2
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 March 31, 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 April 30, 1995, 14,484,953 shares of the registrant's Common Stock were
outstanding.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(UNAUDITED)
Quarter Quarter
Ended Ended
Mar 31, 1994 Mar 31, 1995
Operating Revenues
Local service $8,931,000 $11,480,000
Network access service 10,824,000 7,925,000
Long distance service 1,937,000 1,040,000
Miscellaneous 3,768,000 4,099,000
Total operating revenues 25,460,000 24,544,000
Operating Expenses 16,373,000 19,130,000
Income From Operations 9,087,000 5,414,000
Other Income, Net 76,000 763,000
Income Before Income Taxes 9,163,000 6,177,000
Income Taxes 3,677,000 2,508,000
NET INCOME $5,486,000 $3,669,000
Per Share of Common Stock
Net Income (1) $0.39 $0.25
Cash Dividends (2) $0.14 $0.15
Shares of common stock used to
calculate net income per
share data 14,084,953 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
Dec 31, 1994 Mar 31, 1995
ASSETS (UNAUDITED)
Current Assets:
Cash and Cash Equivalents $21,282,000 $32,848,000
Short-term Investments 13,689,000 -
Accounts Receivable, Net 15,565,000 13,380,000
Inventories 1,302,000 1,706,000
Prepaid Expenses and Other Current Assets 1,541,000 1,504,000
Total Current Assets 53,379,000 49,438,000
Property, Plant and Equipment, Net 173,359,000 176,539,000
Investments and Other Assets:
Cellular Partnership 18,447,000 22,066,000
Deferred Charges and Other Assets 1,623,000 1,617,000
Total Investments and Other Assets 20,070,000 23,683,000
$246,808,000 $249,660,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $17,643,000 $18,815,000
Current Portion of Long-Term Debt 2,679,000 3,571,000
Total Current Liabilities 20,322,000 22,386,000
Long-term Debt 37,321,000 36,429,000
Deferred Credits 24,490,000 24,674,000
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 9,826,000
Total Shareholders' Equity 164,675,000 166,171,000
$246,808,000 $249,660,000
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Three Months Three Months
Ended Ended
Mar 31, 1994 Mar 31,1995
Net cash provided by operating activities $10,482,000 $10,352,000
Cash flows from investing activities:
Purchases of short-term investments (3,962,000) -
Maturities of short-term investments 3,008,000 13,689,000
Capital expenditures for property, plant and
equipment (3,535,000) (7,907,000)
Investment in cellular partnership (1,410,000) (2,401,000)
Changes in deferred charges and other assets 6,000 6,000
Net cash provided by (used in) investing
activities (5,893,000) 3,387,000
Cash flows from financing activities:
Dividends paid (2,010,000) (2,173,000)
Net cash used in financing activities (2,010,000) (2,173,000)
Net increase in cash and cash equivalents 2,579,000 11,566,000
Cash and cash equivalents at beginning of
period 9,847,000 21,282,000
Cash and cash equivalents at end of
period $12,426,000 $32,848,000
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 for the Three Months Ended March 31, 1995 and 1994
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 March 31,
1995 and 1994, respectively. In accordance with the Pacific Bell Agreements,
the transition revenues are being reduced by approximately $8.3 million in total
for the year ending December 31, 1995. 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.
Operating revenues decreased approximately $916,000, or 4% for the three months
ended March 31, 1995 compared to the same period in 1994, principally reflecting
the implementation of the IRD Decision discussed above. Local Service revenues
increased $2.5 million or 29% due to P.U.C. ordered increases in basic exchange
service rates and revenues from the California High Cost Fund, with the
remainder attributable to access line growth of approximately 1%. Network
access revenues decreased $2.9 million or 27% due to the elimination of certain
charges to interexchange carriers and the reduction in transition revenues.
Long distance revenues decreased $897,000 or 46% due to the reduction in
transition revenues for the first three months of 1995, compared to the same
period for 1994. The reduction in operating revenues was expected to be offset
by increased toll usage and revenues as a result of P.U.C. ordered decreases in
toll rates, which did not materialize in the first three months of 1995.
Operating Expenses:
Operating expenses for the three months ended March 31, 1995 increased
approximately $2.8 million, or 17% compared to the same period in 1994. Cost of
services and products increased approximately $1.2 million 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
early January 1995. Depreciation expense increased approximately $367,000 as a
result of higher plant levels. Customer operations expense increased
approximately $309,000 primarily due to increased employee costs as described
above. In addition, general and administrative expense increased approximately
$898,000 primarily reflecting higher costs associated with the Company's
involvement in numerous federal and state regulatory matters.
Other Income, Net:
Other income, net, increased approximately $687,000 for the three months ended
March 31, 1995, compared to the same period in 1994. The net increase was
primarily due to an increase of approximately $293,000 in interest income
attributable to larger invested balances and rising market interest rates and an
increase in income of $474,000 attributable to the Company's interest in the
Sacramento-Valley Limited Partnership("SVLP").
Income Taxes:
Income tax expense for the three months ended March 31, 1995 decreased $1.2
million, compared to the same period in 1994. The decrease was due to a
decrease in income subject to income tax. The effective federal and state
income tax rate was 40.6% and 40.1% for the quarters ended March 31, 1995 and
1994, respectively.
Liquidity and Capital Resources:
As reflected in the accompanying Condensed Consolidated Statements of Cash
Flows, net cash provided by operating activities amounted to $10.4 million and
$10.5 million for the three months ended March 31, 1995 and 1994, respectively.
During the three months ended March 31, 1995, the Company used cash flows from
operations and existing cash, cash equivalents and short-term investments to
fund 1) capital expenditures of $7.9 million pertaining to on-going plant
construction projects, 2) dividends of $2.2 million and 3) capital contributions
to the SVLP of $2.4 million. Cash flows to meet the remaining 1995 budgeted
capital expenditures of approximately $14.4 million, dividends anticipated to be
approximately $6.5 million, current maturities of long-term debt of $2.7 million
and potential 1995 capital requirements for SVLP are anticipated to be met from
both positive net cash generated from operations and existing cash and cash
equivalents.
Competition:
The Company believes it continues to meet 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 three months ended March 31, 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 Local Access Transport Area
("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 requires 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.
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 Commission expressed
its intent to implement local exchange competition, intraLATA presubscription,
open access to local exchange carrier networks based 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 submitted on March 10, 1995,
the Commission anticipates issuing further orders in this proceeding during 1995
and 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. After reviewing
comments to be submitted on May 24, 1995, the Commission anticipates issuing
further orders in this proceeding during 1995 and 1996.
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 5. Other Information
The Company will be submitting a proposal to stockholders to approve the
creation of a holding company. The decision to propose the holding company
structure was determined independently from and not as a result of any of the
proceedings described in Item 1. In addition, it is not anticipated that the
holding company structure would have any impact upon any such proceedings.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) No reports on Form 8-K were filed during the first 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: May 15, 1995 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: May 15, 1995 By: /s/MICHAEL D. CAMPBELL
Michael D. Campbell,
Vice-President and Chief
Financial Officer
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