UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
ROSEVILLE TELEPHONE COMPANY
(Exact name of registrant as specified in its charter)
California 94-0817190
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
211 Lincoln Street, Roseville, California 95678
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 786-6141
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 1995, 14,484,953 shares of the registrant's Common Stock were
outstanding.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Quarter Six Months Quarter Six Months
Ended Ended Ended Ended
June 30, 1994 June 30, 1994 June 30, 1995June 30, 1995
-------------------------- ------------- -------------
Operating Revenues
Local Service $ 9,166,000 $18,097,000 $11,778,000 $23,258,000
Network Access Service 10,513,000 21,336,000 8,136,000 16,061,000
Long Distance Service 1,938,000 3,875,000 1,053,000 2,093,000
Miscellaneous 3,751,000 7,520,000 4,259,000 8,358,000
----------- ----------- ----------- -----------
Total Operating 25,368,000 50,828,000 25,226,000 49,770,000
Revenues
Operating Expenses 16,734,000 33,107,000 18,469,000 37,599,000
----------- ----------- ----------- -----------
Income From Operations 8,634,000 17,721,000 6,757,000 12,171,000
Other Income, Net 455,000 531,000 1,228,000 1,991,000
----------- ----------- ----------- -----------
Income Before Income 9,089,000 18,252,000 7,985,000 14,162,000
Taxes
Income Taxes 3,687,000 7,364,000 3,246,000 5,754,000
----------- ----------- ----------- -----------
NET INCOME $ 5,402,000 $10,888,000 $ 4,739,000 $ 8,408,000
========== ========== ========== ==========
Per Share of Common Stock
Net Income (1) $0.38 $0.77 $0.33 $0.58
Cash Dividends (2) $0.14 $0.29 $0.15 $0.30
Shares of common stock
used to calculate net
income per share data 14,084,953 14,084,953 14,484,953 14,484,953
(1) Shares used in the computation of net income per share of common stock are
based on the weighted average number of shares outstanding in each period after
giving retroactive effect to a 5% stock dividend issued in December 1994.
(2) Cash dividends per share of common stock are based on the actual dividends
per share, as declared by the Company's Board of Directors, after giving
retroactive effect to stock dividends.
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1994 June 30, 1995
----------------- -------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 21,282,000 $ 31,533,000
Short-term Investments 13,689,000 2,903,000
Accounts Receivable, Net 15,565,000 13,329,000
Inventories 1,302,000 1,879,000
Prepaid Expenses and Other Current Assets 1,541,000 1,824,000
------------ ------------
Total Current Assets 53,379,000 51,468,000
Property, Plant and Equipment, Net 173,359,000 175,396,000
Investments and Other Assets:
Cellular Partnership 18,447,000 22,193,000
Deferred Charges and Other Assets 1,623,000 1,612,000
------------ ------------
Total Investments and Other Assets 20,070,000 23,805,000
------------ ------------
$246,808,000 $250,669,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-Term Debt $ 2,679,000 $ 3,571,000
Accounts Payable and Accrued Liabilities 17,643,000 18,462,000
------------ ------------
Total Current Liabilities 20,322,000 22,033,000
Long-term Debt 37,321,000 35,536,000
Deferred Credits 24,490,000 24,362,000
Shareholders' Equity:
Common Stock, without par value; 20,000,000
shares authorized, 14,484,953 shares
issued and outstanding 156,345,000 156,345,000
Retained Earnings 8,330,000 12,393,000
------------ ------------
Total Shareholders' Equity 164,675,000 168,738,000
------------ ------------
$246,808,000 $250,669,000
============ ============
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six Months Six Months
Ended Ended
June 30, 1994 June 30, 1995
------------- -------------
Net cash provided by operating activities $18,635,000 $17,238,000
Cash flows from investing activities:
Purchases of held to maturity investments (17,799,000) (2,903,000)
Maturities of short-term investments 12,882,000 13,689,000
Capital expenditures for property, plant and
equipment (7,302,000) (11,545,000)
Investment in cellular partnership (1,410,000) (2,401,000)
Return of investment in cellular partnership 1,073,000 1,400,000
Changes in deferred charges and other assets (446,000) 11,000
----------- -----------
Net cash used in investing activities (13,002,000) (1,749,000)
Cash flows from financing activities:
Principal payments of long-term debt - (893,000)
Dividends paid (4,020,000) (4,345,000)
----------- -----------
Net cash used in financing activities (4,020,000) (5,238,000)
----------- -----------
Net increase in cash and cash equivalents 1,613,000 10,251,000
Cash and cash equivalents at beginning of
period 9,847,000 21,282,000
----------- -----------
Cash and cash equivalents at end of
period $11,460,000 $31,533,000
=========== ===========
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The condensed consolidated financial statements of Roseville Telephone Company
(the "Company") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results for the interim periods
shown. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations and generally accepted accounting principles applicable for interim
periods. Management believes that the disclosures made are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1994 Annual Report to
Shareholders.
ROSEVILLE TELEPHONE COMPANY
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Operating Revenues:
As of January 1, 1992, the Company exited revenue sharing arrangements with
Pacific Bell, applicable to certain network access, long distance and local
service revenues. Also effective on that date, the Company began billing
Pacific Bell various charges in connection with the provision of services by the
Company pursuant to certain tentative agreements with Pacific Bell that were
completed in February, 1994 (the "Pacific Bell Agreements"). Included in the
amounts billed under the Pacific Bell Agreements were transition revenues of
approximately $2 million and $4.1 million during the quarters ended June 30,
1995 and 1994, respectively. For the six months ended June 30, 1995 and 1994,
transition revenues were approximately $4.1 million and $8.2 million,
respectively. In accordance with the Pacific Bell Agreements, the transition
revenues are being reduced in calendar year 1995 by approximately $8.3 million
from the amount of such revenues for the year ending December 31, 1994.
Beginning in 1997, these transition revenues will be further reduced by
approximately $2 million per year until ultimately eliminated.
In September 1994, the Public Utilities Commission of the State of California
(the "P.U.C.") adopted an Implementation Rate Design Decision (the "IRD
Decision") authorizing toll competition within the Company's Local Access
Transport Area ("LATA") commencing January 1, 1995. The IRD Decision ordered
decreases in the Company's access rates and other charges to interexchange
carriers beginning on January 1, 1995. Such decreases and the reduction in
transition revenues mentioned above will be partially offset by ordered
increases in basic exchange rates and revenues from other sources. Based on
calculations by the P.U.C., the IRD Decision will result in a $5.3 million
reduction in the Company's 1995 annual operating revenues, negatively impacting
current and future results of operations. Furthermore, the IRD Decision
required the Company to file a rate case on May 15, 1995. The completion of the
rate case proceeding and the decision by the P.U.C. is not expected until the
third quarter of 1996.
Operating revenues decreased $142,000, or 1% for the quarter ended June 30, 1995
compared to the same period in 1994. For the six months ended June 30, 1995,
operating revenues decreased approximately $1.1 million, or 2% compared to the
same period in 1994.
Local service revenues increased approximately $2.6 and $5.2 million, or 28% and
29%, respectively, for the quarter and six month periods ended June 30, 1995
compared to the same periods in 1994. These increases were due to P.U.C.
ordered increases in basic exchange service rates and revenues from the
California High Cost Fund resulting from the implementation of the IRD Decision
discussed above. The remaining increase is attributable to access line growth
of approximately 5%.
Network access revenues decreased approximately $2.4 and $5.3 million, or 23%
and 25%, respectively, for the quarter and six month periods ended June 30, 1995
compared to the same periods in 1994. These decreases were due to the
elimination or reduction of certain charges to interexchange carriers resulting
from the implementation of the IRD Decision and the reduction in transition
revenues discussed above. The reduction in network access revenues was expected
to be offset by increased access volumes and revenues as a result of P.U.C.
ordered decreases in toll rates, which did not materialize in full in the first
six months of 1995.
Long distance revenues decreased $885,000 and $1.8 million, or 46% for both the
quarter and six month periods ended June 30, 1995 compared to the same periods
in 1994. These decreases were due to the reduction in transition revenues
discussed above.
Operating Expenses:
Operating expenses for the quarter ended June 30, 1995 increased approximately
$1.7 million, or 10% compared to the same period in 1994. For the six months
ended June 30, 1995, operating expenses increased approximately $4.5 million or
14%, compared to the same period in 1994. Cost of services and products
increased $667,000 and $2.1 million for the quarter and six month periods ended
June 30, 1995 compared to the same periods in 1994 due to a combination of
normal inflationary factors and costs associated with a larger work force and
higher maintenance costs associated with the severe weather and flooding in
January 1995. Depreciation expense increased approximately $511,000 and
$900,000 for the quarter and six month periods ended June 30, 1995 compared to
the same periods in 1994 as a result of higher plant levels. Customer
operations expense increased $199,000 and $378,000 for the quarter and six month
periods ended June 30, 1995 compared to the same periods in 1994 primarily due
to increased employee costs as described above. In addition, general and
administrative expense increased $357,000 and $1.1 million for the quarter and
six month periods ended June 30, 1995 compared to the same periods in 1994 due
to higher costs associated with the Company's involvement in numerous and state
and federal regulatory proceedings.
Other Income, Net:
Other income, net, increased $773,000 for the quarter ended June 30, 1995,
compared to the same period in 1994. For the six months ended June 30, 1995,
other income, net, increased approximately $1.5 million compared to the same
period in 1994. The year to date increase was primarily due to an increase of
approximately $558,000 in interest income attributable to larger invested
balances and higher average interest rates, and an increase in income of
$961,000 attributable to the Company's interest in the Sacramento-Valley Limited
Partnership ("SVLP"). Consistent with the historical trends of SVLP's operating
results, the Company believes that the income attributable to SVLP for the
second half of 1995 may be significantly lower than that recognized for the six
months ended June 30, 1995.
Income Taxes:
Income tax expense for the quarter ended June 30, 1995 decreased $441,000
compared to the same period in 1994. For the six months ended June 30, 1995,
income tax expense decreased $1.6 million compared to the same period in 1994.
The decreases were due to a decrease in income subject to income tax. The
effective federal and state income tax rates were approximately 41% and 40%,
respectively, for the six month periods ended June 30, 1995 and 1994.
Liquidity and Capital Resources
As reflected in the accompanying Condensed Consolidated Statements of Cash
Flows, net cash provided by operating activities amounted to $17.2 million and
$18.6 million for the six month periods ended June 30, 1995 and 1994,
respectively. During the six months ended June 30, 1995, the Company used cash
flows from operations and existing cash, cash equivalents and short-term
investments to fund 1) capital expenditures of $11.5 million pertaining to
on-going plant construction projects, 2) dividends of $4.3 million and 3) net
capital contributions to SVLP of $1.0 million. Cash flows to meet the remaining
1995 budgeted capital expenditures of approximately $9.5 million, anticipated
dividends of approximately $4.3 million, remaining 1995 maturities of long-term
debt of $1.8 million and potential 1995 capital requirements for SVLP are
anticipated to be met from both positive net cash generated from operations and
existing cash, cash equivalents and short-term investments.
Competition
The Company believes it meets the criteria of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("SFAS No. 71"), which requires the Company to give effect in its financial
statements to certain actions of regulators. Accordingly, the Company's
consolidated financial statements have been prepared on that basis. For
example, amounts charged to operations for depreciation expense reflect
estimated lives and methods prescribed by regulators rather than those
consisting of useful and economic lives that might otherwise apply to
nonregulated enterprises. As a result of increasing competition and rapid
changes in the telecommunications industry, the Company periodically monitors
whether it continues to meet the criteria which require the use of SFAS No. 71.
In the future, should the Company determine it no longer meets the SFAS No. 71
criteria, a material, extraordinary, noncash charge would result. The
approximate amount of the Company's net regulatory asset at December 31, 1994
was between $5 million and $12 million, consisting principally of property,
plant and equipment. The estimate for property, plant and equipment was
calculated based upon a projection of useful lives which may be affected by the
increasing competition and rapid changes in the telecommunications industry
referred to above.
PART II
Item 1. Regulatory and Legal Proceedings.
Except for the proceedings described below, the Company is not aware of any
material pending legal proceedings, other than ordinary routine litigation
incidental to its business, to which it is a party or to which any of its
property is subject.
The Company is subject to regulation by the Federal Communications Commission
(the "F.C.C.") and the P.U.C. In the past, there have been various proceedings
before these agencies to which the Company has been a party. The regulatory
proceedings discussed below relate to matters which may effect the Company
prospectively and are not expected to affect the Company's interim financial
statements at or for the six months ended June 30, 1995.
The P.U.C. has instituted an investigation (I.87-11-033) into the manner in
which it regulates local exchange carriers, including the Company. It has
announced that in the course of this investigation it will consider the manner
in which certain services presently provided solely by the Company within its
local exchange area should be opened to competition. On September 15, 1994, the
P.U.C. adopted Decision 94-09-065, its opinion in this matter with respect to
competition within each LATA and rate design issues. The order revised basic
exchange, toll, access, private line, and service connection rates and
authorized competition for toll and toll-like services within the Company's LATA
effective January 1, 1995. Based on calculations by the P.U.C., the rates
adopted in the order will result in an annual revenue reduction to the Company
of approximately $5.3 million beginning in 1995. In addition, the order as
amended required the Company to submit an application for a general rate case
and proposal for a new regulatory framework. This application was filed on May
15, 1995. The P.U.C. is currently reviewing the Company's application and the
Company expects a final decision in the third quarter of 1996.
On April 7, 1993, the P.U.C. opened an investigation and rulemaking proceeding
(R. 93-04-003) to establish rules necessary to provide nondiscriminatory access
by competing service providers to the network capabilities of local exchange
carriers necessary to ensure fair competition in accordance with the mandate of
Public Utilities Code Section 2282.5. In connection with this proceeding, the
P.U.C. issued a further order on August 5, 1993 proposing additional rules for
implementation of the open access principles proposed in its open access
proceeding. On April 26, 1995, the P.U.C. adopted Decision 95-04-073, an
interim opinion governing the provision of expanded interconnection and
restructuring of local transport rates by Pacific Bell and GTE California. These
proceedings may broaden the scope of competition in the provision of intrastate
services. The Company anticipates further decisions in this matter during 1995.
In November 1993, the P.U.C. issued a report to the Governor of the State of
California entitled "Enhancing California's Competitive Strength: A Strategy
For Telecommunications Infrastructure" in which it proposes to open all markets
to competition and aggressively streamline regulation to accelerate the pace of
innovation in the telecommunications marketplace. In connection with this
report, on December 21, 1994, the P.U.C. adopted Decision 94-12-053, an initial
procedural plan to facilitate opening local exchange telecommunications markets
to competition by January 1, 1997. In this decision, the P.U.C. expressed its
intent to implement local exchange competition, intraLATA presubscription, open
access to local exchange carrier networks on an unbundled basis, and reform of
the new regulatory framework for local exchange carriers. In conjunction with
these proceedings, the P.U.C. adopted Rulemaking 95-01-020 and Investigation 95-
01-021 on January 24, 1995, an order instituting investigation and rulemaking to
consider the goals of and definition of universal telephone service in a
changing telecommunications environment, including examination of subsidy
support mechanisms and issues of "carrier of last resort" and "franchise"
obligations. After reviewing comments, the P.U.C. issued Decision 95-07-050 on
July 19, 1995 setting forth a set of proposed rules pertaining to universal
service responsibilities in a competitive environment. Comments on these
proposed rules are due on September 1, 1995. A final set of rules are expected
to be developed by the end of 1996.
In addition, on April 26, 1995, the P.U.C. adopted a Rulemaking 95-04-043 and
Investigation 95-04-044, an order instituting investigation and rulemaking to
develop and adopt rules for local exchange competition. On July 24, 1995, the
P.U.C. issued Decision 95-07-54 opening Pacific Bell and GTE territories to
competition under interim rules. The interim rules do not apply to the
Company's territory. The P.U.C. stated that January 1997 is still the target
date for implementing full competition to all telecommunications markets,
including the Company's territory. Further comments will be taken and hearings
held to resolve a number of issues in order to develop the final rules for local
service competition to be effective January 1, 1997.
There are a number of regulatory proceedings occurring at the federal level that
may have a material impact on the Company. These regulatory proceedings
include, but are not limited to, consideration of changes to the interstate
universal service fund and the regulation of local exchange carriers. In
addition, the F.C.C. periodically establishes the authorized rate of return for
interstate access services. Since January 1, 1991, the F.C.C. has established
an 11.25% rate of return for interstate access services.
In addition, in September 1992, the F.C.C. issued an order granting to
competitors expanded interconnection rights to the facilities of local exchange
carriers with annual revenues from regulated operations in excess of $100
million. These rules were overturned by the United States Court of Appeals. In
1994, the F.C.C. issued new rules to comply with the decision of the Court of
Appeals. While not yet applicable to the Company, these rules will permit
competitors to terminate facilities on terms and conditions equivalent to those
which would apply if they were permitted to terminate their facilities in
telephone company central offices.
In addition, the F.C.C. initiated a separate notice of proposed rulemaking
establishing a two-phase proceeding to modify interstate access rate structures
to further competition in the provision of interstate services. An interim rate
structure has been implemented pursuant to this notice of proposed rulemaking.
The United States Telephone Association ("USTA") filed an action in the United
States District Court in Washington, D.C. on behalf of its members, including
the Company, alleging that current federal law prohibiting local telephone
companies from owning or operating cable television systems in their telephone
service territories is an unconstitutional infringement of their First Amendment
rights. The court entered an order enjoining enforcement of the prohibition.
The defendants, the United States Department of Justice and F.C.C., have
declared their intention to appeal the court's decision as they have appealed
similar decisions in favor of other telephone companies. The decision, if
affirmed, will permit the Company to provide cable television in its telephone
service area.
In addition, the F.C.C. is currently proceeding with a rulemaking to consider
how telephone companies may offer "video dialtone" services in their telephone
service areas, including how common costs and plant are to be allocated between
telephone and video service for accounting and ratemaking purposes. Video
dialtone involves the provision of common carrier video transport for other
video programmers. The outcome of the F.C.C. proceeding will determine, in
part, whether the Company may profitably offer video dialtone service in its
telephone service area. The proceeding will also consider how telephone
companies provide cable television in their telephone service areas.
The eventual impact on the Company of the effect of all the proceedings
described above cannot presently be determined.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 16, 1995, the Company held its regularly scheduled Annual Meeting
of Shareholders, at which the shareholders:
(1) Elected a Board of five (5) Directors; and
(2) Considered and acted upon a proposal to approve the creation of a
holding company by approving the Agreement and Plan of Reorganization described
in the proxy solicitation materials prepared pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
The five nominees to serve as Directors, which constituted the existing
Board of Directors, were all reelected to serve as Directors, by the following
votes (out of 14,484,953 shares).
Broker
Nominees For Against/Withheld Abstentions Non-votes
Robert L. Doyle 13,430,435 256,511 N/A N/A
Brian H. Strom 13,428,465 258,481 N/A N/A
Thomas E. Doyle 13,430,443 256,503 N/A N/A
Ralph E. Hoeper 13,428,747 258,199 N/A N/A
John R. Roberts III 13,429,737 257,209 N/A N/A
The proposal to approve the creation of a holding company was approved by
the following vote:
Broker
For Against/Withheld Abstentions Non-votes
12,444,093 782,650 N/A N/A
Item 5. Other Information.
On July 26, 1995, the Board of Directors of the Company adopted a resolution,
subject to the approval of the P.U.C., declaring a stock dividend of up to three
percent (3%) on the common stock of the Company, payable as soon as practicable
after December 1, 1995 to shareholders of record of the Company at the close of
business on such date. The Company subsequently filed an application for the
stock dividend with the P.U.C. in August, 1995.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) No reports on Form 8-K were filed during the second quarter of
1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROSEVILLE TELEPHONE COMPANY
(Registrant)
Date: August 11, 1995 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: August 11, 1995 By: /s/MICHAEL D. CAMPBELL
Michael D. Campbell,
Vice-President and Chief
Financial Officer
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