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.
Item 3. LEGAL PROCEEDINGS
The Company is a party to various legal claims, actions and complaints, two of which are described below. Although the ultimate resolution of legal proceedings cannot be predicted with certainty, management believes that disposition of these matters will not have a material adverse effect on the Company's consolidated financial results.
Loewen, et al. v. Galligan, et al. (Circuit Court for the State of Oregon, __________________________________________________________________________ County of Multnomah) ____________________
In November 1991, former shareholders of American Network, Inc. (AmNet) filed a third amended complaint against PTI and others, suing individually and also derivatively on behalf of AmNet for damages allegedly arising out of the acquisition of AmNet by United States Transmission Systems, Inc. (USTS), a subsidiary of ITT Corporation, in 1988 and various alleged wrongs in connection with certain transactions that occurred in 1984 and 1986 between AmNet or its subsidiaries and PTI or between AmNet and other parties. At the time of the acquisition by USTS, PTI owned 36.4 percent of the common shares of AmNet. The third amended complaint revised the plaintiffs' 1984 and 1986 fraud claims and changed the plaintiffs under all claims. As a result, differing plaintiff groups were suing PTI and other defendants for state securities and common law fraud allegedly committed in 1984, 1986 and 1988 and four plaintiffs were suing PTI alone for breach of an alleged promise to provide financial support to AmNet in 1984. Plaintiffs sought to recover damages from PTI in the amount of plaintiffs' lost investments, plaintiffs' costs, disbursements and reasonable attorney fees, and punitive damages of $100 million. On August 19, 1992, the court granted defendants' motions for summary judgment against all claims in the third amended complaint. Judgment in favor of defendants was entered on November 23, 1992 and plaintiffs' appeal to the Oregon Court of Appeals affirmed the trial court's judgment in all respects. On October 19, 1994, plaintiffs filed a petition for review of the Court of Appeals' decision with the Oregon Supreme Court. On December 27, 1994, the Oregon Supreme Court denied the plaintiffs' petition for review. Plaintiffs have not filed for reconsideration or further review, and the case now appears concluded.
Werboff v. Robinson, et al. (Superior Court of Washington for Clark ___________________________________________________________________ County) _______
The Company and certain other defendants, including the members of the Company's Board of Directors, were sued in the Superior Court of Washington for Clark County, regarding Holdings' offer to acquire the common shares representing the 13 percent minority interest of the Company. The plaintiff in the action alleged, among other things, that he was a shareholder of the Company, that the offer of $28 per share made by Holdings was inadequate and that the members of the Board of Directors of the Company breached their fiduciary duty to the public shareholders of the Company. The plaintiff sought certification of the case as a class action on behalf of all public shareholders of the Company and sought to enjoin the proposed transaction or, in the alternative, to be awarded rescissory damages in an unspecified amount if the transaction closed. On February 3, 1995, the action was dismissed as prematurely filed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No information is required to be reported pursuant to this item.
PART II _______________________________________________________________________________
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE FOR QUARTERS ENDED (Source: NASDAQ)
Sale Price --------------------------------------- 1994 1993 ----------------- ----------------- HIGH LOW High Low --------------------------------------------------------------------------- First Quarter $27 $22 1/2 $24 3/4 $22 1/2 Second Quarter $25 3/8 $20 3/4 $24 $21 Third Quarter $26 3/4 $21 $28 3/4 $23 Fourth Quarter $30 3/4 $22 3/4 $28 1/2 $24 1/2 _______________________________________________________________________________
The Company's common stock is traded over-the-counter under NASDAQ symbol PTCM. As of December 31, 1994, there were 4,033 holders of record of the Company's common stock.
CASH DIVIDEND PAYMENT DATES
PER Per SHARE Share ------------------------------------------------------------------------------ MARCH 7, 1994 $.33 March 1, 1993 $.33 JUNE 6, 1994 $.33 June 7, 1993 $.33 SEPTEMBER 5, 1994 $.33 September 6, 1993 $.33 DECEMBER 5, 1994 $.33 December 6, 1993 $.33 ------------------------------------------------------------------------------
Dividends are normally declared in the quarter during which they are paid. See Note 12 of Notes to Consolidated Financial Statements included under Item 8 hereof for information concerning restrictions on the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
(1) In August 1990, PTI acquired North-West Telecommunications, Inc. (North-West) for $272 million. Through North-West, PTI acquired four LECs with approximately 64,500 access lines and ownership interests in certain cellular properties. Interest expense increased in 1991 due to additional interest expense incurred as a result of amounts borrowed to acquire North-West. (2) The gain on sale of subsidiaries and investments included, in 1994, a $2.3 million pre-tax gain on the sale of PTI Harbor Bay, Inc. and Upsouth Corporation. The gain in 1993 included the sale of a cellular property in Washington. The gains in 1992 included a $21.4 million gain on the sale of Catalina Marketing Corporation common stock and a $7.2 million gain from cellular property sales and exchanges. The gains in 1991 included a $22.2 million gain on the sale of TU International, Inc. and a $6.1 million gain on the sales of cellular interests. The gain in 1990 included the $18.5 million gain from the sale of Petroleum Communications, Inc. These transactions had an after-tax earnings per share effect of $.02 per share in 1994, $.02 per share in 1993, $.45 per share in 1992, $.54 per share in 1991 and $.36 per share in 1990.
(3) The increase in other expense in 1991 resulted from a $5.9 million increase in noncore business valuation adjustments and an $8.8 million decrease in interest income. The Company recognized interest income in 1990 related to the funds advanced to PacificCorp Holdings, Inc. for the North-West acquisition, the settlement of a dispute with an Alaska LEC and a favorable resolution of income tax audit issues. (4) International Communications Holdings, Inc. (ICH) had been shown as a discontinued operation for financial statement reporting purposes through September 1993 when TRT Communications, Inc. (TRT), its major subsidiary, was sold. The remaining investment in ICH is now reported as a continuing operation. See Note 7 to Consolidated Financial Statements included under Item 8 hereof for information concerning the $60.4 million after-tax gain on the sale of ICH's major operating subsidiary recorded in 1993 and a $45.7 million after-tax loss recorded in 1992. Interest expense in 1994 decreased as proceeds from the sale of TRT were used to reduce outstanding debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In October 1994, PTI signed an agreement to sell the stock of Alascom to AT&T. The agreement was reached after the FCC ordered the restructuring of the Alaska telecommunications market in May 1994. Among other things, the FCC order required the termination of the JSA between AT&T and Alascom effective January 1, 1996 and the payment by AT&T to Alascom of a $150 million transition payment in two installments of $75 million each. 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. In the transaction, the Company will receive $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. The Company will retain the $75 million transition payment made by AT&T to Alascom in July 1994. 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 transaction failed to close. The $30 million down payment received from AT&T is included in "Other long-term liabilities" at December 31, 1994, pending closing of the transaction. The Company anticipates recognizing a material gain from the sale of Alascom. (See "Financial Forecast" below for more information about this gain.) In November 1994, PacifiCorp Holdings, Inc. (Holdings), owner of approximately 87 percent of PTI's outstanding common stock, proposed a merger transaction in which it would have acquired the 13 percent minority interest of PTI for $28 per share in cash. Following a study of the proposal by a Special Committee of the PTI Board of Directors and upon the unanimous recommendation of the Special Committee and the full PTI Board of Directors, a definitive merger agreement was signed by Holdings and PTI on March 9, 1995. Under the merger agreement, the minority shareholders of PTI common stock would receive $30 in cash for each share held and 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 approximately 5.3 million shares held by the unaffiliated public shareholders. The Company is expecting to add approximately 85,000 access lines in 1995 due to various acquisitions of rural exchange assets from USWC. The purchase of the Colorado assets for approximately $200 million in cash, serving approximately 50,000 access lines, closed in February 1995, while the purchase of the assets in Oregon and Washington for approximately $180 million in cash, serving about 35,000 access lines, is expected to close in the second half of 1995. Proceeds from the sale of Alascom, external debt issuances and internally generated funds are expected to be used to fund the acquisitions. (See "Pro Forma Financial Information" and "Financial Forecast" below for more information regarding these transactions.)
RESULTS OF OPERATIONS _____________________
In 1994, income from continuing operations increased $22.3 million from 1993 mainly due to long lines interstate settlement revenues, a depreciation rate decrease for Alaska local exchange operations, lower interest expense reflecting lower debt levels, and higher 1993 noncore investment valuation adjustments. In 1993, income from continuing operations decreased $8.2 million from 1992 mainly because 1992 included a $13.5 million after-tax gain on the sale of Catalina Marketing Corporation's common stock, which was partially offset by valuation adjustments of noncore investments. In addition, decreases in revenues resulting from rate base reductions for long lines operations and decreased private line services were offset by favorable revised revenue estimates for long lines and increased USF support and access line growth for the Company's local exchange business.
OPERATING REVENUES __________________
The Company operates predominately in the telecommunications industry, providing voice, data, video and other services through local exchange and long lines operations. There are substantial similarities in the operations of and revenues derived from these activities. The Company is involved with cellular operations which generate revenues from retail and foreign roamer activities, as well as from management of cellular properties for other owners. The Company is also involved in the operation and maintenance of the North Pacific Cable. Revenues from this project are recognized from the sale of capacity on the cable and backhaul system and from maintenance and restoration services provided for the cable. In 1994, 49 percent of consolidated operating revenues were contributed by long lines, 45 percent by local exchange companies, three percent by cellular operations and three percent by cable and backhaul capacity sales and related cable services. In 1993, 48 percent of consolidated operating revenues were contributed by long lines, 45 percent by local exchange companies, three percent by cable and backhaul capacity sales and related cable services and two percent by cellular operations. Certain revenues from the Company's rate of return regulated operations are based on estimates that are subject to subsequent adjustments as refined operational information becomes available.
LOCAL NETWORK SERVICE revenues increased $15.2 million in 1994 and $7.7 million in 1993. Internal access line growth in the local exchange companies of 4.8 percent for both 1994 and 1993 increased revenues by $4.9 million and $6.0 million during 1994 and 1993, respectively. Revenues related to access line growth were higher in 1993 compared to 1994 due to the multi-party to single-party conversions during 1993. Enhanced and extended calling area services also increased 1994 and 1993 local network service revenues by $9.1 million and $1.1 million, respectively. Local network service revenue increases generated by extended area service resulted in decreases in network access service, long distance network service and other revenues for the local exchange companies.
NETWORK ACCESS SERVICE revenues are charges to common carriers for access to the local exchange companies' networks. These revenues decreased $15.3 million in 1994 and increased $9.0 million in 1993. The effect of increased extended calling area services in local network service caused network access
service revenues to decline by $5.7 million in 1994 and $.5 million in 1993. Revenue adjustments from revised estimates for prior years decreased $4.0 million in 1994 and increased $.3 million in 1993. Network access service revenues decreased $5.1 million in 1994 and $.8 million in 1993 because of decreases in the operating expenses used in setting interstate access rates. Reduced charges in 1994 are mainly attributable to lower depreciation and corporate support costs. Reduced charges in 1993 are mainly attributable to the effects of a 1992 early retirement program. Increased USF support, which recovers a portion of nontraffic sensitive costs that are above the national average, increased network access service revenues by $7.5 million in 1993. The acquisition of local exchange companies in 1993 and internal access line growth increased network access service revenues by $1.5 million in 1993. 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 placed 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 working local loops. The interim rules are intended to allow moderate growth in the total level of the USF while the FCC and a 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 local exchange operations receive USF compensation, significant changes to the USF assistance mechanism could affect the Company's results. Revenues derived from the USF assistance mechanism were $30.0 million in 1994, $30.5 million in 1993 and $25.3 million in 1992. With the purchase of USWC assets in Colorado and the pending purchase of assets in Oregon and Washington, revenues received under the USF could double in 1996 over 1994 levels. 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 local service rates and access charges.
LONG DISTANCE NETWORK SERVICE revenues increased $9.4 million in 1994. This increase was primarily due to the settlement of all open revenue studies relating to the JSA, which resulted in a long lines interstate revenue increase of $18.7 million. Long lines interstate revenues from October 1994 until the sale closes are recognized based on interim cash settlement amounts outlined in the stock sale agreement. Improvement in intrastate revenue relating to increased intrastate billed minutes added $3.2 million to long distance network service in 1994. Reducing long distance network service revenues were the $6.3 million decline in revenue recovery for interstate access expenses due to Anchorage Telephone Utility (ATU) exiting the NECA traffic sensitive pools, the $4.7 million revenue effects of other long lines reduced operating expenses and a $3.2 million decrease from a reduction in long lines rate base relating mainly to the $75 million transition payment received in July 1994. Excluding the effect of ATU exiting the NECA pool, interstate access revenue grew $2.0 million in 1994 from increased common carrier network usage. Long distance network service revenues decreased $12.9 million in 1993. This decrease reflected the $10.5 million revenue effect of reduced long lines rate base resulting mainly from the sale of satellite transponders in late 1992. Contributing to the revenue decline were the $4.7 million revenue effect of long lines recoverable expense reductions and a $2.6 million revenue decrease due to the effect of lower average revenue per minute for intrastate message toll services. Intrastate minute volumes for 1993 message toll service increased two percent over 1992 levels, contributing $1.3 million of increased revenues. The revenue decreases in 1993 were also offset in part by higher long lines revenue settlement adjustments of $5.6 million and a net foreign message toll service revenue settlement increase of $2.0 million. The Company estimates that its share of the intrastate market in Alaska was approximately 78 percent at December 31, 1994, as compared to approximately 79 percent at December 31, 1993.
PRIVATE LINE SERVICE revenue declined by $5.6 million in 1994 and $6.6 million in 1993. As a result of the Company's decision to exit noncore subsidiary operations, private line revenues decreased by $7.3 million in 1994 and $2.9 million in 1993. Partially offsetting the 1994 decrease were increased revenues of $1.7 million relating to private line services provided by long lines operations. Revenues amounting to $3.9 million in 1992 for services provided on the Alaska Spur portion of the North Pacific Cable were not received in 1993 as a result of the sale of a portion of the cable in late 1992 to a company that previously leased those services.
SALES OF CABLE CAPACITY revenues represent amounts recorded from activities relating to the North Pacific Cable (NPC) and its backhaul system. At December 31, 1994, approximately 53 percent of the
cable's capacity had been sold with two percent sold in 1994, one percent sold in 1993 and four percent sold in 1992. The Company continues to market the remaining cable capacity. AT&T completed construction of a submarine fiber optic cable between the U.S. and Japan and placed it in service in late 1992. AT&T has stated that all the capacity on that cable has been subscribed. AT&T has announced plans for an additional cable system in the Pacific for completion over the next three years. The Company believes that competition with AT&T for capacity sales has slowed sales on the NPC. The Company also believes that cable capacity sales were negatively affected by adverse economic conditions in Japan and other Far East countries. In addition, as a result of six outages on the cable since turn-up in May 1991, three from external causes, two due to failed components with differing causes and one under investigation, an adverse market perception as to the reliability of the cable may exist. This perception may have contributed to the slowing in sales of capacity and may continue to have an adverse effect on future sales. The last outage on the cable system occurred in February 1995. The original three-year warranty on the NPC 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 NPC system was operating at or above contracted levels before the outage in February 1995. Extended warranties for certain components of the NPC system will continue in effect until November 2001. These extended warranties apply to the majority of the cable supplied by the manufacturers. As a result of an agreement between PTC, Cable & Wireless plc and International Digital Communications, Inc. and the cable contractor, the contractor has agreed to provide industry support programs and enhanced repair arrangements if needed. During 1993, the Company reduced the cable inventory carrying value by $19.2 million. This reduction was offset by increases in cash and accounts receivable. The Company is investigating use of the North Pacific Cable to provide video transmission services. Successful tests of such services were completed in 1993. These services are geared toward television broadcasters and program distributors, and will allow secure digital transmission of news gathering and programming, while avoiding delays encountered with satellite transmissions. Pricing of these services is anticipated to be competitive with existing international satellite providers. Based on current estimates of the discounted net cash flow from remaining capacity sales, the Company believes that the inventory value of the cable system at December 31, 1994 can be recovered. These estimates are based on anticipated growth in trans-Pacific demand for communications capacity, interconnectivity between existing and planned cable systems and the NPC, the availability of other sources of capacity and the possible development of alternative business uses of the NPC.
CELLULAR AND OTHER operating revenues decreased by $.5 million in 1994 and increased by $12.7 million in 1993. Growth in retail and foreign roamer revenues boosted cellular revenues by $9.6 million and $5.9 million in 1994 and 1993, respectively, as several cell sites were turned up in the second half of 1992, acquisitions were completed and customer penetration increased. Increased extended area local network services reduced local exchange operations billing and collection revenues by $2.0 million during 1994. In the third quarter of 1993, the long lines subsidiary recognized a one-time other revenue item of $3.2 million relating to service in Saudi Arabia. Long lines equipment resale revenue declined by $1.7 million in 1994 and grew by $3.1 million in 1993. The income effect of long lines resale activities were mainly offset by changes in plant support expense. Cable maintenance and restoration revenue decreased other revenue by $1.1 million in 1994 and increased other revenue by $3.2 million in 1993 due to additional circuit activations and submarine system sales and repairs in 1993. Declining noncore subsidiary activity resulted in a decrease in other revenue of $1.0 million in 1994 and $1.3 million in 1993. Other operating revenues decreased by $1.1 million in 1993 due to a reduction of operations in Saudi Arabia, where the Company was providing services under agreements with the U.S. Department of Defense and AT&T. The composite market penetration rate for cellular operations controlled by the Company is 2.5 percent and ranges from 1 percent in a developing rural RSA to 4.5 percent in an established MSA. The composite average monthly retail revenue per customer for the cellular operations controlled by the Company is $44 and by market ranges from $30 to $100; the composite average monthly total revenue per customer is $77 and ranges by market from $59 to $173.
OPERATING EXPENSES __________________
The Company adopted Statement of Financial Accounting Standards (SFAS) 106 on January 1, 1993, which increased postretirement expense by $3.0 million in 1993 and an additional $1.0 million in 1994, thereby causing increases in plant support, other operating expense, customer operations and administrative support.
PLANT SUPPORT expense decreased by $4.3 million in 1994 and increased by $4.6 million in 1993. Equipment resale costs included in plant support decreased 1994 expenses by $1.6 million and increased 1993 expenses by $3.0 million. Noncore subsidiary plant support expense decreased $1.0 million in 1994 and $2.2 million in 1993. Cellular growth caused plant support increases of $1.0 million during 1994. One-time long lines services provided in Saudi Arabia increased plant support and other revenue by $3.2 million in 1993.
DEPRECIATION AND AMORTIZATION expense was lower by $5.9 million in 1994. This was due mainly to the $5.6 million effect of a depreciation rate decrease ordered by the APUC for Alaska local exchange operations. Additionally, depreciation in 1994 was reduced by $2.7 million from the sale of noncore subsidiaries and by $2.1 million from the decrease in Alascom depreciable plant balances resulting from the $75 million transition payment received in July 1994. Offsetting these decreases in 1994 were a $3.4 million increase resulting from growth in plant in service in local exchange operations and an $.8 million increase due to the purchase of transponders by long lines in 1993 and 1994. Depreciation and amortization expense decreases in 1993 of $4.7 million include $7.3 million relating to the sale of satellite transponders in October 1992 and $1.4 million due to certain long lines property being retired or fully depreciated. Offsetting these decreases were increases of $2.2 million due to an increase in the depreciation rate for Oregon local exchange companies and $1.2 million for cellular operations relating mainly to the turn-up of new cell sites and acquisitions.
LEASED CIRCUITS expense declined $4.0 million in 1994, of which $2.4 million related to noncore business activities that were sold and $1.1 million related to a cable outage in 1993. Leased circuits expense rose by $11.7 million in 1993 mainly due to the operating lease expense for several satellite transponders of $9.0 million. Other increases in 1993 include $1.2 million for noncore subsidiaries and $.9 million for long lines retroactive billings and new contracts.
ACCESS EXPENSE decreased $2.5 million in 1994 and $2.3 million in 1993 due to the $6.3 million and $2.6 million effects in those years of ATU exiting NECA traffic sensitive pools and developing its own stand alone tariff. Partially offsetting this decrease in 1994 was an increase of $2.2 million relating to increased facility costs associated with access services and an increase of $2.0 million due to higher common carrier network usage.
OTHER OPERATING EXPENSE AND TAXES increased by $2.8 million in 1994 and remained constant in 1993 and 1992. Other operating expense increased $.8 million in 1994 due to cellular customer growth. Other taxes increased $.9 million in 1994 as a result of higher plant balances and appraised values for property tax calculations and other miscellaneous state and local taxes.
CUSTOMER OPERATIONS expense grew by $2.2 million in 1994. Cellular customer growth and the incremental cost to acquire new cellular customer subscriptions increased customer support expense by $3.1 million. Partially offsetting this increase was a decrease resulting from lower long lines operator costs as this function was automated in 1994. Customer operations expense increased $3.7 million in 1993 mainly due to cellular costs of $2.0 million relating to customer growth and acquisitions. In addition, local exchange company directory assistance and expenses related to growth caused an increase of $1.0 million in 1993.
ADMINISTRATIVE SUPPORT expense declined $8.8 million in 1994, with $7.9 million of the decrease mainly relating to lower corporate support and employee benefit costs and $2.4 million due to the sale of other noncore subsidiaries. Administrative support expense declined $5.7 million in 1993 mainly because 1992 included $6.4 million of costs relating to the early retirement program in 1992.
OTHER INCOME (EXPENSE) ______________________
INTEREST EXPENSE in 1994 and 1993 was lower by $14.5 million and $9.2 million, respectively, due to lower short-term borrowing levels, partially offset by the effects of interest rate increases which increased interest expense by $5.0 million and $1.3 million in those respective years.
GAIN ON SALE OF SUBSIDIARIES AND INVESTMENTS included a $2.3 million gain on the sale of PTI Harbor Bay, Inc. and Upsouth Corporation in April 1994, a $1.3 million gain on the sale of a cellular property in September 1993, a $21.4 million gain on the sale of Catalina Marketing Corporation common stock in March 1992, and $7.2 million in gains from cellular sales and exchanges in September and December of 1992. In October 1994, the Company signed a definitive agreement to sell the stock of Alascom to AT&T. The sale is expected to be completed in the first half of 1995 and to result in a material gain. See "Dispositions" below.
MINORITY INTEREST in 1994, 1993 and 1992 related primarily to the 20 percent minority shareholders' interest in income from the North Pacific Cable project and various cellular interests.
OTHER expense was lower by $5.6 million in 1994 and $1.0 million in 1993. Other expense in 1994 included $3.7 million of corporate support costs, $1.4 million of costs relating to the buyout of an interest rate swap agreement, $1.8 million of valuation adjustments to immaterial noncore investments and businesses, $1.1 million in advisory fees relating to the proposed buyout of the Company's minority interest and Alascom sale, $1.2 million for the net effect of recording cellular excess cost and goodwill amortization and equity income, and $1.3 million of other miscellaneous losses. (See Note 10 to Consolidated Financial Statements included in Item 8 hereof.) Other expense in 1993 included $7.9 million of valuation adjustments on certain noncore businesses, $2.6 million of amortization relating to goodwill and excess cost on cellular investments, $3.4 million of corporate support costs, and $1.2 million of noncore business losses.
INCOME TAXES ____________
(in millions) 1994 1993 1992 ------------------------------------------------------------------------------ Income tax expense $40.8 $23.8 $32.5 Effective income tax rate 33.4% 28.8% 32.6%
The lower 1993 effective income tax rate resulted from a favorable settlement of state income taxes for 1992.
INFLATION _________
The effects of inflation on the Company's regulated businesses are not significant to ongoing operations. A substantial portion of the Company's operating assets are utilized in regulated communications services. Under the ratemaking principles currently prescribed by regulatory commissions, only the historical cost of plant is recoverable in revenues as depreciation. While the ratemaking process gives no recognition to the current cost of replacing plant, based upon past practices, the Company has been allowed to recover and earn on the increased cost of its net investment when replacement of facilities actually occurs. Operating assets of the Company's nonregulated businesses, not including the North Pacific Cable inventory, were approximately 18 percent of the Company's total assets. Inflation could have a significant impact if these assets were replaced, depending on the rate of inflation, advances in technology and the timing of these expenditures.
LIQUIDITY AND CAPITAL RESOURCES _______________________________
(in millions) Plan 1995 1994 1993 1992 ----------------------------------------------------------------------------- Capital expenditures: Local exchange companies $109 $111(a) $ 74 $ 69 Long Lines 7 22 18 22 Cellular 9 10 7 10 Other 3 5 4 8 ----------------------------------------------------------------------------- Total capital expenditures $128 $148 $103 $109 ============================================================================= Acquisitions $380 $ -- $ 16 $ 18 =============================================================================
(a) Includes $30.1 million incurred to upgrade Colorado assets acquired from USWC in February 1995.
CAPITAL EXPENDITURES ____________________
The Company's capital expenditures during 1994, 1993 and 1992 were funded primarily through internally generated cash of $141.4 million, $180.4 million and $177.1 million, respectively. The Company expects to fund its capital expenditures in 1995 primarily through internally generated cash. Net cash provided by operating activities in 1994 was reduced by $63.8 million for taxes paid on the transition payments received and to be received from AT&T totalling $150 million. The cash used to make this tax payment directly relates to the $75 million in cash received in July 1994 for the first transition payment included in cash flows from investing activities. However, Generally Accepted Accounting Principles require that income tax expenses be offset against cash from operating activities; whereas, the cash received is classified in cash flows from investing activities. This tax payment had little effect on net income as the increase in current income tax expense was mostly offset by a reduction in deferred income tax expense. Capital expenditures during 1994 and 1993 related mainly to network upgrades and growth in the Company's operations. The costs associated with the contract with USWC to upgrade facilities for assets that the Company purchased from USWC in Colorado also increased local exchange company expenditures in 1994. (See "Acquisitions" below for information concerning this contract.) The Company does not have any other major construction projects underway at the present time. In 1993 and 1994, the Company purchased two additional transponders on a satellite on which it leases 16 transponders. The lease is accounted for as an operating lease.
ACQUISITIONS ____________
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. In February 1995, the Company acquired certain rural telephone exchange assets in Colorado from USWC. The assets include approximately 50,000 access lines that service 45 exchanges. The Company paid approximately $200 million for these assets at closing. Under a contract with USWC, the Company acted as a general contractor to construct and upgrade single-party service and digital switching for the assets subject to the agreement. These improvements are a result of a regulatory requirement of the Colorado Public Utilities Commission. During 1993 and 1994, the Company spent $30.1 million under this contract. Projected expenditures for 1995 are $20.7 million. At year end 1994, the total expenditures under the contract were included in "Construction work in progress" on the balance sheet. In 1993, the Company acquired a local exchange company in Wisconsin, with 1,100 access lines, and increased its ownership interest in existing cellular properties and operations. 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 service 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. Completion of the transactions with USWC is dependent on regulatory and governmental approvals, receipt of which is expected to occur prior to the end of 1995. The Colorado acquisition was funded through short-term bank borrowings, including advances under the Company's $300 million revolving credit agreement. The Company anticipates repaying these borrowings with proceeds from the sale of Alascom. The Company expects to fund the Oregon and Washington acquisitions with proceeds from the sale of Alascom, the issuance of external debt and internally generated funds. Other local exchange company acquisitions in the future may require a significant amount of funding depending on the Company's success in pursuing its strategy. The Company expects to fund such acquisitions through a combination of internally generated funds and external debt. If the Company is successful in acquiring larger local exchange properties, it would consider equity issuances if necessary, to help fund the acquisitions and maintain acceptable credit ratings. In September 1993, the FCC allocated several blocks of spectrum for Personal Communications Services (PCS). The FCC began the broadband PCS auction process in December 1994 by auctioning major trading area licenses. The auctions for the basic trading area licenses are expected to be initiated by
the second quarter of 1995. The Company, as well as several of the Company's cellular licensees, are eligible to bid on PCS licenses subject to certain limitations established by the FCC. Although the Company does not plan to bid for PCS licenses, it continues to monitor PCS developments and evaluate its opportunities in the PCS market.
DISPOSITIONS ____________
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: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. The net assets of these subsidiaries were shown in "Other current assets" at December 31, 1993. See "Pro Forma Financial Information" and "Financial Forecast" below and Note 16 to Consolidated Financial Statements included in Item 8 hereof for information concerning the pending sale of Alascom to AT&T.
DISCONTINUED OPERATIONS _______________________
In September 1993, the Company concluded the sale of TRT Communications, Inc., the major operating subsidiary of International Communications Holdings, Inc. (ICH), and the stock of a smaller subsidiary to IDB Communications Group, Inc. (IDB) for 4.5 million shares of IDB common stock and $1 million in cash. The market value of IDB stock increased during 1993 resulting in the Company recognizing an after-tax gain from discontinued operations of $60.4 million. (See Note 7 to Consolidated Financial Statements included in Item 8 hereof.) The $195.2 million in proceeds received from the sale of the IDB stock in 1993 were used mainly to repay short-term debt.
LONG-TERM AND SHORT-TERM DEBT _____________________________
December 31, 1994 1993 1992 ------------------------------------------------------------------------------ (in millions) Long-term debt $377 $427 $572 Short-term debt 22 25 71 Currently maturing long-term debt 16 16 31 ------------------------------------------------------------------------------ $415 $468 $674 ============================================================================== Debt as a percent of total capitalization 38% 42% 54% ==============================================================================
In 1994, net proceeds from the down payment for the sale of Alascom and the transition payment received from AT&T and the sale of IntelCom stock were used to repay long-term debt. In 1993, debt decreased as the proceeds from the sale of IDB stock in November were used to repay short-term debt instruments. Currently maturing long-term debt decreased due to the retirement of Series A Medium-Term Notes in 1993. Short-term borrowings from other available banking arrangements at December 31, 1994, of $25 million have been classified as long-term debt based on management's intent and the Company's ability to support this debt on a long-term basis. The Company has access to funds through its $300 million revolving credit agreement which has been renewed for a five-year term ending in November 1999. At December 31, 1994, no borrowings were outstanding under this agreement. (See Note 12 to Consolidated Financial Statements included in Item 8 hereof.) The revolving credit agreement also serves as backup for a $100 million commercial paper program, under which nothing was outstanding at December 31, 1994. The Company had $37.0 million outstanding under other available banking arrangements, $7.8 million due to GE American Communications, Inc. for the purchase of a satellite transponder and $1.9 million due to the minority owner of a Company subsidiary at December 31, 1994. The Colorado asset acquisition in February 1995 was funded through short-term bank borrowings.
The Company has a $150 million Series B Medium-Term Note program, under which $72.5 million of notes were outstanding at December 31, 1994, with terms of one to 12 years and an average annual interest rate of 7.9 percent. The Company also has approval from the Rural Telephone Bank to borrow $20.9 million in additional REA debt for certain construction projects. Any temporary cash or liquidity requirements during 1995 will be met through utilization of funds available under the revolving credit agreement or temporary advances from Holdings. (See Note 2 to Consolidated Financial Statements included in Item 8 hereof.) Long-term liquidity requirements will be met through utilization of funds available under the revolving credit agreement, which term ends in November 1999, or the issuance of additional Series B Medium-Term Notes.
FUTURE ACCOUNTING CHANGES _________________________
Financial accounting standards that have been adopted, but are not yet in effect, are not applicable or are not expected to have a material effect on the Company's results of operations and statement of financial position.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED) ___________________________________________
The accompanying unaudited pro forma consolidated balance sheet as of December 31, 1994 reflects the Company's consolidated financial position excluding the assets and liabilities of Alascom and including the local exchange assets acquired in Colorado and to be acquired in Oregon and Washington. The Company signed a definitive agreement on September 30, 1994 to sell the stock of Alascom to AT&T for $365 million (including the $75 million transition payment received in July 1994). The Company closed the purchase of assets in Colorado from USWC on February 15, 1995 for $200 million and expects to close the purchase of assets in Oregon and Washington for approximately $180 million before the end of 1995 after the receipt of certain regulatory approvals and subject to certain purchase price adjustments at closing. The pro forma balance sheet assumes the sale and purchases occurred on December 31, 1994. See Item 1. "Business - Telecommunications Operations - Alaska Market Restructuring" and Note 16 "Pending Sale of Alascom, Inc." of the notes to the consolidated financial statements in Item 8 hereof for additional information relating to the pending sale of Alascom. See "Acquisitions" above and Item 1. "Business - Telecommunications Operations - Local Exchange Companies" for additional information relating to the acquisitions of local exchange assets from USWC. The unaudited pro forma consolidated balance sheet and related notes should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 1994 included in Item 8 hereof.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
PRO FORMA ADJUSTMENTS - The accompanying pro forma consolidated balance sheet as of December 31, 1994 consists of the historical balance sheet of the Company (after elimination of affiliated transactions and interest), less the historical balance sheet of Alascom, plus the assets purchased in Colorado and an estimate for the assets to be purchased in Oregon and Washington and certain liabilities related to these acquisitions, plus certain pro forma adjustments described below: a. Affiliated balances between the Company and its subsidiaries and Alascom eliminated in the consolidation process were restored on the pro forma balance sheet. The affiliated balances between PTI and Alascom were added to PTI's investment in Alascom. The affiliated balances between the other PTI subsidiaries and Alascom were reclassified to the proper nonaffiliated line item. b. Cash proceeds of $260 million to be received at closing the sale of Alascom and the $30 million deposit in "Other long-term liabilities" received in October 1994 were offset by the Company's investment in Alascom, income tax liability from the gain on the sale and net gain on sale. The actual gain to be realized on the sale will be lower than indicated on the pro forma balance sheet as the Company's basis in Alascom will increase as Alascom's earnings are recognized and affiliated account balances change between December 31, 1994 and closing. c. Cash proceeds received from the sale of Alascom have been applied to the purchase of assets from USWC. Amounts needed for the purchases in excess of the Alascom proceeds and cash on hand were assumed to be borrowed on a long-term basis.
FINANCIAL FORECAST __________________
GENERAL. The financial forecast set forth below was derived from the Company's internal Five Year Business Plan, which was prepared by the Company's management and presented to its Board of Directors in early February 1995 as part of the board's normal review and oversight procedures. The Five Year Business Plan was prepared in the ordinary course of the Company's business and was not prepared in contemplation of the pending proposal by Holdings to acquire the shares of the Company's common stock held by the minority public shareholders. Accordingly, the financial forecast does not give effect to the proposed merger. CERTAIN IMPORTANT CAVEATS AND LIMITATIONS. Financial forecasts involve estimates as to the future which, notwithstanding the fact that they are presented with numeric specificity, may or may not prove to be accurate. The financial forecast set forth below reflects numerous assumptions as to industry performance, general business and economic conditions, regulatory and legal requirements, taxes and other matters, many of which are beyond the control of the Company. Similarly, these materials assume certain future business decisions which are subject to change. Among other things, the financial forecast assumes the ability of the Company to consummate future acquisitions in the rural telecommunications business which have not been identified. As discussed elsewhere in this Report, the Company is actively seeking acquisitions which could occur earlier or later than forecasted, or not at all. Moreover, Deloitte & Touche LLP, independent auditors for the Company, have not examined, compiled or applied agreed-upon procedures to the financial forecast set forth below and, consequently, assume no responsibility therefor. In addition, no other independent expert has reviewed any of these materials.
THERE CAN BE NO ASSURANCE THAT THE RESULTS PREDICTED BY THE FINANCIAL FORECAST SET FORTH BELOW WILL BE REALIZED. ACTUAL RESULTS WILL VARY FROM THOSE REPRESENTED BY THE FINANCIAL FORECAST, AND THOSE VARIATIONS MAY BE MATERIAL. THE INCLUSION OF THE FINANCIAL FORECAST SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE FORECASTED RESULTS WILL BE ACHIEVED. RECIPIENTS OF THIS REPORT ARE CAUTIONED TO CONSIDER CAREFULLY THE FOREGOING AND THE NOTES AND ASSUMPTIONS SET FORTH BELOW WHILE REVIEWING THE FINANCIAL FORECAST. IN ADDITION, THE COMPANY HAS NOT UPDATED THE FORECAST TO REFLECT DEVELOPMENTS OCCURRING AFTER JANUARY 21, 1995, THE DATE THE FORECAST WAS PREPARED. THE COMPANY DOES NOT INTEND TO UPDATE OR PUBLICLY REVISE THE FORECAST.
BACKGROUND. The Company completed the acquisition of local exchange assets in Colorado from USWC in February 1995 and anticipates completing the acquisition of additional local exchange assets from USWC in Oregon and Washington before , the end of 1995. In addition, the Company has an agreement to sell the stock of Alascom to AT&T. The Company anticipates closing this sale during the first half of 1995. Financial forecast information reflecting these transactions and other material transactions
enumerated under "Summary of Significant Forecast Assumptions" are presented below. See Item 1. "Business - Telecommunications Operations - Alaska Market Restructuring" and Note 16 "Pending Sale of Alascom, Inc." of the notes to the consolidated financial statements in Item 8 hereof for additional information related to the pending sale of Alascom. See "Acquisitions" above and Item 1. "Business - Telecommunications Operations - Local Exchange Companies" for additional information relating to the acquisitions of local exchange assets from USWC.
SUMMARY OF ACCOUNTING POLICIES AND SIGNIFICANT ASSUMPTIONS FOR THE FINANCIAL FORECAST
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- The forecast financial statements have been prepared using accounting principles and policies generally consistent with those used by the Company in its historical financial presentations for the year ended December 31, 1994. See Note 1 "Summary of Significant Accounting Policies" in the notes to the consolidated financial statements included in Item 8 hereof.
2. SUMMARY OF SIGNIFICANT FORECAST ASSUMPTIONS
A. GENERAL ASSUMPTIONS -- As noted above, the financial forecast was prepared as part of the Company's normal budgeting process, assuming the Company would remain an 86.6 percent owned subsidiary of Holdings for the entire forecasted period. The forecast was prepared prior to the completion of the 1994 consolidated financial statements and, therefore, the initial basis for the financial forecast was not the historical statements for 1994. Variations from historical 1994 results and balances in the forecast's initial basis do not have a material effect on the information presented in the five-year forecast.
B. DISPOSITION OF ALASCOM, INC. -- The forecast assumes that the Company will close the sale of Alascom to AT&T at the end of May 1995. After-tax proceeds from the sale were estimated at $256 million. Management has assumed that the Company will recognize a $74 million after-tax gain from the sale. Proceeds will be used to finance the acquisitions of assets from USWC in Colorado, Oregon and Washington. (See "Acquisition Assumptions" below.) Alascom's results of operations are included in the 1994 historical amounts and the 1995 forecast through May 1995 as follows (in millions): 1994 1995 Actual Forecast ----------------------------------------------------------- Operating Revenues $343.5 $135.1 Operating Expenses 262.8 111.3 ----------------------------------------------------------- Operating Income $ 80.7 $ 23.8 =========================================================== EBITDA* $115.4 $ 37.6 =========================================================== *EBITDA - Earnings before interest, taxes, depreciation and amortization
C. ACQUISITION ASSUMPTIONS -- The Company closed the acquisition of local exchange assets from USWC in Colorado in February 1995 at a purchase price of $200 million. In the forecast, management has assumed that substantially all of the purchase price was borrowed at an average interest rate of 6.5 percent to fund the acquisition. These borrowings were assumed to be repaid at the end of May 1995 with proceeds from the sale of Alascom. In the forecast, the purchase of the USWC assets in Oregon and Washington was assumed to close at the end of June 1995 at a final adjusted purchase price of $170 million. Management has assumed the Company would borrow an additional $106 million to complete the funding for the purchase of these local exchange assets at an assumed average interest rate of 6.5 percent. This interest rate assumes financing through short-term, floating-rate debt. In 1993, the Company lowered its debt balances by retiring debt with proceeds received from the sale of the Company's international operations. The actual timing of the closings for the Oregon and Washington asset acquisitions is dependent upon the receipt of certain regulatory approvals, a process over which the Company has no control. Consequently, the closings may occur later than anticipated. The five-year forecast also assumes that the Company will acquire additional local exchange assets serving access lines in rural and suburban areas for $268 million and $166 million in cash at the end of 1995 and 1997, respectively. The forecast assumes that the financial results from operations of these unidentified acquisitions will be similar to other known acquisition opportunities that
the Company is currently evaluating. Long and short-term borrowings with an assumed average interest rate of 8.1 percent are assumed to be used to finance the acquisitions. Should the Company not be successful in completing these unidentified acquisitions, forecast amounts would be (in millions):
1995 1996 1997 1998 1999 -------------------------------------------------------------------------- Operating Revenues $609.5 $533.8 $563.3 $594.9 $624.5 Operating Income 147.3 153.4 168.7 182.1 195.5 Net Income 138.5 69.7 80.5 92.5 103.9 EBITDA 253.5 262.7 284.1 305.6 325.4 Debt 526.8 510.6 474.0 427.9 363.4 Equity 753.9 770.6 796.4 832.6 878.7 Cash Provided by Operations 162.6 182.0 193.8 207.1 220.7 Construction Expenditures 127.5 117.1 108.7 112.1 105.8
D. ACCESS LINE GROWTH -- Management has assumed that internal access line growth of between 4.5 percent and 5.0 percent, annually for its combined local exchange operations, will continue throughout the five-year forecast. The Company has experienced this level of access line growth for the past six years.
E. OPERATING REVENUES AND EXPENSES -- For the Company's existing local exchange operations, the operating revenues and expenses have been estimated for the next five years using projections of historical results, adjusted for access line growth, the effects of increases due to assumed general inflation of 3.0 percent to 3.5 percent, annually, and certain planned operating efficiencies. Management has assumed that the regulatory environment in which it operated in 1994 will continue to exist through 1999 and that competition within its service areas will not increase significantly. Management has assumed that future legislative changes regarding the telecommunications regulatory structure will not abandon interstate support for the higher cost rural areas. To the extent there are changes in the support mechanisms, management has assumed that the Company can successfully pursue rate rebalancing on a revenue neutral basis. Although the five-year forecast assumptions do not include new revenues that might arise from technological changes, management has assumed that future technological changes may result in opportunities to develop new services which will generate additional revenues to help offset changes, if any, in the high cost support mechanisms that the Company may not recover through rate rebalancing from interstate to state jurisdictions. For the areas served by the newly acquired local exchange assets, revenue estimates are based on the number of access lines served by the assets and an estimate of the minutes of use those lines would generate. The resulting usage estimate is then multiplied by the rate element assumed to be adopted by the Company at the closing of the acquisitions. This rate element is based either on estimated revenue requirement calculations or on existing rates for the entity selling the assets. The forecast assumes no material revenue increases as a result of rate case activity. Any adjustments to rates resulting from the current rate proceeding in Wisconsin or in the rate proceeding scheduled for Colorado in three years are assumed to be revenue neutral. Operating expenses for the acquired assets were developed by estimating the necessary staffing requirements to support their unique service and geographic territories. In addition, expenses were estimated based upon the Company's experience as a local telephone service provider in similar geographic areas and its experiences in completing similar acquisitions of comparable size.
F. CONSTRUCTION EXPENDITURES -- Management has assumed a normal managed construction program to replace and upgrade property as needed due to retirement or obsolescence with expenditures of $92.6 million in 1995, $97.3 million in 1996, $92.9 million in 1997, $96.3 million in 1998 and $92.2 million in 1999. In the areas where the Company plans to acquire additional local exchange assets, management has assumed that construction expenditures will be necessary to upgrade systems to meet service requirements established by governing regulatory authorities and to meet the service standard maintained by the Company. These expenditures are assumed to total $34.9 million in 1995, $56.5 million in 1996, $23.0 million in 1997, $46.5 million in 1998 and $26.8 million in 1999.
G. NORTH PACIFIC CABLE -- The forecast assumes that the Company will be successful in either selling the remaining capacity on the North Pacific Cable, or using its available, unsold capacity to develop a business in the international high-quality television transmission market. The North Pacific Cable experienced an outage in February 1995 after this financial forecast was prepared. While the
cable system has returned to operation, the cause of the outage is still under investigation. The results of that investigation may have an impact on the Company's ability to fully recover its remaining $62.8 million investment in the North Pacific Cable.
H. CELLULAR OPERATIONS -- Cellular operations were assumed to grow consistent with the cellular industry's customer penetration estimates. Customer growth was assumed to average 24 percent annually over the next five years. Management plans to manage its pricing structure and vertical service offerings to stabilize average monthly customer revenue. The forecast assumes no expenditures for pursuit or integration of Personnel Communications Systems (PCS) licenses. Management has assumed that the impact of competition by PCS providers will be minimal in the five-year forecast period due to delays in the bidding process and the time required by the successful bidders to build competing PCS systems. In the interim, management intends to digitize part of its cellular network to reduce its unit cost structure so that its cellular operations can be cost competitive with other wireless options. The forecast has assumed ongoing ownership of non-controlled properties and no impairment of cellular investments. However, in those cellular markets where the Company owns a minority interest, managing cellular operations to avoid such impairments is beyond the Company's control.
I. INTEREST RATES -- Management has assumed that it can borrow funds to finance its acquisition and construction programs and repay outstanding debt as it matures using internally generated funds and funds available under its existing unissued Series B Medium-Term Note program ($75.5 million unissued at December 31, 1994), a new $150 million Series C Medium-Term Note program commencing at the end of 1995 and the $300 million revolving credit agreement. Interest rates on borrowings to fund the acquisitions of local exchange assets are enumerated in "Note 2C" above. Management has assumed that the weighted average interest rate on its outstanding floating and fixed rate debt at December 31, 1994 of 7.6 percent can be maintained though the five-year forecast period for debt other than debt incurred for newly acquired assets.
J. INCOME TAXES -- The statutory federal income tax rate was assumed to remain at 35 percent throughout the forecast period. In the 1995 forecast, the effective tax rate was estimated at 23.1 percent. This rate is low because the Company's assumed tax basis in Alascom at closing is expected to be slightly less than the selling price of the Alascom stock. The Company's basis in Alascom increased as a result of the FCC ordered transition payments of $150 million by AT&T to Alascom.
K. AVERAGE SHARES OUTSTANDING AND DIVIDEND PAYMENTS -- No equity issuances have been assumed during the forecast period. Earnings per share were calculated based on 39,620,000 average shares outstanding for each forecast year. The financial forecast for dividend payments assumed no increase in the dividend during 1995, a $.02 per share increase in 1996 and $.04 per share increases each year for 1997, 1998 and 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT ____________________________
To the Directors and Shareholders of Pacific Telecom, Inc.: We have audited the accompanying consolidated balance sheets of Pacific Telecom, Inc. and its subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements represent fairly, in all material respects, the financial position of Pacific Telecom, Inc. and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 9 in the consolidated financial statements, the Company changed its method of accounting for other postretirement benefits in the year ended December 31, 1993.
DELOITTE & TOUCHE LLP
Portland, Oregon February 15, 1995 (March 9, 1995 as to the definitive merger agreement discussed in Note 2)
REPORT OF MANAGEMENT ____________________
The management of Pacific Telecom, Inc. is responsible for preparing the accompanying consolidated financial statements and for their integrity and objectivity. These financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and include amounts that are based on management's best estimates and judgment. Management also prepared the other information in this Annual Report and is responsible for its accuracy and consistency with the financial statements. Management of the Company maintains internal control systems that provide reasonable assurance that assets are safeguarded, business is conducted in accordance with management's authorization, transactions are properly recorded and the financial statements are reliable. The Company also maintains a staff of professional internal auditors whose responsibilities include monitoring the effectiveness of the internal control system in coordination with the independent auditors. Management recognizes its responsibility to foster a strong ethical climate to ensure the Company's affairs are conducted according to the highest standards of personal and corporate conduct. The Company's published "Principles of Business Conduct" policy addresses the necessity of ensuring open communication within the corporation, avoiding potential conflicts of interest, complying with all domestic and foreign laws, including those relating to financial reporting and maintaining the confidentiality of proprietary information. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the independent auditors, internal auditors and management to review the scope of work scheduled and the results of work completed. The independent auditors and internal auditors have free access to the Audit Committee, without management present, to discuss the results of their work and their evaluations of the adequacy of internal controls and the quality of financial reporting.
CHARLES E. ROBINSON JAMES H. HUESGEN
Charles E. Robinson James H. Huesgen Chairman, President and Chief Executive Officer Executive Vice President and Chief Financial Officer
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS __________________________________________
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation -- The consolidated financial statements include the accounts of Pacific Telecom, Inc. (PTI) and its subsidiaries (Company). The equity method is used to account for those affiliated companies in which the Company exerts significant influence through management agreements or ownership of 20 to 50 percent and for all cellular partnerships in which a Company subsidiary is a partner. All appropriate intercompany transactions and balances have been eliminated. The 1993 and 1992 consolidated financial statements reflect certain reclassifications to conform to the 1994 presentations. (b) Discontinued operations -- International Communications Holdings, Inc. (ICH), the Company's international subsidiary, was shown as a discontinued operation in the consolidated financial statements and notes through September 1993 (Note 7). (c) Industry segmentation -- Although regulatory requirements impose structural separation in its operations, the Company operates predominately in the telecommunications industry providing voice, data and video communication services. (d) Regulatory authorities -- The accounting policies of the Company are in conformity with the requirements of the Federal Communications Commission (FCC) and the regulatory agencies of the various states in which the Company operates. (e) Telecommunications plant -- Telecommunications plant is stated at cost. Additions to plant include direct costs and related indirect charges. Depreciation and amortization are provided using the straight-line method based on the estimated service lives of the various classes of depreciable assets. Amounts charged to operations for depreciation expense reflect methods prescribed by regulators in the Company's regulated operations and, given the Company's operating environment, do not materially differ from estimated useful life determinations used to calculate depreciation estimates of the Company's nonregulated operations. These depreciation estimates and methods are applied consistently in both regulated and public financial presentations. The composite depreciation rate for depreciable telecommunications plant was 6.4 percent in 1994, 6.9 percent in 1993 and 7.4 percent in 1992. The depreciation rate decrease in 1994 is mainly due to the rate decrease ordered by the Alaska Public Utilities Commission for Alaska local exchange operations. The depreciation rate decrease in 1993 is attributable to the sale of the transponders on the satellite in late 1992. (f) Cash and cash equivalents -- The Company considers all investments with original maturities less than 90 days to be cash equivalents. (g) Income taxes -- In 1993, the Company retroactively adopted Statement of Financial Accounting Standards (SFAS) 109 "Accounting for Income Taxes" and restated prior year financial statements. The statement prescribes the liability method of accounting for income taxes, which requires that deferred income taxes be provided for all differences between the financial statement and tax bases of assets and liabilities. Deferred income taxes result primarily from differences between the financial statement and tax bases of depreciable assets and certain acquired assets, as well as employment related expenses not currently deductible. Excess deferred income taxes on regulated assets and liabilities resulting from the decrease in the statutory rates under the Tax Reform Act of 1986, net of an increase arising from the Revenue Reconciliation Act of 1993, are being amortized to income over the composite book life of the related assets as required by regulatory authorities. Investment tax credits relating to regulated telephone property, plant and equipment have been deferred and are being amortized over the estimated useful lives of the related assets. (h) Intangible assets -- These costs are primarily for franchises of local exchange and cellular companies acquired and goodwill established with the retroactive adoption of SFAS 109 and are being amortized generally over 40 years. Accumulated amortization of these costs at December 31, 1994 and 1993 was $33,448,000 and $25,903,000, respectively. Intangible assets related to nonconsolidated investments are included in "Investments" on the balance sheet. The Company will recognize impairments to intangible assets if the market value of the investment or the investment's ability to return cash to the Company through operations or through sale do not equal or exceed the carrying value of the investment, including related intangible assets (Notes 10 and 13).
(i) Inventory -- Inventory on the North Pacific Cable represents the construction costs for the cable, which are carried at lower of cost or market and charged to income on an average cost per unit basis as capacity in the cable is sold. During 1993, inventory cost was reduced by approximately $19,200,000 as a result of an agreement reached with the consortium that constructed the cable. (j) Software capitalization -- The Company capitalizes initial operating system software development costs and expenses subsequent additions or modifications to operating system software. The Company also capitalizes application software that is purchased at a cost of $10,000 or more and with a useful life in excess of one year. (k) Revenue recognition -- The Company's subsidiaries participate with other telephone companies in access revenue pools for certain interstate and intrastate revenues, which are initially recorded based on estimates. Certain long distance network service revenues are estimated under cost separations procedures that base revenues on current operating costs and investments in facilities to provide such services. These estimates are subject to subsequent adjustment as refined operational information becomes available. (l) Net income per share -- Net income per share is based on the weighted average number of common shares outstanding during each of the periods. (m) Regulatory assets and liabilities -- At December 31, 1994 and 1993, respectively, the Company had $8,193,000 and $9,308,000 in regulatory assets and $14,196,000 and $23,554,000 in regulatory liabilities on its balance sheet. The regulatory assets were included in "Deferred charges" and the regulatory liabilities were included in "Other long-term liabilities." The regulatory assets arose from the income tax benefits provided to current ratepayers for pre-1987 tax deductible expenses that were capitalized on the books of the Company and for which no deferred taxes were provided. These regulatory assets are being reduced as the capitalized amounts are depreciated on the books and those expenses are recovered. The regulatory liabilities are made up of two items. The first relates to the excess deferred taxes that resulted from a reduction in the federal tax rate from 46 percent to 35 percent. This excess will not be paid to the federal government, but rather will reduce future revenue requirements from customers over the average life of the assets that generated the difference. In addition, the regulatory liability includes the tax savings resulting from this reduced revenue requirement created by the amortization of the excess deferred taxes. The second relates to a similar reduction in revenue requirements due to the tax savings resulting from amortization of deferred investment tax credits.
NOTE 2. TRANSACTIONS WITH RELATED PARTIES
Approximately 87 percent of the Company's outstanding common stock is owned by PacifiCorp Holdings, Inc. (Holdings), a wholly-owned subsidiary of PacifiCorp. In November 1994, Holdings proposed a merger transaction in which it would have acquired the 13 percent minority interest of the Company for $28 per share in cash. Following a study of the proposal by a Special Committee of the PTI Board of Directors and upon the unanimous recommendation of the Special Committee and the full PTI Board of Directors, a definitive merger agreement was signed by Holdings and PTI on March 9, 1995. Under the merger agreement, the minority shareholders of PTI common stock would receive $30 in cash for each share held and 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 approximately 5.3 million shares held by the unaffiliated public shareholders. The following is a summary of other transactions with PacifiCorp and various affiliates of the Company: (a) Notes payable -- The Company has an agreement that permits temporary cash advances to or from Holdings at short-term borrowing rates. There were no borrowings from Holdings in 1994 or 1993. Interest income related to cash advances to Holdings was $777,000 in 1994, $53,000 in 1993 and $115,000 in 1992. (b) Accounts and notes receivable - affiliates -- These amounts generally represent billings to affiliates for services provided by the Company, but in 1994 and 1993 the amount represents primarily a tax refund receivable from Holdings. (c) Access expense -- The long lines subsidiary recognized approximately $18,332,000 in 1994, $15,852,000 in 1993 and $15,073,000 in 1992 of interstate and intrastate access expense related to the Company's local exchange companies in Alaska. Due to the tariffed nature of access charges, the amounts were recorded as network access service revenues by the local exchange companies and have not been eliminated in the consolidated financial statements.
(d) Income taxes -- The Company participates with PacifiCorp in filing consolidated income tax returns. The Company's income tax provisions are based on a separate company calculation of income taxes. (e) The Company rents its headquarters building from a 50 percent owned partnership. Annual rent was $1,661,000 in 1994, 1993 and 1992, 50 percent of which was included in administrative support.
NOTE 3. TELECOMMUNICATIONS PLANT IN SERVICE
The average lives and balances by category of "Telecommunications plant in service" are (in thousands):
Average December 31, Life 1994 1993 --------------------------------------------------------------------------- Central office equipment 13 $ 530,871 $ 528,639 Poles, cable and conduit 19 576,044 555,981 Building and towers 29 169,974 193,123 Earth stations 15 117,595 124,894 Satellite 12 14,183 7,800 Other 14 141,886 146,605 --------------------------------------------------------------------------- Telecommunications plant in service $1,550,553 $1,557,042 ===========================================================================
Depreciation expense was $97,784,000, $103,894,000 and $107,986,000 for 1994, 1993 and 1992, respectively.
NOTE 4. LEASE AND MAINTENANCE ARRANGEMENTS
The Company's operating lease and maintenance agreements relate to the use of headquarters buildings, certain data processing and customer premise equipment, satellite transponders, terrestrial communications circuits and cable maintenance and backhaul. These agreements generally contain provisions or options to renew the agreements at fair market rental rates. In October 1992, the Company's 16 transponders on the satellite were sold and leased back under an operating lease agreement with annual lease payments through July 1998 of $11,549,000. 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. The Company has no material capital lease obligations at this time. Under these noncancellable operating lease and maintenance agreements, minimum annual rental commitments are as follows (in thousands):
Year Ended December 31, Alascom Other Total --------------------------------------------------------------------------- 1995 $ 22,303 $14,001 $ 36,304 1996 21,687 11,826 33,513 1997 21,241 10,502 31,743 1998 39,847 9,911 49,758 1999 5,786 4,703 10,489 2000 and beyond 61,225 5,026 66,251 --------------------------------------------------------------------------- Total minimum lease and maintenance payments $172,089 $55,969 $228,058 ===========================================================================
Rent expense approximated $41,688,000 in 1994, $45,744,000 in 1993 and $33,352,000 in 1992. The Company has an agreement for the provision of Alascom's satellite telemetry, tracking, control and protection services for approximately $5,747,000 per year terminating in 2001. AT&T will assume the lease and maintenance commitments of Alascom upon closing of the sale (Note 16).
NOTE 5. SALE OF SUBSIDIARIES AND INVESTMENTS
On April 29, 1994, the Company completed the sale of PTI Harbor Bay, Inc. and Upsouth Corporation, to IntelCom Group, Inc. for 1,183,147 shares of IntelCom common stock and $200,000 in cash. On October 17, 1994, the Company sold its IntelCom stock. Cash proceeds of $15,934,000 and a gain of $1,007,000, net of tax and selling expenses, were recognized in 1994. The net assets of PTI Harbor Bay, Inc. and Upsouth Corporation of $13,941,000 were shown in "Other current assets" at December 31, 1993. In September 1993, the Company sold a cellular property which resulted in proceeds of $2,183,000 and an after-tax gain of $827,000. In March 1992, the Company sold its minority ownership interest in Catalina Marketing Corporation, a company that develops, markets, installs and maintains electronic scanner software and equipment for point of sale coupon distribution. The Company received cash proceeds of $26,247,000 and recognized an after-tax gain of $13,452,000 on the sale. During 1992, the Company sold or transferred several cellular properties. These transactions resulted in proceeds of $9,556,000 and after-tax gains of $4,289,000.
NOTE 6. INCOME TAXES
The Company's effective combined state and federal income tax rate was 33.4 percent in 1994, 28.8 percent in 1993 and 32.6 percent in 1992. The difference between taxes calculated as if the statutory federal tax rate of 35 percent (34 percent in 1992) were applied to pre-tax income and the recorded tax expense is due to the following:
The tax effect of significant items comprising the Company's net deferred tax liability are as follows:
December 31, 1994 1993 -------------------------------------------------------------------------- (in thousands) Deferred tax liabilities: Property, plant and equipment $70,274 $126,476 Cellular acquisition adjustments 46,749 50,609 Deferred tax assets: Employment related liabilities (14,893) (12,820) Valuation adjustments (7,507) (8,116) Reserve for self insurance (5,201) (4,759) Other (422) (10,510) -------------------------------------------------------------------------- Net deferred tax liability $89,000 $140,880 ========================================================================== Noncurrent tax liabilities $95,966 $153,455 Current tax assets (6,966) (12,575) -------------------------------------------------------------------------- $89,000 $140,880 ==========================================================================
NOTE 7. DISCONTINUED OPERATIONS
In January 1993, the Company signed an agreement to sell TRT Communications, Inc. (TRT), a wholly-owned subsidiary of ICH, to IDB Communications Group, Inc. (IDB). ICH had been reported as a discontinued operation for financial statement reporting purposes. The remaining investment in ICH is now reported as a continuing operation. On September 23, 1993, the Company completed the sale of TRT and the stock of a smaller subsidiary to IDB for 4,500,000 shares of IDB common stock and $1,000,000 in cash. Based on the market value of IDB stock at closing, the Company recognized an after-tax gain from discontinued operations of $60,444,000, or $1.53 per share, on the sale. The market value of the IDB stock increased during 1993 resulting in the gain. 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 results of operations in 1992 included an after-tax loss from discontinued operations of $45,741,000, or $1.16 per share, of which $10,431,000 represents the 1992 operating losses of ICH and $35,310,000 represents a valuation adjustment resulting from the agreement with IDB. The valuation adjustment was based on the market value of IDB stock at the time the agreement was signed in January 1993, adjusted for closing costs and estimated fluctuations in IDB's stock price. Revenues, net of settlements, included in discontinued operations in 1992 were $108,498,000. The Company recorded tax expense of $26,011,000 in 1993 and tax benefits of $22,800,000 in 1992 with respect to the discontinued operations of ICH.
NOTE 8. PENSION PLAN
Substantially all employees of the Company, except those who are members of the International Brotherhood of Teamsters and one local of the International Brotherhood of Electrical Workers (IBEW), are covered under the Company's pension plan. The Company recognized costs of $3,110,000 and $1,065,000 during 1994, $3,342,000 and $874,000 during 1993 and no cost and $651,000 during 1992 for contributions to the International Brotherhood of Teamsters and IBEW pension plans, respectively. The Company's plan provides benefits based upon an employee's total years of service and the highest five years compensation during the last 10 years of service. The Company's policy is to fund annually up to the maximum amount of the unfunded pension liability that can be deducted for federal income tax purposes. The Company's unrecognized net asset resulting from the initial application of SFAS 87 "Employer Accounting for Pensions", is being amortized over a 10-year period ending in 1996 for the Company's original plan and over a 20-year period ending in 2006 for the North-West Telecommunications, Inc. plan that was merged with the Company's plan on January 1, 1993. Net pension cost and funded status of the pension plans are summarized as follows:
Assumptions used to develop pension plan information were:
December 31, 1994 1993 1992 -------------------------------------------------------------------------- Discount rate 8.5% 7.5% 9.0% Estimated long-term rate of return on assets 9.0% 9.0% 9.0% Assumed rate of increase in compensation levels 5.0% 5.0% 6.5%
The Company's pension liability at December 31, 1994 was included in "Other long-term liabilities" on the balance sheet. Due to differences in the Company and the North-West Telecommunications, Inc. plans' provisions and the merging of these plans in 1993, the net unrecognized prior service cost was reduced by $3,990,000. In the fourth quarter of 1992, the Company offered an early retirement program to a group of corporate employees and employees of certain local exchange companies. In 1992, the Company recognized an expense of $7,331,000 relating to this early retirement program. The Company participates in PacifiCorp's K Plus Employee Stock Ownership and Savings Plan. Under this plan, eligible employees may elect to contribute a portion of their pay, within specified limits, to the plan. The Company makes a matching contribution of 50 percent of the employee's elective contribution. Employee elective contributions subject to matching are limited to six percent of pay. In addition, the Company makes a fixed contribution of two percent of pay per year. The costs to the Company for these contributions in 1994, 1993 and 1992 were $2,991,000, $2,838,000 and $2,943,000, respectively. The Company and PacifiCorp also have long-term incentive plans for certain executive employees of the Company. Participants receive grants of restricted shares of the Company's common stock based on past performance of the companies. The granted shares generally vest over a four-year period. The costs to the Company for this benefit amounted to $80,000, $734,000 and $78,000 in 1994, 1993 and 1992, respectively. Awards granted under this plan that are not yet vested are included as a contra balance in shareholders' equity under "Unearned stock compensation." In 1993, the Company adopted the Non-Employee Directors' Stock Compensation Plan. Directors who are employees of the Company or any affiliated companies are not eligible to participate. The participants' interest in the plan vests at 20 percent per year. The Company recognized a total cost for this plan of $640,000 in 1993, which includes past service costs of $602,000. Awards granted under this plan that are not yet vested are included as a contra balance in shareholders' equity under "Unearned stock compensation."
NOTE 9. OTHER POSTRETIREMENT BENEFITS
The Company provides health care and life insurance benefits to eligible retired employees. Substantially all employees of the Company, except those who are members of the International Brotherhood of Teamsters, are covered under the Company's postretirement health care and life insurance plans. The postretirement health care and life insurance plans are noncontributory as long as the Company's cost per retiree remains below $300 per month ($600 per family per month). Generally, the health care plan pays stated percentages of most medical expenses, reduced for any deductible and payments made by government programs. Effective January 1, 1993, the Company adopted SFAS 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under SFAS 106, the Company must recognize the cost of postretirement benefits over the active service period of its employees. The adoption of SFAS 106 increased postretirement benefit expenses by $3,000,000 in 1993 and an additional $1,000,000 in 1994. The Company's policy is to fund annually the maximum amount of postretirement benefit expense that can be deducted for federal income tax purposes. In 1993, the Company funded a total of $5,703,000 into a 401(h) and a VEBA trust. In addition, the Company funded $2,429,000 and $2,672,000 in 1994 and 1993, respectively, by directly paying postretirement benefit costs to third parties. The Company anticipates making additional tax deductible contributions into the 401(h) and VEBA trusts for 1994 totalling approximately $14,715,000. The Company will recognize the transition obligation, which represents the previously unrecognized prior service cost, over a period of 20 years. At January 1, 1993, the Company had a transition obligation of $38,356,000.
The net funded status for the combined plans is shown below:
Net periodic postretirement benefit cost included the following components:
Assumptions used to develop the accumulated postretirement benefit obligation information were:
December 31, 1994 1993 -------------------------------------------------------------------------- Discount rate 8.5% 7.5% Estimated long-term rate of return on assets 9.0% 9.0% Initial health care cost trend rate-under 65 11.0% 14.0% Initial health care cost trend rate-over 65 10.0% 10.0% Ultimate health care cost trend rate 5.5% 5.0%
The assumed health care cost trend rates gradually decrease over nine years. The health care cost trend rate assumptions have a significant effect on the amount reported. Increasing the assumed health care cost trend rate by one percentage point would increase the postretirement benefit obligation as of December 31, 1994 by $1,985,000, and the annual net periodic postretirement benefit costs by $254,000. The Company's long-term portion of the accrued postretirement benefit cost appears in "Other long-term liabilities" and the current portion of the accrued postretirement benefit cost appears in "Accrued liabilities" on the balance sheet at December 31, 1994.
NOTE 10. INVESTMENTS
The investment balances, which included interest bearing advances of $4,000,000 and $5,241,000 at December 31, 1994 and 1993, respectively, are summarized as follows:
December 31, 1994 1993 ------------------------------------------------------------------------- (in thousands) Equity investments: Cellular partnerships (a) $106,270 $110,120 Other equity investees 1,585 1,317 Cost investments: Cellular partnerships 767 767 Other 14,988 17,693 ------------------------------------------------------------------------- Investments $123,610 $129,897 =========================================================================
(a) Cellular partnerships include goodwill established under SFAS 109 of $23,814,000 in 1994 and $24,079,000 in 1993, which is net of accumulated amortization of $2,767,000 and $2,149,000, respectively.
NOTE 11. SHORT-TERM DEBT
Short-term debt consisted of outstanding notes payable under borrowing arrangements with various banks and other lenders. Information regarding short-term debt follows:
The average interest rate is calculated by dividing the actual short-term interest expense by the average daily weighted balance of short-term debt outstanding for the year.
NOTE 12. LONG-TERM DEBT
Long-term debt consisted of the following:
(a) The weighted average cost of long-term debt outstanding at December 31, 1994 was 7.6 percent. (b) Based upon management's intent and the Company's ability to support the debt on a long-term basis through its revolving credit agreement, $25,000,000 of borrowings under other available banking arrangements at December 31, 1994, were classified as long-term debt. At December 31, 1993, the Company classified $15,000,000 of unsecured medium-term notes and the unsecured term note of $40,000,000, both maturing in 1994, as long-term debt. The Company used proceeds from the sale of IDB Communications Group, Inc. stock in November 1993 to repay the commercial paper and borrowings under the revolving credit agreement (Note 7).
On November 13, 1991, the Company entered into a $300,000,000 revolving credit agreement. Borrowings under the revolving credit agreement bear interest at rates based on bids from participating banks, certain prime rates, interbank borrowing rates or certificate of deposit rates. The revolving credit agreement has been renewed for a five-year term ending in November 1999. Annual commitment fees on the revolving credit agreement are currently .125 percent of the total authorized amount. Available funds under the revolving credit agreement at December 31, 1994 were $300,000,000. At December 31, 1994, approximately $786,586,000 of telecommunications plant in service was pledged as collateral under various loan agreements. Certain agreements also contain provisions restricting the payment of cash dividends. At December 31, 1994, consolidated retained earnings available for dividends and other distributions were $234,939,000, all of which were available from the retained earnings of subsidiaries. Long-term debt maturing annually within each of the four years subsequent to 1995 is as follows: 1996 -- $5,823,000; 1997 -- $16,005,000; 1998 -- $29,164,000; 1999 -- $37,228,000.
NOTE 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are summarized as follows:
(a) The carrying amount approximates fair value because of the short maturity of these instruments. (b) The fair values of the other investments are estimated based on quoted market prices for these or similar investments, or the investment's ability to return cash to the Company through the sale of the investment. (c) The fair value of the Company's long-term debt is estimated using the discounted cash flow method based on the quoted market rates and prices for the same or similar issues of the same remaining maturities. The discount rate is determined using U.S. Treasury rates plus the average spread for the Company quoted by several dealers. Prepayment penalties and other costs of debt retirement are not reflected in these estimates.
The fair value of the interest rate swap agreement, obtained from the counterparty of the swap agreement, was a net payable position of $2,904,000 at December 31, 1993. The Company terminated the agreement during 1994 at a cost of $1,418,000 and currently has no other derivatives. The interest rate swap agreement was initiated to limit the Company's exposure to interest rate fluctuations with the intent to reduce interest expense.
NOTE 14. COMMITMENTS AND CONTINGENCIES
In May 1994, the Company signed definitive agreements with USWC under which the Company has agreed to purchase certain telephone exchange assets in Oregon and Washington for approximately $180,000,000. Completion of this transaction will be dependent upon appropriate regulatory approvals, expected to be received during 1995. Such regulatory approvals may establish service commitments for the Company related to customers served by the assets to be acquired. Expenditures under the Company's 1995 construction and capital expenditure program are expected to approximate $127,496,000. This amount includes $20,732,000 to construct and upgrade plant in Colorado that the Company purchased from USWC. The construction and upgrade program will accelerate single-party service and digital switching required by the Colorado Public Utilities Commission. There are currently no long-term construction projects underway. As of December 31, 1994, 130,587 shares of common stock were reserved for issuance under the Company's profit sharing and savings plan (Note 8). The Company is a party to various legal claims, actions and complaints. Although the ultimate resolution of legal proceedings cannot be predicted with certainty, management believes that disposition of these matters will not have a material adverse effect on the Company's consolidated financial results.
NOTE 15. SUBSEQUENT EVENT
On February 15, 1995, the Company closed the acquisition of local exchange assets in Colorado from USWC. The Company acquired assets in 45 local exchanges that serve approximately 50,000 access lines, largely in rural areas of Colorado. The Company paid approximately $200,000,000 at closing for the assets acquired, with funds being provided from short-term borrowings. These funds are expected to be repaid with proceeds from the sale of Alascom (Note 16).
NOTE 16. PENDING SALE OF ALASCOM, INC.
In October 1994, the Company signed an agreement to sell the stock of Alascom to AT&T Corp. (AT&T) in a transaction providing $365,000,000 in proceeds. Under the terms of the agreement, AT&T will pay $290,000,000 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 $75,000,000 transition payment, which was used to reduce telecommunications plant, made by AT&T to Alascom in July 1994 pursuant to an FCC order. AT&T made a down payment of $30,000,000 to the Company upon signing the stock purchase agreement, which would be applied to the final $75,000,000 transition payment required in the FCC order if the sale failed to close. The $30,000,000 down payment was shown in "Other long-term liabilities" at December 31, 1994. The remaining $260,000,000 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 anticipates recognizing a material gain from the sale of Alascom. 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. Condensed financial information for Alascom is as follows:
December 31, 1994 1993 ----------------------------------------------------------------------------- (in thousands) Current assets $ 82,680 $101,329 Net plant 185,527 274,705 Other assets 7,509 8,366 ----------------------------------------------------------------------------- Total assets $275,716 $384,400 ============================================================================= Current liabilities $ 69,872 $ 49,508 Long-term liabilities 9,383 90,059 Equity 196,461 244,833 ----------------------------------------------------------------------------- Total liabilities and equity $275,716 $384,400 =============================================================================
Twelve months ended December 31, 1994 1993 1992 ----------------------------------------------------------------------------- (in thousands) Operating revenues $343,506 $337,843 $346,750 Operating income 80,651 59,454 60,067
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1994 and 1993 are as follows:
Three Months Ended Dec. 31 Sept. 30 June 30 March 31 -------------------------------------------------------------------------------- (in thousands except per share amounts) OPERATING REVENUES $174,186 $194,448 $170,541 $165,787 OPERATING INCOME 40,246 54,952 34,782 34,661 NET INCOME 18,284 29,681 17,634 15,800 NET INCOME PER SHARE .46 .75 .44 .40 Operating revenues $177,016 $181,317 $174,025 $169,753 Operating income 37,957 36,590 34,549 32,552 Income from continuing operations 16,836 14,034 13,987 14,201 Net gain from discontinued operations -- 60,444 -- -- Net income 16,836 74,478 13,987 14,201 Income per share from continuing operations .43 .35 .35 .36 Net income per share .43 1.88 .35 .36
Increased net income in the third quarter of 1994 resulted from the settlement of all open revenue studies relating to the Joint Services Agreement, which resulted in long lines interstate revenue increases of $18,706,000 (Note 16). Net income from discontinued operations in the third quarter of 1993 resulted from the sale of TRT and a smaller subsidiary to IDB (Note 7). The year 1993 included $2,327,000 of after-tax valuation adjustments in the third quarter and $2,497,000 of after-tax valuation adjustments in the fourth quarter for certain noncore businesses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No information is required to be reported pursuant to this item.
PART III ________________________________________________________________________________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows, with respect to each of the Company's directors, his or her name, age, other positions and offices with the Company, principal occupation or employment for the past five years and the year first elected a director of the Company. Directors are elected annually by the Company's shareholders. There are no family relationships between any directors or executive officers of the Company. See Item 12. "Security Ownership of Certain Beneficial Owners and Management" for information concerning stock ownership by directors and certain executive officers.
The executive officers of PTI are as set forth below:
The executive officers of PTI are elected annually for one year and hold office until their successors are elected and qualified. Mr. Robinson was elected Chairman of the Board in February 1989. In April 1982, he was elected Director, President and Chief Operating Officer. He became Chief Executive Officer in April 1985. Mr. Robinson is also President and Chairman of the Board of Alascom. Mr. Huesgen, a CPA, was elected Executive Vice President and Chief Financial Officer in October 1990. He had served as Vice President, Accounting and Financial Planning since February 1989 and as Controller since July 1986. Ms. Snowden was elected Senior Vice President, Local Exchange Company Operations in December 1994. From May 1993 to November 1994, she had served as Senior Vice President of Pacific Power & Light Company. Prior to that, she had served as Vice President of Pacific Power & Light Company since 1986. Mr. Wonnell, an attorney, was elected Vice President, Regulatory Affairs and Corporate Secretary in February 1991. Prior to joining the Company, he was engaged in the private practice of law and in corporate development activities. Mr. Bloodworth, a CPA, was elected Vice President, Revenue Requirements and Controller in April 1993. From October 1987 to April 1993, he was employed by PacifiCorp Financial Services, Inc., most recently as Vice President and Treasurer. Additionally, from January 1992 to April 1993, he served as Vice President and Treasurer of PacifiCorp Holdings, Inc. and Assistant Treasurer of PacifiCorp. Mr. Carson, an attorney, was elected Vice President, Human Resources in November 1991. He had served as Manager, Employee Relations since February 1990 and as Manager, Labor Relations since February 1989. Mr. Wirkkala was elected Vice President and Treasurer in February 198l.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for services in all capacities to the Company and its subsidiaries for fiscal years ended December 31, 1994, 1993 and 1992 of those persons who were, at December 31, 1994, the Chief Executive Officer of the Company and the other four most highly compensated executive officers of the Company.
(1) Amounts shown for 1994 include (a) $10 of interest earned on deferred compensation accounts in excess of 120 percent of the applicable federal long-term rate for each of Messrs. Bloodworth and Carson, and (b) $346 in tax reimbursement for Mr. Bloodworth. (2) Amounts shown for 1994 include (a) contributions to defined contribution plans of $7,500 for each of Messrs. Robinson, Huesgen, Wonnell, Bloodworth and Carson, and (b) premiums on term life insurance policies of $3,191, $1,551, $1,226, $1,011 and $933 for Messrs. Robinson, Huesgen, Wonnell, Bloodworth and Carson, respectively. (3) Restricted stock grants made in connection with the 1994 restatement of the Company's Long-Term Incentive Plan (Restated Plan). Dividends are payable with respect to such shares from the date of grant. At December 31, 1994, the aggregate value of all restricted stock holdings held by Mr. Robinson, Mr. Huesgen, Mr. Wonnell, Mr. Bloodworth and Mr. Carson, based on the market value of the shares at December 31, 1994, without giving effect to the diminution of value attributable to the restrictions on such stock, were $106,890, $67,500, $54,000, $27,000 and $27,000, respectively. (4) Restricted stock grant made in connection with the 1993 restatement of PacifiCorp's long-term incentive plan, in which Mr. Robinson is a participant. Dividends are payable with respect to such shares from the date of grant. (5) Prior to its restatement, the Company's Long-Term Incentive Plan had a four-year performance cycle ending December 31, 1992. For that performance cycle, the performance criteria were relative return on equity compared to an industry composite and earnings per share growth. In connection with the adoption of the Restated Plan, the Company terminated the performance cycle that was to end December 31, 1994 and made prorated awards in December 1993 for that performance cycle. The performance objectives for that performance cycle were earnings per share growth and return on equity compared to a five-year Treasury Bond rate.
DIRECTOR COMPENSATION
The Company's directors, other than Mr. Robinson, are each paid $12,000 per year, $750 per board meeting and $900 for the chairperson or $750 for committee members for committee meetings. Ms. Galleher and Messrs. Huhndorf, Mellish and Snyder are members of the Special Committee of PTI's Board of Directors formed in connection with the proposed merger transaction in which Holdings would acquire the publicly held minority interest of PTI. Mr. Mellish served as Chairman of the Special Committee and received a fee of $20,000 and $750 per meeting attended. Each other member of the Special Committee received a fee of $15,000 and $750 per meeting attended. Under the Company's Non-Employee Director Stock Compensation Plan, directors of the Company who are not employees of the Company or any of its subsidiaries or of PacifiCorp or any of PacifiCorp's subsidiaries are awarded approximately $37,500 worth of the Company's common stock every five years. Non-employee directors having fewer than five years of service remaining before reaching retirement age receive stock awards equivalent to approximately $7,500 for each remaining year. The director's right to receive the stock awarded under this provision of the plan accrues over the five-year period following the award or shorter period to retirement and unaccrued shares are forfeited if the recipient ceases to be a director prior to the end of the five-year period. Accrued shares vest upon the director's retirement and are subject to forfeiture prior to retirement if the director (a) fails to attend at least 50 percent of the meetings of the Board of Directors or committee of which the director is a member, (b) is removed by the Board of Directors for cause, or (c) becomes a director of or is otherwise employed by a competing entity. The shares awarded under the plan are purchased in the open market with funds supplied by the Company, and the certificates representing the shares and the dividends earned on the shares are then held by the Company until the shares vest. No awards were made pursuant to this plan during 1994.
SEVERANCE ARRANGEMENTS
The Company adopted an Executive Officer Severance Plan effective January 1, 1994 under which certain executive officers of the Company, including Messrs. Robinson, Huesgen, Wonnell and Carson, will receive a severance payment equal to twice the executive's total cash compensation during the last full calendar year upon termination of employment with the Company. The severance payment will be made to the executive in 24 equal monthly payments following the date of the termination of his employment,
and the payments may be terminated by the Company if the executive accepts employment with a competitor of the Company or its affiliates. The plan does not apply to the termination of an executive for reasons of normal retirement, death or total disability, or to a termination for cause or a voluntary termination. "Voluntary termination" does not include a change in reporting relationship, a material change in authority or a change in control of the ownership of the Company that results in a change in position that is detrimental to the executive officer, unless such change in reporting relationship, authority or control is agreed to by the executive officer. Under the plan, "cause" for termination includes any act by an executive that is materially contrary to the interests of the Company or its affiliates and the willful and continued failure by an executive to devote his full business time and efforts to the business affairs of the Company or its affiliates. In February 1995, the Personnel Committee of the Board of Directors extended the termination date of the plan from December 31, 1995 to December 31, 1997.
RETIREMENT PLANS
The Company and many of its subsidiaries have adopted a noncontributory defined benefit retirement plan (Retirement Plan) for their employees (other than employees subject to collective bargaining agreements that do not provide for coverage). Certain of the Company's executive officers, including Messrs. Robinson, Huesgen and Wonnell, are also eligible to participate in PacifiCorp's non-qualified Supplemental Executive Retirement Plan (SERP). The plans provide benefits at retirement payable for life based on length of service with the Company or its subsidiaries and average pay in the 60 consecutive months of highest pay out of the last 120 months. Actuarially equivalent alternative forms of benefits are also available at the participant's election. Retirement benefits are reduced to reflect Social Security benefits. For participants in both plans, pay includes salary and bonuses, as reflected in the Summary Compensation Table. For participants in the Retirement Plan only, pay includes base salary plus bonuses up to 10 percent of base pay, reduced by any nonqualified salary reductions elected by the employee. Accrued benefits are completely unvested until an employee has five years of service or reaches age 65, when the benefits become 100 percent vested. The SERP provides a normal retirement benefit of 65 percent of final average pay reduced by the amount of Social Security benefits and certain other retirement benefits. SERP participants are eligible to receive full benefits after age 62 with 30 years of service or at age 65 with at least 15 years of service. Participants in the SERP are also entitled to receive reduced benefits upon early retirement after age 55 and at least five years of service. The following table shows the estimated annual retirement benefit payable upon normal retirement at age 65 as of January 1, 1995. Amounts in the table reflect payments from the Retirement Plans and the SERP combined.
Final Average Annual Pay at Retirement Date Years of Credited Service --------------------------------------------------------------------------- 5 15 25 30 --------------------------------------------------------------------------- $ 200,000 $ 43,333 $130,000 $130,000 $130,000 400,000 86,667 260,000 260,000 260,000 600,000 130,000 390,000 390,000 390,000 800,000 173,333 520,000 520,000 520,000 1,000,000 216,667 650,000 650,000 650,000
(1) The benefits shown in the table above assume that the individual will remain in the employ of the Company until normal retirement at age 65 and that the plans will continue in their present form. Amounts shown above do not reflect the Social Security offset. (2) The number of credited years of service used to compute benefits under the Retirement Plan for Messrs. Robinson, Huesgen and Wonnell are 30, 11 and 4.
Messrs. Bloodworth and Carson are accruing benefits only under the Retirement Plan. The following table shows the estimated annual benefits payable under the Retirement Plan upon normal retirement at age 65 as of January 1, 1995:
Pension Qualified Salary Years of Credited Service --------------------------------------------------------------------------- 10 15 20 25 30 --------------------------------------------------------------------------- $ 50,000 $ 8,065 $12,097 $16,130 $20,162 $24,194 100,000 17,815 26,722 35,630 44,537 53,444 150,000 27,565 41,347 55,130 68,912 82,694
(1) Amounts shown above reflect Social Security Covered Compensation for a participant turning age 65 in 1995. The number of credited years of service used to compute benefits under the Retirement Plan for Messrs. Bloodworth and Carson are 11 and 11, respectively. (2) 1994 pension qualified salary used to compute Retirement Plan benefits for Messrs. Bloodworth and Carson was $140,635 and $129,415, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership, as of January 31, 1995, of the Company's common stock and common stock of PacifiCorp by (i) each director of the Company, (ii) each of the executive officers named in the Summary Compensation Table and (iii) all executive officers and directors of the Company as a group. As of January 31, 1995, each of the directors and executive officers identified below and all executive officers and directors of the Company as a group owned less than one percent of the Company's common stock and less than one percent of the common stock of PacifiCorp. No person is known by the Company to be the beneficial owner of more than five percent of the Company's common stock, except that, as of January 31, 1995, PacifiCorp Holdings, Inc., a wholly-owned subsidiary of PacifiCorp, was the beneficial owner of 34,325,181 shares of the Company's common stock, which represents approximately 86.6 percent of the Company's common stock. PacifiCorp Holdings, Inc. has pledged those shares to Chemical Bank, as agent for a group of lenders, as security for repayment of certain obligations of PacifiCorp Holdings, Inc. The address of PacifiCorp Holdings, Inc. is 700 N.E. Multnomah, Suite 1600, Portland, OR 97232.
(1) Includes ownership of (a) shares held by family members even though beneficial ownership of such shares may be disclaimed, (b) shares granted and subject to vesting as to which the individual has voting but not investment power under one or more of the stock based compensation plans of the Company or PacifiCorp, and (c) shares held for the account of such persons under the PacifiCorp Compensation Reduction Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PacifiCorp provides certain corporate services to the Company, at PacifiCorp's cost, under a Management Services Agreement. In addition, an indirect subsidiary of PacifiCorp provides certain air transportation services to the Company and its subsidiaries. For the year ended December 31, 1994, billings to the Company under these agreements totaled $1,702,000. During 1994, a subsidiary of PacifiCorp also billed the Company $884,000, primarily for computer hardware lease payments, and PacifiCorp billed the Company $126,000 for pole contact rental. The Company provides certain computer services to PacifiCorp. During 1994, the Company billed PacifiCorp $197,000 for these services. Pursuant to the terms of an intercompany borrowing arrangement, from time to time the Company and PacifiCorp Holdings, Inc. (Holdings) make open account advances to each other. Advances are evidenced by notes, payable on demand, and bear interest at a short-term market rate. No advances were made from Holdings to the Company during 1994. The daily weighted average balance of advances to Holdings was $15,309,000 during 1994, with a weighted average interest rate of 5.1 percent. No advances to Holdings were outstanding on December 31, 1994. The Company joins with PacifiCorp in filing a consolidated federal income tax return along with unitary state income tax returns and will pay an estimated $101,500,000 to PacifiCorp for the Company's 1994 federal and state income taxes. Holdings entered into an agreement and plan of merger with the Company, dated as of March 9, 1995, pursuant to which Holdings would acquire the 13 percent publicly held minority interest in the Company for $30 per share. See Item 1. "Business -- Introduction" for additional information concerning the proposed merger.
PART IV ________________________________________________________________________________
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE REFERENCES
(a) The following documents are filed under Item 8 of this Report.
(1) Index to Consolidated Financial Statements: Independent Auditors' Report 35 Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992 36 Consolidated Balance Sheets at December 31, 1994 and 1993 37 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992 38 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 39 Notes to Consolidated Financial Statements 40-51
(2) Supplemental Schedules*
*All schedules have been omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements filed under Item 8 of this Report.
(3) Exhibits:
2 Agreement for Purchase and Sale of Exchanges between US WEST Communications, Inc. and the Registrant dated August 30, 1993. (Incorporated by reference to Exhibit 2 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-873.) 2A Agreement for Purchase and Sale of Exchanges between US West Communications, Inc., Telephone Utilities of Eastern Oregon, Inc. and the Registrant dated May 5, 1994. 2B Agreement for Purchase and Sale of Exchanges between US WEST Communications, Inc., Telephone Utilities of Washington, Inc. and the Registrant dated May 5, 1994. 2C Stock Purchase Agreement by and among AT&T Corp. and the Registrant dated October 1, 1994. 2D Agreement and Plan of Merger, dated as of March 9, 1995, by and among Pacific Telecom, Inc., PacificCorp Holdings, Inc. and PXYZ Corporation. (Incorporated by reference to Exhibit 2A of the Registrant's Current Report on Form 8-K dated March 9, 1995, File No. 0-873.) 2E Agreement dated as of March 9, 1995, by and between PacifiCorp and Pacific Telecom, Inc. (Incorporated by reference to Exhibit 2B of the Registrant's Current Report on Form 8-K dated March 9, 1995, File No. 0-873.) 3A Restated Articles of Incorporation of the Registrant, as amended June 13, 1990. (Incorporated by reference to Exhibit 3A of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, File No. 0-873.) 3B Bylaws of the Registrant, as amended and restated effective April 30, 1993. (Incorporated by reference to Exhibit 3B of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-873.) 4 Indenture dated as of September 20, 1991, between the Company and The First National Bank of Chicago, as Trustee for the Series B Medium-Term Notes. (Incorporated by reference to Exhibit 4 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, File No. 0-873.)
In reliance upon Item 601(4)(iii) of Regulation S-K, various instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries are not being filed because the total amount authorized under each such instrument does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such instrument to the Commission upon request.
*10A Executive Bonus Plan, dated October 26, 1990. (Incorporated by reference to Exhibit 10B of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-873.) 10B Intercompany Borrowing Agreement between the Registrant, Inner PacifiCorp, Inc. (now PacifiCorp Holdings, Inc.) and certain other affiliated companies dated as of April 1, 1991. (Incorporated by reference to Exhibit 10A of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, File No. 0-873.) 10C Management Services Agreement between the Registrant and Pacific Power & Light Company. (Incorporated by reference to Exhibit 10D of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1980, File No. 0-873.) 10D Lease Agreement between Northwestel, Inc. and Alascom, Inc., dated January 3, 1990. (Incorporated by reference to Exhibit 10D of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-873.) *10E PacifiCorp Supplemental Executive Retirement Plan 1988 Restatement, as amended. (Incorporated by reference to Exhibit 10(i) of PacifiCorp's Form 10-K for the year ended December 31, 1994, File No. 1-5152.) *10F Pacific Telecom, Inc. Long-Term Incentive Plan 1994 Restatement dated as of January 1, 1994. (Incorporated by reference to Exhibit 10F of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-873.) *10G PacifiCorp Long-Term Incentive Plan 1993 Restatement. (Incorporated by reference to Exhibit 10G of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-873.) *10H Form of Restricted Stock Agreement under the PacifiCorp Long-Term Incentive Plan 1993 Restatement. (Incorporated by reference to Exhibit 10H of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-873.) 10I Credit Agreement dated as of November 13, 1991. (Incorporated by reference to Exhibit 10M of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-873.) 10J Lease Intended for Security dated March 12, 1993, among Alascom, Inc., as lessee, Norwest Bank Minnesota, as Agent, and certain institutions as lessors. (Incorporated by reference to Exhibit 10K of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-873.) *10K Non-employee Directors' Stock Compensation Plan dated April 5, 1993. (Incorporated by reference to Exhibit 10L of the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1992, File No. 0-873.) *10L Executive Deferred Compensation Plan dated as of January 1, 1994 as amended. *10M Form of Restricted Stock Agreement under Pacific Telecom, Inc. Long-Term Incentive Plan dated as of February 4, 1994. (Incorporated by reference to Exhibit 10(o) of PacifiCorp's Annual Report on Form 10-K/A for the year ended December 31, 1993, File No. 1-5152.) *10N Executive Officer Severance Plan dated as of January 1, 1994. 10O Second Amendment to the Credit Agreement dated November 29, 1994. 12 Statements re Computation of Ratios 21 Subsidiaries 23 Independent Auditors' Consent 27 Financial Data Schedule -------- *This exhibit constitutes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. On Form 8-K dated December 9, 1994, under Item 5. "Other Events," the Company reported that the Special Committee of the Board of Directors of the Company retained financial advisors and legal counsel to assist in evaluating and responding to the offer made by PacifiCorp Holding, Inc. to acquire the 13 percent minority interest in the Company. The Company also reported information with respect to a lawsuit relating to the proposed purchase of minority interest.
On Form 8-K dated February 6, 1995, under Item 5. "Other Events," the Company reported that litigation brought by certain minority shareholders of the Company, in connection with the pending offer of PacifiCorp Holding, Inc. to acquire the outstanding minority interest in the Company, had been dismissed. On Form 8-K dated February 15, 1995, under Item 2.