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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999.
/ / 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
GST TELECOMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in its Charter)
CANADA N/A
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
4001 Main Street, Vancouver, Washington 98663
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (360) 356-7100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
The aggregate market value at March 15, 2000 of the Registrant's Common
Shares, without par value (based upon the closing price of $9 1/4 per share of
such Shares on NASDAQ), held by non-affiliates of the Company was approximately
$350,130,232. Solely for the purposes of this calculation, shares held by
directors and officers of the Registrant have been excluded. Such exclusion
should not be deemed a determination or an admission by the Registrant that such
individuals are, in fact, affiliates of the Registrant.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At March 15, 2000,
there were outstanding 37,934,567 of the Registrant's Common Shares, without par
value.
DOCUMENTS INCORPORATED BY REFERENCE
The Securities and Exchange Commission allows us to incorporate by
reference the information we file with them, which means that we can disclose
important information to you by referring you to those documents. In this Annual
Report on Form 10-K, we incorporate by reference certain portions of our
definitive proxy statement to be filed with the SEC no later than May 1, 2000
pursuant to Regulation 14A.
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TABLE OF CONTENTS
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PART I Item 1. Business ............................................................................. 1
Item 2. Properties ........................................................................... 14
Item 3. Legal Proceedings .................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders .................................. 18
PART II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .................................................................. 18
Item 6. Selected Financial Data .............................................................. 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................. 20
Risk Factors ......................................................................... 31
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ........................... 43
Item 8. Financial Statements and Supplementary Data .......................................... 44
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................................................. 44
PART III Item 10. Directors and Executive Officers ..................................................... 44
Item 11. Executive Compensation ............................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................................................... 44
Item 13. Certain Relationships and Related Transactions ....................................... 44
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ............................................................................. 45
SIGNATURES .......................................................................................................... 50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS .......................................................................... F-1
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Unless the context suggests otherwise, references in this Form 10-K to
"we," "us," "our" and "GST" mean GST Telecommunications, Inc. and its
subsidiaries. Unless otherwise indicated, dollar amounts over $1 million have
been rounded to one decimal place and dollar amounts less than $1 million have
been rounded to the nearest thousand. Additionally, unless otherwise indicated,
all amounts expressed as "$" or "dollars" in this Form 10-K refer to United
States currency.
This Form 10-K contains "forward-looking statements" within the meaning
of the securities laws. These forward-looking statements are subject to a number
of risks and uncertainties, many of which are beyond our control. All statements
included in this Form 10-K, other than statements of historical facts, are
forward-looking statements, including the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business," regarding our strategy, future operations, financial position,
projected costs, prospects, plans and objectives of management. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results to be materially different from
any future results expressed or implied by such forward-looking statements.
Important factors that could cause our actual results to be materially different
from the forward-looking statements are disclosed under the heading
"Business--Risk Factors" and throughout this Form 10-K. All forward-looking
statements speak only as of the date of this Form 10-K. We do not undertake any
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
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PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a facilities-based integrated communications provider, or ICP,
offering voice, data and Internet services throughout the western United States.
By providing service over our own network facilities, we are able to lower and
control our costs while also developing flexible products to meet the needs of
both small and large business customers. Our current products include data
transport, high-speed Internet access, voice services, including a bundled
offering of local and long distance services, and wholesale services, including
dark fiber and conduit rights.
DEVELOPMENT OF THE COMPANY'S BUSINESS
GST Telecommunications, Inc. was founded in 1987 as a
federally-chartered Canadian corporation. GST was originally known as Greenstar
Resources, Ltd., which was re-named Greenstar Telecommunications, Inc. in 1993
and GST Telecommunications, Inc. in 1995. In June 1994, we formed a subsidiary,
GST Telecom, Inc., a Delaware corporation, to develop, construct and operate
telecommunications networks in the western United States. We began operations as
a facilities-based competitive access provider, and during the past five years
we have expanded our network to include 49 cities in eight states and have fully
evolved into an integrated communications provider, offering voice, data and
Internet services throughout our markets. An essential component for our
strategic development was the Telecommunications Act of 1996, or the Telecom
Act, and several state regulatory initiatives, which substantially changed the
telecommunications regulatory environment in the United States and enabled us to
provide local dial tone in addition to interstate and intrastate switched access
services.
During 1999, we re-focused on our core business lines of local, data
and wholesale service offerings. We divested our assets in Guam, and most of our
assets related to shared tenant services. We also sold our assets relating to
our resold long distance services based out of Abilene, Texas. During the first
quarter of 2000, we continued our plan of divesting non-core assets by selling
our mainland U.S. dial-up Internet assets and our assets related to our network
management services product. We will also continue to seek to divest other
non-core assets (such as our Hawaii assets) in transactions consistent with
maximizing shareholder value.
SERVICES OFFERED
The following table summarizes the percent of total revenue
contributed by our principal services for the past three years.
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Three Month Year
Period Ended Ended
Years Ended December 31 September 30 September 30
1999 1998 1997 1997
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Local services............... 29.1% 29.9% 19.4% 16.0%
Long distance services....... 20.4 40.2 34.8 42.4
Data transport services...... 6.2 5.4 3.0 1.9
Internet services............ 3.0 5.1 2.8 2.8
Product...................... 1.3 2.9 24.0 22.1
Long-haul services........... 3.6 9.0 9.4 11.4
Construction................. 35.7 5.4 4.1 0.0
Other........................ 0.7 2.1 2.5 3.4
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100.0% 100.0% 100.0% 100.0%
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DATA SERVICES
The proliferation of corporate networks, Internet usage and enhanced
data services is causing data flow to become an increasingly larger portion of
overall telecommunications traffic. Businesses must be able to access and
distribute data and other information quickly. Our broadband local networks and
IP (Internet Protocol) facilities enable us to deliver broadband data services
to businesses and other high-capacity users. We offer our customers the
following data services:
DATA TRANSPORT SERVICES. We offer frame relay services that provide
customers with high-performance, cost-efficient global interconnection of
multiple local area networks. Our frame relay services are high-speed packet
switching systems that utilize transmission links only when required--which
allows us to offer customers capacity comparable to a dedicated circuit at a
lower price.
INTERNET ACCESS SERVICES. We offer primarily high-speed Internet access
services at speeds ranging from 56 Kbps to 45 Mbps. We also offer dial-up
Internet access in Hawaii. A large portion of our Internet access business is as
a provider of Internet access to other Internet service providers, or ISPs.
WHOLESALE SERVICES
LONG-HAUL SERVICES. We offer high-capacity, un-switched
telecommunications transmission circuits, including resold circuits of other
carriers, to customers who transport their already-switched traffic between
local service areas. For the use of such long-haul circuits, we typically bill
customers a non-usage based monthly rate determined by capacity, location and
circuit length.
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DARK FIBER AND CONDUIT RIGHTS. We lease customers long-term rights to
dark fiber and conduit. Dark fiber consists of fiber strands contained within a
fiber-optic cable that are not connected to electronic equipment. A lease of
dark fiber rights typically has a term that approximates the economic life of
a fiber-optic strand (generally 20 to 30 years). Purchasers of dark fiber
rights usually install their own electrical and optical transmission
equipment. A purchaser of conduit rights lays its own cable inside the
conduit, which may be either a spare conduit or one that already contains GST
cables. Payment for dark fiber and conduit rights is generally made at the
time of delivery and acceptance of the fiber or conduit, although other
payment options may be available. We report revenues associated with these
projects as part of our construction revenues.
VOICE AND BUNDLED SERVICES
LOCAL SERVICES. We offer analog and digital telephone lines to
customers, as well as an integrated service offering that combines voice and
data services over a single line. Our high-speed digital switches allow us to
customize network configurations and solutions to meet the individual needs of
customers. We also offer our customers a wide range of enhanced features such as
call waiting, call forwarding, conference calling and voice mail, as well as
operator and directory assistance services. During 1999 we introduced Enhanced
Business services, a product consolidating our most popular calling features
for medium and large businesses. We provide local services by using our own
communications network facilities, coupled with leased lines or unbundled
network elements provided by the incumbent local exchange carrier as needed.
COLLOCATION SERVICES. We offer collocation space bundled with other
voice and data products. Each collocation site provides a secure,
temperature-controlled environment with customer access 24 hours a day, seven
days a week, and is typically located near a GST switch to provide immediate
access to our voice and data services.
PRIVATE LINE SERVICES. We offer customers dedicated broadband capacity,
typically T-1s and DS-3s. Private lines enable customers to connect directly to
their long distance carriers, bypassing the incumbent local exchange carrier and
thereby reducing costs. Private lines also enable customers to establish virtual
private wide-area networks for data and voice transmissions between or among
multiple locations. We provide private line services by using our own
communications network facilities, leasing communications network facilities
from other telecommunications carriers, or using some combination of owned and
leased communications network facilities
LONG DISTANCE SERVICES. We provide our basic and enhanced long distance
services both over our own communications network facilities and through
agreements with major long distance carriers. These agreements provide us with
access to the long distance networks of carriers at discounted rates, which can
vary with the volume of monthly traffic.
SALES CHANNELS AND CUSTOMER SUPPORT
We primarily market our data, Internet, voice and bundled services to
customers through
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our direct sales force. We have also established an inside sales (telemarketing)
group, a government systems group, and an alternate channels group, which
includes referral partners, independent agents and resellers. We have a separate
sales force devoted specifically to our wholesale services.
As of December 31, 1999, we employed 423 sales and marketing employees.
OUR DIRECT SALES FORCE
Our direct sales effort is led primarily by account executives located
in our field sales offices. We offer our account executives competitive,
commission-based compensation and a new-hire training program, as well as
ongoing technical and sales education. Account executives initiate contacts and
qualify leads in discrete geographic areas targeted by proximity to our network
facilities and collocations.
Our account executives are supported by sales engineers, who provide
technical advice for creating customer-specific solutions, and account
development representatives, who coordinate service installation and provide
continuing support and quality assurance. Sales managers provide local sales
leadership to the account teams in each market.
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.
OUR NETWORK
By building and operating our own network, we reduce our reliance on
the facilities of other providers,--such as the incumbent local exchange
carriers--enhance service to our customers, and reduce our cost of providing
services. Our facilities-based network incorporates technology that enables us
to carry voice and data traffic on the same network. We connect our local
networks, typically a fiber-optic ring configuration, with our high-capacity
long-haul network, which together cover 4,415 route miles and 252,642 fiber
miles. We have an additional 917 route miles (which corresponds to 59,618 fiber
miles) under construction. In addition to the fiber miles we own and use in our
operations, we own an additional 52,100 fiber miles which we have leased to
other telecommunications carriers as dark fiber rights. We also lease fiber
for our own use, as necessary, and as of December 31, 1999, we leased a total
of 838 route miles and 9,054 fiber miles from other telecommunications
carriers. Thus, our total owned and leased fiber miles are approximately
373,414.
We recently discovered errors in previous disclosures of fiber miles
and route miles. We are currently reviewing our network records and the
numbers stated above reflect our best estimate based on our review to date.
In addition, prior disclosures included both under-construction miles and
miles which we lease to other telecommunications carriers in the total, but
did not provide the breakdown as shown above. Restated route miles and fiber
miles information for prior quarters is being provided in amendments to Form
10-Q for the periods ended June 30 and September 30, 1999, to be filed
concurrently with this Form 10-K.
LOCAL FIBER OPTIC NETWORKS
In many of our markets, the core of our local networks is a ring of
fiber-optic cable, typically in the city's central business district, that
connects to our central offices. In markets where we do not yet, or do not plan
to, have a fiber-optic ring in place, we rely on strategically-placed
fiber-optic network connections between our central offices and various
collocation and
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customer sites. Our central offices contain the switches and routers that direct
data and voice traffic to their destinations, and also have the space to house
the additional equipment necessary for future telecommunications services. Our
central offices also function as collocation facilities where we house
telecommunications equipment for our customers and other carriers to support
interconnection of these various networks. We have 15 Class 4/5 voice switches,
23 frame relay switches and 37 ATM (Asynchronous Transfer Mode) switches
located throughout our network.
We are now offering services in 49 cities throughout eight states. We
serve larger cities, such as Los Angeles and the San Francisco Bay area,
medium-sized markets, such as Phoenix, Albuquerque, Portland and Boise, and
clusters of smaller markets throughout the western United States.
In our metropolitan networks designed on a fiber-optic ring
configuration, the ring is typically constructed in the central business
district and enables connectivity between our hub/switch site and the following
locations:
- major or tandem ILEC central offices;
- interexchange carrier Points of Presence, for wholesale purposes;
- strategic multi-tenant office buildings providing a high density
of businesses fitting GST's customer profile; and
- carrier hotels housing other ICP and interexchange carrier
customers.
We will then construct, as opportunities arise or as market demand
supports, extensions or distribution loops off the central business district
ring that target other ILEC collocation opportunities or locations containing
multiple businesses fitting GST's target-customer profile. These distribution
rings are normally 48 to 96 fibers, depending on the length of the loop.
The central business district fiber-optic ring is usually small with
respect to route miles, but contains significant bandwidth, typically ranging
from 144 to 216 fibers. We use the higher count fiber to ensure that fiber is
not significantly stranded on the distribution loops as they route back to the
hub/switch site. Where feasible, we also seek to provide customers a
diversely-routed path from their premises back to our central office.
LONG-HAUL NETWORK
Our core fiber-optic backbone network, as planned, extends from Seattle
to San Diego, with most segments complete or expected to be complete during
2000. The capacity of the network varies along the route, with cables ranging
from 12 to 144 fibers and six to eight two-inch conduits. Fiber and conduits not
needed for our operations will be used to support our wholesale services. Where
feasible, we participate in joint construction projects with other carriers to
reduce our overall cost of construction. We will also continue to explore
opportunities to expand our long-haul network through swaps with other carriers.
We were selected to participate as the long-haul network provider in
the National Transparent Optical Network, or NTON, Consortium, consisting of
Nortel Networks, Lawrence Livermore National Laboratory, Sprint
Communications, and Bay Area Rapid Transit. NTON is the West Coast leg of the
Defense
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Advanced Research Projects Agency (DARPA)-sponsored SUPERNET, which is an
integral part of the United States government's Next Generation Internet (NGI)
project. The NGI will eventually connect a series of extremely high-bandwidth
networks, providing a national testbed for the development of future high-speed,
broadband applications. The NTON backbone will run from Seattle to San Diego,
with major connection points in those cities and Portland, Ore., San Francisco,
and Los Angeles. We provide the long-haul fiber and long-haul network management
for the NTON Consortium. Using our existing commercial fiber (Corning LEAF
OC-192 long-haul fiber), Versalar Terabit IP Switch Routers and Vector
Asynchronous Transfer Mode (ATM) switches, the network is capable of supporting
bandwidth speeds of 10 Gigabytes per second and greater.
NETWORK CONTROL CENTER
Our Vancouver, Washington-based network control center is staffed by
approximately 32 employees, who provide network monitoring 24 hours a day, seven
days a week. Generally, advanced monitoring systems allow our personnel to
diagnose and resolve problems before customers detect a meaningful degradation
in service quality.
COMPETITION
The communications industry is highly competitive. Some of our
competitors may have personnel, financial and other competitive advantages. New
competitors may enter the market because of increased consolidation and
strategic alliances resulting from the Telecom Act, as well as technological
advances and further deregulation.
Our current and prospective competitors include, among others, the
following companies:
- GTE Corp.;
- US West, Inc.;
- AT&T Corp.;
- MCI WorldCom, Inc.;
- Sprint Corp.;
- Williams Communications, Inc.;
- Level 3 Communications, Inc.;
- Qwest Communications, Inc.; and
- other competitive local exchange carriers operating in the markets
we serve.
We compete primarily on the basis of pricing, transmission quality,
network reliability and customer service and support. We have only recently
begun to offer some of our services and products, and, as a result, we may have
fewer and less well-established customer relationships than some of our
competitors.
We believe that we have advantages over our competitors. In particular,
many of the
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incumbent local exchange carriers and interexchange carriers rely on systems
that were constructed before ours. We believe that the older systems operated by
these carriers generally face disadvantages when compared to our network, such
as:
- lower transmission speeds;
- lower overall capacity;
- more costly maintenance requirements;
- inefficiency due to design and competing traffic requirements;
and
- greater susceptibility to systems interruption from physical
damage to the network infrastructure.
We are aware that other competitors may employ advanced technology that
is comparable to our network. Additional capacity that is expected to be
available over the next several years from competitors may cause significant
decreases in prices overall. Competitive factors that may have a material
adverse impact on our operations are discussed under the heading "Risk Factors."
REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION IS NOT
COMPREHENSIVE. IT DOES NOT DESCRIBE ALL PRESENT AND PROPOSED FEDERAL, STATE AND
LOCAL REGULATION AND LEGISLATION AFFECTING THE TELECOMMUNICATIONS INDUSTRY.
EXISTING FEDERAL AND STATE REGULATIONS ARE CURRENTLY SUBJECT TO JUDICIAL
PROCEEDINGS, LEGISLATIVE HEARINGS AND ADMINISTRATIVE PROPOSALS THAT COULD
CHANGE, IN VARYING DEGREES, THE MANNER IN WHICH OUR INDUSTRY OPERATES. WE CANNOT
PREDICT THE OUTCOME OF THESE PROCEEDINGS OR THEIR IMPACT ON THE
TELECOMMUNICATIONS INDUSTRY OR OUR BUSINESS.
OVERVIEW. Our services are subject to varying degrees of federal, state
and local regulation. The FCC exercises jurisdiction over all the facilities of,
and services offered by, telecommunications common carriers like us to the
extent we use our facilities to provide, originate or terminate interstate or
international communications. State regulatory commissions retain jurisdiction
over most of the same facilities and services to the extent they are used to
provide, originate or terminate intrastate communications. The decisions of
these regulatory bodies are often subject to judicial review, which makes it
difficult for us to predict, with certainty, the legal outcomes in this area.
Finally, while industry and the markets recognize the evolutionary nature of
data-centric ICPs, the regulatory bodies still refer to any competitive
telecommunications carriers as competitive local exchange carriers, or CLECs.
For that reason, although we refer to our business as an ICP throughout this
annual report, for purposes of the following regulatory discussion we refer to
our business as a CLEC.
FEDERAL REGULATION. We must comply with the requirements applicable to
common carriers set forth in the Communications Act of 1934. Comprehensive
amendments to the Communications Act of 1934 were made by the Telecom Act, which
substantially altered both federal and state regulation of the
telecommunications industry. The primary purpose of this legislation was to
foster increased competition among telecommunications carriers. Because
implementation of the Telecom Act is subject to numerous federal and state
policy rulemaking proceedings and judicial review, we cannot predict with
certainty its ultimate effect on our
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business.
Under the Telecom Act, any entity may enter a telecommunications
market, subject to reasonable financial, safety, quality, consumer protection
and state regulations. The Telecom Act makes local markets accessible by
requiring the incumbent local exchange carrier, or ILEC, to permit
interconnection to its network and establishes ILEC obligations with respect to:
- COLLOCATION OF EQUIPMENT, which allows companies like us to
install and maintain our own network equipment, including ATM
switches and fiber-optic equipment, in ILEC central offices.
- RECIPROCAL COMPENSATION, which requires the ILECs and CLECs to
compensate each other for telecommunications traffic that
originates on the network of one carrier and is sent to the
network of the other.
- RESALE OF SERVICE OFFERINGS, which requires the ILEC to
establish wholesale rates for retail services so CLECs may
resell those services to their own end-users.
- INTERCONNECTION, which requires the ILECs to permit their
competitors to interconnect with ILEC facilities at any
technically feasible point in the ILECs' networks.
- ACCESS TO UNBUNDLED NETWORK ELEMENTS, which requires the ILECs
to unbundle and provide access to some components of their
local service network to other local service providers.
Unbundled network elements are portions of an ILEC's network,
such as copper lines or "loops," that CLECs can lease for use in
their own networks.
- NUMBER PORTABILITY, which requires the ILECs and CLECs to
allow a customer to retain an existing phone number within the
same local area even if the customer changes
telecommunications services providers. All telecommunications
carriers are required to contribute to the shared industry
costs of number portability.
- DIALING PARITY, which requires the ILECs and CLECs to provide
customers with uniform quality of service when dialing between
networks.
- ACCESS TO RIGHTS-OF-WAY, which requires the ILECs and CLECs to
establish non-discriminatory access to telephone poles, ducts,
conduits and rights-of-way.
The Telecom Act requires ILECs to negotiate in good faith with other
carriers that request any of the arrangements discussed above. If a requesting
carrier is unable to reach agreement with the ILEC within a prescribed time,
either carrier may request arbitration by the applicable state commission. If an
agreement still cannot be reached, the carriers are forced to abide by the
obligations established by the FCC and the applicable state commission.
We have entered into a number of interconnection agreements with the
ILECs in our markets and will enter into additional agreements as needed. We
have existing interconnection
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agreements in each of our existing markets. Several of the interconnection
agreements covering our existing markets expired in 1999 or will expire in 2000.
We are in the process of negotiating new interconnection terms with the ILECs.
Pending conclusion of these negotiations, the existing interconnection
agreements should continue to apply.
The FCC is charged with establishing guidelines to implement the
Telecom Act. In August 1996, the FCC released a decision known as the
Interconnection Decision, that established rules for the interconnection
requirements outlined above and provided guidelines for interconnection
agreements by state commissions. The U.S. Court of Appeals for the Eighth
Circuit vacated portions of the Interconnection Decision. On January 25, 1999,
the U.S. Supreme Court reversed the Eighth Circuit and upheld the FCC's
authority to issue regulations governing pricing of unbundled network elements
provided by the ILECs in interconnection agreements, including regulations
governing reciprocal compensation, which are discussed in more detail below. In
addition, the Supreme Court affirmed an FCC rule that allows requesting carriers
to "pick and choose" the most attractive portions of existing interconnection
agreements with other carriers. The Supreme Court did not, however, address
other challenges raised about the FCC's rules at the Eighth Circuit because
those challenges were not decided by the Eighth Circuit. These challenges will
have to be addressed by the Eighth Circuit in light of the Supreme Court's
decision. In addition, the Supreme Court disagreed with the standard applied by
the FCC for determining whether an ILEC should be required to provide a
competitor with particular unbundled network elements. This issue will be
addressed by the FCC in a new rulemaking proceeding that the FCC recently
initiated.
The decisions of the Eight Circuit and Supreme Court have not resolved
the uncertainty about the rules governing the pricing terms and conditions of
interconnection agreements. The Supreme Court's actions in particular may affect
the re-negotiation of existing agreements. The ILECs may, as a result of the
Supreme Court reversal, seek to stop providing some unbundled elements. Although
state commissions continue to implement and enforce interconnection agreements,
the Supreme Court ruling and future FCC actions and court rulings may affect the
state commissions' authority to implement or enforce interconnection agreements
or lead to additional rulemaking by the FCC. The resulting uncertainty makes it
difficult to predict whether we will be able to continue to rely on our existing
interconnection agreements or have the ability to negotiate acceptable
interconnection agreements in the future.
In addition to requiring the ILECs to open their networks to
competitors and reducing the level of regulation applicable to CLECs, the
Telecom Act also reduced the level of regulation that applies to the ILECs,
thereby increasing their ability to respond quickly in a competitive market. For
example, the FCC has applied "streamlined" tariff regulation of the ILECs, which
shortens the requisite waiting period before which tariff changes may take
effect. These developments enable the ILECs to change rates more quickly in
response to competitive pressures. The FCC has also introduced substantial price
flexibility for the ILECs, subject to specified caps. This flexibility could
decrease our ability to effectively compete with ILECs in our markets.
In March 1999, the FCC issued an order requiring ILECs to provide
unbundled loops and collocation on more favorable terms than had previously been
available. The order permits
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collocation of equipment that could be used to more efficiently provide advanced
data services such as high-speed DSL service, and requires less expensive
"cageless" collocation. In the March 1999 order, the FCC deferred action on its
previous proposal to permit ILECs to offer advanced data services through
separate affiliates that are not restricted by certain provisions of the
Telecom Act. Permitting ILECs to provide data services through separate
affiliates that are subject to fewer regulatory requirements could have a
material adverse impact on our ability to compete in the data services sector.
These areas of regulation are subject to change through additional proceedings
by the FCC or through judicial challenge.
The Telecom Act gives the FCC authority to cease regulating carriers if
it determines that regulation would not serve the public interest. The FCC is
charged with reviewing its regulations for continued relevance on a regular
basis. As a result of this mandate, a number of regulations that apply to CLECs
have been and may in the future be eliminated.
RECIPROCAL COMPENSATION. Reciprocal compensation is the compensation
paid by one carrier to complete particular calls on another local exchange
carrier's network. Because a number of our customers typically receive more
calls than they make, we expect to receive more reciprocal compensation than we
pay for calls that originate on our networks. However, as a result of the
current regulatory environment and several trends in our business, which are
discussed below, we expect our revenues from reciprocal compensation to decline
in the future.
Despite the compensation arrangements we have negotiated with ILECs in
our markets which have included compensation for inbound ISP traffic, many ILECs
continue to assert the position that reciprocal compensation charges resulting
from inbound ISP traffic fall outside the scope of existing interconnection
agreements. On February 25, 1999, the FCC issued a declaratory ruling and Notice
of Proposed Rulemaking concerning inbound ISP traffic. The FCC concluded in its
ruling that ISP traffic is jurisdictionally mixed and largely interstate in
nature, and thus within the FCC's jurisdiction. The FCC has requested comment as
to what reciprocal compensation rules should govern this traffic upon expiration
of existing interconnection agreements. The FCC also determined that no federal
rule existed that governed reciprocal compensation for ISP traffic at the time
existing interconnection agreements were negotiated and concluded that it should
permit states to determine whether reciprocal compensation should be paid for
calls to ISPs under existing interconnection agreements. The FCC order was
appealed to the United States Court of Appeals for the District of Columbia, and
oral argument was held November 22, 1999. We cannot predict the effect of the
FCC's ruling on existing state decisions, or the outcome of pending appeals or
additional pending cases.
Some states in which we operate have ordered the ILECs to pay
reciprocal compensation for Internet-related calls. Overall, the majority of
states that have addressed the question have ruled that compensation is owed
for this traffic. However, these states and other states that have not yet
considered the issue may determine that no compensation is owed for
Internet-related calls.
In light of the FCC's February 1999 order, state commissions that
previously addressed this issue and required reciprocal compensation to be paid
for ISP traffic may reconsider and may modify their prior rulings. Several
ILECs, including US West and Pacific Bell, are seeking to overturn prior orders
that they claim are inconsistent with the FCC's February 1999 order. Relief
10
<PAGE>
sought could include repayment of reciprocal compensation previously paid by the
ILECs. Of the 21 state commissions that have considered the issue since the
FCC's February 25, 1999 order, only four of these states do not require carriers
to compensate each other for ISP-bound traffic. At least one ILEC has already
filed suit in United States District Court seeking a refund from another carrier
of reciprocal compensation the ILEC previously paid to that carrier. That suit
was dismissed for lack of subject matter jurisdiction.
Upon expiration of our existing interconnection agreements, we must
negotiate new rates for reciprocal compensation with each carrier. Pending
conclusion of these negotiations, the existing interconnection agreements are
expected to continue to govern the payment of reciprocal compensation. We expect
rates for reciprocal compensation will be lower under new interconnection
agreements than under our existing agreements.
Recently, a U.S. district court in Wisconsin dismissed several appeals
of decisions of the state commission, involving, among other issues, the
obligations to pay reciprocal compensation. The court dismissed the actions in
light of recent Supreme Court decisions that sought to clarify when states may
be sued in U.S. courts. Based on a reading of these decisions, the district
court determined that the Wisconsin Public Service Commission could not be
sued in federal court in connection with the Commission's enforcement of
interconnection agreements. This decision has been appealed to the Seventh
Circuit Court of Appeals. If the decision is upheld, it would raise questions
concerning how state commission action approving and enforcing interconnection
agreements may be reviewed or challenged.
UNIVERSAL SERVICE. On May 7, 1997, the FCC issued an order
establishing a significantly expanded universal service program. The FCC
established new funding for services provided to qualifying schools and
libraries and for services provided to rural health care providers. The FCC
also expanded the federal subsidies to low-income consumers. Providers of
interstate telecommunications service, such as us, must contribute to these
programs. Our share of these universal service funds is based on a percentage
of certain of our defined end-user revenues. Generally, the amounts we
contribute are billed to our end-users and we currently do so using a 3.99%
rate on international and interstate calls. We have been billed for universal
service fund contributions, which represented less than 1% of our total
revenues for 1999. We are unable to specify the amount of any universal
service contributions that we may be required to make in the future. In its
May 1997 order, the FCC also announced that it will revise its rules for
subsidizing service provided to consumers in high-cost areas, which may
result in additional increases in the overall cost of the universal service
program.
TARIFF AND FILING REQUIREMENTS. Non-dominant carriers, including GST,
must file tariffs with the FCC listing the rates, terms and conditions of
interstate and international services provided by the carrier. On October 29,
1996, the FCC adopted an order in which it eliminated the requirement that
non-dominant interstate carriers maintain tariffs on file with the FCC for
domestic interstate services. The FCC's order was issued pursuant to authority
granted in the Telecom Act to forebear from regulating any telecommunications
services provider if specified statutory analyses are satisfied. The FCC's
order, however, has been stayed by a federal court. Accordingly, non-dominant
interstate carriers, including GST, currently must continue to file interstate
tariffs with the FCC until final determination of the issue.
11
<PAGE>
In addition, periodic reports concerning carriers' interstate circuits
and deployment of network facilities are required to be filed with the FCC.
Generally, the FCC does not exercise direct oversight over cost justification
and the level of charges for services of non-dominant carriers, although it has
the power to do so. The FCC may also impose prior approval requirements on
transfers of control and assignments of operating authorizations. The FCC may
also impose fines or other penalties for violations of FCC rules or regulations.
Additionally, the FCC also requires that certified carriers notify the FCC of
foreign carrier affiliations and secure a determination that such foreign
ownership interests, if in excess of a specified amount, are in the public
interest.
Under the Communications Act of 1934 and other federal regulations,
foreign nationals generally 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 World Trade Organization, or 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. Additionally, on
November 25, 1997, the FCC adopted rules implementing the WTO policies that
permit nationals of WTO member states to acquire up to a 100% indirect
interest in a U.S. radio license. Prior approval is still required. 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. A determination by the FCC to exercise this
authority could have a material adverse effect on our business in light of the
fact that GST Telecommunications, Inc. is a Canadian corporation.
STATE REGULATION. Most states regulate entry into the markets for local
exchange and other intrastate services. The states' approaches to regulating
CLECs vary in type and degree of regulation. The majority of states require that
companies seeking to provide local exchange and other intrastate services apply
for and obtain the requisite authorization from a state regulatory body, such as
a state commission. This authorization process generally requires the carrier to
demonstrate that it has sufficient financial, technical and managerial
capabilities and that the granting of the authorization will serve the public
interest.
As a CLEC, we are and will continue to be subject to the regulatory
directives of each state in which we are and will be certified. Most states
require that CLECs charge just and reasonable rates and prohibit CLECs from
discriminating among similarly-situated customers. Some other state requirements
include:
- Filing of periodic reports;
- Payment of various regulatory fees and surcharges; and
- Compliance with service standards and consumer protection rules.
States also often require prior approval or notification for certain transfers
of assets or customers by a CLEC, transfers of ownership of a CLEC and issuances
by certified carriers of equity securities, notes or indebtedness. States
generally retain the right to sanction a carrier or to
12
<PAGE>
revoke certifications if a carrier violates relevant laws and/or regulations.
Delays in receiving required regulatory approvals could have a material adverse
effect on us. We cannot assure you that regulators or third parties will not
raise material issues with regard to our compliance or non-compliance with
applicable laws or regulations.
In most states, certified carriers like us are required to file tariffs
setting forth the terms, conditions, and prices for services which are
classified as intrastate. In some states, the required tariff may list a range
of prices for particular services, and in others, such prices can be set on an
individual customer basis. We may, however, be required to file additional
information on our contract terms.
Under the Telecom Act, implementation of our plans to compete in local
markets is and will continue to be, to a certain extent, controlled by the
individual states. The states in which we operate or intend to operate have
taken regulatory and legislative action to open local communications market to
various degrees of local exchange competition.
LOCAL REGULATION. We are also subject to numerous local regulations,
such as building code requirements and permits relating to excavation and
conduit construction within local rights-of-way. These regulations may vary
greatly from state to state and from city to city.
MAGNACOM
Magnacom Wireless, LLC, or Magnacom, was controlled by John Warta,
our former Chairman of the Board and Chief Executive Officer. We understand
that Magnacom held certain PCS licenses for markets in Arizona, Arkansas, New
Mexico, Oregon, Utah, Hawaii, Idaho, and Washington (collectively referred to
as the Magnacom FCC Licenses). We entered into a Services Agreement and a
Reseller Agreement with Magnacom pursuant to which, among other things, (i)
we were designated a non-exclusive reseller of PCS telephone services in the
markets in which Magnacom had obtained FCC licenses, and (ii) Magnacom
granted us 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 we had operational networks so long as
our rates and other terms of service were competitive. See Part II, Item 7
"Management's Discussion and Analysis--Results of Operations, Fiscal 1999
compared to Fiscal 1998" for a discussion of payments made to Magnacom.
In consideration for the Magnacom FCC Licenses, we understand 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, we understand that Magnacom has not made any
payments. 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 we understand that such relief has
been granted.
In January 2000, the bankruptcy court approved a request from the
Trustee in Bankruptcy for Magnacom to retain counsel for the purpose of
analyzing potential claims against us. We have not been served with any such
claims and we are not aware that any have been filed.
13
<PAGE>
EMPLOYEES
As of December 31, 1999, we had 1,317 full-time employees. In
March 2000, we implemented a reduction-in-force which eliminated
approximately 100 employee positions. None of our employees is covered by a
collective bargaining agreement. We consider our relationship with our
employees to be good.
ITEM 2. PROPERTIES.
Our corporate headquarters are located in Vancouver, Washington. We own
a building that consists of approximately 60,000 square feet in Vancouver,
Washington, and contains our executive offices and network control center. We
also lease a building consisting of approximately 50,000 square feet, which is
located at 4001 Main Street, Vancouver, Washington and contains the majority of
our centralized operational functions. The remainder of our corporate functions
are conducted from a leased building consisting of approximately 27,000 square
feet in Vancouver, Washington. In addition to our corporate offices, our
subsidiaries lease space in a number of locations, primarily for sales offices,
storage warehouses and network equipment installations. Such locations include
California, Arizona, Hawaii, New Mexico, Oregon, Washington, Texas and Idaho.
The various leases expire in years ranging from 2000 to 2020. Additional space
will be leased as required by expansion of our operations and networks.
14
<PAGE>
ITEM 3. 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 had filed in the
U.S. District Court in Phoenix against the Arizona Corporation Commission and
Arizona competitive local exchange carriers, including our subsidiaries, GST
Tucson Lightwave, Inc., GST Net (AZ), Inc., and GST Telecom, Inc. On
November 24, 1999, we joined US West in filing a letter with the court
stating that US West had no claims on appeal against us and would not seek to
reverse or modify any Arizona district court judgment in favor of GST which
is otherwise on appeal as to the other parties. No further action is expected
or required by the court with respect to GST.
GST AND GST TELECOM V. GLOBAL LIGHT TELECOMMUNICATIONS, INC., ET AL.
On October 20, 1998, we 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.,
or 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, referred to as the Bestel transaction. The complaint seeks
an accounting, a constructive trust and restitution of our interest in the
opportunity and also seeks unspecified exemplary and punitive damages and
reimbursement of attorneys' fees.
The Superior Court granted the defendants' motion to stay the
proceedings on February 5, 1999, and we filed a notice of appeal on February 9,
1999.
On September 16, 1999, we received $30 million in cash from Global
and others in connection with the settlement of various lawsuits, including
this lawsuit, between GST, Global, GST Mextel, Inc., W. Gordon Blankstein, Ian
Watson, and Peter E. Legault. Pursuant to the settlement, all claims among
these parties have been dismissed with the exception of the claims discussed
below as "GST v. Gordon Blankstein et al." Our claims against the nonsettling
parties are unaffected by this settlement. With regard to the status of claims
by and against Mr. Irwin, see "GST v. Irwin and Olshan" below.
GLOBAL AND MEXTEL V. GST AND GST TELECOM
On January 27, 1999, Global and GST Mextel, Inc., or Mextel, filed a
complaint in the Supreme Court of British Columbia, No. C990449, against us. The
complaint, which arises from the same matters for which we brought suit against
Global, et al., in the Superior Court of California, as described above,
includes claims for declaratory and injunctive relief to confirm the ownership
of the Mexican business opportunity by Global, and unspecified general and
special damages. We answered by denying liability and asserting counterclaims.
Pursuant to the settlement discussed above at "GST and GST Telecom v.
Global Light
15
<PAGE>
Telecommunications, Inc.," all claims against us have been dismissed. The
remaining claims involve our counterclaims against Messrs. Warta, Irwin, Hanson,
and Sander relating to the Bestel transaction, as well as claims by such
individuals presented in companion case No. C990488 seeking affirmative relief
against us and certain members of our Board of Directors on grounds of
oppression and breach of duty with respect to our pursuit of a remedy on the
Bestel transaction. On October 6, 1999, the court ordered all claims against
those directors struck out, and further stayed the remaining claims of the
individuals against us. Messrs. Warta, et al., have appealed the
October 6 ruling of the Court. With regard to the status of claims by and
against Mr. Irwin, see "GST v. Irwin and Olshan" below. No trial date has
been set with regard to any of the matters pending in British Columbia.
SCHIEFELBEIN V. GST, ET AL.
On October 21, 1999, the first of several putative securities class
action lawsuits was filed in the United States District Court for the Western
District of Washington against GST, certain former officers and directors and,
in the Schiefelbein lawsuit, Global Light Telecommunications, Inc. No current
director or officer of GST is named as a defendant. The apparent theory of these
lawsuits is that we and the other defendants committed securities fraud by
failing to make disclosures concerning the Bestel transaction that is the
subject of the "GST and GST Telecom v. Global Light Telecommunications, Inc."
matter discussed above. The complaints do not specify the amount of damages
sought. A consolidated amended complaint was filed by the plaintiffs on March
14, 2000. We plan to file a motion to dismiss the complaint.
We believe the lawsuits are wholly without merit and intend to
vigorously contest them. There has been no discovery pending consolidation of
the complaint and a ruling on our subsequent motion to dismiss the lawsuit.
Although we believe we have strong defenses, litigation is inherently
unpredictable and there is no guarantee we will prevail. Failure to resolve this
case in a manner that is favorable to us could significantly harm our business.
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 us. The complaint,
which relates to the circumstances under which Mr. Warta ceased to serve as an
officer and director of GST, includes claims for breach of an employment
agreement, breach of the covenant of good faith and fair dealing, violation of
wage statutes, and indemnity.
We have denied all liability, and have counterclaimed against Mr. Warta
and Clifford Sander, a former officer of GST, for damages we incurred with
respect to the transfer of corporate funds to Magnacom LLC, a company owned by
Mr. Warta, and to Mr. Warta for a PCS license position in Guam. The matter is
currently in discovery. Although we believe we have strong defenses, litigation
is inherently unpredictable and there is no guarantee we will prevail.
GST, GST USA AND GST TELECOM V. IRWIN AND OLSHAN
16
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On December 16, 1998, we 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, or Olshan. The
complaint, which relates to Mr. Irwin and Olshan's representation of GST 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 March 10, 2000, the parties entered into a settlement pursuant to
which, among other things, GST will dismiss or discontinue with prejudice all
claims and counterclaims asserted against Mr. Irwin and the Olshan firm in
this litigation and in the litigation entitled GST Telecommunications, et al.
v. GST Global Telecommunications, et al., now on appeal in the California
Court of Appeals (6th District, Case No. H019681), Global Light
Telecommunications, et al. v. GST Telecommunications, et al. (Case No. C99049,
Supreme Court of British Columbia), and Stephen Irwin et al. v. GST
Telecommunications, et al. (Case No. 990488, Supreme Court of British
Columbia). Mr. Irwin and the Olshan firm will dismiss or discontinue with
prejudice all their claims and counterclaims against GST in the
above-referenced actions. In addition, Mr. Irwin will release GST from
certain indemnity claims in connection with the above-referenced litigation
and other pending matters. The settlement is subject to the preparation and
execution of customary settlement agreements and the funding and payment of
the settlement amount by Olshan.
GST V. GORDON BLANKSTEIN, ET AL.
On June 4, 1999, we 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
common shares of GST that we believe were wrongfully removed from escrow by
Messrs. Blankstein, Blankstein and Watson, with the assistance of Mr. Sander.
The defendants have denied liability. The matter is currently in discovery.
COREY FORD V. GST, ET AL.
Corey Ford, a former employee of Magnacom, filed suit in Oregon
state court in February, 1999, Case No. 9902-01746, against GST, Pacwest
Network LLC, John Warta, and Stephen Irwin, for breach of contract and
various other claims involving Mr. Ford's employment relationship with
Magnacom. See Item 1, "Business--Magnacom" for further discussion relating to
Magnacom. The case subsequently was removed to federal court, Case No.
00-160-HU in the U.S. District Court, District of Oregon. Among other things,
Mr. Ford has claimed that we should be liable for Magnacom's obligations to
him on the basis that we functioned as the corporate "alter ego" to Magnacom.
We have denied liability to Mr. Ford, and the matter is in discovery. Trial
has been scheduled for September 5, 2000. Although we believe we have strong
defenses, litigation is inherently unpredictable and there is no guarantee we
will prevail. Failure to resolve this case in a manner that is favorable to
us could harm our business.
OTHER MATTERS
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We are a party to various other claims and legal actions arising in the
ordinary course of business. While the results of these proceedings cannot be
predicted with certainty, we do not anticipate that these matters will
materially impact our business. We are also a party to various proceedings
before the public utilities commissions of the states in which we provide or
propose to provide telecommunications services. These proceedings typically
relate to licensure and the regulation of the provision of telecommunications
service.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
Our common shares have been listed on the Nasdaq National Market, or
NASDAQ, since April 14, 1998 and trade under the symbol "GSTX." Our common
shares have also been listed on the Toronto Stock Exchange, or TSE, since August
26, 1997 and trade under the symbol "GTE.U." Our common shares were listed on
the American Stock Exchange, or AMEX, from March 11, 1994 to April 13, 1998 and
on the Vancouver Stock Exchange from February 28, 1991 to March 27, 2000.
The following table sets forth, for the two most recent fiscal years,
the high and low closing prices of the Common Shares as reported on the AMEX,
NASDAQ and the TSE.
<TABLE>
<CAPTION>
AMEX NASDAQ TSE
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR 1998
First Quarter............... 17 1/4 10 13/16 -- -- 17.40 10.50
Second Quarter.............. -- -- $16 7/8 $10 11/16 16.40 11.00
Third Quarter............... -- -- 16 6 1/4 16.50 6.00
Fourth Quarter.............. -- -- 7 1/2 3 11/16 7.55 3.75
CALENDAR YEAR 1999
First Quarter............... -- -- 11 1/2 6 1/4 11.00 7.00
Second Quarter.............. -- -- 15 3/16 9 7/8 14.65 10.50
Third Quarter............... -- -- 17 15/16 6 3/4 17.75 7.00
Fourth Quarter ............. -- -- 9 7/8 5 15/32 9.75 7.00
</TABLE>
18
<PAGE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock
and do not anticipate paying cash dividends on our capital stock in the
foreseeable future. It is our current policy to retain earnings to finance our
operations and make principal and interest payments on our outstanding
indebtedness. Future declaration and payment of dividends, if any, will be
determined in light of the then-current conditions, including:
- our earnings;
- our capital requirements;
- our operations;
- our financial condition, including required interest payments
on our outstanding indebtedness; and
- other factors deemed relevant by our board of directors.
In addition, our ability to pay dividends is prohibited by the terms of our debt
instruments.
NUMBER OF SHAREHOLDERS
As of March 15, 2000, there were 253 registered holders of our common
shares. We believe that there are in excess of 10,000 beneficial owners of our
common shares in addition to such registered holders.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Twelve Months Ended Three Months Ended
Year Ended December 31, December 31,
December 31, --------------------------- ---------------------------
1999 1998 1997 1997 1996
------------ ------------ ------------ ----------- ------------
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C>
Telecommunications services $ 202,686 $ 149,783 $ 90,220 $ 26,064 $ 18,437
Construction, facility sales 115,147 8,826 1,488 1,488 -
and other Telecommunications
products 4,089 4,708 27,300 8,706 4,780
Total revenues 321,922 163,317 119,008 36,258 23,217
Operating loss (100,284) (135,172) (90,410) (21,855) (17,988)
Other expenses (income):
Interest income (9,736) (24,145) (10,288) (4,101) (839)
Interest expense(a) 115,481 101,648 51,179 18,948 5,434
Other, net (23,460) (c) (57,985) (b) (3,894) 1,569 104
Income tax expense - - 1,753 850 -
------------ ------------ ------------ ----------- ------------
Net loss(d) $ (182,569) $ (154,690) $ (130,297) $ (39,593) $ (22,634)
============ ============ ============ =========== ============
Net loss per share, basic
and diluted(e) $ (5.11) $ (4.52) $ (5.11) $ (1.39) $ (1.02)
============ ============ ============ =========== ============
Weighted average number
of common shares outstanding,
basic and diluted 37,271 35,834 26,707 30,804 22,237
OTHER DATA:
Capital expenditures $ 271,258 $ 247,683 $ 214,359 $ 46,663 $ 58,047
Ratio of earnings to
fixed charges(f) - - - - -
Adjusted EBITDA(g) (25,650) (60,538) (50,705) (12,032) (13,208)
CASH FLOW PROVIDED BY
(USED IN):
Operating income (32,429) (83,923) (82,103) (40,580) (15,479)
Investing activities (36,257) (344,190) (237,303) (42,954) (67,221)
Financing activities 25,599 315,130 505,096 226,725 34,720
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents 42,983 86,070 199,053
Investments 44,596 16,246 7,619
Restricted cash and investments 29,676 281,364 144,450
Property and equipment 944,410 678,374 433,680
Accumulated depreciation (112,363) (62,522) (26,785)
Investment in joint ventures(h) - -
Total assets 1,112,629 1,151,283 898,174
Current portion of long-term debt
and capital lease obligations 24,159 19,066 10,865
Long-term debt and capital lease
obligations (excluding current
portion) 1,168,591 1,122,700 777,286
Redeemable Preferred Shares 69,688 61,741 54,635
Common Shares and commitment
to issue Common Shares 238,626 234,267 221,709
Accumulated deficit (566,523) (383,954) (229,264)
Accumulated other comprehensive
income 44,550 16,200 -
Shareholders' deficit (283,347) (133,487) (7,555)
<CAPTION>
Years Ended
September 30,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C>
Telecommunications services $ 82,593 $ 31,726 $ 11,118
Construction, facility sales - - -
and other Telecommunications
products 23,374 9,573 7,563
Total revenues 105,967 41,299 18,681
Operating loss (86,543) (42,597) (11,631)
Other expenses (income):
Interest income (7,206) (5,549) (303)
Interest expense(a) 37,665 21,224 838
Other, net (5,359) 2,360 1,347
Income tax expense 903 157 166
------------ ------------ ------------
Net loss(d) $ (113,338) $ (60,378) $ (11,315)
============ ============ ============
Net loss per share, basic
and diluted(e) $ (4.71) $ (3.18) $ (0.82)
============ ============ ============
Weighted average number
of common shares outstanding,
basic and diluted 24,703 18,988 13,781
OTHER DATA:
Capital expenditures $ 225,743 $ 97,561 $ 33,922
Ratio of earnings to
fixed charges(f) - - -
Adjusted EBITDA(g) (51,881) (33,936) (8,807)
CASH FLOW PROVIDED BY
(USED IN):
Operating income (57,002) (33,306) (11,056)
Investing activities (261,570) (105,674) (24,522)
Financing activities 313,091 194,299 (37,383)
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash equivalents 55,862 61,343 6,204
Investments 3,322 5,176 871
Restricted cash and investments 171,750 16,000 -
Property and equipment 385,252 134,714 39,583
Accumulated depreciation (20,738) (7,139) (1,550)
Investment in joint ventures(h) - 1,364 2,859
Total assets 728,405 301,701 73,125
Current portion of long-term debt
and capital lease obligations 10,656 5,554 959
Long-term debt and capital lease
obligations (excluding current
portion) 628,043 234,127 19,746
Redeemable Preferred Shares 51,756 - -
Common Shares and commitment
to issue Common Shares 149,880 98,101 51,660
Accumulated deficit (189,671) (76,333) (15,955)
Accumulated other comprehensive
income - - -
Shareholders' deficit (39,791) 21,768 35,705
</TABLE>
- --------------------------
(a) 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 and
$32.1million for Fiscal 1999. During the construction of our 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."
(b) Includes a $61,266 gain on the sale of NACT Telecommunications, Inc.
(c) Includes a $28,000 gain (net) from the settlement of lawsuits
described in Part I, Item 3, "Legal Proceedings--GST and GST Telecom
v. Global Light Telecommunications, Inc., et al." Global.
(d) Includes minority interest in (income) loss of subsidiaries $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 and Fiscal 1999
(e) 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 six months ended December 31, 1997, $7.1 million for Fiscal 1998
and $7.9 million for Fiscal 1999.
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(f) 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 we believe to
be representative of interest and preferred stock accretion. For
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 Fiscal 1999, earnings were insufficient to
cover fixed charges $13.8 million, $62.9 million, $130.0 million, $25.2
million, $45.1 million, $149.9 million, $187.5 million and $222.7
million, respectively.
(g) 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 us 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 our continuing operations 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 1995 through Fiscal
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 our net losses throughout these
periods.
(h) Represents principally GST's then 50% ownership interest in Phoenix
Fiber Access, Inc. ("Phoenix Fiber"), the owner and operator of the
Phoenix network. We acquired the remaining 50% interest in Phoenix
Fiber effective as of October 1, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
We are a facilities-based integrated communications provider, or ICP,
offering a broad range of telecommunications products and services, primarily to
business customers located in California and other western states. We own and
operate a converged network capable of carrying both voice and data
traffic--offering our customers an alternative to incumbent local exchange
carriers. Our current products include data transport, high-speed Internet
access, voice services (including a bundled offering of local and long distance
services), and wholesale services, including dark fiber and conduit rights.
As an ICP, we have one reportable operating segment. While our chief
decision-maker monitors 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. The various revenue
streams generate many shared expenses. As a result, we believe
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that any allocation of the expenses to multiple revenue streams would be
impractical and arbitrary. For that reason, we do not currently make such
allocations internally. Furthermore, substantially all of our revenue is
attributable to customers in the United States and all significant operating
assets are located within the United States.
The chief decision-maker does, however, monitor revenue streams at a
more detailed level than those depicted in our historical general purpose
consolidated financial statements. The following table presents revenues by
service type (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Local service............ $ 93,620 $ 48,859 $ 7,034 $ 16,993
Long distance
services............. 65,590 65,701 12,609 44,981
Data services............ 19,843 8,770 1,100 2,000
Internet services........ 9,601 8,404 1,013 3,006
Long-haul services....... 11,603 14,673 3,395 12,057
Product.................. 4,089 4,708 8,706 23,374
Other.................... 2,429 3,376 913 3,556
Construction and facility
sales................ 115,147 8,826 1,488 --
--------------- --------------- ----------------- -------------------
Total revenues..... $ 321,922 $ 163,317 $ 36,258 $ 105,967
=============== =============== ================= ===================
</TABLE>
RECENT DEVELOPMENTS
On January 25, 2000, we announced that Joseph A. Basile, Jr. had
resigned as President and Chief Executive Officer of GST. Mr. Basile continues
to serve as a director. We appointed Thomas Malone, the Chief Operating Officer
of GST, as Acting Chief Executive Officer.
In a series of transactions in February 2000, we sold all of our common
shares of Global Light Telecommunications, Inc. for net proceeds of
approximately $56.5 million in cash.
On March 23, 2000, we announced that Daniel L. Trampush resigned as
Senior Vice President of Chief Financial Officer of GST. His successor has
been appointed and is expected to assume his duties in early April. Mr.
Trampush will remain in office until that time.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
For the purpose of making quarter-over-quarter comparisons, see
GST's restated quarterly results for 1999 in amendments to Form 10-Q for the
periods ending March 31, June 30 and September 30, 1999. These changes relate
primarily to construction revenues and cost of construction revenues.
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<PAGE>
REVENUES. Total revenue for Fiscal 1999 increased $158.6 million, or
97.1%, to $321.9 million from $163.3 million for Fiscal 1998.
Telecommunications and other services revenues for Fiscal 1999
increased $52.9 million, or 35.3%, to $202.7 million from $149.8 million for
Fiscal 1998. The increase in telecommunications and other services revenues
resulted from increased local, data and Internet services. We bundle these
products to provide better access and services to our customers. To a lesser
extent, the increase was attributable to 1998 strategic acquisitions, including
the acquisition of ICON Communications Corporation in April 1998. Reciprocal
compensation, which we recognize based on interconnection agreements and other
agreements with ILECs, totaled $11.2 million for 1999 compared to $.1 million
for 1998.
Construction, facility sales and other revenue for 1999 increased
$106.3 million, to $115.1 million from $8.8 million for 1998. The increase in
construction, facility sales and other revenue was attributable to revenue from
several agreements to sell, construct or lease conduit and fiber to other
carriers.
Product revenue for Fiscal 1999 decreased $.6 million, or 13.1%, to
$4.1 million from $4.7 million in Fiscal 1998. The decrease in product revenue
was primarily due to the divestiture of the portion of Texas-based Action
Telcom's product sales division relating to long distance interconnection
equipment, in October 1999
OPERATING EXPENSES. Total operating expenses for Fiscal 1999 increased
$123.7 million, or 41.4%, to $422.2 million from $298.5 million for Fiscal 1998.
Network expenses, which include direct local and long distance
circuit costs, increased $25.4 million, or 24.4%, to $129.8 million, or 64.0%
of telecommunications services revenues for Fiscal 1999 compared to $104.3
million, or 69.6% of telecommunications services revenues for Fiscal 1998. The
decrease in network expenses as a percentage of revenue resulted from an
increase in revenues for traffic carried on our network as a percentage of
total telecommunications services revenues.
Facilities administration and maintenance expenses for Fiscal 1999
increased $4.4 million, or 26.2%, to $21.1 million, or 10.4% of
telecommunications services revenues compared to $16.7 million, or 11.2% of
telecommunications services revenues for Fiscal 1998. The primary reason for
the decrease in these expenses as a percentage of telecommunications services
revenues is the inclusion of revenues from acquisitions, substantially all of
which are not generated on our networks.
Cost of construction revenues for Fiscal 1999 was $74.9 million, an
increase of $73.5 million over Fiscal 1998. The increase was caused by the
increase in construction, facility sales and other revenue.
Cost of product revenues for Fiscal 1999 decreased $.5 million, or
17.2%, to $2.5 million from $3.0 million for Fiscal 1998. For Fiscal 1999, cost
of product revenues was 60.7% of
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product revenues compared to 63.7% for Fiscal 1998.
Selling, general and administrative expenses for Fiscal 1999 increased
$26.5 million, or 27.4%, to $123.0 million from $96.5 million for Fiscal 1998.
The increase is primarily due to: (1) the expansion of our local and enhanced
services operations, which resulted in additional marketing, management
information and sales staff; (2) selling, general and administrative expenses
related to companies acquired in 1998; (3) increased bad debt expense related to
reserves recorded for certain ICP and carrier customers; and (4) increased
bonuses related to our Variable Incentive Plan. In addition we had increased
litigation costs related to the legal proceedings described in Part 1, Item 3,
"Legal Proceedings." As a percentage of total revenue, selling, general and
administrative expenses for Fiscal 1999 were 38.2%, compared to 59.1% for Fiscal
1998.
Depreciation and amortization for Fiscal 1999 increased $25.0 million,
or 54.4%, to $71.0 million from $46.0 million for Fiscal 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 our
acquisitions. We expect that depreciation will continue to increase as we expand
our network and long-haul fiber-optic facilities. Depreciation and amortization
expense was 22.1% of total revenue for Fiscal 1999 compared to 28.1% for Fiscal
1998.
There were no special charges recorded for Fiscal 1999. Special charges
for Fiscal 1998 consist of the following (in thousands):
<TABLE>
<CAPTION>
<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 1998, we changed our strategic direction to focus on our core,
domestic business. In conjunction with the change, management identified certain
in-process network construction projects no longer considered compatible due to
geographic location or technology changes. The write-off totaled $9.9 million
and represented the entire amount of the costs related to these in-process
projects, including the costs of fiber-optic networks and electronic
equipment. These assets had never been placed in service and, as such, were
not an integral part of our ongoing operations. While the historical cost of
these assets has been written-off of our consolidated balance sheets, we
continue to hold these assets for disposal.
In conjunction with the change in strategic direction, management
halted further development of, and investment in, shared tenant services. The
decision resulted in an
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impairment charge of $2.7 million for property, plant and equipment, and
$1.2 million for customer lists associated with such services. At December 31,
1998, we held our shared tenant services assets to sell and sold 80% of such
assets during 1999. We anticipate that we will sell the remaining operations
and assets during 2000. 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 the 1996 acquisition of Tri-Star Residential Communications, Inc.,
or Tri-Star, a shared-tenant service provider. No goodwill had been recorded
in conjunction with the acquisition of Tri-Star.
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
employees worked in a variety of functions and operations throughout GST. At
December 31, 1998, we had accrued $1.1 million in severance-related costs.
The majority of these costs relate to the termination plan and all but $.3
million were paid out in Fiscal 1999.
In 1996, GST and Magnacom, a company which was controlled by the
Company's former Chairman and Chief Executive Officer, entered into a
reseller agreement pursuant to which (i) we were to become a reseller of PCS
services in markets in which Magnacom had obtained FCC licenses, and (ii)
Magnacom was to use us to provide switched local and long distance services
in markets where we had operational networks. Pursuant to such agreement, we
paid Magnacom $-0-, $.2 million, $-0- and $8.4 million during the years ended
December 31, 1999 and 1998, the three-months ended December 31, 1997 and the
year ended September 30, 1997, respectively. In addition, we made operating
advances to Magnacom of $-0-, $.9 million, $.1 million and $.1 million during
the years ended December 31, 1999 and 1998, the three-months ended December
31, 1997 and the year ended September 30, 1997, respectively.
In October 1998, Magnacom filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. As a result, we wrote-off all
amounts previously paid to Magnacom in the third quarter of 1998. The total
write-off of approximately $15.7 million is included in special charges in the
accompanying consolidated statement of operations for the year ending December
31, 1998. We have not asserted a claim in the bankruptcy matter, which has been
converted to a case under Chapter 7 of the United States Bankruptcy Code in July
1999.
Of the special charges recorded for the year ended December 31, 1998,
only the severance costs are recorded as an accrued liability on our balance
sheet as of December 31, 1999.
OTHER EXPENSES/INCOME. For Fiscal 1999, we recorded net other expense
of $82.3 million, compared to net other expense of $19.5 million for Fiscal
1998. For Fiscal 1999, net other expense includes a $28.0 million gain (net)
resulting from a payment received from Global Light Telecommunications in
connection with the settlement of various lawsuits (the "Global Settlement").
See Part I, Item 3, Legal Proceedings--GST and GST Telecom v. Global Light
Telecommunications, Inc., et al." For Fiscal 1998, net other expense includes a
$61.3 million gain resulting from the sale of our remaining 63% interest in NACT
Telecommunications, Inc. (the "NACT Sale"). Excluding such gains, net other
expense would have increased $29.5 million for Fiscal 1999 as compared to Fiscal
1998. Such increase related primarily to increased interest
24
<PAGE>
expense resulting from the issuance in May 1998 of the 1998 Notes ("1998 Notes"
means the 10 1/2% Senior Secured Discount Notes due 2008 of GST Network Funding
issued pursuant to the indenture dated as of May 4, 1998 between GST, GST USA ,
GST Network Funding and United States Trust Company of New York) and decreased
interest income due to lower cash and restricted cash balances.
NET LOSS. Net loss for Fiscal 1999 increased $27.9 million, or 18.0%,
to $182.6 million from $154.7 million for Fiscal 1998. Excluding the $28.0
million gain (net) on the Global Settlement in Fiscal 1999 and the $61.3 million
gain on the NACT Sale in Fiscal 1998, net loss would have been $210.6 million
and $216.0 million for Fiscal 1999 and 1998, respectively.
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 Communications Corp., or ICON, in April 1998, and from
increased local service revenue generated by our 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 long-haul network facilities in
California. Telecommunications products revenues for Fiscal 1998 decreased $22.6
million, or 82.8%, to $4.7 million from $27.3 million for the twelve months
ended December 31, 1997. The decrease in product revenues resulted from the sale
of our 63% interest in NACT Telecommunications, Inc., or 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 included 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 our 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 was the inclusion of revenues from strategic
acquisitions, substantially all of which were not generated on our 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
product revenues compared to 34.0% for the comparable period ended
December 31, 1997. The decrease in the dollar amount of cost
25
<PAGE>
of product revenues and the increase in cost of product revenues as a percent of
product sales resulted from the sale of NACT. Research and development costs
reported in the twelve months ended December 31, 1997 were related to activities
at NACT.
Cost of construction revenues for Fiscal 1998 increased $1.1 million to
$1.4 million from $.3 million for the twelve months ended December 31, 1997. The
increase resulted from an increase in construction, facility sales and other
revenues.
Selling, general and administrative expenses for Fiscal 1998 increased
$17.3 million, or 21.8%, to $96.5 million from $79.2 million for the twelve
months ended December 31, 1997. The increase was due to the expansion of our
local and enhanced services operations, which had 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 was attributable to newly-constructed networks
and related equipment being placed into service and to the amortization of
intangible assets related to our acquisitions. 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 this section, "Fiscal 1999 compared to Fiscal 1998," above 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 our
former executives. See Part I, Item 3, "Legal Proceedings--GST v. Gordon
Blankstein."
OTHER EXPENSES AND INCOME. For Fiscal 1998, we 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 included a $61.3
million gain resulting from the NACT Sale. 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 related
primarily to increased interest expense resulting from the issuance in November
and December 1997 of the Accrual Notes ("Accrual Notes" means the 12 3/4% Senior
Subordinated Accrual Notes due 2007 of GST issued pursuant to the indenture
dated as of November 19, 1997 between GST and United States Trust Company of New
York) 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.
26
<PAGE>
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 our
networks and from increased long distance service revenue. To a lesser extent,
the increase in revenue resulted from the acquisitions of Action Telcom, Inc. 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 its network management
system, called NAMS. Excluding NACT, product revenue totaled $1.4 million and $0
for the 1997 Three Month Period and the 1996 Three Month Period, respectively.
During the 1997 Three Month Period, we completed a $1.5 million long-haul
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 was the increase in on-net revenues
generated for traffic carried on our 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 our 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 included 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 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 related to
the sale of a long-haul conduit system.
27
<PAGE>
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 was due to the expansion of our 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 our 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 our
acquisitions. 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 ("Secured Notes" means the 13 1/4%
Senior Secured Discount Notes due 2007 of GST Equipment Funding issued pursuant
to the indenture dated as of May 13, 1997 among GST, GST USA, GST Equipment
Funding and United States Trust Company of New York) and the 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 our share of GST Global
Telecommunication, Inc.'s (now known as Global Light Telecommunications, Inc.)
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.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating and net losses as a result of
the development and operation of our networks. We expect that such losses will
continue as we develop, construct and expand our networks and long-haul
facilities and continue to build our customer base. Cash provided by our
operations will not be sufficient to fund expansion of our networks, long-haul
fiber-optic facilities and services.
At December 31, 1999, we had approximately $1,192.8 million of
indebtedness outstanding and $69.7 million of 11.875% mandatorily redeemable
preference shares. We have significant debt service obligations and will be
required to make principal and interest payments of approximately $69.9
million (of which $17.6 million will be made from funds securing the Secured
Notes), $115.3 million, $112.4 million, $155.7 million and $144.3
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<PAGE>
million in 2000, 2001, 2002, 2003 and 2004, respectively. In addition, we
anticipate 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. We also
anticipate that cash flow from operations will be insufficient to repay the 1995
Notes, the Secured Notes, the Accrual Notes, and the 1998 Notes in full and
these will need to be refinanced. Our ability to obtain such refinancings will
be dependent upon our future performance, which will be subject to prevailing
economic conditions and to financial, business and other factors beyond our
control. There can be no assurance that we will be able to improve our operating
results or that we will be able to meet our debt service obligations.
At December 31, 1999, we had cash, cash equivalents, and
investments, including restricted investments, of approximately $117.3
million. We believe that such amounts, along with the proceeds from the sale
of our common shares of Global and anticipated proceeds in May 2000, from a
conduit lease consummated in January 2000, will be sufficient to fund our
operations through August 2000. Divestitures and other management actions
should prolong capital availability through the fiscal year 2000 and beyond.
Thereafter, we expect to require additional financing. The extent of
additional financing will depend on, among other things, the rate of our
expansion and the success of the business. In the event that our plans or
assumptions change or prove to be inaccurate, we incur significant unexpected
expenses, or our cash resources, together with borrowings under the current
financing arrangements, prove to be insufficient to fund our growth and
operations, or if we consummate acquisitions, we may be required to seek
additional sources of capital (or seek additional capital sooner than
currently anticipated). We 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 us or, if available,
that it can be concluded on terms acceptable to us or within the limitations
contained within our existing financing arrangements. Failure to obtain
additional financing could result in the delay or abandonment of some or all
of our development or expansion plans and could have a material adverse
effect on our business. Such failure could also limit our ability to make
principal and interest payments on our outstanding indebtedness. We have no
material working capital or other credit facility under which we may borrow
for working capital and other general corporate purposes. There can be no
assurance that such facility will be available to us in the future or that if
such facility were available, that it would be available on terms and
conditions acceptable to us.
Our net cash used in operating activities was $32.4 million and $83.9
million for Fiscal 1999 and 1998, respectively, and net cash used investing
activities was $36.3 million and $344.2 million for Fiscal 1999 and 1998,
respectively. For Fiscal 1999, net cash used in operating activities
includes a $28.0 million gain (net) resulting from a payment received from
the Global Settlement. Excluding such gain, net cash used in operating
activities would have decreased $23.5 million for Fiscal 1999 as compared to
Fiscal 1998. For Fiscal 1999, net cash used in investing activities includes
$218.9 million of transfers from restricted investments. For Fiscal 1998, net
cash used in investment activities includes $85.0 million of proceeds from
the NACT Sale and $170.3 of transfers to restricted investments. Excluding
such proceeds and transfers, net cash used in investing activities would have
decreased $3.8 million for Fiscal 1999 as compared with Fiscal 1998. Net cash
provided by financing activities from borrowings and equity issuances to fund
capital expenditures, acquisitions and operating losses was $25.6 million and
$315.1 million Fiscal 1999 and 1998, respectively.
Capital expenditures for Fiscal 1999 and Fiscal 1998 were $296.7
million and $247.7 million, respectively, including $32.1 million and $25.9
million of capitalized interest. We estimate capital expenditures of
approximately $150 million in Fiscal 2000. The majority of these expenditures is
expected to be made for the construction of network and long-haul fiber-optic
facilities and the purchase of switches and related equipment to facilitate the
offering of our services. Continued significant capital expenditures are
expected to be made thereafter. In addition, we expect to continue to incur
operating losses while we expand our business and continue to build
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our 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 our control, including economic
conditions, competition, regulatory developments and the availability of
capital.
INCOME TAXES AND ADOPTION OF NEW ACCOUNTING STANDARDS
At December 31, 1999, we had a U.S. net operating loss carryforward of
approximately $264.5 million available to offset future taxable income of GST
USA and the other U.S. operating subsidiaries. Substantially all of our
operations are conducted in the United States. In addition, at that date, we had
a net operating loss carryforward of approximately Cdn. $90.3 million (U.S.
$60.8 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 in each respective tax jurisdiction, we may not generate
sufficient taxable income so as to use all, or a substantial portion, of such
loss carryforwards prior to their expiration. Further, our use of net operating
loss carryforwards applied against future taxable income is subject to
limitation if we experience an "ownership change" as defined in Section 382 of
the Code and the analogous provision of the Canada Act.
In June 1998, the Financial Accounting Standards Board, or 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
allderivative 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. We must adopt SFAS No.
133 by January 1, 2001. We have not determined the impact that SFAS No. 133
will have on our financial statements and will not do so 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." The interpretation is
effective for sales of real estate with property improvements or integral
equipment entered into after June 30, 1999. Under this interpretation,
conduit is considered integral equipment and dark fiber will likely be
considered integral equipment. Accordingly, title must transfer to a lessee
in order for a lease transaction to be accounted for as a sales-type lease.
For contracts entered into after June 30, 1999, sales-type lease accounting
is no longer appropriate for dark fiber and conduit leases and therefore,
these transactions will be accounted for as operating leases unless title
transfers to the lessee.
YEAR 2000 PROGRAM
Having completed our planned remediation and testing of all systems
identified as business-critical during the third quarter of 1999, we focused on
refining our contingency plans during the fourth quarter. To date, we have had
no reported system failures attributable to the year 2000 date conversion.
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The total amount expended on the project through December 31, 1999 was
approximately $2.8 million. The total cost of the year 2000 project was
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. We do not anticipate future material costs related to
the year 2000 project.
RISK FACTORS
This annual report contains forward-looking statements that involve
risks and uncertainties. We use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends" and similar expressions to identify
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of certain
factors, including the risks described below and elsewhere in this annual
report. We disclaim any obligation to update information contained in any
forward-looking statement.
RISKS RELATED TO GST
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH.
We have now and will continue to have a significant amount of indebtedness. The
following chart shows certain information about our outstanding indebtedness:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------
<S> <C>
Total indebtedness...................................... $1,192.8
Total shareholders' deficit............................. $ (283.3)
</TABLE>
<TABLE>
<CAPTION>
FOR THE TWELVE FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ------------------
<S> <C> <C>
Deficiency of earnings to fixed charges............. $222.7 $187.5
</TABLE>
Our level of outstanding indebtedness can have material adverse consequences.
These consequences include:
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- Our ability to obtain additional financing in the future for
capital expenditures, acquisitions, working capital or other
purposes may be limited;
- A material portion of our cash flow from operations will be
dedicated to the payment of, and interest on, our debt; and
- This indebtedness may limit our ability to withstand
competitive pressures and reduce our flexibility in
responding to changing business and economic conditions.
ABILITY TO SERVICE DEBT -- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness, to
grow our business and to fund planned capital expenditures and research and
development efforts will depend on our ability to generate cash in the future.
This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
We cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowings will be available to us in an
amount sufficient to enable us to pay our indebtedness, to grow our business
or to fund our other liquidity needs. If we fail to make payments on our
indebtedness or otherwise fail to comply with the various covenants of our
indebtedness, we would be in default under the terms of such indebtedness,
which would permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause defaults under our other
indebtedness or result in a bankruptcy, either of which could delay or
preclude payment of distributions on the securities.
We may need to refinance all or a portion of our indebtedness on or
before maturity. We cannot assure you that we will be able to refinance any of
our indebtedness on commercially reasonable terms or at all.
WE EXPECT TO CONTINUE TO HAVE OPERATING LOSSES WHICH MAY RESULT IN OUR FAILURE
TO MEET OUR WORKING CAPITAL AND DEBT SERVICE REQUIREMENTS.
As we have implemented our business strategy to enhance our
telecommunications service offerings, expanded our fiber optic network and
entered new markets, we have experienced operating losses. We expect this to
continue for the next several years as we continue to grow our business and
continue to make substantial capital expenditures. We cannot assure you that we
will attain an adequate customer base to achieve a significant market share for
any of our services. If we cannot achieve or sustain operating profitability and
positive net cash flow, we may not be able to obtain the funds necessary to
continue our operations or to repay amounts due on our outstanding debt. We
cannot assure you that we will achieve or sustain profitability or positive net
cash flow in the future.
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OUR CURRENT INDEBTEDNESS CONTAINS RESTRICTIVE COVENANTS THAT MAY LIMIT OUR
FLEXIBILITY.
We are subject to restrictions under our indentures governing our outstanding
indebtedness and the terms of our outstanding Series A Preferred Stock. These
restrictions affect and, in certain cases, significantly limit or prohibit,
among other things, our ability and the ability of our subsidiaries to:
- incur indebtedness;
- pay dividends or make other distributions to our shareholders;
- create liens;
- engage in transactions with affiliates;
- engage in certain mergers or consolidations;
- enter into sale-leaseback transactions;
- make investments;
- issue additional securities; and
- sell assets.
Our indentures restrict our ability to incur indebtedness, other than, subject
to certain conditions, indebtedness to finance the acquisition of equipment,
inventory or network assets and other specified indebtedness. In addition, these
restrictive covenants may adversely affect our ability to finance our future
operations or capital needs, or to engage in other business activities that may
be in our interest. See "--Substantial Leverage -- Our substantial indebtedness
could adversely affect our financial health."
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH SUCCESSFULLY.
The expansion and development of our business will depend upon, among other
things, our ability to:
- successfully implement our sales and marketing strategy;
- evaluate markets;
- design fiber routes;
- recruit and retain an appropriately qualified workforce;
- secure financing;
- control costs;
- install facilities;
- install, maintain and upgrade equipment as necessary to
maintain and enhance the capacity of our fiber-optic network;
- acquire rights of way;
- obtain any required government authorizations;
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- interconnect to, and collocate with, facilities owned by
incumbent local exchange carriers; and
- obtain appropriately priced unbundled network elements and
wholesale services from the incumbent local exchange carriers.
These all must be accomplished in a timely manner, at reasonable cost
and on satisfactory terms and conditions. We cannot assure you that we will be
able to do so.
Rapid growth may place a significant strain on our administrative,
operational and financial resources. Our ability to continue to manage our
growth successfully will require us to:
- enhance our operational, management, financial and information
systems and controls; and
- hire and retain qualified sales, marketing, administrative,
operating and technical personnel.
We cannot assure you that we will be able to manage our growth successfully. Our
inability to manage our growth effectively could have a material adverse effect
on our business, results of operations and financial condition.
WE MAY NOT HAVE, OR BE ABLE TO OBTAIN, THE SIGNIFICANT AMOUNTS OF CAPITAL THAT
WE NEED TO EXPAND OUR NETWORK, OPERATIONS AND SERVICES.
We need significant capital to expand our network, operations and
services in accordance with our business plans. During 1999, we made capital
expenditures of approximately $296.7 million, including $32.1 million of
capitalized interest. We currently estimate that our capital expenditures will
total approximately $150 million in 2000. If our estimates prove to be
inaccurate and/or we do not have access to the capital that we require, we will
need to change our business plans. This could have a material adverse effect on
our business, financial condition and results of operations.
Although we cannot assure you that our capital resources will permit
us to fund the expansion of our network, operations and services, we expect
to have sufficient funds to enable us to operate our business as currently
planned through August 2000. We believe that these funds will be provided by
cash on hand and cash flow from operations, including the proceeds from the
sale of our common shares of Global and anticipated proceeds in May 2000,
from a conduit lease consummated in January 2000. Capital availability may be
extended through fiscal year 2000 and beyond by completion of planned
divestments and other management actions.
If our current sources of funds are unavailable or insufficient to fund
our business plans, we may need to seek additional funds. The extent of
additional financing required will depend on numerous factors, including the
rate of our expansion and the success of our business. These additional funds
may come from public and private equity and debt financings, but we cannot
assure you that we will be able to obtain any additional funds on a timely
basis, on terms that are acceptable to us or at all. Our inability to obtain the
capital that we need to implement our current business plans could have a
material adverse effect on our business, financial condition
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and results of operations.
WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS.
We may acquire other businesses that will complement our existing business.
These acquisitions will likely involve some or all of the following risks:
- the difficulty of assimilating the acquired operations and
personnel;
- the potential disruption of our ongoing business;
- diversion of resources;
- the possible inability of management to maintain uniform
standards, controls, procedures and policies;
- the possible difficulty of managing our growth and information
systems;
- entering markets in which we have little experience;
- the possible delay and cost of obtaining required regulatory
approvals; and o the potential impairment of relationships
with employees or customers.
There can be no assurance that we will be able to identify additional suitable
acquisition candidates available for sale at reasonable prices, consummate any
acquisition, or successfully integrate any acquired business into our
operations.
OUR RELIANCE ON ILEC INTERCONNECTIONS AND CHANGES TO OUR AGREEMENTS WITH THE
ILECS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
We are dependent upon our agreements with the ILECs operating in our
existing and targeted markets. These agreements, called interconnection
agreements, specify how we connect our networks with the network of the ILEC in
each of our markets. Federal legislation regulating the telecommunications
industry has enhanced competition in the local service market by requiring the
ILECs to provide access to their networks through interconnection agreements and
to offer unbundled elements of their network and retail services at prescribed
rates to other telecommunications carriers. A failure to negotiate required
interconnection agreements or renew existing interconnection agreements on
favorable terms and in a timely manner, or an inability to obtain unbundled
network elements to the extent needed and at a price that permits us to compete,
could have a material adverse effect on our business.
The Telecommunications Act creates incentives for Regional Bell
Operating Companies, or RBOCs, to permit access to their facilities by denying
them the ability to provide in-region long distance service until they have met
specified conditions opening the market to competition at the local level. The
RBOCs in the territories we serve have indicated their intent to apply for such
authority. If they were to receive the authority to provide in-region long
distance service, there can be no assurances that the RBOCs would continue to
cooperate with us in opening the local market. In that case, our ability to
offer local services in those states on a timely and cost-effective basis could
be adversely affected.
Our interconnection agreements also require the ILECs to provide
sufficient transmission
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capacity to keep blocked calls between our networks within industry limits.
Accordingly, we are partially dependent on the ILECs in our efforts to provide
our customers with superior service and avoid blocked calls. The failure by the
ILECs to comply with their obligations under our interconnection agreements
could result in customer dissatisfaction and the loss of existing and potential
customers. In addition, the rates charged to us under the interconnection
agreements may be too high to permit us to offer usage rates that are low enough
to attract a sufficient number of customers and permit us to operate profitably.
The pace at which we are able to add new customers and services could
be adversely affected if the ILECs do not provide us with necessary network
elements, collocation space, inter-company network connections and the means to
share information about customer accounts, service orders and repairs on a
timely basis. In addition, our ability to provide high-speed data services will
be dependent on our obtaining space from the various ILECs for physical
collocation of our equipment in the ILECs' central offices and elsewhere. In
many instances, the ILECs do not timely or fully comply with these requirements.
Also, the rules governing which elements the ILECs must provide and the cost
methodology for providing these elements are currently under FCC and judicial
review.
Interconnection agreements are subject to review and approval by
various federal and state regulators. In addition, parties to the agreements may
seek to have the agreements modified based upon the outcome of regulatory or
judicial rulings occurring after the dates of the agreements. The outcome of
these rulings, or any modified agreements, could have a material adverse effect
on us. In addition, certain aspects of interconnection agreements, including the
price and economic terms of these agreements, have been and will continue to be
subject to industry-wide litigation and regulatory action.
WE MAY NOT BE ABLE TO CONNECT OUR NETWORK TO THE INTERNET ON FAVORABLE TERMS.
To successfully develop and maintain a national IP (Internet
Protocol) backbone, we require peering arrangements with other providers of
Internet transport services, particularly those with national coverage. While
we anticipate that we will enter into and maintain the necessary agreements,
the terms and conditions of these peering agreements are becoming more
restrictive as Internet service becomes increasingly commercialized, and we
cannot be sure that our peering arrangements will be on favorable terms.
WE ARE DEPENDENT UPON RIGHTS-OF-WAY AND OTHER THIRD-PARTY AGREEMENTS TO EXPAND
AND MAINTAIN OUR FIBER OPTIC NETWORK.
To construct and maintain our fiber optic network, we have obtained
easements, rights-of-way, franchises and licenses from various private parties,
including actual and potential competitors, and local governments. We cannot
assure you that we will continue to have access to existing rights-of-way and
franchises after the expiration of our current agreements, or that we will
obtain additional rights necessary to extend our network on reasonable terms. We
may also incur additional costs to satisfy state and local environmental and
other regulations, as they relate to our
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construction/excavation activities within easements and rights-of-way. If a
franchise, license or lease agreement were terminated and we were forced to
remove or abandon a significant portion of our network, such termination could
have a material adverse effect on our business, results of operations and
financial condition. Similarly, our business plans could be adversely affected
if our network expansion is hindered through delays or denials of rights of way,
easements or related licenses on competitive terms.
SERVICE INTERRUPTIONS ON OUR NETWORK COULD EXPOSE US TO LIABILITY OR CAUSE US TO
LOSE CUSTOMERS.
Our operations depend on our ability to avoid and mitigate any damages from
power losses, excessive sustained or peak user demand, telecommunications
failures, network software flaws, transmission cable cuts or natural disasters.
The failure of any equipment or facility on our network could result in the
interruption of customer service until we make necessary repairs or install
replacement equipment. Additionally, if a carrier or other service provider
fails to provide the communications capacity that we have leased in order to
provide service to our customers, service to our customers would be interrupted.
If service is not restored in a timely manner, agreements with our customers may
obligate us to provide credits or other remedies to them, which would reduce our
revenues. Service disruptions could also damage our reputation with customers,
causing us to lose existing customers or have difficulty attracting new ones.
Many of our customers' communications needs will be extremely time sensitive,
and delays in signal delivery may cause significant losses to a customer using
our network. Our network may also contain undetected design faults and software
"bugs" that, despite our testing, may be discovered only after the network has
been completed and is in use.
DELAYS IN CONSTRUCTION COULD EXPOSE US TO LIABILITY OR CAUSE US TO LOSE
CUSTOMERS.
As a facilities-based ICP, we largely depend on our own network
facilities to provide our customers with communications services. We may be
required to construct or install network facilities at customer locations where
we do not already have network facilities installed. Delays in connecting our
customers to our network and providing them with the services they requested
could cause us to lose customers or incur additional expenses in procuring
alternative methods of delivering the services.
We also lease conduits and dark fiber to other telecommunications
carriers. In addition, we engage in joint construction projects with other
telecommunications carriers desiring to build network facilities in the same
location. Our failure to complete construction of conduits or installation of
fiber on a timely basis could expose us to liability from the other carriers
with rights to use the conduits and/or fiber.
THE LOSS OF MAJOR CUSTOMERS COULD SEVERELY IMPACT OUR BUSINESS.
We currently derive a substantial portion of our total revenue from
several major customers. Our five largest telecommunications and other services
customers accounted for approximately 11.3%, 16.4%, 16.8% and 20.8% of our
consolidated telecommunications and
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other services revenue for the years ended December 31, 1999 and 1998, the
three-month period ended December 31, 1997 and the year ended September 30,
1997, respectively. While we expect revenue from these key customers to decrease
as a percentage of revenue in future periods, we believe that revenue derived
from a limited number of customers may continue to represent a significant
portion of our revenue. As a result, the loss of one or more of our major
customers could have a material adverse effect on our business, financial
condition and results of operations. In addition, we cannot assure you that
revenue from customers that have accounted for significant revenue in past
periods, individually or as a group, will continue, or will reach or exceed
historical levels in any future period.
WE ARE DEPENDENT ON SOPHISTICATED BILLING, CUSTOMER SERVICE AND INFORMATION
SYSTEMS.
We depend on sophisticated information and processing systems to grow,
monitor costs, bill customers, provision customer orders and achieve operating
efficiencies. As we increase our provision of local and data services, the need
for enhanced billing and information systems will also increase. We rely on a
number of third-party providers for the systems and software we use. Our
inability to identify adequately all of our information and processing needs,
identify and remediate defects, or upgrade systems as necessary, could have a
material adverse effect on our ability to reach our objectives on our financial
condition and results of operations.
IF WE LOSE KEY PERSONNEL AND QUALIFIED TECHNICAL AND SALES STAFF, OUR ABILITY TO
MANAGE THE DAY-TO-DAY ASPECTS OF OUR COMPLEX NETWORK MAY BE WEAKENED.
We believe that a critical component for our success will be the
attraction and retention of qualified professional and technical personnel. If
we lose key personnel and qualified technical staff, or are unable to recruit
qualified personnel, our ability to manage the day-to-day aspects of our
business may be weakened. Competition for such personnel is intense and there
can be no assurance that we will be to attract, assimilate or retain highly
qualified technical and managerial personnel in the future.
In addition, we must also develop and retain a large and sophisticated
sales force. If we fail to do so, there may be an adverse effect on our ability
to generate revenue and, consequently, our operating cash flow.
OUR OPERATING RESULTS COULD VARY SIGNIFICANTLY FROM PERIOD TO PERIOD.
Our revenues and operating results could vary significantly from period
to period for many reasons, including:
- significant non-capital expenses associated with the
construction and expansion of our network and services;
- changes in pricing and service offerings;
- competition and regulatory developments;
- changes in market growth rates for our products and services;
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- availability or announcement of alternative technologies; and
- general economic conditions.
These factors and any resulting fluctuations in our operating results
will make period to period comparisons of our financial condition less
meaningful and could have a material adverse effect on our business, results of
operations and financial condition.
THERE MAY BE ADDITIONAL RISKS ASSOCIATED WITH INVESTING IN A CANADIAN
CORPORATION.
We are incorporated under the Canada Business Corporations Act,
although all of our operating subsidiaries are incorporated in various states
within the United States. Some of our directors are Canadian residents. As a
result, it may be difficult for U.S. security holders to effect service of
process on our Canadian directors or enforce judgments of U.S. courts against us
or our Canadian directors if the judgment is based solely upon civil liability
under the U.S. securities laws. In addition, our status as a Canadian company
may limit our ability to hold or control wireless licenses in the United States.
RISKS RELATED TO OUR INDUSTRY
THE TELECOMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES, AND
NEW TECHNOLOGY MAY BE SUPERIOR TO THE TECHNOLOGY WE USE.
The telecommunications industry is subject to rapid and significant
changes in technology. In addition, we may be required to select in advance one
emerging technology over another, but it will be impossible to predict with any
certainty, at the time we are required to make our investment, which technology
will prove to be the most economic, efficient or capable of attracting customer
usage. Unexpected developments, or our failure to adapt to them, could have a
material adverse effect on our business, results of operations and financial
condition.
The following technologies and equipment that we use or will use are
subject to obsolescence:
- wire-line transmission technologies;
- circuit and packet switching technologies; and
- data transmission technologies.
In addition, we cannot assure you that the technologies that we choose
to invest in will lead to successful implementation of our business plan.
THE LOCAL SERVICES MARKET IS HIGHLY COMPETITIVE, AND MANY OF OUR COMPETITORS
HAVE SIGNIFICANT ADVANTAGES THAT MAY ADVERSELY AFFECT OUR ABILITY TO COMPETE
WITH THEM.
Portions of the telecommunications industry are highly competitive.
Many of our existing and potential competitors, including the incumbent local
exchange carriers, or ILECs, and some competitive local exchange carriers, or
CLECs, have financial, personnel, marketing
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and other resources significantly greater than ours. Many of these competitors
also have a more established network and a broader existing customer base than
we do.
In most markets, our principal competitor is the ILEC. Although recent
federal legislation and rulemaking have afforded us increased opportunities,
they also provide the ILECs with some advantages which could adversely affect
our business. In addition, current competitive advantages afforded to CLECs may
also be adversely affected by changes in existing regulation of
telecommunications services. These changes include permitting ILECs to:
- reduce their prices because of fewer regulatory restrictions;
- offer selective discount pricing to their customers;
- provide advanced data networks through less-regulated separate
subsidiaries than may be used for voice traffic;
- eliminate the resale of advanced services;
- provide in-region long distance service; and
- limit the network elements required to be provided on an
unbundled basis.
In addition, significant new competitors in the local exchange market could
arise as a result of:
- consolidation and strategic alliances in the industry;
- foreign carriers being allowed to compete in the U.S. market;
- further technological advances; and
- further deregulation and other regulatory initiatives.
Other competitors and potential market entrants include long distance
companies, other CLECs, cable television companies, other ICPs, electric
utilities, microwave carriers, wireless telephone system operators, data service
companies and operators of private networks.
WE FACE A CONTINUING TREND TOWARD BUSINESS COMBINATIONS AND STRATEGIC ALLIANCES
IN THE TELECOMMUNICATIONS INDUSTRY THAT MAY FURTHER ENHANCE COMPETITION.
The telecommunications industry has experienced a significant trend
toward business combinations and strategic alliances. Qwest Communications, for
example, is in the process of acquiring US West, the RBOC serving many of our
service areas in the western United States. This acquisition could enhance the
competition we face in local exchange and data services. Additionally, AT&T has
acquired Teleport Communications Group, a CLEC that also competes with us in
several markets. WorldCom acquired MFS Communications, Brooks Fiber Properties
and MCI, each of which compete with us in several of the markets in which we
operate. In addition, MCI WorldCom is seeking to acquire Sprint. Business
combinations and strategic alliances such as these could materially enhance the
level of competition we face in many current and future markets.
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THE LOCAL AND LONG DISTANCE INDUSTRIES ARE SUBJECT TO SIGNIFICANT GOVERNMENT
REGULATION, AND THE REGULATIONS MAY CHANGE.
We are required to obtain authorizations from the FCC and state public
utility commissions to offer some of our telecommunications services. We are
also required to file tariffs for many of our services and to comply with local
license or permit requirements relating to installation and operation of our
network. Any of the following could have a material adverse effect on our
business, results of operations and financial condition:
- failure to maintain proper federal and state tariffs;
- failure to maintain proper state certifications;
- failure to comply with federal, state or local laws and
regulations;
- failure to obtain and maintain required licenses and permits;
- burdensome license or permit requirements to operate in
public rights-of-way; and
- burdensome or adverse regulatory requirements or developments.
In addition, existing federal and state regulations, or new
regulations, could have a material impact on our prices and revenues. Certain
rates we charge our customers must be filed with the FCC and/or state
regulators, which provides price transparency to customers and competitors.
Federal and state regulatory agencies also have the right to impose
sanctions and forfeitures, mandate refunds or impose other penalties for
regulatory non-compliance.
In markets where we provide local exchange services, the
Telecommunications Act of 1996 and FCC rules require us to:
- not unreasonably limit the resale of our services;
- provide telephone number portability if technically feasible;
- provide dialing parity to competing providers;
- provide access to poles, ducts and conduits we own; and
- establish reciprocal compensation arrangements for the
transport and termination of telecommunications traffic.
Recent federal legislation governing the telecommunications industry
remains subject to judicial review and additional FCC rule-making. As a result,
we cannot predict the legislation's effect on our future operations or results.
Many regulatory actions regarding important items that impact us are underway or
are being contemplated by federal and state authorities. Changes in current or
future regulations adopted by federal, state or local regulators, or other
legislative or judicial initiatives relating to the telecommunications industry
could have a material adverse effect on us.
Unlike some of our competitors, particularly the ILECs, we are not
currently subject to some of the burdensome regulations imposed by federal
legislation. Our ability to compete in the
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local exchange market will depend upon a continued favorable, pro-competitive
regulatory environment, and could be adversely affected by new regulations or
legislation affording greater flexibility and regulatory relief to our
competitors.
In May 1997, for example, 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. We could be
adversely affected if we do not experience access cost reductions proportionally
equivalent to those of our competitors. Further, competitors 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, and are not currently subject to international
settlements payments.
42
<PAGE>
Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK - We have 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 our investment portfolio is affected
by changes in the general level of U.S. interest rates. We
believe 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 our risk exposure
associated with changing interest rates. Currently, we do not use
derivative financial instruments to manage our interest rate risk.
<TABLE>
<CAPTION>
EXPECTED MATURITY
(In thousands of dollars)
---------------------------------------------------------------------------------------------------
Market
Value at
December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999 (1)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate $1,259,304 (2) $1,259,304 (2) $1,030,892
Average interest rate 12.275%
Variable rate $ 17,466 $ 19,814 $ 20,511 $ 21,388 $ 11,582 $ 5,801 $ 96,562
Average interest rate 3.27% 3.28% 3.33% 3.34% 3.21% 3.06%
(LIBOR plus)
Capital Leases:
Fixed rate $ 6,697 $ 3,221 $ 1,864 $ 1,859 $ 1,996 $ 7,869 $ 23,506
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 December 31, 1999
(2) Includes $186.6 million of unaccreted discount
MARKET PRICE RISK - Our risk exposure associated with market price is
limited to its long-term debt that is publicly traded. These bonds are
recorded at book value, which could vary from current market prices.
FOREIGN CURRENCY MARKET RISK - Although we conduct some business in
Canada, the international operations were not material to our
consolidated financial position. Accordingly, we were not subject to
material foreign currency exchange rate risk from the effects that
exchange rate movements of foreign currencies would have on our future
costs or on future cash flows we would receive.
43
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
We have had no changes in or disagreements with accountants on
accounting or financial disclosure matters during the two most recent fiscal
years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 10 through 13 is incorporated by
reference from our definitive proxy statement, pursuant to general instruction
G(3). We plan to file our definitive proxy statement with the SEC pursuant to
Regulation 14A by May 1, 2000.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements: see the Index to Consolidated
Financial Statements.
Exhibits:
3(a) Certificate of Incorporation of the Company, as amended to date,
incorporated by reference to Exhibit 3(a) to the Company's Form
10-K for the fiscal year ended September 30, 1996, as amended (the
"1996 Form 10-K").
3(b) By-Laws of the Company as amended to date, incorporated by
reference to Exhibit 3.1 to the Company's Form S-3 (No. 333-38091)
(the "Form S-3").
4(a) Senior Notes Indenture dated as of December 19, 1995, by and among
GST USA, Inc., the Company and United States Trust Company of New
York, incorporated by reference to Exhibit 2.3 to the Company's
Form 20-F for the fiscal year ended September 30, 1995 (the "1995
Form 20-F").
4(b) Convertible Notes Indenture dated as of December 19, 1995, by and
among the Company, GST USA, Inc. and United States Trust Company of
New York, incorporated by reference to Exhibit 2.4 to the 1995 Form
20-F.
4(c) Indenture dated as of May 13, 1997, by and among GST Equipment
Funding, Inc., the Company, GST USA, Inc. and United States Trust
Company of New York, incorporated by reference to Exhibit 10.2 to
the Company's Form 10-Q for the period ended June 30, 1997 (the
"June 1997 10-Q").
4(d) Indenture dated as of November 19, 1997, by and between the Company
and United States Trust Company of New York, incorporated by
reference to Exhibit 4.1 to the Company's Form S-3 (No. 333-38301)
(the "Debt Form S-3").
4(e) Indenture dated May 4, 1998 by and among GST Telecommunications,
Inc., GST USA, Inc., GST Network Funding, Inc. and the United
States Trust Company of New York, as trustee, incorporated by
reference to Exhibit 4.1 of the Company's Form 8-K filed May 19,
1998.
10(a) 1995 Stock Option Plan of the Company, as amended to date;
incorporated by reference to Exhibit 10(a) to the Company Form 10-K
for the fiscal year ended September 30, 1997 (the "1997 Form 10-K").
10(b) 1996 Stock Option Plan of the Company, as amended to date,
incorporated by
45
<PAGE>
reference to Exhibit 10(b) to the 1997 Form 10-K.
10(c) 1996 Employee Stock Purchase Plan of the Company, incorporated by
reference to Exhibit 10(c) to the 1997 Form 10-K.
10(d) 1996 Senior Executive Officer Stock Option Plan of the Company,
incorporated by reference to Exhibit 10(d) to the 1997 Form 10-K.
10(e) 1996 Senior Operating Officer Stock Option Plan of the Company,
incorporated by reference to Exhibit 10(e) to the 1997 Form 10-K.
10(f) Amended and Restated Credit Agreement dated as of April 26, 1995, by
and between GST Pacific Lightwave, Inc. and Tomen America Inc.,
incorporated by reference to Exhibit 1.2 to the 1995 Form 20-F.
10(g) Collateral Pledge and Security Agreement dated as of May 13, 1997,
by and among GST Equipment Funding, Inc., United States Trust
Company of New York and the holders of the Notes as defined
therein, incorporated by reference to Exhibit 10.4 to the June 1997
Form 10-Q.
10(h) Amended and Restated Master Agreement dated as of May 24, 1996, by
and among Tomen America Inc., the Company, GST Telecom Inc., GST
Pacific Lightwave, Inc., Pacwest Network L.L.C., Pacwest Network
Inc., GST Tucson Lightwave, Inc. and GST New Mexico Lightwave,
Inc., incorporated by reference to Exhibit 10(l) to the 1996 Form
10-K.
10(i) Credit Agreement dated as of May 24, 1996, by and between GST New
Mexico Lightwave, Inc. and TM Communications LLC, incorporated by
reference to Exhibit 10(n) to the 1996 Form 10-K.
10(j) Credit Agreement dated as of May 24, 1996, by and between GST
Tucson Lightwave, Inc. and TM Communications LLC, incorporated by
reference to Exhibit 10(o) to the 1996 Form 10-K.
10(s) Employment Agreement dated March 11, 1997, by and between GST USA,
Inc. and Joseph Basile, Jr, incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the period ended March 31, 1997
(the "March 1997 10-Q").
10(t) Employment Agreement dated February 10, 1997, by and between GST
USA, Inc. and GST Telecom Inc. and Daniel L. Trampush, incorporated
by reference to Exhibit 10.2 to the March 1997 Form 10-Q.
10(u) Reseller Agreement dated as of October 30, 1996, by and between
Magnacom Wireless, L.L.C., and GST Telecom Inc., incorporated by
reference to Exhibit 10(z) to the 1996 Form 10-K.
46
<PAGE>
10(w) Agreement and Plan of Merger dated as of May 31, 1997, by and among
Action Telcom Co., Britt E. Bilberry, Timothy Harding Bilberry,
Paul S Bilberry, GST Action Telecom, Inc. and the Company,
incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
dated May 31, 1997.
10(x) Equipment Loan and Security Agreement dated December 19, 1996 by
and between NTFC Capital Corporation and GST Equipco, incorporated
by reference to Exhibit 10(v) to the 1996 Form 10-K.
10(y) Loan and Security Agreement dated as of September 4, 1996 by and
between Siemens Stromberg-Carlson ("Siemens") and GST Switchco,
Inc. ("GST Switchco"), incorporated by reference to Exhibit 10(d)
to the Company's Form 10-Q for the period ended December 31, 1996
(the "December 1996 Form 10-Q").
10(z) Unconditional Continuing Guaranty dated as of September 4, 1996 by
and between Siemens and GST USA, Inc., incorporated by reference to
Exhibit 10(e) to the December 1996 Form 10-Q.
10(aa) Unconditional Limited Guaranty Agreement dated as of December 19,
1996 made by GST USA, Inc., in favor of NTFC Capital Corporation,
incorporated by reference to Exhibit 10(f) to the December 1996
Form 10-Q.
10(bb) Securities Purchase Agreement, dated as of February 28, 1997,
between the Company and Ocean Horizon SRL, incorporated by
reference to Exhibit 4.1 to the Company's Form 8-K dated February
28, 1997 (the "February Form 8-K").
10(cc) Securityholders Agreement, dated as of February 28, 1997, between
the Registrant and Ocean Horizon SRL, incorporated by reference to
Exhibit 4.2 to the Company's February Form 8-K.
10(dd) Credit Agreement dated as of September 30, 1997 by and between GST
Telecom Hawaii, Inc. and TM Communications Hawaii LLC, incorporated
by reference to Exhibit 99.1 to the Company's Form 8-K dated
September 30, 1997 (the "September 8-K").
10(ee) Service Agreement dated as of September 30, 1997 by and between
Pacwest Network, Inc. and GST Telecom Hawaii, Inc, incorporated by
reference to Exhibit 99.2 to the September 8-K.
10(ff) Management Agreement dated as of September 30, 1997 by and between
Pacwest Network, Inc. and GST Telecom Hawaii, Inc., incorporated by
reference to Exhibit 99.3 to the September 8-K.
10(gg) Agreement dated as of September 30, 1997 by and among GST Telecom
Hawaii, Inc., GST Telecom Inc. and Pacwest Network, Inc., incorporated
by reference to Exhibit 99.4 to the September 8-K.
47
<PAGE>
10(hh) Stock Purchase Agreement dated December 31, 1997 by and among GST
Telecommunications, Inc., GST USA, Inc. and World Access, Inc.,
incorporated by reference to Exhibit 99.2 to the Company's Form 8-K
dated January 6, 1998.
10(ii) 1997 Stock Option Plan of the Company, as amended to date,
incorporated by reference to the 1997 transition report on Form
10-K for the three month period ended December 31, 1997.
10(jj) Placement Agreement dated April 29, 1998 by and among GST
Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc,
and the several Placement Agents named in Schedule I thereto,
incorporated by reference to Exhibit 10.1 to the Company's Form 8-K
filed May 19, 1998.
10(kk) Registration Rights Agreement dated May 4, 1998 by and among GST
Telecommunications, Inc., GST USA, Inc., GST Network Funding, Inc.
and Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc.,
Credit Suisse First Boston Corporation and SBC Warburg Dillon Read
Inc., incorporated by reference to Exhibit 10.2 to the Company's
Form 8-K filed May 19, 1998.
10(ll) Collateral Pledge and Security Agreement dated as of May 4, 1998
from GST Network Funding, Inc. to United States Trust Company of
New York, as trustee, incorporated by reference to Exhibit 10.3 to
the Company's Form 8-K filed May 19, 1998.
10(mm) Reimbursement and Commitment Fee Agreement dated May 4, 1998 among
GST Telecommunications, Inc., GST USA, Inc. and GST Network
Funding, Inc., incorporated by reference to Exhibit 10.4 to the
Company's Form 8-K filed May 19, 1998.
10(nn) Employment Agreement dated March 3, 1999, effective as of October
20, 1998, by and between GST USA, Inc. and Joseph A. Basile, Jr.
incorporated by reference to Exhibit 10.1 to the Company's Form
10-K filed March 12, 1999.
10(oo) 1999 Stock Option Plan, incorporated by reference to Exhibit 4.1 to
the Company's Form S-8 filed on April 16, 1999 (the "1999 S-8")
10(pp) 1996 Amended and Restated Employee Stock Purchase Plan,
incorporated by reference to Exhibit 4.3 to the 1999 S-8.
10(qq) 1999 Supplemental Employee Stock Purchase Plan, incorporated by
reference to Exhibit 4.4 to the 1999 S-8.
*21 Subsidiaries of the Company.
48
<PAGE>
*23 Consent to the incorporation by reference in the Company's
Registration Statements on Forms S-3 and S-8 of the independent
auditors' report included herein.
*27 Financial Data Schedule.
- -------------
* Filed herewith.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on the 28th day of March, 2000.
GST TELECOMMUNICATIONS, INC.
By: /s/ Robert A. Ferchat
--------------------------------
Robert A. Ferchat,
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert A. Ferchat and Thomas M. Malone
his true and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Robert A. Ferchat Chairman of the Board March 28, 2000
- -------------------------------------
(Robert A. Ferchat)
/s/ Thomas M. Malone Acting President, Acting Chief Executive March 28, 2000
- ------------------------------------- Officer (Principal Executive Officer) and
(Thomas M. Malone) Chief Operating Officer
/s/ Daniel L. Trampush Senior Vice President and Chief March 28, 2000
- ------------------------------------- Financial Officer (Principal Financial
(Daniel L. Trampush) Officer)
/s/ Michael R. Vestal Treasurer (Principal Accounting Officer) March 28, 2000
- -------------------------------------
(Michael R. Vestal)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
/s/ Joseph A. Basile, Jr. Director March 28, 2000
- -------------------------------------
(Joseph A. Basile, Jr.)
/s/ Stanley M.D. Beck Director March 28, 2000
- -------------------------------------
(Stanley M.D. Beck)
/s/ George B. Cobbe Director March 28, 2000
- -------------------------------------
(George B. Cobbe)
/s/ Joseph G. Fogg, III Director March 28, 2000
- -------------------------------------
(Joseph G. Fogg, III)
/s/ David W. Garrison Director March 28, 2000
- -------------------------------------
(David W. Garrison)
/s/ A. Roy Megarry Director March 28, 2000
- -------------------------------------
(A. Roy Megarry)
The Company's Authorized
Representative
in the United States
/s/ Thomas M. Malone
- -------------------------------------
Thomas M. Malone
</TABLE>
<PAGE>
GST TELECOMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report.......................................................................................F - 2
Consolidated Balance Sheets at December 31, 1999 and 1998..........................................................F - 3
Consolidated Statements of Operations for the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997............................................................................................F - 4
Consolidated Statements of Shareholders' (Deficit) Equity for the years ended
December 31, 1999 and 1998, the three-month period ended December 31, 1997
and the
year ended September 30, 1997.................................................................................F - 5
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and the year ended
September 30, 1997............................................................................................F - 6
Notes to Consolidated Financial Statements.........................................................................F - 7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
GST Telecommunications, Inc.:
We have audited the accompanying consolidated balance sheets of GST
Telecommunications, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for each of the years in the two-year period ended December
31, 1999, the three-month period ended December 31, 1997, and for the year
ended September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GST
Telecommunications, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and cash flows for each of the years in
the two-year period ended December 31, 1999, the three-month period ended
December 31, 1997, and for the year ended September 30, 1997 in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Portland, Oregon
March 17, 2000
F-2
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
ASSETS 1999 1998
------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,983 $ 86,070
Restricted investments 19,828 34,107
Trade accounts receivable, net 45,244 32,935
Construction contracts receivable 26,823 3,338
Investments 44,596 16,246
Prepaid and other current assets 8,562 9,601
------------------ ------------------
188,036 182,297
Restricted investments 9,848 247,257
Property and equipment, net 832,047 615,852
Goodwill, net 41,409 51,091
Other assets, net 41,289 54,786
------------------ ------------------
Total assets $ 1,112,629 $ 1,151,283
================== ==================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 30,579 $ 26,411
Accrued expenses 49,759 37,445
Deferred revenue 10,066 6,030
Current portion of capital lease obligations 6,693 5,649
Current portion of long-term debt 17,466 13,417
------------------ ------------------
114,563 88,952
------------------ ------------------
Long-term interest payable 43,134 21,377
Capital lease obligations, less current portion 16,813 19,741
Long-term debt, less current portion 1,151,778 1,092,959
Commitments and contingencies
Redeemable preference shares:
Authorized - 10,000,000 no par shares; 500 shares
issued and outstanding at December 31, 1999
and 1998 69,688 61,741
Shareholders' deficit:
Common shares:
Authorized - unlimited number of no par common shares;
issued and outstanding - December 31, 1999 - 37,734,507
shares, December 31, 1998 - 36,264,066 shares 238,626 234,267
Accumulated deficit (566,523) (383,954)
Accumulated other comprehensive income 44,550 16,200
------------------ ------------------
(283,347) (133,487)
------------------ ------------------
Total liabilities and shareholders' deficit $ 1,112,629 $ 1,151,283
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statement of Operations
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
----------------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications and other services $ 202,686 $ 149,783 $ 26,064 $ 82,593
Construction, facility sales and other 115,147 8,826 1,488 --
Product 4,089 4,708 8,706 23,374
------------ ------------ ------------ ------------
Total revenues 321,922 163,317 36,258 105,967
------------ ------------ ------------ ------------
Operating costs and expenses:
Network expenses 129,761 104,320 19,127 66,250
Facilities administration and maintenance 21,074 16,703 3,511 12,304
Cost of construction revenues 74,940 1,424 300 --
Cost of product revenues 2,484 2,999 3,102 7,990
Selling, general and administrative 122,974 96,506 22,428 72,046
Research and development -- -- 781 2,316
Depreciation and amortization 70,973 45,957 8,864 24,159
Special charges -- 30,580 -- 7,445
------------ ------------ ------------ ------------
Total operating costs and expenses 422,206 298,489 58,113 192,510
------------ ------------ ------------ ------------
Loss from operations (100,284) (135,172) (21,855) (86,543)
------------ ------------ ------------ ------------
Other expenses (income):
Interest income (9,736) (24,145) (4,101) (7,026)
Interest expense, net of amounts capitalized 115,481 101,648 18,948 37,665
Gain on sale of subsidiary shares -- (61,266) -- (7,376)
Other (23,460) 3,281 1,569 2,017
------------ ------------ ------------ ------------
82,285 19,518 16,416 25,280
------------ ------------ ------------ ------------
Loss before minority interest in income
of subsidiaries and income tax (182,569) (154,690) (38,271) (111,823)
------------ ------------ ------------ ------------
Income tax expense:
Current -- -- 758 1,802
Deferred -- -- 92 (899)
------------ ------------ ------------ ------------
-- -- 850 903
------------ ------------ ------------ ------------
Loss before minority interest in income
of subsidiaries (182,569) (154,690) (39,121) (112,726)
Minority interest in income of subsidiaries -- -- (472) (612)
------------ ------------ ------------ ------------
Net loss (182,569) (154,690) (39,593) (113,338)
Accretion of preference shares 7,948 7,106 3,145 2,969
------------ ------------ ------------ ------------
Net loss to common shareholders $ (190,517) $ (161,796) $ (42,738) $ (116,307)
============ ============ ============ ============
Net loss per share, basic and dilutive $ (5.11) $ (4.52) $ (1.39) $ (4.71)
============ ============ ============ ============
Weighted average common shares, basic
and diluted 37,270,710 35,834,196 30,804,376 24,702,870
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statement of Shareholders' Deficit
(In thousands, except share amounts)
<TABLE>
<CAPTION>
COMMITMENT TO ISSUE
COMMON SHARES COMMON SHARES
------------------------------------- --------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Balances, September 30, 1996 21,257,697 $ 72,647 1,988,230 $ 25,454
Issuance of shares for services 25,000 221 -- --
Issuance of shares in business
combinations 3,132,854 29,394 (1,700,169) (21,049)
Issuances of shares and
warrants, net 2,505,882 32,666 -- --
Issuance of shares under option
plans 643,016 3,309 -- --
Issuance of shares under employee
share purchase plan 62,993 400 -- --
Accrual of compensation costs for
share awards and option plans -- 9,807 -- --
Accretion of redeemable
preference shares -- (2,969) -- --
Net loss -- -- -- --
----------------- ----------------- ----------------- ------------------
Balances, September 30, 1997 27,627,442 145,475 288,061 4,405
Issuance of shares in business
combinations 246,392 3,801 (237,174) (3,801)
Issuance of shares, net 6,440,000 73,092 -- --
Issuance of shares under option
plans 158,209 1,107 -- --
Issuance of shares under employee
share purchase plan 75,198 463 -- --
Accrual of compensation costs for
share awards and option plans -- 179 -- --
Accretion of redeemable
preference shares -- (3,145) -- --
Conversion of senior subordinated
discount notes 17,657 133 -- --
Net loss -- -- -- --
----------------- ----------------- ----------------- ------------------
Balances, December 31, 1997 34,564,898 221,105 50,887 604
Issuance of shares for business
combinations 57,632 2,952 (50,887) (604)
Issuance of shares under option
plans 429,350 3,258 -- --
Issuance of shares for warrant
exercise 991,343 12,852 -- --
Issuance of shares under employee
share purchase plan 220,843 1,563 -- --
Accrual of compensation costs for
share awards and option plans -- (357) -- --
Accretion of redeemable
preference shares -- (7,106) -- --
Net loss -- -- -- --
Other comprehensive income -
unrealized gain on securities -- -- -- --
----------------- ----------------- ----------------- ------------------
Comprehensive loss
Balances, December 31, 1998 36,264,066 234,267 -- --
Issuance of shares under option
plans 989,504 7,495 -- --
Issuance of shares under employee
share purchase plan 348,610 1,876 -- --
Accrual of compensation costs for
share awards and option plans 30,000 2,161 -- --
Accretion of redeemable
preference shares -- (7,948) -- --
Conversion of senior subordinated
discount notes 102,327 775 -- --
Net loss -- -- -- --
Other comprehensive income -
unrealized gain on securities -- -- -- --
----------------- ----------------- ----------------- ------------------
Comprehensive loss
Balances, December 31, 1999 37,734,507 $ 238,626 -- $ --
================= ================= ================= ==================
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
LOSS DEFICIT INCOME DEFICIT
------------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Balances, September 30, 1996 $ -- $ (76,333) $ -- $ 21,768
Issuance of shares for services -- -- -- 221
Issuance of shares in business
combinations -- -- -- 8,345
Issuances of shares and
warrants, net -- -- -- 32,666
Issuance of shares under option
plans -- -- -- 3,309
Issuance of shares under employee
share purchase plan -- -- -- 400
Accrual of compensation costs for
share awards and option plans -- -- -- 9,807
Accretion of redeemable
preference shares -- -- -- (2,969)
Net loss (113,338) (113,338) -- (113,338)
------------------- ---------------- ------------------- -----------------
Comprehensive loss (113,338)
-------------------
-------------------
Balances, September 30, 1997 -- (189,671) -- (39,791)
Issuance of shares in business
combinations -- -- -- --
Issuance of shares, net -- -- -- 73,092
Issuance of shares under option
plans -- -- -- 1,107
Issuance of shares under employee
share purchase plan -- -- -- 463
Accrual of compensation costs for
share awards and option plans -- -- -- 179
Accretion of redeemable
preference shares -- -- -- (3,145)
Conversion of senior subordinated
discount notes -- -- -- 133
Net loss (39,593) (39,593) -- (39,593)
------------------- ---------------- ------------------- -----------------
Comprehensive loss (39,593)
-------------------
-------------------
Balances, December 31, 1997 -- (229,264) -- (7,555)
Issuance of shares for business
combinations -- -- -- 2,348
Issuance of shares under option
plans -- -- -- 3,258
Issuance of shares for warrant
exercise -- -- -- 12,852
Issuance of shares under employee
share purchase plan -- -- -- 1,563
Accrual of compensation costs for
share awards and option plans -- -- -- (357)
Accretion of redeemable
preference shares -- -- -- (7,106)
Net loss (154,690) (154,690) -- (154,690)
Other comprehensive income -
unrealized gain on securities 16,200 -- 16,200 16,200
------------------- ---------------- ------------------- -----------------
Comprehensive loss $ (138,490)
===================
Balances, December 31, 1998 (383,954) 16,200 (133,487)
Issuance of shares under option
plans -- -- -- 7,495
Issuance of shares under employee
share purchase plan -- -- -- 1,876
Accrual of compensation costs for
share awards and option plans -- -- -- 2,161
Accretion of redeemable
preference shares -- -- -- (7,948)
Conversion of senior subordinated
discount notes -- -- -- 775
Net loss (182,569) (182,569) -- (182,569)
Other comprehensive income -
unrealized gain on securities 28,350 -- 28,350 28,350
------------------- ---------------- ------------------- -----------------
Comprehensive loss $ (154,219)
===================
Balances, December 31, 1999 $ (566,523) $ 44,550 $ (283,347)
================ =================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GST TELECOMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
------------------------ DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------------------ ----------------------------
<S> <C> <C> <C> <C>
Operations:
Net loss $(182,569) $(154,690) $(39,593) $(113,338)
Adjustments to reconcile net loss to net cash used
in operations:
Minority interest in income of subsidiary -- -- 472 612
Depreciation and amortization 77,086 51,328 10,115 26,634
Deferred income taxes -- -- 92 (899)
Accretion and accrual of interest 73,894 59,783 8,276 19,236
Non-cash stock compensation and other expense 2,161 (253) 374 2,583
Loss on disposal of assets 4,160 239 -- 679
Non-cash special charges -- 29,467 -- 7,445
Equity in losses of investments and joint venture -- 593 1,286 1,482
Gain on sale of subsidiary shares -- (61,266) -- (7,376)
Changes in non-cash operating working capital:
Trade accounts receivable, net (13,573) (15,321) (3,547) (11,284)
Construction contracts receivable (23,485) (3,338) -- --
Prepaid, other current and other assets, net (507) 3,859 (585) (7,627)
Accounts payable and accrued liabilities 26,368 (754) (18,177) 24,970
Other liabilities 4,036 6,430 707 (119)
----------------------- ------------------------
Cash used in operations (32,429) (83,923) (40,580) (57,002)
----------------------- ------------------------
Investments:
Acquisition of subsidiaries, net of cash acquired -- (35,471) (2,105) (1,618)
Purchase of investments -- -- (4,297) (3,247)
Proceeds from sale of investments -- 327 -- 5,176
Purchase of property and equipment (259,965) (219,129) (45,970) (222,001)
Proceeds from sale of property and equipment 6,514 3,589 -- 5,774
Purchase of other assets (1,684) (3,014) (1,866) (14,058)
Change in investments restricted for the
purchase of property and equipment 218,878 (170,288) 11,143 (58,701)
Proceeds from the sale of subsidiary shares, net -- 85,048 141 27,105
Cash disposed of in sale of subsidiary -- (5,252) -- --
----------------------- ------------------------
Cash used in investing activities (36,257) (344,190) (42,954) (261,570)
----------------------- ------------------------
Financing:
Proceeds from long-term debt 1,782 300,955 151,420 353,257
Issuance of redeemable preference shares, net -- -- -- 48,679
Principal payments on long-term debt and capital leases (18,364) (23,769) (10,101) (7,455)
Issuance of common shares, net of issuance costs 9,371 17,673 74,629 27,692
Deferred debt financing costs -- (13,103) (5,380) (12,033)
Change in investments restricted to finance interest
payments 32,810 33,374 16,157 (97,049)
----------------------- ------------------------
Cash provided by financing activities 25,599 315,130 226,725 313,091
----------------------- ------------------------
Increase (decrease) in cash and cash
equivalents (43,087) (112,983) 143,191 (5,481)
Cash and cash equivalents, beginning of period 86,070 199,053 55,862 61,343
----------------------- ------------------------
Cash and cash equivalents, end of period $ 42,983 $ 86,070 $199,053 $ 55,862
======================= ========================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 48,802 $ 50,315 $ 21,684 $ 4,982
Cash paid for income taxes -- -- 1,038 638
Supplemental schedule of non-cash investing and financing activities:
Recorded in business combinations:
Assets -- 45,719 2,605 14,148
Liabilities -- 7,900 500 4,369
Common shares -- 2,348 -- 8,161
Disposition of subsidiaries:
Assets 8,096 35,480 -- --
Liabilities (213) 4,218 -- --
Minority interest -- 12,732 -- --
Amounts in accounts payable and accrued liabilities
for the purchase of fixed assets at end of period 28,880 25,945 19,029 19,718
Unrealized gain on securities 28,350 16,200 -- --
Accretion of redeemable preference shares 7,948 7,106 3,145 2,969
Assets acquired through capital leases 5,068 10,079 480 21,765
Debt converted to equity 775 -- 133 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF THE COMPANY
GST Telecommunications, Inc., a Canadian company, and its U.S.
subsidiaries collectively, (the Company or GST), is in the
business of providing integrated telecommunications products
and services primarily in the western United States. The Company
provides a range of telecommunications services, including
local, long distance, Internet and data services, and constructs
telecommunications network segments for other providers, and
produces telecommunications software.
The consolidated financial statements for the years ended December
31, 1999 and 1998, the three-month period ended December 31, 1997
and the year ended September 30, 1997 have been reported in U.S.
dollars, the functional currency of the Company. These
consolidated financial statements are prepared in conformity with
generally accepted accounting principles in the United States. The
Company also prepares separate consolidated financial statements
in accordance with Canadian generally accepted accounting
principles.
(b) CHANGE IN FISCAL YEAR-END
In 1997, the Company changed its fiscal year-end from September 30
to December 31. Included in the accompanying audited consolidated
financial statements are the results of operations for the three-
month transition period ended December 31, 1997. Unaudited results
of operations for the comparable three-month period ended December
31, 1996 are summarized below:
<TABLE>
<CAPTION>
<S> <C>
Revenues......................................................... $ 23,217
Loss from operations............................................. (17,988)
Other expenses, net.............................................. (4,646)
Net loss......................................................... (22,634)
Loss per share, basic and diluted................................ (1.02)
</TABLE>
(c) BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of
the Company and its greater than 50% owned subsidiaries. The
Company's investments in unconsolidated companies owned 20% or
more or where the Company exercise significant influence are
accounted for using the equity method. At December 31, 1999,
the Company held no investments accounted for pursuant to the
equity method. All significant intercompany accounts have been
eliminated.
(d) CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments
with original maturities of ninety days or less.
F-7 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(e) ACCOUNTS AND NOTES RECEIVABLE
Gross trade accounts receivable total $52,518 and $38,209 at
December 31, 1999 and 1998, respectively. Notes receivable total
$268 and $208 at December 31, 1999 and 1998, respectively.
Management provides an allowance for doubtful accounts and
customer credits based on current customer information and
historical statistics. The allowance was $7,542 and $5,482 at
December 31, 1999 and 1998, respectively.
Valuation and qualifying accounts for the allowance for doubtful
accounts and customer credits is as follows:
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
---------------------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 5,482 $ 3,956 $ 3,582 $ 1,264
Charged to bad debt expense 8,629 4,776 1,541 5,737
Charged to revenue 1,500 -- -- --
Written off (8,069) (3,250) (1,167) (3,419)
--------------- --------------- ----------------- -------------------
Balance at end of period $ 7,542 $ 5,482 $ 3,956 $ 3,582
=============== =============== ================= ===================
</TABLE>
Results of operations are derived from United States operations
and substantially all assets reside in the United States. The
Company is exposed to concentration of credit risk principally
from accounts receivable. The Company's five largest
telecommunications and other services customers accounted for
approximately 11.3%, 16.4%, 16.8% and 20.8% of the Company's
consolidated telecommunications and other services revenue for the
years ended December 31, 1999 and 1998, the three-month period
ended December 31, 1997 and the year ended September 30, 1997,
respectively.
In certain cities, the Company relies on incumbent local exchange
carriers for the provision of local telephone service. In
addition, the Company relies on other carriers to provide
transmission and termination services for a majority of its long
distance traffic. The inability of any of these companies or
carriers to fulfill service delivery requirements could impact the
Company's future results.
Construction contracts receivable consists of costs in excess of
billings on certain contracts and amounts due from joint
construction partners. Construction contracts receivable
consists of balances due from three customers.
F-8 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(f) RESTRICTED AND UNRESTRICTED INVESTMENTS
Restricted investments classified as available-for-sale consist
primarily of U.S. Treasury securities maturing between one and
eight months which are restricted for the purchase and
installation of network assets. Held-to-maturity investments
consist of U.S. Treasury securities and certificates of deposit
maturing between four months and eighteen months which are
primarily restricted for interest payments. Restricted investments
are recorded at amortized cost, which approximates fair value for
all periods presented.
Unrestricted available-for-sale investments consist of the
Company's approximate 14% equity interest in Global Light
Telecommunications, Inc. (Global) at December 31, 1999 and U.S.
Government securities and certificates of deposit at December 31,
1998. An unrealized gain of $28,350 related to the Company's
interest in Global, which is carried at fair value, is included in
comprehensive income for the year ended December 31, 1999. See
note 16 for a discussion of the sale of the Company's investment
in Global.
Under Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Company
classifies its investments as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Restricted investments:
Available-for-sale........................ $ 9,848 $ 230,014
Held-to-maturity.......................... 19,828 51,350
Unrestricted investments:
Available-for-sale........................ 44,596 16,246
</TABLE>
(g) INVESTMENTS IN FORMER AFFILIATE
At December 31, 1997, the Company held a greater than 20% equity
interest in Global, a publicly-traded corporation listed on the
Vancouver Stock Exchange, which conducts telecommunications
operations on a worldwide basis. The carrying value of this
investment at December 31, 1997 totaled $593 and was included in
other assets in the accompanying consolidated balance sheet. At
both December 31, 1998 and 1999, the Company held a less than
20% interest in Global. See note 1(f), note 11(a) for a discussion
of litigation with Global and note 16 for a discussion of the sale
of the Company's investment in Global subsequent to year-end.
F-9 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(h) MINORITY INTEREST
In March 1997, the Company's then wholly-owned subsidiary, NACT
Telecommunications, Inc. (NACT), completed an initial public
offering of its common stock, pursuant to which the Company and
NACT sold one and two million shares, respectively, of NACT's
common stock, resulting in net proceeds of approximately $9,000
and $18,100, respectively. As a result of the offering, the
Company's ownership was reduced to 63%. Minority interest
represents the non-Company owned shareholder interest in NACT's
equity resulting from the 1997 offering.
In February 1998, the Company sold its remaining interest in NACT
for net proceeds of $85,048, which resulted in a gain of $61,266.
(i) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on
the straight-line basis over their estimated useful lives, which
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Telecommunications networks........................................ 20 years
Electronic and related equipment................................... 10 years
Leasehold improvements............................................. 10 years
Computer equipment, office equipment and other..................... 3 - 7 years
Buildings.......................................................... 40 years
</TABLE>
Construction, engineering and overhead costs directly related to
the development of the Company's networks are capitalized. The
Company capitalizes internal information systems costs in
accordance with Statement of Position (SOP) 98-1, "Accounting for
the costs of computer software developed or obtained for internal
use." The amount capitalized under SOP 98-1 was $13,075, and $621
of amortization was charged to operations for the year ended
December 31, 1999. These amounts are included in Property and
Equipment. The Company begins depreciating these costs when the
assets become operational. Depreciation expense totaled $55,368,
$30,056, $6,240 and $14,985 for the years ended December 31, 1999
and 1998, the three-month period ended December 31, 1997 and for
the year ended September 30, 1997, respectively.
(j) GOODWILL
Goodwill is amortized using the straight-line method over periods
ranging from five to ten years. Amortization charged to operations
was $6,785, $6,218, $1,054 and $4,044 for the years ended December
31, 1999 and 1998, the three-month period ended December 31, 1997
and for the year ended September 30, 1997, respectively.
F-10 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(k) OTHER ASSETS
Other assets consists primarily of customer lists, software
development costs and deferred financing costs. These assets are
amortized using the straight-line method over periods ranging from
three to ten years. Amortization charged to operations for
customer lists and software development costs was $10,320,
$11,183, $1,945 and $5,630 for the years ended December 31, 1999
and 1998, the three-month period ended December 31, 1997 and for
the year ended September 30, 1997, respectively. Amortization
charged to interest expense for deferred financing costs was
$4,613, $3,873, $669 and $1,495 for the years ended December 31,
1999 and 1998, the three-month period ended December 31, 1997 and
for the year ended September 30, 1997, respectively.
(l) ASSET IMPAIRMENT
The Company reviews long-lived assets, goodwill and certain
identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable.
During 1998, the Company recorded a non-cash special charge of
$3,881 related to the impairment of certain long-lived assets
associated with the Company's shared tenant services operations.
The impaired assets primarily consist of customer lists and
electronic and related equipment. As the projected future cash
flows were less than the assets' carrying value, an impairment
loss was recognized. The impairment loss was measured as the
amount by which the carrying amount of the assets exceeded the
estimated fair value of the assets, which was determined based on
current market prices for similar assets.
As discussed in note 14, the Company also recorded a non-cash
special charge of $15,668 during 1998 related to the impairment of
a prepaid reseller agreement and advances to Magnacom Wireless
LLC.
F-11 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(m) REVENUE RECOGNITION
Telecommunication services revenue is recognized monthly as
services are provided. Amounts billed in advance of the service
month are recorded as deferred revenue. Product revenue is
recorded upon installation of products and is presented in the
accompanying consolidated statements of operations net of product
returns.
Network construction services revenue is recognized using the
percentage of completion method. Accordingly, the Company
recognizes revenues and expenses as construction progresses. Cost
of construction revenue is estimated using weighted average
allocations of the total costs of constructing the specific phase
of the network.
The Company treats certain long term fiber and conduit lease
contracts entered into prior to June 30, 1999 as sales-type leases
and recognizes revenue under the percentage of completion method.
In June 1999, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 43, REAL ESTATE SALES, AN INTERPRETATION
OF FASB STATEMENT NO. 66. The interpretation is effective for
sales of real estate with property improvements or integral
equipment entered into after June 30, 1999. Under this
interpretation, conduit is considered integral equipment and dark
fiber will likely be considered integral equipment. Accordingly,
title must transfer to a lessee in order for a lease transaction
to be accounted for as a sales-type lease. For contracts entered
into after June 30, 1999, sales-type lease accounting is no longer
appropriate for dark fiber and conduit leases and therefore, these
transactions will be accounted for as operating leases unless
title transfers to the lessee.
(n) NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the
weighted average number of common shares outstanding during the
period. Common equivalent shares, consisting of options, warrants
and convertible securities, were antidilutive for all periods
presented and were not included in determining 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 11,245,435, 10,411,640, 9,741,498 and
8,186,050 for the years ended December 31, 1999 and 1998, the
three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively.
Net loss per share is increased for redeemable preference shares'
accretion totaling $7,948, $7,106, $3,145 and $2,969 for the years
ended December 31, 1999 and 1998, the three-month period ended
December 31, 1997 and the year ended September 30, 1997,
respectively.
(o) ISSUANCE OF SUBSIDIARY STOCK
Issuances of subsidiary stock are accounted for as capital
transactions in the accompanying consolidated financial
statements.
F-12 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(p) INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Under the asset and liability method, deferred
income taxes reflect the future tax consequences of differences
between the tax basis of assets and liabilities and their
financial reporting amounts at the end of each reporting period.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the period 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.
(q) COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
on January 1, 1998. Comprehensive income is defined as changes in
stockholders' equity exclusive of transactions with owners such as
capital contributions and dividends. For the years ended December
31, 1999 and 1998, comprehensive loss includes a $28,350 and
$16,200 unrealized gain on available-for-sale securities. There
are no differences between net loss and comprehensive loss for all
other periods presented.
(r) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(s) ADVERTISING COSTS
The Company expenses advertising costs as incurred.
(t) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying
consolidated financial statements for prior periods to conform
with the December 31, 1999 presentation.
F-13 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(2) ACQUISITIONS
The Company has made the acquisitions set forth below, each of which was
accounted for using the purchase method of accounting. The consolidated
financial statements include the operating results from the effective
date of acquisition.
(a) ICON COMMUNICATIONS CORP. (ICON)
In April 1998, the Company acquired 100% of the outstanding
capital stock of ICON, a Washington company which provides long
distance and ancillary communications services. Consideration paid
for this acquisition consisted of $23,916 in cash. Goodwill of
$15,957 was recorded as a result of this acquisition.
(b) KLP, INC. (D/B/A CALL AMERICA) (CALL AMERICA PHOENIX)
In March 1998, the Company acquired 100% of the outstanding
capital stock of Call America Phoenix, an Arizona company which
provides long distance services. Consideration paid for this
acquisition consisted of $3,838 in cash. Goodwill of $2,405 was
recorded as a result of this acquisition.
(c) WHOLE EARTH NETWORKS, LLC (WHOLE EARTH)
In March 1998, the Company acquired the assets of Whole Earth, a
California Internet services provider. Consideration paid for this
acquisition consisted of $9,053 in cash and the assumption of
$1,273 in liabilities. Goodwill of $3,293 was recorded as a result
of this acquisition.
(d) ACTION TELCOM CO. (ACTION TELCOM)
In May 1997, the Company acquired 100% of the outstanding capital
stock of Action Telcom, a Texas company which provides long
distance and ancillary telecommunications services, and produces
software used in the telecommunications industry. The Company
acquired Action Telcom for consideration of 903,000 common shares
valued at $8,161, $1,290 in cash and $2,580 in notes payable.
Goodwill of $3,863 was recorded as a result of this acquisition.
In October 1999, the Company sold the assets of the long distance
portion of Action Telcom for $4,895 in cash. A loss of $163 was
recognized as a result of this divestiture.
(e) GUAM OPERATIONS OF SPRINT COMMUNICATIONS COMPANY L.P. (SPRINT)
In October 1997, the Company purchased the assets of the Guam
operations of Sprint which provide long distance and ancillary
services in Guam. Consideration paid for this acquisition
consisted of $2,000 in cash and $500 in liabilities for services
to be provided to Sprint.
In July 1999, the Company sold the assets of its Guam operations
for $1,500 in cash. A gain of $294 was recognized as a result of
this divestiture.
F-14 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The unaudited pro forma results shown below reflect results of
operations as if the 1998 and 1997 acquisitions described above
occurred as of the beginning of each of the periods presented.
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
----------------- ------------------ -------------------
<S> <C> <C> <C>
Revenues................. $ 167,556 $ 40,521 $ 133,958
Net loss................. (155,236) (39,655) (115,266)
Net loss per share....... (4.33) (1.29) (4.67)
</TABLE>
The pro forma results are not necessarily indicative of what
actually would have occurred had the acquisitions been in effect
for the entire periods presented. In addition, they are not
intended to be a projection of future results that may be achieved
from the combined operations.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Telecommunications networks.............................. $ 264,229 $ 178,008
Electronic and related equipment......................... 314,880 181,270
Leasehold improvements................................... 28,708 24,509
Computer equipment, office
equipment and other.................................. 55,820 40,585
Buildings................................................ 2,808 2,803
Construction in progress................................. 277,965 251,199
-------------------- --------------------
944,410 678,374
Less accumulated depreciation............................ (112,363) (62,522)
-------------------- --------------------
$ 832,047 $ 615,852
==================== ====================
</TABLE>
Property and equipment includes $277,965 and $251,199 of equipment which
had not been placed in service at December 31, 1999 and 1998,
respectively, and accordingly, is not being depreciated. During the years
ended December 31, 1999 and 1998, the three-month period ended December
31, 1997 and the year ended September 30, 1997, $32,133, $25,920, $3,726
and $15,170 of interest, respectively, was capitalized as part of
property and equipment.
F-15 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(4) ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Fixed asset purchases.................................... $ 6,012 $ 9,552
Carrier costs............................................ 13,814 4,885
Interest payable......................................... 8,223 9,272
Payroll and related liabilities.......................... 5,694 5,252
Other.................................................... 16,016 8,484
-------------------- --------------------
Total...................................... $ 49,759 $ 37,445
==================== ====================
</TABLE>
(5) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
13.25% Senior Secured Notes due May 1, 2007.............. $ 265,000 $ 265,000
10.5% Senior Secured Discount Notes
due May 1, 2008...................................... 355,587 320,997
Note payable to Tomen, LIBOR plus 3.0%
(9.0% at December 31, 1999).......................... 42,187 45,262
Note payable to NTFC, LIBOR plus 3.5%
(9.5% at December 31, 1999).......................... 44,375 50,000
Note payable to Siemens, LIBOR plus 3.5%
(9.5% at December 31, 1999).......................... 10,000 9,463
13.875% Senior Discount Notes due
December 15, 2005.................................... 274,800 240,304
13.875% Convertible Senior Subordinated Discount
Notes, due December 15, 2005......................... 33,295 29,884
12.75% Senior Subordinated Accrual Notes due
November 15, 2007.................................... 144,000 144,000
Other.................................................... -- 1,466
-------------------- --------------------
1,169,244 1,106,376
Less current portion of long-term debt................... 17,466 13,417
-------------------- --------------------
$ 1,151,778 $ 1,092,959
==================== ====================
</TABLE>
F-16 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The schedule of future debt service payments is as follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
-------------------- --------------------
Year ending December 31:
<S> <C> <C>
2000........................................... $ 17,466 $ 43,267
2001........................................... 19,814 90,143
2002........................................... 20,511 88,265
2003........................................... 21,388 130,919
2004........................................... 11,582 155,636
Thereafter..................................... 1,265,105 (a) 373,200
-------------------- --------------------
Less unaccreted discount....................... (186,622) --
-------------------- --------------------
$ 1,169,244 $ 881,430
==================== ====================
</TABLE>
(a) Includes $500,000, $312,448 and $37,856 of 10.5% Senior
Secured Notes, 13.875% Senior Discount Notes and 13.875%
Convertible Senior Subordinated Discount Notes, respectively,
due at maturity.
SENIOR SECURED NOTES
In May 1997, the Company issued $265,000 in Senior Secured Notes (the
Secured Notes) due May 1, 2007. The Secured Notes bear interest at a rate
of 13.25% with semiannual interest payments due beginning November 1,
1997. Approximately $93,790 of the proceeds were set aside to fund the
first six scheduled interest payments. The remainder of the net proceeds
were restricted to finance the cost of design, development, construction,
acquisition, installation and integration of telecommunications
equipment. The Secured Notes are secured by the assets financed with the
proceeds and are subject to certain debt covenants.
SENIOR SECURED DISCOUNT NOTES
In May 1998, the Company issued $300,000 in 10.5% Senior Secured Discount
Notes (the Senior Secured Discount Notes) maturing on May 1, 2008. The
Senior Secured Discount Notes sold at a substantial discount and there
will be no accrual of cash interest prior to May 1, 2003, or payment of
interest until November 1, 2003. The Senior Secured Discount Notes
accrete to a total principal amount, due May 1, 2008, of approximately
$500,000. The net proceeds from the sale of the Senior Secured Discount
Notes are restricted to finance the cost of design, development,
construction, acquisition, installation and integration of
telecommunications equipment. The Senior Secured Discount Notes are
secured by the assets financed with the proceeds and are subject to
certain debt covenants.
F-17 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
TOMEN FACILITY
In October 1994, the Company entered into a master financing agreement
with Tomen. Under the agreement, Tomen will loan up to $100,000 to
subsidiaries of the Company for development and construction of network
projects. As of December 31, 1999, Tomen had provided a total of $69,468
(of which $42,187 was outstanding at December 31, 1999) in debt financing
to the Company's subsidiaries for construction and operation of fiber
optic networks in southern California, New Mexico, Arizona and Hawaii.
The Tomen financing is secured by equipment at the funded network
locations and is subject to certain debt covenants. Although, Tomen has
the right of first refusal to finance fiber optic projects for the
Company, management does not believe that it is likely that they will
finance any additional projects.
NTFC CAPITAL CORPORATION (NTFC) AGREEMENT
In March 1997, the Company entered into a $50,000 ($44,375 of which was
outstanding at December 31, 1999) loan and security agreement with NTFC
to finance the purchase of certain equipment from Northern Telecom, Inc.
Amounts borrowed under the agreement bear interest at LIBOR plus 3.5% and
will be repaid in twenty quarterly installments which began in March
1999. The loan is secured by the equipment purchased with the proceeds
and subject to certain debt covenants.
SIEMENS TELECOM NETWORKS (SIEMENS) AGREEMENT
In September 1996, the Company entered into a loan and security agreement
with Siemens. Under the terms of the agreement, Siemens will loan up to
$226,000 to the Company for the purchase and installation of
telecommunications switching and related equipment. At December 31, 1999,
$116,000 was available to the Company and $10,000 was outstanding.
Amounts borrowed under the agreement initially bear interest at LIBOR
plus 4.5% and are secured by the equipment. Such interest decreases to
LIBOR plus 3.5% at the time each initial loan is converted to a term
loan, which conversion occurs at the first calendar quarter following the
initial loan. Amounts borrowed under the agreement will be repaid in
twenty-four quarterly installments beginning five quarters after the
initial loan is converted to a term loan. The loan is subject to certain
debt covenants.
SENIOR DISCOUNT NOTES AND CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES
In December 1995, the Company issued approximately $160,000 in 13.875%
Senior Discount Notes (the Senior Notes) and $20,000 in 13.875%
Convertible Senior Subordinated Discount Notes (the Convertible Notes)
maturing on December 15, 2005 (together the Notes). The Notes were sold
at a substantial discount and there will be no accrual of cash interest
prior to December 15, 2000 or payment of interest until June 15, 2001.
The Notes accrete to a total principal amount, due December 15, 2005, of
approximately $350,304 by December 15, 2000. The Senior Notes rank in
right of payment with all unsubordinated indebtedness of the Company
while the Convertible Notes are junior to all senior Company debt.
Each of the Convertible Notes is convertible at the option of the holder
into common shares. The number of shares to be issued upon conversion is
based on an accreted value on the conversion date divided by $7.563. In
addition, all of the Convertible Notes may be automatically converted to
common shares by the Company if the Company's common shares sustain
certain market value levels for thirty consecutive
F-18 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
trading days. On or after December 15, 2000, the Notes will be redeemable
at the option of the Company. The Notes are subject to certain debt
covenants.
F-19 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
SENIOR SUBORDINATED ACCRUAL NOTES
In November and December 1997, the Company issued $144,000 in 12.75%
Senior Subordinated Accrual Notes (the Accrual Notes). Cash interest on
the Accrual Notes will not be paid until May 15, 2003. The Accrual Notes
are subordinated to all senior indebtedness, including the Notes.
The Accrual Notes are redeemable at the option of the Company, in whole
or in part after November 15, 2002. Prior to November 15, 2000, up to
one-third of the aggregate principal amount of the Accrual Notes may be
redeemed by the Company from the proceeds of one or more sales of the
Company's common shares. The Accrual Notes are subject to certain debt
covenants.
DEBT COVENANTS AND CLASSIFICATION OF LONG-TERM DEBT
In November 1998, the Company informed the trustee who represents the
holders of the Senior Secured Notes, the Senior Secured Discount Notes,
the Senior Notes, the Convertible Notes and the Accrual Notes that it may
have violated certain technical covenants contained in the indentures
related to each of the aforementioned debt issuances. In particular, the
Company advised the trustee that the transfer to Global of its interest
in a telecommunications project to be developed in Mexico may have
constituted a violation of certain provisions in the indentures. In
February 1999, the trustee informed the noteholders of the potential
violations. The noteholders did not declare a default, as defined within
the indentures of each of the notes.
On September 16, 1999, the Company received $30,000 in cash from Global
and others in connections with the settlement of various lawsuits and has
taken other actions to cure the potential technical violations. As a
result, the Company believes that there is currently no basis on which
the noteholders could declare a default under the indentures relating to
the Company's debt issuances. Accordingly, the Company has classified the
related debt obligations as non-current in the accompanying consolidated
balance sheets.
F-20 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(6) REDEEMABLE PREFERENCE SHARES
The Company's Board of Directors has the authority, without any further
vote or action by the Company's shareholders, to issue up to 10,000,000
Preference Shares, without par value, in one or more series and to
determine the designations, powers, preferences and relative,
participating, optional or other rights thereof, including, without
limitation, the dividend rate (and whether dividends are cumulative),
conversion rights, voting rights, rights and terms of redemption,
redemption price and liquidation preference.
In February 1997, the Company consummated a private placement of $50,000
of 500 Redeemable Preference Shares. The Redeemable Preference Shares do
not pay dividends in cash, except to the extent such dividends are paid
on Common Shares. In addition, the liquidation, conversion and redemption
prices of the Redeemable Preference Shares accrete semiannually at a rate
of 11.875%.
The Company is required to redeem the Redeemable Preference Shares on
February 28, 2004 (the Mandatory Redemption Date) in cash at a redemption
price of approximately $224,000 per share (the Mandatory Redemption
Price); provided that to the extent the Company is prohibited from paying
such redemption price in cash, the holders of Redeemable Preference
Shares have the option to convert each Redeemable Preference Share into a
number of Common Shares equal to the Mandatory Redemption Price divided
by 95% of the then market price for Common Shares.
In the event the Company is prevented from paying the redemption price
for Redeemable Preference Shares in cash and any holder of Redeemable
Preference Shares does not exercise such conversion option, the Company
has the option of extending the Mandatory Redemption Date to August 28,
2007. The Company has the option of redeeming the Redeemable Preference
Shares at any time after February 2000 in cash at a redemption price per
Redeemable Preference Share equal to the number of Common Shares into
which such Redeemable Preference Share is then convertible multiplied by
the price at which such Redeemable Preference Share would become subject
to mandatory conversion.
Redeemable Preference Shares are convertible at the option of the holders
into Common Shares at any time after February 28, 2000 or earlier upon a
change of control of the Company. The holders of Redeemable Preference
Shares have the right to require the Company to repurchase their shares
upon a change of control of the Company after February 28, 2002; prior to
that time, holders have a right to convert their Redeemable Preference
Shares into Common Shares upon a change of control. Further, the
Redeemable Preference Shares are subject to mandatory conversion into
Common Shares if the market price of Common Shares exceeds $15.925 per
share (subject to adjustment) for a specified period after February 28,
2000.
F-21 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(7) SHAREHOLDERS' (DEFICIT) EQUITY
(a) STOCK-BASED COMPENSATION
The Company has six stock-based compensation plans, which are
described below. The Company follows SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). In accordance with SFAS 123,
the Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, compensation cost is
generally not recognized for options awarded in the 1995 and 1996
Stock Incentive Plans, the Employee Stock Purchase Plan and fixed
stock option awards under the Senior Operating and Executive
Officer Stock Option Plans. Compensation cost recognized in the
statements of operations for the years ended December 31, 1999 and
1998, the three-month period ended December 31, 1997 and for the
year ended September 30, 1997 totaled $2,161, $(357), $149 and
$9,747, respectively. The fair value of each option grant is
estimated on the date of the grant using the Black-Scholes
option-pricing model assuming no dividend yield and the following
weighted average assumptions for grants for the years ended
December 31, 1999 and 1998, the three-month period ended December
31, 1997 and for the year ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
OPTION AWARDS
------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Expected volatility........... 70% 62% 58% 56%
Risk free interest rate....... 5.6% 5.2% 5.4% 6.3%
Expected life (in years)...... 3.5 3.5 3.5 3.5
</TABLE>
<TABLE>
<CAPTION>
EMPLOYEE STOCK PURCHASE PLAN
------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Expected volatility........... 70% 62% 58% 56%
Risk free interest rate....... 5.0% 4.8% 5.3% 5.4%
Expected life (in years)...... .5 .5 .5 .5
(Continued)
</TABLE>
F-22
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The weighted average fair value of stock awards granted under the various
plans are as follows:
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------------------
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Stock option awards.............. $ 5.41 $ 6.50 $ 6.17 $ 4.68
Employee Stock Purchase
Plan......................... 5.04 2.16 1.81 1.81
</TABLE>
Had compensation cost for the Company's six stock-based
compensation plans been determined pursuant to SFAS 123, the
Company's net loss and net loss per common share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------------------
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Net loss to common shareholders:
As reported................. $ (190,517) $ (161,796) $ (42,738) $ (116,307)
Pro forma................... (200,460) (170,184) (44,487) (119,183)
Net loss per share, basic and diluted:
As reported............... $ (5.11) $ (4.52) $ (1.39) $ (4.71)
Pro forma................. (5.38) (4.75) (1.44) (4.82)
</TABLE>
Pro forma net loss reflects only options granted since October 1,
1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS 123 is not reflected in the pro forma
net loss amounts presented above because compensation cost is
reflected over the options' vesting period and compensation cost
for options granted prior to September 30, 1995 is not considered.
(b) STOCK OPTION AWARDS
Under the 1995, 1996, 1997 and 1999 Stock Option Plans (the
Plans), the Company has authorized the issuance of 1,750,000,
1,000,000, 1,000,000 and 2,000,000 common shares, respectively.
The Plans provide for the granting of incentive stock options and
non-statutory stock options to employees, officers and employee
directors and consultants at an exercise price no less than 100%
of the market value on the last trading day prior to the date of
grant. The 1995, 1996 and 1997 options have a maximum term of five
years and the 1999 options have a maximum term of ten years and
become exercisable at such times and in such installments, for
each individual option, as determined by the Board of Directors.
F-23 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
In addition, the Company grants fixed option awards under the 1996
Senior Operating Officer Stock Option Plan (Operating Officer
Plan). These options have a term of six years and become
exercisable at such time and in such installments for each
individual option, as determined by the Board of Directors.
Under the Operating Officer Plan and the 1996 Senior Executive
Officer Stock Option Plan (Executive Plan), the Company may grant
stock options to purchase up to 900,000 and 600,000 common shares,
respectively, to selected individuals. The options have a maximum
term of six years.
A summary of the status of the Company's fixed and
performance-based stock option awards as of December 31, 1999,
1998, 1997 and September 30, 1997 and the changes during the
period of years ended on those dates is presented below:
<TABLE>
<CAPTION>
STOCK OPTIONS AWARDS
-----------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at September 30, 1996.................. 3,061,205 $ 7.68
Granted............................................ 1,490,000 9.91
Exercised.......................................... (643,016) 5.15
Canceled........................................... (83,655) 8.89
----------------
Outstanding at September 30, 1997.................. 3,824,534 8.95
Granted............................................ 175,000 10.29
Exercised.......................................... (158,209) 7.00
Canceled........................................... (236,218) 10.94
----------------
Outstanding at December 31, 1997................... 3,605,107 8.97
Granted............................................ 2,927,357 11.02
Exercised.......................................... (429,350) 7.58
Canceled........................................... (1,807,987) 12.20
----------------
Outstanding at December 31, 1998................... 4,295,127 9.15
Granted............................................ 3,116,343 10.02
Exercised.......................................... (989,504) 7.57
Canceled........................................... (1,565,370) 10.57
----------------
Outstanding at December 31, 1999................... 4,856,596 9.57
================
</TABLE>
F-24 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
STOCK OPTIONS AWARDS
-----------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------------- ----------------
<S> <C> <C>
Number of options exercisable
at end of period............................... 1,690,821 $9.27
================
</TABLE>
F-25 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OF SHARES CONTRACTUAL EXERCISE OF SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.00 - 5.99 125,000 9.3 years $ 5.88 41,667 $ 5.88
6.00 - 8.99 2,593,721 2.5 years 7.90 936,905 7.96
9.00 - 11.99 1,406,115 5.9 years 10.86 603,593 10.47
12.00 - 14.99 469,787 8.7 years 12.81 -- --
15.00 - 16.4375 261,973 3.5 years 15.08 108,656 15.10
</TABLE>
On December 14, 1998, options to purchase 1,197,830 shares were
repriced from prices ranging between $8.25 and $15.00 per share,
to $7.15 per share. The vesting terms for the repriced options
were extended from three to four years from the original date of
grant. Options for directors, officers and key executives were not
repriced.
(c) EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Company amended the 1996 Employee Stock
Purchase Plan (the Purchase Plan), to authorize the issuance of an
additional 600,000 common shares. The total shares authorized
since adoption of the Plan is 1,100,000. The Purchase Plan allows
eligible employees of the Company to purchase common shares of the
Company at a price equal to 85% of the lower of the fair market
value at the beginning or end of the six-month offering period.
Fair market value is calculated as the lesser of (i) the closing
price of the Company's common shares on the last trading day
immediately before the date of determination, or (ii) the weighted
average trading price for such shares for the five trading days
immediately before the date of determination. Employees who own 5%
or more of the voting rights of the Company's outstanding common
shares may not participate in the Purchase Plan. Employees
purchased 260,317, 220,843, 75,198 and 62,993 shares under the
purchase plan during the years ended December 31, 1999 and 1998,
the three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively.
In April 1999, the Company adopted the 1999 Supplemental Employee
Stock Purchase Plan (the Supplemental Plan). The Supplemental Plan
allowed employees participating in the Purchase Plan for the
October 1998 to March 1999 offering period rights to shares that
were not available in the Purchase Plan due to a shortfall in
available shares. The Supplemental Plan authorized 150,000 common
shares at $4.83 per share of which 88,293 were granted and
subsequently 61,707 were cancelled. The related compensation cost
recognized in the statement of operations for the year ended
December 31, 1999 was $700.
F-26 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(d) WARRANTS OUTSTANDING
At December 31, 1999, a warrant to purchase 300,000 common shares
at $6.75 per share was outstanding and exercisable. The warrant
was granted to a former director and expires in September 2000.
(e) DIVIDEND RESTRICTIONS
The indentures related to the Secured Notes, the Senior Secured
Discount Notes, the Notes and the Accrual Notes prohibit the
payment of dividends.
F-27 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(8) INCOME TAXES
The provision for income taxes differs from the amount computed by
applying the Canadian statutory income tax rate to net income before
taxes for the years ended December 31, 1999 and 1998, the three-month
period ended December 31, 1997 and the year ended September 30, 1997 as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Computed expected income
tax benefit at
Canadian statutory rate.. (39)% (39)% (39)% (39)%
Expected state/province
income tax benefit....... (5) (5) (4) (4)
Increase in valuation
allowance................ 37 41 37 30
Amortization of goodwill..... 1 1 1 1
Effect of difference in United
States statutory rate.... 5 5 5 5
Effect of acquisition of new
subsidiaries............. -- 1 -- 2
Non-deductible interest...... -- -- 2 2
Other........................ 1 (4) -- 4
---------------- ---------------- ---------------- ----------------
Income tax expense........... --% --% 2% 1%
================ ================ ================ ================
</TABLE>
F-28 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant items comprising the Company's
deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
United States Federal and state net
operating loss carryforwards....................... $ 96,520 $ 76,241
Canadian net operating loss
carryforwards...................................... 28,291 15,975
Non-deductible interest.............................. 66,046 39,199
Canadian non-deductible interest..................... 7,044 5,269
Canadian capital loss carryforward................... 128 128
Other................................................ 4,174 3,361
-------------------- --------------------
Total deferred tax assets.................. 202,203 140,173
Less valuation allowance............................. (197,488) (129,757)
-------------------- --------------------
Total gross deferred tax assets............ 4,715 10,416
-------------------- --------------------
Deferred tax liabilities:
Furniture, fixtures and equipment, due to
differences in depreciation........................ 4,071 6,217
Capitalized software/intangibles..................... 644 4,199
-------------------- --------------------
Total gross deferred
tax liabilities.......................... 4,715 10,416
-------------------- --------------------
Net deferred tax liabilities............... $ -- $ --
==================== ====================
</TABLE>
The valuation allowance for deferred tax assets as of October 1, 1996 was
$19,429. The net change in total valuation allowance for the years ended
December 31, 1999 and 1998, the three-month period ended December 31,
1997 and for the year ended September 30, 1997 was an increase of
$67,731, $61,787, $14,490 and $34,051, respectively.
F-29 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The Company has non-capital losses for income tax purposes of
approximately $60,826 available to reduce Canadian taxable income of
future years, expiring as follows:
<TABLE>
<CAPTION>
<S> <C>
2001............................................................................ $ 1,574
2002............................................................................ 1,877
2003............................................................................ 3,079
2004............................................................................ 2,909
2005............................................................................ 23,755
2006............................................................................ 27,632
--------------------
$ 60,826
====================
</TABLE>
Based on a history of recurring losses, it is questionable whether the
Company will be allowed to utilize these Canadian losses if the tax
authority determines that the Company has no reasonable expectation of
profit. As of December 31, 1999, the Company also has a Canadian net
capital loss carryforward of $280. Net capital losses can be carried
forward indefinitely but can only be utilized to offset taxable capital
gain.
The Company has net operating losses for income tax purposes of
approximately $264,506 available to reduce United States taxable income
of future years, expiring as follows:
<TABLE>
<CAPTION>
<S> <C>
2006............................................................................ $ 405
2007............................................................................ 537
2008............................................................................ 2,800
2009............................................................................ 5,020
2010............................................................................ 36,922
2011............................................................................ 64,283
2017............................................................................ 36,601
2018............................................................................ 61,039
2019............................................................................ 56,899
--------------------
$ 264,506
====================
</TABLE>
Approximately 58% of these net operating losses may be utilized for state
income tax purposes.
For United States income tax purposes, utilization of net operating
losses may be subject to limitation in the event of certain substantial
stock ownership changes pursuant to IRC Section 382 and referred to
hereinafter as an ownership change. An ownership change would limit the
utilization of any net operating losses incurred prior to the change in
ownership date. The Company has completed an analysis under IRC Section
382 and has determined that no ownership change has occurred.
F-30 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(9) LEASES
The Company is obligated under capital lease agreements for equipment
which expire at various dates during the next twenty years. Certain of
these agreements contain clauses which allow the lessor to cancel the
agreement upon twelve-month written notice. However, the Company believes
that the likelihood of such clauses being exercised is remote. Gross
amounts of equipment and related accumulated amortization recorded under
capital leases were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Network facilities and equipment......................... $ 38,608 $ 33,540
Less accumulated amortization............................ (15,864) (9,307)
-------------------- --------------------
$ 22,744 $ 24,233
==================== ====================
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has noncancelable operating leases, primarily for
facilities, which expire over the next five years. Rental expense under
operating leases was $7,582, $6,281, $1,114 and $3,385 for the years
ended December 31, 1999 and 1998, the three-month period ended December
31, 1997 and for the year ended September 30, 1997, respectively.
F-31 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
Future minimum lease payments under noncancelable leases (with initial or
remaining lease terms in excess of one year) and future minimum capital
lease payments as of December 31, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------------------- --------------------
<S> <C> <C>
Year ending December 31:
2000................................................. $ 9,202 $ 6,942
2001................................................. 5,333 6,147
2002................................................. 3,672 5,814
2003................................................. 3,431 5,423
2004................................................. 3,320 4,583
Thereafter........................................... 14,064 9,243
-------------------- --------------------
Total minimum lease payments............... 39,022 $ 38,152
====================
Less amount representing interest (at rates
ranging from 9% to 17%).............................. 15,516
--------------------
Net minimum lease payments................. 23,506
Current portion of capital leases obligations............ 6,693
--------------------
Capital lease obligations,
less current portion..................... $ 16,813
====================
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
(a) PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution 401(k) plan (the Plan).
Employees are eligible to participate in the Plan upon
commencement of service. Participants may defer up to 15% of
eligible compensation. In October 1999, the Company amended the
Plan to provide matching contributions of 50% on the first 6% of
employee deferrals. The matching contributions vest over five
years. Company contributions were $272 for the year ended December
31, 1999.
(b) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key
members of management. These agreements provide for certain
payments in the event of death, disability and change of control.
The agreements also contain covenants not to compete.
(c) CONSTRUCTION CONTRACTS
The Company is party to various construction contracts arising in
the ordinary course of business.
F-32 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(11) LEGAL PROCEEDINGS
(a) GLOBAL AND CURRENT AND FORMER OFFICERS AND DIRECTORS
On October 20, 1998, the Company and GST Telecom, filed a
Complaint in the Superior Court of California, County of Santa
Clara, against Global and six former GST officers and directors
(the Defendants). The Complaint included claims for fraud,
negligent misrepresentation, unjust enrichment, and unfair
competition primarily related to the alleged misappropriation of a
Mexican business opportunity. The Complaint sought an accounting,
a constructive trust, and restitution of GST's interest in the
opportunity and also sought unspecified exemplary and punitive
damages and attorneys' fees.
On January 27, 1999, Global and GST Mextel, Inc. (Mextel) filed a
Complaint in the Supreme Court of British Columbia, against GST
and GST Telecom. The Complaint, which arose from the same matters
for which GST and GST Telecom filed its complaint against Global,
et al., in the Superior Court of California, included claims for
declaratory and injunctive relief and unspecified general and
special damages.
On January 28, 1999, five former GST officers or directors filed a
Complaint in the Supreme Court of British Columbia against the
Company, GST Telecom and four current GST directors. The
Complaint, which arose from the same matters for which GST and GST
Telecom filed its complaint against Global, et al., in the
Superior Court of California, included claims for oppression and
declaratory relief, and seeks unspecified actual and punitive
damages, cost, and attorneys' fees.
On September 16, 1999, the Company received $30,000 in cash from
Global and others in connection with the settlement of various
lawsuits, including the above lawsuits between GST, Global,
Mextel and three of the former directors. Pursuant to the
settlement, all claims against these parties have been dismissed
with the exception of the claim discussed in 11(d) below. The
Company claims against the non-settling parties are unaffected by
this settlement.
(b) FORMER DIRECTOR AND COUNSEL
On December 16, 1998, GST, GST USA, Inc. (GST USA) and GST Telecom
filed a Complaint in the Unites States District Court, Southern
District of New York, against a former director and a law firm
which previously represented the Company as general counsel. The
Complaint includes claims for professional negligence, breach of
fiduciary duty, and breach of contract, and seeks compensatory
damages and attorneys' fees.
On February 12, 1999, the former director filed his Answer to the
Complaint. The law firm filed its Answer and Counterclaims to the
Complaint on February 17, 1999. The law firm 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.
F-33 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
On March 10, 2000, the parties entered into a settlement
of the Complaint and certain of the proceedings described
in 11(a) and (c). The settlement is subject to the execution
of a final agreement and payment by the law firm.
F-34 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(c) FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER
On January 25, 1999, the Company's former Chairman and Chief
Executive Officer, filed a Complaint in the Superior Court of
Washington, King County, against GST, GST USA and GST Telecom. The
Complaint, which relates to the circumstances under which the
former Chairman and Chief Executive Officer ceased to serve as an
officer and director of GST, 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, the Company answered by denying all
liability and filed counterclaims against the former Chairman and
Chief Executive Officer, Global and five other former officers and
directors for liability with respect to the matters leading to the
termination of the former Chairman and Chief Executive Officer's
employment. In particular, GST seeks recovery under Washington law
for matters described in note 11(a), above, as well as for
breaches committed with respect to the wrongful use of GST funds
for the purchase of telecommunications licenses. The matter is
currently in discovery.
(d) FORMER TREASURER AND FORMER DIRECTORS
On February 9, 1999, the Company filed a Complaint in the Superior
Court for the State of Washington, Clark County, against the
former treasurer of the Company. The Complaint is based on alleged
misconduct and 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 misuse of insider
information in the purchase of stock, wrongful disbursements to
third parties, and involvement in a fraudulent release of stock
from escrow. This claim has been consolidated with the claim
against the Former Chairman and Chief Executive Officer described
in note 11(c), above.
On June 4, 1999, the Company filed a Complaint in the Supreme
Court of British Columbia, against three former directors and the
former treasurer seeking a constructive trust over the proceeds of
750,000 common shares of GST which the Company believes was
wrongfully removed from an escrow account. The defendants have
denied liability. The matter is currently in discovery.
F-35 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(e) CLASS ACTION SECURITIES LAWSUITS
On October 21, 1999, the first of several class action lawsuits
was filed in the United States District Court for the Western
District of Washington against GST, certain former officers and
directors and in one lawsuit against Global Light
Telecommunications, Inc. No current director or officer of GST is
named as a defendant. The Complaint claims that the Company and
the other defendants committed securities fraud by failing to make
disclosures concerning a transaction with Global regarding the
Company's joint venture in Bestel, S.A. de C.V., the owner of a
2,270 kilometer fiber optic telecommunications network in Mexico,
that is the subject of 11(a) discussed above. The Complaints do
not specify the amount of damages sought. A single consolidated
complaint was filed by the plaintiffs on March 14, 2000. The
Company denies liability, and will vigorously dispute the
allegations of the Complaint.
(f) FORMER EMPLOYEE OF MAGNACOM
In February 1999, a former employee of Magnacom Wireless, LLC
filed suit in Oregon state court against the Company. It has
subsequently been transferred to federal court. The suit claims
that the Company should be liable for Magnacom's obligations on
the basis that the Company was involved in many functions of
Magnacom. The Company has denied liability and the matter is
currently in discovery.
Pursuant to the guidance set forth in SFAS 5, ACCOUNTING FOR
CONTINGENCIES, the Company has accrued loss provisions related to
certain of the legal proceedings detailed above. In the opinion of
management, the ultimate disposition of such matters will not have
a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company is also involved in various other claims and legal
actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not
have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
(12) RELATED PARTY TRANSACTIONS
(a) MAGNACOM WIRELESS, LLC (MAGNACOM)
In 1996, the Company and Magnacom, a company which was
controlled by the Company's former Chairman and Chief Executive
Officer, entered into a reseller agreement pursuant to which (i)
the Company was to become a reseller of PCS services in markets
in which Magnacom had obtained FCC licenses, and (ii) Magnacom
was to use the Company to provide switched local and long
distance services in markets where the Company had operational
networks. Pursuant to such agreement, the Company paid Magnacom
$-0-, $200, $-0- and $8,403 during the years ended December 31,
1999 and 1998, the three-months ended December 31, 1997 and the
year ended September 30, 1997, respectively. In addition, the
Company made operating advances to Magnacom of $-0-, $925, $91
and $52 during the years ended December 31, 1999 and 1998,
the three-months ended December 31, 1997 and the year ended
September 30, 1997, respectively.
In October 1998, Magnacom filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. As a
result, the Company wrote-off all amounts previously paid to
Magnacom in the third quarter of 1998. The total write-off of
approximately $15,668 is included in special charges in the
accompanying consolidated statement of operations for the years
ending December 31, 1998.
F-36 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
The transactions with Magnacom form the basis for certain of the
legal proceedings described in notes 11(b), 11(c) and 11(d),
and 11(f).
F-37 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(b) PACWEST NETWORK, INC. (PNI)
The operations of the Company's Hawaiian microware network require
the use of radio licenses from the FCC. Such licenses are owned by
PNI, a company controlled by the Company's former Chairman and the
former treasurer. Under agreements between the Company and PNI,
(1) the Company pays a monthly fee to PNI to utilize PNI's
licenses for its communications traffic and (2) PNI pays an equal
monthly fee to the Company for the right to utilize the Company's
facilities for other communications traffic using up to 10% of
PNI's license capacity.
(c) GLOBAL
In a series of transactions during the third and fourth quarters
of 1996, the Company acquired 3,600,000 shares of Canadian
Programming Concepts, Inc. (CPC), a Canadian corporation which is
publicly traded on the Vancouver Stock Exchange, for consideration
of $3,659. CPC's name was subsequently changed to Global. The
Company's shares constitute approximately 14% of Global's total
outstanding shares at December 31, 1999. As noted in note 11(a),
the Company has reached a settlement of the litigation with
Global, and as described in note 16, has disposed of its shares in
Global.
(d) TOMEN
Under the Tomen facility, Tomen has the right to act as
procurement agent for each network project it finances. The
Company has purchased equipment through Tomen at competitive
prices. Additionally, an upfront fee of 1.50% of the aggregate
principal amount of each project loan advanced and a commitment
fee of .50% per annum on the unused portion of each project loan
is payable to Tomen.
Pursuant to the Tomen agreements, Tomen has purchased 1,586,595
shares of common stock for total cash consideration of $10,400.
(e) OTHER
The Company paid approximately $0, $1,929, $104, and $2,066 in
legal fees during the years ended December 31, 1999 and 1998, the
three-month period ended December 31, 1997 and the year ended
September 30, 1997, respectively, to a firm having a member who
was also a director of the Company.
The Company paid approximately $264 in compensation, in
addition to director fees, for the year ended December 31, 1999
to the Company's non-employee Chairman of the Board.
Prior to June 1997, the Company's former Chairman and Chief
Executive Officer served as a paid consultant to Tomen.
Additionally, Pacwest Network LLC received a fee equal to 1% of
the aggregate debt and equity financing provided by Tomen to the
Company through October 1997. Such fees incurred by the Company
totaled $437 during the year ended September 30, 1997.
F-38 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(13) SEGMENTS
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. As an integrated communications
provider, the Company has one reportable operating segment. While the
Company's chief decision-maker monitors 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. The chief decision-maker does, however, monitor
revenue streams at a more detailed level than those depicted in the
Company's historical general purpose financial statements. The following
table presents revenues by service type:
<TABLE>
<CAPTION>
THREE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED
---------------------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Local service............ $ 93,620 $ 48,859 $ 7,034 $ 16,993
Long distance
services............. 65,590 65,701 12,609 44,981
Data services............ 19,843 8,770 1,100 2,000
Internet services........ 9,601 8,404 1,013 3,006
Longhaul services........ 11,603 14,673 3,395 12,057
Product.................. 4,089 4,708 8,706 23,374
Other.................... 2,429 3,376 913 3,556
Construction and facility
sales................ 115,147 8,826 1,488
--
--------------- --------------- ----------------- -------------------
Total revenues...... $ 321,922 $ 163,317 $ 36,258 $ 105,967
=============== =============== ================= ===================
</TABLE>
Substantially all of the Company's revenue is attributable to customers
in the United States. Additionally, all significant operating assets are
located within the United States.
F-39 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(14) SPECIAL CHARGES
There were no special charges for the year ended December 31, 1999.
Special charges for the year ended December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
<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 1998, the Company changed its strategic direction to focus on its
core, domestic business. In conjunction with the change, management
identified certain in-process network construction projects no longer
considered compatible due to geographic location or technology changes.
The write-off totaled $9,918 and represented the entire amount of the
costs related to these in-process projects, including the costs of
fiber optic networks and electronic equipment. These assets had
never been placed in service and, as such, were not an integral part of
the Company's ongoing operations. While the historical cost of these
assets has been written-off of the accompanying consolidated balance
sheets, the Company holds these assets for disposal.
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 sale and sold approximately 80% of such assets in
1999 for $207. 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 the 1996 acquisition of Tri-Star Residential
Communications, Inc. (Tri-Star) a shared-tenant service provider. No
goodwill had been recorded in conjunction with the acquisition of
Tri-Star.
F-40 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
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 employees worked in a variety of functions and operations throughout
the Company. The termination of those employees did not have a material
impact on the Company's business functions. At December 31, 1998, the
Company had accrued $1,113 in severance-related costs. The majority of
these costs relate to the termination plan and all but $315 were paid out
in 1999. The following table details 1999 activity related to the
severance accrual:
<TABLE>
<CAPTION>
<S> <C>
Accrual at December 31, 1998................................................... $ 1,113
Payments....................................................................... (737)
Adjustments.................................................................... (61)
--------------------
Accrual at December 31, 1999................................................... $ 315
====================
</TABLE>
See footnote 12 for a discussion of the amounts paid to Magnacom.
Special charges for the year ended September 30, 1997 relate to a $7,445
non-cash compensation charge incurred when 750,000 common shares were
released from escrow to former members of management. This transaction is
part of the litigation described in note 11(d).
F-41 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for
cash and cash equivalents, accounts and notes receivable, investments,
accounts payable and accrued expenses approximate fair values due to the
short-term maturities of those instruments. The carrying amounts for
current and non-current restricted investments approximate fair value
due to the composition of such investments and the related maturities.
The carrying amount of unrestricted investments is based upon fair
value as determined by quoted market prices.
The following table details the carrying amounts and estimated fair
values of long-term debt and redeemable preference shares at
December 31, 1999 (the financial instruments for which carrying value
and estimated fair value differ at December 31, 1999 and 1998):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Long-term debt:
Senior Secured Notes, 13.25%......................... $ 265,000 $ 262,350 $ 265,000 $ 273,933
Senior Secured Discount Notes, 10.5%................. 355,587 242,500 320,997 239,555
Senior Discount Notes, 13.875%....................... 274,800 228,087 240,304 228,415
Convertible Senior Subordinated
Discount Notes, 13.875%............................ 33,295 27,635 29,884 28,406
Senior Subordinated Accrual
Notes, 12.75%...................................... 144,000 136,800 144,000 133,920
Redeemable preference shares, 11.875%.................... 69,688 70,675 61,741 54,950
</TABLE>
The fair value of publicly traded long-term debt is estimated based on
quoted market prices. For substantially all other long-term obligations,
carrying amounts approximate fair values as incremental borrowings
available to the Company are at similar rates and terms. The fair value
of redeemable preference shares is estimated based upon rates available
to the Company for redeemable preferred equity with similar maturities
and features.
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 judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly impact the
estimates.
F-42 (Continued)
<PAGE>
GST TELECOMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands, except per share and share amounts)
(16) SUBSEQUENT EVENTS
On January 25, 2000, the President and Chief Executive Officer of the
Company resigned. The Company has appointed the Chief Operating Officer
as Acting Chief Executive Officer until a permanent appointment is made.
In a series of transactions in February 2000, the Company sold its
investment in Global described in note 1 for $56,534 in cash, resulting
in a realized gain of the same amount.
F-43
<PAGE>
EXHIBIT 21
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST Telecommunications, Inc.:
We consent to incorporation by reference in the Registration Statements
(Nos. 33-94072, 333-07237 and 333-53981) on Form S-8, (Nos. 33-95324,
33-94096, 333-1538 and 333-76405) on Form F-3, and (Nos. 333-15699,
333-16141, 333-32137, 333-21729, 333-19339, 333-45013 and 333-52437) on
Form S-3 of GST Telecommunications, Inc. of our report dated March 17, 2000
relating to the consolidated balance sheets of GST Telecommunications, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' deficit, and
cash flows for each of the years in the two-year period ended December 31,
1999, the three-month period ended December 31, 1997 and the year ended
September 30, 1997, which report appears in the December 31, 1999 Form 10K of
GST Telecommunications, Inc.
/s/ KPMG LLP
Portland, Oregon
March 27, 2000
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
GST Telecommunications, Inc.:
We consent to incorporation by reference in the Registration Statements
(Nos. 33-94072, 333-07237 and 333-53981) on Form S-8, (Nos. 33-95324,
33-94096, 333-1538 and 333-76405) on Form F-3, and (Nos. 333-15699,
333-16141, 333-32137, 333-21729, 333-19339, 333-45013 and 333-52437) on
Form S-3 of GST Telecommunications, Inc. of our report dated March 17, 2000
relating to the consolidated balance sheets of GST Telecommunications, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' deficit, and
cash flows for each of the years in the two-year period ended December 31,
1999, the three-month period ended December 31, 1997 and the year ended
September 30, 1997, which report appears in the December 31, 1999 Form 10K of
GST Telecommunications, Inc.
/s/ KPMG LLP
Portland, Oregon
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-K for the year ended December 31, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> $42,983,000
<SECURITIES> 44,596,000
<RECEIVABLES> 79,591,000
<ALLOWANCES> (7,542,000)
<INVENTORY> 0
<CURRENT-ASSETS> 188,036,000
<PP&E> 944,410,000
<DEPRECIATION> (122,363,000)
<TOTAL-ASSETS> 1,112,629,000
<CURRENT-LIABILITIES> 114,563,000
<BONDS> 1,112,620
69,688,000
0
<COMMON> 238,626,000
<OTHER-SE> (521,973,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,112,629,000
<SALES> 321,922,000
<TOTAL-REVENUES> 321,922,000
<CGS> 207,185,000
<TOTAL-COSTS> 422,206,000
<OTHER-EXPENSES> (33,196,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,481,000
<INCOME-PRETAX> (182,569,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (182,569,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (182,569,000)
<EPS-BASIC> (5.11)
<EPS-DILUTED> (5.11)
</TABLE>
