EXHIBIT 99
PACIFIC TELECOM, INC.
ITEM 1. BUSINESS AND
ITEM 2. PROPERTIES
1994 ANNUAL REPORT ON FORM 10-K
PART I
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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 expansion of 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 certain cellular
holdings, and ongoing efforts to complete the sale of the Alaska long distance
operations to AT&T. Upon completion of the pending sale of Alascom to AT&T, the
Company will have resolved its uncertainties related to the Alaska long distance
market. The sale of two noncore operations in 1993 successfully completed the
Company's exit from its material noncore businesses.
PTI has been a majority-owned subsidiary of PacifiCorp since 1973. At
December 31, 1994, PacifiCorp, through a wholly-owned subsidiary, PacifiCorp
Holdings, Inc. (Holdings), beneficially owned approximately 87 percent of PTI's
common stock. On March 9, 1995, PacifiCorp and PTI announced a definitive merger
agreement pursuant to which a newly-formed, wholly-owned subsidiary of Holdings
will merge with and into PTI. Under the agreement, the holders of the
approximately 5.3 million shares of common stock of PTI not held by Holdings
will receive $30 in cash in exchange for each share of PTI common stock. As a
result of the merger, PTI would become an indirect, wholly-owned subsidiary of
PacifiCorp. The merger is conditioned upon, among other things, affirmative
approval of the merger by holders of a majority of the shares held by the
unaffiliated public shareholders.
On November 1, 1994, Holdings originally proposed to acquire the shares not
owned by it for $28 per share in cash. Promptly thereafter, PTI's Board of
Directors formed a Special Committee of independent directors to receive, study,
negotiate and make recommendations to the PTI Board regarding that proposal. The
merger agreement was unanimously approved by the Board of Directors of PTI as
fair to, and in the best interests of, PTI's public minority shareholders upon
the unanimous recommendation of the Special Committee. In connection with its
recommendation of the transaction, the Special Committee received the written
opinions of Smith Barney Inc. and CS First Boston Corporation, to the effect
that the consideration to be received by the minority shareholders in the merger
is fair, from a financial point of view, to such holders.
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. At February 28, 1995, the Company operated 15
LECs within eleven states comprised of approximately 471,000 access lines in 297
exchanges. The average number of access lines per exchange is approximately
1,586, 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 23,390 access lines at
December 31, 1994. Of the Company's 252 exchanges at December 31, 1994, 143
serve less than 1,000 access lines. Service areas are located primarily in the
states of Alaska, Colorado, Montana, Oregon, Washington and Wisconsin. States
also served, but to a lesser extent, include Idaho, Iowa, Minnesota, Nevada and
Wyoming. (See "Regulation -- General.") The Company provides centralized
administrative services to field operations from its corporate offices in
Vancouver, Washington.
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During the five years ended December 31, 1994, the number of access lines
served by the Company increased from 252,700 to 418,000. As a result of the
acquisitions of several LECs located in the Midwest, the Company added
approximately 69,000 access lines in 1990, 3,200 in 1992 and 1,100 in 1993.
Approximately 50,000 access lines in Colorado were added in February 1995 upon
completion of the purchase of rural telephone exchange assets from USWC. (See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Acquisitions" for more information concerning the Colorado
acquisition.) The LECs have also experienced strong internal access line growth
in certain service areas, as evidenced by a 4.8 percent increase in access lines
served during 1994. The Company anticipates that access line growth in the
future will come from acquisitions and population growth in current service
areas.
Excluding the Colorado properties recently acquired from USWC, the Company
has completed the conversion of all multi-party lines to single-party lines.
Approximately 60 percent of the multi-party lines in these newly acquired
Colorado exchanges were converted to single-party service by the end of 1994,
and the Company expects that these exchanges will be fully converted to
single-party service by December 31, 1995.
The LECs have contracts with interexchange carriers under which the Company
provides billing and collection services. The Company has an agreement to
provide these services for AT&T and an agreement with Independent NECA Services
(INS), a clearinghouse service bureau, to provide these services for other
carriers for varying periods of time, some with automatic renewals and some
terminating in 1995 and 1996. In Alaska, the Company's LECs have similar
agreements with Alascom.
Effective March 6, 1995, AT&T started billing and collection for most of
its toll messages in the western areas served by the Company, and will do so in
the midwest areas served by the Company beginning in April 1995. This change is
expected to reduce the Company's billing and collection revenues by
approximately $1 million in 1995 compared to 1994. It is anticipated that this
reduction will be partially offset by the effects of increased message volumes
billed due to acquisitions and billing for additional carriers through the
agreement with INS.
In addition to its basic telephone service, the Company offers enhanced
services, such as caller name and number identification, automatic call back,
auto recall and call trace, to certain of its service areas under the Custom
Local Area Signaling Service (CLASS). CLASS services were offered to certain of
the Company's customers in Washington, Montana and Wisconsin in 1994. The
Company is evaluating the offering of CLASS services in 1995 to certain Alaska,
Colorado and Oregon markets and additional markets in Washington and Wisconsin.
The Company's existing switching equipment provides these services with minimal
software and hardware enhancements. Some of the Company's switching equipment
has other enhanced service capabilities, such as voice messaging, that are being
offered to its customers where available. The Company also offers certain
customers custom calling features like call forwarding, call waiting and speed
dial. The LECs also sell and lease, on a nonregulated basis, customer premise
(i.e., telephone) equipment for use by residential and business customers. As
part of this program, residential and business customers are offered maintenance
services on a monthly fee basis. In 1994, revenues from these services totalled
$1.4 million.
The Company continues to seek expansion of its local exchange operations
through acquisition. In February 1995, the Company acquired certain rural
telephone exchange assets in Colorado from USWC. The assets represent 45
exchanges that serve approximately 50,000 access lines. The Company paid
approximately $200 million for these assets at closing. The Company funded the
Colorado acquisition through short-term bank borrowings and anticipates repaying
these borrowings with proceeds from the sale of Alascom. In an attempt to
satisfy certain regulatory concerns in Colorado, the Company also entered into a
construction contract with USWC in July 1993 that required the Company to
construct and upgrade plant related to the acquired assets. Under the contract,
the Company acted as general contractor on behalf of USWC. The construction and
upgrade program accelerated single-party service and digital switching required
by the CPUC. During 1993 and 1994, the Company spent an aggregate of $30.1
million under this contract. The Company has added the amounts expended under
the contract to its construction work in progress or plant in service accounts
for these exchanges.
The Company has received an order from the FCC granting the waivers to
reclassify the exchanges from USWC's regulatory study area in Colorado to the
Company's regulatory study area in Colorado and to permit rate of return
regulation on the exchanges served by the acquired assets. Included in the study
area waivers was permission for these exchanges to be eligible to receive
support from the USF, as the cost to provide service in these exchanges exceeds
the national average. The FCC waivers will allow the
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Company to replace the incentive regulation adopted for these exchanges by USWC
with cost based rate of return regulation, which is consistent with the
Company's other LEC operations. (See "Regulation -- Local Exchange Companies"
for additional information concerning new USF limitations.)
In May 1994, the Company signed definitive purchase agreements to acquire
certain rural telephone exchange assets in Oregon and Washington from USWC. The
assets to be acquired by the Company represent 49 exchanges that serve
approximately 35,000 access lines. Many of these exchanges are contiguous to or
located near other rural exchanges that the Company owns and operates in these
states. The combined price for these assets of approximately $180 million in
cash is subject to certain adjustments, including adjustments for actual book
value of the assets at closing. The Company will not assume any financial
liabilities from USWC in the transactions. Applications seeking Washington
Utilities and Transportation Commission and Oregon Public Utilities Commission
approvals and FCC study area and price cap waivers were filed in the second
quarter of 1994. The FCC order approving the Colorado transaction grandfathered
the FCC waiver requests for the Oregon and Washington assets, permitting them to
be evaluated without application of a newly imposed restriction limiting the
redistribution of USF funding. (See "Regulation -- Local Exchange Companies" for
additional information about changes in the USF.) Completion of the transactions
with USWC is also dependent on other regulatory and governmental approvals,
receipt of which is expected to occur prior to the end of 1995. The Company
expects to fund the acquisition of these assets through proceeds from the sale
of Alascom to AT&T, 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. All interstate MTS and certain interstate private line services are
provided via the Alaska Spur. (See "Telecommunications Operations -- Pacific
Telecom Cable.") Satellite facilities 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.
Alascom operates 18 satellite transponders on a communication satellite
that replaced Alascom's original satellite in 1991. Alascom purchased two
transponders, one in 1994 and one in 1993, and leases 16 transponders under an
operating lease that expires in mid-1998. At the end of the lease, the Company
has the option of either repurchasing the satellite or guaranteeing a minimum
sales price to a non-affiliated party. Telemetry, tracking, control and in-orbit
protection services are provided under contract by GE American Communications,
Inc. for the projected remaining service life of the satellite estimated at 8
years.
Alascom owns 173 satellite transmit and receive earth stations (including
12 transportable earth stations), a 50 percent interest in 46 earth stations
used generally for service throughout Alaska and 7 additional earth stations
located in the lower 48 states, 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. 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.
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Alaska Market Restructuring
In October 1994, the Company signed an agreement to sell the stock of
Alascom to AT&T in a transaction providing $365 million in proceeds. Under the
terms of the agreement, AT&T will pay $290 million in cash for the Alascom stock
and for settlement of all past cost study issues. AT&T has also agreed to allow
PTI to retain a $75 million transition payment made by AT&T to Alascom in July
1994 pursuant to an FCC order. AT&T made a down payment of $30 million to the
Company upon signing the stock purchase agreement, which would be applied to the
final $75 million transition payment required in the FCC order if the sale
failed to close. The remaining $260 million is to be paid when the transaction
closes. Closing of the sale of Alascom is subject to certain conditions,
including receipt of state and federal regulatory approvals that are expected to
be received during the first half of 1995. The Company has agreed to provide
accounting, data processing and human resource service support for up to 15
months following the sale to allow for a smooth transition in exchange for
certain equipment that the Company intends to incorporate in its LEC operations.
The Company anticipates recognizing a material gain from the sale of Alascom.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Forecast" for information about this gain.
The JSA and the entire telecommunications market in Alaska have been under
review by a Joint Board of the FCC and state regulators over the past ten years.
In May 1994, the FCC, based on recommendations of the Joint Board, ordered a
restructuring of the Alaska telecommunications market. Among other matters, the
FCC order would have required termination of the JSA between Alascom and AT&T,
effective January 1, 1996; the payment by AT&T to Alascom of $150 million for
transition payments in two equal installments of $75 million each; AT&T to
continue utilizing 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 allocation of costs between rural and
nonrural locations. Although the FCC order remains in effect, the agreement to
sell Alascom to AT&T was reached as a solution to issues that remained
unresolved by the order. Alascom filed a petition for review of the FCC order
with the United States Court of Appeals for the District of Columbia in June
1994. This petition has been stayed pending completion of the proposed
transaction with AT&T.
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 10 of these interests in Alaska, Michigan and
Wisconsin. The Company also manages five other RSAs in Minnesota. Revenues from
cellular operations represented approximately three percent of total Company
revenues in 1994.
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 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 Company believes that the creation of a large regional automatic call
delivery area is important to the continued success of its cellular operations.
During 1994, the Company's cellular properties in Wisconsin and Michigan were
networked with the major MSA markets in Wisconsin and with all of the markets in
rural Minnesota. This provided the Company's Wisconsin and Michigan customers
with one of the largest regional automatic call delivery areas available in the
U.S. The Company plans to continue its efforts to expand its presence in the
Midwest and to network with additional major MSA markets in Minnesota, Michigan
and Illinois in early 1995. The provision of automatic call delivery services
within the region simplifies the process by which customers receive cellular
calls in the areas that they travel most often, thus increasing the convenience
and value of their cellular service.
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The Company continues to test and evaluate digital cellular technology and
is preparing to provide digital cellular service when market forces warrant its
deployment. The Company does not anticipate that in the near future it will be
required to deploy digital cellular technology solely to increase the capacity
of its cellular systems.
The following table sets forth the Company's POP ownership by state as of
December 31, 1994.
Non-
State Controlled(1) Controlled Total
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Alaska 201,000 -- 201,000
Michigan 315,000 -- 315,000
Minnesota -- 23,567 23,567
Oregon -- 107,035 107,035
South Dakota -- 16,147 16,147
Washington -- 41,152 41,152
Wisconsin 688,646 627,407 1,316,053
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Total 1,204,646 815,308 2,019,954
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<FN>
(1) Represents interests with respect to RSAs and MSAs where the Company has an
ownership position and manages the operations.
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. On January 18, 1995, the Company
signed a letter of intent to sell 20 percent of its interest in the Alaska RSA
#1 market (Fairbanks) for cash and notes receivable. The letter of intent also
provides options for the buyer to increase its ownership of the market to a
maximum level of 49 percent over a two-year period. Consummation of the
transaction is subject to negotiation of definitive agreements and certain
corporate approvals. This sale is not anticipated to have a significant impact
on the financial results of the Company. The Company has budgeted $20.6 million
for the development of cellular operations over the next three years.
Customers served by the cellular operations controlled by the Company
increased 61 percent in 1994, 65 percent in 1993 and 70 percent in 1992.
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 was 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.
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
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1991. Forty-three private and government-owned telecommunications firms
representing 26 countries have purchased approximately 53 percent of the cable's
17,010 circuit capacity. PTC recognized revenues of $4.6 million in 1994, $4.9
million in 1993 and $10.8 million in 1992 related to cable and backhaul capacity
sales.
PTC continues to market the remaining 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, interconnectivity between
existing and planned cable systems and the North Pacific Cable, the availability
of other sources of capacity over the next five years and the possible
development of alternative business uses of the cable, the Company believes that
the inventory value of the cable system at December 31, 1994 can be recovered.
The original three-year warranty on the North Pacific Cable system's
submersible plant and terminal equipment ended on November 11, 1994. This
warranty covered the repeaters, electronics, cable and branching unit. Testing
to verify the status of the system was completed prior to warranty expiration.
Results of the completed tests indicated that the North Pacific Cable system was
operating at or above contracted levels before an outage in February 1995. This
outage is under investigation. Extended warranties for certain components of the
North Pacific Cable system will continue in effect until November 2001. These
extended warranties apply to the majority of the cable supplied by the
manufacturers.
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.
Other Communications Subsidiaries and Partnerships
On April 29, 1994, the Company completed the sale of two wholly-owned
noncore subsidiaries, PTI Harbor Bay, Inc. and Upsouth Corporation, to IntelCom
Group, Inc. (IntelCom) (AMEX:ITR) for 1,183,147 shares of IntelCom common stock
and $.2 million in cash. On October 17, 1994, the Company sold its IntelCom
stock in an underwritten public offering. Cash proceeds of $15.9 million and a
gain of $1.0 million, net of tax and selling expenses, were recognized in 1994.
PTI Harbor Bay, Inc. provides transmission services principally in the greater
San Francisco Bay Area. Upsouth Corporation owns an earth station complex near
Atlanta, Georgia and another near Carteret, New Jersey. The net assets of PTI
Harbor Bay, Inc. and Upsouth Corporation prior to the sale were classified in
"other current assets."
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 and
the Company recognized a tax benefit. The Company sold the FM station in Idaho
in July 1994 and recognized a pre-tax loss of $.3 million. On February 28, 1995,
the Company completed the sale of the Oregon stations and recognized no gain or
loss on the transaction. The Company also has agreements to sell the remaining
stations in Nevada and is waiting for regulatory approval of the sales, which
are expected to close in the first half of 1995. Due to their pending sale, the
net assets of the radio stations were classified as "other current assets" at
December 31, 1994. The Company expects to recover its investment in these
entities as the result of these transactions.
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REGULATION
General
The Company's LECs and Alascom 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, Congress and some state regulatory agencies are pursuing alternative forms
of regulation that depart from traditional rate of return regulation for
telecommunications companies such as the Company. These alternatives include the
possible opening of local exchange franchises to competition. The effects of any
such alternative forms of regulation on the Company's LECs is uncertain.
The Company's LECs are governed by tariffs filed with the FCC for
interstate access services provided to interexchange carriers. Interstate and
certain international services provided by Alascom are governed by tariffs
filed with the FCC. 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
the LECs and Alascom. 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 or NECA tariffs
filed with the FCC allow for charges to interexchange carriers for access to
customers. The traffic sensitive costs are recovered either directly through
access charges or through cost based settlements with NECA. The nontraffic
sensitive portion (subscriber loop) of these interstate-related costs is
recovered through a settlement process with NECA. The subscriber loop represents
investment in plant from the central office to the customer's premise. 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 loop 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.
Based on a concern over recent growth in the size of the USF, a
Federal-State Joint Board proposed interim USF rules that were adopted by the
FCC in 1993. These interim rules place an indexed cap on USF growth to allow the
USF to grow at a rate no greater than the rate of growth in the nation's total
work-
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ing 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 1994 and 1995. 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, a reduction in USF revenues will shift revenue requirement to the
intrastate jurisdiction where 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.
In 1994, Congress considered legislation (S. 1822) that would rewrite the
1934 Communications Act. Efforts to pass comprehensive telecommunications
legislation are expected to continue in 1995. Based upon statements of
Congressional leaders, it is expected that the 1995 effort, much like the 1994
effort, will address universal service concepts and the support mechanisms
necessary to sustain them.
On January 5, 1995, the FCC issued its order granting the Company a study
area waiver and price cap waiver associated with the Company's purchase of USWC
assets in Colorado. The order clears the way for the purchased assets to fully
participate in the USF and allows them to be operated on a rate of return as
opposed to price cap basis. The order also implemented new standards on
transactions having an impact on the USF. any future transaction that would
cause a shift of USF payments exceeding one percent of the total fund will be
held to a higher standard of review by the FCC. However, the Company's pending
waiver requests associated with the Company's purchase of USWC Washington and
Oregon assets were grandfathered and will be evaluated without application of
the one percent cap.
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 for interstate purposes in
the near future. NECA has recently filed its own recommendation for an incentive
regulation plan with the FCC. The Company will monitor the progress of NECA's
efforts and evaluate its options if an alternative regulation plan is
implemented.
In early 1995, the Company's largest Wisconsin LEC filed proposed local
exchange and intrastate access rate changes with the Wisconsin Public Service
Commission, which would become effective June 1, 1995. The proposed rate design
would be revenue neutral with lower revenues from interexchange access and
services offset by increased local exchange revenues of approximately $.6
million. Extended Area Service (EAS), which extends local calling areas, would
not be part of the basic rates and would be measured on a minute of use basis or
a flat rate optional service. Management does not believe that these changes
will significantly impact the Company's financial results.
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 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 were
single-party, with approximately 98 percent having EAS capabilities.
In December 1994, the Company received an order from the APUC to implement
revised depreciation rates retroactive to January 1, 1994. This adjustment
decreased the depreciation rate, which resulted in an annual increase in
operating income of $3.6 million. The income was recognized in the last quarter
of 1994. There are no other LEC depreciation rate adjustments currently pending
with any of the Company's regulatory commissions.
Long Lines
Long Lines -- Interstate Revenues
Through September 1994, Alascom's interstate MTS and WATS revenues were
derived through the JSA with AT&T. Based on a May 1994 FCC order, the JSA is
scheduled to be terminated on January 1, 1996. Since that order was received,
the Company has agreed to sell the stock of Alascom to AT&T. Long lines
interstate revenues from October 1994 until the sale closes are recognized based
on the interim cash settlement amounts outlined in the stock sale agreement.
These monthly payments are fixed at historically projected settlement amounts.
Prior to signing the agreement in October 1994, long lines recognized revenue
under the JSA based on the current computation of the revenue requirements. (See
"Telecommunications Operations -- Alaska Market Restructuring.")
11
Long Lines -- Access Charges
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.")
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
Alascom purchased and operates the Alaska Spur under a temporary
authorization from the FCC which expires on August 8, 1995. 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 the Company
believes that these investments will be made only if appropriate economic
opportunities and demand for such services exist. The Company also 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 providers
(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. This
activity is most prominent in the business districts of large urban areas. A
number of interexchange carriers have also announced or implemented programs to
construct facilities which bypass those of local exchange companies. This
competitive activity pressures LECs to lower access rates. There are also
political pressures supporting lower access rates.
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 ratio of
residential to business access lines for the Regional Bell Operating Companies
averages two to one, while the Company's LECs average three to one. 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 seeking to find ways to
benefit from changes which may occur as competition increases.
12
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 2.7 percent in 1994, 6.2 percent in 1993
and 11.9 percent in 1992. 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 in 1994 and in 1993 and six percent in 1992. 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. Intrastate
minute volumes increased 5.0 percent in 1994 and 1.7 percent in 1993 but
decreased 7.3 percent in 1992.
Cellular Operations
Under FCC guidelines, two licenses to provide cellular service were granted in
each MSA and RSA. 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 June 1994, the FCC modified the rules issued in September 1993 governing
broadband Personal Communications Services (PCS). The FCC defined the PCS
license areas based on 51 major and 493 basic trading areas (MTA and BTA,
respectively). Under the PCS rules as modified, the FCC created six licensed
frequency blocks representing 120 MHz of spectrum and identified 20 MHz of
spectrum for unlicensed PCS. The licensed spectrum was divided into two 30 MHz
MTA blocks, one 30 MHz BTA block and three 10 MHz BTA blocks. The FCC began the
broadband PCS auction process in December 1994 by auctioning the MTA licenses.
The auctions for the BTA licenses are expected to be initiated by the second
quarter of 1995. The Company's cellular operations are eligible to participate
in the PCS auctions subject to certain limitations established by the FCC. The
PCS license term is set at 10 years with 30 MHz licensees required to cover
one-third of the POPs within five years and two-thirds of the POPs within ten
years; 10 MHz licensees are required to cover one-quarter of the POPs within
five years. Although the Company is not planning on bidding for PCS licences, it
continues to monitor PCS developments and evaluate its opportunities in the PCS
market.
13
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
over the next three years. The North Pacific Cable also competes with available
capacity on international communication 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, 1994, the Company had 2,762 employees, approximately 39
percent of whom were members of six different bargaining units. These units are
represented by the International Brotherhood of Teamsters, the International
Brotherhood of Electrical Workers, Communication Workers of America or the NTS
Employee Committee. During 1994, negotiations were completed on three collective
bargaining agreements governing 392 employees. Negotiations on three contracts
covering 692 employees commenced in 1994 and continued into 1995. Relations with
represented and non-represented employees continue to be generally good.
As a result of the pending sale of Alascom, the Company's workforce would
no longer include the 632 full-time employees of Alascom. PTI would retain all
liabilities related to Alascom's retired employees in accordance with the
Company's retirement plans while AT&T would make available its plans to existing
Alascom employees at closing under terms of the stock purchase agreement.
CONSTRUCTION PROGRAM
The Company financed its 1994 construction program primarily through
internally generated funds. Construction expenditures for 1994 and estimated
expenditures for 1995 through 1997, including expenditures relating to assets
acquired or to be acquired from USWC of $24.4 million, $34.9 million, $19.9
million and $15.8 million for 1994, 1995, 1996 and 1997, respectively, are as
follows (in millions):
Plan
------------------------------
1994 1995 1996 1997
-----------------------------------------------------------------------------
LECs $110.9 $108.7 $109.5 $99.0
Long Lines 22.2 7.1 -- --
PT Cellular 9.8 8.5 5.0 7.1
Other 5.3 3.2 2.6 2.6
-----------------------------------------------------------------------------
Total $148.2 $127.5 $117.1 $108.7
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 1995 from internally
generated funds.
14
ACQUISITION PROGRAM
The Company continues to seek expansion of its local exchange operations
and cellular interests through the acquisition of additional local exchange
companies and assets and cellular properties that complement its existing
properties and operations. 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 "Telecommunications Operations -- Local Exchange
Companies" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Pro Forma Financial Information" and
"Financial Forecast" for information regarding pending acquisitions of USWC
assets in 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
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 leases 16 transponders on a satellite through an
operating lease with a term of 69 months. The Company also purchased and placed
in service two additional transponders on this satellite, one in 1993 and one in
1994. (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.
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 73 percent of the 225,000 square-foot building.
The Company owns its mainframe computer and leases most of the other equipment
used in conjunction with providing data processing services.
15
PACIFICORP FINANCIAL SERVICES, INC.
ITEM 1. BUSINESS AND
ITEM 2. PROPERTIES
1994 ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
PacifiCorp Financial Services, Inc. (the "Company") is a holding company
with three principal business segments - Financial Services, Real Estate,
and, as a result of the resolution of a problem loan situation,
Agriculture. A formal plan for disposal of the Company's investment in its
Agriculture operations was adopted late in the fourth quarter of 1994 and
Agriculture is now classified as part of discontinued operations (see Note
10 to the Consolidated Financial Statements). A fourth business segment,
Manufacturing, was disposed of in the third quarter of 1994. The Financial
Services and Real Estate business segments conform to the definitions
provided by Statement of Financial Accounting Standards No. 14 - "Financial
Reporting of Segments of a Business Enterprise." The net assets and
results of operations of the Agriculture and Manufacturing segments have
been classified as discontinued operations. Financial information
concerning Financial Services, Real Estate and discontinued operations 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 has sold substantial
portions of its assets. The Company presently expects to continue this
selling effort over the next several years and retain only its tax
advantaged investments in leveraged lease assets (primarily aircraft) and
affordable housing projects. 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
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, 1994, approximately 91% of aircraft in the Company's
portfolio investment was Stage III noise compliant. At December 31, 1994,
the Company's Aviation Finance portfolio had total assets of $391 million
(44 aircraft, of which two C-130's aggregating $1 million were held as
Assets Held for Sale at December 31, 1994), representing approximately 53%
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 was owned by PacifiCorp Capital, Inc., a wholly-owned
subsidiary of the Company, and Bell Atlantic Systems Leasing, Inc. In
addition to conducting its own computer leasing business activities, PASLI
managed both shareholders' preexisting computer leasing portfolios. In
November 1994, the Company sold its computer leasing assets and its 50%
interest in PASLI.
OTHER FINANCIAL SERVICES
Other Financial Services include 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 and other assets. At December 31, 1994, Other Financial Services
had a portfolio of $126 million, or approximately 17% 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
and anticipates that in the future it will increase its involvement in the
development phase of new projects. At December 31, 1994, the Company had
investments in 15 projects, consisting of 3,037 rental units, which were
approximately 95% occupied. These projects, which are generally suburban,
garden style apartment complexes, are located throughout the United States.
In February 1993 and April 1994, the Company successfully completed
syndications of approximate 80% interests in certain of its projects for
$11.6 million and $3.5 million in cash, respectively. The Company expects
to complete similar transactions in the future. Further information
relating to these tax credits can be found in Note 12 to the Company's
Consolidated Financial Statements. At December 31, 1994, Affordable
Housing assets totaled $135 million, representing approximately 18% of the
Company's consolidated assets.
4
PACIFIC DEVELOPMENT, INC. ("PDI")
PDI owns or manages several office buildings (in aggregate, approximately
1,178,000 square feet), in which the Company and PacifiCorp are significant
tenants. At December 31, 1994, these buildings were approximately 98%
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 several 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.
At December 31, 1994, PDI had assets of $34 million, representing
approximately 5% of the Company's consolidated assets. These assets are
classified as "Held for Sale" in the Company's consolidated balance sheet.
PDI agreed to sell the majority of these properties on March 7, 1995. The
sale is contingent on financing and is expected to close in the third
quarter of 1995.
OTHER REAL ESTATE
At December 31, 1994, the Company had other real estate holdings in Bartow,
Florida and Columbus, Ohio totaling $2 million. The Company sold its
Springfield, Illinois properties in 1994.
DISCONTINUED OPERATIONS
MANUFACTURING
VERMONT CASTINGS, INC. ("VCI")
VCI was acquired in May 1990 as the result of a loan default. The Company
sold its interest in VCI in August 1994.
The net assets of VCI at December 31, 1993, and the results of operations
for the periods ended December 31, 1994 and 1993 are reported as
discontinued operations.
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.
A formal plan for disposal of the Company's investment in its agriculture
operations was adopted late in the fourth quarter of 1994. As a result,
the net assets and results of operations of Color Spot are reported as
discontinued operations.
5
ITEM 2. PROPERTIES
FINANCIAL SERVICES - The principal executive offices of the Company are
leased from PacifiCorp. 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 15
projects consisting of 3,037 rental units located throughout the United
States. As of December 31, 1994, PDI owns several office buildings
(approximate aggregate square footage of 369,771) and other developed and
undeveloped property in the Lloyd District of Portland, Oregon.
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