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, 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 July 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 Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Operating revenues:
Local service $17,346 $15,487 $33,854 $30,635
Network access service 10,679 9,054 21,843 18,692
------- ------- ------- -------
Total rate regulated
revenues 28,025 24,541 55,697 49,327
Directory advertising 3,230 2,997 6,511 5,968
Nonregulated sales and
service 1,487 1,524 3,155 2,932
Other 2,258 1,524 4,617 3,360
------- ------- ------- -------
Total operating revenues 35,000 30,586 69,980 61,587
Operating expenses:
Cost of services and
products 8,807 8,218 17,729 16,649
Customer operations and
selling 4,078 3,925 8,219 7,458
General and administrative 3,946 5,064 9,055 9,891
Depreciation 5,236 5,172 10,150 10,280
------- ------- ------- -------
Total operating expenses 22,067 22,379 45,153 44,278
------- ------- ------- -------
Income from operations 12,933 8,207 24,827 17,309
Other income (expense):
Interest income 486 335 998 633
Interest expense (749) (509) (1,551) (1,040)
Equity in earnings of
cellular partnership 2,484 2,770 4,308 4,964
Other, net 548 122 988 191
------- ------- ------- -------
Total other income, net 2,769 2,718 4,743 4,748
------- ------- ------- -------
Income before income taxes 15,702 10,925 29,570 22,057
Income taxes 6,362 4,399 11,976 8,885
------- ------- ------- -------
Net income $ 9,340 $ 6,526 $17,594 $13,172
======= ======= ======= =======
Basic and diluted earnings
per share (1) $ .59 $ .41 $ 1.11 $ .83
===== ===== ===== =====
Cash dividends per share (2) $ .25 $ .20 $ .50 $ .40
===== ===== ===== =====
Shares of common stock used
to calculate earnings per share 15,816 15,815 15,816 15,815
====== ====== ====== ======
(1) Shares used in the computation of basic earnings 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 amount 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)
June 30, 1999 December 31, 1998
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 32,062 $ 38,840
Short-term investments 3,531 4,242
Accounts receivable, net 18,022 16,851
Refundable income taxes - 969
Inventories 2,098 1,828
Deferred income tax asset 1,240 1,240
Prepaid expenses and other current
assets 426 107
-------- --------
Total current assets 57,379 64,077
Property, plant and equipment, net 220,581 202,137
Investments and other assets:
Cellular partnership 37,958 35,875
PCS licenses 9,000 9,000
Deferred charges and other assets 3,692 4,788
-------- --------
50,650 49,663
-------- --------
$328,610 $315,877
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,143 $ 2,143
Accounts payable and accrued
liabilities 9,195 9,506
Payables to telecommunications
entities 6,501 5,790
Advance billings and customer deposits 2,593 1,926
Accrued pension cost 4,251 3,111
Accrued compensation 5,113 3,618
-------- --------
Total current liabilities 29,796 26,094
Long-term debt 47,500 48,571
Deferred credits and other liabilities 28,505 28,406
Minority interest in subsidiary 1,451 1,517
Shareholders' equity:
Common Stock, without par value;
100,000 shares authorized,
15,828 and 15,815 shares issued and
outstanding at June 30, 1999 and
December 31, 1998 189,554 189,171
Retained earnings 31,804 22,118
-------- --------
Total shareholders' equity 221,358 211,289
-------- --------
$328,610 $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)
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
-------------- -------------
Net cash provided by operating activities $27,764 $21,609
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment (28,594) (10,839)
Purchases of held-to-maturity investments (2,289) (3,240)
Maturities of held-to-maturity investments 3,000 4,000
Investment in cellular partnership - (701)
Return of investment in cellular partnership 2,225 1,873
Return of refundable deposit - 1,620
Changes in deferred charges and other
assets 95 108
------- -------
Net cash used in investing activities (25,563) (7,179)
Cash flows from financing activities:
Principal payments of long-term debt (1,071) (2,858)
Dividends paid (7,908) (6,326)
------- -------
Net cash used in financing activities (8,979) (9,184)
------- -------
Increase (decrease) in cash and cash
equivalents (6,778) 5,246
Cash and cash equivalents at beginning of
period 38,840 15,360
------- -------
Cash and cash equivalents at end of
period $32,062 $20,606
======= =======
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 95.1% 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 quarter and
six month periods ended June 30, 1999 and 1998 for SVLP is as follows
(in thousands):
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30,1999 June 30,1998 June 30,1999 June 30,1998
------------ ------------ ------------ ------------
Net revenues $51,498 $42,741 $92,774 $81,909
Costs and
expenses 40,912 30,937 74,419 60,760
------- ------- ------- -------
Net Income $10,586 $11,804 $18,355 $21,149
======= ======= ======= =======
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.
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 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 now seeks to compel arbitration to resolve the
dispute.
The parties to the litigation have continued to explore the possibility
of a resolution under 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 $38 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 $1.1 million
for the six months ended June 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 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 95.1% 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 and
network access service generated by Roseville Telephone, constitute
approximately 80% of the Company's total operating revenues for the quarters
and six month periods ended June 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. 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"). Of the Company's total
revenues for the quarters ended June 30, 1999 and 1998, 11% and 14%,
respectively, were recorded under the Pacific Bell Agreements. Approximately
12% and 14% of the Company's total revenues were recorded under the Pacific
Bell Agreements during the six month periods ended June 30, 1999 and 1998,
respectively.
In March 1999, Pacific Bell ("Pacific") expressed interest to Roseville
Telephone 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 and, if the negotiations are successful, will seek approval
from the P.U.C. of the modifications and replacement revenues for 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.
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 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 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. This decision
resulted in the one-time positive adjustment during the quarter ended June
30, 1999 as described below and an ongoing effect of increasing revenue $328
thousand annually.
Rate regulated revenues increased $3.5 million and $6.4 million, or 14% and
13%, for the quarter and six month periods ended June 30, 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, 4) a one-time positive adjustment of $812
thousand to interstate access settlements relating to 1998, and 5) a one-time
positive adjustment of $739 thousand retroactive to 1997 relating to the
modification to Roseville Telephone's general rate case decision.
Directory advertising revenues increased $233 thousand and $543 thousand, or
8% and 9%, for the quarter and six month periods ended June 30, 1999 compared
to the same periods in 1998 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 $734 thousand and $1.3 million for the quarter and six
month periods ended June 30, 1999 due primarily to an increase in the market
penetration of long distance services.
Operating Expenses:
Operating expenses decreased $312 thousand or 1.4% for the quarter ended June
30, 1999 compared to the same period in 1998. For the six months ended June
30, 1999 operating expenses increased $875 thousand or 2% compared to the
same period in 1998. Cost of services and products increased $589 thousand
and $1.1 million for the quarter and six month periods ended June 30, 1999
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 $153 thousand and $761
thousand for the quarter and six month periods ended June 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 more
fully discussed below.
General and administrative costs decreased $1.1 million and $836 thousand for
the quarter and six month periods ended June 30, 1999 compared to the same
periods in 1998 due primarily to the adoption of SOP 98-1 as more fully
discussed below. This decrease was partially offset by expenses relating to
increased labor and benefits.
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 $1.1 million for the six months ended June 30, 1999.
Other Income, Net:
Other income, net, increased $51 thousand and decreased $5 thousand for the
quarter and six month periods ended June 30, 1999 compared to the same
periods in 1998. The Company's income attributable to its interest in SVLP
for the quarter and six month periods ended June 30, 1999 decreased $286
thousand and $656 thousand compared to the same periods in 1998 which was
offset by an increase in interest costs capitalized during construction
resulting from the PCS network construction activities. Interest expense
increased $240 thousand and $511 thousand for the quarter and six month
periods ended June 30, 1999 compared to the same periods in 1998 as a result
of an increase in the Company's long-term debt balances.
Income Taxes:
Income taxes for the quarter and six month period ended June 30, 1999
increased $2 million and $3.1 million compared to the same periods 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 June 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 $27.4 million and $21.6 million for the
six month period ended June 30, 1999 and 1998, respectively. During the six
month period ended June 30, 1999 the Company used cash flows from operations
and existing cash and cash equivalents to fund 1) capital expenditures of
$28.6 million pertaining to ongoing plant construction projects, 2) dividends
of $7.9 million, and 3) principal payments of $1.1 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 $18.0 million and $10.0 million relating to Roseville Telephone
and RCS Wireless, respectively, 2) remaining scheduled payments to retire
long-term debt of $1.1 million 3) anticipated cash dividends of $7.9 million
and 4) net operating expenditures of up to $6.6 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
substantially complete.
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 incurred approximately $1.1 million in costs to modify and
convert its systems as of June 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 one-time
positive adjustment during the quarter ended June 30, 1999 of $739 thousand
retroactive to 1997 and an ongoing annual effect of increasing revenue $328
thousand annually.
In March 1999, Pacific Bell ("Pacific") expressed interest to Roseville
Telephone 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 and, if the negotiations are successful, will seek approval
from the P.U.C. of the modifications and replacement revenues for 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.
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 or international revenues in determining a carriers'
universal service contribution and rejected the so-called flowback method of
collecting universal service contributions through access charges.
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.
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 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 now seeks to compel
arbitration to resolve the dispute.
The parties to the litigation have continued to explore the possibility of a
resolution under 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 $38 million
investment in SVLP.
Item 4. Submission of Matters to a Vote of Security Holders
On June 18, 1999, the Company held its regularly scheduled Annual Meeting of
Shareholders, at which the shareholders:
(1) Elected a Board of seven (7) Directors; and
(2) Considered and acted upon a proposal to approve the Roseville
Communications Company 1999 Restricted Stock Bonus Plan (the "Plan")
described in the proxy solicitation materials prepared pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
The seven nominees to serve as directors, which constituted the existing
Board of Directors, were all reelected to serve as directors, by the
following votes (out of 15,815,230).
Broker
Non-Votes
Votes Votes Votes and
Director For Against Withheld Abstentions
-------- ---------- ------- -------- -----------
Robert L. Doyle 14,793,115 152,945 N/A N/A
Thomas E. Doyle 14,788,148 158,292 N/A N/A
Brian H. Strom 14,770,622 175,677 N/A N/A
Ralph A. Hoeper 14,741,286 169,154 N/A N/A
John R. Roberts III 14,763,186 182,007 N/A N/A
Chris L. Branscum 14,719,004 231,137 N/A N/A
Neil J. Doerhoff 14,719,204 225,989 N/A N/A
The proposal to approve the creation of the Plan was approved by the
following vote:
For Against/Withheld Abstentions Broker Non-Votes
---------- ---------------- ----------- ----------------
13,426,625 924,887 297,684 N/A
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 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: August 9, 1999 By: /s/BRIAN H. STROM
--------------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: August 9, 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: August 9, 1999 By: ___________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: August 9, 1999 By: ___________________________
Michael D. Campbell,
Executive Vice-President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 220,581
<OTHER-PROPERTY-AND-INVEST> 46,958
<TOTAL-CURRENT-ASSETS> 57,379
<TOTAL-DEFERRED-CHARGES> 3,692
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 328,610
<COMMON> 189,554
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 31,804
<TOTAL-COMMON-STOCKHOLDERS-EQ> 221,358
0
0
<LONG-TERM-DEBT-NET> 47,500
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,143
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 57,609
<TOT-CAPITALIZATION-AND-LIAB> 328,610
<GROSS-OPERATING-REVENUE> 69,980
<INCOME-TAX-EXPENSE> 11,976
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 36,098
<OPERATING-INCOME-LOSS> 24,827
<OTHER-INCOME-NET> 4743
<INCOME-BEFORE-INTEREST-EXPEN> 31,121
<TOTAL-INTEREST-EXPENSE> 1,551
<NET-INCOME> 17,594
0
<EARNINGS-AVAILABLE-FOR-COMM> 17,594
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 27,764
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.11
</TABLE>
