1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates (and on the
assumption that all shares held by registrant's employee benefit plan, directors
and officers may be deemed shares held by affiliates), was $321,755,075 as of
February 29, 1996. As of February 29, 1996, 14,915,424 shares of the
registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into Part III hereof are portions of the registrant's
definitive proxy statement issued in connection with the annual meeting of
registrant's shareholders to be held June 21, 1996.
TABLE OF CONTENTS
ITEM NO. PAGE
PART I
1.Business 3
2.Properties 5
3.Legal Proceedings 5
4.Submission of Matters to a Vote of Security Holders 8
PART II
5.Market for Registrant's Common Equity and Related Stockholder
Matters 9
6.Selected Financial Data 9
7.Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
8.Financial Statements and Supplementary Data 16
9.Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
PART III
10.Directors and Executive Officers of the Registrant 35
11.Executive Compensation 35
12.Security Ownership of Certain Beneficial Owners and
Management 35
13.Certain Relationships and Related Transactions 35
PART IV
14.Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 35
PART I
Item 1. Business.
Roseville Telephone Company (the "Company"), incorporated under the laws of the
State of California in 1914, is engaged in the business of furnishing
communications services, mainly local and toll telephone service and network
access services, in a territory covering approximately 83 square miles in Placer
and Sacramento Counties, California. Toll service to points outside the
Company's own area is furnished through connection at Roseville with facilities
of Pacific Bell, AT&T and other interexchange carriers. The City of Roseville,
which is centrally located in the Company's service area, is 18 miles northeast
of Sacramento.
During recent years, including the year ended December 31, 1995, the area served
by the Company has experienced both land subdividing activity for home building
purposes and significant commercial and industrial development. The Company
continues to be engaged in the expansion of its facilities and operations to
meet current and anticipated service demand increases and to maintain modern and
efficient service.
Currently, no other telephone company operates in the area served by the
Company. However, the Company's future operations may be impacted by several
proceedings pending before the Public Utilities Commission of the State of
California (the "P.U.C.") which are considering the manner in which certain
local exchange services presently provided solely by the Company should be
opened to competition. See "Item 3 - Legal Proceedings" and "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
In February 1996, Congress passed the Telecommunications Act of 1996 which
significantly changed the regulatory environment for telecommunications
companies. As a result of the Telecommunications Act, specific telephone and
cable television services historically provided exclusively by one company may
be provided by competing companies. The Company is actively evaluating the
financial viability of various opportunities in the long-distance and wireless
telecommunications segments as well as the cable television industry.
The Company, with an approximate 23.5% equity interest, is one of four limited
partners of Sacramento-Valley Limited Partnership (the "Cellular Partnership"),
a California limited partnership formed for the construction and operation of a
cellular mobile radiotelephone system, which now operates in the following
Standard Metropolitan Statistical Areas ("SMSA"):
Sacramento Reno
Stockton Yuba City - Marysville
Modesto Redding - Chico
In addition, the Cellular Partnership also operates in the Tehama, Sierra and
Storey (Carson City) Rural Statistical Areas ("RSA").
AirTouch Cellular is the sole general partner of the Cellular Partnership and
responsible for the construction, operation, maintenance and marketing of the
cellular mobile radiotelephone system.
In each SMSA and RSA, the Federal Communications Commission (the "F.C.C.") has
granted one license to provide cellular services to a wireline carrier and one
license to a non-wireline carrier. The Cellular Partnership is the wireline
carrier licensee for each SMSA and RSA in which it operates and competes with
the non-wireline licensee in each of those areas.
The table that follows reflects the percentage of total operating revenues of
the Company contributed by various sources, excluding revenues from the
Company's ownership interest in the Cellular Partnership.
% of Total Operating Revenues
Revenues 1995 1994 1993
- ------------------------ ---- ---- ----
Rate regulated revenues 82% 85% 85%
Other revenues 18% 15% 15%
---- ---- ----
Total operating revenues 100% 100% 100%
==== ==== ====
As indicated above, revenues from rate regulated services, which include local
service, network access service and long distance service revenues, constituted
approximately 82% of the Company's total operating revenues in 1995. Other
revenues consist primarily of directory advertising services, billing and
collection services, nonregulated services and other miscellaneous revenues.
Nonregulated revenues are derived from the sale, lease and maintenance of
telecommunications equipment, and the provision of alarm monitoring services.
Substantially all of the Company's revenues are from communications and related
services. Approximately 24%, 34% and 36% of the Company's consolidated operating
revenues in 1995, 1994 and 1993, respectively, were derived from access charges
and charges for other services to, and transition contract payments from Pacific
Bell pursuant to certain agreements. Approximately 10% of the Company's
consolidated operating revenues in 1994 and 1993 (7% in 1995) were derived from
the provision of services to AT&T. The revenues from services provided to AT&T
were received primarily from access charges, but also included revenues from the
provision of operator, billing and collection, and other interexchange services.
No other customers accounted for more than 10% of consolidated operating
revenues.
Total rate regulated revenues from telephone services are affected by rates
authorized by various regulatory agencies. Intrastate service rates are subject
to regulation by the P.U.C. The Company is currently engaged in a rate
proceeding before the P.U.C. and expects a final decision by the end of 1996.
The Company has agreements with Pacific Bell relating to extended area service
settlements and a significant portion of network access and long distance
revenues. With respect to intrastate toll calls, interexchange carriers are
assessed access charges based on tariffs filed by Pacific Bell. With respect to
interstate services, the Company has filed its own tariff with the F.C.C. for
all elements of access services except carrier common line charges, for which
the Company concurs with tariffs filed by the National Exchange Carrier
Association. Extensive cost separation studies are utilized to determine both
the final settlements and access charges. For further discussion regarding the
Company's rate regulated revenues, see "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations".
In addition to its regulatory authority with respect to rates, the P.U.C. also
has the power, among other things, to establish the terms and conditions of
service, to regulate securities issues, to prescribe uniform systems of accounts
to be kept by public utilities and to regulate the mortgaging or disposition of
public utility properties.
The Company uses public streets and highways in the conduct of its public
utility telephone business under a non-exclusive perpetual franchise granted by
Section 7901 of the California Public Utilities Code.
At December 31, 1995, the Company had 521 employees, none of whom is represented
by any union.
Item 2. Properties.
The Company owns central office buildings and related equipment in Roseville,
Citrus Heights, Granite Bay, and other locations in Placer County. The
Company's 68,000 square foot principal business office and administrative
headquarters and 128,000 square foot operations facility are located in
Roseville. Other land is held for future expansion. The Company has
appropriate easements, rights of way and other arrangements for the
accommodation of its pole lines and underground conduits and for its aerial and
underground cables and wires.
In addition to land and structures, the Company's property consists of equipment
required in providing telephone service. This includes central office
equipment, customer premises equipment and connections, radio antennas, pole
lines, aerial and underground cable and wire facilities, vehicles, furniture and
fixtures and other equipment. The Company also owns certain other
communications equipment held as inventory for sale or lease.
In addition to plant and equipment that the Company wholly-owns, the Company
utilizes poles and conduit systems wholly-owned by, or jointly-owned with, other
utilities and leases space on facilities wholly or jointly-owned by the Company
to other utilities. These arrangements are in accordance with written
agreements customary in the industry.
The Cellular Partnership owns certain equipment used in the provision of
cellular mobile radiotelephone services.
Item 3. 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.
As appears in Item 1, above, the Company is subject to regulation by the F.C.C.
and P.U.C. In the past, there have been various proceedings before these
agencies to which the Company has been a party. Reference is made to Item 1 for
further information regarding the nature of the jurisdiction of the F.C.C. and
P.U.C. over the business and operations of the Company. The regulatory
proceedings discussed below relate to matters which may affect the Company
prospectively and are not expected to affect the Company's 1995 financial
statements.
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 and 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., these ordered changes were expected to result in a
net reduction in the Company's 1995 rate regulated revenues of approximately
$5.3 million. 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 ("D.R.A."), 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 D.R.A.'s proposal and provided its response to the P.U.C. on January
12, 1996. Hearings on the issues commenced February 13, 1996 and the Company
expects a final decision by the end 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. On
December 6, 1995, the P.U.C. adopted Decision 95-12-016 which adopted principles
to govern the development of cost studies for the basic network functions of the
local exchange networks of Pacific Bell and GTE California. In this order, the
P.U.C. ordered the Company to participate in the process of developing these
cost studies in anticipation of a possible order that the Company designate and
be bound for two years by the results of the cost studies for a comparable
Pacific Bell or GTE California wire center and to develop a proposal for how to
account for shared and common costs, including overhead. Also, on December 6,
1995, the P.U.C. adopted Decision 95-12-020 which modified the rate structure
previously adopted for local transport in order to bring it into parity with
that adopted by the F.C.C. in its own proceedings on local transport
restructuring. These proceedings may broaden the scope of competition in the
provision of intrastate services, the effects of which on the Company cannot
presently be determined.
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, 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. Proceedings in
connection with establishing the mechanisms for calculating and funding future
subsidy support mechanisms are continuing. The Company anticipates that further
orders will be issued in this proceeding during 1996 which may result in changes
in intrastate telecommunication regulation, the effects of which on the Company
cannot yet be determined.
On April 26, 1995, the P.U.C. adopted 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 95-07-054 opening Pacific Bell and GTE California territories to
competition under interim rules by facilities-based competitors on January 1,
1996 and by resale competitors on March 31, 1996. Additional interim rules
governing interconnection and related matters were adopted on December 20, 1995
in Decision 95-12-057 approving the applications of an initial group of
facilities-based local service competitors. On February 23, 1996, the P.U.C.
adopted Decision 96-02-072 approving the applications of an initial group of
resale competitors. A companion decision establishing the rates to be paid by
resale competitors for interconnection and related services was adopted on March
13, 1996 to be effective March 31, 1996. While the orders issued to date on
local service competition do not apply to the Company's territory, the P.U.C.
has expressed its intention to open all telecommunications markets, including
the Company's territory, to competition by January 1, 1997. The P.U.C. is
anticipated to hold proceedings during 1996 to establish the rules for local
service competition in the Company's territory.
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 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.
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 terminated their facilities in telephone company
central offices.
The Company's operations may also be impacted by the recently enacted
Telecommunications Act of 1996. Given its recent enactment, and the
commencement of proceedings by the F.C.C. to promulgate rules and regulations
thereunder, it is not yet possible to comprehend fully the impact of the
Telecommunications Act on the Company's operations.
These proceedings may broaden the scope of competition in the provision of
regulated services and change the rates and rate structure for regulated
services furnished by the Company, the effects of which on the Company cannot
yet be determined.
On May 16, 1995, the Company filed an application with the P.U.C. requesting
authorization to implement an Agreement and Plan of Reorganization (the "Plan")
approved by the Company's shareholders on June 16, 1995, which would result in a
holding company. The Company intends to proceed with the reorganization after
approval of the Plan by the P.U.C. The decision to approve the creation of a
holding company structure was determined independently from and not as a result
of any other regulatory proceedings. In addition, it is not anticipated that the
holding company structure would have any impact upon any such proceedings.
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.
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of the Company trades principally in local transactions without
the benefit of an established public trading market. As a result of the minimal
number of stock transactions, the Company's information with respect to price
per share is derived from reports provided by the Company's Retirement
Supplement Plan and disclosure, in limited circumstances, of third party
transactions. Retirement Supplement Plan transactions in the Company's common
stock were effected at approximately $24 per share from the beginning of the
first quarter of 1994 through the beginning of the fourth quarter of 1995, and
approximately $25 per share thereafter.
The Company's approximate number of shareholders was 9,600 as of February 29,
1996.
The Company pays quarterly cash dividends on its common stock. The Company paid
cash dividends of $.15 per share for each quarter during 1994 and 1995.
Item 6. Selected Financial Data.
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Total operating
revenues $ 102,661 $ 102,963 $ 96,780 $ 92,280 $ 88,461
Net income $ 18,507 $ 20,355 $ 22,518 $ 21,816 $ 19,940
Net income per share
of common stock (1) $ 1.24 $ 1.39 $ 1.55 $ 1.50 $ 1.37
Cash dividends per
share of common
stock (2) $ .58 $ .55 $ .53 $ .50 $ .48
Property, plant and
equipment, at cost $ 263,210 $ 243,774 $ 228,927 $ 203,379 $ 181,552
Total assets $ 256,889 $ 246,808 $ 226,459 $ 190,760 $ 165,380
Long-term debt $ 33,750 $ 37,321 $ 40,000 $ 25,000 $ 13,270
Shares of common stock
used to calculate
net income per
share (1) 14,915,424 14,615,424 14,515,424 14,515,424 14,515,424
(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 issued in 1995 and 5%
stock dividends issued in 1994, 1993 and 1992.
(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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Overview
Roseville Telephone Company (the "Company") is an independent telecommunications
company that is primarily engaged in providing traditional telephone service in
Roseville, California and adjacent communities. The Company's service area
continues to experience strong economic growth, which is reflected in the 6%
increase in access lines in 1995. In addition to the Company's local telephone
operations, the Company has an approximate 23.5% interest in the Sacramento-
Valley Limited Partnership (the "Cellular Partnership"), which provides cellular
telephone service principally in California.
Revenues from rate regulated services, which include local service, network
access service and long distance service revenues, constitute approximately 82%
of the Company's total operating revenues in 1995. Rate regulated revenues are
derived from various sources, including billings to business and residential
subscribers for basic exchange services, extended area service charges and
transition revenues from Pacific Bell, P.U.C. mandated surcharges, billings to
Pacific Bell, long distance carriers and subscribers for network access
services, interstate settlement revenues from the National Exchange Carrier
Association, and support payments from the interstate Universal Service Fund and
California High Cost Fund.
The Company bills Pacific Bell various charges for certain local service,
network access service and long distance service revenues pursuant to agreements
(the "Pacific Bell Agreements") that arose as a result of the termination on
January 1, 1992 of previous revenue sharing arrangements with Pacific Bell. Of
the Company's total revenues in 1995, 1994 and 1993, 24%, 34% and 36%,
respectively, were recorded under the Pacific Bell Agreements. Included in such
amounts were transition revenues of $8.2 million, $16.5 million, and $16.5
million in 1995, 1994 and 1993, respectively. The transition revenues are
anticipated to be approximately $8.2 million in 1996. Beginning in 1997 such
revenues will be reduced by approximately $2.0 million per year until ultimately
eliminated.
In September 1994, the P.U.C. issued the Implementation Rate Decision ("IRD
Decision"), which authorized toll competition within each Local Access Transport
Area ("LATA") commencing January 1, 1995. The IRD Decision ordered decreases in
the Company's network access rates and other charges to interexchange carriers
beginning January 1, 1995. Such decreases and the reduction in transition
revenues discussed above were intended to be partially offset by ordered
increases in basic exchange rates and revenues from other sources. Based on
calculations by the P.U.C., these ordered changes were expected to result in a
net reduction in the Company's 1995 rate regulated revenues of approximately
$5.3 million, which includes the effects of the reduction in transition revenues
of $8.3 million mentioned above. However, the actual net reduction in revenues
for 1995 was $6.7 million.
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 P.U.C.'s Division of
Ratepayer Advocates ("D.R.A.") submitted its report on the Company's application
in the rate case and proposed an approximate $10 million reduction in the
Company's annual rates and charges. The Company disagrees with the D.R.A.'s
proposal and provided its response to the P.U.C. on January 12, 1996. Hearings
on the issues commenced in February 1996 and the Company expects a final
decision by the end of 1996. The ultimate outcome of the rate case, and its
effect on the Company's consolidated financial position and results of
operations, cannot presently be determined. However, any consequences of the
rate case would be accounted for at or following the time a final decision is
rendered.
1995 versus 1994
Net income for 1995 was $18.5 million or $1.24 per share, compared with net
income of $20.4 million or $1.39 per share for 1994. The decline in net income
and net income per share from 1994 to 1995 was principally due to the IRD
Decision.
Operating Revenues:
The ordered changes in the sources of the Company's rate regulated revenues
resulting from the IRD Decision significantly affected the comparability between
1995 and 1994 of the related revenue categories in the Company's consolidated
income statements. Total rate regulated revenues decreased $3.6 million or 4%
from 1994. The decline resulted primarily from a $6.7 million reduction in rate
regulated revenues as a result of the IRD Decision, which exceeded the P.U.C.'s
estimated impact of $5.3 million. The P.U.C. had projected that intraLATA toll
calling volumes, from which the Company derives network access service revenues
from Pacific Bell, would be stimulated by lower intraLATA toll rates ordered in
the IRD Decision for Pacific Bell. However, actual calling volumes in 1995 were
far below the levels forecasted by the P.U.C. and thus below the level necessary
to limit the net reduction in the Company's revenues to $5.3 million.
The $6.7 million reduction in rate regulated revenues resulting from the IRD
Decision was partially offset by the effects of 1) access line growth of
approximately 6% and increased custom calling, voice mail and enhanced network
service revenues, which increased revenues by approximately $1.5 million, and 2)
an increase of $1.2 million in special access revenues arising from several new
commercial customers.
Nonregulated sales and service revenues increased $3.1 million or 78% over 1994.
This increase was principally due to the sale of a large telephone system to a
commercial customer.
Operating Expenses:
Operating expenses in 1995 increased approximately $7.9 million or 11% compared
to 1994. Plant operations increased $1.7 million during 1995 due to 1) costs
associated with a larger work force, 2) switching software expenditures, 3)
maintenance costs associated with the severe weather and flooding in January
1995, and 4) normal inflationary factors. Depreciation expense increased
approximately $1.5 million during 1995 as a result of higher average plant
levels. Customer operations expense increased $1.1 million during 1995
primarily due to increased labor costs. General and administrative expense
increased $1.3 million during 1995 due to higher costs associated with the
Company's involvement in numerous state and federal regulatory proceedings
including the Company's rate proceeding. Cost of nonregulated sales and service
increased $2.3 million during 1995 due primarily to the sale of a large
telephone system to a commercial customer.
Other Income, Net:
Other income, which consists primarily of income attributable to the Company's
interest in the Cellular Partnership and interest income from cash equivalents
and short-term investments, increased $5.1 million over 1994. The increase was
primarily due to an increase in income of $4.5 million attributable to the
Company's interest in the Cellular Partnership and an increase of approximately
$617,000 in interest income attributable to larger average invested balances.
Other expense consists primarily of interest expense on long-term debt, which
remained at essentially the same level in 1995 and 1994.
Income Taxes:
Income taxes in 1995 decreased approximately $1.2 million compared to 1994 due
to the decrease in income subject to tax. The effective federal and state
income tax rate was approximately 40.6% in 1995 compared to 40.5% in 1994.
1994 versus 1993
Operating Revenues:
Total rate regulated revenues increased $5.5 million or 7% over 1993. Local
service revenues decreased slightly to $36.7 million in 1994 due to positive
settlement adjustments recorded in 1993 for extended area service revenues,
which did not reoccur in 1994. This decrease was largely offset by the effects
of 5% growth in access lines in 1994. Network access revenues increased $5.7
million or 15% over 1993, primarily due to growth in minutes of use volumes and
higher interstate settlements from the National Exchange Carrier Association,
which contributed approximately equally to such revenue growth. Long distance
revenues, comprised largely of transition revenues from Pacific Bell, remained
at essentially the same level in 1994 and 1993.
Operating Expenses:
Operating expenses in 1994 increased approximately $9.1 million or 15% compared
to 1993. Depreciation expense increased approximately $5.7 million in 1994, of
which $3.7 million was attributable to depreciation rate changes authorized by
the P.U.C. and the balance was related to larger average plant levels. Customer
operations expenses increased by $1.0 million and general and administrative
expense increased by $2.4 million, primarily due to normal inflationary factors
combined with a larger workforce to serve the Company's increasing customer
base. In addition, the increase in general and administrative expense was
partially a result of the Company's increased involvement in numerous federal
and state regulatory proceedings and efforts to enhance the Company's existing
information systems.
Other Income, Net:
Other income increased $75,000 over 1993. Increased interest income due to
larger invested balances and rising market interest rates was offset by
reductions in Allowance for Funds Used During Construction ("AFUDC") due to the
completed construction of an operations facility in the fourth quarter of 1993.
Other expense consists primarily of interest expense on long-term debt, which
increased $852,000 over 1993 due to increased average borrowings.
Income Taxes:
Income taxes in 1994 decreased approximately $1.5 million compared to 1993 due
to the decrease in income subject to tax. The effective federal and state
income tax rate was 40.5% in 1994 compared to 40.6% in 1993.
Liquidity and Capital Resources
As reflected in the Consolidated Statements of Cash Flows, net cash provided by
operating activities amounted to $32.8 million, $36.7 million and $36.6 million
in 1995, 1994 and 1993, respectively. The Company used cash flows from
operations and existing cash, cash equivalents and short-term investments to
fund 1) capital expenditures of $24.3 million pertaining to ongoing plant
construction projects, 2) a deposit of $9 million to participate in the F.C.C.
auction for personal communication service licences, 3) dividends of $8.8
million, and 4) principal payments of $2.7 million to retire long-term debt.
The Company's most significant use of funds in 1996 is expected to be for 1)
budgeted capital expenditures of approximately $25 million for central office
equipment, cable and wire facilities, and general purpose assets, and 2)
scheduled payments of long-term debt of $3.6 million. It is anticipated that
the Company's capital requirements in 1996 will be met from cash flows from
operations, existing cash, cash equivalents and short-term investments and the
refund of the $9 million deposit as a result of the Company's withdrawal from
the F.C.C. auction described above.
Inflation
While the Company is not immune from increased costs brought on by inflation and
regulatory requirements, the impact of such items on the Company's operations
and financial condition depends partly on results of current and future rate
cases and the extent to which increased rates can be translated into improved
earnings.
Other Financial Information
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 their financial statements to certain
actions of regulators. However, because such telecommunications companies are
significantly different from the Company in the level and nature of competition
they experience and in the nature and mix of services they offer, the Company
believes it continues to meet the criteria of SFAS No. 71. 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.
If it becomes no longer reasonable to assume that the Company can recover its
costs of providing regulated services through rates charged to customers,
whether resulting from the effects of increased competition or specific
regulatory actions, SFAS No. 71 would no longer apply. 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, 1995 was between $5 million and
$13 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.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"),
which is effective for the Company in 1996. Under SFAS No. 121, companies are
required to recognize impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. SFAS No. 121 requires the impairment loss
to be recognized to the extent the carrying amount of the assets exceeds the
fair value of the assets. Given the uncertainties relating to the outcome of
the Company's rate proceeding before the P.U.C., the future effect, if any, of
applying SFAS No. 121 cannot be determined at this time.
Regulatory Matters
On May 16, 1995, the Company filed an application with the P.U.C. requesting
authorization to implement an Agreement and Plan of Reorganization (the "Plan")
approved by the Company's shareholders on June 16, 1995, which would result in a
holding company. The Company intends to proceed with the reorganization after
approval of the Plan by the P.U.C. The decision to approve the creation of a
holding company structure was determined independently from and not as a result
of any other regulatory proceedings. In addition, it is not anticipated that the
holding company structure would have any impact upon any such proceedings.
In February 1996, Congress passed the Telecommunications Act of 1996 (the "Act")
which significantly changed the regulatory environment for telecommunications
companies. As a result of the Act, specific telephone and cable television
services historically provided exclusively by one company may be provided by
competing companies. The Company is actively evaluating the financial viability
of various opportunities in the long-distance and wireless telecommunications
segments as well as the cable television industry.
The Company's financial condition and results of operations continues to be
affected by recent and future proceedings by the P.U.C. and F.C.C. The P.U.C.
authorized competition for intraLATA toll service effective January 1, 1995,
accompanied with rate changes affecting the Company's toll, access, private line
and basic exchange revenue. In addition to the Company's rate case described
above, pending before the P.U.C. are proceedings which are considering:
The opening of all markets to competition by January 1, 1997 and
aggressively streamlining regulation to accelerate the pace of
innovation in the California telecommunications marketplace
The goals and definition of universal telephone service in a
changing environment, including examination of subsidy support
mechanisms for subscribers in high cost areas and issues of "carrier
of last resort" and "franchise" obligations
Rules that will provide non-discriminatory access by competing
service providers to the network capabilities of local exchange
carriers
The eventual impact on the Company of the effect of all the proceedings
described above cannot presently be determined.
Item 8. Financial Statements and Supplementary Data.
Page
Report of independent auditors 17
Consolidated balance sheets as of December 31, 1995 and 1994 18
Consolidated statements of income for each of the three years in
the period ended December 31, 1995 20
Consolidated statements of shareholders' equity for each of the
three years in the period ended December 31, 1995 21
Consolidated statements of cash flows for each of the three years
in the period ended December 31, 1995 22
Notes to consolidated financial statements 24
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Roseville Telephone Company
We have audited the accompanying consolidated balance sheets of Roseville
Telephone Company as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Roseville
Telephone Company at December 31, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ERNST & YOUNG LLP
Sacramento, California
February 29, 1996
ROSEVILLE TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
------ ----- -----
Current assets:
Cash and cash equivalents $24,854,000 $21,282,000
Short-term investments 1,748,000 13,689,000
Refundable deposit 8,960,000 -
Accounts receivable (less allowances of $54,000
and $66,000, respectively) 13,687,000 15,565,000
Refundable income taxes 1,287,000 -
Inventories 2,189,000 1,302,000
Deferred income tax asset 982,000 1,106,000
Prepaid expenses and other current assets 419,000 435,000
----------- -----------
Total current assets 54,126,000 53,379,000
Property, plant and equipment:
In service 259,201,000 239,380,000
Under construction 4,009,000 4,394,000
----------- -----------
263,210,000 243,774,000
Less accumulated depreciation 84,985,000 70,415,000
----------- -----------
178,225,000 173,359,000
Investments and other assets:
Cellular partnership 23,292,000 18,447,000
Deferred charges and other assets 1,246,000 1,623,000
----------- -----------
24,538,000 20,070,000
----------- -----------
$256,889,000 $246,808,000
=========== ===========
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1994
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
------------------------------------ ---- ----
Current liabilities:
Current portion of long-term debt $ 3,571,000 $ 2,679,000
Accounts payable and other accrued liabilities 4,220,000 3,863,000
Payables to telecommunications entities 6,011,000 6,880,000
Advance billings and customer deposits 1,809,000 1,860,000
Accrued income taxes - 345,000
Accrued pension cost 2,916,000 1,815,000
Accrued compensation 3,111,000 2,880,000
----------- -----------
Total current liabilities 21,638,000 20,322,000
Long-term debt 33,750,000 37,321,000
Deferred income taxes 21,857,000 21,010,000
Other liabilities and deferred credits 3,301,000 3,480,000
Commitments and contingencies (Notes 1 and 7)
Minority interest in subsidiary 1,950,000 -
Shareholders' equity:
Common stock, without par value; 20,000,000
shares authorized, 14,915,424 shares issued and
outstanding (14,484,953 shares in 1994) 166,676,000 156,345,000
Retained earnings 7,717,000 8,330,000
----------- -----------
Total shareholders' equity 174,393,000 164,675,000
----------- -----------
$256,889,000 $246,808,000
=========== ===========
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Operating revenues:
Local service $47,431,000 $ 36,679,000 $ 36,883,000
Network access service 32,438,000 43,197,000 37,466,000
Long distance service 4,189,000 7,749,000 7,781,000
----------- ------------ -----------
Total rate regulated revenues 84,058,000 87,625,000 82,130,000
Directory advertising 6,387,000 6,059,000 6,085,000
Nonregulated sales and service 6,987,000 3,925,000 3,516,000
Other 5,229,000 5,354,000 5,049,000
----------- ----------- -----------
Total operating revenues 102,661,000 102,963,000 96,780,000
Operating expenses:
Plant operations 21,984,000 20,263,000 20,962,000
Depreciation 19,574,000 18,121,000 12,453,000
Customer operations 12,791,000 11,718,000 10,717,000
General and administrative 15,656,000 14,363,000 11,951,000
Cost of nonregulated sales and
services 5,007,000 2,678,000 2,176,000
Property and miscellaneous taxes 1,747,000 1,760,000 1,571,000
----------- ------------ -----------
Total operating expenses 76,759,000 68,903,000 59,830,000
----------- ------------ -----------
Income from operations 25,902,000 34,060,000 36,950,000
Other income (expense):
Interest income 1,825,000 1,208,000 285,000
Interest expense (3,012,000) (3,072,000) (2,220,000)
Equity in earnings of cellular
partnership 6,183,000 1,662,000 1,579,000
Allowance for funds used during
construction 399,000 425,000 1,356,000
Other, net (156,000) (62,000) (48,000)
----------- ------------ -----------
Total other income, net 5,239,000 161,000 952,000
----------- ----------- -----------
Income before income taxes 31,141,000 34,221,000 37,902,000
Income taxes 12,634,000 13,866,000 15,384,000
----------- ----------- -----------
Net income $18,507,000 $ 20,355,000 $ 22,518,000
============ ============ ============
Per share of common stock:
Net income $1.24 $1.39 $1.55
===== ===== =====
Cash dividends $ .58 $ .55 $ .53
===== ===== =====
Shares of common stock used to
calculate net income per share 14,915,424 14,615,424 14,515,424
============ ============ ============
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 and 1993
Common Stock
-------------------------
Number of Retained
Shares Amount earnings Total
------------ ------------ ------------ ------------
Balance at December 31,
1992 12,765,141 $115,704,000 $ 12,455,000 $128,159,000
5% stock dividend, at
fair value:
Shares 634,053 14,583,000 (14,583,000) -
Cash in lieu of
fractional shares - - (97,000) (97,000)
Cash dividends - - (7,659,000) (7,659,000)
Net income - - 22,518,000 22,518,000
----------- ----------- ----------- -----------
Balance at December 31,
1993 13,399,194 130,287,000 12,634,000 142,921,000
Sale of common stock to
Retirement Supplement
Plan 400,000 9,600,000 - 9,600,000
5% stock dividend, at
fair value:
Shares 685,759 16,458,000 (16,458,000) -
Cash in lieu of
fractional shares - - (101,000) (101,000)
Cash dividends - - (8,100,000) (8,100,000)
Net income - - 20,355,000 20,355,000
----------- ----------- ----------- -----------
Balance at December 31,
1994 14,484,953 156,345,000 8,330,000 164,675,000
3% stock dividend, at
fair value:
Shares 430,471 10,331,000 (10,331,000) -
Cash in lieu of
fractional shares - - (98,000) (98,000)
Cash dividends - - (8,691,000) 8,691,000)
Net income - - 18,507,000 18,507,000
----------- ----------- ----------- ----------
Balance at December 31,
1995 14,915,424 $ 166,676,000 $7,717,000 $174,393,000
============ ============ ============ ===========
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
1995 1994 1993
---- ---- ----
Cash flows from operating
activities:
Net income $18,507,000 $20,355,000 $22,518,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 19,574,000 18,121,000 12,453,000
Equity component of allowance for
funds used during construction (314,000) (322,000) (976,000)
Provision (benefit) for deferred
income taxes 848,000 (12,000) 2,525,000
Equity in earnings of cellular
partnership (6,183,000) (1,662,000) (1,579,000)
Provision for doubtful
accounts 183,000 283,000 106,000
Other, net 183,000 176,000 121,000
Net changes in:
Accounts receivable 1,695,000 261,000 (1,198,000)
Refundable income taxes (1,287,000) 944,000 (944,000)
Inventories, prepaid expenses
and other current assets (871,000) (188,000) 591,000
Payables, accrued liabilities and
other deferred credits 795,000 (1,570,000) 3,082,000
Accrued income taxes (345,000) 345,000 (52,000)
----------- ----------- -----------
Net cash provided by operating
activities 32,785,000 36,731,000 36,647,000
Cash flows from investing
activities:
Capital expenditures for property,
plant and equipment (24,309,000) (22,763,000) (35,484,000)
Purchases of held-to-maturity
investments (5,672,000) (44,333,000) (8,920,000)
Maturities of held-to-maturity
investments 17,613,000 39,564,000 -
Investment in cellular
partnership (2,402,000) (1,678,000) (1,387,000)
Return of investment in
cellular partnership 3,740,000 2,220,000 1,410,000
Refundable deposit (8,960,000) - -
Other, net 295,000 295,000 (863,000)
----------- ----------- -----------
Net cash used in investing
activities (19,695,000) (26,695,000) (45,244,000)
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1995, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
1995 1994 1993
---- ---- ----
Cash flows from financing
activities:
Proceeds of long-term debt $ - $ - $ 15,000,000
Principal payments of long-term
debt (2,679,000) - -
Dividends paid and fractional share
amounts (8,789,000) (8,201,000) (7,756,000)
Sale of common stock - 9,600,000 -
Investment in subsidiary by
minority partners 1,950,000 - -
----------- ----------- -----------
Net cash provided by (used in)
financing activities (9,518,000) 1,399,000 7,244,000
----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents 3,572,000 11,435,000 (1,353,000)
Cash and cash equivalents at
beginning of year 21,282,000 9,847,000 11,200,000
----------- ----------- -----------
Cash and cash equivalents at end
of year $24,854,000 $21,282,000 $9,847,000
=========== =========== ===========
See accompanying notes.
ROSEVILLE TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and basis of accounting
Roseville Telephone Company (the "Company") is engaged in the business of
furnishing communications and related services principally within its
service area in Roseville, California and adjacent communities.
Communications and related services include local and toll telephone
services, network access services, billing and collection services,
directory advertising services and certain nonregulated services. The
Company engages in nonregulated activities including the sale, lease and
maintenance of telecommunications equipment, and the provision of alarm
monitoring services.
The Company maintains its accounts in accordance with the Uniform System of
Accounts prescribed for telephone companies by the Federal Communications
Commission (the "F.C.C."). The consolidated financial statements were
prepared in accordance with generally accepted accounting principles which
require management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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 their financial
statements to certain actions of regulators. However, because such
telecommunications companies are significantly different from the Company
in the level and nature of competition they experience and in the nature
and mix of services they offer, the Company believes it continues to meet
the criteria of SFAS No. 71. 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. If
it becomes no longer reasonable to assume that the Company can recover its
costs of providing regulated services through rates charged to customers,
whether resulting from the effects of increased competition or specific
regulatory actions, SFAS No. 71 would no longer apply. 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, 1995 was
between $5 million and $13 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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and a majority-owned limited liability
company. All significant intercompany transactions have been eliminated.
Cash equivalents and short-term investments
The Company invests its excess cash in high-quality debt instruments and
certain other investments. The Company considers highly liquid investments
with maturities of three months or less from the acquisition date of the
instrument to be cash equivalents. Short-term investments at December 31,
1995 consist of U.S. government and agency securities with maturities
greater than 90 days; however, none of the Company's investments have
maturities greater than one year. The Company has no investments in equity
securities.
Fair values of financial instruments
As of December 31, 1995 and 1994, the Company's financial instruments
consist of cash, cash equivalents, short-term investments and long-term
debt. Management believes that the carrying values of cash equivalents and
short-term investments at December 31, 1995 and 1994, which are at
amortized cost, approximated their fair values at such dates. The
aggregate fair value of the Company's long-term debt (including current
maturities) was approximately $39,000,000 and $38,400,000 at December 31,
1995 and 1994, respectively. Fair values for cash equivalents and short-
term investments were determined by quoted market prices and for long-term
debt by a discounted cash flow analysis based on the Company's current
incremental borrowing rates for similar instruments.
Inventories
Telephone construction inventories consist of materials and supplies, which
are stated at average cost. Equipment and other nonregulated inventory
held for resale are stated at the lower of average cost or market.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Retirements and other
reductions of regulated telephone plant and equipment with a cost of
approximately $4,958,000, $8,093,000 and $9,886,000 in 1995, 1994 and 1993,
respectively, were charged against accumulated depreciation with no gain or
loss recognized. When property applicable to nonregulated operations is
sold or retired, the asset and related accumulated depreciation are removed
from the accounts and the associated gain or loss is recognized. The cost
of maintenance and repairs is charged to operating expense when incurred.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"), which is effective for the Company in 1996. Under SFAS No. 121,
companies are required to recognize impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
by those assets are less than the carrying amount of those assets. SFAS
No. 121 requires the impairment loss to be recognized to the extent the
carrying amount of the assets exceeds the fair value of the assets. Given
the uncertainties relating to the outcome of the Company's rate proceeding
before the P.U.C., the future effect, if any, of applying SFAS No. 121
cannot be determined at this time.
Revenues
The Company is subject to regulation by the F.C.C. and the Public Utilities
Commission of the State of California (the "P.U.C."). Pending and future
regulatory actions may have a significant impact on the Company's future
operations and financial position.
The Company bills Pacific Bell various charges for certain local service,
network access service and long distance service revenues pursuant to
agreements (the "Pacific Bell Agreements") that arose as a result of the
termination on January 1, 1992 of previous revenue sharing arrangements
with Pacific Bell. Of the Company's total revenues in 1995, 1994 and 1993,
24%, 34% and 36%, respectively, were recorded under the Pacific Bell
Agreements. Included in such amounts were transition revenues of
$8,200,000, $16,500,000, and $16,500,000 in 1995, 1994 and 1993,
respectively. The transition revenues are anticipated to be approximately
$8,200,000 in 1996. Beginning in 1997 such revenues will be reduced by
approximately $2,000,000 per year until ultimately eliminated.
In September 1994, the P.U.C. issued an Implementation Rate Design Decision
(the "IRD Decision") which authorized toll competition within each Local
Access Transport Area commencing January 1, 1995. The IRD Decision ordered
decreases in the Company's access rates and other charges to interexchange
carriers beginning January 1, 1995. Such decreases and the reduction in
transition revenues discussed above were partially offset by ordered
increases in basic exchange rates and revenues from other sources. Based
on calculations by the P.U.C., these ordered changes were expected to
result in a net reduction in the Company's 1995 rate regulated revenues of
approximately $5,300,000, which includes the effects of the reduction in
transition revenues of $8,300,000 mentioned above. However, the actual net
reduction in revenues for 1995 was $6,700,000.
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 P.U.C.'s Division
of Ratepayer Advocates ("D.R.A.") submitted its report on the Company's
application in the rate case and proposed an approximate $10 million
reduction in the Company's annual rates and charges. The Company disagrees
with the D.R.A.'s proposal and provided its response to the P.U.C. on
January 12, 1996. Hearings on the issues commenced in January 1996 and the
Company expects a final decision by the end of 1996. The ultimate outcome
of the rate case, and its effect on the Company's consolidated financial
position and results of operations, cannot presently be determined.
However, any consequences of the rate case would be accounted for at or
following the time a final decision is rendered.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation
Depreciation of regulated telephone plant and equipment is computed on a
straight-line basis using rates approved by the P.U.C. Average annual
composite depreciation rates were 8.07%, 7.99% and 6.56% in 1995, 1994 and
1993, respectively.
The cost of property, plant and equipment used in nonregulated activities
is depreciated over their estimated useful lives, which range from 3 to 5
years, on a straight-line basis.
Allowance for funds used during construction
The F.C.C. and the P.U.C. allow the Company to capitalize an allowance for
funds used during construction, which includes both an interest and return
on equity component. Such amounts are reflected as a cost of constructing
certain plant assets and as an element of "Other income."
Income taxes
The Company accounts for income taxes using the liability method, which
requires deferred tax assets and liabilities to be recorded for the
expected future tax consequences of events that have been included in the
financial statements and tax returns. Additionally, the liability method
requires adjustments of deferred tax assets and liabilities for changes in
tax laws or rates and requires recognition of a regulatory asset or
liability when it is probable that deferred taxes would be reflected in
future rates of regulated companies.
Per share amounts
Net income per share of common stock is based on the weighted average
number of shares outstanding each year after giving retroactive effect to
stock dividends. Cash dividends per share is based on the actual dividends
per share, as declared by the Company's board of directors, after giving
retroactive effect to stock dividends.
Statements of cash flows information
During the years ended December 31, 1995, 1994 and 1993, the Company made
payments for interest and income taxes as follows (in thousands):
1995 1994 1993
---- ---- ----
Interest (net of amounts capitalized) $ 2,915 $ 3,606 $ 1,747
Income taxes $13,441 $12,589 $13,855
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. At December 31, 1995 and 1994, all securities are designated as
held-to-maturity as management believes it has the positive intent and
ability to hold the securities until maturity. Held-to-maturity securities
are stated at amortized cost, adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion, as
well as any interest on the securities, is included in interest income.
Following is a summary of the Company's investments at December 31, 1995
and 1994 by major security type at amortized cost which approximates fair
value (in thousands):
1995 1994
---- ----
Commercial paper $ 19,970 $ 23,612
Repurchase agreements 1,501 1,657
U.S. government and agency securities 1,748 -
Other unsecured corporate notes 502 4,360
--------- ---------
$ 23,721 $ 29,629
========= =========
Amounts included in cash and cash equivalents $ 21,973 $ 15,940
Amounts included in short-term investments 1,748 13,689
--------- ---------
$ 23,721 $ 29,629
========= =========
3. INVESTMENT IN CELLULAR PARTNERSHIP
The Company has an approximate 23.5% interest in the Sacramento-Valley
Limited Partnership (the "Cellular Partnership"), which is accounted for
using the equity method. The Cellular Partnership operates a cellular
mobile radiotelephone system principally in California. The Company's
portion of undistributed earnings of the Cellular Partnership included in
the Company's consolidated shareholders' equity at December 31, 1995
amounted to $7,737,000.
Summarized unaudited financial information for the Cellular Partnership is
as follows (in thousands):
Balance sheet information as of December 31,
1995 and 1994:
1995 1994
---- ----
Current assets $ 24,183 $ 19,341
Noncurrent assets, primarily cellular plant $ 100,372 $ 89,592
Current liabilities $ 24,371 $ 29,568
Noncurrent liabilities $ 861 $ 760
3. INVESTMENT IN CELLULAR PARTNERSHIP (CONTINUED)
Income statement information for the years
ended December 31, 1995, 1994 and 1993:
1995 1994 1993
---- ---- ----
Net revenues $ 124,393 $ 87,894 $ 68,123
Costs and expenses 98,048 80,812 61,391
--------- --------- ---------
Net income $ 26,345 $ 7,082 $ 6,732
========= ========= =========
4. LONG-TERM DEBT
Long-term debt outstanding as of December 31, 1995 and 1994 consisted of
the following:
(In thousands)
1995 1994
---- ----
Unsecured term loan with a bank, with interest
payable quarterly at rates increasing from 8.16%
to 8.46% during the period of the loan; principal
payments are due in equal quarterly installments
of approximately $893,000 through April 2002. $ 22,321 $ 25,000
Unsecured term loan with a bank, with interest
payable quarterly at a fixed rate of 6.22%;
principal payments are due in equal quarterly
installments of approximately $536,000,
commencing in March 1997, and ending in December
2003. 15,000 15,000
-------- ------
37,321 40,000
Less current portion 3,571 2,679
-------- --------
$ 33,750 $ 37,321
======== ========
At December 31, 1995, the aggregate maturity requirements on all long-term
debt are $3,571,000 in 1996 and $5,716,000 in each of the years 1997
through 2000.
The aforementioned credit arrangements contain various positive and
negative covenants with respect to cash flow coverage, tangible net worth
and leverage ratio. These provisions could restrict the payment of
dividends in certain circumstances; however, the entire amount of retained
earnings at December 31, 1995 was unrestricted.
5. INCOME TAXES
The income tax provisions consist of the following components (in
thousands):
1995 1994 1993
----- ----- ----
Current expense:
Federal $ 8,979 $ 10,718 $ 9,633
State 2,807 3,160 3,226
--------- --------- ---------
11,786 13,878 12,859
Deferred expense (benefit):
Federal 792 (80) 2,266
State 56 68 259
--------- --------- ---------
848 (12) 2,525
--------- --------- ---------
$ 12,634 $ 13,866 $ 15,384
========= ========= =========
The income tax provisions differ from those computed by using the statutory
federal rate (35% in all years presented) for the following reasons (in
thousands):
1995 1994 1993
---- ---- ----
Computed at statutory rates $ 10,899 $ 11,977 $ 13,266
Increase (decrease):
State taxes, net of federal benefit 1,861 2,098 2,265
Other, net (126) (209) (147)
-------- -------- --------
Income tax provision $ 12,634 $ 13,866 $ 15,384
======== ======== ========
Effective federal and state rate 40.6% 40.5% 40.6%
===== ===== =====
5. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred income tax assets and
liabilities were as follows at December 31, 1995 and 1994 (in thousands):
Deferred Income Taxes
----------------------
1995 1994
---- ----
Assets Liabilities Assets Liabilities
------ ----------- ------ ----------
Property, plant and equipment -
primarily due to depreciation
differences $ - $ 21,747 $ - $ 21,869
Differences in the timing of
recognition of revenues 2,636 - 2,850 -
Cellular partnership - 4,218 - 3,088
State franchise taxes 982 - 1,106 -
Other, net 2,091 619 1,820 723
-------- -------- -------- ---------
Total 5,709 26,584 5,776 25,680
Less current portion 982 - 1,106 -
-------- ------- ------- -------
$ 4,727 $ 26,584 $ 4,670 $ 25,680
======== ======== ======== ========
Net long-term deferred income
tax liability $ 21,857 $ 21,010
======== ========
As of December 31, 1995 and 1994, there was no valuation allowance for
deferred tax assets.
6. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company sponsors a noncontributory defined benefit pension plan
covering substantially all employees. Benefits are based on years of
service and the employee's average compensation during the five highest
consecutive years of the last ten years of credited service. The Company's
funding policy is to contribute annually an actuarially determined amount
consistent with applicable federal income tax regulations. Contributions
are intended to provide for benefits attributed to service to date. Plan
assets are primarily invested in collective trust accounts, government and
government agency obligations, publicly traded stocks and bonds and
mortgage-related securities.
6. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Net periodic pension cost for the years ended December 31, 1995, 1994 and
1993 includes the following components (in thousands):
1995 1994 1993
---- ---- ----
Service cost-benefits earned during the period $2,416 $2,376 $2,149
Interest cost on projected benefit obligation 3,830 3,493 3,131
Actual (return) loss on plan assets (7,741) 600 (2,313)
Net amortization and deferral 5,664 (2,311) 910
------ ------ ------
Net pension cost $4,169 $4,158 $3,877
====== ====== ======
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the consolidated balance sheets as of December 31,
1995 and 1994 (in thousands):
1995 1994
---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation $30,848 $26,085
Nonvested benefit obligation 7,439 6,315
------- -------
Accumulated benefit obligation $38,287 $32,400
======= =======
Plan assets at fair value $42,022 $32,549
Less projected benefit obligation (58,774) (49,345)
------- -------
Projected benefit obligation in excess of plan assets (16,752) (16,796)
Unrecognized net loss 11,125 12,002
Unrecognized transition obligation 2,711 2,979
------- -------
Accrued pension cost $(2,916) $(1,815)
======= =======
The discount rates used in determining the projected benefit obligation at
December 31, 1995 and 1994 were 7% and 7.5%, respectively. The assumed
rate of increase in future compensation levels used to measure the
projected benefit obligation was 6% at December 31, 1995 and 1994. The
expected long-term rate of return on plan assets used in determining net
pension cost was 8.5% in 1995 and 8% in 1994 and 1993. Changes in the
discount rate and expected long-term rate of return on plan assets
decreased pension cost $720,000 in 1995, which was largely offset by
increased amortization of plan experience losses.
The Company also maintains a retirement supplement plan providing both a
retirement and savings feature for substantially all employees. The
retirement feature allows for tax deferred contributions by employees under
6. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Section 401(k) of the Internal Revenue Code. Subject to certain
limitations, one-half of all employee contributions made to the retirement
supplement plan are matched by the Company. Such matching contributions
amounted to approximately $1,137,000, $1,043,000 and $903,000 in 1995, 1994
and 1993, respectively. At December 31, 1995, 9% of the Company's
outstanding shares of common stock were held by the retirement supplement
plan.
The Company provides certain postretirement benefits other than pensions to
substantially all employees, including life insurance benefits and a stated
reimbursement for Medicare supplemental insurance. The benefit obligations
and annual postretirement benefits costs relating to these benefits are not
significant to the Company's consolidated financial position and results of
operations.
7. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain facilities and equipment used in its operations
and reflects lease payments as rental expense for the periods to which they
relate. Total rental expense amounted to $394,000, $387,000 and $1,137,000
in 1995, 1994 and 1993, respectively.
At December 31, 1995, the aggregate minimum rental commitments under
noncancellable operating lease obligations are not significant.
Other commitments
The Company's budgeted capital expenditures for the year ending
December 31, 1996 approximate $25 million. Binding commitments for such
planned expenditures at December 31, 1995 were approximately $4 million.
Litigation
The Company is subject to certain legal proceedings and claims arising in
the ordinary course of its business. In the opinion of management, any
liability which may ultimately be incurred with respect to these matters
will not materially affect the consolidated financial position or results
of operations of the Company.
8. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Substantially all of the Company's revenues were from communications and
related services provided in the Northern California area. The Company
performs ongoing credit evaluations of its customers' financial condition
and management believes that an adequate allowance for doubtful accounts
has been provided.
As discussed in Note 1 - Revenues, approximately 24%, 34% and 36% of the
Company's consolidated operating revenues in 1995, 1994, and 1993,
respectively, were derived from access charges and other charges to, and
transition contract payments from Pacific Bell pursuant to the Pacific Bell
Agreements. Approximately 10% of the Company's consolidated operating
revenues in 1994 and 1993 (7% in 1995) were derived from the provision of
8. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS (CONTINUED)
services to AT&T. The revenues from services provided to AT&T were
received primarily from access charges, but also included revenues from the
provision of operator, billing and collection, and other interexchange
services. No other customers accounted for more than 10% of consolidated
operating revenues.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated herein by reference from the proxy statement for the annual meeting
of the Company's shareholders to be held on June 21, 1996.
Item 11. Executive Compensation.
Incorporated herein by reference from the proxy statement for the annual meeting
of the Company's shareholders to be held on June 21, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference from the proxy statement for the annual meeting
of the Company's shareholders to be held on June 21, 1996.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) 1 and 2. Financial Statements
The financial statements listed in the accompanying
Index to Financial Statements are filed as part of this
annual report.
3. Exhibits
The exhibits listed on the accompanying Index to
Exhibits are filed as part of this annual report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth
quarter of 1995.
ROSEVILLE TELEPHONE COMPANY
INDEX TO FINANCIAL STATEMENTS
(Item 14(a) 1 and 2)
PAGE
Report of independent auditors 17
Consolidated balance sheets as of December 31, 1995 and 1994 18
Consolidated statements of income for each of the three years in
the period ended December 31, 1995 20
Consolidated statements of shareholders' equity for each of the
three years in the period ended December 31, 1995 21
Consolidated statements of cash flows for each of the three years
in the period ended December 31, 1995 22
Notes to consolidated financial statements 24
All schedules are omitted since the required information is not present or is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
ROSEVILLE TELEPHONE COMPANY
INDEX TO EXHIBITS
(Item 14(a) 3)
Method
Exhibit No. Description of Filing Page
----------- ----------- --------- ----
3(a) Restated Articles of Incorporation of the Incorporated -
Company (Filed as Exhibit I to Form 10-Q by reference
Quarterly Report for the quarter ended June
30, 1980), together with Certificate of
Amendment amending such Restated Articles
of Incorporation (as filed with Exhibit
3(a) to Form 10-K Annual Report for the
year ended December 31, 1982), and
Certificate of Amendment further amending
such Restated Articles of Incorporation, as
amended (Filed as Exhibit 3A to Form 10-K
Annual Report for the year ended December
31, 1983)
3(b) Certificate of Amendment of Articles of Incorporated -
Incorporation (Filed as Exhibit 3(b) to by reference
Form 10-K Annual Report for the year ended
December 31, 1988)
3(c) Bylaws of the Company, as amended to date Incorporated -
(Filed as Exhibit 3(c)to Form 10-K Annual by reference
Report for the year ended December 31,
1988)
10(a) Sacramento-Valley Limited Partnership Incorporated -
Agreement, dated April 4, 1984 (Filed as by reference
Exhibit I to Form 10-Q Quarterly Report for
the quarter ended March 31, 1984)
10(b) Credit Agreement with Bank of America Incorporated -
National Trust and Savings Association, by reference
dated March 27, 1992, with respect to
$25,000,000 term loan. (Filed as Exhibit
10(a) to Form 10-Q Quarterly Report for the
quarter ended March 31, 1992)
10(c) Credit Agreement with Bank of America Incorporated -
National Trust and Savings Association, by reference
dated January 4, 1994, with respect to
$15,000,000 term loan (Filed as Exhibit
10(c) to Form 10-K Annual Report for the
year ended December 31, 1993)
21(a) List of subsidiaries (Filed as Exhibit Incorporated -
22(a) to Form 10-K Annual Report for the by reference
year ended December 31, 1981)
23.01 Consent of Ernst & Young LLP, Independent Filed
Auditors herewith
27 Financial Data Schedule Filed
herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 1996 By: /s/ Brian H. Strom
Brian H. Strom,
President and Chief
Executive Officer
Date: March 26, 1996 By: /s/Michael D. Campbell
Michael D. Campbell,
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 26, 1996 /s/ Robert L. Doyle
Robert L. Doyle,
Chairman of the Board
Date: March 26, 1996 /s/ Brian H. Strom
Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 26, 1996 /s/ Michael D. Campbell
Michael D. Campbell,
Vice President and Chief
Financial Officer
Date: March 26, 1996 /s/ Thomas E. Doyle
Thomas E. Doyle,
Director
Date: March 26, 1996 /s/ Ralph E. Hoeper
Ralph E. Hoeper,
Director
Date: March 26, 1996 /s/ John R. Roberts III
John R. Roberts III,
Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 1996 By:
Brian H. Strom,
President and Chief
Executive Officer
Date: March 26, 1996 By:
Michael D. Campbell,
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 26, 1996
Robert L. Doyle,
Chairman of the Board
Date: March 26, 1996
Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 26, 1996
Michael D. Campbell,
Vice President and Chief
Financial Officer
Date: March 26, 1996
Thomas E. Doyle,
Director
Date: March 26, 1996
Ralph E. Hoeper,
Director
Date: March 26, 1996
John R. Roberts III,
Director
Exhibit 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-4 No. 33-58271) of Roseville Comtech and in the related Prospectus of our
report dated February 29, 1996, with respect to the consolidated financial
statements of Roseville Telephone Company included in this Annual Report (Form
10-K) for the year ended December 31, 1995.
/s/ERNST & YOUNG LLP
Sacramento, California
March 26, 1996
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