<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 March 31, 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
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GST TELECOMMUNICATIONS, INC.
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(Exact name of Registrant as Specified in its Charter)
Canada Not Applicable
- ---------------------------------- ----------------------------
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 Main Street, Vancouver, WA 98663
- ------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 356-7100
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N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At May 12, 1999,
there were outstanding 37,390,815 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 MARCH 31, 1999, AND AMENDS, IN ITS
ENTIRETY, PART I, ITEMS 1 AND 2, AND PART II, ITEM 6 OF SUCH REPORT AS
ORIGINALLY FILED MAY 17, 1999. SEE NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS FOR A DISCUSSION OF THE BASIS FOR SUCH AMENDMENTS.
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheets - March 31,
1999 and December 31, 1998 2
Consolidated Condensed Statements of Operations
- Three Months Ended March 31, 1999 and
1998 3
Consolidated Condensed Statements of Cash Flows
- Three Months Ended March 31, 1999 and 1998 4
Notes to Consolidated Condensed Financial
Statements 5-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7-12
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
</TABLE>
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GST Telecommunications, Inc.
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1999 DECEMBER 31, 1998
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(As Restated)
<S> <C>
Current assets:
Cash and cash equivalents $ 50,035 $ 86,070
Restricted investments 34,681 34,107
Accounts receivable, net 39,037 32,935
Investments 16,246 16,246
Inventory, net 1,554 1,485
Prepaid and other current assets 19,506 11,454
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Total current assets 161,059 182,297
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Restricted investments 185,571 247,257
Property and equipment 755,677 678,374
less accumulated depreciation (74,266) (62,522)
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681,411 615,852
Other assets 145,803 145,906
less accumulated amortization (45,583) (40,029)
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100,220 105,877
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Total assets $ 1,128,261 $ 1,151,283
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------------------ -----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 22,839 $ 26,411
Accrued expenses 42,347 37,445
Deferred revenue 7,864 6,030
Current portion of capital lease obligations 5,271 5,649
Current portion of long-term debt 13,225 13,417
------------------ -----------------
Total current liabilities 91,546 88,952
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Other liabilities 26,566 21,377
Capital lease obligations, less current portion 18,934 19,741
Long-term debt, less current portion 1,109,280 1,092,959
Redeemable preference shares 61,741 61,741
Shareholders' deficit:
Common shares 240,289 234,267
Accumulated deficit (436,295) (383,954)
Accumulated other comprehensive income 16,200 16,200
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(179,806) (133,487)
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Total liabilities and shareholders' deficit $ 1,128,261 $ 1,151,283
------------------ -----------------
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</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
GST Telecommunications, Inc.
Consolidated Condensed Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------------------
1999 1998
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(As Restated)
<S> <C> <C>
Revenues:
Telecommunications services $ 48,724 $ 29,180
Construction, facility sales and other 10,769 ---
Product 1,082 864
---------------- ---------------
Total revenues 60,575 30,044
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Operating costs and expenses:
Network expenses 31,699 21,128
Facilities administration and maintenance 5,135 3,955
Cost of construction revenues 5,838 ---
Cost of product revenues 695 689
Selling, general and administrative 27,973 20,410
Depreciation and amortization 16,978 8,669
---------------- ---------------
Total operating costs and expenses 88,318 54,851
---------------- ---------------
Loss from operations (27,743) (24,807)
---------------- ---------------
Other expenses (income):
Interest income (3,861) (4,935)
Interest expense, net of amounts capitalized 28,260 21,275
Gain on sale of subsidiary shares --- (61,266)
Other 199 657
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24,598 (44,269)
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(Loss) income before income taxes (52,341) 19,462
Income tax expense --- ---
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Net (loss) income $ (52,341) $ 19,462
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---------------- ---------------
Net (loss) income per share:
Basic $ (1.44) $ 0.56
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---------------- ---------------
Diluted $ (1.44) $ 0.44
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Weighted average shares outstanding:
Basic 36,461,055 35,035,130
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---------------- ---------------
Diluted 36,461,055 44,714,589
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</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
GST Telecommunications, Inc.
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------------------
1999 1998
-------------- ---------------
(As Restated)
<S> <C> <C>
Operations:
Net (loss) income $ (52,341) $ 19,462
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 18,398 9,990
Accretion and accrual of interest 17,983 9,782
Non-cash stock compensation and other expense 156 943
Loss (gain) on disposal of assets 359 (221)
Equity in losses of investments and joint
venture --- 593
Gain on sale of subsidiary shares --- (61,266)
Changes in non-cash operating working capital:
Accounts receivable, net (6,102) (2,788)
Inventory (69) (190)
Prepaid, other current and other assets,
net (8,052) 1,828
Accounts payable and accrued liabilities 4,912 12,387
Deferred revenue 1,834 1,310
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Cash used in operations (22,922) (8,170)
-------------- ----------------
Investments:
Acquisition of subsidiaries, net of cash acquired --- (12,418)
Purchase of property and equipment (76,779) (39,214)
Proceeds from sale of property and equipment --- 772
Purchase of other assets (139) (90)
Change in investments restricted for the
purchase of property and equipment 61,897 8,011
Proceeds from the sale of subsidiary shares, net --- 85,048
Cash disposed of in sale of subsidiary --- (5,252)
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Cash (used in) provided by
investing activities (15,021) 36,857
-------------- ----------------
Financing:
Proceeds from long-term debt 316 ---
Principal payments on long-term debt and capital
leases (2,715) (2,473)
Issuance of common shares, net of issuance costs 5,092 14,914
Deferred debt financing costs --- (1,519)
Change in investments restricted to finance
interest payments (785) 1,242
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Cash provided by financing activities 1,908 12,164
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(Decrease) increase in cash and cash
equivalents (36,035) 40,851
Cash and cash equivalents, beginning of period 86,070 199,053
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Cash and cash equivalents, end of period $ 50,035 $ 239,904
-------------- ----------------
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</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full fiscal
year or for subsequent periods. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements for
the fiscal year ended December 31, 1998 as included in the Company's annual
report on Form 10-K.
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR PRIOR PERIODS
The Company has restated its results for the three months ended
March 31, 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
had 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
---------------------------
March 31, 1999
---------------------------
(As Reported) (As Restated)
----------- -----------
<S> <C> <C>
Construction, facility sales and other revenue $ 5,876 $ 10,769
Cost of construction revenues 2,514 5,838
Selling, general and administrative expense 27,275 27,973
Net loss (53,212) (52,341)
Net loss per share, basic and diluted (1.46) (1.44)
Property and equipment 754,806 755,677
Accumulated deficit at March 31, 1999 (437,166) (436,295)
</TABLE>
3. BASIC AND DILUTED NET LOSS PER SHARE
For the three months ended March 31, 1999, 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 13,628,341 for the three
month period ended March 31, 1999.
For the three months ended March 31, 1998, diluted net income per
share excludes $901 of interest expense related to convertible notes. Net
income per share is computed using the weighted average number of common and
dilutive common equivalent shares assumed to be outstanding during the
period. For the three months ended March 31, 1998, diluted weighted average
shares outstanding includes the following components:
<TABLE>
<S> <C>
Weighted average shares outstanding, basic 35,035,130
Options to purchase common shares 1,115,494
Warrants to purchase common shares 175,559
Debt convertible into common shares 3,455,327
Preference shares convertible into common shares 4,933,079
----------
Weighted average shares outstanding, diluted 44,714,589
----------
----------
</TABLE>
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<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
4. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
---------------- -----------------
(As Restated)
<S> <C> <C>
Common shares, no par value 37,098,179 36,264,066
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------------
1999 1998
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(As Restated)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,538 $ 4,194
Cash paid for income taxes --- ---
Supplemental schedule of non-cash investing and
financing activities:
Recorded in business combinations:
Assets --- 17,378
Liabilities --- 2,612
Common shares --- 2,348
Disposition of subsidiary:
Assets --- 35,480
Liabilities --- 4,218
Minority interest --- 12,732
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets at
end of period 22,363 20,027
Assets acquired through capital leases 543 3,289
Non-cash conversion of debt to equity 774 ---
</TABLE>
6. ADOPTION OF NEW ACCOUNTING STANDARD
The Company adopted Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" (SOP 98-5) on January 1, 1999. SOP 98-5 requires
that costs incurred during start-up activities, including organization costs,
be expensed as incurred and that previously capitalized costs related to such
activities be expensed as cumulative effect of a change in accounting
principle upon adoption. Adoption of SOP 98-5 did not have a material effect on
results of operations for the three month period ended March 31, 1999.
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain information included in this Quarterly Report may be deemed
to include forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that involve risk and uncertainty, such as
information relating to expected capital expenditures and expected trends in
operating losses and cash flows, as well as any statements preceded by,
followed by, or that include the words "intends," "estimates," "believes,"
"expects," "anticipates," "should," "could," or similar expressions, and
other statements contained herein regarding matters that are not historical
facts. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its expectations will
be achieved. The important factors that could cause actual results to differ
materially from those in the forward-looking statements herein (the
"Cautionary Statements") include, without limitation, risks associated with
the Company's operating losses, risks relating to the Company's development
and expansion and possible inability to manage growth, risks relating to the
Company's significant capital requirements, substantial indebtedness and
possible inability to service its debt, risks relating to competition and
regulatory developments, risks relating to implementing local and enhanced
services, risks relating to its long distance business, as well as other
risks referenced from time to time in the Company's filings with the
Securities and Exchange Commission, including Amendment No. 3 to the
Company's Form S-4 as filed on May 3, 1999 and the Company's Form 10-K for
the fiscal year ended December 31, 1998. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements. The Company does not undertake any obligation to release publicly
any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company, through its subsidiaries, provides a broad range of
integrated telecommunications products and services, primarily to business
customers located in California, Hawaii and other western continental states.
As a facilities-based integrated communications provider ("ICP"), the Company
operates state-of-the-art, digital telecommunications networks that represent
an alternative to incumbent local exchange carriers ("ILECs"). The Company's
full line of products, which offer a "one-stop" customer-focused solution to
the telecommunications services requirements of its customers, include local
dial tone, long distance, Internet, data transmission and private line
services. With the turn-up of its Virtual Integrated Transport and Access
("VITA") network in the fiscal year ended December 31, 1998 ("Fiscal 1998"),
the Company became one of the first ICPs to develop and deploy a converged
network. As of March 31, 1999, the VITA network was operational in 18 of the
Company's markets, positioning the Company for deployment of advanced
Internet Protocol ("IP") services in those markets.
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three month period ended March 31,
1999 increased $30.6 million, or 101.6%, to $60.6 million from $30.0 million
for the comparable three months ended March 31, 1998. Telecommunications
services revenues for the three month period ended March
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<PAGE>
31, 1999 increased $19.5 million, or 67.0%, to $48.7 million from $29.2
million for the comparable three months ended March 31, 1998. The increase in
telecommunications services revenues resulted primarily from strategic
acquisitions, including the acquisition of ICON Communications Corp. in April
1998, and from increased local service revenue generated by the Company's
networks. To a lesser extent, the increase in telecommunications services
revenues resulted from increased long distance, Internet, and data services.
Construction, facility sales and other revenue was $10.8 million and $0 for
the three month periods ended March 31, 1999 and 1998, respectively. The
increase was attributable to revenue from the construction of network and
fiber systems. Product revenue for the three month period ended March 31,
1999 increased $0.2 million, or 25.2%, to $1.1 million from $0.9 million for
the three month period ended March 31, 1998.
OPERATING EXPENSES. Total operating expenses for the three month
period ended March 31, 1999 increased $33.4 million, or 61.0%, to $88.3
million from $54.9 million for the three month period ended March 31, 1998.
Network expenses, which include direct local and long distance circuit costs,
increased $10.6 million, or 50.0%, to $31.7 million, or 65.1% of
telecommunications services revenues for the three month period ended March
31, 1999 compared to $21.1 million, or 72.4% for the comparable three month
period ended March 31, 1998. The decrease in network expenses as a percentage
of telecommunications services revenue resulted from the inclusion of
strategic acquisitions and an increase in revenues for traffic carried on the
Company's network. Facilities administration and maintenance expenses for the
three month period ended March 31, 1999 increased $1.1 million, or 29.8%, to
$5.1 million, or 10.5% of telecommunications services revenues compared to
$4.0 million, or 13.6% for the comparable three month period ended March 31,
1998. The decrease in these expenses as a percentage of telecommunications
services revenues resulted from the inclusion of revenues from strategic
acquisitions, substantially all of which are not generated on the Company's
networks.
Cost of construction revenue was $5.8 million and $0 for the three
months periods ended March 31, 1999 and 1998, respectively. The increase was
attributable to new construction of network and fiber systems.
Cost of product revenues was $0.7 million in each of the three
month periods ended March 31, 1999 and 1998. For the three month period ended
March 31, 1999 cost of product revenues were 64.2% of product revenues,
compared to 79.7% for the comparable three month period ended March 31, 1998.
Selling, general and administrative expenses for the three month
period ended March 31, 1999 increased $7.6 million, or 37.1%, to $28.0
million from $20.4 million for the three month period ended March 31, 1998.
The increase is due to the expansion of the Company's local and enhanced
services operations, which resulted in additional marketing, management
information and sales staff, and to selling, general and administrative
expenses related to companies acquired in 1998. As a percentage of total
revenue, selling, general and administrative expenses for the three months
ended March 31, 1999 were 46.2%, compared to 67.9% for the three months ended
March 31, 1998.
Depreciation and amortization for the three month period ended March
31, 1999 increased $8.3 million, or 95.8%, to $17.0 million from $8.7 million
for the three months ended March 31, 1998. The increase is attributable to
newly-constructed networks and related equipment being placed into service
and to the amortization of intangible assets related to companies acquired in
1998. The Company expects that depreciation will continue to increase as it
expands its networks and longhaul fiber optic facilities and installs
additional switches. Depreciation and amortization expense was 28.0% of total
revenue for the three months ended March 31, 1999 compared to 28.9% for the
comparable three month period ended March 31, 1998.
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<PAGE>
OTHER EXPENSES/INCOME. For the three month period ended March 31,
1999, the Company recorded net other expense of $24.6 million, compared to
net other income of $44.3 million for the comparable three month period ended
March 31, 1998. For the three months ended March 31, 1998, net other income
includes a $61.3 million gain resulting from the sale of the Company's
majority interest in NACT (the "NACT Sale"). Excluding such gain, net other
expense would have increased $7.6 million for the three month period ended
March 31, 1999 as compared to the same period in the previous year. The
increase in net other expense related primarily to increased interest expense
resulting from the issuance in May, 1998 of $500.0 million principal amount
at maturity of 10.5% senior secured discount notes (the "1998 Notes").
NET INCOME/LOSS. Net income (loss) for the three months ended March
31, 1999 decreased $71.8 million, or 368.9%, to ($52.3) million from $19.5
million for the three months ended March 31, 1998. Excluding the $61.3
million gain on the NACT Sale, net loss would have been $41.8 million for the
three months ended March 31, 1998. Excluding the gain on the NACT Sale, net
loss would have increased $10.5 million for the three months ended March 31,
1999 as compared to the three months ended March 31, 1998. Such increase in
net loss resulted primarily from a $7.0 million increase in interest expense
and a $33.4 million increase in operating expenses and was partially offset by
a $30.6 million increase in revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a
result of the development and operation of its networks. The Company expects
that such losses will continue as the Company emphasizes the development,
construction and expansion of its networks and builds its customer base. Cash
provided by the Company's operations will not be sufficient to fund the
expansion of its networks, longhaul fiber optic facilities and services.
At March 31, 1999, the Company had approximately $1,146.7 million of
indebtedness outstanding. Although the Company's liquidity was substantially
improved as a result of proceeds
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<PAGE>
received from the sale of $312.4 million principal amount at maturity of
13.875% senior discount notes and $37.9 million principal amount at maturity
of 13.875% convertible senior subordinated discount notes in December 1995
(collectively the "1995 Notes"), the sale of $265.0 million of 13.25% senior
secured notes in May 1997 (the "Secured Notes"), the sale of $144.0 million
of 12.75% senior subordinated accrual notes in November 1997 (the "Accrual
Notes") and the sale of the "1998 Notes", the Company has significant debt
service obligations. The Company will be required to make principal and
interest payments of approximately $61.3 million (of which $35.1 million will
be made from funds securing the Secured Notes), $66.8 million (of which $17.6
million will be made from funds securing the Secured Notes), $113.1 million,
$111.5 million and $155.0 million in the remainder of 1999 and in 2000, 2001,
2002, and 2003, respectively. In addition, the Company anticipates that cash
flow from operations will be insufficient to pay interest in cash on the 1995
Notes when such interest becomes payable in June 2001 and on the Secured Notes
starting in November 2000 once the amount pledged to fund the first six
scheduled interest payments on the Secured Notes is paid and to repay the 1995
Notes, the Secured Notes and the Accrual Notes in full and that such notes
will need to be refinanced. The ability of the Company to 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 March 31, 1999, the Company had cash, cash equivalents, and
investments, including restricted investments, of approximately $286.5
million. The Company believes that such amounts will be sufficient to fund
the Company's operations through the end of Fiscal 1999. Divestitures and
other management actions may prolong capital availability into the fiscal
year 2000 and beyond. Thereafter, the Company expects to require additional
financing. The extent of additional financing will depend on, among other
things, the rate of the Company's expansion and the success of the Company's
businesses. In the event that the Company's plans or assumptions change or
prove to be inaccurate, the Company incurs significant unexpected expenses,
or the Company's cash resources, together with borrowings under the current
financing arrangements prove to be insufficient to fund the Company's growth
and operations, or if the Company consummates additional acquisitions, the
Company may be required to seek additional sources of capital (or seek
additional capital sooner than currently anticipated). The Company may also
seek to raise additional capital to take advantage of favorable conditions in
the capital markets. There can be no assurance that additional financing will
be available to the Company or, if available, that it can be concluded on
terms acceptable to the Company or within the limitations contained within
the Company's financing arrangements. Failure to obtain such financing could
result in the delay or abandonment of some or all of the Company's
development or expansion plans and could have a material adverse effect on
the Company's business. Such failure could also limit the ability of GST to
make principal and interest payments on its outstanding indebtedness. The
Company has no material working capital or other credit facility under which
it may borrow for working capital and other general corporate purposes. There
can be no assurance that such facility will be available to the Company in
the future or that if such facility were available, that it would be
available on terms and conditions acceptable to the Company.
The Company's net cash (used in) provided by operating and investing
activities was ($37.9) million and $28.7 million for the three months ended
March 31, 1999 and 1998, respectively. Net cash provided by financing
activities from borrowings and equity issuances to
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<PAGE>
fund capital expenditures, acquisitions and operating losses was $1.9 million
and $12.2 million for the three months ended March 31, 1999 and 1998,
respectively.
Capital expenditures for the three months ended March 31, 1999 and
1998 were $76.2 million and $41.8 million, respectively. The Company
estimates capital expenditures of $172.9 million and $150 million in the
remainder of 1999 and in Fiscal 2000, respectively. The majority of these
expenditures is expected to be made for the construction of network and
longhaul fiber optic 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.
The Company, GST USA, GST Network Funding, Inc. and GST Equipment
Funding, Inc. are parties to certain indentures and have issued or guaranteed
notes governed by those indentures. In November 1998, the Company notified
United States Trust Company of New York, as trustee under the indentures,
that certain actions by the Company and its subsidiaries may not have been in
compliance with the technical requirements of certain restrictive covenants
contained in the indentures. In particular, the Company disclosed that a
series of transactions involving Global may have resulted in technical
non-compliances with the indentures. The Company is currently conducting a
review of the relevant transactions and intends to vigorously pursue any
necessary action to cure the potential non-compliances. The Company has
initiated litigation against Global and others in an effort to cure any
technical covenant violations that may have resulted from the transactions
involving Global. See Item 1, "Legal Proceedings."
In February 1999, the trustee informed the note holders of the
potential violations. Pursuant to the definitions contained within the
indentures of each of the notes described above, no default has been declared
and no event of default has occurred. The Company has not classified the
related debt obligations as current in its consolidated financial statements
because management believes it is probable that, in the event that the
holders declared a default, the Company would be able to take corrective
actions to cure any objectively determinable violations within the prescribed
grace period.
While the Company believes that any non-compliances can be cured, the
Company cannot offer any assurance that the litigation will be successful or
that any other potential cures will be effected in a timely manner or be
sufficient. In the event that the Company has violated its indentures and
does not cure the violations, the holders of the notes issued under the
indentures could demand repayment of the notes, discontinue disbursements of
cash proceeds of the most recent notes and assert other remedies against the
Company. If any of these events occurred, the Company would not have
sufficient liquid assets to repay the notes.
YEAR 2000 PROGRAM
The Company is currently verifying system readiness for the
processing of date-sensitive information by its information technology ("IT")
systems (applications, hardware, system software and interfaces) and its
network operations. The review of IT systems and network operations is
centrally managed through a year 2000 Program Management Office (PMO).
THE COMPANY'S STATE OF READINESS. In general, the Company's year
2000 project is divided into three phases: (1) inventory and assessment
("Phase One"), (2) strategy and contingency planning ("Phase Two"), and (3)
conversion and remediation ("Phase Three").
The Company completed its Phase One assessment for IT systems in
October 1998. Phase One for network operations was completed in March 1999.
The Company has focused its independent testing activities principally on
those systems whose failure would pose the greatest risk to the Company. The
Company may not independently test all of its equipment and will rely upon
vendor representations, if received by the Company, where tests are not
conducted. There can be no assurance of the accuracy or completeness of such
representations. The Company is continuing to contact all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues.
With respect to IT systems, the Company completed Phase Two, wherein
remedial actions were planned and a contingency plan was formulated, in
December 1998. The Company expects to complete Phase Three for IT systems,
wherein remedial actions will be implemented and tested, in third quarter
1999. The Company has completed strategy planning and anticipates conclusion
of remaining Phase Two and Phase Three activities for network operations in
third quarter 1999.
COSTS. The total amount expended on the project through March 31,
1999 was approximately $1.7 million. The total cost of the year 2000 project
is estimated to be $3.3 million, including $.3 million in internal staffing
costs, $1.8 million in external staffing costs and $1.2 million in hardware
and software upgrade costs. This cost may be reduced if software and hardware
are replaced with compliant systems as a result of other currently scheduled
capital projects. The Company does not expect remediation costs to have a
material adverse effect on its
-11-
<PAGE>
financial position, results of operation or cash flows. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of changes as the program progresses, and
failure to implement such changes could have an adverse effect on future
results of operations.
RISKS. The failure to correct a material year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and adversely affect
the Company's results of operations, liquidity and financial condition. Due
to the general uncertainty inherent in the year 2000 problem, resulting in
part from the uncertainty of the year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The year
2000 project is expected to significantly reduce the Company's level of
uncertainty about the year 2000 problem. The Company believes that, with the
implementation of new business systems and completion of the project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
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.
-12-
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
-13-
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Date: MARCH 27, 2000 GST TELECOMMUNICATIONS, INC.
(Registrant)
/s/ Daniel L. Trampush
----------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
-14-
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FR0M THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 41,451,117
<ALLOWANCES> (2,607,431)
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<CURRENT-ASSETS> 161,059,580
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<CURRENT-LIABILITIES> 91,546,833
<BONDS> 1,016,984,421
240,288,905
61,740,900
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