EXHIBIT (99)
Pacific Telecom, Inc.
Item 1. Business and
Item 2. Properties
1996 Annual Report on Form 10-K
DEFINITIONS
When the following terms are used in the text, they will have the meanings
indicated:
TERM MEANING
Alaska Spur A portion of the North Pacific Cable that links
Alaska and the lower 48 states
AT&T AT&T Corp.
Alascom Alascom, Inc., a wholly-owned subsidiary of PTI
until its sale to AT&T in August 1995
Company PTI and its subsidiaries
FCC Federal Communications Commission
FMUS Fairbanks Municipal Utility System
GTE GTE North Incorporated
Holdings PacifiCorp Holdings, Inc., a wholly-owned
subsidiary of PacifiCorp
LEC Local exchange company
MSA Metropolitan statistical area
NPC North Pacific Cable, a submarine fiber optic cable
between the U.S. and Japan
PCS Personal communication services
PTC Pacific Telecom Cable, Inc., an 80 percent owned
subsidiary of PTI
PT Cellular Pacific Telecom Cellular, Inc., a wholly-owned
subsidiary of PTI
PT Transmission Pacific Telecom Transmission Services, Inc., a
wholly-owned subsidiary of PTI
PTI Pacific Telecom, Inc., a Washington corporation
RSA Rural service area
U.S. United States of America
USF Universal Service Fund
USWC US WEST Communications, Inc.
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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 expansion of its
service offerings in several areas within the telecommunications industry. This
expansion included investments in cellular telephone operations, international
communications, including the construction of a trans-Pacific fiber optic cable
and, until August 1995, the provision of long distance services in the State of
Alaska through Alascom. 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 has been implemented through the acquisition of LECs,
the sale of certain international operations, the consolidation and sale of
cellular holdings, and the sale of Alascom to AT&T.
The Company is a wholly-owned subsidiary of Holdings, which is a
wholly-owned subsidiary of PacifiCorp. On September 27, 1995, holders of a
majority of the approximately 5.3 million shares of outstanding common stock
held by minority shareholders voted in favor of the merger of a wholly-owned
subsidiary of Holdings into the Company. As a result of the merger, the Company
has a liability at December 31, 1996 of $29.5 million to be paid to dissenters
in the merger based on $30.00 per share fair value for their shares, including
interest on the liability accrued at a rate equal to 5.97 percent per annum.
The Company also has a receivable from Holdings in the amount of the accrued
liability to dissenters. PTI had been a majority-owned subsidiary of PacifiCorp
since 1973.
TELECOMMUNICATIONS OPERATIONS
LOCAL EXCHANGE COMPANIES
The Company's LECs operate under a common business and brand name, PTI
Communications. This marketing concept creates a unified identity for the local
operations, improves communication with customers and assists 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 LECs also provide directory advertising and, through
contracts with interexchange carriers, billing and collection services. At
December 31, 1996, the Company operated 13 LECs within eleven states comprised
of 559,500 access lines in 344 exchanges. The average number of access lines
per exchange is approximately 1,626, reflecting the lower population density
generally found in the Company's service areas. The Company's largest exchange
in terms of access lines is in Kalispell, Montana, which had 26,594 access lines
at December 31, 1996. 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.") The Company provides centralized administrative
and support services to field operations from its corporate offices in
Vancouver, Washington.
The LECs experienced strong internal access line growth in certain
service areas, as evidenced by a 5.5 percent increase in access lines served
during 1996. As a result of acquisitions in Colorado, Washington and Oregon,
the Company added 90,000 access lines in 1995, an increase of 22 percent. The
Company has definitive agreements with USWC and GTE to purchase local exchange
telephone properties in Minnesota and Michigan, respectively. The Minnesota
properties represent 32 exchanges serving 27,100 access lines and the Michigan
properties represent eight exchanges serving 11,300 access lines. The Company
has a definitive agreement with the City of Fairbanks to acquire its telephone
and cellular operations, FMUS, that have approximately 32,000 access lines and
6,800 cellular customers. These acquisitions are subject to regulatory approval
and are expected to close in 1997. The Company has letters of intent to acquire
operations representing eight exchanges serving approximately 4,300 access
lines. These acquisitions are subject to completion of due diligence
investigations, negotiations of definitive purchase agreements and regulatory
approval.
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CELLULAR OPERATIONS
The Company's wholly-owned subsidiary, PT Cellular, is a holding
company with subsidiaries in Alaska, Michigan, Oregon, South Dakota, Washington
and Wisconsin. The Company has ownership interests with respect to 24 MSAs and
RSAs and manages 10 of these interests in Alaska, Michigan and Wisconsin. The
Company also manages one other RSA in Wisconsin in which it has no ownership
interest. Revenues from cellular operations represented approximately eight
percent of total Company revenues in 1996.
The Company may increase its ownership interests in certain cellular
properties in order to achieve ownership control or to consolidate the Company's
cellular service areas into larger contiguous units for operating and network
efficiencies. This plan may be accomplished through the exchange of existing
cellular interests and/or future acquisitions.
Due to the purchase of cellular properties with the pending FMUS
acquisition, the Company would own a portion of both the wireline and non
wireline channel blocks in Alaska RSA #1. The FCC rules generally prohibit
direct or indirect ownership interest in licensees for both blocks in the same
cellular geographic service areas. Therefore, the Company will be required to
sell one of the channel blocks located in Alaska RSA #1.
On January 14, 1997, the FCC completed its auction of 1,479 licenses
to provide broadband PCS on the D, E and F blocks in the two GHz frequency band.
Each license authorizes service on 10 MHz of spectrum in one of 493 Basic
Trading Areas, with three licenses awarded in each area. The Company, through
its wholly-owned subsidiary MVI, Corp., was high bidder on eleven licenses in
Wisconsin, eight licenses in Michigan, three licenses each in Minnesota and
Alaska and one license each in Montana, Iowa and Colorado. The Company's
average bid per POP for these licenses was $2.17. These licenses overlap the
Company's existing cellular and local exchange properties. The Company
continues to evaluate the potential services to be offered within each license
area, but anticipates initial deployment of services in some areas to commence
in late 1997. The FCC requires that an adequate signal be provided to at least
one-quarter of the population of the licensed area within five years of the
license grant. Funds to be used to purchase the PCS licences will be provided
from the sale of cellular interests in two properties in Wisconsin.
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 NPC. 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 NPC 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 and only 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. (See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information about cable outages during
1995.) At December 31, 1996, approximately 59 percent of the cable's 17,010
circuit capacity had been sold.
PT Transmission provides restoration services for the eastern end of
the NPC 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.
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REGULATION
The Company's LECs operate in an industry that is subject to extensive
regulation by the FCC and state regulatory agencies. Virtually all services 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, judicial and Congressional proceedings
regarding the deregulation of certain aspects of the industry. The FCC and
certain state regulatory agencies are also pursuing alternative forms of
regulation that depart from traditional rate of return regulation for
telecommunications companies such as the Company. These alternatives include
opening local exchange franchises to encourage greater competition.
In 1993, the Wisconsin legislature enacted a new model to manage the
transition to a competitive telecommunications marketplace. Telecommunication
utilities are permitted to file alternatives to traditional rate-of-return
regulation, and the Company's Wisconsin LEC operations received approval of an
alternative regulation plan effective July 1, 1996. The plan covers a five-year
period and includes a provision that allows the Company to adjust rates within
specified parameters if certain quality-of-service and
infrastructure-development commitments are met. The alternative regulation plan
also included proposed open market initiatives designed to facilitate the
introduction of local exchange competition in the Company's Wisconsin service
territory.
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996 (the 1996 Act). The 1996 Act addresses a
substantial number of telecommunications matters, with a general goal of
promoting the development of competitive service provisioning in all
telecommunications markets over time, including local exchange services. Among
the many issues comprehended by the 1996 Act are those affecting removal of
barriers to entry for various geographic and service markets, universal service
standards and mechanisms, eligibility for and access to universal service
support funding, interconnection and unbundling of telecommunications networks
(including exemption, suspensions, and modifications of requirements pertaining
thereto for certain classes of carriers), large carrier (Bell Operating
Companies) entry into interstate interexchange communications markets, and
infrastructure sharing.
The 1996 Act, which applies generally to the Company, also contains
provisions with specific import for the Company's operations. Definitional
provisons classify the Company as a "rural telephone company" for certain
purposes of the Act. Various of the interconnection and unbundling requirements
applicable generally to incumbent local exchange carriers are subject to
exemption provisions available to rural telephone companies, which the Company
is under the above definition, or to waiver provisions for local exchange
companies with less than two percent of the total nationwide access lines, which
qualification the Company also meets. The 1996 Act authorizes the establishment
of USF to provide support for eligible telecommunications carriers, for which
designation the Company believes it will qualify in the future. Management
believes these and other provisions will prove consistent with the Company's
current and planned operations. The Company recognized USF revenues of $55.1
million in 1996 and anticipates recognition of approximately $56.0 million in
1997.
With respect to a number of matters, the 1996 Act permits or requires
further proceedings by the FCC, or state regulatory commissions, or both.
Following the effective date of the 1996 Act, the FCC initiated more than one
hundred separate dockets to address various aspects of the 1996 Act's
implementation. Also, a Federal-State Joint Board was convened to examine and
to make recommendations concerning issues pertaining to future universal service
definitions and the establishment of mechanisms for support funding.
Independently, a number of state regulatory commissions overseeing the Company's
local exchange operations within the states commenced proceedings relating to
both the 1996 Act and specific state statutory initiatives and requirements.
The Company has participated actively in all major proceedings which are likely
to have an impact upon its future operations and financial performance.
Additionally, the Company has helped to organize or has participated, or both,
in industry organizations in an effort to communicate its views effectively on
these various issues.
The Company believes that the 1996 Act, and the regulatory proceedings
deriving therefrom, continue to prove consistent with the long-term strategic
plan of the Company. Based in part upon the rural nature of the Company's
operations and the recognition currently being accorded to rural serving
requirements in the 1996 Act and derivative regulatory proceedings, the Company
does not believe that the Act and its associated regulatory interpretations will
have a material advese impact on the Company's financial results of operations.
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.
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EMPLOYEES
At December 31, 1996, the Company had 2,187 employees, approximately
32 percent of whom were members of five 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. Relations with represented and non-represented employees
continue to be generally good.
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. Approximately 39 percent of plant assets 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.)
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 NPC 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 63 percent of the 225,000 square-foot
building. The Company owns two mainframe computers and leases most of the other
equipment used in conjunction with providing data processing services.
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