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 September 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 October 31, 1995, 14,484,953 shares of the registrant's Common Stock were
outstanding.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
Sep 30, 1994 Sep 30, 1995 Sep 30, 1994 Sep 30, 1995
------------ ------------ ------------ ------------
Operating Revenues:
Local Service $ 9,307,000 $12,074,000 $27,404,000 $35,332,000
Network Access Service 10,412,000 8,361,000 31,748,000 24,422,000
Long Distance Service 1,936,000 1,047,000 5,811,000 3,140,000
Miscellaneous 4,097,000 6,282,000 11,617,000 14,640,000
----------- ----------- ----------- -----------
Total Operating Revenues 25,752,000 27,764,000 76,580,000 77,534,000
Operating Expenses 17,320,000 19,929,000 50,427,000 57,528,000
----------- ----------- ----------- -----------
Income From Operations 8,432,000 7,835,000 26,153,000 20,006,000
Other Income, Net 132,000 1,968,000 663,000 3,959,000
----------- ----------- ----------- -----------
Income Before Income Taxes 8,564,000 9,803,000 26,816,000 23,965,000
Income Taxes 3,443,000 3,992,000 10,807,000 9,746,000
----------- ----------- ----------- -----------
NET INCOME $ 5,121,000 $ 5,811,000 $16,009,000 $14,219,000
========== ========== ========== ==========
Per Share of Common Stock
Net Income (1) $0.35 $0.39 $1.10 $0.95
Cash Dividends (2) $0.14 $0.15 $0.41 $0.44
Shares of common stock
used to calculate net
income per share data 14,554,284 14,919,502 14,531,223 14,919,502
(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 3% stock dividend declared in July 1995 to be
issued in December 1995. Additionally, the weighted average number of shares
outstanding for 1994 reflects the sale of 400,000 shares to the employee
retirement plan in September 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 Sept 30, 1995
----------------- -------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 21,282,000 $ 27,161,000
Short-term Investments 13,689,000 5,680,000
Accounts Receivable, Net 15,565,000 14,407,000
Inventories 1,302,000 2,115,000
Prepaid Expenses and Other Current Assets 1,541,000 1,580,000
------------ ------------
Total Current Assets 53,379,000 50,943,000
Property, Plant and Equipment, Net 173,359,000 178,129,000
Investments and Other Assets:
Cellular Partnership 18,447,000 23,291,000
Deferred Charges and Other Assets 1,623,000 1,608,000
------------ ------------
Total Investments and Other Assets 20,070,000 24,899,000
------------ ------------
$246,808,000 $253,971,000
============ ============
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 19,296,000
------------ ------------
Total Current Liabilities 20,322,000 22,867,000
Long-term Debt 37,321,000 34,643,000
Deferred Credits 24,490,000 24,085,000
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
Stock dividend distributable,
434,549 shares at $24 per share - 10,429,000
Retained Earnings 8,330,000 5,602,000
------------ ------------
Total Shareholders' Equity 164,675,000 172,376,000
------------ ------------
$246,808,000 $253,971,000
============ ============
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Nine Months Nine Months
Ended Ended
Sept 30, 1994 Sept 30, 1995
------------- -------------
Net cash provided by operating activities $28,892,000 $25,189,000
Cash flows from investing activities:
Purchases of held-to-maturity investments (40,388,000) (5,680,000)
Maturities of short-term investments 26,719,000 13,689,000
Capital expenditures for property, plant and
equipment (11,557,000) (19,135,000)
Investment in cellular partnership (1,410,000) (2,401,000)
Return of investment in cellular partnership 2,220,000 2,506,000
Changes in deferred charges and other assets 13,000 15,000
----------- -----------
Net cash used in investing activities (24,403,000) (11,006,000)
Cash flows from financing activities:
Principal payments of long-term debt - (1,786,000)
Dividends paid (6,030,000) (6,518,000)
Sale of common stock to employee
retirement plan 9,600,000 -
----------- -----------
Net cash provided by (used in) financing
activities 3,570,000 (8,304,000)
----------- -----------
Net increase in cash and cash equivalents 8,059,000 5,879,000
Cash and cash equivalents at beginning of
period 9,847,000 21,282,000
----------- -----------
Cash and cash equivalents at end of
period $17,906,000 $27,161,000
=========== ===========
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.
2. STOCK DIVIDEND DISTRIBUTABLE
On July 26, 1995, the Board of Directors of the Company adopted a resolution,
which was approved by the Public Utilities Commission of the State of California
(the "P.U.C.") on September 27, 1995, 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 stockholders of record of the Company at the close of
business on such date. Accordingly, 434,549 shares estimated to be
distributable have been reflected on the accompanying condensed consolidated
balance sheet at September 30, 1995, and have been included in the computation
of net income and cash dividends per share for all periods presented.
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 $2.1 million and $4.2 million during the quarters ended September
30, 1995 and 1994, respectively. For the nine months ended September 30, 1995
and 1994, transition revenues were approximately $6.2 million and $12.4 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 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, in accordance
with the IRD Decision, the Company filed a rate case with the P.U.C. on May 15,
1995, in which the Company requested a revenue increase of approximately
$11 million. On November 13, 1995, the Division of Ratepayer Advocates (DRA),
submitted its report on the Company's application in the rate case and proposed
an approximate $10 million reduction in the Company's rates and charges. The
Company disagrees with the DRA's proposal and will provide it's response to the
P.U.C. by December 22, 1995. Hearings on the issues will be held beginning
January 10, 1996. The Company expects a final decision in the third quarter of
1996.
Local service revenues increased approximately $2.8 and $7.9 million, or 30% and
29%, respectively, for the quarter and nine month periods ended September 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 6%.
Network access revenues decreased approximately $2.1 and $7.3 million, or 20%
and 23%, respectively, for the quarter and nine month periods ended September
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 during the
nine month period ended September 30, 1995.
Long distance revenues decreased $889,000 and $2.7 million, or 46% for both the
quarter and nine month periods ended September 30, 1995 compared to the same
periods in 1994. These decreases were due to the reduction in transition
revenues discussed above.
Miscellaneous revenues increased $2.2 million and $3 million, or 53% and 26%,
respectively, for the quarter and nine month periods ended September 30, 1995.
These increases were principally due to the sale of a large telephone system to
a commercial customer.
Operating Expenses:
Operating expenses for the quarter ended September 30, 1995 increased
approximately $2.6 million, or 15% compared to the same period in 1994. For the
nine months ended September 30, 1995, operating expenses increased approximately
$7.1 million or 14%, compared to the same period in 1994. Cost of services and
products increased $1.9 million and $4 million for the quarter and nine month
periods ended September 30, 1995 compared to the same periods due to 1) costs
associated with a larger work force, 2) switching software expenditures, 3)
normal inflationary factors, 4) higher maintenance costs associated with the
severe weather and flooding in January 1995 and 5) higher cost of sales
associated with the increase in nonregulated equipment sales. Depreciation
expense increased approximately $239,000 and $1.1 million for the quarter and
nine month periods ended September 30, 1995 compared to the same periods in 1994
as a result of higher plant levels. Customer operations expense increased
$464,000 and $842,000 for the quarter and nine month periods ended September 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 $1.1 million for the nine month period ended September 30, 1995
compared to the same period in 1994 due to higher costs associated with the
Company's involvement in numerous state and federal regulatory proceedings.
Other Income, Net:
Other income, net, increased $1.8 million for the quarter ended September 30,
1995, compared to the same period in 1994. For the nine months ended
September 30, 1995, other income, net, increased approximately $3.3 million
compared to the same period in 1994. The year to date increase was primarily
due to an increase of approximately $776,000 in interest income attributable to
larger invested balances and higher average interest rates, and an increase in
income of $2.6 million 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 fourth quarter of 1995 may be significantly lower than that
recognized in each of the first three quarters of 1995.
Income Taxes:
Income tax expense for the quarter ended September 30, 1995 increased $549,000
compared to the same period in 1994 due to an increase in income subject to
income tax. For the nine months ended September 30, 1995, income tax expense
decreased $1.1 million compared to the same period in 1994 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 nine month periods ended
September 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 $25.2 million and
$28.9 million for the nine month periods ended September 30, 1995 and 1994,
respectively. During the nine months ended September 30, 1995, the Company used
cash flows from operations and existing cash, cash equivalents and short-term
investments to fund 1) capital expenditures of $19.1 million pertaining to
on-going plant construction projects, 2) dividends of $6.5 million and 3)
principal payments of long-term debt of $1.8 million. Cash flows to meet the
remaining 1995 budgeted capital expenditures of approximately $3 million,
anticipated dividends of approximately $2.2 million, and remaining 1995
maturities of long-term debt of $893,000 are anticipated to be met from both
positive net cash generated from operations and existing cash, cash equivalents
and short-term investments.
Additionally, the Company plans to pursue licenses for personal communications
services ("P.C.S.") at the Federal Communications Commission ("F.C.C.") auctions
scheduled to begin on December 11, 1995. Accordingly, the Company formed a
wholly-owned subsidiary, Roseville PCS, Inc. ("RPCS"), to act as the manager of
West Coast PCS LLC ("WCPCS"), a California limited liability company, which was
formed together with other entities for the express purpose of providing P.C.S.
In order to participate in the P.C.S. auctions, WCPCS is planning to make a
fully refundable deposit of up to $9 million, of which RPCS's portion would be
approximately 80%. The Company cannot predict if it will be a successful
bidder, and, if so, what the costs of these licenses will be.
COMPETITION
As of September 30, 1995, a number of telecommunications companies, including
all of the Regional Bell Operating Companies, have determined that they no
longer 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 companies meeting the criteria to give effect in the financial
statements to certain actions of regulators. However, because the Company and
such telecommunications companies are significantly different in the level and
nature of competition each experiences and in the nature and mix of services
each offers, the Company believes it continues to meet the criteria of SFAS No.
71. Accordingly, the Company's condensed 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 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 nine months ended
September 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, which was filed
on May 15, 1995, included a request for a revenue increase of approximately $11
million. On November 13, 1995, the Division of Ratepayer Advocates (DRA),
submitted its report on the Company's application in the rate case and proposed
an approximate $10 million reduction in the Company's rates and charges. The
Company disagrees with the DRA's proposal and will provide its response to the
P.U.C. by December 22, 1995. Hearings on the issues will be held beginning
January 10, 1996. 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 were filed on September 1, 1995. Reply comments are due on
December 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 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 which permits 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) None.
b) No reports on Form 8-K were filed during the third 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: November 14, 1995 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: November 14, 1995 By: /s/MICHAEL D. CAMPBELL
Michael D. Campbell,
Vice-President and Chief
Financial Officer
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