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As filed with the Securities and Exchange Commission on June 29, 1999
Registration No. 333-60645
Registration No. 333-60645-01
Registration No. 333-60645-02
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO NOTE EXCHANGE OFFER ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GST NETWORK FUNDING, INC.
GST USA, INC.
GST TELECOMMUNICATIONS, INC.
(Exact name of Registrants as specified in their charters)
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DELAWARE 4813 13-4001870
DELAWARE (Primary Standard Industrial 83-0310464
CANADA Classification Code Number) NOT APPLICABLE
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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GST NETWORK FUNDING, INC.
GST USA, INC.
GST TELECOMMUNICATIONS, INC.
4001 MAIN STREET
VANCOUVER, WASHINGTON 98663
(360) 356-7100
(Address and telephone number of registrants' principal executive offices)
DANIEL L. TRAMPUSH
GST NETWORK FUNDING, INC.
GST USA, INC.
GST TELECOMMUNICATIONS, INC.
CHIEF FINANCIAL OFFICER
4001 MAIN STREET
VANCOUVER, WASHINGTON 98663
TELEPHONE: (360) 356-7100
FACSIMILE: (360) 356-7150
(Name, address and telephone number of agent for service for registrants)
Copy to:
J. JEFFREY MAYHOOK
GST NETWORK FUNDING, INC.
GST USA, INC.
GST TELECOMMUNICATIONS, INC.
CORPORATE COUNSEL
4001 MAIN STREET
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VANCOUVER, WASHINGTON 98663
TELEPHONE: (360) 356-7100
FACSIMILE: (360) 356-7163
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. / /
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
__________
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO BUY NOR SHALL THERE
BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
DATED June 29, 1999
OFFER TO EXCHANGE
10-1/2% SENIOR SECURED DISCOUNT EXCHANGE NOTES DUE 2008
FOR
ALL OUTSTANDING
10-1/2% SENIOR SECURED DISCOUNT NOTES DUE 2008
($329,279,167 MILLION AGGREGATE ACCRETED VALUE
OUTSTANDING AT MARCH 31, 1999)
OF
GST NETWORK FUNDING, INC.
WHICH, UNDER CERTAIN CIRCUMSTANCES, MAY BE ASSUMED BY GST USA, INC. AND
GUARANTEED BY GST TELECOMMUNICATIONS, INC.
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON __________ __, 1999, UNLESS EXTENDED
______________
SEE "RISK FACTORS" IMMEDIATELY FOLLOWING THE PROSPECTUS SUMMARY FOR A
DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH
THE EXCHANGE OFFER AND AN INVESTMENT IN THE NEW NOTES.
______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
______________
THE DATE OF THIS PROSPECTUS IS _____, 1999
(Continued on next page)
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(Cover page continued)
GST Network Funding, Inc., a Delaware corporation ("GST Network"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (the Letter of Transmittal
and together with this Prospectus, the "Exchange Offer"), to exchange $1,000
principal amount at maturity of its 10-1/2% Senior Secured Discount Exchange
Notes Due 2008 (the "New Notes") for each $1,000 principal amount at maturity of
its outstanding 10-1/2% Senior Secured Discount Notes Due 2008 (the "Old
Notes"). The offer and sale of the New Notes are being registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to the
Registration Statement (as defined herein) of which this Prospectus constitutes
a part. As of March 31, 1999, $329.3 million Accreted Value of the Old Notes was
outstanding. The Old Notes were originally issued at a discount price of $599.99
per Old Note. The Exchange Offer is being made pursuant to the terms of the
registration rights agreement (the "Registration Rights Agreement") dated May 4,
1998, by and among GST Network, GST USA, Inc., a Delaware corporation ("GST
USA"), GST Telecommunications, Inc., a federally chartered Canadian corporation
("GST"), and Morgan Stanley & Co. Incorporated ("Morgan Stanley"), Bear, Stearns
& Co. Inc. ("Bear Stearns"), Credit Suisse First Boston Corporation ("Credit
Suisse First Boston") and SBC Warburg Dillon Read Inc. ("Warburg Dillon Read"
and together with Morgan Stanley, Bear Stearns and Credit Suisse First Boston,
the "Placement Agents") as Placement Agents, pursuant to the terms of the
Placement Agreement dated April 29, 1998, by and among GST Network, GST and the
Placement Agents. The New Notes and the Old Notes are collectively referred to
herein as the "Notes." As used herein, the term "Holder" means a holder of the
Notes.
THE NOTES ARE SENIOR, SECURED OBLIGATIONS OF GST NETWORK, AND WILL BE
UNCONDITIONALLY AND IRREVOCABLY ASSUMED BY GST USA AND GUARANTEED BY GST, ON MAY
1, 2003, OR EARLIER IF PERMITTED UNDER THE TERMS OF GST USA'S AND GST'S
OUTSTANDING INDEBTEDNESS. Neither GST USA will be liable on, nor will GST
guarantee the Notes until they are assumed by GST USA. There is a substantial
risk that GST USA may be unable to assume the Notes by May 1, 2003. See "Risk
Factors -- Possible Inability of GST USA to Assume, GST to Guarantee and GST
Network to Redeem the Notes."
If and when the Notes are assumed by GST USA, the Notes will be senior,
secured indebtedness of GST USA and GST USA's obligations under the Notes will
be fully and unconditionally guaranteed on an unsubordinated basis by GST (the
"Note Guarantee"). The Note Guarantee will be senior, unsecured indebtedness of
GST. At March 31, 1999, GST Network had no outstanding borrowings other than the
Notes. GST Network is a wholly-owned, special purpose finance subsidiary of GST
USA, and GST USA and GST are each holding companies. GST USA is a wholly-owned
subsidiary of GST that owns, directly or indirectly, the capital stock of all
of GST's operating subsidiaries.
GST Network will accept for exchange any and all Old Notes that are
validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time,
on the date the Exchange Offer expires, which will be __________ __, 1999 [20
BUSINESS DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER], unless the Exchange
Offer is extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any aggregate minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
certain conditions, which may be waived by GST Network, and to the terms and
provisions of the Registration Rights Agreement. Old Notes may be tendered only
in denominations of $1,000 aggregate principal amount at maturity and integral
multiples thereof. GST Network has agreed to pay the expenses of the Exchange
Offer. See "The Exchange Offer."
Any waiver, extension or termination of the Exchange Offer will be
publicly announced by GST Network through a release to the Dow Jones News
Service and as otherwise required by applicable law or regulations.
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The Old Notes were issued in a private placement (the "May Offering")
under an indenture dated as of May 4, 1998, by and among GST Network, GST, GST
USA and United States Trust Company of New York (in such capacity, the
"Trustee") (the "Indenture"). The New Notes will be obligations of GST Network
(until such time as they may be assumed by GST USA) and are entitled to the
benefits of the Indenture. The Indenture provides that GST Network must use all
of the net proceeds of the May Offering (in addition to any cash on hand) to
purchase United States government securities (the "Pledged Securities") and must
pledge the Pledged Securities to the Trustee for the benefit of the Holders.
In addition, in consideration for GST Network facilitating the purchase
of GST USA's telecommunications equipment with the proceeds of the May Offering,
GST USA has agreed to reimburse GST Network for any fees or expenses incurred by
GST Network in connection therewith and to pay GST Network a commitment fee. See
"Prospectus Summary -- Summary Description of the New Notes -- Security." Such
commitment fee shall be paid semiannually, in arrears, on each May 1 and
November 1, commencing November 1, 1998, by GST USA issuing to GST Network
promissory notes (the "Fee Notes") guaranteed by GST.
The Notes are secured by a first priority security interest in the
Pledged Securities and in the accounts established therefor (the "Pledge
Account") and by a first priority security interest in the Fee Notes. Upon
written request from GST Network to the Trustee, Pledged Securities will be
released from the Pledge Account in order to finance the cost (including,
without limitation, the cost of design, development, construction, acquisition,
installation or integration) of telecommunications equipment (the "Acquired
Equipment Cost"); provided that the cost of design, development, construction,
installation and integration of such telecommunications equipment (the "Acquired
Equipment") shall not exceed 50% of the aggregate Acquired Equipment Cost.
Immediately upon the acquisition of any Acquired Equipment, GST Network must
grant a first priority security interest in such Acquired Equipment to the
Trustee for the benefit of the Holders. GST USA will purchase the Acquired
Equipment from GST Network for an amount equal to the Acquired Equipment Cost
and will issue a senior secured promissory note guaranteed by GST in an amount
equal to the Acquired Equipment Cost payable to GST Network (an "Intercompany
Note"). Each Intercompany Note will mature on May 1, 2003. GST Network will
grant a first priority security interest in all Intercompany Notes to the
Trustee for the benefit of the Holders. The Trustee and the Holders will be
entitled to foreclose upon the Fee Notes, the Intercompany Notes and the
Acquired Equipment upon the occurrence of an Event of Default under the Notes.
See "Risk Factors--Insufficiency of Acquired Equipment to Satisfy the Notes upon
Liquidation."
The form and terms of the New Notes are identical in all material
respects to the form and terms of the Old Notes, except that the offer and sale
of the New Notes have been registered under the Securities Act. Any Old Notes
not tendered and accepted in the Exchange Offer will remain outstanding and will
be entitled to all the rights and preferences and will be subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the Holders of Old Notes will continue to be subject to the
existing restrictions upon transfer thereof and GST Network will have no further
obligation to such Holders to provide for the registration under the Securities
Act of the offer and sale of the Old Notes held by them. Following the
completion of the Exchange Offer, none of the Notes will be entitled to the
contingent increase in interest rate provided pursuant to the Registration
Rights Agreement. See "The Exchange Offer."
The Notes will mature on May 1, 2008. The Old Notes were and the New
Notes are being sold at a substantial discount from their principal amount and
there will not be any accrual of interest thereon prior to November 1, 2003.
Each Note will have a principal amount at maturity of $1,000 and had an Accreted
Value of $658.56 at March 31, 1999. Interest on the Notes will be paid in cash
at a rate of 10-1/2% per annum on each May 1 and November 1, commencing November
1, 2003.
The Notes will be redeemable at the option of GST USA, in whole or in
part, at any time or from time to time, on or after May 1, 2003, initially at
105.250% of their principal amount at maturity, plus accrued and unpaid
interest, declining ratably to 100% of their principal amount at maturity, plus
accrued and unpaid interest on or after May 1, 2006. If on May 1, 2003, GST USA
is prohibited by its outstanding indebtedness from assuming all of the
3
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Notes, GST Network will redeem, upon not less than 10 nor more than 30 days'
notice, the portion of the Notes that cannot be assumed, at 105.250% of their
principal amount at maturity plus accrued and unpaid interest to the date of
redemption. In addition, upon a Change of Control (as defined in the Indenture,
and set forth below under "Description of the Old Notes"), GST Network or GST
USA, as the case may be, will be required to make an offer to purchase the Notes
at a purchase price equal to 101% of their principal amount plus accrued
interest. See "Description the New Notes -- Mandatory Redemption," " -- Optional
Redemption," and " -- Repurchase of Notes Upon Change of Control."
Based upon no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to Exxon Capital Holdings Corporation
(available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 5,
1991) and Shearman & Sterling (available July 2, 1993), GST Network believes
that New Notes issued pursuant to this Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by a Holder thereof
other than (i) a broker-dealer who purchased such Old Notes directly from GST
Network to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an "affiliate" (within the meaning
of Rule 405 of the Securities Act) (an "Affiliate") of GST Network, GST USA or
GST, without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the Holder is acquiring the New Notes in
the ordinary course of its business and is not participating, and has no
arrangement or understanding with any person to participate, in the distribution
of the New Notes. Holders of Old Notes who tender in the Exchange Offer with the
intention to participate in a distribution of the New Notes may not rely upon
the position of the staff of the Commission enunciated in the above-referenced
no-action letters, and, in the absence of an exemption, must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Holders of Old Notes wishing to
participate in the Exchange Offer must represent to GST Network in the Letter of
Transmittal that such conditions have been met.
Each broker-dealer (other than an Affiliate of GST Network, GST USA or
GST) that receives New Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. GST Network has agreed that, for a
period of 180 days after the consummation of the Exchange Offer, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." Any broker-dealer who is an Affiliate
of GST Network, GST or GST USA may not rely on such no-action letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
The New Notes constitute a new issue of securities with no established
trading market. GST Network does not intend to list the New Notes on any United
States securities exchange or to seek approval for quotation through any
automated quotation system. GST Network has been advised by the Placement Agents
that, following completion of the Exchange Offer, they currently intend to make
a market in the New Notes; however, the Placement Agents are not obligated to do
so and any market-making activities with respect to the New Notes may be
discontinued at any time. The Placement Agents may act as principal or agent in
such transactions. There can be no assurance that an active trading market for
the New Notes will develop. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes
could be adversely affected.
This Prospectus, together with the Letter of Transmittal, is being sent
to all registered Holders of Old Notes as of _____________ __, 1999.
GST Network will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
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No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus and the Letter of Transmittal and, if given or made, such
information or representation must not be relied upon as having been authorized
by GST Network, GST USA, GST or United States Trust Company of New York, as
exchange agent. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy the New Notes in any jurisdiction to any person
to whom it is unlawful to make such offer or solicitation in such jurisdiction.
The delivery of this Prospectus shall not, under any circumstances, create any
implication that the information herein is correct at any time subsequent to its
date.
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INDEX OF DEFINED TERMS
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DEFINED TERM PAGE NUMBERS
- ------------ ------------
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1995 Notes............................................................. 55
1995 Indentures........................................................ 24
1996 Three Month Period................................................ 50
1997 Pledged Securities................................................ 106
1997 Three Month Period................................................ 50
1997 Initial Note...................................................... 106
ACC.................................................................... 69
Accrual Notes Indenture................................................ 24
Accrual Notes.......................................................... 77
Acquired Equipment..................................................... 3, 74
Acquired Equipment Cost................................................3, 19, 74
Act.................................................................... 112
Action Telecom......................................................... 48, 57
Additional Amounts..................................................... 98
Affiliate.............................................................. 4
AFR.................................................................... 110
AHYDOs................................................................. 110
AT&T................................................................... 27
ATM.................................................................... 64
Bankruptcy Code........................................................ 33
Banking Organization................................................... 101
Bear Stearns........................................................... 2
Bestel Project......................................................... 68
Bestel................................................................. 68
Brooks................................................................. 29
Call America-Phoenix................................................... 64
Canada Act............................................................. 23
CAP.................................................................... 63
Cautionary Statements.................................................. 37
CBCA................................................................... 36, 116
CCN.................................................................... 70
Certificate of Foreign Status.......................................... 110
Certificated Notes..................................................... 100
Clearing Corporation................................................... 101
Clearing Agency........................................................ 101
CLEC................................................................... 66
Code................................................................... 23
Collateral............................................................. 33
Commission............................................................. 4, 76
Communications Act..................................................... 31
Company................................................................ 13
Convertible Notes...................................................... 80
CPCN................................................................... 68
Credit Suisse First Boston............................................. 2
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Credit Agreement..................................................... 103
Development Company.................................................. 102
DTC.................................................................. 21
EDGAR................................................................ 11
Eighth Circuit....................................................... 67
Eligible Institution................................................. 41
Excess Proceeds...................................................... 93
Exchange Agent....................................................... 18
Exchange Act......................................................... 11
Exchange Offer....................................................... 2, 75
Excluded Holder...................................................... 98
Expiration Date...................................................... 40
FCC.................................................................. 13
Fee Notes............................................................ 3
Final Interest Accrual Date.......................................... 106
Final Accumulated Interest Amount.................................... 107
Fiscal............................................................... 13
Fiscal 1994.......................................................... 13
Fiscal 1995.......................................................... 13
Fiscal 1996.......................................................... 13
Fiscal 1997.......................................................... 13
Fiscal 1998.......................................................... 13
Fiscal 1999.......................................................... 13
Fiscal 2000.......................................................... 13
Fiscal Year.......................................................... 13
Four Quarter Period.................................................. 81
Global Notes......................................................... 100
Global............................................................... 14, 68, 70
GST.................................................................. 2
GST Call America..................................................... 48
GST EquipCo.......................................................... 104
GST Funding.......................................................... 13, 51
GST Net (AZ)......................................................... 69
GST Network.......................................................... 2
GST SwitchCo......................................................... 104
GST Telecom.......................................................... 63
GST USA.............................................................. 2
GTE Companies........................................................ 65
Guaranteed Indebtedness.............................................. 90
Holder............................................................... 2
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ICON...................................................................... 52
ICP....................................................................... 13
ILECs..................................................................... 13
Indenture................................................................. 3, 24
Indentures................................................................ 24
Indirect Participants..................................................... 101
Intercompany Note......................................................... 3
Interconnection Decision.................................................. 66
International Asset....................................................... 93
International Business.................................................... 93
Investments............................................................... 82
IP........................................................................ 13
ISDN...................................................................... 63
ISPs...................................................................... 31
Issuer.................................................................... 13
IT........................................................................ 62
Magnacom.................................................................. 68
Magnacom Agreements....................................................... 69
Magnacom FCC Licenses..................................................... 69
Mandatory Redemption Date................................................. 108
Mandatory Redemption Price................................................ 108
May Offering.............................................................. 3
MCI....................................................................... 29
MCIWorldCom............................................................... 29
Mextel.................................................................... 71
MFS....................................................................... 29
Morgan Stanley............................................................ 2
NACT......................................................................23, 50
NACT Sale................................................................. 23
New Notes................................................................. 2
Non-Global Purchaser...................................................... 100
Non-U.S. Holder........................................................... 109
Nortel Purchase Agreement................................................. 104
Note Guarantee............................................................ 2, 75
Notes..................................................................... 2
NTFC Loan Agreement....................................................... 24
OID....................................................................... 109
Old Notes................................................................. 2
Olshan.................................................................... 71
Participants.............................................................. 100
Payment Date.............................................................. 82
Permanent Regulation S Global Note........................................ 99
Phase One................................................................. 62
Phase Two................................................................. 62
Phase Three............................................................... 62
Phoenix Fiber............................................................. 50
Placement Agents.......................................................... 2
Pledge Account............................................................ 3
Pledged Securities........................................................ 3
PNI....................................................................... 31
POP....................................................................... 63
price cap LECs............................................................ 31
Project Loan.............................................................. 102
Project Phase I........................................................... 103
Project Phase II.......................................................... 103
Protected Property........................................................ 92
RBOCs..................................................................... 65
Redeemable Preferred Shares............................................... 50
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Reference Period........................................................... 81
Registration Rights Agreement.............................................. 2
Registration Statement..................................................... 11
Registration............................................................... 94
Regulation S Global Note................................................... 99
Restricted Development Company............................................. 90
Restricted Global Note..................................................... 99
SBC........................................................................ 30
Secured Notes Guarantee.................................................... 106
Secured Notes Offering..................................................... 51
Secured Notes Indenture.................................................... 24
Secured Notes.............................................................. 54
Securities Act.............................................................2,119
Semi-Annual Accrual Date................................................... 76
Senior Notes............................................................... 97
Service.................................................................... 37
SFAS....................................................................... 61
Shelf Registration Statement............................................... 76
Siemens Sales Agreement.................................................... 104
Siemens Loan Agreement..................................................... 24
Siemens.................................................................... 24
SOP 98-5................................................................... 61
Sprint..................................................................... 29
Subsidiary Guarantee....................................................... 90
Taxes...................................................................... 98
Telecommunications Act..................................................... 26
Temporary Regulation S Global Note......................................... 99
Tomen Stock Purchase Agreement............................................. 102
Tomen Facility............................................................. 72
Tomen...................................................................... 72
Tomen Master Agreement..................................................... 102
TotalNet................................................................... 48
Transaction Date........................................................... 86
Transferor................................................................. 42
Treasury Regulations....................................................... 108
Trust Indenture Act........................................................ 73
Trustee.................................................................... 3
U S WEST.................................................................... 30
U.S. Holder................................................................ 109
VITA....................................................................... 13
Warburg Dillon Read........................................................ 2
WorldCom................................................................... 29
WTO........................................................................ 30
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TABLE OF CONTENTS
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Page Page
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INDEX OF DEFINED TERMS........................... 6 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 72
AVAILABLE INFORMATION............................ 11
DESCRIPTION OF THE NEW NOTES....................... 73
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.. 11
DESCRIPTION OF INDEBTEDNESS AND
PROSPECTUS SUMMARY............................... 13 REDEEMABLE PREFERRED SHARES........................ 102
RISK FACTORS..................................... 23 CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSIDERATIONS.......................... 108
THE EXCHANGE OFFER............................... 39 CERTAIN CANADIAN TAX
CONSIDERATIONS..................................... 112
USE OF PROCEEDS.................................. 45
SELECTED FINANCIAL DATA.......................... 46 PLAN OF DISTRIBUTION............................... 114
MANAGEMENT'S DISCUSSION AND ANALYSIS OF.......... LEGAL MATTERS...................................... 115
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................... 51 EXPERTS............................................ 115
BUSINESS......................................... 63 INDEX TO FINANCIAL STATEMENTS...................... F-1
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AVAILABLE INFORMATION
GST Network, GST USA and GST have filed with the Commission a
Registration Statement on Form S-4 under the Securities Act with respect to the
New Notes offered in the Exchange Offer. For the purposes hereof, the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. In accordance with the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth in
the Registration Statement and the schedules and exhibits thereto. Each
statement made in this Prospectus concerning a document filed as an exhibit to
the Registration Statement is qualified in its entirety by reference to such
exhibit for a complete statement of its provisions. For further information
pertaining to GST Network, GST USA, GST and the New Notes offered in the
Exchange Offer, reference is made to such Registration Statement, including the
exhibits and schedules thereto and the financial statements, notes and schedules
filed as a part thereof. The Registration Statement (and the exhibits and
schedules thereto) may be inspected and copied at the public reference
facilities maintained by the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, or at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at Seven World Trade Center, Suite 1300, New York, New York 10048. Any
interested party may obtain copies of all or any portion of the Registration
Statement and the exhibits thereto at prescribed rates from the Public Reference
Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth
Street, Room 1024, Washington, D.C. 20549. In addition, registration statements
and other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov.
GST and GST USA are, and upon effectiveness of this Registration
Statement GST Network will be, subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file or will file reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
The Indenture requires GST Network, or GST USA if and when the Notes
are assumed, and GST to file with the Commission the annual, quarterly and other
reports required by Sections 13(a) and 15(d) of the Exchange Act, regardless of
whether such Sections are applicable to GST Network, GST USA or GST. GST Network
or GST USA, as the case may be, and GST will supply without cost to each Holder
of Notes, and file with the Trustee under the Indenture, copies of the audited
financial statements, quarterly reports and other reports that GST Network or
GST USA, as the case may be, and GST are required to file with the Commission
pursuant to Sections 13(a) and 15(d) of the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
GST's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, and the Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1999, are incorporated by reference in this Prospectus and shall be deemed
to be a part hereof.
GST USA's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, and the Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999,
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<PAGE> 14
are incorporated by reference in this Prospectus and shall be deemed to be a
part hereof.
All subsequent reports filed by the Company on Forms 10-K, 10-Q, 8-K or
otherwise, prior to the termination of this offering, are deemed to be
incorporated by reference in this Prospectus and shall be deemed to be a part
hereof from the date of filing of such documents.
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made hereby, and, if given or made, such
information or representations must not be relied upon as having been authorized
by GST Network, GST USA or GST. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the securities offered hereby to any
person in any state or other jurisdiction in which such offer or solicitation is
unlawful. The delivery of this Prospectus at any time does not imply that
information contained herein is correct as of any time subsequent to its date.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL GST NETWORK ACCEPT SURRENDERS
FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
GST and GST USA hereby undertake to provide without charge to each
person to whom a copy of this Prospectus has been delivered, on the written or
oral request of any such person, a copy of any or all of the documents referred
to above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents. Written requests for such copies should
be directed to GST Telecommunications, Inc. at 4001 Main Street, Vancouver,
Washington 98663, Attention: Chief Financial Officer. Oral requests should be
directed to such individual (telephone number (360) 356-7100). In order to
ensure timely delivery of the documents, any request should be made on or before
____________, 1999 [five business days prior to the date on which the final
investment decision must be made].
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<PAGE> 15
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, the term
"Company" means the consolidated business operations of GST and its
subsidiaries, including GST USA and GST Network; the terms "fiscal" and "fiscal
year" refer to the Company's fiscal years, including the thirteen months ended
September 30, 1994 ("Fiscal 1994"), the fiscal year ended September 30, 1995
("Fiscal 1995"), the fiscal year ended September 30, 1996 ("Fiscal 1996"), the
fiscal year ended September 30, 1997 ("Fiscal 1997"), the fiscal year ended
December 31, 1998 ("Fiscal 1998"), the fiscal year ending December 31, 1999
("Fiscal 1999") and the fiscal year ending December 31, 2000 ("Fiscal 2000");
"1997 Three Month Period" refers to the three months ended December 31, 1997 and
"1996 Three Month Period" refers to the three months ended December 31, 1996;
and, unless otherwise indicated, all dollar amounts are in U.S. dollars. All
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. Industry figures were obtained from reports
published by the Federal Communications Commission (the "FCC"), the U.S.
Department of Commerce and other industry sources, all of which the Company has
not independently verified. As used in this Prospectus, the term "Issuer" means
GST Network until such time as GST USA may become the obligor on the Notes,
after which the term "Issuer" means GST USA. Certain information contained in
this summary and elsewhere in this Prospectus, including information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and information with regard to the Company's plans and strategy for
its business and related financing, are forward-looking statements. See "Risk
Factors" for a discussion of important factors that could cause actual results
to differ materially from the forward-looking statements.
RISK FACTORS
See "Risk Factors" immediately following this Prospectus Summary for a
discussion of certain factors relating to an investment in the Notes, including
risks relating to the Company's historical and anticipated operating losses and
negative Adjusted EBITDA; risks relating to the Company's development and
expansion and possible inability to manage growth; risks relating to the
Company's significant capital requirements and substantial indebtedness and
possible inability of the Company to service its debt, including the Notes;
risks relating to the possible inability of GST USA to assume, GST to guarantee
and GST Network to redeem the Notes and the insufficiency of Acquired Equipment
to satisfy the Notes upon liquidation.
THE COMPANY
The Company, through its subsidiaries, provides a broad range of
integrated telecommunications products and services, primarily to business
customers located in California, Hawaii and other western continental states. As
a facilities-based integrated communications provider ("ICP"), 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" customer-focused solution to the
telecommunications services requirements of its customers, include local dial
tone, long distance, Internet, data transmission and private line services. With
the turn-up of its Virtual Integrated Transport and Access ("VITA") network in
Fiscal 1998, the Company became one of the first ICPs to develop and deploy a
converged network. As of March 31, 1999, the VITA network was operational in 18
of the Company's markets, positioning the Company for deployment of advanced
Internet Protocol ("IP") services in those markets.
RECENT DEVELOPMENTS
GST, GST Network, GST USA, and GST Equipment Funding, Inc. ("GST
Funding") are parties to certain indentures and have issued or guaranteed notes
governed by those indentures, including the Old Notes. In November 1998, the
Company notified United States Trust Company of New York, as trustee under the
indentures, that certain actions by the Company and its subsidiaries may not
have been in compliance with the technical requirements of certain restrictive
covenants contained in the indentures, including the indenture relating to the
Old Notes.
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<PAGE> 16
In particular, the Company has been advised that the transfer of its
interest in a telecommunications project to be developed in Mexico to Global
Light Telecommunications, Inc. ("Global") may constitute a violation of
provisions in the indentures limiting investments in entities that conduct
business outside of the continental United States and Hawaii. In addition, the
Company has not yet received any consideration for this transfer to Global,
which may constitute a violation of provisions in the indentures respecting
consideration to be received in connection with Asset Sales to affiliated
entities. The Company has initiated litigation to recover this asset or its fair
market value. See "Legal Proceedings." The Company has also been advised that
certain transactions relating to Guam and the Northern Mariana Islands --
particularly, an investment in an entity that conducted business in Guam and the
Northern Mariana Islands and the Company's 1998 acquisition of certain operating
assets located in Guam -- may constitute violations of provisions in the
indentures limiting investments in entities that conduct business outside of the
continental United States and Hawaii. With respect to the operating assets
located in Guam, the Company is currently seeking to divest these assets in a
transaction complying with indentures. The Company intends to vigorously
pursue any necessary action to cure the potential non-compliances.
In February 1999, the trustee informed the note holders of the potential
violations. Pursuant to the definitions contained within the indentures of each
of the notes described above, no default has been declared and no event of
default has occurred. The Company has not classified the related debt
obligations as current in its consolidated financial statements because
management believes it is probable that, in the event that the holders declared
a default, the Company would be able to take corrective actions to cure any
objectively determinable violations within the prescribed grace period.
While the Company believes that any non-compliances can be cured, the
Company cannot offer any assurance that the litigation will be successful or
that any other potential cures will be effected in a timely manner or be
sufficient. In the event that the Company has violated its indentures and does
not cure the violations, the holders of the notes issued under the indentures
could demand repayment of the notes, discontinue disbursements of cash proceeds
of the most recent notes and assert other remedies against the Company. If any
of these events occurred, the Company would not have sufficient liquid assets to
repay the notes.
FINANCING PLAN
The Company plans capital expenditures of approximately $250.0 million
and $150.0 million for Fiscal 1999 and Fiscal 2000, respectively. The majority
of these expenditures will be made to continue to fund the expansion of the
Company's infrastructure, including the development and construction of
additional networks and longhaul fiber optic facilities and the purchase and
installation of switches and related equipment. The Company believes that the
cash on hand, including the proceeds from the May Offering (which may be used
solely for the purchase and installation of Acquired Equipment) will provide the
Company with sufficient funds to expand its business as presently planned and to
fund its operating expenses through the end of Fiscal 1999. Divestitures and
other management actions may prolong capital availability in the fiscal year
2000 and beyond. Thereafter, the Company expects to require additional
financing. The extent of additional financing required will depend upon the rate
of the Company's expansion and the success of its business. There can be no
assurance that additional financing will be available to the Company, or if
available that it can be obtained on acceptable terms or within the limitations
contained in the Company's financing agreements. See "Risk Factors--Significant
Capital Requirements," "Use of Proceeds," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
14
<PAGE> 17
CORPORATE ORGANIZATION
[ORGANIZATIONAL CHART]
(1) The Company owns 100% of the stock of each company. GST
Telecommunications, Inc. is the issuer of the Convertible Notes. See
"Description of Certain Indebtedness and Redeemable Preferred Shares -
Senior Notes and Convertible Notes."
(2) GST USA is a holding company that owns, directly or indirectly, the
stock of all of the Company's operating subsidiaries. GST USA
is the issuer of the Senior Notes. See "Description of Certain
Indebtedness and Redeemable Preferred Shares - Senior Notes and
Convertible Notes."
(3) GST Net and its subsidiaries, together with GST Action Telcom and
certain subsidiaries of GST Telecom, conduct the Company's long
distance operations.
(4) GST SwitchCo is the owner of certain telecommunications equipment. It
has incurred the indebtedness outstanding under the Siemens Loan
Agreement. See "Description of Certain Indebtedness and Redeemable
Preferred Shares - Equipment Financing."
(5) GST EquipCo is the owner of certain telecommunications equipment. It
has incurred the indebtedness outstanding under the NTFC Loan
Agreement. See "Description of Certain Indebtedness and Redeemable
Preferred Shares - Equipment Financing."
(6) GST Equipment Funding is the issuer of the Secured Notes. See
"Description of Certain Indebtedness and Redeemable Preferred Shares -
Secured Notes."
(7) GST Network Funding is the issuer of the Notes. See "Description of The
New Notes."
(8) GST Telecom and its subsidiaries conduct the Company's ICP operations.
Certain of GST Telecom's subsidiaries have incurred indebtedness under
the Tomen Facility. See "Description of Certain Indebtedness and
Redeemable Preferred Shares - Tomen Facility."
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<PAGE> 18
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer................... Pursuant to the Exchange Offer, New
Notes will be issued in exchange for
outstanding Old Notes validly tendered
and not withdrawn. The Accreted Value
of the New Notes will be equal to that
of the Old Notes and New Notes will be
issued in denominations of $1,000 in
principal amount at maturity and any
integral multiple of $1,000 in excess
thereof. GST Network will issue New
Notes to tendering Holders of Old Notes
as promptly as practicable after the
Expiration Date.
Resale ............................ Based upon an interpretation by the staff
of the Commission set forth in Exxon
Capital Holdings Corporation (available
May 13, 1988), Morgan Stanley & Co.
Incorporated (available June 5, 1991)
and Shearman & Sterling (available July
2, 1993) and other no-action letters
issued to third parties, GST Network
believes that the New Notes issued
pursuant to the Exchange Offer in
exchange for Old Notes may be offered
for resale, resold and otherwise
transferred by any Holder thereof
(other than broker-dealers, as set
forth below, and any such Holder that
is an Affiliate of GST Network, GST USA
or GST) without compliance with the
registration and prospectus delivery
provisions of the Securities Act,
provided that such New Notes are
acquired in the ordinary course of such
Holder's business and that such Holder
has no arrangement or understanding
with any person to participate in the
distribution of such New Notes. Each
broker-dealer (other than an affiliate
of GST Network, GST USA or GST) that
receives New Notes for its own account
in exchange for Old Notes that were
acquired as a result of market-making
or other trading activity must
acknowledge that it will deliver a
prospectus in connection with any
resale of such New Notes. The Letter of
Transmittal states that by so
acknowledging and delivering a
prospectus, such broker-dealer will not
be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it
may be amended or supplemented from
time to time, may be used by such
broker-dealer in connection with
resales of New Notes received in
exchange for Old Notes where such New
Notes were acquired by such
broker-dealer as a result of
market-making activities or other
trading activities. GST Network has
agreed that, for a period of 180 days
after the Expiration Date, it will make
this Prospectus available to any such
broker-dealer for use in connection
with any such resale. See "Plan of
Distribution." Any Holder who tenders
in the Exchange Offer with the
intention to participate, or for the
purpose of participating, in a
distribution of the New Notes or who is
an affiliate of GST Network, GST USA or
GST may not rely on the position of the
staff of the Commission enunciated in
the no-action letters referenced above
and, in the absence of an exemption
therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with a secondary resale
transaction. Failure to comply with
such requirements in such instance may
result in such Holder incurring
liabilities under the Securities Act
for which the
16
<PAGE> 19
Holder is not indemnified
by GST Network, GST USA or GST.
The Exchange Offer is not being made
to, nor will GST Network accept
surrenders for exchange from, Holders
of Old Notes in any jurisdiction in
which this Exchange Offer or the
acceptance thereof would not be in
compliance with the securities or blue
sky laws of such jurisdiction.
Expiration Date...................... 5:00 p.m., New York City time, on _______
__, 1999 [20 BUSINESS DAYS AFTER
COMMENCEMENT OF THE EXCHANGE OFFER],
unless the Exchange Offer is extended,
in which case the term "Expiration
Date" means the latest date and time to
which the Exchange Offer is extended.
Any extension, if made, will be
publicly announced through a release to
the Dow Jones News Service and as
otherwise required by applicable law or
regulations.
Conditions to the
Exchange Offer..................... The Exchange Offer is subject to certain
conditions, which may be waived by GST
Network. See "The Exchange Offer --
Conditions to the Exchange Offer." The
Exchange Offer is not conditioned upon
any minimum principal amount at
maturity of Old Notes being tendered.
Procedures for Tendering Old Notes... Each Holder of Old Notes wishing to
accept the Exchange Offer must
complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in
accordance with the instructions
contained herein and therein, and mail
or otherwise deliver the Letter of
Transmittal, or a facsimile thereof,
together with the Old Notes to be
exchanged and any other required
documentation to United States Trust
Company of New York, as Exchange Agent,
at the address set forth herein and
therein. By executing a Letter of
Transmittal, each Holder will represent
to GST Network, GST USA and GST that,
among other things, the New Notes
acquired pursuant to the Exchange Offer
are being obtained in the ordinary
course of business of the person
receiving such New Notes, whether or
not such person is the Holder, that
neither the Holder nor any such other
person has any arrangement or
understanding with any person to
participate in the distribution of such
New Notes and that neither the Holder
nor any such other person is an
Affiliate, of GST Network, GST USA or
GST.
Special Procedures for
Beneficial Owners.................. Any beneficial owner whose Old Notes
are registered in the name of a broker,
dealer, commercial bank, trust company
or other nominee and who wishes to
tender in the Exchange Offer should
contact such registered Holder promptly
and instruct such registered Holder to
tender on such beneficial owner's
behalf. If such beneficial owner wishes
to tender on his own behalf, such
beneficial owner must, prior to
completing and executing the Letter of
Transmittal and delivering his Old
Notes, either make appropriate
arrangements to register ownership of
the Old Notes in such owner's name or
obtain a
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<PAGE> 20
properly completed bond power
from the registered Holder. The
transfer of registered ownership may
take considerable time and may not be
able to be completed prior to the
Expiration Date.
Guaranteed Delivery Procedures....... Holders of Old Notes who wish to tender
such Old Notes and whose Old Notes are
not immediately available or who cannot
deliver their Old Notes and a properly
completed Letter of Transmittal or any
other documents required by the Letter
of Transmittal to the Exchange Agent
prior to the Expiration Date may tender
their Old Notes according to the
guaranteed delivery procedures set
forth in "The Exchange Offer --
Procedures for Tendering."
Acceptance of Old Notes and
Delivery of New Notes.............. Subject to certain conditions (as
described more fully in "The Exchange
Offer -- Conditions to the Exchange
Offer"), GST Network will accept for
exchange any and all Old Notes that are
properly tendered in the Exchange Offer
and not withdrawn, prior to 5:00 p.m.,
New York City time, on the Expiration
Date. The New Notes issued pursuant to
the Exchange Offer will be delivered as
promptly as practicable following the
Expiration Date.
Withdrawal Rights.................... Subject to the conditions set forth
herein, tenders of Old Notes may be
withdrawn at any time prior to 5:00
p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
Certain United States Federal
Income Tax Considerations.......... The exchange pursuant to the Exchange
Offer should not constitute a taxable
exchange for United States federal
income tax purposes. Each New Note
should be treated as having the same
adjusted issue price, adjusted basis
and holding period as the Old Note
exchanged therefor. . See "Certain
United States Federal Income Tax
Considerations."
Exchange Agent....................... United States Trust Company of New
York, the Trustee under the Indenture,
is serving as exchange agent (the
"Exchange Agent") in connection with
the Exchange Offer. For information
with respect to the Exchange Offer, the
telephone number for the Exchange Agent
is (800) 548-6565 and the facsimile
number for the Exchange Agent is (212)
780-0592.
See "The Exchange Offer" for more detailed information concerning the terms of
the Exchange Offer.
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<PAGE> 21
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $329.3 million aggregate Accreted Value
of Old Notes as of March 31, 1999. The form and terms of the New Notes will
be the same in all material respects as the form and terms of the Old Notes,
except that the offer and sale of the New Notes will be registered under the
Securities Act and, therefore, the New Notes will not bear legends restricting
the transfer thereof. Upon consummation of the Exchange Offer, none of the Notes
will be entitled to registration rights under the Registration Rights Agreement.
The New Notes will evidence the same debt as the Old Notes, will be entitled to
the benefits of the Indenture and will be treated as a single class thereunder
with any Old Notes that remain outstanding. See "Description of the New Notes."
Issuer .......................... GST Network. The Notes will be
unconditionally and irrevocably assumed
by GST USA and guaranteed by GST, on May
1, 2003, or earlier if permitted under
the terms of GST USA's and GST's
outstanding indebtedness. See "Risk
Factors--Possible Inability of GST USA to
Assume, GST to Guarantee and GST Network
to Redeem the Notes" and "Description of
the New Notes--Structure and Security."
Securities Offered................. $329.3 million aggregate Accreted Value
of 10 1/2% Senior Secured Discount
Exchange Notes due 2008 as of March
31, 1999.
Maturity .......................... May 1, 2008.
Yield and Interest................. The Old Notes were sold at a substantial
discount from their principal amount at
maturity, and there will not be any
payment of interest on the Notes prior to
November 1, 2003. For a discussion of the
federal income tax treatment of the Notes
under the original issue discount rules,
see "Certain United States Federal Income
Tax Considerations." The Notes will fully
accrete to face value on May 1, 2003.
From and after May 1, 2003, the Notes
will bear interest, which will be payable
in cash, at a rate of 10 1/2% per annum
on each May 1 and November 1, commencing
November 1, 2003.
Security .......................... The New Notes will be identical in all
material respects to the forms and terms
of the corresponding Old Notes. The
Indenture provides that as of the Closing
Date, GST Network must use all of the net
proceeds of the May Offering to purchase
Pledged Securities and pledge the Pledged
Securities to the Trustee for the benefit
of the Holders.
In addition, in consideration for GST
Network facilitating the purchase of GST
USA's telecommunications equipment, GST
USA has agreed to reimburse GST Network
for any fees or expenses incurred by GST
Network in connection therewith and to
pay GST Network a commitment fee. Such
commitment fee shall be in an amount
equal to 4.5% per annum of the amount by
which the aggregate principal amount at
maturity of the Notes exceeds the
aggregate principal amount of all
Intercompany Notes then held as security
for the Notes. Such commitment fee shall
be paid semiannually, in arrears, on each
May 1 and November 1, commencing November
1, 1998, by GST USA issuing to GST
Network Fee Notes guaranteed by GST. The
Notes will be secured by a first priority
security interest in the Pledged
Securities, the Pledge Account and the
Fee Notes.
GST Network has used the net proceeds of
the May Offering to purchase Pledged
Securities which, upon written request
from GST Network to the Trustee, will be
released from the Pledge Account in order
to finance the cost (including, without
limitation, the cost of design,
development, construction, acquisition,
installation or integration) of Acquired
Equipment (the "Acquired
19
<PAGE> 22
Equipment Cost"); provided that the cost of
design, development, construction,
installation and integration of the
Acquired Equipment shall not exceed 50% of
the aggregate Acquired Equipment Cost.
Immediately upon the acquisition of any
Acquired Equipment, GST Network must grant
a first priority security interest in such
Acquired Equipment to the Trustee for the
benefit of the Holders. GST USA will
purchase the Acquired Equipment from GST
Network for an amount equal to the Acquired
Equipment Cost and will issue an
Intercompany Note guaranteed by GST in an
amount equal to the Acquired Equipment Cost
payable to GST Network. Each Intercompany
Note will mature on May 1, 2003. GST
Network will grant a first priority
security interest in all Intercompany Notes
to the Trustee for the benefit of the
Holders. The Trustee and the Holders will
be entitled to foreclose upon the Fee
Notes, the Intercompany Notes and the
Acquired Equipment upon the occurrence of
an Event of Default under the Notes. See
"Risk Factors--Insufficiency of Acquired
Equipment to Satisfy the Notes upon
Liquidation."
Optional Redemption................ The Notes are redeemable at the option of
GST USA, in whole or in part, at any time
or from time to time, on or after May 1,
2003, initially at 105.250% of their
principal amount at maturity, plus
accrued and unpaid interest, declining
ratably to 100% of their principal amount
at maturity, plus accrued and unpaid
interest on or after May 1, 2006. See
"Description of the Notes--Optional
Redemption."
Mandatory Redemption............... If on May 1, 2003 GST USA is prohibited
by the terms of any indebtedness
outstanding on the Closing Date from
assuming all of the Notes, GST Network
will redeem, upon not less than 10 nor
more than 30 days' notice, the portion of
the Notes that cannot be assumed, at
105.250% of their principal amount at
maturity plus accrued and unpaid interest
to the date of redemption. There can be
no assurance that GST Network will have
sufficient funds to make such redemption.
See "Risk Factors--Possible Inability of
GST USA to Assume, GST to Guarantee and
GST Network to Redeem the Notes."
Additional Amounts................. Any payments in respect of the Fee Notes,
the Intercompany Notes, or after May 1,
2003, the Notes, made by GST will be made
without withholding or deduction for
Canadian taxes except as required by law
or the interpretation or administration
thereof, in which case GST will pay such
additional amounts as may be necessary so
that the net amount received by GST
Network or the Holders , as the case may
be, after such withholding or deduction
will not be less than the amount that
would have been received in the absence
of such withholding or deduction. See
"Description of the New Notes--Additional
Amounts."
Redemption for
Changes in Canadian
Withholding Taxes................ After GST USA has become the obligor on
the Notes, in the event that, as a result
of certain changes affecting Canadian
withholding taxes, GST becomes obligated
to pay additional amounts in accordance
with the Indenture, the Notes will be
redeemable, as a whole but not in part,
at the option of GST at any time at 100%
of their principal amount plus accrued
interest. See "Description of the New
Notes--Optional Redemption."
Change of Control.................. Upon a Change of Control (as defined in
the Indenture), GST Network or GST USA,
as the case may be, will be required to
make an offer to purchase the Notes at a
purchase price equal to 101% of their
Accreted Value on the date of purchase
plus accrued interest. There can be no
assurance that GST Network or GST USA
will have sufficient funds available at
the time of any Change of
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<PAGE> 23
Control to make any required debt payment
(including repurchases of the Notes). See
"Description of the New Notes--Repurchase
of Notes upon a Change of Control."
Ranking ........................... The Notes are secured, senior
indebtedness of GST Network and, once
assumed by GST USA, will be secured,
senior indebtedness of GST USA. The Note
Guarantee will be senior unsecured
indebtedness of GST. As of March 31,
1999, GST had $1,146.7 million of
indebtedness outstanding, GST USA had
$971.3 million of indebtedness
outstanding and GST Network had no
indebtedness other than the Notes. After
GST USA assumes the Notes, the Notes and
the Note Guarantee will be effectively
subordinated to all liabilities of GST
USA's subsidiaries, including trade
payables. As of March 31, 1999, the
subsidiaries of GST USA other than GST
Network had approximately $412.4 million
of liabilities (excluding intercompany
payables), including $385.9 million of
indebtedness. See "Risk
Factors--Substantial Indebtedness,"
"--Possible Inability to Service Debt;
Refinancing Risks," "--Structure of GST
Network, GST USA and GST; Secured
Indebtedness; Ranking of Notes" and
"Description of Certain Indebtedness and
Redeemable Preferred Shares."
Certain Covenants.................. The Indenture contains certain covenants
which, among other things, prohibit GST
Network from incurring any indebtedness
other than the Notes and from creating
any liens other than liens for the
benefit of the Holders. In addition, the
Indenture restricts the ability of GST
and its Restricted Subsidiaries
(including GST USA) to: incur additional
indebtedness; create liens; engage in
sale-leaseback transactions; pay
dividends or make distributions in
respect of their capital stock; make
investments or make certain other
restricted payments; sell assets; create
restrictions on the ability of Restricted
Subsidiaries to make certain payments;
issue or sell capital stock of Restricted
Subsidiaries; enter into transactions
with shareholders or affiliates; and
consolidate, merge or sell all or
substantially all of their assets. See
"Description of the New
Notes--Covenants."
Conditional Guarantee.............. If and when the Notes are assumed by GST
USA, GST USA's obligations under the
Notes will be fully and unconditionally
guaranteed on an unsubordinated basis by
GST. However, the Note Guarantee shall
not be enforceable against GST in an
amount in excess of the net worth of GST
at the time that determination of such
net worth is, under applicable law,
relevant to the enforceability of such
Note Guarantee. Such net worth shall
include any claim of GST against GST USA
for reimbursement and any claim against
any other guarantor for contribution.
Exchange Rights.................... Holders of New Notes will not be entitled
to any exchange or registration rights
with respect to the New Notes. Holders of
Old Notes are entitled to certain
exchange rights pursuant to the
Registration Rights Agreement. Under the
Registration Rights Agreement, the
Company is required to offer to exchange
the Old Notes for the New Notes having
substantially identical terms which have
been registered under the Securities Act.
This Exchange Offer is intended to
satisfy such obligation. Once the
Exchange Offer is consummated, the
Company will have no further obligations
to register or exchange any Old Notes not
tendered by the Holders thereof for
exchange. See "Risk Factors -
Consequences of the Exchange Offer to
Non-Tendering Holders of the Old Notes."
Settlement at DTC.................. Transfers of Notes between participants
in The Depository Trust Company ("DTC")
will be effected in the ordinary way in
accordance with DTC rules and will be
settled in next-day funds.
Book-Entry;
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<PAGE> 24
Delivery and Form.................. Notes sold in reliance on Rule 144A will
be represented by one or more permanent
global Notes in definitive, fully
registered form, deposited with the
Trustee as custodian for, and registered
in the name of a nominee of, DTC. Notes
sold in offshore transactions in reliance
on Regulation S initially will be
represented by one or more temporary
global Notes in definitive, fully
registered form, deposited with the
Trustee as custodian for, and registered
in the name of a nominee of, DTC for the
accounts of Euroclear and Cedel Bank. The
temporary global Notes will be
exchangeable for permanent global Notes
40 days after the Closing Date upon
certification that the beneficial
interests in such global Notes are owned
by non-U.S. persons. Institutional
Accredited Investors that are not
Qualified Institutional Buyers will
receive certificates for the Notes owned
by them, which cannot then be traded
through the facilities of DTC, except in
connection with a transfer to a Qualified
Institutional Buyer or a transfer
pursuant to Regulation S. See
"Description of the New
Notes--Book-Entry; Delivery and Form."
22
<PAGE> 25
RISK FACTORS
An investment in the Notes offered hereby involves a high degree of
risk. The following risk factors, together with the other information set forth
in this Prospectus, should be considered when evaluating an investment in the
Notes.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE ADJUSTED EBITDA
The Company has incurred and expects to continue to incur operating
losses and negative Adjusted EBITDA while it expands its business and builds its
customer base. The Company has incurred significant increases in expenses
associated with these activities and there can be no assurance that an adequate
customer base with respect to any or all of its services will be achieved or
sustained. The Company had a net loss of approximately $53.2 million, an
operating loss of approximately $28.6 million and a negative adjusted EBITDA of
$10.3 million for the three months ended March 31, 1999, a net loss of
approximately $154.7 million, an operating loss of approximately $135.2 million
and negative Adjusted EBITDA of $60.5 million for Fiscal 1998, a net loss of
approximately $39.6 million, an operating loss of approximately $21.9 million
and negative Adjusted EBITDA of $12.0 million for the 1997 Three Month Period
and a net loss of approximately $113.3 million, an operating loss of
approximately $86.5 million and negative Adjusted EBITDA of $51.9 million for
Fiscal 1997. There can be no assurance that the Company will achieve or sustain
profitability or generate positive Adjusted EBITDA. In February 1998, the
Company consummated the sale of NACT Telecommunications Inc. ("NACT" and "NACT
Sale"), yielding net proceeds of approximately $85.0 million. Without NACT, the
Company would have had a net loss of $40.4 million and negative Adjusted EBITDA
of $14.4 million for the 1997 Three Month Period and a net loss of $117.8
million and negative Adjusted EBITDA of $59.0 million for Fiscal 1997. Adjusted
EBITDA consists of loss before interest, income taxes, depreciation and
amortization, minority interest, gains and losses on the disposition of assets
and noncash charges. Management believes that Adjusted EBITDA provides a
meaningful measure of operating cash flow (without the effects of working
capital changes) for the continuing operations of the Company by excluding the
effects of noncash expenses and non-operating activities. However, Adjusted
EBITDA should not be used as an alternative to operating loss and net loss as
determined in accordance with GAAP. See footnote (h) to the Company's "Selected
Financial Data" included herein. See "Selected Financial Data."
At December 31, 1998, the Company had a U.S. net operating loss
carryforward of approximately $208.9 million available to offset future taxable
income of GST USA and the other U.S. operating subsidiaries. Substantially all
of the Company's operations are conducted in the United States. In addition, at
that date, the Company had a net operating loss carryforward of approximately
Cdn. $49.6 million (U.S. $35.5 million) available to offset future taxable
income of the parent holding company in Canada. While such loss carryforwards
are available to offset future taxable income of the Company in each respective
tax jurisdiction, the Company does not expect to generate sufficient taxable
income so as to utilize all or a substantial portion of such loss carryforwards
prior to their expiration. Further, the utilization of net operating loss
carryforwards against future taxable income is subject to limitation if the
Company experiences an "ownership change" as defined in Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the analogous
provision of the Income Tax Act (Canada) (the "Canada Act").
DEVELOPMENT AND EXPANSION RISK AND POSSIBLE INABILITY TO MANAGE GROWTH
The Company is in the early stages of its operations. Certain of its
networks have only recently become commercially operational and the Company has
only recently begun to deploy switches in its networks. The success of the
Company will depend, among other things, upon the Company's ability to "smart
build" and assess potential markets, design fiber backbone routes that provide
ready access to a substantial customer base, secure financing, obtain required
rights-of-way, building access and governmental permits, implement expanded
interconnection and collocation with facilities owned by ILECs, achieve a
sufficient customer base, service customers it has targeted using its "smart
build" approach, and upon subsequent developments in state and federal
regulations. The Company has begun to target Tier 1 cities and competition in
such markets is expected to be significantly greater than in the Tier 2 and Tier
3 cities in which the Company is currently operating. There can be no assurance
that any networks to be developed or further developed will be completed on
schedule, at a commercially reasonable cost or within the Company's
specifications. In addition, the expansion of the Company's business has
involved and is expected to continue to involve acquisitions, which could divert
the resources and management time of the Company and require integration with
the Company's existing operations. There can be no assurance that any acquired
business will be
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<PAGE> 26
successfully integrated into the Company's operations or that any such business
will meet the Company's expectations. The Company's future performance will
depend, in part, upon its ability to manage its growth effectively, which will
require it to continue to implement and improve its operating, financial and
accounting systems, to expand, train and manage its employee base and to
effectively manage the integration of acquired businesses. These factors and
others could adversely affect the expansion of the Company's customer base and
service offerings. The Company's inability either to expand in accordance with
its plans or to manage its growth could have a material adverse effect on its
business, financial condition and results of operations.
SIGNIFICANT CAPITAL REQUIREMENTS
The Company estimates that its capital expenditures will be
approximately $250 million in Fiscal 1999 and $150 million in Fiscal 2000. The
Company believes that the cash on hand will provide sufficient funds for the
Company to expand its business as presently planned and to fund its operating
expenses through the end of Fiscal 1999. Divestitures and other management
actions may prolong capital availability into Fiscal 2000 and beyond.
Thereafter, the Company expects to require additional financing. In the event
that the Company's plans or assumptions change or prove to be inaccurate, or the
foregoing sources of funds prove to be insufficient to fund the Company's growth
and operations, or if the Company consummates acquisitions, the Company may be
required to seek additional capital (or seek additional capital sooner than
currently anticipated). Sources of financing may include public or private debt
or equity financing by the Company or its subsidiaries, sales of assets or other
financing arrangements. There can be no assurance that additional financing
would be available to the Company, or, if available, that it could be obtained
on acceptable terms or within the limitations contained in the Company's
existing note indentures or other financing arrangements. Failure to obtain such
financing could result in the delay or abandonment of some or all of the
Company's development and expansion plans and expenditures and could have a
material adverse effect on the Company. Such failure could also limit the
ability of the Company to make principal and interest payments on its
outstanding indebtedness. The Company has no material working capital or other
credit facility under which it may borrow for working capital and other general
corporate purposes. There can be no assurance that such a facility will be
available to the Company in the future or that if such a facility were
available, that it would be available on terms and conditions acceptable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
SUBSTANTIAL INDEBTEDNESS
At March 31, 1999, the Company had outstanding on a consolidated basis
approximately $1,146.7 million of indebtedness and $61.7 million of mandatorily
redeemable preferred stock. In addition, the accretion of original issue
discount is expected to cause a $71.8 million increase in liabilities by
December 15, 2000 relating to the 1995 Notes sold in December 1995, a $96.3
million increase in liabilities relating to the Accrual Notes by November 15,
2002 and a $170.7 million increase in liabilities by May 1, 2003 relating to the
1998 Notes. The indentures relating to the 1995 Notes (the "1995 Indentures"),
the indenture relating to the Secured Notes (the "Secured Notes Indenture"), the
indenture relating to the Accrual Notes (the "Accrual Notes Indenture") and the
indenture relating to the 1998 Notes (the "Indenture" and together with the 1995
Indentures, the Secured Notes Indenture and the Accrual Notes Indenture, the
"Indentures") limit, but do not prohibit, the incurrence of additional
indebtedness by the Company. The Company expects to incur substantial additional
indebtedness in the future. The Company has entered into an agreement with
Siemens (the "Siemens Loan Agreement") that provides for up to an aggregate of
$226.0 million in equipment financing, of which $116.0 million is currently
available to the Company, and of which $10.0 million had been provided at March
31, 1999. The Company also entered into an agreement (the "NTFC Loan Agreement")
with NTFC Capital Corp. for up to $50.0 million of additional equipment
financing (all of which had been provided at March 31, 1999). There can be no
assurance that any additional financing will be available to the Company on
acceptable terms or at all.
The level of the Company's indebtedness could have important
consequences to its future prospects, including the following: (i) limiting the
ability of the Company to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes; (ii) requiring that a substantial portion of the Company's cash flow
from operations, if any, be dedicated to the payment of principal of and
interest on its indebtedness and other obligations; (iii) limiting its
flexibility in planning for, or reacting to changes in, its business; (iv) the
Company will be more highly leveraged than some of its competitors, which may
place it at a
24
<PAGE> 27
competitive disadvantage; and (v) increasing its vulnerability in the event of a
downturn in its business.
POSSIBLE INABILITY TO SERVICE DEBT; REFINANCING RISKS
In connection with the buildout of its networks and expansion of ICP
services, the Company has been experiencing increasing negative Adjusted EBITDA.
The Company's earnings before fixed charges were insufficient to cover fixed
charges for the three months ended March 31, 1999, Fiscal 1998, the 1997 Three
Month Period, Fiscal 1997 and Fiscal 1996 by $60.6 million, $187.6 million,
$45.1 million, $130.0 million and $62.9 million, respectively, and the Company's
Adjusted EBITDA minus capital expenditures and interest expense for the three
months ended March 31, 1999, Fiscal 1998, the 1997 Three Month Period, Fiscal
1997 and Fiscal 1996 were negative $115.7 million, negative $409.9 million,
negative $77.6 million, negative $315.3 million and negative $152.7 million,
respectively. There can be no assurance that the Company will be able to improve
its earnings before fixed charges or Adjusted EBITDA or that it will be able to
meet its debt service obligations. As the Company does not currently have a
revolving credit facility, if a shortfall occurs, alternative financing would be
necessary in order for the Company to meet its liquidity requirements and there
can be no assurance that such financing would be available. In such event, the
Company could face substantial liquidity problems. In addition, the Company
anticipates that cash flow from operations will be insufficient to pay interest
in cash on both the 1995 Notes when such interest becomes payable in June 2001
and on the Secured Notes starting in November 2000 once the amount pledged to
fund the first six interest payments on the Secured Notes is paid and to repay
the 1995 Notes, the Secured Notes, the Accrual Notes and the 1998 Notes at
maturity and that such indebtedness will need to be refinanced. There can be no
assurance that the Company will be able to effect such refinancings. The ability
of the Company to meet its obligations and to effect such refinancings will be
dependent upon, among other things, the future performance of the Company, which
will be subject to prevailing economic conditions and to financial, business and
other factors, including factors beyond the control of the Company. Failure by
the Company to meet its obligations could result in a default on its
indebtedness, including the 1995 Notes, the Secured Notes, the Accrual Notes and
the 1998 Notes, which would permit the holders of substantially all of the
Company's indebtedness to accelerate the maturity thereof.
FINANCIAL AND OPERATING RESTRICTIONS IMPOSED BY EXISTING INDEBTEDNESS
The Company's financing arrangements impose significant operating and
financial restrictions on the Company. Such restrictions affect, and in certain
cases significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness or to create liens on its assets, sell
assets, engage in mergers or acquisitions or make investments. Failure to comply
with any such covenant could result in a default thereunder, which could result
in an acceleration of such indebtedness.
POSSIBLE INABILITY TO REMEDY CURRENT NON-COMPLIANCES UNDER THE INDENTURES
GST, GST Network, GST USA, and GST Funding are parties to certain
indentures and have issued or guaranteed notes governed by those indentures. In
November 1998, the Company notified United States Trust Company of New York, as
trustee under the indentures, that certain actions by the Company and its
subsidiaries may not have been in compliance with the technical requirements of
the restrictive covenants contained in the indentures, including the indentures
relating to the Old Notes. See "Management's Discussion and Analysis--Recent
Developments. The Company intends to vigorously pursue any necessary action to
cure the potential non-compliances.
In February 1999, the trustee informed the note holders of the
potential violations. Pursuant to the definitions contained within the
indentures of each of the notes described above, no default has been declared
and no event of default has occurred. The Company has not classified the related
debt obligations as current in its consolidated financial statements because
management believes it is probable that, in the event that the holders declared
a default, the Company would be able to take corrective actions to cure any
objectively-determinable violations within the prescribed grace period.
While the Company believes that any non-compliances can be cured, the
Company cannot offer any
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<PAGE> 28
assurance that the litigation will be successful or that any other potential
cures will be effected in a timely manner or be sufficient. In the event that
the Company has violated its indentures and does not cure the violations, the
holders of the notes issued under the indentures could demand repayment of the
notes, discontinue disbursements of cash proceeds of the most recent notes and
assert other remedies against the Company. If any of these events occurred, the
Company would not have sufficient liquid assets to repay the notes.
DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
The Company has deployed and plans to continue to deploy high capacity
digital switches in the cities in which it operates or plans to operate
networks, as well as in certain cities where the Company will rely on ILEC
facilities for transmission. This enables the Company to offer a variety of
switched access services, enhanced services and local dial tone. The Company
expects negative Adjusted 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 relies on
ILEC facilities for transmission, the Company will experience lower or negative
operating margins. The ILECs will be required to unbundle local networks and
permit the Company to purchase only those portions of the network it
needs, thereby decreasing operating expenses. There can be no assurance that
such unbundling will be effected in a timely manner or result in prices
favorable to the Company. In addition, the Company's ability to successfully
implement its switched and enhanced services will require the negotiation of
resale agreements with ILECs and other CLECs and the negotiation of
interconnection agreements with ILECs, which can take considerable time, effort
and expense.
In August 1996, the FCC released its Interconnection Decision
implementing the interconnection portions of the Telecommunications Act of 1996
("Telecommunications Act"). The Interconnection Decision establishes rules for
negotiating interconnection agreements and guidelines for review of such
agreements by state public utilities commissions. On July 18, 1997, the Eighth
Circuit vacated certain portions of the Interconnection Decision, including
provisions establishing a pricing methodology for unbundled elements and a
procedure permitting new entrants to "pick and choose" among various provisions
of existing interconnection agreements between ILECs and their competitors. On
January 25, 1999, the Supreme Court reversed the Eighth Circuit. The Supreme
Court and 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 interconnection agreements on terms
acceptable to the Company. See "Business -- Regulation."
The Company will generally be dependent on ILECs for provision of local
telephone service through access to local loops, termination service and, in
some markets, central office switches of such carriers. In addition, in certain
markets the Company intends to obtain the local telephone services of the ILEC
on a wholesale basis and resell that service to end users. Any successful effort
by the ILEC to deny or substantially limit the Company's access to the ILEC's
network elements or wholesale services could have a material adverse effect on
the Company's ability to provide local telephone services in those markets where
the Company relies on such network elements to provision local dial tone
service. Although the Telecommunications Act imposes interconnection obligations
on ILECs, there can be no assurance that the Company will be able to obtain
access to such network elements or services at rates, and on terms and
conditions, that permit the Company to offer local services at rates that are
both profitable and competitive. The Eighth Circuit is now reviewing certain FCC
rules intended to govern such rates, terms and conditions.
Many new carriers, including the Company, have experienced certain
difficulties with respect to provisioning, interconnection and the operational
support systems used by new carriers to order and receive network elements and
wholesale services from the ILECs. These systems are necessary for new carriers
such as the Company to provide local service to customers on a timely and
competitive basis. In addition, the Telecommunications Act creates incentives
for RBOCs to permit access to their facilities by denying such carriers the
ability to provide long distance services in their regions until they have met
specified conditions opening the market to competition at the local level. The
RBOCs in the Company's markets have indicated their intent to seek authority to
provide in-region long distance services but are not yet permitted to do so.
There can be no assurance that the RBOCs will be
26
<PAGE> 29
accommodating to the Company once they are permitted to offer in-region long
distance service. Should the Company be unable to obtain the cooperation of an
ILEC in a region, whether or not such ILEC has been authorized to offer
in-region long distance service, the Company's ability to offer local services
in such region on a timely and cost-effective basis would be adversely affected.
The Company is a recent entrant into the newly created competitive
local telecommunications services industry. The local dial tone services market
was opened to competition due to the passage of the Telecommunications Act and
related state and federal regulatory rulings. There are numerous operating
complexities associated with providing these services. The Company is required
to develop new products, services and systems and to develop new marketing
initiatives to sell these services.
The Company's switched services may not be profitable due to, among
other factors, lack of customer demand, inability to secure access to facilities
of ILECs at acceptable rates, competition from other CLECs and pricing pressure
from the ILECs. The Company has very limited experience providing switched
access and local dial tone services and there can be no assurance that the
Company will be able to successfully implement its switched and enhanced
services strategy. See "Business--Telecommunications Services Strategy."
RECENT COMMENCEMENT OF INTEGRATED MARKETING EFFORT
The Company has only recently begun an integrated marketing effort of
its telecommunication service offerings. Historically, the Company has marketed
its access services primarily to long distance carriers and significant
end-users of telecommunications services, and its long distance services to
small businesses and consumers. Although the Company expects to market a variety
of telecommunications services to all of its customers, there can be no
assurance that the Company will be able to attract and retain new customers or
retain and sell additional services to existing customers.
RISKS RELATING TO LONG DISTANCE BUSINESS
For the three months ended March 31, 1999, Fiscal 1998, the 1997 Three
Month Period, Fiscal 1997 and Fiscal 1996, long distance represented 36.3%,
41.4%, 45.8%, 54.5% and 54.2% of the Company's consolidated telecommunications
services revenues, respectively. The long distance business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline. In addition, the long distance industry has
historically had a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The Company has resale agreements with long distance
carriers to provide it with transmission services. Such agreements typically
provide for the resale of long distance services on a per minute basis with
minimum volume commitments. Negotiation of these agreements involves estimates
of future supply and demand for transmission capacity as well as estimates of
the calling pattern and traffic levels of the Company's future customers. In the
event the Company fails to meet its minimum volume commitments, it may be
obligated to pay underutilization charges and in the event it underestimates its
need for transmission capacity, the Company may be required to obtain capacity
through more expensive means.
Charges for access service for the origination and termination of long
distance traffic have made up a significant portion of the Company's overall
cost of providing long distance service. In May 1997, the FCC adopted changes to
its interstate access rules that among other things reduce per-minute access
charges and substitute new per-line flat rate monthly charges. The FCC also
approved reductions in overall access rates, and established new rules to
recover subsidies to support universal service and other public policies. The
impact on these changes on the Company or its competitors is not yet clear. The
Company could be adversely affected if it does not experience access cost
reductions proportionally equivalent to those of its competitors. Insofar as
Internet-based competitors continue to be exempt from these charges, they could
enjoy a significant cost advantage in this area. See "Business--Regulation."
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
The long distance transmission industry has generally been
characterized by over-capacity and declining prices since shortly after the AT&T
Corp. ("AT&T") divestiture in 1984. The Company believes that, in the last
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<PAGE> 30
several years, increasing demand has ameliorated the over-capacity and that
pricing pressure has been reduced. However, the Company anticipates that prices
for its wholesale longhaul services will continue to decline over the next
several years. While demand continues to increase, the Company is aware that
certain long distance carriers are expanding their capacity and believes that
other long distance carriers, as well as potential new entrants to the industry,
are constructing new fiber optic and other long distance transmission networks
in the United States. Since the cost of the actual fiber (as opposed to
construction costs) is a relatively small portion of the cost of building new
transmission lines, persons building such lines are likely to install fiber that
provides substantially more transmission capacity than will be needed over the
short or medium term. Further, recent technological advances may greatly expand
the capacity of existing and new fiber optic cable. Although such technological
advances may enable the Company to increase its capacity, an increase in the
capacity of the Company's competitors could adversely affect the Company's
business. If industry expansion results in capacity that exceeds overall demand
along any of the Company's routes, severe additional pricing pressure could
develop. In addition, strategic alliances or similar transactions, such as the
long distance capacity purchasing alliance among certain RBOCs announced in the
spring of 1996, could result in additional pricing pressure on long distance
carriers. Furthermore, the marginal cost of carrying an additional call over
existing fiber optic cable is extremely low. As a result, within a few years,
there may be dramatic and substantial price reductions. See "Competition."
DEPENDENCE ON BILLING, CUSTOMER SERVICES AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the
Company's growth and its ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies. Billing and information
systems for the Company's historical lines of business have been produced
largely in-house with partial reliance on third-party vendors. These systems
have generally met the Company's needs due in part to the low volume of customer
billing. As the Company transitions to the provisioning of local services and as
its long distance and Internet operations continue to expand, the need for
sophisticated billing and information systems will continue to increase. The
Company's plans for the development and implementation of its billing systems
rely, for the most part, on the delivery of products and services by third party
vendors. Similarly, the Company is developing customer call centers to provision
service orders. Information systems are vital to the success of the call
centers, and the information systems for these call centers are largely being
developed by third party vendors. Failure of these vendors to deliver proposed
products and services in a timely and effective manner and at acceptable costs,
failure of the Company to adequately identify all of its information and
processing needs, failure of the Company's related processing or information
systems, or the failure of the Company to upgrade systems as necessary could
have a material adverse effect on the ability of the Company to reach its
objectives, its financial condition and its results of operations.
YEAR 2000 ISSUES
The dates on which the Company believes the year 2000 project will be
completed are based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved, or that there
will not be a delay in, or increased costs associated with, the implementation
of the year 2000 project. Specific factors that might cause differences between
the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability to locate
and correct all relevant computer code, timely responses to and corrections by
third-parties and suppliers, the ability to implement interfaces between the new
systems and the systems not being replaced, and similar uncertainties. Due to
the general uncertainty inherent in the year 2000 problem resulting in part from
the uncertainty of the year 2000 readiness of third parties, the Company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the year 2000 issue that may affect its operations and business, or expose
it to third-party liability. See "Management's Discussion and Analysis - Year
2000 Program."
COMPETITION
The telecommunications industry is highly competitive. In most markets,
the Company's principal competitor for local exchange services is the RBOC or
the GTE Companies. Other competitors may include other ICPs, CLECs, microwave
and satellite carriers, wireless telecommunications providers and private
networks built by
28
<PAGE> 31
large end-users. Potential competitors (using similar or different technologies)
include cable television companies, utilities and RBOCs outside their current
local service areas. In addition, the Company anticipates future competition
from large long distance carriers, such as AT&T, MCI Worldcom, Inc. ("MCI
WorldCom") and Sprint Communications Company, L.P. ("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 and recently acquired Tele-Communications, Inc., a major cable
company. Two long distance carriers, Qwest Communication Inc. and Global
Crossing, Ltd. are each attempting to acquire US West, the RBOC serving much of
the Company's service area. Several companies have begun to offer
telecommunications services over the Internet at rates substantially below
current long distance rates. Companies offering telecommunications services over
the Internet could enjoy a significant cost advantage because at this time they
do not pay carrier access charges or universal service fees. The influx of
competitors into the Company's markets and into markets that the Company may
subsequently enter may result in more participants than can ultimately be
successful in a given market. Consolidation of telecommunications companies and
the formation of strategic alliances within the telecommunications industry, as
well as the development of new technologies, could give rise to significant new
competitors to the Company. In addition, a continuing trend toward business
combinations and strategic alliances in the telecommunications industry may
further enhance competition. For example, WorldCom Inc. ("WorldCom") acquired
MFS Communications Company, Inc. ("MFS"), Brooks Fiber Properties Inc.
("Brooks") and MCI Communications Corp. ("MCI"), each of which compete with the
Company in several of the markets in which the Company operates. AT&T has
acquired Teleport Communications Group, Inc., a CLEC that also competes with the
Company in several markets. 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 may not 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. For
example, the FCC granted ILECs additional flexibility in pricing their
interstate special and switched access services on a central office specific
basis. Under this pricing scheme, ILECs may establish pricing zones based on
access traffic density and charge different prices for central offices in each
zone. On February 8, 1997, new FCC rules became effective allowing ILECs to file
streamlined tariffs on 15 days' notice for rate increases and seven days' notice
for rate decreases. Unless the FCC acts during the notice period, such tariffs
become effective at its end. The Company has begun to target Tier 1 cities and
competition in such markets is expected to be significantly greater than in Tier
2 and Tier 3 cities in which the Company is currently operating.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards. The Company will
become increasingly dependent on interconnection with ILECs as switched services
become a greater percentage of the Company's business. The Telecommunications
Act imposes interconnection obligations on ILECs, but there can be no assurance
that the Company will be able to obtain the interconnection it requires at
rates, and on terms and conditions, that permit the Company to offer switched
services at rates that are simultaneously competitive and profitable. See
"--Difficulties in Implementing Local and Enhanced Services." In the event that
the Company experiences difficulties in obtaining high quality, reliable and
reasonably priced service from the ILECs, the attractiveness of the Company's
services to its customers could be impaired.
The long distance telecommunications industry has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The Company competes with major carriers such as
AT&T, Sprint and MCI 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.
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The Company believes that the principal competitive factors affecting
its long distance operations are pricing, customer service, accurate billing,
clear pricing policies and, to a lesser extent, variety of services. The ability
of the Company to compete effectively will depend upon its continued ability to
maintain high quality, market driven services at prices generally equal to or
below those charged by its competitors. To maintain its competitive posture, the
Company believes that it must be in a position to reduce its prices in order to
meet reductions in rates, if any, by others. Any such reductions could adversely
affect the Company.
The Company's longhaul business is subject to intense competition. See
"Pricing Pressures and Risks of Industry Over-Capacity."
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 petitioned the FCC to allow it to build
and operate packet- and cell-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. On
June 9, 1998, SBC Communications, Inc. ("SBC") filed a similar petition
with the FCC. The Company provides certain services with which U S WEST and
SBC's proposed services would compete if the petitions were granted by the FCC.
While the FCC denied these requests, it initiated a rulemaking which, if
adopted, would permit ILECs to provide advanced services through a structurally
separated, and largely deregulated subsidiary. The proposed rulemaking would not
permit the RBOC provision of such services across LATA boundaries.
The 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.
GOVERNMENT REGULATION
The Company's networks and the provision of switched and private line
services are subject to significant regulation at the federal, state and local
levels. Delays in receiving required regulatory approvals or the enactment of
new adverse regulation or regulatory requirements may have a material adverse
effect upon the Company. The FCC exercises jurisdiction over the Company with
respect to interstate and international services. Additionally, the Company
files tariffs with the FCC. State regulatory commissions exercise jurisdiction
over the Company to the extent it provides intrastate services. As such a
provider, the Company is required to obtain regulatory authorization and/or file
tariffs at state agencies in most of the states in which it operates.
Certificates of authority to provide services can generally be conditioned,
modified, canceled, terminated or revoked for failure to comply with rules and
regulations. Fines and other penalties may also be imposed. Local authorities
regulate the Company's access to municipal rights-of-way. The networks are also
subject to numerous local regulations such as building codes and licensing. Such
regulations vary on a city by city and county by county basis. See
"Business--Regulation." There can be no assurance that the FCC or state
commissions will grant required authority or refrain from taking action against
the Company if it is found to have provided services without obtaining the
necessary authorizations. If authority is not obtained or if tariffs are not
filed, or are not updated, or otherwise do not fully comply with the tariff
filing rules of the FCC or state regulatory agencies, third parties or
regulators could challenge these actions. Such challenges could cause the
Company to incur substantial legal and administrative expenses.
The Telecommunications Act provides for a significant deregulation of
the domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act
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remains subject to judicial review and additional FCC and state rulemakings, and
thus it is difficult to predict what effect the legislation will have on the
Company and its operations. There are currently many regulatory actions underway
and being contemplated by federal and state authorities regarding
interconnection pricing and other issues that could result in significant
changes to the business conditions in the telecommunications industry. There can
be no assurance that these changes will not have a material adverse effect upon
the Company.
The FCC released a Report to Congress on April 10, 1998 concerning its
implementation of the telecommunications subsidy provisions of the
Telecommunications Act. The FCC clarified that entities that provide
transmission capacity to Internet service providers are providing
telecommunications services subject to contribution requirements. The FCC
indicated that it would address the issue of whether Internet Service Providers
("ISPs") would contribute to a universal service fund based on the utilization
of their own transmission facilities at a later date and whether certain ISP
services such as phone-to-phone IP telephony are telecommunications services
subject to universal service fund contribution and access charge payments.
Beginning in June 1997, every RBOC advised CLEC's that they did not
consider calls in the same local calling area from their customers to CLEC
customers, who are ISPs, to be local calls under the interconnection agreements
between the RBOCs and the CLECs. The RBOCs claim that these calls are exchange
access calls for which exchange access charges would be owed. The RBOCs claimed,
however, that the FCC exempted these calls from access charges so that no
compensation is owed to the CLECs for transporting and terminating such calls.
As a result, the RBOCs threatened to withhold and in many cases did withhold,
reciprocal compensation for the transport and termination of such calls. To
date, thirty-one state commissions have ruled on this issue in the context of
state commission arbitration proceedings or enforcement proceedings. In thirty
of these states, to date, the state commission has determined that reciprocal
compensation is owed for such calls. Several of these cases are presently on
appeal. Reviewing courts have upheld the state commissions in the four decisions
rendered to date on appeal. Appeals from these decisions are pending in the
Fifth, Seventh and Ninth U.S. Circuit Courts of Appeal. On February 25, 1999,
the FCC issued a Declaratory Ruling on the issue of inter-carrier compensation
for calls bound to ISPs. The FCC ruled that the calls are jurisdictionally
interstate calls, not local calls. The FCC, however, determined that this issue
was not dispositive of whether inter-carrier compensation is owed. The FCC noted
a number of factors which would allow the state commissions to leave their
decisions requiring the payment of compensation undisturbed. The FCC decision
has been appealed to the United States Court of Appeals for the District of
Columbia Circuit. The Company cannot predict the impact of the FCC's ruling on
existing state decisions, or the outcome of pending appeals or of additional
pending cases. Since the FCC's ruling, thirteen state commissions have ruled on
this issue. In twelve of these states, the commission either reaffirmed its
prior decision or found that reciprocal compensation applies as an initial
finding. In the one remaining state, Massachusetts, the commission vacated its
earlier decision and left the dispute unresolved.
In a combined Report and Order and Notice of Proposed Rulemaking
released on December 24, 1996, the FCC made changes and proposed further changes
in the interstate access charge structure. In the Report and Order, the FCC
removed restrictions on ILECs' ability to lower access prices and relaxed the
regulation of new switched access services in those markets where there are
other providers of access services. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on the Company's ability to compete in providing interstate access
services. On May 16, 1997, the FCC released an order revising its access charge
rate structure. The new rules substantially increase the costs that ILECs
subject to the FCC's price cap rules ("price cap LECs") recover through monthly,
non-traffic sensitive access charges and substantially decrease the costs that
price cap LECs recover through traffic sensitive access charges. In the May 16th
order, the FCC also announced its plan to bring interstate access rate levels
more in line with cost. The plan will include rules that grant price cap LECs
increased pricing flexibility upon demonstrations of increased competition (or
potential competition) in relevant markets.
Under the Communications Act of 1934 ("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. The operations of GST Telecom Hawaii, Inc. 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 Company's former
Chairman of the Board and Chief Executive Officer. As a
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result of changes in federal policies, there is no regulatory impediment to
preclude PNI from transferring such microwave facilities and associated licenses
to the Company, subject to FCC approval. 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.
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant
changes in technology, with the Company relying on third parties for the
development of and access to new technology. The effect of technological changes
on the business of the Company cannot be predicted although, historically,
telecommunications companies have been required to adopt new technologies to
enhance the services provided to customers, thereby requiring continuing
investment in capital equipment. The Company believes its future success will
depend, in part, on its ability to anticipate or adapt to such changes and to
offer, on a timely basis, services that meet customer demands, which may require
significant continued capital expenditures to provide enhanced services to the
Company's customers.
LITIGATION RISKS
The Company is involved in various legal proceedings. An unfavorable
decision in one or more of such actions could have a material adverse effect on
the Company. See "Business--Legal Proceedings."
POSSIBLE INABILITY TO RECOVER PAYMENTS MADE TO MAGNACOM
See "Business - Magnacom" for a discussion of the risks relating to the
Company's prior payments made to Magnacom.
DEPENDENCE ON KEY PERSONNEL
The efforts of a small number of key management and operating personnel
will largely determine the Company's success and the loss of any of such persons
could adversely affect the Company. The success of the Company also depends in
part upon its ability to hire and retain highly skilled and qualified operating,
marketing, financial and technical personnel. The competition for qualified
personnel in the telecommunications industry is intense and, accordingly, there
can be no assurance that the Company will be able to hire or retain necessary
personnel.
DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS
The Company must obtain easements, rights-of-way, entry to premises,
franchises and licenses from various private parties, actual and potential
competitors and state and local governments in order to construct and operate
its networks. There can be no assurance that the Company will obtain
rights-of-way and franchise agreements on acceptable terms or that current or
potential competitors will not obtain similar rights-of-way and franchise
agreements that will allow them to compete against the Company. If any of the
existing franchise or license agreements were terminated or not renewed and the
Company were forced to remove its fiber optic cables or abandon its networks in
place, such termination could have a material adverse effect on the Company. See
"Business--Legal Proceedings" and "--Regulation."
RISKS OF INVESTMENT IN A CANADIAN CORPORATION
GST is a corporation incorporated under the Canada Business
Corporations Act. Certain of the directors and the Company's professional
advisors are residents of Canada or otherwise reside outside of the U.S. All
or a substantial portion of the assets of such persons are or may be located
outside of the U.S. It may be difficult for U.S. security holders to effect
service of process within the United States upon such directors or professional
advisors or to realize in the U.S. upon judgments of U.S. courts predicated
upon civil liability of GST or
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such persons under U.S. federal securities laws. GST has been advised that there
is doubt as to whether Canadian courts would (i) enforce judgments of U.S.
courts obtained against GST or such directors or professional advisors
predicated solely upon the civil liabilities provisions of U.S. federal
securities laws, or (ii) impose liabilities in original actions against GST or
such directors and professional advisors predicated solely upon such U.S. laws.
However, a judgment against GST predicated solely upon civil liabilities
provisions of such U.S. federal securities laws may be enforceable in Canada if
the U.S. court in which such judgment was obtained has a basis for jurisdiction
in that matter that would be recognized by a Canadian court. In addition, GST's
status as a Canadian company could, under certain circumstances, limit the
ability of GST to hold or control radio frequency licenses in the United States.
INSUFFICIENCY OF ACQUIRED EQUIPMENT TO SATISFY THE NOTES UPON LIQUIDATION
In the event that GST Network (or upon the assumption of the Notes by
GST USA, GST USA) were to be unable to pay amounts due under the Notes and
(following the assumption of the Notes by GST USA) GST were to default under the
Note Guarantee, Holders would be entitled to foreclose on the Pledged
Securities, Acquired Equipment, Fee Notes and the Intercompany Notes
(collectively, the "Collateral") to satisfy indebtedness under the Notes. A
substantial portion of the value of the Acquired Equipment will consist of the
cost of designing, constructing, acquiring, installing and integrating such
equipment. In addition, because the telecommunications industry is subject to
rapidly changing technologies and frequent new product introductions, the value
of the Acquired Equipment may decline over time. The value of the Acquired
Equipment may also decline due to the availability and price of competing
products and technologies, evolving industry standards and regulatory
requirements and depreciation. Further, a foreclosure will not result in the
realization of the full fair market value of the Acquired Equipment because such
value may be affected by the removal from an integrated network of the Acquired
Equipment and because of costs associated with such foreclosure. Therefore, in
the event of foreclosure, the value of the Acquired Equipment will not satisfy
the Notes in full.
Further, the right of the Trustee to repossess and dispose of the
Collateral upon the occurrence of a default under the Notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against GST Network or, after the sale of any
Acquired Equipment to GST USA, GST USA, prior to the Trustee's having disposed
of the Collateral. Under Title XI of the United States Code (the "Bankruptcy
Code"), a secured creditor such as the Trustee is prohibited from disposing of
security repossessed from a debtor in a bankruptcy case without bankruptcy court
approval. Moreover, the Bankruptcy Code prohibits a secured creditor from
disposing of collateral even though the debtor is in default under the
applicable debt instruments if the secured creditor is given "adequate
protection." The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution of the value of the collateral as a
result of the stay of disposition during the pendency of the bankruptcy case. In
view of the lack of a precise definition of the term "adequate protection" and
the broad discretionary powers of a bankruptcy court, it is impossible to
predict how long payment under the Notes could be delayed following commencement
of a bankruptcy case, whether or when the Trustee could dispose of the
Collateral or whether or to what extent holders of Notes would be compensated
for any delay in payment or loss of value of the Collateral through the
requirement of "adequate protection."
In addition, notwithstanding anything to the contrary described above,
unless an event of default under the Indenture shall have occurred and be
continuing, GST Network or GST USA, as the case may be, will have the right to
remain in possession and retain exclusive control of the Acquired Equipment,
will have the right to freely utilize the Acquired Equipment and will have the
right to collect, invest and dispose of any income thereon.
MAINTENANCE OF SECURITY INTEREST IN COLLATERAL
Under the terms of a Collateral Pledge and Security Agreement made by
GST Network to the Trustee for the benefit of the Holders, GST Network and, upon
the sale of the Acquired Equipment to GST USA, GST USA are required to secure
the Notes and the Intercompany Notes, respectively, by granting liens on the
Acquired Equipment. GST Network and GST USA are required to file UCC-1 Financing
Statements in each state in which Acquired Equipment will be located and to
maintain such security filings in effect under the relevant provisions of the
Uniform Commercial Code as in effect in each such state. Although failure to do
so may result in an event of default under the
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Notes, such failure may allow other creditors of GST Network or, after the sale
of the Acquired Equipment to GST USA, GST USA, or owners or mortgagees of
property on which Acquired Equipment is installed, to obtain rights in such
Acquired Equipment that are equal or superior to those of the Holders. This
could result in some or all of the value of the Acquired Equipment not being
available to the Holders to satisfy the Notes in the event of a default. Such
failure could arise, among other reasons, because of the failure to file
continuation statements prior to the expiration of each five-year period after
the initial filing.
POSSIBLE INABILITY OF GST USA TO ASSUME, GST TO GUARANTEE AND GST NETWORK TO
REDEEM THE NOTES
The Indenture provides that GST USA will assume and become a direct
obligor on the Notes and GST will guarantee the Notes on May 1, 2003, or earlier
if permitted under the 1995 Indentures, the Secured Notes Indenture and the
Accrual Notes Indenture. The Indenture provisions requiring GST USA to assume,
and GST to guarantee, the Notes, unless consents are obtained, require GST to
repay all indebtedness then outstanding that by its terms would prohibit such
assumption or guarantee. The failure of GST USA to assume the Notes, or of GST
to guarantee the Notes, would result in a default under the Notes and the
Intercompany Notes. See "Description of the New Notes--Events of Default." A
default under the Notes and the Intercompany Notes could result in a default
under other indebtedness of the Company, including the 1995 Notes, the Secured
Notes and the Accrual Notes, which would permit the holders of substantially all
of the Company's indebtedness to accelerate the maturity thereof.
In the event of a default on the Notes prior to the time GST USA
becomes a direct obligor on the Notes, and in the event the Holders or the
Trustee foreclose on the collateral securing the Notes and such collateral is
insufficient to pay all amounts due on the Notes, the Holders will not have a
claim against GST USA or GST under the Notes or the Notes Guarantee, other than
under the Fee Notes and the Intercompany Notes pledged to secure the Notes and
to the extent GST Network is otherwise a creditor of GST USA or GST. However,
the obligations of GST USA under the Fee Notes and the Intercompany Notes, and
of GST under the guarantee thereof, may be less than the principal of and
accrued interest on the Notes. To the extent there is a shortfall, GST USA and
GST will not be liable to Holders for amounts due on the Notes prior to the time
that GST USA becomes a direct obligor. GST Network will have no assets other
than the collateral securing the Notes, which, upon foreclosure after a default
upon the Notes, may not be sufficient to repay all amounts due on the Notes.
See "--Insufficiency of Acquired Equipment to Satisfy the Notes upon
Liquidation."
STRUCTURE OF GST NETWORK, GST USA AND GST; SECURED INDEBTEDNESS; RANKING OF
NOTES
GST and GST USA are each holding companies and none of GST, GST USA or
GST Network conducts any operations. The principal assets of GST consist of the
common stock of GST USA, and the principal asset of GST USA consists of the
common stock of its subsidiaries. Neither GST USA nor GST will be liable on the
Notes until they are assumed by GST USA. GST USA must rely upon payments from
its subsidiaries to generate the funds necessary to meet its obligations,
including the payment of principal of and interest on the Fee Notes and the
Intercompany Notes and, after its assumption thereof, the Notes. GST must rely
upon dividends and other payments from GST USA's subsidiaries should it be
required to make any payments under the Note Guarantee. The subsidiaries,
however, are legally distinct from GST and GST USA and such subsidiaries will
have no obligation, contingent or otherwise, to pay amounts due pursuant to the
Notes or the Note Guarantee or to make funds available for such payment,
although GST USA will be obligated to make payments on the Fee Notes and any
Intercompany Notes. See "--Possible Inability of GST USA to Assume, GST to
Guarantee and GST Network to Redeem the Notes." GST USA's subsidiaries will not
guarantee the Notes. The ability of GST USA's subsidiaries to make such payments
to GST USA will be subject to, among other things, the availability of funds,
the terms of such subsidiaries' indebtedness and applicable state laws. Pursuant
to credit agreements under the Tomen Facility, GST USA's subsidiaries that own
and operate the Southern California and Hawaii networks may not pay any
dividends or make any distributions on their capital stock. Subsequent network
financings, if any, under the Tomen Facility are expected to include similar
prohibitions.
As of March 31, 1999, the Company and its subsidiaries had $698.3
million of secured indebtedness outstanding, including the Notes, the Secured
Notes and indebtedness under the Tomen Facility, the Siemens Loan Agreement and
the NTFC Loan Agreement. The Secured Notes are secured by all of the equipment
purchased with the proceeds thereof as well as certain intercompany notes issued
by GST USA. The indebtedness under the Tomen
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Facility is secured by the stock, and substantially all of the assets, of the
Company's subsidiaries that own the Southern California and Hawaii networks and
subsequent financings, if any, under the Tomen Facility are expected to be
secured in a similar manner. The indebtedness under the Siemens Loan Agreement
and the NTFC Loan Agreement are each secured by the equipment purchased with the
proceeds thereof. In addition, the Indentures permit the Company and its
subsidiaries to incur additional secured indebtedness. See "Description of
Certain Indebtedness and Redeemable Preferred Shares." In the event that a
default were to occur with respect to any secured indebtedness incurred by the
Company or its subsidiaries and the holders thereof were to foreclose on the
collateral, the holders of such indebtedness would be entitled to payment out of
the proceeds of their collateral prior to any holders of any other indebtedness,
including the Notes. In the event of any bankruptcy, liquidation or
reorganization of GST, holders of secured indebtedness would have a claim, prior
to the claim of the holder of the Notes, on the assets of GST and its
subsidiaries securing such indebtedness. In addition, to the extent that the
value of such collateral is insufficient to satisfy such secured indebtedness,
holders of amounts of such secured indebtedness remaining outstanding would be
entitled to share pari passu with Holders with respect to any other assets of
GST and its subsidiaries (other than Acquired Equipment and any Intercompany
Notes or other assets securing the Notes). Assets remaining after satisfaction
of the claims of the holders of secured indebtedness may not be sufficient to
pay amounts due on any or all of the Notes then outstanding.
Claims of creditors of GST USA's subsidiaries, including trade
creditors, will generally have priority as to the assets of such subsidiaries
over the claims of GST Network, GST USA and the holders of GST Network's and GST
USA's indebtedness, including the Notes, the Fee Notes, the Intercompany Notes
and the Note Guarantee. Accordingly, after GST USA becomes the obligor on the
Notes, the Notes and the Note Guarantee will be effectively subordinated to the
liabilities (including trade payables) of the subsidiaries of GST USA, except
with respect to any Acquired Equipment. At March 31, 1999, the subsidiaries
of GST USA other than GST Network had approximately $412.4 million of
liabilities (excluding intercompany payables), including $385.9 million of
indebtedness, all of which was secured. After GST USA becomes the obligor on the
Notes, to the extent the Acquired Equipment is foreclosed upon and is
insufficient to repay all amounts due with respect to the Notes, the Holders
would have a general, unsecured, unsubordinated claim against GST USA for the
shortfall. See "--Insufficiency of Acquired Equipment to Satisfy the Notes upon
Liquidation" and "--Possible Inability of GST to Assume, GST to Guarantee and
GST Network to Redeem the Notes."
FRAUDULENT TRANSFER AND PREFERENCE CONSIDERATIONS
The incurrence by GST Network of indebtedness, such as the Notes, and
the incurrence by the Guarantors of indebtedness, such as the Guarantees, may be
subject to review under U.S. Federal bankruptcy law or insolvency or relevant
state fraudulent conveyance laws if the Company or any Guarantor should become
subject to bankruptcy or insolvency proceedings or if an action is commenced by
or on behalf of the Company's or any Guarantor's unpaid creditors. Under these
laws, if in such a case or lawsuit a court were to find that, at the time the
Company, or the applicable Guarantors, incurred indebtedness (including
indebtedness under the Notes and the Guarantees),
(1) the Company or the applicable Guarantors incurred such indebtedness
with the intent of hindering, delaying or defrauding current or future
creditors; or
(2) (a) the Company or the applicable Guarantors received less
than reasonably equivalent value or fair consideration for incurring such
indebtedness; and
(b) the Company was, or the applicable Guarantors were,
(i) insolvent or rendered insolvent by reason of
any of the transactions;
(ii) engaged, or about to engage, in a business
or transaction for which the assets
remaining with the Company or the applicable
Guarantors, as the case may be, constituted
an unreasonably small capital to carry on
its business; or
(iii) intending to incur, or believing that it
would incur, debts beyond its ability to pay
as such debts matured and became due and
payable (as all of the foregoing terms
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are defined in or interpreted under the
relevant fraudulent transfer or conveyance
statutes)
then such court could avoid the Company's obligations to repay the Notes or the
applicable Guarantors' obligations to pay under the applicable Guarantees,
subordinate the amounts owing under the Notes or the applicable Guarantee to
presently existing and future liabilities (including any subordinated debt and
trade payables), require the holders to return amounts the holders have already
received in payment of interest and principal on the Notes and take other
actions detrimental to the holders.
The measure of insolvency for purposes of the foregoing will vary
depending on the law of the jurisdiction that is being applied in any such
proceeding. Generally, however, a company would be considered insolvent if, at
the time it incurred indebtedness, either (1) the sum of its debts (including
contingent liabilities) is greater than its assets, at fair valuation, or (2)
the present fair saleable value of its assets is less than the amount required
to pay the probable liability on its total existing debts and liabilities
(including contingent liabilities) as they become absolute and matured. There
can be no assurance as to what standards a court would use to determine whether
the Company was, or any applicable Guarantor was, solvent at the relevant time,
or whether, whatever standard was used, the Notes or the applicable Guarantees
would not be avoided or further subordinated, or payments the holders had
received would not have to be returned, on another of the grounds set forth
above.
The Company believes that at the time the Company and the Guarantors
initially issued the Notes and the Guarantees, respectively, each of the Company
and the Guarantors:
(1) (a) were neither insolvent nor rendered insolvent
thereby,
(b) were in possession of sufficient capital to run
their respective businesses effectively; and
(c) were not incurring debts exceeding its ability to
pay them as the same mature or become due; and
(2) had sufficient assets to satisfy any probable money judgment
against it in any action that was pending at that time.
In reaching the foregoing conclusions, the Company has relied upon its
analyses of internal cash flow projections and estimated values of the assets
and liabilities of the Company and each Guarantor. There can be no assurance,
however, that a court passing on such questions would reach the same
conclusions.
Additionally, under U.S. Federal bankruptcy law or relevant state
preference laws, if certain bankruptcy or insolvency proceedings were initiated
by or against the Company or any Guarantor within 90 days after any payment by
the Company or any Guarantor with respect to the Notes or the Guarantees or
after the delivery of any future Guarantee or if the Company or any Guarantor
anticipated becoming insolvent at the time of such payment or incurrence, all
or a portion of such payment or such future Guarantee could be avoided or be
required to be returned by its recipient.
The incurrence by GST of indebtedness under the Note Guarantee may also
be subject to review under Canadian Federal bankruptcy and insolvency laws or
corporate laws or relevant Canadian Provincial fraudulent conveyance or
fraudulent preference laws if GST should become subject to Canadian bankruptcy
or insolvency proceedings, or if an action is commenced in Canada by or on
behalf of any of GST's unpaid creditors. The Note Guarantee purports to be
governed by the laws of the State of New York. However, if a Canadian Court
finds that Canadian corporate law related to issuance of the Note Guarantee
applies, or that the Note Guarantee is governed by Canadian laws, the applicable
law may differ from that set out above. The granting of a guarantee by a
corporation incorporated under the Canada Business Corporations Act ("CBCA") is
prohibited unless the corporation satisfies certain solvency and net worth
tests. However, a parent corporation is permitted to give a guarantee of the
debts of its wholly owned subsidiary. If, in connection with a bankruptcy
proceeding or other action in Canada, a court were to hold that the Note
Guarantee was not so permitted and the other tests were not met, this may effect
the enforceability of such guarantee. Under Canadian Federal or Provincial laws
dealing with fraudulent conveyances or fraudulent preferences the enforceability
of the Note Guarantee may also be affected if a holder of the Note Guarantee was
a creditor of GST through circumstances unrelated to the Note Guarantee and the
giving of the guarantee was considered a preference.
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF THE NOTES AND THE COMPANY
The Notes were issued at a substantial discount from their principal
amount and there will be no periodic payments in cash of interest on the Notes
prior to November 1, 2003. Consequently, purchasers of the Notes generally will
be required to include amounts in gross income for United States federal income
tax purposes in advance of receipt of the cash payments to which the income is
attributable.
If a bankruptcy case under the U.S. Bankruptcy Code were to be
commenced by or against GST Network after the issuance of the Notes, the claim
of a holder of Notes might be limited to an amount equal to the sum of (i) the
initial offering price for the Notes and (ii) that portion of the original issue
discount that would not be deemed to
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constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any
original issue discount that was not amortized as of the time of any such
bankruptcy filing would constitute "unmatured interest."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements, including
statements regarding the Company's expected financial position, business and
financing plans. These forward-looking statements reflect the Company's views
with respect to future events and financial performance. The words, "believe,"
"expect," "plans" and "anticipate" and similar expressions identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from such
expectations (the "Cautionary Statements") are disclosed in this Prospectus,
including, without limitation, in conjunction with the forward-looking
statements included in this Prospectus and under "Risk Factors." All subsequent
written and oral forward-looking statements attributable to the Company, its
subsidiaries or persons acting on the Company's behalf are expressly qualified
in their entirety by the Cautionary Statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
their dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
EXCHANGE OF NOTES
Under current United States tax laws, no gain or loss will be
recognized by an exchanging Holder upon an exchange of the Old Notes for the New
Notes. A Holder's basis in the New Notes will be the same as the Holder's basis
in the Old Notes, and the Holder's holding period in the New Notes will include
the period during which the Old Notes had been held by the Holder. If the
exchange of the Old Notes for the New Notes were deemed by the Internal Revenue
Service (the "Service") to constitute the exchange of a debt instrument for a
modified instrument that differed materially either in kind or in extent,
additional original issue discount could arise. However, under the relevant
regulations issued by the Service, the New Notes should not be deemed to
constitute a modification of the Old Notes, inasmuch as the New Notes reflect
all of the terms and conditions of the Old Notes in registered form, which
registration results from the original terms of the Old Notes. See "Certain
United States Federal Income Tax Considerations."
LACK OF A PUBLIC MARKET
The New Notes will constitute a new issue of securities with no
established trading market. GST Network does not intend to list the New Notes on
any United States securities exchange or to seek approval for quotation through
any automated quotation system. GST Network has been advised by the Placement
Agents that following completion of the Exchange Offer, the Placement Agents
intend to make a market in the New Notes. However, the Placement Agents are not
obligated to do so and any market-making activities with respect to the New
Notes may be discontinued at any time without notice. Accordingly, no assurance
can be given that an active public or other market will develop for the New
Notes or as to the liquidity of or the trading market for the New Notes. If a
trading market does not develop or is not maintained, Holders of the New Notes
may experience difficulty in reselling the New Notes or may be unable to sell
them at all. If a market for the New Notes develops, any such market may cease
to continue at any time. If a public trading market develops for the New Notes,
future trading prices of the New Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities and other factors, including
the financial condition of the Company.
CONSEQUENCES OF THE EXCHANGE OFFER TO NON-TENDERING HOLDERS OF THE OLD NOTES
In the event the Exchange Offer is consummated, GST Network will not be
required to register any Old Notes not tendered and accepted in the Exchange
Offer. In such event, Holders of Old Notes seeking liquidity in their investment
would have to rely on exemptions to the registration requirements under the
Securities Act. Following the Exchange Offer, none of the Notes will be entitled
to the contingent increase in interest rate provided for (in the event of a
failure to consummate the Exchange Offer in accordance with the terms of the
Registration Rights Agreement) pursuant to the Registration Rights Agreement.
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POSSIBLE TREATMENT OF THE NOTES AS EQUITY
Although the Company believes that the Notes should be treated as
indebtedness for United States income tax purposes, it is possible that the
Notes may be treated as equity. In the unlikely event the Notes are treated as
equity, the amount of any actual or constructive distributions on any such Note
would first be taxable to the holder as dividend income to the extent of the
issuer's current and accumulated earnings and profits, and next would be treated
as a return of capital to the extent of the holder's tax basis in the Note, with
any remaining amount treated as gain from the sale of a Note. As a result, until
such time as the issuer has earnings and profits as determined for United States
federal income tax purposes, distributions on any Note treated as equity will be
a nontaxable return of capital and will be applied against and in the case of
actual distributions reduce the adjusted tax basis of such Note in the hands of
its holder (but not below zero). Further, payments on the Notes treated as
equity to Non-U.S. Holders (as hereinafter defined) would not be eligible for
the portfolio interest exception from United States withholding tax, and
dividends thereon would be subject to United States withholding tax at a flat
rate of 30% (or lower applicable treaty rate) and gain from their sale or other
taxable disposition might also be subject to United States tax. In addition, in
the event of equity treatment, neither GST Network nor GST USA, as the case may
be, would ever be entitled to deduct interest on the Notes for United States
federal income tax purposes.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by GST Network on May 4, 1998 to the Placement
Agents, which placed the Old Notes with certain institutional investors in
reliance on Section 4(2) of, and Rule 144A under, the Securities Act. In
connection with the sale of the Old Notes, GST Network entered into the
Registration Rights Agreement, pursuant to which GST Network, GST USA and GST
agreed to use their best efforts to consummate an offer to exchange the Old
Notes for the New Notes pursuant to an effective registration statement on or
before November 4, 1998. Unless the context requires otherwise, the term
"Holder" with respect to the Exchange Offer means any person in whose name Old
Notes are registered on the books of GST Network or any other person who has
obtained a properly completed bond power from the registered Holder, or any
person whose Old Notes are held of record by DTC who desires to deliver such Old
Notes by book-entry transfer at DTC.
GST Network has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any Holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based upon interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, GST Network believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any Holder of such New
Notes (other than any such Holder that is an Affiliate of GST Network, GST USA
or GST) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holder's business and such Holder has no arrangement
or understanding with any person to participate in the distribution of such New
Notes. Any Holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes or who is an Affiliate of GST
Network, GST USA or GST may not rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder of Old Notes will
represent to GST Network, GST USA and GST that, among other things, (i) the New
Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is such Holder, (ii) neither the Holder of Old Notes, nor any such other
person, has an arrangement or understanding with any person to participate in
the distribution of such New Notes, (iii) if the Holder is not a broker-dealer,
or is a broker-dealer but will not receive New Notes for its own account in
exchange for Old Notes, neither the Holder, nor any such other person, is
engaged in or intends to participate in the distribution of such New Notes and
(iv) neither the Holder nor any such other person is an Affiliate of GST
Network, GST USA or GST or, if such Holder is an Affiliate, that such Holder
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
Following the consummation of the Exchange Offer, Holders of Old Notes
not tendered will not have any further registration rights and the Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for the Old Notes could be adversely affected. See
"Risk Factors Consequences of the Exchange Offer to Non-Tendering Holders of the
Old Notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, GST Network will accept any and all
Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. Subject to the minimum denomination requirements
of the New Notes, GST Network will issue $1,000 principal amount at maturity of
New Notes in exchange for each $1,000 principal amount at maturity of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old
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Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000 principal amount at maturity.
The forms and terms of the New Notes will be identical in all material
respects to the forms and terms of the corresponding Old Notes, except that the
offer and sale of the New Notes will have been registered under the Securities
Act and, therefore, the New Notes will not bear legends restricting the transfer
thereof. The Exchange Offer is not conditioned upon any minimum aggregate
principal amount at maturity of Old Notes being tendered for exchange. As of
March 31, 1999, $329.3 million aggregate Accreted Value of the Old Notes was
outstanding. This Prospectus, together with the Letter of Transmittal, is being
sent to all Holders as of ________, 1999. Holders of Old Notes do not have any
appraisal or dissenters' rights under the Indenture in connection with the
Exchange Offer. GST Network intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the applicable rules
and regulations of the Commission thereunder.
GST Network shall be deemed to have accepted validly tendered Old Notes
when, as and if GST Network has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the New Notes from GST Network. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, such unaccepted Old Notes
will be returned, without expense, to the tendering Holder thereof as promptly
as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. GST Network will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
" -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
_____________, 1999 [20 BUSINESS DAYS AFTER THE COMMENCEMENT OF THE EXCHANGE
OFFER], unless GST Network in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended. Although GST Network has no current
intention to extend the Exchange Offer, GST Network reserves the right to extend
the Exchange Offer at any time and from time to time by giving oral or written
notice to the Exchange Agent and by timely public announcement communicated,
unless otherwise required by applicable law or regulation, by making a release
to the Dow Jones News Service. During any extension of the Exchange Offer, all
Old Notes previously tendered pursuant to the Exchange Offer and not withdrawn
will remain subject to the Exchange Offer. The date of the exchange of the New
Notes for Old Notes will be the first Nasdaq National Market trading day
following the Expiration Date.
GST Network expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Old Notes if any of the events set forth
below under " -- Conditions to the Exchange Offer" shall have occurred and shall
not have been waived by GST Network and (ii) amend the terms of the Exchange
Offer in any manner that, in its good faith judgment, is advantageous to the
Holders of the Old Notes, whether before or after any tender of the Old Notes.
PROCEDURES FOR TENDERING
The tender to GST Network of Old Notes by a Holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between such
Holder and GST Network in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal signed by such
Holder. A Holder of the Old Notes may tender such Old Notes by (i) properly
completing and signing a Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date, (ii) by complying with the procedure for book-entry
transfer
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described below and in "Description of the Old Notes - Book-Entry; Delivery and
Form",or (iii) complying with the guaranteed delivery procedures described
below.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the New Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered Holder (which term, for the purposes described herein, shall include
any participant in DTC whose name appears on a security listing as the owner of
Old Notes), the signature of such signer need not be guaranteed. In any other
case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to GST Network and duly executed by
the registered Holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under
the Exchange Act (any of the foregoing hereinafter referred to as an "Eligible
Institution"). If the New Notes and/or the Old Notes not exchanged are to be
delivered to an address other than that of the registered Holder appearing on
the register for the Old Notes, the signature in the Letter of Transmittal must
be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF TRANSMITTAL AND ALL
OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS
BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
GST NETWORK.
GST Network understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish an account with respect
to the Old Notes at DTC for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution that is a
participant in DTC's system may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account with respect to
the Old Notes in accordance with DTC's procedure for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an appropriate Letter of Transmittal with any
required signature guarantee and all other revised documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at the address
set forth in the Letter of Transmittal on or prior to the Expiration Date, or,
if the guaranteed delivery procedures described below are complied with, within
the time period provided under such procedures.
If the Holder desires to accept the Exchange Offer and time will not
permit a Letter of Transmittal or Old Notes to reach the Exchange Agent before
the Expiration Date or the procedure for book-entry transfer cannot be completed
on a timely basis, a tender may be effected if the Exchange Agent has received
at its office, on or prior to the Expiration Date, a letter, telegram or
facsimile transmission from an Eligible Institution setting forth the name and
address of the tendering Holder, the name(s) in which the Old Notes are
registered and the certificate number(s) of the Old Notes to be tendered, and
stating that the tender is being made thereby and guaranteeing that, within
three Nasdaq National Market trading days after the date of execution of such
letter, telegram or facsimile transmission by the Eligible Institution, such Old
Notes, in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC), will be delivered by
such Eligible Institution together with a properly completed and duly executed
Letter of Transmittal (and any other required documents). Unless Old Notes being
tendered by the above-described method are deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
completed Letter of Transmittal and any other required documents), GST Network
may, at its option, reject the tender. Copies of a Notice of Guaranteed
Delivery, which may be used by Eligible Institutions for the purposes described
in this paragraph, are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i)
the tendering Holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC), is received by the Exchange
Agent or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes
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tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by GST Network, whose determination will be final and binding. GST
Network reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of GST
Network's counsel, be unlawful. GST Network also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of GST Network, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or will incur any liability for failure to give any
such notification. Any Old Notes received by the Exchange Agent that are not
validly tendered and as to which the defects or irregularities have not been
cured or waived, or if Old Notes are submitted in an aggregate principal amount
at maturity greater than the aggregate principal amount at maturity of Old Notes
being tendered by such tendering Holder, will be returned by the Exchange Agent
to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, GST Network reserves the right in its sole discretion (i)
to purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date and (ii) to the extent permitted by applicable law, to
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers will differ from the terms
of the Exchange Offer.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Old Notes to GST Network and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Old Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Notes and to acquire
New Notes issuable upon the exchange of such tendered Old Notes, and that, when
the same are accepted for exchange, GST Network will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim. The
Transferor also warrants that it will, upon request, execute and deliver any
additional documents deemed by GST Network to be necessary or desirable to
complete the exchange, assignment and transfer of tendered Old Notes or transfer
ownership of such Old Notes on the account books maintained by DTC. All
authority conferred by the Transferor will survive the death, bankruptcy or
incapacity of the Transferor and every obligation of the Transferor will be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
By executing a Letter of Transmittal, each Holder will make to GST
Network, GST USA and GST the representations set forth above under the heading "
- -- Purpose and Effect of the Exchange Offer."
WITHDRAWAL OF TENDERS
Tenders of Old Notes pursuant to the Exchange Offer are irrevocable,
except that Old Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at the
address set forth in the Letter of Transmittal prior to 5:00 p.m., New York City
time on the Expiration Date. Any such notice of withdrawal must specify the
holder named in the Letter of Transmittal as having tendered Old Notes to be
withdrawn, the certificate numbers and designation of Old Notes to be withdrawn,
the principal amount of Old Notes delivered for exchange, a statement that such
Holder is withdrawing his election to have such Old Notes exchanged, and the
name of the registered Holder of such Old
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Notes, and must be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal (including any required signature
guarantees) or be accompanied by evidence satisfactory to GST Network that the
person withdrawing the tender has succeeded to the beneficial ownership of the
Old Notes being withdrawn. The Exchange Agent will return the properly withdrawn
Old Notes promptly following receipt of notice of withdrawal. If Old Notes have
been tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawn Old Notes or otherwise comply with DTC procedure. All
questions as to the validity of notices of withdrawal, including time of
receipt, will be determined by GST Network, and such determination will be final
and binding on all parties.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any
extension of the Exchange Offer, GST Network will not be required to issue New
Notes in exchange for any properly tendered Old Notes not theretofore accepted
and may terminate the Exchange Offer, or, at its option, modify or otherwise
amend the Exchange Offer, if either of the following events occur:
(i) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority
which, in the reasonable judgment of GST Network, would prohibit,
restrict or otherwise render illegal consummation of the Exchange
Offer, or
(ii) there shall occur a change in the current interpretation by the
staff of the Commission which, in GST Network's reasonable judgment,
might materially impair GST Network's ability to proceed with the
Exchange Offer.
GST Network expressly reserves the right to terminate the Exchange
Offer and not accept for exchange any Old Notes upon the occurrence of either of
the foregoing conditions (which represent all of the material conditions to the
acceptance by GST Network of properly tendered Old Notes).
The foregoing conditions are for the sole benefit of GST Network and
may be waived by GST Network, in whole or in part, in its reasonable discretion.
The foregoing conditions must be either satisfied or waived prior to termination
of the Exchange Offer. Any determination made by GST Network concerning an
event, development or circumstance described or referred to above will be final
and binding on all parties.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
By Mail (registered or certified mail recommended): By Overnight Courier:
<S> <C>
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 770 Broadway, 13th Floor
Cooper Station Corporate Trust Operations Department
New York, New York 10276-0844
New York, New York 10003
By Hand Delivery:
United States Trust Company of New York
111 Broadway, Lower Level
New York, New York 10006
Attn: Corporate Trust Services
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
By Facsimile: (212) 780-0592 Confirm by Telephone: (800) 548-6565
(For Eligible Institutions Only)
</TABLE>
FEES AND EXPENSES
The expense of soliciting tenders will be borne by GST Network. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or other means of electronic communication
or in person by officers and regular employees of GST Network and its
affiliates. No additional compensation will be paid to any such officers and
employees who engage in soliciting tenders.
GST Network has not retained any dealer-manager or other soliciting
agent in connection with the Exchange Offer and will not make any payments to
brokers, dealers or others soliciting acceptances of the Exchange Offer. GST
Network, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. GST Network may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees of GST Network, will be paid by GST Network.
GST Network will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, New Notes, or
Old Notes for principal amounts not tendered or accepted for exchange, are to be
delivered to, or are to be issued in the name of, any person other than the
registered Holder of the Old Notes tendered or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Holder or any other persons) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old
Notes as reflected in GST Network's accounting records on the date of the
exchange because the exchange of the Old Notes for the New Notes is the
completion of the selling process contemplated in the issuance of the Old Notes.
Accordingly, no gain or loss for accounting purposes will be recognized. The
expenses of the Exchange Offer and the unamortized expenses related to the
issuance of the Old Notes will be amortized over the term of the New Notes.
OTHER
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by GST Network, GST USA or GST.
Neither the delivery of this Prospectus nor any exchange made hereunder shall,
under any circumstances, shall create any implication that there has been no
change in the affairs of GST Network, GST USA or GST since the respective dates
as of which information is given herein. The Exchange Offer is not being made to
(nor will tenders be accepted from or on behalf of) Holders of Old Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, GST
Network
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may, at its discretion, take such action as it may deem necessary to make the
Exchange Offer in any such jurisdiction and extend the Exchange Offer to Holders
of Old Notes in such jurisdiction.
As a result of the making of the Exchange Offer, GST Network, GST USA
and GST will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of the Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to all
the rights and limitations applicable thereto under the Indenture except for any
such rights under the Registration Rights Agreement and except that the Old
Notes will not be entitled to the contingent increase in interest rate provided
for in the Old Notes. All untendered Old Notes will continue to be subject to
the restrictions on transfer set forth in the Indenture and the Old Notes. To
the extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for untendered Old Notes could be adversely affected.
USE OF PROCEEDS
GST Network will not receive any cash proceeds from the issuance of the
New Notes offered hereby. In consideration for issuing the New Notes as
contemplated in this Prospectus, GST Network will receive in exchange Old Notes
in like principal amount, the terms of which are identical in all material
respects to the New Notes, except that the offer and sale of such New Notes will
be registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. Old Notes surrendered in exchange for New
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the New Notes will not result in a change in the indebtedness of GST Network.
The net proceeds received by GST Network from the May Offering were
approximately $288.9 million. GST Network intends to use the net proceeds of the
May Offering to finance the cost (including, without limitation, the cost of
design, development, construction, acquisition, installation or integration) of
Acquired Equipment for the continued expansion of the Company's infrastructure,
including the development and construction of additional networks and longhaul
fiber optic facilities; provided that the cost of design, development,
construction, installation and integration of the Acquired Equipment shall not
exceed 50% of the aggregate Acquired Equipment Cost. GST Network will thereafter
sell such Acquired Equipment to GST USA for Intercompany Notes equal to the
Acquired Equipment Cost.
45
<PAGE> 48
SELECTED FINANCIAL DATA
GST NETWORK
The selected financial data set forth below for the period from April 16,
1998 (date of inception) to December 31, 1998 is derived from the audited
financial statements of GST Network. The selected financial data for the three
months ended March 31, 1999 is unaudited, but in the opinion of the management
of GST Network, reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of results for interim period.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
(in thousands)
Period from April 16, 1998 (date of Three months ended
inception) to December 31, 1998 March 31, 1999
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income ........................................ $10,661 $5,488
Commitment fee income .................................. 14,256 3,618
Interest expense ....................................... 22,132 8,963
Income tax expense ..................................... 8,472 3,096
------- -------
Net loss ............................................... (5,687) (2,953)
======= =======
December 31, 1998 March 31, 1999
BALANCE SHEET DATA (AT END OF PERIOD):
Restricted cash and investments ........................ $230,014 $168,055
Total assets ........................................... 326,749 335,622
Long term debt ......................................... 320,997 329,279
Common shares and additional paid-in-capital ........... 2,000 2,000
Accumulated deficit .................................... (5,687) (8,640)
Shareholder's deficit .................................. (3,687) (6,640)
</TABLE>
46
<PAGE> 49
GST USA
The selected consolidated financial data set forth below for Fiscal
1994, Fiscal 1995, Fiscal 1996, Fiscal 1997, the 1997 Three Month Period and
Fiscal 1998 are derived from the audited consolidated financial statements of
GST USA. The selected consolidated financial data for the three months ended
December 31, 1996, the twelve months ended December 31, 1997 and the three
months ended March 31, 1998 and 1999 is unaudited, but in the opinion of the
management of GST USA, reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results for interim
periods. The selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the notes thereto incorporated by
reference in this Prospectus.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
THIRTEEN MONTHS YEAR ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
1994(a) 1995 1996(b) 1997(b)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services ..................... $ 112 $ 11,118 $ 31,726 $ 82,596
Construction, facility sales and other........... -- -- -- --
Telecommunication products ..................... 5,889 7,563 9,573 23,374
------- -------- --------- ---------
Total revenues ......................... 6,001 18,681 41,299 105,970
Operating loss ........................................... (975) (10,261) (40,116) (77,002)
Other expenses (income):
Interest income ................................. (89) (241) (4,927) (6,332)
Interest expense(c) ............................. 27 805 18,334 34,171
Other, net ...................................... 1,877 820 2,289 (6,180)
Income tax expense ....................................... 502(e) 166(e) 157 903
------- -------- --------- --------
Net income (loss)(f) ..................................... $(3,492) $ (9,447) $ (55,558) (99,564)
======== ======== ========= ========
OTHER DATA:
Capital expenditures ..................................... $ 1,429 $ 33,905 $ 97,561 225,743
Ratio of earnings to fixed charges(g) .................... -- -- -- --
Adjusted EBITDA(h) ....................................... $ (591) $ (7,532) $ (31,462) (49,883)
Cash flow provided by (used in):
Operating activities ................................... (149) (11,276) (31,796) (51,907)
Investing activities ................................... (6,452) (29,069) (105,440) (260,579)
Financing activities ................................... 7,911 42,929 174,882 326,248
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents ................................... $ 1,310 $ 3,894 $ 41,540 55,302
Investments .............................................. 843 871 5,177 3,322
Restricted cash and investments .......................... -- -- 16,000 171,750
Property and equipment ................................... 4,593 39,556 134,274 385,194
Accumulated depreciation ................................. (222) (1,545) (6,777) (20,724)
Investment in joint ventures(i) .......................... 3,552 2,859 1,364 --
Total assets ............................................. 18,887 71,421 277,673 723,301
Current portion of long-term debt
and capital lease obligations .......................... 134 745 5,346 9,366
Long term debt and capital lease obligations
(excluding current portion) ............................ -- 19,495 211,907 601,344
Common Shares ............................................ 16,340 47,909 69,957 78,373
Accumulated deficit ...................................... (3,678) (13,125) (68,683) (167,247)
Shareholder's equity (deficit) ........................... 12,662 34,784 1,274 (89,874)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996(b) 1997(b) 1997(b) 1998(b) 1998(b) 1999
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services ..................... 18,437 26,064 90,220 149,783 29,180 48,724
Construction, facility sales and other........... -- 1,488 1,488 8,826 -- 5,876
Telecommunication products ..................... 4,780 8,706 27,300 4,708 864 1,082
------- ------ ------- -------- ------ -------
Total revenues ......................... 23,217 36,258 119,008 163,317 30,044 55,682
Operating loss ........................................... (17,432) (21,443) (81,006) (131,696) (24,353) (27,578)
Other expenses (income):
Interest income ................................. (693) (4,096) (9,735) (24,134) (4,933) (3,858)
Interest expense(c) ............................. 4,646 15,855 45,380 77,814 15,432 21,866
Other, net ...................................... 81 756 (5,452) (58,596) (61,238) 193
Income tax expense ....................................... -- 850 1,753 -- -- --
------- ------ ------- -------- ------ -------
Net income (loss)(f) ..................................... (21,413) (34,808) (112,952) (126,780) 26,386 (45,779)
======== ======= ======== ======== ====== =======
OTHER DATA:
Capital expenditures ..................................... 58,047 46,663 214,359 247,683 41,760 77,106
Ratio of earnings to fixed charges(g) .................... -- -- -- -- 2.04 --
Adjusted EBITDA(h) ....................................... (12,661) (11,629) (48,783) (57,152) (14,374) (9,699)
Cash flow provided by (used in):
Operating activities ................................... (15,172) (42,269) (79,004) (82,614) (6,988) (21,249)
Investing activities ................................... (63,755) (42,260) (239,084) (342,435) 36,665 (14,158)
Financing activities ................................... 40,503 228,097 513,842 312,063 10,566 (2,129)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash, cash equivalents ................................... 198,870 85,884 48,348
Investments .............................................. 7,619 -- 46
Restricted cash and investments .......................... 144,450 281,364 220,252
Property and equipment ................................... 433,621 678,374 754,806
Accumulated depreciation ................................. (26,766) (62,522) (74,266)
Investment in joint ventures(i) .......................... -- -- --
Total assets ............................................. 891,606 1,128,778 1,101,998
Current portion of long-term debt
and capital lease obligations .......................... 9,575 17,776 17,206
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, DECEMBER 31, THREE MONTHS ENDED
1996(b) 1997(b) 1997(b) 1998(b) MARCH 31, 1999
<S> <C> <C> <C> <C> <C>
Long term debt and capital lease obligations
(excluding current portion)......................... 605,862 938,816 954,099
Common Shares ........................................ 78,462 78,462 78,462
Accumulated deficit .................................. (203,055) (329,835) (375,614)
Shareholder's equity (deficit) ....................... (124,593) (251,373) (297,152)
</TABLE>
(a) GST USA was formed in August 1994 at which time the Company transferred
all operating subsidiaries to GST USA. The consolidated financial
statements as of and for the thirteen months ended September 30, 1994
reflect the results of operations, financial position and cash flows of
the operating subsidiaries using the "as if" pooling of interests basis
of accounting, as the entities were under common control during the
period.
(b) Effective January 1, 1998, the Company transferred GST Call America,
Inc. ("GST Call America") and TotalNet Communications, Inc.
("TotalNet"), previously direct wholly-owned subsidiaries of the
Company, to GST USA. Effective January 1, 1999, the Company transferred
GST Action Telcom, Inc. ("Action Telcom"), previously a direct
wholly-owned subsidiary of the Company, to GST USA. The financial
results have been restated to reflect the operations of GST Call
America, TotalNet and Action Telcom from the dates such subsidiaries
were acquired by the Company. The financial results have been restated
in order to conform with the Company's presentation as the entities are
under common control.
(c) Excludes capitalized interest of $291 for Fiscal 1995, $2,316 for
Fiscal 1996, $15,170 for Fiscal 1997, $2,549 for the 1996 Three Month
Period, $3,726 for the 1997 Three Month Period, $16,347 for the twelve
months ended December 31, 1997, $25,920 for Fiscal 1998, $4,849 for the
three months ended March 31, 1998 and $7,424 for the three months ended
March 31, 1999. During the construction of GST USA'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."
(d) Includes a $61,266 gain on the sale of NACT.
(e) During Fiscal 1994 and the first eight months of Fiscal 1995, GST USA
owned less than 80% of GST Telecom and was therefore unable to deduct
for tax purposes the losses incurred by GST Telecom.
(f) Includes minority interest in (income) loss of subsidiaries of ($2) for
Fiscal 1994, $2,364 for Fiscal 1995, $411 for Fiscal 1996, $(612) for
Fiscal 1997, $53 for the 1996 Three Month Period, $(472) for the 1997
Three Month Period, $(1,137) for the twelve months ended December 31,
1997, $0 for Fiscal 1998, $0 for the three months ended March 31, 1998
and $0 for the three months ended March 31, 1999.
(g) The ratio of earnings to fixed charges is computed by dividing pretax
income from continuing operations before fixed charges (other than
capitalized interest) by fixed charges. Fixed charges consist of
interest charges and amortization of debt expense and discount or
premium related to indebtedness, whether expensed or capitalized and
that portion of rental expense the Company believes to be
representative of interest. For Fiscal 1994, Fiscal 1995, Fiscal 1996,
Fiscal 1997, the 1996 Three Month Period, the 1997 Three Month Period,
the twelve months ended December 31, 1997 Fiscal 1998 and the three
months ended March 31, 1999, earnings were insufficient to cover fixed
charges by $3.0 million, $11.9 million, $58.1 million, $113.2 million,
$24.0 million, $37.2 million, $126.4 million, $152.7 million and $53.2
million, respectively.
(h) Adjusted EBITDA consists of loss before interest, income taxes,
depreciation and amortization, minority interest, gains and losses on
the disposition of assets, and noncash charges. Adjusted EBITDA should
not be considered in isolation from, and is not presented as an
alternative measure of operating loss, cash flow from operations or net
loss as determined in accordance with GAAP. Adjusted EBITDA as
presented may not be comparable to similarly titled measures reported
by other companies. Adjusted EBITDA is not a measure of liquidity, or
of amounts available to the Company for debt service requirements or
for discretionary purposes. Management believes that Adjusted EBITDA
provides a meaningful measure of operating cash flow (without the
effects of working capital changes) for the continuing operations of
the Company by excluding the effects of noncash expenses and
non-operating activities. However, Adjusted EBITDA does not capture the
following financial trends, which pertain to the periods from Fiscal
1994 through the six months ended June 30, 1998: (i) an increase in
depreciation expense resulting from continuing network construction
activities, (ii) an increase in amortization expense resulting from
acquisition activities, and (iii) an increase in net interest expense
from borrowing activities. Such trends are captured through an analysis
of the Company's net losses throughout these periods.
(i) Represents principally GST USA's then 50% ownership interest in Phoenix
Fiber, the owner and operator of the Phoenix network. GST USA acquired
the remaining 50% interest in Phoenix Fiber effective as of October 1,
1996.
48
<PAGE> 51
THE COMPANY
The selected consolidated financial data set forth below for Fiscal
1994, Fiscal 1995, Fiscal 1996, Fiscal 1997 and the 1997 Three Month Period and
Fiscal 1998 are derived from the audited consolidated financial statements of
the Company. The selected consolidated financial data for the 1996 Three Month
Period, the twelve months ended December 31, 1997 and the three months ended
March 31, 1998 and 1999 is unaudited, but in the opinion of the management of
the Company, reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the notes thereto incorporated by reference in this
Prospectus. The selected consolidated financial data includes information with
respect to NACT. In February 1998, the Company sold its remaining 63% interest
in NACT in the NACT Sale.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
THIRTEEN
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1994(a) 1995 1996 1997
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services ....... $ 112 $ 11,118 $ 31,726 $ 82,593
Construction, facility sales and
other ........................... -- -- -- --
Telecommunications products ....... 5,889 7,563 9,573 23,374
-------- -------- --------- ---------
Total revenues ........... 6,001 18,681 41,299 105,967
Operating loss ............................. (1,337) (11,631) (42,597) (86,543)
-------- -------- --------- ---------
Other expenses (income):
Interest income ................... (254) (303) (5,549) (7,026)
Interest expense(b) ............... 27 838 21,224 37,665
Other, net ........................ 1,877 1,347 2,360 (5,359)
Income tax expense ......................... 502(d) 166(d) 157 903
--------- ---------
Net income (loss)(e) ....................... $ (3,491) $(11,315) $ (60,378) $(113,338)
======== ======== ========= =========
Net income (loss) per share, basic(f) ...... $ (.35) $ (.82) $ (3.18) $ (4.71)
======== ======== ========= =========
Net income (loss) per share, diluted(f)..... (.35) (.82) (3.18) (4.71)
======== ======== ========= =========
Weighted average number of common shares
outstanding, basic ....................... 9,879 13,781 18,988 24,703
Weighted average number of common shares
outstanding, diluted ..................... 9,879 13,781 18,988 24,703
OTHER DATA:
Capital expenditures ....................... $ 1,486 $ 33,922 $ 97,561 $ 225,743
Ratio of earnings to fixed charges (g) ..... -- -- -- --
Adjusted EBITDA(h) ......................... (779) (8,807) (33,936) (51,881)
CASH FLOW PROVIDED BY (USED IN):
Operating income .......................... 294 (11,056) (33,306) (57,002)
Investing activities ...................... (11,706) (24,522) (105,674) (261,570)
Financing activities ...................... 10,885 37,383 194,299 313,091
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents .................. $ 4,219 $ 6,204 $ 61,343 $ 55,862
Investments ................................ 843 871 5,176 3,322
Restricted cash and investments ............ -- -- 16,000 171,750
Property and equipment ..................... 4,805 39,583 134,714 385,252
Accumulated depreciation ................... (221) (1,550) (7,139) (20,738)
Investment in joint ventures(i) ............ 3,552 2,859 1,364 --
Total assets ............................... 26,769 73,125 301,701 728,405
Current portion of long-term debt and
capital lease obligations ................ -- 959 5,554 10,656
Long-term debt and capital lease
obligations (excluding current portion) .. -- 19,746 234,127 628,043
Redeemable Preferred Shares ................ -- -- -- 51,756
Common Shares and commitment to issue
Common Shares ............................ 25,075 51,660 98,101 149,880
Accumulated deficit ........................ (4,640) (15,955) (76,333) (189,671)
Accumulated other comprehensive
income .................................. -- -- -- --
Shareholders' equity (deficit) ............. 20,435 35,705 21,768 (39,791)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS ENDED THREE MONTHS ENDED
ENDED DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services ....... $ 18,437 $ 26,064 $ 90,220 $ 149,783 $ 29,180 $ 48,724
Construction, facility sales and
other ........................... -- 1,488 1,488 8,826 -- 5,876
Telecommunications products ....... 4,780 8,706 27,300 4,708 864 1,082
-------- --------- --------- ---------- ---------- ----------
Total revenues ........... 23,217 36,258 119,008 163,317 30,044 55,682
Operating loss ............................. (17,988) (21,855) (90,410) (135,172) (24,807) (28,614)
-------- --------- --------- ---------- ---------- ----------
Other expenses (income):
Interest income ................... (839) (4,101) (10,288) (24,145) (4,935) (3,861)
Interest expense(b) ............... 5,434 18,948 51,179 101,648 21,275 28,260
Other, net ........................ 104 1,569 (3,894) (57,985)(c) (60,609) 199
Income tax expense ......................... -- 850 1,753 -- -- --
-------- --------- --------- ---------- ---------- ----------
Net income (loss)(e) ....................... $(22,634) $ (39,593) $(130,297) $ (154,690) $ 19,462 $ (53,212)
======== ========= ========= ========== ========== ==========
Net income (loss) per share, basic(f) ...... $ (1.02) $ (1.39) $ (5.11) $ (4.52) $ 0.56 $ (1.46)
======== ========= ========= ========== ========== ==========
Net income (loss) per share, diluted(f)..... (1.02) (1.39) (5.11) (4.52) 0.44 (1.46)
======== ========= ========= ========== ========== ==========
Weighted average number of common shares
outstanding, basic ....................... 22,237 30,804 26,707 35,834 35,035 36,461
Weighted average number of common shares
outstanding, diluted ..................... 22,237 34,804 26,707 25,834 44,715 36,461
OTHER DATA:
Capital expenditures ....................... $ 58,047 $ 46,663 $ 214,359 247,683 41,760 77,106
Ratio of earnings to fixed charges(g) ...... -- -- -- -- 1.55 --
Adjusted EBITDA(h) ......................... (13,208) (12,032) (50,705) (60,538) (14,820) (10,339)
CASH FLOW PROVIDED BY (USED IN):
Operating income .......................... (15,479) (40,580) (82,103) (83,923) (8,170) (23,793)
Investing activities ...................... (67,221) (42,954) (237,303) (344,190) 36,857 (14,150)
Financing activities ...................... 34,720 226,725 505,096 315,130 12,164 1,908
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents .................. $ 199,053 $ 86,070 50,035
Investments ................................ 7,619 16,246 16,246
Restricted cash and investments ............ 144,450 281,364 34,681
Property and equipment ..................... 433,680 678,374 754,806
Accumulated depreciation ................... (26,785) (62,522) (74,266)
Investment in joint ventures(i) ............ -- -- --
Total assets ............................... 898,174 1,151,283 1,127,390
Current portion of long-term debt and
capital lease obligations ................ 10,865 19,066 18,496
Long-term debt and capital lease
obligations (excluding current portion) .. 777,286 1,112,700 1,128,214
Redeemable Preferred Shares ................ 54,635 61,741 61,741
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
THREE
MONTHS
THREE MONTHS ENDED TWELVE MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Common Shares and commitment to issue
Common Shares ........................ 221,709 234,267 240,289
Accumulated deficit .................... (229,264) (383,954) (437,166)
Accumulated other comprehensive
income .............................. -- 16,200 16,200
Shareholders' equity (deficit) ......... (7,555) (133,487) (180,677)
</TABLE>
(a) The Company changed its fiscal year end to September 30, effective in
1994. As a result, amounts reported for Fiscal 1994 are for the 13
months ended September 30, 1994. Results for Fiscal 1994 include the
acquisition of 60% of GST Telecom, the Company's subsidiary that owned
and operated each of the Company's networks, and, at various times
during Fiscal 1994, an aggregate of 80% of NACT Telecommunications,
Inc. ("NACT").
(b) Excludes capitalized interest of $.3 million for Fiscal 1995, $2.3
million for Fiscal 1996, $15.2 million for Fiscal 1997, $2.5 million
for the three months ended December 31, 1996 (the "1996 Three Month
Period") and $3.7 million for the three months ended December 31, 1997
(the "1997 Three Month Period"), $16.4 million for the twelve month
period ended December 31, 1997, $25.9 million for Fiscal 1998, $4.8
million for three months ended March 31, 1998 and $7.4 million for the
three months ended March 31, 1999. 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."
(c) Includes a $61,266 gain on the sale of NACT.
(d) 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.
(e) Includes minority interest in (income) loss of subsidiaries of $0 for
Fiscal 1994, $2.4 million for Fiscal 1995, $.4 million for Fiscal 1996,
$(.6) million Fiscal 1997, $.1 million for the 1996 Three Month Period,
$(.5) million for the 1997 Three Month Period, ($1.0) million for
Fiscal 1997, $0 for Fiscal 1998, $0 for the three months ended March
31, 1998 and $0 for the three months ended March 31, 1999.
(f) Net loss per share also reflects the accretion of the liquidation and
redemption prices of the outstanding Series A Preference Shares of GST
(the "Redeemable Preferred Shares") totaling $3.0 million for Fiscal
1997, $3.1 million for the 1997 Three Month Period, $6.1 million for
the twelve months ended December 31, 1997, $7.1 million for Fiscal
1998, $0 for the three months ended March 31, 1998, and $0 for the
three months ended March 31, 1999.
(g) The ratio of earnings to fixed charges is computed by dividing pretax
income from continuing operations before fixed charges (other than
capitalized interest and preferred stock accretion) by fixed charges.
Fixed charges consist of interest charges and amortization of debt
expense and discount or premium related to indebtedness, whether
expensed or capitalized, that portion of rental expense the Company
believes to be representative of interest and preferred stock
accretion. For Fiscal 1994, Fiscal 1995, Fiscal 1996, Fiscal 1997, the
1996 Three Month Period, the 1997 Three Month Period, the twelve months
ended December 31, 1997, Fiscal 1998 and the three months ended March
31, 1999, earnings were insufficient to cover fixed charges by $3.0
million, $13.8 million, $62.9 million, $130.0 million, $25.2 million,
$45.1 million, $149.9 million, $187.6 million and $60.6 million,
respectively.
(h) Adjusted EBITDA consists of loss before interest, income taxes,
depreciation and amortization, minority interest, gains and losses on
the disposition of assets, and noncash charges. Adjusted EBITDA should
not be considered in isolation from, and is not presented as an
alternative measure of operating loss, cash flow from operations or net
loss as determined in accordance with GAAP. Adjusted EBITDA as
presented may not be comparable to similarly titled measures reported
by other companies. Adjusted EBITDA is not a measure of liquidity, or
of amounts available to the Company for debt service requirements or
for discretionary purposes. Management believes that Adjusted EBITDA
provides a meaningful measure of operating cash flow (without the
effects of working capital changes) for the continuing operations of
the Company by excluding the effects of noncash expenses and
non-operating activities. However, Adjusted EBITDA does not capture the
following financial trends, which pertain to the periods from Fiscal
1994 through Fiscal 1998: (i) an increase in depreciation expense
resulting from continuing network construction activities, (ii) an
increase in amortization expense resulting from acquisition activities,
and (iii) an increase in net interest expense from borrowing
activities. Such trends are captured through an analysis of the
Company's net losses throughout these periods.
(i) 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.
50
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GST NETWORK
OVERVIEW
GST Network was formed on April 16, 1998 for the purpose of issuing the
Old Notes and financing the purchase of Acquired Equipment. GST Network acts as
purchasing agent for GST USA and sells to GST USA the equipment it purchases
with the proceeds from the May Offering. GST Network has only a limited
operating history.
As of March 31, 1999, GST Network holds restricted cash and
investments of approximately $168.1 million restricted for the acquisition of
telecommunications equipment. All of such equipment will be sold to GST USA in
exchange for Intercompany Notes. Ultimately, such telecommunications equipment
is leased by GST USA to the various operating subsidiaries of the Company.
OPERATIONS
The operations of GST Network are limited to (i) purchasing equipment,
(ii) selling equipment, (iii) receiving payments under Intercompany Notes, (iv)
making payments of interest and principal on the Notes, and (v) fulfilling its
obligations under the Indenture, the Pledge Agreement and the Registration
Rights Agreement.
NET LOSS
Net loss of $3.0 million for the three months ended March 31, 1999
includes the following components: (i) interest income of $5.5 million relating
to interest earned on proceeds from the May Offering and from interest earned
on Intercompany Notes, (ii) commitment fee income of $3.6 million earned from
GST USA, (iii) interest expense of $9.0 million relating to the Notes and (iv)
income tax expense of $3.1 million.
Net loss of $5.7 million for the period from April 16, 1998 (date of
inception) to December 31, 1998 includes the following components: (i) interest
income of $10.7 million relating to interest earned on proceeds from the May
Offering and from interest earned on Intercompany Notes, (ii) commitment fee
income of $14.3 million earned from GST USA, (iii) interest expense of $22.1
million relating to the Notes and (iv) income tax expense of $8.5 million.
LIQUIDITY AND CAPITAL RESOURCES
On May 4, 1998, GST Network completed the May Offering, consisting of
$500.0 million aggregate principal amount at maturity of Old Notes. As of March
31, 1999, the net proceeds from the issuance of the Notes of approximately
$288.9 million had been used to purchase government securities. The Indenture
governing the Notes includes restrictive covenants which, among other items,
limit or restrict additional indebtedness incurred by the Company, investment in
certain subsidiaries and the payment of dividends.
GST USA
OVERVIEW
GST USA was formed to hold the capital stock of the consolidated
operating subsidiaries of GST. In December 1995, GST USA issued in a private
placement its Senior Notes, which are unconditionally guaranteed by GST, and GST
issued its Convertible Notes, which are unconditionally guaranteed by GST USA.
The net proceeds from the sale of the 1995 Notes were used to fund capital
expenditures and for working capital.
GST USA also purchases equipment from its wholly-owned subsidiary, GST
Equipment Funding, Inc. ("GST Funding") and leases such equipment to the
operating subsidiaries of GST and GST USA. GST USA is obligated to assume GST
Funding's Secured Notes as soon as GST USA is permitted to do so pursuant to the
terms of the indenture relating to the Senior Notes. At such time GST is
obligated to guarantee the Secured Notes. GST Funding issued the Secured Notes
in the Secured Notes Offering in May 1997. Of the $255.8 million of net proceeds
from the Secured Notes Offering, as of March 31, 1999 approximately $93.8
million had been used to purchase securities pledged to fund the first six
interest payments on the Secured Notes ($43.8 million of which was used to
51
<PAGE> 54
make the first three interest payments in November 1997, May 1998 and November
1998) and approximately $194.2 million had been used to purchase
telecommunications equipment ($41.5 million of which was used to refinance
intercompany indebtedness).
Effective January 1, 1998, the Company transferred GST Call America and
TotalNet, previously direct wholly-owned subsidiaries of the Company, to GST
USA. Effective January 1, 1999 the Company transferred Action Telcom, previously
a direct wholly-owned subsidiary of the Company, to GST USA. The financial
results have been restated to reflect the operations of GST Call America,
TotalNet and Action Telcom from the dates such subsidiaries were acquired by the
Company. The financial results have been restated in order to conform with the
Company's presentation as the entities are under common control.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1998
Revenues. Total revenue for the three month period ended March 31, 1999
increased $25.7 million, or 85.3%, to $55.7 million from $30.0 million for the
comparable three months ended March 31, 1998. Telecommunications services
revenues for the three month period ended March 31, 1999 increased $19.5
million, or 67.0%, to $48.7 million from $29.2 million for the comparable three
months ended March 31, 1998. The increase in telecommunications services
revenues resulted primarily from strategic acquisitions, including the
acquisition of ICON Communications Corp. ("ICON") in April 1998, and from
increased local service revenue generated by GST USA's networks. To a lesser
extent, the increase in telecommunications services revenues resulted from
increased long distance, Internet, and data services. Construction, facility
sales and other revenue was $5.9 million and $0 for the three month periods
ended March 31, 1999 and 1998, respectively. The increase was attributable to
revenue from the construction of network and fiber systems. Product revenue for
the three month period ended March 31, 1999 increased $0.2 million, or 25.2%, to
$1.1 million from $0.9 million for the three month period ended March 31, 1998.
Operating Expenses. Total operating expenses for the three month period
ended March 31, 1999 increased $28.9 million, or 53.1%, to $83.3 million from
$54.4 million for the three month period ended March 31, 1998. Network expenses,
which include direct local and long distance circuit costs, increased $10.6
million, or 50.0%, to $31.7 million, or 65.1% of telecommunications services
revenues for the three month period ended March 31, 1999 compared to $21.1
million, or 72.4% for the comparable three month period ended March 31, 1998.
The decrease in network expenses as a percentage of telecommunications services
revenue resulted from the inclusion of strategic acquisitions and an increase in
revenues for traffic carried on GST USA's network. Facilities administration and
maintenance expenses for the three month period ended March 31, 1999 increased
$1.1 million, or 29.8%, to $5.1 million, or 10.5% of telecommunications services
revenues compared to $4.0 million, or 13.6% for the comparable three month
period ended March 31, 1998. The primary reason for the decrease in these
expenses as a percentage of telecommunications services revenues is the
inclusion of revenues from strategic acquisitions, substantially all of which
are not generated on GST USA's networks.
Cost of construction revenue was $2.5 million and $0 for the three
month periods ended March 31, 1999 and 1998, respectively. The increase was
attributable to new construction of network and fiber systems.
Cost of product revenues was $0.7 million in each of the three month
periods ended March 31, 1999 and 1998. For the three month period ended March
31, 1999 cost of product revenues were 64.2% of product revenues, compared to
79.7% for the comparable three month period ended March 31, 1998.
Selling, general and administrative expenses for the three month period
ended March 31, 1999 increased $6.2 million, or 31.5%, to $26.2 million from
$20.0 million for the three month period ended March 31, 1998. The increase is
due to the expansion of GST USA's local and enhanced services operations, which
resulted in additional marketing, management information and sales staff, and to
selling, general and administrative expenses related to companies acquired in
1998. As a percentage of total revenue, selling, general and administrative
expenses for the three
52
<PAGE> 55
months ended March 31, 1999 were 47.1%, compared to 66.4% for the three months
ended March 31, 1998.
Depreciation and amortization for the three month period ended March
31, 1999 increased $8.3 million, or 95.9%, to $17.0 million from $8.7 million
for the three months ended March 31, 1998. The increase is attributable to
newly-constructed networks and related equipment being placed into service and
to the amortization of intangible assets related to companies acquired in
1998. GST USA expects that depreciation will continue to increase as it expands
its networks and longhaul fiber optic facilities and installs additional
switches. Depreciation and amortization expense was 30.5% of total revenue for
the three months ended March 31, 1999 compared to 28.8% for the comparable three
month period ended March 31, 1998.
Other Expenses/Income. For the three month period ended March 31, 1999,
GST USA recorded net other expense of $18.2 million, compared to net other
income of $50.7 million for the comparable three month period ended March 31,
1998. For the three months ended March 31, 1998, net other income includes a
$61.3 million gain resulting from the NACT Sale. Excluding such gain, net other
expense would have increased $7.7 million for the three month period ended March
31, 1999 as compared to the same period in the previous year. The increase in
net other expense related primarily to increased interest expense resulting from
the issuance in May 1998 of the senior secured discount notes.
Net Income/Loss. Net income (loss) for the three months ended March 31,
1999 decreased $72.2 million, or 273.5%, to ($45.8) million from $26.4 million
for the three months ended March 31, 1998. Excluding the $61.3 million gain on
the NACT Sale, net loss would have been $34.9 million for the three months ended
March 31, 1998. Excluding the gain on the NACT Sale, net loss would have
increased $10.9 million for the three months ended March 31, 1999 as compared to
the three months ended March 31, 1998. Such increase in net loss resulted
primarily from a $6.4 million increase in interest expense and a $28.9 million
increase in operating expenses and was partially offset by a $25.7 million
increase in revenues.
FISCAL 1998 COMPARED TO THE UNAUDITED YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenue for Fiscal 1998 increased $44.3 million, or
37.2%, to $163.3 million from $119.0 million for the comparable twelve months
ended December 31, 1997. Telecommunications services revenues for Fiscal 1998
increased $59.6 million, or 66.0%, to $149.8 million from $90.2 million for the
twelve months ended December 31, 1997. The increase in telecommunications
services revenues resulted primarily from strategic acquisitions, including the
acquisition of ICON in April 1998, and from increased local service revenue
generated by GST USA's networks. To a lesser extent, the increase in
telecommunications services revenues resulted from increased long distance,
Internet, and data services. Construction, facility sales and other revenues for
Fiscal 1998 increased $7.3 million to $8.8 million from $1.5 million for the
twelve months ended December 31, 1997. The increase primarily resulted from the
construction and sale of longhaul network facilities in California. The decrease
in product revenues resulted from the sale of the Company's 63% interest in
NACT.
Operating Expenses. Total operating expenses for Fiscal 1998 increased
$95.0 million, or 47.5%, to $295.0 million from $200.0 million for the twelve
months ended December 31, 1997. Network expenses, which include direct local and
long distance circuit costs, increased $33.8 million, or 47.9%, to $104.3
million, or 69.7% of telecommunications services revenues for Fiscal
<PAGE> 56
1998 compared to $70.5 million, or 78.2% for the comparable period in the
previous year. The decrease in network expenses as a percentage of revenue
resulted from the inclusion of strategic acquisitions and an increase in
revenues for traffic carried on GST USA's network as a percentage of total
telecommunications services revenues. Facilities administration and maintenance
expenses for Fiscal 1998 increased $4.0 million, or 31.5%, to $16.7 million, or
11.2% of telecommunications services revenues compared to $12.7 million, or
14.1% for the comparable period ended December 31, 1997. The primary reason for
the decrease in these expenses as a percentage of telecommunications services
revenues is the inclusion of revenues from strategic acquisitions, substantially
all of which are not generated on GST USA's networks.
Cost of product revenues for Fiscal 1998 decreased $6.3 million, or
67.7%, to $3.0 million from $9.3 million for the twelve months ended December
31, 1997. For Fiscal 1998, cost of product revenues were 63.7% of
telecommunications products revenues compared to 34.0% for the comparable period
ended December 31, 1997. The decrease in the dollar amount of cost of product
revenues and the increase in cost of product revenues as a percent of product
sales resulted from the sale of NACT. Research and development costs reported in
the twelve months ended December 31, 1997 were related to activities at NACT.
Cost of construction revenues for Fiscal 1998 increased $1.1 million to
$1.4 million from $.3 million for the twelve months ended December 31, 1997. The
increase resulted from an increase in construction, facility sales and other
revenues.
Selling, general and administrative expenses for Fiscal 1998 increased
$16.8 million, or 22.1%, to $93.1 million from $76.2 million for the twelve
months ended December 31, 1997. The increase is due to the expansion of GST
USA's local and enhanced services operations, which resulted in additional
marketing, management information and sales staff, and to selling, general and
administrative expenses related to strategic acquisitions. As a percentage of
total revenue, selling, general and administrative expenses for Fiscal 1998 were
57.0%, compared to 64.0% for the twelve months ended December 31, 1997.
Depreciation and amortization for Fiscal 1998 increased $17.6 million,
or 62.3%, to $45.9 million from $28.3 million for the twelve months ended
December 31, 1997. The increase is attributable to newly-constructed networks
and related equipment being placed into service and to the amortization of
intangible assets related to GST USA's acquisitions. GST USA expects that
depreciation will continue to increase as it expands its networks and longhaul
fiber optic facilities and installs additional switches. Depreciation and
amortization expense was 28.1% of total revenue for Fiscal 1998 compared to
23.8% for the comparable period ended December 31, 1997.
See "The Company -- Recent Developments" for a discussion of special
charges incurred by GST USA and the Company during Fiscal 1998.
Other Expenses/Income. For Fiscal 1998, GST USA recorded net other
income of $4.9 million, compared to net other expense of $29.1 million for the
comparable period ended December 31, 1997. For Fiscal 1998, net other income
includes a $61.3 million gain resulting from the NACT Sale. Excluding such gain,
net other expense would have increased $27.3 million for Fiscal 1998 as
<PAGE> 57
compared to the same period in the previous year. The increase in net other
expense related primarily to increased interest expense resulting from the
issuance in May 1998 of the 1998 Notes.
Net Loss. Net loss for Fiscal 1998 increased $13.8 million, or 12.2%,
to $126.8 million from $113.0 million for the twelve months ended December 31,
1997. Excluding the $61.3 million gain on the NACT Sale, net loss would have
been $188.1 million for Fiscal 1998, an increase of $75.1 million as compared to
the twelve months ended December 31, 1997. Such increase in net loss resulted
primarily from a $32.4 million increase in interest expense and a $50.7 million
increase in operating loss.
THE THREE MONTHS ENDED DECEMBER 31, 1997 ("1997 THREE MONTH PERIOD") COMPARED TO
THE UNAUDITED THREE MONTHS ENDED DECEMBER 31, 1996 ("1996 THREE MONTH PERIOD")
Revenues. Total revenue for the 1997 Three Month Period increased $13.1
million, or 56.2%, to $36.3 million from $23.2 million for 1996 Three Month
Period. Telecommunications services revenue for the 1997 Three Month Period
increased $7.6 million, or 41.4%, to $26.1 million from $18.4 million for the
1996 Three Month Period. The increase in telecommunications services revenue
resulted primarily from increased local service revenue generated by GST USA's
networks and from increased long distance service revenue. To a lesser extent,
the increase in revenue resulted from the acquisitions of Action Telcom, Inc.
("Action Telcom") and the Guam operations of Sprint in October 1997. Product
revenue for the 1997 Three Month Period increased $3.9 million, or 82.2%, to
$8.7 million from $4.8 million for the 1996 Three Month Period. The increase in
product revenue resulted primarily from increased unit sales of NACT's STX
switch. During the 1997 Three Month Period, GST USA completed a $1.5 million
longhaul conduit sale.
Operating Expenses. Total operating expenses for the 1997 Three Month
Period increased $17.0 million, or 42.0%, to $57.7 million from $40.7 million
for the 1996 Three Month Period. Network expenses, which include direct local
and long distance circuit costs, increased $4.3 million, or 29.0%, to $19.1
million, or 73.4% of telecommunications services revenue for the 1997 Three
Month Period compared to $14.8 million, or 80.4% of telecommunications services
revenue for the 1996 Three Month Period. The primary reason for the decrease in
network expenses as a percent of revenue is the increase in on-net revenues
generated at GST USA'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 GST
USA's networks) for the 1997 Three Month Period decreased $.4 million, or 12.7%,
to $3.5 million, or 13.5% of telecommunications services revenue, compared to
$3.1 million, or 16.9% of telecommunications services revenue, for the 1996
Three Month Period.
Cost of product revenue, which represents the costs associated with
product revenue of NACT, increased $1.3 million, or 70.4%, to $3.1 million for
the 1997 Three Month Period from $1.8 million for the 1996 Three Month Period.
Cost of product revenue was 35.7% of product revenue for the 1997 Three Month
Period compared to 38.1% for the 1996 Three Month Period. 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.
Excluding NACT, cost of product revenue totaled $.8 million and $0 for the 1997
Three Month Period and the 1996 Three Month Period, respectively. Research and
development costs for the 1997 Three Month Period increased $.4 million, or
90.5%, to $.8 million from $.4 million for the 1996 Three Month Period. The
increase was due to the addition of personnel to enhance NACT's switch product
line and to facilitate the development of new switching products and
applications.
<PAGE> 58
Cost of construction revenue for the 1997 Three Month Period relates to
the sale of a longhaul conduit system.
Selling, general and administrative expenses for the 1997 Three Month
Period increased $6.2 million, or 39.4%, to $22.0 million from $15.8 million for
the 1996 Three Month Period. The increase is due to the expansion of GST USA's
CLEC and enhanced services operations and the hiring of a significant number of
marketing, management information and sales personnel to implement GST USA's
integrated services strategy. Selling, general and administrative expenses were
60.8% of total revenue for the 1997 Three Month Period compared to 68.0% of
total revenue for the 1996 Three Month Period.
Depreciation and amortization for the 1997 Three Month Period increased
$4.2 million, or 89.2%, to $8.9 million from $4.7 million for the 1996 Three
Month Period. The increase was attributable to newly-constructed networks
becoming operational and to the amortization of intangible assets related to GST
USA's acquisitions. GST USA 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 1997 Three Month Period compared to 20.2% for the 1996 Three Month
Period.
Other Expenses/Income. For the 1997 Three Month Period, net other
expenses increased $8.0 million, or 198.6%, to $12.0 million, or 33.2% of total
revenue, from $4.0 million, or 17.4% of total revenue, for the 1996 Three Month
Period. The primary reason for the increase was the inclusion of interest
expense associated with the 13.25% senior secured notes due 2007 (the "Secured
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 the
Secured Notes. To a lesser extent, net other expenses increased due to NACT's
income tax expense as well as minority interest in the income of NACT.
Net Loss. Net loss for the 1997 Three Month Period increased $13.4
million, or 62.6%, to $34.8 million from $21.4 million for the 1996 Three Month
Period. The increase in net loss resulted primarily from a $4.0 million increase
in operating loss and a $11.2 million increase in interest expense.
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 the fiscal year ended September
30, 1996 ("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
Call America Business Communications Corp. ("GST Call America") and TotalNet
Communications, Inc. ("TotalNet"), as well as increased CLEC service revenue
generated by GST USA'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 sales of
network management and fraud protection systems by Action Telcom, which was
acquired on May 31, 1997.
<PAGE> 59
Operating Expenses. Total operating expenses for Fiscal 1997 increased
$101.6 million, or 124.7%, to $183.0 million from $81.4 million for Fiscal 1996.
Network expenses, which include direct local and long distance circuit costs,
increased $39.6 million, or 149.2%, to $66.2 million for Fiscal 1997 compared to
$26.6 million for Fiscal 1996. Facilities administration and maintenance
expenses (consisting primarily of costs related to personnel providing
maintenance, monitoring and technical assistance for GST USA'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
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 are costs associated with product
revenue of NACT, increased $4.0 million, or 101.1%, to $8.0 million for Fiscal
1997 from $4.0 million 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 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
$39.1 million, or 126.5%, to $70.0 million from $30.9 million for Fiscal 1996.
The increase is due to the expansion of GST USA's CLEC and enhanced services
operations and the hiring of a significant number of marketing, management
information and sales personnel to implement GST USA's integrated services
strategy. Selling, general and administrative expenses were 66.0% of total
revenue for Fiscal 1997 compared to 74.8% of total revenue for Fiscal 1996.
Depreciation and amortization for Fiscal 1997 increased $15.8 million,
or 191.0%, to $24.1 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 GST USA's acquisitions.
Depreciation and amortization was 22.8% of total revenue for Fiscal 1997
compared to 20.1% for Fiscal 1996.
Other Expenses/Income. For Fiscal 1997, net other expenses increased
$5.3 million, or 34.1%, to $21.0 million, or 19.9% of total revenue, from $15.7
million, or 38.0% 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
GST USA's shares of NACT in February 1997. If the gain had been excluded, other
expenses for Fiscal 1997 would have increased $12.7 million over Fiscal 1996.
Such increase primarily resulted from increased interest expense due to the
issuance of the 13.875% senior discount notes due 2005 (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 was no longer consolidated for tax
purposes.
Net Loss. Net loss for Fiscal 1997 increased $44.0 million, or 79.2%,
to $99.6 million from $55.6 million for Fiscal 1996. Excluding the $7.4 million
gain on the sale of NACT shares, net loss would have been $107.0 million for
Fiscal 1998, an increase of $51.4 million as compared to the
<PAGE> 60
twelve months ended December 31, 1997. The increase in net loss resulted
primarily from a $36.9 million increase in operating loss and a $15.8 million
increase in interest expense.
<PAGE> 61
THE COMPANY
OVERVIEW
The Company, through its subsidiaries, provides a broad range of
integrated telecommunications products and services, primarily to business
customers located in California, Hawaii and other western continental states. As
a facilities-based ICP, the Company operates state-of-the-art, digital
telecommunications networks that represent an alternative to ILECs. The
Company's full line of products, which offer a "one-stop" customer-focused
solution to the telecommunications services requirements of its customers,
include local dial tone, long distance, Internet, data transmission and private
line services. With the turn-up of its VITA network in Fiscal 1998, the Company
became one of the first ICPs to develop and deploy a converged network. As of
March 31, 1999, the VITA network was operational in 18 of the Company's markets,
positioning the Company for deployment of advanced IP services in those markets.
RECENT DEVELOPMENTS
GST, GST Network, GST USA, and GST Funding are parties to certain
indentures and have issued or guaranteed notes governed by those indentures,
including the Old Notes. In November 1998, the Company notified United States
Trust Company of New York, as trustee under the indentures, that certain actions
by the Company and its subsidiaries may not have been in compliance with the
technical requirements of the restrictive covenants contained in the indentures,
including the indenture relating to the Old Notes.
In particular, the Company has been advised that the transfer of its
interest in a telecommunications project to be developed in Mexico to Global may
constitute a violation of provisions in the indentures limiting investments in
entities that conduct business outside of the continental United States and
Hawaii. In addition, the Company has not yet received any consideration for this
transfer to Global, which may constitute a violation of provisions in the
indentures respecting consideration to be received in connection with Asset
Sales to affiliated entities. The Company has initiated litigation to recover
this asset or its fair market value. See "Legal Proceedings." The Company has
also been advised that certain transactions relating to Guam and the Northern
Mariana Islands--particularly, an investment in an entity that conducted
business in Guam and the Northern Mariana Islands and the Company's 1998
acquisition of certain operating assets located in Guam--may constitute
violations of provisions in the indentures limiting investments in entities that
conduct business outside of the continental United States and Hawaii. With
respect to the operating assets located in Guam, the Company is currently
seeking to divest these assets in a transaction complying with the indentures.
The Company intends to vigorously pursue any necessary action to cure the
potential non-compliances.
In February 1999, the trustee informed the note holders of the
potential violations. Pursuant to the definitions contained within the
indentures of each of the notes described above, no default has been declared
and no event of default has occurred. The Company has not classified the related
debt obligations as current in its consolidated financial statements because
management believes it is probable that, in the event that the holders
55
<PAGE> 62
declared a default, the Company would be able to take corrective actions to cure
any objectively determinable violations within the prescribed grace period.
While the Company believes that any non-compliances can be cured, the
Company cannot offer any assurance that the litigation will be successful or
that any other potential cures will be effected in a timely manner or be
sufficient. In the event that the Company has violated its indentures and does
not cure the violations, the holders of the notes issued under the indentures
could demand repayment of the notes, discontinue disbursements of cash proceeds
of the most recent notes and assert other remedies against the Company. If any
of these events occurred, the Company would not have sufficient liquid assets to
repay the notes.
Special charges for the year ended December 31, 1998 consist of the
following:
<TABLE>
<S> <C>
Write-off of amounts paid to Magnacom pursuant to a reseller agreement $14,600
Write-off of operating advances paid to Magnacom 1,068
Write-off of costs related to abandoned projects 9,918
Impairment of assets 3,881
-------
Non-cash special charges 29,467
Accrual of severance-related costs 1,113
-------
Total special charges $30,580
=======
</TABLE>
In the fourth quarter of 1998, the Company changed its strategic direction
to focus on its core, domestic business. In conjunction with the change,
management identified certain in-process network construction projects no longer
considered useful due to geographic location or technological compatibility. The
write-off totaled $9,918 and represented the entire amount of the costs related
to these in-process projects, including the costs of fiber optic networks and
electronic equipment. These assets had never been placed in service and, as
such, were not an integral part of the Company's ongoing operations. While the
historical cost of these assets has been written-off of the Company's December
31, 1998 balance sheet, the Company holds these assets for disposal and is
considering its disposal alternatives for such assets.
In conjunction with the change in strategic direction, management halted
further development of and investment in shared tenant services. The decision
resulted in an impairment charge of $2,728 for property, plant and equipment,
and $1,153 for customer lists associated with such services. At December 31,
1998, the Company held its shared tenant services assets for sell and
anticipates that it will sell the related operations and assets during 1999.
The impairment loss was measured as the amount by which the carrying amount of
these assets exceeded the estimated fair value of the assets, which was
determined based on current market prices for similar assets. The loss reserve
was recorded by increasing accumulated depreciation for the property, plant and
equipment, and accumulated amortization for the customer lists. The amount of
the write-off of customer lists represents the remaining unamortized balance of
such lists, which were related to a 1996 acquisition. No goodwill had been
recorded in conjunction with the acquisition.
In the fourth quarter of 1998, management consummated a plan to
involuntarily terminate approximately 40 employees, including former members of
management, and to pay termination benefits to such employees. The Company does
not anticipate that the termination of these employees will have a material
impact on its business functions. At December 31, 1998, the Company had accrued
$1,113 in severance-related costs, the majority of which is expected to be paid
out in the first quarter of 1999.
See "BUSINESS -- Magnacom" for a discussion of the amounts paid to
Magnacom.
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1998
Revenues. Total revenue for the three month period ended March 31, 1999
increased $25.7 million, or 85.3%, to $55.7 million from $30.0 million for the
comparable three months ended March 31, 1998. Telecommunications services
revenues for the three month period ended March 31, 1999 increased $19.5
million, or 67.0%, to $48.7 million from $29.2 million for the comparable three
months ended March 31, 1998. The increase in telecommunications services
revenues resulted primarily from strategic acquisitions, including the
acquisition of ICON in April 1998, and from increased local service revenue
generated by the Company's networks. To a lesser extent, the increase in
telecommunications services revenues resulted from increased long distance,
Internet, and data services. Construction, facility sales and other was $5.9
million and $0 for the three month period ended March 31, 1999 and 1998,
respectively. The increase was attributable to revenue from the construction of
network and fiber systems. Product revenue for the three month period ended
March 31, 1999 increased $0.2 million, or 25.2%, to $1.1 million from $0.9
million for the three month period ended March 31, 1998.
Operating Expenses. Total operating expenses for the three month period
ended March 31, 1999 increased $29.4 million, or 53.7%, to $84.3 million from
$54.9 million for the three month period ended March 31, 1998. Network expenses,
which include direct local and long distance circuit costs, increased $10.6
million, or 50.0%, to $31.7 million, or 65.1% of telecommunications services
revenues for the three month period ended March 31, 1999 compared to $21.1
million, or 72.4% for the comparable three month period ended March 31, 1998.
The decrease in network expenses as a percentage of telecommunications services
revenue resulted from the inclusion of strategic acquisitions and an increase in
revenues for traffic carried on the Company's network. Facilities administration
and maintenance expenses for the three month period ended March 31, 1999
increased $1.1 million, or 29.8%, to $5.1 million, or 10.5% of
telecommunications services revenues compared to $4.0 million, or 13.6% for the
comparable three month period ended March 31, 1998. The primary reason for the
decrease in these expenses as a percentage of telecommunications services
revenues is the inclusion of revenues from strategic acquisitions, substantially
all of which are not generated on the Company's networks.
Cost of construction revenue was $2.5 million for the three month
period ended March 31, 1999 and 1998, respectively. The increase was
attributable to new construction of network and fiber systems.
Cost of product revenues was $0.7 million in each of the three month
periods ended March 31, 1999 and 1998. For the three month period ended March
31, 1999 cost of product revenues were 64.2% of product revenues, compared to
79.7% for the comparable three month period ended March 31, 1998.
Selling, general and administrative expenses for the three month period
ended March 31, 1999 increased $6.9 million, or 33.6%, to $27.3 million from
$20.4 million for the three month period ended March 31, 1998. The increase is
due to the expansion of the Company's local and enhanced services operations,
which resulted in additional marketing, management information and sales staff,
and to selling, general and administrative expenses related to companies
acquired in 1998. As a percentage of total revenue, selling, general and
administrative expenses for the three months ended March 31, 1999 were 49.0%,
compared to 67.9% for the three months ended March 31, 1998.
Depreciation and amortization for the three month period ended March
31, 1999 increased $8.3 million, or 95.8%, to $17.0 million from $8.7 million
for the three months ended March 31, 1998. The increase is attributable to
newly-constructed networks and related equipment being placed into service and
to the amortization of intangible assets related to companies acquired in 1998.
The Company expects that depreciation will continue to increase as it expands
its networks and longhaul fiber optic facilities and installs additional
switches. Depreciation and amortization expense was 30.5% of total revenue for
the three months ended March 31, 1999 compared to 28.9% for the comparable three
month period ended March 31, 1998.
Other Expenses/Income. For the three month period ended March 31, 1999,
the Company recorded net other expense of $24.6 million, compared to net other
income of $44.3 million for the comparable three month period ended March 31,
1998. For the three months ended March 31, 1998, net other income includes a
$61.3 million gain resulting from the NACT Sale. Excluding such gain, net other
expense would have increased $7.6 million for the three month period ended March
31, 1999 as compared to the same period in the previous year. The increase in
net other expense related primarily to increased interest expense resulting from
the issuance in May, 1998 of the senior secured discount notes.
Net Income/Loss. Net income (loss) for the three months ended March 31,
1999 decreased $72.7 million, or 373.4%, to ($53.2) million from $19.5 million
for the three months ended March 31, 1998. Excluding the $61.3 million gain on
the NACT Sale, net loss would have been $41.8 million for the three months ended
March 31, 1998. Excluding the gain on the NACT sale, net loss would have
increased $11.4 million for the three months ended March 31, 1999 as compared to
the three months ended March 31, 1998. Such increase in net loss resulted
primarily from a $7.0 million increase in interest expense and a $29.4 million
increase in operating expenses and was partially offset by a $25.7 million
increase in revenues.
FISCAL 1998 COMPARED TO THE UNAUDITED YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues for Fiscal 1998 increased $44.3 million, or
37.2%, to $163.3 million from $119.0 million for the comparable twelve months
ended December 31, 1997. Telecommunications services revenues for Fiscal 1998
increased $59.6 million, or 66.0%, to $149.8 million from $90.2 million for the
twelve months ended December 31, 1997. The increase in telecommunications
services revenues resulted primarily from strategic acquisitions, including the
acquisitions of ICON in April 1998, and from increased local service revenue
generated by the Company's networks. To a lesser extent, the increase in
telecommunications services revenues resulted from increased long distance,
Internet and data services. Construction, facility sales and other revenues for
Fiscal 1998 increased $7.3 million to $8.8 million from $1.5 million for the
twelve months ended December 31, 1997. The increase primarily resulted from the
construction and sale of longhaul network facilities in California.
Telecommunications products revenues for Fiscal 1998 decreased $22.6 million, or
82.8%, to $4.7 million from $27.3 million for the twelve months ended December
31, 1997. The decrease in product revenues resulted from the sale of the
Company's 63% interest in NACT.
Operating Expenses. Total operating expenses for Fiscal 1998 increased
$89.1 million, or 42.5%, to $298.5 million from $209.4 million for the 12 months
ended December 31, 1997. Network expenses, which include direct local and long
distance circuit costs, were 69.7% of telecommunications and other services
revenues for Fiscal 1998 compared to 78.2% for the comparable period in the
previous year. The decrease in network expenses as a percentage of revenue
resulted from the inclusion of strategic acquisitions and an increase in
revenues for traffic carried on the Company's network as a percentage of total
telecommunications services revenues. Facilities administration and
maintenance expenses for Fiscal 1998 were 10.5% of telecommunications and other
services revenues compared to 13.6% for the comparable period ended December 31,
1997. The primary reason for the decrease in these expenses as a percentage of
telecommunications and other services revenues is the inclusion of revenues from
strategic acquisitions, substantially all of which are not generated on the
Company's networks.
Cost of product revenues for Fiscal 1998 decreased $6.3 million, or
67.7%, to $3.0 million from $9.3 million for the twelve months ended December
31, 1997. For Fiscal 1998, cost of product revenues were 63.7% of
telecommunications products revenues compared to 34.0% for the comparable period
ended December 31, 1997. The decrease in the dollar amount of cost of product
revenues and the increase in cost of product revenues as a percent of product
sales resulted from the sale of NACT. Research and development costs reported in
the twelve months ended December 31, 1997 were related to activities at NACT.
Cost of construction revenues for Fiscal 1998 increased $1.1 million to
$1.4 million from $.3 million for the twelve months ended December 31, 1997. The
increase resulted from an increase in construction, facility sales and other
revenues.
Selling, general and administrative expenses for Fiscal 1998 increased
$17.3 million, or 21.8%, to $96.5 million from $79.2 million for the twelve
months ended December 31, 1997. The increase is due to the expansion of the
Company's local and enhanced services operations, which has resulted in
additional marketing, management information and sales staff, and to selling,
general and administrative expenses related to strategic acquisitions. As a
percentage of total revenue, selling, general and administrative expenses for
Fiscal 1998 were 59.1%, compared to 66.6% for the comparable period ended
December 31, 1997.
Depreciation and amortization for Fiscal 1998 increased $17.7 million,
or 62.2%, to $46.0 million from $28.3 million for the twelve months ended
December 31, 1997. The increase is attributable to newly-constructed networks
and related equipment being placed into service 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
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and longhaul fiber optic facilities and installs additional switches.
Depreciation and amortization expense was 28.1% of total revenue for Fiscal 1998
compared to 23.8% for the comparable period ended December 31, 1997.
See "Recent Developments" for a discussion of special charges incurred in
1998. Special charges for the twelve months ended December 31, 1997 represent a
one-time $7.4 million non-cash charge recorded when 750,000 Common Shares were
released from escrow to certain of the Company's former executives, which the
Company views as an actionable claim. See "Legal Proceedings -- GST v.
Sander and GST v. Blankenstein."
Other Expenses and Income. For Fiscal 1998, the Company recorded net
other expense of $19.5 million, compared to $39.9 million for the comparable
period ended December 31, 1997. For Fiscal 1998, net other income includes a
$61.3 million gain resulting from the sale of NACT. Excluding such gain, net
other expense would have increased $40.9 million for Fiscal 1998 as compared to
the same period in the previous year. The increase in net other expense relates
primarily to increased interest expense resulting from the issuance in November
and December 1997 of the Accrual Notes and the issuance in May 1998 of the 1998
Notes.
Net Loss. Net loss for Fiscal 1998 increased $24.4 million, or 18.7%,
to $154.7 million from $130.3 million for the twelve months ended December 31,
1997. Excluding the $61.3 million gain on the sale of NACT, net loss would have
been $216.0 million for Fiscal 1998, an increase of $85.7 million as compared to
the twelve months ended December 31, 1997. Such increase in net loss resulted
primarily from a $50.5 million increase in interest expense and a $44.8 million
increase in operating loss.
1997 THREE MONTH PERIOD COMPARED TO THE UNAUDITED 1996 THREE MONTH PERIOD
Revenues. Total revenue for the 1997 Three Month Period increased $13.1
million, or 56.2%, to $36.3 million from $23.2 million for the 1996 Three Month
Period. Telecommunications services revenue for the 1997 Three Month Period
increased $7.6 million, or 41.4%, to $26.1 million from $18.4 million for the
1996 Three Month Period. The increase in telecommunications services revenue
resulted primarily from increased local service revenue generated by the
Company's networks and from increased long distance service revenue. To a lesser
extent, the increase in revenue resulted from the acquisitions of Action Telcom,
Inc. ("Action Telcom") in May 1997 and the Guam operations of Sprint in October
1997. Product revenue for the 1997 Three Month Period increased $3.9 million, or
82.1%, to $8.7 million from $4.8 million for the 1996 Three Month Period. The
increase in product revenues resulted from increased unit sales of NACT's STX
switch and, to a lesser extent, the inclusion of Action Telcom's sales of NAMS.
Excluding NACT, product revenue totalled $1.4 million and $0 for the 1997 Three
Month Period and the 1996 Three Month Period, respectively. During the 1997
Three Month Period, the Company completed a $1.5 million longhaul conduit sale.
Operating Expenses. Total operating expenses for the 1997 Three Month
Period increased $16.9 million, or 41.0%, to $58.1 million from $41.2 million
for the 1996 Three Month Period. Network expenses, which include direct local
and long distance circuit costs, increased $4.3 million, or 29.0%, to $19.1
million, or 73.4% of telecommunications services revenue for the 1997 Three
Month Period compared to $14.8 million, or 80.4% of telecommunications services
revenue for the 1996 Three Month Period. The primary reason for the decrease in
network expenses as a percent of revenue is the increase in on-net revenues
generated for traffic carried on 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 1997 Three Month Period
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 1996 Three Month Period.
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 1997 Three Month Period from $1.8 million for the 1996
Three Month Period. Cost of product revenue was 35.6% of product revenue for the
1997 Three Month Period
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compared to 38.1% for the 1996 Three Month Period. 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.
Excluding NACT, cost of product revenue totalled $.8 million and $0 for the 1997
Three Month Period and the 1996 Three Month Period, respectively. Research and
development costs for the 1997 Three Month Period increased $.4 million, or
90.5%, to $.8 million from $.4 million for the 1996 Three Month Period. The
increase was due to the addition of personnel to enhance NACT's switch product
line and to facilitate the development of new switching products and
applications.
Cost of construction revenue for the 1997 Three Month Period relates
to the sale of a longhaul conduit system.
Selling, general and administrative expenses for the 1997 Three Month
Period increased $7.2 million, or 47.2%, to $22.4 million from $15.2 million for
the 1996 Three Month Period. 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 1997 Three Month Period compared to 65.6% of
total revenue for the 1996 Three Month Period.
Depreciation and amortization for the 1997 Three Month Period increased
$4.2 million, or 89.0%, to $8.9 million from $4.7 million for the 1996 Three
Month Period. 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 1997 Three Month Period compared to 20.2% for the 1996 Three
Month Period.
Other Expenses/Income. For the 1997 Three Month Period, 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 1996 Three Month
Period. 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.
Net Loss. Net loss for the 1997 Three Month Period increased $17.0
million, or 74.9%, to $39.6 million from $22.6 million for the 1996 Three Month
Period. The increase in net loss resulted primarily from a $3.9 million increase
in operating loss and a $13.5 million increase in interest expense.
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 sales of network management and fraud protection systems by Action
Telcom, which was acquired on 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
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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 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 million 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
$38.6 million, or 115.9%, to $72.0 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.
Selling, general and administrative expenses were 68.0% 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.
Depreciation and amortization was 22.8% of total revenue for Fiscal 1997
compared to 20.1% for Fiscal 1996.
Special charges for Fiscal 1997 represents a one-time $7.4 million
non-cash charge recorded when 750,000 Common Shares were released from escrow to
certain of the Company's former executives, which the Company views as an
actionable claim. See "Legal Proceedings -- GST v. Sander and GST v.
Blankenstein."
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.
Net Loss. Net loss for Fiscal 1997 increased $52.9 million, or 87.7%,
to $113.3 million from $60.4 million for Fiscal 1996. The increase in net loss
resulted primarily from a $43.9 million increase in operating loss and a $16.4
million increase in interest expense.
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.
At March 31, 1999, the Company had approximately $1,146.7 million of
indebtedness outstanding and $61.7 million of 11.875% mandatorily redeemable
preference shares. Although the Company's liquidity was substantially improved
as a result of proceeds received from the sale of the 13.875% 1995 Notes, the
13.25% Secured Notes, the 12.75% Accrual Notes and the 10.5% 1998 Notes, the
Company will have significant debt service obligations. The Company will be
required to make principal and interest payments of approximately $61.3 million
(of which $35.1 million will be made from funds securing the Secured Notes),
$66.8 million (of which $17.6
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million will be made from funds securing the Secured Notes), $113.1 million,
$111.5 million and $155.0 million in the remainder of 1999 and in 2000, 2001,
2002 and 2003, respectively. In addition, the Company anticipates that cash flow
from operations will be insufficient to pay interest in cash on the 1995 Notes
when such interest becomes payable in June 2001 and on the Secured Notes
starting in November 2000 once the amount pledged to fund the first six
scheduled interest payments on the Secured Notes is paid and to repay the 1995
Notes, the Secured Notes and the Accrual Notes in full and that such notes will
need to be refinanced. The ability of the Company to effect such refinancings
will be dependent upon the future performance of the Company, which will be
subject to prevailing economic conditions and to financial, business and other
factors beyond the control of the Company. There can be no assurance that the
Company will be able to improve its operating results or that the Company will
be able to meet its debt service obligations.
At March 31, 1999, the Company had cash, cash equivalents, and
investments, including restricted investments of approximately $286.5 million.
The Company believes that such amounts will be sufficient to fund the Company's
operations through the end of Fiscal 1999. Divestitures and other management
actions may prolong capital availability into the fiscal year 2000 and beyond.
Thereafter, the Company expects to require additional financing. The extent of
additional financing will depend on, among other things, the rate of the
Company's expansion and the success of the Company's businesses. In the event
that the Company's plans or assumptions change or prove to be inaccurate, the
Company incurs significant unexpected expenses, or the Company's cash resources,
together with borrowings under the current financing arrangements prove to be
insufficient to fund the Company's growth and operations, or if the Company
consummates additional acquisitions, the Company may be required to seek
additional sources of capital (or seek additional capital sooner than currently
anticipated). The Company may also seek to raise additional capital to take
advantage of favorable conditions in the capital markets. There can be no
assurance that additional financing will be available to the Company or, if
available, that it can be concluded on terms acceptable to the Company or within
the limitations contained within the Company's financing arrangements. Failure
to obtain such financing could result in the delay or abandonment of some or all
of the Company's development or expansion plans and could have a material
adverse effect on the Company's business. Such failure could also limit the
ability of the Company to make principal and interest payments on its
outstanding indebtedness. The Company has no material working capital or other
credit facility under which it may borrow for working capital and other general
corporate purposes. There can be no assurance that such a facility will be
available to the Company in the future or that if such a facility were
available, that it would be available on terms and conditions acceptable to the
Company.
The Company's net cash (used in) provided by operating and investing
activities was ($37.9) million and $28.7 million for the three months ended
March 31, 1999 and 1998, respectively. Net cash provided by financing activities
from borrowings and equity issuances to fund capital expenditures, acquisitions
and operating losses was $1.9 million and $12.2 million for the three months
ended March 31, 1999 and 1998, respectively.
Capital expenditures for the three months ended March 31, 1999 and 1998
were $77.1 million and $41.8 million, respectively. The Company estimates
capital expenditures of $250 million and $150 million in Fiscal 1999 and Fiscal
2000, respectively. The majority of these expenditures is expected to be made
for the construction of network and longhaul fiber optic facilities and the
purchase of switches and related equipment to facilitate the offering of the
Company's services. Continued significant capital expenditures are expected to
be made thereafter. In addition, the Company expects to continue to incur
operating losses while it expands its business and builds its customer base.
Actual capital expenditures and operating losses will depend on numerous
factors, including the extent of future expansion, acquisition opportunities and
other factors beyond the Company's control, including economic conditions,
competition, regulatory developments and the availability of capital.
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The Company may have committed certain technical indenture covenant
violations, and the Company has notified the indenture trustee in this regard.
See "Recent Developments."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are now required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in fair value (i.e., gains and losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. The Company must adopt
SFAS No. 133 by January 1, 2000. The Company has not determined the impact that
SFAS No. 133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of initial
adoption.
The Company adopted Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (SOP 98-5) on January 1, 1999. SOP 98-5 requires that
costs incurred during start-up activities, including organization costs, be
expensed as incurred and that previously capitalized costs related to such
activities be expensed as a cumulative effect of a change in accounting
principles upon adoption. Adoption of SOP 98-5 did not have a material effect on
results of operations for the three month period ended March 31, 1999.
Income Taxes
At December 31, 1998, the Company had a U.S. net operating loss
carryforward of approximately $208.9 million available to offset future taxable
income of GST USA and the other U.S. operating subsidiaries. Substantially all
of the Company's operations are conducted in the United States. In addition, at
that date, the Company had a net operating loss carryforward of approximately
Cdn. $49.6 million (U.S.$35.5 million) available to offset future taxable
income of the parent holding company in Canada. While such loss carryforwards
are available to offset future taxable income of the Company in each respective
tax jurisdiction, the Company may not 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.
YEAR 2000 PROGRAM
The year 2000 issue is the result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
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The Company is currently verifying system readiness for the processing
of date-sensitive information by its information technology ("IT") systems
(applications, hardware, system software and interfaces) and its network
operations. The review of IT systems and network operations is centrally managed
through a year 2000 Program Management Office.
The Company's State of Readiness. In general, the Company's year 2000
project is divided into three phases: (1) inventory and assessment ("Phase
One"), (2) strategy and contingency planning ("Phase Two"), and (3) conversion
and remediation ("Phase Three").
The Company completed its Phase One assessment for IT systems in
October 1998. Phase One for network operations was completed in March 1999. The
Company has focused its independent testing activities principally on those
systems whose failure would pose the greatest risk to the Company. The Company
may not independently test all of its equipment and will rely upon vendor
representations, if received by the Company, where tests are not conducted.
There can be no assurance of the accuracy or completeness of such
representations. The Company is continuing to contact all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues.
With respect to IT systems, the Company completed Phase Two, wherein
remedial actions were planned and a contingency plan was formulated, in December
1998. The Company expects to complete Phase Three for IT systems, wherein
remedial actions will be implemented and tested, in third quarter 1999. The
Company has completed strategy planning and anticipates conclusion of remaining
Phase Two and Phase Three activities for network operations in third quarter
1999.
Costs. The total amount expended on the project through March 31, 1999
was approximately $1.7 million. The total cost of the year 2000 project is
estimated to be $3.3 million, including $.3 million in internal staffing costs,
$1.8 million in external staffing costs and $1.2 million in hardware and
software upgrade costs. This cost may be reduced if software and hardware are
replaced with compliant systems as a result of other currently scheduled capital
projects. The Company does not expect remediation costs to have a material
adverse effect on its financial position, results of operation or cash flows.
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.
Risks. The failure to correct a material year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The year 2000 project is expected
to significantly reduce the Company's level of uncertainty about the year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
Readers are cautioned that forward-looking statements contained in the
year 2000 update should be read in conjunction with the Company's Cautionary
Statements as supplemented by the following statements regarding the year 2000
project in particular. See Risk Factors -- Year 2000 Issues."
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BUSINESS
OVERVIEW
The Company, through its subsidiaries, provides a broad range of
integrated telecommunications products and services, primarily to
business customers located in California, Hawaii and other western continental
states. As a facilities-based ICP, the Company operates state-of-the-art,
digital telecommunications networks that represent an alternative to ILECs. The
Company's full line of products, which offer a "one-stop" customer-focused
solution to the telecommunications services requirements of its customers,
include local dial tone, long distance, Internet, data transmission and private
line services. With the turn-up of its VITA network in Fiscal 1998, the Company
became one of the first ICPs to develop and deploy a converged network. As of
March 31, 1999, the VITA network was operational in 18 of the Company's
markets, positioning the Company for deployment of advanced IP services in
those markets.
DEVELOPMENT OF THE COMPANY'S BUSINESS
In June 1994, the Company formed GST Telecom Inc. ("GST Telecom") to
develop, construct and operate telecommunications networks. Since its inception
as a facilities-based competitive access provider ("CAP"), the Company has
constructed and operated state-of-the-art, digital telecommunications networks
that provide an alternative to the ILECs. Through a number of strategic
acquisitions and a concentration on the development of its infrastructure, the
Company has expanded beyond the scope of traditional CAP operations into ICP
services that include long distance, Internet, data transmission, private line
services and local dial tone services. The Telecommunications Act and several
state regulatory initiatives substantially changed the telecommunications
regulatory environment in the United States and enabled the Company to provide
local dial tone in addition to interstate and intrastate switched access
services.
The Company has recently undertaken a plan to redirect its focus to its
core business lines of local, data and backhaul services. In connection with
such plan, the Company has determined to disband its subsidiary that was
responsible for research and development on international undersea cable
systems, implement a series of cost reductions, decentralize business to its
regional centers, and form business units in data and backhaul services.
Additionally, the Company is pursuing a strategy of divesting assets that fall
outside the scope of its core business focus as an ICP. Such assets are expected
to include the Company's Guam and Hawaii subsidiaries and its assets relating to
shared tenant services.
TELECOMMUNICATIONS SERVICES STRATEGY
In conjunction with its network expansion, the Company has developed a
strategy to leverage its existing facilities, 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 medium to large-sized businesses that have significant telecommunications
requirements. The Company, through its established sales channels, offers: (i)
bundled telecommunications 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 authorized, 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. The Company plans to
continue to install switching equipment in its targeted markets. Once a switch
is operational, where regulatory conditions and interconnection agreements
permit, the Company offers local dial tone, in addition to enhanced services
such as Integrated Services Digital Network ("ISDN"), Centrex, voice mail and
other custom calling features. For Fiscal 1998, local services accounted for
30.8%, or approximately $48.9 million, of the Company's telecommunications
services revenues.
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Long Distance Services. The Company offers basic and enhanced long
distance services, such as toll free, and calling card services, targeting
primarily business customers purchasing between $200 and $15,000 of services per
month as well as resellers and other carriers. Currently, the Company provides
these services over its own network facilities, and by reselling the services of
certain major long distance carriers as needed to complement the Company's
network. In April 1998, the Company acquired ICON, a switch-based reseller of
long distance and local services located in Seattle, Washington for
approximately $23.9 million in cash. In March 1998, the Company acquired KLP,
Inc. (d/b/a/ Call America-Phoenix), ("Call America-Phoenix"), a reseller of long
distance services located in Phoenix, Arizona for approximately $3.8 million in
cash. For Fiscal 1998, long distance services accounted for 41.1%, or
approximately $65.7 million, of the Company's telecommunications services
revenues.
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 frame relay
switches in 24 markets in the western United States. Such switches can provide
both frame relay and Internet services. The Company offers data networking
services such as asynchronous transfer mode ("ATM"), high speed LAN connectivity
service, frame relay and high capacity access to the Internet and plans to offer
video conferencing and multi-media networking in the future. As of December 31,
1998, the Company had installed 22 ATM switches throughout its network
footprint. For Fiscal 1998, data services accounted for 5.5%, or approximately
$8.8 million, of the Company's telecommunications services revenues.
Internet Services. The Company presently offers Internet-related
services in most of its markets, such as dedicated Internet access, Web site
development and hosting, provides access and upstream transport for local ISPs
and electronic commerce services and is in the process of developing various
Internet software applications, including applications that will allow customers
to monitor usage statistics and provide for usage-based customer billing. The
Company also offers dial-up Internet access to customers in Portland (Oregon),
Vancouver (Washington), the State of Hawaii, Houston (Texas) and select markets
in California, including San Francisco and Los Angeles. In March 1998, the
Company acquired the business of Whole Earth Networks, a San Francisco-based
full-service ISP, for approximately $9.1 million in cash and the assumption of
approximately $1.3 million of liabilities. For Fiscal 1998, Internet services
accounted for 5.3%, or approximately $8.4 million, of the Company's
telecommunications services revenues.
Longhaul Services. The Company offers unswitched telecommunications
transmission circuits, including resold circuits of other carriers, to customers
who transport their already-switched traffic between LATAs. For the use of such
longhaul circuits, the Company typically bills customers a non-usage based
monthly rate determined by capacity, location and circuit length. The Company
also constructs longhaul facilities for other carriers. For Fiscal 1998,
longhaul services accounted for 14.8%, or approximately $23.5 million, of the
Company's telecommunications services revenues.
TELECOMMUNICATIONS NETWORKS AND FACILITIES
The Company's networks comprise fiber optic cables, 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 Company's digital networks currently serve 43 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Oregon, Texas and Washington. The
Company's 15 high-capacity digital switches enable it to deliver switched local
services. The Company installed 15,993 access lines in the first quarter of
1998, 27,426 in the second quarter, 30,439 in the third quarter and 34,187 in
the fourth quarter, for a total of 108,045 access lines installed during Fiscal
1998. Additionally, the Company installed 34,311 access lines in the first
quarter of 1999. As of March 31, 1999, the Company's facilities-based network
was comprised of 299,255 fiber miles owned, with 5,751 total route miles owned,
including those currently under construction. In addition to construction and
operation of its longhaul fiber optic facilities and localized fiber optic
rings, the Company is pursuing a strategy of targeted building entry, and, as of
March 31, 1999, had 697 buildings on-net.
The Company plans to continue to develop and expand its local and
longhaul network infrastructure to
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ultimately assemble, through a combination of owned and leased facilities and
joint ventures, an integrated regional network for the on-net provision of local
services. By building and utilizing its own network, the Company reduces its
reliance on the facilities of other providers, such as the ILECs, enhances
service to its customers and reduces its cost of providing services. In
addition, increasing demand for high bandwidth capacity has created
opportunities for the Company to sell or lease capacity on its network to other
communications carriers.
The Company plans to build specific network segments or to lease
capacity as economically justified and as the demands of its customers warrant.
Management believes that pursuing this "smart-build" approach should permit the
Company to provide for ongoing capital expenditures on a "success basis" and
allow the Company to build its customer base through an increased focus on
sales, marketing and operations support systems. "Smart builds" also provide the
Company with the ability to address attractive service areas selectively
throughout its targeted markets.
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 23 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.
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 or one of its affiliated
companies (collectively, the "GTE Companies"). There are many other competitors
and potential competitors that have financial, marketing or other resources
significantly greater than the Company, as well as other competitive advantages.
See "Risk Factors - Competition."
SALES CHANNELS AND CUSTOMER SUPPORT
The Company markets its services through five sales channels, including
a direct sales force, an inside sales (telemarketing) group, a government
systems group, a wholesale carrier group and alternate channels, which includes
referral partners, independent agents and resellers. As of December 31, 1998,
the Company had 326 sales and marketing employees in 24 cities and utilized 344
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 the Company's 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 31, 1998, the Company had approximately 105,850
customers, including approximately 48,200 long distance customers, 9,350 local
dial tone customers and 32,450 Internet customers (substantially all of whom are
dial-up customers). Approximately 17,700 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 Federal Communications Commission ("FCC") regulates interstate and
international telecommunications services. The Company provides service either
on a private carrier basis or on a common carrier basis. 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, competitive local exchange carriers ("CLECs") and ICPs.
The Telecommunications Act is intended to increase competition. The
Telecommunications Act opens the local services market by requiring ILECs to
permit interconnection to their networks and establishing ILEC obligations with
respect to:
Reciprocal Compensation. Requires all telecommunications carriers 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 telecommunications carriers 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 telecommunications carriers 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 ILEC's 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, certain 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). In determining the elements that must
be unbundled, the FCC must consider whether access is necessary or the failure
to provide access would impair the competing carrier's ability to provide the
telecommunications services.
Number Portability. Requires all telecommunications carriers 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 telecommunications carriers 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 local exchange carriers 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.
In August 1996, the FCC released its interconnection decision, In re
Implementation of the Local Competition Provisions in the Telecommunications Act
of 1996, 11 FCC Rcd. 15,499 ("Interconnection Decision").
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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. The Court of Appeals for the Eighth Circuit
("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
January 25, 1999, the Supreme Court reversed the Eighth Circuit, confirming the
FCC's jurisdiction to issue regulations governing local interconnection pricing
(including regulations governing reciprocal compensation). The Supreme Court
also found that the FCC had authority to promulgate a "pick and choose" rule and
upheld most of the FCC's rules governing access to unbundled network elements.
The Supreme Court remanded to the FCC for further consideration the standard by
which the FCC identified the network elements that must be made available on an
unbundled basis. The Supreme Court's action may require or trigger the
renegotiation of existing agreements. Although state public utilities
commissions have continued to conduct arbitrations, and to implement and enforce
interconnection agreements during the pendency of the Eighth Circuit
proceedings, the Supreme Court's recent ruling and further proceedings on remand
(at the Eighth Circuit and the FCC) may affect the scope of state commissions'
authority to conduct such proceedings or to implement or enforce interconnection
agreements. They could also result in new or additional rules being promulgated
by the FCC and a determination by the Eighth Circuit of the validity of the
FCC's pricing mechanism.
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 revenues for the high cost and low income fund are the
Company's estimated quarterly interstate and gross end-user telecommunications
revenues. The revenues for the schools and libraries and rural health care fund
are the Company's estimated quarterly intrastate, interstate and international
gross end-user telecommunications revenues. The contribution factors issued by
the FCC for 1998 range from 3.14% to 3.19% for the high cost and low income fund
and .72% to .76% for the schools, libraries and rural healthcare fund. The
amounts contributed may be billed to customers. The Company has been billed for
such contributions,which represented less than 1% of total revenues for Fiscal
1998. In the May 8th order, the FCC also announced that it will soon revise its
rules for subsidizing service provided to consumers in high cost areas. Several
parties have appealed the May 8th order. Such appeals have been consolidated and
transferred to the United States Court of Appeals for the Fifth Circuit where
they are currently pending. In addition, on July 3, 1997, several ILECs filed a
petition for stay of the May 8th order with the FCC. That petition is pending.
The Telecommunications Act also codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the AT&T
Antitrust Consent Decree (and similar antitrust restrictions on the GTE
Companies) restricting the RBOCs from providing long distance services and
engaging in telecommunications equipment manufacturing. These provisions permit
a RBOC to enter the long distance market in its traditional service area if it
satisfies several procedural and substantive requirements, including obtaining
FCC approval upon a showing that facilities-based competition is present in its
market, that the RBOC has entered into interconnection agreements in those
states in which it seeks long distance relief, the interconnection agreements
satisfy a 14-point "checklist" of competitive requirements, and the FCC is
satisfied that the RBOC's entry into long distance markets is in the public
interest. SBC, the RBOC serving some of the states served by the Company,
applied to the FCC for such authority which was denied. On appeal, the FCC
decision was upheld. U S WEST, an RBOC serving some states served by the
Company, has announced its intention to seek such authority this year. The
Telecommunications Act permits the RBOCs to enter the out-of-region long
distance market immediately upon its enactment.
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 a few cases, or permit
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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 has provided such ILECs with additional flexibility in
pricing their interstate switched and special access on a central office
specific basis.
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.
State Regulation
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 Certificate of Public Convenience and Necessity ("CPCN") from the state
regulatory agency and comply with state requirements for telecommunications
utilities, including state tariffing requirements. The Company has obtained
regulatory authority for its subsidiaries to provide intrastate toll service in
48 states and the District of Columbia and is applying for such authority in the
remaining states. 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.
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.
GLOBAL LIGHT TELECOMMUNICATIONS
As of May 31, 1999, the Company had invested approximately $3.7 million
in Global Light Telecommunications ("Global") to acquire 3.6 million common
shares. In legal proceedings initiated against Global and others, the Company
asserts that Global is liable to the Company for compensation for, or rescission
of, Global's acquisition of its rights held by the Company to acquire an
interest in a Mexican telecommunications joint venture opportunity (the "Bestel
Project"). Global has asserted in public filings that it has yet to determine
what compensation, if any, is owed to the Company with respect to the Bestel
Project. To date, Global has not issued any common shares, or provided any other
form of compensation, to the Company in respect of its acquisition of the Bestel
Project. The Company has filed a complaint against Global and certain current
and former directors of the Company in respect of this matter. See "Legal
Proceedings."
In 1996, Global assumed the Company's right to subscribe for 49% of the
outstanding shares of Bestel, S.A. de C.V. ("Bestel"). As compensation, Global
was to issue shares to the Company. At that time, certain of the directors and
officers of the Company were also directors or officers of Global, including
Messrs. Gordon Blankstein, John Warta, Stephen Irwin and Peter Legault. At
present there are no common directors and officers of the Company and Global. In
addition, in connection with the rights to subscribe for shares of Bestel,
Global was required to and the Company understands that it has loaned $36.0
million to Bestel. 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.
MAGNACOM
Magnacom Wireless, LLC ("Magnacom") is controlled by John Warta, the
Company's former Chairman of the Board and Chief Executive Officer. The Company
understands that Magnacom holds certain PCS licenses for markets in Arizona,
Arkansas, New Mexico, Oregon, Utah, Hawaii, Idaho, and Washington (collectively,
the
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"Magnacom FCC Licenses"). Magnacom and the Company entered into a Services
Agreement and a Reseller Agreement (the "Magnacom Agreements") pursuant to
which, among other things, (i) the Company was designated a non-exclusive
reseller of PCS telephone services in the markets in which Magnacom had obtained
FCC licenses, and (ii) Magnacom granted the Company a right of first refusal 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 so long as the Company's rates and other terms
of service were competitive. In connection with the Magnacom Agreements, as of
December 31, 1998 the Company had paid Magnacom approximately $14.6 million as
prepayments for future PCS services and approximately $1.1 million in advances
for certain operating expenses.
In consideration for the Magnacom FCC Licenses, the Company understands
that Magnacom owes the FCC approximately $50.1 million plus accrued interest.
Quarterly interest payments of approximately $1.1 million were scheduled to
begin July 31, 1998; however, as of the date hereof, Magnacom has not made such
first payment. Magnacom had until October 29, 1998 to make the delinquent
interest payment, together with a five percent penalty. On October 28, 1998,
Magnacom filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code. The Office of the United States Trustee has filed a
motion to convert or dismiss the petition for reorganization. In addition, the
FCC has filed a motion for relief from stay and the Company understands that
such relief has been granted.
EMPLOYEES
As of March 31, 1999, the Company and its subsidiaries had 1,334
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.
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.
LEGAL PROCEEDINGS
U S WEST V. JENNINGS, ET AL.
On June 4, 1999, U S WEST appealed to the U.S. Court of Appeals for the
Ninth Circuit several declaratory judgment actions that U S WEST filed in the
U.S. District Court in Phoenix against the Arizona Corporation Commission
("ACC") and Arizona competitive local exchange carriers, including GST Tucson
Lightwave, Inc., GST Net (AZ), Inc. ("GST Net (AZ)") and GST Telecom. U S WEST
appeals District Court rulings that dismissed U S WEST's claims that the ACC
approved an interconnection agreement with the Company that unlawfully required
U S WEST to resell services below cost, imposed resale restrictions and denied
U S WEST recovery for construction and implementation costs, treated the cost
recovery of access revenue for interim number portability, required U S WEST to
obtain additional rights of way or build additional facilities solely to
provide access to the Company, and amounted to a taking of U S West's property
without just compensation. In addition, U S WEST appeals District Court rulings
that remanding to the ACC the discount level U S WEST must offer competitors
for purchase of wholesale telecommunications services and the rate level for
certain kinds of unbundled network elements. If U S WEST prevails in its
appeal, the Company and other CLECs may pay more for U S WEST interconnection
and services, which could have an adverse impact on the Company's Arizona
operations.
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U S WEST V. THE ACC ET AL.
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
Certificate of Convenience and Necessity ("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. On September 21, 1998, the court dismissed
the case as against all parties. US WEST has appealed the dismissal to the
Arizona Court of Appeals. Should US WEST successfully reverse the lower court
ruling, the Company's regulatory status in Arizona may be changed, which could
have a material adverse effect on the Company's operations in Arizona.
GST AND GST TELECOM V. GLOBAL LIGHT TELECOMMUNICATIONS, INC., ET AL.
On October 20, 1998, GST and GST Telecom filed a Complaint in the
Superior Court of California, County of Santa Clara, No. CV777408, against GST
Global Telecommunications, Inc., now known as Global Light Telecommunications,
Inc. ("Global") and six former GST officers and directors. The Complaint
includes claims for fraud, negligent misrepresentation, unjust enrichment, and
unfair competition primarily related to the alleged misappropriation of a
Mexican business opportunity. The complaint seeks an accounting, a constructive
trust, and restitution of GST's interest in the opportunity and also seeks
unspecified exemplary and punitive damages and reimbursement of attorneys' fees.
In particular, the Complaint alleges that Global and the individual
defendants misappropriated the Company's joint venture interest in Bestel, the
owner of a 2,270 kilometer fiber optic telecommunications network in Mexico. The
lawsuit alleges that the individual defendants caused the Company's 49% interest
in Bestel to be transferred to Global, then a shell corporation in which the
individuals, had secretly invested. No written agreement validated the transfer.
The Company therefore seeks return of the asset and monetary compensation to
remedy the loss arising from the wrongful transfer.
On December 23, 1998, Defendants filed a motion to stay or dismiss the
action on grounds of inconvenient forum. The Superior Court granted Defendants'
motion to stay the proceedings on February 5, 1999, and GST and GST Telecom
filed a notice of appeal on February 9, 1999.
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WARTA V. GST, GST USA, AND GST TELECOM AND COUNTERCLAIMS
On January 25, 1999, John Warta filed a Complaint in the Superior Court
of Washington, King County, No. 99-2-02287-4SEA, against the Company, GST USA,
and GST Telecom. The Complaint, which relates to the circumstances under which
Mr. Warta ceased to serve as an officer and director of the Company, includes
claims for breach of employment agreement, breach of the covenant of good faith
and fair dealing, violation of wage statutes, and indemnity.
On February 23, 1999, GST answered by denying all liability and filed
counterclaims against Mr. Warta, Global and five other former officers and
directors for liability with respect to the matters leading to the termination
of Mr. Warta's employment. In particular, GST seeks recovery under Washington
law for breaches committed with respect to the wrongful use of Company funds for
the purchase of telecommunications licenses by Mr. Warta through companies he
owns, and other matters.
GST, GST USA AND GST TELECOM V. IRWIN AND OLSHAN
On December 16, 1998, GST, GST USA and Telecom filed a Complaint in the
United States District Court, Southern District of New York, No. 98 CIV. 8865,
against Stephen Irwin and the law firm of Olshan Grundman Frome & Rosenzweig LLP
("Olshan"). The Complaint, which relates to Mr. Irwin and Olshan's
representation of GST, GST USA and GST Telecom in various matters, includes
claims for professional negligence, breach of fiduciary duty, and breach of
contract, and seeks compensatory damages and reimbursement of attorneys' fees.
On February 12, 1999, Mr. Irwin filed his Answer to the Complaint.
Olshan filed its Answer and Counterclaims to the Complaint on February 17, 1999.
Olshan counterclaimed against GST, GST USA and GST Telecom for breach of
contract, unjust enrichment, quantum meruit, and "account stated," based on
invoices submitted to GST of approximately $250,000. No trial date has been set.
GST V. SANDER
On February 9, 1999, the Company filed a Complaint in the Superior
Court for the State of Washington, Clark County, No. 99-2-00573-6, against
Clifford Sander, the former treasurer of the Company. The Complaint, which is
based on Mr. Sander's alleged misconduct as an officer of GST, includes claims
for fraud, breach of fiduciary duty, unjust enrichment, and unfair business
practices, and seeks an accounting, imposition of a constructive trust,
compensatory damages, costs of suit, attorneys' fees, and treble damages. In
particular, the Complaint seeks relief based on Mr. Sander's misuse of insider
information in the purchase of stock, wrongful disbursements to third parties,
and involvement in a fraudulent release of stock from escrow to three former
directors and/or officers of GST. Mr. Sander has not yet responded to the
Complaint. On May 5, 1999, the Court transferred this action to King County,
Superior Court in Seattle.
GLOBAL AND MEXTEL V. GST AND GST TELECOM
On January 27, 1999, Global and GST Mextel, Inc. ("Mextel") filed a
Complaint in the Supreme Court of British Columbia, No. C990449, against GST and
GST Telecom. The Complaint, which arises from the same matters for which GST and
GST Telecom brought suit against Global et al. in the Superior Court of
California, includes claims for declaratory and injunctive relief to confirm the
ownership of the Mexican business opportunity by Global, and unspecified general
and special damages. In particular, Global seeks a declaration from the court
that it is entitled to retain the equity interest in Bestel, or at least a
judicial determination of the amount Global owes GST. GST intends to vigorously
dispute the allegations in the Complaint. GST and GST Telecom have denied all
liability and have asserted counterclaims for damages and for a constructive
trust in the Bestel opportunity.
IRWIN ET AL. V. GST ET AL.
On January 28, 1999, Stephen Irwin, Robert Hanson, Peter Legault,
Clifford Sander, and John Warta, all former GST officers or directors, filed a
Complaint in the Supreme Court of British Columbia, No. C990488, against GST,
GST Telecom, and four current GST directors. The Complaint, which arises from
the same matters for which GST and GST Telecom brought suit against Global et
al. in the Superior Court of California,
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<PAGE> 78
includes claims for oppression and declaratory relief, and seeks unspecified
actual and punitive damages, cost, and attorneys' fees. In particular, the
plaintiffs have asked the court to declare that the plaintiffs may retain the
Global stock they purchased while fiduciaries of GST and seek to have the
Canadian court enjoin GST from pursuing its claims against them. The Company and
its directors will vigorously dispute the allegations in the Complaint.
GST V. GORDON BLANKSTEIN, ET AL.
On June 4, 1999, GST commenced an action in the Supreme Court of
British Columbia, No. C992879, against Gordon Blankstein, Robert Blankstein, Ian
Watson and Clifford Sander seeking a constructive trust over the proceeds of
750,000 shares of GST stock wrongfully removed from an escrow account by Messrs.
Blankstein, Blankstein and Watson, with the assistance of Mr. Sander. The
defendants have not responded yet to the lawsuit.
OTHER MATTERS
The Company is a party to various other claims and legal actions
arising in the ordinary course of business. The Company does not anticipate that
these items will materially impact its business. 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a party to a credit facility (the "Tomen Facility") with
Tomen America, Inc. ("Tomen"), which beneficially owned more than five percent
of the Common Shares during part of Fiscal 1998. Pursuant to the Tomen Facility,
Tomen has the right to act as procurement agent for each network project it
finances. As of December 31, 1998, the Company had purchased approximately $32.2
million of equipment from Tomen. The Company believes that the prices it paid to
Tomen for equipment are comparable to what it would have paid in transactions
with unrelated third parties. Tomen also has the contractual right to appoint a
designee to the Board of Directors of the Company. Until his resignation on May
28, 1999, Mitsuhiro Naoe served on the Board of Directors as Tomen's designee.
See discussion in "Business - Magnacom" relating to transactions
involving the Company and John Warta, former Chairman and Chief Executive
Officer of the Company
In May 1997, the Company loaned $100,000 to Mr. Joseph A. Basile, Jr.
the President, Chief Executive 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.
The Company has loaned $72,000 to Mr. Daniel L. 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 June 1998, the Company loaned $100,000 to Mr. Kevin R. Wright, Chief
Technical Officer of the Company, to enable him to purchase a new primary
residence in the Vancouver, Washington area. The loan matures in June 2001,
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. Wright's former residence and from the sale of
Common Shares acquired upon exercise of options held by Mr. Wright.
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DESCRIPTION OF THE NEW NOTES
The Old Notes were issued under the Indenture among GST Network, as
issuer, GST USA, GST and United States Trust Company of New York. The New Notes
will be issued under the Indenture, which will be qualified under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), upon the
effectiveness of the Registration Statement of which this Prospectus is a part.
The form and terms of the New Notes are the same in all material respects as the
form and terms of the Old Notes, except that the offer and sale of the New Notes
will have been registered under the Securities Act and, therefore, the New Notes
will not bear legends restricting transfer thereof. Upon the consummation of the
Exchange Offer, Holders of Notes will not be entitled to registration rights
under, or the contingent increase in interest rate provided pursuant to, the
Registration Rights Agreement. The New Notes will evidence the same debt as the
Old Notes and will be treated as a single class under the Indenture with any Old
Notes that remain outstanding.
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act as in effect
on the date of the Indenture. The Notes are subject to all such terms and
reference is made to the Indenture and the Trust Indenture Act for a statement
thereof. A copy of the Indenture has been filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus forms a part. The
following summary describes the material provisions of the Indenture and the
Notes. Whenever particular defined terms of the Indenture not otherwise defined
herein are referred to, such defined terms are incorporated herein by reference.
GENERAL
The Notes are, or will be, secured, unsubordinated obligations of the
Issuer, initially limited to $500.0 million aggregate principal amount at
maturity, and will mature on May 1, 2008. Although for United States federal
income tax purposes a significant amount of original issue discount, taxable as
ordinary income, will be recognized by a holder as such discount accrues from
the Closing Date, no interest will be payable on the Notes prior to November 1,
2003. From and after May 1, 2003, interest on the Notes will accrue at the rate
of 10-1/2% from May 1, 2003 or from the most recent interest payment date to
which interest has been paid or provided for, payable semiannually (to Holders
of record on the close of business on the April 15 or October 15 immediately
preceding the interest payment date) on May 1 and November 1 of each year,
commencing November 1, 2003. Interest will be computed on the basis of a 360-day
year of twelve 30-day months. See "--Registration Rights" for a description of
the circumstances under which the interest rate on the Notes may be increased by
.5% per annum.
Principal of, premium, if any, and interest on the Notes will be
payable, and the Notes may be exchanged or transferred, at the office or agency
of the Issuer in the Borough of Manhattan, The City of New York (which initially
will be the corporate trust office of the Trustee at 114 West 47th Street, New
York, New York 10036-1532); provided that, at the option of the Issuer, payment
of interest may be made by check mailed to the respective addresses of the
Holders as each such address appears in the Security Register.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. See "--Book-Entry; Delivery and Form." No service charge will
be made for any registration of transfer or exchange of Notes, but the Issuer
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith.
The Issuer may, subject to the covenants described below under
"Covenants" and applicable law, issue additional Notes under the Indenture. The
Notes offered hereby and any additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
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STRUCTURE AND SECURITY
The Indenture provides that on the Closing Date, GST Network must use
all of the net proceeds from the May Offering (in addition to any cash on hand)
to purchase Pledged Securities and pledge the Pledged Securities to the Trustee
for the benefit of the Holders of the Notes pursuant to a Collateral Pledge and
Security Agreement dated as of the Closing Date from GST Network to United
States Trust Company of New York, as Trustee. The Pledged Securities are pledged
pursuant to the Pledge Agreement and are held by the Trustee in the Pledge
Account. Interest earned on the Pledged Securities will be added to the Pledge
Account. In addition, in consideration for GST Network facilitating the purchase
of GST USA's telecommunications equipment, GST USA has agreed to reimburse GST
Network for any fees or expenses incurred by GST Network in connection therewith
and to pay GST Network a commitment fee. Such commitment fee shall be in an
amount equal to 4.5% per annum of the amount by which the aggregate principal
amount at maturity of the Notes exceeds the aggregate principal amount of all
Intercompany Notes then held as security for the Notes. Such commitment fee
shall be paid semiannually, in arrears, on each May 1 and November 1, commencing
November 1, 1998 and shall be paid by GST USA issuing to GST Network Fee Notes
guaranteed by GST; provided that the aggregate principal amount of the Fee Notes
shall be reduced to the extent such principal amount exceeds the aggregate
principal amount of the Notes less (x) the aggregate principal amount of Pledged
Securities and cash then held in the Pledge Account, together with accrued
interest thereon and (y) the aggregate principal amount of all Intercompany
Notes then held as security for the Notes plus the amount of interest that will
accrue on such Intercompany Notes by May 1, 2003. The Fee Notes will mature on
May 1, 2003 and there will not be any payment of interest prior to maturity.
Upon written request from GST Network to the Trustee, Pledged
Securities will be released from the Pledge Account to GST Network in order to
finance the cost (including, without limitation, the cost of design,
development, construction, acquisition, installation or integration)
(collectively, "Acquired Equipment Cost") of telecommunications inventory or
equipment purchased or leased by GST Network ("Acquired Equipment"). The
Acquired Equipment primarily will consist of fiber optic cable, digital switches
and digital automatic cross connect equipment. The release of amounts to GST
Network in order to finance Acquired Equipment Cost will occur concurrently with
the expenditure of funds by GST Network with respect to such costs and will be
in an amount equal to such costs. Immediately upon the acquisition of Acquired
Equipment, GST Network will grant a first priority security interest in such
Acquired Equipment to the Trustee for the benefit of the Holders of the Notes.
GST USA must purchase all Acquired Equipment from GST Network at a purchase
price equal to the Acquired Equipment Cost for such Acquired Equipment and the
obligation to pay the purchase price shall be evidenced by an Intercompany Note
in a principal amount equal to the Acquired Equipment Cost, issued by GST USA
and fully and unconditionally guaranteed by GST. Each Intercompany Note will
mature on May 1, 2003. Interest on each Intercompany Note will accrue at 12 1/2%
compounded semiannually on each May 1 and November 1, but will not be payable in
cash until the maturity of the Intercompany Note. Each Intercompany Note will be
secured by a first priority security interest in all Acquired Equipment
purchased by GST USA. The Intercompany Notes will be prepaid if the maturity of
the Notes is accelerated because an Event of Default has occurred with respect
to the Notes or the payment of principal, premium or interest on the Notes is
otherwise due and payable. GST Network shall grant a first priority security
interest in the Pledged Securities, the Pledge Account, the Fee Notes and all
Intercompany Notes to the Trustee for the benefit of the Holders of the Notes to
secure repayment of the principal of, premium and interest on the Notes. On May
1, 2003, or earlier if permitted under the Existing Indentures, GST USA will
assume and become the direct obligor on the Notes, GST will fully and
unconditionally guarantee the Notes on an unsubordinated basis, GST USA will
grant a first priority security interest in all Acquired Equipment to the
Trustee for the benefit of the Holders of the Notes and GST Network will be
liquidated and its assets distributed to GST USA.
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MANDATORY REDEMPTION
If on May 1, 2003 GST USA is prohibited by the Existing Indentures from
assuming all of the Notes, GST Network will redeem, upon not less than 10 nor
more than 30 days' notice, the portion of the Notes that cannot be assumed at
105.250% of their principal amount plus accrued and unpaid interest to the date
of redemption.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Issuer, in whole or
in part, at any time or from time to time, on or after May 1, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first-class mail to each Holder's last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount at maturity), plus accrued and unpaid interest thereon to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date), if redeemed during the 12-month
period commencing May 1 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2003 105.250%
2004 103.500%
2005 101.750%
2006 and thereafter 100.000%
</TABLE>
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee by lot or by such other method as the
Trustee in its sole discretion shall deem to be fair and appropriate; provided
that no Note of $1,000 in principal amount at maturity or less shall be redeemed
in part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note.
The Notes will also be subject to redemption as a whole, but not in
part, at the option of GST, at any time after GST USA has become the obligor on
the Notes and GST has guaranteed the Notes, at 100% of their Accreted Value on
the Redemption Date, together with accrued interest thereon, to the Redemption
Date, in the event GST has become or would become obligated to pay, on the next
date on which any amount would be payable with respect to the Note Guarantee,
any Additional Amounts as a result of a change in the laws (including any
regulations promulgated thereunder) of Canada (or any political subdivision or
taxing authority thereof or therein), or any change in any official position
regarding the application or interpretation of such laws or regulations, which
change is announced or becomes effective on or after the date of this
Prospectus.
GUARANTEE
GST USA's obligations under the Notes, the Fee Notes and the
Intercompany Notes will be fully and unconditionally guaranteed on an
unsubordinated basis by GST (collectively, the "Note Guarantee"). The
obligations of GST under the Note Guarantee will be limited to the maximum
amount which, after giving effect to all other contingent and fixed liabilities
of GST and after giving effect to any collections from or payments made by or on
behalf of the Issuer in respect of obligations of the Issuer under the
Indenture, will result in the obligations of GST under the Note Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
REGISTRATION RIGHTS
GST Network, GST and GST USA have agreed with the Placement Agents, for
the benefit of the Holders, that they will use their best efforts, at their
cost, to file and cause to become effective a registration statement with
respect to a registered offer (the "Exchange Offer") to exchange the Old Notes
for New Notes with terms identical to the Notes (except that the New Notes will
not bear legends restricting the transfer thereof). Upon such registration
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statement being declared effective, the Issuer shall offer the Exchange Notes in
return for surrender of the Notes. Such offer shall remain open for not less
than 20 business days after the date notice of the Exchange Offer is mailed to
Holders. For each Note duly surrendered to the Issuer under the Exchange Offer,
the Holder will receive an Exchange Note of equal principal amount at maturity.
The accreted value of each Exchange Note shall be identical to, and shall be
determined in the same manner as, the Accreted Value of the Notes so surrendered
and exchanged therefor. Interest on each Exchange Note shall be calculated and
paid in the same manner as interest on the notes so surrendered and exchanged
therefor. In the event that applicable interpretations of the staff of the
Securities and Exchange Commission (the "Commission") do not permit the Issuer
to effect the Exchange Offer, or under certain other circumstances, GST Network,
GST and GST USA shall, at their cost, use their best efforts to cause to become
effective a shelf registration statement (the "Shelf Registration Statement")
with respect to resales of the Notes and to keep such registration statement
effective until the expiration of the time period referred to in Rule 144(k)
under the Securities Act after the Closing Date. The Issuer shall, in the event
of such a shelf registration, provide to each Holder copies of the prospectus,
notify each Holder when the Shelf Registration Statement for the Notes has
become effective and take certain other actions as are required to permit
resales of the Notes. A Holder that sells its Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
Holder (including certain indemnification obligations).
In the event that the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after the Closing Date, interest (in addition to the accrual of
original issue discount during the period ending May 1, 2003 and in addition to
interest otherwise due on the Notes after such date) will accrue commencing
November 4, 1998, at an annual rate of .5% per annum of the Accreted Value on
the preceding Semi-Annual Accrual Date, on the Notes and be payable in cash
semiannually on May 1 and November 1 of each year, commencing May 1, 1999, until
the Exchange Offer is consummated or the Shelf Registration Statement is
declared effective.
If GST Network, GST and GST USA effect the Exchange Offer, they will be
entitled to close the Exchange Offer 20 business days after the commencement
thereof, provided that they have accepted all Notes theretofore validly
surrendered in accordance with the terms of the Exchange Offer. Notes not
tendered in the Exchange Offer shall bear interest at the rate of 10-1/2% per
annum, subject to all of the terms and conditions specified in the Indenture and
to the transfer restrictions described in "Transfer Restrictions."
This summary of certain provisions of the Registration Rights Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available from the Issuer upon request.
RANKING
The Notes are, or will be, secured, unsubordinated indebtedness of the
Issuer. The Note Guarantee will be unsecured, unsubordinated indebtedness of
GST, will rank pari passu in right of payment with all unsecured, unsubordinated
indebtedness, and will be senior in right of payment to all subordinated
indebtedness, of GST, including the Convertible Notes and the Accrual Notes. As
of March 31, 1999, GST had $1,146.7 million of indebtedness outstanding, GST
USA had $971.3 million of indebtedness outstanding and GST Network had no
indebtedness other than the Notes. After GST USA becomes a direct obligor on the
Notes on May 1, 2003, or earlier if permitted under the Existing Indentures, the
Notes and the Note Guarantee will be effectively subordinated to all liabilities
(including trade payables) of GST USA's subsidiaries. At March 31, 1999, GST
USA's subsidiaries other than GST Network had $412.4 million of liabilities
(excluding intercompany payables), including $385.9 million of indebtedness.
After GST USA becomes a direct obligor on the Notes in the event the Holders or
the Trustee foreclose on the collateral securing the Notes and such collateral
is insufficient to pay all amounts due with respect to the Notes, the Holders
will have an unsecured unsubordinated claim for the amount still owing with
respect to the Notes. See "Risk Factors--Substantial Indebtedness," "-- Possible
Inability to Service Debt; Refinancing Risks," "-- Insufficiency of Acquired
Equipment to Satisfy the Notes upon Liquidation," "-- Structure of GST Network,
GST USA and GST; Secured Indebtedness; Ranking of Notes," "Capitalization" and
"Description of Certain Indebtedness and Redeemable Preferred Shares." Prior to
the time GST USA becomes a direct obligor on the
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Notes, in the event the Holders or the Trustee foreclose on the collateral
securing the Notes and such collateral is insufficient to pay all amounts due on
the Notes, the Holders will not have a claim against GST USA or GST under the
Notes or the Note Guarantee. See "Risk Factors--Possible Inability of GST USA to
Assume, GST to Guarantee and GST Network to Redeem the Notes."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
terms used herein for which no definition is provided.
"Accreted Value" is defined to mean, for any Specified Date, the amount
calculated pursuant to (i), (ii), (iii) or (iv) below for each $1,000 of
principal amount at maturity of the Notes:
(i) if the Specified Date occurs on one or more of the
following dates (each a "Semi-Annual Accrual Date"), the Accreted Value
will equal the amount set forth below for such Semi-Annual Accrual
Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
------------ --------
<S> <C>
November 1, 1998 $ 630.95
May 1, 1999 664.08
November 1, 1999 698.94
May 1, 2000 735.64
November 1, 2000 774.26
May 1, 2001 814.91
November 1, 2001 857.69
May 1, 2002 902.72
November 1, 2002 950.11
May 1, 2003 $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) $599.99 and
(b) an amount equal to the product of (1) the Accreted Value for the
first Semi-Annual Accrual Date less $599.99 multiplied by (2) a
fraction, the numerator of which is the number of days from the Closing
Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is the number of days elapsed from
the Closing Date to the first Semi-Annual Accrual Date, using a 360-day
year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (a) the
Accreted Value for the Semi-Annual Accrual Date immediately preceding
such Specified Date and (b) an amount equal to the product of (1) the
Accreted Value for the immediately following Semi-Annual Accrual Date
less the Accreted Value for the immediately preceding Semi-Annual
Accrual Date multiplied by (2) a fraction, the numerator of which is
the number of days from the immediately preceding Semi-Annual Accrual
Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"Accrual Notes" means the 12 3/4% Senior Subordinated Accrual Notes due
2007 of GST issued pursuant to the Accrual Notes Indenture.
"Accrual Notes Indenture" means the indenture dated as of November 19,
1997 between GST and United States Trust Company of New York.
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"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income (or loss) of GST and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person (other than net income attributable to a
Restricted Subsidiary) in which any Person (other than GST or any of its
Restricted Subsidiaries) has an interest and the net income of any Unrestricted
Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid to GST or any of its Restricted Subsidiaries by such
other Person, or such Unrestricted Subsidiary, during such period; (ii) solely
for the purposes of calculating the amount of Restricted Payments that may be
made pursuant to clause (C) of the first paragraph of the "Limitation on
Restricted Payments" covenant described below (and in such case, except to the
extent includable pursuant to clause (i) above), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is merged
into or consolidated with GST or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by GST
or any of its Restricted Subsidiaries; (iii) the net income of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of GST or any Restricted Subsidiary owned by Persons other than GST and
any of its Restricted Subsidiaries; and (vi) all extraordinary gains and
extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of GST and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of GST and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the quarterly or annual consolidated balance sheet of GST and its
Restricted Subsidiaries, prepared in conformity with GAAP and most recently
filed with the Commission pursuant to the "Commission Reports and Reports to
Holders" covenant described below.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by GST or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary of GST or shall be merged into or consolidated
with GST or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of GST
and its Restricted Subsidiaries on the date of such investment or (ii) an
acquisition by GST or any of its Restricted Subsidiaries of the property and
assets of any Person other than GST or any of its Restricted Subsidiaries that
constitute substantially all of a division or line of business of such Person;
provided that the property and assets acquired are related, ancillary or
complementary to the businesses of GST and its Restricted Subsidiaries on the
date of such acquisition.
"Asset Sale" means any sale, transfer or other disposition (including
by way of merger, consolidation or sale-leaseback transactions) in one
transaction or a series of related transactions by GST or any of its Restricted
Subsidiaries to any Person other than GST or any of its Restricted Subsidiaries
of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or
substantially all of the property and assets of an operating unit or business of
GST or any of its Restricted Subsidiaries or (iii) any other property or assets
of GST or any of its Restricted Subsidiaries outside the ordinary course of
business of GST or such Restricted Subsidiary and, in each case, that is not
governed by the provisions of the Indenture applicable to mergers,
consolidations and sales of assets of GST; provided that "Asset Sale" shall not
include (A) sales or other dispositions of inventory, receivables and other
current assets or (B) sales or other dispositions of assets with a fair market
value (as certified in an Officers' Certificate) not
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in excess of $1 million; or (C) sales of Acquired Equipment by GST Network to
GST USA in accordance with the terms of the Indenture; or (D) sales or other
dispositions of assets to the extent GST or a Restricted Subsidiary receives
consideration at least equal to the fair market value of the assets sold or
disposed of, provided that the consideration received consists of property or
assets (other than current assets) of a nature or type or that are used in a
business (or a company having property or assets of a nature or type, or engaged
in a business) similar or related to the nature or type of the property and
assets of, or business of, GST and its Restricted Subsidiaries existing on the
date of such sale or other disposition.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of Voting Stock representing more than 30% of the total voting power of the
Voting Stock of GST on a fully diluted basis; (ii) individuals who on the
Closing Date constitute the Board of Directors (together with any new directors
whose election by the Board of Directors or whose nomination for election by
GST's shareholders was approved by a vote of at least two-thirds of the members
of the Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office; or (iii) all of the Common
Stock of GST USA or GST Network is not beneficially owned by GST.
"Closing Date" means May 4, 1998, the date on which the Old Notes were
originally issued under the Indenture.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to either extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for GST and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by GST or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including amortization of
original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all
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commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing; the net costs associated with
Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by GST
or any of its Restricted Subsidiaries) and all but the principal component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by GST and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination,
shareholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of GST and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
Capital Stock of GST or any of its Restricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Convertible Notes" means the 13 7/8% Convertible Senior Subordinated
Discount Notes due 2005 of GST issued pursuant to the Convertible Notes
Indenture.
"Convertible Notes Indenture" means the convertible notes indenture
dated December 19, 1995 among GST, as issuer, GST USA, as guarantor, and United
States Trust Company of New York.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Development Company" means a Restricted Subsidiary whose primary
business is the development, ownership and operation of alternative access
telecommunications networks.
"Existing Indentures" means, collectively the Convertible Notes
Indenture, the Senior Notes Indenture, the Secured Notes Indenture and the
Accrual Notes Indenture.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy,
as determined in good faith by the Board of Directors of GST (whose
determination shall be conclusive) and evidenced by a Board Resolution.
"Fee Notes" means the intercompany notes due May 1, 2003 issued to GST
Network in payment of the commitment fees by GST USA and guaranteed by GST;
provided that the aggregate principal amount of such notes shall be reduced to
the extent the aggregate principal amount exceeds the principal amount at
maturity of the Notes less (x) the principal amount of Pledged Securities and
cash then held in the Pledge Account, together with accrued interest thereon and
(y) the principal amount of all Intercompany Notes then held as security for the
Notes plus the amount of interest that will accrue on such Intercompany Notes by
May 1, 2003.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained in the
Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and
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(ii) except as otherwise provided, the amortization of any amounts required or
permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other obligation
of any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "incurrence" of Indebtedness by reason of a Person
becoming a Restricted Subsidiary; provided that neither the accrual of interest
nor the accretion of original issue discount shall be considered an Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the unamortized
portion of the original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP, (B) money borrowed and set aside
at the time of the Incurrence of any Indebtedness in order to pre-fund the
payment of interest as such Indebtedness shall be deemed not to be
"Indebtedness" and (C) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination,
the ratio of (i) the aggregate amount of Indebtedness of GST and its Restricted
Subsidiaries on a consolidated basis as at the date of determination (the
"Transaction Date") to (ii) the Consolidated EBITDA of GST for the then most
recent four full fiscal quarters for which reports have been filed pursuant to
the "Commission Reports and Report to Holders" covenant described below (such
four full fiscal quarter period being referred to herein as the "Four Quarter
Period"); provided that (x) pro forma effect shall be given to any Indebtedness
Incurred from the beginning of the Four Quarter Period through the Transaction
Date (including any Indebtedness Incurred on the Transaction Date), to the
extent outstanding on the Transaction Date, (y) if during the period commencing
on the first day of such Four Quarter Period through the Transaction Date (the
"Reference Period"), GST or any of its Restricted Subsidiaries shall have
engaged in any Asset Sale, Consolidated EBITDA for such period shall be reduced
by an amount equal to the EBITDA (if positive), or increased by an amount equal
to the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale as if such Asset Sale had occurred on the first day
of such Reference Period or (z) if during such Reference Period GST or any of
the Restricted Subsidiaries shall have made any Asset Acquisition, Consolidated
EBITDA of GST shall be calculated on a pro forma basis as if such Asset
Acquisition and
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any Incurrence of Indebtedness to finance such Asset Acquisition had taken place
on the first day of such Reference Period.
"Intercompany Notes" means the promissory notes due May 1, 2003 issued
to GST Network by GST USA and guaranteed by GST.
"Investment" in any Person means any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Issuer or its Restricted Subsidiaries) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall include
(i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and
(ii) the fair market value of the Capital Stock (or any other Investment) held
by GST and its Restricted Subsidiaries of any Person that has ceased to be a
Restricted Subsidiary by reason of any transaction permitted by clause (iii) of
the "Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant. For purposes of the definition of "Unrestricted
Subsidiary" and the "Limitation on Restricted Payments" covenant described
below, (i) "Investment" shall include the fair market value of the assets (net
of liabilities to GST or any of its Restricted Subsidiaries) of any Restricted
Subsidiary of GST at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
by the Board of Directors in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof, any sale with
recourse against the seller or any Affiliate of the seller, or any agreement to
give any security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to GST or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of GST and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by GST or
any Restricted Subsidiary as a reserve against any liabilities associated with
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Issuer or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Issuer from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest (or original
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issue discount) pursuant to its terms; (iv) that, unless the Issuer defaults in
the payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest (or original issue discount) on
and after the Payment Date; (v) that Holders electing to have a Note purchased
pursuant to the Offer to Purchase will be required to surrender such Note,
together with the form entitled "Option of the Holder to Elect Purchase" on the
reverse side thereof completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the Business Day immediately
preceding the Payment Date; (vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of business on
the third Business Day immediately preceding the Payment Date, a telegram,
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of Notes delivered for purchase and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion thereof; provided that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or integral multiples thereof. On the Payment Date, the
Issuer shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Issuer. The
Paying Agent shall promptly mail to the Holders of Notes so accepted payment in
an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount at maturity of
$1,000 or integral multiples thereof. The Issuer will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase. The Issuer
will comply with Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Issuer is required to repurchase Notes
pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to, GST or a Restricted Subsidiary;
provided that such person's primary business is related, ancillary or
complementary to the businesses of GST and its Restricted Subsidiaries on the
date of such Investment; (ii) a Temporary Cash Investment; (iii) payroll, travel
and similar advances to cover matters that are expected at the time of such
advances ultimately to be treated as expenses in accordance with GAAP; (iv)
loans or advances to employees made in the ordinary course of business that do
not exceed $1 million in the aggregate at any time outstanding; and (v) stock,
obligations or securities received in satisfaction of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of GST or any of its Restricted Subsidiaries; (vi) Liens
(including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, (1) to finance the cost
(including, without limitation, the cost of design, development, construction,
acquisition, installation or integration) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of or within six
months after the later of the acquisition, the completion of construction or the
commencement of full operation of such property or (2) to refinance any
Indebtedness previously so secured, (b) the principal amount of the Indebtedness
secured by such
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Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to
or cover any property or assets other than such item of property or assets and
any improvements on such item; (vii) leases or subleases granted to others that
do not materially interfere with the ordinary course of business of GST and its
Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or
assets under construction arising from progress or partial payments by a
customer of GST or its Restricted Subsidiaries relating to such property or
assets; (ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of stock or Indebtedness of, any corporation existing at the
time such corporation becomes, or becomes a part of, any Restricted Subsidiary;
provided that such Liens do not extend to or cover any property or assets of GST
or any Restricted Subsidiary other than the property or assets acquired; (xii)
Liens in favor of GST or any Restricted Subsidiary; (xiii) Liens arising from
the rendering of a final judgment or order against GST or any Restricted
Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
parameters customary in the industry and incurred in the ordinary course of
business, in each case, securing Indebtedness under Interest Rate Agreements and
Currency Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed to protect GST or any of
its Restricted Subsidiaries from fluctuations in interest rates or the price of
commodities; (xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by GST or
any of its Restricted Subsidiaries in the ordinary course of business in
accordance with the past practices of GST and its Restricted Subsidiaries prior
to the Closing Date; and (xviii) Liens on or sales of receivables.
"Pledge Account" means the accounts established with the Trustee
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by GST Network with the net proceeds from the sale of the
Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by GST Network in favor of the Trustee, as
such agreement may be amended, restated, supplemented or otherwise modified from
time to time.
"Pledged Securities" means the securities which shall consist of U.S.
Government Securities, purchased by GST Network with the proceeds from the sale
of the Notes or the proceeds from such securities, to be held in the Pledge
Account, all in accordance with the terms of the Pledge Agreement.
"Redeemable Preferred Shares" means the Series A Convertible Preference
Shares of GST outstanding on the Closing Date.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its term or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Issuer's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Restricted Subsidiary" means any Subsidiary of GST other than an
Unrestricted Subsidiary.
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"Secured Notes" means the 13 1/4% Senior Secured Discount notes due
2007 of GST Funding issued pursuant to the Secured Notes Indenture.
"Secured Notes Indenture" means the Indenture dated as of May 13, 1997
among GST, GST USA, GST Funding and United States Trust Company of New York.
"Senior Notes" means the 13 7/8% Senior Discount Notes due 2005 of GST
USA issued pursuant to the Senior Notes Indenture.
"Senior Notes Indenture" means the senior notes indenture dated
December 19, 1995 among GST USA, as issuer, GST, as guarantor, and United States
Trust Company of New York.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of GST, accounted for more than 10% of the consolidated
revenues of GST and its Restricted Subsidiaries or (ii) as of the end of such
fiscal year, was the owner of more than 10% of the consolidated assets of GST
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of GST for such fiscal year.
"Specified Date" means any Redemption Date, any Payment Date for an
Offer to Purchase or any date on which the Notes first become due and payable
after an Event of Default.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker-dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Issuer) organized and in
existence under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States of America with a rating at
the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard & Poor's Ratings Services, and (v) securities with maturities of six
months or less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Services or Moody's Investors Service,
Inc.
"Tomen" means Tomen Corporation or its Affiliates.
"Tomen Facility" means, collectively, the Tomen Master Agreement
together with all other agreements (including credit agreements), instruments
and documents executed or delivered pursuant thereto or in connection
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therewith, in each case as such agreements, instruments or documents may be
amended, supplemented, extended, renewed, replaced or otherwise modified from
time to time.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by GST or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of GST that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary), other than
GST USA or a Subsidiary Guarantor, to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, GST or any Restricted Subsidiary; provided that (A) any Guarantee by GST or
any Restricted Subsidiary of any Indebtedness of the Subsidiary being so
designated shall be deemed an Incurrence of such Indebtedness and an Investment
by GST or such Restricted Subsidiary at the time of such designation; (B) either
(I) the Subsidiary to be so designated has total assets of $1,000 or less or
(II) if such Subsidiary has assets greater than $1,000, that such designation
would be permitted under the "Limitation on Restricted Payments" covenant
described below and (C) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (A) above would be permitted under the
"Limitation on Indebtedness" and "Limitation on Restricted Payments" covenants
described below. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary of GST; provided that immediately after
giving effect to such designation (x) the Liens and Indebtedness of such
Unrestricted Subsidiary outstanding immediately after such designation is
permitted to be Incurred for all purposes of the Indenture and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing with
the Trustee a copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person,
such Subsidiary if all of the outstanding Capital Stock in such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
Limitation on Indebtedness
(a) GST will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that GST and GST USA may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness and
the receipt and application of the proceeds therefrom, the Indebtedness to
EBITDA Ratio would be greater than zero and less than 5:1. GST Network may not
Incur any Indebtedness other than the Notes.
Notwithstanding the foregoing, GST and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time (including, but not limited to,
Indebtedness under the Tomen Facility) in an aggregate principal amount not to
exceed $320 million, less any amount of Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness (A) to GST evidenced by a promissory note or (B) to any of its
Restricted Subsidiaries; provided that any subsequent event which results in any
such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to GST or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness, other than Indebtedness
Incurred under clause (i), (ii), (iv), (v), (vii) or (viii) of this paragraph,
and any refinancings
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thereof in an amount not to exceed the amount so refinanced or refunded (plus
premiums, accrued interest, fees and expenses); provided that Indebtedness the
proceeds of which are used to refinance or refund the Notes and Note Guarantee
or Indebtedness that is or would be pari passu with, or subordinated in right of
payment to, the Notes and Note Guarantee shall only be permitted under this
clause (iii) if (A) in case the Notes and Note Guarantee are refinanced in part,
or the Indebtedness to be refinanced is or would be pari passu with the Notes or
Note Guarantee, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is outstanding,
is expressly made pari passu with, or subordinate in right of payment to, the
remaining Notes or Note Guarantee, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes or Note Guarantee, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made
subordinate in right of payment to the Notes or Note Guarantee at least to the
extent that the Indebtedness to be refinanced is or would be subordinated to the
Notes or Note Guarantee and (C) such new Indebtedness, determined as of the date
of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and provided further that in no event
may Indebtedness of GST or GST USA be refinanced by means of any Indebtedness of
any Restricted Subsidiary of GST USA pursuant to this clause (iii); (iv)
Indebtedness (A) in respect of performance, surety or appeal bonds provided in
the ordinary course of business, (B) under Currency Agreements and Interest Rate
Agreements; provided that such agreements do not increase the Indebtedness of
the obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder; and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of GST or any of the Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Subsidiary (other
than Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by GST or any Restricted Subsidiary in connection
with such disposition; (v) Indebtedness of GST not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by GST after the Closing
Date from the issuance and sale of its Capital Stock (other than Redeemable
Stock) to a Person other than a Subsidiary of GST to the extent such Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or
clauses (iii), (iv) or (vi) of the second paragraph of the "Limitation on
Restricted Payments" covenant described below to make a Restricted Payment;
provided that such Indebtedness does not mature prior to the Stated Maturity of
the Notes and has an Average Life longer than the Notes; (vi) Indebtedness
Incurred to finance the cost (including, without limitation, the cost of design,
development, construction, acquisition, installation or integration) of network
assets (including, without limitation, equipment and real property and leasehold
improvements that are necessary to install or operate network assets; provided
that in no event shall the cost of any such real property and leasehold
improvements financed hereby exceed 20% of the total cost of the related network
assets) or inventory purchased or leased by GST or any of its Restricted
Subsidiaries after the Closing Date; (vii) Indebtedness of GST or GST USA under
one or more revolving credit or working capital facilities in an aggregate
principal amount outstanding at any time not to exceed the lesser of (A) $50
million and (B) 75% of the consolidated book value of the accounts receivable of
GST and its Restricted Subsidiaries; and (viii) Indebtedness of GST or GST USA
to the extent the proceeds thereof are promptly (a) used to purchase Notes
tendered in an Offer to Purchase made as a result of a Change of Control or (b)
deposited to defease the Notes as described below under "Defeasance."
(b) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred
under the Tomen Facility on or prior to the Closing Date shall be treated as
Incurred pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant and (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this "Limitation on Indebtedness" covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in the above clauses, GST, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
Limitation on Restricted Payments
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GST will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on its Capital Stock (other than dividends or distributions payable solely in
shares of its or such Restricted Subsidiary's Capital Stock (other than
Redeemable Stock) or in options, warrants or other rights to acquire such shares
of Capital Stock) held by Persons other than GST or any of its Restricted
Subsidiaries (and other than pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries), (ii) purchase, redeem, retire or otherwise acquire
for value any shares of Capital Stock of GST (including options, warrants or
other rights to acquire such shares of Capital Stock) held by Persons other than
any Wholly Owned Restricted Subsidiaries of GST, (iii) make any voluntary or
optional principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of GST
USA or GST that is subordinated in right of payment to the Notes or the Note
Guarantee, as the case may be, or (iv) make any Investment, other than a
Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) being collectively "Restricted Payments")
if, at the time of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing, (B) GST
could not Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant or (C) the aggregate amount of all
Restricted Payments (the amount, if other than in cash, to be determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) made after the Closing Date shall exceed the
sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of such
amount) (determined by excluding income resulting from transfers of assets by
GST or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed pursuant to the "Commission Reports and
Reports to Holders" covenant plus (2) the aggregate Net Cash Proceeds received
by GST after the Closing Date from the issuance and sale permitted by the
Indenture of its Capital Stock (other than Redeemable Stock) to a Person who is
not a Subsidiary of GST, or from the issuance to a Person who is not a
Subsidiary of GST of any options, warrants or other rights to acquire Capital
Stock of GST (in each case, exclusive of any Redeemable Stock or any options,
warrants or other rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the Notes), in each
case except to the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to clause (v) of the second paragraph of the "Limitation on
Indebtedness" covenant, plus (3) an amount equal to the net reduction in
Investments (other than reductions in Permitted Investments and reductions in
Investments made pursuant to clause (vi) of the second paragraph of this
"Limitation on Restricted Payments" covenant) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to GST or any Restricted
Subsidiary (except to the extent any such payment is included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed the amount of Investments previously
made by GST and its Restricted Subsidiaries in such Person.
The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof if,
at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment to
the Intercompany Notes or, after GST USA assumes the Notes, the Notes or Note
Guarantee, including premium, if any, and accrued and unpaid interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of GST in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Redeemable Stock) of GST; (iv) the acquisition of
Indebtedness of GST USA or GST which is subordinated in right of payment to the
Intercompany Notes or, after GST USA assumes the Notes, the Notes or Note
Guarantee, in exchange for, or out of the proceeds of, a substantially
concurrent offering of, shares of the Capital Stock of GST (other than
Redeemable Stock); (v) payments or distributions, in the nature of satisfaction
of dissenters' rights, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially all
of the property and assets of GST USA or GST; (vi) Investments in any Person or
Persons (other than an Affiliate (other than a Subsidiary) of the Company), the
primary business of which is related, ancillary or complementary to the business
of GST and its Restricted Subsidiaries on the date of such Investments, in an
aggregate amount not to exceed $50 million plus, (a) in any fiscal year, an
amount not to exceed 10% of GST's Consolidated EBITDA (if positive) for the
immediately preceding fiscal year, (b) an
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amount not to exceed the Net Cash Proceeds received by GST after May 13, 1997
from the issuance and sale permitted by the Indenture of its Capital Stock
(other than Redeemable Stock) to a Person that is not a Subsidiary of GST,
except to the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to clause (v) under the "Limitation on Indebtedness" covenant or to
make Restricted Payments pursuant to clause (C)(2) of the first paragraph or
clause (iii) or (iv) of this paragraph of this "Limitation on Restricted
Payments" covenant and (c) the net reduction in Investments in any Person made
pursuant to this clause (vi), except to the extent such reduction is included in
the calculation of Adjusted Consolidated Net Income; provided that the net
reduction in any such Investment shall not exceed the amount of Investments
previously made in such Person; (vii) Investments by GST or a Restricted
Subsidiary made pursuant to the second paragraph of the "Limitation on
Investments" covenant, in an aggregate amount not to exceed $25 million; and
(viii) cash payments in lieu of the issuance of fractional Common Shares upon
conversion (including mandatory conversion) of the Convertible Notes provided
for in the Convertible Notes Indenture or the Redeemable Preferred Shares;
provided that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth herein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof and an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof), and the Net Cash Proceeds from any issuance of
Capital Stock referred to in clauses (iii), (iv) and (vi) shall be included in
calculating whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Capital Stock of GST are used for the redemption, repurchase or other
acquisition of the Notes or Indebtedness that is pari passu with the Notes or
Note Guarantee, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
GST Network will not, and will not permit any Subsidiary to, directly
or indirectly, make any Restricted Payment other than Investments in Pledged
Securities, cash, the Fee Notes and Intercompany Notes, in each case pledged to
secure the Notes.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
GST will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by GST
or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to GST or any
other Restricted Subsidiary, (iii) make loans or advances to GST or any other
Restricted Subsidiary or (iv) transfer any of its property or assets to GST or
any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreement in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by GST or any Restricted Subsidiary, existing at the time of such
acquisition and not incurred in contemplation thereof, which encumbrances or
restrictions are not applicable to any Person or the property or assets of any
Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of GST or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) arising or agreed to in the ordinary course
of business, not relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets of GST or any
Restricted Subsidiary in any manner material to GST or
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any Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and
imposed pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or property and
assets of, such Restricted Subsidiary; (vi) with respect to any Development
Company, imposed pursuant to or in connection with any Indebtedness Incurred by
such Development Company to finance at least 50% of the total financing required
for the development and construction of all of such Development Company's
alternative access networks or any Indebtedness Incurred to refinance or replace
such Indebtedness; provided that (a) such Indebtedness (including such
refinancing Indebtedness) is permitted to be Incurred under the "Limitation on
Indebtedness" covenant described above, (b) such encumbrances and restrictions
are no more restrictive in any material respect than those encumbrances and
restrictions existing under the Tomen Facility as in effect on the Closing Date
and (c) such encumbrances and restrictions shall only apply to such Development
Company for so long as such Indebtedness (or such refinancing Indebtedness)
remains outstanding; or (vii) with respect to any Development Company (a
"Restricted Development Company"), imposed pursuant to or in connection with any
Indebtedness Incurred by another Development Company to finance at least 50% of
the total financing required for the development and construction of all of such
other Development Company's alternative access networks or any Indebtedness
Incurred to refinance or replace such Indebtedness; provided that (a) such
encumbrances and restrictions shall not apply to such Restricted Development
Company prior to the occurrence of an event of default under such Indebtedness
(or refinancing Indebtedness), (b) such Indebtedness (including such refinancing
Indebtedness) is permitted to be Incurred under the "Limitation on Indebtedness"
covenant, (c) such encumbrances and restrictions are no more restrictive in any
material respect than those contemplated by the Tomen Facility as in effect on
the Closing Date and (d) at least 50% of the total financing required for the
development and construction of all of such Restricted Development Company's
alternative access networks was provided by the holder of the Indebtedness of
such other Development Company.
GST Network will not, and will not permit any Subsidiary to, create or
otherwise cause or suffer to exist or become effective any of the matters
referred to in the first paragraph of this section.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent GST or
any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of GST or any of
its Restricted Subsidiaries that secure Indebtedness of GST or any of its
Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries
GST will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to GST or a Wholly Owned Restricted
Subsidiary; (ii) issuances or sales to foreign nationals of shares of Capital
Stock of foreign Restricted Subsidiaries, to the extent required by applicable
law; (iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary; or
(iv) a sale of Common Stock of Phoenix Fiber, and in connection and concurrently
with such sale, a sale of Common Stock of GST Tucson Lightwave, Inc. provided
that the proceeds of any such sale under this clause (v) shall be applied in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
GST Network will not sell, and will not permit any Subsidiary, directly
or indirectly, to issue or sell any shares of Capital Stock of a Subsidiary
(including options, warrants or other rights to purchase shares of such Capital
Stock).
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Under the terms of the Indenture, GST will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee any Indebtedness of GST or any
Indebtedness of GST USA ("Guaranteed Indebtedness"), unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment of the
Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives
and will not in any manner whatsoever claim or take the benefit or advantage of,
any rights of reimbursement, indemnity or subrogation or any other rights
against GST Network, GST or GST USA as a result of
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any payment by such Restricted Subsidiary under its Subsidiary Guarantee;
provided that this paragraph shall not be applicable to any Guarantee of any
Restricted Subsidiary that (x) existed at the time such Person became a
Restricted Subsidiary and (y) was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) pari passu with the Intercompany Notes, the Notes
or the Note Guarantee, then the Guarantee of such Guaranteed Indebtedness shall
be pari passu with, or subordinated to, the Subsidiary Guarantee or (B)
subordinated to the Intercompany Notes, the Notes or the Note Guarantee, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Intercompany Notes, the Notes or Note Guarantee, as the case
may be.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of GST of all of GST's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the
Indenture) or (ii) the release or discharge of the Guarantee which resulted in
the creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.
Under the terms of the Indenture, GST Network will not permit any
Subsidiary to, directly or indirectly, Guarantee any Indebtedness.
Limitation on Transactions with Shareholders and Affiliates
GST will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of GST or any Restricted
Subsidiary or with any Affiliate of GST or any Restricted Subsidiary, except
upon fair and reasonable terms no less favorable to GST or such Restricted
Subsidiary than could be obtained, at the time of such transaction or, if such
transaction is pursuant to a written agreement, at the time of the execution of
the agreement providing therefor, in a comparable arm's-length transaction with
a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which GST or a Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to GST or such Restricted Subsidiary from a
financial point of view; (ii) any transaction solely between GST and any of its
Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted
Subsidiaries; (iii) the payment of reasonable and customary regular fees
(including through the issuance of shares of Common Stock of GST or options,
warrants or other rights to acquire such shares) to directors of GST who are not
employees of GST or any of its subsidiaries; (iv) any payments or other
transactions pursuant to any tax-sharing agreement between GST and any other
Person with which GST files a consolidated tax return or with which GST is part
of a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction or series of transactions covered by the first
paragraph of this "Limitation on Transactions with Shareholders and Affiliates"
covenant and not covered by clauses (ii) through (vi) of this paragraph, the
aggregate amount of which exceeds $500,000 in value, must be approved or
determined to be fair in the manner provided for in clause (i)(A) or (B) above.
GST Network will not, and will not permit any Subsidiary to, directly
or indirectly, enter into, renew or extend any of the transactions described in
the first paragraph of this section other than any transaction between GST
Network and GST or any of its Restricted Subsidiaries required or permitted by
the Indenture and Pledge Agreement.
Limitation on Liens
GST will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character, or any shares of Capital Stock or Indebtedness of any
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Restricted Subsidiary (collectively, "Protected Property"), without making
effective provision for all of the Notes (or in the case of a Lien on Protected
Property of GST, the Note Guarantee) and all other amounts due under the
Indenture to be directly secured equally and ratably with (or, if the obligation
or liability to be secured by such Lien is subordinated in right of payment to
the Notes or the Note Guarantee, prior to) the obligation or liability secured
by such Lien; provided that neither GST nor any Restricted Subsidiary will
create, Incur, assume or suffer to exist any Lien on the Pledged Securities, the
Pledge Account or any Acquired Equipment, except Liens securing the Notes and
the Intercompany Notes.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of GST or its Restricted Subsidiaries securing the Initial Note, the
Intercompany Notes or created in favor of GST Network, the Trustee or the
Holders of the Notes; (iii) Liens with respect to the assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to GST or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to GST or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of GST
or any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens upon or Capital Leases with respect to
inventory, property or equipment acquired or held by GST or any of its
Restricted Subsidiaries to secure all or a part of the purchase price therefor
or GST's or such Restricted Subsidiary's obligations under such lease; provided
that such Liens do not extend to or cover any property or assets of GST or any
Restricted Subsidiary other than the inventory, property or equipment acquired;
(vi) Liens on assets or property of, or the Capital Stock of, a Development
Company securing Indebtedness Incurred under clause (i) of the second paragraph
of the "Limitation on Indebtedness" covenant to finance at least 50% of the
total financing for the development and construction of the alternative access
networks owned by such Development Company; provided such Liens do not extend to
or cover any other property or assets of GST or any of its Restricted
Subsidiaries; (vii) Liens on any property or assets of a Restricted Subsidiary
securing Indebtedness of such Restricted Subsidiary permitted to be Incurred
under the Indenture; or (viii) Permitted Liens.
GST Network will not, and will not permit any Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character other than Liens granted in favor of the Trustee or the Holders of
the Notes.
Limitation on Sale-Leaseback Transactions
GST will not, and will not permit any Restricted Subsidiary to, enter
into any sale-leaseback transaction involving any of its assets or properties
whether now owned or hereafter acquired, whereby GST or a Restricted Subsidiary
sells or transfers such assets or properties and then or thereafter leases such
assets or properties or any part thereof or any other assets or properties which
GST or such Restricted Subsidiary, as the case may be, intends to use for
substantially the same purpose or purposes as the assets or properties sold or
transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if (i) the lease is for a period, including renewal rights, of not
in excess of three years; (ii) the lease secures or relates to industrial
revenue or pollution control bonds; (iii) the transaction is solely between GST
and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or (iv) GST or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
GST Network will not, and will not permit any Subsidiary to, enter into
any sale-leaseback transaction.
Limitation on Investments
GST will not, and will not permit any Restricted Subsidiary to, (i)
make any Investment in any Person (including an Unrestricted Subsidiary) that
during its most recent
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fiscal year derived or in its current fiscal year is expected by the Board of
Directors of GST to derive more than $250,000 in revenues from, or in its most
recent fiscal year spent or in its current fiscal year is expected by the Board
of Directors of GST to spend more than $250,000 on, operations or activities
located outside the continental United States (other than in the State of Hawaii
or between the continental United States and the State of Hawaii) (an
"International Business") or (ii) acquire or own (directly or indirectly), other
than through an Unrestricted Subsidiary, any entity, business or asset that is
primarily located outside the continental United States (other than in the State
of Hawaii) or any right with respect to any of the foregoing (an "International
Asset").
Notwithstanding the foregoing, and subject to the "Limitation on
Restricted Payments" covenant, GST and its Restricted Subsidiaries may make an
Investment in an Unrestricted Subsidiary which owns, intends to acquire or has
rights with respect to an International Business or International Asset provided
that the aggregate amount of such Investments does not exceed (i) $25 million
plus, (A) in any fiscal year, an amount not to exceed 10% of GST's Consolidated
EBITDA (if positive) for the immediately preceding fiscal year and (B) an amount
not to exceed the Net Cash Proceeds received by GST after May 13, 1997 from the
issuance and sale permitted by the Indenture of its Capital Stock (other than
Redeemable Stock) to a Person who is not a Subsidiary of GST, less (ii) the
amount of any Investments made pursuant to the first paragraph, or the amount of
any Restricted Payment made pursuant to clause (iii), (iv) or (vi) of the second
paragraph, of the "Limitation on Restricted Payments" covenant; provided that
the International Business or International Assets are related, ancillary or
complementary to the primary business of GST and its Restricted Subsidiaries on
the date of such Investment.
Limitation on Asset Sales
GST will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by GST or such
Restricted Subsidiary is at least equal to the fair market value of the assets
sold or disposed of and (ii) at least 85% of the consideration received consists
of cash or Temporary Cash Investments; provided, however, that clause (ii) shall
not apply to long-term assignments of capacity in a network. In the event and to
the extent that the Net Cash Proceeds received by GST or its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net
Tangible Assets (determined as of the date closest to the commencement of such
12-month period for which a consolidated balance sheet of the Issuer and its
Subsidiaries has been prepared), then GST shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of GST or GST USA, Indebtedness of any Restricted
Subsidiary (other than GST USA), in each case owing to a Person other than GST
or any of its Restricted Subsidiaries or (B) invest an equal amount, or the
amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, GST and its Restricted Subsidiaries existing
on the date of such investment (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) apply (no later than the end of the 12-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5.0 million, the Issuer
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate Accreted Value of Notes equal to the Excess Proceeds on such date, at
a purchase price equal to 101% of the Accreted Value of the Notes on the
relevant Payment Date, plus, in each case, accrued interest to the Payment Date.
GST Network will not, and will not permit any Subsidiary to, consummate
any Asset Sale except as permitted under the Pledge Agreement.
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Impairment of Security Interests or Ability to Assume the Notes
The Indenture provides that none of GST, GST USA nor GST Network shall,
nor shall they permit any Subsidiary to, take or knowingly omit to take any
action which (i) might or would have the result of materially impairing the
security interest with respect to the Pledged Securities, any Acquired
Equipment, the Fee Notes or Intercompany Notes for the benefit of the Trustee
and the Holders of the Notes, (ii) grant to any Person other than the Trustee or
the Holders of the Notes, any interest whatsoever in the Pledged Securities,
other amounts in the Pledge Account, any Acquired Equipment, the Fee Notes or
any Intercompany Note, (iii) would prevent, or restrict GST USA from assuming,
or GST from guaranteeing, the Notes on May 1, 2003 or earlier if permitted by
the Existing Indentures or (iv) would prevent, or restrict GST USA from issuing
Fee Notes to GST Network.
Repurchase of Notes upon a Change of Control
The Issuer must commence, within 30 days of the occurrence of a Change
of Control, and consummate an Offer to Purchase for all Notes then outstanding,
at a purchase price equal to 101% of the Accreted Value thereof on the relevant
Payment Date, plus accrued interest to the Payment Date. Prior to the mailing of
the notice to Holders commencing such Offer to Purchase, but in any event within
30 days following any Change of Control, the Issuer covenants to (i) repay in
full all indebtedness of the Issuer that would prohibit the repurchase of the
Notes pursuant to such Offer to Purchase or (ii) obtain any requisite consents
under instruments governing any such indebtedness of the Issuer to permit the
repurchase of the Notes. The Issuer shall first comply with the covenant in the
preceding sentence before it shall repurchase Notes pursuant to this "Repurchase
of Notes upon a Change of Control" covenant.
Under the terms of the Indenture, if the Issuer is unable to repay all
of its indebtedness that would prohibit repurchase of the Notes or is unable to
obtain the consents of the holders of indebtedness, if any, of the Issuer
outstanding at the time of a Change of Control whose consent would be so
required to permit the repurchase of Notes or otherwise fails to purchase any
Notes, then the Issuer will have breached such covenant. This breach will
constitute an Event of Default under the Indenture if it continues for a period
of 30 consecutive days after written notice is given to the Issuer by the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes outstanding. In addition, the failure by the Issuer to repurchase Notes at
the conclusion of an Offer to Purchase will constitute an Event of Default
without any waiting period or notice requirements.
There can be no assurance that the Issuer will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Issuer which might be outstanding at
the time). The above covenant requiring the Issuer to repurchase the Notes will,
unless the consents referred to above are obtained, require the Issuer to repay
all indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
Commission Reports and Reports to Holders
At all times from and after the earlier of (i) the date of the
commencement of an Exchange Offer or the effectiveness of the Shelf Registration
Statement (the "Registration") and (ii) six months after the Closing Date, in
either case, whether or not GST Network is then required to file reports with
the Commission, GST Network shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act if it were subject thereto. In
addition, at all times prior to the earlier of the date of the Registration and
six months after the Closing Date, GST Network shall, at its cost, deliver to
each Holder of the Notes quarterly and annual reports substantially equivalent
to those which would be required by the Exchange Act. In addition, at all times
prior to the Registration, upon the request of any Holder or any prospective
purchaser of the Notes designated by a Holder, GST Network shall supply to such
Holder or such prospective purchaser the information required under Rule 144A
under the Securities Act. Whether or not GST is required to file reports with
the Commission, if any Notes are outstanding, GST shall file with the Commission
all such reports and other information as it would be required to file with the
Commission by Sections 13(a) or 15(d) under the Exchange Act. GST Network and
GST shall supply the Trustee and each Holder of Notes or shall supply to the
Trustee for forwarding to each Holder, without cost to such Holder, copies of
such reports or other information.
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EVENTS OF DEFAULT
The following events are defined as "Events of Default": (a) default in
the payment of principal of (or premium, if any, on) any Note when the same
becomes due and payable at maturity, upon acceleration, redemption or otherwise;
(b) default in the payment of interest on any Note when the same becomes due and
payable, and such default continues for a period of 30 days; (c) GST, GST USA or
GST Network defaults in the performance of or breaches any other covenant or
agreement in the Indenture or under the Notes, the Note Guarantee, the Fee Notes
or the Intercompany Notes and such default or breach continues for a period of
30 consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of Notes; (d) there occurs with respect to
any issue or issues of Indebtedness of GST or any Significant Subsidiary having
an outstanding principal amount of $5 million or more in the aggregate for all
such issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder thereof
to declare such Indebtedness to be due and payable prior to its Stated Maturity
and such Indebtedness has not been discharged in full or such acceleration has
not been rescinded or annulled within 30 days of such acceleration and/or (II)
the failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or extended
within 30 days of such payment default; (e) any final judgment or order (not
covered by insurance) for the payment of money in excess of $5 million in the
aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against GST, GST USA, GST Network or any Significant Subsidiary and
shall not be paid or discharged, and there shall be any period of 30 consecutive
days following entry of the final judgment or order that causes the aggregate
amount for all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $5 million during which a stay of
enforcement of such final judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; (f) a court having jurisdiction in the
premises enters a decree or order for (A) relief in respect of GST, GST USA, GST
Network or any Significant Subsidiary in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of GST, GST USA, GST Network or any Significant
Subsidiary (other than a liquidation of GST Network into GST USA in connection
with the assumption of the Notes) or for all or substantially all of the
property and assets of GST, GST USA, GST Network or any Significant Subsidiary
or (C) effects any general assignment for the benefit of creditors; (h) the
Trustee or GST Network does not have at all times a first priority perfected
security interest in all Pledged Securities, the Pledge Account, all Acquired
Equipment, the Fee Notes and Intercompany Notes or GST, GST USA or GST Network
asserts in writing that the security arrangements under the Indenture, the
Pledge Account, the Fee Notes and the Intercompany Notes are not in full force
and effect; or (i) GST USA shall not have become a direct obligor on the Notes
(other than Notes to be redeemed as described under "Mandatory Redemption" for
which GST Network shall have deposited the redemption price) and GST shall not
have become a guarantor of the Notes by May 1, 2003.
If an Event of Default (other than an Event of Default specified in
clause (f) or (g) above that occurs with respect to GST USA, GST or GST Network
or clause (h) above) occurs and is continuing under the Indenture, the Trustee
or the Holders of at least 25% in aggregate principal amount of the outstanding
Notes, by written notice to the Issuer (and to the Trustee if such notice is
given by the Holders), may, and the Trustee at the request of such Holders
shall, declare the Accreted Value of, premium, if any, and accrued interest, on
the Notes to be immediately due and payable. Upon a declaration of acceleration,
such Accreted Value premium, if any, and accrued interest shall be immediately
due and payable. In the event of a declaration of acceleration because an Event
of Default set forth in clause (d) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to clause (d) shall
be remedied or cured by GST or the relevant Significant Subsidiary or waived by
the holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(f) or (g) above occurs with respect to GST USA, GST, or GST Network or an Event
of Default specified in clause (h) occurs, the Accreted Value of, premium, if
any, and accrued interest, on the Notes then outstanding shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any Holder. The Holders of at least a majority in
principal amount of the outstanding Notes by written notice to the Issuer and to
the Trustee, may waive all past Defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have
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been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer and, if requested provide, the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense; (iv) the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity; and (v) during such 60-day period, the
Holders of a majority in aggregate principal amount of the outstanding Notes do
not give the Trustee a direction that is inconsistent with the request. However,
such limitations do not apply to the right of any Holder of a Note to receive
payment of the principal of, premium, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or affected without
the consent of the Holder.
The Indenture requires certain officers of the Issuer to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of GST Network, GST and GST USA
under the Indenture and that GST Network, GST and GST USA have fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Issuer will also be obligated to notify the Trustee of any default
or defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Indenture, neither GST nor GST USA shall
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person (other than a consolidation or merger with or into
a Wholly Owned Restricted Subsidiary with a positive net worth; provided that,
in connection with any such merger or consolidation, no consideration (other
than Common Stock in the surviving Person, GST or GST USA) shall be issued or
distributed to the stockholders of GST or GST USA) or permit any Person to merge
with or into GST or GST USA unless: (i) GST or GST USA shall be the continuing
Person, or the Person (if other than GST or GST USA) formed by such
consolidation or into which GST or GST USA is merged or that acquired or leased
such property and assets of GST or GST USA shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of GST or GST USA,
on all of the Notes, the Intercompany Notes and the Note Guarantee and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, GST or GST USA or
any Person becoming the successor obligor of the Notes or the Note Guarantee, as
the case may be, shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of GST or GST USA, as the case may be, immediately
prior to such transaction; (iv) immediately after giving effect to such
transaction on a pro forma basis GST or GST USA, as the case may be, or any
Person becoming the successor obligor of the Notes or the Note Guarantee, as the
case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant; and (v) GST or GST USA,
as the case may be, delivers to the Trustee an Officers' Certificate (attaching
the arithmetic computations to demonstrate compliance with clauses (iii) and
(iv)) and Opinion of Counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture complies with this provision
and all conditions precedent provided for herein relating to such transaction
have been complied with; provided, however, that clauses (iii) and (iv) above do
not apply if, in the good faith determination of the Board of Directors of GST
or GST USA, as the case may be, whose determination shall be evidenced by a
Board Resolution, the principal purpose of such transaction is to change the
jurisdiction of incorporation of GST to a state of the United States or of
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GST USA to another state of the United States; and provided further that any
such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
The restrictions and conditions described in the preceding paragraph
also apply to GST Network except that clauses (iii) and (iv) do not apply to a
merger or consolidation of GST USA and GST Network or the sale, conveyance or
other disposition of all or substantially all of the assets of GST Network to
GST USA.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Issuer will
be deemed to have paid and GST, GST USA and GST Network will be discharged from
any and all obligations in respect of the Notes on the 123rd day after the
deposit referred to below, and the provisions of the Indenture will no longer be
in effect with respect to the Notes (except for, among other matters, certain
obligations to register the transfer or exchange of the Notes to replace stolen,
lost or mutilated Notes, to maintain paying agencies and to hold monies for
payment in trust) if, among other things, (A) the Issuer has deposited with the
Trustee, in trust, money and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Notes, (B)
the Issuer has delivered to the Trustee (i) either (x) an Opinion of Counsel to
the effect that Holders will not recognize income, gain or loss for United
States federal income tax purposes as a result of the Issuer's exercise of its
option under this "Defeasance" provision and will be subject to United States
federal income tax on the same amount and in the same manner as would have been
the case if such deposit, defeasance and discharge had not occurred, which
Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of
the United States Internal Revenue Service to the same effect unless there has
been a change in applicable United States federal income tax law after the
Closing Date such that a ruling is no longer required or (y) a ruling directed
to the Trustee received from the United States Internal Revenue Service to the
same effect as the aforementioned Opinion of Counsel; (ii) an Opinion of Counsel
or a ruling from Revenue Canada, Customs, Excise & Taxation to the effect that
Holders will not recognize income, gain or loss for Canadian federal, provincial
or territorial income tax or other tax purposes as a result of such deposit and
defeasance and will be subject to Canadian federal or provincial income tax and
other tax on the same amounts, in the same manner and at the same times as would
have been the case had such deposit and defeasance not occurred (and for
purposes of such opinion, such Canadian counsel shall assume that Holders of the
Notes include Holders who are not resident in Canada); and (iii) an Opinion of
Counsel to the effect that the creation of the defeasance trust does not violate
the Investment Company Act of 1940 and after the passage of 123 days following
the deposit, the trust fund will not be subject to the effect of Section 547 of
the United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law, (C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or lapse of
time or both would become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the 123rd
day after the date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Issuer or any of its Subsidiaries is a party or by which
the Issuer or any of its Subsidiaries is bound and (D) if at such time the Notes
are listed on a national securities exchange, the Issuer has delivered to the
Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that its provisions will no longer be in effect with
respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of
Assets" and all the covenants described herein under "Covenants," clause (c)
under "Events of Default" with respect to such covenants and clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets," and clauses (d), (e) and
(h) under "Events of Default" shall be deemed not to be Events of Default upon,
among other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses B(iii), (C) and (D) of the preceding paragraph and the delivery by the
Issuer to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for United States
federal income tax purposes or Canadian federal, provincial or territorial
income tax or other tax purposes as a result of such
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deposit and defeasance of certain covenants and Events of Default and will be
subject to United States federal income tax and Canadian federal or provincial
income tax on the same amount and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Issuer
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Issuer will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by GST, GST
USA and GST Network and the Trustee with the consent of the Holders of not less
than a majority in aggregate principal amount of the outstanding Notes;
provided, however, that no such modification or amendment may, without the
consent of each Holder affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (ii) reduce the
Accreted Value or principal of, or premium, if any, or interest on, any Note,
(iii) change the place or currency of payment of principal of, or premium, if
any, or interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case of a
redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentage of outstanding Notes the consent of whose Holders is
necessary to modify or amend the Indenture, (vi) waive a default in the payment
of principal of, premium, if any, or interest on the Notes, or (vii) reduce the
percentage or aggregate principal amount of outstanding Notes the consent of
whose Holders is necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults.
None of GST, GST USA or GST Network shall amend, modify, alter or
supplement or permit or consent to any amendment, modification or supplement of,
the Pledge Agreement, the Fee Notes or any Intercompany Notes in any way that
would be adverse to the Holders of the Notes.
ADDITIONAL AMOUNTS
Any payments made by GST under or with respect to the Notes pursuant to
the Note Guarantee will be made free and clear of and without withholding or
deduction for or on account of any present or future tax, duty, levy, impost,
assessment or other governmental charge (including penalties, interest and other
liabilities related thereto) imposed or levied by or on behalf of Government of
Canada or of any province or territory thereof or by any authority or agency
therein or thereof having power to tax (hereinafter, "Taxes"), unless GST is
required to withhold or deduct Taxes by law or by the interpretation or
administration thereof. If GST is required to withhold or deduct any amount for
or on account of Taxes from any payment made under or with respect to the Notes,
GST will pay such additional amounts ("Additional Amounts") as may be necessary,
so that the net amount received by each Holder of Notes (including Additional
Amounts) after such withholding or deduction will not be less than the amount
such Holder would have received if such Taxes had not been withheld or deducted;
provided, however, that no Additional Amounts will be payable with respect to a
payment made to a Holder (an "Excluded Holder") (i) with which GST does not deal
at arm's length (within the meaning of the Income Tax Act (Canada)) at the time
of making such payment, or (ii) which is subject to such Taxes by reason of its
being connected with Canada or any province or territory thereof otherwise than
solely by reason of the Holder's activity in connection with purchasing the
Notes, by the mere holding of Notes or by reason of the receipt of payments
thereunder. GST will, upon written request of any Holder (other than an Excluded
Holder), reimburse such Holder, for the amount of (i) any Taxes so levied or
imposed and paid by such Holder as a result of payments made under or with
respect to the Notes and (ii) any Taxes so levied or imposed with respect to any
reimbursement under the foregoing clause (i), but excluding any such Taxes
on such Holder's net income so that the net amount received by such Holder after
such reimbursement will not be less than the net amount the Holder would have
received if Taxes on such reimbursement had not been imposed.
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At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if GST will be obligated to pay
Additional Amounts with respect to such payment, GST will deliver to the Trustee
an Officers' Certificate stating the fact that such Additional Amounts will be
payable and the amounts so payable and will set forth such other information
necessary to enable the Trustee to pay such Additional Amounts to Holders on the
payment date. Whenever either in the Indenture or in this Prospectus there is
mentioned, in any context, the payment of principal (or premium, if any),
Redemption Price, interest or any other amount payable under or with respect to
the Notes, such mention shall be deemed to include mention of the payment of
Additional Amounts to the extent that, in such context, Additional Amounts are,
were or would be payable in respect thereof.
In the event that GST has become or would become obligated to pay, on
the next date on which any amount would be payable under or with respect to the
Notes any Additional Amounts as a result of certain changes affecting Canadian
withholding tax laws, GST may redeem all, but not less than all, of the Notes at
any time at 100% of their Accreted Value on the redemption date, together with
accrued interest thereon to the redemption date. See "-- Optional Redemption."
CONSENT TO JURISDICTION AND SERVICE
GST has appointed Olshan Grundman Frome & Rosenzweig LLP, 505 Park
Avenue, New York, New York 10022 as its agent for service of process in any
suit, action or proceeding with respect to the Indenture or the Notes and for
the actions brought under federal or state securities laws brought in any
federal or state court located in The City of New York and will agree to submit
to the jurisdiction of such courts.
ENFORCEABILITY OF JUDGMENTS
GST is a corporation incorporated under the Canada Business
Corporations Act. Certain of the directors and the Company's
professional advisors are residents of Canada or otherwise reside outside of
the U.S. All or a substantial portion of the assets of such persons are or may
be located outside of the U.S. It may be difficult for U.S. noteholders to
effect service of process within the United States upon such directors or
professional advisors or to realize in the U.S. upon judgments of U.S. courts
predicated upon civil liability of GST or such persons under U.S. federal
securities laws. GST has been advised that there is doubt as to whether
Canadian courts would (i) enforce judgments of U.S. courts obtained against GST
or such directors or professional advisors predicated solely upon the civil
liabilities provisions of U.S. federal securities laws, or (ii) impose
liabilities in original actions against GST or such directors and professional
advisors predicated solely upon such U.S. laws. However, a judgment against GST
predicated solely upon civil liabilities provisions of such U.S. federal
securities laws may be enforceable in Canada if the U.S. court in which such
judgment was obtained has a basis for jurisdiction in that matter that would be
recognized by a Canadian court.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes are issued in fully registered
form without interest coupons. Notes sold in offshore transactions in reliance
on Regulation S under the Securities Act will initially be represented by one or
more temporary global Notes in definitive, fully registered form without
interest coupons (each a "Temporary Regulation S Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of a
nominee of, DTC for the accounts of Euroclear and Cedel Bank. The Temporary
Regulation S Global Note will be exchangeable for one or more permanent global
Notes (each a "Permanent Regulation S Global Note"; and together with the
Temporary Regulation S Global Notes, the "Regulation S Global Note") on or after
the 40th day following the Closing Date upon certification that the beneficial
interests in such global Note are owned by non-U.S. persons. Prior to the 40th
day after the Closing Date, beneficial interests in the Temporary Regulation S
Global Note may be held only through Euroclear or Cedel Bank and any resale or
other transfer of such interests to U.S. persons shall not be permitted during
such period unless such resale or transfer is made pursuant to Rule 144A or
Regulation S and in accordance with the requirements described below.
Notes sold in reliance on Rule 144A will be represented by one or more
permanent global Notes in definitive, fully registered form without interest
coupons (each a "Restricted Global Note"; and together with the
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Regulation S Global Note, the "Global Notes") and will be deposited with the
Trustee as custodian for, and registered in the name of a nominee of, DTC.
Each Global Note (and any Notes issued for exchange therefor) will be
subject to certain restrictions on transfer set forth therein as described under
"Transfer Restrictions."
Notes originally purchased by or transferred to Institutional
Accredited Investors who are not qualified institutional buyers ("Non-Global
Purchasers") will be issued Notes in registered form without interest coupons
("Certificated Notes"). Upon the transfer of Certificated Notes initially issued
to a Non-Global Purchaser to a qualified institutional buyer or in accordance
with Regulation S, such Certificated Notes will, unless the relevant Global Note
has previously been exchanged in whole for Certificated Notes, be exchanged for
an interest in a Global Note. For a description of the restrictions on the
transfer of Certificated Notes, see "Transfer Restrictions."
The Global Notes. Ownership of beneficial interests in a Global Note
will be limited to persons who have accounts with DTC ("participants") or
persons who hold interests through participants. Ownership of beneficial
interests in a Global Note will be shown on, and the transfer of that ownership
will be effected only through, records maintained by DTC or its nominee (with
respect to interests of participants) and the records of participants (with
respect to interests of persons other than participants). Qualified
institutional buyers may hold their interests in a Restricted Global Note
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
Investors may hold their interests in a Regulation S Global Note
directly through Cedel Bank or Euroclear, if they are participants in such
systems, or indirectly through organizations that are participants in such
system. Cedel Bank and Euroclear will hold interests in the Regulation S Global
Notes on behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with the applicable procedures of DTC, in addition to those provided for under
the Indenture and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a Global Note will be
made to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Issuer, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Issuer expects that DTC or its nominee, upon receipt of any payment
of principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Issuer also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary
way in accordance with DTC rules and will be settled in same-day funds.
Transfers between participants in Euroclear and Cedel Bank will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
The Issuer expects that DTC will take any action permitted to be taken
by a Holder (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note is credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is
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an Event of Default under the Notes, DTC will exchange the applicable Global
Note for Certificated Notes, which it will distribute to its participants and
which may be legended as set forth under the heading "Transfer Restrictions."
The Issuer understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A under the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates and certain other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC, Euroclear and Cedel Bank are expected to follow the
foregoing procedures in order to facilitate transfers of interests in a Global
Note among participants of DTC, Euroclear and Cedel Bank, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer nor the Trustee
will have any responsibility for the performance by DTC, Euroclear or Cedel Bank
or their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary
for the Global Notes and a successor depositary is not appointed by the Issuer
within 90 days, the Issuer will issue Certificated Notes, which may bear the
legend referred to under "Transfer Restrictions," in exchange for the Global
Notes. Holders of an interest in a Global Note may receive Certificated Notes,
which may bear the legend referred to under "Transfer Restrictions," in
accordance with the DTC's rules and procedures in addition to those provided for
under the Indenture.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the
principal of, premium, if any, or interest on any of the Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of GST, GST USA or GST Network in the
Indenture, or in any of the Notes or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, shareholder,
officer, director, employee or controlling person of GST, GST USA or GST Network
or of any successor Person thereof. Each Holder by accepting the Notes, waives
and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a
Default, the Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Indenture. If an Event of Default
has occurred and is continuing, the Trustee will use the same degree of care and
skill in its exercise of the rights and powers vested in it under the Indenture
as a prudent person would exercise under the circumstances in the conduct of
such person's own affairs.
The Indenture and provisions of the Trust Indenture Act, incorporated
by reference therein, contain limitations on the rights of the Trustee, should
it become a creditor of the Issuer, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if the Trustee acquires any conflicting
interest, it must eliminate such conflict or resign.
United States Trust Company of New York is the Trustee under the
Existing Indentures.
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DESCRIPTION OF CERTAIN INDEBTEDNESS AND REDEEMABLE PREFERRED SHARES
TOMEN FACILITY
The following summary of the material provisions of the documents
comprising the Tomen Facility does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of such
documents, including the definitions of certain terms therein. Terms used and
not defined herein have the meanings given to them in the documents described
herein.
General
The Company, GST Telecom and Pacwest are parties to a Master Agreement
dated October 24, 1994 and amended May 24, 1996 (the "Tomen Master Agreement")
with Tomen pursuant to which Tomen agreed, in its sole discretion on a
project-by-project basis, to make available up to a total of $100.0 million of
financing for telecommunications network projects developed and constructed by
the Company. Under the terms of the Tomen Master Agreement, Tomen has the
exclusive right to review the Company's proposed network projects until Tomen
has extended $100.0 million in debt financing or has refused three projects that
the Company subsequently finances. If Tomen approves a project it would enter
into a credit agreement (in substantially the form of the Credit Agreement
hereinafter described) with the subsidiary of the Company developing the project
(a "Development Company") to provide financing for 75% of the project's costs (a
"Project Loan"). The first 25% of such costs would be contributed as equity by
the Company prior to or at the same time as the receipt of the debt financing.
In connection with each project it finances, Tomen has the right to act as
procurement agent for the network project.
Prior to its amendment, the Tomen Master Agreement had provided that
Tomen could purchase up to 10% (on a fully diluted basis) of the capital stock
of a Development Company to which it agreed to provide financing. In October
1994, Tomen purchased 10% of the equity of GST Pacific for the sum of $615,000.
In May 1996, the Company entered into a series of transactions pursuant to which
GST Telecom purchased the shares of GST Pacific held by Tomen for $1.25 million
and the parties amended the Tomen Master Agreement to eliminate Tomen's right to
purchase 10% of the shares in Development Companies to which it provides a
Project Loan and to grant to Tomen in connection with each Project Loan the
right to purchase a number of Common Shares the aggregate value of which based
on their market price would equal 10% of the total equity contribution by the
Company to the Development Company. In addition, the parties agreed that in
connection with certain Project Loans, Tomen's purchase of Common Shares would
include, for no additional consideration, a specified number of warrants to
purchase additional Common Shares.
The Tomen Master Agreement provides that each Project Loan will bear
interest at LIBOR plus 3% and will amortize in 24 quarterly installments
beginning after the project's construction period (which may not exceed three
years). An upfront fee of 1.50% of the aggregate principal amount of each
Project Loan and a commitment fee of 0.50% per annum on the unused portion of
each Project Loan is payable to Tomen. In addition, until October 1997 Pacwest,
an entity controlled by Mr. Warta, the Company's former Chairman of the Board
and Chief Executive Officer, had been entitled to receive a fee equal to 1% of
the total debt and equity financing received by the Company under the Tomen
Facility. A Project Loan may be repaid or refinanced at any time; however, Tomen
has a right of first refusal on any such refinancing and Tomen would be entitled
to receive one-third of the net present value of any interest rate savings that
would be realized by the Development Company in connection with any such
refinancing.
Each Project Loan is to be secured by all of the Development Company's
assets and a pledge of all capital stock of the Development Company. In
addition, the Tomen Master Agreement requires that the net cash flow of each
project financed under the Tomen Facility be assigned to secure the repayment of
each other Project Loan. Any management fees payable by the Development Company
are subordinated in right of payment to the repayment of Project Loans.
Pursuant to a stock purchase agreement (the "Tomen Stock Purchase
Agreement") entered into in connection with the Tomen Master Agreement, Tomen
purchased (i) for an aggregate purchase price of $2.3 million, 500,000 Common
Shares and warrants to purchase 250,000 Common Shares at an exercise price of
$5.52, which
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have been exercised, (ii) for an aggregate of $1.2 million, 250,000 Common
Shares and warrants to purchase 125,000 Common Shares at an exercise price of
$4.62, which have been exercised, and (iii) for an aggregate of $2.7 million,
250,000 Common Shares and warrants to purchase 125,000 Common Shares at an
exercise price of $12.96 per share, which have been exercised. Pursuant to an
amendment to the Tomen Master Agreement and the Tomen Stock Purchase Agreement,
Tomen purchased (i) for an aggregate of $800,000, 74,074 Common Shares and
warrants to purchase 46,155 Common Shares at an exercise price of $12.96 per
share, which have been exercised and (ii) for an aggregate of $1.4 million,
130,828 Common Shares and warrants to purchase 75,000 Common Shares at an
exercise price of $12.61 per share. The Company has registered the resale of an
aggregate of 1,620,229 Common Shares that have been issued or are issuable to
Tomen upon exercise of warrants.
Financed Projects
The first two projects financed under the Tomen Master Agreement were
the San Bernardino portion of the Southern California network ("Project Phase
I") and the Ontario portion of the Southern California network ("Project Phase
II"). Pursuant to the credit agreement between GST Pacific and Tomen America
(the "Credit Agreement"), Tomen agreed to provide $9.0 million of debt financing
to develop Project Phase I and $9.5 million of debt financing to develop Phase
II. The terms of the Credit Agreement are substantially the terms contemplated
by the Tomen Master Agreement. In addition, the Credit Agreement contains
covenants which, among other things, restrict or prohibit GST Pacific's ability
to incur debt, create liens, sell assets, make investments, enter into
transactions with affiliates, merge or consolidate, transfer GST Pacific's
capital stock and pay dividends to the Company. Failure to satisfy any of the
covenants constitutes an event of default under the Credit Agreement. The Credit
Agreement also contains customary events of default for project financing,
including a cross default to other indebtedness of GST Pacific. An event of
default under the Credit Agreement would allow Tomen to accelerate the maturity
of the Project Loan, foreclose on the collateral or take possession of and
complete the project.
In May 1996, Tomen provided financing with respect to the Tucson and
Albuquerque networks, in the amount of up to $8.0 million each. The terms of the
respective credit agreements between Tomen and GST Tucson and GST New Mexico are
substantially similar to the terms of the Credit Agreement. On September 3,
1998, GST New Mexico and GST Tucson each prepaid in full the outstanding
principal balance ($8.0 million and $5.9 million, respectively) and all other
amounts due under their credit agreements under the Tomen Facility. The
aggregate amount paid at the closing for both entities was $13.9 million,
including interest.
On September 30, 1997, Tomen agreed to provide the Company with up to
$40.5 million of debt financing for the Company's Hawaiian inter-island
submarine network and various other terrestrial installations. In connection
with such financing, the Company entered into a credit agreement with Tomen
containing substantially similar terms as those previously entered into under
the Tomen Facility, except that the loan will amortize in 22 quarterly
installments beginning March 31, 2000.
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EQUIPMENT FINANCING
Siemens Switching Equipment Purchase Agreement and Loan Agreement
The Company, through its indirect subsidiary, GST SwitchCo, Inc. ("GST
SwitchCo"), entered into a Switching Products Sales Agreement (the "Siemens
Sales Agreement") pursuant to which GST SwitchCo may purchase switching and
related equipment from Siemens. The Siemens Sales Agreement provides price
protection for 10 years for several categories of Siemens switching equipment
and related software. In addition, on the same date, GST SwitchCo entered into
the Siemens Loan Agreement that provides for up to an aggregate of $226.0
million of loans to finance the purchase of Siemens equipment and equipment from
other suppliers, of which $116.0 million is presently available to the Company
(of which $10.0 million had been provided as of March 31, 1999). Each loan made
under the Siemens Loan Agreement initially bears interest at an interim loan
rate of LIBOR plus 4.5% on the outstanding balance of the loan until the
beginning of the calendar quarter following the original loan advance date, at
which time the outstanding balance of the loan converts to a term loan and
begins accruing interest at a term loan rate of LIBOR plus 3.5%. Repayment of
the outstanding principal amount of each loan is required in quarterly
installments commencing on the last day of the fifth quarter following the
original loan advance date with the remaining balance of each outstanding loan
being payable in full on the last day of the 24th quarter following such
original loan advance date. GST SwitchCo's obligations under the Siemens Loan
Agreement are secured by the grant to Siemens of a first priority security
interest in all products purchased by GST SwitchCo with the proceeds of loans by
Siemens and are guaranteed in part by GST USA.
Nortel Switching Equipment and Related Financing
The Company, through its wholly-owned subsidiary, GST EquipCo, Inc.
("GST EquipCo"), entered into a Network Products Purchase Agreement (the "Nortel
Purchase Agreement") pursuant to which GST EquipCo may purchase switching and
related equipment and software from Nortel. The Nortel Purchase Agreement
provides price protection for 10 years for several categories of Nortel
switching equipment and related products and software. The Company has purchased
$50.0 million of equipment pursuant to the Nortel Purchase Agreement.
The Company has entered into the NTFC Loan Agreement that provides for
up to $50.0 million to finance the purchase by GST EquipCo of Nortel equipment
and products (all of which had been provided as of December 31, 1998). Loans
under the NTFC Loan Agreement will bear interest at a floating interest rate
equal to 90 day LIBOR plus 3.5%. GST EquipCo was required to pay interest only
until December 31, 1998 under the NTFC Loan Agreement and the principal amounts
outstanding thereunder become due and payable in 20 consecutive quarterly
installments following such interest only period. GST EquipCo's obligations
under the NTFC Loan Agreement are secured by the grant to NTFC of a first
priority security interest in all Nortel products purchased by GST EquipCo with
the proceeds of such financing and are guaranteed by GST USA.
SENIOR NOTES AND CONVERTIBLE NOTES
GST USA issued $312.4 million principal amount at maturity of Senior
Notes guaranteed by GST, under a senior notes indenture dated December 19, 1995,
among GST USA, as issuer, GST, as guarantor, and United States Trust Company of
New York, as trustee, and GST issued $39.1 million principal amount at maturity
of the Convertible Notes guaranteed by GST USA, under a convertible notes
indenture dated December 19, 1995, among GST, as issuer, GST USA, as guarantor,
and United States Trust Company of New York, as trustee. The 1995 Notes were
issued in units, with each unit consisting of eight Senior Notes and one
Convertible Note. Cash interest does not accrue on the 1995 Notes prior to
December 15, 2000 at which time the 1995 Notes will have fully accreted to their
principal amount at maturity. From and after December 15, 2000, the 1995 Notes
will accrue interest, payable semiannually in cash, at a rate of 13 7/8% per
annum.
The Senior Notes and the Senior Notes guarantee are senior, unsecured
obligations of GST USA and GST, respectively, ranking pari passu in right of
payment with all unsubordinated obligations of GST USA and GST, respectively.
The Convertible Notes and the Convertible Notes guarantee are senior
subordinated, unsecured obligations of GST and GST USA, respectively, ranking
junior in right of payment to all senior obligations of GST
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and GST USA, respectively, pari passu with all senior subordinated indebtedness
of GST and GST USA, respectively.
The 1995 Notes may be redeemed at any time on or after December 15,
2000, in whole or in part, at 106.938% of their principal amount at maturity
plus accrued interest, declining to 100% of their principal amount at maturity
plus accrued interest on and after December 15, 2002. In addition, the 1995
Notes are redeemable under certain circumstances in the event of certain changes
affecting Canadian withholding taxes.
The Convertible Notes are convertible, at the option of the holders,
into Common Shares. The number of Common Shares issuable upon conversion of
Convertible Notes is determined by dividing the accreted value on the date of
conversion of the Convertible Notes being converted by the conversion price of
$7.563, subject to adjustment. In addition, the Convertible Notes will
automatically convert under certain circumstances, if the closing price of the
Common Shares during any period described below exceeds the price for such
period for at least 30 consecutive trading days:
<TABLE>
<CAPTION>
12 MONTHS BEGINNING CLOSING PRICE
- ------------------- -------------
<S> <C>
December 15, 1997 $19.80
December 15, 1998 $22.82
December 15, 1999 $25.84
</TABLE>
The 1995 Indentures contain certain covenants that affect and in some
cases significantly restrict or prohibit, among other things, the ability of GST
and its restricted subsidiaries (including GST USA) to incur additional
indebtedness, create liens, engage in sale-leaseback transactions, pay dividends
or make distributions in respect of its capital stock, make investments or
certain other restricted payments, sell assets, create restrictions on the
ability of restricted subsidiaries to make certain payments, issue or sell stock
of restricted subsidiaries, enter into transactions with stockholders or
affiliates and consolidate, merge or sell all or substantially all of their
assets.
Upon the occurrence of a Change of Control (as hereinafter defined),
GST USA will be required to make an offer to purchase the Senior Notes and GST
will be required to make an offer to purchase the Convertible Notes, in each
case at a purchase price equal to 101% of their accreted value on the date of
purchase plus accrued interest, if any. For purposes of the 1995 Indentures, a
"Change of Control" is defined to mean such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act, becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of voting stock representing more than 30% of the total voting power of the
voting stock of GST on a fully diluted basis; (ii) individuals who on December
19, 1995 constituted the Board of Directors (together with any new directors
whose election by the Board of Directors or whose nomination for election by
GST's shareholders was approved by a vote of at least two-thirds of the members
of the Board of Directors then in office who either were members of the Board of
Directors on December 19, 1995 or whose election or nomination for election was
previously approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office; or (iii) all of the common
stock of GST USA is not beneficially owned by GST.
SECURED NOTES
GST Funding issued $265.0 million aggregate principal amount of Secured
Notes, under the Secured Notes Indenture, dated May 13, 1997, among GST Funding,
as issuer, GST USA, GST, and United States Trust Company of New York, as
trustee. The Secured Notes will mature on May 13, 2007. Interest on the Secured
Notes will be paid in cash at a rate of 13 1/4% per annum on each May 1 and
November 1, commencing November 1, 1997. Of the $255.8 million of the net
proceeds from the issuance of the Secured Notes, as of March 31, 1999, $93.8
million had been used to purchase securities pledged to fund the first six
interest payments on the Secured Notes (the first three of such payments having
been made in November 1997, May 1998 and November 1998). The remaining proceeds
were used to purchase telecommunications equipment which has been sold to GST
USA for secured intercompany notes.
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The Secured Notes are senior, secured obligations of GST Funding, and
will be unconditionally and irrevocably assumed by GST USA and guaranteed by
GST, on May 13, 2000, or earlier if permitted under the terms of GST USA's and
GST's outstanding indebtedness. Neither GST USA nor GST will be liable on the
Secured Notes until they are assumed by GST USA. There is a substantial risk
that GST USA may be unable to assume the Secured Notes on or before May 13,
2000. The Notes are secured by (i) the approximately $93.8 million of U.S.
government securities (the "1997 Pledged Securities") pledged to secure and fund
the first six scheduled interest payments on the Secured Notes, (ii) a $35.0
million promissory note from GST USA (the "1997 Initial Note"), guaranteed by
GST; provided that the amount of the 1997 Initial Note will be reduced to the
extent the principal amount thereof exceeds the aggregate principal amount of
Secured Notes less (x) the aggregate amount of 1997 Pledged Securities (other
than the 1997 Pledged Securities securing the first six scheduled interest
payments on the Secured Notes), including accrued interest thereon, and (y) the
aggregate principal amount of all intercompany notes issued by GST USA to GST
Funding in payment for the purchase of equipment ($194.2 million as of December
31, 1998), including the amount of interest that will accrue on such
intercompany notes by May 13, 2000, and (iii) the remaining proceeds from the
Secured Notes Offering, until such proceeds are used to purchase equipment to be
sold to GST USA for intercompany notes. Once the Secured Notes are assumed by
GST USA, they will be senior, secured indebtedness of GST USA and GST USA's
obligations under the Secured Notes will be fully and unconditionally guaranteed
on an unsubordinated basis by GST (the "Secured Notes Guarantee"). The Secured
Notes Guarantee will be senior, unsecured indebtedness of GST.
The Secured Notes will be redeemable at the option of GST USA, in whole
or in part, at any time or from time to time, on or after May 1, 2002, initially
at 106.625% of their principal amount, plus accrued and unpaid interest,
declining ratably to 100% of their principal amount, plus accrued and unpaid
interest on or after May 1, 2004. If on May 13, 2000 GST USA is prohibited by
its outstanding indebtedness from assuming all of the Secured Notes, GST Funding
will redeem, upon not less than 10 nor more than 30 days' notice, the portion of
the Secured Notes that cannot be assumed, at 101% of their principal amount plus
accrued and unpaid interest to the date of redemption. In addition, upon a
Change of Control (as hereinafter defined), GST Funding or GST USA, as the case
may be, will be required to make an offer to purchase the Secured Notes at a
purchase price equal to 101% of their principal amount plus accrued interest.
For purposes of the Secured Notes Indenture, a "Change of Control" is defined to
mean such time as (i) a "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Exchange Act), becomes the ultimate "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of voting stock representing
more than 30% of the total voting power of the voting stock of GST on a fully
diluted basis; (ii) individuals who on May 13, 1997 constituted the Board of
Directors (together with any new directors whose election by the Board of
Directors or whose nomination for election by GST's shareholders was approved by
a vote of at least two-thirds of the members of the Board of Directors then in
office who either were members of the Board of Directors on May 13, 1997 or
whose election or nomination for election was previously approved) cease for any
reason to constitute a majority of the members of the Board of Directors then in
office; or (iii) all of the common stock of GST USA or GST Funding is not
beneficially owned by GST.
The Secured Notes Indenture contains certain covenants that affect and
in some cases significantly restrict or prohibit, among other things, the
ability of GST and its restricted subsidiaries (including GST USA) to incur
additional indebtedness, create liens, engage in sale-leaseback transactions,
pay dividends or make distributions in respect of its capital stock, make
investments or certain other restricted payments, sell assets, create
restrictions on the ability of restricted subsidiaries to make certain payments,
issue or sell stock of restricted subsidiaries, enter into transactions with
stockholders or affiliates and consolidate, merge or sell all or substantially
all of their assets.
ACCRUAL NOTES
GST issued $144.0 million principal amount of Accrual Notes in November
and December 1997. Until November 15, 2002 (the "Final Interest Accrual Date"),
interest on the Accrual Notes accrues and is compounded semi-annually on each
May 15 and November 15, commencing May 15, 1998 but is not payable in cash. From
and after November 15, 2002, interest on the sum of the principal amount of each
Accrual Note and the accrued and
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unpaid interest thereon through the Final Interest Accrual Date (the "Final
Accumulated Interest Amount") is payable semiannually (to holders of record at
the close of business on May 1 or November 1 immediately preceding the Interest
Payment Date) on May 15 and November 15 of each year, commencing May 15, 2003.
The Accrual Notes are senior subordinated, unsecured obligations of
GST, ranking junior in right of payment to all senior obligations of GST and
pari passu with all senior subordinated obligations of GST.
The Accrual Notes may be redeemed at any time on or after November 15,
2002, in whole or in part, at 106.375% of the sum of their principal amount and
Final Accumulated Interest Amount, plus accrued interest thereon, declining to
100% of the sum of their principal amount and Final Accumulated Interest Amount,
plus accrued interest thereon, on and after November 15, 2004. In addition, the
Accrual Notes are redeemable under certain circumstances in the event of certain
changes affecting Canadian withholding taxes.
The Accrual Notes Indenture contains certain covenants that affect and
in some cases significantly restrict or prohibit, among other things, the
ability of GST and its restricted subsidiaries (including GST USA) to incur
additional indebtedness, create liens, pay dividends or make distributions in
respect of its capital stock, make investments or certain other restricted
payments, sell assets, create restrictions on the ability of restricted
subsidiaries to make certain payments, issue or sell stock of restricted
subsidiaries, enter into transactions with shareholders or affiliates and
consolidate, merge or sell all or substantially all of their assets.
Upon the occurrence of a Change of Control, GST will be required to
make an offer to purchase the Accrual Notes at a purchase price equal to 101% of
the sum of their principal amount and the Accumulated Interest Amount thereon,
plus accrued interest. For purposes of the Accrual Notes Indenture, a "Change of
Control" is defined to mean such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act, becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of voting
stock representing more than 30% of the total voting power of the voting stock
of GST on a fully diluted basis; (ii) individuals who on November 19, 1997
constitute the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination for election by GST's
shareholders approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either are members of the Board of
Directors on November 19, 1997 or whose election or nomination for election was
previously approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office; or (iii) all of the common
stock of GST USA is not beneficially owned by GST.
POTENTIAL NON-COMPLIANCES UNDER THE INDENTURES
GST, GST Network, GST USA, and GST Funding are parties to certain
indentures and have issued or guaranteed notes governed by those indentures. In
November 1998, GST notified United States Trust Company of New York, as trustee
under the indentures, that certain actions by GST and its subsidiaries may not
have been in compliance with the technical requirements of the restrictive
covenants contained in the indentures, including the indentures relating to the
Old Notes. See "Management's Discussion and Analysis--Recent Developments." GST
intends to vigorously pursue any necessary action to cure the potential
non-compliances.
In February 1999, the trustee informed the note holders of the
potential violations. Pursuant to the definitions contained within the
indentures of each of the notes described above, no default has been declared
and no event of default has occurred. GST has not classified the related debt
obligations as current in its consolidated financial statements because
management believes it is probable that, in the event that the holders declared
a default, GST would be able to take corrective actions to cure any objectively
determinable violations within the prescribed grace period.
While GST believes that any non-compliances can be cured, GST cannot
offer any assurance that the litigation will be successful or that any other
potential cures will be effected in a timely manner or be sufficient. In the
event that GST has violated its indentures and does not cure the violations, the
holders of the notes issued under the indentures could demand repayment of the
notes, discontinue disbursements of cash proceeds of the most recent
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notes and assert other remedies against GST. If any of these events occurred,
GST would not have sufficient liquid assets to repay the notes.
REDEEMABLE PREFERRED SHARES
In a private placement in February 1997, GST issued and sold 500
Redeemable Preferred Shares for $100,000 per share to an affiliate of Princes
Gate Investors II, L.P. The Redeemable Preferred Shares will not pay dividends,
except to the extent that cash dividends are paid on the Common Shares. The
liquidation and redemption prices of the Redeemable Preferred Shares will
accrete semi-annually at a rate of 11 7/8% per annum.
GST is required to redeem the Redeemable Preferred Shares on February
28, 2004 (the "Mandatory Redemption Date") in cash at a redemption price of
approximately $224,231 per share (the "Mandatory Redemption Price"); provided
that to the extent GST is prohibited from paying such redemption price in cash,
the holders of Redeemable Preferred Shares have the option to convert each
Redeemable Preferred Share into a number of Common Shares equal to the Mandatory
Redemption Price divided by 95% of the then market price for Common Shares. In
the event GST is prevented from paying the redemption price for Redeemable
Preferred Shares in cash and any holder of Redeemable Preferred Shares does not
exercise such conversion option, GST has the option of extending the Mandatory
Redemption Date to August 28, 2007. GST has the option of redeeming the
Redeemable Preferred Shares at any time after February 28, 2000 in cash at a
redemption price per Redeemable Preferred Share equal to the number of Common
Shares into which such Redeemable Preferred Share is then convertible multiplied
by the price at which such Redeemable Preferred Share would become subject to
mandatory conversion. Under the terms of the Redeemable Preferred Shares, the
holders thereof are entitled to designate for election one person to the Board
of Directors of the Company. In June 1997, Joseph G. Fogg III, designee of the
holders of the Redeemable Preferred Shares, was appointed to the Board of
Directors of the Company.
Redeemable Preferred Shares are convertible at the option of the
holders into Common Shares at any time after February 28, 2000 or earlier upon a
change of control of the Company. The holders of Redeemable Preferred Shares
have the right to require the Company to repurchase their shares upon a change
of control of the Company after February 28, 2002; prior to that time, holders
have a right to convert their Redeemable Preferred Shares into Common Shares
upon a change of control. Further, the Redeemable Preferred Shares are subject
to mandatory conversion into Common Shares if the market price of Common Shares
exceeds $15.925 per share (subject to adjustment) for a specified period after
February 28, 2000.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income
tax consequences of the purchase, ownership and disposition of the Notes by
initial investors who acquire the Notes at original issue for cash in an amount
equal to the original issue price. This summary is based on current provisions
of the Code, applicable final, temporary and proposed Treasury Regulations
("Treasury Regulations"), judicial authority, and current administrative rulings
and pronouncements of the Service and upon the facts concerning the Company as
of the date hereof. There can be no assurance that the Service will not take a
contrary view, and no ruling from the Service or opinion of counsel has been or
will be sought by the Company. Legislative, judicial, or administrative changes
or interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or may
not be retroactive and could affect the tax consequences to holders.
This summary does not purport to deal with all aspects of taxation that
may be relevant to particular holders of the Notes in light of their personal
investment or tax circumstances, or to certain types of investors (including
insurance companies, financial institutions, broker-dealers or tax-exempt
organizations) subject to special treatment under the United States federal
income tax laws. This discussion does not deal with special tax situations, such
as the holding of the Notes as part of a straddle with other investments, or
situations in which the functional currency of a holder who is a U.S. Holder (as
defined below) is not the United States dollar. In addition, this discussion
deals only with Notes held as capital assets within the meaning of Section 1221
of the Code. In addition, the discussion below does not address the effect of
any applicable state, local or foreign tax laws.
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As used in the discussion which follows, the term "U.S. Holder" means
an initial beneficial owner of the Notes that for United States federal income
tax purposes is (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust the administration of which is subject
to primary supervision of a court within the United States and for which one or
more U.S. persons have the authority to control all substantial decisions. The
term "Non-U.S. Holder" means an initial beneficial owner of Notes that is, for
United States federal income tax purposes, not a U.S. Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
GENERAL
Under applicable authorities, the Notes should be treated as
indebtedness for United States federal income tax purposes. In the event the
Notes are treated as equity, the amount of any actual or constructive
distributions on any such Note would first be taxable to the holder as dividend
income to the extent of the issuer's current and accumulated earnings and
profits, and next would be treated as a return of capital to the extent of the
holder's tax basis in the Note, with any remaining amount treated as gain from
the sale of a Note. As a result, until such time as the issuer has earnings and
profits as determined for United States federal income tax purposes,
distributions on any Note treated as equity will be a nontaxable return of
capital and will be applied against and in the case of actual distributions
reduce the adjusted tax basis of such Note in the hands of its holder (but not
below zero). Further, payments on the Notes treated as equity to Non-U.S.
Holders would not be eligible for the portfolio interest exception from United
States withholding tax, and dividends thereon would be subject to United States
withholding tax at a flat rate of 30% (or lower applicable treaty rate) and gain
from their sale or other taxable disposition might also be subject to United
States tax. In addition, in the event of equity treatment, neither GST Network
nor GST USA, as the case may be, would ever be entitled to deduct interest on
the Notes for United States federal income tax purposes. The remainder of this
discussion assumes that the Notes will constitute indebtedness of either GST
Network or GST USA, as appropriate, for such tax purposes.
EXCHANGE OF NOTES
A Holder should not recognize gain or loss on the exchange of Old Notes
for New Notes pursuant to the Exchange Offer. A Holder's adjusted issue price,
adjusted basis and holding period in a New Note should be the same as the Old
Note exchanged therefor.
TAX CONSEQUENCES TO U.S. HOLDERS
Original Issue Discount. The excess of a Note's "stated redemption
price at maturity" over its "issue price" will generally constitute original
issue discount ("OID") for United States federal income tax purposes. The stated
redemption price at maturity of a Note will equal the sum of all cash payments
due in respect of the Notes, whether denominated as principal or interest, other
than payments of "qualified stated interest", which is defined generally as
stated interest that is unconditionally payable in cash or in property (other
than the debt instruments of the issuer) at least annually at a single fixed
rate that appropriately takes into account the length of intervals between
payments. The issue price of a Note is equal to the first price to the public
(not including bond houses, brokers, or similar persons or organizations acting
in the capacity of underwriters, placement agents, or wholesalers) at which a
substantial amount of the Notes is sold for money even if part of the issue is
subsequently sold at a different price. Because interest on the Notes is not
payable until 2003, the stated interest on the Notes will not be treated as
qualified stated interest but will be added to the stated redemption price at
maturity of the Notes. As a result, the Notes will be treated as having been
issued with original issue discount equal to the excess of their stated
redemption price at maturity (payments of stated interest and principal) over
their issue price. Regardless of their method of accounting, U.S. Holders of the
Notes will be required to include an amount equal to the sum of the "daily
portions"
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of such OID attributable to each day during the taxable year on which the U.S.
Holder holds the Note in income for federal income tax purposes as it accrues,
in accordance with a constant yield method based on a compounding of interest,
before the receipt of cash payments attributable to such income. Under this
method, U.S. Holders of the Notes generally will be required to include in
income increasingly greater amounts of OID in successive accrual periods.
The Company does not intend to treat the possibility of an optional
redemption or repurchase of the Notes as giving rise to any additional accrual
of OID or recognition of ordinary income upon redemption, sale or exchange of a
Note. In the event that the interest rate on the Notes is increased, then such
increased interest may be treated as increasing the amount of OID on the Notes,
which would be includable by a U.S. Holder in income as such OID accrues, in
advance of receipt of any cash payment thereof.
Applicable High Yield Discount Obligations. The Notes will be
"applicable high yield discount obligations" ("AHYDOs"), as defined in the Code,
if the yield to maturity of such Notes exceeds the "applicable federal rate" in
effect at the time of their issuance (the "AFR") plus five percentage points.
The appropriate AFR depends on the weighted average maturity of the Notes. If
the Notes are AHYDOs, a portion of the OID that accrues on the Notes will not be
deductible by the Company at any time. The non-deductible portion of the OID
will be an amount that bears the same ratio to such OID as (i) the excess of the
yield to maturity of the Notes over the AFR plus six percentage points bears to
(ii) the yield to maturity of the Notes. To the extent that the non-deductible
portion of OID would have been treated as a dividend if it had been distributed
with respect to the Company's stock, it will be treated as a dividend to holders
of the Notes for purposes of the rules relating to the dividends received
deduction for corporate holders. Any remaining OID on the Notes will not be
deductible by the Company until such OID is paid.
Sale or Other Disposition. In general, a U.S. Holder of Notes will
recognize gain or loss upon the sale, exchange, redemption, or other taxable
disposition of such Notes measured by the difference between (i) the amount of
cash and the fair market value of property received and (ii) the U.S. Holder's
adjusted tax basis in the Notes. In general, the adjusted tax basis of a Note
will equal the purchase price of the Note, increased by amounts of OID
previously included in income by the U.S. Holder, and decreased by payments
received by the U.S. Holder in respect of the Note. Any such gain or loss will
generally be capital gain or loss, provided the Notes have been held as capital
assets. U.S. Holders taxed as individuals will be subject to U.S. federal income
tax in respect of capital gains at varying rates depending upon the holding
period. The distinction between capital gain or loss and ordinary income or loss
is also relevant for purposes of, among other things, limitations on the
deductibility of capital losses.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
A Non-U.S. Holder will generally not be subject to United States
federal income tax and/or United States federal withholding tax on interest paid
on the Notes, provided that (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of the voting stock of either GST Network or GST USA, (ii) the Non-U.S. Holder
is not a bank, or a controlled foreign corporation that is related to either GST
Network or GST USA (actually or constructively) through stock ownership, (iii)
such interest is not effectively connected with a United States trade or
business and (iv) either (a) the beneficial owner of the Notes certifies to the
Issuer (GST Network or GST USA, as the case may be) or its agent, under
penalties of perjury, that it is not a U.S. Holder and provides a completed IRS
Form W-8 or substantially similar substitute form ("Certificate of Foreign
Status") or (b) a securities clearing organization, bank or other financial
institution which holds customers' securities in the ordinary course of its
trade or business (a "financial institution") and holds the Notes, certifies to
the Issuer or its agent, under penalties of perjury, that it has received a
Certificate of Foreign Status from the beneficial owner or that it has received
from another financial institution a Certificate of Foreign Status and furnishes
the payor with a copy thereof. A Non-U.S. Holder must inform GST Network, GST
USA or any agent thereof of any change in the information provided on the
Certificate of Foreign Status within 30 days of the change. A Non-U.S. Holder of
a Note who does not meet these certification requirements generally would be
subject to U.S. federal withholding at a flat rate of 30% (or a lower applicable
treaty rate) on payments of interest on the Notes.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States and interest on the Note is effectively connected with the conduct
of such trade or business, and, if a tax treaty applies, such interest is
attributable to a U.S. permanent establishment maintained by such holder, such
Non-U.S. Holder, although exempt
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from U.S. federal withholding tax (provided the Non-U.S. Holder delivers a
properly completed IRS Form 4224 or applicable successor form), will be subject
to U.S. federal income tax on such interest in essentially the same manner as a
U.S. Holder. In addition, if such Non-U.S. Holder is a foreign corporation, it
may also be subject to a U.S. foreign branch profits tax equal to 30% of its
effectively connected earnings and profits (subject to adjustment) for that
taxable year, unless reduced or eliminated by an applicable income tax treaty.
Subject to the discussion of backup withholding below, a Non-U.S.
Holder generally will not be subject to United States federal income tax on any
gain realized in connection with the sale, exchange, redemption or other
disposition of Notes, unless (i) the gain is effectively connected with a trade
or business carried on by the Non-U.S. Holder within the United States (as
evidenced by the delivery of a properly completed IRS Form 4224 or applicable
successor form) and, if a treaty applies, the gain is generally attributable to
the United States permanent establishment maintained by the Non-U.S. Holder, or
(ii) the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of disposition and certain other
conditions are satisfied.
Notes held by an individual who is neither a citizen nor a resident of
the United States for U.S. federal estate tax purposes at the time of such
individual's death will not be subject to U.S. federal estate tax, provided that
the income from the Notes was not or would not have been effectively connected
with a U.S. trade or business of such individual and that such individual
qualified for the exemption from U.S. federal withholding tax (without regard to
the certification requirements) that is described above.
Non-U.S. Holders should consult with their tax advisers regarding U.S.
and foreign tax consequences with respect to the Notes.
EARNING STRIPPING RULES
Under Section 163(j) of the Code, no deduction is allowed for
"disqualified interest" paid or accrued by a corporation during a taxable year
if (i) such corporation has "excess interest expense" (as defined by the Code
generally to mean the excess, if any, of the corporation's net interest expense
over 50% of the "adjusted taxable income" of the corporation) for the taxable
year, and (ii) the ratio of debt to equity of such corporation, as of the close
of the taxable year, exceeds 1.5 to 1. "Disqualified interest" includes any
interest paid or accrued by a corporation with respect to debt that is
guaranteed by a foreign person that is related to such corporation to the extent
that no gross basis United States tax is imposed with respect to such interest.
Section 163(j) of the Code may apply to limit the deductibility of interest by
GST USA or GST Network, as appropriate, with respect to the Notes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
"Backup" withholding and information reporting requirements may apply
to certain payments of principal and interest on a Note and to certain payments
of proceeds of the sale or retirement of a Note. GST Network, GST USA, GST, any
agent thereof, a broker, the Trustee or any paying agent, as the case may be,
will be required to withhold tax from any payment that is subject to backup
withholding at a rate of 31% of such payment if a U.S. Holder fails to furnish
his taxpayer identification number (social security number or employer
identification number), to certify that such U.S. Holder is not subject to
backup withholding, or to otherwise comply with the applicable requirements of
the backup withholding rules. Certain U.S. Holders are not subject to the backup
withholding and reporting requirements.
Reports must be made annually to the IRS and to each non-U.S. Holder
with respect to interest that is subject to withholding, or that is exempt from
U.S. withholding tax pursuant to a tax treaty, or interest that is exempt from
U.S. tax under the portfolio interest exception. Copies of the information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the non-U.S. Holder
resides.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by GST Network, GST USA or GST or any
agent thereof (in its capacity as such) to a Holder of a Note who has provided
the required certification under penalties of perjury that it is not a U.S.
Holder as set forth in clause (iv) in the first paragraph under "Tax
Consequences to Non-U.S. Holders" or has otherwise established an
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exemption (provided that neither the company nor such agent has actual knowledge
that the Holder is a U.S. Holder or that the conditions of any other exemption
are not in fact satisfied).
Payment of the proceeds from the sale by a non-U.S. Holder of a Note
made to or through a foreign office of a broker will not be subject to U.S.
information reporting or backup withholding, except that if the broker is a U.S.
person, a controlled foreign corporation for U.S. federal income tax purposes, a
foreign person 50% or more of whose gross income is effectively connected with a
United States trade or business for a specified three-year period, or, (in the
case of payments made after December 31, 1999 a foreign partnership with certain
connections to the United States), U.S. information reporting, but not backup
withholding, may apply to such payments. Payments of the proceeds from the sale
of a Note to or through the United States office of a broker is subject to U.S.
information reporting and backup withholding unless the Holder certifies as to
its non-U.S. status or otherwise establishes an exemption from U.S.
information reporting and backup withholding.
Any amounts withheld under the backup withholding rules from a payment
to a Holder may be claimed as a credit against such Holder's U.S. federal income
tax liability, provided that the required information is provided to the
Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES
FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM FROM
THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES OR OTHER TAX LAWS.
CERTAIN CANADIAN TAX CONSIDERATIONS
No Canadian income tax will be payable by an investor who is a
non-resident of Canada who exchanges Old Notes for New Notes pursuant to the
Exchange Offer. This opinion does not apply to an investor who holds the Old
Notes in the course of carrying on business in Canada.
The following is a general summary of the principal Canadian federal
income tax consequences to investors who acquire New Notes pursuant to the terms
of this Exchange Offer.
This summary is based upon the current provisions of the Income Tax Act
(Canada) (the "Act") as in force from the date hereof, the regulations
thereunder, any proposals to amend the Act or the Regulations announced by the
date hereof by the federal Minister of Finance and counsel's understanding of
the current administrative and assessing policies of Revenue Canada, Taxation.
This description is not exhaustive of all Canadian federal income tax
consequences and does not anticipate any changes in law whether by legislative,
governmental or judicial action other than the passing of the proposed
amendments in their present form, nor does it take into account provincial tax
considerations that may differ significantly from those discussed herein.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE NOR
SHOULD IT BE CONSTRUED TO BE LEGAL OR TAX ADVICE TO ANY INVESTOR. ACCORDINGLY,
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH RESPECT TO THE
CANADIAN INCOME TAX CONSEQUENCES ASSOCIATED WITH THEIR PARTICIPATION IN THIS
OFFERING.
The New Notes will be issued by GST Network in exchange for Old Notes
having substantially identical terms. On May 1, 2003, the date by which the New
Notes will accrete to their full principal amount at maturity, they will be
unconditionally and irrevocably assumed by GST USA and guaranteed by GST.
Neither GST nor GST USA will be liable on the New Notes until they are assumed.
From and after May 1, 2003, each New Note will bear interest, payable in cash,
at the rate specified in this Prospectus, payable on each May 1 and November 1.
A. NON-RESIDENT NOTE HOLDERS
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This summary specifically does not apply to an investor who is a
non-resident of Canada who holds the New Notes in the course of carrying on
business in Canada.
No Canadian income tax will be payable by an investor who is a
non-resident of Canada who exchanges Old Notes for New Notes pursuant to the
Exchange Offer.
Provided that GST USA honors all of its obligations in respect of
principal and interest payments due under the New Notes and GST USA does not
carry on its business principally in Canada, no Canadian taxes will be payable
in respect of such payments made by GST USA to holders of New Notes who are not
residents of Canada for purposes of the Act. If, as a result of a default by GST
USA, GST, as guarantor, makes payments under the New Notes, GST will be required
to withhold and remit, on behalf of the holders of such New Notes, Canadian
withholding tax at a rate of 25% of any amounts paid on account, in lieu of or
in satisfaction of interest. In such circumstances, withholding tax will be
payable in respect of both the interest that has accrued after May 1, 2003 and
also the OID.
The rate of withholding tax to be withheld and remitted by GST on
behalf of the holders of New Notes may be reduced from 25% to some lesser rate
in accordance with the provisions of any applicable tax treaty.
B. CANADIAN RESIDENT NOTE HOLDERS
This summary specifically does not apply to a Canadian resident
investor that is a "financial institution" as defined in subsection 142.2(1) of
the Act.
(i) Disposition of Old Notes
A Canadian resident holder of Old Notes who exchanges Old Notes for New
Notes under the terms of the Exchange Offer and who holds the Old Notes as
capital property will be deemed to have proceeds of the disposition of the Old
Notes and a cost (measured in Canadian dollars) of the New Notes equal to the
adjusted cost base (measured in Canadian dollars) of the Old Notes immediately
before the exchange. As a result, no gain or loss will arise on the exchange.
Some uncertainty attaches to this result as there is no determinative published
administrative practice or jurisprudence relating to the exchange of accreting
discount debts. If the exchange is not tax deferred, the investor will realize
income and/or losses on the Old Notes similar to those described under the
heading "Disposition of the New Notes," below and the cost of a New Note will be
the Canadian dollar value of an Old Note at the time of the exchange.
(ii) Interest Income
A Canadian resident holder of New Notes who is a corporation,
partnership, unit trust or trust of which a corporation or partnership is a
beneficiary is required to include in income for each taxation year the amount
of interest accrued, deemed to accrue or paid on the New Note in that year, to
the extent such interest was not included in income for a preceding taxation
year. For these purposes, interest will be considered to accrue at a rate of 10
1/2% compounded annually with such accrual including the period in which the Old
Notes were held by the investor. For taxation years in which an amount of
interest not previously included in income is paid on the New Notes, such
holders must include in income the amount of interest paid in the taxation year.
A Canadian resident holder of New Notes who is an individual or a trust
(other than one referred to above) that holds New Notes the day before each
anniversary of the New Notes' issue is required to include in income each year
interest that accrues or is deemed to accrue on the New Notes to that date to
the extent such interest was not otherwise included in income for the year or a
preceding year. For these purposes, interest will be considered to accrue at a
rate of 10 1/2% compounded annually with such accrual including the period in
which the Old Notes were held by the investor. For taxation years in which an
amount of interest not previously included in income is paid on the New Notes,
such holders must include in income the amount of interest paid in the taxation
year.
Any bonus or premium payable on New Notes held by Canadian residents
will be deemed to be interest and will be required to be included in the
holder's income.
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(iii) Income Denominated in U.S. Currency
The amount of interest accrued or paid on a New Note that a Canadian
resident holder is required to include in income will be the Canadian dollar
equivalent of such interest at the time of accrual or payment. The terms of the
New Notes require interest to be accrued and paid in U.S. currency. As a result,
a Canadian resident holder of New Notes whose income inclusion in respect of
accrued interest does not coincide with the stipulated payment dates for
interest, may have a foreign exchange gain or loss when interest is paid. Any
such gain or loss will be included in the holder's income on income account.
Revenue Canada's administrative policy is to accept any method used to determine
foreign exchange gains or losses on income transactions provided:
(a) the method is in accordance with generally accepted accounting
principles;
(b) the same method is used for financial statement purposes and
income tax purposes; and,
(c) no reserve is claimed in respect of known or anticipated
foreign exchange gains or losses that have occurred or may
occur after the end of a taxation year.
(iv) Disposition of the New Notes
A Canadian resident holder of New Notes who assigns or transfers the
New Notes or whose New Notes are redeemed or purchased by GST USA will be
required to include in income for the year in which the disposition occurs the
amount of interest accrued (including increases in Accreted Value) on the New
Notes to the date of disposition, to the extent such amount has not been
included in income for the year or a preceding year. Amounts received on the
disposition in respect of interest that has previously been included in income
will not be taxable (except that foreign exchange gains/losses may arise as
described above). Where a Canadian resident holder of a New Note disposes of
such New Note for proceeds equal to its fair market value and at the time of the
disposition the total amount of interest previously included in the holder's
income in respect of the New Note exceeds the amount that was received or became
receivable by the holder at or prior to that time in respect of such interest,
the holder is entitled to deduct from income an amount equal to the excess
interest that was previously included in income and not received by the holder
or recouped by him on the disposition of the New Note.
In addition, a Canadian resident holder of New Notes who holds them as
capital property may realize a capital gain (or capital loss) on the disposition
of the New Notes equal to the amount by which the proceeds of disposition of
such New Notes, excluding payments in respect of interest that has previously
been included in income, net of any cost of disposition, exceeds (or is less
than) the adjusted cost base of the New Notes to that holder. Generally,
three-quarters of any capital gain realized on a disposition of the New Notes
must be included in computing income for that year as a taxable capital gain.
Three-quarters of any capital loss realized by a Canadian holder of New Notes on
a disposition of such New Notes in a year may be deducted from the holder's
taxable capital gains for that year.
Any gain or loss to a Canadian resident who does not hold the New Notes
as capital property will be on income account and will be fully included or
deducted from income, as the case may be.
The proceeds of disposition of New Notes to a Canadian resident holder
thereof will be the Canadian dollar equivalent of the US dollar proceeds
received as such amounts are determined at the time of the Notes' acquisition
and disposition.
PLAN OF DISTRIBUTION
Except as described below, (i) a broker-dealer may not participate in
the Exchange Offer in connection with a distribution of the New Notes, (ii) such
broker-dealer would be deemed an underwriter in connection with such
distribution and (iii) such broker-dealer would be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transactions. A broker-dealer may, however,
receive New Notes for its own account pursuant to the Exchange Offer in exchange
for Old Notes when such Old Notes were acquired as a result of market-making
activities or other trading activities. Each such broker-
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dealer must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. This Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer (other than an Affiliate of
the Company) in connection with resales of such New Notes. GST Network has
agreed that for a period of 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any such broker-dealer
for use in connection with any such resale.
GST Network will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, GST Network will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in a Letter of Transmittal. GST Network has agreed to pay all expenses incident
to the Exchange Offer other than commissions or concessions of any brokers or
dealers and transfer taxes and will indemnify the Holders of the Old Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
The Placement Agents have indicated to GST Network that they intend to
effect offers and sales of the New Notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale, but
is not obligated to do so and such market-making activities may be discontinued
at any time. The Placement Agents may act as principal or agent in such
transactions. There can be no assurance that an active market for the New Notes
will develop.
LEGAL MATTERS
Certain legal matters in connection with the Notes are being passed
upon for the Company by Wilson, Sonsini, Goodrich & Rosati, a Professional
Corporation, Palo Alto, California, counsel to the Company. Certain Canadian
tax matters are being passed upon for the Company by Thorsteinssons, Vancouver,
British Columbia.
EXPERTS
The consolidated balance sheets of GST Telecommunications, Inc. and its
subsidiaries as of December 31, 1998 and 1997 and the consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the year ended
December 31, 1998, the three month period ended December 31, 1997 and each of
the years in the two-year period ended September 30, 1997, have been
incorporated herein by reference in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated balance
sheets of GST USA, Inc. and its subsidiaries as of December 31, 1998 and 1997
and the consolidated statements of operations, shareholder's equity (deficit)
and cash flows for the year ended December 31, 1998, the three month period
ended December 31, 1997 and each of the years in the two-year period ended
September 30, 1997, have been incorporated herein by reference in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants.
The balance sheets of GST Network Funding, Inc. as of April 16, 1998 (date of
inception) and December 31, 1998 and the statements of operations, shareholder's
deficit and cash flows for the period from April 16, 1998 (date of inception) to
December 31, 1998 have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
GST Network
The General Corporation Law of the State of Delaware (the "Delaware
Law") permits indemnification of directors, employees and agents of corporations
under certain conditions and subject to certain limitations. Pursuant to the
Delaware Law, GST Network has included in its Certificate of Incorporation and
bylaws a provision to eliminate the personal liability of its directors for
monetary damages for breach or alleged breach of their duty of care to the
fullest extent permitted by the Delaware Law and to provide that GST Network
shall indemnify its directors and officers to the fullest extent permitted by
the Delaware Law.
GST USA
Pursuant to the Delaware Law, GST USA has included in its Certificate
of Incorporation and bylaws a provision to eliminate the personal liability of
its directors for monetary damages for breach or alleged breach of their duty of
care to the fullest extent permitted by the Delaware Law and to provide that GST
USA shall indemnify its directors and officers to the fullest extent permitted
by the Delaware Law.
GST
Except as hereinafter set forth, there is no statute, charter
provision, by-law, contract or other arrangement under which any controlling
person, director or officer of GST is insured or indemnified in any manner
against liability which he may incur in his capacity as such.
GST's authority to indemnify its directors and officers is
governed by the provisions of Section 124 of the Canada Business Corporations
Act (the "CBCA"), as follows:
(1) Indemnification. Except in respect of an action by or on
behalf of the corporation or body corporate to procure a judgment in its favor,
a corporation may indemnify a director or officer of the corporation, a former
director or officer of the corporation or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of which the
corporation is or was a shareholder or creditor, and his heirs and legal
representatives, against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of being or having been a director or officer of
such corporation or body corporate, if
(a) he acted honestly and in good faith with a view to
the best interests of the corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he
had reasonable grounds for believing that his conduct
was lawful.
(2) Indemnification in derivative actions. A corporation may with
the approval of a court indemnify a person referred to in subsection (1) in
respect of an action by or on behalf of the corporation or body corporate to
procure a judgment in its favor, to which he is made a party by reason of being
or having been a director or an officer of the corporation or body corporate,
against all costs, charges and expenses reasonably incurred by him in connection
with such action if he fulfills the conditions set out in paragraphs (1)(a) and
(b).
(3) Indemnity as of right. Notwithstanding anything in this
section, a person referred to in subsection (1) is entitled to indemnity from
the corporation in respect of all costs, charges and expenses reasonably
incurred by him in connection with the defense of any civil, criminal or
administrative action or proceeding to which he is made
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a party by reason of being or having been a director or officer of the
corporation or body corporate, if the person seeking indemnity
(a) was substantially successful on the merits in his defense of
the action or proceeding, and
(b) fulfills the conditions set out in paragraphs (1)(a) and (b).
(4) Directors' and officers' insurance. A corporation may purchase and
maintain insurance for the benefit of any person referred to subsection (1)
against any liability incurred by him
(a) in his capacity as a director or officer of the corporation,
except where the liability relates to his failure to act
honestly and in good faith with a view to the best interests
of the corporation; or
(b) in his capacity as a director or officer of another body
corporate where he acts or acted in that capacity at the
corporation's request, except where the liability relates to
his failure to act honestly and in good faith with a view to
the best interests of the body corporate.
(5) Application to court. A corporation or a person referred to in
subsection (1) may apply to a court for an order approving an indemnity under
this section and the court may so order and make any further order it thinks
fit.
(6) Notice to Director. An applicant under subsection (5) shall give
the Director appointed under the CBCA notice of the application and the Director
is entitled to appear and be heard in person or by counsel.
(7) Other notice. On an application under subsection (5), the court may
order notice to be given to any interested person and such person is entitled to
appear and be heard in person or by counsel.
GST's by-laws provide that, subject to Section 124 of the CBCA, every
director and officer of GST and his heirs, executors, administrators and other
legal personal representatives shall be indemnified and held harmless from and
against (a) any liability and all costs, charges and expenses that he sustains
or incurs in respect of any action, suit or proceeding that is proposed or
commenced against him for or in respect of anything done or permitted by him in
respect of the execution of the duties of his office, and (b) all other costs,
charges and expenses that he sustains or incurs in respect of the affairs of
GST.
GST maintains directors and officers liability and indemnity insurance
policies in the amount of $40.0 million.
GST also has indemnification agreements in place with certain of its
directors and executive officers to indemnify them from and against any and all
expenses, losses, claims, damages and liability incurred by such director or
executive officer for or as a result of action taken or not taken while such
director or executive officer was acting in his capacity as a director,
officer, employee or agent of the Company, subject to Section 124 of the CBCA.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a complete list of Exhibits filed as a part of this
Registration Statement, which are incorporated herein:
<TABLE>
<S> <C>
1 Placement Agreement dated April 29, 1998, by and among GST
Network, GST, GST USA, and the Placement Agents (incorporated
by reference to Exhibit 10.1 to GST's Current Report on Form
8-K dated May 4, 1998 (the "May 8-K").
*3.1 Certificate of Incorporation of GST Network.
*3.2 By-laws of GST Network.
</TABLE>
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<TABLE>
<S> <C>
3.3 Certificate of Incorporation of GST USA, as amended
(incorporated by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-4 (File No. 333-33601) (the
"1997 S-4").
3.4 By-laws of GST USA (incorporated by reference to Exhibit 3.4
to the 1997 S-4).
3.5 Certificate of Incorporation of GST Telecommunications, Inc.
(incorporated by reference to Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1996).
3.6 Amended and Restated By-laws of GST Telecommunications, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's
Form S-3 (File No. 333-38091).
4.1 Indenture dated as of May 4, 1998, by and among GST Network,
GST USA, GST and United States Trust Company of New York
(incorporated by reference to Exhibit 4.1 to the May 8-K).
#5.1 Opinion of Wilson, Sonsini, Goodrich & Rosati, a Professional
Corporation
#12.1 Statements re Computations of Ratios of GST
#12.2 Statements re Computations of Ratios of GST USA
#21.1 Subsidiaries of the Registrant
#23.1 Consent of KPMG Peat Marwick LLP.
#23.2 Consent of KPMG Peat Marwick LLP.
#23.3 Consent of KPMG Peat Marwick LLP.
#23.4 Consent of Wilson, Sonsini, Goodrich & Rosati, a Professional
Corporation (included in Exhibit 5.1 to this Registration
Statement).
*23.6 Consent of Madson & Metcalf.
*25 Statement of eligibility of trustee.
99.1 Registration Rights Agreement dated May 4, 1998, by and among
GST Network, GST USA, GST and the Placement Agents
(incorporated by reference to Exhibit 10.2 to the May 8-K).
99.2 Collateral Pledge and Security Agreement dated May 4, 1998,
from GST Network to United States Trust Company of New York
(incorporated by reference to Exhibit 10.3 to the May 8-K).
*99.3 Form of Letter of Transmittal for Tender of all outstanding
10-1/2% Senior Secured Discount Notes Due 2008 in exchange for
10-1/2% Senior Secured Discount Exchange Notes Due 2008 of GST
Network Funding, Inc.
</TABLE>
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<TABLE>
<S> <C>
*99.4 Form of Tender for all outstanding 10-1/2% Senior Secured
Discount Notes Due 2008 in exchange for 10-1/2% Senior Secured
Discount Exchange Notes Due 2008 of GST Network Funding, Inc.
*99.5 Form of Instruction to Registered Holder from Beneficial Owner
of 10-1/2% Senior Secured Discount Notes due 2008 of GST
Network Funding, Inc.
*99.6 Form of Notice of Guaranteed Delivery for outstanding 10-1/2%
Senior Secured Discount Notes Due 2008 in exchange for 10-1/2%
Senior Secured Discount Exchange Notes Due 2008 of GST Network
Funding, Inc.
</TABLE>
* Previously filed.
# Filed herewith.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) under the Securities Act of 1933, as amended (the
"Securities Act"), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415 under the Securities Act, will be filed as a part
of an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement
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relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
enforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrants of expenses incurred or
paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceedings) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(e) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act, each filing of the
registrants' annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
GST Network Funding, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Vancouver, State of Washington, on June 25, 1999.
GST NETWORK FUNDING, INC.
By: /s/ Joseph A. Basile, Jr.
-------------------------
Joseph A. Basile, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed by the following persons in the
capacities on June 25, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Joseph A. Basile, Jr.
------------------------- Chief Executive Officer, President (Principal Executive
(Joseph A. Basile, Jr.) Officer) and Director
/s/ Daniel L. Trampush Senior Vice President and Chief Financial Officer (Principal
---------------------- Financial Officer)
(Daniel L. Trampush)
/s/ Robert A. Ferchat Chairman of the Board and Director
----------------------
(Robert A. Ferchat)
/s/ George B. Cobbe Director
----------------------
(George B. Cobbe)
</TABLE>
121
<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, GST USA,
Inc. has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Vancouver, State of
Washington, on June 25, 1999.
GST USA, INC.
By: /s/ Joseph A. Basile, Jr.
-------------------------
Joseph A. Basile, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 25, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Joseph A. Basile, Jr. Chief Executive Officer, President and Director (Principal
---------------------- Executive Officer)
(Joseph A. Basile, Jr.)
/s/ Daniel L. Trampush Senior Vice President and Chief Financial Officer (Principal
---------------------- Financial Officer)
(Daniel L. Trampush)
/s/ Robert A. Ferchat Chairman of the Board and Director
----------------------
(Robert A. Ferchat)
/s/ George B. Cobbe Director
----------------------
(George B. Cobbe)
</TABLE>
122
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Vancouver, State of
Washington, on this 25th day of June, 1999.
GST TELECOMMUNICATIONS, INC.
(Registrant)
By: /s/ Robert A. Ferchat
------------------------------
Robert A. Ferchat, Chairman of the Board
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities indicated on June
25, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Robert A. Ferchat Chairman of the Board and Director
- ------------------------------
(Robert A. Ferchat)
/s/ Joseph A. Basile, Jr. President, Chief Executive Officer (Principal
- ------------------------------ Executive Officer) and Director
(Joseph A. Basile, Jr.)
/s/ Daniel Trampush Senior Vice President and Chief Financial Officer
- ------------------------------ (Principal Financial Officer)
(Daniel Trampush)
/s/ Michael R. Vestal Treasurer (Principal Accounting Officer)
- ------------------------------
(Michael R. Vestal)
/s/ Stanley M.D. Beck Director
- ------------------------------
Stanley M.D. Beck
/s/ Roy Megarry Director
- ------------------------------
(Roy Megarry)
/s/ George B. Cobbe Director
- ------------------------------
(George B. Cobbe)
/s/ David W. Garrison Director
- ------------------------------
(David W. Garrison)
</TABLE>
123
<PAGE> 130
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Mitsuhiro Naoe Director
- ------------------------------
(Mitsuhiro Naoe)
/s/ Joseph G. Fogg, III Director
- ------------------------------
(Joseph G. Fogg, III)
The Company's Authorized Representative
in the United States
/s/ Daniel L. Trampush
- ------------------------------
Daniel L. Trampush
</TABLE>
124
<PAGE> 131
<PAGE> 132
<PAGE> 133
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GST NETWORK FUNDING, INC. PAGE
<S> <C>
Independent Auditors' Report ..................................................... F-2
Balance Sheets at March 31, 1999 (unaudited) and December 31, 1998 ............... F-3
Statements of Operations for the three months ended March 31, 1999 (unaudited)
and the period from April 16, 1998 (date of inception)
to December 31, 1998 .................................................... F-4
Statements of Shareholder's Deficit for the three months ended March 31, 1999
(unaudited) and the period from April 16, 1998 (date of inception)
to December 31, 1998 .................................................... F-5
Statements of Cash Flows for the three months ended March 31, 1999 (unaudited)
and the period from April 16, 1998 (date of inception) to
December 31, 1998 ....................................................... F-6
Notes to Financial Statements..................................................... F-7
</TABLE>
F-1
<PAGE> 134
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
GST Network Funding, Inc.:
We have audited the accompanying balance sheets of GST Network Funding, Inc. as
of April 16, 1998 (date of inception) and December 31, 1998, and the related
statements of operations, shareholder's deficit and cash flows for the period
from April 16, 1998 (date of inception) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GST Network Funding, Inc. as
of April 16, 1998 (date of inception) and December 31, 1998, and the results of
its operations and its cash flows for the period from April 16, 1998 (date of
inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
[KPMG Peat Marwick LLP]
Portland, Oregon
April 12, 1999
F-2
<PAGE> 135
GST NETWORK FUNDING, INC.
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
(unaudited)
--------- ---------
<S> <C> <C>
Current assets:
Cash .......................................... $ -- $ --
--------- ---------
-- --
Restricted investments ............................ 230,014 168,055
Notes receivable from parent ...................... 71,342 135,591
Commitment fees receivable from parent ............ 14,256 17,874
Interest receivable from parent ................... 852 4,093
Deferred financing costs, net ..................... 10,285 10,009
--------- ---------
$ 326,749 $ 335,622
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accrued liabilities ........................... 52 46
Accrued interest payable ...................... 396 801
Accrued income taxes payable to parent ........ 8,472 11,568
Other payable to parent ....................... 519 568
--------- ---------
9,439 12,983
--------- ---------
Long-term debt .................................... 320,997 329,279
Shareholder's deficit:
Common stock:
Authorized - $.01 par value; authorized
1,000 shares; 100 shares issued
and outstanding ........................... -- --
Additional paid-in capital .................... 2,000 2,000
Accumulated deficit ........................... (5,687) (8,640)
--------- ---------
(3,687) (6,640)
--------- ---------
$ 326,749 $ 335,622
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 136
GST NETWORK FUNDING, INC.
Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1998 THREE MONTHS
(DATE OF ENDED
INCEPTION) TO MARCH 31,
DECEMBER 31, 1999
1998 (unaudited)
-------------- --------------
<S> <C> <C>
Revenues:
Interest income ........................................... $ 10,661 $ 5,488
Commitment fee income ..................................... 14,256 3,618
-------- --------
Total revenues .................................. 24,917 9,106
Operating costs and expenses:
Interest expense .......................................... 22,132 8,963
-------- --------
Income before income taxes ...................... 2,785 143
-------- --------
Income tax expense:
Current ................................................... 8,472 3,096
Deferred .................................................. -- --
-------- --------
Net loss ........................................ $ (5,687) $ (2,953)
======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 137
GST NETWORK FUNDING, INC.
Statements of Shareholder's Deficit
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, at April 16, 1998
(date of inception) ........ 100 $ -- $ 1 $ -- $ 1
Capital investment by parent ......... -- -- 1,999 -- 1,999
Net loss ............................. -- -- -- (5,687) (5,687)
------- ------- ------- ------- -------
Balance, December 31, 1998 ........... 100 -- 2,000 (5,687) (3,687)
------- ------- ------- ------- -------
Net loss, (unaudited)................. -- -- -- (2,953) (2,953)
------- ------- ------- ------- -------
Balance, March 31, 1999, (unaudited).. 100 $ -- $2,000 $(8,640) $(6,640)
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 138
GST NETWORK FUNDING, INC.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1998
(DATE OF
INCEPTION) TO Three Months Ended
DECEMBER 31, March 31,
1998 1999
(unaudited)
-------------- ------------------
<S> <C> <C>
Operations:
Net loss ................................................... $ (5,687) $ (2,953)
Items not involving cash:
Amortization of deferred financing costs ................. 735 276
Accretion of interest..................................... 21,002 8,282
Changes in non-cash operating working capital:
Commitment fee receivable from parent .................... (14,256) (3,618)
Interest receivable from parent .......................... (852) (3,241)
Other accrued liabilities ................................ 52 (6)
Accrued interest payable ................................. 396 405
Accrued income taxes payable to parent ................... 8,472 3,096
Other payable to parent .................................. 519 49
--------- ---------
Cash provided by operations ...................... 10,381 2,290
--------- ---------
Investing:
Change in investments restricted for
fixed asset purchases..................................... (230,014) 61,959
Notes receivable from parent ............................... (71,342) (64,249)
--------- ---------
Cash used in investing activities ................ (301,356) (2,290)
--------- ---------
Financing:
Proceeds from issuance of long-term debt ................... 299,995 --
Deferred debt financing costs .............................. (11,020) --
Proceeds from investment by parent ......................... 1,999 --
--------- ---------
Cash provided by financing activities ............ 290,974 --
--------- ---------
Decrease in cash and
cash equivalents ............................... (1) --
Cash and cash equivalents, beginning of period ................. 1 --
--------- ---------
Cash and cash equivalents, end of period ....................... -- $ --
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ..................................... -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 139
GST NETWORK FUNDING, INC.
Notes to Financial Statements
April 16, 1998 to December 31, 1998 and
the three months ended
March 31, 1999 (unaudited)
(In thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
GST Network Funding, Inc. (the Company) was formed on April 16, 1998. The
Company is a wholly-owned subsidiary of GST USA, Inc. (GST USA), which is
a wholly-owned subsidiary of GST Telecommunications, Inc. (GST).
The Company's operations are limited to (i) purchasing equipment, (ii)
selling equipment to GST USA, (iii) receiving payments under intercompany
notes, and (iv) making payments of interest and principal on senior
secured notes.
INTERIM FINANCIAL STATEMENTS (unaudited)
The condensed financial statements for the three months ended March 31,
1999 are unaudited. In the opinion of management of the Company, such
unaudited financial statements include all adjustments (consisting of
only normal and recurring adjustments) necessary to present fairly the
information set forth therein.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Results for the
interim periods are not necessarily indicative of the results for the
entire year.
RESTRICTED INVESTMENTS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities.
The Company classifies its restricted investments, consisting exclusively
of U.S. Treasury securities, as available-for-sale. These investments are
restricted for the purchase and installation of network assets.
Restricted investments are recorded at amortized cost which approximates
the fair value of such securities at December 31, 1998.
DEFERRED FINANCING COSTS
Deferred financing costs, consisting of legal, accounting and
underwriting fees related to the May 1998 debt offering, have been
deferred and are being amortized to interest expense over the life of the
notes.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under the asset and liability method, deferred income taxes
reflect the future tax consequences of differences between the tax bases
of assets and liabilities and their financial reporting amounts at each
year-end. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in the tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
F-7
<PAGE> 140
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and accrued
liabilities approximate fair values due to the short maturity of those
instruments.
The carrying value and estimated fair value of the Company's long-term
debt were $320,997 and $239,555, respectively, at December 31, 1998. The
fair value of the Company's long-term debt was estimated based on quoted
market prices. The difference between the carrying amount and the fair
value of long term debt results from changes in the economic conditions
of high-yield debt markets from May 4, 1998, when the Company sold its
debt securities, to December 31, 1998.
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.
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.
(2) FINANCING ARRANGEMENTS
LONG-TERM DEBT
The Company's long-term debt consists of the following at December 31,
1998:
<TABLE>
<S> <C>
Senior secured discount notes, interest at 10.5% with semiannual interest
payments due commencing November 1, 2003, principal due May 1, 2008............. $320,997
========
</TABLE>
ISSUANCE OF SENIOR SECURED NOTES
The Company completed a private placement (the May Offering) under an
indenture (the Indenture) dated May 4, 1998 of $500,000 aggregate
principal amount at maturity ($299,995 initial accreted value) of 10.5%
senior secured discount notes due 2008 (the Notes). The Notes were sold
at a substantial discount, and there will be no accrual of interest prior
to May 2003 and no cash payment of interest until November 2003. The net
proceeds from the sale of the Notes, approximately $288,900, are
restricted for the acquisition of telecommunications equipment and other
related costs as defined in the Indenture. The Notes are subject to
certain debt covenants.
F-8
<PAGE> 141
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
Pursuant to the Indenture, all purchased equipment will be sold to GST
USA for use in its telecommunications operations. In exchange for the
purchased equipment , GST USA will issue to the Company intercompany
notes due May 1, 2003 (the Intercompany Notes). Additionally, in
consideration for the Company making the net proceeds from the Notes
available to GST USA and for the Company facilitating the purchase of GST
USA's equipment, on each May 1 and November 1, GST USA will pay to the
Company a commitment fee equal to 4.5% per annum of the amount by which
the $500,000 principal amount at maturity exceeds the amount of the
Intercompany Notes then outstanding. The commitment fee will be paid
semiannually, commencing November 1, 1998, by GST USA issuing
promissory notes due May 1, 2003 (the Fee Notes) to the Company in the
amount of such fees. The Fee Notes and Intercompany Notes will bear
interest at 12.5% per annum, compounding semiannually, and will be
guaranteed by GST. The Notes are secured by the restricted investment
securities purchased with the proceeds from the sale of the Notes, and
will be secured by any equipment purchased with such proceeds, the Fee
Notes and Intercompany Notes.
The Indenture provides that GST USA will assume and become a direct
obligor on the Notes and GST will guarantee the Notes on May 1, 2003, or
earlier if permitted by the terms of their existing debt. Once assumed,
the Notes will be senior secured indebtedness of GST USA and the note
guarantee will be senior unsecured indebtedness of GST.
The Notes are redeemable at the option of GST USA, in whole or in part,
at any time, on or after May 1, 2003 initially at 105.25% of their
principal amount at maturity, plus accrued and unpaid interest, declining
ratably to 100% on or after May 1, 2006. If on May 1, 2003, GST USA is
prohibited from assuming all of the Notes, the Company will redeem the
portion of the Notes that cannot be assumed at 105.25% of their principal
amount at maturity, plus accrued interest and unpaid interest.
The Company is a party to a registration rights agreement relating to the
Notes whereby it agreed to consummate an exchange offer for the Notes
pursuant to an effective registration statement or cause the Notes to be
registered under the Securities Act of 1933, as amended, pursuant to a
shelf registration statement by November 4, 1998. Although the Company
has filed a registration statement on Form S-4 with respect to an
exchange offer for the Notes, it has not yet been declared effective.
Therefore, in accordance with the terms of the registration rights
agreement, interest (in addition to the accrual of original issue
discount and interest otherwise due on the Notes after such date) on the
Notes will accrue at an annual rate of 0.5%, beginning November 4, 1998,
and is payable in cash semiannually in arrears, on each May 1 and
November 1, commencing May 1, 1999, until such exchange offer is
consummated or a shelf registration statement is declared effective. At
December 31, 1998, the Company had accrued $396 in additional interest
related to the Notes.
F-9
<PAGE> 142
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
DEBT COVENANTS AND CLASSIFICATION OF LONG TERM DEBT
In November 1998, the Company informed the Trustee who represents the
holders of the Notes that it may have violated certain technical
covenants contained in the indenture related to such notes. In February
1999, the Trustee informed the note holders of the potential violations.
The note holders have not declared a default, as defined within the
indentures of the Notes. The Company has classified the related debt
obligations as non-current in the accompanying balance sheets as
management believes it is probable that, in the event the note holders
declare a default, the Company would be able to take corrective actions
to cure, within the prescribed grace period, those technical violations
deemed objectively-determinable.
(3) RELATED PARTY TRANSACTIONS
The Company acts as a purchasing agent for GST USA and sells to GST USA
the equipment it purchases with the proceeds from the 1997 Offering. The
note receivable from parent of $71,342 at December 31, 1998, represents
equipment purchases for GST USA and compounded interest. The note
receivable is guaranteed by GST and bears interest at 12.5%, compounded
semiannually on May and November 1, and is payable in full on May 1,
2003. Interest income earned on the notes receivable from parent totaled
$743 for the period from April 16, 1998 (date of inception) to December
31, 1998.
As discussed in note 2, GST USA pays a commitment fee to the Company in
consideration for the Company facilitating the purchase of equipment for
GST USA. Commitment fee income totaled $14,256 and interest income on
Fee Notes totaled $230 for the period from April 16, 1998 (date of
inception) to December 31, 1998.
The payable to parent of $519 at December 31, 1998, consists of cash
advances from GST USA for the purchase of equipment and the payment of
expenses related to the May Offering.
(4) INCOME TAXES
Income tax expense for the period from April 16, 1998 (date of inception)
to December 31, 1998 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
Federal ..................... $8,472 $ -- $8,472
State ....................... -- -- --
------ ------ ------
$8,472 $ -- $8,472
====== ====== ======
</TABLE>
F-10
<PAGE> 143
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
The provision for income taxes differs from the "expected" amount
computed by applying the U.S. federal corporate rate as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1998
(DATE OF
INCEPTION) TO
DECEMBER 31,
1998
--------------
<S> <C>
Computed "expected" income
tax expense .......................................... $ 947
Effect of change in valuation
allowance ............................................ 7,525
------
Actual tax expense ................................... $8,472
======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1998 are derived
primarily from interest expense not currently deductible for tax
purposes. Gross deferred tax assets and liabilities amount to $7,525 at
December 31, 1998.
The valuation allowance for deferred tax assets as of December 31, 1998
was $7,525. The net change in the total valuation allowance for the
period from April 16, 1998 (date of inception) to December 31, 1998 was
an increase of $7,525.
F-11
<PAGE> 144
EXHIBIT INDEX
<TABLE>
<S> <C>
1 Placement Agreement dated April 29, 1998, by and among GST Network,
GST, GST USA, and the Placement Agents (incorporated by reference to
Exhibit 10.1 to GST's Current Report on Form 8-K dated May 4, 1998 (the
"May 8-K").
*3.1 Certificate of Incorporation of GST Network.
*3.2 By-laws of GST Network.
3.3 Certificate of Incorporation of GST USA, as amended (incorporated by
reference to Exhibit 3.3 to the Company's Registration Statement on
Form S-4 (File No. 333-33601) (the "1997 S-4").
3.4 By-laws of GST USA (incorporated by reference to Exhibit 3.4 to the
1997 S-4).
3.5 Certificate of Incorporation of GST Telecommunications, Inc.
(incorporated by reference to Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1996).
3.6 Amended and Restated By-laws of GST Telecommunications, Inc.
(incorporated by reference to Exhibit 3.1 to the Company's Form S-3
(File No. 333-38091).
4.1 Indenture dated as of May 4, 1998, by and among GST Network, GST USA,
GST and United States Trust Company of New York (incorporated by
reference to Exhibit 4.1 to the May 8-K).
#5.1 Opinion of Wilson, Sonsini, Goodrich & Rosati, a Professional
Corporation
#12.1 Statements re Computations of Ratios of GST
#12.2 Statements re Computations of Ratios of GST USA
#21.1 Subsidiaries of the Registrant
#23.1 Consent by KPMG Peat Marwick LLP.
#23.2 Consent of KPMG Peat Marwick LLP.
#23.3 Consent of KPMG Peat Marwick LLP.
#23.4 Consent of Wilson, Sonsini, Goodrich & Rosati, a Professional
Corporation (included in Exhibit 5.1 to this Registration Statement).
*23.6 Consent of Madson & Metcalf.
*25 Statement of eligibility of trustee.
99.1 Registration Rights Agreement dated May 4, 1998, by and among GST
Network, GST USA, GST and the Placement Agents (incorporated by
reference to Exhibit 10.2 to the May 8-K).
99.2 Collateral Pledge and Security Agreement dated May 4, 1998, from GST
Network to United States Trust Company of New York (incorporated by
reference to Exhibit 10.3 to the May 8-K).
</TABLE>
<PAGE> 145
<TABLE>
<S> <C>
*99.3 Form of Letter of Transmittal for Tender of all outstanding 10-1/2%
Senior Secured Discount Notes Due 2008 in exchange for 10-1/2% Senior
Secured Discount Exchange Notes Due 2008 of GST Network Funding, Inc.
*99.4 Form of Tender for all outstanding 10-1/2% Senior Secured Discount
Notes Due 2008 in exchange for 10-1/2% Senior Secured Discount Exchange
Notes Due 2008 of GST Network Funding, Inc.
*99.5 Form of Instruction to Registered Holder from Beneficial Owner of
10-1/2% Senior Secured Discount Notes due 2008 of GST Network Funding,
Inc.
*99.6 Form of Notice of Guaranteed Delivery for outstanding 10-1/2% Senior
Secured Discount Notes Due 2008 in exchange for 10-1/2% Senior Secured
Discount Exchange Notes Due 2008 of GST Network Funding, Inc.
</TABLE>
* Previously filed.
# Filed herewith.
<PAGE> 1
Exhibit 5.1
June 29, 1999
GST Network Funding, Inc.
GST USA, Inc.
GST Telecommunications, Inc.
4001 Main Street
Vancouver, Washington 98663
RE: EXCHANGE OFFER OF 10-1/2% SENIOR SECURED DISCOUNT NOTES DUE
2008 FOR 10-1/2% SENIOR DISCOUNT NOTES DUE 2008 ($312,836,364
MILLION AGGREGATE ACCRETED VALUE OUTSTANDING AT SEPTEMBER 30,
1998) OF GST NETWORK FUNDING, INC.
Ladies and Gentlemen:
We have acted as counsel to GST Network Funding, Inc., a Delaware
corporation ("GST Network"), GST USA, Inc., a Delaware corporation ("GST USA")
and GST Telecommunications, Inc., a federally chartered Canadian corporation
("GST" and taken together with GST Network and GST USA, the "GST Entities") in
connection with the filing by the GST Entities of a registration statement on
Form S-4 (No. 333-60645), as amended (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement relates to GST Network's exchange offer (the "Exchange Offer") of its
10-1/2% Senior Secured Discount Notes Due 2008 (the "New Notes") for 10-1/2%
Senior Discount Notes Due 2008 (the "Old Notes") ($312,836,364 million aggregate
Accreted Value outstanding at September 30, 1998). Prior to the filing of
Amendment No. 2 to the Registration Statement by the GST Entities with the
Commission, we did not represent any of the GST Entities, in any matter,
including (a) the issuance of the Old Notes by GST Network, (b) the assumption,
under certain circumstances, of the obligations of GST Network under the Old
Notes or (c) the guarantee of the obligations of GST Network under the Old Notes
by GST.
To render the opinions hereinafter set forth, we have examined
originals or copies of the following:
a) the Registration Statement;
b) the Indenture dated as of May 4, 1998, by and among the GST
Entities and United States Trust Company of New York, as
trustee (the "Trustee");
c) a specimen certificate of a New Note;
<PAGE> 2
GST Network Funding, Inc.
GST USA, Inc.
GST Telecommunications, Inc.
June 29, 1999
Page 2
d) the Registration Rights Agreement dated May 4, 1998, by and
among the GST Entities and Morgan Stanley & Co. Incorporated,
Bear, Stearns & Co. Inc., Credit Suisse First Boston
Corporation and SBC Warburg Dillon Read Inc.;
e) resolutions of the Board of Directors of GST Network,
authorizing and approving the transactions in connection with
the issuance of the Old Notes;
f) the form of Authentication and Delivery Order of the Company
to be delivered to the Trustee pursuant to the Indenture,
directing the Trustee to authenticate and deliver the
appropriate New Notes, including the acknowledgment by the
Trustee of receipt thereof:
With your permission we have assumed the following: (a) the
authenticity of original documents and the genuineness of all signatures; (b)
the conformity to the originals of all documents submitted to us as copies; (c)
the truth, accuracy and completeness of the information, factual matters,
representations and warranties as to matters of fact contained in the records,
documents, instruments and certificates we have reviewed as of their stated
dates and as of the date hereof; (d) the due authorization, execution and
delivery on behalf of the respective parties thereto (except the GST Entities)
of documents referred to herein and the legal, valid and binding effect thereof
on such parties; (e) the absence of any understanding among the parties intended
to vary the express written agreements, and (f) the legal capacity of natural
persons.
This Opinion Letter is provided as a legal opinion only, and not as a
guaranty or warranty of the matters discussed herein. This Opinion Letter is
limited to the matters stated herein, and no opinion is implied or may be
inferred beyond the matters expressly stated.
On the basis of the foregoing and subject to the limitations and
qualifications set forth herein, we advise you that in our opinion:
1. GST Network has all requisite corporate power and authority to
issue, deliver and perform its obligations under the New Notes.
2. The New Notes are in the form contemplated by the Indenture, have
been duly authorized by GST Network, and when executed by GST Network and
authenticated by the Trustee in accordance with the terms of the Indenture, and
delivered in exchange for Old Notes in the manner described in the Registration
Statement, and when the Registration Statement, as finally amended (including
all necessary post-effective amendments, if any), shall have become effective
under the Securities Act, the New Notes will be (a) valid and binding
obligations of GST Network enforceable in accordance
<PAGE> 3
GST Network Funding, Inc.
GST USA, Inc.
GST Telecommunications, Inc.
June 29, 1999
Page 3
with their terms, except that we express no opinion as to the validity or
enforceability of rights of indemnity or contribution, or both, and except as
the enforceability thereof may be limited by (i) bankruptcy, insolvency,
fraudulent conveyance, reorganization or similar laws affecting the rights of
creditors or providing relief to debtors, or (ii) principles of equity (whether
enforcement is considered in a proceeding at law or in equity) and (b) entitled
to the benefits of the Indenture.
The foregoing opinions are subject to the following exceptions,
qualifications and limitations:
A. To the extent relevant to the opinions set forth above, we have
assumed that the Trustee is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization; that the Trustee is
duly qualified to engage in the activities contemplated by the Indenture and is
duly qualified and eligible under the terms of the Indenture to act as trustee
thereunder; that the Indenture was duly authorized, executed and delivered by
the Trustee; that the Indenture is a valid and binding obligation of the
Trustee; that the Trustee is in compliance, generally with respect to acting as
a trustee under the Indenture, with all applicable laws and regulations; and
that the Trustee has the requisite organizational and legal power and authority
to perform its obligations under the Indenture.
B. This opinion is given in respect of the Indenture and the New Notes
only, and we express no opinion as to the legality, validity or binding effect
of any collateral agreement or other document or any other matter beyond the
matters expressly set forth herein.
C. We express no opinion as to the enforceability of provisions of the
Indenture or the New Notes which provide that the assertion or employment of any
right or remedy shall not prevent the concurrent assertion or employment of any
other right or remedy, or that every right and remedy shall be cumulative and in
addition to every other right and remedy, or that any delay or omission to
exercise any right or remedy shall not impair any other right or remedy or
constitute a waiver thereof.
D. Members of our firm are admitted to the bar of the State of
California and we do not express any opinion as to the laws of any jurisdiction
other than the laws of the State of California, the General Corporation Law of
the State of Delaware and the federal laws of the United States, and we express
no opinion with respect to the applicability thereto, or the effect thereon, of
the laws of any other jurisdiction. In this regard, we note that the Indenture
provides that the Indenture and the New Notes are to be governed by the law of
the State of New York. The opinions expressed herein concerning the validity,
binding effect and enforceability of the Indenture and the New Notes are
intended to express our views on those matters as if the substantive law of
California were applicable. We do not act as regulatory counsel to the GST
Entities, and have made no review of
<PAGE> 4
GST Network Funding, Inc.
GST USA, Inc.
GST Telecommunications, Inc.
June 29, 1999
Page 4
regulatory restrictions applicable to the GST Entities. We render no opinion
with respect to choice of laws provisions contained in the Indenture or the New
Notes. Without limiting the generality of clause 2(a)(i), we express no opinion
with respect to compliance with state securities laws or as to the applicability
to the obligations of GST Network under the Indenture or the New Notes or
Sections 547 and 548 of Title 11 of the United States Code or applicable state
law (including, without limitation, Article 10 of the New York Debtor & Creditor
Law and Sections 3439 et seq. of the California Civil Code) relating to
preference or fraudulent transfers, whether arising in a bankruptcy or
insolvency proceeding or otherwise.
E. This opinion is rendered solely for your benefit in connection with
the transactions described above. This opinion may not be used or relied upon by
any other person and may not be disclosed, quoted, filed with a governmental
agency or otherwise referred to without our prior written consent. However, we
consent to the filing of this opinion as an exhibit to the Registration
Statement and prospectus and to the use of our name under the caption "Legal
Matters" in the Registration Statement and any amendments thereto. In giving
such consent, we do not concede that we are experts within the meaning of the
Securities Act or the rules and regulations thereunder or that this consent is
required by Section 7 of the Securities Act.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 12.1
GST TELECOMMUNICATIONS, INC.
Ratio of Earnings to Fixed Charges
(Insufficiency of Earnings to Cover Fixed Charges)
<TABLE>
<CAPTION>
Thirteen
Year Ended Months Year Ended
Ended Ended September 30,
August 31, September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense, including amortization of
deferred financing costs 0 27 838 21,224 37,665
Capitalized interest 0 0 291 2,316 15,170
Estimated interest on operating leases 16 84 288 500 1,127
Preferred stock accretion 0 0 0 0 2,969
------ ------ ----- ----- -----
Total fixed charges 16 111 1,417 24,040 56,931
====== ====== ===== ===== =====
Earnings:
Loss before minority interest in income (loss)
of subsidiaries and income taxes (822) (2,987) (13,513) (60,632) (111,823)
Fixed charges excluding capitalized interest
and preferred stock accretion 16 111 1,126 21,724 38,792
------ ------ ----- ----- -----
Total earnings (806) (2,876) (12,387) (38,908) (73,031)
====== ====== ===== ===== =====
Ratio of earnings to fixed charges (51.52) (25.85) (8.74) (1.62) (1.28)
====== ====== ===== ===== =====
Insufficiency of earnings to cover fixed charges 822 2,987 13,804 62,948 129,962
====== ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Twelve Months Three Months
Ended December 31, Ended December 31, Ended March 31,
1996 1997 1997 1998 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense, including amortization of
deferred financing costs 5,434 18,948 51,179 101,648 21,275 28,260
Capitalized interest 2,549 3,726 16,347 25,920 4,849 7,424
Estimated interest on operating leases 203 371 1,295 1,900 417 514
Preferred stock accretion 0 3,145 6,114 6,861 0 0
------- ------- ------- ------- ------- -------
Total fixed charges 8,186 26,190 74,935 136,329 26,541 36,198
======= ======= ======= ======= ======= =======
Earnings:
Income (loss) before minority interest in income
(loss) of subsidiaries and income taxes (22,687) (38,271) (127,407) (154,690) 19,462 (53,212)
Fixed charges excluding capitalized interest
and preferred stock accretion 5,637 19,319 52,474 103,548 21,692 28,774
------- ------- ------- ------- ------- -------
Total earnings (17,050) (18,952) (74,933) (51,142) 41,154 (24,438)
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges (2.08) (0.72) (1.00) (0.38) 1.55 (0.68)
======= ======= ======= ======= ======= =======
Insufficiency of earnings to cover fixed charges 25,236 45,142 149,868 187,471 (14,613) 60,636
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 12.2
GST USA, INC.
Ratio of Earnings to Fixed Charges
(Insufficiency of Earnings to Cover Fixed Charges)
<TABLE>
<CAPTION>
Thirteen
Months
Ended Year Ended September 30,
September 30,
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fixed charges:
Interest expense, including amortization of
deferred financing costs 27 805 18,334 34,171
Capitalized interest 0 291 2,316 15,170
Estimated interest on operating leases 84 288 500 1,127
Preferred stock accretion 0 0 0 0
------ ----- ----- -------
Total fixed charges 111 1,384 21,150 50,468
====== ===== ===== =======
Earnings:
Loss before minority interest in income (loss)
of subsidiaries and income taxes (2,987) (11,645) (55,812) (98,049)
Fixed charges excluding capitalized interest
and preferred stock accretion 111 1,093 18,834 35,298
------ ----- ----- -------
Total earnings (2,876) (10,552) (36,978) (62,751)
====== ===== ===== =======
Ratio of earnings to fixed charges (25.85) (7.62) (1.75) (1.24)
====== ===== ===== =======
Insufficiency of earnings to cover fixed charges 2,987 11,936 58,128 113,219
====== ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Twelve Months Three Months
Ended December 31, Ended December 31, Ended March 31,
1996 1997 1997 1998 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense, including amortization of
deferred financing costs 4,646 15,855 45,380 77,814 15,432 21,866
Capitalized interest 2,549 3,726 16,347 25,920 4,849 7,424
Estimated interest on operating leases 203 371 1,295 1,900 417 514
Preferred stock accretion 0 0 0 0 0 0
------- ------- -------- -------- ------- -------
Total fixed charges 7,398 19,952 63,022 105,634 20,698 29,804
======= ======= ======== ======== ======= =======
Earnings:
Income (loss) before minority interest in income
(loss) of subsidiaries and income taxes (21,466) (33,486) (110,062) (126,780) 26,386 (45,779)
Fixed charges excluding capitalized interest
and preferred stock accretion 4,849 16,226 46,675 79,714 15,849 22,380
------- ------- -------- -------- ------- -------
Total earnings (16,617) (17,260) (63,387) (47,066) 42,235 (23,399)
======= ======= ======== ======== ======= =======
Ratio of earnings to fixed charges (2.25) (0.87) (1.01) (0.45) 2.04 (0.79)
======= ======= ======== ======== ======= =======
Insufficiency of earnings to cover fixed charges 24,015 37,212 126,409 152,700 (21,537) 53,203
======= ======= ======== ======== ======= =======
</TABLE>
<PAGE> 1
Exhibit 21.1
GST Telecommunications, Inc.
Significant Subsidiaries as of 3/31/99
GST USA, Inc., a Delaware corporation
GST Telecom Inc., a Delaware corporation
GST Equipment Funding, Inc., a Delaware corporation
GST Network Funding, Inc., a Delaware corporation
GST Net, Inc., a Delaware corporation
GST Call America, Inc., a California corporation
TotalNet Communications, Inc., a Texas corporation
ICON Communications Corp., a Washington corporation
GST USA, Inc.
Significant Subsidiaries as of 3/31/99
GST USA, Inc., a Delaware corporation
GST Telecom Inc., a Delaware corporation
GST Equipment Funding, Inc., a Delaware corporation
GST Network Funding, Inc., a Delaware corporation
GST Net, Inc., a Delaware corporation
GST Call America, Inc., a California corporation
TotalNet Communications, Inc., a Texas corporation
ICON Communications Corp., a Washington corporation
<PAGE> 1
Exhibit 23.1
GST NETWORK FUNDING, INC.
Independent Auditors' Consent
Dated May 3, 1999
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST Network Funding, Inc.:
We consent to the use of our report, dated April 12, 1999, included in the
Registration Statement on Form S-4, dated June 29, 1999, of GST
Telecommunications, Inc., GST USA, Inc. and GST Network Funding, Inc. and to the
references to our firm under the "Experts" heading in the Prospectus.
[KPMG Peat Marwick LLP]
Portland, Oregon
June 29, 1999
<PAGE> 1
EXHIBIT 23.2
GST USA, INC.
INDEPENDENT AUDITOR'S CONSENT
DATED MAY 3, 1999
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST USA, Inc.:
We consent to the use of our report, dated March 1, 1999, incorporated herein by
reference in the Registration Statement on Form S-4, dated June 29, 1999, of
GST Telecommunications, Inc., GST USA, Inc. and GST Network Funding, Inc. and to
the references to our firm under the "Experts" heading in the Prospectus.
[KPMG PEAT MARWICK LLP]
Portland, Oregon
June 29, 1999
<PAGE> 1
Exhibit 23.3
GST TELECOMMUNICATIONS, INC.
Independent Auditors' Consent
Dated April 30, 1999
<PAGE> 2
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
GST Telecommunications, Inc.:
We consent to the use of our report, dated March 1, 1999, incorporated herein
by reference in the Registration Statement on Form S-4, dated June 29, 1999,
of GST Telecommunications, Inc., GST USA, Inc. and GST Network Funding, Inc.
and to the references to our firm under the "Experts" heading in the Prospectus.
[KPMG Peat Marwick LLP]
Portland, Oregon
June 29, 1999
