-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G0/tbXbcUNgiApj6nnSnCASuz6Rdo/MCzXnqgonXyDU9b9lRpHHAO9heO2m+Wzy7 5Yjsjm5/kSACmQ+SLvyhAA== 0000950123-99-002912.txt : 19990409 0000950123-99-002912.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950123-99-002912 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GST EQUIPMENT FUNDING INC CENTRAL INDEX KEY: 0001044271 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 911785734 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-33601 FILM NUMBER: 99583927 BUSINESS ADDRESS: STREET 1: 4317 NE THURSTON WAY CITY: VANCOUVER STATE: WA ZIP: 98662 BUSINESS PHONE: 3602544700 MAIL ADDRESS: STREET 1: 4317 NE THURSTON WAY STREET 2: STE 400 CITY: VANCOUVER STATE: WA ZIP: 98662 10-K405 1 GST EQUIPMENT FUNDING, INC. 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 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. 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- 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- 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- 6 ** Filed herewith. (b) Reports on Form 8-K: None. -4- 7 INDEX TO FINANCIAL STATEMENTS
GST Equipment Funding, Inc. PAGE 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
F-1 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 9 GST EQUIPMENT FUNDING, INC. Balance Sheets (In thousands, except share amounts)
DECEMBER 31, ----------------------- ASSETS 1998 1997 --------- --------- 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 ========= =========
See accompanying notes to financial statements. F-3 10 GST EQUIPMENT FUNDING, INC. Statements of Operations (In thousands)
PERIOD FROM MARCH 5, 1997 THREE-MONTH (DATE OF YEAR ENDED PERIOD ENDED INCEPTION) TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1998 1997 1997 -------- -------- -------- 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) ======== ======== ========
See accompanying notes to financial statements. F-4 11 GST EQUIPMENT FUNDING, INC. Statements of Shareholder's Deficit (In thousands)
ADDITIONAL TOTAL COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDER'S SHARES AMOUNT CAPITAL DEFICIT DEFICIT -------- --------- -------- -------- -------- 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) ======== ========= ======== ======== ========
See accompanying notes to financial statements. F-5 12 GST EQUIPMENT FUNDING, INC. Statements of Cash Flows (In thousands)
PERIOD FROM MARCH 5, 1997 THREE-MONTH (DATE OF YEAR ENDED PERIOD ENDED INCEPTION) TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1998 1997 1997 --------- --------- --------- 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 $ --
See accompanying notes to financial statements. F-6 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 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 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: Senior secured notes, interest at 13.25%, due May 1, 2007............................................. $ 265,000 ==========
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 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:
PERIOD FROM MARCH 5, 1997 THREE-MONTH (DATE OF YEAR ENDED PERIOD ENDED INCEPTION) TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1998 1997 1997 ------- ------- ------- 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 ======= ======= =======
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 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 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) 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. EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 12-MOS DEC-31-1998 DEC-31-1998 0 32,759,350 0 0 0 32,759,350 0 0 257,230,142 6,889,931 265,000,000 1 0 0 (14,659,790) 257,230,142 28,979,456 28,979,456 0 0 0 0 36,102,168 (7,122,712) 0 (7,122,712) 0 0 0 (7,122,712) 0 0
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