<PAGE> 1
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, 1998
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 EQUIPMENT FUNDING, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 91-1785734
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 Main Street, Vancouver, WA 98663
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 356-7100
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 13,
1998, there were outstanding 100 shares of common stock, $.01 par value per
share, of the Registrant.
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GST EQUIPMENT FUNDING, INC.
INDEX
PAGE(S)
-------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Balance Sheets - September 30, 1998 (unaudited)
and December 31, 1997 2
Statements of Operations - Three Months Ended
September 30, 1998 and 1997 and Nine Months Ended
September 30, 1998 and period from March 5, 1997
(date of inception) to September 30, 1997 (unaudited) 3
Statements of Cash Flows - Nine Months Ended
September 30, 1998 and period from March 5, 1997
(date of inception) to September 30, 1998 (unaudited) 4
Notes to Financial Statements (unaudited) 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE
NARRATIVE) 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION 7
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 7
SIGNATURES 8
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GST EQUIPMENT FUNDING, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997(1)
--------------------- --------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 92 $ 373
Restricted investments 32,082 30,656
--------- ---------
Total current assets 32,174 31,029
--------- ---------
Restricted investments 40,085 112,719
Notes receivable from parent 176,243 109,164
Interest receivable from parent 10,225 2,670
Deferred financing costs, net 8,431 8,994
--------- ---------
$ 267,158 $ 264,576
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accrued interest payable $ 14,630 $ 5,852
Other payable to parent 1,127 1,260
--------- ---------
Total current liabilities 15,757 7,112
--------- ---------
Long term debt 265,000 265,000
Shareholders' deficit
Common stock:
Authorized - 1,000 of $.01 par common stock;
issued and outstanding - 100 shares -- --
Additional paid-in capital 1,000 1,000
Accumulated deficit (14,599) (8,536)
--------- ---------
Total shareholders' deficit (13,599) (7,536)
--------- ---------
$ 267,158 $ 264,576
========= =========
</TABLE>
(1) The information in this column was derived from GST Equipment Funding's
audited financial statements as of December 31, 1997.
See notes to financial statements.
2
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GST EQUIPMENT FUNDING, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months Period from date
Ended September 30, Ended September 30, of inception
---------------------- -------------------- (March 5, 1997)
1998 1997 1998 to September 30, 1997
-------- -------- -------- ---------------------
<S> <C> <C> <C> <C>
Revenue:
Interest income $ 7,632 $ 5,294 $ 21,017 $ 8,248
Operating costs and expenses:
Interest expense 9,023 9,022 27,080 13,824
-------- -------- -------- --------
Loss before income taxes (1,391) (3,728) (6,063) (5,576)
Income taxes -- 1,676 -- 2,680
-------- -------- -------- --------
Net loss $ (1,391) $ (5,404) $ (6,063) $ (8,256)
======== ======== ======== ========
</TABLE>
See notes to financial statements.
3
<PAGE> 5
GST EQUIPMENT FUNDING, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
Nine Months date of inception
Ended September 30, (March 5, 1997)
1998 to September 30, 1997
------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (6,063) (8,256)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of deferred financing costs 745 364
Changes in non-cash operating working capital:
Interest receivable from parent (7,555) (3,655)
Accrued interest payable 8,778 13,460
Accrued income taxes payable to parent -- 2,680
Other payable to parent (133) 1,905
------- --------
Net cash provided by (used in) operating activities (4,228) 6,498
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in investments restricted for fixed asset purchases 54,526 (74,701)
Notes receivable from parent (67,079) (91,274)
------- --------
Net cash used in investing activities (12,553) (165,975)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt -- 265,000
Equity investment by parent -- 1,000
Change in investments restricted to finance interest payments 16,682 (95,974)
Deferred financing costs (182) (9,546)
------- --------
Net cash provided by financing activities 16,500 160,480
------- --------
Net increase (decrease) in cash and cash equivalents (281) 1,003
Cash and cash equivalents at beginning of period 373 --
------- --------
Cash and cash equivalents at end of period 92 1,003
======= ========
</TABLE>
See notes to financial statements.
4
<PAGE> 6
GST EQUIPMENT FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared by GST Equipment Funding, Inc. ("GST Funding"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. 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 such rules and regulations. 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 Funding's audited financial statements for the three
months ended December 31, 1997, as included in the GST Funding's Transition
Report on Form 10-K for the three month transition period ended December 31,
1997.
2. NET LOSS PER SHARE AND SHAREHOLDER'S EQUITY
GST Funding does not have any equity instruments that are considered
common stock equivalents, and weighted average common shares total only 100 for
the periods presented, all of which are owned by GST USA, Inc. Loss per share
data is meaningless and is not presented in the accompanying financial
statements.
3. RECENT DEVELOPMENTS
GST Funding and GST Telecommunicatons, Inc. ("GST") are investigating
certain matters with respect to compliance with covenants contained in the
indentures relating to certain of GST's and its subsidiaries' outstanding
notes. See Item 5 of Part II hereof.
5
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE NARRATIVE).
OVERVIEW
GST Equipment Funding, Inc. ("GST Funding") was formed on March 5, 1997
for the purpose of issuing its 13.25% Senior Secured Notes due 2007 (the
"Secured Notes") and financing the purchase of telecommunications equipment. GST
Funding acts as purchasing agent for GST USA, Inc. ("GST USA") and sells to GST
USA the equipment it purchases with proceeds from the issuance of the Secured
Notes. GST Funding has only a limited operating history.
As of September 30, 1998, GST Funding has purchased approximately $162.9
million of equipment and holds restricted investments of approximately $72.2
million restricted for the acquisition of equipment and the payment of interest.
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").
OPERATIONS
The operations of GST Funding are limited to (i) purchasing equipment,
(ii) selling equipment, (iii) receiving payments under intercompany notes, (iv)
making payments of interest and principal on the Secured Notes, and (v)
fulfilling its obligations under the indenture relating to the Secured Notes,
the pledge agreement relating to the security interest in the Secured Notes and
the registration rights agreement relating to the Secured Notes. GST Funding
satisfied its obligations under such registration rights agreement in November
1997, upon the consummation of an exchange offer for the Secured Notes.
LIQUIDITY AND CAPITAL RESOURCES
In May 1997, GST Funding issued $265.0 million of Secured Notes in a
private placement. Of the $255.8 million of net proceeds from the issuance of
the Secured Notes, as of September 30, 1998 approximately $93.8 million had been
used to purchase securities pledged to fund the first six interest payments on
the Secured Notes (the first two payments totaling $33.9 million having been
made as of September 30, 1998) and approximately $162.9 million had been used to
purchase telecommunications equipment ($41.5 million of which was used to
refinance intercompany indebtedness). The indenture governing the Secured Notes
includes restrictive covenants which, among other items, limit or restrict
additional indebtedness incurred by GST Funding, GST USA and GST, investment in
certain subsidiaries and the payment of dividends. GST Funding and GST are
investigating certain matters with respect to compliance with covenants
contained in the indentures relating to certain of GST's and its subsidiaries'
outstanding notes. See Item 5 of Part II hereof.
6
<PAGE> 8
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The following matters are related to the indentures respectively governing the
13-7/8% Senior Discount Notes due 2005, the 13-7/8% Convertible Senior
Subordinated Discount Notes due 2005, the 12-3/4% Senior Subordinated Accrual
Notes due 2007, the 13-1/4% Senior Secured Notes due 2007 and the 10-1/2%
Senior Secured Discount Notes due 2008, in respect of each of which,
GST Telecommunications, Inc. ("the Company") or its subsidiaries', is an
obligor.
In connection with the Company's preparation of the California Superior Court
litigation, referenced in the Company's Form 10-Q for the period ending
September 30, 1998:
The Company has reviewed the transfer of its interest in a
telecommunications project to be developed in Mexico, to Global Light
Telecommunications, Inc. ("GLT") (formerly known as GST Global
Telecommunications, Inc.) which transfer forms the basis for certain claims in
that litigation. As a result of the transfer GLT was engaged in business outside
the continental United States, and because it did not meet certain other
technical requirements specified in the indentures, the Company has been advised
that this transfer may constitute a violation of indenture covenants limiting
investments in entities that conduct business outside the continental United
States and Hawaii. Furthermore, this transfer was one for which the Company has
not yet received any consideration, which may also constitute a violation of
indenture covenants respecting consideration to be received from sales to
affiliated entities. The litigation has been instituted to recover this asset or
its fair market value.
The Company has become aware of certain transactions occurring in 1997
which may have comprised an investment of approximately $.4 million in a
business entity that conducted business operations in Guam and the Northern
Mariana Islands. The Company has been advised that these transactions may have
constituted violations of indenture covenants limiting investments in entities
that conduct business outside of the continental United States and Hawaii.
The Company has reviewed its acquisition in 1998 of certain operating
assets located in Guam, purchased for $2.0 million of cash and $.5 million of
liabilities for future services to be provided to the seller in that
transaction. Because this activity is conducted outside the continental United
States it should have been placed in an "unrestricted subsidiary." In the
absence of such a subsidiary, the Company has been advised that this transaction
may constitute a violation of indenture covenants respecting its activities
outside the continental United States and Hawaii. The Company intends to
transfer this activity to an unrestricted subsidiary.
The Company has provided notice to the indenture trustee respecting
these matters and correcting earlier annual reports required by the indenture
in these respects.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
7
<PAGE> 9
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 13, 1998 GST EQUIPMENT FUNDING, INC.
(Registrant)
/s/ Daniel L. Trampush
----------------------
Daniel L. Trampush,
(Senior Vice President and
Chief Financial Officer)
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GST
FUNDING'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 91,580
<SECURITIES> 32,082,453
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,174,033
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 267,157,447
<CURRENT-LIABILITIES> 15,757,136
<BONDS> 265,000,000
0
0
<COMMON> 1
<OTHER-SE> (13,599,690)
<TOTAL-LIABILITY-AND-EQUITY> 267,157,447
<SALES> 0
<TOTAL-REVENUES> 21,016,828
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,079,440
<INCOME-PRETAX> (6,062,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,062,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,062,612)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
