UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31, 1999
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
ROSEVILLE COMMUNICATIONS COMPANY
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(Exact name of registrant as specified in its charter)
California 68-0365195
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
211 Lincoln Street, Roseville, California 95678
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 786-6141
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
--------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1999, 15,815,230 shares of the registrant's Common Stock were
outstanding.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(amounts in thousands, except per share amounts)
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
-------------- --------------
Operating revenues:
Local service $ 16,508 $ 15,148
Network access service 11,164 9,638
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Total rate regulated revenues 27,672 24,786
Directory advertising 3,281 2,971
Nonregulated sales and service 1,668 1,408
Other 2,359 1,836
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Total operating revenues 34,980 31,001
Operating expenses:
Cost of services and products 8,922 8,431
Customer operations and selling 4,141 3,533
General and administrative 5,109 4,827
Depreciation 4,914 5,108
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Total operating expenses 23,086 21,899
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Income from operations 11,894 9,102
Other income (expense):
Interest income 512 298
Interest expense (802) (531)
Equity in earnings of cellular
partnership 1,824 2,194
Other, net 440 69
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Total other income, net 1,974 2,030
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Income before income taxes 13,868 11,132
Income taxes 5,614 4,486
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Net income $ 8,254 $ 6,646
======= =======
Basic and diluted earnings per share (1)$ .52 $ .42
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Cash dividends per share (2) $ .25 $ .20
===== =====
Shares of common stock used to
Calculate earnings per share 15,815 15,815
======= =======
(1) Shares used in the computation of basic and diluted earnings per share of
common stock are based on the weighted average number of shares outstanding in
each period.
(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.
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 41,045 $ 38,840
Short-term investments 4,264 4,242
Accounts receivable, net 18,134 16,851
Refundable income tax asset - 969
Inventories 1,878 1,828
Deferred income tax asset 1,240 1,240
Prepaid expenses and other current
assets 481 107
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Total current assets 67,042 64,077
Property, plant and equipment, net 206,844 202,137
Investments and other assets:
Cellular partnership 37,289 35,875
PCS licenses 9,000 9,000
Deferred charges and other assets 4,050 4,788
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50,339 49,663
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$324,225 $315,877
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,143 $ 2,143
Accounts payable and accrued
liabilities 11,963 9,506
Payables to telecommunications
entities 6,552 5,790
Advance billings and customer
deposits 2,828 1,926
Accrued pension cost 3,158 3,111
Accrued compensation 4,051 3,618
-------- --------
Total current liabilities 30,695 26,094
Long-term debt 48,035 48,571
Deferred credits and other
liabilities 28,432 28,406
Minority interest in subsidiary 1,474 1,517
Shareholders' equity:
Common Stock, without par value;
100,000 shares authorized,
15,815 shares issued and
outstanding 189,171 189,171
Retained earnings 26,418 22,118
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Total shareholders' equity 215,589 211,289
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$324,225 $315,877
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See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(amounts in thousands)
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
-------------- ---------------
Net cash provided by operating
activities $15,879 $11,518
Cash flows from investing activities:
Capital expenditures for property,
plant and equipment (9,621) (3,910)
Purchases of held-to-maturity
investments (1,522) (1,795)
Maturities of held-to-maturity
investments 1,500 1,500
Investment in cellular partnership - (701)
Return of investment in cellular
partnership 410 -
Return of refundable deposit - 1,620
Changes in deferred charges and
other assets 49 28
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Net cash used in investing
activities (9,184) (3,258)
Cash flows from financing activities:
Principal payments of long-term
debt (536) (1,429)
Dividends paid (3,954) (3,163)
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Net cash used in financing
activities (4,490) (4,592)
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Increase in cash and cash equivalents 2,205 3,668
Cash and cash equivalents at
beginning of period 38,840 15,360
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Cash and cash equivalents at end of
period $41,045 $19,028
======= =======
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 1998 Annual Report to Shareholders.
The Company is a holding company with subsidiaries operating in the
communications services industry. The Company's principal operating
subsidiary is Roseville Telephone Company ("Roseville Telephone").
Roseville PCS, Inc., Roseville Directory Company ("Roseville Directory"),
and Roseville Long Distance Company ("Roseville Long Distance") are each
wholly owned subsidiaries of the Company. Roseville PCS, Inc. is the
manager of and has an approximate 93.1% interest in West Coast PCS LLC
(d.b.a. "RCS Wireless"), which was formed for the purpose of providing
personal communications services ("PCS"). 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 requires 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, 1998 was between
$8.0 million and $15.0 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 Sacramento-Valley Limited Partnership ("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 quarters ended
March 31, 1999 and 1998 for SVLP is as follows (in thousands):
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
-------------- --------------
Net revenues $ 41,276 $ 39,168
Costs and expenses 33,507 29,823
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Net Income $ 7,769 $ 9,345
======== ========
Commencing in July 1998, there have been a series of communications between
the partners of SVLP regarding the ownership and operation of PCS licenses
in territories served by SVLP and the allegation by its general partner,
AirTouch Cellular ("AirTouch"), that such ownership and operation would
cause a partner of SVLP to be in violation of the terms of SVLP's Agreement
Establishing Limited Partnership, as amended ("Partnership Agreement"). In
addition to the Company's ownership of PCS licenses, an affiliate of
AirTouch and one other limited partner also own such licenses.
Representatives of the Company and AirTouch have engaged in discussions
regarding a solution to the dispute by the execution of an amendment to the
Partnership Agreement redefining certain of the partners' rights under the
Partnership Agreement. In furtherance thereof, AirTouch and the Company
prepared and distributed drafts of such an amendment, which were not
accepted by the other party.
Unable to reach an agreement with AirTouch, on March 26, 1999, the Company
filed an action against AirTouch in the United States District Court for
the Eastern District of California requesting declaratory relief,
injunctive relief and damages for violation of the Sherman Act, the
California Cartwright Act, breach of contract, breach of fiduciary duty,
intentional and negligent interference with economic advantage and
violation of California's unfair competition act. AirTouch has not yet
answered the complaint, but instead filed a request for a thirty day
extension to file the same, which was opposed by the Company in view of
prior discussions among the parties.
The parties to the litigation have continued to explore the possibility of
a negotiated amendment to the Partnership Agreement, which would be
acceptable to the Company if it were protective of the Company's rights as
a partner of SVLP. Absent a satisfactory resolution of the dispute, the
Company intends to vigorously pursue its litigation alternatives. The
Company strongly disagrees with the position asserted by AirTouch and does
not believe that these proceedings have impaired the recoverability of its
$37.3 million investment in SVLP as of March 31, 1999. is not impaired.
3. 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
Company expects to implement SOP 98-1 when accepted by the F.C.C.,
currently expected during the second quarter of 1999. Had the Company
adopted SOP 98-1 during the first quarter of 1999, net income would have
increased by approximately $508 thousand.
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
93.1% interest in West Coast PCS LLC (d.b.a. "RCS Wireless"), which was formed
together with another entity not controlled by the Company for the purpose of
providing personal communications services ("PCS"). Roseville Directory Company
("Roseville Directory"), a wholly-owned subsidiary of the Company, produces,
publishes and distributes Roseville Telephone's 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 other Northern California communities outside of
Roseville Telephone's service area. The Company's wholly-owned subsidiary,
Roseville Long Distance Company ("Roseville Long Distance"), is engaged in the
provision of long distance services. 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 79% and 80% of the Company's total operating revenues
for the quarters ended March 31, 1999 and 1998, 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
general 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"). During the quarter ended March 31, 1999,
Pacific Bell approached the Company with a proposal to modify the Pacific Bell
Agreements, the effects of which on the Company cannot presently be determined.
Of the Company's total revenues for the quarters ended March 31, 1999 and 1998,
12% and 14%, respectively, were recorded under the Pacific Bell Agreements.
In December 1996, the P.U.C. issued a decision granting an annual revenue
increase of $470 thousand as a result of Roseville Telephone's general rate
proceeding filed in 1995. 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
up to the benchmark rate-of-return of 11.5% 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 a
6.75% floor, Roseville Telephone is permitted to file for a general rate
increase. As of December 31, 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 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 Company filed a
Petition for Modification and an Application for Rehearing (the "Petition") with
the P.U.C. in January 1997 which identifies legal and factual errors with the
rate case decision. In connection with the Petition, the P.U.C. issued a
decision in April 1999 modifying the rate case decision by increasing rates to
correct these legal and factual errors. Due to its recent adoption, it is not
yet possible to fully determine the impact of this rate increase on Roseville
Telephone's operations.
Rate regulated revenues increased $2.9 million, or 12%, for the quarter ended
March 31, 1999 compared to the same period in 1998 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) increased network access revenues due to larger minute-of-use volumes and
expanded demand for special access services and 4) a one-time positive
adjustment of $812 thousand to interstate access settlements relating to 1998.
Directory advertising revenues increased $310 thousand due to an increase in
advertising sales relating to Roseville Telephone's directory and the addition
of an independent directory outside of Roseville Telephone's service area.
Other operating revenues increased $523 thousand due primarily to an increase in
the market penetration of long distance services.
Operating Expenses:
Operating expenses increased $1.2 million, or 5%, for the quarter ended March
31, 1999 compared to the same period in 1998. Cost of services and products
increased $491 thousand due primarily to an increase in transport costs
associated with long distance services, increased publishing and distribution
costs relating to directory advertising activities and start up costs associated
with testing and implementing the PCS network.
Customer operations and selling expense increased $608 thousand due to increased
labor costs relating to an increase in personnel, and marketing and customer
service costs associated with long distance services and the Company's PCS
operations.
General and administrative costs increased $282 thousand due primarily to
improvements to the Company's information systems.
Other Income, Net:
Other income, net, decreased $56 thousand for the quarter ended March 31, 1999
compared to the same period in 1998. The decrease was primarily due to a
decrease of $370 thousand in income attributable to the Company's interest in
SVLP which was partially offset by an increase in interest during construction
resulting from the PCS network construction activities.
Income Taxes:
Income taxes for the quarter ended March 31, 1999 increased $1.1 million
compared to the same period in 1998 due primarily to the increase in income
subject to tax. The effective federal and state income tax rate was
approximately 40.5% and 40.3% for the quarters ended March 31, 1999 and 1998,
respectively.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities amounted to $15.9 million and $11.5 million for
the quarters ended March 31, 1999 and 1998, respectively. During the quarter
ended March 31, 1999, the Company used cash flows from operations and existing
cash and cash equivalents to fund 1) capital expenditures of $9.6 million
pertaining to ongoing plant construction projects, 2) dividends of $4.0 million,
and 3) principal payments of $536 thousand to retire long-term debt.
The Company's most significant use of funds for the balance of 1999 is expected
to be for 1) remaining budgeted capital expenditures of approximately $27.3
million and $16.7 million relating to Roseville Telephone and RCS Wireless,
respectively, 2) remaining scheduled payments of long-term debt of $1.6 million
3) anticipated cash dividends of $11.9 million and 4) start-up costs and net
operating expenditures of up to $7.6 million relating to RCS Wireless.
In addition to net cash provided by operations and existing cash, cash
equivalents and short-term investments, the Company may consider other sources
of external financing for the purposes of funding future capital expenditures
and potential investments.
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 hardware and 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 software modifications and
conversions to software the Year 2000 issue will not pose significant
operational problems for its computer systems. 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 Company has initiated a formal plan to address the Year 2000
issue in order to mitigate the impact to the Company's operations and its
customers. The Year 2000 Project (the "Project") consists of four phases:
inventory, evaluation, planning and implementation. The scope of the Project
includes information technology (IT) systems, such as the Company's financial
and administrative systems, as well as its operating asset systems, the most
significant of which is the Company's communications network systems. In
addition to addressing the IT and operating asset systems, the Company is also
querying its significant vendors and suppliers to ensure that they are Year 2000
compliant.
The inventory phase consists of identifying all systems potentially affected by
the Year 2000 including any related hardware, software, firmware, special stand-
alone equipment, outside vendor systems, and business partners' systems. This
phase is substantially complete.
The second phase is the evaluation process whereby each of the Company's systems
is evaluated to determine Year 2000 compliance. This phase includes discussions
with vendors and manufacturers, obtaining compliance certification from
suppliers, testing systems and reviewing programming code. The initial
evaluation phase is substantially complete.
The planning phase involves developing cost estimates and timetables for
completion for the identified hardware and software modifications and
replacements. The planning phase also consists of determining the appropriate
allocations of internal and external resources to ensure the Company minimizes
the financial impact to its operations. The initial planning phase is
substantially complete.
The implementation phase is the final process and involves modifying programming
code, upgrading computer software and upgrading or replacing computer hardware
and certain operating asset systems. Once remediation efforts are complete,
extensive testing and verification procedures are performed to ensure that
changes to the hardware, software, and operating asset systems are working
properly. The implementation phase is approximately 70% complete and the
Company expects this final phase to be substantially complete by June 30, 1999.
In addition to the four phases discussed above, the Company is also in the
process of developing a contingency plan for various critical systems. This
contingency plan includes utilizing existing disaster plans, adjusting staffing
and resource requirements, developing alternative manual solutions and ongoing
assessment, planning and implementation activities through 1999 in order to
ensure Year 2000 readiness.
The Company estimates it will incur up to $1.3 million in costs to modify and
convert its systems, of which approximately $915 thousand has been spent as of
March 31, 1999. As the implementation phase is expected to utilize the majority
of the planned expenditures, there is no strict correlation between expenditures
and project completion.
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 guaranty 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,
1998 was between $8.0 million and $15.0 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 1993, the P.U.C. opened an investigation and rulemaking proceeding 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 the
Public Utilities Code. These proceedings continue through the present and 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 markets to
competition and aggressively streamline regulation to accelerate the pace of
innovation in the telecommunications marketplace. In conjunction with these
proceedings, the P.U.C. issued an order in January 1995 to consider the goals
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. In 1995, the P.U.C.
issued an order to develop and adopt rules for local exchange competition.
Roseville Telephone anticipates that additional proceedings and negotiations
will be held to refine further the rules for local service competition in its
territory, the effects of which on Roseville Telephone cannot yet be determined.
In connection with Roseville Telephone's rate case decision described in Part 1,
Item 2, the P.U.C. issued a decision in April 1999 modifying the rate case
decision by increasing rates to correct certain legal and factual errors
contained in the rate case decision. Due to its recent adoption, it is not yet
possible to fully determine the impact of this rate increase on Roseville
Telephone's operations.
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 1991, the
F.C.C. has established an 11.25% rate of return for interstate access services.
However, in 1998 the F.C.C. released a notice initiating a prescription
proceeding and notice of proposed rulemaking to represcribe the authorized rate
of return for interstate access services provided by incumbent local exchange
carriers ("ILEC").
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. In 1996, the United States Court of Appeals for the Eighth Circuit
issued a stay pending appeal of portions of the F.C.C. orders. In 1997, 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, in
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. In early 1999, the United States Supreme Court reversed
the Eighth Circuit's determinations that the F.C.C. lacked authority to
implement the Act by adopting local pricing standards or to bar incumbent local
exchange carriers from separating already-combined unbundled network elements
("UNEs") before offering them to competitors. The Supreme Court also reinstated
the agency's "pick-and-choose" rules. However, the Supreme Court invalidated
the F.C.C.'s original list of UNEs, saying the F.C.C. had failed to make sure
that those elements were necessary for competitors to offer service.
Given the Act's relatively recent enactment, the Eighth Circuit's decision
vacating portions of the F.C.C.'s interconnection orders, the Supreme Court's
order reversing much of the Eighth Circuit's decision on interconnection
pricing, the recent actions taken by the F.C.C. to promulgate rules and
regulations on access charge and universal service reform, and the various on-
going legal challenges considering the validity of these 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.
In 1997, the F.C.C. adopted orders on access charge reform and a new universal
service program. The F.C.C.'s order on access charge reform generally removed
from rates 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 order on universal
service reformed the existing system of universal service in a manner that will
permit local telephone markets to move to a competitive arena. The order on
universal service 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.
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.
Commencing in July 1998, there have been a series of communications between the
partners of SVLP regarding the ownership and operation of PCS licenses in
territories served by SVLP and the allegation by its general partner, AirTouch
Cellular ("AirTouch"), that such ownership and operation would cause a partner
of SVLP to be in violation of the terms of SVLP's Agreement Establishing Limited
Partnership, as amended ("Partnership Agreement"). In addition to the Company's
ownership of PCS licenses, an affiliate of AirTouch and one other limited
partner also own such licenses.
Representatives of the Company and AirTouch have engaged in discussions
regarding a solution to the dispute by the execution of an amendment to the
Partnership Agreement redefining certain of the partners' rights under the
Partnership Agreement. In furtherance thereof, AirTouch and the Company
prepared and distributed drafts of such an amendment, which were not accepted by
the other party.
Unable to reach an agreement with AirTouch, on March 26, 1999, the Company filed
an action against AirTouch in the United States District Court for the Eastern
District of California requesting declaratory relief, injunctive relief and
damages for violation of the Sherman Act, the California Cartwright Act, breach
of contract, breach of fiduciary duty, intentional and negligent interference
with economic advantage and violation of California's unfair competition act.
AirTouch has not yet answered the complaint, but instead filed a request for a
thirty day extension to file the same, which was opposed by the Company in view
of prior discussions among the parties.
The parties to the litigation have continued to explore the possibility of a
negotiated amendment to the Partnership Agreement, which would be acceptable to
the Company if it were protective of the Company's rights as a partner of SVLP.
Absent a satisfactory resolution of the dispute, the Company intends to
vigorously pursue its litigation alternatives. The Company strongly disagrees
with the position asserted by AirTouch and does not believes that these
proceedings have impaired the recoverability of its $37.3 million investment in
SVLP of $37.3 million as of March 31, 1999 is not impaired.
Item 6. Exhibits and Reports on Form 8-K.
a) None.
b) No reports on Form 8-K were filed during the first quarter of 1999.
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: May 7, 1999 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: May 7, 1999 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: May 7, 1999 By: ___________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: May 7, 1999 By: ___________________________
Michael D. Campbell,
Executive Vice-President
and Chief Financial Officer
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