pay any dividends or make any distributions on their capital stock to their
shareholder, GST Telecom. Subsequent network financings under the Tomen Facility
are expected to include similar prohibitions. In addition, indentures (the
"Indentures") relating to the 13 7/8% Senior Discount Notes due 2005 (the
"Senior Notes") of GST USA, the 13 7/8% Convertible Senior Subordinated Discount
Notes due 2005 of the Company (the "Convertible Notes" and together with the
Senior Notes, the "1995 Notes"), the 13 1/4% Senior Secured Notes due 2007 (the
"Secured Notes") of GST Equipment Funding, Inc., a wholly owned subsidiary of
GST USA ("GST Funding") and the 12 3/4% Senior Subordinated Accrual Notes due
2007 of the Company (the "Accrual Notes") limit, and, for the foreseeable
future, effectively prohibit, the ability of the Company to declare or pay cash
dividends.
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<PAGE>
NUMBER OF SHAREHOLDERS
As of March 6, 1998, there were 252 holders of record of the Company's
Common Shares. The Company believes that there are in excess of 3,500 beneficial
owners of the Company's Common Shares additional to such holders of record.
RECENT SALES OF UNREGISTERED SECURITIES
On December 19, 1997, the Company issued an aggregate of 24,554 Common
Shares to four individuals as an installment payment in consideration for the
Company's acquisition in September 1996 of Tri-Star Residential Communications
Corp. ("Tri-Star").
On November 20, 1997, the Company issued an aggregate of 221,838 Common
Shares to 27 individuals and/or entities as an installment payment in
consideration for the Company's acquisition in October 1996 of TotalNet.
There were no underwriters involved in any of the foregoing issuances
of equity securities and such issuances were exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, as transactions not
involving a public offering.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
THIRTEEN
YEAR ENDED MONTHS ENDED YEAR ENDED THREE MONTHS ENDED
AUGUST 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
----------- ------------- --------------------------------- -----------------------
1993 1994(1) 1995 1996 1997 1996 1997
---- ------- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Telecommunications services.. $ -- $ 112 $ 11,118 $ 31,726 $ 82,593 $18,437 $27,552
Telecommunications products.. -- 5,889 7,563 9,573 23,374 4,780 8,706
----- ------- ------- ------- ------- ------ ------
Total revenues...... -- 6,001 18,681 41,299 105,967 23,217 36,258
Operating loss........................ (418) (1,337) (11,631) (42,597) (86,543) (17,988) (21,855)
Other expenses (income):
Interest income.............. (35) (254) (303) (5,549) (7,026) (839) (4,101)
Interest expense(2).......... -- 27 838 21,224 37,665 5,434 18,948
Other, net................... 439 1,877 1,347 2,360 (5,359) 104 1,569
Income tax expense.................... -- 502(3) 166(3) 157 903 -- 850
------ ------ ------ ------ ------ ------ ------
Net loss(4)........................... $ (822) $(3,491) $(11,315) $(60,378) $(113,338) $(22,634) $(39,593)
======= ======== ========= ========= ========== ========= =========
Net loss per share,
basic and dilutive(5)........ $(.22) $(.35) $(.82) $(3.18) $(4.71) $(1.02) $(1.39)
====== ====== ====== ======= ======= ======= =======
Weighted average number of Common
Shares outstanding........... 3,821 9,879 13,781 18,988 24,703 22,237 30,804
Ratio of earnings to fixed charges.... -- -- -- -- -- -- --
OTHER DATA:
Capital expenditures.................. $ 4 $ 1,486 $ 33,922 $ 97,561 $225,743 $58,047 $46,663
EBITDA(6)............................. (418) (779) (8,807) (33,936) (51,881) (13,208) (12,032)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents and investments $ 4,746 $ 5,062 $ 6,895 $66,519 $59,184 $199,053
Restricted cash and investments....... -- -- -- 16,000 171,750 144,450
Property and equipment................ 4 4,805 39,583 134,714 385,252 433,680
Accumulated depreciation.............. -- 221 1,550 7,139 (20,738) (26,785)
Investment in joint ventures(7)....... 4,616 3,552 2,859 1,364 -- --
Total assets.......................... 9,398 26,769 73,125 301,701 728,405 898,174
Current portion of long-term debt and
capital lease obligations.... -- -- 959 5,554 10,656 10,865
Long term debt and capital lease obligations -- -- 19,746 234,127 628,043 779,428
(excluding current portion)..
Redeemable Preferred Shares........... -- -- -- -- 51,756 54,635
Common Shares and commitment to issue
Common Shares(8)............. 10,511 25,075 51,660 98,101 149,880 221,709
Accumulated deficit................... (1,149) (4,640) (15,955) (76,333) (189,671) (229,264)
Shareholders' equity (deficit)........ 9,362 20,435 35,705 21,768 (39,791) (7,555)
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
</TABLE>
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(1) The Company changed its fiscal year end to September 30, effective in
1994. As a result, amounts reported for the thirteen months ended
September 30, 1994 ("Fiscal 1994") are for the 13 months ended
September 30, 1994. Results for Fiscal 1994 include the acquisition of
60% of GST Telecom, the Company's subsidiary that owned and operated
each of the Company's networks, and, at various times during Fiscal
1994, an aggregate of 80% of NACT.
(2) Excludes capitalized interest of $.3 million for the fiscal year ended
September 30, 1995 ("Fiscal 1995"), $2.3 million for the fiscal year
ended September 30, 1996 ("Fiscal 1996"), $15.2 million for Fiscal
1997, $2.5 million for the three months ended December 31, 1996 and
$3.7 million for the three months ended December 31, 1997. During the
construction of the Company's networks, the interest costs related to
construction expenditures are considered to be assets qualifying for
interest capitalization under FASB Statement No. 34 "Capitalization of
Interest Cost."
(3) During Fiscal 1994 and the first eight months of Fiscal 1995, the
Company owned less than 80% of GST Telecom and was therefore unable to
deduct for tax purposes the losses incurred by GST Telecom.
(4) Includes minority interest in (income) loss of subsidiaries of (i)
$(.2) million for Fiscal 1994, (ii) $2.4 million for Fiscal 1995, (iii)
$.4 million for Fiscal 1996, (iv) $(.6) million Fiscal 1997, (v) $.05
million for the three months ended December 31, 1996 and (vi) $(.5)
million for the three months ended December 31, 1997.
(5) Under U.S. Generally Accepted Accounting Principles, net loss is
increased for the accretion of Redeemable Preferred Shares (as
hereinafter defined) totaling $3.0 million for Fiscal 1997 and $3.1
million for the three months ended December 31, 1997.
(6) EBITDA consists of loss before interest, income taxes, depreciation and
amortization, other income and non-cash expense. EBITDA is provided
because it is a measure commonly used in the industry. It is presented
to enhance an understanding of the Company's operating results and is
not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles for the
periods indicated. See the Company's consolidated financial statements
and notes thereto included elsewhere in this Annual Report.
(7) Represents principally the Company's then 50% ownership interest in
Phoenix Fiber Access, Inc. ("Phoenix Fiber"), the owner and operator of
the Phoenix network. The Company acquired the remaining 50% interest in
Phoenix Fiber effective as of October 1, 1996.
(8) At December 31, 1997, the Company was committed to issue a number of
Common Shares with a market value of $.6 million, based on the then
market value of the Common Shares and payable at various times in the
fiscal year ending December 31, 1998 to the former shareholders of
Tri-Star.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of financial
condition and results of operations contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors discussed herein.
OVERVIEW
The Company provides a broad range of integrated telecommunications
products and services, primarily to business customers located in the western
continental United States and Hawaii. The Company's digital networks currently
serve 40 markets in Arizona, California, Hawaii, Idaho, New Mexico, Texas,
Washington and Guam. In addition, the Company has networks under construction
which, when completed, will serve two additional markets and expand its regional
footprint to Oregon. The Company also constructs, markets and manages longhaul
fiber optic facilities, principally in Arizona, California and Hawaii. The
Company's longhaul fiber optic facilities currently extend approximately 700
route miles and an additional 1,600 route miles are expected to become
operational over the next 12 months. The Company's full line of products, which
offer a "one-stop" solution to customers' telecommunications services
requirements, include long distance, Internet, data transmission, and private
line services, and local dial tone services, which were recently introduced.
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<PAGE>
The Company has invested significant capital and effort in developing
its telecommunications business. This capital has been invested in the
development of the Company's networks and longhaul fiber optic facilities, for
the hiring and development of an experienced management team, the development
and installation of operating systems, the introduction of services, marketing
and sales efforts and for acquisitions. The Company expects to continue to make
capital expenditures to expand its networks and longhaul fiber optic facilities
and broaden its service offerings and may consummate additional acquisitions.
Proper management of the Company's growth will require the Company to maintain
quality control over its services and to expand the Company's internal
management, technical and accounting systems, all of which will require
substantial investment.
The Company changed its fiscal year end from September 30th to December
31st in order to align financial reporting with regulatory reporting and to the
reporting of others in the Company's industry sector. The Company is providing
investors audited financial information for the three month transition period
ended December 31, 1997 and will provide audited financial information for the
subsequent 12-month periods ending December 31st. As a result of the limited
revenues and significant expenses associated with the expansion and development
of its networks and services, the Company's operating results could vary
significantly from period to period.
LOCAL SERVICES. To facilitate its entry into local services, the
Company has in service eight high capacity digital switches and has installed
and is currently testing six additional high capacity digital switches that are
expected to become operational by the end of the first quarter of 1998. As
demand warrants, the Company plans to continue to install switching equipment in
its operational networks, in markets where it is constructing networks and in
certain other cities where the Company will rely on ILEC facilities for
transmission. Once a switch is operational, where regulatory conditions permit,
the Company intends to offer local dial tone, in addition to enhanced services
such as ISDN, Centrex, voice mail and other custom calling features.
The Company expects negative EBITDA from its switched services during
the 24 to 36 month period after a switch is deployed. For switches operating in
conjunction with the Company's networks, the Company expects operating margins
to improve as the network is expanded and larger volumes of traffic are carried
on the Company's network. For switches operating in cities where the Company
will rely on ILEC facilities for transmission, the Company will experience lower
or negative operating margins under current ILEC pricing tariffs. Although under
the Telecommunications Act the ILECs will be required to unbundle local tariffs,
permitting the Company to purchase only the origination and termination services
it needs, thereby decreasing operating expenses, there can be no assurance that
such unbundling will be effected in a timely manner and result in prices
favorable to the Company.
LONG DISTANCE SERVICES. The Company offers basic and enhanced long
distance services, such as toll free, calling card, prepaid calling card and
international call back services, targeting primarily business customers
purchasing between $200 and $15,000 of services per month as well as resellers
and other carriers. As part of its strategy, the Company has acquired a number
of long distance carriers and intends to continue to pursue acquisitions of long
distance carriers in the future. The Company purchases long distance capacity
under agreements with certain major long distance carriers that provide the
Company capacity at rates that vary with the monthly traffic generated by the
Company. The Company is obligated to satisfy certain minimum monthly usage
requirements of an aggregate of $2.3 million per month as of January 1, 1998,
increasing to a maximum of $6.1 million per month over the next three years. If
such requirements are not satisfied, the Company may be required to pay an
underutilization fee in addition to its monthly bill.
INTERNET SERVICES. The Company presently offers Internet-related
services in most of its markets, such as dedicated Internet services, Web site
development and hosting, provides access and upstream transport for local ISPs,
EDI and electronic commerce services and is in the process of developing various
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<PAGE>
Internet software applications. The Company also offers dial-up Internet
services to customers in Portland (Oregon), Vancouver (Washington), the State of
Hawaii and select markets in California and intends to begin offering such
services in the Los Angeles, San Francisco and Houston metropolitan areas in
1998. Management believes that these services will become an important component
of the Company's overall product offerings and intends to continue to expand its
Internet access and service business to other markets.
DATA SERVICES. The Company offers national and international frame
relay services on its own frame relay network and through interconnection
agreements with other data service providers. Under these agreements, the
Company and such data service providers have agreed to link their data networks
and terminate one another's traffic. The Company has deployed Cascade
Communications frame relay switches in 21 markets in the western United States.
Such switches can provide both frame relay and Internet services.
The Company is leveraging its infrastructure and network experience to
offer data networking services such as ATM, high speed LAN connectivity, video
conferencing, multimedia networking, frame relay and high capacity access to the
Internet. The Company has one ATM switch commercially operational in each of Los
Angeles and Ontario, California.
NETWORK OPERATIONS. The development, construction and expansion of the
Company's networks requires significant capital, a large portion of which is
invested before any revenue is generated. The Company has experienced, and
expects to continue to experience, negative EBITDA and losses while it expands
its network operations and builds its customer base. Based on its experience to
date and that of its competitors, the Company estimates that a new network will
generate EBITDA within 30 to 36 months after commencement of commercial
operations. Construction periods and operating results will vary from network to
network. There can be no assurance that the Company will be able to establish a
sufficient revenue-generating customer base or achieve EBITDA on a consolidated
basis.
Management estimates that the total costs associated with the purchase
and installation of fiber optic cable and high-speed electronic transmission
equipment, including capitalized engineering costs, will range from $10.0
million to $25.0 million per network, depending upon the size of the market
served and the scope and complexity of the network. Actual costs may vary
significantly from this range. The amounts and timing of these expenditures are
subject to a variety of factors that may vary significantly by the geographic
and demographic characteristics of each market. In addition to capital
expenditure requirements, upon commencement of the construction phase of a
network, the Company begins to incur direct operating costs for such items as
salaries and rent. As network construction progresses, the Company incurs
rights-of-way costs and increased sales and marketing expenses.
The initial development of a network may take as long as six months,
depending upon the size and complexity of the network and a variety of factors,
including the time required to obtain rights-of-way and other governmental
approvals, such as franchise agreements. Once actual construction commences, it
may take from two to six months to complete the initial backbone segment of a
network. The time required during the construction phase is significantly
influenced by the number of route miles involved, the mix of aerial versus
underground fiber deployment, possible delays in receiving fiber optic cable,
electronic equipment and required permits and other factors.
MANUFACTURING. In a series of transactions between 1993 and 1995, the
Company acquired 100% of the outstanding capital stock of NACT, which produces
advanced telecommunications switching platforms with integrated applications
software and network telemanagement capabilities. The aggregate consideration
paid for the Company's 100% interest in NACT was $8.9 million, consisting of
$4.1 million in cash and notes payable and 956,283 Common Shares valued at $4.8
million. In February 1997, the
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<PAGE>
Company sold one million shares of NACT's common stock for net proceeds of $9.0
million. In February 1998, the Company sold its remaining interest in NACT for
net proceeds of $86.5 million.
In May 1997, the Company acquired Action Telcom, a facilities-based
telecommunications company located in Abilene, Texas that operates its own
network and switching equipment, originating and terminating its own traffic
principally in Texas. In addition, Action Telcom manufactures the Network
Analysis Management System ("NAMS"), a UNIX based software and hardware platform
that provides automated real-time billing record collection, fraud protection
and network design.
The Company has entered into a 12-year reseller agreement with
Magnacom, a company 99% owned by PNI which is in turn controlled by John Warta,
the Company's Chairman of the Board and Chief Executive Officer, pursuant to
which the Company has paid Magnacom approximately $14.0 million as prepayments
for future PCS services. The Company and Magnacom are presently in negotiations
with respect to modifying their agreement to reflect certain regulatory
requirements and to provide clarification as to the basis upon which the Company
and Magnacom will provide such services.
In addition, the Company has been granted a conditional option to
acquire up to PNI's entire interest in Magnacom (currently 99%), conditioned
upon Magnacom and the Company entering into an agreement for the construction
and/or operation of Magnacom's facilities. If and when the condition precedent
is met, the exercise of the option will be subject to compliance with all
applicable FCC regulations relating to prior approval of any transfer of control
of PCS licenses, including those relating to the foreign ownership of licenses.
Accordingly, until such time as FCC regulations or administrative action permit
the Company to own in excess of 25% of Magnacom, the option by its term is
limited to a 24% interest in Magnacom. The Company, Magnacom and PNI are in
negotiations with respect to modifying the option in order to provide, among
other things, that the Company own no more than a 25% interest in Magnacom upon
exercise of such option.
Magnacom is currently negotiating with a telecommunications equipment
vendor to provide equipment and other financing and to invest in Magnacom. The
terms of any such transaction may include the issuance by the Company to such
vendor of a warrant to purchase up to 4% of the then outstanding Common Shares.
If such warrant is issued, the Company will record a one-time noncash charge in
an amount equal to the value of the warrant. Although there can be no assurance,
the Company believes that the value of such a warrant could be between $6.0
million and $7.0 million, depending on the terms of the warrant.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE UNAUDITED THREE MONTHS
ENDED DECEMBER 31, 1996
REVENUES. Total revenue for the three months ended December 31, 1997
increased $13.1 million, or 56.2%, to $36.3 million from $23.2 million for the
three months ended December 31, 1996. Telecommunications services revenue for
the three months ended December 31, 1997 increased $9.1 million, or 49.4%, to
$27.5 million from $18.4 million for the three months ended December 31, 1996.
The increase in telecommunications services revenue resulted primarily from
increased local and long distance service revenue generated by the Company's
networks. To a lesser extent, the increase in revenue resulted from the
acquisitions of Action Telcom in May 1997 and the Guam operations of Sprint in
October 1997. Additionally, during the three months ended December 31, 1997, the
Company completed a $1.5 million longhaul conduit sale. Product revenue for the
three months ended December 31, 1997 increased $3.9 million, or 82.1%, to $8.7
million from $4.8 million for the three months ended December 31, 1996. The
increase in product revenue resulted primarily from the inclusion of Action
Telcom's sales of NAMS. To a lesser extent, the increase in product revenues
resulted from increased unit sales of NACT's STX switch.
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<PAGE>
OPERATING EXPENSES. Total operating expenses for the three months ended
December 31, 1997 increased $16.9 million, or 41.0%, to $58.1 million from $41.2
million for the three months ended December 31, 1996. Network expenses, which
include direct local and long distance circuit costs, increased $3.7 million, or
23.5%, to $19.4 million, or 70.5% of telecommunications services revenue for the
three months ended December 31, 1997 compared to $15.7 million, or 85.3% of
telecommunications services revenue for the three months ended December 31,
1996. The primary reason for the decrease in network expenses as a percent of
revenue is the increase in on-net revenues generated at the Company's network as
a percent of total revenues. Facilities administration and maintenance expenses
(consisting primarily of costs related to personnel providing maintenance,
monitoring and technical assistance for the Company's networks) for the three
months ended December 31, 1997 increased $.2 million, or 5.6%, to $3.5 million,
or 12.7% of telecommunications services revenue, compared to $3.3 million, or
18.0% of telecommunications services revenue, for the three months ended
December 31, 1996.
Cost of product revenue, which includes the costs associated with
product revenue of NACT and Action Telcom, increased $1.3 million, or 70.4%, to
$3.1 million for the three months ended December 31, 1997 from $1.8 for the
three months ended December 31, 1996. Cost of product revenue was 35.6% of
product revenue for the three months ended December 31, 1997 compared to 38.1%
for the three months ended December 31, 1996. The decrease in cost of product
revenue as a percentage of product revenue resulted primarily from economies of
scale related to increased unit sales of NACT's STX switch. Research and
development costs for the three months ended December 31, 1997 increased $.4
million, or 90.5%, to $.8 million from $.4 million for the three months ended
December 31, 1996. The increase was due to the addition of personnel to enhance
the current switch product line and to facilitate the development of new
switching products and applications.
Selling, general and administrative expenses for the three months ended
December 31, 1997 increased $7.2 million, or 47.2%, to $22.4 million from $15.2
million for the three months ended December 31, 1996. The increase is due to the
expansion of the Company's CLEC and enhanced services operations, the
acquisition of two companies between May and October 1997 and the hiring of a
significant number of marketing, management information and sales personnel to
implement the Company's integrated services strategy. Selling, general and
administrative expenses were 61.9% of total revenue for the three months ended
December 31, 1997 compared to 65.6% of total revenue for the three months ended
December 31, 1996.
Depreciation and amortization for the three months ended December 31,
1997 increased $4.2 million, or 89.0%, to $8.9 million from $4.7 million for the
three months ended December 31, 1996. The increase was attributable to
newly-constructed networks becoming operational and to the amortization of
intangible assets related to the Company's acquisitions. The Company expects
that depreciation will continue to increase as it expands its networks and
longhaul fiber optic facilities and installs additional switches. Depreciation
and amortization was 24.4% of total revenue for the three months ended December
31, 1997 compared to 20.2% for the three months ended December 31, 1996.
OTHER EXPENSES/INCOME. For the three months ended December 31, 1997,
net other expenses increased $13.1 million, or 281.8%, to $17.7 million, or
48.9% of total revenue, from $4.6 million, or 20.0% of total revenue, for the
three months ended December 31, 1996. The primary reason for the increase was
the inclusion of interest expense associated with the Secured Notes and Accrual
Notes. The increase in interest expense was partially offset by interest income
earned on the investment of a portion of the proceeds of the sale of such notes.
To a lesser extent, net other expenses increased due to the Company's share of
Global's losses and to NACT's income tax expense as well as minority interest in
the income of NACT.
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<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Total revenue for Fiscal 1997 increased $64.7 million, or
156.6%, to $106.0 million from $41.3 million for Fiscal 1996. Telecommunications
services revenue for Fiscal 1997 increased $50.9 million, or 160.3%, to $82.6
million from $31.7 million for Fiscal 1996. The increase in telecommunications
services revenue resulted from the inclusion of a full year of revenue from
strategic acquisitions, including GST Call America and TotalNet, as well as
increased CLEC service revenue generated by the Company's networks. To a lesser
extent, the increase in telecommunications services revenue resulted from
increased Internet, shared tenant and data services. Product revenue for Fiscal
1997 increased $13.8 million, or 144.2%, to $23.4 million from $9.6 million for
Fiscal 1996. The increase in product revenue resulted primarily from the
introduction in April 1996 of NACT's STX switch and subsequent increased unit
sales. To a lesser extent the increase in product revenue is due to the
inclusion of Action Telcom's sales of network management and fraud protection
systems which was acquired May 31, 1997.
OPERATING EXPENSES. Total operating expenses for Fiscal 1997 increased
$108.6 million, or 129.5%, to $192.5 million from $83.9 million for Fiscal 1996.
Network expenses, which include direct local and long distance circuit costs,
increased $39.7 million, or 149.2%, to $66.3 million, or 80.2% of
telecommunications services revenue for Fiscal 1997 compared to $26.6 million,
or 83.8% of telecommunications services revenue for Fiscal 1996. Facilities
administration and maintenance expenses (consisting primarily of costs related
to personnel providing maintenance, monitoring and technical assistance for the
Company's networks) for Fiscal 1997 increased $2.0 million, or 19.3%, to $12.3
million, or 14.9% of telecommunications services revenue, compared to $10.3
million, or 32.5% of telecommunications services revenue, for Fiscal 1996. The
primary reason for the increase in network expenses as a percent of
telecommunications services revenue and the decrease in facilities
administration and maintenance expenses as a percent of telecommunications
services revenue was the inclusion of revenue from 1996 strategic acquisitions,
a significant portion of which was generated off-net.
Cost of product revenue, which includes the costs associated with
product revenue of NACT and Action Telcom, increased $4.0 million, or 101.1%, to
$8.0 million for Fiscal 1997 from $4.0 for Fiscal 1996. Cost of product revenue
was 34.2% of product revenue for Fiscal 1997 compared to 41.5% for Fiscal 1996.
The decrease in cost of product revenue as a percentage of product revenue
resulted primarily from economies of scale related to increased unit sales of
NACT's STX switch. Research and development costs for Fiscal 1997 increased $1.0
million, or 71.3%, to $2.3 million from $1.3 million for Fiscal 1996. The
increase was due to the addition of NACT personnel to enhance the current switch
product line and to facilitate the development of new switching products and
applications.
Selling, general and administrative expenses for Fiscal 1997 increased
$46.1 million, or 138.2%, to $79.5 million from $33.4 million for Fiscal 1996.
The increase is due to the expansion of the Company's CLEC and enhanced services
operations, the acquisition of four companies from September 1996 to May 1997
and the hiring of a significant number of marketing, management information and
sales personnel to implement the Company's integrated services strategy. In
addition, the increase in selling, general and administrative expense was
partially attributable to a one-time $7.4 million non-cash charge recorded in
Fiscal 1997 when 750,000 Common Shares were released from escrow upon the
resolution of a contingency. Selling, general and administrative expenses were
75.0% of total revenue for Fiscal 1997 compared to 80.8% of total revenue for
Fiscal 1996.
Depreciation and amortization for Fiscal 1997 increased $15.9 million,
or 191.1%, to $24.2 million from $8.3 million for Fiscal 1996. The increase was
attributable to newly-constructed networks becoming operational and to the
amortization of intangible assets related to the Company's acquisitions. The
Company expects that depreciation will continue to increase as it expands its
networks and long haul fiber optic facilities and installs additional switches.
Depreciation and amortization was 22.8% of total revenue for Fiscal 1997
compared to 20.1% for Fiscal 1996.
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OTHER EXPENSES/INCOME. For Fiscal 1997, net other expenses increased
$9.0 million, or 50.7%, to $26.8 million, or 25.3% of total revenue, from $17.8
million, or 43.1% of total revenue, for Fiscal 1996. Fiscal 1997 net other
expenses included a $7.4 million gain recognized on the sale of one million of
the Company's shares of NACT in February 1997. If the gain had been excluded,
other expenses for Fiscal 1997 would have increased $16.4 million over Fiscal
1996. Such increase primarily resulted from increased interest expense due to
the issuance of the 1995 Notes in December 1995 and the issuance of the Secured
Notes in May 1997. To a lesser extent, other expenses increased due to income
tax expense attributable to income of NACT, which as of March 1, 1997 is no
longer consolidated for tax purposes.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Total revenues for Fiscal 1996 increased $22.6 million, or
121.0%, to $41.3 million from $18.7 million for Fiscal 1995. Telecommunications
services revenues for Fiscal 1996 increased $20.6 million, or 185%, to $31.7
million from $11.1 million for Fiscal 1995. The increase in telecommunications
services revenues resulted from the continuing growth of long distance
(including revenues associated with Fiscal 1995 and 1996 acquisitions), local,
Internet and data services. Acquisitions (primarily the acquisition of ITG but
also the acquisitions of GST Call America and the businesses of Hawaii On Line
and Texas-Ohio) accounted for $15.1 million of the increase in such revenues.
Telecommunications products revenues for Fiscal 1996 increased $2.0 million, or
26.6%, over Fiscal 1995. The increase in telecommunications products revenues
resulted from the introduction by NACT of the STX product line in the third
quarter of Fiscal 1996.
OPERATING EXPENSES. Total operating expenses for Fiscal 1996 increased
$53.6 million, or 176.8%, to $83.9 million from $30.3 million for Fiscal 1995.
Network expenses, which include direct local and long distance circuit costs,
increased $16.5 million to $26.6 million from $10.1 million for Fiscal 1995, due
to an expanded customer base and increased usage. As a percentage of
telecommunications services revenues, network expenses decreased from 90.9% for
Fiscal 1995 to 83.8% for Fiscal 1996. Facilities administration and maintenance
expenses for Fiscal 1996 increased $8.2 million to $10.3 million from $2.1
million for Fiscal 1995. As a percentage of telecommunications services
revenues, facilities administration and maintenance expenses increased from
18.9% for Fiscal 1995 to 32.5% for Fiscal 1996. The increase related to
additional personnel and facility costs required by continuing network
expansion, a substantial portion of which are incurred before the realization of
revenues.
Cost of product revenues at NACT for Fiscal 1996 increased $.9 million
to $4.0 million from $3.1 million for Fiscal 1995. As a percentage of
telecommunications products revenues for Fiscal 1996, cost of product revenues
increased nominally as compared to Fiscal 1995 due to initial lower margins
resulting from the discontinuance of NACT's former switch product line as it
began to offer the new STX to existing customers. Research and development costs
increased nominally for Fiscal 1996 relative to Fiscal 1995 as the Company moved
to more rapidly develop an improved billing system product and to maintain
ongoing research and development of the Company's existing hardware and software
product lines.
Selling, general and administrative expenses increased $22.0 million,
or 193.5%, to $33.4 million from $11.4 million for Fiscal 1995. The increase was
due to the expansion of the Company's CLEC and enhanced services operations, and
to a lesser extent, the acquisitions during Fiscal 1996 of GST Call America and
Tri-Star. and the businesses of Hawaii On Line and Texas-Ohio. The
implementation of the Company's integrated services strategy has resulted in
additional marketing, management information and sales staff.
Depreciation and amortization for Fiscal 1996 increased $5.9 million to
$8.3 million from $2.4 million for Fiscal 1995 due to increased depreciation
resulting from newly constructed networks becoming
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operational. To a lesser extent, the increase in depreciation and amortization
was also due to increased amortization of intangible assets resulting from
acquisitions.
OTHER EXPENSES/INCOME. Net other expenses income for Fiscal 1996
increased $16.1 million to $18.0 million from $1.9 million for Fiscal 1995. The
increase was principally the result of additional interest expense associated
with the 1995 Notes, offset by interest income resulting from the investment of
the proceeds of the sale of the 1995 Notes.
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
$83.5 million, $318.6 million and $139.0 million for the three months ended
December 31, 1997, Fiscal 1997, and Fiscal 1996, respectively. Net cash provided
by financing activities from borrowings and equity issuances to fund capital
expenditures, acquisitions and operating losses was $226.7 million, $313.1
million, and $194.3 million for the three months ended December 31, 1997, Fiscal
1997, and Fiscal 1996, respectively.
Capital expenditures for the three months ended December 31, 1997,
Fiscal 1997, and Fiscal 1996 were $46.7 million, $225.7 million, and $97.6
million, respectively. The Company estimates 1998 capital expenditures of
approximately $245 million. The majority of these expenditures are expected to
be made for the construction of network and longhaul fiber optic facilities and
the purchase of switches and related equipment to facilitate the offering of the
Company's services. Continued significant capital expenditures are expected to
be made thereafter. In addition, the Company expects to continue to incur
operating losses while it expands its business and builds its customer base.
Actual capital expenditures and operating losses will depend on numerous
factors, including the extent of future expansion, acquisition opportunities and
other factors beyond the Company's control, including economic conditions,
competition, regulatory developments and the availability of capital.
In addition to the Company's capital expenditures in Fiscal 1996, the
Company acquired the business of Texas-Ohio for a purchase price of $.6 million
and the assumption of certain liabilities. All other acquisitions consummated by
the Company in Fiscal 1996 (Hawaii On Line, Tri-Star, GST Call America and
TotalNet) were in consideration of Common Shares. In the first quarter of Fiscal
1997, the Company acquired the remaining 50% interest in Phoenix Fiber owned by
ICG Telecom Group, Inc. ("ICG") in consideration of (i) the repayment to ICG at
closing of approximately $2.1 million of intercompany indebtedness and the
repayment, under certain circumstances, of up to an additional $2.0 million of
such intercompany indebtedness and (ii) the indemnification of ICG in respect of
all indebtedness of Phoenix Fiber to the Company and third parties, other than
certain liabilities of Phoenix Fiber that were assumed by ICG. Prior to the
acquisition of the remaining 50% interest, the Company had contributed an
aggregate of $5.0 million to Phoenix Fiber. In May 1997, the Company acquired
Action Telcom for 903,000 Common Shares valued at $8.2 million, and $3.9 million
in cash, payable in three equal installments at closing and on the first and
second anniversaries thereof. Additional Common Shares may be issued to the
former shareholders of Action Telcom on such anniversaries if the then market
price of the Common Shares does not exceed $10.00 per share. In October 1997,
the Company acquired the assets of Sprint's operations in Guam for consideration
of $2.0 million in cash and $.5 million in liabilities for services to be
provided to Sprint.
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In September 1996, the Company entered into a Loan and Security
Agreement (the "Siemens Loan Agreement") with Siemens Telecom Networks
("Siemens") which provides for loans by Siemens of up to an aggregate of $226.0
million to finance the purchase of Siemens equipment and certain equipment from
other suppliers. At December 31, 1997, $116.0 million of such facility was
available to the Company (of which $7.9 million had been provided). The Company
may seek to increase the amount of such facility up to $226.0 million on an as
needed basis, subject to the negotiation and execution of mutually satisfactory
documentation. In December 1996, the Company entered into an equipment loan and
security agreement (the "NTFC Loan Agreement") with NTFC Capital Corp. ("NTFC")
which provides for $50.0 million of equipment financing to finance the purchase
of equipment and products from Northern Telecom Inc. (all of which had been
provided to the Company at December 31, 1997).
In October 1996, the Company completed a private placement of 2,000,000
special warrants (the "Special Warrants") at a purchase price of $11 1/8 per
Special Warrant for aggregate net proceeds of $20.8 million. Each Special
Warrant was exercisable for one common share and one-half of one warrant (an
"Ordinary Warrant") to purchase one additional common share for a purchase price
of $13. Ordinary Warrants to purchase 984,650 Common Shares were exercised in
February 1998 resulting in aggregate net proceeds to the Company of $12.8
million.
In February 1997, the Company consummated a private placement (the
"Princes Gate Investment"), of $50.0 million of Series A Preference Shares (the
"Redeemable Preferred Shares") with an affiliate of Princes Gate Investors II,
L.P. ("Princes Gate"). Princes Gate is a limited partnership consisting of an
affiliate of Morgan Stanley and certain private investors. The Redeemable
Preferred Shares, which are convertible at any time after February 28, 2000 at
an imputed price of $11 3/8 per share, will not pay dividends in cash, except to
the extent cash dividends are paid on Common Shares. In addition, the
liquidation and redemption prices of the Redeemable Preferred Shares will
accrete at a semi-annual rate of 11 7/8%. On February 28, 2004, and under
certain circumstances, the Redeemable Preferred Shares will also be subject to
mandatory conversion or redemption, provided that to the extent the Company is
prohibited from paying the redemption price in cash, holders of the Redeemable
Preferred Shares may elect to convert such shares into Common Shares and if such
election is not made, the Company may extend the mandatory redemption date to
August 28, 2007.
In March 1997, NACT completed an initial public offering of its common
stock pursuant to which the Company and NACT sold one million and two million
shares, respectively, of NACT's common stock, resulting in net proceeds to the
Company and NACT of approximately $9.0 million and $18.1 million, respectively.
In February 1998, the Company completed the sale of its remaining interest in
NACT for net proceeds of $86.5 million.
In May 1997, GST Equipment Funding, Inc. ("GST Funding") completed the
sale of $265.0 million principal amount of Secured Notes. Of the $255.8 million
of net proceeds from the issuance of the Secured Notes, as of December 31, 1997
approximately $93.8 million had been used to purchase securities pledged to fund
the first six interest payments on the Secured Notes and approximately $104.4
million had been used to purchase equipment, including approximately $41.5
million that had been used to refinance indebtedness of GST USA incurred to
purchase equipment. The indenture relating to the Secured Notes includes
restrictive covenants which, among other items, limit or restrict additional
indebtedness incurred by the Company, investment in certain subsidiaries, the
sale of assets and the payment of dividends.
In November 1997, the Company completed a public offering of 6,440,000
Common Shares at $12 per share and $144.0 million of Accrual Notes. The Accrual
Notes accrete to a total principal value of $266.9 million in November 2002 with
semi-annual cash interest payments beginning May 2003. The Company will use the
net proceeds of such offerings, approximately $211.2 million in the aggregate,
to
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fund the expansion of its infrastructure, the expansion of its products and
service offerings and for working capital and general corporate purposes.
As of December 31, 1997, the Company had $790.3 million of indebtedness
outstanding. In addition, as of December 31, 1997, the Company had $25.0 million
of availability under the Tomen Facility and $108.1 million of availability
under the Siemens Loan Agreement. Although the Company's liquidity was
substantially improved as a result of the proceeds received from the sale of the
1995 Notes, the Secured Notes and the Accrual Notes, the Company will have
significant debt service obligations. The Company will be required to make
principal and interest payments of approximately $59.2 million (of which $35.1
million will be made from funds securing the Secured Notes), $63.3 million (of
which $35.1 million will be made from funds securing the Secured Notes), $66.1
million (of which $17.6 million will be made from funds securing the Secured
Notes), $115.9 million and $114.2 million in 1998, 1999, 2000, 2001 and 2002,
respectively. In addition, the Company anticipates that cash flow from
operations will be insufficient to repay the 1995 Notes, the Secured Notes and
the Accrual Notes in full and that such notes will need to be refinanced. The
ability of the Company to effect such refinancings will be dependent upon the
future performance of the Company, which will be subject to prevailing economic
conditions and to financial, business and other factors, including factors
beyond the control of the Company. There can be no assurance that the Company
will be able to improve its earnings before fixed charges or that the Company
will be able to meet its debt service obligations.
At December 31, 1997, the Company had cash, cash equivalents, and
investments, including restricted cash and investments, of approximately $351.1
million, compared to $230.9 million at September 30, 1997. The Company believes
that the net proceeds from the sale of NACT and the cash on hand (including the
remaining proceeds from the Secured Notes offering available to purchase
equipment), and borrowings expected to be available under the Tomen Facility and
the Siemens Loan Agreement will provide sufficient funds for the Company to
expand its business as presently planned and to fund its operating expenses
through March 2000. Thereafter, the Company expects to require additional
financing. In the event that the Company's plans or assumptions change or prove
to be inaccurate, or its cash resources, together with borrowings under the
current financing arrangements prove to be insufficient to fund the Company's
growth and operations, or if the Company consummates additional acquisitions,
the Company may be required to seek additional sources of capital (or seek
additional capital sooner than currently anticipated). The Company may also seek
to raise additional capital to take advantage of favorable conditions in the
capital markets. There can be no assurance that additional financing will be
available to the Company or, if available, that it can be concluded on terms
acceptable to the Company or within the limitations contained within the
Company's financing arrangements. Failure to obtain such financing could result
in the delay or abandonment of some or all of the Company's development or
expansion plans and could have material adverse effect on the Company's
business. Such failure could also limit the ability of the Company to make
principal and interest payments on its outstanding indebtedness. The Company has
no material working capital or other credit facility under which it may borrow
for working capital and other general corporate purposes. There can be no
assurance that such a facility will be available to the Company in the future or
that if such a facility were available, that it would be available on terms and
conditions acceptable to the Company.
INCOME TAXES AND ADOPTION OF NEW ACCOUNTING STANDARDS
At December 31, 1997, the Company had a U.S. net operating loss
carryforward of approximately $130.4 million and a Canadian net operating loss
carryforward of approximately Cdn. $11.1 million. While such loss carryforwards
are available to offset future taxable income of the Company, the Company does
not expect to generate sufficient taxable income so as to utilize all or a
substantial portion of such loss carryforwards prior to their expiration.
Further, the utilization of net operating loss carryforwards against future
taxable income is subject to limitation if the Company experiences an "ownership
change" as defined in Section 382 of the Code and the analogous provision of the
Canada Act.
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In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("FAS") No. 130, "Reporting
Comprehensive Income." FAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The Company is required to adopt the provisions of FAS No. 130 in 1998, however,
the Company believes that adopting this new accounting standard will not
materially impact the manner of presentation of its financial statements as
currently and previously reported.
In June 1997, the FASB issued FAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information", which changes the way public
companies report information about operating segments. FAS No. 131, which is
based on the management approach to segment reporting, establishes requirements
to report selected segment information quarterly and to report entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenue. The Company is
required to adopt the provisions of FAS No. 131 in 1998. The Company has not yet
completed its analysis of the impact on the financial statements that will be
caused by the adoption of this accounting standard.
YEAR 2000 PROGRAM
Many computer systems experience difficulty processing dates beyond the
year 1999 and, as such, some computer hardware and software will need to be
modified prior to the year 2000 to remain functional. 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 will 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 external
third 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.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement filed with the Commission on January
28, 1998 pursuant to Regulation 14A of the General Rules and Regulations under
the Securities Exchange Act of 1934 ("Regulation 14A").
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ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement filed with the Commission on January
28, 1998 pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the Company's definitive proxy statement filed with the Commission on January
28, 1998 pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 23, 1994, the Company entered into agreements (the "GST Telecom
Agreements") with Pacwest (an entity controlled by John Warta, now the Company's
Chairman of the Board and Chief Executive Officer), pursuant to which the
Company and Pacwest formed a new corporation, GST Telecom, for the purpose of
developing telecommunications networks. Under the terms of the agreements,
Pacwest contributed the stock of GST Pacific, GST Tucson and GST Hawaii and the
Company made certain funding commitments (all of which were subsequently
satisfied) and contributed its 60% interest in GST Tucson, for which the Company
received 60% and Pacwest received 40% of the capital stock of GST Telecom.
Effective June 1, 1995, the Company acquired an additional 20% ownership
interest in GST Telecom from Pacwest in exchange for 1,000,000 Common Shares.
Effective October 20, 1995, the Company acquired Pacwest's remaining 20%
interest in GST Telecom for which Pacwest was eligible to receive up to a
maximum of 1,000,000 Common Shares (valued at $10.00 per Common Share) based
upon the fair market value of a 20% interest in GST Telecom, as determined by
independent appraisal. The Company engaged an investment banking firm to provide
such appraisal, which appraisal valued such 20% interest at not less than $10
million. In November 1996, 1,000,000 Common Shares, which had been held in
escrow since October 20, 1995, were distributed to the designees of Pacwest,
principally Messrs. Warta and Sander.
Prior to his employment with the Company, Mr. Warta served as a
consultant to Tomen for which he was paid a fee. Mr. Warta continued to serve as
a paid consultant to Tomen through June 1997 and served as an unpaid consultant
from June 1997 to March 1998. Simultaneously with the execution of the GST
Telecom Agreements, Pacwest contracted with the Company to receive a fee equal
to 1% of the aggregate debt and equity financing provided by Tomen to the
Company. Mr. Sander, Senior Vice President and Treasurer of the Company, is a
member of Pacwest and participated in such fees. During the last two fiscal
years, the Company incurred approximately $635,000 of such fees to Pacwest.
Effective October 1, 1997, the obligation to pay any such fee was terminated.
Under the Tomen Facility, Tomen has the right to act as procurement
agent for each network project it finances. The Company has purchased equipment
through Tomen at competitive prices.
The operations of the Company's Hawaiian microwave network require
radio licenses from the FCC. PNI, an entity controlled by Mr. Warta, the
Company's Chairman of the Board and Chief Executive Officer, holds the Hawaii
microwave licenses. Under agreements between the Company and PNI, the Company
pays a monthly fee of $3,000 to PNI and PNI pays an offsetting monthly fee to
the Company, in connection with the operation and use of the network. PNI has an
application pending with the FCC to assign the microwave radio licenses to
Pacwest Network Hawaii Inc., an entity controlled by John Warta. The Company is
currently examining the procedures that could be utilized to transfer such
licenses to the Company without compensation to PNI.
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See "Business - Magnacom" for a description of transactions relating to
Magnacom and PCS Plus Pacific, companies controlled by John Warta, the Company's
Chairman of the Board and Chief Executive Officer.
In November 1996, 1,500,000 of the common shares of Global owned by the
Company were purchased at cost from W. Gordon Blankstein, formerly a director
and Chairman of the Company.
Stephen Irwin, Vice Chairman and Secretary of the Company, is of
counsel to the law firm of Olshan Grundman Frome & Rosenzweig LLP, counsel to
the Company. In connection with such services, such firm received fees of
approximately $1.8 million for each of Fiscal 1996 and Fiscal 1997.
Peter E. Legault, a director of the Company, is a director and Vice
President of Thomson Kernaghan, which was engaged by the Company during Fiscal
1996 and Fiscal 1997 to solicit sources of financing for the Company, and was
one of the placement agents for the Company's sale of special warrants in
October 1996. In connection with such services, such firm received fees of
approximately $500,000 during Fiscal 1997.
In May 1997, the Company loaned $100,000 to Joseph Basile, the
President, Chief Operating Officer and a director of the Company, to enable him
to purchase a new primary residence in the Vancouver, Washington area. The loan
matures in March 2000, accrues interest at a rate of 6% per annum and is to be
prepaid to the extent of the proceeds from the sale of Mr. Basile's former
residence and from the sale of Common Shares acquired upon exercise of options
held by Mr. Basile. Such loan was made pursuant to the terms of his employment
agreement with the Company, which was approved by the Board of Directors of the
Company.
As of March 1, 1998, the Company has loaned $72,000 to Daniel Trampush,
Senior Vice President and Chief Financial Officer of the Company, to enable him
to purchase a new primary residence in the Vancouver, Washington area. The loan
is interest-free and matures in March 2002 and is to be prepaid to the extent of
the proceeds from the sale of Common Shares acquired upon exercise of options
held by Mr. Trampush. Such loan was made pursuant to the terms of his employment
agreement with the Company, which was approved by the Board of Directors of the
Company.
In September 1997, an aggregate of 562,500 Common Shares were released
from escrow to Ian Watson and W. Gordon Blankstein, former directors and
officers of the Company. Such Common Shares were issued to provide incentive in
the development of the Company's business and had been held in escrow since 1990
under the policies of the VSE. Such Common Shares were released under the terms
of the applicable escrow agreement. In accordance with U.S. generally accepted
accounting principles, the Company recognized compensation expense of
approximately $5.6 million when such Common Shares were released to Messrs.
Watson and Blankstein.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements: see the Index to Consolidated
Financial Statements.
(2) Financial Statement Schedule: see page S-1.
(3) Exhibits:
3(a) Certificate of Incorporation of the Company, as amended to date,
incorporated by reference to Exhibit 3(a) to the Company's Form 10-K
for the fiscal year ended September 30, 1996, as amended (the "1996
Form 10-K").
3(b) By-Laws of the Company as amended to date, incorporated by reference to
Exhibit 3.1 to the Company's Form S-3 (No. 333-38091) (the "Form S-3").
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4(a) Senior Notes Indenture dated as of December 19, 1995, by and among GST
USA, Inc., the Company and United States Trust Company of New York,
incorporated by reference to Exhibit 2.3 to the Company's Form 20-F for
the fiscal year ended September 30, 1995 (the "1995 Form 20- F").
4(b) Convertible Notes Indenture dated as of December 19, 1995, by and among
the Company, GST USA, Inc. and United States Trust Company of New York,
incorporated by reference to Exhibit 2.4 to the 1995 Form 20-F.
4(c) Indenture dated as of May 13, 1997, by and among GST Equipment Funding,
Inc., the Company, GST USA, Inc. and United States Trust Company of New
York, incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the period ended June 30, 1997 (the "June 1997 10- Q").
4(d) Indenture dated as of November 19, 1997, by and between the Company and
United States Trust Company of New York, incorporated by reference to
Exhibit 4.1 to the Company's Form S-3 (No. 333-38301) (the "Debt Form
S-3").
10(a) 1995 Stock Option Plan of the Company, as amended to date; incorporated
by reference to Exhibit 10(a) to the Company Form 10-K for the fiscal
year ended September 30, 1997 (the "1997 Form 10-K").
10(b) 1996 Stock Option Plan of the Company, as amended to date, incorporated
by reference to Exhibit 10(b) to the 1997 Form 10-K.
10(c) 1996 Employee Stock Purchase Plan of the Company, incorporated by
reference to Exhibit 10(c) to the 1997 Form 10-K.
10(d) 1996 Senior Executive Officer Stock Option Plan of the Company,
incorporated by reference to Exhibit 10(d) to the 1997 Form 10-K.
10(e) 1996 Senior Operating Officer Stock Option Plan of the Company,
incorporated by reference to Exhibit 10(e) to the 1997 Form 10-K.
10(f) Amended and Restated Credit Agreement dated as of April 26, 1995, by
and between GST Pacific Lightwave, Inc. and Tomen America Inc.,
incorporated by reference to Exhibit 1.2 to the 1995 Form 20-F.
10(g) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
and among GST Equipment Funding, Inc., United States Trust Company of
New York and the holders of the Notes as defined therein, incorporated
by reference to Exhibit 10.4 to the June 1997 Form 10-Q.
10(h) Agreement and Plan of Merger, dated September 27, 1996 (the "Merger
Agreement"), by and among TotalNet Communications Inc. ("TotalNet"),
GST Newco of Texas, Inc. and the Company, incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K dated October 17, 1996 (the
"October Form 8-K")
10(i) Letter dated October 17, 1996 amending the Merger Agreement among the
Company, GST Newco of Texas, Inc., and TotalNet, incorporated by
reference to Exhibit 2.2 to the October Form 8-K
10(j) Amended and Restated Master Agreement dated as of May 24, 1996, by and
among Tomen America Inc., the Company, GST Telecom Inc., GST Pacific
Lightwave, Inc., Pacwest Network L.L.C., Pacwest Network Inc., GST
Tucson Lightwave, Inc. and GST New Mexico Lightwave, Inc., incorporated
by reference to Exhibit 10(l) to the 1996 Form 10-K.
10(k) Amendment No. 2 to GST Telecommunications, Inc. Common Stock Purchase
Agreement dated as of May 24, 1996, by and among the Company, Tomen
America Inc. and Tomen Corporation, incorporated by reference to
Exhibit 10(m) to the 1996 Form 10-K.
10(l) Credit Agreement dated as of May 24, 1996, by and between GST New
Mexico Lightwave, Inc. and TM Communications LLC, incorporated by
reference to Exhibit 10(n) to the 1996 Form 10-K.
10(m) Credit Agreement dated as of May 24, 1996, by and between GST Tucson
Lightwave, Inc. and TM Communications LLC, incorporated by reference to
Exhibit 10(o) to the 1996 Form 10-K.
10(n) Amended and Restated Consulting Agreement dated as of September 1,
1995, by and between Sunwest Ventures, Inc. and GST USA, Inc. and GST
Telecom, incorporated by reference to Exhibit 10(p) to the 1996 Form
10-K.
-35-
<PAGE>
10(o) Personal Services Agreement dated as of October 1, 1995, by and between
GST USA, Inc. and GST Telecom Inc. and Stephen Irwin, incorporated by
reference to Exhibit 10(q) to the 1996 Form 10-K.
10(p) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and John Warta,
incorporated by reference to Exhibit 10(r) to the 1996 Form 10-K.
10(q) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Robert H.
Hanson, incorporated by reference to Exhibit 10(s) to the 1996 Form
10-K.
10(r) Amended and Restated Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Clifford V.
Sander, incorporated by reference to Exhibit 10(t) to the 1996 Form
10-K.
10(s) Employment Agreement dated March 11, 1997, by and between GST USA, Inc.
and Joseph Basile, Jr, incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ended March 31, 1997 (the "March
1997 10-Q").
10(t) Employment Agreement dated February 10, 1997, by and between GST USA,
Inc. and GST Telecom Inc. and Daniel L. Trampush, incorporated by
reference to Exhibit 10.2 to the March 1997 Form 10-Q.
10(u) Reseller Agreement dated as of October 30, 1996, by and between
Magnacom Wireless, L.L.C., and GST Telecom Inc., incorporated by
reference to Exhibit 10(z) to the 1996 Form 10-K.
10(v) Agreement and Plan of Merger dated as of September 26, 1996 by and
among Call America Business Communications Corporation, Call America
Business Communications of Fresno, Inc., Call America Business
Communications of Bakersfield, Inc., the shareholders of such
companies, GST Newco of California, Inc., and the Company, incorporated
by reference to Exhibit 10(u) to the 1996 Form 10-K.
10(w) Agreement and Plan of Merger dated as of May 31, 1997, by and among
Action Telcom Co., Britt E. Bilberry, Timothy Harding Bilberry, Paul S
Bilberry, GST Action Telecom, Inc. and the Company, incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated May 31, 1997.
10(x) Equipment Loan and Security Agreement dated December 19, 1996 by and
between NTFC Capital Corporation and GST Equipco, incorporated by
reference to Exhibit 10(v) to the 1996 Form 10-K.
10(y) Loan and Security Agreement dated as of September 4, 1996 by and
between Siemens Stromberg-Carlson ("Siemens") and GST Switchco, Inc.
("GST Switchco"), incorporated by reference to Exhibit 10(d) to the
Company's Form 10-Q for the period ended December 31, 1996 (the
"December 1996 Form 10-Q").
10(z) Unconditional Continuing Guaranty dated as of September 4, 1996 by and
between Siemens and GST USA, Inc., incorporated by reference to Exhibit
10(e) to the December 1996 Form 10-Q.
10(aa) Unconditional Limited Guaranty Agreement dated as of December 19, 1996
made by GST USA, Inc., in favor of NTFC Capital Corporation,
incorporated by reference to Exhibit 10(f) to the December 1996 Form
10-Q.
10(bb) Securities Purchase Agreement, dated as of February 28, 1997, between
the Company and Ocean Horizon SRL, incorporated by reference to Exhibit
4.1 to the Company's Form 8-K dated February 28, 1997 (the "February
Form 8-K").
10(cc) Securityholders Agreement, dated as of February 28, 1997, between the
Registrant and Ocean Horizon SRL, incorporated by reference to Exhibit
4.2 to the Company's February Form 8-K.
10(dd) Credit Agreement dated as of September 30, 1997 by and between GST
Telecom Hawaii, Inc. and TM Communications Hawaii LLC, incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K dated September 30,
1997 (the "September 8-K").
10(ee) Service Agreement dated as of September 30, 1997 by and between Pacwest
Network, Inc. and GST Telecom Hawaii, Inc, incorporated by reference to
Exhibit 99.2 to the September 8-K.
10(ff) Management Agreement dated as of September 30, 1997 by and between
Pacwest Network, Inc. and GST Telecom Hawaii, Inc., incorporated by
reference to Exhibit 99.3 to the September 8-K.
-36-
<PAGE>
10(gg) Agreement dated as of September 30, 1997 by and among GST Telecom
Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc., incorporated
by reference to Exhibit 99.4 to the September 8-K.
10(hh) Stock Purchase Agreement dated December 31, 1997 by and among GST
Telecommunications, Inc., GST USA, Inc. and World Access, Inc.,
incorporated by reference to Exhibit 99.2 to the Company's Form 8-K
dated January 6, 1998.
*10(ii) 1997 Stock Option Plan of the Company, as amended to date.
*21 Subsidiaries of the Company.
*23 Consent to the incorporation by reference in the Company's Registration
Statements on Forms S-3 and S-8 of the independent auditors' report
included herein.
*27 Financial Data Schedule.
- -----------------------------
* Filed herewith.
(b) Reports on Form 8-K: The Registrant filed the following Current Reports
on Form 8-K during the transition period ended December 31, 1997: (i)
Form 8-K dated January 6, 1998, reporting under Item 5 thereof the
announcement that World Access, Inc. would buy a 63% interest in NACT
from the Company.
-37-
<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 17th day of March, 1998.
GST TELECOMMUNICATIONS, INC.
By: /s/ John Warta
--------------------------
John Warta,
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Warta, Stephen Irwin, Daniel
Trampush and Clifford V. Sander his true and lawful attorney-in-fact, each
acting alone, with full power of substitution and resubstitution for him and in
his name, place and stead, in any and all capacities to sign any and all
amendments to this report, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes, each acting alone, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John Warta Chairman of the Board, Chief Executive March 17, 1998
- -------------------------------- Officer (Principal Executive Officer) and
(John Warta) Director
/s/ Daniel L. Trampush Senior Vice President and Chief Financial March 17, 1998
- -------------------------------- Officer (Principal Financial Officer)
(Daniel L. Trampush)
/s/ Clifford V. Sander Senior Vice President, Treasurer and Chief March 17, 1998
- -------------------------------- Accounting Officer (Principal Accounting
(Clifford V. Sander) Officer)
/s/ Stephen Irwin Vice Chairman of the Board, Secretary and March 17, 1998
- -------------------------------- Director
(Stephen Irwin)
/s/ Joseph A. Basile, Jr. President, Chief Operating Officer and March 17, 1998
- -------------------------------- Director
(Joseph A. Basile, Jr.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
- ------------------------------ Director
(Peter E. Legault)
/s/ Jack G. Armstrong
- ------------------------------ Director March 17, 1998
(Jack G. Armstrong)
- ------------------------------ Director
(Mitsuhiro Naoe)
/s/ Joseph G. Fogg, III
- ------------------------------ Director March 17, 1998
(Joseph G. Fogg, III)
/s/ Thomas E. Sawyer
- ------------------------------ Director March 17, 1998
(Thomas E. Sawyer)
/s/ A. Roy Megarry
- ------------------------------ Director March 17, 1998
(A. Roy Megarry)
The Company's Authorized
Representative
in the United States
/s/ Daniel L. Trampush
- ------------------------------
Daniel L. Trampush March 17, 1998
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page(s)
GST TELECOMMUNICATIONS, INC.
Independent Auditors' Report...............................................F-2
Consolidated Balance Sheets at December 31, 1997, and
September 30, 1997 and 1996..............................................F-3
Consolidated Statements of Operations for the
the three-month period ended December 31, 1997 and
the years ended September 30, 1997, 1996 and
1995.....................................................................F-4
Consolidated Statements of
Shareholders' (Deficit) Equity at December 31, 1997
and September 30, 1997, 1996 and 1995....................................F-5
Consolidated Statemnts of Cash Flows for the
three-month period ended December 31, 1997
and the years ended September 30, 1997, 1996
and 1995................................................................F-6
Notes to Consolidated Financial Statements.................................F-8
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. and subsidiaries as of December 31, 1997 and September
30, 1997 and 1996, and the related consolidated statements of operations,
shareholders' (deficit) equity, and cash flows for the three-month period ended
December 31, 1997 and for each of the years in the three-year period ended
September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GST
Telecommunications, Inc. and subsidiaries as of December 31, 1997 and September
30, 1997 and 1996, and the results of its operations and cash flows for the
three-month period ended December 31, 1997 and for each of the years in the
three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles in the United States.
Accounting principles generally accepted in the United States vary in certain
significant respects from accounting principles generally accepted in Canada.
Application of accounting principles generally accepted in Canada would have
affected results of operations and shareholders' (deficit) equity for the
three-month period ended December 31, 1997 and for each of the years in the
three-year period ended September 30, 1997, to the extent summarized in note 11
to the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
- -------------------------
Portland, Oregon
February 25, 1998
F - 2
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
(In U.S. Dollars)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1997 1996
------ ---- ---- ----
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 199,053 $ 55,862 $ 61,343
Restricted cash and investments 31,731 50,039 16,000
Accounts receivable, net 27,324 22,373 9,472
Investments 7,619 3,322 5,176
Inventory, net 3,412 3,458 2,406
Other current assets 13,127 12,588 6,151
---------- -------- --------
282,266 147,642 100,548
Restricted investments 112,719 121,711 -
Property and equipment, net 406,895 364,514 127,575
Goodwill, net 36,056 36,936 35,730
Other assets, net 60,238 57,602 37,848
---------- -------- --------
Total assets $ 898,174 $728,405 $301,701
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
<S> <C> <C> <C>
Accounts payable $ 14,798 $ 21,707 $ 12,443
Accrued expenses 30,869 42,131 26,743
Current portion of capital lease obligations 6,286 6,423 722
Current portion of long-term debt 4,579 4,233 4,832
Other current liabilities 993 607 726
---------- -------- --------
57,525 75,101 45,466
---------- -------- --------
Other liabilities 1,409 1,088 158
Capital lease obligations, less current portion 13,994 15,340 1,453
Long-term debt, less current portion 765,434 612,703 232,674
Minority interest 12,732 12,208 182
Commitments and contingencies
Redeemable preference shares:
Authorized - 10,000,000 no par shares; 500 shares issued and outstanding
at December 31, 1997 and September 30, 1997, no shares issued or
outstanding at September 30, 1996 54,635 51,756 -
Shareholders' (deficit) equity:
Common shares:
Authorized - unlimited number of no par common shares; issued and
outstanding - December 31, 1997 - 34,564,898 shares, September
30, 1997 - 27,627,442 shares, September 30, 1996 - 21,257,697 shares 221,105 145,475 72,647
Commitment to issue common shares:
December 31, 1997 - 50,887 shares, September 30, 1997 - 288,061 shares,
September 30, 1996 - 1,988,230 shares 604 4,405 25,454
Accumulated deficit (229,264) (189,671) (76,333)
-------- -------- ------
(7,555) (39,791) 21,768
--------- -------- ------
Total liabilities and shareholders' (deficit) equity $898,174 $728,405 $301,701
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Operations
(In thousands, except per share and share amounts)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Three-month
period ended YEARS ENDED SEPTEMBER 30,
December 31, ---------------------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Telecommunication and other services $ 27,552 $ 82,593 $ 31,726 $ 11,118
Product 8,706 23,374 9,573 7,563
---------- ----------- ---------- ---------
Total revenues 36,258 105,967 41,299 18,681
----------- ----------- ---------- ---------
Operating costs and expenses:
Network expenses 19,427 66,250 26,580 10,103
Facilities administration and maintenance 3,511 12,304 10,317 2,096
Cost of product revenues 3,102 7,990 3,974 3,096
Selling, general and administrative 22,428 79,491 33,375 11,373
Research and development 781 2,316 1,352 1,270
Depreciation and amortization 8,864 24,159 8,298 2,374
---------- ----------- ---------- ---------
Total operating costs and expenses 58,113 192,510 83,896 30,312
---------- ----------- ---------- ---------
Loss from operations (21,855) (86,543) (42,597) (11,631)
---------- ----------- ---------- ---------
Other expenses (income):
Interest income (4,101) (7,026) (5,549) (303)
Interest expense, net of amounts capitalized 18,948 37,665 21,224 838
Loss from joint venture and investments 1,286 1,482 1,521 1,187
Other 283 (6,841) 839 160
---------- ----------- ---------- -------
16,416 25,280 18,035 1,882
---------- ----------- ---------- ---------
Loss before minority interest in (income)
loss of subsidiaries and income tax (38,271) (111,823) (60,632) (13,513)
---------- ----------- ---------- ---------
Income tax expense:
Current 758 1,802 157 70
Deferred 92 (899) - 96
---------- ----------- ---------- --------
850 903 157 166
----------- ----------- ---------- ---------
Loss before minority interest in (income)
loss of subsidiaries (39,121) (112,726) (60,789) (13,679)
Minority interest in (income) loss of subsidiaries (472) (612) 411 2,364
---------- ----------- ---------- ----------
Net loss $ (39,593) $ (113,338) $ (60,378) $ (11,315)
========== --========= ========== ==========
Net loss per share, basic and dilutive $ (1.39) $ (4.71) $ (3.18) $ (0.82)
========== =========== ========== ==========
Weighted average common shares, basic
and diluted 30,804,376 24,702,870 18,988,127 13,780,796
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Shareholders' (Deficit) Equity
(In thousands, except share amounts)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Commitment to
issue common Total
Common shares shares (Note 7) shareholders'
------------------- ------------------- Accumulated (deficit)
Shares Amount Shares Amount deficit equity
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 11,910,650 $ 22,036 551,536 $ 3,038 $ (4,640) $ 20,434
Issuance of common shares for services 34,057 150 - - - 150
Issuance of common shares in business
combinations 1,719,785 8,785 (551,536) (3,038) - 5,747
Issuance of common shares, net 4,593,598 17,965 - - - 17,965
Issuance of common shares under option
plans 442,200 1,230 - - - 1,230
Commitment to issue shares for business
combinations - - 336,498 1,494 - 1,494
Net loss - - - - (11,315) (11,315)
----------- ------ --------- ------ ------------ ---------
Balance, September 30, 1995 18,700,290 50,166 336,498 1,494 (15,955) 35,705
Issuance of common shares for services 85,627 621 - - - 621
Issuance of common shares in business
combinations 1,200,873 11,097 (168,249) (747) - 10,350
Issuance of common shares, net 1,189,849 9,672 - - - 9,672
Issuance of common shares under option
plans 67,500 293 - - - 293
Commitment to issue shares for business
combinations - - 1,819,981 24,707 - 24,707
Issuance of common shares under employee
shares purchase plan 13,558 132 - - - 132
Accrual of compensation costs for share
awards and option plans - 666 - - - 666
Net loss - - - - (60,378) (60,378)
----------- ------ --------- ------- ----------- ----------
Balance, September 30, 1996 21,257,697 72,647 1,988,230 25,454 (76,333) 21,768
Issuance of common shares for services 25,000 221 - - - 221
Issuance of common shares in business
combinations 3,132,854 29,394 (1,700,169) (21,049) - 8,345
Issuance of common shares and warrants,
net 2,505,882 32,666 - - - 32,666
Issuance of common shares under option
plans 643,016 3,309 - - - 3,309
Issuance of common shares under employee
shares purchase plan 62,993 400 - - - 400
Accrual of compensation costs for share
awards and option plans - 9,807 - - - 9,807
Accretion of redeemable preference shares - (2,969) - - - (2,969)
Net loss - - - - (113,338) (113,338)
----------- ------ --------- ------- --------- ----------
Balance, September 30, 1997 27,627,442 145,475 288,061 4,405 (189,671) (39,791)
Issuance of common shares in business
combinations 246,392 3,801 (237,174) (3,801) - -
Issuance of common shares, net 6,440,000 73,092 - - - 73,092
Issuance of common shares under option
plans 158,209 1,107 - - - 1,107
Issuance of common shares under employee
shares purchase plan 75,198 463 - - - 463
Accrual of compensation costs for share
awards and option plans - 179 - - - 179
Accretion of redeemable preference shares - (3,145) - - - (3,145)
Conversion of senior subordinated discount
notes 17,657 133 - - - 133
Net loss - - - - (39,593) (39,593)
----------- -------- --------- ------- --------- -------
Balance, December 31, 1997 34,564,898 $221,105 50,887 $ 604 $(229,264) $(7,555)
=========== ======== ========= ======= ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Three-month
period ended Years ended September 30,
December 31, ---------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
Operations:
<S> <C> <C> <C> <C>
Net loss $(39,593) $(113,338) $(60,378) $(11,315)
Adjustments to reconcile net loss to net cash used
in operations:
Minority interest in income (loss) of subsidiary 472 612 (411) (2,364)
Depreciation and amortization 10,115 26,634 9,496 2,824
Deferred income taxes 92 (899) - 96
Accretion of interest 8,276 19,236 19,978 -
Non-cash stock compensation and other expense 374 10,028 1,293 301
Loss on disposal of assets - 679 1,012 122
Equity in losses of investments and joint venture 1,286 1,482 1,521 1,187
Gain on sale of subsidiary shares - (7,376) - -
Changes in non-cash operating working capital:
Accounts receivable, net (3,547) (11,284) (1,066) (1,549)
Inventory 46 (455) (2,019) (13)
Other current and other assets, net (631) (7,172) (5,304) (417)
Accounts payable and accrued liabilities (18,177) 24,970 2,387 (190)
Other liabilities 707 (119) 185 262
--------- --------- -------- --------
Cash used in operations (40,580) (57,002) (33,306) (11,056)
--------- --------- -------- --------
Investments:
Acquisition of subsidiaries, net of cash acquired (2,105) (1,618) (1,441) 207
Settlement of notes receivable - - - 3,367
Purchase of investments (4,297) (3,247) (9,799) 848
Proceeds from sale of investments - 5,176 5,493 -
Purchase of fixed assets (45,970) (222,001) (76,192) (27,730)
Proceeds from sale of fixed assets - 5,774 8 -
Purchase of other assets (1,866) (14,058) (7,743) (1,829)
Change in cash and investments restricted for the
purchase of property and equipment 11,143 (58,701) (16,000) -
Proceeds from the sale of subsidiary shares, net 141 27,105 - 615
-------- --------- -------- --------
Cash used in investing activities (42,954) (261,570) (105,674) (24,522)
-------- --------- -------- --------
Financing:
Proceeds from long-term debt 151,420 353,257 196,207 19,857
Issuance of redeemable preference shares, net - 48,679 - -
Principal payments on long-term debt and capital leases (10,101) (7,455) (2,112) (816)
Issuance of common shares, net of issuance costs 74,629 27,692 10,098 19,195
Deferred debt financing costs (5,380) (12,033) (9,894) (853)
Change in investments restricted to finance interest
payments 16,157 (97,049) - -
-------- ---------- -------- --------
Cash provided by financing activities 226,725 313,091 194,299 37,383
-------- ---------- -------- --------
Increase (decrease) in cash and cash
equivalents 143,191 (5,481) 55,319 1,805
Cash and cash equivalents, beginning of period 55,862 61,343 6,024 4,219
-------- ---------- -------- --------
Cash and cash equivalents, end of period $199,053 $ 55,862 $ 61,343 $ 6,024
======== ========== ======== ========
(Continued)
</TABLE>
F - 6
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows, Continued
(In thousands)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Three-monthd
period ended Years ended September 30,
December 31, ---------------------------------
1997 1997 1996 1995
---- ---- ---- ----
Supplemental disclosure of cash flow information:
<S> <C> <C> <C> <C>
Cash paid for interest $21,684 $ 4,982 $ 1,813 $ 364
Cash paid for income taxes 1,038 638 - 264
Supplemental schedule of non-cash investing and
financing activities:
Recorded in business combinations:
Assets 2,605 14,148 45,477 17,081
Liabilities 500 4,369 11,665 7,706
Minority interest - - (2,686) 1,797
Commitment to issue shares - - 5,613 1,494
Common Shares - 8,161 29,444 5,747
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at end of period 19,029 19,718 18,291 4,363
Accretion of redeemable preference shares 3,145 2,969 - -
Assets acquired through capital leases 480 21,765 - 128
Debt converted to equity 133 - - -
</TABLE>
See accompanying notes to consolidated financial statements.
F - 7
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
December 31, 1997 and September 30, 1997 and 1996
(In U.S. Dollars)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
GST Telecommunications, Inc. (the Company) is a Canadian company in the
business of providing competitive local exchange services primarily in
the western United States. In addition, the Company provides a range of
telecommunications services, including long distance, Internet and data
services, and produces telecommunications switching equipment and
software.
The consolidated financial statements for the three-month period ended
December 31, 1997 and the years ended September 30, 1997, 1996 and 1995
have been reported in U.S. dollars, the functional currency of the
Company.
(b) CHANGE IN FISCAL YEAR-END
In 1997, the Company changed its fiscal year-end from September 30 to
December 31. Included in the accompanying audited financial statements
are the results of operations for the three-month transition period
ended December 31, 1997. Unaudited results of operations for the
comparable three-month period ended December 31, 1996 are summarized
below:
Revenues $ 23,217
Loss from operations (17,988)
Other expenses, net (4,646)
Income tax expense -
Net loss (22,634)
Loss per share, basic and diluted (1.02)
(c) 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.
(d) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments with
original maturities of ninety days or less.
(Continued)
F - 8
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(e) ACCOUNTS AND NOTES RECEIVABLE
The Company maintains a security interest in the telecommunications
systems it sells until the Company is paid in full. Notes receivable
from customers total $4,055, $3,334 and $623 at December 31, 1997 and
September 30, 1997 and 1996, respectively. Management provides an
allowance for doubtful accounts and notes based on current customer
information and historical statistics. The allowance for doubtful
accounts was $3,956, $3,582 and $1,264 at December 31, 1997 and
September 30, 1997 and 1996, respectively.
(f) CASH AND INVESTMENTS
The Company follows the provisions of Statement of Financial Accounting
Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities".
The Company classifies its restricted investments, consisting at
December 31, 1997 of $143,375 in U.S. Treasury securities and $1,075 in
certificates of deposit, as available-for-sale and held-to-maturity.
Held-to-maturity investments, recorded at amortized cost, totaling
$81,966 and $97,049 at December 31, 1997 and September 30, 1997,
respectively, and maturing between three months and three years, are
restricted primarily for interest payments. Available-for-sale
investments, totaling $62,484 and $74,701 at December 31, 1997 and
September 30, 1997, respectively, and maturing between two months and
one year, are restricted for equipment purchases. Available-for-sale
securities are recorded at amortized cost which approximates the market
value of such securities at December 31, 1997 and September 30, 1997.
The Company's unrestricted investments totaling $7,619, $3,322 and
$5,176 at December 31, 1997 and September 30, 1997 and 1996,
respectively, consist of U.S. government securities and certificates of
deposit, all maturing within one year, and are classified as
available-for-sale which approximates market value.
(Continued)
F - 9
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(g) INVENTORY, NET
Inventory is stated at the lower of cost (first-in, first-out) or
market (net realizable value) and consists of the following:
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Raw materials $1,577 $1,290 $ 378
Work in process 587 499 346
Finished and refurbished goods 1,248 1,669 1,682
------ ------ ------
Inventory, net $3,412 $3,458 $2,406
====== ====== ======
</TABLE>
(h) INVESTMENTS IN AFFILIATES
The Company has an approximate 25% interest in GST Global
Telecommunications, Inc. (GST Global), a corporation traded publicly on
the Vancouver Stock Exchange which conducts telecommunications
operations on a worldwide basis. The carrying value of this investment,
which is included in other assets in the accompanying consolidated
balance sheet, was $593, $1,879 and $3,634 at December 31, 1997,
September 30, 1997 and 1996, respectively.
(i) MINORITY INTEREST
In March 1997, the Company's then wholly-owned subsidiary, NACT
Telecommunications, Inc. (NACT), completed an initial public offering
of its common stock, pursuant to which the Company and NACT sold one
and two million shares, respectively, of NACT's common stock, resulting
in net proceeds of approximately $9,000 and $18,100, respectively. As a
result of the offering, the Company's ownership was reduced to 63%.
Minority interest represents the non-Company owned shareholder interest
in NACT's equity resulting from the 1997 offering.
As discussed in note 13, the Company sold its remaining interest in
NACT in February 1998.
(Continued)
F - 10
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(j) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated on the
straight-line basis over their estimated useful lives, which are as
follows:
Telecommunications networks 20 years
Electronic and related equipment 10 years
Leasehold improvements 10 years
Furniture, office equipment and other 3 - 7 years
Buildings 40 years
Construction, engineering and overhead costs directly related to the
development of the Company's networks are capitalized. The Company
begins depreciating these costs when the networks become commercially
operational. Depreciation expense totaled $6,240, $14,985, $5,569 and
$1,198 for the three-month period ended December 31, 1997 and for the
years ended September 30, 1997, 1996 and 1995, respectively.
(k) GOODWILL
Goodwill is amortized, using the straight-line method, over periods
ranging from five to twenty years. The Company assesses the carrying
amount of goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Measurement of any impairment would include a comparison of estimated
future operating cash flows anticipated to be generated during the
remaining life of the goodwill to the net carrying value. Amortization
charged to operations was $1,054, $4,044, $1,690 and $389 for the
three-month period ended December 31, 1997 and for the years ended
September 30, 1997, 1996 and 1995, respectively.
(l) REVENUE RECOGNITION
Telecommunication services revenue is recorded upon placing of calls or
rendering of other related services. Product revenue is recorded upon
shipment of product and is presented in the accompanying consolidated
statements of operations net of product returns.
Deferred revenue consists of monthly service contract payments received
in advance, warranty payments received in advance and research and
development advances and is included in other current liabilities in
the accompanying consolidated balance sheets. Advance warranty payments
are amortized over the length of warranty on the system sold, which is
typically one year.
(Continued)
F - 11
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(m) NET LOSS PER SHARE
Effective October 1, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share". Accordingly, "basic net loss per share" for the three-month
period ending December 31, 1997 and for all prior periods presented is
computed using the weighted average number of common shares outstanding
during each period. Given the Company's net loss for all periods
presented, the effect of potentially dilutive common share equivalents
are anti-dilutive. Therefore, the weighted average number of common
shares outstanding for the basic and diluted net loss per share
calculations are equal for all periods presented. Net loss is increased
for redeemable preference shares' accretion totaling $3,145 and $2,969
for the three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively.
(n) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital transactions
in the accompanying consolidated financial statements.
(o) CONCENTRATION OF CREDIT RISK
For purposes of segment reporting, the Company is presently operating
100% in the telecommunications industry in the United States and
results of operations are derived from United States operations and
substantially all assets reside in the United States. The Company is
exposed to concentration of credit risk principally from accounts
receivable. The Company's five largest telecommunications services
customers accounted for approximately 16.8%, 20.8%, 46.9% and 26.8% of
the Company's consolidated telecommunications services revenue for the
three-month period ended December 31, 1997 and for the years ended
September 30, 1997, 1996 and 1995, respectively.
(p) 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.
(Continued)
F - 12
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(q) FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, receivables, short-term borrowings and accounts payable
and accrued liabilities approximate fair values due to the short
maturity of those instruments.
The carrying amount of the Company's long-term debt approximates its
fair value. The fair value of the Company's long-term debt was
determined based on quoted market prices for similar issues or on
current rates available to the Company for debt of the same remaining
maturities and similar terms.
Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
(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) ADVERTISING COSTS
The Company expenses advertising costs as incurred.
(t) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for September 30, 1997, 1996 and 1995
to conform with the December 31, 1997 presentation.
(Continued)
F - 13
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(2) ACQUISITIONS
The Company has made the acquisitions set forth below, each of which
was accounted for as a purchase. The consolidated financial statements
include the operating results from the effective date of acquisition.
(a) ACTION TELCOM CO. (ACTION TELCOM)
In the third quarter of 1997, the Company acquired 100% of the
outstanding capital stock of Action Telcom, a Texas company which
provides long distance and ancillary telecommunications services, and
produces software used in the telecommunications industry. The Company
acquired Action Telcom for consideration of 903,000 common shares
valued at $8,161, $1,290 in cash and $2,580 in notes payable. The
purchase agreement provides for an additional payment of up to 150,000
common shares over the next two years, contingent on future market
values of the Company's common shares. Goodwill of $3,863 was recorded
as a result of this acquisition.
(b) PHOENIX FIBER ACCESS, INC. (PHOENIX FIBER)
In the first quarter of 1997, the Company paid $2,000 in cash to
acquire the remaining 50% of Phoenix Fiber, previously 50% owned by the
Company through a joint venture with ICG Telecom Group, Inc. (ICG). In
addition, the Company assumed the repayment of up to $2,000 of
intercompany indebtedness, under certain circumstances, and indemnified
ICG in respect of all indebtedness of Phoenix Fiber to the Company and
third parties, other than certain liabilities of Phoenix Fiber that
were assumed by ICG. Phoenix Fiber is an Arizona company engaged in
providing competitive local exchange services in the Phoenix
metropolitan area.
(c) CALL AMERICA BUSINESS COMMUNICATIONS, CORP. (CALL AMERICA)
In the fourth quarter of 1996, the Company acquired 100% of the
outstanding capital stock of Call America, a California company that
provides long distance and ancillary communications services. The
Company acquired Call America for consideration of 1,313,505 common
shares valued at $14,905. An additional 130,000 common shares have been
placed in escrow and will be issued to the former owners of Call
America in 1998, subject to certain indemnification clauses contained
in the purchase agreement. Additionally, $533 in notes receivable due
from the former owners of Call America will be forgiven if certain
operating milestones are met over the next ten years. Goodwill of
$10,175 was recorded as a result of this acquisition.
(Continued)
F - 14
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) TOTALNET COMMUNICATIONS, INC. (TOTALNET)
In the fourth quarter of 1996, the Company acquired 100% of the
outstanding capital stock of TotalNet, a long distance service
provider. The Company acquired TotalNet for consideration of 703,229
common shares valued at $8,814. Goodwill of $4,774 was recorded as a
result of this acquisition.
(e) GST TELECOM INC. (GST TELECOM)
In a series of transactions between 1994 and 1996, the Company
purchased 100% of the outstanding shares of GST Telecom, which
develops, constructs and operates competitive local exchange networks
and other communications systems. Consideration paid for GST Telecom
consisted of 2,100,000 common shares valued at $15,447, which shares
were paid to Pacwest, LLC (Pacwest), an entity controlled by the Chief
Executive Officer of the Company. Goodwill of $15,330 was recorded as a
result of this acquisition.
(f) OTHERS
In October 1997, the Company purchased the assets of the Guam
operations of Sprint Communications Company L.P. (Sprint) which provide
long distance and ancillary services in Guam. Consideration paid for
this acquisition consisted of $2,000 in cash and $500 in liabilities
for services to be provided to Sprint.
In the third quarter of 1996, the Company purchased from Tomen America,
Inc. (Tomen) the remaining 10% interest in GST Pacific Lightwave, Inc.,
a GST Telecom subsidiary which operates a fiber optic competitive local
exchange network in southern California. The consideration paid for
this acquisition consisted of $1,250 in cash, which was recorded as
goodwill.
During 1996, the Company acquired the assets of Reservations, Inc. dba
Hawaii OnLine (Hawaii On Line), the assets of Texas-Ohio
Communications, Inc. (Texas-Ohio), and 100% of the outstanding capital
stock of Tri-Star Residential Communications, Inc. (Tri-Star). Hawaii
On Line is an Internet service provider; Texas-Ohio is a long distance
service provider; and Tri-Star provides shared tenant services
consisting of long distance, cable television and security service to
tenants of multi-dwelling apartment units. Consideration paid for these
acquisitions consisted of 199,887 common shares valued at $1,862, a
commitment to issue approximately 50,887 common shares valued at $604
over the next year, and $719 of cash. Goodwill of $1,044 was recorded
as a result of these acquisitions.
(Continued)
F - 15
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The pro forma results shown below reflect results of operations as if
the acquisitions described above occurred as of the beginning of each
of the periods presented. Pro forma results for the three-month period
ended December 31, 1997 are not shown as the current period acquisition
was effective October 1, 1997.
Year Year
ended ended
September 30, September 30,
1997 1996
---- ----
(Unaudited)
Revenues $ 118,098 $ 88,079
Net loss (115,419) (70,097)
Net loss per share (4.68) (3.15)
The pro forma results are not necessarily indicative of what actually
would have occurred had the acquisitions been in effect for the entire
periods presented. In addition, they are not intended to be a
projection of future results that may be achieved from the combined
operations.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Telecommunications networks $132,028 $ 95,447 $ 25,551
Electronic and related equipment 68,636 60,050 31,547
Leasehold improvements 21,673 9,201 3,619
Furniture, office equipment and
other 15,089 14,643 8,746
Buildings 3,366 3,366 2,134
Construction in progress 192,888 202,545 63,117
-------- -------- --------
433,680 385,252 134,714
Less accumulated depreciation (26,785) (20,738) (7,139)
-------- --------- --------
$406,895 $364,514 $127,575
======== ========= ========
</TABLE>
Property and equipment includes $192,888, $202,545 and $63,117 of
equipment which had not been placed in service at December 31, 1997 and
September 30, 1997 and 1996, respectively, and accordingly, is not
being depreciated. During the three-month period ended December 31,
1997 and the three years ended September 30, 1997, 1996 and 1995,
$3,726, $15,170, $2,316 and $291 of interest, respectively, was
capitalized as part of telecommunications networks and networks in
progress.
(Continued)
F - 16
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(4) ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed asset purchases $12,157 $11,531 $14,153
Acquisition costs 500 -- 4,213
Carrier costs 98 2,113 4,057
Interest payable 8,096 18,076 430
Payroll and related liabilities 2,721 3,278 1,747
Other 7,297 7,133 2,143
------- ------- -------
Total $30,869 $42,131 $26,743
======= ======= =======
</TABLE>
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Senior secured notes, 13.25%,
due May 1, 2007 $265,000 $265,000 $ --
Note payable to Tomen, LIBOR
plus 3% (9.0% at December 31,
1997) 61,793 69,137 31,771
Note payable to NTFC, LIBOR
plus 3.5% (9.5% at December 31,
1997) 50,000 44,634 --
Note payable to Siemens, LIBOR
plus 3.5% (9.5% at December 31,
1997) 7,889 5,846 --
Senior discount notes, 13.875%,
due December 15, 2005 210,136 203,280 177,760
Convertible senior subordinated
discount notes, 13.875%, due
December 15, 2005 26,133 25,410 22,220
Senior subordinated accrual notes,
12.75%, due November 15, 2007 146,142 -- --
Other 2,920 3,629 5,755
-------- -------- --------
770,013 616,936 237,506
Less current portion of long-term debt 4,579 4,233 4,832
-------- -------- --------
$765,434 $612,703 $232,674
======== ======== ========
</TABLE>
(Continued)
F - 17
<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:
Year ending December 31:
1998 $ 4,579
1999 14,628
2000 19,115
2001 22,242
2002 22,945
Thereafter 686,504
-------
$770,013
=======
(a) SENIOR SECURED NOTES
In the third quarter of 1997, the Company issued $265,000 in Senior
Secured Notes (the Secured Notes) due May 1, 2007. The Secured Notes
bear interest at a rate of 13.25% with semiannual interest payments due
beginning November 1, 1997. Approximately $93,790 of the proceeds were
set aside to fund the first six scheduled interest payments. The
remainder of the net proceeds are restricted to the purchase and
installation of telecommunications equipment. The Secured Notes are
secured by the equipment purchased with the proceeds and are subject to
certain debt covenants.
(b) TOMEN FACILITY
In the first quarter of 1995, the Company entered into a master
financing agreement with Tomen. Under the agreement, Tomen will loan up
to $100,000 to subsidiaries of the Company for development and
construction of network projects. As of December 31, 1997, Tomen had
provided a total of $69,468 in debt financing to the Company's
subsidiaries for construction and operation of its fiber optic networks
in southern California, New Mexico, Arizona and Hawaii. The Tomen
financing is secured by the equipment purchased with the proceeds and
subject to certain debt covenants.
(c) NTFC CAPITAL CORPORATION (NTFC) AGREEMENT
In the first quarter of 1997, the Company entered into a $50,000 loan
and security agreement with NTFC to finance the purchase of certain
equipment from Northern Telecom, Inc. Amounts borrowed under the
agreement bear interest at LIBOR plus 3.5% and will be repaid in twenty
quarterly installments beginning in January 1999. The loan is secured
by the equipment purchased with the proceeds and subject to certain
debt covenants.
(Continued)
F - 18
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(d) SIEMENS TELCOM NETWORKS (SIEMENS) AGREEMENT
In the fourth quarter of 1996, the Company entered into a loan and
security agreement with Siemens. Under the terms of the agreement,
Siemens will loan up to $226,000 to the Company for the purchase and
installation of telecommunications switching and related equipment. At
December 31, 1997, $116,000 was available to the Company. Amounts
borrowed under the agreement initially bear interest at LIBOR plus 4.5%
and are secured by the equipment. Such interest decreases to LIBOR plus
3.5% at the time each initial loan is converted to a term loan, which
conversion occurs at the first calendar quarter following the initial
loan. The Company is committed to purchase a minimum of $16,500 in
equipment over three years. Amounts borrowed under the agreement will
be repaid in twenty-four quarterly installments beginning five quarters
after the initial loan is converted to a term loan. The loan is subject
to certain debt covenants.
(e) SENIOR DISCOUNT NOTES AND CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES
In the first quarter of 1996, the Company issued approximately $160,000
in 13.875% Senior Discount Notes (the Senior Notes) and $20,000 in
13.875% Convertible Senior Subordinated Discount Notes (the Convertible
Notes) maturing on December 15, 2005 (together the Notes). The Notes
were sold at a substantial discount and there will be no accrual of
cash interest prior to December 15, 2000 or payment of interest until
June 15, 2001. The Notes accrete to a total principal amount, due
December 15, 2005, of approximately $351,500 by December 15, 2000. The
Senior Notes rank in right of payment with all unsubordinated
indebtedness of the Company while the Convertible Notes are junior to
all senior Company debt.
Each of the Convertible Notes is convertible at the option of the
holder into common shares. The number of shares to be issued upon
conversion is based on an accreted value on the conversion date divided
by $7.563. In addition, all of the Convertible Notes may be
automatically converted to common shares by the Company if the
Company's common shares sustain certain market value levels for thirty
consecutive trading days.
On or after December 15, 2000, the Notes will be redeemable at the
option of the Company. The Notes are subject to certain debt covenants.
(Continued)
F - 19
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(f) SENIOR SUBORDINATED ACCRUAL NOTES
In November 1997, the Company issued $144,000 in 12.75% Senior
Subordinated Accrual Notes (the Accrual Notes). Cash interest on the
Accrual Notes will not be accrued until November 15, 2002 or paid until
May 15, 2003. The Accrual Notes accrete to a total principal amount,
due November 15, 2007, of $266,885 by November 15, 2002. The Accrual
Notes are subordinated to all senior indebtedness, including the Notes.
The Accrual Notes are redeemable at the option of the Company, in whole
or in part after November 15, 2002. Prior to November 15, 2000, up to
one-third of the aggregate principal amount of the Accrual Notes may be
redeemed by the Company from the proceeds of one or more sales of the
Company's common shares.
The Accrual Notes are subject to certain debt covenants.
(6) REDEEMABLE PREFERENCE SHARES
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value, in one or more series and to
determine the designations, powers, preferences and relative,
participating, optional or other rights thereof, including, without
limitation, the dividend rate (and whether dividends are cumulative),
conversion rights, voting rights, rights and terms of redemption,
redemption price and liquidation preference.
In February 1997, the Company consummated a private placement of
$50,000 of 500 Redeemable Preference Shares. The Redeemable Preference
Shares do not pay dividends in cash, except to the extent such
dividends are paid on Common Shares. In addition, the liquidation,
conversion and redemption prices of the Redeemable Preference Shares
accrete semiannually at a rate of 11.875%.
The Company is required to redeem the Redeemable Preference Shares on
February 28, 2004 (the Mandatory Redemption Date) in cash at a
redemption price of approximately $224,000 per share (the Mandatory
Redemption Price); provided that to the extent the Company is
prohibited from paying such redemption price in cash, the holders of
Redeemable Preference Shares have the option to convert each Redeemable
Preference Share into a number of Common Shares equal to the Mandatory
Redemption Price divided by 95% of the then market price for Common
Shares. In the event the Company is prevented from paying the
redemption price for Redeemable Preference Shares in cash and any
holder of Redeemable Preference Shares does not exercise such
conversion option, the Company has the option of extending the
Mandatory Redemption Date to August 28, 2007. The Company has the
option of redeeming the Redeemable Preference Shares at any time after
February 28, 2000 in cash at a redemption price per Redeemable
Preference Share equal to the number of Common Shares into which such
Redeemable Preference Share is then convertible multiplied by the price
at which such Redeemable Preference Share would become subject to
mandatory conversion.
(Continued)
F - 20
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Redeemable Preference Shares are convertible at the option of the
holders into Common Shares at any time after February 28, 2000 or
earlier upon a change of control of the Company. The holders of
Redeemable Preference Shares have the right to require the Company to
repurchase their shares upon a change of control of the Company after
February 28, 2002; prior to that time, holders have a right to convert
their Redeemable Preference Shares into Common Shares upon a change of
control. Further, the Redeemable Preference Shares are subject to
mandatory conversion into Common Shares if the market price of Common
Shares exceeds $15.925 per share (subject to adjustment) for a
specified period after February 28, 2000.
(7) SHAREHOLDERS' (DEFICIT) EQUITY
(a) COMMITMENT TO ISSUE SHARES
Pursuant to the terms of the purchase agreements discussed in note 2,
the Company is committed to issue approximately 50,887 shares valued at
$604 at various times over the next year.
(b) STOCK-BASED COMPENSATION
The Company has five stock-based compensation plans, which are
described below. The Company follows SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). In accordance with SFAS 123, the
Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, compensation cost is generally
not recognized for options awarded in the 1995 and 1996 Stock Incentive
Plans, the Employee Stock Purchase Plan and fixed stock option awards
under the Senior Operating and Executive Officer Stock Option Plans.
Compensation cost recognized in the statements of operations for the
three-month period ended December 31, 1997 and for the years ended
September 30, 1997 and 1996 totaled $149, $9,747 and $666,
respectively, for performance-based awards. The fair value of each
option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model assuming no dividend yield and the
following weighted average assumptions for grants for the three-month
period ended December 31, 1997 and for the years ended September 30,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Fixed option awards Performance-based option awards Employee Stock Purchase Plan
------------------- ------------------------------- ----------------------------
December 31, September 30, December 31, September 30, December 31, September 30,
------------- ------------- -------------
1997 1997 1996 1997 1997 1996 1997 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Expected volatility 58% 56% 60% - 56% 60% 58% 56% 60%
Risk free interest rate 5.4% 6.3% 6.1% - 6.3% 6.1% 5.3% 5.4% 5.3%
Expected life (in years) 3.5 3.5 3.5 - 5.0 5.0 .5 .5 .5
</TABLE>
(Continued)
F - 21
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The weighted average fair value of stock awards granted under the
various plans are as follows:
<TABLE>
<CAPTION>
Three-month
period ended Year ended Year ended
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed option awards $ 6.17 $ 4.61 $ 4.41
Performance-based option awards - 4.97 5.18
Employee Stock Purchase Plan 1.81 1.81 2.85
</TABLE>
Had compensation cost for the Company's five stock-based compensation
plans been determined pursuant to SFAS 123, the Company's net loss and
net loss per common share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Three-month
period ended Year ended Year ended
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $ (39,593) $ (113,338) $ (60,378)
Pro forma (41,342) (116,214) (61,949)
Net loss per common share,
basic and diluted:
As reported $ (1.39) $ (4.71) $ (3.18)
Pro forma (1.44) (4.82) (3.24)
</TABLE>
Pro forma net loss reflects only options granted since October 1, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior
to September 30, 1995 is not considered.
(Continued)
F - 22
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
FIXED STOCK OPTION AWARDS
Under the 1995 Stock Option Plan (1995 Plan) and the 1996 Stock Option
Plan (1996 Plan), the Company has authorized the issuance of 1,750,000
and 700,000 common shares, respectively. The 1995 Plan and 1996 Plan
provide for the granting of incentive stock options and non-statutory
stock options to employees, officers and employee directors and
consultants at an exercise price no less than 100% of the market value
on the last trading day prior to the date of grant. The options have a
maximum term of five years and become exercisable at such times and in
such installments, for each individual option, as determined by the
Board of Directors; however, no option vests until at least six months
after the date of grant.
In addition, the Company grants fixed option awards under the 1996
Senior Operating Officer Stock Option Plan (Operating Officer Plan).
These options have a term of five years and become exercisable ratably
over a four-year vesting period.
A summary of the status of the Company's fixed stock option awards as
of December 31, 1997 and September 30, 1997, 1996 and 1995 and the
changes during the period and years ended on those dates is presented
below:
<TABLE>
<CAPTION>
December 31, September 30, September 30, September 30,
1997 1997 1996 1995
------------------ -------------------- ----------------- --------------------
Weighted Weighted Weighted Weighted
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 2,924,534 $ 8.62 2,461,205 $ 7.11 1,605,553 $ 5.81 876,500 $ 3.55
Granted 175,000 10.29 1,190,000 9.89 963,373 9.07 1,186,035 6.33
Exercised (158,209) 7.00 (643,016) 5.15 (67,500) 4.33 (442,200) 2.78
Forfeited (51,456) 9.82 (83,655) 8.89 (40,221) 6.54 (14,782) 4.69
----------- ----------- ---------- ----------
Outstanding at
end of period 2,889,869 8.79 2,924,534 8.62 2,461,205 7.11 1,605,553 5.81
========== =========== ========== ==========
Number of options
exercisable at
end of period 793,789 955,933 1,208,908 1,078,600
</TABLE>
(Continued)
F - 23
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------------- -------------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of of shares contractual exercise of shares exercise
exercise prices outstanding life price exercisable price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 3.55-5.00 178,796 1.2 years $ 4.85 97,361 $ 4.92
6.75-7.06 796,277 2.8 years 6.76 543,053 6.75
9.94-12.00 1,914,796 4.4 years 10.01 153,375 10.00
</TABLE>
PERFORMANCE-BASED STOCK OPTION AWARDS
Under the Operating Officer Plan and the 1996 Senior Executive Officer
Stock Option Plan (Executive Plan), the Company grants stock options to
purchase up to 900,000 and 600,000 common shares, respectively, to
selected individuals. Vesting for these performance-based awards is
based upon the achievement of certain Company operating and common
share price milestones. The options have a maximum term of six years.
A summary of the status of the Company's performance-based stock option
awards as of December 31, 1997 and September 30, 1997 and 1996 and the
changes during the period and years ended on those dates is presented
below:
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1997 1996
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 900,000 $ 10.00 600,000 $ 10.00 - $ -
Granted - - 300,000 10.00 600,000 10.00
Exercised - - - - - -
Forfeited - - - - - -
---------- ---------- ---------- -
Outstanding at end of period 900,000 10.00 900,000 10.00 600,000 10.00
========== ========== ==========
</TABLE>
(Continued)
F - 24
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
At December 31, 1997, the exercise price and weighted average remaining
contractual life of outstanding options was $10.00 and 4.3 years,
respectively. 200,000 options were exercisable at December 31, 1997 and
no options were exercisable at September 30, 1997 and 1996.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), the
Company has authorized the issuance of 500,000 common shares which
allows eligible employees of the Company to purchase common shares of
the Company at 85% of the market value on the date of grant. Employees
who own 5% or more of the voting rights of the Company's outstanding
common shares may not participate in the Purchase Plan. Employees
purchased 75,198, 62,993 and 13,558 shares under the purchase plan
during the three-month period ended December 31, 1997 and the years
ended September 30, 1997 and 1996, respectively.
(c) WARRANTS OUTSTANDING
Warrants outstanding and exercisable at December 31, 1997:
Number of
common shares Exercise Exercise
Issuable price expiration date
-------- ----- ---------------
1,000,000 $13.00 February 1998
171,155 $12.96 May 1998
50,000 $10.00 April 1999
75,000 $12.61 September 1999
300,000 $6.75 September 2000
The 246,155 warrants expiring in May 1998 and September 1999 were
granted to Tomen in conjunction with the Tomen financing agreements.
The 50,000 warrants expiring in April 1999 were granted in conjunction
with a private placement of common shares during 1994. The 300,000
warrants expiring in September 2000 were granted to a director of the
Company. The 1,000,000 warrants expiring in February 1998 were granted
in conjunction with a stock offering during fiscal year 1997; 984,650
warrants were exercised subsequent to year-end (see note 13(b)).
(Continued)
F - 25
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(8) INCOME TAXES
The provision for income taxes differs from the amount computed by
applying the Canadian statutory income tax rate to net income before
taxes for the three-month period ended December 31, 1997 and the years
ended September 30, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
December 31, September 30, September 30, September 30,
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed expected income tax
expense (benefit) at Canadian
statutory rate (39)% (39)% (39)% (39)%
Expected state/province income
tax expense (benefit) (4) (4) (4) (6)
Increase (decrease) in valuation
allowance 37 30 21 38
Amortization of goodwill 1 1 1 5
Minority interest - - - (7)
Effect of difference in United
States statutory rate 5 5 5 5
Effect of acquisition of new
subsidiaries - 2 10 1
Non-deductible interest 2 2 2 -
Other - 4 4 4
--- --- -- ---
Income tax expense 2% 1% -% 1%
=== === == ===
</TABLE>
(Continued)
F - 26
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant items comprising the Company's
deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
United States Federal and
state net operating loss
carryforwards $ 47,550 $ 40,303 $ 16,378
Canadian net operating loss
carryforwards 5,001 4,162 3,065
Non-deductible interest 18,365 13,757 4,608
Canadian non-deductible
interest 2,859 1,875 798
Canadian capital loss
carryforward 128 128 128
Other 4,528 3,828 2,063
-------- -------- --------
Total gross deferred
tax assets 78,431 64,053 27,040
Less valuation allowance (67,970) (53,480) (19,429)
-------- -------- --------
Deferred tax liabilities:
Furniture, fixtures and
equipment, due to
differences in depreciation 5,398 4,960 2,110
Capitalized software/
intangibles 5,498 5,956 5,501
-------- -------- --------
Total gross deferred
tax liabilities 10,896 10,916 7,611
-------- -------- --------
Net deferred tax
liabilities $ (435) $ (343) $ --
======== ======== ========
</TABLE>
(Continued)
F - 27
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
The valuation allowance for deferred tax assets as of October 1, 1994
was $2,388. The net change in total valuation allowance for the
three-month period ended December 31, 1997 and for the years ended
September 30, 1997, 1996 and 1995 was an increase of $14,490, $34,051,
$12,695 and $4,346, respectively.
The Company has non-capital losses for income tax purposes of
approximately Canadian $11,114 available to reduce Canadian taxable
income of future years, expiring as follows:
1998 $ 676
1999 2,043
2000 -
2001 1,574
2002 1,877
2003 3,079
2004 1,865
-----
$11,114
=======
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 December 31, 1997, the Company also has a Canadian net
capital loss carryforward of $280. Net capital losses can be carried
forward indefinitely but can only be utilized to offset taxable capital
gain.
The Company has net operating losses for income tax purposes of
approximately $130,426 available to reduce United States taxable income
of future years, expiring as follows:
2006 $ 405
2007 537
2008 2,800
2009 5,020
2010 36,922
2011 64,893
2012 19,849
------
$130,426
========
(Continued)
F - 28
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
For United States income tax purposes, utilization of net operating
losses may be subject to limitation in the event of certain substantial
stock ownership changes having occurred pursuant to IRC Section 382 and
referred to hereinafter as an ownership change. The Company may have
incurred an ownership change under IRC Section 382. This potential
ownership change would limit the utilization of any net operating
losses incurred prior to the change in ownership date. The Company
intends to complete an analysis under IRC Section 382 to determine if
an ownership change has occurred.
(9) LEASES
The Company is obligated under capital lease agreements for equipment
which expire at various dates during the next twenty years. Certain of
these agreements contain clauses which allow the lessor to cancel the
agreement upon twelve-month written notice. However, the Company
believes that the likelihood of such clauses being exercised is remote.
Gross amounts of equipment and related accumulated amortization
recorded under capital leases were as follows:
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equipment $ 27,003 $ 26,769 $ 2,068
Less accumulated amortization (6,408) (4,828) (291)
-------- -------- --------
$ 20,595 $ 21,941 $ 1,777
======== ======== ========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $1,114, $3,385, $1,501 and $866 for the
three-month period ended December 31, 1997 and for the years ended
September 30, 1997, 1996 and 1995, 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)
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 December 31, 1997 are:
Capital Operating
Leases Leases
------ ------
Year ending September 30:
1998 $ 8,400 $ 4,510
1999 3,319 4,013
2000 3,176 3,054
2001 3,097 2,465
2002 2,780 2,317
Thereafter 12,930 9,012
------ -----
Total minimum lease payments 33,702 $25,371
=======
Less amount representing interest
(at rates ranging from 8.7%
to 17.0%) 13,422
------
Net minimum lease payments 20,280
Less current installments of
obligations under capital
leases 6,286
-----
Obligations under capital
leases, excluding
current installments $13,994
=======
(Continued)
F - 30
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(10) COMMITMENTS AND CONTINGENCIES
(a) PENSION AND PROFIT SHARING PLANS
In 1995, the Company adopted a defined contribution 401(k) plan (the
Plan). Employees are eligible to participate in the Plan upon
commencement of service. Participants may defer up to 15% of eligible
compensation. Currently, the Company does not provide matching
contributions for the Plan.
(b) LONG DISTANCE CARRIERS
The Company is party to various contracts with long distance carriers
pursuant to which the Company is committed to minimum service fees. The
average monthly minimum commitments range from $2,300 to $6,100 per
month over the next three years. The Company may be required to pay the
carriers for differences between the commitment amounts and the actual
amounts billed.
(c) LEGAL PROCEEDINGS
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc.
(collectively, "Aerotel") filed a patent infringement suit against NACT
alleging that telephone systems manufactured and sold by NACT
incorporate prepaid calling features which infringe upon a patent
issued to Aerotel in November 1987. The complaint further alleges
defamation and unfair competition by NACT and seeks various damages.
NACT has filed an Answer and Counterclaim denying patent infringement,
committing defamation or unfair competition and seeks judgment that the
Aerotel patent is invalid and that Aerotel has misused its patent in
violation of antitrust laws. On May 3, 1996, NACT served its motion for
summary judgment, which the Court has indicated it will deny such
motion, although the Court has not yet issued its ruling. Aerotel
amended its complaint to include as defendants the Company and GST USA,
Inc. (GST USA). The amended pleadings allege that the Company and GST
USA have infringed the Aerotel patent, aided and abetted infringement
by others, including NACT, and participated in, and aided and abetted
alleged tortious conduct by NACT. The Company and GST USA have served
answers denying all material allegations and intend to defend
vigorously. Pretrial discovery has commenced and is scheduled to be
completed in 1998. The case is not expected to be tried until late 1998
at the earliest. NACT's patent counsel believes that NACT has valid
defenses to the Aerotel claims. If upheld, these defenses would also be
valid for all defendants. An unfavorable decision in this action could
have a material adverse effect on the Company. Based on information
currently available, the Company's management is of the opinion that
there will be no material impact of the Company's financial position,
results of operations, or cash flows as a result of this suit.
Accordingly, no provision for loss has been provided in the
accompanying consolidated financial statements.
(Continued)
F - 31
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
Concurrent with the sale of NACT (see note 13(b)), the Company and NACT
entered into an agreement whereby the Company generally will bear 50%
of any damages, including reasonable attorney fees, losses,
liabilities, claims and assessments, royalties and license fees. Under
the agreement, subsequent to a determination, if any, by a Court that
the Aerotel patent is valid and it has been infringed, the Company's
liability associated with royalties and license fees, refunds and cost
of product replacement or modification is limited to $2,000.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material effect on the Company's consolidated financial position,
results of operations or cash flows.
(d) REPURCHASE AGREEMENT
NACT is guarantor for financing transactions executed under a
repurchase agreement with Zions Credit Corporation (Zions) for a
maximum of $4,169 at December 31, 1997. Zions provides lease financing
to NACT customers on a recourse basis.
(e) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key members of
management. These agreements provide for payments based upon death,
disability and change of control. The agreements also contain covenants
not to compete.
(11) RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
IN THE UNITED STATES AND IN CANADA
These financial statements have been prepared by management in
accordance with generally accepted accounting principles in the United
States (U.S. GAAP). Except for the following, these statements also
conform, in all material respects, with those accounting principles
that are generally accepted in Canada (Canadian GAAP):
o Certain shares held in escrow are excluded from the weighted
average share calculation until their release from escrow
under U.S. GAAP while, under Canadian GAAP, such shares are
included in the weighted average share calculation. As a
result, Canadian GAAP weighted average shares outstanding
exceeds U.S. GAAP weighted average shares outstanding by
172,732, 906,806, 750,000 and 750,000 shares for the three
months ended December 31, 1997 and the years ended September
30, 1997, 1996 and 1995, respectively.
(Continued)
F - 32
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
o Compensation expense associated with performance-based stock
awards totaling $149, $9,747 and $666 for the three-month
period ended December 31, 1997 and for the years ended
September 30, 1997 and 1996, respectively, is included in the
statements of operations for U.S. GAAP purposes while, under
Canadian GAAP, compensation expense for stock awards is not
recognized in the statements of operations. For the year ended
September 30, 1997, compensation expense includes $7,446
recorded in conjunction with the release of 750,000 common
shares held in escrow.
o Accretion of redeemable preference shares totaling $3,145 and
$2,969 for the three-month period ended December 31, 1997 and
for the year ended September 30, 1997, respectively, is
excluded from the statements of operations and included in net
loss per share for U.S. GAAP purposes while, under Canadian
GAAP, such accretion is included in both the statements of
operations and net loss per share.
The Company's results of operations under Canadian GAAP are summarized
as follows:
<TABLE>
<CAPTION>
Three-month
period ended Years ended September 30,
December 31, ---------------------------------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (42,589) $ (106,560) $ (59,712) $ (11,315)
Loss per share $ (1.37) $ (4.16) $ (3.03) $ (0.78)
Weighted average
common and
common equivalent
shares outstanding 30,977,108 25,609,676 19,738,127 14,530,796
</TABLE>
(Continued)
F - 33
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(12) RELATED PARTY TRANSACTIONS
(a) MAGNACOM WIRELESS, LLC (MAGNACOM)
Magnacom, a company 99% owned by Pacwest Network, Inc. (PNI), which is
in turn controlled by the Chief Executive Officer of the Company, and
the Company have entered into a twelve-year reseller agreement (the
Magnacom Reseller Agreement) pursuant to which (i) the Company has been
designated a non-exclusive reseller of PCS telephone services in the
markets in which Magnacom has obtained licenses, and (ii) Magnacom has
agreed to use the Company on an exclusive basis to provide switched
local and long distance services, and other enhanced telecommunications
services, to all of Magnacom's resellers in markets where the Company
has operational networks. Magnacom agreed to sell PCS minutes to the
Company at five cents per minute, subject to downward adjustment to
equal the most favorable rates offered to Magnacom's other resellers
(but in no event less than Magnacom's cost). In connection with the
Magnacom Reseller Agreement, the Company has paid a total of
approximately $14,000 as pre-payments for future PCS services.
In addition, the Company has been granted a conditional option to
acquire up to PNI's entire interest in Magnacom (currently 99%),
conditioned upon Magnacom and the Company entering into an agreement
for the construction and/or operation of Magnacom's facilities. The
condition precedent to such option has not yet been met. 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 and requirements regarding the
ownership of C and F block licenses. Accordingly, until such time as
FCC regulations or administrative action permit the Company to own in
excess of 25% of Magnacom, the option by its terms is limited to a 24%
interest in Magnacom. The Company, Magnacom and PNI are in negotiations
with respect to modifying the option in order to provide, among other
things, that the Company own no more than a 25% interest in Magnacom
upon exercise of such option.
(b) PACWEST NETWORK, INC. (PNI)
The operations of the Company's Hawaiian microwave network require the
use of radio licenses from the FCC. Such licenses are owned by PNI, a
company controlled by the Company's Chief Executive Officer. Under
agreements between the Company and PNI, (1) the Company pays a monthly
fee to PNI to utilize PNI's licenses for its communications traffic and
(2) PNI pays an equal monthly fee to the Company for the right to
utilize the Company's facilities for other communications traffic using
up to 10% of PNI's license capacity.
(Continued)
F - 34
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(c) GST GLOBAL
In a series of transactions during the third and fourth quarters of
1996, the Company acquired 3,600,000 shares of Canadian Programming
Concepts, Inc. (CPC), a Canadian corporation which is publicly traded
on the Vancouver Stock Exchange, for consideration of $3,659. CPC's
name was subsequently changed to GST Global. The Company's shares
constitute approximately 25% of GST Global's total outstanding shares
at December 31, 1997. GST Global owes the Company $714, at December 31,
1997, for reimbursement of expenses made by the Company on behalf of
GST Global.
GST Global is to issue to the Company additional common shares of GST
Global, subject to regulatory approval, in consideration for the
transfer by the Company to GST Global of its rights in and to a
telecommunications project in Mexico.
(d) TOMEN
Under the Tomen facility, Tomen has the right to act as procurement
agent for each network project it finances. The Company has purchased
equipment through Tomen at competitive prices. Additionally, an upfront
fee of 1.50% of the aggregate principal amount of each project loan
advanced and a commitment fee of .50% per annum on the unused portion
of each project loan is payable to Tomen.
Pursuant to the Tomen agreements, Tomen has purchased 1,579,902 shares
of common stock for total cash consideration of $10,400 and holds
warrants to purchase an additional 246,155 shares of common stock at
prices ranging from $12.61 to $12.96 per share. Such warrants expire at
various times between May 1998 and September 1999.
(e) OTHER
The Company paid approximately $104, $2,066, $2,264 and $770 in legal
fees during the three-month period ended December 31, 1997 and the
years ended September 30, 1997, 1996 and 1995, respectively, to a firm
having a member who is also a director of the Company.
Prior to June 1997, the Company's Chief Executive Officer served as a
paid consultant to Tomen. Additionally, Pacwest received a fee equal to
1% of the aggregate debt and equity financing provided by Tomen to the
Company through October 1997. Such fees incurred by the Company totaled
$437, $195 and $221 during the ended September 30, 1997, 1996 and 1995,
respectively.
(Continued)
F - 35
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(In thousands, except per share and share amounts)
(In U.S. Dollars)
(13) SUBSEQUENT EVENTS
(a) SALE OF NACT
In February 1998, the Company completed the sale of its remaining
interest in NACT for net proceeds of $86,545.
(b) EXERCISE OF WARRANTS
In February 1998, warrants to purchase 984,650 common shares were
exercised for net proceeds of $12,800, and warrants to purchase 15,350
common shares expired.
F - 36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GST Telecommunications, Inc.:
Under date of February 25, 1998, we reported on the consolidated balance sheets
of GST Telecommunications, Inc. and subsidiaries as of December 31, 1997,
September 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' (deficit) equity and cash flows for the three-month
period ended December 31, 1997 and each of the years in the three-year period
ended September 30, 1997, which are included in the transition report on Form
10-k for the three months ended December 31, 1997. In connection with our audits
of the aforementioned consolidated financial statements, we also have audited
the related consolidated financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Portland, Oregon
February 25, 1998
S-1
<PAGE>
GST TELECOMMUNICATIONS, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged Written off Balance at
beginning to bad debt against end of
Allowance for doubtful accounts of period expense allowance period
- ------------------------------- --------- ------- --------- ------
<S> <C> <C> <C> <C>
Three months ended December 31, 1997 3,582 1,541 1,167 3,956
Year ended September 30, 1997 1,264 5,737 3,419 3,582
Year ended September 30, 1996 1,402 1,809 1,947 1,264
Year ended September 30, 1995 60 1,354 12 1,402
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT
3(a) Certificate of Incorporation of the Company, as amended to date,
incorporated by reference to Exhibit 3(a) to the Company's Form 10-K
for the fiscal year ended September 30, 1996, as amended (the "1996
Form 10-K").
3(b) By-Laws of the Company as amended to date, incorporated by reference to
Exhibit 3.1 to the Company's Form S-3 (No. 333-38091) (the "Form S-3").
4(a) Senior Notes Indenture dated as of December 19, 1995, by and among GST
USA, Inc., the Company and United States Trust Company of New York,
incorporated by reference to Exhibit 2.3 to the Company's Form 20-F for
the fiscal year ended September 30, 1995 (the "1995 Form 20-F").
4(b) Convertible Notes Indenture dated as of December 19, 1995, by and among
the Company, GST USA, Inc. and United States Trust Company of New York,
incorporated by reference to Exhibit 2.4 to the 1995 Form 20-F.
4(c) Indenture dated as of May 13, 1997, by and among GST Equipment Funding,
Inc., the Company, GST USA, Inc. and United States Trust Company of New
York, incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the period ended June 30, 1997 (the "June 1997 10-Q").
4(d) Indenture dated as of November 19, 1997, by and between the Company and
United States Trust Company of New York, incorporated by reference to
Exhibit 4.1 to the Company's Form S-3 (No. 333- 38301) (the "Debt Form
S-3").
10(a) 1995 Stock Option Plan of the Company, as amended to date; incorporated
by reference to Exhibit 10(a) to the Company Form 10-K for the fiscal
year ended September 30, 1997 (the "1997 Form 10-K").
10(b) 1996 Stock Option Plan of the Company, as amended to date, incorporated
by reference to Exhibit 10(b) to the 1997 Form 10-K. 10(c) 1996
Employee Stock Purchase Plan of the Company, incorporated by reference
to Exhibit 10(c) to the 1997 Form 10-K. 10(d) 1996 Senior Executive
Officer Stock Option Plan of the Company, incorporated by reference to
Exhibit 10(d) to the 1997 Form 10-K. 10(e) 1996 Senior Operating
Officer Stock Option Plan of the Company, incorporated by reference to
Exhibit 10(e) to the 1997 Form 10-K. 10(f) Amended and Restated Credit
Agreement dated as of April 26, 1995, by and between GST Pacific
Lightwave, Inc. and Tomen America Inc., incorporated by reference to
Exhibit 1.2 to the 1995 Form 20-F.
10(g) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
and among GST Equipment Funding, Inc., United States Trust Company of
New York and the holders of the Notes as defined therein, incorporated
by reference to Exhibit 10.4 to the June 1997 Form 10-Q.
10(h) Agreement and Plan of Merger, dated September 27, 1996 (the "Merger
Agreement"), by and among TotalNet Communications Inc. ("TotalNet"),
GST Newco of Texas, Inc. and the Company, incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K dated October 17, 1996 (the
"October Form 8-K")
10(i) Letter dated October 17, 1996 amending the Merger Agreement among the
Company, GST Newco of Texas, Inc., and TotalNet, incorporated by
reference to Exhibit 2.2 to the October Form 8-K
10(j) Amended and Restated Master Agreement dated as of May 24, 1996, by and
among Tomen America Inc., the Company, GST Telecom Inc., GST Pacific
Lightwave, Inc., Pacwest Network L.L.C., Pacwest Network Inc., GST
Tucson Lightwave, Inc. and GST New Mexico Lightwave, Inc., incorporated
by reference to Exhibit 10(l) to the 1996 Form 10-K.
10(k) Amendment No. 2 to GST Telecommunications, Inc. Common Stock Purchase
Agreement dated as of May 24, 1996, by and among the Company, Tomen
America Inc. and Tomen Corporation, incorporated by reference to
Exhibit 10(m) to the 1996 Form 10-K.
10(l) Credit Agreement dated as of May 24, 1996, by and between GST New
Mexico Lightwave, Inc. and TM Communications LLC, incorporated by
reference to Exhibit 10(n) to the 1996 Form 10-K.
10(m) Credit Agreement dated as of May 24, 1996, by and between GST Tucson
Lightwave, Inc. and TM Communications LLC, incorporated by reference to
Exhibit 10(o) to the 1996 Form 10-K.
<PAGE>
10(n) Amended and Restated Consulting Agreement dated as of September 1,
1995, by and between Sunwest Ventures, Inc. and GST USA, Inc. and GST
Telecom, incorporated by reference to Exhibit 10(p) to the 1996 Form
10-K.
10(o) Personal Services Agreement dated as of October 1, 1995, by and between
GST USA, Inc. and GST Telecom Inc. and Stephen Irwin, incorporated by
reference to Exhibit 10(q) to the 1996 Form 10-K.
10(p) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and John Warta,
incorporated by reference to Exhibit 10(r) to the 1996 Form 10-K.
10(q) Restated and Amended Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Robert H.
Hanson, incorporated by reference to Exhibit 10(s) to the 1996 Form
10-K.
10(r) Amended and Restated Employment Agreement dated as of September 1,
1995, by and between GST USA, Inc. and GST Telecom Inc. and Clifford V.
Sander, incorporated by reference to Exhibit 10(t) to the 1996 Form
10-K.
10(s) Employment Agreement dated March 11, 1997, by and between GST USA, Inc.
and Joseph Basile, Jr, incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the period ended March 31, 1997 (the "March
1997 10-Q").
10(t) Employment Agreement dated February 10, 1997, by and between GST USA,
Inc. and GST Telecom Inc. and Daniel L. Trampush, incorporated by
reference to Exhibit 10.2 to the March 1997 Form 10-Q.
10(u) Reseller Agreement dated as of October 30, 1996, by and between
Magnacom Wireless, L.L.C., and GST Telecom Inc., incorporated by
reference to Exhibit 10(z) to the 1996 Form 10-K.
10(v) Agreement and Plan of Merger dated as of September 26, 1996 by and
among Call America Business Communications Corporation, Call America
Business Communications of Fresno, Inc., Call America Business
Communications of Bakersfield, Inc., the shareholders of such
companies, GST Newco of California, Inc., and the Company, incorporated
by reference to Exhibit 10(u) to the 1996 Form 10-K.
10(w) Agreement and Plan of Merger dated as of May 31, 1997, by and among
Action Telcom Co., Britt E. Bilberry, Timothy Harding Bilberry, Paul S
Bilberry, GST Action Telecom, Inc. and the Company, incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K dated May 31, 1997.
10(x) Equipment Loan and Security Agreement dated December 19, 1996 by and
between NTFC Capital Corporation and GST Equipco, incorporated by
reference to Exhibit 10(v) to the 1996 Form 10-K.
10(y) Loan and Security Agreement dated as of September 4, 1996 by and
between Siemens Stromberg-Carlson ("Siemens") and GST Switchco, Inc.
("GST Switchco"), incorporated by reference to Exhibit 10(d) to the
Company's Form 10-Q for the period ended December 31, 1996 (the
"December 1996 Form 10-Q").
10(z) Unconditional Continuing Guaranty dated as of September 4, 1996 by and
between Siemens and GST USA, Inc., incorporated by reference to Exhibit
10(e) to the December 1996 Form 10-Q.
10(aa) Unconditional Limited Guaranty Agreement dated as of December 19, 1996
made by GST USA, Inc., in favor of NTFC Capital Corporation,
incorporated by reference to Exhibit 10(f) to the December 1996 Form
10-Q.
10(bb) Securities Purchase Agreement, dated as of February 28, 1997, between
the Company and Ocean Horizon SRL, incorporated by reference to Exhibit
4.1 to the Company's Form 8-K dated February 28, 1997 (the "February
Form 8-K").
10(cc) Securityholders Agreement, dated as of February 28, 1997, between the
Registrant and Ocean Horizon SRL, incorporated by reference to Exhibit
4.2 to the Company's February Form 8-K.
10(dd) Credit Agreement dated as of September 30, 1997 by and between GST
Telecom Hawaii, Inc. and TM Communications Hawaii LLC, incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K dated September 30,
1997 (the "September 8-K").
10(ee) Service Agreement dated as of September 30, 1997 by and between Pacwest
Network, Inc. and GST Telecom Hawaii, Inc, incorporated by reference to
Exhibit 99.2 to the September 8-K.
10(ff) Management Agreement dated as of September 30, 1997 by and between
Pacwest Network, Inc. and GST Telecom Hawaii, Inc., incorporated by
reference to Exhibit 99.3 to the September 8-K.
10(gg) Agreement dated as of September 30, 1997 by and among GST Telecom
Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc., incorporated
by reference to Exhibit 99.4 to the September 8-K.
<PAGE>
10(hh) Stock Purchase Agreement dated December 31, 1997 by and among GST
Telecommunications, Inc., GST USA, Inc. and World Access, Inc.,
incorporated by reference to Exhibit 99.2 to the Company's Form 8-K
dated January 6, 1998.
*10(ii) 1997 Stock Option Plan of the Company, as amended to date.
*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.
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* Filed herewith.
As Amended Through March 4, 1998
GST TELECOMMUNICATIONS, INC.
1997 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
This 1997 Stock Option Plan (the "Plan") is intended as an
incentive, to retain in the employ of and as consultants and advisors to GST
TELECOMMUNICATIONS, INC., a Canadian corporation with its principal office at
4001 Main Street, Vancouver, Washington 98663 (the "Company") and any Subsidiary
of the Company, within the meaning of Section 424(f) of the United States
Internal Revenue Code of 1986, as amended (the "Code"), persons of training,
experience and ability, to attract new employees, directors, advisors and
consultants whose services are considered valuable, to encourage the sense of
proprietorship and to stimulate the active interest of such persons in the
development and financial success of the Company and its Subsidiaries.
It is further intended that certain options granted pursuant to
the Plan shall constitute incentive stock options within the meaning of Section
422 of the Code (the "Incentive Options") while certain other options granted
pursuant to the Plan shall be nonqualified stock options (the "Nonqualified
Options"). Incentive Options and Nonqualified Options are hereinafter referred
to collectively as "Options."
The Company intends that the Plan meet the requirements of Rule
16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and that transactions of the type specified in
subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and directors of
the Company pursuant to the Plan will be exempt from the operation of Section
16(b) of the Exchange Act. Further, the Plan is intended to satisfy the
performance-based compensation exception to the limitation on the Company's tax
deductions imposed by Section 162(m) of the Code. In all cases, the terms,
provisions, conditions and limitations of the Plan shall be construed and
interpreted consistent with the Company's intent as stated in this Section 1.
<PAGE>
2. ADMINISTRATION OF THE PLAN.
The Board of Directors of the Company (the "Board") shall appoint
and maintain as administrator of the Plan a Committee (the "Committee")
consisting of two or more directors that are Non- Employee Directors (as such
term is defined in Rule 16b-3) and "Outside Directors" (as such term is defined
in Section 162(m) of the Code), which shall serve at the pleasure of the Board.
The Committee, subject to Sections 3 and 5 hereof, shall have full power and
authority to designate recipients of Options, to determine the terms and
conditions of respective Option agreements (which need not be identical) and to
interpret the provisions and supervise the administration of the Plan. The
Committee shall have the authority, without limitation, to designate which
Options granted under the Plan shall be Incentive Options and which shall be
Nonqualified Options. To the extent any Option does not qualify as an Incentive
Option, it shall constitute a separate Nonqualified Option.
Subject to the provisions of the Plan, the Committee shall
interpret the Plan and all Options granted under the Plan, shall make such rules
as it deems necessary for the proper administration of the Plan, shall make all
other determinations necessary or advisable for the administration of the Plan
and shall correct any defects or supply any omission or reconcile any
inconsistency in the Plan or in any Options granted under the Plan in the manner
and to the extent that the Committee deems desirable to carry into effect the
Plan or any Options. The act or determination of a majority of the Committee
shall be the act or determination of the Committee and any decision reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority at a meeting duly held. Subject
to the provisions of the Plan, any action taken or determination made by the
Committee pursuant to this and the other Sections of the Plan shall be
conclusive on all parties.
In the event that for any reason the Committee is unable to act or
if the Committee at the time of any grant, award or other acquisition under the
Plan of Options or Stock (as hereinafter defined) does not consist of two or
more Non-Employee Directors, or if there shall be no such Committee, then the
Plan shall be administered by the Board and any such grant, award or other
acquisition may be approved or ratified in any other manner contemplated by
subparagraph (d) of Rule 16b-3; PROVIDED, HOWEVER, that options granted to the
Company's Chief Executive Officer or to any of the Company's other four most
highly compensation officers that are intended to qualify as performance-based
compensation under Section 162(m) of the Code may only be granted by the
Committee.
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<PAGE>
3. DESIGNATION OF OPTIONEES.
The persons eligible for participation in the Plan as recipients
of Options (the "Optionees") shall include employees, officers and directors of,
and consultants and advisors to, the Company or any Subsidiary; provided that
Incentive Options may only be granted to employees of the Company and the
Subsidiaries. In selecting Optionees, and in determining the number of shares to
be covered by each Option granted to Optionees, the Committee may consider the
office or position held by the Optionee or the Optionee's relationship to the
Company, the Optionee's degree of responsibility for and contribution to the
growth and success of the Company or any Subsidiary, the Optionee's length of
service, age, promotions, potential and any other factors that the Committee may
consider relevant. An Optionee who has been granted an Option hereunder may be
granted an additional Option or Options, if the Committee shall so determine.
4. STOCK RESERVED FOR THE PLAN.
Subject to adjustment as provided in Section 7 hereof, a total of
1,000,000 shares of the Company's Common Shares (the "Stock") shall be subject
to the Plan. The maximum number of shares of Stock that may be subject to
options granted under the Plan to any individual in any calendar year shall not
exceed 200,000, and the method of counting such shares shall conform to any
requirements applicable to performance-based compensation under Section 162(m)
of the Code. The shares of Stock subject to the Plan shall consist of unissued
shares or previously issued shares held by any Subsidiary of the Company, and
such amount of shares of Stock shall be and is hereby reserved for such purpose.
Any of such shares of Stock that may remain unsold and that are not subject to
outstanding Options at the termination of the Plan shall cease to be reserved
for the purposes of the Plan, but until termination of the Plan the Company
shall at all times reserve a sufficient number of shares of Stock to meet the
requirements of the Plan. Should any Option expire or be cancelled prior to its
exercise in full or should the number of shares of Stock to be delivered upon
the exercise in full of an Option be reduced for any reason, the shares of Stock
theretofore subject to such Option may be subject to future Options under the
Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Options granted under the Plan shall be subject to the following
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) OPTION PRICE. The purchase price of each share of
Stock purchasable under an Option shall be determined by the Committee at the
time of grant, but shall not be less than 100% of the Fair Market Value (as
defined below) of such share of Stock on the last trading day prior to the date
the Option is granted;
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<PAGE>
PROVIDED, HOWEVER, that with respect to an Optionee who, at the time an
Incentive Option is granted, owns (within the meaning of Section 424(d) of the
Code) more than 10% of the total combined voting power of all classes of stock
of the Company or of any Subsidiary, the purchase price per share of Stock shall
be at least 110% of the Fair Market Value per share of Stock on the last trading
day prior to the date of grant. The exercise price for each Option shall be
subject to adjustment as provided in Section 7 below. Fair Market Value means
the closing price of publicly traded shares of Stock on the principal United
States securities exchange on which shares of Stock are listed (if the shares of
Stock are so listed), or on the NASDAQ Stock Market (if the shares of Stock are
regularly quoted on the NASDAQ Stock Market), or, if not so listed or regularly
quoted, the mean between the closing bid and asked prices of publicly traded
shares of Stock in the over-the-counter market, or, if such bid and asked prices
shall not be available, as reported by any nationally recognized quotation
service selected by the Company, or as determined by the Committee in a manner
consistent with the provisions of the Code. Anything in this Section 5(a) to the
contrary notwithstanding, in no event shall the purchase price of a share of
Stock be less than the minimum price permitted under rules and policies of the
American Stock Exchange, the Toronto Stock Exchange or the Vancouver Stock
Exchange, so long as the Common Shares are listed on any such exchange.
(b) OPTION TERM. The term of each Option shall be
fixed by the Committee, but no Option shall be exercisable more than five years
after the date such Option is granted.
(c) EXERCISABILITY. Subject to Section 5(j) hereof,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at the time of grant.
(d) METHOD OF EXERCISE. Options to the extent then
exercisable may be exercised in whole or in part at any time during the option
period, by giving written notice to the Company specifying the number of shares
of Stock to be purchased, accompanied by payment in full of the purchase price,
in cash, by check or such other instrument as may be acceptable to the
Committee. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part may also be made in the form of Stock owned by
the Optionee (based on the Fair Market Value of the Stock on the trading day
before the Option is exercised). An Optionee shall have the right to dividends
and other rights of a stockholder with respect to shares of Stock purchased upon
exercise of an Option after (i) the Optionee has given written notice of
exercise and has paid in full for such shares and (ii) becomes a stockholder of
record with respect thereto.
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<PAGE>
(e) NON-TRANSFERABILITY OF OPTIONS. Options are not transferable
and may be exercised solely by the Optionee during his lifetime or after his
death by the person or persons entitled thereto under his will or the laws of
descent and distribution. Any attempt to transfer, assign, pledge or otherwise
dispose of, or to subject to execution, attachment or similar process, any
Option contrary to the provisions hereof shall be void and ineffective and shall
give no right to the purported transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined
by the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised, to the extent then exercisable (or on such accelerated
basis as the Committee shall determine at or after grant), by the legal
representative of the estate or by the legatee of the Optionee under the will of
the Optionee, for a period of one year after the date of such death or until the
expiration of the stated term of such Option as provided under the Plan,
whichever period is shorter.
(g) TERMINATION BY REASON OF DISABILITY. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of total
and permanent disability, any Option held by such Optionee may thereafter be
exercised, to the extent it was exercisable at the time of termination due to
Disability (or on such accelerated basis as the Committee shall determine at or
after grant), but may not be exercised after 90 days after the date of such
termination of employment or service or the expiration of the stated term of
such Option, whichever period is shorter; provided, however, that, if the
Optionee dies within such 90 day period, any unexercised Option held by such
Optionee shall thereafter be exercisable to the extent to which it was
exercisable at the time of death for a period of one year after the date of such
death or for the stated term of such Option, whichever period is shorter.
(h) TERMINATION BY REASON OF RETIREMENT. Unless
otherwise determined by the Committee at grant, if any Optionee's employment
with or service to the Company or any Subsidiary terminates by reason of Normal
or Early Retirement (as such terms are defined below), any Option held by such
Optionee may thereafter be exercised to the extent it was exercisable at the
time of such Retirement (or on such accelerated basis as the Committee shall
determine at or after grant), but may not be exercised after 90 days after the
date of such termination of employment or service or the expiration of the
stated term of such Option, whichever period is shorter; provided, however,
that, if the Optionee dies within such 90 day period, any unexercised Option
held by such Optionee shall thereafter be exercisable, to the extent to which it
was exercisable at the time of death, for a period of one year after
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<PAGE>
the date of such death or for the stated term of such Option, whichever period
is shorter.
For purposes of this paragraph (h), Normal Retirement shall mean
retirement from active employment with the Company or any Subsidiary on or after
the normal retirement date specified in the applicable Company or Subsidiary
pension plan or if no such pension plan, age 65. Early Retirement shall mean
retirement from active employment with the Company or any Subsidiary pursuant to
the early retirement provisions of the applicable Company or Subsidiary pension
plan or if no such pension plan, age 55.
(i) OTHER TERMINATION. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with or service to the
Company or any Subsidiary terminates for any reason other than death, Disability
or Normal or Early Retirement, the Option shall thereupon terminate, except that
the portion of any Option that was exercisable on the date of such termination
of employment may be exercised for the lesser of 90 days after the date of
termination or the balance of such Option's term if the Optionee's employment or
service with the Company or any Subsidiary is terminated by the Company or such
Subsidiary without cause (the determination as to whether termination was for
cause to be made by the Committee). The transfer of an Optionee from the employ
of the Company to a Subsidiary, or vice versa, or from one Subsidiary to
another, shall not be deemed to constitute a termination of employment for
purposes of the Plan.
(j) LIMIT ON VALUE OF INCENTIVE OPTION. The aggregate
Fair Market Value, determined as of the date the Incentive Option is granted, of
Stock for which Incentive Options are exercisable for the first time by any
Optionee during any calendar year under the Plan (and/or any other stock option
plans of the Company or any Subsidiary) shall not exceed $100,000.
(k) TRANSFER OF INCENTIVE OPTION SHARES. The stock
option agreement evidencing any Incentive Options granted under this Plan shall
provide that if the Optionee makes a disposition, within the meaning of Section
424(c) of the Code and regulations promulgated thereunder, of any share or
shares of Stock issued to him upon exercise of an Incentive Option granted under
the Plan within the two-year period commencing on the day after the date of the
grant of such Incentive Option or within a one-year period commencing on the day
after the date of transfer of the share or shares to him pursuant to the
exercise of such Incentive Option, he shall, within 10 days after such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of United States federal income tax withholding required by law.
(l) LIMITATION ON OPTIONS HELD BY ONE PERSON. The
aggregate number of shares of Stock subject to options held by any
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<PAGE>
one person shall not exceed that number of shares as equals 5% of the
outstanding shares of the Company.
(m) LIMITATION ON OPTIONS GRANTED TO INSIDERS. No
Option may be granted under the Plan to an insider (as such term is defined in
the company manual of the Toronto Stock Exchange) if such grant would cause the
Company to: (i) reserve for issuance to insiders such number of Common Shares of
the Company as would exceed 10% of the outstanding issue of the Company; (ii)
issue to insiders, within a one-year period, such number of Common Shares of the
Company as would exceed 10% of the outstanding issue of the Company; or (iii)
issue to any one insider and such insider's associates (as such term is defined
in the company manual of the Toronto Stock Exchange), within a one year period,
such number of Common Shares as would exceed 5% of the outstanding issue of the
Company.
6. TERM OF PLAN.
No Option shall be granted pursuant to the Plan on or after
December 16, 2007, but Options theretofore granted may extend beyond that date.
7. CAPITAL CHANGE OF THE COMPANY.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the Plan
and in the number and option price of shares subject to outstanding Options
granted under the Plan, to the end that after such event each Optionee's
proportionate interest shall be maintained as immediately before the occurrence
of such event.
8. PURCHASE FOR INVESTMENT.
Unless the Options and shares covered by the Plan have been
registered under the United States Securities Act of 1933, as amended (the
"Securities Act"), or the Company has determined that such registration is
unnecessary, each person exercising an Option under the Plan may be required by
the Company to give a representation in writing that he is acquiring the shares
for his own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof.
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<PAGE>
9. TAXES.
The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options granted under the
Plan with respect to the withholding of any United States or Canadian taxes or
any other tax matters.
10. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on December 16, 1997, provided however
that the Plan shall subsequently be approved by majority vote of the Company's
shareholders not later than December 15, 1998.
11. AMENDMENT AND TERMINATION.
The Board may amend, suspend, or terminate the Plan, except that
no amendment shall be made that would impair the rights of any Optionee under
any Option theretofore granted without his consent, and except that no amendment
shall be made which, without the approval of the shareholders of the Company
would:
(a) materially increase the number of shares that may
be issued under the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to the
Optionees under the Plan;
(c) materially modify the requirements as to
eligibility for participation in the Plan;
(d) decrease the exercise price of an Incentive
Option to less than 100% of the Fair Market Value per share of Stock on
the last trading day prior to the date of grant thereof; or
(e) extend the term of any Option beyond that
provided for in Section 5(b).
The Committee may amend the terms of any Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Optionee without his consent. The Committee may also substitute new Options
for previously granted Options, including options granted under other plans
applicable to the participant and previously granted Options having higher
option prices, upon such terms as the Committee may deem appropriate.
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<PAGE>
12. GOVERNMENT REGULATIONS.
The Plan, and the grant and exercise of Options hereunder, and the
obligation of the Company to sell and deliver shares under such Options, shall
be subject to all applicable laws, rules and regulations, and to such approvals
by any governmental agencies or national securities exchanges (including the
American Stock Exchange, the Toronto Stock Exchange or the Vancouver Stock
Exchange, so long as the Common Shares are listed on any such exchange) as may
be required.
13. GENERAL PROVISIONS.
(a) CERTIFICATES. All certificates for shares of
Stock delivered under the Plan shall be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission, or
other securities commission having jurisdiction, any applicable Federal,
provincial or state securities law, any stock exchange upon which the Stock is
then listed and the Committee may cause a legend or legends to be placed on any
such certificates to make appropriate reference to such restrictions.
(b) EMPLOYMENT MATTERS. The adoption of the Plan
shall not confer upon any Optionee of the Company or any Subsidiary any right to
continued employment or, in the case of an Optionee who is a director, continued
service as a director, with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or any Subsidiary to
terminate the employment of any of its employees, the service of any of its
directors or the retention of any of its consultants or advisors at any time.
(c) LIMITATION OF LIABILITY. No member of the Board
or the Committee, or any officer or employee of the Company acting on behalf of
the Board or the Committee, shall be personally liable for any action,
determination or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board or the Committee and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted by
law, be fully indemnified and protected by the Company in respect of any such
action, determination or interpretation.
(d) REGISTRATION OF STOCK. Notwithstanding any other
provision in the Plan, no Option may be exercised unless and until the Stock to
be issued upon the exercise thereof has been registered under the Securities Act
and applicable state securities laws, or are, in the opinion of counsel to the
Company, exempt from such registration in the United States or exempt from the
prospectus and registration requirements under applicable provincial
legislation. The Company shall not be under any
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<PAGE>
obligation to register under applicable federal or state securities laws any
Stock to be issued upon the exercise of an Option granted hereunder, or to
comply with an appropriate exemption from registration under such laws or the
laws of any province in order to permit the exercise of an Option and the
issuance and sale of the Stock subject to such Option however, the Company may
in its sole discretion register such Stock at such time as the Company shall
determine. If the Company chooses to comply with such an exemption from
registration, the Stock issued under the Plan may, at the direction of the
Committee, bear an appropriate restrictive legend restricting the transfer or
pledge of the Stock represented thereby, and the Committee may also give
appropriate stop transfer instructions to the Company's transfer agents.
GST TELECOMMUNICATIONS, INC.
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GST TELECOMMUNICATIONS,INC.
SIGNIFICANT SUBSIDIARIES AS OF 12/31/97
GST USA, Inc., a Delaware corporation.
GST Telecom Inc., a Delaware corporation.
GST Equipment Funding, Inc., a Delaware corporation.
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST Telecommunications, Inc.:
We consent to incorporation by reference in the Registration Statements (Nos.
33-94072, 333-07237) on Forms S-8 (Nos.33-95324, 33-94096 and 333-1538) on Forms
F-3 and (Nos. 333-15699, 333-16141, 333-32137, 333-21729, 333-19339 and
333-45013) on Forms S-3 of GST Telecommunications, Inc. of our report dated
February 25, 1998 relating to the consolidated balance sheets of GST
Telecommunications, Inc. and subsidiaries as of December 31, 1997, September 30,
1997 and 1996, and the related consolidated statements of operations,
shareholders' (deficit) equity, and cash flows and related schedule for the
three-month period ended December 31, 1997 and each of the years in the
three-year period ended September 30, 1997, which reports appear in the December
31, 1997 transition report on Form 10K of GST Telecommunications, Inc.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Portland, Oregon
March 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-K for the three month transition period ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<PERIOD-START> OCT-01-1997
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 199,053,691
<SECURITIES> 39,349,572
<RECEIVABLES> 27,225,716
<ALLOWANCES> (3,956,086)
<INVENTORY> 3,412,301
<CURRENT-ASSETS> 282,266,357
<PP&E> 433,679,208
<DEPRECIATION> 26,784,118
<TOTAL-ASSETS> 898,173,535
<CURRENT-LIABILITIES> 57,525,781
<BONDS> 647,410,237
<COMMON> 221,104,832
54,634,707
0
<OTHER-SE> 604,288
<TOTAL-LIABILITY-AND-EQUITY> 898,173,535
<SALES> 36,257,609
<TOTAL-REVENUES> 36,257,609
<CGS> 22,529,142
<TOTAL-COSTS> 35,583,839
<OTHER-EXPENSES> (2,059,593)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,948,174
<INCOME-PRETAX> (38,743,952)
<INCOME-TAX> 849,644
<INCOME-CONTINUING> (39,593,596)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,593,596)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
