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Previous: BASIC TECHNOLOGIES INC, 10QSB, EX-27, 2000-11-20 |
Next: GST NETWORK FUNDING INC, 10-Q, EX-27, 2000-11-20 |
UNITED STATES
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, 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) |
|
| 4001 Main Street, Vancouver, WA (Address of Principal Executive Offices) |
|
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 November 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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Page(s) |
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| PART I: Financial Information | ||||
| ITEM 1. | FINANCIAL STATEMENTS: | |||
| Balance Sheets—September 30, 2000 and December 31, 1999 | 2 | |||
| Statements of Operations—Three and Nine Months Ended September 30, 2000 and 1999 | 3 | |||
| Statements of Cash Flows—Nine Months Ended September 30, 2000 and 1999 | 4 | |||
| Notes to Financial Statements | 5 | |||
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE NARRATIVE) | 6-9 | ||
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 9 | ||
| PART II: Other Information | ||||
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | 9 | ||
| SIGNATURES | 10 | |||
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ITEM 1. FINANCIAL STATEMENTS
GST NETWORK FUNDING, INC.
BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| ASSETS |
September 30, 2000 |
December 31, 1999(1) |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Current assets— | |||||||||||
| Cash and cash equivalents | — | — | |||||||||
| Restricted investments | 3,510 | 9,848 | |||||||||
| Notes receivable from parent (see Note 6) | 341,431 | 319,336 | |||||||||
| Commitment fees receivable from parent (see Note 6) | 27,511 | 24,942 | |||||||||
| Interest receivable from parent (see Note 6) | 2,001 | 6,851 | |||||||||
| Other receivable from parent (see Note 6) | 1,322 | — | |||||||||
| Deferred financing costs, net | 8,356 | 9,182 | |||||||||
| Total assets | $ | 384,131 | $ | 370,159 | |||||||
| LIABILITIES AND SHAREHOLDER'S DEFICIT | |||||||||||
| Current liabilities not subject to compromise: | |||||||||||
| Accrued liabilities | $ | 12 | $ | 18 | |||||||
| Accrued income taxes payable to parent | 29,318 | 22,827 | |||||||||
| Other payable to parent | — | 4,306 | |||||||||
| Total current liabilities not subject to compromise | 29,330 | 27,151 | |||||||||
| Liabilities subject to compromise (see Note 3) | 369,499 | — | |||||||||
| Long-term debt | — | 355,587 | |||||||||
| 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 | (16,698 | ) | (14,579 | ) | |||||||
| Total shareholder's deficit | (14,698 | ) | (12,579 | ) | |||||||
| Total liabilities and shareholder's deficit | $ | 384,131 | $ | 370,159 | |||||||
See accompanying notes to financial statements.
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GST NETWORK FUNDING, INC.
Statements of Operations
(In thousands)
(Unaudited)
| |
Three Months Ended September 30, |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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2000 |
1999 |
2000 |
1999 |
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| Revenues: | |||||||||||||||||
| Interest income | $ | 40 | 8,553 | 16,521 | 21,400 | ||||||||||||
| Commitment fee income | — | 2,267 | 2,571 | 12,461 | |||||||||||||
| Total revenues | 40 | 10,820 | 19,092 | 33,861 | |||||||||||||
| Operating costs and expenses: | |||||||||||||||||
| Interest expense (contractual interest of $9,655 and $14,431 not recorded for the three- and nine-month periods ended September 30, 2000) | 275 | 9,414 | 14,720 | 27,461 | |||||||||||||
| Income before reorganization expense and income taxes |
(235 | ) | 1,406 | 4,372 | 6,400 | ||||||||||||
| Reorganization expenses (see Note 4) | — | — | — | — | |||||||||||||
| Income (loss) before income taxes | (235 | ) | 1,406 | 4,372 | 6,400 | ||||||||||||
| Income tax expense: | |||||||||||||||||
| Current | 14 | 3,679 | 6,491 | 11,513 | |||||||||||||
| Deferred | — | — | — | — | |||||||||||||
| 14 | 3,679 | 6,491 | 11,513 | ||||||||||||||
| Net loss | $ | (249 | ) | $ | (2,273 | ) | $ | (2,119 | ) | $ | (5,113 | ) | |||||
See accompanying notes to financial statements.
3
GST NETWORK FUNDING, INC.
Statements of Cash Flows
(In thousands)
(Unaudited)
| |
Nine Months Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|
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2000 |
1999 |
|||||||||
| Operations: | |||||||||||
| Net loss | $ | (2,119 | ) | (5,113 | ) | ||||||
| Items not involving cash: | |||||||||||
| Amortization of deferred financing costs | 826 | 827 | |||||||||
| Accretion of interest | 13,894 | 25,568 | |||||||||
| Changes in non-cash operating working capital: | |||||||||||
| Commitment fee receivable from parent | (2,571 | ) | (12,461 | ) | |||||||
| Interest receivable from parent | 4,850 | (10,629 | ) | ||||||||
| Other accrued liabilities | — | (22 | ) | ||||||||
| Accrued interest payable | — | 291 | |||||||||
| Pre-petition accounts payable and accrued liabilities | (6 | ) | |||||||||
| Accrued income taxes payable to parent | 6,491 | 11,513 | |||||||||
| Other payable to parent | (5,608 | ) | 201 | ||||||||
| Cash provided by operations | 15,757 | 10,175 | |||||||||
| Investing: | |||||||||||
| Change in investments restricted for fixed assets purchases | 6,338 | 173,909 | |||||||||
| Notes receivable from parent | (22,095 | ) | (184,084 | ) | |||||||
| Cash used in investing activities | (15,757 | ) | (10,175 | ) | |||||||
| 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 | $ | — | $ | — | |||||||
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. ("GST Network") and GST USA, Inc. ("GST USA"), filed voluntary petitions for protection from creditors under Chapter 11 of the United States Bankruptcy Code in the District of Delaware ("Bankruptcy Code"). The Company and its subsidiaries (collectively the "Debtors") are currently operating as debtors-in-possession under the supervision of the United States District 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 $50,000 and the potential for up to an additional $75,000 in cash. On May 26, 2000, the Bankruptcy Court entered an order approving the initial $30,000 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 $40,000 of the $50,000 in financing mentioned above. Based upon current unencumbered assets, the additional $10,000 is available without the consent of the bondholders. To date, we have not drawn on the Heller credit facility, or sought bondholder consent.
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 as of August 11, 2000. On September 11, 2000, the Company and Time Warner Telecom Inc. executed a definitive asset purchase agreement which provides for the purchase of substantially all of the Company's assets, excluding certain assets in Hawaii and certain non-core businesses, for $690,000. On September 21, 2000, the Bankruptcy Court approved the definitive asset purchase agreement between the Company and Time Warner Telecom Inc. Closing of the sale is anticipated in the last quarter of 2000, or first quarter of 2001, subject to regulatory approvals and other customary terms and conditions. In addition, the Company is seeking purchasers for certain of its remaining assets.
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.
2. BASIS OF PRESENTATION
The accompanying financial statements of 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
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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 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 September 30, 2000, liabilities subject to compromise consist of the following:
| Accounts payable | $ | 18 | ||||
| Long-term debt | 369,481 | |||||
| Total | $ | 369,499 | ||||
4. REORGANIZATION EXPENSES
No reorganization expenses related to the Chapter 11 filing, were recorded by GST Network for the three- and nine-month periods ended September 30, 2000. All recorded expenses for those periods are included in GST'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, loss per share data is meaningless and is not presented in the accompanying financial statements.
6. IMPAIRMENT OF ASSETS AND COLLECTABILITY OF INTERCOMPANY RECEIVABLES
As a result of entering into the definitive asset purchase agreement with Time Warner Telecom Inc. in the amount of $690,000 and anticipated proceeds from the sale or sales of all remaining assets, GST USA recorded an impairment charge, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," of $256,000 during the three-months ended September 30, 2000.
As a result of GST USA's decision to sell its assets for less than the book value of those assets, the collectability of GST Network's receivables from GST USA, which total $372,265 at September 30, 2000, is in doubt. While it is likely that these receivables are impaired, the extent of impairment is not currently measurable. The amount collected by GST Network will be determined upon the completion of all asset sales and the allocation of proceeds via the bankruptcy process.
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 strategy, future operations, financial position, projected costs, prospects, plans and objectives of management.
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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 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 September 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 the 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.
Recent Developments
On May 17, 2000, GST and its subsidiaries, including GST Network and GST USA, 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 District Court for the
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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 $50.0 million and the potential for up to an additional $75.0 million in cash. On May 26, 2000, the Bankruptcy Court entered an order approving the initial $30.0 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 $40.0 million of the $50.0 million in financing mentioned above. Based upon current unencumbered assets, the additional $10.0 million is available without the consent of the bondholders. To date, we have not drawn on the Heller credit facility, or sought bondholder consent.
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 as of August 11, 2000. On September 11, 2000, the Company and Time Warner Telecom Inc. executed a definitive asset purchase agreement which provides for the purchase of substantially all of the Company's assets, excluding certain assets in Hawaii and certain non-core businesses, for $690.0 million. On September 21, 2000, the Bankruptcy Court approved the definitive asset purchase agreement between the Company and Time Warner Telecom Inc. Closing of the sale is anticipated in the last quarter of 2000, or first quarter of 2001, subject to regulatory approvals and other customary terms and conditions. In addition, the Company's seeking purchasers for certain of its remaining assets.
On July 26, 2000, the Bankruptcy Court approved the modification of existing construction and capacity contracts between us and 360networks, Level (3) Communications ("Level (3)"), and Williams Communications ("Williams"). We agreed to assume certain of our contracts with the three companies within the meaning of the Bankruptcy Code and to make other commitments, in return for which 360networks, Level (3), and Williams agreed to various changes in their relationships with us. The commitments by 360networks, Level (3), and Williams resulted in the acceleration of cash paid to us for our provision of conduits or fiber to the three companies and reduce the near-term cash paid by us for certain construction obligations, resulting in a net cash flow benefit of approximately $26.0 million, of which approximately $20.0 million had been realized as of September 30, 2000. These modifications, in addition to the Heller credit facility, should enable us to finance our operations pending disposition of our assets.
For the three-months ended September 30, 2000, GST USA recorded an impairment of assets charge of $256.0 million. As a result of GST USA's decision to sell its assets for less than the book value of those assets, the collectability of GST Network's receivables from GST USA, which total $372,265 at September 30, 2000, is in doubt. While it is likely that these receivables are impaired, the extent of impairment is not currently measurable. The amount collected by GST Network will be determined upon the completion of all asset sales and the allocation of proceeds via the bankruptcy process.
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.
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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 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 $245,000 at September 30, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(b) Reports on Form 8-K
Reference is made to the report on Form 8-K filed on September 12, 2000, on which we reported the following:
On September 11, 2000, the Company and Time Warner Telecom Inc. executed a definitive asset purchase agreement which provides for the purchase of substantially all of the Company's assets, excluding certain assets in Hawaii and certain non-core businesses for $690.0 million.
Reference is made to the report on Form 8-K filed on October 4, 2000, on which we reported the following:
On September 21, 2000, the Company announced the U.S. District Court for the District of Delaware approved the definitive asset purchase agreement between the Company and Time Warner Telecom Inc. Closing of the purchase is subject to regulatory approvals and other customary terms and conditions.
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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 November 20, 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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