<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
/ / 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 000-22330
GST NETWORK FUNDING, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-4001870
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
4001 Main Street, Vancouver, Washington 98663
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (360) 356-7100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K
WITH THE REDUCED DISCLOSURE FORMAT CONTEMPLATED THEREBY.
<PAGE>
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: At March 27, 2000,
there were outstanding 100 shares of the Registrant's common stock, $.01 par
value per share.
TABLE OF CONTENTS
PART I Item 1. Business............................................. 2
Item 2. Properties........................................... 2
Item 3. Legal Proceedings.................................... 2
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................ 2
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation....... 3
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................ 3
Item 8. Financial Statements and Supplementary Data.......... 4
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 4
PART IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................ 4
SIGNATURES............................................................... 6
INDEX TO FINANCIAL STATEMENTS............................................ F-1
<PAGE>
ITEM 1. BUSINESS.
OVERVIEW
GST Network Funding, Inc. ("GST Network") is a special purpose
finance subsidiary of GST Telecommunications, Inc. ("GST"). 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 due 2008 (the "1998
Notes") that were sold in a private placement in May 1998 (the "May
Offering") and financing the purchase of telecommunications equipment with
the proceeds of the May Offering. GST Network acts as purchasing agent for
GST USA Inc. ("GST USA"), a wholly owned subsidiary of GST and the parent of
GST Network, and sells to GST USA, the equipment it purchases with the
proceeds from the 1998 Notes.
GST is a facilities-based integrated communications provider, or
ICP, offering voice, data and Internet services throughout the western United
States. By providing service over its own network facilities, it is able to
lower and control its costs while also developing flexible products to meet
the needs of both small and large business customers. Its current products
include data transport, high-speed Internet access, voice services, including
a bundled offering of local and long distance services, and wholesale
services, including dark fiber and conduit rights.
ITEM 2. PROPERTIES.
GST Network neither owns nor leases material properties.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which GST Network is a
party. GST Network knows of no threatened or pending material legal action
against it.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for GST Network's common
equity. All of the issued and outstanding shares of such common equity are owned
by GST USA.
-2-
<PAGE>
ITEM 7. 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
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. GST Network has
only a limited operating history.
As of December 31, 1999, GST Network had purchased approximately
$300.9 million of equipment and holds restricted investments of approximately
$9.8 million restricted for the purchase of equipment. All of such equipment
has been sold to GST USA in exchange for intercompany notes due May 1, 2003
(the Intercompany Notes). Ultimately, such equipment is leased by GST USA to
the various operating subsidiaries of GST.
OPERATIONS
The operations of GST Network are limited to (i) purchasing
equipment, (ii) selling equipment to GST USA, (iii) receiving payments under
the 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.
NET LOSS
Net loss of $8.9 million for the year ended December 31, 1999
includes the following components: (i) interest income of $31.5 million for
the year ended December 31, 1999 relating to interest earned on proceeds from
the May Offering and from interest earned on the Intercompany Notes, (ii)
commitment fee income of $10.7 million earned from GST USA, (iii) interest
expense of $36.8 million relating to the 1998 Notes and (iv) income tax
expense of $14.4 million.
Net loss of $5.7 million for the period from April 16, 1998 (date of
inception) to December 31, 1998 includes the following components: (i)
interest income of $10.7 million related to interest earned on the proceeds
from the May Offering, (ii) commitment fee income of $14.3 million earned
from GST USA, (iii) interest expense of $22.1 million relating to the 1998
Notes and (iv) income tax expense of $8.5 million. The increases in each of
these components for the year ended December 31, 1999 compared to the period
from April 16, 1998 (date of inception) to December 31, 1998 relates to the
fact that GST Network was not formed until April 1998 and the 1998 Notes were
not offered until May 1998.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
GST Network has fixed income investments consisting of cash equivalents
and short-term investments in U.S. government debt instruments.
-3-
<PAGE>
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 $355,587
and $320,997 at December 1999 and 1998, respectively, and a market value of
$242,500 and $239,555 at December 31, 1999 and 1998, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements: see the Index to Financial Statements.
Exhibits:
-4-
<PAGE>
*3(a) Certificate of Incorporation of GST Network.
*3(b) By-Laws of GST Network.
*4(a) Indenture dated as of May 4, 1998, by and among GST Network,
GST, GST USA and United States Trust Company of New York.
*10(a) Collateral Pledge and Security Agreement dated as of May 4,
1998, by and among GST Network, United States Trust Company of
New York and the holders of the Notes as defined therein.
**27 Financial Data Schedule.
- --------------------------
* Incorporated by reference to GST Network's Registration Statement on
Form S-4 (No.333-60645).
** Filed herewith.
(b) Reports on Form 8-K: None.
-5-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Vancouver, State of Washington, on the 30th day of March, 2000.
GST NETWORK FUNDING, INC.
By: /s/ Robert A. Ferchat
--------------------------------
Robert A. Ferchat,
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert A. Ferchat and Thomas M. Malone
his true and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities on March 30, 2000.
SIGNATURE TITLE
--------- -----
/s/ Robert A. Ferchat Chairman of the Board and Director
- ---------------------------
(Robert A. Ferchat)
/s/ Thomas M. Malone Acting President and Chief Executive Officer
- --------------------------- (Principal Executive Officer) and Director
(Thomas M. Malone)
/s/ George B. Cobbe Director
- ---------------------------
(George B. Cobbe)
/s/ Daniel L. Trampush Senior Vice President and Chief Financial Officer
- --------------------------- (Principal Financial Officer)
(Daniel L. Trampush)
-6-
<PAGE>
GST NETWORK FUNDING, INC.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..........................................................F - 2
Balance Sheets at December 31, 1999 and 1998..........................................F - 3
Statements of Operations
for the year ended December 31, 1999 and the
period from April 16, 1998 (date of inception)
to December 31, 1998.............................................................F - 4
Statements of Shareholder's Deficit for the year ended December 31,
1999 and the period from April 16, 1998 (date of inception)
to December 31, 1998.............................................................F - 5
Statements of Cash Flows
for the year ended December 31, 1999 and the
period from April 16, 1998 (date of inception)
to December 31, 1998.............................................................F - 6
Notes to Financial Statements.........................................................F - 7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
GST Network Funding, Inc.:
We have audited the accompanying balance sheets of GST Network Funding,
Inc. as of December 31, 1999 and 1998, and the related statements of operations,
shareholder's deficit, and cash flows for the year ended December 31, 1999 and
for the period from April 16, 1998 (date of inception) to December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the 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 financial statements referred to above present
fairly, in all material respects, the financial position of GST Network
Funding, Inc. as of December 31, 1999 and 1998, and the results of its
operations and cash flows for the year ended December 31, 1999 and for the
period from April 16, 1998 (date of inception) to December 31, 1998, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
Portland, Oregon
March 17, 2000
F-2
<PAGE>
GST NETWORK FUNDING, INC.
Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Restricted investments $ 9,848 $ 230,014
Notes receivable from parent 319,336 71,342
Commitment fees receivable from parent 24,942 14,256
Interest receivable from parent 6,851 852
Deferred financing costs, net 9,182 10,285
--------- ---------
Total assets $ 370,159 $ 326,749
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accrued liabilities $ 18 $ 52
Accrued interest payable - 396
Accrued income taxes payable to parent 22,827 8,472
Other payable to parent 4,306 519
--------- ---------
27,151 9,439
--------- ---------
Long-term debt 355,587 320,997
Shareholder's deficit:
Common shares:
1,000 shares authorized, 100 shares issued and outstanding,
$.01 par common shares - -
Additional paid-in capital 2,000 2,000
Accumulated deficit (14,579) (5,687)
--------- ---------
(12,579) (3,687)
--------- ---------
Total liabilities and shareholder's deficit $ 370,159 $ 326,749
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
GST NETWORK FUNDING, INC.
Statements of Operations
(In thousands, except share amounts)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1998
(DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ --------------
<S> <C> <C>
Revenues:
Interest income $ 31,536 $ 10,661
Commitment fee income 10,686 14,256
-------- --------
Total revenues 42,222 24,917
-------- --------
Operating costs and expenses:
Interest expense 36,759 22,132
-------- --------
Income before income taxes 5,463 2,785
-------- --------
Income tax expense:
Current 14,355 8,472
Deferred - -
-------- --------
14,355 8,472
-------- --------
Net loss $ (8,892) $ (5,687)
======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
GST NETWORK FUNDING, INC.
Statements of Shareholder's Deficit
(In thousands, except share amounts)
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, April 16, 1998
(at date of inception) 100 $ - $ 1 $ - $ 1
Capital investment by parent - - 1,999 - 1,999
Net loss - - - (5,687) (5,687)
------ ------ ---------- ----------- -------------
Balances, December 31, 1998 100 - 2,000 (5,687) (3,687)
Net loss - - - (8,892) (8,892)
------ ------ ---------- ----------- -------------
Balances, December 31, 1999 100 $ - $ 2,000 $(14,579) $(12,579)
------ ------ ---------- ----------- -------------
------ ------ ---------- ----------- -------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
GST NETWORK FUNDING, INC.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1998
(DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Operations:
Net loss $ (8,892) $ (5,687)
Adjustments to reconcile net loss to net cash
provided by operations:
Amortization of deferred financing costs 1,103 735
Accretion of interest 34,590 21,002
Changes in non-cash operating working capital:
Commitment fee receivable from parent (10,686) (14,256)
Interest receivable from parent (5,999) (852)
Other accrued liabilities (34) 52
Accrued interest payable (396) 396
Accrued income taxes payable to parent 14,355 8,472
Other payable to parent 3,787 519
------------ -------------
Cash provided by operations 27,828 10,381
------------ -------------
Investments:
Change in investments restricted for the
purchase of property and equipment 220,166 (230,014)
Notes receivable from parent (247,994) (71,342)
------------ -------------
Cash used in investing activities (27,828) (301,356)
------------ -------------
Financing:
Proceeds from long-term debt - 299,995
Deferred debt financing costs - (11,020)
Proceeds from investment by parent - 1,999
------------ -------------
Cash provided by financing activities - 290,974
------------ -------------
Increase (decrease) in cash and cash
equivalents - (1)
Cash and cash equivalents, beginning of period - 1
------------ -------------
Cash and cash equivalents, end of period $ - $ -
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
GST NETWORK FUNDING, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(In thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
GST Network Funding, Inc. (the Company) was formed on April 16, 1998.
The Company is a wholly-owned subsidiary of GST USA, Inc. (GST USA),
which is a wholly-owned subsidiary of GST Telecommunications, Inc.
(GST).
The Company's operations are limited to (i) purchasing equipment, (ii)
selling equipment to GST USA, (iii) receiving payments under
intercompany notes, and (iv) making payments of interest and principal
on the $500,000 aggregate principal amount at maturity of 10.5% Senior
Secured Discount Notes due 2008 (the Senior Secured Discount Notes).
RESTRICTED INVESTMENTS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES.
The Company classifies its restricted investments, consisting of
$9,848 and $230,014 at December 31, 1999 and 1998 respectively, in U.S.
Treasury securities as available-for-sale. These investments are
restricted for the purchase and installation of network assets.
Restricted investments are recorded at amortized cost which
approximates the fair value of such securities at December 31, 1999
and 1998.
DEFERRED FINANCING COSTS
Deferred financing costs, consisting of legal, accounting and
underwriting fees related to the May 1998 debt offering, have been
deferred and are being amortized to interest expense over the life of
the notes. Amounts amortized totaled $1,103 and $735 for the year ended
December 31, 1999 and for the period from April 16, 1998 (date of
inception) to December 31, 1998, respectively. The Company amortizes
deferred financing costs using the straight-line method.
F-7
<PAGE>
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
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
bases of assets and liabilities and their financial reporting amounts
at each year-end. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years 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.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for accrued
liabilities approximate fair values due to the short maturity of those
instruments.
The carrying value and estimated fair value of the Company's long-term
debt were $355,587 and $242,500, respectively, at December 31, 1999
and $320,992 and $239,555, respectively, at December 31, 1998. The
fair value of the Company's long-term debt was estimated based on
quoted market prices. The difference between the carrying amount and
the fair value of long-term debt results from changes in the economic
conditions of high-yield debt markets from May 4, 1998, when the
Company sold its debt securities, to December 31, 1998.
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 judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
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.
F-8
<PAGE>
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
(2) FINANCING ARRANGEMENTS
LONG-TERM DEBT
The Company's long-term debt consists of the following at December 31,
1999 and 1998:
<TABLE>
December 31,
----------------------
1999 1998
---------- ---------
<S> <C> <C>
Senior Secured Discount Notes, interest at 10.5% with semiannual interest
payments due commencing November 1, 2003, principal due May 1, 2008 $ 355,587 $ 320,997
========= =========
</TABLE>
ISSUANCE OF SENIOR SECURED DISCOUNT NOTES
The Company completed a private placement (the May Offering) under an
indenture (the Indenture) dated May 4, 1998 of $500,000 aggregate
principal amount at maturity ($299,995 initial accreted value) of 10.5%
Senior Secured Discount Notes due 2008 (the Senior Secured Discount
Notes or the Notes). The Notes were sold at a substantial discount, and
there will be no accrual of interest prior to May 2003 and no cash
payment of interest until November 2003. The net proceeds from the sale
of the Notes, approximately $288,900, are restricted for the
acquisition of telecommunications equipment and other related costs
as defined in the Indenture. The Notes are subject to certain debt
covenants. Pursuant to the Indenture, all purchased equipment will
be sold to GST USA for use in its telecommunications operations. In
exchange for the purchased equipment, GST USA will issue to the Company
intercompany notes due May 1, 2003 (the Intercompany Notes).
Additionally, in consideration for the Company making the net proceeds
from the Notes available to GST USA and for the Company facilitating
the purchase of GST USA's equipment, on each May 1 and November 1, GST
USA will pay to the Company a commitment fee equal to 4.5% per annum of
the amount by which the $500,000 principal amount at maturity exceeds
the amount of the Intercompany Notes then outstanding. The commitment
fee will be paid semiannually, commencing November 1, 1998, by GST USA
issuing promissory notes due May 1, 2003 (the Fee Notes) to the Company
in the amount of such fees. The Fee Notes and Intercompany Notes will
bear interest at 12.5% per annum, compounding semiannually, and will
be guaranteed by GST. The Notes are secured by the restricted
investment securities purchased with the proceeds from the sale of the
Notes, and will be secured by any equipment purchased with such
proceeds, the Fee Notes and Intercompany Notes.
The Indenture provides that GST USA will assume and become a direct
obligor on the Notes and GST will guarantee the Notes on May 1, 2003,
or earlier if permitted by the terms of their existing debt. Once
assumed, the Notes will be senior secured indebtedness of GST USA and
the note guarantee will be senior unsecured indebtedness of GST.
The Notes are redeemable at the option of GST USA, in whole or in part,
at any time, on or after May 1, 2003 initially at 105.25% of their
principal amount at maturity, plus accrued and unpaid interest,
declining ratably to 100% on or after May 1, 2006. If on May 1, 2003,
GST USA is prohibited from assuming all of the Notes, the Company will
redeem the portion of the Notes that cannot be assumed at 105.25% of
their principal amount at maturity, plus accrued interest and unpaid
interest.
F-9
<PAGE>
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
DEBT COVENANTS AND CLASSIFICATION OF LONG-TERM DEBT
In November 1998, the Company informed the trustee who represents
the holders of the Notes that it may have violated certain technical
covenants contained in the Indentures related to such notes. In
particular, the Company advised the trustee that the transfer to
Global Light Telecommunications, Inc. (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 have not declared a default,
as defined within the indentures of the Notes.
On September 16, 1999, the Company received $30,000 in cash from Global
and others in connection 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 issuance. Accordingly, the Company has
classified the related debt obligation as non-current in the
accompanying balance sheets.
(3) RELATED PARTY TRANSACTIONS
The Company acts as a purchasing agent for GST USA and sells to GST USA
the equipment it purchases with the proceeds from the May Offering.
The note receivable from parent of $319,336 and $71,342, at December
31, 1999 and 1998, respectively, represents equipment purchases for GST
USA and compounded interest. The note receivable is guaranteed by GST
and bears interest at 12.5%, compounded semiannually on May and
November 1, and is payable in full on May 1, 2003. Interest income
earned on the note receivable from parent totaled $23,877 and $743 for
the year ended December 31, 1999 and the period from April 16, 1998
(date of inception) to December 31, 1998, respectively.
As discussed in note 2, GST USA pays a commitment fee to the Company in
consideration for the Company facilitating the purchase of equipment
for GST USA. Commitment fee income totaled $10,686 and $14,256 for the
year ended December 31, 1999 and the period from April 16, 1998 (date
of inception) to December 31, 1998, respectively. Interest income on
the Fee Notes totaled $2,217 and $230 for the year ended December 31,
1999 and the period from April 16, 1998 (date of inception) to December
31, 1998, respectively.
The payable to parent of $4,306 and $519 at December 31, 1999 and, 1998
respectively, consists of cash advances from GST USA for the purchase
of equipment and the payment of expenses related to the May Offering.
F-10
<PAGE>
GST NETWORK FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
(4) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
PERIOD FROM APRIL 16, 1998
(DATE OF INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------- -----------------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal......................... $ 14,355 $ --- $ 14,355 $ 8,472 $ --- $ 8,472
State........................... --- --- --- --- --- ---
---------- ---------- ---------- ---------- ---------- ----------
$ 14,355 $ --- $ 14,355 $ 8,472 $ --- $ 8,472
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The provision for income taxes differs from the "expected" amount
computed by applying the U.S. federal corporate rate as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1998
(DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Computed "expected"
income tax benefit.......... $ 1,857 $ 947
Effect of change in
valuation allowance......... 12,498 7,525
-------------- --------------
Actual tax expense.............. $ 14,355 $ 8,472
-------------- --------------
-------------- --------------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1999 and 1998, are
derived primarily from interest expense not currently deductible for tax
purposes. Gross deferred tax assets and liabilities amount to $20,023 and
$-0-, respectively, at December 31, 1999, and $7,525 and $-0-,
respectively, at December 31, 1998.
The valuation allowance for deferred tax assets as of December 31, 1999
and 1998 was $20,023 and $7,525, respectively. The net change in the
total valuation allowance for the year ended December 31, 1999 and the
period from April 16, 1998 (date of inception) to December 31, 1998 was
an increase of $12,498 and an increase of $7,525, respectively.
The Company files consolidated income tax returns with its parent
corporation. However, income tax expense (benefit) is computed as if the
Company filed on a single entity basis. The tax related balance due to
the parent corporation as of December 31, 1999 and 1998 was $22,827 and
$8,472, respectively.
F-11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GST
NETWORK'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 370,159,000
<CURRENT-LIABILITIES> 27,151,000
<BONDS> 355,587,000
0
0
<COMMON> 0
<OTHER-SE> (12,579,000)
<TOTAL-LIABILITY-AND-EQUITY> 370,159,000
<SALES> 42,222,000
<TOTAL-REVENUES> 42,222,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,759,000
<INCOME-PRETAX> 5,463,000
<INCOME-TAX> 14,355,000
<INCOME-CONTINUING> (8,892,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,892,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
