<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
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(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 17, 2000 there were
outstanding 39,962,283 Common Shares, without par value, of the Registrant.
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GST TELECOMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE(s)
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
<S> <C> <C>
Condensed Consolidated Balance Sheets - March 31,
2000 and December 31, 1999 2
Condensed Consolidated Statements of Operations
- Three Months Ended March 31, 2000 and
1999 3
Condensed Consolidated Statements of Cash Flows
- Three Months Ended March 31, 2000 and 1999 4
Notes to Condensed Consolidated Financial
Statements 5-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7-12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
</TABLE>
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GST Telecommunications, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS MARCH 31, 2000 DECEMBER 31, 1999 (1)
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,398 $ 42,983
Restricted investments 17,615 19,828
Accounts receivable, net 41,141 45,244
Construction contracts receivable 30,704 26,823
Investments 910 44,596
Prepaid and other current assets 11,426 8,562
----------------- -----------------
Total current assets 144,194 188,036
----------------- -----------------
Restricted investments 3,412 9,848
Property and equipment 978,440 944,410
less accumulated depreciation (129,732) (112,363)
----------------- -----------------
848,708 832,047
Other assets 129,310 139,262
less accumulated amortization (53,176) (56,564)
----------------- -----------------
76,134 82,698
----------------- -----------------
Total assets $ 1,072,448 $ 1,112,629
================= =================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 17,304 $ 30,579
Accrued expenses 55,036 49,759
Deferred revenue 9,864 10,066
Current portion of capital lease obligations 6,826 6,693
Current portion of long-term debt 18,215 17,466
----------------- -----------------
Total current liabilities 107,245 114,563
----------------- -----------------
Long-term interest payable 49,006 43,134
Capital lease obligations, less current portion 14,241 16,813
Long-term debt, less current portion 1,154,349 1,151,778
Other liabilities 18,754 ---
Commitments, contingencies and subsequent events
Redeemable preference shares 69,688 69,688
Shareholders' deficit:
Common shares 252,141 238,626
Accumulated deficit (592,976) (566,523)
Accumulated other comprehensive income --- 44,550
----------------- -----------------
(340,835) (283,347)
----------------- -----------------
Total liabilities and shareholders' deficit $ 1,072,448 $ 1,112,629
================= =================
</TABLE>
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1999.
See accompanying notes to condensed consolidated financial statements.
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GST Telecommunications, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Revenues:
Telecommunications and other services $ 54,454 $ 48,724
Construction, facility sales and other 9,012 10,769
Product 205 1,082
------------------ ------------------
Total revenues 63,671 60,575
------------------ ------------------
Operating costs and expenses:
Network expenses 34,271 31,699
Facilities administration and maintenance 5,776 5,135
Cost of construction revenues 6,055 5,838
Cost of product revenues 305 695
Selling, general and administrative 35,633 27,973
Depreciation and amortization 21,867 16,978
------------------ ------------------
Total operating costs and expenses 103,907 88,318
------------------ ------------------
Loss from operations (40,236) (27,743)
------------------ ------------------
Other expenses (income):
Interest income (915) (3,861)
Interest expense, net of amounts capitalized 32,734 28,260
Gain on sale of investment, net (42,349) ---
Other (3,253) 199
------------------ ------------------
(13,783) 24,598
------------------ ------------------
Loss before income taxes (26,453) (52,341)
------------------ ------------------
Income tax expense --- ---
------------------ ------------------
Net loss $ (26,453) $ (52,341)
================== ==================
Net loss per share, basic and diluted $ (0.70) $ (1.44)
================== ==================
Weighted average shares outstanding 38,024,267 36,461,055
================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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GST Telecommunications, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------------------------------
2000 1999
--------------------- -----------------------
<S> <C> <C>
Operations:
Net loss $ (26,453) $ (52,341)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization 21,342 18,398
Accretion and accrual of interest 21,730 17,983
Non-cash stock compensation and other expense 224 156
(Gain) loss on disposal of assets (1,275) 359
Gain on sale of investments (42,349) ---
Changes in non-cash operating working capital:
Accounts receivable, net 3,690 (6,102)
Construction contracts receivable (3,881) ---
Prepaid, other current and other assets, net (600) (8,121)
Accounts payable and accrued liabilities 5,635 4,912
Deferred revenue (34) 1,834
Deferred revenue from construction contracts 4,569 ---
----------------- ------------------
Cash used in operations (17,402) (22,922)
----------------- ------------------
Investments:
Proceeds from sale of investments 56,580 ---
Purchase of property and equipment (47,431) (76,779)
Proceeds from sale of assets 5,966 ---
Purchase of other assets 240 (139)
Change in investments restricted for the
purchase of property and equipment 6,436 61,897
----------------- ------------------
Cash provided by (used in)
investing activities 21,791 (15,021)
----------------- ------------------
Financing:
Proceeds from long-term debt 1,309 316
Principal payments on long-term debt and capital leases (6,275) (2,715)
Issuance of common shares, net of issuance costs 265 5,092
Change in investments restricted to finance interest
payments (273) (785)
----------------- ------------------
Cash provided by (used in)
financing activities (4,974) 1,908
----------------- ------------------
Decrease in cash and cash
equivalents (585) (36,035)
Cash and cash equivalents, beginning of period 42,983 86,070
----------------- ------------------
Cash and cash equivalents, end of period $ 42,398 $ 50,035
================= ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BANKRUPTCY PROCEEDINGS AND LETTER OF INTENT
On May 17, 2000, GST Telecommunications, Inc. ("GST" or the "Company")
and its subsidiaries filed voluntary petitions for protection under Chapter 11
of the United States Bankruptcy Code in the District of Delaware. The Company
and its subsidiaries (collectively the "Debtors") are currently operating as
debtors-in-possession under the supervision of the United States District Court
for the District of Delaware. The Chapter 11 cases have been consolidated for
the purpose of joint administration under Case No. 00-1982 (GMS).
On May 17, 2000, the Debtors also commenced ancillary proceedings under
the Companies' Creditors Arrangement Act in Canada in the Ontario Superior Court
of Justice.
Under these proceedings, substantially all liabilities, litgation and
claims against the Debtors in existence at the filing date are stayed unless the
stay is modified or lifted or payment has been otherwise authorized by the
court.
On May 16, 2000, we signed a letter of intent with Time Warner Telecom,
Inc. for the sale of substantially all of the Company's assets for $450 million
in cash. This sale is subject to approval of the court, the execution and
delivery of a definitive purchase agreement, satisfactory completion of due
diligence, state and federal regulatory approval and other customary terms and
conditions. If such a sale is consummated, it is highly unlikely that the
current equity security holders of the Company would receive any distribution
upon the subsequent liquidation of the Company and the interest of both secured
and unsecured creditors may be substantially impaired.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated 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, 1999 as included in the Company's annual report on Form 10-K.
3. BASIC AND DILUTED NET LOSS PER SHARE
For the three months ended March 31, 2000 and 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 10,500,700 and
13,052,066 for the three months ended March 31, 2000 and 1999, respectively.
4. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------------------------- ------------------------
<S> <C> <C>
Common shares, no par value 39,494,174 37,734,507
</TABLE>
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GST TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company accounts for comprehensive income under Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." Comprehensive income is defined as changes in stockholders' equity
exclusive of transactions with owners such as capital contributions and
dividends. The change in the Company's accumulated other comprehensive income
is as follows:
March 31, December 31,
2000 2000
--------- ------------
Balance, beginning of period $44,550 $36,675
Change in unrealized gain on available-
for-sale investment sold during the
period (44,550) 7,875
------- -------
Balance, end of period $ -- $44,550
======= =======
6. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,731 $ 3,538
Cash paid for income taxes --- ---
Supplemental schedule of non-cash investing and
financing activities:
Disposition of subsidiary:
Assets (4,182) ---
Liabilities (266) ---
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets at
end of period 15,345 20,027
Assets acquired through capital leases 820 3,289
Conversion of debt to equity 13,026 ---
</TABLE>
7. CAPITALIZATION OF INTEREST
The Company capitalized interest of $5,700 and $7,600 as a part of
property and equipment for the three months ended March 31, 2000 and 1999,
respectively.
8. ACCRUED SEVERANCE
In the fourth quarter of 1998, the Company accrued $1,113 in
severance-related costs. The balance of the accrual at March 31, 2000 is for one
employee and is included in accrued expenses on the accompanying condensed
consolidated financial statements. 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 March 31, 2000 $315
=======
</TABLE>
9. SALE OF GLOBAL INVESTMENT
In a series of transactions during the three months ended March 31,
2000, the Company sold its investment in Global Light Telecommunications, Inc.
(Global) The Company was accounting for the investment as available-for-sale
under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." The after tax net gain as a result of the transactions was
$42,349.
10. DEBT SERVICE REQUIREMENTS
At March 31, 2000, the Company had $1,193,631 of indebtedness outstanding
along with $69,688 of manditorily redeemable preference shares. As a result of
filing for protection under bankruptcy law, the Company is not permitted to make
any payments of the debt service requirements. All of these obligations are
subject to discharge in bankruptcy upon the completion of all proceedings.
11. IMPAIRMENT OF ASSETS
Due to the event described in Note 1 and the potential disposition of
substantially all of the Company's assets, the Company is considering if an
impairment of assets has occurred during the three months ended June 30, 2000
under SFAS No. 121 "Accounting for the Impairment of Long-Lived assets and for
Long-Lived Assets to be disposed of." If it is determined that an impairment has
occurred, the Company believes that it will have a material effect on that
period's condensed consolidated financial statements.
12. ADOPTION OF NEW ACCOUNTING STANDARD
In June 1999, the Financial Accounting Standards Board (the "FASB")
issued Interpretation No. 43, "Real Estate Sales, an interpretation of FASB
Statement No. 66." (FIN 43) The interpretation is effective for sales of real
estate with property improvements or integral equipment entered into after June
30, 1999. Under this interpretation, conduit is considered integral equipment
and dark fiber will likely be considered integral equipment. Accordingly, title
must transfer to a lessee in order for a lease transaction to be accounted for
as a sales-type lease. For contracts entered into after June 30, 1999,
sales-type lease accounting will no longer be appropriate for conduit and dark
fiber
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<PAGE> 8
leases and, therefore, these transactions will be accounted for as operating
leases unless title transfers to the lessee.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." This interpretation clarifies the application of Opinion No. 25
for certain issues: a) the definition of employee for purposes of applying
Opinion No. 25, b), the criteria for determining whether a plan qualifies as a
noncompensatory plan, c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and d) the accounting for
an exchange of stock compensation awards in a business combination. Generally,
this interpretation is effective July 1, 2000. We do not expect the adoption of
this interpretation to have a material effect on our financial position or
results of operations.
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 our 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 our 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
our 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 uncertainty of our future as a result of filing for protection
under bankruptcy law;
- the significant amount of our indebtedness;
- our limited operating history and expectation of operating losses;
- the availability and terms of the significant additional capital
required to fund our expansion;
- the extensive competition we expect to face in each of our
markets;
- our dependence on sophisticated information and processing
systems;
- our ability to manage growth;
- our 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. We do not undertake any obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. Although we believe that our plans, intentions and
expectations reflected in or suggested by the forward-looking statements made in
this Quarterly Report are reasonable, we can give no assurance that such plans,
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intentions or expectations will be achieved. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements.
OVERVIEW
We are a facilities-based integrated communications provider, or ICP,
offering a broad range of telecommunications products and services, primarily to
business customers located in California and other western states. We own and
operate a converged network capable of carrying both voice and data
traffic--offering our customers an alternative to incumbent local exchange
carriers. Our current products include data transport, high-speed Internet
access, voice services (including a bundled offering of local and long distance
services), and wholesale services, including dark fiber and conduit rights.
As an ICP, we have one reportable operating segment. While our chief
decision-maker monitors the revenue streams of various services, operations are
managed and financial performance is evaluated based upon the delivery of
multiple services over common network and facilities. The various revenue
streams generate many shared expenses. As a result, we believe that any
allocation of the expenses to multiple revenue streams would be impractical and
arbitrary. For that reason, we do not currently make such allocations
internally. Furthermore, substantially all of our revenue is attributable to
customers in the United States and all significant operating assets are located
within the United States.
The chief decision-maker does, however, monitor revenue streams
consolidated at a more detailed level than those depicted in our historical
general purpose financial statements. The following table presents revenues by
service type (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Local service..................... $ 20,204 $ 18,990
Long distance
services..................... 14,188 17,674
Data services..................... 6,689 4,331
Internet services................. 1,239 2,514
Long-haul services................ 11,725 4,231
Product........................... 205 1,075
Other............................. 409 991
Construction and
facility sales............... 9,012 10,769
-------------------- --------------------
Total revenues............ $ 63,671 $ 60,575
==================== ====================
</TABLE>
RECENT DEVELOPMENTS
On May 17, 2000, GST and its subsidiaries filed voluntary petitions for
protection under Chapter 11 of the United States Bankruptcy Code in the
District of Delaware. GST and its subsidiaries are currently operating as
debtors-in-possession under the supervision of the United States District Court
for the District of Delaware. The Chapter 11 cases have been consolidated for
the purpose of joint administration under Case No. 00-1982 (GMS).
On May 17, 2000, the Debtors also commenced ancillary proceedings under
the Companies' Creditors Arrangement Act in Canada in the Ontario Superior
Court of Justice.
Under these proceedings, substantially all liabilities, litigation and
claims against the Debtors in existence at the filing date are stayed unless
the stay is modified or lifted or payment has been otherwise authorized by the
court.
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<PAGE> 10
We have obtained a commitment letter which will provide us, subject to
satisfying certain conditions, debtor-in-possession financing for $50 million in
cash and the potential for up to an additional $75 million in cash. This
debtor-in-possession financing is subject to certain restrictions and is also
contingent on court approval. On May 26, 2000, the Bankrupty Court entered an
order approving the initial $30 million of this financing.
Under the Bankruptcy Code, the rights and treatment of pre-petition
creditors and shareholders may be substantially altered. At this time, it is
not possible to predict the outcome of the Chapter 11 cases in general or the
effects of such cases on our business, or on the interests of creditors and
shareholders. However, management believes that it is highly unlikely that
current equity security holders will receive any distribution under any
reorganization or liquidation of GST and its subsidiaries.
On May 16, 2000, we signed a letter of intent with Time Warner Telecom,
Inc. for the sale of substantially all of our assets for $450 million in cash.
This sale is subject to approval of the court, the execution and delivery of a
definitive purchase agreement, satisfactory completion of due diligence, state
and federal regulatory approval and other customary terms and conditions. If
such a sale is consummated, it is highly unlikely that the current equity
security holders of GST would receive any distribution upon the subsequent
liquidation of GST and the interest of both secured and unsecured creditors may
be substantially impaired.
RESULTS OF OPERATIONS
Revenues. Total revenues for the three months ended March 31, 2000
increased $3.1 million, or 5.1%, to $63.7 million from $60.6 million for the
three months ended March 31, 1999.
Telecommunications and other services revenues for the three months ended
March 31, 2000 increased $5.7 million, or 11.8%, to $54.5 million from $48.7
million for the three months ended March 31, 1999. The increase in
telecommunications and other services revenues resulted from increased local,
data and long-haul services. We bundle these products to provide better access
and services to our customers. Excluding divested properties,telecommunications
and other services revenues for the three months ended March 31, 2000
increased $9.9 million over the three months ended March 31, 1999. Reciprocal
compensation, which we recognize based on interconnection agreements and other
agreements with ILECs, totaled $4.2 million for the three months ended March
31, 2000 compared to $.7 million for the three months ended March 31, 1999.
Construction, facility sales and other revenue for the three months ended
March 31, 2000 decreased $1.8 million, to $9.0 million from $10.8 million for
the three months ended March 31, 1999. The decrease in construction, facility
sales and other revenue was attributable to a reduction in segment completions
on several agreements to sell, construct or lease conduit and fiber to other
carriers. Management estimates that construction revenue will continue to
decline over the remaining quarters in 2000 and beyond due to construction
delays and to the implementation of FIN 43. As noted in footnote 12 of
Item 1, under FIN 43, sales-type lease treatment will no longer be appropriate
for conduit and dark fiber leases entered into after June 30, 1999. Our
construction revenue for the three months ended March 31, 2000 was not affected
by the application of FIN 43. Our construction revenue for future quarters will
be affected due to the signing of a conduit lease in January 2000, which has not
yet been completed to date. If FIN 43 had been applied retroactively to
contracts already consummated prior to June 30, 1999, the Company would have
recorded operating lease revenue of approximately $.7 million and $0 for the
three months ended March 31, 2000 and 1999 respectively, instead of the amounts
recorded as construction, facility sales & other revenue in those respective
periods.
Product revenue for the three months ended March 31, 2000 decreased $.9
million, or 81.1%, to $.2 million from $1.1 million in the three months ended
March 31, 1999. The decrease in product revenue was due to the divestitures of
Texas-based Action Telecom's (Action Telecom) product sales division relating to
long distance interconnection equipment in October 1999, and Action Telecom's
product sales division relating to network analysis management systems in
March 2000.
Operating Expenses. Total operating expenses for the three months ended
March 31, 2000 increased $15.6 million, or 17.7%, to $103.9 million from $88.3
million for the three months ended March 31, 1999.
Network expenses, which include direct local and long distance circuit
costs, increased $2.6 million, or 8.1%, to $34.3 million, or 62.9% of
telecommunications services
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<PAGE> 11
revenues for the three months ended March 31, 2000 compared to $31.7 million, or
65.1% of telecommunications services revenues for the three months ended March
31, 1999. The decrease in network expenses as a percentage of revenues resulted
from an increase in revenues for traffic carried on our network as a percentage
of total telecommunications services revenues.
Facilities administration and maintenance expenses for the three months
ended March 31, 2000 increased $.6 million, or 12.5%, to $5.8 million, or 10.6%
of telecommunications services revenues compared to $5.1 million, or 10.5% of
telecommunications services revenues for the three months ended March 31, 1999.
Cost of construction revenues for the three months ended March 31, 2000
was $6.1 million, an increase of $.2 million over the three months ended March
31, 1999. The decrease was caused by the decrease in construction, facility
sales and other revenue.
Cost of product revenues for the three months ended March 31, 2000
decreased $.4 million, or 56.1%, to $.3 million from $.7 million for March 31,
1999. For the three months ended March 31, 2000, cost of product revenues was
148.8% of product revenues compared to 64.2% for the three months ended March
31, 1999.
Selling, general and administrative expenses for the three months ended
March 31, 2000 increased $7.6 million, or 27.4%, to $35.6 million from $28.0
million for the three months ended March 31, 1999. The increase is primarily due
to: (1) increased bonuses related to our Variable Incentive Plan; (2) increased
severance related to a reduction in force; and (3) increased consulting costs
related to a proposed change in strategy and executive recruitment for our new
Chief Financial Officer and our search for a new Chief Executive Officer. In
addition we have had increased litigation costs relating to ongoing legal
matters. As a percentage of total revenues, selling, general and administrative
expenses for the three months ended March 31, 2000 were 56.0%, compared to
46.2% for the three months ended March 31, 1999.
Depreciation and amortization for the three months ended March 31, 2000
increased $4.9 million, or 28.8%, to $21.9 million from $17.0 million for the
three months ended March 31, 1999. The increase is attributable to
newly-constructed networks and related equipment being placed into service and
to the amortization of tangible assets related to our acquisitions. Depreciation
and amortization expense was 34.3% of total revenues for the three months ended
March 31, 2000 compared to 28.0% for the three months ended March 31, 1999.
Other Expenses/Income. For the three months ended March 31, 2000, we
recorded net other income of $13.8 million, compared to net other expense of
$24.6 million for the three months ended March 31, 1999. For the three months
ended March 31, 2000, net other income includes a $42.3 million net gain after
tax resulting from the sale of 3.6 million shares of common stock in Global
Light Telecommunications, Inc. (the "Global Sale").
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<PAGE> 12
Excluding such gain, net other expense would have increased $4.0 million for the
three months ended March 31, 2000 as compared to the three months ended March
31, 1999, primarily as a result of increased interest expense.
Net Loss. Net loss for the three months ended March 31, 2000 decreased
$25.6 million, or 49.5%, to $26.5 million from $52.3 million for the three
months ended March 31, 1999. Excluding the $42.3 million net gain on the Global
Sale, net loss would have been $68.8 for the three months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating and net losses as a result of the
development and operation of our networks. We expect that our operating losses
will continue as we operate as a debtor-in-possession as a result of our Chapter
11 bankruptcy filing described in "Recent Developments." Cash provided by our
operations will not be sufficient to fund the continuation of daily operations
of the business during bankruptcy.
At March 31, 2000, we had approximately $1,193.6 million of indebtedness
outstanding and $69.7 million of 11.875% mandatorily redeemable preference
shares. As a result of filing for protection under bankruptcy law, we are not
currently permitted to pay any of our debt service obligations that are
outstanding as of May 17, 2000. We have significant debt service obligations,
which we are not currently permitted to pay under bankruptcy law. These amounts
are principal and interest payments of approximately $62.8 million (of which
$17.6 million was made from funds securing the secured notes), $113.5 million,
$110.7 million, $153.9 million and $142.4 million in the remainder of 2000 and
in 2001, 2002, 2003 and 2004, respectively. In addition, future payment of
principal and interest on all of our outstanding indebtedness is subject to
court approval and may be discharged in whole or in part in bankruptcy
with proceeds from the planned sale of our assets, court approved plan of
reorganization or a liquidation of GST. There can be no assurance that any
amounts owed to unsecured creditors will be paid or that secured creditors will
be paid in full.
At March 31, 2000, we had cash, cash equivalents, and investments,
including restricted investments, of approximately $63.4 million. Management
currently estimates that these amounts will be sufficient to fund daily
operations until the end of June, 2000. We stated in our Form 10-K filed on
March 30, 2000, that the anticipated proceeds of a conduit lease consummated in
January, 2000, among other things, would enable us to fund operations through
August, 2000. However, the approximately $26 million in proceeds from the
conduit lease that we had expected to receive in May, 2000, was not received
because of construction delays, and we currently estimate that we are not likely
to receive the proceeds until August, 2000, at the earliest. Also, divestitures
and other management activities noted in our 10-K to prolong capital
availability through fiscal 2000 and beyond are subject to the bankruptcy. As
described above, we have obtained a commitment letter for debtor in possession
financing which, subject to court approval and the satisfaction of
certain conditions, will provide us with a credit facility of $50 million and
the potential for up to an additional $75 million. On May 26, 2000, the
Bankruptcy Court entered an order approving the initial $30 million of this
financing. We believe that if we are able to obtain the debtor-in-possession
financing, along with protection under bankruptcy law, we should be able to
fund operations until the sale of our assets has been completed, assuming that
the sale occurs on the presently anticipated schedule of August or September,
2000. If a sale of our assets is not completed or is substantially delayed, we
will either reorganize our operations and seek discharge from bankruptcy or a
complete liquidation will occur. The extent of additional financing will depend
on, among other things, the outcome and timing of our bankruptcy proceedings.
In the event that our plans or assumptions change or prove to be inaccurate, we
incur significant unexpected expenses, or our cash resources, together with
borrowings under the contemplated financing arrangements, prove to be
insufficient to fund operations, we may be required
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<PAGE> 13
to seek additional sources of capital (or seek additional capital sooner than
currently anticipated).
Our net cash used in operating activities was $17.4 million and $22.9
million for the three months ended March 31, 2000 and 1999, respectively, and
net cash provided by (used in) investing activities was $21.8 million and
$(15.0) million for the three months ended March 31, 2000 and 1999,
respectively. For the three months ended March 31, 2000, net cash provided by
investing activities included $56.6 of proceeds from the Global Sale and
$6.4 million of transfers from restricted investments. For the three months
ended March 31, 1999, net cash used in investing activities included
$61.9 of transfers from restricted investments. Excluding such proceeds and
transfers, net cash used in investing activities would have decreased $35.7
million for the three months ended March 31, 2000 as compared with the three
months ended March 31, 1999. Net cash provided by (used in) by financing
activities from borrowings and equity issuances to fund capital expenditures,
acquisitions and operating losses was $(5.0) million and $1.9 million for the
three months ended March 31, 2000 and 1999, respectively.
Capital expenditures for the three months ended March 31, 2000 and 1999
were $39.4 million and $75.2 million, respectively, including $5.7 million and
$7.6 million of capitalized interest. Our estimated future capital expenditures
are under review as part of the restructuring process. Continued significant
capital expenditures will only be made if a successful reorganization is
provided through bankruptcy.
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<PAGE> 14
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE MARKET RISK - We have fixed income investments
consisting of cash equivalents, short-term investments in United States
government debt instruments, certificates of deposit and commercial paper.
Interest income earned on our investment portfolio is affected
by changes in the general level of United States interest rates. We
believe that we are not exposed to significant changes in fair value
because such investments are classified as available-for-sale and
held-to-maturity and are recorded at amortized cost. The fair value of
each investment approximates its amortized cost, and long-term securities
have maturities of less than two years.
The following table provides information about our risk exposure associated
with changing interest rates. Currently, we do not use derivative financial
instruments to manage our interest rate risk.
<TABLE>
<CAPTION>
EXPECTED MATURITY
(In thousands of dollars)
----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-term Debt:
Fixed rate $1,244,916 (2)
Average interest rate 12.275%
Variable rate $ 14,499 $19,951 $20,695 $21,590 $11,791 $ 4,691
Average interest rate (LIBOR plus) 3.25% 3.28% 3.34% 3.34% 3.21% 3.14%
Capital Leases:
Fixed rate $ 5,071 $ 3,209 $ 1,850 $ 1,844 $ 1,978 $ 7,115
Average interest rate 11.89% 11.89% 11.89% 11.89% 11.89% 11.89%
Redeemable Preferred Stock:
Fixed rate $ 112,000
Average interest rate 11.88%
<CAPTION>
EXPECTED MATURITY
(In thousands of dollars)
-------------------------------------
Market
Value at
March 31,
Total 2000 (1)
-------------------------------------
<S> <C> <C>
Long-term Debt:
Fixed rate $1,244,916 (2) $ 811,191
Average interest rate
Variable rate $ 93,217
Average interest rate (LIBOR plus)
Capital Leases:
Fixed rate $ 21,067
Average interest rate
Redeemable Preferred Stock:
Fixed rate $ 112,000
Average interest rate
</TABLE>
(1) Based on quoted market prices at March 31, 2000
(2) Includes $165.6 million of unaccreted discount
MARKET PRICE RISK - Our risk exposure associated with market price
is limited to our long-term debt that is publicly traded. These bonds are
recorded at book value, which could vary from current market prices.
FOREIGN CURRENCY MARKET RISK - Although we conduct some business in Canada,
the international operations were not material to our consolidated financial
position. Accordingly, we were not subject to material foreign currency
exchange rate risk from the effects that exchange rate movements of foreign
currencies would have on our future costs or on future cash flows we would
receive.
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<PAGE> 15
Part II - Other Information
Item 1. Legal Proceedings.
Reference is made to the discussion of "Scheifelbein v. GST, et al." in
Item 3 of our annual report on Form 10-K for the year ended December 31, 1999,
in which we disclosed that, on October 21, 1999, the first of several putative
securities class action lawsuits was filed against GST, certain former officers
and directors and, in the Shiefelbein lawsuit, Global Light Telecommunications,
Inc.
On April 28, 2000, GST filed a motion to dismiss the lawsuits.
Pursuant to Section 362 of the United States Bankruptcy Code, all
pending litigation against GST and its subsidiaries will be subject to an
automatic stay.
We note, however, that with respect to the Scheifelbein lawsuit, the
plaintiffs may request that the matter proceed because directors' and officers'
liability insurance may apply to these claims.
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 May 24, 2000,
on which the Company reported the following:
On May 17, 2000, GST Telecommunications, Inc. and our subsidiaries
filed a voluntary petition for bankruptcy under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court of the District of
Delaware. Pursuant to the bankruptcy filing, we have remained in possession of
our assets and properties, and our business and affairs will continue to be
managed by our directors and officers, subject in each case to the supervision
of the Bankruptcy Court.
On May 17, 2000, GST Telecommunications, Inc. issued a press release,
addressing our voluntary petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code, our letter of intent with Time Warner Telecom, Inc. for the
sale of substantially all of our assets, and our receipt of a commitment for
Debtor-In-Possession financing for up to $50 million in cash and the potential
for up to an additional $75 million in cash (subject to certain restrictions and
court approval) to continue day-to-day operations.
GST Telecommunications, Inc. has postponed our annual shareholders'
meeting that had been scheduled for June 8, 2000. Our plan is to hold an annual
shareholders' meeting in the course of our restructuring. On May 24, 2000, we
issued a press release regarding this matter.
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<PAGE> 16
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: June 6, 2000 GST TELECOMMUNICATIONS, INC.
------------ (Registrant)
/s/ Donald A. Bloodworth
--------------------------------------------------
Donald A. Bloodworth,
(Senior Vice President and Chief Financial Officer)
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