-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RbvyvMPGTvYTj8MJtv6d2myl1D1E7pZS4VIi72KyJV4KscI/0++TnhAIyJBqfg09 cn55iX/isoaJwnYV/bRg4g== 0000912057-00-014923.txt : 20000331 0000912057-00-014923.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014923 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GST USA INC CENTRAL INDEX KEY: 0001010605 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 830310464 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 333-02260-01 FILM NUMBER: 586518 BUSINESS ADDRESS: STREET 1: 4001 MAIN STREET CITY: VANCOUVER STATE: WA ZIP: 98663 BUSINESS PHONE: 3609067100 MAIL ADDRESS: STREET 1: 4001 MAIN STREET CITY: VANCOUVER STATE: WA ZIP: 98663 10-Q/A 1 10-Q/A 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 333-02260-01 GST USA, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as Specified in its Charter) Delaware 83-0310464 - ---------------------------------- ---------------------------- (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) THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY. 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 10, 1999, there were outstanding 20 shares of common stock, no par value per share, of the Registrant. GST USA, 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.
Page(s) ------- 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 Months Ended September 30, 1999 and 1998 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 (REDUCED DISCLOSURE 9-13 NARRATIVE) PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 18
-1- GST USA, Inc. Condensed Consolidated Balance Sheets (In thousands) (Unaudited)
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998 (1) -------------------- ------------------- (As Restated) Current assets: Cash and cash equivalents $ 44,861 $ 85,884 Restricted investments 36,496 34,107 Accounts receivable, net 72,161 32,935 Investments 46 46 Inventory, net 1,204 1,485 Prepaid and other current assets 25,133 11,316 --------------------- ------------------- Total current assets 179,901 165,773 --------------------- ------------------- 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 136,663 138,773 less accumulated amortization (53,009) (38,877) --------------------- ------------------- 83,654 99,896 --------------------- ------------------- Total assets $ 1,115,145 $ 1,128,778 ===================== =================== LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Accounts payable $ 25,207 $ 26,229 Accrued expenses 60,606 36,621 Payable to parent 359,810 354,679 Deferred revenue 14,614 6,030 Current portion of capital lease obligations 5,887 5,649 Current portion of long-term debt 15,461 12,127 --------------------- ------------------- Total current liabilities 481,585 441,335 --------------------- ------------------- Capital lease obligations, less current portion 16,052 19,741 Long-term debt, less current portion 961,642 919,075 Shareholder's deficit: Common shares 78,462 78,462 Accumulated deficit (422,596) (329,835) --------------------- ------------------- (344,134) (251,373) --------------------- ------------------- Total liabilities and shareholder's deficit $ 1,115,145 $ 1,128,778 ===================== ===================
(1) The information in this column was derived from GST USA's audited financial statements as of December 31, 1998. See notes to condensed consolidated financial statements. -2- GST USA, Inc. Condensed Consolidated Statements of Operations (In thousands) (Unaudited)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------- ------------ ------------ ------------ (As Restated) (As Restated) 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 31,102 23,981 87,401 67,887 Depreciation and amortization 18,669 12,414 52,279 32,144 ------------- ------------ ------------ ------------ Total operating costs and expenses 125,306 69,639 316,305 189,481 ------------- ------------ ------------ ------------ Loss from operations (19,848) (25,805) (63,383) (76,076) ------------- ------------ ------------ ------------ Other expenses (income): Interest income (2,035) (7,483) (8,507) (19,201) Interest expense, net of amounts capitalized 21,255 21,649 64,332 56,337 Gain on sale of subsidiary shares --- --- --- (61,266) Other (27,931) 16,294 (26,447) 16,788 ------------- ------------ ------------ ------------ (8,711) 30,460 29,378 (7,342) ------------- ------------ ------------ ------------ Loss before income taxes (11,137) (56,265) (92,761) (68,734) ------------- ------------ ------------ ------------ Income tax expense --- --- --- --- ------------- ------------ ------------ ------------ Net Loss $ (11,137) $ (56,265) $ (92,761) $ (68,734) ============= ============ ============ ============
See notes to condensed consolidated financial statements. -3- GST USA, Inc. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 -------------- ---------------- (As Restated) Operations: Net loss $ (92,761) $ (68,734) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 56,457 36,087 Accretion and accrual of interest 34,671 25,360 Non-cash stock compensation and other expense 1,662 1,123 Loss on disposal of assets 3,430 38 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 (14,307) 2,013 Accounts payable and accrued liabilities 32,526 6,526 Deferred revenue 8,584 6,326 -------------- ---------------- Cash used in operations (8,852) (52,532) -------------- ---------------- Investments: Acquisition of subsidiaries, net of cash acquired --- (35,471) Proceeds from sale of investments --- 327 Purchase of property and equipment (215,323) (146,672) Proceeds from sale of assets 1,500 3,562 Purchase of other assets (340) (2,688) 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 (41,015) (338,831) -------------- ---------------- Financing: Proceeds from long-term debt 1,782 300,562 Principal payments on long-term debt and capital leases (12,022) (21,421) Increase in payable to parent 3,469 12,764 Deferred debt financing costs --- (12,614) Change in investments restricted to finance interest payments 15,615 16,682 -------------- ---------------- Cash provided by financing activities 8,844 295,973 -------------- ---------------- Decrease in cash and cash equivalents (41,023) (95,390) Cash and cash equivalents, beginning of period 85,884 198,870 -------------- ---------------- Cash and cash equivalents, end of period $ 44,861 $ 103,480 ============== ================
See notes to condensed consolidated financial statements. -4- GST USA, 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 GST USA's audited consolidated financial statements for the fiscal year ended December 31, 1998 as included in GST USA'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 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 and development costs were more apporpriately 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 restatment is as follows:
Three Months Ended Nine Months Ended September 30, 1999 September 30, 1999 ------------------------------------ ------------------------------------ (As Reported) (As Restated) (As Reported) (As Restated) Construction, facility sales and other revenue $ 45,555 $ 53,692 $ 70,982 $ 98,979 Cost of construction revenues 16,722 37,203 26,190 63,068 Selling, general and administrative expenses 29,340 31,102 83,747 87,401 Net income (loss) 2,969 (11,137) (80,226) (92,761) Property and equipment 904,963 892,428 904,963 892,428 Accumulated deficit as September 30, 1999 (410,061) (422,596) (410,061) (422,596)
3. TRANSFER OF SUBSIDIARIES Effective January 1, 1999, GST USA's parent, GST Telecommunications, Inc. ("GST"), transferred the ownership of GST Action Telcom, Inc. (the "Transferred Subsidiary") to GST USA. The condensed consolidated financial statements included herein give effect to such transfer as if the Transferred Subsidiary was consolidated into GST USA as of the date of acquisition of the Transferred Subsidiary by GST. 4. BASIC AND DILUTED NET LOSS PER SHARE GST USA does not have equity instruments that are considered common stock equivalents, and, as weighted average common shares total only 20 and 10 for September 30, 1999 and December 31, 1998, respectively, all of which are owned by GST, income (loss) per share data is meaningless and is not presented in the accompanying condensed financial statements. -5- GST USA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1999 1998 ------------- ------------- (As Restated) Supplemental disclosure of cash flow information: Cash paid for interest $ 27,462 $ 30,556 Cash paid for income taxes --- --- Supplemental schedule of non-cash investing and financing activities: Recorded in business combinations: Assets --- 45,719 Liabilities --- 10,248 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
6. ACCRUED SEVERANCE In the fourth quarter of 1998, GST USA accrued $1,113 in severance-related costs. The following table details activity related to the severance accrual. Accrual at December 31, 1998 $1,113 Payments (737) Adjustments (61) ------- Accrual at September 30, 1999 $315 =======
-6- GST USA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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 GST USA 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. 8. RECENT DEVELOPMENTS A. The following table details a measurement and reporting structure recently adopted by GST USA'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
THREE MONTHS THREE MONTHS ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998 ------------------------------ ------------------------------ ADJUSTED ADJUSTED REVENUES EBITDA REVENUES EBITDA ------------- ------------- ------------ ------------ (As Restated) (As Restated) 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 --- (15,425) --- (7,904) ------------- ------------- ------------ ------------ Total $ 105,458 $ (576) $ 43,834 $ (13,061) ============= ============= ============ ============ NINE MONTHS NINE MONTHS ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998 ----------------------------- ----------------------------- ADJUSTED ADJUSTED REVENUES EBITDA REVENUES EBITDA ------------- ------------ ------------ ------------ (As Restated) (As Restated) 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 --- (40,301) --- (22,752) ------------- ------------ ------------ ------------ Total $ 252,922 $ (8,317) $ 113,405 $ (41,728) ============= ============ ============ ============
-7- GST USA 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 GST USA has both switching and network assets deployed. The acquisition and legacy category encompasses those business operations acquired by GST USA 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, 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 GST USA 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. Reference is made to "Recent Developments" in "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations" in GST USA's annual report on Form 10-K/A for the fiscal year ended December 31, 1998 in which GST USA disclosed potential technical violations of certain debt covenants. On September 16, 1999, GST USA 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, GST USA believes that there is currently no basis on which the noteholders could declare a default under the indentures relating to GST USA's debt issuances. -8- 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 GST USA'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 GST USA'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 GST USA'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 GST USA's indebtedness; - - GST USA's limited operating history and expectation of operating losses; - - the availability and terms of the significant additional capital required to fund GST USA's expansion; - - the extensive competition GST USA expects to face in each of its markets; - - GST USA's dependence on sophisticated information and processing systems; - - GST USA's ability to manage growth; - - GST USA'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. GST USA 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 GST USA believes that its plans, intentions and expectations reflected in or suggested by the forward-looking statements made in this Quarterly Report are reasonable, GST USA 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. -9- OVERVIEW GST USA is a wholly-owned subsidiary of GST Telecommunications, Inc. ("GST"). GST USA was formed to hold the capital stock of the consolidated operating subsidiaries of GST. GST USA, 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. GST USA 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. GST USA's products include local dial tone, long distance, Internet, data transmission and private line services. The following table highlights key statistical information about GST USA, as of September 30, 1999: - --------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------
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 revenue 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 GST USA launched new products and entered new markets. GST USA 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 GST USA 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 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. -10- 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 $55.7 million, or 80.0%, and $126.8 million, or 66.9%, 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 GST USA'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 GST USA'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 $7.1 million, or 29.7%, and $19.5 million, or 28.7%, respectively, as compared to the three and nine month periods ended September 30, 1998. The increase is primarily due to: 1) the expansion of GST USA'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 expense related to reserves recorded for certain ISP and carrier customers; and 4) increased bonuses related to the GST USA's Variable Incentive Plan. In addition, GST USA 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 29.5% and 34.6%, respectively, compared to 54.7% and 59.9%, respectively, for the three and nine months ended September 30, 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 -11- 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. GST USA 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% for both 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 $8.7 million and net other expense of $29.4 million, respectively, compared to net other expense of $30.5 million and net other income of $7.3 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 $11.2 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 income would have increased $3.4 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 $45.2 million, or 80.2%, to net loss of $11.1 million from net loss of $56.3 million for the three months ended September 30, 1998. Net loss for the nine month period ended September 30, 1999 increased $24.1 million, or 35.0%, to $92.8 million from $68.7 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 $17.2 million for the three months ended September 30, 1999. Such 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 $9.3 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 GST USA'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
THREE MONTHS THREE MONTHS ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998 ------------------------------ ------------------------------ ADJUSTED ADJUSTED REVENUES EBITDA REVENUES EBITDA ------------- ------------- ------------ ------------ (As Restated) (As Restated) 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 --- (15,425) --- (7,904) ------------- ------------- ------------ ------------ Total $ 105,458 $ (576) $ 43,834 $ (13,061) ============= ============= ============ ============
-12-
NINE MONTHS NINE MONTHS ENDED SEPTEMBER 30, 1999 ENDED SEPTEMBER 30, 1998 ----------------------------- ----------------------------- ADJUSTED ADJUSTED REVENUES EBITDA REVENUES EBITDA ------------- ------------ ------------ ------------ (As Restated) (As Restated) 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 --- (40,301) --- (22,752) ------------- ------------ ------------ ------------ Total $ 252,922 $ (8,317) $ 113,405 $ (41,728) ============= ============ ============ ============
GST USA 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 GST USA has both switching and network assets deployed. The acquisition and legacy category encompasses those business operations acquired by GST USA 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, 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 GST USA 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 GST USA'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, 1998. This decline in revenues and adjusted EBITDA resulted from the sale of GST USA's Guam operations and the sale of a portion of GST USA'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 $7.5 million, or 95.2%, and $17.5 million, or 77.1%, 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. -13- 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. Reference is made to the report on Form 8-K filed as of September 21, 1999, on which GST USA reported the following: On September 16, 1999, GST and GST USA 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 Nextel, Inc., W. Gordon Blankstein, Dan Watson, and Peter P. Legault. On September 20, 1999, GST and GST USA 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. -17- 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 29, 2000 GST USA, INC. ----------------- (Registrant) /s/ Daniel L. Trampush -------------------------------- Daniel L. Trampush, (Senior Vice President and Chief Financial Officer) -18- EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GST USA'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 10,1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1999 SEP-30-1999 44,861,000 36,496,000 66,833,000 (5,328,000) 1,204,000 179,901,000 892,428,000 (96,943,000) 1,115,145,000 481,585,000 877,400,000 78,452,000 0 0 (422,596,000) 1,115,145,000 252,922,000 252,922,000 161,877,000 316,305,000 (34,964,000) 0 64,332,000 (92,761,000) 0 (92,761,000) 0 0 0 (92,761,000) 0 0
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