<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to
Commission file number 1-12866
GST TELECOMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
Canada Not Applicable
- -------------------------------- --------------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 Main Street, Vancouver, WA 98663
- --------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 356-7100
-----------------
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At November
5, 1999, there were outstanding 37,714,059 Common Shares, without par value, of
the Registrant.
<PAGE>
GST TELECOMMUNICATIONS, INC.
FORM 10-Q/A
INDEX
THIS REPORT ON FORM 10-Q/A CONSTITUTES AMENDMENT NO.1 TO THE REGISTRANT'S
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999, AND AMENDS,
IN ITS ENTIRETY, PART I, ITEMS 1 AND 2, AND PART II, ITEM 6 OF SUCH REPORT
AS ORIGINALLY FILED NOVEMBER 15, 1999. SEE NOTE 2 OF NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR A DISCUSSION OF THE BASIS FOR SUCH AMENDMENTS.
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets
- September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations
- Three and Nine Months Ended September 30, 1999
and 1998 3
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial
Statements 5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-15
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
-1-
<PAGE>
GST Telecommunications, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998 (1)
-------------------- -------------------
(As Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 45,204 $ 86,070
Restricted investments 36,496 34,107
Accounts receivable, net 72,161 32,935
Investments 36,721 16,246
Inventory, net 1,204 1,485
Prepaid and other current assets 25,282 11,454
--------------------- -------------------
Total current assets 217,068 182,297
--------------------- -------------------
Restricted investments 56,105 247,257
Property and equipment 892,428 678,374
less accumulated depreciation (96,943) (62,522)
--------------------- -------------------
795,485 615,852
Other assets 143,796 145,906
less accumulated amortization (54,701) (40,029)
--------------------- -------------------
89,095 105,877
--------------------- -------------------
Total assets $ 1,157,753 $ 1,151,283
===================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 26,210 $ 26,411
Accrued expenses 60,411 37,445
Deferred revenue 14,614 6,030
Current portion of capital lease obligations 5,887 5,649
Current portion of long-term debt 15,461 13,417
--------------------- -------------------
Total current liabilities 122,583 88,952
--------------------- -------------------
Other liabilities 37,439 21,377
Capital lease obligations, less current portion 16,052 19,741
Long-term debt, less current portion 1,137,851 1,092,959
Redeemable preference shares 65,603 61,741
Shareholders' deficit:
Common shares 241,198 234,267
Accumulated deficit (499,648) (383,954)
Accumulated other comprehensive income 36,675 16,200
--------------------- -------------------
(221,775) (133,487)
--------------------- -------------------
Total liabilities and shareholders' deficit $ 1,157,753 $ 1,151,283
===================== ===================
</TABLE>
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1998.
See notes to condensed consolidated financial statements.
-2-
<PAGE>
GST Telecommunications, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 50,424 $ 39,091 $ 150,362 $ 106,008
Construction, facility sales and other 53,692 3,250 98,979 4,006
Product 1,342 1,493 3,581 3,391
------------- ------------ ------------ ------------
Total revenues 105,458 43,834 252,922 113,405
------------- ------------ ------------ ------------
Operating costs and expenses:
Network expenses 32,295 27,933 96,770 74,886
Facilities administration and maintenance 5,348 4,201 14,748 11,857
Cost of construction revenues 37,203 300 63,068 500
Cost of product revenues 689 810 2,039 2,207
Selling, general and administrative 32,590 24,871 90,559 69,932
Depreciation and amortization 18,676 12,420 52,300 32,164
------------- ------------ ------------ ------------
Total operating costs and expenses 126,801 70,535 319,484 191,546
------------- ------------ ------------ ------------
Loss from operations (21,343) (26,701) (66,562) (78,141)
------------- ------------ ------------ ------------
Other expenses (income):
Interest income (2,037) (7,492) (8,520) (19,220)
Interest expense, net of amounts capitalized 28,022 27,830 84,058 74,355
Gain on sale of subsidiary shares --- --- --- (61,266)
Other (27,898) 16,275 (26,406) 17,396
------------- ------------ ------------ ------------
(1,913) 36,613 49,132 11,265
------------- ------------ ------------ ------------
Loss before income taxes (19,430) (63,314) (115,694) (89,406)
------------- ------------ ------------ ------------
Income tax expense --- --- --- ---
------------- ------------ ------------ ------------
Net loss $ (19,430) $ (63,314) $ (115,694) $ (89,406)
============= ============ ============ ============
Net loss per share, basic and diluted (1) $ (.52) $ (1.76) $ (3.22) $ (2.60)
============= ============ ============ ============
Weighted average shares outstanding 37,550,357 36,063,767 37,121,573 35,737,086
============= ============ ============ ============
</TABLE>
(1) Net loss per share is increased for preference shares' accretion totaling
$3,862 and $3,453 for the nine month periods ended September 30, 1999 and
1998, respectively.
See notes to condensed consolidated financial statements.
-3-
<PAGE>
GST Telecommunications, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------------------
1999 1998
-------------- ----------------
(As Restated)
<S> <C> <C>
Operations:
Net loss $ (115,694) $ (89,406)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization 56,990 45,355
Accretion and accrual of interest 53,832 35,112
Non-cash stock compensation and other expense 1,662 1,213
Loss on disposal of assets 3,430 56
Equity in losses of investments and joint venture --- 593
Gain on sale of subsidiary shares --- (61,266)
Reserve on long term assets --- 15,668
Changes in non-cash operating working capital:
Accounts receivable, net (39,395) (15,165)
Inventory 281 (508)
Prepaid, other current and other assets, net (14,318) 1,971
Accounts payable and accrued liabilities 32,328 6,304
Deferred revenue 8,584 6,326
-------------- ----------------
Cash used in operations (12,300) (53,747)
-------------- ----------------
Investments:
Acquisition of subsidiaries, net of cash acquired --- (35,471)
Proceeds from sale of investments --- 327
Purchase of property and equipment (215,323) (147,822)
Proceeds from sale of assets 1,500 3,584
Purchase of other assets (333) (2,638)
Change in investments restricted for the
purchase of property and equipment 173,148 (237,685)
Proceeds from the sale of subsidiary shares, net --- 85,048
Cash disposed of in sale of subsidiary --- (5,252)
-------------- ----------------
Cash used in investing activities (41,008) (339,909)
-------------- ----------------
Financing:
Proceeds from long-term debt 1,782 300,562
Principal payments on long-term debt and capital leases (13,312) (22,714)
Issuance of common shares, net of issuance costs 8,357 16,578
Deferred debt financing costs --- (12,945)
Change in investments restricted to finance interest
payments 15,615 16,682
-------------- ----------------
Cash provided by financing activities 12,442 298,163
-------------- ----------------
Decrease in cash and cash
equivalents (40,866) (95,493)
Cash and cash equivalents, beginning of period 86,070 199,053
-------------- ----------------
Cash and cash equivalents, end of period $ 45,204 $ 103,560
============== ================
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
have been condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full fiscal
year or for subsequent periods. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements for
the fiscal year ended December 31, 1998 as included in the Company's annual
report on Form 10-K/A.
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR PRIOR PERIODS
The Company has restated its results for the three and nine month
periods ended September 30, 1999 to reflect the following three changes:
1) For a certain construction contract involving both monetary and
non-monetary events, the Company is restating construction revenue,
cost of construction revenues and property and equipment to comply
with Emerging Issues Task Force 86-29, "Nonmonetary Transactions."
The Company has previously accounted for only the value of the net
cash impact and believes that recording all portions of the contract
on their relative fair values is a more appropriate treatment.
2) The Company is restating its cost of construction revenues related to
conduit transactions in which it leases or sells certain conduits while
retaining others for its own use. The Company believes that using a
weighted average conduit cost for each conduit in the system, whether
retained or sold/leased, is more appropriate than the incremental cost
of the sold/leased conduits previously used.
3) The Company determined that certain software development costs were
more appropriately expensed in accordance with American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use."
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------------------- -------------------------------
(As Reported) (As Restated) (As Reported) (As Restated)
<S> <C> <C> <C> <C>
Construction, facility sales and other revenue $ 45,555 $ 53,692 $ 70,892 $ 98,979
Cost of construction revenues 16,722 37,203 26,190 63,068
Selling, general and administrative expense 30,828 32,590 86,905 90,559
Net loss (5,324) (19,430) (103,159) (115,694)
Net loss per share, basic and diluted (.14) (.52) (2.88) (3.22)
Property and equipment 904,963 892,428 904,963 892,428
Accumulated deficit at September 30, 1999 (487,113) (499,648) (487,113) (499,648)
</TABLE>
3. BASIC AND DILUTED NET LOSS PER SHARE
For the three and nine months ended September 30, 1999 and 1998, common
stock equivalents were antidilutive and were not included in diluted weighted
average shares outstanding. If the Company had reported net income for the
periods presented, the weighted average number of common equivalent shares used
to determine diluted net loss per share would have increased by 14,693,507 and
15,122,291 for the three and nine months ended September 30, 1999, respectively,
and 13,350,426 and 13,677,107 for the three and nine months ended September 30,
1998, respectively.
4. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------------ ------------------------
(As Restated)
<S> <C> <C>
Common shares, no par value 37,577,514 36,264,066
</TABLE>
-5-
<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1999 1998
----------- ----------
(As Restated)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $27,143 $30,681
Cash paid for income taxes --- ---
Supplemental schedule of non-cash investing
and financing activities:
Recorded in business combinations:
Assets --- 45,719
Liabilities --- 7,900
Common shares --- 2,348
Disposition of subsidiary:
Assets 2,579 35,480
Liabilities (216) 4,218
Minority interest --- 12,732
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets at
end of period 28,560 24,560
Assets acquired through capital leases 1,590 9,347
Conversion of debt to equity 774 ---
</TABLE>
6. ACCRUED SEVERANCE
In the fourth quarter of 1998, the Company accrued $1,113 in
severance-related costs. The following table details activity related to the
severance accrual.
<TABLE>
<CAPTION>
<S> <C>
Accrual at December 31, 1998 $1,113
Payments (737)
Adjustments (61)
--------
Accrual at September 30, 1999 $ 315
========
</TABLE>
7. ADOPTION OF NEW ACCOUNTING STANDARD
In June 1999, the FASB issued Interpretation No. 43, "Real Estate
Sales," an interpretation of FASB Statement No. 66, "Accounting for Sales of
Real Estate." Interpretation No. 43 clarifies that the phrase ALL REAL ESTATE
SALES, from Paragraph 1 of Statement No. 66, includes sales of real estate
with property improvements or integral equipment that cannot be removed and
used separately from the real estate without incurring significant costs.
This Interpretation applies to all sales of real estate with property
improvements or integral equipment entered into after June 30, 1999. While the
Company is still evaluating the full effect of the new interpretation, it
anticipates that FIN 43 will impact revenue recognition for all dark fiber and
conduit lease and sale transactions entered into after June 30, 1999.
-6-
<PAGE>
7. RECENT DEVELOPMENTS
A. The following table details a measurement and reporting structure
recently adopted by the Company's chief operating decision makers for the
three and nine month periods ended September 30, 1999 and 1998.
Revenues and Adjusted EBITDA by Operational Category
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
------------------------------ ------------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------- ------------ ------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Core ICP $ 26,158 $ 1,245 $ 10,116 $ (5,493)
Acquisition and legacy 24,572 (3,053) 29,562 (2,633)
Product and facility sales 54,728 16,657 4,156 2,969
Corporate overhead costs --- (16,913) --- (8,749)
------------- ------------- ------------ ------------
Total $ 105,458 $ 2,064 $ 43,834 $ (13,906)
============= ============= ============ ============
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
----------------------------- -----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------ ------------ ------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Core ICP $ 66,649 $ (705) $ 25,462 $ (14,960)
Acquisition and legacy 84,844 (3,517) 80,896 (8,317)
Product and facility sales 101,429 36,206 7,047 4,301
Corporate overhead costs --- (43,459) --- (24,661)
------------- ------------ ------------ ------------
Total $ 252,922 $ (11,475) $ 113,405 $ (43,637)
============= ============ ============ ============
</TABLE>
The Company categorizes its operations as follows: 1) Core ICP
operations (also known as "CLEC cities"); 2) Acquisition and Legacy; 3)
Product and Facility Sales; and 4) Corporate Overhead Costs. Core ICP
operations includes those markets where the Company has both switching and
network assets deployed. The acquisition and legacy category encompasses
those business operations acquired by GST that do not prominently feature
facilities-based service. Product and facility sales are attributable to
several agreements to lease, construct or sell conduit and fiber to other
carriers. Corporate overhead costs include costs related to engineering,
information management, sales, marketing, management and other support
functions.
Adjusted EBITDA consists of loss before interest, income taxes,
-7-
<PAGE>
depreciation and amortization, minority interest, gains and losses on the
disposition of assets and non-cash charges. Management believes that Adjusted
EBITDA provides a meaningful measure of operating cash flow (without the
effects of working capital changes) for the continuing operations of the
Company by excluding the effects of non-cash expenses and non-operating
activities. However, Adjusted EBITDA should not be used as an alternative to
operating loss and net loss as determined in accordance with GAAP.
B. On October 21, 1999, the Company learned that putative securities
class action lawsuits had been filed in the United States District Court for
the Western District of Washington against the Company, certain former
officers and directors of the Company and against Global Light
Telecommunications, Inc. See "Legal Proceedings" in Part II: Other
Information.
C. Reference is made to "Recent Developments" in "Item 7: Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Company's annual report on Form 10-K/A for the fiscal year ended December
31, 1998 in which the Company disclosed potential technical violations of
certain debt convenants. On September 16, 1999, the Company received $30.0
million from Global Light Telecommunications, Inc. and others in connections
with the settlement of various lawsuits. See "Legal Proceedings" in Part II.
Other Information. 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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report 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 the
Company's control. All statements included in this Quarterly Report, 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" regarding the Company's
strategy, future operations, financial position, projected costs, prospects,
plans and objectives of management.
Certain statements contained in this Quarterly Report, including
without limitation, statements containing the words "will," "anticipate,"
"believe," "intend," "estimate," "expect," "project" and words of similar
import, constitute forward-looking statements, although not all
forward-looking statements contain such identifying words. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other factors include, among others, the following:
- - the significant amount of the Company's indebtedness;
- - the Company's limited operating history and expectation of operating
losses;
- - the availability and terms of the significant additional capital required
to fund the Company's expansion;
- - the extensive competition the Company expects to face in each of its
markets;
- - the Company's dependence on sophisticated information and processing
systems;
- - the Company's ability to manage growth;
- - the Company's ability to access markets and obtain any required
governmental authorizations, franchises and permits, in a timely manner, at
reasonable costs and on satisfactory terms and conditions;
- - technological change; and
- - changes in, or the failure to comply with, existing government regulations.
All forward-looking statements speak only as of the date of this Quarterly
Report. The Company does not undertake any obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. Although the Company
-8-
<PAGE>
believes that its plans, intentions and expectations reflected in or
suggested by the forward-looking statements made in this Quarterly Report are
reasonable, the Company can give no assurance that such plans, intentions or
expectations will be achieved. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements.
OVERVIEW
The Company, through its subsidiaries, provides a broad range of
integrated telecommunications products and services, including enhanced data
and Internet services and comprehensive voice services throughout the United
States, with a robust presence in California and the West. The Company
continues to focus on its western regional strategy by anchoring its next
generation networks in local markets and connecting them via long haul fiber
networks. The Company's products include local dial tone, long distance,
Internet, data transmission and private line services.
The following table highlights key statistical information about the Company,
as of September 30, 1999:
<TABLE>
<S> <C>
- ----------------------------------------- --------------------------------------
Access Lines, sold this quarter 38,712
- ----------------------------------------- --------------------------------------
Access Lines, installed this quarter 30,887
- ----------------------------------------- --------------------------------------
Cities Served 49
- ----------------------------------------- --------------------------------------
Route Miles, total 6,048 (86% owned, 14% leased)
- ----------------------------------------- --------------------------------------
Fiber Miles, total 362,600 (97% owned, 3% leased)
- ----------------------------------------- --------------------------------------
Collocations 98
- ----------------------------------------- --------------------------------------
Class 4/5 Switches Operational 15
- ----------------------------------------- --------------------------------------
Frame Relay Switches Operational 23
- ----------------------------------------- --------------------------------------
ATM Switches Operational 37
- ----------------------------------------- --------------------------------------
Customers 96,527
- ----------------------------------------- --------------------------------------
Interconnection Agreements 12
- ----------------------------------------- --------------------------------------
Employees 1,297
- ----------------------------------------- --------------------------------------
</TABLE>
* We recently discovered errors in previous disclosures of fiber miles and
route miles. We are currently reviewing our network records and these
numbers reflect our best estimate based on our review to date. These numbers
reflect a downward restatement of approximately 760 route miles and 26,562
fiber miles.
RESULTS OF OPERATIONS
REVENUES. Total revenues for the three month and nine month periods
ended September 30, 1999 increased $61.6 million, or 140.6%, and $139.5
million, or 123.0%, respectively, over the comparable three and nine month
periods ended September 30, 1998. Telecommunications services revenues for
the three and nine month periods ended September 30, 1999 increased $11.3
million, or 29.0%, and $44.4 million, or 41.8%, respectively, over the
comparable three and nine month periods ended September 30, 1998. The
increase in telecommunications services revenues resulted from increased
local, long distance, data and Internet services revenue as the Company
launched new products and entered new markets. The Company bundles these
products to provide better access and services to its customers. In addition,
for the nine month period ended September 30, 1999, the increase was also
attributable to 1998 strategic acquisitions, including the acquisition of
ICON Communications Corporation. Reciprocal compensation, which the Company
recognizes based on interconnection agreements, totaled $3.0 million and $5.2
million for the three and nine month periods September 30, 1999,
respectively, as compared to $0 for both the three and nine-month
-9-
<PAGE>
periods ended September 30, 1998. Construction, facility sales and other
revenue for the three and nine month periods ended September 30, 1999
increased $50.4 million and $95.0 million, respectively, over the comparable
three and nine month periods ended September 30, 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 the three and nine month periods ended
September 30, 1999 decreased $.2 million, or 10.1%, and increased
$.2 million, or 5.6%, respectively, over the three and nine month periods
ended September 30, 1998.
OPERATING EXPENSES. Total operating expenses for the three and nine
month periods ended September 30, 1999 increased $56.3 million, or 79.8%, and
$127.9 million, or 66.8%, respectively, over the comparable three and nine
month periods ended September 30, 1998. Network expenses, which include
direct local and long distance circuit costs, were 64.0% and 64.4%,
respectively, of telecommunications services revenues for the three and nine
month periods ended September 30, 1999 compared to 71.5% and 70.4% for the
comparable periods in the previous year. The decrease in network expenses as
a percentage of telecommunications services revenue resulted primarily from
an increase in traffic carried on the Company's network. Facilities
administration and maintenance expenses for the three and nine month periods
ended September 30, 1999 were 10.6% and 9.8%, respectively, of
telecommunications services revenues compared to 10.7% and 11.2% for the
comparable periods ended September 30, 1998. The decrease in these expenses
as a percentage of telecommunications services revenues for the nine month
period primarily resulted from the inclusion of revenues from strategic
acquisitions, substantially all of which were not generated on the Company's
networks.
Cost of construction revenues for the three and nine month periods
ended September 30, 1999 were $37.2 million and $63.1 million, respectively,
an increase of $36.9 million and $62.6 million over the comparable periods in
the previous year. The increase was caused by the increase in construction,
facility sales and other revenue. For the three and nine month periods ended
September 30, 1999, cost of construction revenues were 69.3% and 63.7%,
respectively, of construction revenues, compared to 9.2% and 19.9% for the
three and nine month periods ended September 30, 1998.
Cost of product revenues for the three and nine month periods ended
September 30, 1999 were $.7 million and $2.0 million, respectively, as
compared with $.8 million and $2.2 million for the three and nine month
periods ended September 30, 1998. For the three and nine month periods ended
September 30, 1999 cost of product revenues were 51.3% and 56.9%,
respectively, of product revenues, compared to 54.3% and 65.1% for the
comparable three and nine month periods ended September 30, 1998.
Selling, general and administrative expenses for the three and nine
month periods ended September 30, 1999 increased $7.7 million, or 31.0%, and
$20.6 million, or 22.8%, respectively, as compared to the three and nine
month periods ended September 30, 1998. The increase is primarily due to: 1)
the expansion of the Company's 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 expenses related to reserves recorded for certain
ISP and carrier customers; and 4) increased bonuses related to the Company's
Variable Incentive Plan. In addition, the Company had increased litigation
costs related to its legal proceedings described in "Legal Proceedings" in
"Part II: Other Information." As a percentage of total revenues, selling,
general and administrative expenses for the three and nine months ended
September 30, 1999 were 31.0% and 35.8%, respectively, compared to 56.7% and
61.7%, respectively, for the three and nine months ended September 30,
-10-
<PAGE>
1998. The decrease in selling, general and administrative expenses as a
percentage of total revenue relates primarily to increased construction,
facility sales and other revenue.
Depreciation and amortization for the three and nine month periods
ended September 30, 1999 increased $6.3 million, or 50.4%, and $20.1 million,
or 62.6%, respectively, as compared to the three and nine month periods ended
September 30, 1998. The increase is attributable to newly-constructed
networks and related equipment being placed into service. The nine month
period increase is also attributable to the amortization of intangible assets
related to companies acquired in 1998. The Company expects that depreciation
will continue to increase as it expands its networks and longhaul fiber optic
facilities and installs additional switches. Depreciation and amortization
expense was 17.7% and 20.7% of total revenue for the three and nine months
ended September 30, 1999 compared to 28.3% and 28.4% for the comparable three
and nine month periods ended September 30, 1998.
OTHER EXPENSES/INCOME. For the three and nine month periods ended
September 30, 1999, the Company recorded net other income of $1.9 million and
net other expense of $49.1 million, respectively, compared to net other
expense of $36.6 million and $11.3 million for the comparable three and nine
month periods ended September 30, 1998, respectively. For the three and nine
months ended September 30, 1999, net other income/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"). Excluding such gain, net other expense would have
decreased $10.5 million for the three months ended September 30, 1999. Such
decrease relates primarily to a $15.7 million loss reserve recorded in
September 1998 for amounts paid to Magnacom Wireless, LLC ("Magnacom"). For
the nine months ended September 30, 1998, net other income includes a $61.3
million gain resulting from the Company's sale of its remaining 63% interest
in NACT Telecommunications, Inc. (the "NACT Sale"). Excluding the gain on the
Global Settlement in 1999 and the gain on the NACT Sale in 1998, net other
expense would have increased $4.5 million for the nine month period ended
September 30, 1999 as compared to the same period in the previous year. The
increase in net other expense related primarily to increased interest expense
resulting from the issuance in May, 1998 of $500.0 million principal amount
at maturity of 10.5% senior secured discount notes and the $15.7 million loss
reserve recorded related to Magnacom.
NET INCOME/LOSS. Net loss for the three month period ended September
30, 1999 decreased $43.9 million, or 69.3%, to $19.4 million from $63.3
million for the three months ended September 30, 1998. Net loss for the nine
month period ended September 30, 1999 increased $26.3 million, or 29.4%, to
$115.7 million from $89.4 million for the nine month period ended September
30, 1998. Excluding the $28.0 million gain (net) on the Global Settlement,
net loss would have decreased $15.9 million for the three months ended
September 30, 1999. The decrease in net loss primarily related to increased
construction and facility sales. Excluding the $28.0 million gain (net) on the
Global Settlement in 1999 and $61.3 million gain on the NACT Sale in 1998, net
loss would have decreased $7.0 million for the nine months ended September
30, 1999 as compared to the nine months ended September 30, 1998. Such
decrease primarily relates to increased construction and facility sales.
The following table details a measurement and reporting structure
recently adopted by the Company's chief operating decision maker for the
three and nine month periods ended September 30, 1999 and 1998.
Revenues and Adjusted EBITDA by Operational Category
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
------------------------------ ------------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------- ------------ ------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Core ICP $ 26,158 $ 1,245 $ 10,116 $ (5,493)
Acquisition and legacy 24,572 (3,053) 29,562 (2,633)
Product and facility sales 54,728 16,657 4,156 2,969
Corporate overhead costs --- (16,913) --- (8,749)
------------- ------------- ------------ -----------
Total $ 105,458 $ 2,064 $ 43,834 $ (13,906)
============= ============= ============ ===========
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998
----------------------------- -----------------------------
ADJUSTED ADJUSTED
REVENUES EBITDA REVENUES EBITDA
------------- ------------ ------------ ------------
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Core ICP $ 66,649 $ (705) $ 25,462 $ (14,960)
Acquisition and legacy 84,844 (3,517) 80,896 (8,317)
Product and facility sales 101,429 36,206 7,047 4,301
Corporate overhead costs --- (43,459) --- (24,661)
------------- ------------ ------------ -----------
Total $ 252,922 $ (11,475) $ 113,405 $ (43,637)
============= ============ ============ ===========
</TABLE>
The Company categorizes its operations as follows: 1) Core ICP
operations (also known as CLEC cities); 2) Acquisition and Legacy; 3)
Product and Facility Sales; and 4) Corporate Overhead Costs. Core ICP
operations includes those markets where the Company has both switching and
network assets deployed. The acquisition and legacy category encompasses
those business operations acquired by GST that do not prominently feature
facilities-based service. Product and facility sales are attributable to
several agreements to lease or sell conduit and fiber capacity to other
carriers. Corporate overhead costs include costs related to engineering,
information management, sales, marketing, management and other support
functions.
Adjusted EBITDA consists of loss before interest, income taxes,
depreciation and amortization, minority interest, gains and losses on the
disposition of assets and non-cash charges. Management believes that Adjusted
EBITDA provides a meaningful measure of operating cash flow (without the
effects of working capital changes) for the continuing operations of the
Company by excluding the effects of non-cash expenses and non-operating
activities. However, Adjusted EBITDA should not be used as an alternative to
operating loss and net loss as determined in accordance with GAAP.
Core ICP revenue for the three and nine month periods ended
September 30, 1999 increased $16.0 million, or 158.6%, and $41.2 million, or
161.7%, respectively, over the three and nine months ended September 30,
1998. Core ICP adjusted EBITDA for the three and nine month periods ended
September 30, 1999 increased $6.7 million, or 122.7%, and $14.3 million, or
95.3% respectively, over the three and nine months ended September 30, 1998.
The improvement in revenues and adjusted EBITDA resulted primarily from
increased local and data services, and increased reciprocal compensation
revenue, recorded at the Company's CLEC cities operations.
Acquisition and legacy revenue for the three months ended September
30, 1999 decreased $5.0 million, or 16.9%, compared to the three months ended
September 30, 1998 and adjusted EBITDA for the three months ended September
30, 1999 decreased $.4 million, or 16.0%, compared to the three months ended
September 30, 1999. This decline in revenues and adjusted EBITDA resulted
from the sale of the Company's Guam operations and the sale of a portion of
the Company's shared tenant services operations in August and April 1999,
respectively, and a decrease in resold long distance revenue. Acquisition and
legacy revenue for the nine months ended September 30, 1999 increased $3.9
million, or 4.9%, compared to the nine months ended September 30, 1998, and
adjusted EBITDA for the nine months ended September 30, 1999 improved $4.8
million or 57.7%, compared to the nine months ended September 30, 1998. This
increase in revenues and improvement in adjusted EBITDA resulted from
acquisitions of KLP, Inc. (d/b/a Call America Phoenix) and the assets of Whole
Earth Networks, LLC in March 1999 and the acquisition of Icon Communications,
Corp. in April 1999.
Product and facility sales revenue for the three and nine month
periods ended September 30, 1999 increased $50.6 million and $94.4 million,
respectively, over the three and nine month periods ended September 30, 1998.
Product and facility sales adjusted EBITDA for the three and nine months
ended September 30, 1999 increased $13.7 million and $31.9 million,
respectively, over the three and nine months ended September 30, 1998. This
increase in revenues and adjusted EBITDA resulted primarily from revenues
related to agreements to sell, construct or lease fiber and conduit to other
carriers.
Adjusted EBITDA from corporate overhead costs for the three and nine
month periods ended September 30, 1999 decreased $8.2 million, or 93.3%,
and $18.8 million, or 76.2%, respectively, over the three and nine months
ended September 30, 1998. Such decrease resulted from an increase in corporate
overhead costs related to increased marketing and management information staff
as well as increased litigation costs related to legal proceedings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a
result of the development and operation of its networks. The Company expects
that such losses will continue as the Company emphasizes the development,
construction and expansion of its networks and builds its customer base. Cash
provided by the Company's operations will not be sufficient to fund the
expansion of its networks, longhaul fiber optic facilities and services.
-12-
<PAGE>
At September 30, 1999, the Company had approximately $1,175.3
million of indebtedness outstanding. The Company has significant debt service
obligations and will be required to make principal and interest payments of
approximately $31.4 million (of which $17.6 million will be made from funds
securing the Secured Notes), $68.2 million (of which $17.6 million will be
made from funds securing the Secured Notes), $114.1 million, $112.2 million
and $155.6 million in the remainder of 1999 and in 2000, 2001, 2002, and
2003, respectively. In addition, the Company anticipates that cash flow from
operations will be insufficient to pay interest in cash on the 1995 Notes
when such interest becomes payable in June 2001 and on the Secured Notes
starting in November 2000 once the amount pledged to fund the first six
scheduled interest payments on the Secured Notes is paid. The Company also
anticipates 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 that such notes will need to be refinanced. The ability of the Company to
obtain such refinancings will be dependent upon the future performance of the
Company, which will be subject to prevailing economic conditions and to
financial, business and other factors beyond the control of the Company.
There can be no assurance that the Company will be able to improve its
operating results or that the Company will be able to meet its debt service
obligations.
At September 30, 1999, the Company had cash, cash equivalents, and
investments, including restricted investments, of approximately $174.5
million. The Company believes that such amounts will be sufficient to fund
the Company's operations through March 2000. Divestitures and other
management actions may prolong capital availability through the fiscal year
2000 and beyond. Thereafter, the Company expects to require additional
financing. The extent of additional financing will depend on, among other
things, the rate of the Company's expansion and the success of the Company's
businesses. In the event that the Company's plans or assumptions change or
prove to be inaccurate, the Company incurs significant unexpected expenses,
or the Company's cash resources, together with borrowings under the current
financing arrangements, prove to be insufficient to fund the Company's growth
and operations, or if the Company consummates additional acquisitions, the
Company may be required to seek additional sources of capital (or seek
additional capital sooner than currently anticipated). The Company may also
seek to raise additional capital to take advantage of favorable conditions in
the capital markets. There can be no assurance that additional financing will
be available to the Company or, if available, that it can be concluded on
terms acceptable to the Company or within the limitations contained within
the Company's existing financing arrangements. Failure to obtain additional
financing could result in the delay or abandonment of some or all of the
Company's development or expansion plans and could have a material adverse
effect on the Company's business. Such failure could also limit the ability
of the Company to make principal and interest payments on its outstanding
indebtedness. The Company has no material working capital or other credit
facility under which it may borrow for working capital and other general
corporate purposes. There can be no assurance that such facility will be
available to the Company in the future or that if such facility were
available, that it would be available on terms and conditions acceptable to
the Company.
-13-
<PAGE>
The Company's net cash used in operating and investing activities was
$53.3 million and $393.7 million for the nine months ended September 30, 1999
and 1998, respectively. Net cash provided by financing activities from
borrowings and equity issuances to fund capital expenditures, acquisitions and
operating losses was $12.4 million and $298.2 million for the nine months ended
September 30, 1999 and 1998, respectively.
Capital expenditures for the nine months ended September 30, 1999 and
1998 were $222.0 million and $170.1 million, respectively, including $25.9
million and $18.4 million of capitalized interest. The Company estimates capital
expenditures of approximately $40.0 million and $160.0 million in the
remainder of 1999 and in Fiscal 2000, respectively. The majority of these
expenditures is expected to be made for the construction of network and
longhaul fiber optic facilities and the purchase of switches and related
equipment to facilitate the offering of the Company's services. Continued
significant capital expenditures are expected to be made thereafter. In
addition, the Company expects to continue to incur operating losses while it
expands its business and builds its customer base. Actual capital
expenditures and operating losses will depend on numerous factors, including
the extent of future expansion, acquisition opportunities and other factors
beyond the Company's control, including economic conditions, competition,
regulatory developments and the availability of capital.
YEAR 2000 PROGRAM
The Company has completed its planned remediation and testing of all
systems identified as business-critical. During the fourth quarter, the
Company will continue to refine its contingency plans and maintain its system
readiness for the processing of date-sensitive information by its information
technology ("IT") systems (applications, hardware, system software and
interfaces) and network operations (consisting of those network elements
owned and operated by the Company). The review of IT systems and network
operations is centrally managed through a year 2000 Program Management Office.
STATUS OF OUR YEAR 2000 PROGRAM. In general, the Company's year 2000
program is divided into three phases: (1) inventory and assessment ("Phase
One"), (2) strategy and contingency planning ("Phase Two"), and (3) conversion
and remediation ("Phase Three").
PHASE ONE:
The Company completed its Phase One assessment for IT systems in
October 1998. Phase One for network operations was completed in March 1999. The
Company has focused its independent testing activities principally on those
systems whose failure would pose the greatest risk to customers and operations.
The Company may not independently test all of its equipment and will rely upon
vendor representations where it does not conduct tests. The Company cannot
provide assurances that the vendor representations received are accurate or
complete or that the Company will receive responses from all of the vendors it
contacts. The Company continues to contact all of its significant suppliers and
business partners to determine the extent to which its interface systems are
vulnerable to those third parties' failure to remediate their own year 2000
issues.
PHASE TWO:
With respect to IT systems, the Company completed Phase Two--which
involved planning remedial actions and creating a contingency plan--in December
1998. The Company will continue to develop and refine additional contingency
plans throughout 1999. The Company completed Phase Two for network operations
during the third quarter of 1999.
PHASE THREE:
-14-
<PAGE>
During October 1999, the Company completed remediation and testing on
all IT systems identified as business-critical. During the third quarter of
1999, the Company completed all planned remediation and testing of its network
operations.
COSTS. The total amount expended on the project through September 30,
1999 was approximately $2.4 million. The total cost of the year 2000 project is
estimated to be $3.3 million, including $.3 million in internal staffing costs,
$1.8 million in external staffing costs and $1.2 million in hardware and
software upgrade costs. This cost may be reduced if software and hardware are
replaced with compliant systems as a result of other currently scheduled capital
projects. The Company does not expect remediation costs to have a material
adverse effect on its financial position, results of operation or cash flows.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of changes as the program
progresses, and failure to implement such changes could have an adverse effect
on future results of operations.
RISKS. The failure to correct a material year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and business
partners, the Company is unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on its results of
operations, liquidity or financial condition. The Company's year 2000 program is
expected to significantly reduce its level of uncertainty about the year 2000
problem. The Company believes that, with the implementation of new business
systems and completion of the project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are now required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in fair value (i.e., gains and losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. The Company must adopt
SFAS No. 133 by January 1, 2001. The Company has not determined the impact that
SFAS No. 133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of initial
adoption.
In June 1999, the FASB issued Interpretation No. 43, "Real Estate
Sales," an interpretation of FASB Statement No. 66, "Accounting for Sales of
Real Estate." Interpretation No. 43 clarifies that the phrase ALL REAL ESTATE
SALES, from Paragraph 1 of Statement No. 66, includes sales of real estate
with property improvements or integral equipment that cannot be removed and
used separately from the real estate without incurring significant costs.
This Interpretation applies to all sales of real estate with property
improvements or integral equipment entered into after June 30, 1999. While the
Company is still evaluating the full effect of the new interpretation, it
anticipates that FIN 43 will impact revenue recognition for all dark fiber and
conduit lease and sale transactions entered into after June 30, 1999.
-15-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Reference is made to the report on Form 8-K filed as of
September 21, 1999, on which the Company reported the following:
On September 16, 1999, the Company announced, in a press
release that it received $30 million from Global Light
Telecommunications, Inc. and others in connection with the settlement of
various lawsuits between the Registrants, Global Light, GST Mextel, Inc.,
W. Gordon Blankstein, Ian Watson, and Peter E. Legault.
On September 20, 1999, the Company announced, in a press
release, that it estimated reduced losses per share due to the receipt
of $30.0 million in connection with the Global Light settlement, and also
announced estimates of total revenues and adjusted EBITDA for the quarter
ending September 30, 1999.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Date: MARCH 27, 2000 GST TELECOMMUNICATIONS, INC.
----------------- (Registrant)
/s/ Daniel L. Trampush
-------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 45,204,000
<SECURITIES> 36,496,000
<RECEIVABLES> 66,833,000
<ALLOWANCES> (5,328,000)
<INVENTORY> 1,204,000
<CURRENT-ASSETS> 217,068,000
<PP&E> 892,428,000
<DEPRECIATION> (96,943,000)
<TOTAL-ASSETS> 1,157,753,000
<CURRENT-LIABILITIES> 122,583,000
<BONDS> 1,053,608,000
65,603,000
0
<COMMON> 241,198,000
<OTHER-SE> (462,973,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,157,753,000
<SALES> 252,922,000
<TOTAL-REVENUES> 252,922,000
<CGS> 161,877,000
<TOTAL-COSTS> 319,484,000
<OTHER-EXPENSES> (34,926,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,058,000
<INCOME-PRETAX> (115,694,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (115,694,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,694,000)
<EPS-BASIC> (3.22)
<EPS-DILUTED> (3.22)
</TABLE>
