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, 2000
[ ] 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 June 30, 2000, 15,563,794 shares of the registrant's Common Stock were
outstanding.
<PAGE>
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,
2000 1999 2000 1999
-------- ------- ------- -------
Operating revenues:
Local service $17,284 $17,346 $34,741 $33,854
Network access service 12,194 10,679 23,922 21,843
------- ------- ------- -------
Total rate regulated revenues 29,478 28,025 58,663 55,697
Directory advertising 3,278 3,230 6,644 6,511
Nonregulated sales and service 1,682 1,487 3,524 3,155
Other 2,832 2,258 5,436 4,617
------- ------- ------- -------
Total operating revenues 37,270 35,000 74,267 69,980
Operating expenses:
Cost of services and products 11,075 8,807 22,253 17,729
Customer operations and
selling 5,128 4,078 10,076 8,219
General and administrative 4,600 3,946 9,262 9,055
Depreciation and amortization 6,845 5,236 13,590 10,150
------- ------- ------- -------
Total operating expenses 27,648 22,067 55,181 45,153
------- ------- ------- -------
Income from operations 9,622 12,933 19,086 24,827
Other income (expense):
Interest income 190 486 383 998
Interest expense (976) (749) (1,753) (1,551)
Equity in earnings of cellular
partnership 3,139 2,484 6,891 4,308
Other, net 553 548 953 988
------- ------- ------- -------
Total other income, net 2,906 2,769 6,474 4,743
------- ------- ------- -------
Income before income taxes 12,528 15,702 25,560 29,570
Income taxes 5,030 6,362 10,292 11,976
------- ------- ------- -------
Net income $ 7,498 $ 9,340 $ 15,268 $17,594
======= ======= ======= =======
Basic and diluted earnings
per share (1) $ .48 $ .59 $ .97 $ 1.11
===== ===== ===== =====
Cash dividends per share (2) $ .25 $ .25 $ .50 $ .50
===== ===== ===== =====
Shares of common stock used to
calculate basic and 15,649 15,816 15,732 15,816
diluted
earnings per share ====== ====== ====== ======
(1) Shares used in the computation of basic earnings per share 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 are based on the actual dividends per share as
declared by the Company's Board of Directors.
See accompanying notes.
<PAGE>
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
June 30 December 31
2000 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 17,556 $ 10,886
Short-term investments 1,247 6,464
Accounts receivable, net 19,224 20,399
Refundable income taxes - 330
Inventories 4,160 2,510
Deferred income tax asset 1,625 1,625
Prepaid expenses and other current assets 1,189 251
-------- --------
Total current assets 45,001 42,465
Property, plant and equipment, net 258,761 238,908
Investments and other assets:
Cellular partnership 33,945 38,426
PCS licenses, at cost, net 8,513 8,737
Deferred charges and other assets 4,107 4,651
-------- --------
46,565 51,814
-------- --------
$350,327 $333,187
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 20,000 $ -
Current portion of long-term debt 2,143 2,143
Accounts payable and accrued liabilities 4,033 6,265
Payables to telecommunications entities 5,915 6,353
Advance billings and customer deposits 3,019 2,014
Accrued pension cost 7,335 5,128
Accrued compensation 4,523 4,253
-------- --------
Total current liabilities 46,968 26,156
Long-term debt 45,357 46,428
Deferred credits and other liabilities 32,295 31,747
Minority interest in subsidiary 1,346 1,256
Shareholders' equity:
Common stock, without par value;
100,000 shares authorized,
15,564 shares issued and
outstanding (15,828 shares in 1999) 182,886 189,554
Retained earnings 41,475 38,046
-------- --------
Total shareholders' equity 224,361 227,600
-------- --------
$350,327 $333,187
======== ========
See accompanying notes.
<PAGE>
ROSEVILLE COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(Amounts in thousands)
Six Six
Months Ended Months Ended
June 30, 2000 June 30, 1999
-------------- --------------
Net cash provided by operating activities $24,081 $27,764
Cash flows from investing activities:
Capital expenditures for property, plant
and equipment (33,219) (28,594)
Purchases of held-to-maturity investments (33) (2,289)
Maturities of held-to-maturity investments 5,250 3,000
Investment in cellular partnership (3,078) -
Return of investment in cellular
partnership 14,450 2,225
Refundable deposit (925) -
Changes in deferred charges and other
assets 96 95
------- -------
Net cash used in investing activities (17,459) (25,563)
Cash flows from financing activities:
Increase in short-term borrowings 20,000 -
Principal payments of long-term debt (1,071) (1,071)
Dividends paid (7,880) (7,908)
Repurchase of common stock (11,001) -
------- -------
Net cash provided by (used in)
financing
activities 48 (8,979)
------- -------
Increase (decrease) in cash and cash equivalents 6,670 (6,778)
Cash and cash equivalents at beginning of
period 10,886 38,840
------- -------
Cash and cash equivalents at end of
period $17,556 $32,062
======= =======
See accompanying notes.
<PAGE>
ROSEVILLE COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 1999 Annual Report to Shareholders.
The Company is a holding company with subsidiaries operating in the
communications services industry. The Company's wholly-owned principal
operating subsidiary is Roseville Telephone Company ("Roseville
Telephone"). Roseville Directory Company ("RCS Directories"), Roseville
Long Distance Company ("Roseville Long Distance"), RCS Internet
Services ("RCS Internet") and Roseville PCS, Inc. are also wholly-owned
subsidiaries of the Company. Roseville PCS, Inc. is the manager of and
has an approximate 97.6% 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 periods 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 ("SFAS")
No. 71, "Accounting for the Effects of Certain Types of Regulation",
which requires companies meeting its 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 California Public
Utilities Commission's ("P.U.C.") 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, non-cash charge would result. The
approximate non-cash charge for Roseville Telephone's net regulatory
asset at December 31, 1999 was between $9,900 and $17,100, 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 24% 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, 2000 and 1999 for SVLP is as follows:
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Net revenues $ 51,431 $ 48,301 $101,298 $ 95,421
Costs and
expenses 38,058 37,715 77,066
71,939
-------- -------- -------- --------
Net Income $ 13,373 $ 10,586 $ 29,359 $ 18,355
======== ======== ======== ========
In May 2000, the Company settled its two-year dispute with AirTouch
Cellular regarding the ownership and operation of PCS licenses by the
Company's subsidiary, RCS Wireless. AirTouch Cellular is the general
partner of SVLP. Beginning in July 1998, there were a series of
communications between various partners of SVLP regarding the ownership
by the partners' affiliates of PCS licenses and whether such ownership
caused the partners to be in violation of the SVLP partnership
agreement. In March 1999, the Company filed an action against AirTouch
Cellular in the United States District Court for the Eastern District
of California requesting declaratory relief and injunctive relief and
other remedies, to which AirTouch Cellular answered and filed
counterclaims against the Company.
To resolve the dispute and related litigation, all of the partners of
SVLP have executed an amendment to the SVLP partnership agreement which
provides generally that RCS Wireless can continue to own and operate
the PCS licenses without causing the Company to be in violation of the
partnership agreement, subject to the understanding that the Company
will have restricted access to SVLP's competitively sensitive
information.
<PAGE>
3. BUSINESS SEGMENTS
The Company has two reportable business segments: Telecom and PCS. The
Telecom segment primarily provides local, network access and long
distance services, directory advertising services, internet services
and the sale of non-regulated products and services principally to
customers residing in Roseville Telephone's service area. Additionally,
the Telecom segment includes Roseville Telephone's investment in SVLP.
The PCS segment provides personal communications services and the sale
of related communications equipment. The Company evaluates the
performance of these business segments based on income from operations.
These segments are strategic business units that offer different
products and services. The accounting policies of these segments are
the same as those described in Note 1 - Summary of Significant
Accounting Policies. The Company accounts for intersegment sales and
transfers at prevailing market rates. Intersegment sales and transfers
between the Telecom and PCS segments are not significant. The Company's
business segment information is as follows:
Three months ended June 30,
2000 Telecom PCS Consolidated
------- -------- ------------
Operating revenues $36,843 $427 $37,270
Depreciation and amortization 5,579 1,266 6,845
Income/(loss) from operations 12,932 (3,310) 9,622
Three months ended June 30,
1999 Telecom PCS Consolidated
------- -------- ------------
Operating revenues $34,897 $103 $35,000
Depreciation and amortization 5,141 95 5,236
Income/(loss) from operations 13,900 (967) 12,933
At June 30, 2000 or the six
months ended Telecom PCS Consolidated
------- -------- ------------
Operating revenues $73,618 $649 $74,267
Depreciation and amortization 11,248 2,342 13,590
Income/(loss) from operations 25,619 (6,533) 19,086
Assets 297,816 52,511 350,327
At June 30, 1999 or the six
months ended Telecom PCS Consolidated
------- -------- ------------
Operating revenues $69,869 $111 $69,980
Depreciation and amortization 10,051 99 10,150
Income/(loss) from operations 26,363 (1,536) 24,827
Assets 299,427 29,183 328,610
4. PENDING ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the staff's views
in applying generally accepted accounting principles to revenue
recognition in financial statements and is effective for the Company in
the fourth quarter of 2000, retroactive to January 1, 2000. The Company
is currently evaluating the impact that SAB 101 has on its various
revenue recognition policies, including those pertaining to
nonrefundable activation and installation fees, which the Company
currently recognizes as revenue upon completion of the service. In
addition the SEC is expected to issue certain interpretive guidance
pertaining to the implementation of SAB 101 subsequent to June 30,
2000. Furthermore, the F.C.C. has not yet issued an order indicating
the extent or manner in which telephone companies should adopt the
provisions of SAB 101. Accordingly, the Company cannot yet fully
evaluate the impact of SAB 101 on its consolidated financial
statements.
5. LINE OF CREDIT
In March 2000, the Company entered into a business loan agreement with
a bank for a $30,000 revolving line of credit with a term of three
years. At June 30, 2000, the Company had utilized $20,000 of said
borrowing capacity. Interest on such borrowings accrues on a
LIBOR-based pricing formula and is payable monthly. The maturity date
on such borrowings is April 13, 2001.
6. EQUITY INCENTIVE PLANS
The Company has adopted two Equity Incentive Plans for certain
employees, outside directors, and consultants of the Company, which
were subsequently approved by the shareholders. The Company authorized
for future issuance under the Plans one million shares of authorized
but unissued common stock. The Plans include issuance by the Company to
certain individuals awards in the form of Restricted Shares, Stock
Units, Performance Shares, Options and Stock Appreciation Rights. The
exercise price per share of Company common stock purchasable under any
stock option shall be determined by the Company provided, however, the
exercise price under an incentive stock option shall not be less than
100% of the fair market value of a share of the Company's common stock
on the date of the grant, and the exercise price under a non-qualified
stock option shall not be less than 85% of the fair market value of the
Company's common stock on the date of the grant.
Effective May 22, 2000, stock options to purchase 5,000 shares of the
Company's common stock were automatically granted at an exercise price
of $40.00 per share, with a vesting period of one year. On June 28,
2000, stock options to purchase 387,000 shares of the Company's common
stock were granted at an exercise price of $39.25 per share, with
vesting periods ranging from four to five years. Options granted under
the Plans generally have maximum terms of ten years. The Company
applies APB Opinion No. 25 and related interpretations in accounting
for its stock-based compensation plans. No stock based compensation
expense was recognized for the six month period ended June 30, 2000.
7. STOCK REPURCHASE
In February 2000, the Board of Directors authorized the repurchase of
up to 1 million shares of the Company's common stock. The shares are
purchased from time to time in the open market or through privately
negotiated transactions subject to overall financial and market
conditions. Through June 30, 2000, approximately 275 thousand shares of
common stock have been repurchased. As a result, the Company has
authorization from the Board of Directors to repurchase 725 thousand
additional outstanding shares.
<PAGE>
ROSEVILLE COMMUNICATIONS COMPANY
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Dollars in thousands)
Information included in the Company's quarterly report on From 10-Q contains
"forward looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the beliefs and expectations of the Company and its subsidiaries, are
forward looking statements. Such forward looking statements are subject to a
number of risks, assumptions and uncertainties that could cause the Company's
actual results to differ materially from those projected in such forward looking
statements.
Important factors that could cause actual results to differ from those set forth
in the forward looking statements include, but are not limited to: advances in
telecommunications technology, changes in the telecommunications regulatory
environment, changes in competition in markets in which the Company operates,
the availability of future financing, changes in the demand for services and
products, new product and service development and introductions, pending and
future litigation and unanticipated changes in the growth of PCS operations. The
Company does not undertake any obligation to update any forward looking
statements whether as a result of new information, future events or otherwise.
Results of Operations
General
Roseville Communications Company (the "Company") is a holding company with
subsidiaries operating in the Telecommunications ("Telecom") and Personal
Communications Services ("PCS") segments.
The Telecom segment is aligned with specific subsidiaries of the Company.
Roseville Telephone, a wholly-owned subsidiary of the Company, provides local
and toll telephone services, network access services, billing and collection
services, directory advertising services and certain nonregulated services.
Additionally, Roseville Telephone and an affiliate company own an approximate
24% limited partnership interest in Sacramento-Valley Limited Partnership
("SVLP") which provides cellular telephone service principally in California.
Roseville Directory Company ("RCS Directories"), a wholly-owned subsidiary of
the Company, produces, publishes and distributes Roseville Telephone's directory
including the sale of yellow pages advertising. RCS Directories 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 PCS segment consists of the Company's wholly-owned subsidiary, Roseville
PCS, Inc., which is the manager of and has an approximate 97.6% 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 PCS.
The Company expects that the sources of its revenues and its cost structure may
be different in future periods as a result of its entry into new communications
markets.
<PAGE>
Operating Revenues
The Telecom segment derives its revenue from rate regulated services, long
distance services, directory advertising services, internet services and the
sale of non-regulated products and services. The PCS segment derives its revenue
from the provision of wireless digital personnel communication services and the
sale of related communications equipment.
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 six month
periods ended June 30, 2000 and 1999, 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 California Public Utilities Commission (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.
Roseville Telephone bills Pacific Bell various charges for certain local service
and network access service revenues pursuant to certain agreements described
below. Of the Company's total revenues for the quarters ended June 30, 2000 and
1999, 11% was recorded under these agreements. Approximately 11% and 12% of the
Company's total revenues were recorded under Pacific Bell agreements during the
six month periods ended June 30, 2000 and 1999 respectively. In March 1999,
Pacific Bell 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 Telephone and Pacific Bell for
certain intraLATA toll services. Pacific Bell also pays Roseville Telephone
$11,500 per year for EAS pursuant to a Settlement Transition Agreement ("STA").
Pacific Bell and Roseville Telephone have agreed to modifications to these
agreements whereby Pacific Bell's payments to Roseville Telephone for EAS will
cease as of December 31, 2000. In addition, Roseville Telephone has filed an
application with the P.U.C. for revenues to replace potential changes in Pacific
Bell's payments. Roseville Telephone anticipates that a decision in this matter
will be adopted during 2000, 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, 1999 and 1998, Roseville Telephone had no obligation to share
earnings with customers.
In accordance with the requirements of its general rate case order, Roseville
Telephone filed an application for review of its NRF in March 1999. This
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. In
addition, the P.U.C. Office of Ratepayer Advocates ("ORA") conducted a
verification audit of Roseville Telephone's non-regulated and affiliated
transactions pursuant to the general rate case, the NRF framework and other
P.U.C. orders. The ORA report was submitted in the NRF proceeding and
evidentiary hearings on how this impacts the NRF framework were completed on
April 21, 2000. During these hearings, ORA claimed, among other things, that the
results of the verification audit allegedly show that Roseville Telephone has
misallocated costs and revenues between regulated and non-regulated accounts. As
a result, ORA recommends retroactive rate adjustments and continuation of the
sharing mechanism. The Company disagrees with the audit findings and ORA's
recommendations to the P.U.C. The Company anticipates a P.U.C. decision in the
NRF proceeding later this year, the effect of which on Roseville Telephone
cannot yet be determined.
Rate regulated revenues increased $1,500 and $3,000, or 5%, for the quarter and
six month periods ended June 30, 2000, respectively, compared to the same
periods in 1999 due to the combined effects of 1) access line growth of 2%, 2)
improved penetration in custom calling, voice mail and other enhanced network
services, 3) increased network access revenues due to larger minute-of-use
volumes and expanded demand for dedicated access services and 4) the
introduction of digital subscriber line ("DSL") services in August of 1999.
Subscribers of DSL services have grown from approximately 1,300 as of December
31, 1999 to over 4,100, or 215%, as of June 30, 2000. Additionally, in the first
quarter 1999 the Company recorded a one-time positive adjustment of $812
relating to interstate access settlements.
Directory advertising revenues increased $48 and $133 for the quarter and six
month periods ended June 30, 2000, respectively, compared to the same periods in
1999 due primarily to an increase in advertising sales relating to Roseville
Telephone's directory. Other operating revenues increased $574 and $819 for the
quarter and six month periods ended June 30, 2000, respectively, compared to the
same periods in 1999, due primarily to an increase in the market penetration of
long distance services and the introduction of wireless and internet services in
June and August of 1999, respectively.
Operating Expenses:
Operating expenses increased $5,600 and $10,000, or 25% and 22%, for the quarter
and six month periods ended June 30, 2000, respectively, compared to the same
periods in 1999 due to the factors described below. Cost of services and
products increased $2,300 and $4,500 for the quarter and six month periods ended
June 30, 2000, due primarily to an increase in tower rents related to RCS
Wireless, transport costs associated with long distance services, and modem and
transport costs related to internet services.
Customer operations and selling expense increased $1,100 and $1,900, or 26%, and
23%, for the quarter and six month periods ended June 30, 2000, respectively,
compared to the same periods in 1999 due to increased labor costs relating to an
increase in personnel, marketing and advertising costs associated with wireless
services, and customer support activities associated with internet services.
General and administrative costs increased $654 and $207 or 17%, and 2%, for the
quarter and six month periods ended June 30, 2000, respectively, compared to the
same periods in 1999. Increases in various general and administrative costs
during the six months ended June 30, 2000 compared to the same period in 1999
were offset by costs related to the year 2000 computer upgrades in 1999 which
did not occur in 2000. The increase in the quarter ended June 30, 2000, compared
to the same period in 1999 is due to the Company's adoption of Statement of
Position 98-1 in June 1999, retroactive to the beginning of 1999. Prior to
adoption of SOP 98-1, the Company expensed all internal use software costs as
incurred.
Depreciation and amortization costs increased $1,600 and $3,400, or 31% and 34%,
for the quarter and six month periods ended June 30, 2000, respectively,
compared to the same periods in 1999 due primarily to the amortization of PCS
licenses commencing in June 1999, network software and increased wireless and
telephone plant depreciation.
Other Income, Net:
Other income, net, increased $137 and $1,700, or 5% and 36%, for the quarter and
six month periods ended June 30, 2000, respectively, compared to the same
periods in 1999. The increase was primarily due to an increase of $655 and
$2,600 for the quarter and six month periods ended June 30, 2000, respectively,
in income attributable to the Company's interest in SVLP. Consistent with
historical trends of SVLP's operating results, the Company believes that the
income attributable to SVLP for the remaining quarters of 2000 may be lower than
that recognized in the first half of 2000. These increases were partially offset
by a decrease in interest income due to lower investment balances. Interest
expense increased $227 and $202 for the quarter and six month periods ended June
30, 2000, respectively, compared to the same periods in 1999, due to higher
aggregate long-term and short-term borrowings.
Income Taxes:
Income taxes for the quarter and six month periods ended June 30, 2000,
decreased $1,300 and $1,700, respectively, compared to the same periods in 1999
due primarily to the decrease in income subject to tax. The effective federal
and state income tax rate was approximately 40.3% and 40.5% for the six month
periods ended June 30, 2000 and 1999, respectively.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities was $24,000 and $27,800 for the six month
periods ended June 30, 2000 and 1999, respectively. During the six month period
ended June 30, 2000, the Company used cash flows from operations and existing
cash, cash equivalents and short-term investments to fund 1) capital
expenditures of $33,200 pertaining to ongoing plant construction projects, 2)
common stock repurchases of $11,000 3) dividends of $7,900, 4) principal
payments of $1,100 to retire long-term debt and 5) a deposit of $900 to
participate in the F.C.C. auction for Local Multipoint Distribution System
("LMDS") broadband wireless licenses.
The Company's most significant use of funds for the balance of 2000 is expected
to be for 1) remaining budgeted capital expenditures of approximately $30,400,
2) remaining scheduled payments of long-term debt of $1,100 3) anticipated cash
dividends of $7,800 and 4) net operating expenditures of up to $5,000 relating
to RCS Wireless.
In February 2000, the Board of Directors authorized the repurchase of up to 1
million shares of the Company's common stock. The shares are purchased from time
to time in the open market or through privately negotiated transactions subject
to overall financial and market conditions. Through June 30, 2000, approximately
275 thousand shares of common stock have been repurchased. As a result, the
Company has authorization from the Board of Directors to repurchase 725 thousand
additional outstanding shares.
In March 2000, the Company entered into a business loan agreement with a bank
for a $30,000 line of credit with a term of three years. At June 30, 2000, the
Company had utilized $20,000 of said borrowing capacity. Interest on such
borrowing accrues on a LIBOR-based pricing formula and is payable monthly. The
maturity date on such borrowings is April 13, 2001.
In addition to net cash provided by operations and existing cash, cash
equivalents and short-term investments, as well as the Company's borrowing
capacity under the aforementioned business loan agreement, the Company may
consider other sources of external financing for the purposes of funding future
capital expenditures and potential investments.
Other Financial Information
As discussed in the notes to the condensed consolidated financial statements,
the Company's consolidated financial statements have been prepared in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting
for the Effects of Certain Types of Regulation", which requires companies
meeting its 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, non-cash charge would result. The
approximate non-cash charge for Roseville Telephone's net regulatory asset at
December 31, 1999 was between $9,900 and $17,100, 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements and is
effective for the Company in the fourth quarter of 2000, retroactive to January
1, 2000. The Company is currently evaluating the impact that SAB 101 has on its
various revenue recognition policies, including those pertaining to
nonrefundable activation and installation fees, which the Company currently
recognizes as revenue upon completion of the service. In addition, the SEC is
expected to issue certain interpretive guidance pertaining to the implementation
of SAB 101 subsequent to June 30, 2000. Furthermore, the F.C.C. has not yet
issued an order indicating the extent or manner in which telephone companies
should adopt the provisions of SAB 101. Accordingly, the Company cannot yet
fully evaluate the impact of SAB 101 on its consolidated financial statements.
<PAGE>
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 1996, Congress passed the Telecommunications Act of 1996 (the "Act") which
significantly changed the regulatory environment for telecommunications
companies. 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 determine 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 incumbent local
exchange carriers ("ILECs") must make available to competitors. On July 18,
2000, the United States Court of Appeals for the Eighth Circuit vacated the
FCC's Total Element Long Run Incremental Cost ("TELRIC") pricing standard for
determining the price that ILECs can charge to CLECs seeking use of unbundled
network elements. The 1998 United States Supreme Court decision remanded the
reasonableness of TELRIC pricing back to the Eighth Circuit for determination.
In addition, the Circuit's decision, also vacated, among other things, the FCC's
rules which define "avoided retail costs" for purposes of determining wholesale
rates, the FCC's proxy prices, the FCC's rules which addressed the
identification of additional network elements to be unbundled, and the FCC's
superior quality and additional combinations rules.
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 minute-of-use access charges costs that are not incurred on a
per-minute-of-use basis. The F.C.C. also adopted changes to its interstate rate
structure for transport services which are designed to move the charges for
these services to more cost-based levels. The F.C.C.'s order on universal
service reformed the existing system of universal service in a manner that will
permit local telephone markets to move to a competitive arena. The order on
universal service provides continued support to low-income consumers and will
help to connect eligible schools, libraries and rural health care providers to
the global telecommunications network. In 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 in October 1999, making
revisions to its rules, effective on November 1, 1999, requiring, among other
things, that ILECs 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, 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 Company's financial condition and results of operations have been and
will be affected by recent and future proceedings before
the P.U.C. and F.C.C. Pending before the F.C.C. and P.U.C. are proceedings
which are considering:
The rules governing the opening of markets to competition
The goals and definition of universal telephone service in a changing
environment, including examination of subsidy support mechanisms for
subscribers in high cost areas and issues of "carrier of last resort"
and "franchise" obligations
Rules that will provide non-discriminatory access by competing
service providers to the network capabilities of local exchange
carriers
The eventual impact on the Company of the effect of all the proceedings
described above cannot presently be determined.
In May 2000, the Company settled its two-year dispute with AirTouch Cellular
regarding the ownership and operation of PCS licenses by the Company's
subsidiary, RCS Wireless. AirTouch Cellular is the general partner of SVLP.
Beginning in July 1998, there were a series of communications between various
partners of SVLP regarding the ownership by the partners' affiliates of PCS
licenses and whether such ownership caused the partners to be in violation of
the SVLP partnership agreement. In March 1999, the Company filed an action
against AirTouch Cellular in the United States District Court for the Eastern
District of California requesting declaratory relief and injunctive relief and
other remedies, to which AirTouch Cellular answered and filed counterclaims
against the Company.
To resolve the dispute and related litigation, all of the partners of SVLP have
executed an amendment to the SVLP partnership agreement which provides generally
that RCS Wireless can continue to own and operate the PCS licenses without
causing the Company to be in violation of the partnership agreement, subject to
the understanding that the Company will have restricted access to SVLP's
competitively sensitive information.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
On May 19, 2000, 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 and adopt the
Roseville Communications Company 2000 Equity Incentive 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 15,680,946).
Votes Broker Non-Votes
Director For Votes Withheld and Abstentions
------------ ----------- ---------- -----------
Robert L. Doyle 14,090,950 637,129 N/A
Thomas E. Doyle 14,097,387 630,692 N/A
Brian H. Strom 14,072,696 655,383 N/A
Ralph A. Hoeper 13,851,515 876,564 N/A
John R. Roberts III 13,871,216 856,863 N/A
Chris L. Branscum 13,863,413 864,666 N/A
Neil J. Doerhoff 13,868,257 859,822 N/A
The proposal to approve and adopt the Plan was approved by the following vote:
For Against/Withheld Abstentions Broker Non-Votes
---------- ---------------- ----------- ----------------
13,633,212 635,543 459,324 N/A
Item 6. Exhibits and Reports on Form 8-K.
a) See Index to Exhibits.
b) Reports on Form 8-K
A current report on Form 8-K, was filed on May 23, 2000, announcing the
settlement of litigation involving the Company's subsidiary Roseville
Telephone Company and the general partner of Sacramento-Valley Limited
Partnership.
<PAGE>
ROSEVILLE COMMUNICATIONS COMPANY
INDEX TO EXHIBITS
(Item 6 (a))
Method
Exibit No. Description of Filing Page
-------- ----------- --------- ----
3(a) Articles of Incorporation of the Company, Incorporated -
together with Certificate of Amendment by
of Articles of Incorporation dated reference
January 25, 1996 and Certificate of
Amendment of Articles of Incorporation
dated June 21, 1996 (Filed as Exhibit 3(a)
to Form 10-Q Quarterly Report for the quarter
ended September 30, 1996)
3(b) Bylaws of the Company Incorporated -
by
reference
4(a) Shareholder Rights Plan(Filed as Exhibit 2.1 to Incorporated -
Form 8-A Registration Statement under the by
Securities Act of 1934) reference
10(a) Sacramento-Valley Limited Partnership Agreement, Incorporated -
dated April 4, 1984 (Filed as Exhibit I to Form by
10-Q Quarterly Report of Roseville Telephone reference
Company for the quarter ended March 31, 1984)
10(b) Credit Agreement of Roseville Telephone Company Incorporated -
with Bank of America National Trust and Savings by
Association, dated March 27, 1992, with respect reference
to $25,000,000 term loan.
(Filed as Exhibit 10(a) to Form 10-Q Quarterly
Report of Roseville Telephone Company for the
quarter ended March 31, 1992)
10(c) Note Purchase Agreement for Series A Senior Notes Incorporated -
in the aggregate amount of $40,000,000 dated by
December 9, 1998 (Filed as Exhibit 10(c) to Form reference
10-K Annual Report of Roseville Communications
Company for the year ended
December 31, 1998)
10(d) Operating Agreement of West Coast PCS LLC Incorporated -
(Filed as Exhibit 10(d) to Form 10-K Annual by
Report of Roseville Communications Company reference
for the year ended December 31, 1997)
10(e) 1999 Restricted Stock Bonus Plan (Filed as Exhibit Incorporated -
10(e) to Form 10-K Annual Report of Roseville by
Communications Company reference
for the year ended December 31, 1998)
10(f) 2000 Equity Incentive Plan Incorporated -
(Filed as Exhibit 10f to Form 10-K Annual Report by
of Roseville Communications Company for the year reference
ended December 31, 1999)
10(g) Business Loan Agreement of Roseville Incorporated -
Communications Company by
with Bank of America, dated March 15, 2000 reference
(Filed as Exhibit 10(g) to Form 10-Q Quarterly
Report of Roseville Communications Company for
the quarter ended March 31, 2000)
21(a) List of subsidiaries Filed herewith 22
27 Financial Data Schedule Filed herewith -
<PAGE>
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: July 31, 2000 By: /s/BRIAN H. STROM
----------------------------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: July 31, 2000 By: /s/MICHAEL D. CAMPBELL
----------------------------------------
Michael D. Campbell,
Executive Vice-President
and Chief Financial Officer
<PAGE>
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: July 31, 2000 By: ___________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: July 31, 2000 By: ___________________________
Michael D. Campbell,
Executive Vice-President
and Chief Financial Officer
