<PAGE> 1
As Filed Pursuant to Rule 424(b)(3)
Registration Nos. 333-60645;
333-60645-01;
333-60645-02
PROSPECTUS
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
($337,850,000 MILLION AGGREGATE ACCRETED VALUE
OUTSTANDING AT JUNE 30, 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 SEPTEMBER 30, 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.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 2, 1999
(Continued on next page)
<PAGE> 2
(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 June 30, 1999, $337.9 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 June 30, 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 September 30, 1999, 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.
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
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<PAGE> 3
(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
$675.70 at June 30, 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 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
ii
<PAGE> 4
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
of 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 September 2, 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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<PAGE> 5
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
<TABLE>
<CAPTION>
PAGE
DEFINED TERM NUMBERS
- ------------ ---------
<S> <C>
1995 Notes........................ 48
1995 Indentures................... 14
1996 Three Month Period........... 41
1997 Pledged Securities........... 103
1997 Three Month Period........... 3
1997 Initial Note................. 103
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................ 95
Affiliate......................... iv
AFR............................... 107
AHYDOs............................ 107
AT&T.............................. 27
ATM............................... 61
Bankruptcy Code................... 23
Banking Organization.............. 97
Bear Stearns...................... ii
Bestel Project.................... 65
Bestel............................ 68
Brooks............................ 19
Call America -- Phoenix........... 61
Canada Act........................ 13
CAP............................... 60
Cautionary Statements............. 27
CBCA.............................. 26
CCN............................... 66
Certificate of Foreign Status..... 107
Certificated Notes................ 96
Clearing Corporation.............. 97
Clearing Agency................... 97
CLEC.............................. 66
Code.............................. 13
Collateral........................ 23
Commission........................ 4, 73
Communications Act................ 21
Company........................... 3
Convertible Notes................. 77
CPCN.............................. 65
Credit Suisse First Boston........ ii
Credit Agreement.................. 100
Development Company............... 77
DTC............................... 12
</TABLE>
<TABLE>
<CAPTION>
PAGE
DEFINED TERM NUMBERS
- ------------ ---------
<S> <C>
EDGAR............................. 1
Eighth Circuit.................... 64
Eligible Institution.............. 31
Excess Proceeds................... 90
Exchange Agent.................... 8
Exchange Act...................... 1
Exchange Offer.................... ii, 72
Excluded Holder................... 95
Expiration Date................... ii, 7, 30
FCC............................... 63
Fee Notes......................... 77
Final Interest Accrual Date....... 103
Final Accumulated Interest
Amount.......................... 103
Fiscal............................ 3
Fiscal 1994....................... 3
Fiscal 1995....................... 3
Fiscal 1996....................... 3
Fiscal 1997....................... 3
Fiscal 1998....................... 3
Fiscal 1999....................... 3
Fiscal 2000....................... 3
Fiscal Year....................... 3
Four Quarter Period............... 78
Global Notes...................... 96
Global............................ 4, 15
GST............................... ii
GST Call America.................. 38
GST EquipCo....................... 101
GST Funding....................... 3, 44
GST Net (AZ)...................... 3, 66
GST Network....................... ii
GST SwitchCo...................... 101
GST Telecom....................... 60
GST USA........................... ii
GTE Companies..................... 62
Guaranteed Indebtedness........... 87
Holder............................ ii
ICON.............................. 52
ICP............................... 3
ILECs............................. 3
Indenture......................... 14
Indentures........................ 14
Indirect Participants............. 97
Intercompany Note................. iii
Interconnection Decision.......... 63
International Asset............... 89
International Business............ 89
</TABLE>
v
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<TABLE>
<CAPTION>
PAGE
DEFINED TERM NUMBERS
- ------------ ---------
<S> <C>
Investments....................... 85
IP................................ 3
ISDN.............................. 60
ISPs.............................. 21
Issuer............................ 3
IT................................ 58
Magnacom.......................... 65
Magnacom Agreements............... 65
Magnacom FCC Licenses............. 65
Mandatory Redemption Date......... 105
Mandatory Redemption Price........ 105
May Offering...................... ii
MCI............................... 19
MCIWorldCom....................... 19
Mextel............................ 68
MFS............................... 19
Morgan Stanley.................... ii
NACT.............................. 13
NACT Sale......................... 13
New Notes......................... ii
Non-Global Purchaser.............. 96
Non-US Holder..................... 106
Nortel Purchase Agreement......... 101
Note Guarantee.................... ii, 72
Notes............................. ii
NTFC Loan Agreement............... 14
OID............................... 106
Old Notes......................... ii
Olshan............................ 68
Participants...................... 97
Payment Date...................... 79
Permanent Regulation S Global
Note............................ 96
Phase One......................... 58
Phase Two......................... 58
Phase Three....................... 58
Phoenix Fiber..................... 42
Placement Agents.................. ii
Pledge Account.................... iii
Pledged Securities................ iii
PNI............................... 22
POP............................... 60
Price Cap LECs.................... 21
Project Loan...................... 99
Project Phase I................... 100
Project Phase II.................. 100
Protected Property................ 88
</TABLE>
<TABLE>
<CAPTION>
PAGE
DEFINED TERM NUMBERS
- ------------ ---------
<S> <C>
RBOCs............................. 16
Redeemable Preferred Shares....... 42
Reference Period.................. 78
Registration Rights Agreement..... ii
Registration Statement............ 1
Registration...................... 91
Regulation S Global Note.......... 96
Restricted Development Company.... 87
Restricted Global Note............ 96
SBC............................... 20
Secured Notes Guarantee........... 103
Secured Notes Offering............ 44
Secured Notes Indenture........... 14
Secured Notes..................... 47
Securities Act.................... ii
Semi-Annual Accrual Date.......... 74
Senior Notes...................... 82
Service........................... 27
SFAS.............................. 59, F-7
Shelf Registration Statement...... 73
Siemens Sales Agreement........... 101
Siemens Loan Agreement............ 14
Siemens........................... 14
SOP 98-5.......................... 59
Sprint............................ 19
Subsidiary Guarantee.............. 87
Taxes............................. 95
Telecommunications Act............ 16
Temporary Regulation S Global
Note............................ 96
Tomen Stock Purchase Agreement.... 99
Tomen Facility.................... 69
Tomen............................. 69
Tomen Master Agreement............ 99
TotalNet.......................... 38
Transaction Date.................. 78
Transferor........................ 32
Treasury Regulations.............. 105
Trust Indenture Act............... 70
Trustee........................... ii
US WEST........................... 19, 66
U.S. Holder....................... 105
VITA.............................. 3
Warburg Dillon Read............... ii
WorldCom.......................... 19
WTO............................... 20
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX OF DEFINED TERMS................ v
AVAILABLE INFORMATION................. viii
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................... viii
PROSPECTUS SUMMARY.................... 1
RISK FACTORS.......................... 11
THE EXCHANGE OFFER.................... 28
USE OF PROCEEDS....................... 34
SELECTED FINANCIAL DATA............... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 42
BUSINESS.............................. 59
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 68
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE NEW NOTES.......... 69
DESCRIPTION OF INDEBTEDNESS AND
REDEEMABLE PREFERRED SHARES......... 100
CERTAIN UNITED STATES FEDERAL INCOME
TAX CONSIDERATIONS.................. 106
CERTAIN CANADIAN TAX CONSIDERATIONS... 110
PLAN OF DISTRIBUTION.................. 113
LEGAL MATTERS......................... 113
EXPERTS............................... 113
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
vii
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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 Reports on Form 10-Q for the quarterly periods ended
June 30, 1999 and 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 Reports on Form 10-Q for the quarterly periods ended
June 30, 1999 and March 31, 1999, 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
viii
<PAGE> 10
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
September 23, 1999.
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<PAGE> 11
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 June 30, 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
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<PAGE> 12
technical requirements of certain 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
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 initiated litigation to recover this asset or its fair
market value. See "Legal Proceedings." The Company recently negotiated a
settlement of the litigation with Global. See "Legal Proceedings -- GST and GST
Telecom v. Global Light Telecommunications, Inc., et al." If the settlement is
effected, the Company believes that all technical indenture violations relating
to Global will have been cured. 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 has divested these assets in a transaction
complying with the indentures. The Company intends to vigorously pursue any
other 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 or any
resulting settlement will be effected, the Company cannot offer any assurance
that the litigation will be successful or any resulting settlement will be
effected, 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."
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<PAGE> 13
CORPORATE ORGANIZATION
[CORPORATE ORGANIZATION OF GST NETWORK FLOW 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 Telecom 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> 14
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 Holder is not
indemnified by GST Network, GST USA or GST.
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<PAGE> 15
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 September 30,
1999, 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 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 Trans-
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<PAGE> 16
mittal 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.
6
<PAGE> 17
SUMMARY DESCRIPTION OF THE NEW NOTES
The Exchange Offer applies to $337.9 million aggregate Accreted Value of
Old Notes as of June 30, 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............ $337.9 million aggregate Accreted Value of
10 1/2% Senior Secured Discount Exchange Notes
due 2008 as of June 30, 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.
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<PAGE> 18
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 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."
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<PAGE> 19
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 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 June 30, 1999, GST
had $1,160.4 million of indebtedness
outstanding, GST USA had $985.3 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 June 30, 1999,
the subsidiaries of GST USA other than GST
Network had approximately $418.5 million of
liabilities (excluding intercompany payables),
including $383.3 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
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<PAGE> 20
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; 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."
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<PAGE> 21
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 $97.8 million, an
operating loss of approximately $46.8 million and a negative adjusted EBITDA of
$8.6 million for the six months ended June 30, 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
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completed on schedule, at a commercially reasonable cost or within the Company's
specifications. In addition, the expansion of the Company's business has
involved and is expected to continue to involve acquisitions, which could divert
the resources and management time of the Company and require integration with
the Company's existing operations. There can be no assurance that any acquired
business will be successfully integrated into the Company's operations or that
any such business will meet the Company's expectations. The Company's future
performance will depend, in part, upon its ability to manage its growth
effectively, which will require it to continue to implement and improve its
operating, financial and accounting systems, to expand, train and manage its
employee base and to effectively manage the integration of acquired businesses.
These factors and others could adversely affect the expansion of the Company's
customer base and service offerings. The Company's inability either to expand in
accordance with 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 June 30, 1999, the Company had outstanding on a consolidated basis
approximately $1,160.4 million of indebtedness and $65.6 million of mandatorily
redeemable preferred stock. In addition, the accretion of original issue
discount is expected to cause a $62.2 million increase in liabilities by
December 15, 2000 relating to the 1995 Notes sold in December 1995, a $91.0
million increase in liabilities relating to the Accrual Notes by November 15,
2002 and a $162.2 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 $10.6 million had been provided at June
30, 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 June 30, 1999). There can be no
assurance that any additional financing will be available to the Company on
acceptable terms or at all.
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The level of the Company's indebtedness could have important consequences
to its future prospects, including the following: (i) limiting the ability of
the Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes; (ii)
requiring that a substantial portion of the Company's cash flow from operations,
if any, be dedicated to the payment of principal of and interest on its
indebtedness and other obligations; (iii) limiting its flexibility in planning
for, or reacting to changes in, its business; (iv) the Company will be more
highly leveraged than some of its competitors, which may place it at a
competitive disadvantage; and (v) increasing its vulnerability in the event of a
downturn in its business.
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 six months ended June 30, 1999, Fiscal 1998, the 1997 Three
Month Period, Fiscal 1997 and Fiscal 1996 by $117.7 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 six
months ended June 30, 1999, Fiscal 1998, the 1997 Three Month Period, Fiscal
1997 and Fiscal 1996 were negative $216.6 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 particular, the Company recently
negotiated a settlement of the litigation with Global Light Telecommunications,
Inc. ("Global"). See "Legal Proceedings -- GST and
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<PAGE> 24
GST Telecom v. Global Light Telecommunications, Inc., et al." If the settlement
is effected, the Company believes that all technical indenture violations
relating to Global will have been cured.
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.
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 Telecommunica-
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<PAGE> 25
tions 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 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 six months ended June 30, 1999, Fiscal 1998, the 1997 Three Month
Period, Fiscal 1997 and Fiscal 1996, long distance represented 32.1%, 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
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<PAGE> 26
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 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.
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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 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. Qwest Communications, Inc. has announced that it intends to merge
with 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. 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
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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.
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.
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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 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 CLECs 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
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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 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.
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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 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
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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 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
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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 June 30, 1999, the Company and its subsidiaries had $704.7 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 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
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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 June 30, 1999, the subsidiaries of GST USA other
than GST Network had approximately $418.5 million of liabilities (excluding
intercompany payables), including $383.3 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 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
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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.
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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 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.
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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.
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.
27
<PAGE> 38
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
28
<PAGE> 39
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 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
June 30, 1999, $337.9 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 September 2, 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
September 30, 1999, 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
29
<PAGE> 40
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 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.
30
<PAGE> 41
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 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.
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<PAGE> 42
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 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.
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<PAGE> 43
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>
<S> <C>
By Mail (registered or certified mail By Overnight Courier:
recommended):
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: By Facsimile:
United States Trust Company of New York (212) 780-0592
111 Broadway, Lower Level Confirm by Telephone: (800) 548-6565
New York, New York 10006 (For Eligible Institutions Only)
Attn: Corporate Trust Services
</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.
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<PAGE> 44
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 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.
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<PAGE> 45
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 period
from April 16, 1998 to June 30, 1998 and the six months ended June 30, 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 periods. 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>
PERIOD FROM PERIOD FROM
APRIL 16, 1998 APRIL 16, 1998 SIX MONTHS
(DATE OF INCEPTION) TO (DATE OF INCEPTION) TO ENDED
DECEMBER 31, 1998 JUNE 30, 1998 JUNE 30, 1999
---------------------- ---------------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income........................... $10,661 $ 2,346 $12,847
Commitment fee income..................... 14,256 3,575 10,194
Interest expense.......................... 22,132 5,295 18,047
Income tax expense........................ 8,472 2,013 7,834
------- ------- -------
Net loss.................................. (5,687) (1,387) (2,840)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Restricted cash and investments............................. $230,014 $119,710
Total assets................................................ 326,749 348,612
Long term debt.............................................. 320,997 337,850
Common shares and additional paid-in capital................ 2,000 2,000
Accumulated deficit......................................... (5,687) (8,527)
======== ========
Shareholder's deficit....................................... (3,687) (6,527)
</TABLE>
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 six months ended June
30, 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.
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<PAGE> 46
<TABLE>
<CAPTION>
THIRTEEN MONTHS YEAR ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, ----------------------------------
1994(A) 1995 1996(B) 1997(B)
--------------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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 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)
Shareholders' equity (deficit)............ 12,662 34,784 1,274 (89,874)
</TABLE>
36
<PAGE> 47
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------------- ---------------------- ----------------------
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 $ 66,917 $ 99,938
Construction, facility
sales, and other......... -- 1,488 1,488 8,826 756 25,427
Telecommunication
products................. 4,780 8,706 27,300 4,708 1,898 2,239
-------- -------- --------- ---------- --------- ----------
Total revenues...... 23,217 36,258 119,008 163,317 69,571 127,604
Operating loss................ (17,432) (21,443) (81,006) (131,696) (50,271) (45,106)
Other expenses (income):
Interest income............. (693) (4,096) (9,735) (24,134) (11,718) (6,472)
Interest expense(c)......... 4,646 15,855 45,380 77,814 34,688 43,077
Other, net.................. 81 756 (5,452) (58,596) (60,772) 1,484
Income tax expense............ -- 850 1,753 -- -- --
-------- -------- --------- ---------- --------- ----------
Net loss(f)................... $(21,413) $(34,808) $(112,952) $ (126,780) $ (12,469) $ (83,195)
======== ======== ========= ========== ========= ==========
OTHER DATA:
Capital expenditures.......... $ 58,047 $ 46,663 $ 214,359 $ 247,683 $ 97,479 $ 151,938
Ratio of earnings to fixed
charges(g).................. -- -- -- -- 0.50 --
Adjusted EBITDA(h)............ $(12,661) $(11,629) $ (48,783) $ (57,152) $ (28,668) $ (7,176)
Cash flow provided by (used
in):
Operating activities........ (15,172) (42,269) (79,004) (82,614) (45,607) (15,055)
Investing activities........ (63,755) (42,260) (239,084) (342,435) (288,631) (40,178)
Financing activities........ 40,503 228,097 513,842 312,063 311,126 (14,322)
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash, cash equivalents........ $198,870 $ 85,884 $ 44,973
Investments................... 7,619 -- 46
Restricted cash and
investments................. 144,450 281,364 119,710
Property and equipment........ 433,621 678,374 825,215
Accumulated depreciation...... (26,766) (62,522) (82,919)
Investment in joint
ventures(i)................. -- -- --
Total assets........ 891,606 1,128,778 1,096,111
Current portion of long-term
debt and capital lease
obligations................. 9,575 17,776 20,072
Long term debt and capital
lease obligations (excluding
current portion)............ 605,862 938,816 965,223
Common Shares................. 78,462 78,462 78,462
Accumulated deficit........... (203,055) (329,835) (413,030)
Shareholders' equity
(deficit)................... (124,593) (251,373) (334,568)
</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.
37
<PAGE> 48
(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, $11,066 for the six months ended
June 30, 1998 and $16,043 for the six months ended June 30, 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 six months ended June 30, 1998 and $0 for the six
months ended June 30, 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 six months ended June 30, 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 $99.2 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, 1999: (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.
38
<PAGE> 49
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 six months ended June
30, 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>
THIRTEEN MONTHS YEAR ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1994(A) 1995 1996 1997
------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<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 loss(e)................................................. $(3,491) $(11,315) $(60,378) $(113,338)
======= ======== ======== =========
Net loss per share, basic and diluted(f).................... $ (.35) $ (.82) $ (3.18) $ (4.71)
======= ======== ======== =========
Weighted average number of common shares outstanding, basic
and 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>
39
<PAGE> 50
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
-------------------- ------------------------ ----------------------
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 $ 66,917 $ 99,938
Construction, facility sales and other....... -- 1,488 1,488 8,826 756 25,427
Telecommunications products.................. 4,780 8,706 27,300 4,708 1,898 2,239
-------- --------- --------- ------------ --------- ----------
Total revenues........................ 23,217 36,258 119,008 163,317 69,571 127,604
Operating loss................................. (17,988) (21,855) (90,410) (135,172) (51,440) (46,790)
-------- --------- --------- ------------ --------- ----------
Other expenses (income):
Interest income.............................. (839) (4,101) (10,288) (24,145) (11,728) (6,483)
Interest expense(b).......................... 5,434 18,948 51,179 101,648 46,525 56,036
Other, net................................... 104 1,569 (3,894) (57,985)(c) (60,145) 1,492
Income tax expense............................. -- 850 1,753 -- -- --
-------- --------- --------- ------------ --------- ----------
Net loss(e).................................... $(22,634) $ (39,593) $(130,297) $ (154,690) $ (26,092) $ (97,835)
======== ========= ========= ============ ========= ==========
Net loss per share, basic and diluted(f)....... $ (1.02) $ (1.39) $ (5.11) $ (4.52) $ (0.83) $ (2.76)
======== ========= ========= ============ ========= ==========
Weighted average number of common shares
outstanding, basic and diluted............... 22,237 30,804 26,707 35,834 35,607 36,904
OTHER DATA:
Capital expenditures........................... $ 58,047 $ 46,663 $ 214,359 $ 247,683 $ 97,479 $ 151,938
Ratio of earnings to fixed charges(g).......... -- -- -- -- 0.34 --
Adjusted EBITDA(h)............................. (13,208) (12,032) (50,705) (60,538) (29,550) (8,593)
CASH FLOW PROVIDED BY (USED IN):
Operating income............................... (15,479) (40,580) (82,103) (83,923) (48,518) (16,959)
Investing activities........................... (67,221) (42,954) (237,303) (344,190) (288,557) (40,170)
Financing activities........................... 34,270 226,725 505,096 315,130 314,714 16,447
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents...................... $ 199,053 $ 86,070 $ 45,388
Investments.................................... 7,619 16,246 32,446
Restricted cash and investments................ 144,450 281,364 119,710
Property and equipment......................... 433,680 678,374 825,215
Accumulated depreciation....................... (26,785) (62,522) (82,919)
Investment in joint ventures(i)................ -- -- --
Total assets................................... 898,174 1,151,283 1,134,721
Current portion of long-term debt and capital
lease obligations............................ 10,865 19,066 20,072
Long-term debt and capital lease obligations
(excluding current portion).................. 777,286 1,112,700 1,140,358
Redeemable Preferred Shares.................... 54,635 61,741 65,603
Common Shares and commitment to issue Common
Shares....................................... 221,709 234,267 240,212
Accumulated deficit............................ (229,264) (383,954) (481,789)
Accumulated other comprehensive income......... -- 16,200 32,400
Shareholders' equity (deficit)................. (7,555) (133,487) (209,177)
</TABLE>
- ---------------
(a) The Company changed its fiscal year end to September 30, effective in 1994.
As a result, amounts reported for the thirteen months ended September 30,
1994. 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.
(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, $11.1 million for the six months ended June
30, 1998, and $16.0 million for the six months ended June 30, 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.
40
<PAGE> 51
(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 six months ended June 30, 1998 and $0 for the
six months ended June 30, 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, $3.5 million for the
six months ended June 30, 1998, and $3.9 million for the six months ended
June 30, 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 six months
ended June 30, 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 $117.7 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 June 30, 1999: (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.
41
<PAGE> 52
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 June 30, 1999, GST Network holds restricted cash and investments of
approximately $119.7 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 $2.8 million for the six months ended June 30, 1999 includes
the following components: (i) interest income of $12.8 million relating to
interest earned on proceeds from the May Offering and from interest earned on
Intercompany Notes, (ii) commitment fee income of $10.2 million earned from GST
USA, (iii) interest expense of $18.0 million relating to the Notes and (iv)
income tax expense of $7.8 million.
Net loss of $1.4 million for the period from April 16, 1998 (date of
inception) to June 30, 1998 includes the following components: (i) interest
income of $2.3 million related to interest earned on the proceeds from the May
offering, (ii) commitment fee income of $3.6 million earned from GST USA, (iii)
interest expense of $5.3 million relating to the Notes and (iv) income tax
expense of $2.0 million. The increases in each of these components for the six
months ended June 30, 1999 compared to the period from April 16, 1998 (date of
inception) to June 30, 1998 relates to the fact that GST Network was not formed
until April 1998 and the Notes were not offered until May 1998.
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 June
30, 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.
42
<PAGE> 53
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 June 30, 1999 approximately $93.8 million
had been used to purchase securities pledged to fund the first six interest
payments on the Secured Notes ($59.8 million of which was used to make the first
four interest payments in November 1997, May 1998, November 1998 and May 1999)
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 Telecom,
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 six months ended June 30, 1999 compared to the six months ended June 30,
1998
Revenues. Total revenue for the six month period ended June 30, 1999
increased $58.0 million, or 83.4% over the comparable six month period ended
June 30, 1998. Telecommunications services revenues for the six month period
ended June 30, 1999 increased $33.0 million, or 49.3% over the comparable six
month period ended June 30, 1998. The increase in telecommunications services
revenues resulted from increased local, long distance, data and Internet
services revenue as GST USA launched new products and entered new markets. GST
USA is bundling these products to provide better access and services to its
customers. In addition, the increase was also attributable to 1998 strategic
acquisitions, including the acquisition of ICON Communications Corp. Reciprocal
compensation, which GST USA recognizes based on interconnection agreements,
totaled $2.2 million for the six month period ended June 30, 1999, as compared
to $0 for the six month period ended June 30, 1998. Construction, facility sales
and other revenue for the six month period ended June 30, 1999 increased $24.7
million over the comparable six month period ended June 30, 1998. The increase
in construction, facility sales and other revenue was attributable to revenue
from several agreements to sell or lease conduit and fiber capacity to other
carriers. GST USA anticipates it will record approximately $75.0 million in
revenue, related to three significant transactions, during the third and fourth
quarters of 1999. Product revenue for the six month period ended June 30, 1999
increased $0.3 million, or 18.0%, over the six month period ended June 30, 1998.
Operating Expenses. Total operating expenses for the six month period
ended June 30, 1999 increased $52.9 million, or 44.1%, over the comparable six
month period ended June 30, 1998. Network expenses, which include direct local
and long distance circuit costs, were 64.5% of telecommunications services
revenues for the six month period ended June 30, 1999 compared to 70.2% for the
comparable period in the previous year. The decrease in network expenses as a
percentage of telecommunications services revenue resulted primarily from an
increase in traffic carried on GST USA's network. Facilities administration and
maintenance expenses for the six month period ended June 30, 1999 were 9.4% of
telecommunications services revenues
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compared to 11.4% for the comparable period ended June 30, 1998. The decrease in
these expenses as a percentage of telecommunications services revenues primarily
results from the inclusion of revenues from strategic acquisitions,
substantially all of which are not generated on GST USA's networks.
Cost of construction revenues for the six month period ended June 30, 1999
were $9.5 million, an increase of $9.3 million over the comparable period in the
previous year. The increase was caused by the increase in construction facility
sales and other revenue. For the six month period ended June 30, 1999, cost of
construction revenues were 37.2% of construction revenues, compared to 26.5% for
the six month period ended June 30, 1998.
Consistent with the comparable period in 1998, cost of product revenues for
the six month period ended June 30, 1999 were $1.4 million. For the six month
period ended June 30, 1999 cost of product revenues were 60.3% of product
revenues, compared to 73.6% for the comparable six month period ended June 30,
1998.
Selling, general and administrative expenses for the six month period ended
June 30, 1999 increased $10.5 million, or 23.9%, as compared to the six month
period ended June 30, 1998. The increase is due primarily 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. In addition, GST
USA had increased litigation costs related to its legal proceedings. See "Legal
Proceedings." As a percentage of total revenue, selling, general and
administrative expenses for the six months ended June 30, 1999 were 42.6%,
compared to 63.1% for the six months ended June 30, 1998.
Depreciation and amortization for the six month period ended June 30, 1999
increased $13.9 million, or 70.3%, as compared to the six month period ended
June 30, 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 by GST USA 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 26.3% of total revenue for the six
months ended June 30, 1999 compared to 28.4% for the comparable six month period
ended June 30, 1998.
Other Expenses/Income. For the six month period ended June 30, 1999, GST
USA recorded net other expense of $38.1 million compared to net other income of
$37.8 million for the comparable six month period ended June 30, 1998. For the
six months ended June 30, 1998, net other income includes a $61.3 million gain
resulting from GST USA's sale of its remaining 63% interest in NACT. Excluding
such gain, net other expense would have increased $14.6 million for the six
month period ended June 30, 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 $500.0 million principal
amount at maturity of 10.5% senior secured discount notes.
Net Income/Loss. Net loss for the six month period ended June 30, 1999
increased $70.7 million, or 567.2%, to $83.2 million from $12.5 million for the
six month period ended June 30, 1998. Excluding the $61.3 million gain on the
NACT Sale, net loss would have increased $9.4 million for the six months ended
June 30, 1999 as compared to the six months ended June 30, 1998. Such increase
primarily relates to increased interest expense.
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
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<PAGE> 55
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 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 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
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<PAGE> 56
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.
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.
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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.
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
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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 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.
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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
June 30, 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.
As an ICP, the Company has one reportable operating segment. While the
Company's chief decision-makers monitor the revenue streams of various services,
operations are managed and financial performance is evaluated based upon the
delivery of multiple services over common network and facilities. This allows
the Company to leverage its network costs in an effort to maximize return. As a
result, there are many shared expenses generated by the various revenue streams;
because management believes that any allocation of the expenses to multiple
revenue streams would be impractical and arbitrary, management does not
currently make such allocations internally. Furthermore, substantially all of
the Company's revenue is attributable to customers in the United States and all
significant operating assets are located within the United States.
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 initiated litigation to recover this
asset or its fair market value. See "Legal Proceedings." The Company recently
negotiated a settlement of the litigation with Global. See "Legal Proceedings
- -- GST and GST Telecom v. Global Light Telecommunications, Inc., et al." If the
settlement is effected, the Company believes that all technical indenture
violations relating to Global will have been cured. 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 has divested these assets in a
transaction complying with the indentures. The Company intends to vigorously
pursue any other 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.
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While the Company believes that any non-compliances can be cured or any
resulting settlement will be effected, the Company cannot offer any assurance
that the litigation will be successful or any resulting settlement will be
effected, 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.
In July 1999, the Company sold substantially all of the assets of its Guam
operations for approximately $1.4 million in cash, which approximated the net
book value of such assets. For the six months ended June 30, 1999, the operation
of these assets contributed approximately $1.8 million in revenue and $.6
million in net loss to the Company's consolidated operating results. The Company
does not anticipate that the sale of these assets will materially impact its
future results of operations.
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 businesses of local, data and longhaul services.
Management believes that by focusing on such services and limiting geographic
expansion, the Company will maximize its return on invested assets and will be
better positioned to serve the addressable markets in its service locations. In
conjunction with the change, management identified certain in-process network
construction projects no longer considered useful. Assets related to such
projects included assets located outside of the Company's core domestic service
areas, assets which were being constructed to facilitate international services
and assets which were no longer technologically compatible. The write off of
these assets totaled $9,918 and represented the entire amount of the costs
related to the 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 was paid out in the
first quarter of 1999.
See "BUSINESS -- Magnacom" for a discussion of the amounts paid to
Magnacom.
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RESULTS OF OPERATIONS
The six months ended June 30, 1999 compared to the six months ended June 30,
1998
Revenues. Total revenue for the six month period ended June 30, 1999
increased $58.0 million, or 83.4%, over the comparable six month period ended
June 30, 1998. Telecommunications services revenues for the six month period
ended June 30, 1999 increased $33.0 million, or 49.3%, over the comparable six
month period ended June 30, 1998. The increase in telecommunications services
revenues resulted from increased local, long distance, data and Internet
services revenue as the Company launched new products and entered new markets.
The Company is bundling these products to provide better access and services to
its customers. In addition, the increase was also attributable to 1998 strategic
acquisitions, including the acquisition of ICON Communications, Corp. Reciprocal
compensation, which the Company recognizes based on interconnection agreements,
totaled $2.2 million for the six month period ended June 30, 1999, as compared
to $0 for the six month period ended June 30, 1998. Construction, facility sales
and other revenue for the six month period ended June 30, 1999 increased $24.7
million over the comparable six month period ended June 30, 1998. The increase
in construction, facility sales and other revenue was attributable to revenue
from several agreements to sell or lease conduit and fiber capacity to other
carriers. The Company anticipates it will record approximately $75.0 million in
revenue, related to three significant transactions, during the third and fourth
quarters of 1999. Product revenue for the six month period ended June 30, 1999
increased $0.3 million, or 18.0%, over the six month period ended June 30, 1998.
Operating Expenses. Total operating expenses for the six month period
ended June 30, 1999 increased $53.4 million, or 44.1%, over the comparable six
month period ended June 30, 1998. Network expenses, which include direct local
and long distance circuit costs, were 64.5% of telecommunications services
revenues for the six month period ended June 30, 1999 compared to 70.2% for the
comparable period in the previous year. The decrease in network expenses as a
percentage of telecommunications services revenue resulted primarily from an
increase in traffic carried on the Company's network. Facilities administration
and maintenance expenses for the six month period ended June 30, 1999 were 9.4%
of telecommunications services revenues compared to 11.4% for the comparable
period ended June 30, 1998. The decrease in these expenses as a percentage of
telecommunications services revenues primarily results from the inclusion of
revenues from strategic acquisitions, substantially all of which are not
generated on the Company's networks.
Cost of construction revenues for the six month period ended June 30, 1999
were $9.5 million, an increase of $9.3 million over the comparable period in the
previous year. The increase was caused by the increase in construction facility
sales and other revenue. For the six month period ended June 30, 1999, cost of
construction revenues were 37.2% of construction revenues, compared to 26.5% for
the six month period ended June 30, 1998.
Consistent with the comparable period in 1998, cost of product revenues for
the six month period ended June 30, 1999 were $1.4 million. For the six month
period ended June 30, 1999 cost of product revenues were 60.3% of product
revenues, compared to 73.6% for the comparable six month period ended June 30,
1998.
Selling, general and administrative expenses for the six month period ended
June 30, 1999 increased $11.0 million, or 24.4%, as compared to the six month
period ended June 30, 1998. The increase is due primarily 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. In
addition, the Company had increased litigation costs related to its legal
proceedings. See "Legal Proceedings." As a percentage of total revenue, selling,
general and administrative expenses for the six months ended June 30, 1999 were
43.9% compared to 64.8% for the six months ended June 30, 1998.
Depreciation and amortization for the six month period ended June 30, 1999
increased $13.9 million, or 70.3%, as compared to the six month period ended
June 30, 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 by the Company in 1998. The
Company expects that depreciation will continue to increase as it expands its
networks and longhaul fiber optic facilities and installs additional
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switches. Depreciation and amortization expense was 26.4% of total revenue for
the six months ended June 30, 1999 compared to 28.4% for the comparable six
month period ended June 30, 1998.
Other Expenses/Income. For the six month period ended June 30, 1999, the
Company recorded net other expense of $51.0 million, compared to net other
income of $25.3 million for the comparable six month period ended June 30, 1998.
For the six months ended June 30, 1998, net other income includes a $61.3
million gain resulting from the Company's sale of its remaining 63% interest in
NACT. Excluding such gain, net other expense would have increased $15.1 million
for the six month period ended June 30, 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 $500.0
million principal amount at maturity of 10.5% senior secured discount notes.
Net Income/Loss. Net loss for the six month period ended June 30, 1999
increased $71.7 million, or 275.0%, to $97.8 million from $26.1 million for the
six month period ended June 30, 1998. Excluding the $61.3 million gain on the
NACT Sale, net loss would have increased $10.4 million for the six months ended
June 30, 1999 as compared to the six months ended June 30, 1998. Such increase
primarily relates to increased interest expense.
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 faclities 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 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.
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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 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. Blankstein."
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
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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 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
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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 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. Blankstein."
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
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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 June 30, 1999, the Company had approximately $1,160.4 million of
indebtedness outstanding. Although the Company's liquidity was substantially
improved as a result of proceeds received from the sale of $312.4 million
principal amount at maturity of 13.875% senior discount notes and $37.9 million
principal amount at maturity of 13.875% convertible senior subordinated discount
notes in December 1995 (collectively, the "1995 Notes"), the sale of $265.0
million of 13.25% senior secured notes in May 1997 (the "Secured Notes"), the
sale of $144.0 million of 12.75% senior subordinated accrual notes in November
1997 (the "Accrual Notes") and the sale of $500.0 million principal amount at
maturity of 10.5% senior secured discount notes in May 1998 (the "1998 Notes"),
the Company has significant debt service obligations. The Company will be
required to make principal and interest payments of approximately $36.5 million
(of which $17.6 million will be made from funds securing the Secured Notes),
$67.5 million (of which $17.6 million will be made from funds securing the
Secured Notes), $113.5 million, $111.8 million and $155.3 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 June 30, 1999, the Company had cash, cash equivalents, and investments,
including restricted investments of approximately $232.8 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 anticipates that it will receive approximately $48 million of
cash in the third quarter of 1999 from the completion of a network conduit
agreement. In addition, the Company expects to receive between $27 million and
$30 million in September 1999 from the settlement of a complaint against Global
Light Telecommunications, Inc. See "Legal Proceedings -- GST and GST Telecom v.
Global Light Telecommunications, Inc., et al."
The Company's net cash used in operating and investing activities was $57.1
million and $337.1 million for the six months ended June 30, 1999 and 1998,
respectively. Net cash provided by financing activities from
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borrowings and equity issuances to fund capital expenditures, acquisitions and
operating losses was $16.4 million and $314.7 million for the six months ended
June 30, 1999 and 1998, respectively.
Capital expenditures for the six months ended June 30, 1999 and 1998 were
$151.9 million and $97.5 million, respectively. The Company estimates capital
expenditures of approximately $100 million and $150 million in the remainder of
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.
YEAR 2000 PROGRAM
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 June 30, 1999 was
approximately $1.9 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
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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."
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.
In June 1999, the FASB issued Interpretation No. 43, "Real Estate Sales,"
an interpretation of FASB Statement No. 66, "Accounting for Sales of Real
Estate." Interpretation No. 43 clarifies that the phrase all real estate sales,
from Paragraph 1 of Statement No. 66, includes sales of real estate with
property improvements or integral equipment that cannot be removed and used
separately from the real estate without incurring significant costs. This
Interpretation applies to all sales of real estate with property improvements or
integral equipment entered into after June 30, 1999. The Company is currently
evaluating Interpretation No. 43 to determine the impact it will have on its
financial statements.
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 six month period ended June 30, 1999.
INCOME TAXES
At December 31, 1999, 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, all utilization of net operating loss carryforwards
against future taxable income is subject to limitation if the Company
experiences an "ownership change" as defined in Section 382 of the Code and the
analogous provision of the Canada Act.
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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
June 30, 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.
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
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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 $23.8 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 June 30, 1999, the
Company had installed 35 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 48 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 and 30,696 access lines in the second quarter of 1999. As of
June 30, 1999, the Company's facilities-based network was comprised of 299,255
fiber miles owned, with 5,937 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 June 30, 1999, had 715
buildings on-net.
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The Company plans to continue to develop and expand its local and longhaul
network infrastructure to ultimately assemble, through a combination of owned
and leased facilities and joint ventures, an integrated regional network for the
on-net provision of 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"). The Interconnection
Decision establishes rules implementing the Telecommunications Act
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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. US 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
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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
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.
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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 "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 case was converted to a case under Chapter 7 of the
United States Bankruptcy Code on July 12, 1999. 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 June 30, 1999, the Company and its subsidiaries had 1,258 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
US West v. Jennings, et al.
On June 4, 1999, US WEST appealed to the U.S. Court of Appeals for the
Ninth Circuit several declaratory judgment actions that US 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. US WEST
appeals District Court rulings that dismissed US WEST's claims that the ACC
approved an interconnection agreement with the Company that unlawfully required
US WEST to resell services below cost, imposed resale restrictions and denied US
WEST recovery for construction and implementation costs, treated the cost
recovery of access revenue for interim number portability, required US WEST to
obtain additional rights of way or build additional facilities solely to provide
access to the Company, and amounted to a taking of US West's property without
just compensation. In addition, US WEST appeals District Court rulings that
remanding to the ACC the discount level US WEST must offer competitors for
purchase of wholesale telecommunications services and the rate level for certain
kinds of unbundled network elements. If US WEST prevails in its appeal, the
Company and other CLECs may pay more for US WEST interconnection and services,
which could have an adverse impact on the Company's Arizona operations.
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US 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, US 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 US 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.
On July 12, 1999, the Company entered into a tentative settlement with
Global Light Telecommunications, W. Gordon Blankstein, Ian Watson, and Peter E.
Legault (the "Global Parties"). Pursuant to the terms of that settlement, the
Global Parties will dismiss with prejudice all claims asserted against GST, its
affiliates, officers and directors, and the Company will dismiss with prejudice
all claims against the Global Parties with the exception of the claims asserted
in GST v. Gordon Blankstein, et al. relating to the allegedly wrongful release
of escrowed shares. In consideration of the Company's dismissals, the Global
Parties will pay the Company the sum of US$27 million on September 15, 1999.
Additionally, if the average closing price of Global Light Telecommunications
stock on the American Stock Exchange for the twenty trading days preceding
September 15, 1999, equals or exceeds US$10 per share, the Global parties shall,
on September 15, 1999, make an additional payment of US$3 million.
The settlement agreement is subject to the preparation and execution of
customary settlement agreements, regulatory approvals, and the funding and
payment of the settlement amount by the Global Parties.
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,
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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.
See "GST and GST Telecom v. Global Light Telecommunications, Inc., et al."
for a discussion of a tentative settlement as it relates to the counterclaims
against Global and Messrs. Blankstein, Watson and Legault.
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.
See "GST and GST Telecom v. Global Light Telecommunications, Inc., et al."
for a discussion of a tentative settlement.
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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, 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.
See "GST and GST Telecom v. Global Light Telecommunications, Inc., et al."
for a discussion of a tentative settlement as it relates to Mr. Legault, the
Company, and the Company's four current directors named as defendants.
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 Mr. 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
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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.
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
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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.
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
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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.
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.
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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 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 June 30, 1999, GST had $1,160.4 million of indebtedness outstanding, GST USA
had $985.3 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
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subsidiaries. At June 30, 1999, GST USA's subsidiaries other than GST Network
had $418.5 million of liabilities (excluding intercompany payables), including
$383.3 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 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
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(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.
"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
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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 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,
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(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 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.
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"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 (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
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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 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
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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 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
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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 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.
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"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.
"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.
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"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker-dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the 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 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
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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 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
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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
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
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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 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
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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 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
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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 l
east 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 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
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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 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
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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 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
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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
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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.
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
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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 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
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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 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
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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 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
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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.
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.
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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 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.
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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 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.
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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
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$5.52, which 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 ("Phase I") and the
Ontario portion of the Southern California network ("Phase II"). Pursuant to the
credit agreement between GST Pacific and Tomen America (the "Credit Agreement"),
Tomen agreed to provide $9.0 million of debt financing to develop Phase I and
$9.5 million of debt financing to develop Phase II. The terms of the Credit
Agreement are substantially the terms contemplated by the Tomen Master
Agreement. In addition, the Credit Agreement contains covenants which, among
other things, restrict or prohibit GST Pacific's ability to incur debt, create
liens, sell assets, make investments, enter into transactions with affiliates,
merge or consolidate, transfer GST Pacific's capital stock and pay dividends to
the Company. Failure to satisfy any of the covenants constitutes an event of
default under the Credit Agreement. The Credit Agreement also contains customary
events of default for project financing, including a cross default to other
indebtedness of GST Pacific. An event of default under the Credit Agreement
would allow Tomen to accelerate the maturity of the Project Loan, foreclose on
the collateral or take possession of and complete the project.
In May 1996, Tomen provided financing with respect to the Tucson and
Albuquerque networks, in the amount of up to $8.0 million each. The terms of the
respective credit agreements between Tomen and GST Tucson and GST New Mexico are
substantially similar to the terms of the Credit Agreement. On September 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.
On September 30, 1997, Tomen agreed to provide the Company with up to $40.5
million of debt financing for the Company's Hawaiian inter-island submarine
network and various other terrestrial installations. In connection with such
financing, the Company entered into a credit agreement with Tomen containing
substantially similar terms as those previously entered into under the Tomen
Facility, except that the loan will amortize in 22 quarterly installments
beginning March 31, 2000.
EQUIPMENT FINANCING
Siemens Switching Equipment Purchase Agreement and Loan Agreement
The Company, through its indirect subsidiary, GST SwitchCo, Inc. ("GST
SwitchCo"), entered into 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 June 30, 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
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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 June 30, 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 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
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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 June 30, 1999, $93.8
million had been used to purchase securities pledged to fund the first six
interest payments on the Secured Notes (the first four of such payments having
been made in November 1997, May 1998, November 1998 and May 1999). The remaining
proceeds were used to purchase telecommunications equipment which has been sold
to GST USA for secured intercompany notes.
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
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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 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.
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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. In particular, GST disclosed that a
series of transactions involving Global may have resulted in technical
non-compliances with the indentures, including the indentures relating to the
Old Notes. See "Management's Discussion and Analysis -- Recent Developments,"
including the Old Notes. GST intends to vigorously pursue any necessary action
to cure the potential non-compliances. In particular, GST recently negotiated a
settlement of the litigation with Global. See "Legal Proceedings -- GST and GST
Telecom v. Global Light Telecommunications, Inc., et al." If the settlement is
effected, GST believes that all technical indenture violations relating to
Global will have been cured.
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, that any resulting
settlement will be effected, 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 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
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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.
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
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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" 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
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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
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interest is attributable to a U.S. permanent establishment maintained by such
holder, such Non-U.S. Holder, although exempt 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.
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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 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.
110
<PAGE> 121
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
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
111
<PAGE> 122
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.
(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.
112
<PAGE> 123
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-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 CompanyCertain 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 1997and 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
113
<PAGE> 124
reliance upon the report of KPMG 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 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 LLP, independent certified public accountants.
114
<PAGE> 125
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GST NETWORK FUNDING, INC.
Independent Auditors' Report................................ F-2
Balance Sheets at June 30, 1999 (unaudited) and December 31,
1998...................................................... F-3
Statements of Operations for the period from April 16, 1998
(date of inception) to June 30, 1998 (unaudited), the six
months ended June 30, 1999 (unaudited) and the period from
April 16, 1998 (date of inception) to December 31, 1998... F-4
Statements of Shareholder's Deficit for six months ended
June 30, 1999 (unaudited) and the period from April 16,
1998 (date of inception) to December 31, 1998............. F-5
Statements of Cash Flows for the period from April 16, 1998
(date of inception) to June 30, 1998 (unaudited), the six
months ended June 30, 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> 126
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.
/s/ KPMG LLP
Portland, Oregon
April 12, 1999
F-2
<PAGE> 127
GST NETWORK FUNDING, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- $ --
-------- --------
-- --
Restricted investments...................................... 230,014 119,710
Notes receivable from parent................................ 71,342 190,748
Commitment fees receivable from parent...................... 14,256 24,450
Interest receivable from parent............................. 852 3,971
Deferred financing costs, net............................... 10,285 9,733
-------- --------
$326,749 $348,612
======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accrued liabilities....................................... 52 30
Accrued interest payable.................................. 396 262
Accrued income taxes payable to parent.................... 8,472 16,306
Other payable to parent................................... 519 691
-------- --------
9,439 17,289
-------- --------
Long-term debt.............................................. 320,997 337,850
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) (8,527)
-------- --------
(3,687) (6,527)
-------- --------
$326,749 $348,612
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 128
GST NETWORK FUNDING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
APRIL 16, 1998 APRIL 16, 1998
(DATE OF SIX MONTHS (DATE OF
INCEPTION) TO ENDED INCEPTION) TO
DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1998
-------------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Interest income..................................... $10,661 $12,847 $ 2,346
Commitment fee income............................... 14,256 10,194 3,575
------- ------- -------
Total revenues.............................. 24,917 23,041 5,921
Operating costs and expenses:
Interest expense.................................... 22,132 18,047 5,295
------- ------- -------
Income before income taxes.................. 2,785 4,994 626
------- ------- -------
Income tax expense:
Current............................................. 8,472 7,834 2,013
Deferred............................................ -- -- --
------- ------- -------
Net loss.................................... $(5,687) $(2,840) $(1,387)
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 129
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).................. -- -- -- (2,840) (2,840)
--- --- ------ ------- -------
Balance, June 30, 1999................. 100 $-- $2,000 $(8,527) $(6,527)
=== === ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 130
GST NETWORK FUNDING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1998 PERIOD FROM
(DATE OF SIX MONTHS APRIL 16, 1998
INCEPTION) TO ENDED (DATE OF
DECEMBER 31, JUNE 30, INCEPTION) TO
1998 1999 JUNE 30, 1998
-------------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operations:
Net loss............................................ $ (5,687) $ (2,840) $ (1,387)
Items not involving cash:
Amortization of deferred financing costs......... 735 552 370
Accretion of interest............................ 21,002 16,853 4,926
Changes in non-cash operating working capital:
Commitment fee receivable from parent............ (14,256) (10,194) (3,575)
Interest receivable from parent.................. (852) (3,119) --
Other accrued liabilities........................ 52 (22) 360
Accrued interest payable......................... 396 134 --
Accrued income taxes payable to parent........... 8,472 7,834 2,013
Other payable to parent.......................... 519 172 240
--------- --------- ---------
Cash provided by operations.................... 10,381 9,102 2,947
--------- --------- ---------
Investing:
Change in investments restricted for fixed asset
purchases........................................ (230,014) 110,304 (293,842)
Notes receivable from parent........................ (71,342) (119,406) --
--------- --------- ---------
Cash used in investing activities.............. (301,356) (9,102) (293,842)
--------- --------- ---------
Financing:
Proceeds from issuance of long-term debt............ 299,995 -- 299,995
Deferred debt financing costs....................... (11,020) -- (11,100)
Proceeds from investment by parent.................. 1,999 -- 1,999
--------- --------- ---------
Cash provided by financing activities.......... 290,974 -- 290,894
--------- --------- ---------
Decrease in cash and cash equivalents.......... (1) -- (1)
Cash and cash equivalents, beginning of period........ 1 -- 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> 131
GST NETWORK FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 16, 1998 TO DECEMBER 31, 1998,
THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
AND THE PERIOD FROM APRIL 16, 1998 TO
JUNE 30, 1998 (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 six months ended June 30, 1999
and the period from April 16, 1998 to June 30, 1998 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> 132
GST NETWORK FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
seminannually, 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
F-8
<PAGE> 133
GST NETWORK FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Notes will bear interest at 12.5% per annum, compounding seminannually, 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.
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.
F-9
<PAGE> 134
GST NETWORK FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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-10
