2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 1997
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
ROSEVILLE COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
California 68-0365195
(State or other jurisdiction (I.R.S. Employer
f 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, 1997, 15,358,720 shares of the registrant's
Common Stock were outstanding.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Quarter Quarter Nine Months Nine
Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
----------- ----------- ----------- ----------
Operating revenues:
Local service $14,236,000 $12,555,000 $41,633,000 $36,799,000
Network access service 9,594,000 9,358,000 28,120,000 27,293,000
Long distance service 36,000 1,038,000 453,000 3,124,000
----------- ----------- ----------- -----------
Total rate regulated
revenues 23,866,000 22,951,000 70,206,000 67,216,000
Directory advertising 1,664,000 1,599,000 5,233,000 5,063,000
Nonregulated sales and
service 1,773,000 1,073,000 5,339,000 3,170,000
Other 1,961,000 1,304,000 4,292,000 3,706,000
----------- ----------- ----------- -----------
Total operating revenues 29,264,000 26,927,000 85,070,000 79,155,000
Operating expenses:
Plant operations 5,876,000 5,737,000 18,194,000 17,915,000
Depreciation 4,783,000 4,535,000 14,211,000 14,516,000
Customer operations 3,556,000 3,370,000 10,576,000 10,183,000
General and administrative 4,649,000 4,068,000 14,520,000 12,366,000
Cost of nonregulated sales
and service 1,201,000 639,000 3,440,000 2,066,000
Property and miscellaneous
taxes 470,000 471,000 1,366,000 1,385,000
----------- ----------- ----------- -----------
Total operating expenses 20,535,000 18,820,000 62,307,000 58,431,000
----------- ----------- ----------- -----------
Income from operations 8,729,000 8,107,000 22,763,000 20,724,000
Other income (expense):
Interest income 351,000 354,000 1,127,000 1,051,000
Interest expense (598,000) (682,000) (1,847,000) (2,091,000)
Equity in earnings of
cellular partnership 2,168,000 3,131,000 8,282,000 7,722,000
Other, net 80,000 33,000 191,000 221,000
----------- ----------- ----------- -----------
Total other income, net 2,001,000 2,836,000 7,753,000 6,903,000
----------- ----------- ----------- -----------
Income before income taxes 10,730,000 10,943,000 30,516,000 27,627,000
Income taxes 4,264,000 4,467,000 12,102,000 11,264,000
----------- ----------- ----------- -----------
Net income $ 6,466,000 $ 6,476,000 $18,414,000 $16,363,000
=========== =========== =========== ===========
Per share of common stock:
Net income (1) $ .41 $ .41 $1.16 $1.03
===== ===== ===== =====
Cash dividends (2) $ .15 $ .14 $ .44 $ .42
===== ===== ===== =====
Shares of common stock used
to calculate net income per
share 15,819,482 15,819,482 15,819,482 15,819,482
========== ========== ========== ==========
(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 stock dividends.
(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 COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1997 1996
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,968,000 $ 24,435,000
Short-term investments 3,972,000 2,233,000
Accounts receivable, net 15,994,000 14,720,000
Inventories 4,036,000 2,895,000
Prepaid expenses and other
current assets 1,642,000 1,635,000
------------ ------------
Total current assets 47,612,000 45,918,000
Property, plant and equipment,
net 185,631,000 184,182,000
Investments and other assets:
Cellular partnership 31,916,000 26,147,000
PCS licenses 9,003,000 9,000,000
Deferred charges and other
assets 2,664,000 2,634,000
------------ ------------
43,583,000 37,781,000
------------ ------------
$276,826,000 $267,881,000
============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt $ 5,714,000 $ 5,714,000
Accounts payable and accrued
liabilities 21,351,000 20,537,000
------------ ------------
Total current liabilities 27,065,000 26,251,000
Long-term debt 23,750,000 28,036,000
Deferred credits and
liabilities other 26,708,000 25,791,000
Minority interest in subsidiary 999,000 1,002,000
Shareholders' equity:
Common Stock, without par
value; 100,000,000 shares
authorized, 15,358,720 shares
issued and outstanding 177,758,000 177,758,000
Stock dividend distributable,
460,762 shares at $25 per
share 11,519,000 -
Retained earnings 9,027,000 9,043,000
------------ ------------
Total shareholders' equity 198,304,000 186,801,000
------------ ------------
$276,826,000 $267,881,000
============ ============
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
Sept 30, Sept 30,
1997 1996
------------ ------------
Net cash provided by operating
activities $23,649,000 $24,004,000
Cash flows from investing activities:
Purchases of held-to-maturity
investments (5,989,000) (1,726,000)
Maturities of held-to-maturity
investments 4,250,000 1,750,000
Capital expenditures for property,
plant and equipment (15,660,000) (21,487,000)
Purchase of PCS licenses (9,003,000) -
Investment in cellular partnership (2,514,000) (366,000)
Return of investment in cellular
partnership 5,027,000 3,996,000
Return of refundable deposit 9,000,000 8,960,000
Refundable deposit - (9,000,000)
Changes in deferred charges and
other assets (30,000) 15,000
----------- -----------
Net cash used in investing activities (14,919,000) (17,858,000)
Cash flows from financing activities:
Principal payments of long-term debt (4,286,000) (2,678,000)
Dividends paid (6,911,000) (6,712,000)
Return of minority partners'
investment subsidiary - (1,898,000)
Investment in subsidiary by minority
partner - 1,000,000
----------- -----------
Net cash used in financing activities (11,197,000) (10,288,000)
----------- -----------
Net decrease in cash and cash
equivalents (2,467,000) (4,142,000)
Cash and cash equivalents at
beginning of period 24,435,000 24,854,000
----------- -----------
Cash and cash equivalents at end of
period $21,968,000 $20,712,000
=========== ===========
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General and Basis of Accounting
The condensed consolidated financial statements of Roseville
Communications 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 1996 Annual Report to Shareholders.
The Company is a holding company with subsidiaries operating
in the communications services industry. The Company's
principal operating subsidiary, Roseville Telephone Company
("Roseville Telephone"), provides local and toll telephone
services, network access services, billing and collection
services, directory advertising services and certain
nonregulated services. Additionally, Roseville Telephone,
with an approximate 23.5% equity interest, is a limited
partner of Sacramento-Valley Limited Partnership ("SVLP"),
which provides cellular telephone service principally in
California. Roseville Telephone's wholly-owned subsidiary,
Roseville PCS, Inc., is the manager of and has an
approximate 89% interest in West Coast PCS LLC ("West
Coast"), which was formed together with an unrelated entity
for the purpose of providing personal communications
services ("PCS"). The Company recently formed a wholly-
owned subsidiary, Roseville Cable Company ("Roseville
Cable"), for the purpose of acquiring and operating a cable
television system currently serving approximately 18,000
subscribers in the City of Roseville and certain
unincorporated areas of Placer County, California. During
February 1997, Roseville Directory Company ("Roseville
Directory"), a wholly-owned subsidiary of the Company,
commenced operations to produce, publish and distribute
Roseville Telephone's 1998 directory including the sale of
yellow pages advertising previously provided by an
unaffiliated company. In January 1997, the Company formed a
wholly-owned subsidiary, Roseville Long Distance Company
("Roseville Long Distance"), which commenced the provision of
long distance services to customers on September 23, 1997.
West Coast, Roseville Cable and Roseville Long Distance have
not generated any significant revenues or incurred any
significant costs and expenses for the period from their
inception to September 30, 1997. However, the Company expects
that the sources of its revenues and its cost structure may be
significantly different in the future as a result of its entry
into these communications markets.
The Company's consolidated financial statements have been
prepared in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" ("SFAS No. 71"), which require
companies meeting the criteria to give effect in
their financial statements to certain actions of regulators.
For example, amounts charged to operations for depreciation
expense reflect estimated lives and methods prescribed by
regulators rather than the economic lives that might
otherwise apply to nonregulated enterprises. A number of
telecommunications companies, including all of the Regional
Bell Operating Companies, have determined that they no
longer meet the criteria of SFAS No. 71. However, such
telecommunications companies are significantly different
from Roseville Telephone in the level and nature of
competition they experience and in the nature and mix of
services they offer. The Company believes its regulated
operations continue to meet the criteria of SFAS No.71 due
to its nature and mix of revenues, the authority of federal
and state regulators to establish rates and monitor
Roseville Telephone's earnings, the P.U.C.'s regulatory
authority to set Roseville Telephone's depreciation lives
and recent legal proceedings at the federal level which
prohibit a regulatory agency from setting rates and charges
at levels which do not allow telephone companies to recover
their cost of providing telephone services, including a
reasonable profit.
As a result of increasing competition and rapid changes in
the telecommunications industry, the Company periodically
monitors whether its regulated operations continue to meet
the criteria which require the use of SFAS No. 71. If it
becomes no longer reasonable to assume that Roseville
Telephone 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 its
regulated operations no longer meet the SFAS No. 71
criteria, a material, extraordinary, noncash charge would
result. The approximate amount of Roseville Telephone's net
regulatory asset at December 31, 1996 was between $6 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.
2. Investment in SVLP
The Company has an approximate 23.5% interest in SVLP, which
operates a cellular mobile radiotelephone system principally
in California.
Summarized unaudited income statement information for the
quarter and nine month periods ended September 30, 1997 and
1996 for SVLP is as follows (in thousands):
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net revenues $38,623 $37,725 $115,726 $105,098
Costs and
expenses 29,387 24,386 80,441 72,201
------- ------- ------- -------
Net income $ 9,236 $13,339 $35,285 $32,897
======= ======= ======= =======
3. Shareholders' Equity and Shareholder Matters
On October 14, 1997, the Board of Directors of the Company
adopted a resolution declaring a stock dividend of three
percent (3%) on the common stock of the Company, payable as
soon as practicable after December 14, 1997 to stockholders
of record of the Company at the close of business on
December 1, 1997. Accordingly, 460,762 shares estimated to
be distributable have been reflected on the accompanying
condensed consolidated balance sheet at September 30, 1997,
and have been included in the computation of net income and
cash dividends per share for all periods presented.
Additionally, the Board of Directors of the Company
increased the quarterly cash dividend from $.15 to $.20 to
shareholders of record at the close of business on November
28, 1997.
4. Pending Acquisition
On October 14, 1996, Roseville Cable entered into an Asset
Purchase Agreement (the "Purchase Agreement") with IDS/Jones
Growth Partners 87-A, Ltd. ("Seller") under which Roseville
Cable agreed to purchase a cable television system (the
"System") currently serving approximately 18,000 subscribers
in the City of Roseville, California and certain
unincorporated areas of Placer County, California. The
consummation of the transaction contemplated by the Purchase
Agreement is subject to various conditions including 1)
approval of the City of Roseville and Placer County to the
transfer of the franchises, 2) satisfaction of requirements
under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, 3) a waiver from the Federal Communications Commission
of certain provisions of the Telecommunications Act of 1996
and 4) approval of the Board of Directors of the Company and
the limited partners of the Seller.
Upon satisfaction of the terms and conditions of the
Purchase Agreement, Roseville Cable will purchase
substantially all of the assets of the System for a purchase
price of $30.9 million in cash. In accordance with the
provisions of the Purchase Agreement, $1.6 million of the
consideration was delivered to an escrow account in December
1996 as a refundable earnest money deposit. While certain
of these conditions have been satisfied, there can be no
assurance that the remaining waivers and approvals will be
obtained.
ROSEVILLE COMMUNICATIONS COMPANY
PART I
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
General
The Company is a holding company with subsidiaries operating in
the communications services industry. The Company's principal
operating subsidiary, Roseville Telephone Company ("Roseville
Telephone"), provides local and toll telephone services, network
access services, billing and collection services, directory
advertising services and certain nonregulated services.
Additionally, Roseville Telephone, with an approximate 23.5%
equity interest, is a limited partner of Sacramento-Valley
Limited Partnership ("SVLP"), which provides cellular telephone
service principally in California. Roseville Telephone's wholly-
owned subsidiary, Roseville PCS, Inc., is the manager of and has
an approximate 89% interest in West Coast PCS LLC ("West Coast"),
which was formed together with an unrelated entity for the
purpose of providing personal communications services ("PCS").
The Company recently formed a wholly-owned subsidiary, Roseville
Cable Company ("Roseville Cable"), for the purpose of acquiring
and operating a cable television system currently serving
approximately 18,000 subscribers in the City of Roseville and
certain unincorporated areas of Placer County, California.
During February 1997, Roseville Directory Company ("Roseville
Directory"), a wholly-owned subsidiary of the Company, commenced
operations to produce, publish and distribute Roseville
Telephone's 1998 directory including the sale of yellow pages
advertising previously provided by an unaffiliated company. In
January 1997, the Company formed a wholly-owned subsidiary,
Roseville Long Distance Company ("Roseville Long Distance"),
which commenced the provision of long distance services to
customers on September 23, 1997. West Coast, Roseville Cable and
Roseville Long Distance have not generated any significant
revenues or incurred any significant costs and expenses for the
period from their inception to September 30, 1997. However, the
Company expects that the sources of its revenues and its cost
structure may be significantly different in the future as a
result of its entry into these communications markets.
Operating Revenues
Revenues from rate regulated services, which include local
service, network access service and long distance service
revenues, constituted approximately 82% and 85% of the Company's
total operating revenues for the quarters ended September 30,
1997 and 1996, respectively. For the nine month periods ended
September 30, 1997 and 1996, revenues from rate regulated
services constituted approximately 83% and 85%, respectively, of
the Company's total operating revenues. 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,
surcharges mandated by the Public Utilities Commission of the
State of California ("P.U.C."), billings to Pacific Bell, long
distance carriers and subscribers for network access services,
interstate settlement revenues from the National Exchange Carrier
Association ("NECA"), and support payments from the interstate
Universal Service Fund and California High Cost Fund. As
discussed below, beginning February 1, 1997 the sources of
Roseville Telephone's revenues were substantially modified as a
result of the rate restructuring in its recent rate case
decision.
Roseville Telephone 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 for the quarters ended
September 30, 1997 and 1996, 17% and 23%, respectively, were
recorded under the Pacific Bell Agreements. Approximately 16%
and 23% of the Company's total revenues were recorded under the
Pacific Bell Agreements in the nine month periods ended September
30, 1997 and 1996, respectively. Included in such amounts were
transition revenues of $2.1 million in the quarter ended
September 30, 1996. For the nine month periods ended September
30, 1997 and 1996, transition revenues were approximately
$685,000 and $6.2 million, respectively. Effective February 1,
1997, transition revenues from Pacific Bell were eliminated as a
result of Roseville Telephone's recent rate case, as discussed
below.
On May 15, 1995, Roseville Telephone filed a rate case with the
P.U.C. requesting authority to restructure and increase rates for
certain telephone services and decrease rates for others. On
December 20, 1996, the P.U.C. issued Decision 96-12-074 (the
"Decision") granting an annual revenue increase of $470,000. The
P.U.C. also authorized Roseville Telephone to implement a new
regulatory framework for services furnished within the State of
California in order to accommodate market and regulatory movement
toward competition and greater pricing flexibility.
Additionally, the P.U.C. ordered the elimination of various
sources of revenue including a California High Cost Fund draw,
transition payments from Pacific Bell and a previously mandated
billing surcharge. Based on calculations by the P.U.C., the
elimination of these sources of revenues was expected to be
offset by ordered increases in Roseville Telephone's local
exchange and switched access rates. This rate restructuring
became effective on February 1, 1997.
Roseville Telephone believes that the Decision contained various
miscalculations as well as legal and factual errors which will
result in Roseville Telephone not realizing the ordered annual
increase in revenues of $470,000. The Company believes that the
miscalculations and errors contained in the Decision could
instead result in an annual revenue reduction of up to $1.3
million. Accordingly, in January 1997 Roseville Telephone filed
a Petition for Modification and Application for Rehearing with
the P.U.C. requesting a reexamination and correction of the
miscalculations and errors. On October 6, 1997, the
administrative law judge issued a proposed decision for
consideration by the P.U.C. The proposed decision agrees that
the rate design adopted in the rate case decision was in error
and recommends the P.U.C. correct Roseville Telephone's rates on
a prospective basis. Roseville Telephone submitted comments on
the proposed decision requesting complete recovery of the revenue
deficiency caused by the rate design errors. Roseville Telephone
anticipates that the P.U.C. will issue a final decision on this
issue in December 1997, the outcome of which cannot yet be
determined.
The ordered changes in the sources of the Company's rate
regulated revenues resulting from the Decision significantly
affected the comparability between the 1997 and 1996 periods of
the related rate regulated revenue categories in the Company's
consolidated income statements, but had no significant effect on
total rate regulated revenues.
Rate regulated revenues increased $915,000 and $3 million or 4%
for the quarter and nine month periods ended September 30, 1997,
compared to the same periods in 1996. These increases were due
to the combined effects of 1) access line growth of approximately
8% and increased custom calling, voice mail and enhanced network
service revenues and 2) an increase in network access revenues
due to increased minute-of-use volumes and demand for special
access services.
Revenues from nonregulated sales and services increased by
$700,000 and $2.2 million for the quarter and six month periods
ended September 30, 1997, respectively, compared to the same
periods in 1996 due to the effects of several large equipment
sales in 1997.
Operating Expenses:
Operating expenses increased $1.7 million and $3.9 million or 9%
and 7% for the quarter and nine month periods ended September 30,
1997, respectively, compared to the same periods in 1996. Plant
operations expense increased $139,000 and $279,000 for the
quarter and nine month periods ended September 30, 1997 compared
to the same periods in 1996 due primarily to costs associated
with a larger customer base, switching software expenditures and
normal inflationary factors. Depreciation expense decreased
$305,000 for the nine months ended September 30, 1997 compared to
the same period in 1996 due primarily to the effect of the
retirement in 1996 of certain equipment that was depreciated over
a relatively short life in anticipation of its planned
replacement. The year-to-date reduction in depreciation of $1.2
million relating to the retired equipment was largely offset by a
$895,000 increase in depreciation expense resulting from higher
average plant levels for the nine months period ended September
30, 1997 compared to the same period in 1996. Customer
operations expense increased $186,000 and $393,000 for the
quarter and nine month periods ended September 30, 1997 compared
to the same periods in 1996 primarily due to increased labor
costs. General and administrative expense increased $581,000 and
$2.2 million for the quarter and nine month periods ended
September 30, 1997 compared to the same periods in 1996 due to
administrative and support costs associated with Roseville
Directory, higher advertising costs and continuing improvements
to the Company's information systems. The cost of nonregulated
sales and services increased by $562,000 and $1.4 million for the
quarter and nine month periods ended September 30, 1997 compared
to the same periods in 1996 due to the effects of several large
equipment sales in 1997.
Other Income, Net:
Other income, net, decreased $838,000 for the quarter ended
September 30, 1997 compared to the same period in 1996. For the
nine months ended September 30, 1997, other income, net,
increased $850,000. The decrease in quarter-to-quarter
income was largely due to a decrease in the quarterly
income of $963,000 attributable to the Company's interest in
SVLP. The year to date increase was primarily due to an increase
in income of $560,000 attributable to 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 1997 may be significantly lower than that recognized
in each of the first three quarters of 1997.
Income Taxes:
Income taxes for the quarter ended September 30, 1997 decreased
$203,000 compared to the same periods in 1996. For the nine
months ended September 30, 1997, income taxes increased $838,000
compared to the same period in 1996 due to a increase in income
subject to income tax. The effective federal and state income
tax rate was approximately 39.7% and 40.8% for the nine month
periods ended September 30, 1997 and 1996, respectively.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash
Flows, net cash provided by operating activities was $23.6
million and $24 million for the nine months ended September 30,
1997 and 1996, respectively. During the nine months ended
September 30, 1997, the Company used cash flows from operations,
existing cash and cash equivalents, and distributions from its
cellular partnership to fund 1) capital expenditures of $15.7
million for ongoing plant construction projects, 2) dividends of
$6.9 million, 3) principal payments of $4.3 million to retire
long-term debt and 4) capital contribution to SVLP of $2.5
million. Additionally, the Company utilized the proceeds from
the return of a refundable deposit to purchase PCS licenses for
$9 million.
The Company's most significant use of funds for the balance of
1997 is expected to be for 1) remaining budgeted capital
expenditures of approximately $7.5 million relating to Roseville
Telephone's operations, 2) remaining scheduled payments of long-
term debt of $1.4 million, 3) anticipated cash dividends of $3.1
million, 4) purchase of a cable television system for $30.9
million, 5) expenditures of up to $1 million relating to West
Coast and 6) remaining working capital requirements of up to $2
million relating to the initial year of Roseville Directory's
operations.
In addition to net cash provided by operations and existing cash,
cash equivalents and short-term investments, the Company is
currently considering various sources of external financing,
including short-term borrowings or long-term debt, for the
purposes of funding capital expenditures, potential investments
and pending acquisitions for 1997 and beyond.
Other Financial Information
As discussed in the notes to the condensed consolidated financial
statements, the Company's consolidated financial statements have
been prepared in accordance with Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation" ("SFAS No. 71"), which require
companies meeting the criteria to give effect in their financial
statements to certain actions of regulators. For example,
amounts charged to operations for depreciation expense reflect
estimated lives and methods prescribed by regulators rather than
the economic lives that might otherwise apply to nonregulated
enterprises. A number of telecommunications companies, including
all of the Regional Bell Operating Companies, have determined
that they no longer meet the criteria of SFAS No. 71. However,
such telecommunications companies are significantly different
from Roseville Telephone in the level and nature of competition
they experience and in the nature and mix of services they offer.
The Company believes its regulated operations continue to meet
the criteria of SFAS No.71 due to its nature and mix of revenues,
the authority of federal and state regulators to establish rates
and monitor Roseville Telephone's earnings, the P.U.C.'s
regulatory authority to set Roseville Telephone's depreciation
lives and recent legal proceedings at the federal level which
prohibit a regulatory agency from setting rates and charges at
levels which do not allow telephone companies to recover their
cost of providing telephone services, including a reasonable
profit.
As a result of increasing competition and rapid changes in the
telecommunications industry, the Company periodically monitors
whether its regulated operations continue to meet the criteria
which require the use of SFAS No. 71. If it becomes no longer
reasonable to assume that Roseville Telephone 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 its
regulated operations no longer meet the SFAS No. 71 criteria, a
material, extraordinary, noncash charge would result. The
approximate amount of Roseville Telephone's net regulatory asset
at December 31, 1996 was between $6 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.
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.
Roseville Telephone is subject to regulation by the Federal
Communications Commission ("F.C.C.") and P.U.C. In the past,
there have been various proceedings before these agencies to
which the Roseville Telephone has been a party.
The P.U.C. has instituted an investigation (I.87-11-033) into the
manner in which it regulates local exchange carriers, including
Roseville Telephone. It has announced that in the course of this
investigation it will consider the manner in which certain
services presently provided solely by Roseville Telephone 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 Roseville Telephone's LATA effective
January 1, 1995. On April 23, 1997, the P.U.C. adopted Decision
97-04-083, which established the rules which govern the
implementation of intraLATA equal access (the ability to place
toll calls within a LATA through other telephone carriers without
having to dial additional preliminary numbers) and the means by
which local exchange carriers may recover the costs of
implementing intraLATA equal access. Roseville Telephone began
to offer intraLATA equal access on September 23, 1997. Roseville
Telephone expects that implementation of intraLATA equal access
will increase competition in the local toll market. Therefore,
the ultimate effects on Roseville Telephone of implementing
intraLATA equal access cannot yet be determined.
On May 15, 1995, Roseville Telephone filed a rate case with the
P.U.C. requesting authority to restructure and increase rates for
certain telephone services and decrease rates for others. On
December 20, 1996, the P.U.C. issued Decision 96-12-074 (the
"Decision") granting an annual revenue increase of $470,000. The
P.U.C. also authorized Roseville Telephone to implement a new
regulatory framework for services furnished within the State of
California in order to accommodate market and regulatory movement
toward competition and greater pricing flexibility.
Additionally, the P.U.C. ordered the elimination of various
sources of revenues including the California High Cost Fund draw,
certain settlement contract revenues with Pacific Bell and a
previously mandated billing surcharge. Based on calculations by
the P.U.C., the elimination of these sources of revenues are
expected to be offset by ordered increases in Roseville
Telephone's local exchange and switched access rates. This rate
restructuring became effective on February 1, 1997.
Roseville Telephone believes that the Decision contains various
miscalculations as well as legal and factual errors which will
result in Roseville Telephone not realizing the ordered annual
increase in revenues of $470,000. The Company believes that the
miscalculations and errors contained in the Decision could
instead result in an annual revenue reduction of up to $1.3
million. Accordingly, in January 1997 Roseville Telephone filed
a Petition for Modification and Application for Rehearing with
the P.U.C. requesting a reexamination and correction of the
miscalculations and errors. On October 6, 1997, the
administrative law judge issued a proposed decision for
consideration by the P.U.C. The proposed decision agrees that
the rate design adopted in the rate case decision was in error
and recommends the P.U.C. correct Roseville Telephone's rates on
a prospective basis. Roseville Telephone submitted comments on
the proposed decision requesting complete recovery of the revenue
deficiency caused by the rate design errors. Roseville Telephone
anticipates the P.U.C. will issue a final decision on this issue
in December 1997, the outcome of which cannot presently be
determined.
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 Roseville Telephone to participate in the process
of developing these cost studies in anticipation of a possible
order that Roseville Telephone 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 Roseville Telephone 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 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. On October 25, 1996, the P.U.C.
adopted Decision 96-10-066 setting forth the rules pertaining to
universal service. In this decision, the P.U.C. adopted a model
for determining universal service funding beginning February 1,
1997. The decision establishes Roseville Telephone's annual
universal service fund draw at approximately $500,000, subject to
offsetting rate reductions. In addition, the decision allows
Roseville Telephone to file its own cost study to determine its
draw from the universal service fund. Roseville Telephone is
reviewing this option. In December 1996, a number of parties
filed Applications for Rehearing, including Roseville Telephone,
on various issues which may result in changes to the rules and
amount of funds Roseville Telephone is entitled to receive.
Roseville Telephone anticipates that these issues will be
resolved in 1998, the effects of which on Roseville Telephone
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 interim rates to be paid by resale competitors for
interconnection and related services was adopted on March 13,
1996 to be effective March 31, 1996. Comments on the rules for
local service competition in Roseville Telephone's territory were
filed on July 31, 1996. On April 30, 1997, Electric Lightwave,
Inc. filed an application with the P.U.C. to amend its
certificate of public convenience and necessity for authority to
provide competitive local exchange services to include the local
exchange service territory of Roseville Telephone. As a result,
the P.U.C. converted Electric Lightwave's application into a
petition in Investigation 95-04-044 and on June 19, 1997,
requested the parties to provide further comments concerning the
adoption of rules for the entry of competitive local carriers
("CLCs")into the service territories of mid-sized local exchange
carriers such as Roseville Telephone. These comments were filed
on July 15, 1997. On September 24, 1997, the P.U.C. issued
Decision 97-09-115 which extended the coverage of its adopted
rules for local exchange competition to include the service
territories of California's mid-sized incumbent local exchange
carriers, including Roseville Telephone. The P.U.C. authorized
CLCs to submit petitions for facilities-based local exchange
authority within Roseville Telephone's territory to be subject to
consideration for approval by February 1, 1998 and to submit
petitions for resale-based authority to be subject to
consideration for approval by April 1, 1998. In addition, the
decision authorizes Roseville Telephone to establish a memorandum
account and accrue therein actual implementation costs for local
exchange competition. There is no assurance that the P.U.C. will
allow Roseville Telephone to set its rates at levels that will
permit timely recovery of all costs incurred in implementing
local service competition. In connection with this proceeding,
the P.U.C. has directed Roseville Telephone to participate in the
on-going proceeding to establish permanent wholesale rates for
resale by CLCs. Pending establishment of permanent wholesale
rates by Roseville Telephone, CLCs are directed to establish
interconnection terms and resale arrangements by mutual agreement
with Roseville Telephone, subject to resolution by the P.U.C. in
cases where mutual agreement can not be reached. In addition,
the P.U.C. has solicited comments on the question of whether or
not Pacific Bell and GTE California should be permitted to
compete as CLCs in Roseville Telephone's service area in light of
their ability to average their rates over a substantially larger
and more diverse customer base compared to the mid-sized LECs.
Roseville Telephone anticipates these issues will be resolved
during 1998 and that additional proceedings will be held to
further refine the rules for local service competition in its
territory, the effects of which on Roseville Telephone cannot yet
be determined.
On January 23, 1997, Roseville Long Distance filed an application
with the P.U.C. requesting a Certificate of Public Convenience
and Necessity for authority to provide interLATA and intraLATA
long distance services. On August 1, 1997, the P.U.C. approved
Roseville Long Distance's application. Roseville Long Distance
began providing long distance services to customers on September
23, 1997 concurrent with Roseville Telephone's implementation of
intraLATA presubscription.
There are a number of regulatory proceedings occurring at the
federal level that may have a material impact on Roseville
Telephone. 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.
Roseville Telephone's operations may also be impacted by the
recently enacted Telecommunications Act of 1996 (the "Act") and
rules and regulations issued thereunder. Beginning in 1996, the
F.C.C. adopted orders implementing the Act's provisions to open
local exchange service markets to competition. The F.C.C. rules
outline pricing methodologies for the states to follow when
setting rates for resale, interconnection and unbundled network
elements. On October 15, 1996, the United States Court of
Appeals for the Eighth Circuit (the "Court") issued a stay
pending appeal of portions of the F.C.C. Orders. On July 18,
1997, the Court issued its decision on these issues. The Court
found that the F.C.C. exceeded its jurisdiction in promulgating
pricing rules regarding local telephone service. Accordingly,
the Court vacated the F.C.C.'s rules relating to pricing of
services. The Court also vacated the F.C.C.'s "Pick and Choose"
rule which allowed competing carriers to pick individual
provisions from an incumbent local exchange carrier's contracts
with other carriers, without being bound to the entire contract.
Additionally, on October 14, 1997, the Court issued an order that
vacated the portion of the F.C.C.'s interconnection rules that
required ILECs to combine Unbundled Network Elements for
interconnectors. These issues on interconnection and pricing now
fall into the state jurisdiction, the effects of which on
Roseville Telephone cannot yet be determined.
On May 7, 1997, the F.C.C. adopted orders on access charge reform
and a new universal service program. The F.C.C.'s access charge
reform Order generally removed from minute-of-use access charges
costs that are not incurred on a per-minute-of-use basis. The
F.C.C. also adopted changes to its interstate rate structure for
transport services which are designed to move the charges for
these services to more cost-based levels. The F.C.C.'s universal
service Order reformed the existing system of universal service
in a manner that will permit local telephone markets to move to a
competitive arena. The Order provides continued support to low-
income consumers and will help to connect eligible schools,
libraries and rural health care providers to the global
telecommunications network. Several parties have filed cases
with the Court on various issues within these two orders. Given
the Act's recent enactment, the Court's decision vacating
portions of the F.C.C.'s interconnection Order, the recent
actions taken by the F.C.C. to promulgate rules and regulations
on access charge and universal service reform and the various
legal challenges considering the validity of the F.C.C. Orders,
it is not yet possible to determine fully the impact of the Act
and related F.C.C. regulations on Roseville Telephone's
operations.
On October 7, 1997, the F.C.C. released the long awaited Notice
of Proposed Rulemaking on reforming the jurisdictional
separations process to ensure that they meet the objectives of
the Act, and to consider changes that may need to be made to the
jurisdictional separations process in light of changes in the
law, technology, and market structure of the telecommunications
industry. Jurisdictional separations is the process of
apportioning regulated costs between the intrastate and
interstate jurisdictions. Comments are due on December 10, 1997
and replies are due on January 26, 1998. Roseville Telephone
anticipates that these issues will be resolved in 1998, the
effects of which on Roseville Telephone cannot yet be determined.
The proceedings described above may broaden the scope of
competition in the provision of regulated services and change the
rates and rate structure for regulated services furnished by
Roseville Telephone, the effects of which on Roseville Telephone
cannot yet be determined.
On October 14, 1996, Roseville Cable entered into an Asset
Purchase Agreement (the "Purchase Agreement") with IDS/Jones
Growth Partners 87-A, Ltd. ("Seller") under which Roseville Cable
agreed to purchase a cable television system (the "System")
currently serving approximately 18,000 subscribers in the City of
Roseville, California and certain unincorporated areas of Placer
County, California. The consummation of the transaction
contemplated by the Purchase Agreement is subject to various
conditions including 1) approval of the City of Roseville and
Placer County to the transfer of the franchises, 2) satisfaction
of requirements under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 3) a waiver from the F.C.C. of certain
provisions of the Telecommunications Act of 1996 and 4) approval
of the Board of Directors of the Company and the limited partners
of the Seller. While certain of these conditions have been
satisfied, there can be no assurance that the remaining waivers
and approvals will be obtained.
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
1997.
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 COMMUNICATIONS COMPANY
(Registrant)
Date: November 14, 1997 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: November 14, 1997 By: /s/MICHAEL D. CAMPBELL
Michael D. Campbell,
Executive Vice-President
and Chief Financial Officer
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 COMMUNICATIONS COMPANY
(Registrant)
Date: November 14, 1997 By: __________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: November 14, 1997 By: __________________________
Michael D. Campbell,
Executive Vice-President
and Chief Financial Officer
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