UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 30, 1998
[ ]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
of incorporation or organization) Identification No.)
211 Lincoln Street, Roseville, California 95678
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 786-6141
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of July 31, 1998, 15,815,230 shares of the registrant's Common
Stock were outstanding.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Operating revenues:
Local service $15,487,000 $14,207,000 $30,635,000 $27,397,000
Network access service 9,024,000 9,086,000 18,627,000 18,526,000
Other 30,000 117,000 65,000 417,000
----------- ----------- ----------- -----------
Total rate regulated
revenues 24,541,000 23,410,000 49,327,000 46,340,000
Directory advertising 2,997,000 1,732,000 5,968,000 3,569,000
Nonregulated sales and
service 1,524,000 1,925,000 2,932,000 3,566,000
Other 1,524,000 1,007,000 3,360,000 2,331,000
----------- ----------- ----------- -----------
Total operating revenues 30,586,000 28,074,000 61,587,000 55,806,000
Operating expenses:
Cost of services and
products 8,218,000 7,500,000 16,649,000 15,453,000
Customer operations and
selling 3,925,000 3,510,000 7,458,000 7,020,000
General and administrative 5,064,000 4,772,000 9,891,000 9,871,000
Depreciation 5,172,000 4,723,000 10,280,000 9,428,000
----------- ----------- ----------- -----------
Total operating expenses 22,379,000 20,505,000 44,278,000 41,772,000
----------- ----------- ----------- -----------
Income from operations 8,207,000 7,569,000 17,309,000 14,034,000
Other income (expense):
Interest income 335,000 364,000 633,000 776,000
Interest expense (509,000) (619,000) (1,040,000) (1,249,000)
Equity in earnings of
cellular partnership 2,770,000 3,008,000 4,964,000 6,114,000
Other, net 122,000 70,000 191,000 111,000
----------- ----------- ----------- -----------
Total other income, net 2,718,000 2,823,000 4,748,000 5,752,000
----------- ----------- ----------- -----------
Income before income taxes 10,925,000 10,392,000 22,057,000 19,786,000
Income taxes 4,399,000 4,121,000 8,885,000 7,838,000
----------- ----------- ----------- -----------
Net income $ 6,526,000 $ 6,271,000 $13,172,000 $11,948,000
=========== =========== =========== ===========
Basic and diluted earnings
per share (1) $ .41 $ .40 $ .83 $ .76
===== ===== ===== =====
Cash dividends per share (2) $ .20 $ .15 $ .40 $ .29
===== ===== ===== =====
Shares of common stock used
to calculate earnings per
share 15,815,230 15,815,230 15,815,230 15,815,230
========== ========== ========== ==========
(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)
June 30, 1998 December 31, 1997
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,606,000 $ 15,360,000
Short-term investments 3,204,000 3,964,000
Refundable deposit - 1,620,000
Accounts receivable, net 16,527,000 16,173,000
Inventories 2,052,000 2,077,000
Prepaid expenses and other
current assets 1,278,000 3,022,000
------------ -----------
Total current assets 43,667,000 42,216,000
Property, plant and equipment,
net 189,940,000 187,681,000
Investments and other assets:
Cellular partnership 36,823,000 33,031,000
PCS licenses 9,000,000 9,000,000
Deferred charges and other
assets 3,902,000 4,369,000
------------ -----------
49,725,000 46,400,000
------------ -----------
$283,332,000 $276,297,000
============ ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt $ 5,714,000 $ 5,714,000
Accounts payable and accrued
liabilities 22,121,000 19,337,000
------------ -----------
Total current liabilities 27,835,000 25,051,000
Long-term debt 19,464,000 22,322,000
Deferred credits and other
liabilities 28,490,000 28,240,000
Minority interest in subsidiary 1,014,000 1,001,000
Shareholders' equity:
Common Stock, without par
value; 100,000,000 shares
authorized,15,815,230 shares
issued and outstanding 189,171,000 189,171,000
Retained earnings 17,358,000 10,512,000
------------ ------------
Total shareholders' equity 206,529,000 199,683,000
------------ ------------
$283,332,000 $276,297,000
============ ============
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
------------ ------------
Net cash provided by operating
activities $21,609,000 $14,074,000
Cash flows from investing activities:
Capital expenditures for property,
plant and equipment (10,839,000) (10,163,000)
Purchases of held-to-maturity
investments (3,240,000) (2,988,000)
Maturities of held-to-maturity
investments 4,000,000 2,250,000
Purchase of PCS licenses - (9,000,000)
Investment in cellular partnership (701,000) (2,514,000)
Return of investment in cellular
partnership 1,873,000 3,789,000
Return of refundable deposit 1,620,000 9,000,000
Changes in deferred charges and
other assets 108,000 (17,000)
----------- -----------
Net cash used in investing
activities (7,179,000) (9,643,000)
Cash flows from financing activities:
Principal payments of long-term
debt (2,858,000) (2,857,000)
Dividends paid (6,326,000) (4,608,000)
----------- -----------
Net cash used in financing
activities (9,184,000) (7,465,000)
----------- -----------
Increase (decrease) in cash and cash
equivalents 5,246,000 (3,034,000)
Cash and cash equivalents at
beginning of period 15,360,000 24,435,000
----------- -----------
Cash and cash equivalents at end of
period $20,606,000 $21,401,000
=========== ===========
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 1997 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,
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. The Company'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"). 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. Roseville Directory is also
engaged in the business of producing, publishing and
distributing directories in certain communities surrounding
Roseville Telephone's service area. 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 on
September 23, 1997. The Company expects that the sources of
its revenues and its cost structure may be different in
future years 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, 1997 was between $7 million
and $14 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 six month periods ended June 30, 1998 and 1997
for SVLP is as follows (in thousands):
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net revenues $42,741 $39,184 $81,909 $77,103
Costs and
expenses 30,937 26,367 60,760 51,054
------- ------- ------- -------
Net income $11,804 $12,817 $21,149 $26,049
======= ======= ======= =======
3. Shareholder Rights Plan
In March 1998, the Board of Directors of the Company adopted
a Shareholder Rights Plan (the "Plan") wherein shareholders
of the Company received rights to purchase the Company's
common stock, or an acquirer's common stock, at a discount
in certain events involving an acquisition of 20% or more of
the Company's common stock by any person or group in a
transaction not approved by the Board. The rights expire in
March, 2008.
4. Pending Accounting Standard
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires companies to
capitalize certain costs associated with obtaining or
developing internal-use software and is effective for the
Company in 1999. Currently, the costs of computer software
purchased or developed for internal use are expensed as
incurred, except for operating system and application
software initially acquired with the related equipment. The
F.C.C. has not yet issued an order indicating the extent or
manner in which telephone companies should adopt the
provisions of SOP 98-1. Accordingly, the Company cannot yet
fully evaluate the impact on its consolidated financial
statements of SOP 98-1.
ROSEVILLE COMMUNICATIONS COMPANY
PART I
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
General
Roseville Communications Company (the "Company") is a holding
company with subsidiaries operating in the communications
services industry. The Company's principal operating subsidiary,
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. The Company'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").
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.
Roseville Directory is also engaged in the business of producing,
publishing and distributing directories in certain communities
surrounding Roseville Telephone's service area. 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 on September 23, 1997. The
Company expects that the sources of its revenues and its cost
structure may be different in future years 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 other service revenues
generated by Roseville Telephone, constitute approximately 80%
and 83% of the Company's total operating revenues for the
quarters and six month periods ended June 30, 1998 and 1997,
respectively. Rate regulated revenues are derived from various
sources, including billings to business and residential
subscribers for basic exchange services, extended area service
charges, surcharges mandated by the Public Utilities Commission
of the State of California (the "P.U.C."), billings to Pacific
Bell, long distance carriers, competitive access providers 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. As discussed below, beginning
February 1, 1997, the sources of Roseville Telephone's revenues
were substantially modified as a result of its rate case.
Roseville Telephone bills Pacific Bell various charges for
certain local service and network access service revenues
pursuant to agreements with Pacific Bell (the "Pacific Bell
Agreements"). Of the Company's total revenues for the quarters
and six month periods ended June 30, 1998 and 1997, 14% and 16%,
respectively, were recorded under the Pacific Bell Agreements.
On December 20, 1996, the P.U.C. issued Decision 96-12-074 (the
"Rate Case Decision") in connection with the Company's rate case
granting an annual revenue increase of $470,000. Due to various
miscalculations in the initial Rate Case Decision which would
result in the Company not realizing the ordered annual increase
in revenues of $470,000, the P.U.C. subsequently modified its
decision to correct the revenue deficiency, which resulted in an
increase in revenues of $1.7 million in the fourth quarter of
1997. The P.U.C. also authorized Roseville Telephone to
implement a new regulatory framework ("NRF") for services
furnished within the State of California in order to accommodate
market and regulatory movement toward competition and greater
pricing flexibility. Under NRF, Roseville Telephone is subject
to ongoing monitoring and reporting requirements, including a
sharing mechanism whereby Roseville Telephone may be required to
share earnings with customers based on its earned annual rate-of-
return. All earnings between Roseville Telephone's benchmark
rate-of-return of 11.5% and the 6.75% floor are retained by the
Company. Earnings between the benchmark rate-of-return and 15%
are to be shared equally between Roseville Telephone and its
customers. All earnings above 15% are to be returned to
customers. Additionally, in the event that earnings fall below
the 6.75% floor, Roseville Telephone is permitted to file for a
general rate increase. As of June 30, 1998 Roseville Telephone
had no obligation to share earnings with customers. Additionally,
the P.U.C. ordered the elimination of various sources of revenue,
including the existing 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, switched
access and other rates. This rate restructuring became effective
on February 1, 1997.
The ordered changes in the sources of the Company's rate
regulated revenues resulting from the Decision affected the
comparability between the 1998 and 1997 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 $1.1 million and $3.0 million
or 5% and 6% for the quarter and six month periods ended June 30,
1998 compared to the same periods in 1997 due to the combined
effects of 1) access line growth of 7%, 2) improved penetration
in custom calling, voice mail and other enhanced network services
due to increased marketing activities, 3) the introduction of a
new national directory assistance service, 4) a modification to
the Rate Case Decision in the fourth quarter of 1997, which
increased local revenues by $459,000 and $953,000 for the quarter
and six month periods ended June 30, 1998 compared to the same
periods in 1997, and 5) increased network access revenues due to
larger minute-of-use volumes, expanded demand for special access
services and increased interstate access settlements.
Directory advertising revenues have increased $1.3 million and
$2.4 million or 73% and 67% for the quarter and six month periods
ended June 30, 1998 compared to the same periods in 1997. Prior
to 1998, the Company recognized a net share of the revenues
generated by the directory, which was previously produced by a
third party. Beginning in 1998, the Company's consolidated
financial statements reflect all of the revenues and the related
costs associated with the directory, which is now produced by
Roseville Directory.
Operating Expenses:
Operating expenses increased $1.9 million and $2.5 million or 9%
and 6% for the quarter and six month periods ended June 30, 1998
compared to the same periods in 1997. Cost of services and
products increased $718,000 and $1.2 million for the quarter and
six month periods ended June 30, 1998 compared to the same
periods in 1997 due primarily to costs relating to the production
of Roseville Telephone's 1998 directory. Customer operations
expense increased $415,000 and $438,000 for the quarter and six
month periods ended June 30, 1998 compared to the same periods in
1997 due primarily to increased labor costs and costs associated
with new services. Depreciation expense increased $449,000 and
$852,000 for the quarter and six month periods ended June 30,
1998 compared to the same periods in 1997 as a result of higher
plant levels. Operating expenses are expected to be higher
during the second half of 1998, which may result in lower levels
of net income for the third and fourth quarters of 1998 when
compared to the six months ended June 30, 1998.
Other Income, Net:
Other income, net, decreased $105,000 and $1.0 million for the
quarter and six month periods ended June 30, 1998 compared to the
same periods in 1997. The decrease was primarily due to a
decrease of $238,000 and $1.2 million in income attributable to
the Company's interest in SVLP for the quarter and six month
periods ended June 30, 1998 compared to the same period in 1997.
Income Taxes:
Income taxes for the quarter and six month period ended June 30,
1998 increased $278,000 and $1.0 million compared to the same
periods in 1997 due primarily to the increase in income subject
to tax. The effective federal and state income tax rate was
approximately 40.3% for the six month period ended June 30, 1998
compared to 39.6% in 1997 due to certain income tax credits
received in 1997.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash
Flows, net cash provided by operating activities amounted to
$21.6 million and $14.1 million for the six month periods ended
June 30, 1998 and 1997, respectively. During the six months
ended June 30, 1998, the Company used cash flows from operations
and existing cash, cash equivalents and short-term investments to
fund 1) capital expenditures of $10.8 million pertaining to
ongoing plant construction projects, 2) dividends of $6.3
million, 3) principal payments of $2.9 million to retire long-
term debt and 4) a capital contribution to SVLP of $701,000.
The Company's most significant use of funds for the balance of
1998 is expected to be for 1) remaining budgeted capital
expenditures of approximately $12.5 million relating to Roseville
Telephone 2) remaining scheduled payments of long-term debt of
$2.9 million 3) anticipated cash dividends of $6.3 million and 4)
start-up costs and net operating expenditures of up to $2.2
million and remaining capital expenditures of approximately $16.5
million relating to West Coast.
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 and potential
investments for 1998 and beyond.
Year 2000 Matters
Year 2000 issues arise from computer programs written using two
digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send customer bills, or engage in similar normal
business activities.
Based on ongoing assessments, the Company determined that it will
be required to modify or replace portions of its software so that
its computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company presently believes
that with modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. The Company
estimates it will incur up to $4 million in expenses to modify
and convert its systems and anticipates completing the Year 2000
project by the quarter ending March 31, 1999. However, if such
modifications and conversions are not made in a timely manner,
the Year 2000 issue could have a material impact on the
operations of the Company.
The cost of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based
on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and
similar uncertainties.
Other Financial Information
As more fully 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, 1997 was between $7 million and $14 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 F.C.C. and
P.U.C. In the past, there have been various proceedings before
these agencies to which Roseville Telephone has been a party.
In response to an application for rehearing by Roseville
Telephone of the Rate Case Decision, discussed in Part I, Item 2,
the P.U.C. adopted Decision 98-06-028 on June 4, 1998, its Order
Granting Limited Rehearing of Decision 96-12-074 on Specified
Issues and Otherwise Denying Rehearing. In this order, the
P.U.C. agreed to review and correct certain calculations and to
provide supplemental explanations and findings on how it weighted
the evidence with respect to certain other calculations which
formed the basis of the rates adopted in the Rate Case Decision.
Further orders in this proceeding are anticipated during 1998 and
1999, the effects of which on Roseville Telephone cannot 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 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. 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 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.
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. On January 7,
1998, the P.U.C. issued Decision 98-09-115 stating that Pacific
Bell and GTE California may request authority to operate as CLCs
in Roseville Telephone's service area subject to the same rules
and regulations applicable to all CLCs. In addition, Decision 98-
09-115 required that Pacific Bell and GTE California must keep
separate books and records for their CLC operations distinct from
their incumbent local exchange operations. On January 21, 1998,
the P.U.C. approved the first eleven CLC's requests to begin
offering local exchange services within Roseville Telephone's
service area. Roseville Telephone anticipates that additional
proceedings and negotiations will be held during 1998 to refine
further the rules for local service competition in its territory,
the effects of which on Roseville Telephone cannot yet be
determined.
On June 18, 1998, the P.U.C. issued Decision 98-06-067, which
granted Roseville Telephone's application to operate as a
facilities-based competitive local carrier and to offer resold
local exchange services within the territories of Pacific Bell,
GTE California, and Citizens Telephone Company.
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, access charge reform 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
Telecommunications Act of 1996 (the "Act"). 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 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. The
resolution of the issues on interconnection and pricing which
were held to be outside of the jurisdiction of the F.C.C. now
fall into the state jurisdiction, the effects of which on
Roseville Telephone cannot yet be determined. In addition, on
January 26, 1998, the United States Supreme Court granted
petitions for writ of certiorari in connection with this matter
and will review the Eighth Circuit's decision on the jurisdiction
of the F.C.C. to mandate interconnection pricing rules.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders of the Company held on June
19, 1998, each of the incumbent members of the Board of Directors
of the Company was reelected to the Board of Directors. The
votes were as follows:
Votes Votes Votes Broker Non-
Director For Against Withheld Votes
and
Abstentions
-------- ------- ------- ------- --------------
Robert L. Doyle 14,730,280 159,678 N/A N/A
Thomas E. Doyle 14,732,043 157,915 N/A N/A
Brian H. Strom 14,710,710 179,248 N/A N/A
Ralph A. Hoeper 14,726,645 163,313 N/A N/A
John R. Roberts III 14,726,682 163,276 N/A N/A
Jon S. Kelly 14,726,112 163,846 N/A N/A
Item 5. Other Information
The Securities and Exchange Commission has recently amended Rules
14a-4 and 14a-5 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"), in respect of the Company's
exercise of discretionary voting authority in connection with
annual shareholder meetings, and in particular with respect to
matters not submitted under the Shareholder Proposal rule set
forth in Rule 14a-8 under the 1934 Act.
Under the amended Rules, a company is permitted discretionary
voting authority in those instances in which the company did not
have notice of the matter by a date more than 45 days before the
month and day in the current year corresponding to the date on
which the company first mailed its proxy materials for the prior
year's annual meeting of shareholders, or by a date established
by an overriding advance notice provision in a company's articles
of incorporation or bylaws. The Company has not yet implemented
such an advance notice provision. Accordingly, in connection
with the 1999 Annual Meeting of Shareholders of the Company, the
date after which notice of a shareholder proposal submitted
outside the processes of Rule 14a-8 under the 1934 Act is
considered untimely is March 16, 1999.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) No reports on Form 8-K were filed during the second quarter of
1998.
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: August 7, 1998 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: August 7, 1998 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: August 7, 1998 By: ___________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: August 7, 1998 By: ___________________________
Michael D. Campbell,
Executive Vice-President
and Chief Financial
Officer
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