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Previous: STATE FARM LIFE & ACCIDENT ASS CO VAR ANN SEP ACCT, 485BPOS, EX-99.10(B), 2000-08-18 |
Next: GST NETWORK FUNDING INC, 10-Q, EX-27.1, 2000-08-18 |
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 June 30, 2000
OR
| / / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-9728
GST NETWORK FUNDING, INC.
(Exact name of Registrant as Specified in its Charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
13-4001870 (IRS Employer Identification Number) |
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| 4001 Main Street, Vancouver, WA (Address of Principal Executive Offices) |
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98663 (Zip Code) |
(360) 356-7100
Registrant's Telephone Number, Including Area Code
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
THE
REGISTRANT MEETS THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q
AND IS THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At August 14, 2000, there were outstanding 100 shares of common stock, $.01 par value per share, of the Registrant.
GST NETWORK FUNDING, INC.
INDEX
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| PART I: Financial Information | ||||
| ITEM 1. |
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FINANCIAL STATEMENTS: |
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Balance Sheets—June 30, 2000 and December 31, 1999 |
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2 |
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Statements of Operations —Three and Six Months Ended June 30, 2000 and 1999 |
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3 |
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Statements of Cash Flows —Six Months Ended June 30, 2000 and 1999 |
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4 |
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Notes to Financial Statements |
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5-7 |
| ITEM 2. |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE NARRATIVE) |
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7-9 |
| ITEM 3. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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| PART II: Other Information |
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| ITEM 6. |
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EXHIBITS AND REPORTS ON FORM 8-K |
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| SIGNATURES |
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1
GST NETWORK FUNDING, INC.
BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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June 30, 2000 |
December 31, 1999(1) |
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|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||
| Restricted investments | 3,457 | 9,848 | ||||||||
| Notes receivable from parent | 341,431 | 319,336 | ||||||||
| Commitment fees receivable from parent | 27,513 | 24,942 | ||||||||
| Interest receivable from parent | 2,001 | 6,851 | ||||||||
| Other receivable from parent | 1,332 | — | ||||||||
| Deferred financing costs, net | 8,632 | 9,182 | ||||||||
| Total assets | $ | 384,366 | $ | 370,159 | ||||||
| LIABILITIES AND SHAREHOLDER'S DEFICIT | ||||||||||
| Current liabilities not subject to compromise: | ||||||||||
| Accrued liabilities | $ | 6 | $ | 18 | ||||||
| Accrued income taxes payable to parent | 29,304 | 22,827 | ||||||||
| Other payable to parent | — | 4,306 | ||||||||
| Total current liabilities not subject to compromise | 29,310 | 27,151 | ||||||||
| Liabilities subject to compromise (see Note 3) | 369,505 | — | ||||||||
| Long-term debt not subject to compromise |
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— |
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355,587 |
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| Shareholder's deficit: |
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| 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 | (16,449 | ) | (14,579 | ) | ||||||
| Total shareholder's deficit | (14,449 | ) | (12,579 | ) | ||||||
| Total liabilities and shareholder's deficit | $ | 384,366 | $ | 370,159 | ||||||
See accompanying notes to financial statements.
2
GST NETWORK FUNDING, INC.
Statements of Operations
(In thousands)
(Unaudited)
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Three Months Ended June 30 , |
Six Months Ended June 30 , |
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2000 |
1999 |
2000 |
1999 |
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| Revenues: | ||||||||||||||||
| Interest income | $ | 5,597 | $ | 7,358 | $ | 16,481 | $ | 12,846 | ||||||||
| Commitment fee income | 583 | 3,360 | 2,571 | 6,978 | ||||||||||||
| Total revenues | 6,180 | 10,718 | 19,052 | 19,824 | ||||||||||||
| Operating costs and expenses: |
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| Interest expense (contractual interest of $4,776 not recorded for the three- and six-month periods ended June 30, 2000) | 4,995 | 9,083 | 14,445 | 18,046 | ||||||||||||
| Income before reorganization expenses and income taxes | 1,185 | 1,635 | 4,607 | 1,778 | ||||||||||||
| Reorganization expenses (see Note 4) |
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— |
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— |
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| Income before income taxes | 1,185 | 1,635 | 4,607 | 1,778 | ||||||||||||
| Income tax (benefit) expense: | ||||||||||||||||
| Current | 2,101 | 3,644 | 6,477 | 6,740 | ||||||||||||
| Deferred | — | — | — | — | ||||||||||||
| 2,101 | 3,644 | 6,477 | 6,740 | |||||||||||||
| Net income (loss) | $ | (916 | ) | $ | (2,009 | ) | $ | (1,870 | ) | $ | (4,962 | ) | ||||
See accompanying notes to financial statements.
3
GST NETWORK FUNDING, INC.
Statements of Cash Flows
(In thousands)
(Unaudited)
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Six Months Ended June 30, |
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2000 |
1999 |
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| Operations: | |||||||||||
| Net income (loss) | $ | (1,870 | ) | $ | (4,962 | ) | |||||
| Items not involving cash: | |||||||||||
| Amortization of deferred financing costs | 550 | 552 | |||||||||
| Accretion of interest | 13,894 | 16,853 | |||||||||
| Changes in non-cash operating working capital: | |||||||||||
| Commitment fee receivable from parent | (2,571 | ) | (6,979 | ) | |||||||
| Interest receivable from parent | 4,850 | (3,119 | ) | ||||||||
| Other accrued liabilities | (6 | ) | 241 | ||||||||
| Accrued interest payable | — | (396 | ) | ||||||||
| Accrued income taxes payable to parent | 6,477 | 6,740 | |||||||||
| Other payable to parent | (5,620 | ) | 172 | ||||||||
| Cash provided by operations | 15,704 | 9,102 | |||||||||
| Investing: | |||||||||||
| Change in investments restricted for fixed assets purchases | 6,391 | 110,304 | |||||||||
| Notes receivable from parent | (22,095 | ) | (119,406 | ) | |||||||
| Cash used in investing activities | (15,704 | ) | (9,102 | ) | |||||||
| Increase in cash and cash equivalents | — | — | |||||||||
| Cash and cash equivalents, beginning of period |
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— |
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— |
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| Cash and cash equivalents, end of period | $ | — | $ | — | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest | $ | — | $ | — | |||||||
See accompanying notes to financial statements.
4
GST NETWORK FUNDING, INC.
Notes to Financial Statements
(Unaudited)
1. BANKRUPTCY PROCEEDINGS
On May 17, 2000, GST Telecommunications, Inc. ("GST" or the "Company"), and its subsidiaries, including GST Network Funding, Inc. and GST USA, Inc., 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 its 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 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.
5
2. 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 GST Network's audited financial statements for the year ended December 31, 1999, as included in GST Network's Report on Form 10-K for the year ended December 31, 1999.
3. LIABILITIES SUBJECT TO COMPROMISE
As of June 30, 2000, liabilities subject to compromise consist of the following:
| Accounts payable | $ | 18 | ||
| Accrued liabilities | 6 | |||
| Long-term debt | 369,481 | |||
| Total | $ | 369,505 | ||
4. REORGANIZATION EXPENSES
No reorganization expenses related to the Chapter 11 filing were recorded by GST Network for the three- and six-month periods ended June 30, 2000. All recorded expenses for those periods are included in GST and GST USA's financial statements.
5. NET LOSS PER SHARE AND SHAREHOLDER'S DEFICIT
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"), loss per share data is meaningless and is not presented in the accompanying financial statements.
6. INTERCOMPANY RECEIVABLES AND IMPAIRMENT OF ASSETS
The bidding and auction processes described in Note 1 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 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.
Total revenue includes $6,201 and $9,044 for the three months ended June 30, 2000 and 1999, respectively, and $19,012 and $16,132 for the six months ended June 30, 2000 and 1999, respectively, of interest and commitment fee income due from GST Network's parent, GST USA. As of, June 30, 2000, receivables from GST USA, including notes receivable, commitment fees receivable and accrued interest receivable, totaled $370,945. The degree to which such amounts are collectible by GST
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Network would be impacted by an impairment of fixed assets associated with the equipment purchased with proceeds from GST Network's $500.0 million principal amount at maturity 10.5% Senior Secured Discount Notes.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains "forward-looking statements" within the meaning of the securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements included in this Quarterly Report, other than statements of historical facts, are forward-looking statements, including the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding GST Network Funding, Inc.'s ("GST Network" or the "Company") strategy, future operations, financial position, projected costs, prospects, plans and objectives of management.
Certain statements contained in this Quarterly Report, including without limitation, statements containing the words "will," "anticipate," "believe," "intend," "estimate," "expect," "project" and words of similar import, constitute forward-looking statements, although not all forward-looking statements contain such identifying words. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others, the following:
All forward-looking statements speak only as of the date of this Quarterly Report. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements made in this Quarterly Report are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.
Overview
GST Network was formed on April 16, 1998 for the purpose of issuing $500.0 million principle amount at maturity of 10.5% Senior Secured Discount Notes (the "Senior Secured Notes") and financing the purchase of telecommunications equipment. GST Network acts as purchasing agent for
7
GST USA, Inc. ("GST USA") and sells to GST USA the equipment it purchases with the proceeds from the Senior Secured Notes offering. GST Network has only a limited operating history.
As of June 30, 2000, GST Network had purchased approximately $303.3 million of equipment and held restricted investments of approximately $3.5 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 Telecommunications, Inc. ("GST").
Recent Developments
On May 17, 2000, GST and its subsidiaries filed voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware. We 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, we 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 GST's 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 no later than 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 a sale of our assets 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
8
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.
The bidding and auction processes could ultimately result in the sale of substantially all of our 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 our 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 currently predict the values of the final bid(s) or if those bids will be acceptable to the creditors. The Company has determined that no impairment of assets existed as of June 30, 2000.
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 Senior Secured Notes, and (v) fulfilling its obligations under the indenture relating to the Senior Secured Notes, the pledge agreement relating to the security interest in the Senior Secured Notes and the registration rights agreement relating to the Senior Secured Notes. GST Network satisfied its obligations under such registration rights agreement in September 1999, upon the consummation of an exchange offer for the Senior Secured 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 $369,481 and a market value of approximately $245,000 at June 30, 2000.
9
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule
Reference is made to the report on Form 8-K filed on May 24, 2000, on which we reported the following:
On May 17, 2000, we filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the District of Delaware. Pursuant to the bankruptcy filing, we have remained in possession of our assets and properties, and our business and affairs will continue to be managed by our directors and officers, subject in each case to the supervision of the Bankruptcy Court.
On May 17, 2000, we issued a press release, addressing our voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, our letter of intent with Time Warner Telecom, Inc. for the sale of substantially all of our assets, and our receipt of a commitment for debtor-in-possession financing for up to $50 million in cash and potential for up to an additional $75 million in cash (subject to certain restrictions and court approval) to continue day-to-day operations.
We postponed our annual shareholders' meeting that had been scheduled for June 8, 2000. Our plan is to hold an annual shareholders' meeting in the course of our restructuring. On May 24, 2000, we issued a press release regarding this matter.
Reference is made to the report on Form 8-K filed on June 12, 2000, on which we reported the following:
On June 12, 2000, we issued a press release, stating that we will not be proceeding pursuant to the letter of intent with Time Warner Telecom, Inc., for the sale of substantially all of our assets. Also, it stated that we would seek approval of an open bidding process from the Bankruptcy Court with jurisdiction over our bankruptcy proceedings.
On June 13, 2000, we announced that approval from the Bankruptcy Court was received to start an open bidding process for the sale of substantially all of our assets. The bidding procedures stipulate that qualified buyers were required to submit their bids no later than July 31, 2000, and that an auction would be conducted on August 4, 2000. (These dates were later extended to August 11, 2000, and August 22, 2000, respectively.)
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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: August 18, 2000 | GST NETWORK FUNDING, INC. (Registrant) |
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/s/ DONALD A. BLOODWORTH Donald A. Bloodworth, (Senior Vice President and Chief Financial Officer) |
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