17
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, 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
-----------------------------------------------------
(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 October 31, 1999, 15,827,821 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 Quarter Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Operating revenues:
Local service $17,362 $15,876 $ 51,216 $46,511
Network access service 10,562 10,225 32,405 28,917
------- ------- -------- -------
Total rate regulated
revenues 27,924 26,101 83,621 75,428
Directory advertising 2,990 2,991 9,501 8,959
Nonregulated sales and
service 1,699 1,891 4,854 4,823
Other 2,745 1,809 7,362 5,169
------- ------- -------- -------
Total operating revenues 35,358 32,792 105,338 94,379
Operating expenses:
Cost of services and products 9,682 8,794 27,411 25,443
Customer operations and selling 4,323 3,954 12,542 11,412
General and administrative 5,963 4,934 15,018 14,825
Depreciation 5,956 5,229 16,106 15,509
------- ------- -------- -------
Total operating expenses 25,924 22,911 71,077 67,189
------- ------- -------- -------
Income from operations 9,434 9,881 34,261 27,190
Other income (expense):
Interest income 431 305 1,429 938
Interest expense (848) (487) (2,399) (1,527)
Equity in earnings of cellular
partnership 3,181 2,652 7,489 7,616
Other, net 553 214 1,541 405
------- ------- -------- -------
Total other income, net 3,317 2,684 8,060 7,432
------- ------- -------- -------
Income before income taxes 12,751 12,565 42,321 34,622
Income taxes 5,156 5,070 17,132 13,955
------- ------- -------- -------
Net income $ 7,595 $ 7,495 $ 25,189 $20,667
======= ======= ======== =======
Basic and diluted earnings
per share (1) $ .48 $ .47 $1.59 $1.31
===== ===== ===== =====
Cash dividends per share (2) $ .25 $ .20 $ .75 $ .60
===== ===== ===== =====
Shares of common stock used
to calculate earnings
per share (1) 15,828 15,815 15,820 15,815
====== ====== ====== ======
(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.
Shares used in the computation of diluted earnings per share are not
significantly different than the number of shares used in the computation of
basic earnings per share.
(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)
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 28,273 $ 38,840
Short-term investments 4,450 4,242
Accounts receivable, net 19,063 16,851
Refundable income taxes - 969
Inventories 2,193 1,828
Deferred income tax asset 1,240 1,240
Prepaid expenses and other current assets 413 107
-------- --------
Total current assets 55,632 64,077
Property, plant and equipment, net 227,866 202,137
Investments and other assets:
Cellular partnership 39,115 35,875
PCS licenses, net 8,850 9,000
Deferred charges and other assets 3,433 4,788
-------- --------
51,398 49,663
-------- --------
$334,896 $315,877
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,143 $ 2,143
Accounts payable and accrued liabilities 12,000 9,506
Payables to telecommunications entities 6,627 5,790
Advance billings and customer deposits 2,400 1,926
Accrued pension cost 5,025 3,111
Accrued compensation 4,894 3,618
-------- --------
Total current liabilities 33,089 26,094
Long-term debt 46,964 48,571
Deferred credits and other liabilities 28,480 28,406
Minority interest in subsidiary 1,367 1,517
Shareholders' equity:
Common Stock, without par value;
100,000 shares authorized,
15,828 and 15,815 shares issued and
outstanding at September 30, 1999 and
December 31, 1998, respectively 189,554 189,171
Retained earnings 35,442 22,118
-------- --------
Total shareholders' equity 224,996 211,289
-------- --------
$334,896 $315,877
======== ========
see accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(amounts in thousands)
Nine Months Nine Months
Ended Ended
Sept 30, Sept 30,
1999 1998
--------- ---------
Net cash provided by operating activities $40,407 $29,123
Cash flows from investing activities:
Capital expenditures for property, plant and equipment (41,685) (17,325)
Purchases of held-to-maturity investments (6,008) (5,755)
Maturities of held-to-maturity investments 5,800 5,500
Investment in cellular partnership - (701)
Return of investment in cellular partnership 4,249 3,694
Return of refundable deposit - 1,620
Changes in deferred charges and other assets 142 455
------- -------
Net cash used in investing activities (37,502) (12,512)
Cash flows from financing activities:
Principal payments of long-term debt (1,607) (4,287)
Dividends paid (11,865) (9,489)
------- -------
Net cash used in financing activities (13,472) (13,776)
------- -------
Increase (decrease) in cash and cash equivalents (10,567) 2,835
Cash and cash equivalents at beginning of period 38,840 15,360
------- -------
Cash and cash equivalents at end of period $28,273 $18,195
======= =======
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"),
Roseville Long Distance Company ("Roseville Long Distance") and RCS
Internet Services ("RCS Internet") are each wholly owned subsidiaries of
the Company. Roseville PCS, Inc. is the manager of and has an approximate
96.1% interest in West Coast PCS LLC (d.b.a. "RCS Wireless"), which was
formed for the purpose of providing wireless 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 quarter and nine
month periods ended September 30, 1999 and 1998 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,
1999 1998 1999 1998
--------- ----------- ----------- -----------
Net revenues $51,787 $43,225 $144,561 $125,134
Costs and
expenses 38,172 31,927 112,591 92,687
------- ------- -------- --------
Net Income $13,615 $11,298 $ 31,970 $ 32,447
======= ======= ======== ========
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 of SVLP also own such licenses.
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 answered the complaint, and filed counterclaims against the
Company for breach of contract, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing, fraud and deceit, negligent
misrepresentation, misappropriation of trade secrets, violation of the
California Business and Professions Code, declaratory relief and contract
reformation. In addition, AirTouch also sought to compel arbitration to
resolve the dispute.
The Company and AirTouch have reached an agreement on the form of an
amendment to the Partnership Agreement which would resolve the dispute,
including the dismissal of the litigation, and permit the Company to
continue to provide PCS subject to the restriction on the provision of
certain SVLP information to the Company. The agreement, in its current
form, will not impact the Company's financial operations. The Partnership
Agreement by its terms requires any amendment to be approved by the other
limited partners, who are now reviewing the form thereof. The litigation
is currently in abeyance, but even if the dispute were not resolved, the
Company does not believe that these proceedings have impaired the
recoverability of its $39.1 million investment in SVLP.
3. New Accounting Pronouncement
----------------------------
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,
which the Company was required to adopt in 1999, requires the
capitalization of certain costs incurred in connection with developing or
obtaining internal use software. Prior to adoption of SOP 98-1, the
Company expensed all internal use software related costs as incurred. The
effect of adopting SOP 98-1 was to increase net income $1.9 million for the
nine months ended September 30, 1999.
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 other 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 96.1% 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 wireless 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's wholly-
owned subsidiary, RCS Internet Services ("RCS Internet"), is engaged in the
provision of high speed internet 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 and network
access service generated by Roseville Telephone, constitute approximately 79%
and 80% of the Company's total operating revenues for the quarters and nine
month periods ended September 30, 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.
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 nine month periods ended September 30, 1999 and 1998, approximately
12% and 13%, respectively, were recorded under the Pacific Bell Agreements.
In March 1999, Pacific Bell ("Pacific") expressed interest in withdrawing from
the designated carrier plan ("DCP") for Roseville Telephone's toll traffic and
to enter into a new, permanent compensation arrangement for extended area
service ("EAS"). The DCP is a compensation arrangement between Roseville and
Pacific for certain intraLATA toll services. Pacific also pays Roseville $11.5
million per year for EAS pursuant to a Settlement Transition Agreement. Pacific
and Roseville Telephone have begun to negotiate the terms of possible
modifications to these agreements. In addition, Roseville Telephone has filed
an application with the P.U.C. for revenues to replace potential changes in
Pacific's payments. Roseville Telephone anticipates that additional proceedings
and negotiations will be held to address these issues, the effects of which on
Roseville Telephone cannot yet be determined.
In December 1996, the P.U.C. issued a decision in connection with Roseville
Telephone's general rate proceeding which 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 the 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. 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 certain 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 identified legal and factual
errors with the rate case decision. In April 1999, the P.U.C. issued a decision
modifying the rate case decision by increasing the Company's rates to correct
certain legal and factual errors. This decision resulted in a positive
adjustment for the nine month period ended September 30, 1999 as described
below and an increase to operating revenues of $328 thousand annually.
In accordance with the requirements of its general rate case order, Roseville
Telephone filed an application for review of its New Regulatory Framework
("NRF") on March 8, 1999. The proceeding will consider modifications to the NRF
structure, including potential changes to the current monitoring and reporting
requirements, the earnings sharing mechanism, promotional and pricing
flexibility, and related matters. A decision in this proceeding is anticipated
in mid-2000, the effects of which on Roseville Telephone cannot yet be
determined. In addition, the P.U.C. Office of Ratepayer Advocates ("ORA") has
undertaken a verification audit of Roseville Telephone's non-regulated and
affiliated transactions pursuant to the general rate case and other P.U.C.
orders. At the completion of the audit, ORA may submit recommendations for
further proceedings to the P.U.C. based on its findings.
Rate regulated revenues increased $1.8 million and $8.2 million, or 7% and 11%,
for the quarter and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998 due to the combined effects of 1) access
line growth of 6%, 2) improved penetration in custom calling, voice mail and
national directory assistance 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, 4) a one-time positive adjustment
of $812 thousand to interstate access settlements relating to 1998, and 5) a
positive adjustment of $876 thousand retroactive to 1997 relating to the
modification to Roseville Telephone's general rate case decision.
Directory advertising revenues were unchanged and increased $542 thousand, or
6%, for the quarter and nine month periods ended September 30, 1999,
respectively, compared to the same periods in 1998. The year to date increase
is 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 $936 thousand and
$2.2 million for the quarter and nine month periods ended September 30, 1999,
respectively, due primarily to an increase in the market penetration of long
distance services and the introduction of PCS services in June 1999.
Operating Expenses:
Operating expenses increased $3.0 million and $3.9 million, or 13% and 6%, for
the quarter and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998. Cost of services and products increased
$888 thousand and $2.0 million for the quarter and nine month periods ended
September 30, 1999, respectively compared to the same periods in 1998 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 $369 thousand and $1.1 million
for the quarter and nine month periods ended September 30, 1999 compared to the
same periods in 1998 due primarily 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. These increases were
partially offset by the adoption of SOP 98-1 as discussed more fully below.
General and administrative costs increased $1.0 million and $193 thousand for
the quarter and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998 due primarily to increased labor costs.
These increases were partially offset by the adoption of SOP 98-1 as discussed
more fully below.
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, which the
Company was required to adopt in 1999, requires the capitalization of certain
costs incurred in connection with developing or obtaining internal use software.
Prior to adoption of SOP 98-1, the Company expensed all internal use software
related costs as incurred. The effect of adopting SOP 98-1 was to increase net
income $1.9 million for the nine months ended September 30, 1999.
Income from Operations:
Income from operations decreased $447 thousand, or 5%, for the quarter ended
September 30, 1999 and increased $7.1 million, or 26%, for the nine month period
ended September 30, 1999 compared to the same periods in 1998. The quarterly
decrease in income from operations is due primarily to start-up costs associated
with the introduction of new products and services during the quarter ended
September 30, 1999. The year-to-date increase in income from operations is due
to revenue growth, cost savings resulting from operational and financial
efficiencies gained from the company's diversification and cost-containment
strategies and the effects of adopting SOP 98-1 as discussed above.
Other Income, Net:
Other income, net, increased $633 thousand and $628 thousand for the quarter and
nine month periods ended September 30, 1999, respectively, compared to the same
periods in 1998. Interest income increased $126 thousand and $491 thousand for
the quarter and nine month periods ended September 30, 1999, respectively,
compared to the same periods in 1998 as a result of larger average invested
balances. The Company's income attributable to its interest in SVLP for the
nine month period ended September 30, 1999 decreased $127 thousand compared to
the same period in 1998. For the quarter ended September 30, 1999 income from
the Company's investment in SVLP increased $529 thousand over the same period in
1998. Interest expense increased $361 thousand and $872 thousand for the
quarter and nine month periods ended September 30, 1999, respectively, compared
to the same periods in 1998 as a result of an increase in the Company's long-
term debt balances which was offset by an increase in interest costs capitalized
during construction resulting from the PCS network construction activities.
Income Taxes:
Income taxes increased $86 thousand and $3.2 million for the quarter and nine
month periods ended September 30, 1999, respectively, compared to the same
periods in 1998, due to the corresponding changes in income before income taxes.
The effective federal and state income tax rate was approximately 40.5% and
40.3% for the nine month periods ended September 30, 1999 and 1998,
respectively.
Liquidity and Capital Resources
- - -------------------------------
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities was $40.4 million and $29.1 million for the
nine month periods ended September 30, 1999 and 1998, respectively. During the
nine month period ended September 30, 1999 the Company used cash flows from
operations and existing cash and cash equivalents to fund 1) capital
expenditures of $41.7 million for ongoing plant construction projects, 2)
dividends of $11.9 million, and 3) principal payments of $1.6 million 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 $9.9
million and $7.3 million relating to Roseville Telephone and RCS Wireless,
respectively, 2) remaining scheduled payments to retire long-term debt of $536
thousand 3) anticipated cash dividends of $4.0 million and 4) net operating
expenditures of up to $4.5 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 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 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 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 planning phase is 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 substantially complete.
In addition to the four phases discussed above, the Company has developed 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 has incurred approximately $1.1 million in costs to modify and
convert its systems through September 30, 1999.
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.
Item 3. Qualitative and Quantitative Disclosures About Market Risk.
The Company is subject to market risk associated with interest rate movements.
However, the Company's market risk disclosure pursuant to item 7A is not
material and therefore not required.
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 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 1993, the P.U.C. also 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 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. This decision resulted in a positive
adjustment for the nine months ended September 30, 1999 of $876 thousand
retroactive to 1997 and an increase to operating revenue of $328 thousand
annually.
In accordance with the requirements of its general rate case order, Roseville
Telephone filed an application for review of its New Regulatory Framework
("NRF") on March 8, 1999. The proceeding will consider modifications to the NRF
structure, including potential changes to the current monitoring and reporting
requirements, the earnings sharing mechanism, promotional and pricing
flexibility, and related matters. A decision in this proceeding is anticipated
in mid-2000, the effects of which on Roseville Telephone cannot yet be
determined. In addition, the P.U.C. Office of Ratepayer Advocates ("ORA") has
undertaken a verification audit of Roseville Telephone's non-regulated and
affiliated transactions pursuant to the general rate case and other P.U.C.
orders. At the completion of the audit, ORA may submit recommendations for
further proceedings to the P.U.C. based on its findings.
In March 1999, Pacific Bell ("Pacific") expressed interest in withdrawing from
the designated carrier plan ("DCP") for Roseville Telephone's toll traffic and
to enter into a new, permanent compensation arrangement for extended area
service ("EAS"). The DCP is a compensation arrangement between Roseville and
Pacific for certain intraLATA toll services. Pacific also pays Roseville $11.5
million per year for EAS pursuant to a Settlement Transition Agreement. Pacific
and Roseville Telephone have begun to negotiate the terms of possible
modifications to these agreements. In addition, Roseville Telephone has filed
an application with the P.U.C. for revenues to replace potential changes in
Pacific's payments to Roseville Telephone. Roseville Telephone anticipates that
additional proceedings and negotiations will be held to address these issues,
the effects of which on Roseville Telephone cannot yet be determined.
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 1997, the United States Court of Appeals for the Eighth Circuit
found that the F.C.C. exceeded its jurisdiction in connection with some of its
orders implementing the Act. 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. The F.C.C.
has opened a proceeding to review this issue in light of the Supreme Court's
order, and on September 15, 1999, adopted an order identifying UNEs that ILECs
must make available to competitors.
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 a
funding program to connect eligible schools, libraries and rural health care
providers to the global telecommunications network. On July 30, 1999, the
United States Court of Appeals for the Fifth Circuit issued an opinion
addressing challenges to the F.C.C.'s universal service order. The Court upheld
the F.C.C.'s authority to implement its program for funding telecommunications
services for schools and libraries and rejected challenges on technical issues
such as the F.C.C.'s use of models in determining universal service. The Court
ruled, however, that the F.C.C. can't use intrastate revenues in determining a
carriers' universal service contribution and rejected the so-called flowback
method of collecting universal service contributions through access charges. To
implement the Fifth Circuit's decision, the F.C.C. adopted an order on October
8, 1999 making revisions to its rules, effective on November 1, 1999, requiring,
among other things, that incumbent LECs recover their universal service
contributions either through interstate access charges or interstate end-user
charges based on interstate and international end-user telecommunications
revenues only. On October 21, 1999, the Commission adopted two orders in
connection with universal service reform. In the first order, the F.C.C
completed development of the cost model to be used as a basis for federal
universal service support. In the second order, the F.C.C. adopted a
methodology based on the results of the cost model to calculate the level of
support for non-rural carriers serving high-cost areas. In addition, the F.C.C.
held that the amount of support provided to carriers on a per-line basis by the
forward-looking mechanism will be no less than the amount of support provided to
the carrier by the present mechanism but that federal universal service support
will be portable among all eligible telecommunications carriers. If a
competitor acquires a subscriber line from an incumbent receiving support, the
competitor will receive the incumbent's federal universal service support for
that line.
Given the Act's relatively recent enactment and the ongoing actions of the
F.C.C. to implement the Act, and the various ongoing 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.
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 of SVLP also own such licenses.
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 answered the
complaint, and filed counterclaims against the Company for breach of contract,
breach of fiduciary duty, breach of the covenant of good faith and fair dealing,
fraud and deceit, negligent misrepresentation, misappropriation of trade
secrets, violation of the California Business and Professions Code, declaratory
relief and contract reformation. In addition, AirTouch also sought to compel
arbitration to resolve the dispute.
The Company and AirTouch have reached an agreement on the form of an amendment
to the Partnership Agreement which would resolve the dispute, including the
dismissal of the litigation, and permit the Company to continue to provide PCS
subject to the restriction on the provision of certain SVLP information to the
Company. The Partnership Agreement by its terms requires any amendment to be
approved by the other limited partners, who are now reviewing the form thereof.
The litigation is currently in abeyance, but even if the dispute were not
resolved, the Company does not believe that these proceedings have impaired the
recoverability of its $39.1 million investment in SVLP.
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 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: November 1, 1999 By: /s/BRIAN H. STROM
---------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: November 1, 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: November 1, 1999 By: --------------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: November 1, 1999 By: ---------------------------
Michael D. Campbell,
Executive Vice-President
and Chief Financial Officer
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