EX-99.2 2 d80968aex99-2.txt FINANCIAL STATEMENTS OF GST TELECOMMUNICATIONS,INC 1 EXHIBIT 99.2 GST TELECOMMUNICATIONS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Independent Auditors' Report.......................................................................................F - 2 Consolidated Balance Sheets at December 31, 1999 and 1998..........................................................F - 3 Consolidated Statements of Operations for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997............................................................................................F - 4 Consolidated Statements of Shareholders' (Deficit) Equity for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997.........................................................................F - 5 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997............................................................................................F - 6 Notes to Consolidated Financial Statements.........................................................................F - 7
F-1 2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders GST Telecommunications, Inc.: We have audited the accompanying consolidated balance sheets of GST Telecommunications, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' deficit, and cash flows for each of the years in the two-year period ended December 31, 1999, the three-month period ended December 31, 1997, and for the year ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GST Telecommunications, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and cash flows for each of the years in the two-year period ended December 31, 1999, the three-month period ended December 31, 1997, and for the year ended September 30, 1997 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in note 16(c) and (d) to the consolidated financial statements, on May 17, 2000 the Company filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Laws. Subsequent to this filing, the Company conducted an auction under the supervision of the Bankruptcy Court that has resulted in a definitive agreement to sell a substantial portion of the Company's assets to Time Warner Telecom Inc. These actions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Portland, Oregon March 17, 2000, except for note 16(c) and (d), as to which the date is September 21, 2000 F-2 3 GST TELECOMMUNICATIONS, INC. Consolidated Balance Sheets (In thousands, except share amounts)
DECEMBER 31, ---------------------------- ASSETS 1999 1998 ----------- ----------- Current assets: Cash and cash equivalents $ 42,983 $ 86,070 Restricted investments 19,828 34,107 Trade accounts receivable, net 45,244 32,935 Construction contracts receivable 26,823 3,338 Investments 44,596 16,246 Prepaid and other current assets 8,562 9,601 ----------- ----------- Total current assets 188,036 182,297 ----------- ----------- Restricted investments 9,848 247,257 Property and equipment, net 832,047 615,852 Goodwill, net 41,409 51,091 Other assets, net 41,289 54,786 ----------- ----------- Total assets $ 1,112,629 $ 1,151,283 =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 30,579 $ 26,411 Accrued expenses 49,759 37,445 Deferred revenue 10,066 6,030 Current portion of capital lease obligations 6,693 5,649 Current portion of long-term debt 17,466 13,417 ----------- ----------- Total current liabilities 114,563 88,952 ----------- ----------- Long-term interest payable 43,134 21,377 Capital lease obligations, less current portion 16,813 19,741 Long-term debt, less current portion 1,151,778 1,092,959 Commitments and contingencies Redeemable preference shares: Authorized - 10,000,000 no par shares; 500 shares issued and outstanding at December 31, 1999 and 1998 69,688 61,741 Shareholders' deficit: Common shares: Authorized - unlimited number of no par common shares; issued and outstanding - December 31, 1999 - 37,734,507 shares, December 31, 1998 - 36,264,066 shares 238,626 234,267 Accumulated deficit (566,523) (383,954) Accumulated other comprehensive income 44,550 16,200 ----------- ----------- (283,347) (133,487) ----------- ----------- Total liabilities and shareholders' deficit $ 1,112,629 $ 1,151,283 =========== ===========
See accompanying notes to consolidated financial statements. F-3 4 GST TELECOMMUNICATIONS, INC. Consolidated Statement of Operations (In thousands, except per share and share amounts)
THREE-MONTH YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED ------------------------------ DECEMBER 31, SEPTEMBER 30, 1999 1998 1997 1997 ------------ ------------ ------------ ------------ Revenues: Telecommunications and other services $ 202,686 $ 149,783 $ 26,064 $ 82,593 Construction, facility sales and other 115,147 8,826 1,488 -- Product 4,089 4,708 8,706 23,374 ------------ ------------ ------------ ------------ Total revenues 321,922 163,317 36,258 105,967 ------------ ------------ ------------ ------------ Operating costs and expenses: Network expenses 129,761 104,320 19,127 66,250 Facilities administration and maintenance 21,074 16,703 3,511 12,304 Cost of construction revenues 74,940 1,424 300 -- Cost of product revenues 2,484 2,999 3,102 7,990 Selling, general and administrative 122,974 96,506 22,428 72,046 Research and development -- -- 781 2,316 Depreciation and amortization 70,973 45,957 8,864 24,159 Special charges -- 30,580 -- 7,445 ------------ ------------ ------------ ------------ Total operating costs and expenses 422,206 298,489 58,113 192,510 ------------ ------------ ------------ ------------ Loss from operations (100,284) (135,172) (21,855) (86,543) ------------ ------------ ------------ ------------ Other expenses (income): Interest income (9,736) (24,145) (4,101) (7,026) Interest expense, net of amounts capitalized 115,481 101,648 18,948 37,665 Gain on sale of subsidiary shares -- (61,266) -- (7,376) Other (23,460) 3,281 1,569 2,017 ------------ ------------ ------------ ------------ 82,285 19,518 16,416 25,280 ------------ ------------ ------------ ------------ Loss before minority interest in income of subsidiaries and income tax (182,569) (154,690) (38,271) (111,823) ------------ ------------ ------------ ------------ Income tax expense: Current -- -- 758 1,802 Deferred -- -- 92 (899) ------------ ------------ ------------ ------------ -- -- 850 903 ------------ ------------ ------------ ------------ Loss before minority interest in income of subsidiaries (182,569) (154,690) (39,121) (112,726) Minority interest in income of subsidiaries -- -- (472) (612) ------------ ------------ ------------ ------------ Net loss (182,569) (154,690) (39,593) (113,338) Accretion of preference shares 7,948 7,106 3,145 2,969 ------------ ------------ ------------ ------------ Net loss to common shareholders $ (190,517) $ (161,796) $ (42,738) $ (116,307) ============ ============ ============ ============ Net loss per share, basic and dilutive $ (5.11) $ (4.52) $ (1.39) $ (4.71) ============ ============ ============ ============ Weighted average common shares, basic and diluted 37,270,710 35,834,196 30,804,376 24,702,870
See accompanying notes to consolidated financial statements. F-4 5 GST TELECOMMUNICATIONS, INC. Consolidated Statement of Shareholders' Deficit (In thousands, except share amounts)
COMMITMENT TO ISSUE COMMON SHARES COMMON SHARES ------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ---------- ---------- ---------- Balances, September 30, 1996 21,257,697 $ 72,647 1,988,230 $ 25,454 Issuance of shares for services 25,000 221 -- -- Issuance of shares in business combinations 3,132,854 29,394 (1,700,169) (21,049) Issuances of shares and warrants, net 2,505,882 32,666 -- -- Issuance of shares under option plans 643,016 3,309 -- -- Issuance of shares under employee share purchase plan 62,993 400 -- -- Accrual of compensation costs for share awards and option plans -- 9,807 -- -- Accretion of redeemable preference shares -- (2,969) -- -- Net loss -- -- -- -- ---------- ---------- ---------- ---------- Balances, September 30, 1997 27,627,442 145,475 288,061 4,405 Issuance of shares in business combinations 246,392 3,801 (237,174) (3,801) Issuance of shares, net 6,440,000 73,092 -- -- Issuance of shares under option plans 158,209 1,107 -- -- Issuance of shares under employee share purchase plan 75,198 463 -- -- Accrual of compensation costs for share awards and option plans -- 179 -- -- Accretion of redeemable preference shares -- (3,145) -- -- Conversion of senior subordinated discount notes 17,657 133 -- -- Net loss -- -- -- -- ---------- ---------- ---------- ---------- Balances, December 31, 1997 34,564,898 221,105 50,887 604 Issuance of shares for business combinations 57,632 2,952 (50,887) (604) Issuance of shares under option plans 429,350 3,258 -- -- Issuance of shares for warrant exercise 991,343 12,852 -- -- Issuance of shares under employee share purchase plan 220,843 1,563 -- -- Accrual of compensation costs for share awards and option plans -- (357) -- -- Accretion of redeemable preference shares -- (7,106) -- -- Net loss -- -- -- -- Other comprehensive income - unrealized gain on securities -- -- -- -- ---------- ---------- ---------- ---------- Comprehensive loss Balances, December 31, 1998 36,264,066 234,267 -- -- Issuance of shares under option plans 989,504 7,495 -- -- Issuance of shares under employee share purchase plan 348,610 1,876 -- -- Accrual of compensation costs for share awards and option plans 30,000 2,161 -- -- Accretion of redeemable preference shares -- (7,948) -- -- Conversion of senior subordinated discount notes 102,327 775 -- -- Net loss -- -- -- -- Other comprehensive income - unrealized gain on securities -- -- -- -- ---------- ---------- ---------- ---------- Comprehensive loss Balances, December 31, 1999 37,734,507 $ 238,626 -- $ -- ========== ========== ========== ========== ACCUMULATED OTHER TOTAL COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS' LOSS DEFICIT INCOME DEFICIT ------------- ----------- ------------- ------------- Balances, September 30, 1996 $ -- $ (76,333) $ -- $ 21,768 Issuance of shares for services -- -- -- 221 Issuance of shares in business combinations -- -- -- 8,345 Issuances of shares and warrants, net -- -- -- 32,666 Issuance of shares under option plans -- -- -- 3,309 Issuance of shares under employee share purchase plan -- -- -- 400 Accrual of compensation costs for share awards and option plans -- -- -- 9,807 Accretion of redeemable preference shares -- -- -- (2,969) Net loss (113,338) (113,338) -- (113,338) --------- --------- --------- --------- Comprehensive loss (113,338) --------- Balances, September 30, 1997 -- (189,671) -- (39,791) Issuance of shares in business combinations -- -- -- -- Issuance of shares, net -- -- -- 73,092 Issuance of shares under option plans -- -- -- 1,107 Issuance of shares under employee share purchase plan -- -- -- 463 Accrual of compensation costs for share awards and option plans -- -- -- 179 Accretion of redeemable preference shares -- -- -- (3,145) Conversion of senior subordinated discount notes -- -- -- 133 Net loss (39,593) (39,593) -- (39,593) --------- --------- --------- --------- Comprehensive loss (39,593) --------- Balances, December 31, 1997 -- (229,264) -- (7,555) Issuance of shares for business combinations -- -- -- 2,348 Issuance of shares under option plans -- -- -- 3,258 Issuance of shares for warrant exercise -- -- -- 12,852 Issuance of shares under employee share purchase plan -- -- -- 1,563 Accrual of compensation costs for share awards and option plans -- -- -- (357) Accretion of redeemable preference shares -- -- -- (7,106) Net loss (154,690) (154,690) -- (154,690) Other comprehensive income - unrealized gain on securities 16,200 -- 16,200 16,200 --------- --------- --------- --------- Comprehensive loss $(138,490) ========= Balances, December 31, 1998 (383,954) 16,200 (133,487) Issuance of shares under option plans -- -- -- 7,495 Issuance of shares under employee share purchase plan -- -- -- 1,876 Accrual of compensation costs for share awards and option plans -- -- -- 2,161 Accretion of redeemable preference shares -- -- -- (7,948) Conversion of senior subordinated discount notes -- -- -- 775 Net loss (182,569) (182,569) -- (182,569) Other comprehensive income - unrealized gain on securities 28,350 -- 28,350 28,350 --------- --------- --------- --------- Comprehensive loss $(154,219) ========= Balances, December 31, 1999 $(566,523) $ 44,550 $(283,347) ========= ========= =========
See accompanying notes to consolidated financial statements. F-5 6 GST TELECOMMUNICATIONS, INC. Consolidated Statements of Cash Flows (In thousands)
THREE-MONTH YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED ------------------------ DECEMBER 31, SEPTEMBER 30, 1999 1998 1997 1997 --------- --------- ------------ ------------- Operations: Net loss $(182,569) $(154,690) $ (39,593) $(113,338) Adjustments to reconcile net loss to net cash used in operations: Minority interest in income of subsidiary -- -- 472 612 Depreciation and amortization 77,086 51,328 10,115 26,634 Deferred income taxes -- -- 92 (899) Accretion and accrual of interest 73,894 59,783 8,276 19,236 Non-cash stock compensation and other expense 2,161 (253) 374 2,583 Loss on disposal of assets 4,160 239 -- 679 Non-cash special charges -- 29,467 -- 7,445 Equity in losses of investments and joint venture -- 593 1,286 1,482 Gain on sale of subsidiary shares -- (61,266) -- (7,376) Changes in non-cash operating working capital: Trade accounts receivable, net (13,573) (15,321) (3,547) (11,284) Construction contracts receivable (23,485) (3,338) -- -- Prepaid, other current and other assets, net (507) 3,859 (585) (7,627) Accounts payable and accrued liabilities 26,368 (754) (18,177) 24,970 Other liabilities 4,036 6,430 707 (119) --------- --------- --------- --------- Cash used in operations (32,429) (83,923) (40,580) (57,002) --------- --------- --------- --------- Investments: Acquisition of subsidiaries, net of cash acquired -- (35,471) (2,105) (1,618) Purchase of investments -- -- (4,297) (3,247) Proceeds from sale of investments -- 327 -- 5,176 Purchase of property and equipment (259,965) (219,129) (45,970) (222,001) Proceeds from sale of property and equipment 6,514 3,589 -- 5,774 Purchase of other assets (1,684) (3,014) (1,866) (14,058) Change in investments restricted for the purchase of property and equipment 218,878 (170,288) 11,143 (58,701) Proceeds from the sale of subsidiary shares, net -- 85,048 141 27,105 Cash disposed of in sale of subsidiary -- (5,252) -- -- --------- --------- --------- --------- Cash used in investing activities (36,257) (344,190) (42,954) (261,570) --------- --------- --------- --------- Financing: Proceeds from long-term debt 1,782 300,955 151,420 353,257 Issuance of redeemable preference shares, net -- -- -- 48,679 Principal payments on long-term debt and capital leases (18,364) (23,769) (10,101) (7,455) Issuance of common shares, net of issuance costs 9,371 17,673 74,629 27,692 Deferred debt financing costs -- (13,103) (5,380) (12,033) Change in investments restricted to finance interest payments 32,810 33,374 16,157 (97,049) --------- --------- --------- --------- Cash provided by financing activities 25,599 315,130 226,725 313,091 --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents (43,087) (112,983) 143,191 (5,481) Cash and cash equivalents, beginning of period 86,070 199,053 55,862 61,343 --------- --------- --------- --------- Cash and cash equivalents, end of period $ 42,983 $ 86,070 $ 199,053 $ 55,862 ========= ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest $ 48,802 $ 50,315 $ 21,684 $ 4,982 Cash paid for income taxes -- -- 1,038 638 Supplemental schedule of non-cash investing and financing activities: Recorded in business combinations: Assets -- 45,719 2,605 14,148 Liabilities -- 7,900 500 4,369 Common shares -- 2,348 -- 8,161 Disposition of subsidiaries: Assets 8,096 35,480 -- -- Liabilities (213) 4,218 -- -- Minority interest -- 12,732 -- -- Amounts in accounts payable and accrued liabilities for the purchase of fixed assets at end of period 28,880 25,945 19,029 19,718 Unrealized gain on securities 28,350 16,200 -- -- Accretion of redeemable preference shares 7,948 7,106 3,145 2,969 Assets acquired through capital leases 5,068 10,079 480 21,765 Debt converted to equity 775 -- 133 --
See accompanying notes to consolidated financial statements. F-6 7 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF THE COMPANY GST Telecommunications, Inc., a Canadian company, and its U.S. subsidiaries collectively, (the Company or GST), is in the business of providing integrated telecommunications products and services primarily in the western United States. The Company provides a range of telecommunications services, including local, long distance, Internet and data services, and constructs telecommunications network segments for other providers, and produces telecommunications software. The consolidated financial statements for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997 have been reported in U.S. dollars, the functional currency of the Company. These consolidated financial statements are prepared in conformity with generally accepted accounting principles in the United States. The Company also prepares separate consolidated financial statements in accordance with Canadian generally accepted accounting principles. (b) CHANGE IN FISCAL YEAR-END In 1997, the Company changed its fiscal year-end from September 30 to December 31. Included in the accompanying audited consolidated financial statements are the results of operations for the three- month transition period ended December 31, 1997. Unaudited results of operations for the comparable three-month period ended December 31, 1996 are summarized below: Revenues......................................................... $ 23,217 Loss from operations............................................. (17,988) Other expenses, net.............................................. (4,646) Net loss......................................................... (22,634) Loss per share, basic and diluted................................ (1.02)
(c) BASIS OF CONSOLIDATION These consolidated financial statements include the accounts of the Company and its greater than 50% owned subsidiaries. The Company's investments in unconsolidated companies owned 20% or more or where the Company exercise significant influence are accounted for using the equity method. At December 31, 1999, the Company held no investments accounted for pursuant to the equity method. All significant intercompany accounts have been eliminated. (d) CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments with original maturities of ninety days or less. F-7 (Continued) 8 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (e) ACCOUNTS AND NOTES RECEIVABLE Gross trade accounts receivable total $52,518 and $38,209 at December 31, 1999 and 1998, respectively. Notes receivable total $268 and $208 at December 31, 1999 and 1998, respectively. Management provides an allowance for doubtful accounts and customer credits based on current customer information and historical statistics. The allowance was $7,542 and $5,482 at December 31, 1999 and 1998, respectively. Valuation and qualifying accounts for the allowance for doubtful accounts and customer credits is as follows:
THREE-MONTH YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED ------------------------ DECEMBER 31, SEPTEMBER 30, 1999 1998 1997 1997 ------- ------- ------------- ------------- Balance at beginning of period $ 5,482 $ 3,956 $ 3,582 $ 1,264 Charged to bad debt expense 8,629 4,776 1,541 5,737 Charged to revenue 1,500 -- -- -- Written off (8,069) (3,250) (1,167) (3,419) ------- ------- ------- ------- Balance at end of period $ 7,542 $ 5,482 $ 3,956 $ 3,582 ======= ======= ======= =======
Results of operations are derived from United States operations and substantially all assets reside in the United States. The Company is exposed to concentration of credit risk principally from accounts receivable. The Company's five largest telecommunications and other services customers accounted for approximately 11.3%, 16.4%, 16.8% and 20.8% of the Company's consolidated telecommunications and other services revenue for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997, respectively. In certain cities, the Company relies on incumbent local exchange carriers for the provision of local telephone service. In addition, the Company relies on other carriers to provide transmission and termination services for a majority of its long distance traffic. The inability of any of these companies or carriers to fulfill service delivery requirements could impact the Company's future results. Construction contracts receivable consists of costs in excess of billings on certain contracts and amounts due from joint construction partners. Construction contracts receivable consists of balances due from three customers. F-8 (Continued) 9 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (f) RESTRICTED AND UNRESTRICTED INVESTMENTS Restricted investments classified as available-for-sale consist primarily of U.S. Treasury securities maturing between one and eight months which are restricted for the purchase and installation of network assets. Held-to-maturity investments consist of U.S. Treasury securities and certificates of deposit maturing between four months and eighteen months which are primarily restricted for interest payments. Restricted investments are recorded at amortized cost, which approximates fair value for all periods presented. Unrestricted available-for-sale investments consist of the Company's approximate 14% equity interest in Global Light Telecommunications, Inc. (Global) at December 31, 1999 and U.S. Government securities and certificates of deposit at December 31, 1998. An unrealized gain of $28,350 related to the Company's interest in Global, which is carried at fair value, is included in comprehensive income for the year ended December 31, 1999. See note 16 for a discussion of the sale of the Company's investment in Global. Under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Company classifies its investments as follows:
DECEMBER 31, --------------------- 1999 1998 -------- -------- Restricted investments: Available-for-sale ........................... $ 9,848 $230,014 Held-to-maturity ............................. 19,828 51,350 Unrestricted investments: Available-for-sale ........................... 44,596 16,246
(g) INVESTMENTS IN FORMER AFFILIATE At December 31, 1997, the Company held a greater than 20% equity interest in Global, a publicly-traded corporation listed on the Vancouver Stock Exchange, which conducts telecommunications operations on a worldwide basis. The carrying value of this investment at December 31, 1997 totaled $593 and was included in other assets in the accompanying consolidated balance sheet. At both December 31, 1998 and 1999, the Company held a less than 20% interest in Global. See note 1(f), note 11(a) for a discussion of litigation with Global and note 16 for a discussion of the sale of the Company's investment in Global subsequent to year-end. F-9 (Continued) 10 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (h) MINORITY INTEREST In March 1997, the Company's then wholly-owned subsidiary, NACT Telecommunications, Inc. (NACT), completed an initial public offering of its common stock, pursuant to which the Company and NACT sold one and two million shares, respectively, of NACT's common stock, resulting in net proceeds of approximately $9,000 and $18,100, respectively. As a result of the offering, the Company's ownership was reduced to 63%. Minority interest represents the non-Company owned shareholder interest in NACT's equity resulting from the 1997 offering. In February 1998, the Company sold its remaining interest in NACT for net proceeds of $85,048, which resulted in a gain of $61,266. (i) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated on the straight-line basis over their estimated useful lives, which are as follows: Telecommunications networks........................................ 20 years Electronic and related equipment................................... 10 years Leasehold improvements............................................. 10 years Computer equipment, office equipment and other..................... 3 - 7 years Buildings.......................................................... 40 years
Construction, engineering and overhead costs directly related to the development of the Company's networks are capitalized. The Company capitalizes internal information systems costs in accordance with Statement of Position (SOP) 98-1, "Accounting for the costs of computer software developed or obtained for internal use." The amount capitalized under SOP 98-1 was $13,075, and $621 of amortization was charged to operations for the year ended December 31, 1999. These amounts are included in Property and Equipment. The Company begins depreciating these costs when the assets become operational. Depreciation expense totaled $55,368, $30,056, $6,240 and $14,985 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997, respectively. (j) GOODWILL Goodwill is amortized using the straight-line method over periods ranging from five to ten years. Amortization charged to operations was $6,785, $6,218, $1,054 and $4,044 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997, respectively. F-10 (Continued) 11 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (k) OTHER ASSETS Other assets consists primarily of customer lists, software development costs and deferred financing costs. These assets are amortized using the straight-line method over periods ranging from three to ten years. Amortization charged to operations for customer lists and software development costs was $10,320, $11,183, $1,945 and $5,630 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997, respectively. Amortization charged to interest expense for deferred financing costs was $4,613, $3,873, $669 and $1,495 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997, respectively. (l) ASSET IMPAIRMENT The Company reviews long-lived assets, goodwill and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During 1998, the Company recorded a non-cash special charge of $3,881 related to the impairment of certain long-lived assets associated with the Company's shared tenant services operations. The impaired assets primarily consist of customer lists and electronic and related equipment. As the projected future cash flows were less than the assets' carrying value, an impairment loss was recognized. The impairment loss was measured as the amount by which the carrying amount of the assets exceeded the estimated fair value of the assets, which was determined based on current market prices for similar assets. As discussed in note 14, the Company also recorded a non-cash special charge of $15,668 during 1998 related to the impairment of a prepaid reseller agreement and advances to Magnacom Wireless LLC. F-11 (Continued) 12 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (m) REVENUE RECOGNITION Telecommunication services revenue is recognized monthly as services are provided. Amounts billed in advance of the service month are recorded as deferred revenue. Product revenue is recorded upon installation of products and is presented in the accompanying consolidated statements of operations net of product returns. Network construction services revenue is recognized using the percentage of completion method. Accordingly, the Company recognizes revenues and expenses as construction progresses. Cost of construction revenue is estimated using weighted average allocations of the total costs of constructing the specific phase of the network. The Company treats certain long term fiber and conduit lease contracts entered into prior to June 30, 1999 as sales-type leases and recognizes revenue under the percentage of completion method. In June 1999, the Financial Accounting Standards Board (FASB) issued Interpretation No. 43, REAL ESTATE SALES, AN INTERPRETATION OF FASB STATEMENT NO. 66. The interpretation is effective for sales of real estate with property improvements or integral equipment entered into after June 30, 1999. Under this interpretation, conduit is considered integral equipment and dark fiber will likely be considered integral equipment. Accordingly, title must transfer to a lessee in order for a lease transaction to be accounted for as a sales-type lease. For contracts entered into after June 30, 1999, sales-type lease accounting is no longer appropriate for dark fiber and conduit leases and therefore, these transactions will be accounted for as operating leases unless title transfers to the lessee. (n) NET LOSS PER SHARE Basic and diluted net loss per share is computed using the weighted average number of common shares outstanding during the period. Common equivalent shares, consisting of options, warrants and convertible securities, were antidilutive for all periods presented and were not included in determining diluted weighted average shares outstanding. If the Company had reported net income for the periods presented, the weighted average number of common equivalent shares used to determine diluted net loss per share would have increased by 11,245,435, 10,411,640, 9,741,498 and 8,186,050 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997, respectively. Net loss per share is increased for redeemable preference shares' accretion totaling $7,948, $7,106, $3,145 and $2,969 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997, respectively. (o) ISSUANCE OF SUBSIDIARY STOCK Issuances of subsidiary stock are accounted for as capital transactions in the accompanying consolidated financial statements. F-12 (Continued) 13 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (p) INCOME TAXES The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at the end of each reporting period. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the period in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. (q) COMPREHENSIVE INCOME The Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, on January 1, 1998. Comprehensive income is defined as changes in stockholders' equity exclusive of transactions with owners such as capital contributions and dividends. For the years ended December 31, 1999 and 1998, comprehensive loss includes a $28,350 and $16,200 unrealized gain on available-for-sale securities. There are no differences between net loss and comprehensive loss for all other periods presented. (r) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (s) ADVERTISING COSTS The Company expenses advertising costs as incurred. (t) RECLASSIFICATIONS Certain reclassifications have been made in the accompanying consolidated financial statements for prior periods to conform with the December 31, 1999 presentation. F-13 (Continued) 14 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (2) ACQUISITIONS The Company has made the acquisitions set forth below, each of which was accounted for using the purchase method of accounting. The consolidated financial statements include the operating results from the effective date of acquisition. (a) ICON COMMUNICATIONS CORP. (ICON) In April 1998, the Company acquired 100% of the outstanding capital stock of ICON, a Washington company which provides long distance and ancillary communications services. Consideration paid for this acquisition consisted of $23,916 in cash. Goodwill of $15,957 was recorded as a result of this acquisition. (b) KLP, INC. (D/B/A CALL AMERICA) (CALL AMERICA PHOENIX) In March 1998, the Company acquired 100% of the outstanding capital stock of Call America Phoenix, an Arizona company which provides long distance services. Consideration paid for this acquisition consisted of $3,838 in cash. Goodwill of $2,405 was recorded as a result of this acquisition. (c) WHOLE EARTH NETWORKS, LLC (WHOLE EARTH) In March 1998, the Company acquired the assets of Whole Earth, a California Internet services provider. Consideration paid for this acquisition consisted of $9,053 in cash and the assumption of $1,273 in liabilities. Goodwill of $3,293 was recorded as a result of this acquisition. (d) ACTION TELCOM CO. (ACTION TELCOM) In May 1997, the Company acquired 100% of the outstanding capital stock of Action Telcom, a Texas company which provides long distance and ancillary telecommunications services, and produces software used in the telecommunications industry. The Company acquired Action Telcom for consideration of 903,000 common shares valued at $8,161, $1,290 in cash and $2,580 in notes payable. Goodwill of $3,863 was recorded as a result of this acquisition. In October 1999, the Company sold the assets of the long distance portion of Action Telcom for $4,895 in cash. A loss of $163 was recognized as a result of this divestiture. (e) GUAM OPERATIONS OF SPRINT COMMUNICATIONS COMPANY L.P. (SPRINT) In October 1997, the Company purchased the assets of the Guam operations of Sprint which provide long distance and ancillary services in Guam. Consideration paid for this acquisition consisted of $2,000 in cash and $500 in liabilities for services to be provided to Sprint. In July 1999, the Company sold the assets of its Guam operations for $1,500 in cash. A gain of $294 was recognized as a result of this divestiture. F-14 (Continued) 15 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) The unaudited pro forma results shown below reflect results of operations as if the 1998 and 1997 acquisitions described above occurred as of the beginning of each of the periods presented.
THREE-MONTH YEAR ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1998 1997 1997 ------------ ------------ ------------- Revenues ......................................... $ 167,556 $ 40,521 $ 133,958 Net loss ......................................... (155,236) (39,655) (115,266) Net loss per share ............................... (4.33) (1.29) (4.67)
The pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results that may be achieved from the combined operations. (3) PROPERTY AND EQUIPMENT
DECEMBER 31, ------------------------ 1999 1998 --------- --------- Telecommunications networks ...................... $ 264,229 $ 178,008 Electronic and related equipment ................. 314,880 181,270 Leasehold improvements ........................... 28,708 24,509 Computer equipment, office equipment and other .......................... 55,820 40,585 Buildings ........................................ 2,808 2,803 Construction in progress ......................... 277,965 251,199 --------- --------- 944,410 678,374 Less accumulated depreciation .................... (112,363) (62,522) --------- --------- $ 832,047 $ 615,852 ========= =========
Property and equipment includes $277,965 and $251,199 of equipment which had not been placed in service at December 31, 1999 and 1998, respectively, and accordingly, is not being depreciated. During the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997, $32,133, $25,920, $3,726 and $15,170 of interest, respectively, was capitalized as part of property and equipment. F-15 (Continued) 16 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (4) ACCRUED EXPENSES
DECEMBER 31, ------------------- 1999 1998 ------- ------- Fixed asset purchases ............................ $ 6,012 $ 9,552 Carrier costs .................................... 13,814 4,885 Interest payable ................................. 8,223 9,272 Payroll and related liabilities .................. 5,694 5,252 Other ............................................ 16,016 8,484 ------- ------- Total .............................. $49,759 $37,445 ======= =======
(5) LONG-TERM DEBT
DECEMBER 31, ------------------------- 1999 1998 ---------- ---------- 13.25% Senior Secured Notes due May 1, 2007 ........... $ 265,000 $ 265,000 10.5% Senior Secured Discount Notes due May 1, 2008 ................................... 355,587 320,997 Note payable to Tomen, LIBOR plus 3.0% (9.0% at December 31, 1999) ....................... 42,187 45,262 Note payable to NTFC, LIBOR plus 3.5% (9.5% at December 31, 1999) ....................... 44,375 50,000 Note payable to Siemens, LIBOR plus 3.5% (9.5% at December 31, 1999) ....................... 10,000 9,463 13.875% Senior Discount Notes due December 15, 2005 ................................. 274,800 240,304 13.875% Convertible Senior Subordinated Discount Notes, due December 15, 2005 ...................... 33,295 29,884 12.75% Senior Subordinated Accrual Notes due November 15, 2007 ................................. 144,000 144,000 Other ................................................. -- 1,466 ---------- ---------- 1,169,244 1,106,376 Less current portion of long-term debt ................ 17,466 13,417 ---------- ---------- $1,151,778 $1,092,959 ========== ==========
F-16 (Continued) 17 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) The schedule of future debt service payments is as follows:
PRINCIPAL INTEREST ----------- ----------- Year ending December 31: 2000 ......................................... $ 17,466 $ 43,267 2001 ......................................... 19,814 90,143 2002 ......................................... 20,511 88,265 2003 ......................................... 21,388 130,919 2004 ......................................... 11,582 155,636 Thereafter ................................... 1,265,105(a) 373,200 ----------- ----------- Less unaccreted discount ..................... (186,622) -- ----------- ----------- $ 1,169,244 $ 881,430 =========== ===========
(a) Includes $500,000, $312,448 and $37,856 of 10.5% Senior Secured Notes, 13.875% Senior Discount Notes and 13.875% Convertible Senior Subordinated Discount Notes, respectively, due at maturity. SENIOR SECURED NOTES In May 1997, the Company issued $265,000 in Senior Secured Notes (the Secured Notes) due May 1, 2007. The Secured Notes bear interest at a rate of 13.25% with semiannual interest payments due beginning November 1, 1997. Approximately $93,790 of the proceeds were set aside to fund the first six scheduled interest payments. The remainder of the net proceeds were restricted to finance the cost of design, development, construction, acquisition, installation and integration of telecommunications equipment. The Secured Notes are secured by the assets financed with the proceeds and are subject to certain debt covenants. SENIOR SECURED DISCOUNT NOTES In May 1998, the Company issued $300,000 in 10.5% Senior Secured Discount Notes (the Senior Secured Discount Notes) maturing on May 1, 2008. The Senior Secured Discount Notes sold at a substantial discount and there will be no accrual of cash interest prior to May 1, 2003, or payment of interest until November 1, 2003. The Senior Secured Discount Notes accrete to a total principal amount, due May 1, 2008, of approximately $500,000. The net proceeds from the sale of the Senior Secured Discount Notes are restricted to finance the cost of design, development, construction, acquisition, installation and integration of telecommunications equipment. The Senior Secured Discount Notes are secured by the assets financed with the proceeds and are subject to certain debt covenants. F-17 (Continued) 18 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) TOMEN FACILITY In October 1994, the Company entered into a master financing agreement with Tomen. Under the agreement, Tomen will loan up to $100,000 to subsidiaries of the Company for development and construction of network projects. As of December 31, 1999, Tomen had provided a total of $69,468 (of which $42,187 was outstanding at December 31, 1999) in debt financing to the Company's subsidiaries for construction and operation of fiber optic networks in southern California, New Mexico, Arizona and Hawaii. The Tomen financing is secured by equipment at the funded network locations and is subject to certain debt covenants. Although, Tomen has the right of first refusal to finance fiber optic projects for the Company, management does not believe that it is likely that they will finance any additional projects. NTFC CAPITAL CORPORATION (NTFC) AGREEMENT In March 1997, the Company entered into a $50,000 ($44,375 of which was outstanding at December 31, 1999) loan and security agreement with NTFC to finance the purchase of certain equipment from Northern Telecom, Inc. Amounts borrowed under the agreement bear interest at LIBOR plus 3.5% and will be repaid in twenty quarterly installments which began in March 1999. The loan is secured by the equipment purchased with the proceeds and subject to certain debt covenants. SIEMENS TELECOM NETWORKS (SIEMENS) AGREEMENT In September 1996, the Company entered into a loan and security agreement with Siemens. Under the terms of the agreement, Siemens will loan up to $226,000 to the Company for the purchase and installation of telecommunications switching and related equipment. At December 31, 1999, $116,000 was available to the Company and $10,000 was outstanding. Amounts borrowed under the agreement initially bear interest at LIBOR plus 4.5% and are secured by the equipment. Such interest decreases to LIBOR plus 3.5% at the time each initial loan is converted to a term loan, which conversion occurs at the first calendar quarter following the initial loan. Amounts borrowed under the agreement will be repaid in twenty-four quarterly installments beginning five quarters after the initial loan is converted to a term loan. The loan is subject to certain debt covenants. SENIOR DISCOUNT NOTES AND CONVERTIBLE SENIOR SUBORDINATED DISCOUNT NOTES In December 1995, the Company issued approximately $160,000 in 13.875% Senior Discount Notes (the Senior Notes) and $20,000 in 13.875% Convertible Senior Subordinated Discount Notes (the Convertible Notes) maturing on December 15, 2005 (together the Notes). The Notes were sold at a substantial discount and there will be no accrual of cash interest prior to December 15, 2000 or payment of interest until June 15, 2001. The Notes accrete to a total principal amount, due December 15, 2005, of approximately $350,304 by December 15, 2000. The Senior Notes rank in right of payment with all unsubordinated indebtedness of the Company while the Convertible Notes are junior to all senior Company debt. Each of the Convertible Notes is convertible at the option of the holder into common shares. The number of shares to be issued upon conversion is based on an accreted value on the conversion date divided by $7.563. In addition, all of the Convertible Notes may be automatically converted to common shares by the Company if the Company's common shares sustain certain market value levels for thirty consecutive F-18 (Continued) 19 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) trading days. On or after December 15, 2000, the Notes will be redeemable at the option of the Company. The Notes are subject to certain debt covenants. F-19 (Continued) 20 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) SENIOR SUBORDINATED ACCRUAL NOTES In November and December 1997, the Company issued $144,000 in 12.75% Senior Subordinated Accrual Notes (the Accrual Notes). Cash interest on the Accrual Notes will not be paid until May 15, 2003. The Accrual Notes are subordinated to all senior indebtedness, including the Notes. The Accrual Notes are redeemable at the option of the Company, in whole or in part after November 15, 2002. Prior to November 15, 2000, up to one-third of the aggregate principal amount of the Accrual Notes may be redeemed by the Company from the proceeds of one or more sales of the Company's common shares. The Accrual Notes are subject to certain debt covenants. DEBT COVENANTS AND CLASSIFICATION OF LONG-TERM DEBT In November 1998, the Company informed the trustee who represents the holders of the Senior Secured Notes, the Senior Secured Discount Notes, the Senior Notes, the Convertible Notes and the Accrual Notes that it may have violated certain technical covenants contained in the indentures related to each of the aforementioned debt issuances. In particular, the Company advised the trustee that the transfer to Global of its interest in a telecommunications project to be developed in Mexico may have constituted a violation of certain provisions in the indentures. In February 1999, the trustee informed the noteholders of the potential violations. The noteholders did not declare a default, as defined within the indentures of each of the notes. On September 16, 1999, the Company received $30,000 in cash from Global and others in connections with the settlement of various lawsuits and has taken other actions to cure the potential technical violations. As a result, the Company believes that there is currently no basis on which the noteholders could declare a default under the indentures relating to the Company's debt issuances. Accordingly, the Company has classified the related debt obligations as non-current in the accompanying consolidated balance sheets. F-20 (Continued) 21 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (6) REDEEMABLE PREFERENCE SHARES The Company's Board of Directors has the authority, without any further vote or action by the Company's shareholders, to issue up to 10,000,000 Preference Shares, without par value, in one or more series and to determine the designations, powers, preferences and relative, participating, optional or other rights thereof, including, without limitation, the dividend rate (and whether dividends are cumulative), conversion rights, voting rights, rights and terms of redemption, redemption price and liquidation preference. In February 1997, the Company consummated a private placement of $50,000 of 500 Redeemable Preference Shares. The Redeemable Preference Shares do not pay dividends in cash, except to the extent such dividends are paid on Common Shares. In addition, the liquidation, conversion and redemption prices of the Redeemable Preference Shares accrete semiannually at a rate of 11.875%. The Company is required to redeem the Redeemable Preference Shares on February 28, 2004 (the Mandatory Redemption Date) in cash at a redemption price of approximately $224,000 per share (the Mandatory Redemption Price); provided that to the extent the Company is prohibited from paying such redemption price in cash, the holders of Redeemable Preference Shares have the option to convert each Redeemable Preference Share into a number of Common Shares equal to the Mandatory Redemption Price divided by 95% of the then market price for Common Shares. In the event the Company is prevented from paying the redemption price for Redeemable Preference Shares in cash and any holder of Redeemable Preference Shares does not exercise such conversion option, the Company has the option of extending the Mandatory Redemption Date to August 28, 2007. The Company has the option of redeeming the Redeemable Preference Shares at any time after February 2000 in cash at a redemption price per Redeemable Preference Share equal to the number of Common Shares into which such Redeemable Preference Share is then convertible multiplied by the price at which such Redeemable Preference Share would become subject to mandatory conversion. Redeemable Preference Shares are convertible at the option of the holders into Common Shares at any time after February 28, 2000 or earlier upon a change of control of the Company. The holders of Redeemable Preference Shares have the right to require the Company to repurchase their shares upon a change of control of the Company after February 28, 2002; prior to that time, holders have a right to convert their Redeemable Preference Shares into Common Shares upon a change of control. Further, the Redeemable Preference Shares are subject to mandatory conversion into Common Shares if the market price of Common Shares exceeds $15.925 per share (subject to adjustment) for a specified period after February 28, 2000. F-21 (Continued) 22 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (7) SHAREHOLDERS' (DEFICIT) EQUITY (a) STOCK-BASED COMPENSATION The Company has six stock-based compensation plans, which are described below. The Company follows SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). In accordance with SFAS 123, the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, compensation cost is generally not recognized for options awarded in the 1995 and 1996 Stock Incentive Plans, the Employee Stock Purchase Plan and fixed stock option awards under the Senior Operating and Executive Officer Stock Option Plans. Compensation cost recognized in the statements of operations for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997 totaled $2,161, $(357), $149 and $9,747, respectively. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model assuming no dividend yield and the following weighted average assumptions for grants for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997 are as follows:
OPTION AWARDS ---------------------------------------------- DECEMBER 31, ------------------------------ SEPTEMBER 30, 1999 1998 1997 1997 ------ ------ ------ ------------- Expected volatility .............................. 70% 62% 58% 56% Risk free interest rate .......................... 5.6% 5.2% 5.4% 6.3% Expected life (in years) ......................... 3.5 3.5 3.5 3.5
EMPLOYEE STOCK PURCHASE PLAN ---------------------------------------------- DECEMBER 31, ------------------------------ SEPTEMBER 30, 1999 1998 1997 1997 ------ ------ ------ ------------- Expected volatility .............................. 70% 62% 58% 56% Risk free interest rate .......................... 5.0% 4.8% 5.3% 5.4% Expected life (in years) ......................... .5 .5 .5 .5
(Continued) F-22 23 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) The weighted average fair value of stock awards granted under the various plans are as follows:
THREE-MONTH YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED ------------------------- DECEMBER 31, SEPTEMBER 30, 1999 1998 1997 1997 -------- -------- ------------ ------------- Stock option awards ................ $ 5.41 $ 6.50 $ 6.17 $ 4.68 Employee Stock Purchase Plan ........................... 5.04 2.16 1.81 1.81
Had compensation cost for the Company's six stock-based compensation plans been determined pursuant to SFAS 123, the Company's net loss and net loss per common share would have been increased to the pro forma amounts indicated below:
THREE-MONTH YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED ---------------------------- DECEMBER 31, SEPTEMBER 30, 1999 1998 1997 1997 ----------- ----------- ------------ ------------ Net loss to common shareholders: As reported ............................. $ (190,517) $ (161,796) $ (42,738) $ (116,307) Pro forma ............................... (200,460) (170,184) (44,487) (119,183) Net loss per share, basic and diluted: As reported ........................... $ (5.11) $ (4.52) $ (1.39) $ (4.71) Pro forma ............................. (5.38) (4.75) (1.44) (4.82)
Pro forma net loss reflects only options granted since October 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to September 30, 1995 is not considered. (b) STOCK OPTION AWARDS Under the 1995, 1996, 1997 and 1999 Stock Option Plans (the Plans), the Company has authorized the issuance of 1,750,000, 1,000,000, 1,000,000 and 2,000,000 common shares, respectively. The Plans provide for the granting of incentive stock options and non-statutory stock options to employees, officers and employee directors and consultants at an exercise price no less than 100% of the market value on the last trading day prior to the date of grant. The 1995, 1996 and 1997 options have a maximum term of five years and the 1999 options have a maximum term of ten years and become exercisable at such times and in such installments, for each individual option, as determined by the Board of Directors. F-23 (Continued) 24 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) In addition, the Company grants fixed option awards under the 1996 Senior Operating Officer Stock Option Plan (Operating Officer Plan). These options have a term of six years and become exercisable at such time and in such installments for each individual option, as determined by the Board of Directors. Under the Operating Officer Plan and the 1996 Senior Executive Officer Stock Option Plan (Executive Plan), the Company may grant stock options to purchase up to 900,000 and 600,000 common shares, respectively, to selected individuals. The options have a maximum term of six years. A summary of the status of the Company's fixed and performance-based stock option awards as of December 31, 1999, 1998, 1997 and September 30, 1997 and the changes during the period of years ended on those dates is presented below:
STOCK OPTIONS AWARDS ------------------------ WEIGHTED AVERAGE EXERCISE SHARES PRICE ---------- -------- Outstanding at September 30, 1996 ................ 3,061,205 $ 7.68 Granted .......................................... 1,490,000 9.91 Exercised ........................................ (643,016) 5.15 Canceled ......................................... (83,655) 8.89 ---------- Outstanding at September 30, 1997 ................ 3,824,534 8.95 Granted .......................................... 175,000 10.29 Exercised ........................................ (158,209) 7.00 Canceled ......................................... (236,218) 10.94 ---------- Outstanding at December 31, 1997 ................. 3,605,107 8.97 Granted .......................................... 2,927,357 11.02 Exercised ........................................ (429,350) 7.58 Canceled ......................................... (1,807,987) 12.20 ---------- Outstanding at December 31, 1998 ................. 4,295,127 9.15 Granted .......................................... 3,116,343 10.02 Exercised ........................................ (989,504) 7.57 Canceled ......................................... (1,565,370) 10.57 ---------- Outstanding at December 31, 1999 ................. 4,856,596 9.57 ==========
F-24 (Continued) 25 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts)
STOCK OPTIONS AWARDS ----------------------- WEIGHTED AVERAGE EXERCISE SHARES PRICE --------- --------- Number of options exercisable at end of period ........................ 1,690,821 $ 9.27 =========
F-25 (Continued) 26 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------------- ---------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF OF SHARES CONTRACTUAL EXERCISE OF SHARES EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------------ ----------- ----------- -------- ----------- -------- $ 3.00 - 5.99 125,000 9.3 years $ 5.88 41,667 $ 5.88 6.00 - 8.99 2,593,721 2.5 years 7.90 936,905 7.96 9.00 - 11.99 1,406,115 5.9 years 10.86 603,593 10.47 12.00 - 14.99 469,787 8.7 years 12.81 -- -- 15.00 - 16.4375 261,973 3.5 years 15.08 108,656 15.10
On December 14, 1998, options to purchase 1,197,830 shares were repriced from prices ranging between $8.25 and $15.00 per share, to $7.15 per share. The vesting terms for the repriced options were extended from three to four years from the original date of grant. Options for directors, officers and key executives were not repriced. (c) EMPLOYEE STOCK PURCHASE PLAN In April 1999, the Company amended the 1996 Employee Stock Purchase Plan (the Purchase Plan), to authorize the issuance of an additional 600,000 common shares. The total shares authorized since adoption of the Plan is 1,100,000. The Purchase Plan allows eligible employees of the Company to purchase common shares of the Company at a price equal to 85% of the lower of the fair market value at the beginning or end of the six-month offering period. Fair market value is calculated as the lesser of (i) the closing price of the Company's common shares on the last trading day immediately before the date of determination, or (ii) the weighted average trading price for such shares for the five trading days immediately before the date of determination. Employees who own 5% or more of the voting rights of the Company's outstanding common shares may not participate in the Purchase Plan. Employees purchased 260,317, 220,843, 75,198 and 62,993 shares under the purchase plan during the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997, respectively. In April 1999, the Company adopted the 1999 Supplemental Employee Stock Purchase Plan (the Supplemental Plan). The Supplemental Plan allowed employees participating in the Purchase Plan for the October 1998 to March 1999 offering period rights to shares that were not available in the Purchase Plan due to a shortfall in available shares. The Supplemental Plan authorized 150,000 common shares at $4.83 per share of which 88,293 were granted and subsequently 61,707 were cancelled. The related compensation cost recognized in the statement of operations for the year ended December 31, 1999 was $700. F-26 (Continued) 27 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (d) WARRANTS OUTSTANDING At December 31, 1999, a warrant to purchase 300,000 common shares at $6.75 per share was outstanding and exercisable. The warrant was granted to a former director and expires in September 2000. (e) DIVIDEND RESTRICTIONS The indentures related to the Secured Notes, the Senior Secured Discount Notes, the Notes and the Accrual Notes prohibit the payment of dividends. F-27 (Continued) 28 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (8) INCOME TAXES The provision for income taxes differs from the amount computed by applying the Canadian statutory income tax rate to net income before taxes for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997 as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1999 1998 1997 1997 ------------ ------------ ------------ ------------- Computed expected income tax benefit at Canadian statutory rate ...................... (39)% (39)% (39)% (39)% Expected state/province income tax benefit ........................... (5) (5) (4) (4) Increase in valuation allowance .................................... 37 41 37 30 Amortization of goodwill ......................... 1 1 1 1 Effect of difference in United States statutory rate ........................ 5 5 5 5 Effect of acquisition of new subsidiaries ................................. -- 1 -- 2 Non-deductible interest .......................... -- -- 2 2 Other ............................................ 1 (4) -- 4 --- --- --- --- Income tax expense ............................... --% --% 2% 1% === === === ===
F-28 (Continued) 29 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's deferred tax asset and liability are as follows:
DECEMBER 31, ----------------------------- 1999 1998 --------- --------- Deferred tax assets: United States Federal and state net operating loss carryforwards ............... $ 96,520 $ 76,241 Canadian net operating loss carryforwards .............................. 28,291 15,975 Non-deductible interest ...................... 66,046 39,199 Canadian non-deductible interest ............. 7,044 5,269 Canadian capital loss carryforward ........... 128 128 Other ........................................ 4,174 3,361 --------- --------- Total deferred tax assets .......... 202,203 140,173 Less valuation allowance ..................... (197,488) (129,757) --------- --------- Total gross deferred tax assets .... 4,715 10,416 --------- --------- Deferred tax liabilities: Furniture, fixtures and equipment, due to differences in depreciation ................ 4,071 6,217 Capitalized software/intangibles ............. 644 4,199 --------- --------- Total gross deferred tax liabilities .................. 4,715 10,416 --------- --------- Net deferred tax liabilities ....... $ -- $ -- ========= =========
The valuation allowance for deferred tax assets as of October 1, 1996 was $19,429. The net change in total valuation allowance for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997 was an increase of $67,731, $61,787, $14,490 and $34,051, respectively. F-29 (Continued) 30 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) The Company has non-capital losses for income tax purposes of approximately $60,826 available to reduce Canadian taxable income of future years, expiring as follows: 2001............................................................................ $ 1,574 2002............................................................................ 1,877 2003............................................................................ 3,079 2004............................................................................ 2,909 2005............................................................................ 23,755 2006............................................................................ 27,632 -------- $ 60,826 ========
Based on a history of recurring losses, it is questionable whether the Company will be allowed to utilize these Canadian losses if the tax authority determines that the Company has no reasonable expectation of profit. As of December 31, 1999, the Company also has a Canadian net capital loss carryforward of $280. Net capital losses can be carried forward indefinitely but can only be utilized to offset taxable capital gain. The Company has net operating losses for income tax purposes of approximately $264,506 available to reduce United States taxable income of future years, expiring as follows: 2006............................................................................ $ 405 2007............................................................................ 537 2008............................................................................ 2,800 2009............................................................................ 5,020 2010............................................................................ 36,922 2011............................................................................ 64,283 2017............................................................................ 36,601 2018............................................................................ 61,039 2019............................................................................ 56,899 -------- $264,506 ========
Approximately 58% of these net operating losses may be utilized for state income tax purposes. For United States income tax purposes, utilization of net operating losses may be subject to limitation in the event of certain substantial stock ownership changes pursuant to IRC Section 382 and referred to hereinafter as an ownership change. An ownership change would limit the utilization of any net operating losses incurred prior to the change in ownership date. The Company has completed an analysis under IRC Section 382 and has determined that no ownership change has occurred. F-30 (Continued) 31 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (9) LEASES The Company is obligated under capital lease agreements for equipment which expire at various dates during the next twenty years. Certain of these agreements contain clauses which allow the lessor to cancel the agreement upon twelve-month written notice. However, the Company believes that the likelihood of such clauses being exercised is remote. Gross amounts of equipment and related accumulated amortization recorded under capital leases were as follows:
DECEMBER 31, --------------------------- 1999 1998 -------- -------- Network facilities and equipment ................. $ 38,608 $ 33,540 Less accumulated amortization .................... (15,864) (9,307) -------- -------- $ 22,744 $ 24,233 ======== ========
Amortization of assets held under capital leases is included with depreciation expense. The Company also has noncancelable operating leases, primarily for facilities, which expire over the next five years. Rental expense under operating leases was $7,582, $6,281, $1,114 and $3,385 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and for the year ended September 30, 1997, respectively. F-31 (Continued) 32 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) Future minimum lease payments under noncancelable leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 1999 are:
CAPITAL OPERATING LEASES LEASES ------- --------- Year ending December 31: 2000 ......................................... $ 9,202 $ 6,942 2001 ......................................... 5,333 6,147 2002 ......................................... 3,672 5,814 2003 ......................................... 3,431 5,423 2004 ......................................... 3,320 4,583 Thereafter ................................... 14,064 9,243 ------- ------- Total minimum lease payments ....... 39,022 $38,152 ======= ======= Less amount representing interest (at rates ranging from 9% to 17%) ...................... 15,516 ------- Net minimum lease payments ......... 23,506 Current portion of capital leases obligations .... 6,693 ------- Capital lease obligations, less current portion ............. $16,813 =======
(10) COMMITMENTS AND CONTINGENCIES (a) PENSION AND PROFIT SHARING PLANS The Company has a defined contribution 401(k) plan (the Plan). Employees are eligible to participate in the Plan upon commencement of service. Participants may defer up to 15% of eligible compensation. In October 1999, the Company amended the Plan to provide matching contributions of 50% on the first 6% of employee deferrals. The matching contributions vest over five years. Company contributions were $272 for the year ended December 31, 1999. (b) EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with key members of management. These agreements provide for certain payments in the event of death, disability and change of control. The agreements also contain covenants not to compete. (c) CONSTRUCTION CONTRACTS The Company is party to various construction contracts arising in the ordinary course of business. F-32 (Continued) 33 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (11) LEGAL PROCEEDINGS (a) GLOBAL AND CURRENT AND FORMER OFFICERS AND DIRECTORS On October 20, 1998, the Company and GST Telecom filed a Complaint in the Superior Court of California, County of Santa Clara, against Global and six former GST officers and directors (the Defendants). The Complaint included claims for fraud, negligent misrepresentation, unjust enrichment, and unfair competition primarily related to the alleged misappropriation of a Mexican business opportunity. The Complaint sought an accounting, a constructive trust, and restitution of GST's interest in the opportunity and also sought unspecified exemplary and punitive damages and attorneys' fees. On January 27, 1999, Global and GST Mextel, Inc. (Mextel) filed a Complaint in the Supreme Court of British Columbia, against GST and GST Telecom. The Complaint, which arose from the same matters for which GST and GST Telecom filed its complaint against Global, et al., in the Superior Court of California, included claims for declaratory and injunctive relief and unspecified general and special damages. On January 28, 1999, five former GST officers or directors filed a Complaint in the Supreme Court of British Columbia against the Company, GST Telecom and four current GST directors. The Complaint, which arose from the same matters for which GST and GST Telecom filed its complaint against Global, et al., in the Superior Court of California, included claims for oppression and declaratory relief, and seeks unspecified actual and punitive damages, costs and attorneys' fees. On September 16, 1999, the Company received $30,000 in cash from Global and others in connection with the settlement of various lawsuits, including the above lawsuits between GST, Global, Mextel and three of the former directors. Pursuant to the settlement, all claims against these parties have been dismissed with the exception of the claim discussed in 11(d) below. The Company claims against the non-settling parties are unaffected by this settlement. (b) FORMER DIRECTOR AND COUNSEL On December 16, 1998, GST, GST USA, Inc. (GST USA) and GST Telecom filed a Complaint in the United States District Court, Southern District of New York, against a former director and a law firm which previously represented the Company as general counsel. The Complaint includes claims for professional negligence, breach of fiduciary duty, and breach of contract, and seeks compensatory damages and attorneys' fees. On February 12, 1999, the former director filed his Answer to the Complaint. The law firm filed its Answer and Counterclaims to the Complaint on February 17, 1999. The law firm counterclaimed against GST, GST USA and GST Telecom for breach of contract, unjust enrichment, quantum meruit, and "account stated," based on invoices submitted to GST of approximately $250. F-33 (Continued) 34 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) On March 10, 2000, the parties entered into a settlement of the Complaint and certain of the proceedings described in 11(a) and (c). The settlement is subject to the execution of a final agreement and payment by the law firm. F-34 (Continued) 35 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (c) FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER On January 25, 1999, the Company's former Chairman and Chief Executive Officer, filed a Complaint in the Superior Court of Washington, King County, against GST, GST USA and GST Telecom. The Complaint, which relates to the circumstances under which the former Chairman and Chief Executive Officer ceased to serve as an officer and director of GST, includes claims for breach of employment agreement, breach of the covenant of good faith and fair dealing, violation of wage statutes, and indemnity. On February 23, 1999, the Company answered by denying all liability and filed counterclaims against the former Chairman and Chief Executive Officer, Global and five other former officers and directors for liability with respect to the matters leading to the termination of the former Chairman and Chief Executive Officer's employment. In particular, GST seeks recovery under Washington law for matters described in note 11(a), above, as well as for breaches committed with respect to the wrongful use of GST funds for the purchase of telecommunications licenses. The matter is currently in discovery. (d) FORMER TREASURER AND FORMER DIRECTORS On February 9, 1999, the Company filed a Complaint in the Superior Court for the State of Washington, Clark County, against the former treasurer of the Company. The Complaint is based on alleged misconduct and includes claims for fraud, breach of fiduciary duty, unjust enrichment, and unfair business practices, and seeks an accounting, imposition of a constructive trust, compensatory damages, costs of suit, attorneys' fees, and treble damages. In particular, the Complaint seeks relief based on misuse of insider information in the purchase of stock, wrongful disbursements to third parties, and involvement in a fraudulent release of stock from escrow. This claim has been consolidated with the claim against the Former Chairman and Chief Executive Officer described in note 11(c), above. On June 4, 1999, the Company filed a Complaint in the Supreme Court of British Columbia, against three former directors and the former treasurer seeking a constructive trust over the proceeds of 750,000 common shares of GST which the Company believes were wrongfully removed from an escrow account. The defendants have denied liability. The matter is currently in discovery. F-35 (Continued) 36 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (e) CLASS ACTION SECURITIES LAWSUITS On October 21, 1999, the first of several class action lawsuits was filed in the United States District Court for the Western District of Washington against GST, certain former officers and directors and in one lawsuit against Global Light Telecommunications, Inc. No current director or officer of GST is named as a defendant. The Complaint claims that the Company and the other defendants committed securities fraud by failing to make disclosures concerning a transaction with Global regarding the Company's joint venture in Bestel, S.A. de C.V., the owner of a 2,270 kilometer fiber optic telecommunications network in Mexico, that is the subject of 11(a) discussed above. The Complaints do not specify the amount of damages sought. A single consolidated complaint was filed by the plaintiffs on March 14, 2000. The Company denies liability, and will vigorously dispute the allegations of the Complaint. (f) FORMER EMPLOYEE OF MAGNACOM In February 1999, a former employee of Magnacom Wireless, LLC filed suit in Oregon state court against the Company. It has subsequently been transferred to federal court. The suit claims that the Company should be liable for Magnacom's obligations on the basis that the Company was involved in many functions of Magnacom. The Company has denied liability and the matter is currently in discovery. Pursuant to the guidance set forth in SFAS 5, ACCOUNTING FOR CONTINGENCIES, the Company has accrued loss provisions related to certain of the legal proceedings detailed above. In the opinion of management, the ultimate disposition of such matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. The Company is also involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. (12) RELATED PARTY TRANSACTIONS (a) MAGNACOM WIRELESS, LLC (MAGNACOM) In 1996, the Company and Magnacom, a company which was controlled by the Company's former Chairman and Chief Executive Officer, entered into a reseller agreement pursuant to which (i) the Company was to become a reseller of PCS services in markets in which Magnacom had obtained FCC licenses, and (ii) Magnacom was to use the Company to provide switched local and long distance services in markets where the Company had operational networks. Pursuant to such agreement, the Company paid Magnacom $0, $200, $0 and $8,403 during the years ended December 31, 1999 and 1998, the three-months ended December 31, 1997 and the year ended September 30, 1997, respectively. In addition, the Company made operating advances to Magnacom of $0, $925, $91 and $52 during the years ended December 31, 1999 and 1998, the three-months ended December 31, 1997 and the year ended September 30, 1997, respectively. In October 1998, Magnacom filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. As a result, the Company wrote-off all amounts previously paid to Magnacom in the third quarter of 1998. The total write-off of approximately $15,668 is included in special charges in the accompanying consolidated statement of operations for the years ending December 31, 1998. F-36 (Continued) 37 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) The transactions with Magnacom form the basis for certain of the legal proceedings described in notes 11(b), 11(c) and 11(d), and 11(f). F-37 (Continued) 38 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (b) PACWEST NETWORK, INC. (PNI) The operations of the Company's Hawaiian microware network require the use of radio licenses from the FCC. Such licenses are owned by PNI, a company controlled by the Company's former Chairman and the former treasurer. Under agreements between the Company and PNI, (1) the Company pays a monthly fee to PNI to utilize PNI's licenses for its communications traffic and (2) PNI pays an equal monthly fee to the Company for the right to utilize the Company's facilities for other communications traffic using up to 10% of PNI's license capacity. (c) GLOBAL In a series of transactions during the third and fourth quarters of 1996, the Company acquired 3,600,000 shares of Canadian Programming Concepts, Inc. (CPC), a Canadian corporation which is publicly traded on the Vancouver Stock Exchange, for consideration of $3,659. CPC's name was subsequently changed to Global. The Company's shares constitute approximately 14% of Global's total outstanding shares at December 31, 1999. As noted in note 11(a), the Company has reached a settlement of the litigation with Global, and as described in note 16, has disposed of its shares in Global. (d) TOMEN Under the Tomen facility, Tomen has the right to act as procurement agent for each network project it finances. The Company has purchased equipment through Tomen at competitive prices. Additionally, an upfront fee of 1.50% of the aggregate principal amount of each project loan advanced and a commitment fee of .50% per annum on the unused portion of each project loan is payable to Tomen. Pursuant to the Tomen agreements, Tomen has purchased 1,586,595 shares of common stock for total cash consideration of $10,400. (e) OTHER The Company paid approximately $0, $1,929, $104, and $2,066 in legal fees during the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997, respectively, to a firm having a member who was also a director of the Company. The Company paid approximately $264 in compensation, in addition to director fees, for the year ended December 31, 1999 to the Company's non-employee Chairman of the Board. Prior to June 1997, the Company's former Chairman and Chief Executive Officer served as a paid consultant to Tomen. Additionally, Pacwest Network LLC received a fee equal to 1% of the aggregate debt and equity financing provided by Tomen to the Company through October 1997. Such fees incurred by the Company totaled $437 during the year ended September 30, 1997. F-38 (Continued) 39 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (13) SEGMENTS The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. As an integrated communications provider, the Company has one reportable operating segment. While the Company's chief decision-maker monitors the revenue streams of various services, operations are managed and financial performance is evaluated based upon the delivery of multiple services over common network and facilities. This allows the Company to leverage its network costs in an effort to maximize return. As a result, there are many shared expenses generated by the various revenue streams; because management believes that any allocation of the expenses to multiple revenue streams would be impractical and arbitrary, management does not currently make such allocations internally. The chief decision-maker does, however, monitor revenue streams at a more detailed level than those depicted in the Company's historical general purpose financial statements. The following table presents revenues by service type:
THREE-MONTH YEARS ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED -------------------------- DECEMBER 31, SEPTEMBER 30, 1999 1998 1997 1997 -------- -------- ------------- ------------- Local service .................................... $ 93,620 $ 48,859 $ 7,034 $ 16,993 Long distance services ........................... 65,590 65,701 12,609 44,981 Data services .................................... 19,843 8,770 1,100 2,000 Internet services ................................ 9,601 8,404 1,013 3,006 Longhaul services ................................ 11,603 14,673 3,395 12,057 Product .......................................... 4,089 4,708 8,706 23,374 Other ............................................ 2,429 3,376 913 3,556 Construction and facility sales .................. 115,147 8,826 1,488 -- -------- -------- -------- -------- Total revenues ............................. $321,922 $163,317 $ 36,258 $105,967 ======== ======== ======== ========
Substantially all of the Company's revenue is attributable to customers in the United States. Additionally, all significant operating assets are located within the United States. F-39 (Continued) 40 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (14) SPECIAL CHARGES There were no special charges for the year ended December 31, 1999. Special charges for the year ended December 31, 1998 consist of the following: Write-off of amounts paid to Magnacom pursuant to a reseller agreement ........................... $14,600 Write-off of operating advances paid to Magnacom ...... 1,068 Write-off of costs related to abandoned projects ...... 9,918 Impairment of assets .................................. 3,881 ------- Non-cash special charges ................ 29,467 Accrual of severance-related costs .................... 1,113 ------- Total special charges ................... $30,580 =======
In 1998, the Company changed its strategic direction to focus on its core, domestic business. In conjunction with the change, management identified certain in-process network construction projects no longer considered compatible due to geographic location or technology changes. The write-off totaled $9,918 and represented the entire amount of the costs related to these in-process projects, including the costs of fiber optic networks and electronic equipment. These assets had never been placed in service and, as such, were not an integral part of the Company's ongoing operations. While the historical cost of these assets has been written-off of the accompanying consolidated balance sheets, the Company holds these assets for disposal. In conjunction with the change in strategic direction, management halted further development of and investment in shared tenant services. The decision resulted in an impairment charge of $2,728 for property, plant and equipment, and $1,153 for customer lists associated with such services. At December 31, 1998, the Company held its shared tenant services assets for sale and sold approximately 80% of such assets in 1999 for $207. The impairment loss was measured as the amount by which the carrying amount of these assets exceeded the estimated fair value of the assets, which was determined based on current market prices for similar assets. The loss reserve was recorded by increasing accumulated depreciation for the property, plant and equipment, and accumulated amortization for the customer lists. The amount of the write-off of customer lists represents the remaining unamortized balance of such lists, which were related to the 1996 acquisition of Tri-Star Residential Communications, Inc. (Tri-Star) a shared-tenant service provider. No goodwill had been recorded in conjunction with the acquisition of Tri-Star. F-40 (Continued) 41 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) In the fourth quarter of 1998, management consummated a plan to involuntarily terminate approximately 40 employees, including former members of management, and to pay termination benefits to such employees. The employees worked in a variety of functions and operations throughout the Company. The termination of those employees did not have a material impact on the Company's business functions. At December 31, 1998, the Company had accrued $1,113 in severance-related costs. The majority of these costs relate to the termination plan and all but $315 were paid out in 1999. The following table details 1999 activity related to the severance accrual: Accrual at December 31, 1998 ........... $ 1,113 Payments ............................... (737) Adjustments ............................ (61) ------- Accrual at December 31, 1999 ........... $ 315 =======
See footnote 12 for a discussion of the amounts paid to Magnacom. Special charges for the year ended September 30, 1997 relate to a $7,445 non-cash compensation charge incurred when 750,000 common shares were released from escrow to former members of management. This transaction is part of the litigation described in note 11(d). F-41 (Continued) 42 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (15) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, accounts and notes receivable, investments, accounts payable and accrued expenses approximate fair values due to the short-term maturities of those instruments. The carrying amounts for current and non-current restricted investments approximate fair value due to the composition of such investments and the related maturities. The carrying amount of unrestricted investments is based upon fair value as determined by quoted market prices. The following table details the carrying amounts and estimated fair values of long-term debt and redeemable preference shares at December 31, 1999 (the financial instruments for which carrying value and estimated fair value differ at December 31, 1999 and 1998):
DECEMBER 31, 1999 DECEMBER 31, 1998 -------------------------- -------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Long-term debt: Senior Secured Notes, 13.25% ................. $265,000 $262,350 $265,000 $273,933 Senior Secured Discount Notes, 10.5% ......... 355,587 242,500 320,997 239,555 Senior Discount Notes, 13.875% ............... 274,800 228,087 240,304 228,415 Convertible Senior Subordinated Discount Notes, 13.875% .................... 33,295 27,635 29,884 28,406 Senior Subordinated Accrual Notes, 12.75% .............................. 144,000 136,800 144,000 133,920 Redeemable preference shares, 11.875% ............ 69,688 70,675 61,741 54,950
The fair value of publicly traded long-term debt is estimated based on quoted market prices. For substantially all other long-term obligations, carrying amounts approximate fair values as incremental borrowings available to the Company are at similar rates and terms. The fair value of redeemable preference shares is estimated based upon rates available to the Company for redeemable preferred equity with similar maturities and features. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly impact the estimates. F-42 (Continued) 43 GST TELECOMMUNICATIONS, INC. Notes to Consolidated Financial Statements December 31, 1999 and 1998 (In thousands, except per share and share amounts) (16) SUBSEQUENT EVENTS (a) PRESIDENT AND CHIEF EXECUTIVE OFFICER RESIGNATION On January 25, 2000, the President and Chief Executive Officer of the Company resigned. The Company has appointed the Chief Operating Officer as Acting Chief Executive Officer until a permanent appointment is made. (b) SALE OF GLOBAL INVESTMENT In a series of transactions in February 2000, the Company sold its investment in Global described in note 1 for $56,534 in cash, resulting in a realized gain of the same amount. (c) BANKRUPTCY On May 17, 2000, the Company filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court of the District of Delaware. Pursuant to the bankruptcy filing, the Company has remained in possession of the Company's assets and properties, and all business and affairs will continue to be managed by the Company's directors. (d) DISPOSITION OF ASSETS On September 21, 2000, the U.S. District Court for the District of Delaware approved the agreement between the Company and Time Warner Telecom Inc. ("Time Warner Telecom") for Time Warner Telecom to purchase substantially all of the assets of the Company, excluding certain operations in Hawaii and certain non-core businesses, for $690 million. The Court approved the definitive purchase agreement between the Company and Time Warner Telecom following an auction for the Company's assets that concluded on August 25, 2000. Closing of the purchase is subject to regulatory approvals and other customary terms and conditions. F-43 44 ITEM 1. FINANCIAL STATEMENTS GST TELECOMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
JUNE 30, DECEMBER 31, 2000 1999(1) ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 29,392 $ 42,983 Restricted investments 150 19,828 Accounts receivable, net 40,708 45,244 Construction contracts receivable 35,127 26,823 Investments 910 44,596 Prepaid and other current assets 9,884 8,562 ------------ ------------ Total current assets 116,171 188,036 ------------ ------------ Restricted investments 3,457 9,848 Property and equipment 994,929 944,410 less accumulated depreciation (151,169) (112,363) ------------ ------------ 843,760 832,047 Other assets 130,289 139,262 less accumulated amortization (56,187) (56,564) ------------ ------------ 74,102 82,698 ------------ ------------ Total assets $ 1,037,490 $ 1,112,629 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities not subject to compromise: Accounts payable $ 7,780 $ 30,579 Accrued expenses 19,058 49,759 Deferred revenue 11,733 10,066 Current portion of capital lease obligations -- 6,693 Current portion of long-term debt -- 17,466 ------------ ------------ Total current liabilities not subject to compromise 38,571 114,563 ------------ ------------ Liabilities subject to compromise (see Note 3) 1,319,713 -- Long-term liabilities not subject to compromise: Long-term interest payable -- 43,134 Capital lease obligations, less current portion -- 16,813 Long-term debt, less current portion -- 1,151,778 Other liabilities 5,460 -- Redeemable preference shares 74,008 69,688 Shareholders' deficit: Common shares 251,112 238,626 Accumulated deficit (651,374) (566,523) Accumulated other comprehensive income -- 44,550 ------------ ------------ Total shareholders' deficit (400,262) (283,347) ------------ ------------ Total liabilities and shareholders' deficit $ 1,037,490 $ 1,112,629 ============ ============
---------- (1) The information in this column was derived from the Company's audited financial statements as of December 31, 1999. See notes to condensed consolidated financial statements. 1 -------------------------------------------------------------------------------- 45 GST TELECOMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ----------------------------- ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues: Telecommunications services $ 53,236 $ 51,214 $ 107,690 $ 99,938 Construction, facility sales and other 3,586 34,518 12,598 45,287 Product -- 1,157 205 2,239 ------------ ------------ ------------ ------------ Total revenues 56,822 86,889 120,493 147,464 ------------ ------------ ------------ ------------ Operating costs and expenses: Network expenses 32,175 32,776 66,446 64,475 Facilities administration and maintenance 6,453 4,265 12,229 9,400 Cost of construction revenues 2,428 20,027 8,483 25,865 Cost of product revenues 2 655 307 1,350 Selling, general and administrative 31,180 29,996 66,813 57,969 Depreciation and amortization 23,627 16,646 45,494 33,624 ------------ ------------ ------------ ------------ Total operating costs and expenses 95,865 104,365 199,772 192,683 ------------ ------------ ------------ ------------ Loss from operations (39,043) (17,476) (79,279) (45,219) ------------ ------------ ------------ ------------ Other expenses (income): Interest income (615) (2,622) (1,530) (6,483) Interest expense, net of amounts capitalized (contractual interest of $18,293 not recorded for the three- and six-month periods ended June 30, 2000) 17,304 27,776 50,038 56,036 Other (1,932) 1,293 (47,534) 1,492 ------------ ------------ ------------ ------------ 14,757 26,447 974 51,045 ------------ ------------ ------------ ------------ Loss before reorganization expenses and income tax expense (53,800) (43,923) (80,253) (96,264) ------------ ------------ ------------ ------------ Reorganization expenses (see Note 6) 4,598 -- 4,598 -- ------------ ------------ ------------ ------------ Loss before income tax expense (58,398) (43,923) (84,851) (96,264) ------------ ------------ ------------ ------------ Income tax expense -- -- -- -- ------------ ------------ ------------ ------------ Net loss $ (58,398) $ (43,923) $ (84,851) $ (96,264) ============ ============ ============ ============ Net loss per share, basic and diluted(1) $ (1.57) $ (1.28) $ (2.29) $ (2.71) ============ ============ ============ ============ Weighted average shares outstanding 39,957,139 37,341,335 38,990,703 36,903,627 ============ ============ ============ ============
---------- (1) Net loss per share is increased for preference shares' accretion totaling $4,320 and $3,862 for the three- and six-month periods ended June 30, 2000 and 1999, respectively. See notes to condensed consolidated financial statements. 2 -------------------------------------------------------------------------------- 46 GST TELECOMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------ 2000 1999 ------------ ------------ Operations: Net loss $ (84,851) $ (96,264) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 45,994 36,464 Accretion and accrual of interest 32,798 35,945 Non-cash stock compensation and other expense 224 1,434 (Gain) loss on disposal of assets (1,275) 1,755 Gain on sale of investments (42,349) -- Changes in non-cash operating working capital: Accounts receivable, net 4,123 (9,276) Construction contracts receivable (1,230) -- Prepaid, other current and other assets, net 942 (9,728) Accounts payable and accrued liabilities, prior to reorganization (4,453) 14,149 Post-petition accounts payable and accrued liabilities 20,042 -- Pre-petition accounts payable and accrued liabilities, authorized by the court (8,695) -- Deferred revenue 1,835 10,133 Deferred revenue from construction contracts 5,460 -- ------------ ------------ Cash used in operations (31,435) (15,388) ------------ ------------ Investments: Proceeds from sale of investments 56,580 Purchase of property and equipment (58,981) (151,803) Proceeds from sale of assets 5,966 -- Purchase of other assets 396 (169) Change in investments restricted for the purchase of property and equipment 6,391 110,231 ------------ ------------ Cash provided by (used in) investing activities 10,352 (41,741) ------------ ------------ Financing: Proceeds from long-term debt 2,311 1,040 Principal payments on long-term debt and capital leases, prior to reorganization (12,149) (8,343) Issuance of common shares, net of issuance costs 1,273 7,599 Deferred debt financing costs (1,135) -- Change in investments restricted to finance interest payments 17,192 16,151 ------------ ------------ Cash provided by financing activities 7,492 16,447 ------------ ------------ Decrease in cash and cash equivalents (13,591) (40,682) Cash and cash equivalents, beginning of period 42,983 86,070 ------------ ------------ Cash and cash equivalents, end of period $ 29,392 $ 45,388 ============ ============
See notes to condensed consolidated financial statements. 3 ------------------------------------------------------------------------------- 47 GST TELECOMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) 1. BANKRUPTCY PROCEEDINGS On May 17, 2000, GST Telecommunications, Inc. ("GST" or the "Company"), and its subsidiaries filed voluntary petitions for protection from creditors 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 Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). 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 the proceedings, substantially all liabilities, litigation and claims pending 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 Bankruptcy Court. On May 11, 2000, we obtained a commitment letter from Heller Financial, Inc. ("Heller") which will provide us, subject to satisfying certain conditions, debtor-in-possession financing for $50 million and the potential for up to an additional $75 million in cash. On May 26, 2000, the Bankruptcy Court entered an order approving the initial $30 million of this financing. On July 26, 2000, the Bankruptcy Court entered an order providing a superpriority interest for Heller over the secured debt of existing bondholders, upon the consent of a majority of the secured bondholders, which will in turn permit Heller to provide approximately $40 million of the $50 million in financing mentioned above. Based upon current unencumbered assets, the additional $10 million is available without the consent of the bondholders. To date, we have not drawn on the Heller credit facility. 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 effect of the cases on our business, or on the interests of creditors and shareholders. Management believes that it is highly unlikely that current equity security holders will receive any distribution under any reorganization or liquidation of our assets. 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. On June 12, 2000, we announced that the letter of intent with Time Warner Telecom, Inc., for the sale of substantially all of our assets would not be proceeding. On June 13, 2000, we opened the bidding procedures, with the approval of the Bankruptcy Court, in an auction format for substantially all of our assets. After an extension of the original bid and auction dates, qualified buyers were required to submit their bids on or prior to August 11, 2000. The bids are currently being evaluated. An auction will occur on August 22, 2000, and if such auction results in a bid or series of bids for the assets of GST satisfactory to the Company and its creditors, then we anticipate a Bankruptcy Court hearing on August 25, 2000 to result in an order confirming a sale, with such sale expected to close prior to the end of the year. If such a sale is consummated, it is highly unlikely that our current equity security holders would receive any distribution upon our subsequent liquidation and the interest of both secured creditors and unsecured creditors may be substantially impaired. If a sale of all or a portion of the Company's assets is not completed, we will either reorganize our remaining operations or liquidate the unsold assets. 4 -------------------------------------------------------------------------------- 48 2. 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, 1999, as included in the Company's annual report on Form 10-K. 3. LIABILITIES SUBJECT TO COMPROMISE As of June 30, 2000, liabilities subject to compromise consist of the following: Trade payables $ 44,367 Accrued liabilities 12,808 Current portion, long-term debt 20,030 Current portion, capital lease obligations 5,994 Long-term debt, less current portion 1,156,453 Capital lease obligations, less current portion 13,869 Long-term interest payable 52,007 Other long-term liabilities 14,185 ------------ Total $ 1,319,713 ============
4. BASIC AND DILUTED NET LOSS PER SHARE For the three- and six-month periods ended June 30, 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 5,144 and 971,580 for the three- and six-month periods ended June 30, 2000, respectively, compared to 10,391,271 and 10,828,979 for the three- and six-month periods ended June 30, 1999. 5. SHAREHOLDERS' EQUITY Shares issued and outstanding are as follows:
JUNE 30, DECEMBER 31, 2000 1999 ---------- ---------- Common shares, no par value 39,962,283 37,734,507
5 -------------------------------------------------------------------------------- 49 6. REORGANIZATION EXPENSES For the three- and six-month periods ended June 30, 2000, reorganization expenses totaled $4,598, consisting of $2,564 for professional services and $2,034 for a retention bonus accrual. The retention bonus accrual is pursuant to a Bankruptcy Court-approved plan to retain our employees through the bankruptcy process. 7. 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:
JUNE 30, DECEMBER 31, 2000 1999 ------------ ------------ 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
The balance as of June 30, 2000 is $0 because the Company sold its investment in Global Light Telecommunications, Inc. during the three months ended March 31, 2000 (see Note 11). 8. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED JUNE 30, ------------------------------ 2000 1999 ------------ ------------ Supplemental disclosure of cash flow information: Pre-petition cash paid for interest $ 22,808 $ 24,079 Cash paid for income taxes -- -- Supplemental schedule of non-cash investing and financing activities: Disposition of subsidiary: Assets (4,182) (1,373) Liabilities (266) 216 Amounts in accounts payable and accrued liabilities for the purchase of fixed assets at end of period 1,846 27,220 Assets acquired through capital leases -- 1,194 Conversion of debt to equity 15,309 774 Long term debt and capital leases reclassified to "Liabilities subject to compromise" 1,196,346 --
6 -------------------------------------------------------------------------------- 50 9. CAPITALIZATION OF INTEREST The Company capitalized interest of $2,739 and $8,488 as a part of property and equipment for the three- and six-month periods ended June 30, 2000, respectively, compared to $8,728 and $16,371 for the three- and six-month periods ended June 30, 1999, respectively. 10. ACCRUED SEVERANCE In the fourth quarter of 1998, the Company accrued $1,113 in severance-related costs. The following table details activity related to the severance accrual. Accrual at December 31, 1998 $ 1,113 Payments (737) Adjustments (61) -------- Accrual at June 30, 2000 $ 315 ========
11. 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. 12. DEBT SERVICE REQUIREMENTS At May 16, 2000, the Company had $1,196,346 of indebtedness outstanding along with $74,008 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. 13. IMPAIRMENT OF ASSETS The bidding and auction processes described above could ultimately result in the sale of substantially all of the Company's assets. Although the Company and its creditors are not required to accept any offer, it is possible that the Company's creditors would accept an offer or offers to purchase substantially all of the Company's assets for less than the current book value of those assets. Such a transaction could result in an impairment of assets. Until the auction has been completed, the Company cannot predict the values of the final bid(s) or whether those bids will be acceptable to the creditors. The Company has determined that pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," no impairment of assets existed as of June 30, 2000. 14. APOPTION OF NEW ACCOUNTING STANDARDS In June 1999, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 43 ("FIN 43"), "Real Estate Sales, an interpretation of FASB Statement No. 66." The interpretation is effective for sales of real estate with property improvements or integral equipment 7 -------------------------------------------------------------------------------- 51 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 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 25 for certain issues: a) the definition of employee for purposes of applying Opinion 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 on the results of operations. 8 --------------------------------------------------------------------------------