<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
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GST NETWORK FUNDING, INC.
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(Exact name of Registrant as Specified in its Charter)
DELAWARE 13-4001870
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(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 Main Street, Vancouver, WA 98663
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 356-7100
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N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q
AND IS THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At November 10,
1999, there were outstanding 100 shares of common stock, $.01 par value per
share, of the Registrant.
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GST NETWORK FUNDING, INC.
INDEX
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<CAPTION>
PAGE(S)
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<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Balance Sheets - September 30, 1999 and December 31, 1998 2
Statements of Operations
- Three Months Ended September 30, 1999 and 1998 and Nine Months
Ended September 30, 1999 and period from April 16, 1998 (date of
inception) to September 30, 1998 3
Statements of Cash Flows
- Nine Months Ended September 30, 1999 and period from April 16, 1998 (date
of inception) to September 30, 1998 4
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE) 5-6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 6
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 6
SIGNATURES 7
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GST NETWORK FUNDING, INC.
BALANCE SHEETS
September 30, 1999 and December 31, 1998
(In thousands, except share amounts)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31, (1)
ASSETS 1999 1998
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<S> <C> <C>
Restricted investments............................. 56,105 230,014
Notes receivable from parent....................... 255,426 71,342
Commitment fees receivable from parent............. 26,717 14,256
Interest receivable from parent.................... 11,481 852
Deferred financing costs, net...................... 9,458 10,285
-------------------- -------------------
$ 359,187 $ 326,749
==================== ===================
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accrued liabilities 30 52
Accrued interest payable 687 396
Accrued income taxes payable to parent 19,985 8,472
Other payable to parent 720 519
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21,422 9,439
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Long-term debt..................................... 346,565 320,997
Shareholder's deficit:
Common stock:
Authorized - 1,000 of $.01 par
common shares; issued and
outstanding - 100 shares................... -- --
Additional paid-in capital..................... 2,000 2,000
Accumulated deficit............................ (10,800) (5,687)
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(8,800) (3,687)
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$ 359,187 $ 326,749
==================== ===================
</TABLE>
(1) The information in this column was derived from GST Network Funding, Inc.'s
audited financial statements as of December 31, 1998.
See accompanying notes to financial statements.
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GST NETWORK FUNDING, INC.
Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS NINE MONTHS APRIL 16, 1998
ENDED SEPTEMBER 30, ENDED (DATE OF INCEPTION)
------------------------------- SEPTEMBER 30, TO SEPTEMBER 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues:
Interest income $ 8,553 $ 4,421 $ 21,400 $ 6,767
Commitment fee income 2,267 5,682 12,461 9,257
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Total revenues 10,820 10,103 33,861 16,024
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Operating costs and expenses:
Interest expense 9,414 8,474 27,461 13,769
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Income before income taxes 1,406 1,629 6,400 2,255
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Income tax expense (benefit):
Current 3,679 3,435 11,513 5,448
Deferred -- -- -- --
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Net loss $ (2,273) $ (1,806) $ (5,113) $ (3,193)
============= ============== ================= ====================
</TABLE>
See accompanying notes to financial statements.
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GST NETWORK FUNDING, INC.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS APRIL 16, 1998
ENDED (DATE OF INCEPTION)
SEPTEMBER 30, TO SEPTEMBER 30,
1999 1998
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<S> <C> <C>
Operations:
Net loss.............................................. $ (5,113) $ (3,193)
Items not involving cash:
Amortization of deferred financing costs............ 827 927
Accretion of interest............................... 25,568 12,841
Changes in non-cash operating working capital:
Commitment fee receivable from parent............... (12,461) (9,257)
Interest receivable from parent..................... (10,629) (38)
Other accrued liabilities........................... (22) --
Accrued interest payable............................ 291 --
Accrued income taxes payable to parent.............. 11,513 5,448
Other payable to parent............................. 201 514
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Cash provided by operations................. 10,175 7,242
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Investing:
Change in investments restricted for
fixed asset purchases............................... 173,909 (291,940)
Notes receivable from parent.......................... (184,084) (6,283)
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Cash used in investing activities........... (10,175) (298,223)
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Financing:
Proceeds from issuance of long-term debt.............. -- 299,995
Deferred debt financing costs......................... -- (11,014)
Proceeds from investment by parent.................... -- 2,000
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Cash provided by financing activities....... -- 290,981
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Increase in cash and cash equivalents....... -- --
Cash and cash equivalents, beginning of period............ -- --
-------------------- -------------------
Cash and cash equivalents, end of period.................. $ -- $ --
==================== ===================
Supplemental disclosure of cash flow information:
Cash paid for interest................................ $ -- $ --
</TABLE>
See accompanying notes to financial statements.
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GST NETWORK FUNDING, INC.
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements of GST Network Funding, Inc.
("GST Network") 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 GST
Network's audited financial statements for the period from April 16, 1998
(date of inception) to December 31, 1998, as included in GST Network's Report
on Form S-4/A filed on August 27, 1999.
2. NET INCOME (LOSS) PER SHARE AND SHAREHOLDER'S EQUITY
GST Network does not have equity instruments that are considered
common stock equivalents, and, as weighted average common shares total only
100 for the periods presented, all of which are owned by GST USA, Inc. ("GST
USA"), income (loss) per share data is meaningless and is not presented in the
accompanying financial statements.
3. RECENT DEVELOPMENTS
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in GST Funding's registration statement
on Form S-4/A dated August 27, 1999 in which GST Network disclosed potential
technical violations of certain debt covenants. On September 16, 1999, GST
Telecommunications, Inc. ("GST") received $30.0 million from Global Light
Telecommunications, Inc. and others in connections with the settlement of
various lawsuits. See "Legal Proceedings" in Part II: Other Information in
GST's Form 10-Q for the period ended September 30, 1999. As a result, GST
Network believes that there is currently no basis on which the noteholders
could declare a default under the indentures relating to GST Network's debt
issuance.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
GST Network was formed on April 16, 1998 for the purpose of issuing
$500.0 million principal amount at maturity of 10.5% Senior Secured Discount
Notes (the "1998 Notes") and financing the purchase of telecommunications
equipment. GST Network acts as purchasing agent for GST USA and sells to GST
USA the equipment it purchases with the proceeds from the 1998 Notes
Offering. GST Network has only a limited operating history.
As of September 30, 1999, GST Network had purchased approximately
$250.2 million of equipment and held restricted investments of approximately
$56.1 million restricted for the purchase of equipment. All of such equipment
has been sold to GST USA in exchange for intercompany notes. Ultimately, such
equipment is leased by GST USA to the various operating subsidiaries of GST.
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OPERATIONS
The operations of GST Network are limited to (i) purchasing
equipment, (ii) selling equipment to GST USA, (iii) receiving payments under
intercompany notes, (iv) making payments of interest and principal on the
1998 Notes, and (v) fulfilling its obligations under the indenture relating
to the 1998 Notes, the pledge agreement relating to the security interest in
the Senior Secured Notes and the registration rights agreement relating to
the 1998 Notes. GST Network satisfied its obligations under such registration
rights agreement in September 1999, upon the consummation of an exchange
offer for the 1998 Notes.
ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE MARKET RISK
GST Network has fixed income investments consisting of cash equivalents
and short-term investments in U.S. government debt instruments.
Interest income earned on GST Network's investment portfolio is
affected by changes in the general level of U.S. interest rates. GST Network
believes that it is not exposed to significant changes in fair value because
such investments are composed of Government debt instruments and the maturities
are short term. The fair value of each investment approximates amortized cost,
and long term securities have maturities of less than three months.
GST Network does not use derivative financial instruments to manage its
interest rate risk. GST Network's long-term debt had a book value of $346,565
and a market value of $360,863 at September 30, 1999.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of
the undersigned thereunto duly authorized.
Date: NOVEMBER 15, 1999 GST NETWORK FUNDING, INC.
----------------- (Registrant)
/s/ Daniel L. Trampush
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Daniel L. Trampush,
(Senior Vice President and Chief Financial
Officer)
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<ARTICLE> 5
<LEGEND>
This shcedule contains summary financial information extracted from GST
Network's Form 10-Q for the quarter ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 359,187,000
<CURRENT-LIABILITIES> 21,422,000
<BONDS> 346,565,000
0
0
<COMMON> 0
<OTHER-SE> (8,800,000)
<TOTAL-LIABILITY-AND-EQUITY> 359,187,000
<SALES> 0
<TOTAL-REVENUES> 33,861,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,461,000
<INCOME-PRETAX> 6,400,000
<INCOME-TAX> 11,513,000
<INCOME-CONTINUING> (5,113,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,113,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
