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. ("GST USA"), a wholly owned subsidiary of GST and the parent of GST Funding, 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, 1999 approximately $93.8 million had been used to purchase securities pledged to fund the first six interest payments on the Secured Notes ($86.6 million of which was used to make the first five interest payments in November 1997, May and November 1998 and May and November 1999) and approximately $194.2 million had been used to purchase telecommunications equipment ($41.5 million of which was used to refinance intercompany indebtedness).
GST is a facilities-based integrated communications provider, or ICP, offering voice, data and Internet services throughout the western United States. By providing service over its own network facilities, it is able to lower and control its costs while also developing flexible products to meet the needs of both small and large business customers. Its current products include data transport, high-speed Internet access, voice services, including a bundled offering of local and long distance services, and wholesale services, including dark fiber and conduit rights.
ITEM 2.
ITEM 2. PROPERTIES.
GST Funding neither owns nor leases material properties.
ITEM 3.
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 5.
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 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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.
As of December 31, 1999, GST Funding had purchased approximately $168.4 million of equipment and held restricted investments of approximately $17.2 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.
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.
ITEM 7A.
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.
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 short-term. The fair value of each investment approximates amortized cost, and long-term securities have maturities of less than twelve months.
GST Funding does not use derivative financial instruments to manage its interest rates. GST Funding's long-term debt had a book value of $265.0 million at both December 31, 1999 and 1998 and a market value of $262.4 million and $273.9 million at December 31, 1999 and 1998, respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements: see the Index to Financial Statements.
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). ** Filed herewith.
(b) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Vancouver, State of Washington, on the 30th day of March, 2000.
GST 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 and Thomas M. Malone his true and lawful attorney-in-fact, each acting alone, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes, each acting alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been duly signed by the following persons in the capacities on March 30, 2000.
GST EQUIPMENT FUNDING, INC.
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, 1999 and 1998 and the related statements of operations, shareholder's deficit, and cash flows for each of the years in the two-year period ended December 31, 1999, 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GST Equipment Funding, Inc. as of December 31, 1999 and 1998, and the results of its operations and cash flows for each of the years in the two-year period ended December 31, 1999, 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 accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Portland, Oregon March 17, 2000
GST EQUIPMENT FUNDING, INC.
Balance Sheets
(In thousands, except share amounts)
See accompanying notes to financial statements.
GST EQUIPMENT FUNDING, INC.
Statements of Operations
(In thousands)
See accompanying notes to financial statements.
GST EQUIPMENT FUNDING, INC.
Statements of Shareholder's Deficit
(In thousands, except share amounts)
See accompanying notes to financial statements.
GST EQUIPMENT FUNDING, INC.
Statements of Cash Flows
(In thousands)
See accompanying notes to financial statements.
GST EQUIPMENT FUNDING, INC.
Notes to Financial Statements
December 31, 1999, 1998
(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, 1999 of $17,192 in U.S. Treasury securities as held-to-maturity. Held-to-maturity investments, recorded at amortized cost, totaled $17,192 and $50,003 at December 31, 1999 and 1998, respectively, and maturing in four months, are restricted for interest payments.
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 $977, $989, $241 and $364 for the years ended December 31, 1999 and 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.
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 amount of the Company's long-term debt approximates its fair value. The fair value of the Company's long-term debt was determined based on quoted market prices for similar issues or on current rates available to the Company for debt of the same remaining maturities and similar terms.
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. The long-term debt has a book value of $265,000 at both December 31, 1999 and 1998 and a fair value of $262,350 and $273,933 at December 31, 1999 and 1998, respectively.
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 prior periods to conform with the December 31, 1999 presentation.
(2) FINANCING ARRANGEMENTS
LONG-TERM DEBT
The Company's long-term debt consists of the following at December 31, 1999, 1998, and 1997 and September 30, 1997:
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 semiannual 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.
(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 $223,806 and $194,228, at December 31, 1999 and 1998 respectively, represents equipment purchases for GST USA and compounded interest. The note receivable is guaranteed by GST and bears interest at 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 $31,518, $23,271, $3,838 and $3,543 for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the year ended September 30, 1997, respectively.
The payable to parent of $0 and $1,037 at December 31, 1999 and 1998, respectively, consists of cash advances from GST USA for the purchase of equipment and the payment of expenses.
(4) INCOME TAXES
The provision for income taxes differs from the "expected" amount computed by applying the U.S. federal corporate rate as follows:
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are derived primarily from interest expense not currently deductible for tax purposes. Gross deferred tax assets and liabilities amount to $6,096 and $-0-, respectively, at December 31, 1999 and $5,324 and $-0-, respectively at December 31, 1998.
The valuation allowance for deferred tax assets as of December 31, 1999, 1998 and 1997 and September 30, 1997 was $6,096, $5,324, $2,903 and $4,576, respectively. The net change in the total valuation allowance for the years ended December 31, 1999 and 1998, the three-month period ended December 31, 1997 and the period from March 5, 1997 (date of inception) to September 30, 1997 was an increase of $772, 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, 1999, 1998 and 1997 and September 30, 1997 was $-0-, $-0-, $-0- and $2,680, respectively.