EXHIBIT (99)
PART I
Item 1. BUSINESS
INTRODUCTION
PTI was organized in 1955 to provide telephone service to suburban and
rural communities principally in the Pacific Northwest. Since that time, the
Company has grown significantly through acquisitions and expanded its service
offerings in several areas within the telecommunications industry. This
expansion included the provision of long distance services in the State of
Alaska, investments in cellular telephone operations and international
communications, including the construction of a trans-Pacific fiber optic cable.
Over the past few years, the Company's strategy has been to focus on its core
business of providing local exchange service to suburban and rural markets and
to divest its diversified portfolio of noncore businesses. This strategy is
being implemented through the acquisition of LECs, the sale of certain
international operations, the consolidation and sale of cellular holdings, and
ongoing efforts to achieve a satisfactory restructuring of the Alaska long
distance marketplace. With the completed sale of TRT and upon closing of the
pending sale of two additional noncore operations, the Company will have exited
from all of its material noncore businesses.
PTI has been a majority-owned subsidiary of PacifiCorp since 1973. At
December 31, 1993, PacifiCorp beneficially owned approximately 87 percent of
PTI's common stock.
TELECOMMUNICATIONS OPERATIONS
LOCAL EXCHANGE COMPANIES
The Company's LECs operate under a common business name and logo, PTI
Communications. This marketing concept was established in 1991 to create a
unified identity for the local operations, improve communication with customers
and assist in the marketing of new products and services. As one of the major
independent telephone companies in the U.S., the Company's LECs provide both
local telephone service and access to the long distance network for customers in
their respective service areas. The Company presently operates 20 LECs within
eleven states comprised of 398,700 access lines in 253 exchanges. The average
number of access lines per exchange is approximately 1,576, reflecting the lower
population density generally found in the Company's service areas which are
rural in nature. The Company's largest exchange in terms of access lines is in
Kalispell, Montana, which had 21,976 access lines at December 31, 1993. Service
areas are located primarily in the states of Alaska, Montana, Oregon, Washington
and Wisconsin. States also served, but to a lesser extent, include Colorado,
Idaho, Iowa, Minnesota, Nevada and Wyoming. (See "Regulation - General.") The
Company provides service to its suburban and rural customer base through
centralized administrative services.
During the five years ended December 31, 1993, the number of access
lines served by the Company increased from 239,600 to 398,700. Approximately
69,000, 3,200 and 1,100 access lines were added in 1990, 1992 and 1993,
respectively, as a result of the acquisitions of several LECs located in the
Midwest. The LECs have also experienced strong internal access line growth in
certain service areas, as evidenced by a five percent increase in access lines
served during 1993. The Company anticipates that access line growth in the
future will come from population growth in current service areas and
acquisitions.
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The Company's LECs have replaced virtually all of their
electromechanical switches with digital switches that provide significant space
savings, higher reliability and expanded business and residential service
capabilities. High volume traffic routes continue to be upgraded with fiber
optic or digital microwave systems to meet customer needs for special services.
The fiber optic systems provide increased transmission capabilities at a lower
cost. Basic exchange telecommunications radio systems have been installed to
provide local service to new and existing customers in more remote areas. The
Company has nearly completed the conversion of all multi-party lines to
single-party lines. Approximately one percent of the Company's access lines were
multi-party at the end of 1993.
The LECs have contracts with interexchange carriers under which the
Company provides billing and collection services. During 1992, the Company
signed an agreement to provide these services for AT&T through 2001, and an
agreement with Independent NECA Services, a clearinghouse service bureau, to
provide these services for other carriers for a minimum of two years. In Alaska,
the Company's LECs have similar agreements with Alascom.
In addition to its basic telephone service, the Company offered
enhanced services, such as caller identification, name display, automatic call
back, auto recall and call trace, to certain areas of Washington on a trial
basis under the Custom Local Area Signaling Service (CLASS). The Company began
providing these services in Washington on a permanent basis in January 1994 and
plans to make enhanced services available on a trial basis to other service
areas during 1994. The Company's existing switching equipment provides these
services with minimal software and hardware enhancements. Some of the Company's
switching equipment also has other enhanced service capabilities, such as voice
messaging and call forwarding, that are being offered to certain of its
customers in Washington. The LECs also sell and lease, on a nonregulated basis,
customer premise (i.e., telephone) equipment primarily for use by residential
customers. As part of this program, residential and business customers are
offered maintenance services on a monthly fee basis.
The Company continues to seek expansion of its local exchange
operations through acquisition. In July 1993, the Company acquired Casco
Telephone Company (Casco), an LEC in Wisconsin, for cash and shares of the
Company's common stock aggregating approximately $4.7 million. The Company
acquired shares in the market in an amount approximating those used in the
acquisition. Casco has approximately 1,100 access lines, 1,100 cable television
subscribers and 18,900 pro-rata cellular POPs in Wisconsin.
In August 1993, the Company signed a definitive agreement with USWC
under which the Company would acquire certain rural telephone exchange
properties in Colorado. The properties represent 45 exchanges that serve
approximately 50,000 access lines. The Company will pay approximately $207
million for these properties at closing, subject to a purchase price adjustment
mechanism, based principally on the estimated book value of the assets to be
acquired. Current estimates of book value indicate that the purchase price may
be less than $207 million. The Company intends to fund the Colorado acquisition
through external debt and internally generated funds. In an attempt to satisfy
certain regulatory concerns in Colorado, the Company also entered into a
construction contract with USWC in July 1993 that requires the Company to
construct and upgrade plant in the properties subject to the agreement. Under
the contract, the Company acts as general contractor for USWC. The construction
and upgrade program will
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accelerate single-party service and digital switching required by the CPUC.
During 1993, the Company spent $5.7 million under this contract. Expenditures of
$28 million are projected to be made under the contract in 1994. If the
transaction does not close, USWC is required to reimburse the Company for all of
the Company's expenditures under the construction contract including interest.
The Company filed an application for approval of the transaction with
the CPUC in August 1993 and approval, with conditions, was received in early
March 1994. The parties to the transaction are reviewing the conditions of the
CPUC approval. The Company has also submitted filings with the FCC in which the
Company has requested waivers from the FCC to reclassify the exchanges from
USWC's study area in Colorado to the Company's study area in Colorado and to
permit rate of return regulation on the exchanges being acquired. Approval of
the study area waiver would qualify these exchanges for receipt of support from
the USF, as the cost to provide service in these exchanges exceeds the national
average. Approval of rate of return regulation would allow the Company to
replace the incentive regulation adopted for these exchanges by USWC. (See
"Regulation - Local Exchange Companies.") Certain local government approvals may
also be needed. Transition planning efforts have commenced and the Company
expects to close the transaction in late 1994.
On March 15, 1994, the Company signed letters of intent with USWC to
acquire certain rural exchange properties located in Oregon and Washington from
USWC for $183 million in cash, subject to certain purchase price adjustments at
closing. These properties represent 49 exchanges that serve approximately 34,100
access lines. Many of these exchanges are contiguous to or located near
exchanges that the Company owns and operates in these states. The transaction is
subject to negotiation of a definitive purchase agreement with USWC, which is
expected to be completed in early April. Completion of the transaction will also
be dependent on corporate, regulatory and governmental approvals, all of which
should be received by late 1994 or early 1995. The Company expects to fund the
acquisition of these properties through the issuance of external debt and the
use of internally generated funds.
LONG LINES
Through Alascom, the Company provides intrastate and interstate MTS,
WATS, private line, leased channel and other communications services within
Alaska and between Alaska and the rest of the world. Alascom's facilities
interconnect with 22 LECs and the military bases within Alaska and with the
interstate and international long distance network. Virtually all services are
provided in accordance with tariffs filed with the appropriate regulatory
agencies. (See "Regulation - Long Lines - Interstate Revenues" for information
concerning Alascom's settlements arrangement with AT&T for interstate services.)
Alascom uses both satellite and terrestrial facilities in providing
service. In August 1991, Alascom transferred all interstate MTS and certain
interstate private line services from satellite facilities to the Alaska Spur.
(See "Telecommunications Operations - Pacific Telecom Cable.") Satellite
facilities continue to provide intrastate MTS, WATS and private line services,
link remote areas of Alaska to the long distance network (both interstate and
intrastate) and serve as alternate routing for vital customer services.
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Alascom operates 17 satellite transponders on Aurora II, a
communication satellite that replaced Alascom's original satellite in 1991.
Alascom purchased one transponder in July 1993 and leases 16 transponders under
an operating lease that expires in mid-1998. Telemetry, tracking, control and
in-orbit protection services are provided under contract by GE American
Communications, Inc. for the projected service life of the satellite.
Alascom owns 168 satellite transmit and receive earth stations
(including nine transportable earth stations), a 50 percent interest in 46 earth
stations used generally for service throughout Alaska and 10 additional earth
stations located in the lower 48 states, Hawaii, Panama, Russia and Saudi
Arabia. Alascom routinely upgrades earth stations with digital technology to
provide enhanced communication services. Approximately 70 percent of the earth
station circuits are digital. Alascom has digital switching equipment located at
its toll centers in Anchorage, Fairbanks and Juneau. It also owns and operates
major terrestrial microwave systems (primarily digital) that provide
communications between Anchorage and Fairbanks and Anchorage and the cities on
the Kenai Peninsula. The microwave system also interconnects Anchorage with
leased Canadian facilities at the Canadian border and with Haines, Juneau and
Ketchikan in the rugged terrain of southeastern Alaska. Alascom owns and
operates the communications system along the Trans-Alaska Pipeline that is used
to monitor and control the flow of oil through the pipeline.
Alaska's geographic location makes the state strategically important
for the military. Alascom has numerous private line facilities serving the
government, including several transportable earth stations used to support
military communication needs. In 1993, the Company sold four transportable earth
stations to the U.S. Department of Defense. Alascom continues to operate one
transportable earth station in Saudi Arabia, which provides telecommunication
services under an agreement with the U.S. Department of Defense. Alascom is
participating in a joint venture providing international MTS and private line
service to several locations in the eastern part of Russia.
ALASKA MARKET RESTRUCTURING
In 1985, the FCC established a Federal-State Joint Board (FCC CC
Docket No. 83-1376) to review the interstate market structure of Alaska and to
reconcile various existing and emerging federal policies affecting universal
service, rate integration and competition. On October 29, 1993, the Federal-
State Joint Board released a Final Recommended Decision (FRD), which proposed
modifications to the existing structure for interstate service in and to Alaska.
Among other matters, the FRD proposed termination of the JSA between Alascom and
AT&T, effective September 1, 1995; the payment by AT&T to Alascom of $150
million for accelerated cost recovery in two equal installments of $75 million
each on March 1, 1994 and September 1, 1995; a requirement that AT&T continue to
utilize Alascom's facilities for the origination and termination of interstate
traffic on a declining scale for a period of two and one-half years following
termination of the JSA; and the creation by Alascom of an interstate tariff for
carrier services based upon an as yet to be developed allocation of costs
between rural and nonrural locations.
On November 29, 1993, Alascom filed an Application for Review
(Application) of the FRD with the FCC. In the Application, Alascom cited
multiple substantive and procedural errors contained in the FRD, which it
believes render the FRD legally defective and contrary to the public interest.
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AT&T and GCI subsequently made filings in opposition to Alascom's Application.
To date, the FCC has taken no action on either the FRD or Alascom's Application.
By statute, the FCC has the sole and final authority with respect to issues in
this proceeding, and may adopt, modify and adopt, or reject the FRD. As a
practical matter, since a majority of the FCC Commissioners sit on the Joint
Board, final actions taken by the FCC often reflect the recommendations of the
Joint Board.
On October 12, 1993, the Company and AT&T entered into an agreement,
under which the parties may exchange proprietary information relating to
Alascom's structure and operations. The purpose of the agreement was to promote
the possibility of a negotiated resolution of some or all of the outstanding
issues relating to the JSA and the restructuring of the Alaska interstate
market. Under the terms of the agreement, the substance and progress of any
negotiations between the parties are generally not disclosable. Alascom
continues its efforts to correct perceived errors in the FRD and to achieve a
satisfactory alternative resolution to the Alaska interstate market issues, but
is unable to predict the outcome of this matter.
CELLULAR OPERATIONS
The Company's wholly-owned subsidiary, PT Cellular, is a holding
company with subsidiaries in Alaska, Michigan, Minnesota, Oregon, South Dakota,
Washington and Wisconsin. The Company has ownership interests with respect to 29
MSAs and RSAs and manages 11 of these interests in Alaska, Michigan, South
Dakota and Wisconsin. The Company also manages five other RSA interests in
Minnesota. Revenues from cellular operations represented approximately two
percent of total Company revenues in 1993.
Cellular mobile telephone service is being provided or developed in
areas designated as RSAs or MSAs within boundaries defined by the FCC. Cellular
systems provide local and long distance telephone services through mobile radio
telephones (cellular phones) that are generally either hand-held or mounted in
vehicles. These cellular phones transmit and receive radio signals to and from
transmitter, receiver and signaling equipment (cell sites). Cell sites in an RSA
or MSA are located in a manner that will allow for the most complete coverage of
an area. Each cell site is connected to a switching facility that controls the
cellular system of the specific RSA or MSA and connects the cellular customer to
the conventional wireline local and long distance telephone networks or to other
cellular phone users in the area.
The following table sets forth the Company's POP ownership by state as of
December 31, 1993.
NON-
STATE CONTROLLED(1) CONTROLLED TOTAL
----- ---------- ---------- ----------
Alaska 201,000 - 201,000
Michigan 315,000 - 315,000
Minnesota - 23,567 23,567
Oregon - 96,194 96,194
South Dakota 16,147 - 16,147
Washington - 44,819 44,819
Wisconsin 688,646 627,407 1,316,053
--------- ------- ----------
Total 1,220,793 791,987 2,012,780
--------- ------- ----------
--------- ------- ----------
<FN>
(1) Represents interests with respect to RSAs and MSAs where the Company
has an ownership position and manages the operations.
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The Company plans to increase its ownership interests in certain
cellular properties in order to achieve ownership control and to consolidate the
Company's cellular service areas into larger contiguous units for operating
efficiencies. This plan may be accomplished through the exchange of existing
cellular interests and/or future acquisitions. In 1993, the Company sold its
interests in an RSA where it had a noncontrolling position and exchanged an RSA
where it had a controlling position. In 1993, the Company also increased its
ownership interests in an RSA and gained a controlling interest in an MSA, both
of which are in Wisconsin. The Company recognized after-tax gains on these
transactions totaling $.8 million. The Company has budgeted $17.9 million for
the development of cellular operations over the next three years.
In 1993, the Company obtained 18,900 pro-rata POPs through an LEC
acquisition in Wisconsin and another 75,150 POPs in Wisconsin through the
purchase of certain cellular ownership interests. All of the cellular
properties in which the Company has an ownership interest are operational.
Customers served by the cellular operations controlled by the Company increased
65 percent in 1993, 70 percent in 1992 and 100 percent in 1991.
PACIFIC TELECOM CABLE
PTC, which is owned 80 percent by PTI and 20 percent by Cable &
Wireless plc (C&W), a United Kingdom corporation, is involved in the operation,
maintenance and sale of capacity of a submarine fiber optic cable between the
U.S. and Japan, known as the North Pacific Cable. The eastern end of the cable
is operated by PTC. The western end is operated by International Digital
Communications, Inc. (IDC), a Japanese corporation. Major IDC shareholders
include C. Itoh & Co., Ltd, Toyota Motor Corporation, Pacific Telesis
International and C&W.
The North Pacific Cable is the first submarine fiber optic cable to
provide direct service between the U.S. and Japan. In addition, through the
Alaska Spur, it provides the first digital fiber optic link between Alaska and
the lower 48 states. Service between the U.S. and Japan is carried on three, 420
Mbit/s digital fiber optic pairs, providing a total capacity of 1,260 Mbit/s.
Service between Alaska and the lower 48 states is carried on one, 420 Mbit/s
digital fiber optic pair. On the eastern end, the cable lands at Pacific City,
Oregon and Seward, Alaska. From the landing stations, traffic is transmitted to
carrier access centers near Portland, Oregon and Anchorage, Alaska for
interconnection with digital communications facilities serving the lower 48
states and Alaska and with facilities transmitting traffic to foreign countries.
In 1991, PTC sold capacity on the Alaska Spur and capacity in the landing
station facilities at Pacific City, Oregon and Seward, Alaska to Alascom for
approximately $56 million. In December 1992, Alascom sold 11 percent of the
Alaska Spur's capacity to GCI. On the western end, the cable lands at Miura,
Japan, and traffic is transmitted to IDC's carrier access centers in Tokyo,
Yokohama and Osaka for interconnection with Japanese domestic service providers.
For service to points beyond Japan, IDC has constructed a 75-mile submarine
cable from Miura to Chikura where it interconnects with other international
cables. IDC also participates in the Asia Pacific Cable system that links Miura
with Hong Kong, Singapore, Taiwan and Malaysia.
Construction and laying of the North Pacific Cable were completed in
December 1990, the system was made available for commercial traffic in May 1991
and final system acceptance occurred in November 1991. Forty-one private and
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government-owned telecommunications firms representing 25 countries have
purchased approximately 51 percent of the cable's 17,010 circuit capacity. PTC
recognized revenues of $4.9 million in 1993, $10.8 million in 1992 and $30.9
million in 1991 related to cable and backhaul capacity sales, excluding the
Alaska Spur revenues.
The cable system is operating under a warranty of one to eight years
depending on the component of the system. The cable contractor has agreed to
certain remedies, including providing industry support programs and enhanced
repair arrangements. The Company reduced the cable inventory carrying value by
$19.2 million in 1993 as a result of the agreement with the cable contractor and
increased cash and accounts receivable by a corresponding aggregate amount.
PTC continues to market the remaining 49 percent of unsold capacity.
Marketing efforts have included the completion of tests demonstrating the
feasibility of transmitting international high-quality television signals via
fiber optics using the North Pacific Cable. Based on the Company's estimates of
growth in trans-Pacific demand for communications capacity and the availability
of other sources of capacity over the next five years, PTC believes that a
majority of the remaining capacity can be sold in that time frame.
PTC, IDC and C&W (Founders) are responsible for procuring maintenance
for the North Pacific Cable and have renewed the existing maintenance
arrangements with Cable & Wireless (Marine) Limited for an additional five-year
period beginning in April 1994. Thereafter, the contract has annual renewal
options for up to five years. The Founders continue to seek arrangements for a
maintenance vessel to be available for service on the western end of the cable.
The majority of maintenance service costs are passed on to owners of capacity on
the cable.
PT Transmission provides restoration services for the eastern end of
the North Pacific Cable under the terms of its tariff. In the event of a cable
failure, restoration services are provided via a PT Transmission satellite earth
station located at Moores Valley, Oregon.
INTERNATIONAL COMMUNICATIONS
Since 1990, the Company had reported ICH as a discontinued operation
for financial statement reporting purposes. In October 1993, the Company
purchased the remaining minority interest in ICH, which held investments in
international telecommunications subsidiaries, including TRT. TRT provides
international record messaging, message telephone and private line service
between the U.S. and foreign countries, as well as special domestic
communications services. The 14.9 percent minority interest in ICH was purchased
from a subsidiary of France Cables et Radio.
On September 23, 1993, the Company completed the sale of TRT, the
major operating subsidiary of ICH, and a smaller subsidiary, to IDB for 4.5
million shares of IDB common stock and $1 million in cash. The agreement
provided for the transfer of certain tangible assets and lease obligations from
TRT to ICH. Based on the market value of IDB stock at closing, the Company
recognized an after-tax gain from discontinued operations of $60.4 million on
the sale of TRT and the smaller subsidiary. The IDB common stock was registered
and sold in a secondary public offering in November 1993 and the Company
received $45 per share before commissions and expenses. The $190.9 million in
proceeds received by ICH
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from the sale of IDB stock was paid to PTI in the form of intercompany note
repayments and dividends. PTI used these funds to reduce its long-term and
short-term debt. (See Notes 3, 4 and 12 to the Consolidated Financial Statements
incorporated herein by reference.)
OTHER COMMUNICATIONS SUBSIDIARIES AND PARTNERSHIPS
In May 1984, the Company entered into a 50 percent partnership, Bay
Area Teleport, involved in designing, constructing, operating and marketing a
regional microwave system and satellite earth station complex near San
Francisco, California. During 1991, the partnership was restructured. Under the
restructure agreement, the Company received 100 percent of Bay Area Teleport,
which is currently held by PTI Harbor Bay, Inc., a wholly-owned subsidiary.
After the restructure, Bay Area Teleport was reorganized into two corporations,
Niles Canyon Earth Station, Inc. (Niles Canyon), which provides satellite uplink
and downlink services, and Bay Area Teleport, Inc., which provides transmission
services principally in the greater San Francisco Bay Area. In the transaction
involving the sale of TRT, the Company also sold Niles Canyon to IDB. Proceeds
related to the sale of the IDB stock received in exchange for the stock of Niles
Canyon amounted to $4.3 million. (See "Telecommunications Operations -
International Communications" concerning this transaction.)
The Company also owns Upsouth Corporation (Upsouth), which owns an
earth station complex near Atlanta, Georgia and another near Carteret, New
Jersey.
In October 1993, the Company agreed to sell PTI Harbor Bay and Upsouth
to IntelCom Group, Inc. (IntelCom:ITR) for 853,147 shares of IntelCom stock and
$.2 million in cash. The Company will also receive at least 250,000 more shares
of IntelCom common stock in lieu of debt that will not be assumed by the
purchaser. The Company will be granted certain demand and piggyback registration
rights for the IntelCom stock it receives and expects the transaction to close
in the first half of 1994. Based on recent prices for IntelCom stock, the
Company could record a pre-tax gain ranging from $7 million to $10 million on
this transaction, excluding selling commissions and other expenses. The actual
gain or loss realized will be dependent on IntelCom's stock price when the
shares are sold. The transaction is subject to necessary regulatory approvals.
IntelCom provides alternative local network access, local area networks and
systems integration, as well as operating a full-service domestic and
international satellite uplink teleport.
In 1989, the Company acquired three AM/FM combination radio stations
in Oregon, Nevada and Idaho in an effort to protect an investment made when the
Company was investing in non-telecommunications businesses. In 1992, the AM
radio station in Idaho was contributed to an institution of higher education.
The Company also has signed a letter of intent to sell the FM station in Idaho
and is waiting for regulatory approval of the sale, which is expected to close
in the first half of 1994.
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REGULATION
GENERAL
Alascom and the Company's LECs operate in an industry that is subject
to extensive regulation by the FCC and state regulatory agencies. Virtually all
services, both local and long distance, are provided in accordance with tariffs
filed with the appropriate regulatory agencies. The telecommunications industry
continues to undergo change as a result of a series of regulatory and judicial
proceedings regarding the deregulation of certain aspects of the industry. The
FCC and some state regulatory agencies are exploring alternative forms of
regulation that depart from traditional rate of return regulation for
telecommunications companies. These alternatives include possibilities of
opening local exchange franchises to encourage greater competition. The effects
of any such alternative form of regulation on the Company's LECs is uncertain.
Interstate and certain international services provided by Alascom are
governed by tariffs filed with the FCC. The Company's LECs are governed by
tariffs filed with the FCC for interstate access services provided to
interexchange carriers. The FCC also licenses other aspects of the Company's
telecommunications operations, including the construction and operation of its
microwave, cable and radio facilities and its satellite and earth stations.
As part of its regulation, the FCC prescribes a Uniform System of
Accounts (USOA) that dictates the account structure and accounting policies used
by both Alascom and the LECs. The FCC also establishes the principles and
procedures (separations procedures) that allocate telephone investment,
operating expenses and taxes between interstate and intrastate jurisdictions for
the Company's LEC operations and Alascom. Generally, the state regulatory
agencies have adopted the USOA and the principles and procedures prescribed by
the FCC.
To discourage carriers from subsidizing the cost of nonregulated
business activities and to protect customers from unjust and unreasonable rates,
the FCC and certain state regulatory commissions have adopted accounting and
cost allocation rules for segregating the costs of regulated services and
nonregulated services. The rules are based on fully distributed costing
principles. In addition to segregating costs, the accounting policies prescribe
guidelines for recording transactions between affiliates, require monitoring of
jurisdictional earnings of various services and set forth a process for auditing
the allocation procedures.
The Company's cellular interests are regulated by the FCC with respect
to the construction, operation and technical standards of cellular systems and
the licensing and designation of geographic boundaries of service areas. Certain
states also require operators of cellular systems to satisfy a state
certification process to serve as cellular operators.
LOCAL EXCHANGE COMPANIES
The facilities of the Company's LECs are used principally to provide
local telephone service and customer access to the long distance network. The
costs of providing services are allocated between the interstate and intrastate
jurisdictions.
Interstate service costs (both traffic sensitive and nontraffic
sensitive) are recovered through an access charge plan under which LEC and NECA
tariffs filed with the FCC allow for charges to interexchange carriers for
access
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to customers. The traffic sensitive costs are recovered either directly through
access charges or through settlements with NECA. The nontraffic sensitive
portion (subscriber loop) of these interstate-related costs is recovered through
a settlement process with NECA. The nontraffic sensitive revenue pool
administered by NECA is funded by a subscriber line charge to individual
customers, interexchange carrier access charges and long-term support payments
by nonpooling LECs. Since January 1, 1991, the interstate rate-of-return
authorized by the FCC for LECs' interstate access services, has been 11.25
percent. The USF administered by NECA compensates companies whose nontraffic
sensitive costs per subscriber are greater than an established threshold over
the national average. Due to the suburban and rural nature of its operations,
most of the Company's LECs receive this compensation, as the cost of providing
local service in rural areas generally exceeds the national average.
In November 1993, based on a concern over recent growth in the size of
the USF, a Federal-State Joint Board issued a recommended decision to the FCC
proposing the adoption of interim USF rules. These interim rules recommend that
an indexed cap be placed on USF growth to allow the USF to grow at a rate no
greater than the rate of growth in the U.S.'s total working local loops. The
interim rules are intended to allow moderate growth in the total level of the
USF while the FCC and the Federal-State Joint Board undertake a re-evaluation of
the USF assistance mechanism. The Federal-State Joint Board proposed that the
interim rules remain in effect for two years. The FCC adopted the Joint Board
recommendation at the end of 1993. As most of the Company's LEC operations
receive USF compensation, significant changes to the USF assistance mechanism
could affect the Company's future results. The Company believes that placing the
indexed cap on USF growth may have a negative impact on the Company's revenues,
but the impact is not expected to be material. In addition, the Company may
request a revenue increase at the state level to offset some or all of the lost
assistance where USF proceeds are used to maintain lower rates.
As an alternative for rate-of-return regulation, the FCC adopted
optional incentive regulation for LECs beginning in 1991. Due to specific
constraints, including the requirement that all LECs under common ownership must
adopt incentive regulation when it is adopted by any LEC in the group, it is
unlikely that the Company will adopt this form of regulation in the near future.
NECA has recently filed with the FCC its own recommendation for an incentive
regulation plan. The Company intends to monitor the progress of NECA's efforts
and evaluate its options if an alternative regulation plan is implemented.
In September 1993, the Company filed, in compliance with FCC Docket
No. 91-213, to restructure its interstate switched access transport prices
consistent with the related proposal of the Telephone Utilities Exchange Carrier
Association, which was ultimately approved by the FCC in December 1993 and made
effective January 1, 1994. The local transport restructure proceeding
accomplished a further unbundling of exchange carrier switched access services.
The new structure is expected to promote network efficiency by moving access
prices for local transport closer to cost.
In 1993, the Wisconsin Public Service Commission (WPSC) mandated a new
service, effective December 1, 1993, called Extended Community Calling (ECC).
This service extends local calling areas to allow customers to reach their local
areas of interest without incurring long distance charges, even if exchange
boundaries are crossed. These areas of interest generally extend 15-miles from
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the customer's home exchange. The Company believes that ECC will cause
immaterial reductions in the Company's billing and collection revenues and
access revenues, which reductions are expected to be offset in part by ECC
revenues.
In Washington, a process was started in 1990 to restructure rates to
allow the conversion of all multi-party to single-party lines, to eliminate
touchtone charges and to offer certain customers Extended Area Service (EAS). In
August 1993, the Company proposed additional revisions to rates for further
extension of EAS to substantially all of its Washington customers. By the end of
1994, all lines in Washington are expected to be single-party, with
approximately 98 percent having EAS capabilities. In May 1993, toll free calling
was implemented for the entire Flathead Valley in Montana. Evolution to
single-party service in Montana was completed during 1993. These changes are not
expected to have a significant effect on the financial results of the Company.
The Company received authorization from the Oregon Public Utilities
Commission to implement revised depreciation rates retroactive to January 1,
1993. This adjustment increased the depreciation rate and increased operating
expenses by $2.2 million. In addition, the Company has a depreciation study on
file with the WUTC for its LEC operations in the state of Washington. The
Company is in negotiation with the WUTC to resolve issues relating to the
proposed depreciation rate increase. The Company has also agreed to provide a
depreciation study to the APUC.
LONG LINES - INTERSTATE REVENUES
Alascom's interstate MTS and WATS revenues are presently derived
through the JSA with AT&T providing for cost-based settlements determined in
accordance with historical practices and regulatory procedures. The entire
Alaska interstate long distance market, including these procedures and the
settlement arrangement, have been under review by a Joint Board for several
years. Prior to 1991, AT&T, GCI and Alascom submitted proposals to the Joint
Board recommending alternative market structures in Alaska. None of these
proposals were acted upon by the Joint Board or the FCC. In December 1991, the
Company and AT&T signed an agreement to transfer to AT&T the provision of
interstate and international MTS and WATS services then currently provided in
Alaska by Alascom. This agreement terminated in January 1993 without
implementation. In October 1993, the Joint Board issued a final recommendation
concerning the restructuring of the interstate telecommunications market for
Alaska. That recommendation is awaiting FCC action. (See "Telecommunications
Operations - Alaska Market Restructuring.")
LONG LINES - ACCESS CHARGES
While Alascom's interstate MTS and WATS revenues continue to be
determined under the JSA with AT&T, Alascom purchases access to the local
network under an access tariff and billing and collection services under a
separate contract. These charges for interstate access services are determined
using access charge procedures used by LECs in the contiguous 48 states. (See
"Regulation - Local Exchange Companies.") Interstate access charges and billing
and collection charges are included under the JSA with AT&T.
Alascom makes payments for intrastate access charges through a state
access tariff. The access charge system was implemented in 1991 to accommodate
intrastate competitive entry. (See "Competition - Long Lines - Intrastate.")
- 14 -
The Alaska Exchange Carriers Association coordinates the filing of access
tariffs and the pooling of costs. The adoption of intrastate access charges has
had no material adverse effect on the Company's results of operations. Alascom
purchases intrastate billing and collection services under a separate contract.
LONG LINES - ALASKA SPUR
In November 1989, Alascom filed an application with the FCC seeking
authorization to acquire the Alaska Spur. (See "Telecommunications Operations
- -Pacific Telecom Cable.") On May 13, 1991, the FCC granted Alascom authorization
to acquire and operate the Alaska Spur, subject to certain conditions. Alascom
requested the FCC to issue a revised order without the conditions and did not
accept the authorization. Subsequently, the FCC issued temporary authorization
for Alascom to acquire and operate the Alaska Spur, subject to periodic renewal.
The Alaska Spur was placed into service in August 1991. The request for
reconsideration of the order is still pending before the FCC. The FCC has
granted Alascom a renewal of the temporary authorization through August 8, 1994.
In December 1992, Alascom sold 11 percent of the Alaska Spur's capacity to GCI.
COMPETITION
LOCAL EXCHANGE COMPANIES
The Company's LECs have experienced little competition in providing
basic services, primarily due to the suburban and rural nature of their service
territories. Competition from the development of alternative networks by other
carriers and of private networks (bypass) by government agencies and large
corporate customers has resulted in minor diversions of traffic from the
Company's LECs. To date, the Company has also experienced little competition
from cable TV providers and wireless technologies. Competition from these
sources may increase if regulators open basic telephone service to cable TV
operators and as wireless technologies advance. However, investment by others in
facilities will be required to provide competitive service and these investments
will be based on appropriate economic opportunities and demand for such
services. The Company believes it is well positioned to meet this type of
competition and that price and service are the significant competitive factors
in dealing with alternative networks, bypass and other forms of competition.
With respect to access service, the Company's LECs may face
competition from several sources in the future. Alternative or competitive
access carriers (CAPs) have, in various parts of the country, constructed
facilities which bypass those of the local exchange carrier to provide access
between customers and interexchange carriers. The location and extent of such
activity is determined by a number of factors, including applicable state and
federal regulatory policies, and economic and market conditions in the area. A
number of interexchange carriers have also announced or implemented programs to
construct facilities which bypass those of local exchange companies. AT&T has
entered into an acquisition agreement with a major cellular company, McCaw
Cellular Communication, in part for the apparent purpose of reducing its
dependence upon local exchange companies for access services. MCI has announced
a program for construction of facilities in twenty major metropolitan areas,
also for the purpose, in part, of reducing its dependence upon local exchange
companies for access services.
- 15 -
The Company believes that the activities of CAPs and the major
interexchange carriers, at present, do not pose a direct, material threat to the
Company's revenues due to the rural nature of its operations. The Company
anticipates that competition in services and facilities will evolve over time in
its LEC service areas. The Company is reviewing the potential effect such
competitive activity may have on its operations and is analyzing ways to benefit
from changes which may occur as competition increases.
LONG LINES - INTERSTATE
In 1982, the FCC authorized a variety of carriers to provide
interstate services in Alaska in competition with Alascom. GCI, a carrier
providing private line, MTS and WATS equivalent services to and from Alaska,
attracted a significant number of customers as LECs converted to equal access in
Anchorage, Fairbanks, Juneau and other areas. Although rates were a significant
competitive issue during the introduction of equal access, the rate advantage
enjoyed by GCI prior to rate integration was reduced with the integration of
toll rates in January 1987 and subsequent nationwide annual rate reductions
through 1990. As a result of these rate reductions and other factors, Alascom
has experienced growth in interstate billed minutes of 6.2 percent in 1993, 11.9
percent in 1992 and 10.4 percent in 1991. The Company believes that with minimal
rate differences, service is currently the predominant competitive factor in the
Alaska interstate market.
In January 1990, GCI filed a petition for rulemaking with the FCC
seeking to abolish the present prohibition against construction of duplicate
earth station facilities in rural Alaska. GCI stated that it desired to extend
its services to rural Alaska over a five-year period. Alascom opposed GCI's
petition, as being contrary to the public interest. The FCC has taken no action
with regard to the GCI petition.
LONG LINES - INTRASTATE
In 1990, the Alaska Legislature enacted legislation that authorized
intrastate competition and the APUC established specific regulations for
competition that allowed facilities-based competition in some areas, but
prohibited construction of duplicative facilities in most remote locations. The
APUC also designed a competitive framework under which high costs of providing
service in rural locations are shared by Alascom and its competitors through the
LEC access charge pooling mechanism.
Intrastate competition in Alaska commenced in May 1991. Competition
has been introduced in approximately 90 percent of the Company's intrastate
market. The Company's intrastate long distance service revenues, net of related
access charges, accounted for approximately five percent of the Company's total
revenues for 1993 and six percent in 1992 and 1991. As a result of competition,
intrastate minute volumes increased 1.7 percent in 1993 and decreased 7.3
percent in 1992 and 4.9 percent in 1991. The Company has mounted a marketing
campaign in response to this competition and believes that price and service are
the significant competitive factors in this market.
- 16 -
CELLULAR OPERATIONS
Under FCC guidelines, two licenses were granted in each MSA and RSA to
provide cellular service. All of the MSAs and RSAs in which the Company has an
ownership interest are operational. The Company believes that price and service
are significant competitive factors in the cellular market. A competitive threat
to cellular operations from other wireless communications technologies also
exists. This threat may increase as these technologies are developed in the
future.
In September 1993, the FCC allocated 160 megahertz (MHz) of spectrum
for Personal Communications Services (PCS). The FCC created seven licensed
frequency blocks representing 120 MHz of spectrum and identified 40 MHz of
spectrum for unlicensed PCS. The licensed spectrum was channelized into two 30
MHz blocks, one 20 MHz block and four 10 MHz blocks. The FCC defined the PCS
license areas based on 51 Major and 492 Basic Trading Areas (MTA and BTA,
respectively), as defined by Rand McNally. PCS licenses will be awarded through
an auction process starting not earlier than May 1994. The Company's cellular
operations are eligible to participate in the PCS auction subject to certain
limitations established by the FCC. The PCS license term is set at 10 years with
requirements to cover 33 percent of the POPs within five years, 67 percent
within seven years and 90 percent of the POPs within ten years. The Company is
monitoring PCS developments and evaluating its alternatives under the proposed
PCS licensing rules.
CABLE OPERATIONS
The North Pacific Cable is currently the only operating cable between
the U.S. and the western Pacific that has available capacity for sale. AT&T
placed a cable into service between the U.S. and Japan in late 1992. This cable
competed directly with the North Pacific Cable for subscribers. AT&T has stated
that all capacity on its cable has been subscribed. AT&T has announced plans for
an additional cable system between the eastern and western Pacific for
completion in the period from 1995 to 1997. The North Pacific Cable also
competes with available capacity on international satellites.
ENVIRONMENT
Compliance with federal, state and local provisions relating to
protection of the environment has had no significant effect on the capital
expenditures or earnings of the Company. Future effects of compliance with
environmental laws are not expected to be material, but environmental laws could
become more stringent over time.
EMPLOYEES
At December 31, 1993, the Company had 2,834 employees, approximately
41 percent of whom were members of seven different bargaining units. These units
are represented by one of the International Brotherhood of Teamsters, the
International Brotherhood of Electrical Workers, Communication Workers of
America or the NTS Employee Committee. During 1993, negotiations were completed
on two collective bargaining agreements governing 144 employees. Negotiations on
six contracts covering 1,180 employees are planned in 1994. Relations with
represented and non-represented employees continue to be generally good.
- 17 -
CONSTRUCTION PROGRAM
The Company financed its 1993 construction program primarily through
internally generated funds. Construction expenditures for 1993 and estimated
expenditures for 1994 through 1996, excluding expenditures for the construction
contract with USWC amounting to $5.7 million in 1993 and estimated at $28
million for 1994, are as follows (in millions):
Plan
----------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
LECs $ 73.7 $ 79.6 $ 98.4 $ 94.2
Long Lines 17.9 28.6 12.2 10.5
PT Cellular 7.4 6.8 5.8 5.3
Other 3.6 8.8 2.4 2.2
----- ----- ----- -----
Total $102.6 $123.8 $118.8 $112.2
----- ----- ----- -----
----- ----- ----- -----
The estimates of construction costs set forth above are subject to continuing
review and adjustment. The Company anticipates that it will be able to finance
substantially all of its construction programs for 1994 from internally
generated funds. Estimated increases in LEC construction expenditures in 1995
and 1996 relates mainly to the acquisition of USWC properties in Colorado
anticipated at the end of 1994.
ACQUISITION PROGRAM
The Company expects to complete additional acquisitions as attractive
opportunities become available. The Company's strategy is to acquire rural or
suburban local exchange properties with operating characteristics similar to
existing properties of the Company. These opportunities will allow the Company
to leverage LEC investments by providing data processing and administration
through its centralized systems. The Company seeks to realize economies of scale
through these acquisitions, particularly where the properties are near the
Company's current operations or are of sufficient size to support moving into a
new geographic area. (See "Item 1. Business - Telecommunications Operations -
Local Exchange Companies" for information regarding pending acquisitions of USWC
properties in Colorado, Oregon and Washington.)
Item 2. PROPERTIES
The telephone properties of the Company's LECs include central office
equipment, microwave and radio equipment, poles, cables, rights of way, land and
buildings, customer premise equipment, vehicles and other work equipment. Most
of the Company's division headquarters buildings, telephone exchange buildings,
business offices, warehouses and storage areas are owned by the Company's LECs
and are pledged to secure long-term debt. In addition, certain of the LECs'
microwave facilities, central office equipment and warehouses are located on
leased land. Such leases are not considered material, and their termination
would not substantially interfere with the operation of the Company's business.
(See "Item 1. Business - Telecommunications Operations - Local Exchange
Companies" for information regarding the states in which the Company has LEC
operations.)
The properties of Alascom include toll centers with toll switching
facilities, microwave and radio equipment, satellite transmit and receive earth
stations, submarine cables (including the Alaska Spur), land, warehouse and
- 18 -
administrative buildings, as well as transportation and other work equipment.
Although Alascom owns most of its buildings, much of its telecommunications
equipment is located on leased property. In addition, Alascom leases certain
microwave and satellite circuits to carry both interstate and intrastate
communications. The Company owned 16 transponders on Aurora II until October
1992 when the transponders were sold and leased back on an operating lease basis
for a 69-month period. Aurora II was launched in May 1991 to replace the
Company's original satellite and was placed in service in July 1991. The Company
purchased and placed in service one additional transponder on Aurora II in 1993.
(See "Item 1. Business - Telecommunications Operations - Long Lines" for
information concerning other properties of Alascom.)
PT Cellular's subsidiaries are partners in partnerships that own or
lease switching facilities, cell site towers, cell site radio equipment and
other equipment required to furnish cellular service to the areas they serve.
(See "Item 1. Business - Telecommunications Operations - Cellular Operations"
for information regarding the states in which the Company has cellular
operations.)
The properties of PTC and PT Transmission include a satellite transmit
and receive earth station, located at Moores Valley, Oregon, fiber optic cables,
land, buildings, operating facilities and business offices, all of which are
owned. In addition, PTC leases a duplicate cable for backup between Pacific
City, Oregon and Portland, Oregon and business office space. PTC also holds in
inventory its portion of the unsold capacity in the North Pacific Cable and
backhaul facilities.
Almost all the properties of ICH were sold in 1993 to IDB. However,
ICH owns land, buildings and office equipment in Florida. ICH is obligated under
a lease for office space in Washington D.C., which housed TRT's administrative
offices. ICH is actively pursuing the lease or sublease of these properties. ICH
has leased the Florida building and equipment to IDB for three years with
renewal options for an additional four years. (See Item 1. "Business -
Telecommunications Operations - International Communications" for information
concerning the sale of ICH's major operating subsidiary to IDB.)
The Company's executive, administrative, purchasing and certain
engineering functions are headquartered in Vancouver, Washington. The Company
has a 50 percent ownership interest in its headquarters building and, through a
long-term lease, occupies approximately 72 percent of the 225,000 square-foot
building. The Company leases most of the equipment used in conjunction with
providing data processing services.
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PART I
ITEM 1. BUSINESS
GENERAL
PacifiCorp Financial Services, Inc. (the "Company") is a holding company
with four principal business segments - Financial Services, Real Estate,
and, as a result of problem loan situations, Manufacturing and Agriculture.
These business segments conform to the definitions provided by Statement of
Financial Accounting Standards No. 14 - "Financial Reporting of Segments of
a Business Enterprise." Financial information concerning these segments
can be found in the Company's Consolidated Financial Statements and Notes
thereto.
The Company is a wholly-owned subsidiary of PacifiCorp Holdings, Inc.
("Holdings"), which is, in turn, a wholly-owned subsidiary of PacifiCorp.
PacifiCorp is a Portland, Oregon-based electric utility, conducting retail
electric utility operations under the names of Pacific Power & Light
Company and Utah Power & Light Company. The common stock of PacifiCorp
(PPW) is traded on the New York Stock Exchange and the Pacific Stock
Exchange. Holdings was incorporated in Delaware in 1984 for the purpose of
holding the non-electric subsidiaries of PacifiCorp. In addition to owning
100% of the Company's common stock, Holdings owns approximately 87% of the
common stock of Pacific Telecom, Inc. ("Pacific Telecom"). The common
stock of Pacific Telecom (PTCM) is traded on the national over-the-counter
market. Pacific Telecom provides local telephone and access services in
Alaska, seven other western states and three midwestern states; long-
distance voice and data services in Alaska; cellular mobile telephone
services; and is also involved in the sale of capacity in and operation of
a submarine fiber optic cable between the United States and Japan.
The Company was incorporated in the State of Oregon in 1949 and was
acquired by Holdings in September 1985. The Company's principal executive
offices are located at 825 N.E. Multnomah, Suite 775, Portland, Oregon
97232, and its telephone number is (503) 797-7200.
STRATEGY
To achieve PacifiCorp's strategic objective of significantly reducing the
Company's financial services assets, the Company expects to sell
substantial portions of its assets. The Company presently expects to
retain only its tax advantaged investments in leveraged lease assets
(primarily aircraft and project finance) and affordable housing projects
(included with real estate). As a result, the Company expects to
substantially reduce its workforce during 1994. For further discussion of
the impact of the Company's strategic direction, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
3
BUSINESS SEGMENTS
FINANCIAL SERVICES
AVIATION FINANCE
The Company has been a financier to the aviation industry since 1985.
However, as a result of the desire of PacifiCorp to reduce financial
services assets, the Company has made only limited new investments in
aircraft or loans relating to aircraft since 1991. The Company's portfolio
consists primarily of Stage III noise compliant aircraft, both narrow and
widebody (at December 31, 1993, approximately 90% of the Company's
portfolio investment was Stage III noise compliant). At December 31, 1993,
the Company's Aviation Finance portfolio had total assets of $454.3 million
(52 aircraft, one of which was held in inventory at December 31 but
subsequently leased in February 1994), representing approximately 40% of
the Company's consolidated assets.
COMPUTER LEASING
In late 1992, the Company began conducting its computer leasing activity
through a 50% owned corporation, Pacific Atlantic Systems Leasing, Inc.
("PASLI"). PASLI is owned by PacifiCorp Capital, Inc., a wholly-owned
subsidiary of the Company, and Bell Atlantic Systems Leasing, Inc. In
addition to being the vehicle for these shareholders to conduct all
computer leasing business activities, PASLI manages both shareholders'
preexisting computer leasing portfolios. PASLI also provides equipment
trading, syndication and systems integration for both mainframe and mid-
range systems. At December 31, 1993, Computer Leasing had a portfolio of
$87.6 million, including its $31.2 million investment in PASLI,
representing approximately 7.7% of the Company's consolidated assets.
OTHER FINANCIAL SERVICES
Other Financial Services includes centralized credit administration and
asset management for the Company. Although no longer originating new
business, the Company continues to manage its remaining asset-based lending
portfolio, which includes revolving lines of credit secured by accounts
receivable and inventory, intermediate term loans secured by plant and
equipment, and unsecured or partially secured cash flow-based loans to its
existing customers. These customers are manufacturers and operators in
various industries and other owners of capital equipment. Other Financial
Services also includes the Company's project finance investments, which
include a polymer plastics complex and an undivided interest in a
traditional coal-fired power plant. At December 31, 1993, Other Financial
Services had a portfolio of $212.9 million, or approximately 18.8% of the
Company's consolidated assets.
REAL ESTATE
AFFORDABLE HOUSING GROUP
The Company has historically focused on investing in apartment housing
projects that are eligible for the federal low income housing tax credit.
At December 31, 1993, the Company had investments in 14 projects consisting
of 2,895 rental units, which were approximately 96% occupied. These
projects, which are generally suburban, garden style apartment complexes,
are located throughout the United States. In February 1993, the Company
successfully completed its first syndication of an approximate 80% interest
in three projects for $11.6 million in cash. The Company expects to
complete similar
4
transactions in the future. Further information related to these tax
credits can be found in Note 12 to the Company's Consolidated Financial
Statements. At December 31, 1993, Affordable Housing assets totaled $139.7
million, representing approximately 12.3% of the Company's consolidated
assets.
PACIFIC DEVELOPMENT, INC. ("PDI")
PDI owns and manages several office buildings (in aggregate, approximately
1,019,000 square feet), in which the Company and PacifiCorp are significant
tenants. At December 31, 1993, these buildings were approximately 97%
occupied. PDI also owns other developed and undeveloped property in the
east side business district of Portland, Oregon, known as the Lloyd
District. During the past few years, PDI has sold certain of its Lloyd
District properties and will continue efforts to sell additional
properties. In March 1994, PDI sold one of its office buildings and
certain other assets to PacifiCorp for a gross sales price of $47.7 million
and net cash proceeds of $30.3 million, after repayment of related non-
recourse debt (see Note 21 to the Consolidated Financial Statements).
At December 31, 1993, PDI had assets of $112.6 million, representing
approximately 9.9% of the Company's consolidated assets.
OTHER REAL ESTATE
At December 31, 1993, the Company had other real estate holdings, primarily
in Springfield, Illinois, totaling $71.0 million, or 6.3% of the Company's
consolidated assets. Four of the Company's Springfield properties were
subsequently sold in March 1994 (see Note 21 to the Consolidated Financial
Statements).
MANUFACTURING
VERMONT CASTINGS, INC. ("VCI")
Since the acquisition of VCI in May 1990 (as the result of a loan default),
the Company has overseen the management of VCI with the objective of
improving operating performance to a point where the Company could maximize
the recovery of its investment. During the past three years, VCI's
performance has improved and the Company is actively pursuing the sale of
its interest in VCI.
VCI is a major participant in the Fire on the Hearth industry (heating and
decorative appliances, including freestanding stoves, fireplaces and
fireplace inserts, fueled by either wood, natural or propane gas, pellets
or coal). VCI's principal products currently consist of cast iron
freestanding wood and gas burning stoves, fireplaces and inserts. These
products are marketed under the Vermont Castings, DutchWest and Wonderfire
brand names. In 1992, the Company successfully introduced three new gas
fueled appliances that significantly advanced its presence in this growing
segment of the industry. The Company's products are currently distributed
through independent domestic and foreign dealers.
The Fire on the Hearth industry is seasonal with the majority of revenues
occurring during the last four months of the calendar year. VCI's raw
material is primarily scrap iron and pig iron, which are readily available
commodities.
At December 31, 1993, this segment had total assets of $30.6 million,
representing approximately 2.7% of the Company's consolidated assets.
5
AGRICULTURE
COLOR SPOT, INC. ("COLOR SPOT")
Effective March 1, 1993, in response to a loan default by Color Spot, Inc.,
the Company acquired certain assets and assumed certain liabilities of
Color Spot, Inc., a large West Coast wholesale nursery headquartered near
Richmond, California, in exchange for forgiveness of a portion of the loan.
The Company is operating this business under the name "Color Spot." The
Company oversees the management of Color Spot with the objective of
increasing value in a manner that would facilitate the disposition of its
interest in Color Spot.
Color Spot's primary business is the sale of bedding plants to large retail
customers. Color Spot's six largest customers account for approximately
80% of its sales. Color Spot's business is seasonal, with the highest
level of activity occurring during the spring and early summer. For
further discussion, see Note 3 to the Company's Consolidated Financial
Statements.
At December 31, 1993, Color Spot had total assets of $19.9 million,
representing approximately 1.8% of the Company's consolidated assets.
ITEM 2. PROPERTIES
FINANCIAL SERVICES - The principal executive offices of the Company are
leased from the Company's real estate subsidiary, PDI. The Company's
financial services operations also maintain other leased office premises,
generally under noncancellable leases. For additional information
concerning the Company's lease obligations, see Note 15 to the Company's
Consolidated Financial Statements.
REAL ESTATE - The Company's Affordable Housing group owns interests in 14
projects consisting of 2,895 rental units located throughout the United
States. As of December 31, 1993, PDI owned several office buildings
(approximate aggregate square footage of 1,019,000 and other developed and
undeveloped property) in the Lloyd District of Portland, Oregon. PDI sold
one of its office buildings (approximate square footage of 428,000) to
PacifiCorp in March 1994. This building houses the principal executive
offices of the Company.
MANUFACTURING - VCI owns certain real property, primarily consisting of a
cast iron foundry located on 76 acres in Randolph, Vermont, an enamelling
and assembly plant located on 12 acres in Bethel, Vermont, and an
assembly/administrative facility in Bristol, England. VCI leases certain
real property consisting of an administrative and research facility located
on 4.5 acres in Bethel, Vermont.
AGRICULTURE - Color Spot owns and/or leases 456 acres of land, located at
six sites in California. Color Spot owns 3,225,290 square feet of
greenhouses at these locations. Color Spot also owns an office building in
San Pablo, California that houses its administrative personnel.
6