<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12866
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GST TELECOMMUNICATIONS, INC.
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(Exact name of Registrant as Specified in its Charter)
CANADA NOT APPLICABLE
- ---------------------------------- -----------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 MAIN STREET, VANCOUVER, WA 98663
- --------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 356-7100
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N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At August 6, 1999,
there were outstanding 37,558,205 Common Shares, without par value, of the
Registrant.
<PAGE>
GST TELECOMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 2
Condensed Consolidated Statements of Operations
- Three and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7-12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14-16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
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<PAGE>
GST Telecommunications, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 (1)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,388 $ 86,070
Restricted investments 35,272 34,107
Accounts receivable, net 42,042 32,935
Investments 32,446 16,246
Inventory, net 1,454 1,485
Prepaid and other current assets 21,213 11,454
----------- -----------
Total current assets 177,815 182,297
----------- -----------
Restricted investments 119,710 247,257
Property and equipment 825,215 678,374
less accumulated depreciation (82,919) (62,522)
----------- -----------
742,296 615,852
Other assets 144,004 145,906
less accumulated amortization (49,104) (40,029)
----------- -----------
94,900 105,877
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Total assets $ 1,134,721 $ 1,151,283
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 29,624 $ 26,411
Accrued expenses 40,478 37,445
Deferred revenue 16,163 6,030
Current portion of capital lease obligations 6,539 5,649
Current portion of long-term debt 13,533 13,417
----------- -----------
Total current liabilities 106,337 88,952
----------- -----------
Other liabilities 31,600 21,377
Capital lease obligations, less current portion 17,051 19,741
Long-term debt, less current portion 1,123,307 1,092,959
Redeemable preference shares 65,603 61,741
Shareholders' deficit:
Common shares 240,212 234,267
Accumulated deficit (481,789) (383,954)
Accumulated other comprehensive income 32,400 16,200
----------- -----------
(209,177) (133,487)
----------- -----------
Total liabilities and shareholders' deficit $ 1,134,721 $ 1,151,283
----------- -----------
----------- -----------
</TABLE>
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1998.
See notes to condensed consolidated financial statements.
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<PAGE>
GST Telecommunications, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 51,214 $ 37,737 $ 99,938 $ 66,917
Construction, facility sales and other 19,551 756 25,427 756
Product 1,157 1,034 2,239 1,898
------------ ------------ ------------ ------------
Total revenues 71,922 39,527 127,604 69,571
------------ ------------ ------------ ------------
Operating costs and expenses:
Network expenses 32,776 25,825 64,475 46,953
Facilities administration and maintenance 4,265 3,701 9,400 7,656
Cost of construction revenues 6,954 200 9,468 200
Cost of product revenues 655 707 1,350 1,397
Selling, general and administrative 28,802 24,651 56,077 45,061
Depreciation and amortization 16,646 11,075 33,624 19,744
------------ ------------ ------------ ------------
Total operating costs and expenses 90,098 66,159 174,394 121,011
------------ ------------ ------------ ------------
Loss from operations (18,176) (26,632) (46,790) (51,440)
------------ ------------ ------------ ------------
Other expenses (income):
Interest income (2,622) (6,793) (6,483) (11,728)
Interest expense, net of amounts capitalized 27,776 25,250 56,036 46,525
Gain on sale of subsidiary shares -- -- -- (61,266)
Other 1,293 492 1,492 1,121
------------ ------------ ------------ ------------
26,447 18,949 51,045 (25,348)
------------ ------------ ------------ ------------
Loss before income taxes (44,623) (45,581) (97,835) (26,092)
------------ ------------ ------------ ------------
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (44,623) $ (45,581) $ (97,835) $ (26,092)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share, basic and diluted (1) $ (1.30) $ (1.36) $ (2.76) $ (0.83)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding 37,341,335 35,966,492 36,903,627 35,606,617
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(1) Net loss per share is increased for preference shares' accretion totaling
$3,862 and $3,453 for the three and six-month periods ended June 30, 1999
and 1998, respectively.
See notes to condensed consolidated financial statements.
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<PAGE>
GST Telecommunications, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Operations:
Net loss $ (97,835) $ (26,092)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization 36,464 22,717
Accretion and accrual of interest 35,945 25,625
Non-cash stock compensation and other expense 1,434 1,213
Loss on disposal of assets 1,755 56
Equity in losses of investments and joint
venture -- 593
Gain on sale of subsidiary shares -- (61,266)
Changes in non-cash operating working capital:
Accounts receivable, net (9,276) (6,574)
Inventory 31 (137)
Prepaid, other current and other assets,
net (9,759) 1,188
Accounts payable and accrued liabilities 14,149 (6,719)
Deferred revenue 10,133 878
--------- ---------
Cash used in operations (16,959) (48,518)
--------- ---------
Investments:
Acquisition of subsidiaries, net of cash acquired -- (35,471)
Proceeds from sale of investments -- 318
Purchase of property and equipment (150,232) (80,458)
Proceeds from sale of property and equipment -- 3,584
Purchase of other assets (169) (1,991)
Change in investments restricted for the
purchase of property and equipment 110,231 (254,335)
Proceeds from the sale of subsidiary shares, net -- 85,048
Cash disposed of in sale of subsidiary -- (5,252)
--------- ---------
Cash used in investing activities (40,170) (288,557)
--------- ---------
Financing:
Proceeds from long-term debt 1,040 299,874
Principal payments on long-term debt and capital
leases (8,343) (5,819)
Issuance of common shares, net of issuance costs 7,599 15,832
Deferred debt financing costs -- (12,876)
Change in investments restricted to finance
interest payments 16,151 17,703
--------- ---------
Cash provided by financing activities 16,447 314,714
--------- ---------
Decrease in cash and cash
equivalents (40,682) (22,361)
Cash and cash equivalents, beginning of period 86,070 199,053
--------- ---------
Cash and cash equivalents, end of period $ 45,388 $ 176,692
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year or for subsequent periods. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the fiscal year ended December 31, 1998 as included in
the Company's annual report on Form 10-K/A.
2. BASIC AND DILUTED NET LOSS PER SHARE
For the three and six months ended June 30, 1999 and 1998, common stock
equivalents were antidilutive and were not included in diluted weighted average
shares outstanding. If the Company had reported net income for the periods
presented, the weighted average number of common equivalent shares used to
determine diluted net loss per share would have increased by 14,554,461 and
14,992,169 for the three and six months ended June 30, 1999, respectively, and
13,479,609 and 13,839,484 for the three and six months ended June 30, 1998,
respectively.
3. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
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<S> <C> <C>
Common shares, no par value 37,469,614 36,264,066
</TABLE>
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<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24,079 $ 27,461
Cash paid for income taxes -- --
Supplemental schedule of non-cash investing and
financing activities:
Recorded in business combinations:
Assets -- 45,719
Liabilities -- 7,900
Common shares -- 2,348
Disposition of subsidiary:
Assets (1,373) 35,480
Liabilities 216 4,218
Minority interest -- 12,732
Amounts in accounts payable and accrued liabilities
for the purchase of fixed assets at end of period 27,220 23,770
Assets acquired through capital leases 1,194 6,043
Conversion of debt to equity 774 --
</TABLE>
5. ACCRUED SEVERANCE
In the fourth quarter of 1998, the Company accrued $1,113 in
severance-related costs. The following table details activity related to the
severance accrual.
<TABLE>
<S> <C>
Accrual at December 31, 1998 $1,113
Payments (737)
Adjustments (61)
------
Accrual at June 30, 1999 $ 315
======
</TABLE>
6. ADOPTION OF NEW ACCOUNTING STANDARD
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.
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain information included in this Quarterly Report may be deemed to
include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, that involve risk and uncertainty, such as information
relating to expected capital expenditures and expected trends in operating
losses and cash flows, as well as any statements preceded by, followed by, or
that include the words "intends," "estimates," "believes," "expects,"
"anticipates," "should," "could," or similar expressions, and other statements
contained herein regarding matters that are not historical facts. Although the
Company believes that its expectations are based on reasonable assumptions, it
can give no assurance that its expectations will be achieved. The important
factors that could cause actual results to differ materially from those in the
forward-looking statements herein (the "Cautionary Statements") include, without
limitation, risks associated with the Company's operating losses, risks relating
to the Company's development and expansion and possible inability to manage
growth, risks relating to the Company's significant capital requirements,
substantial indebtedness and possible inability to service its debt, risks
relating to competition and regulatory developments, risks relating to
implementing local and enhanced services, risks relating to its long distance
business, as well as other risks referenced from time to time in the Company's
filings with the Securities and Exchange Commission, including Amendment No. 5
to the Company's Form S-4 as filed on August 4, 1999 and the Company's Form
10-K/A for the fiscal year ended December 31, 1998. All subsequent written and
oral forward-looking statements attributable to the Company or persons acting
on its behalf are expressly qualified in their entirety by the Cautionary
Statements. The Company does not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company, through its subsidiaries, provides a broad range of
integrated telecommunications products and services, including enhanced data and
Internet services and comprehensive voice services throughout the United States,
with a robust presence in California and the West. The Company continues to
focus on its western regional strategy by anchoring its next generation networks
in local markets and connecting them via long haul fiber networks. The Company's
products include local dial tone, long distance, Internet, data transmission and
private line services.
The following table highlights key statistical information about the Company, as
of June 30, 1999:
<TABLE>
<S> <C>
- -------------------------------------- ---------------------------------------
Access Lines, sold this quarter 52,173
- -------------------------------------- ---------------------------------------
Access Lines, installed this quarter 30,696
- -------------------------------------- ---------------------------------------
Cities Served 48
- -------------------------------------- ---------------------------------------
Route Miles, total 6,823 (87% owned, 13% leased)
- -------------------------------------- ---------------------------------------
Fiber Miles, total 307,382 (97% owned, 3% leased)
- -------------------------------------- ---------------------------------------
Collocations 92
- -------------------------------------- ---------------------------------------
Buildings On-Net 715
- -------------------------------------- ---------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
- -------------------------------------- ---------------------------------------
Class 4/5 Switches Operational 15
- -------------------------------------- ---------------------------------------
Frame Relay Switches Operational 24
- -------------------------------------- ---------------------------------------
ATM Switches Operational 35
- -------------------------------------- ---------------------------------------
Customers 107,425
- -------------------------------------- ---------------------------------------
Interconnection Agreements 13
- -------------------------------------- ---------------------------------------
Employees 1,258
- -------------------------------------- ---------------------------------------
</TABLE>
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three month and six month periods
ended June 30, 1999 increased $32.4 million, or 82.0%, and $58.0 million, or
83.4%, respectively, over the comparable three and six month periods ended
June 30, 1998. Telecommunications services revenues for the three and six
month periods ended June 30, 1999 increased $13.5 million, or 35.7%, and
$33.0 million, or 49.3%, respectively, over the comparable three and six
month periods 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, for the six-month period ended
June 30, 1999, 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 $1.5 million and $2.2 million for the three and six-month
periods ended June 30, 1999, respectively, as compared to $0 for both the three
and six-month periods ended June 30, 1998. Construction, facility sales and
other revenue for the three and six month periods ended June 30, 1999
increased $18.8 million and $24.7 million, respectively, over the comparable
three and six month periods 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, in the third and fourth quarters of
1999. Product revenue for the three and six month periods ended June 30, 1999
increased $.1 million, or 11.9%,and $.3 million, or 18.0%, respectively, over
the three and six month periods ended June 30, 1998.
OPERATING EXPENSES. Total operating expenses for the three and six
month periods ended June 30, 1999 increased $23.9 million, or 36.2%, and
$53.4 million, or 44.1%, respectively, over the comparable three and six
month periods ended June 30, 1998. Network expenses, which include direct
local and long distance circuit costs, were 64.0% and 64.5%, respectively, of
telecommunications services revenues for the three and six month periods
ended June 30, 1999 compared to 68.4% and 70.2% for the comparable periods 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 three and six month periods ended June 30, 1999
were 8.3% and 9.4%, respectively, of telecommunications services revenues
compared to 9.8% and 11.4% for the comparable periods 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 three and six month periods
ended June 30, 1999 were $7.0 million and $9.5 million, respectively, an
increase of $6.8 million and $9.3 million over the comparable periods in the
previous year. The increase was caused by the increase in construction,
facility sales and other revenue. For the three and six month periods ended
June 30, 1999, cost of construction revenues were 35.6% and 37.2%, respectively,
of construction revenues, compared to 26.5% for both the three and six month
periods ended June 30, 1998.
Consistent with the comparable periods in 1998, cost of product
revenues for the three and six month periods ended June 30, 1999 were $.7
million and $1.4 million, respectively. For the three and six month periods
ended June 30, 1999 cost of product revenues were 56.6% and 60.3%,
respectively, of product revenues, compared to 68.4% and 73.6% for the
comparable three and six month periods ended June 30, 1998.
Selling, general and administrative expenses for the three and six
month periods ended June 30, 1999 increased $4.2 million, or 16.8%, and $11.0
million, or 24.4%, respectively, as compared to the three and six month periods
ended June 30, 1998. The increase is due primarily to the expansion of the
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<PAGE>
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" in "Part II: Other Information." As a percentage of
total revenue, selling, general and administrative expenses for the three and
six months ended June 30, 1999 were 40.0% and 43.9%, respectively, compared to
62.4% and 64.8%, respectively, for the three and six months ended June 30,
1998.
Depreciation and amortization for the three and six month periods ended
June 30, 1999 increased $5.6 million, or 50.3%, and $13.9 million, or 70.3%,
respectively, as compared to the three and six months periods 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 switches. Depreciation and
amortization expense was 23.1% and 26.4% of total revenue for the three and six
months ended June 30, 1999 compared to 28.0% and 28.4% for the comparable three
and six month periods ended June 30, 1998.
OTHER EXPENSES/INCOME. For the three and six month periods ended June
30, 1999, the Company recorded net other expense of $26.4 million and $51.0
million, respectively, compared to net other expense of $18.9 million and net
other income of $25.3 million for the comparable three and six month periods
ended June 30, 1998, respectively. 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 Telecommunications, Inc. (the "NACT
Sale"). 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 three month period ended June 30,
1999 decreased $1.0 million, or 2.1%, to $44.6 million from $45.6 million for
the three months ended June 30, 1998. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a
result of the development and operation of its networks. The Company expects
that such losses will continue as the Company emphasizes the development,
construction and expansion of its networks and builds its customer base. Cash
provided by the Company's operations will not be sufficient to fund the
expansion of its networks, longhaul fiber optic facilities and services.
At 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
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<PAGE>
$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 facility will
be available to the Company in the future or that if such 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" in "Part
II: Other Information."
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 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 in Fiscal 2000, respectively. The majority of these
expenditures is expected to be made for the construction of network and
longhaul fiber optic
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<PAGE>
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
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<PAGE>
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The year 2000 project is expected
to significantly reduce the Company's level of uncertainty about the year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
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, 2001. 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.
-12-
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK - The Company has fixed income investments
consisting of cash equivalents, short-term investments in U.S. government debt
instruments, certificates of deposit and commercial paper.
Interest income earned on the Company's investment portfolio is
affected by changes in the general level of U.S. interest rates. The Company
believes that it is not exposed to significant changes in fair value because
such investments are classified as available-for-sale and held-to-maturity and
are recorded at amortized cost. The fair value of each investment approximates
its amortized cost, and long-term securities have maturities of less than two
years.
The following table provides information about the Company's risk
exposure associated with changing interest rates. Currently, the Company does
not use derivative financial instruments to manage its interest rate risk.
<TABLE>
<CAPTION>
EXPECTED MATURITY
(In thousands of dollars)
---------------------------------------------------------------------------------------
Market
Value at
June 30,
1999 2000 2001 2002 2003 Thereafter Total 1999 (1)
---- ---- ---- ---- ---- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate $ 30 $1,259,304 (2) $1,259,334 (2) $1,209,726
Average interest rate 10.0% 12.275%
Variable rate $6,189 $17,122 $19,733 $20,427 $21,295 $ 17,087 $ 101,853
Average interest rate (LIBOR plus) 3.38% 3.26% 3.28% 3.33% 3.34% 3.15%
Capital Leases:
Fixed rate $3,161 $ 5,501 $ 2,272 $ 1,833 $ 1,863 $ 8,960 $ 23,590
Average interest rate 12.36% 12.36% 12.36% 12.36% 12.36% 12.36%
Redeemable Preferred Stock:
Fixed rate $ 112,000 $ 112,000
Average interest rate 11.88%
</TABLE>
(1) Based on quoted market prices at June 30, 1999
(2) Includes $224.3 million of unaccreted discount
MARKET PRICE RISK - The Company's risk exposure associated with market
price is limitied to its long-term debt that is publicly traded. Such debt is
recorded at book value, which could vary from current market prices.
FOREIGN CURRENCY MARKET RISK - Although the Company conducts some
business in Canada, the international operations were not material to the
Company's consolidated financial position. Accordingly, the Company was not
subject to material foreign currency exchange rate risk from the effects that
exchange rate movements of foreign currencies would have on the Company's future
costs or on future cash flows it would receive.
-13-
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GST AND GST TELECOM V. GLOBAL LIGHT TELECOMMUNICATIONS, INC., ET AL.
On October 20, 1998, GST and GST Telecom, Inc. ("GST Telecom")
(collectively, the "GST Companies") 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 the GST Companies' 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 GST Companies' 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 GST
Companies' 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 GST Companies therefore seek return of
the asset and monetary compensation to remedy the loss arising from the
wrongful transfer.
On December 23, 1998, the defendants filed a motion to stay or dismiss
the action on grounds of inconvenient forum. The Superior Court granted the
defendants' motion to stay the proceedings on February 5, 1999, and
the GST Companies filed a notice of appeal on February 9, 1999.
On July 12, 1999, the GST Companies 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 GST
Companies 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 GST Companies' dismissals, the Global Parties will pay
the GST Companies 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 GST, GST USA,
Inc. ("GST USA"), and GST Telecom (collectively, the "GST Companies"). The
complaint, which relates to the circumstances under which Mr. Warta ceased to
serve as an officer and director of the GST Companies, includes claims for
breach of employment
-14-
<PAGE>
agreement, breach of the covenant of good faith and fair dealing, violation
of wage statutes, and indemnity.
On February 23, 1999, the GST Companies 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, the GST
Companies seek recovery under Washington law for breaches committed with
respect to the wrongful use of the GST Companies' 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 V. SANDER
On February 9, 1999, GST 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 GST. 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 (collectively, the "GST Companies"). 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
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<PAGE>
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 the
GST Companies. The GST Companies 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.
IRWIN ET AL. V. GST ET AL.
On January 28, 1999, Messrs. 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
(collectively, the "GST Parties"). 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 the GST Parties
from pursuing its claims against them. The GST Parties 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
and the GST Parties.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Date: AUGUST 16, 1999 GST TELECOMMUNICATIONS, INC.
(Registrant)
/s/ Daniel L. Trampush
---------------------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief Financial Officer)
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 45,388,000
<SECURITIES> 35,272,000
<RECEIVABLES> 45,085,000
<ALLOWANCES> (3,043,000)
<INVENTORY> 1,454,000
<CURRENT-ASSETS> 177,815,000
<PP&E> 825,215,000
<DEPRECIATION> (82,919,000)
<TOTAL-ASSETS> 1,134,721,000
<CURRENT-LIABILITIES> 106,337,000
<BONDS> 1,034,957,000
65,603,000
0
<COMMON> 240,212,000
<OTHER-SE> (449,389,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,134,721,000
<SALES> 127,604,000
<TOTAL-REVENUES> 127,604,000
<CGS> 75,293,000
<TOTAL-COSTS> 174,394,000
<OTHER-EXPENSES> (4,991,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,036,000
<INCOME-PRETAX> (97,835,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (97,835,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97,835,000)
<EPS-BASIC> (2.76)
<EPS-DILUTED> (2.76)
</TABLE>
