<PAGE> 1
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, 1998.
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 of (IRS Employer Identification
incorporation or organization Number)
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.
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
<PAGE> 2
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: At March 29, 1999,
there were outstanding 100 shares of the Registrant's common stock, $.01 par
value per share.
<PAGE> 3
ITEM 1. BUSINESS.
OVERVIEW
GST Equipment Funding, Inc. ("GST Funding") is a special purpose
finance subsidiary of GST Telecommunications, Inc. ("GST"). GST Funding was
formed to issue its 13 1/4% Senior Secured Notes due 2007 (the "Secured Notes")
that were sold in a private placement in May 1997 (the "Secured Notes Offering")
and to purchase equipment with the proceeds of the Secured Notes Offering. GST
Funding acts as a purchasing agent for GST USA, Inc., a wholly owned subsidiary
of GST and the parent of GST Funding ("GST USA") and sells to GST USA the
equipment it purchases. Ultimately, such equipment is leased to the operating
subsidiaries of GST by GST USA. Of the $255.8 million of net proceeds from the
issuance of the Secured Notes, as of December 31, 1998 approximately $93.8
million had been used to purchase securities pledged to fund the first six
interest payments on the Secured Notes ($43.8 million of which was used to make
the first three interest payments in November 1997, May 1998 and November 1998)
and approximately $194.2 million had been used to purchase telecommunications
equipment ($41.5 million of which was used to refinance intercompany
indebtedness).
GST provides a broad range of integrated telecommunications products
and services, primarily to business customers located in the western continental
states. As a facilities-based integrated communications provider ("ICP"), GST
operates state-of-the-art, digital telecommunications networks that represent an
alternative to incumbent local exchange carriers. GST's full line of products,
which offer a "one-stop" customer-focused solution to the telecommunications
services requirements of its customers, include local dial tone, long distance,
Internet, data transmission and private line services. With the turn-up of its
Virtual Integrated Transport and Access ("VITA") network in the fiscal year
ended December 31, 1998, GST became one of the first ICPs to develop and deploy
a converged network.
ITEM 2. PROPERTIES.
GST Funding neither owns nor leases material properties.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which GST Funding is a
party. GST Funding knows of no threatened or pending material legal action
against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not required.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no established public trading market for GST Funding's common
equity. All of the issued and outstanding shares of such common equity are owned
by GST USA.
ITEM 6. SELECTED FINANCIAL DATA.
Not required.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (REDUCED DISCLOSURE NARRATIVE).
OVERVIEW
GST Funding was formed on March 5, 1997 for the purpose of issuing the
Secured Notes and financing the purchase of telecommunications equipment. GST
Funding acts as purchasing agent for GST USA and sells to GST USA the equipment
it purchases with the proceeds from the Secured Notes Offering. GST Funding has
only a limited operating history.
-1-
<PAGE> 4
As of December 31, 1998, GST Funding had purchased approximately $194.2
million of equipment and held restricted investments of approximately $50.0
million restricted for 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.
RECENT DEVELOPMENTS
GST, GST USA, GST Funding and GST Network Funding, Inc. (the "GST
Companies") are parties to certain indentures and have issued or guaranteed
notes governed by those indentures. In November 1998, the GST Companies notified
United States Trust Company of New York, as trustee under the indentures, that
certain actions by GST and its subsidiaries may not have been in compliance with
the technical requirements of the restrictive covenants contained in the
indentures. In particular, the GST Companies disclosed that a series of
transactions involving Global Light Telecommunications, Inc. ("Global") may have
resulted in technical non-compliance with the indentures. The GST Companies are
currently conducting a review of the relevant transactions and intend to
vigorously pursue any necessary action to cure the potential non-compliances.
GST has initiated litigation against Global and others in an effort to cure any
technical covenant violations that may have resulted from the transactions
involving Global.
In February 1999, the trustee informed the note holders of the
potential violations. Pursuant to the definitions contained within the
indentures of each of the notes described above, no default has been declared
and no event of default has occurred. GST Funding has not classified the related
debt obligations as current in its consolidated financial statements because
management believes it is probable that, in the event that the holders declared
a default, the GST companies would be able to take corrective actions to cure
any objectively determinable violations within the prescribed grace period.
While GST Funding believes that any non-compliances can be cured, GST
Funding cannot offer any assurance that the litigation will be successful or
that any other potential cures will be effected in a timely manner or be
sufficient. In the event that the GST Companies have violated their indentures
and do not cure the violations, the holders of the notes issued under the
indentures could demand repayment of the notes, discontinue disbursements of
cash proceeds of the most recent notes and assert other remedies against the GST
Companies. If any of these events occurred, the GST Companies would not have
sufficient liquid assets to repay the notes.
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
At December 31, 1998, GST Funding had restricted investments of
approximately $50.0 million. On May 13, 1997, GST Funding completed the Secured
Notes Offering, consisting of $265.0 million in Secured Notes. Of the $255.8
million of net proceeds from the issuance of the Secured Notes, as of December
31, 1998 approximately $93.8 million had been used to purchase securities
pledged to fund the first six interest payments on the Secured Notes ($43.8
million of which was used to make the first three interest payments in November
1997, May 1998 and November 1998) and approximately $194.2 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 and GST, investment in certain
subsidiaries and the payment of dividends.
GST Funding may have committed certain technical indenture covenant
violations, and GST Funding has notified the indenture trustee in this regard.
See "Recent Developments."
-2-
<PAGE> 5
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE MARKET RISK
GST Funding has fixed income investments consisting of cash equivalents
and short-term investments in U.S. government debt instruments. See note 1 to
the Financial Statements for information about investments in U.S. government
debt instruments.
Interest income earned on GST Funding's investment portfolio is
affected by changes in the general level of U.S. interest rates. GST Funding
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 predominantly short term. The fair value of each investment approximates
amortized cost, and long term securities have maturities of eighteen months or
less.
GST Funding does not use derivative financial instruments to manage its
interest rates. GST Funding's investments had a book value of $265,000 and a
market value of $273,933 at December 31, 1998.
MARKET PRICE RISK
GST Funding has risk exposure associated with the market price on its
publicly traded long-term debt. These bonds are recorded at book value, which
could vary from current market prices.
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 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Not required.
ITEM 11. EXECUTIVE COMPENSATION.
Not required.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Not required.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not required.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements: see the Index to Financial Statements.
(2) Financial Statement Schedules: Not applicable.
(3) Exhibits:
*3(a) Certificate of Incorporation of GST Funding.
*3(b) By-Laws of GST Funding.
*4(a) Indenture dated as of May 13, 1997, by and among GST Funding, GST, GST
USA and United States Trust Company of New York.
*10(a) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
and among GST Funding, 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 Funding's Registration Statement on
Form S-4 (No. 333-33601).
-3-
<PAGE> 6
** Filed herewith.
(b) Reports on Form 8-K: None.
-4-
<PAGE> 7
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GST Equipment Funding, Inc.
PAGE
<S> <C>
Independent Auditors' Report ......................................... F-2
Balance Sheets at December 31, 1998 and 1997 ......................... F-3
Statements of Operations for the year ended December 31,
1998, the three-month period ended December 31, 1997 and the period
from March 5, 1997 (date of inception) to September 30, 1997 ....... F-4
Statements of Shareholder's (Deficit) Equity for the year
ended December 31, 1998, the three-month period ended December 31,
1997 and the period from March 5, 1997 (date of inception) to
September 30, 1997 ................................................. F-5
Statements of Cash Flows for the year ended December 31,
1998, the three-month period ended December 31, 1997 and the period
from March 5, 1997 (date of inception) to September 30, 1997 ....... F-6
Notes to Financial Statements ......................................... F-7
</TABLE>
F-1
<PAGE> 8
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
GST Equipment Funding, Inc.:
We have audited the accompanying balance sheets of GST Equipment Funding, Inc.
as of December 31, 1998 and 1997, and the related statements of operations,
shareholder's deficit, and cash flows for the year ended December 31, 1998, the
three-month period ended December 31, 1997 and for the period from March 5, 1997
(date of inception) to September 30, 1997. 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 generally accepted auditing
standards. 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 Equipment Funding, Inc. as
of December 31, 1998 and 1997, and the results of its operations and cash flows
for the year ended December 31, 1998, the three-month period ended December 31,
1997 and for the period from March 5, 1997 (date of inception) to September 30,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
March 1, 1999
F-2
<PAGE> 9
GST EQUIPMENT FUNDING, INC.
Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash ........................................... $ -- $ 373
Restricted investments ......................... 32,759 30,656
--------- ---------
32,759 31,029
--------- ---------
Restricted investments ............................. 17,244 112,719
Notes receivable from parent ....................... 194,228 109,164
Interest receivable from parent .................... 4,812 2,670
Deferred financing costs, net ...................... 8,187 8,994
--------- ---------
224,471 233,547
--------- ---------
$ 257,230 $ 264,576
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accrued interest payable ....................... 5,852 5,852
Accrued income taxes payable to parent ......... -- --
Other payable to parent ........................ 1,037 1,260
--------- ---------
6,889 7,112
--------- ---------
Long-term debt ..................................... 265,000 265,000
Shareholder's deficit:
Common stock:
Authorized - 1,000 of $.01 par
common shares; issued and
outstanding - 100 shares ................... -- --
Additional paid-in capital ..................... 1,000 1,000
Accumulated deficit ............................ (15,659) (8,536)
--------- ---------
(14,659) (7,536)
--------- ---------
$ 257,230 $ 264,576
========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 10
GST EQUIPMENT FUNDING, INC.
Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
THREE-MONTH (DATE OF
YEAR ENDED PERIOD ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Interest income ..................... $ 28,979 $ 6,059 $ 8,248
-------- -------- --------
Total revenues ............ 28,979 6,059 8,248
Operating costs and expenses:
Interest expense .................... 36,102 9,019 13,824
-------- -------- --------
Loss before income taxes .. (7,123) (2,960) (5,576)
-------- -------- --------
Income tax expense (benefit):
Current ............................. -- (2,680) 2,680
Deferred ............................ -- -- --
-------- -------- --------
-- (2,680) 2,680
-------- -------- --------
Net loss .................. $ (7,123) $ (280) $ (8,256)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 11
GST EQUIPMENT FUNDING, INC.
Statements of Shareholder's Deficit
(In thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, at date of inception 100 $ -- $ 1 $ 1 $ 1
Capital investment by parent -- -- 999 -- 999
Net loss .................... -- -- -- (8,256) (8,256)
-------- --------- -------- -------- --------
Balance, September 30, 1997 . 100 -- 1,000 (8,256) (7,256)
Net loss .................... -- -- -- (280) (280)
-------- --------- -------- -------- --------
Balance, December 31, 1997 .. 100 -- 1,000 (8,536) (7,536)
Net loss .................... -- -- -- (7,123) (7,123)
-------- --------- -------- -------- --------
Balance, December 31, 1998 .. 100 $ -- $ 1,000 $(15,659) $(14,659)
======== ========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 12
GST EQUIPMENT FUNDING, INC.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
THREE-MONTH (DATE OF
YEAR ENDED PERIOD ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Operations:
Net loss ...................................... $ (7,123) $ (280) $ (8,256)
Items not involving cash:
Amortization of deferred financing costs .... 989 241 364
Changes in non-cash operating working capital:
Interest receivable from parent ............. (2,142) 985 (3,655)
Accrued interest payable .................... -- (7,608) 13,460
Accrued income taxes payable to parent ...... -- (2,680) 2,680
Other payable to parent ..................... (223) (645) 1,905
--------- --------- ---------
Cash (used in) provided by operations (8,499) (9,987) 6,498
--------- --------- ---------
Investing:
Change in investments restricted for
fixed asset purchases ....................... 62,484 12,217 (74,701)
Notes receivable from parent .................. (85,064) (17,890) (91,274)
--------- --------- ---------
Cash used in investing activities ... (22,580) (5,673) (165,975)
--------- --------- ---------
Financing:
Proceeds from issuance of long-term debt ...... -- -- 265,000
Change in investments restricted for interest
payments .................................... 30,888 15,083 (95,974)
Deferred debt financing costs ................. (182) (53) (9,546)
Proceeds from investment by parent ............ -- -- 1,000
--------- --------- ---------
Cash provided by financing activities 30,706 15,030 160,480
--------- --------- ---------
(Decrease) increase in cash and
cash equivalents .................. (373) (630) 1,003
Cash and cash equivalents, beginning of period .... 373 1,003 --
--------- --------- ---------
Cash and cash equivalents, end of period .......... $ -- $ 373 $ 1,003
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................ $ 35,113 $ 16,386 $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 13
GST EQUIPMENT FUNDING, INC.
Notes to Financial Statements
December 31, 1998 and 1997 and September 30, 1997
(In thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
GST Equipment Funding, Inc. (the Company) was formed on March 5, 1997.
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 senior secured 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 at
December 31, 1998 of $50,003 in U.S. Treasury securities as
available-for-sale and held-to-maturity. Held-to-maturity investments,
recorded at amortized cost, totaling $50,003 and $80,891 at December
31, 1998 and 1997, respectively, and maturing between four months and
eighteen months, are restricted for interest payments.
Available-for-sale investments, totaled $0 and $62,484 at December 31,
1998 and 1997, respectively, are restricted for equipment purchases.
Restricted investments are recorded at amortized cost which
approximates the fair value for all periods presented.
DEFERRED FINANCING COSTS
Deferred financing costs, consisting of legal, accounting and
underwriting fees related to the May 13, 1997 debt offering, and are
being amortized to interest expense over the life of the related notes.
Amounts amortized totaled $989, $241 and $364 for the year ended
December 31, 1998, the three-month period ended December 31, 1997 and
for the period from March 5, 1997 (date of inception) to September 30,
1997, respectively.
F-7
<PAGE> 14
GST EQUIPMENT 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 sheet for cash, short-term
borrowings, accounts payable and accrued liabilities approximate fair
values due to the short maturity of those instruments. The carrying
amounts for current and non-current restricted investments approximate
fair value due to the composition of such investments and related
maturities.
The carrying value and estimated fair value of the Company's long-term
debt were $265,000 and $273,933, respectively, at December 31, 1998.
The fair value of the Company's long-term debt was estimated based on
quoted market prices.
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.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying financial
statements for December 31, 1997 and September 30, 1997 to conform with
the December 31, 1998 presentation.
F-8
<PAGE> 15
GST EQUIPMENT 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,
1998 and 1997:
<TABLE>
<S> <C>
Senior secured notes, interest at 13.25%, due
May 1, 2007............................................. $ 265,000
==========
</TABLE>
ISSUANCE OF SENIOR SECURED NOTES
The Company completed a private placement (the 1997 Offering) under an
indenture (the Indenture) dated May 13, 1997, of $265,000 of Senior
Secured Notes (the Secured Notes). The Secured Notes bear interest at
13.25% payable in semi-annual installments commencing November 1, 1997.
Net proceeds from the 1997 Offering totaled approximately $255,800,
$93,790 of which were set aside to fund the first six scheduled
interest payments. The remainder of the net proceeds is restricted to
the purchase and installation of telecommunications equipment. Pursuant
to the Indenture, all purchased equipment will be sold to GST USA for
use in its telecommunications operations (see note 3). The Secured
Notes are secured by a first priority security interest in the
equipment and the restricted investment securities held for the payment
of interest. The Secured Notes are subject to certain debt covenants.
The Indenture provides that GST USA will assume and become a direct
obligor on the Secured Notes and GST will guarantee the Secured Notes
on May 13, 2000, or earlier if permitted by the terms of their existing
debt. Once assumed the Secured Notes will be secured senior
indebtedness of GST USA. The note guarantee will be senior unsecured
indebtedness of GST.
The Secured Notes are redeemable at the option of GST USA, in whole or
in part, at any time, on or after May 1, 2002, initially at 106.625% of
their principal amount, plus accrued and unpaid interest, declining
ratably to 100% on or after May 1, 2004. If on May 13, 2000, GST USA is
prohibited from assuming all of the Secured Notes, the Company will
redeem the portion of the Secured Notes that cannot be assumed at 101%
of their principal amount plus accrued interest at the date of
redemption.
DEBT COVENANTS AND CLASSIFICATION OF LONG TERM DEBT
In November 1998, the Company informed the Trustee who represents the
holders of the Senior Secured Notes that it may have violated certain
technical covenants contained in the indenture related to such notes.
In February 1999, the Trustee informed the note holders of the
potential violations. The note holders have not declared a default, as
defined within the indentures of the Senior Secured Notes. The Company
has classified the related debt obligations as non-current in the
accompanying balance sheets as management believes it is
probable that, in the event the note holders declare a default, the
Company would be able to take corrective actions to cure, within the
prescribed grace period, those technical violations deemed
objectively-determinable.
F-9
<PAGE> 16
GST EQUIPMENT FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
(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 1997 Offering.
The note receivable from parent of $194,228 and $109,164 at December
31, 1998 and 1997, respectively, represents equipment purchases for GST
USA and compounded interest. The note receivable is guaranteed by GST
and bears interest at 15.25%, compounded semiannually on May and
November 1, and is payable in full on May 13, 2000. Interest income
earned on the note receivable from parent totaled $23,271, $3,838 and
$3,543 for the periods ended December 31, 1998, December 31, 1997 and
September 30, 1997, respectively.
The payable to parent of $1,037 and $1,260 at December 31, 1998 and
1997, respectively, consists of cash advances from GST USA for the
purchase of equipment and the payment of expenses related to the May
Offering.
(4) INCOME TAXES
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
MARCH 5, 1997
THREE-MONTH (DATE OF
YEAR ENDED PERIOD ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1997
------- ------- -------
<S> <C> <C> <C>
Computed "expected" income
tax benefit ................... $(2,421) $(1,007) $(1,896)
Effect of change in valuation
allowance ..................... 2,421 (1,673) 4,576
------- ------- -------
Actual tax expense (benefit) ...... $ -- $(2,680) $ 2,680
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1998, December 31,
1997 and September 30, 1997, are derived primarily from interest
expense not currently deductible for tax purposes. Gross deferred tax
assets and liabilities amount to $5,324 and $0, respectively, at
December 31, 1998 and $2,903 and $0, respectively, at December 31,
1997.
F-10
<PAGE> 17
GST EQUIPMENT FUNDING, INC.
Notes to Financial Statements, Continued
(In thousands)
The valuation allowance for deferred tax assets as of December 31,
1998, December 31, 1997 and September 30, 1997 was $5,324, $2,903 and
$4,576, respectively. The net change in the total valuation allowance
for the periods ended December 31, 1998, December 31, 1997 and
September 30, 1997 was an increase of $2,421, a decrease of $1,673 and
an increase of $4,576, 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, 1998, December 31, 1997
and September 30, 1997 was $-0-, $-0- and $2,680, respectively.
F-11
<PAGE> 18
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, 1999.
GST EQUIPMENT 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, Joseph A. Basile, Jr.,
Jack G. Armstrong and Daniel L. Trampush 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, 1999.
SIGNATURE TITLE
--------- -----
/s/ Robert A. Ferchat Chairman of the Board and Director
(Robert A. Ferchat)
/s/ Joseph A. Basile, Jr. President, Chief Executive Officer (Principal
(Joseph A. Basile, Jr.) Executive Officer) and Director
/s/ Jack G. Armstrong Director
(Jack G. Armstrong)
/s/ Daniel L. Trampush Vice President and Chief Financial Officer
(Daniel L. Trampush) (Principal Financial Officer)
<PAGE> 19
EXHIBIT INDEX
Exhibit
*3(a) Certificate of Incorporation of GST Funding.
*3(b) By-Laws of GST Funding.
*4(a) Indenture dated as of May 13, 1997, by and among GST Funding, GST, GST
USA and United States Trust Company of New York.
*10(a) Collateral Pledge and Security Agreement dated as of May 13, 1997, by
and among GST Funding, 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 Funding's Registration Statement on
Form S-4 (No. 333-33601).
** Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from GST
Funding's Form 10-K for the year ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 32,759,350
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,759,350
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 257,230,142
<CURRENT-LIABILITIES> 6,889,931
<BONDS> 265,000,000
1
0
<COMMON> 0
<OTHER-SE> (14,659,790)
<TOTAL-LIABILITY-AND-EQUITY> 257,230,142
<SALES> 28,979,456
<TOTAL-REVENUES> 28,979,456
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,102,168
<INCOME-PRETAX> (7,122,712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,122,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,122,712)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
