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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
ROSEVILLE COMMUNICATIONS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0365195
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
211 Lincoln Street, Roseville, California 95678
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 786-6141
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates (and on the
assumption that all shares held by registrant's employee benefit plans,
directors and officers may be deemed shares held by affiliates), was
$450,619,680 as of February 29, 2000. As of February 29, 2000, 15,839,173 shares
of the registrant's Common Stock were outstanding.
Documents INCORPORATED BY REFERENCE
Incorporated by reference into Part III hereof are portions of the registrant's
definitive proxy statement issued in connection with the annual meeting of
registrant's shareholders to be held May 19, 2000.
TABLE OF CONTENTS
ITEM NO. PAGE
PART I
1. Business...................................................... 3
2. Properties.................................................... 5
3. Legal Proceedings............................................. 6
4. Submission of Matters to a Vote of Security Holders........... 9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 11
6. Selected Financial Data....................................... 11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
7A. Quantitative and Qualitative Disclosures About Market Risk.... 20
8. Financial Statements and Supplementary Data................... 21
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 43
PART III
10. Directors and Executive Officers of the Registrant.......... 43
11. Executive Compensation...................................... 43
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
13. Certain Relationships and Related Transactions.............. 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 43
PART I
Item 1. Business
Roseville Communications Company (the "Company") was incorporated in 1995 under
the laws of the State of California as a holding company. The Company's
wholly-owned subsidiaries include 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. ("Roseville PCS"). Additionally, the Company
maintains ownership interests in two wireless partnerships through its
wholly-owned subsidiaries as described more fully below.
The Company has formed various subsidiaries for the purposes of pursuing new
businesses in the communications industry. The Company generates a majority of
its revenues from rate regulated services, but expects that its proportionate
share of revenues from nonregulated businesses may be greater in future years as
a result of its entry into these businesses. The table that follows reflects the
percentage of total operating revenues of the Company contributed by various
sources.
% of Total Operating Revenues
Revenues 1999 1998 1997
------------------------ ---- ---- ----
Rate regulated revenues 80% 80% 83%
Other revenues 20% 20% 17%
---- ---- ----
Total operating revenues 100% 100% 100%
Emerging Businesses
In February 1997, RCS Directories commenced operations to produce, publish and
distribute Roseville Telephone's directory including the sale of yellow pages
advertising previously provided by an unaffiliated company. 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.
In September 1997, Roseville Long Distance commenced the provision of long
distance services using a worldwide fiber-optic network, providing
international, interstate and intrastate long distance service, calling card and
800 services.
In August 1999, RCS Internet commenced the provision of high speed internet
access utilizing 100 percent digital subscriber line (DSL) technology.
Roseville PCS is the manager of and has an approximate 96.7% interest in West
Coast PCS LLC (d.b.a. "RCS Wireless"), which was formed together with another
entity not controlled by the Company for the purpose of providing wireless
personal communications services ("PCS"). During 1997, RCS Wireless purchased
from the Federal Communications Commission (the "F.C.C.") licenses to offer PCS
services in four Basic Trading Areas located in central California including
Sacramento, Stockton, Modesto and Yuba City. Each license represents 10
megahertz of broadband spectrum which offers digital wireless technology capable
of providing both voice and data transmission. RCS Wireless commenced deployment
of the network infrastructure in 1998 and commenced the provision of wireless
telecommunications services with telephone, paging and voicemail capabilities in
June 1999.
Investment in Sacramento-Valley Limited Partnership
Roseville Telephone, with an approximate 23.5% equity interest, is a limited
partner of Sacramento-Valley Limited Partnership ("SVLP"), a California limited
partnership formed for the construction and operation of a cellular mobile
radiotelephone system. AirTouch Cellular is the sole general partner of SVLP and
is responsible for the construction, operation, maintenance and marketing of the
cellular mobile radiotelephone system. SVLP currently operates in the following
Standard Metropolitan Statistical Areas in California and Nevada:
Sacramento Reno
Stockton Yuba City - Marysville
Modesto Redding - Chico
In addition, SVLP also operates in the Tehama, Sierra and Storey (Carson City)
Rural Statistical Areas.
The Company's equity in the earnings of SVLP constituted approximately 19% and
21% of the Company's income before income taxes in 1999 and 1998, respectively.
Telephone Operations
The Company's principal operating subsidiary, Roseville Telephone, is engaged in
the business of furnishing communications services, mainly local and toll
telephone service and network access services, in a territory covering
approximately 83 square miles in Placer and Sacramento Counties, California.
Toll service to points outside Roseville Telephone's service area is furnished
through connection in Roseville with facilities of Pacific Bell, AT&T and other
interexchange carriers. The City of Roseville, which is centrally located in
Roseville Telephone's service area, is 18 miles northeast of Sacramento. RCS
Digital Services, a Competitive Local Exchange Carrier ("CLEC") operating as a
non-regulated division of Roseville Telephone, offers local service, network
access service and toll service to customers outside Roseville Telephone's
service area.
For many years, including the year ended December 31, 1999, the area served by
Roseville Telephone has experienced significant residential, commercial and
industrial development. Roseville Telephone continues to be engaged in the
expansion of its facilities and operations to meet current and anticipated
service demand increases and to maintain modern and efficient service. Roseville
Telephone uses public streets and highways in the conduct of its public utility
telephone business under a non-exclusive perpetual franchise granted by Section
7901 of the California Public Utilities Code.
Revenues from rate regulated services, which include local service, network
access service and toll service revenues, constituted approximately 80% of the
Company's total operating revenues in 1999. Other Roseville Telephone revenues
consist primarily of directory advertising services, billing and collection
services, nonregulated sales and services and other miscellaneous revenues.
Nonregulated revenues are derived from the sale, lease and maintenance of
telecommunications equipment, payphone services, alarm monitoring services and
network access services.
Substantially all of the Company's revenues are from communications and related
services. Approximately 11%, 13% and 16% of the Company's total operating
revenues in 1999, 1998 and 1997, respectively, were derived from access charges
and charges for other services to Pacific Bell pursuant to certain agreements.
Approximately 8%, 8% and 10% of the Company's total operating revenues in 1999,
1998 and 1997 were derived from access charges and charges for other services to
AT&T Corp. No other customers accounted for more than 10% of consolidated
operating revenues.
Total rate regulated revenues from telephone services are affected by rates
authorized by various regulatory agencies. Intrastate service rates are subject
to regulation by the California Public Utilities Commission ("P.U.C.").
Roseville Telephone also has agreements with Pacific Bell relating to extended
area service settlements. With respect to intrastate toll calls, interexchange
carriers are assessed access charges based on tariffs filed by Roseville
Telephone. With respect to interstate services, Roseville Telephone has filed
its own tariff with the F.C.C. for all elements of access services except
carrier common line charges, for which Roseville Telephone concurs with tariffs
filed by the National Exchange Carrier Association. Extensive cost separation
studies are utilized to determine both the final settlements and access charges.
Additionally, as discussed in "Item 3 - Legal Proceedings", in December 1996,
the P.U.C. issued a decision regarding Roseville Telephone's authorized revenue
levels. The rate case decision also ordered the implementation of a new
regulatory framework for services furnished within the State of California and
restructured Roseville Telephone's rates in a comprehensive manner. Roseville
Telephone's future operations may be impacted by several proceedings pending
before the F.C.C. and the P.U.C. which are considering the manner in which
certain local exchange services presently provided solely by Roseville Telephone
should be opened to competition. See "Item 3 - Legal Proceedings" and "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion regarding Roseville Telephone's rate
regulated revenues and the competitive environment in which Roseville Telephone
operates.
In addition to its regulatory authority with respect to Roseville Telephone's
rates, the P.U.C. also has the power, among other things, to establish the terms
and conditions of service, to prescribe uniform systems of accounts to be kept
by public utilities and to regulate the mortgaging or disposition of public
utility properties.
In February 1996, Congress passed the Telecommunications Act of 1996 (the "Act")
which significantly changed the regulatory environment for telecommunications
companies. See "Item 3 - Legal Proceedings" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussion regarding the impact of the Act.
Employees
At December 31, 1999, the Company had 671 employees, none of whom is represented
by a union.
Item 2. Properties
The Company owns central office buildings and related equipment in Roseville,
Citrus Heights, Granite Bay, and other locations in Sacramento and Placer
Counties. The Company's 68,000 square foot principal business office and
administrative headquarters and 214,000 square foot operations facility are
located in Roseville. Other land is held for future expansion. The Company has
appropriate easements, rights of way and other arrangements for the
accommodation of its pole lines, underground conduits, aerial and underground
cables and wires, and PCS antennas.
In addition to land and structures, the Company's property consists of equipment
required in providing communication services. This includes central office
equipment, customer premises equipment and connections, radio and PCS antennas,
towers, pole lines, aerial and underground cable and wire facilities, vehicles,
furniture and fixtures and other equipment. The Company also owns certain other
communications equipment held as inventory for sale or lease.
In addition to plant and equipment that the Company wholly-owns, the Company
utilizes poles and conduit systems wholly-owned by, or jointly-owned with, other
utilities and leases space on facilities wholly or jointly-owned by the Company
to other utilities. These arrangements are in accordance with written agreements
customary in the industry.
SVLP owns certain equipment used in the provision of cellular mobile
radiotelephone services.
Item 3. 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.
As appears in Item 1, above, 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. Reference is made to
Item 1 for further information regarding the nature of the jurisdiction of the
F.C.C. and P.U.C. over the business and operations of Roseville Telephone.
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 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 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. In accordance with the
requirements of its general rate case decision, Roseville Telephone filed an
application for review of its New Regulatory Framework ("NRF") on March 8, 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. A decision in this proceeding is anticipated in 2000. In addition, the
P.U.C. Office of Ratepayer Advocates ("ORA") has undertaken a verification audit
of Roseville Telephone's non-regulated and affiliated transactions pursuant to
the general rate case and other P.U.C. orders. The effect of these proceedings
on Roseville Telephone cannot yet be determined.
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 $11.5 million per year for EAS pursuant to a Settlement
Transition Agreement ("STA"). Pacific Bell and Roseville Telephone have begun to
negotiate the terms of possible modifications to these agreements. In addition,
Roseville Telephone has filed an application with the P.U.C. for revenues to
replace potential changes in Pacific Bell's payments to Roseville Telephone. In
January 2000, Pacific Bell filed a petition for arbitration pursuant to the
Telecommunications Act to establish an interconnection agreement for extended
area service which, if successful, might eliminate Pacific Bell's obligation to
make payments pursuant to the STA before the P.U.C. orders replacement revenues.
Roseville Telephone disagrees with the authority on which Pacific Bell relied
for its filing and, in addition, in February 2000, filed a separate application
with the P.U.C. to suspend any such proceedings pending an order on the prior
application filed by Roseville Telephone to obtain revenues to replace any
changes in Pacific Bell's payments to Roseville Telephone. Roseville Telephone
anticipates that additional proceedings and negotiations will be held to address
these issues in 2000, 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 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 ILECs must
make available to competitors.
In 1997, the F.C.C. adopted orders on access charge reform and a new universal
service program. The F.C.C.'s order on access charge reform generally removed
from 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. On July 30, 1999, the United States Court
of Appeals for the Fifth Circuit issued an opinion addressing challenges to the
F.C.C.'s universal service order. The Court upheld the F.C.C.'s authority to
implement its program for funding telecommunications services for schools and
libraries and rejected challenges on technical issues such as the F.C.C.'s use
of models in determining universal service. The Court ruled, however, that the
F.C.C. can't use intrastate revenues in determining a carriers' universal
service contribution and rejected the so-called flowback method of collecting
universal service contributions through access charges. To implement the Fifth
Circuit's decision, the F.C.C. adopted an order on October 8, 1999 making
revisions to its rules, effective on November 1, 1999, requiring, among other
things, that incumbent LECs recover their universal service contributions either
through interstate access charges or interstate end-user charges based on
interstate and international end-user telecommunications revenues only. On
October 21, 1999, the Commission adopted two orders in connection with universal
service reform. In the first order, the F.C.C completed development of the cost
model to be used as a basis for federal universal service support. In the second
order, the F.C.C. adopted a methodology based on the results of the cost model
to calculate the level of support for non-rural carriers serving high-cost
areas. In addition, the F.C.C. held that the amount of support provided to
carriers on a per-line basis by the forward-looking mechanism will be no less
than the amount of support provided to the carrier by the present mechanism but
that federal universal service support will be portable among all eligible
telecommunications carriers. If a competitor acquires a subscriber line from an
incumbent receiving support, the competitor will receive the incumbent's federal
universal service support for that line.
The regulatory proceedings occurring at the state and federal levels described
above may broaden the scope of competition in the provision of regulated
services and change the rates and rate structure for regulated services
furnished by Roseville Telephone, the effects of which on Roseville Telephone
cannot yet be determined.
Commencing in July 1998, there have been a series of communications between the
partners of SVLP regarding the ownership and operation of PCS licenses in
territories served by SVLP and the allegation by its general partner AirTouch
Cellular ("AirTouch") that such ownership and operation would cause a partner of
SVLP to be in violation of the terms of SVLP's Agreement Establishing Limited
Partnership, as amended ("Partnership Agreement"). In addition to the Company's
ownership of PCS licenses, an affiliate of AirTouch and one other limited
partner also own such licenses.
On March 26, 1999, the Company filed an action against AirTouch in the United
States District Court for the Eastern District of California requesting
declaratory relief, injunctive relief and damages for violation of the Sherman
Act, the California Cartwright Act, breach of contract, breach of fiduciary
duty, intentional and negligent interference with economic advantage and
violation of California's unfair competition act. AirTouch answered the
complaint, and filed counterclaims against the Company for breach of contract,
breach of fiduciary duty, breach of the covenant of good faith and fair dealing,
fraud and deceit, negligent misrepresentation, misappropriation of trade
secrets, violation of the California Business and Professions Code, declaratory
relief and contract reformation. In addition, AirTouch also sought to compel
arbitration to resolve the dispute.
The Company and AirTouch have previously reached an agreement on a resolution of
the dispute, including the dismissal of the litigation, which would permit the
Company to continue to provide PCS subject to the restriction on the provision
of certain SVLP information to the Company. AirTouch now refuses to implement
the agreement, and the Company has filed a Motion to Enforce Settlement, and
requested an Evidentiary Hearing, which request was granted and the Evidentiary
Hearing is scheduled to be conducted on March 27, 2000. If the Company prevails
on its Motion to Enforce Settlement, the litigation will be concluded. Even if
the Motion is unsuccessful, the Company will be able to continue to pursue its
legal remedies. If the dispute is not resolved, the Company does not believe
that these proceedings impair the recoverability of its $38.4 million investment
in SVLP.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the executive officers of the Company as of
February 29, 2000 are as follows:
Name Age Office
---- --- ------
Robert L. Doyle 81 Chairman of the Board of Directors
Brian H. Strom 57 President and Chief Executive Officer
(since December 1993)
Michael D. Campbell 51 Executive Vice President and Chief Financial Officer
(since April 1996); Vice President and Chief
Financial Officer(1994 to 1996); Partner, Ernst
& Young LLP(1983 to 1994)
Jay B. Kinder 55 Vice President, Customer Services - Roseville
Telephone Company (since April 1996); Director of
Marketing and Planning (1993 to 1996)
Rulon D. Blackburn 59 Vice President, Network Services - Roseville Telephone
Company(since April 1996); Director, Network Services
(1994 to 1996)
Philip D. Germond 50 Vice President, Marketing - Roseville Telephone
Company (since August 1997); Director of Marketing
and Sales (1996 to 1997); General Sales Manager
(1995 to 1996); Product and Services Manager
(1989 to 1995) of Roseville Telephone Company
Thomas E. Doyle 70 Vice Chairman of the Board of Directors and
Secretary-Treasurer
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of the Company trades principally in local transactions without
the benefit of an established public trading market. As a result of the minimal
number of stock transactions, the Company's information with respect to price
per share is derived from reports provided by the Company's Retirement
Supplement Plan, the Employee Stock Ownership Plan (collectively, the "Plans")
and disclosure, in limited circumstances, of third party transactions.
Transactions in the Company's common stock were effected by the Plans at
approximately $28 per share during the first quarter of 1998, $29 per share
during the second quarter of 1998 and $30 per share from the beginning of the
third quarter of 1998 through the end of the first quarter of 1999. Transactions
in the Company's common stock were effected by the Plans at $31 per share during
the second quarter of 1999, $32 per share during the third quarter of 1999, $33
per share during the fourth quarter of 1999 and $34 per share thereafter.
The Company's approximate number of shareholders was 9,300 as of February 29,
2000.
The Company pays quarterly cash dividends on its common stock. The Company paid
cash dividends of $.20 per share for the first three quarters of 1998, $.25 per
share for the fourth quarter of 1998 and $.25 per share for each quarter of
1999.
Item 6. Selected Financial Data
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(amounts in thousands, except per share amounts)
Total operating revenues $140,801 $126,682 $114,888 $105,566 $102,661
Net income $ 31,750 $ 25,049 $ 22,971 $ 21,461 $ 18,507
Basic and diluted earnings
per share (1) $ 2.01 $ 1.58 $ 1.45 $ 1.36 $ 1.17
Cash dividends per share (2) $ 1.00 $ .85 $ .63 $ .57 $ .55
Property, plant and equipment,
at cost $383,896 $328,437 $297,057 $275,563 $263,210
Total assets $333,187 $315,877 $276,297 $267,881 $256,889
Long-term debt $ 46,428 $ 48,571 $ 22,322 $ 28,036 $ 33,750
Shares of common stock used
to calculate earnings per
share (1) 15,822 15,815 15,815 15,815 15,815
(1) Shares used in the computation of basic and diluted earnings per share
are based on the weighted average number of shares outstanding in each
period after giving retroactive effect to stock dividends.
(2) Cash dividends per share are based on the actual dividends per share,
as declared by the Company's Board of Directors, after giving retroactive
effect to stock dividends.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Overview
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 Company ("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 96.7% interest in West Coast PCS
LLC (d.b.a. "RCS Wireless"), which was formed together with another entity not
controlled by the Company for the purpose of providing wireless personal
communications services ("PCS"). In February 1997, Roseville Directory Company
("RCS Directories"), a wholly-owned subsidiary of the Company, commenced
operations to produce, publish and distribute Roseville Telephone's directory
including the sale of yellow pages advertising previously provided by an
unaffiliated company. 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. In September 1997,
the Company's wholly-owned subsidiary, Roseville Long Distance Company
("Roseville Long Distance"), commenced the provision of long distance services.
In August 1999, the Company's wholly owned subsidiary, RCS Internet Services
("RCS Internet"), commenced the provision of high speed internet services. The
Company expects that the sources of its revenues and its cost structure may be
different in future years as a result of its entry into these communications
markets.
Revenues from rate regulated services, which include local service, network
access service and toll service revenues generated by Roseville Telephone,
constituted approximately 80%, 80%, and 83% of the Company's total operating
revenues in 1999, 1998, and 1997, respectively. Rate regulated revenues are
derived from various sources, including billings to business and residential
subscribers for basic exchange services, extended area service charges,
surcharges mandated by the California Public Utilities Commission ("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 in 1999, 1998 and 1997, 11%, 13% and 16%,
respectively, were recorded under these agreements. 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
$11.5 million per year for EAS pursuant to a Settlement Transition Agreement
("STA"). Pacific Bell and Roseville Telephone have begun to negotiate the terms
of possible modifications to these agreements. In addition, Roseville Telephone
has filed an application with the P.U.C. for revenues to replace potential
changes in Pacific Bell's payments. In January 2000, Pacific Bell filed a
petition for arbitration pursuant to the Telecommunications Act to establish an
interconnection agreement for extended area service which, if successful, might
eliminate Pacific Bell's obligation to make payments pursuant to the STA before
the P.U.C. orders replacement revenues. Roseville Telephone disagrees with the
authority on which Pacific Bell relied for its filing and, in addition, in
February 2000, filed a separate application with the P.U.C. to suspend any such
proceedings pending an order on the prior application filed by Roseville
Telephone to obtain revenues to replace any changes in Pacific Bell's payments
to Roseville Telephone. Roseville Telephone anticipates that additional
proceedings and negotiations will be held to address these issues, the effects
of which on Roseville Telephone cannot yet be determined.
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 April 1999, the P.U.C. issued a decision modifying
the rate case decision by increasing the Company's rates to correct certain
legal and factual errors in the original rate case decision. This modification
resulted in 1) a one-time increase to rate regulated revenues for the year ended
December 31, 1999 of $958 thousand retroactive to 1997 and 2) an annual increase
of approximately $328 thousand to rate regulated revenues.
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. A
decision in this proceeding is anticipated in 2000. In addition, the P.U.C.
Office of Ratepayer Advocates ("ORA") has undertaken a verification audit of
Roseville Telephone's non-regulated and affiliated transactions pursuant to the
general rate case and other P.U.C. orders. The effect of these proceedings on
Roseville Telephone cannot yet be determined.
1999 versus 1998
Net income for 1999 was $31.7 million, or $2.01 per share, compared with net
income of $25.0 million, or $1.58 per share, for 1998. The increase in net
income and earnings per share for 1999 was due principally to the strong
economic growth in the Company's local exchange service area, the introduction
of new products and services, operational and financial efficiencies gained from
the Company's diversification and cost containment initiatives and the adoption
of a new accounting pronouncement.
Operating Revenues:
Rate regulated revenues increased $10.7 million, or 11%, compared to 1998 due to
the combined effects of 1) access line growth of 5%, 2) improved penetration in
custom calling, voice mail, national directory assistance services and other
enhanced network services, 3) increased network access revenues due to
increasing minute-of-use volumes and expanded demand for dedicated access
services, 4) a one-time increase of $812 thousand to interstate access
settlement revenues relating to 1998, and 5) a one-time increase of $958
thousand retroactive to 1997 relating to the modification to Roseville
Telephone's general rate case decision.
Directory advertising revenues increased $1.4 million, or 12%, compared to 1998
due to an increase in advertising sales from surrounding areas relating to
Roseville Telephone's directory, the addition of an independent directory
outside of Roseville Telephone's service area and the publication of another
local exchange carrier's telephone directory. Other operating revenues increased
$2.2 million, or 30%, compared to 1998 due primarily to an increase in the
market penetration of long distance services and the introduction of PCS
services in June 1999.
Operating Expenses:
Operating expenses increased $5.2 million, or 6%, compared to 1998. Cost of
services and products increased $2.3 million, or 6%, during 1999 due primarily
to an increase in transport costs associated with long distance services,
increased publishing and distribution costs relating to directory advertising
and start up costs associated with testing and implementing the PCS network.
These increases were partially offset by the adoption of Statement of Position
98-1 as discussed more fully below.
Customer operations expense increased $1.0 million, or 6%, during 1999 due
primarily to increased labor costs related to an increase in personnel and
marketing and customer service costs associated with long distance services, the
Company's PCS operations, and the introduction of internet services.
General and administrative costs increased $248 thousand, or 1%, during 1999 due
primarily to increased labor costs and administrative costs associated with the
introduction of PCS and internet services. These increases were largely offset
by the adoption of Statement of Position 98-1 as discussed more fully below.
Depreciation and amortization expense increased $1.7 million, or 8%, during 1999
as a result of an increased investment in property, plant and equipment.
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 an increase in
net income of $3.2 million for 1999.
Other Income, Net:
Other income, net, increased $2.4 million, or 30%, compared to 1998 due
primarily to an increase of $1.2 million in income attributable to the Company's
interest in SVLP. The Company's equity in the earnings of SVLP constituted
approximately 19% and 21% of income before income taxes for 1999 and 1998,
respectively. Interest income increased $443 thousand, or 35%, during 1999 as a
result of larger average invested balances during 1999. Interest expense
increased $748 thousand, or 28%, during 1999 as a result of an increase in the
Company's average outstanding long-term debt balances.
Income Taxes:
Income taxes increased $4.6 million, or 27%, compared to 1998 due primarily to
the increase in income subject to tax. The effective federal and state income
tax rate was 40.1% in 1999 compared to 40.0% in 1998.
1998 versus 1997
Net income for 1998 was $25.0 million, or $1.58 per share, compared with net
income of $23.0 million, or $1.45 per share, for 1997. The increase in net
income and earnings per share for 1998 over 1997 was due principally to the
strong economic growth in the Company's local exchange service area, the
introduction of new products and services, the results of various marketing
initiatives and operational and financial efficiencies gained from the Company's
diversification and cost containment initiatives.
Operating Revenues:
Rate regulated revenues increased $5.8 million, or 6%, compared to 1997. This
increase was due to the combined effects of 1) access line growth of 7%, 2)
improved penetration in custom calling, voice mail and other enhanced network
services due to increased marketing activities, 3) the introduction of a new
national directory assistance service, and 4) increased network access revenues
due to larger minute-of-use volumes, expanded demand for special access services
and increased interstate access settlements.
Directory advertising revenues increased $4.7 million, or 68%, compared to 1997.
Prior to 1998, the Company recognized a net share of the revenues generated by
the directory, which was previously produced by a third party. Beginning in
1998, the Company's consolidated financial statements reflect all of the
revenues and the related costs associated with the directory, which is now
produced by RCS Directories.
Other revenues increased $1.8 million, or 33%, over 1997 due primarily to the
introduction of long distance services in the fourth quarter of 1997.
Operating Expenses:
Operating expenses increased $6.0 million, or 7%, compared to 1997. Cost of
services and products increased $2.6 million, or 8%, during 1997 due primarily
to costs associated with the production of Roseville Telephone's 1998 directory.
Depreciation expense increased $1.6 million as a result of an increased
investment in property, plant and equipment. Customer operations expense
increased $1.7 million during 1998 due primarily to increased labor costs
related to an increase in personnel and costs associated with new services.
Other Income, Net:
Other income, net, decreased $1.8 million compared to 1997 due primarily to a
decrease of $1.2 million in income attributable to the Company's interest in
SVLP. The Company's equity in the earnings of SVLP constituted approximately 21%
and 27% of income before income taxes for 1998 and 1997, respectively. Interest
expense increased $300 thousand compared to 1997 primarily as a result of an
increase in the Company's average outstanding long-term debt balances.
Income Taxes:
Income taxes increased $1.9 million compared to 1997 due primarily to the
increase in income subject to tax. The effective federal and state income tax
rate was 40.0% in 1998 compared to 39.2% in 1997 due to certain income tax
credits received in 1997.
Year 2000 Matters
In prior years, the Company discussed the nature and progress of its plans to
make its computer systems Year 2000 compliant. In late 1999, the Company
completed the remediation and testing of its computer systems. As a result of
those planning and implementation efforts, the Company experienced no
significant operational problems for its computer systems and believes those
systems successfully responded to the Year 2000 date change. The Company
incurred approximately $1.3 million during 1999 in connection with modifying and
converting its computer systems. The Company is not aware of any material
problems resulting from Year 2000 issues; however, it will continue to monitor
its computer applications throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
Pending Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for fiscal years beginning after
June 15, 2000. This statement standardized the accounting for derivatives and
hedging activities and requires that all derivatives be recognized in the
statement of financial position as either assets or liabilities at fair value.
Changes in the fair value of derivatives that do not meet the hedge accounting
criteria are to be reported in earnings. The Company is required to adopt this
accounting pronouncement in 2001; however, management believes it will not have
a significant impact on the Company's annual consolidated financial statements.
Liquidity and Capital Resources
As reflected in the Consolidated Statements of Cash Flows, net cash provided by
operating activities was $42.7 million, $41.0 million and $27.1 million in 1999,
1998 and 1997, respectively. The increase in operating cash flows for 1999 was
primarily due to an increase in income from operations and the timing of
payables and other accrued liabilities. The Company used cash flows from
operations and existing cash and cash equivalents to fund 1) capital
expenditures of $58.4 million pertaining to ongoing plant construction projects
for Roseville Telephone and RCS Wireless, 2) dividends of $15.8 million and 3)
principal payments of $2.1 million to retire long-term debt.
The Company's most significant use of funds in 2000 is expected to be for 1)
budgeted capital expenditures of approximately $30.8 million and $20.2 million
relating to Roseville Telephone and RCS Wireless, respectively, 2) net operating
expenditures of up to $9.5 million relating to RCS Wireless, 3) scheduled
payments of long-term debt of $2.1 million and 4) the purchase by the Company of
up to one million shares of its outstanding common stock pursuant to a
repurchase program authorized by the Board of Directors on February 29, 2000.
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, including short-term borrowings or long term debt, for
the purposes of funding future capital expenditures and potential investments.
Other Financial Information
The Company's consolidated financial statements have been prepared in accordance
with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation,"
which requires companies meeting the criteria to give effect in their financial
statements to certain actions of regulators. For example, amounts charged to
regulated 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 would have been between $9.9 million and $17.1 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.
Regulatory and Legal Matters
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.
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. On July 30, 1999, the United States Court
of Appeals for the Fifth Circuit issued an opinion addressing challenges to the
F.C.C.'s universal service order. The Court upheld the F.C.C.'s authority to
implement its program for funding telecommunications services for schools and
libraries and rejected challenges on technical issues such as the F.C.C.'s use
of models in determining universal service. The Court ruled, however, that the
F.C.C. can't use intrastate revenues in determining a carriers' universal
service contribution and rejected the so-called flowback method of collecting
universal service contributions through access charges. To implement the Fifth
Circuit's decision, the F.C.C. adopted an order on October 8, 1999, making
revisions to its rules, effective on November 1, 1999, requiring, among other
things, that 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:
o The rules governing the opening of markets to competition
o 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
o 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.
Commencing in July 1998, there have been a series of communications between the
partners of SVLP regarding the ownership and operation of PCS licenses in
territories served by SVLP and the allegation by its general partner AirTouch
Cellular ("AirTouch") that such ownership and operation would cause a partner of
SVLP to be in violation of the terms of SVLP's Agreement Establishing Limited
Partnership, as amended ("Partnership Agreement"). In addition to the Company's
ownership of PCS licenses, an affiliate of AirTouch and one other limited
partner also own such licenses.
On March 26, 1999, the Company filed an action against AirTouch in the United
States District Court for the Eastern District of California requesting
declaratory relief, injunctive relief and damages for violation of the Sherman
Act, the California Cartwright Act, breach of contract, breach of fiduciary
duty, intentional and negligent interference with economic advantage and
violation of California's unfair competition act. AirTouch answered the
complaint, and filed counterclaims against the Company for breach of contract,
breach of fiduciary duty, breach of the covenant of good faith and fair dealing,
fraud and deceit, negligent misrepresentation, misappropriation of trade
secrets, violation of the California Business and Professions Code, declaratory
relief and contract reformation. In addition, AirTouch also sought to compel
arbitration to resolve the dispute.
The Company and AirTouch have previously reached an agreement on a resolution of
the dispute, including the dismissal of the litigation, which would permit the
Company to continue to provide PCS subject to the restriction on the provision
of certain SVLP information to the Company. AirTouch now refuses to implement
the agreement, and the Company has filed a Motion to Enforce Settlement, and
requested an Evidentiary Hearing, which request was granted and the Evidentiary
Hearing is scheduled to be conducted on March 27, 2000. If the Company prevails
on its Motion to Enforce Settlement, the litigation will be concluded. Even if
the Motion is unsuccessful, the Company will be able to continue to pursue its
legal remedies. If the dispute is not resolved, the Company does not believe
that these proceedings impair the recoverability of its $38.4 million investment
in SVLP.
Item 7A. Quantitative and Qualitative 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.
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors .................................... 22
Consolidated statements of income for each of the
three years in the period ended December 31, 1999 ................. 23
Consolidated balance sheets as of December 31, 1999 and 1998 ...... 24
Consolidated statements of shareholders' equity for each of
the three years in the period ended December 31, 1999 ............. 26
Consolidated statements of cash flows for each of the three
years in the period ended December 31, 1999 ....................... 27
Notes to consolidated financial statements ........................ 29
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Roseville Communications Company
We have audited the accompanying consolidated balance sheets of Roseville
Communications Company as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of Sacramento-Valley Limited
Partnership (a partnership in which the Company has an approximate 23.5%
interest) have been audited by other auditors whose reports have been furnished
to us; insofar as our opinion on the consolidated financial statements relates
to data included for Sacramento-Valley Limited Partnership, it is based solely
on their reports.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Roseville Communications Company at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ERNST & YOUNG LLP
Sacramento, California
February 4, 2000
ROSEVILLE COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
(amounts in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
Operating revenues:
Local service $ 68,605 $ 62,728 $ 57,612
Network access service 43,531 38,724 37,993
-------- -------- --------
Total rate regulated revenues 112,136 101,452 95,605
Directory advertising 12,989 11,593 6,898
Nonregulated sales and service 6,284 6,431 6,952
Other 9,392 7,206 5,433
-------- -------- --------
Total operating revenues 140,801 126,682 114,888
Operating expenses:
Cost of services and products 37,558 35,305 32,702
Customer operations and selling 17,108 16,108 14,403
General and administrative 20,805 20,557 20,431
Depreciation and amortization 22,378 20,684 19,116
-------- -------- --------
Total operating expenses 97,849 92,654 86,652
-------- -------- --------
Income from operations 42,952 34,028 28,236
Other income (expense):
Interest income 1,725 1,282 1,537
Interest expense (3,465) (2,717) (2,417)
Equity in earnings of cellular
partnership 10,129 8,904 10,080
Allowance for funds used during
construction 1,530 498 587
Other, net 154 (244) (228)
-------- -------- --------
Total other income, net 10,073 7,723 9,559
-------- -------- --------
Income before income taxes 53,025 41,751 37,795
Income taxes 21,275 16,702 14,824
-------- -------- --------
Net income $ 31,750 $ 25,049 $ 22,971
======== ======== ========
Basic and diluted
earnings per share $2.01 $1.58 $1.45
===== ===== =====
Cash dividends per share $1.00 $ .85 $ .63
===== ===== =====
Shares of common stock used to
calculate earnings per share 15,822 15,815 15,815
======= ======== ========
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(amounts in thousands)
ASSETS 1999 1998
------ ---- ----
Current assets:
Cash and cash equivalents $ 10,886 $ 38,840
Short-term investments 6,464 4,242
Accounts receivable (less allowances of
$436 and $287, respectively) 20,399 16,851
Refundable income taxes 330 969
Inventories 2,510 1,828
Deferred income tax asset 1,625 1,240
Prepaid expenses and other current assets 251 107
-------- --------
Total current assets 42,465 64,077
Property, plant and equipment:
In service 365,047 309,601
Under construction 18,849 18,836
-------- --------
383,896 328,437
Less accumulated depreciation 144,988 126,300
-------- --------
238,908 202,137
Investments and other assets:
Cellular partnership 38,426 35,875
PCS licenses, at cost, net 8,737 9,000
Deferred charges and other assets 4,651 4,788
-------- --------
51,814 49,663
-------- --------
$333,187 $315,877
======== ========
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1999 and 1998
(amounts in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ---- ----
Current liabilities:
Current portion of long-term debt $ 2,143 $ 2,143
Accounts payable and other accrued
liabilities 6,265 9,506
Payables to telecommunications entities 6,353 5,790
Advance billings and customer deposits 2,014 1,926
Accrued pension cost 5,128 3,111
Accrued compensation 4,253 3,618
-------- --------
Total current liabilities 26,156 26,094
Long-term debt 46,428 48,571
Deferred income taxes 25,629 23,629
Other liabilities and deferred credits 6,118 4,777
Minority interest in subsidiary 1,256 1,517
Shareholders' equity:
Common stock, without par value; 100,000
shares authorized, 15,828 shares issued and
outstanding (15,815 shares in 1998) 189,554 189,171
Retained earnings 38,046 22,118
-------- --------
Total shareholders' equity 227,600 211,289
-------- --------
$333,187 $315,877
======== ========
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(amounts in thousands)
Common Stock
-------------------
Number of Retained
Shares Amount earnings Total
------ -------- -------- -------
Balance at December 31, 1996 15,358 $177,758 $ 9,043 $186,801
3% stock dividend, at fair value:
Shares 457 11,413 (11,413) -
Cash in lieu of fractional
shares - - (106) (106)
Cash dividends - - (9,983) (9,983)
Net income - - 22,971 22,971
------ -------- ------- --------
Balance at December 31, 1997 15,815 189,171 10,512 199,683
Cash dividends - - (13,443) (13,443)
Net income - - 25,049 25,049
------ -------- ------- --------
Balance at December 31, 1998 15,815 189,171 22,118 211,289
Issuance of common stock 13 383 - 383
Cash dividends - - (15,822) (15,822)
Net income - - 31,750 31,750
------ -------- ------- --------
Balance at December 31, 1999 15,828 $189,554 $38,046 $227,600
====== ======== ======= ========
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
(amounts in thousands)
1999 1998 1997
-------- -------- --------
activities:
Net income $ 31,750 $ 25,049 $ 22,971
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 22,378 20,684 19,116
Equity component of allowance
for funds used during
construction (643) (378) (505)
Provision for deferred income
taxes
1,495 (650) 1,455
Equity in earnings of cellular
partnership (10,129) (8,904) (10,080)
Provision for doubtful accounts 638 942 297
Other, net 122 (165) (96)
Net changes in:
Accounts receivable (4,186) (1,620) (1,750)
Refundable income taxes 639 858 (1,955)
Deferred directory charges (53) (299) (3,578)
Inventories, prepaid expenses
and other current assets (826) 400 984
Payables, accrued liabilities
and other deferred credits 1,523 5,127 196
-------- -------- --------
Net cash provided by operating
activities 42,708 41,044 27,055
Cash flows from investing
activities:
Capital expenditures for property,
plant and equipment (58,402) (35,209) (22,116)
Purchase of PCS licenses -- -- (9,000)
Purchases of held-to-maturity
investments (8,022) (7,478) (7,481)
Maturities of held-to-maturity
investments 5,800 7,200 5,750
Investment in cellular partnership -- (701) (2,514)
Return of investment in cellular
partnership 7,578 6,761 5,710
Return of refundable deposit -- 1,620 9,000
Other, net 349 327 299
-------- -------- --------
Net cash used in investing
activities (52,697) (27,480) (20,352)
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1999, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
(amounts in thousands)
1999 1998 1997
---- ---- ----
Cash flows from financing
activities:
Principal payments of long-term
debt $ (2,143) $ (4,822) $ (5,714)
Proceeds of long-term debt - 40,000 -
Retirement of long-term debt - (12,500) -
Dividends paid and fractional
share amounts (15,822) (13,443) (10,089)
Investment in subsidiary by
minority partners - 681 25
-------- -------- --------
Net cash provided by (used in)
financing activities (17,965) 9,916 (15,778)
-------- -------- --------
Increase (decrease) in cash and
cash equivalents (27,954) 23,480 (9,075)
Cash and cash equivalents at
beginning of year 38,840 15,360 24,435
-------- -------- --------
Cash and cash equivalents at
end of year $ 10,886 $ 38,840 $ 15,360
======== ======== ========
See accompanying notes.
ROSEVILLE COMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and basis of accounting
Roseville Communications Company (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 each wholly-owned subsidiaries of the Company. Roseville PCS,
Inc. is the manager of and has an approximate 96.7% interest in West
Coast PCS LLC (d.b.a. "RCS Wireless").
The Company maintains the accounts of Roseville Telephone in accordance
with the Uniform System of Accounts prescribed for telephone companies
by the Federal Communications Commission (the "F.C.C."). The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
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 regulated 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
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 would have been 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.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and a majority-owned limited
liability company. All significant intercompany transactions have been
eliminated.
Cash equivalents and short-term investments
The Company invests its excess cash in high-quality debt instruments and
certain other investments. The Company considers highly liquid
investments with maturities of three months or less from the acquisition
date of the instrument to be cash equivalents. Short-term investments at
December 31, 1999 and 1998 consist of high grade commercial paper, U.S.
government agency securities and unsecured corporate notes with
maturities greater than 90 days; however, none of the Company's
investments have maturities greater than one year. The Company has no
investments in equity securities.
Fair values of financial instruments
As of December 31, 1999 and 1998, the Company's financial instruments
consist of cash, cash equivalents, short-term investments and long-term
debt. Management believes that the carrying values of cash equivalents
and short-term investments at December 31, 1999 and 1998, which are at
amortized cost, approximated their fair values at such dates. The
aggregate fair value of the Company's long-term debt (including current
maturities) was approximately $44,534 and $50,840 at December 31, 1999
and 1998, respectively. Fair values for cash equivalents and short-term
investments were determined by quoted market prices and for long-term
debt by a discounted cash flow analysis based on the Company's current
incremental borrowing rates for similar instruments.
Inventories
Telephone construction inventories consist of materials and supplies,
which are stated at average cost. Equipment and other nonregulated
inventory held for resale are stated at the lower of average cost or
market.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Retirements and other
reductions of regulated telephone plant and equipment with a cost of
approximately $3,586, $3,470 and $1,127 in 1999, 1998 and 1997,
respectively, were charged against accumulated depreciation with no gain
or loss recognized. When property applicable to nonregulated operations
is sold or retired, the asset and related accumulated depreciation are
removed from the accounts and the associated gain or loss is recognized.
The cost of maintenance and repairs is charged to operating expense when
incurred.
Software costs
In 1999, the Company adopted Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
("SOP 98-1"). Under SOP 98-1, the Company capitalizes certain costs
incurred in connection with developing or obtaining internal use
software. The effect of adopting SOP 98-1 was an increase to net income
of $3,200 for the year ended December 31, 1999.
Directory advertising
Costs of directory production and advertising sales are deferred until
the directory is published. Such costs are amortized to expense and the
related advertising revenues are recognized over the life of the related
directory, normally over the year following the issue date of the
directory. Deferred directory costs of approximately $3,900 as of both
December 31, 1999 and 1998 are included in "Deferred charges and other
assets."
Regulated revenues and costs
Certain of the Company's operations are subject to regulation by the
F.C.C. and the P.U.C. Pending and future regulatory actions may have a
significant impact on the Company's future operations and financial
position.
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 in 1999,
1998 and 1997, 11%, 13%, and 16%, respectively, were recorded under
these agreements.
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 begun to negotiate the terms of
possible modifications to these agreements. In addition, Roseville
Telephone has filed an application with the P.U.C. for revenues to
replace potential changes in Pacific Bell's payments. In January 2000,
Pacific Bell filed a petition for arbitration pursuant to the
Telecommunications Act to establish an interconnection agreement for
extended area service which, if successful, might eliminate Pacific
Bell's obligation to make payments pursuant to the STA before the P.U.C.
orders replacement revenues. Roseville Telephone disagrees with the
authority on which Pacific Bell relied for its filing and, in addition,
in February 2000, filed a separate application with the P.U.C. to
suspend any such proceedings pending an order on the prior application
filed by Roseville Telephone to obtain revenues to replace any changes
in Pacific Bell's payments to Roseville Telephone. Roseville Telephone
anticipates that additional proceedings and negotiations will be held to
address these issues, the effects of which on Roseville Telephone cannot
yet be determined.
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 April 1999, the P.U.C. issued a decision modifying
the rate case decision by increasing the Company's rates to correct
certain legal and factual errors in the original rate case decision.
This modification resulted in 1) a one-time increase to rate regulated
revenues for the year ended December 31, 1999 of $958 retroactive to
1997 and 2) an annual increase of approximately $328 to rate regulated
revenues.
In accordance with the requirements of its general rate case order,
Roseville Telephone filed an application for review of its NRF on March
8, 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. A decision in this proceeding
is anticipated in mid-2000. In addition, the P.U.C. Office of Ratepayer
Advocates ("ORA") has undertaken a verification audit of Roseville
Telephone's non-regulated and affiliated transactions pursuant to the
general rate case and other P.U.C. orders. The effect of these
proceedings on Roseville Telephone cannot yet be determined.
Depreciation and amortization
Depreciation of regulated telephone plant and equipment is computed on a
straight-line basis using rates approved by the P.U.C. Average annual
composite depreciation rates were 6.74%, 6.85%, and 6.89% in 1999, 1998
and 1997, respectively.
The cost of property, plant and equipment used in nonregulated
activities is depreciated over its estimated useful lives, which range
from 5 to 10 years, on a straight-line basis.
Amortization of PCS licenses is computed on a straight-line basis over
twenty years.
Advertising costs
The costs of advertising are expensed as incurred. Advertising costs
were $1,351, $887 and $742 in 1999, 1998 and 1997, respectively.
Allowance for funds used during construction
The F.C.C. and the P.U.C. allow Roseville Telephone to capitalize an
allowance for funds used during construction, which includes both an
interest and return on equity component. Such amounts are reflected as a
cost of constructing certain plant assets and as an element of "Other
income."
Income taxes
The Company accounts for income taxes using the liability method, which
requires deferred tax assets and liabilities to be recorded for the
expected future tax consequences of events that have been included in
the financial statements and tax returns. Additionally, the liability
method requires adjustments of deferred tax assets and liabilities for
changes in tax laws or rates and requires recognition of a regulatory
asset or liability when it is probable that deferred taxes would be
reflected in future rates of regulated companies.
Per share amounts
Basic and diluted earnings per share of common stock are based on the
weighted average number of shares outstanding each year. Cash dividends
per share is based on the actual dividends per share, as declared by the
Company's Board of Directors.
Statements of cash flows information
During 1999, 1998 and 1997, the Company made payments for interest and
income taxes as follows:
1999 1998 1997
---- ---- ----
Interest (net of amounts capitalized) $ 2,552 $ 2,536 $ 2,480
Income taxes $19,141 $16,494 $15,324
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Management determines the appropriate classification of securities at
the time of purchase and reevaluates such designation as of each balance
sheet date. At December 31, 1999 and 1998, all securities are designated
as held-to-maturity as management has the positive intent and ability to
hold the securities until maturity. Held-to-maturity securities are
stated at cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion, as well as any
interest on the securities, is included in interest income.
Following is a summary of the Company's investments (included in cash,
cash equivalents and short-term investments) as of December 31, 1999 and
1998 at amortized cost, which approximates fair value:
1999 1998
---- ----
Commercial paper $3,488 $31,329
U.S. government agency securities 2,726 2,754
Repurchase agreements 190 50
Other unsecured corporate notes 250 500
------ -------
Total investments $6,654 $34,633
====== =======
3. INVESTMENT IN SACRAMENTO-VALLEY LIMITED PARTNERSHIP
The Company has an approximate 23.5% interest in Sacramento-Valley
Limited Partnership ("SVLP") which is accounted for using the equity
method. SVLP operates a cellular mobile radiotelephone system
principally in California. The Company's portion of undistributed
earnings of SVLP included in consolidated shareholders' equity at
December 31, 1999 amounted to $31,006.
Summarized financial information for SVLP is as follows:
Balance sheet information as of December 31, 1999 and 1998:
1999 1998
---- ----
Current assets $ 44,240 $ 39,564
Noncurrent assets, primarily cellular plant $161,672 $152,404
Current liabilities $ 34,043 $ 40,080
Noncurrent liabilities $ 201 $ 178
Income statement information for
the years ended December 31, 1999, 1998
and 1997:
1999 1998 1997
---- ---- ----
Net revenues $215,105 $195,624 $173,616
Costs and expenses, net 169,407 158,829 130,673
-------- -------- --------
Net income $ 45,698 $ 36,795 $ 42,943
======== ======== ========
3. INVESTMENT IN SACRAMENTO-VALLEY LIMITED PARTNERSHIP (CONTINUED)
Commencing in July 1998, there have been a series of communications
between the partners of SVLP regarding the ownership and operation of PCS
licenses in territories served by SVLP and the allegation by its general
partner AirTouch Cellular ("AirTouch") that such ownership and operation
would cause a partner of SVLP to be in violation of the terms of SVLP's
Agreement Establishing Limited Partnership, as amended ("Partnership
Agreement"). In addition to the Company's ownership of PCS licenses, an
affiliate of AirTouch and one other limited partner also own such
licenses.
On March 26, 1999, the Company filed an action against AirTouch in the
United States District Court for the Eastern District of California
requesting declaratory relief, injunctive relief and damages for
violation of the Sherman Act, the California Cartwright Act, breach of
contract, breach of fiduciary duty, intentional and negligent
interference with economic advantage and violation of California's unfair
competition act. AirTouch answered the complaint, and filed counterclaims
against the Company for breach of contract, breach of fiduciary duty,
breach of the covenant of good faith and fair dealing, fraud and deceit,
negligent misrepresentation, misappropriation of trade secrets, violation
of the California Business and Professions Code, declaratory relief and
contract reformation. In addition, AirTouch also sought to compel
arbitration to resolve the dispute.
The Company and AirTouch have previously reached an agreement on a
resolution of the dispute, including the dismissal of the litigation,
which would permit the Company to continue to provide PCS subject to the
restriction on the provision of certain SVLP information to the Company.
AirTouch now refuses to implement the agreement, and the Company has
filed a Motion to Enforce Settlement, and requested an Evidentiary
Hearing, which request was granted and the Evidentiary Hearing is
scheduled to be conducted on March 27, 2000. If the Company prevails on
its Motion to Enforce Settlement, the litigation will be concluded. Even
if the Motion is unsuccessful, the Company will be able to continue to
pursue its legal remedies. If the dispute is not resolved, the Company
does not believe that these proceedings impair the recoverability of its
$38,426 investment in SVLP.
4. LONG-TERM DEBT
Long-term debt outstanding as of December 31, 1999 and 1998 consisted of
the following:
1999 1998
---- ----
Unsecured Series A Senior Notes, with interest
payable semiannually at a fixed rate of 6.3%;
principal payments are due in equal annual
installments of approximately $3,636, commencing
in December 2003 and ending in December 2013 $ 40,000 $ 40,000
Unsecured term loan with a bank, with interest
payable quarterly at a fixed rate of 6.22%;
principal payments are due in equal quarterly
installments of approximately $536, through
December 2003 8,571 10,714
-------- --------
Total long-term debt 48,571 50,714
Less current portion 2,143 2,143
-------- --------
Total long-term debt, net of current portion $ 46,428 $ 48,571
======== ========
At December 31, 1999, the aggregate maturity requirements for the years
2000 through 2002 are $2,143 in each year, $5,779 in 2003 and $3,636 in
2004.
Certain of the aforementioned credit arrangements contain various
positive and negative covenants with respect to cash flow coverage,
tangible net worth and leverage ratio. These provisions could restrict
the payment of dividends in certain circumstances; however, the entire
amount of retained earnings at December 31, 1999 and 1998 was
unrestricted.
5. INCOME TAXES
Income tax expense consists of the following components:
1999 1998 1997
---- ---- ----
Current expense:
Federal $ 15,267 $ 13,400 $ 10,273
State 4,513 3,952 3,096
--------- --------- ---------
Total current expense 19,780 17,352 13,369
Deferred expense:
Federal 1,526 (271) 1,442
State (31) (379) 13
--------- --------- ---------
Total deferred expense 1,495 (650) 1,455
--------- --------- ---------
Total income tax expense $ 21,275 $ 16,702 $ 14,824
========= ========= =========
Income tax expense differs from that computed by using the statutory
federal tax rate (35% in all years presented) due to the following:
1999 1998 1997
---- ---- ----
Computed at statutory rates $ 18,559 $ 14,613 $ 13,228
Increase (decrease):
State taxes, net of federal benefit 2,913 2,322 2,021
Other, net (197) (233) (425)
-------- -------- --------
Income tax expense $ 21,275 $ 16,702 $ 14,824
======== ======== ========
Effective federal and state tax rate 40.1% 40.0% 39.2%
======== ======== ========
5. Income taxes (continued)
The significant components of the Company's deferred income tax assets
and liabilities were as follows at December 31, 1999 and 1998:
Deferred Income Taxes
----------------------
1999 1998
---- ----
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Property, plant and
equipment - primarily due
to depreciation differences $ -- $24,801 $ -- $23,429
Differences in the timing of
recognition
of revenues 2,403 -- 2,403 --
Cellular partnership -- 6,757 -- 5,875
State franchise taxes 1,625 -- 1,240 --
Other, net 3,745 219 3,591 319
------- ------- ------- -------
Total 7,773 31,777 7,234 29,623
Less current portion 1,625 -- 1,240 --
------- ------- ------- -------
Total deferred income taxes $ 6,148 $31,777 $ 5,994 $29,623
======= ======= ======= =======
Net long-term deferred
income tax liability $25,629 $23,629
======= =======
6. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The Company sponsors a noncontributory defined benefit pension plan
covering substantially all employees. Benefits are based on years of
service and the employee's average compensation during the five highest
consecutive years of the last ten years of credited service. The
Company's funding policy is to contribute annually an actuarially
determined amount consistent with applicable federal income tax
regulations. Contributions are intended to provide for benefits
attributed to service to date. Plan assets are primarily invested in
collective trust accounts, government and government agency obligations,
publicly traded stocks and bonds and mortgage-related securities.
Net periodic pension cost for 1999, 1998 and 1997 includes the following
components:
1999 1998 1997
---- ---- ----
Service cost-benefits earned during the
period $ 3,750 $ 3,248 $ 2,915
Interest cost on projected benefit
obligation 5,298 4,850 4,599
Expected return on plan assets (5,964) (5,216) (4,341)
Amortization of transition obligation 265 265 265
------- ------- -------
Net pension cost $ 3,349 $ 3,147 $ 3,438
======= ======= =======
The following table sets forth the change in benefit obligation, change
in plan assets and funded status as of December 31, 1999 and 1998:
1999 1998
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 75,813 $ 67,033
Service cost 3,750 3,248
Interest cost 5,298 4,850
Actuarial losses (gain) (8,423) 2,823
Benefits paid (2,489) (2,141)
-------- --------
Benefit obligation at end of year $ 73,949 $ 75,813
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 71,223 $ 60,937
Actual return on plan assets 6,657 9,040
Company contribution 1,332 3,387
Benefits paid (2,489) (2,141)
-------- --------
Fair value of plan assets at end of year $ 76,723 $ 71,223
======== ========
Funded status:
Funded status of plan at end of year $ 2,774 $ (4,590)
Unrecognized actuarial loss (9,520) (404)
Unrecognized prior service cost (24) (26)
Unrecognized net transition obligation 1,642 1,909
-------- --------
Accrued benefit cost $ (5,128) $ (3,111)
======== ========
The discount rates used in determining the projected benefit obligation
at December 31, 1999 and 1998 were 7.5% and 6.75%, respectively. The
assumed rate of increase in future compensation levels used to measure
the projected benefit obligation was 6% and 5.5% at December 31, 1999
and 1998, respectively. The expected long-term rate of return on plan
assets used in determining net pension cost was 8.5% in 1999, 1998 and
1997. A decrease in the discount rate at December 31, 1998 increased
pension cost $233 for 1999.
The Company also maintains two defined contribution retirement plans,
the Employee Stock Ownership Plan ("ESOP") and the Retirement Supplement
Plan ("RSP") which together provide a retirement and savings feature for
substantially all employees. The retirement feature allows for qualified
tax deferred contributions by employees under Section 401(k) of the
Internal Revenue Code (the "Code"). Subject to certain limitations,
one-half of all employee contributions made to the plans are matched by
the Company. Until January 1, 1999, employees made both retirement and
savings contributions to the RSP. However, effective January 1, 1999,
the Company approved an amendment to discontinue the provisions of the
retirement feature of the RSP and approved the formation of the ESOP for
the purposes of qualifying employer and employee contributions under
section 401(k) of the Code. The plan provisions of the ESOP regarding
eligibility, vesting, benefits and qualifying contributions are
substantially the same as the retirement feature of the RSP.
Additionally, the ESOP provides for voting rights as to the
participant's share of the Company's common stock held by the ESOP and
for certain diversification rights of participant's account balances.
Matching contributions made by the Company under the RSP and ESOP
amounted to $1,499, $1,417 and $1,340 in 1999, 1998 and 1997,
respectively. At December 31, 1999, 11% of the Company's outstanding
shares of common stock were held by the RSP and ESOP.
The Company provides certain postretirement benefits other than pensions
to substantially all employees, including life insurance benefits and a
stated reimbursement for Medicare supplemental insurance. The benefit
obligations and annual postretirement benefits costs relating to these
benefits are not significant to the Company's consolidated financial
position and results of operations.
7. SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan wherein shareholders of the
Company receive rights to purchase the Company's common stock, or an
acquirer's common stock, at a discount in certain events involving an
acquisition of 20% or more of the Company's common stock by any person
or group in a transaction not approved by the Company's Board of
Directors. The rights expire in March 2008.
8. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain facilities and equipment used in its
operations and reflects lease payments as rental expense for the periods
to which they relate. Total rent expense was $602, $496, and $482 in
1999, 1998 and 1997, respectively.
As of December 31, 1999 the Company had various non-cancellable leases
with terms greater than one year. The minimum lease payments for the
next five years are as follows:
2000 $ 956
2001 936
2002 845
2003 719
2004 392
------
Total $3,848
======
Other commitments
As of December 31, 1999, binding commitments for future capital
expenditures approximate $1,800. The Company periodically contributes
capital to SVLP to maintain its existing partnership interest. As of
December 31, 1999, the known commitment for future capital funding to
the partnership was $3,079.
Litigation and regulatory proceedings
The Company is subject to certain legal and regulatory proceedings and
claims arising in the ordinary course of its business. In the opinion of
management, any liability which may ultimately be incurred with respect
to these matters will not materially affect the consolidated financial
position or results of operations of the Company.
9. CONCENTRATIONS OF CREDIT RISK, SEGMENTS AND SIGNIFICANT CUSTOMERS
Substantially all of the Company's revenues were from communications and
related services provided in the Northern California area. The Company
performs ongoing credit evaluations of its customers' financial
condition and management believes that an adequate allowance for
doubtful accounts has been provided.
Based on the common nature of the operations, service area, and customer
base, management believes that the Company, its subsidiaries and its
divisions operate in a single business segment.
Approximately 11%, 13%, and 16% of the Company's consolidated operating
revenues in 1999, 1998, and 1997, respectively, were derived from access
charges and other charges to Pacific Bell pursuant to certain agreements
described in Note 1 - Regulated revenues and costs. Approximately 8%,
8%, and 10% of the Company's consolidated operating revenues in 1999,
1998 and 1997, respectively, were derived from access charges and other
charges to AT&T. No other customers accounted for more than 10% of
consolidated operating revenues.
10. PENDING ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for fiscal years beginning after June 15, 2000. This statement
standardized the accounting for derivatives and hedging activities and
requires that all derivatives be recognized in the statement of
financial position as either assets or liabilities at fair value.
Changes in the fair value of derivatives that do not meet the hedge
accounting criteria are to be reported in earnings. The Company is
required to adopt this accounting pronouncement in 2001; however,
management believes it will not have a significant impact on the
Company's annual consolidated financial statements.
11. SUBSEQUENT EVENT (UNAUDITED)
On February 29, 2000, the Company's Board of Directors authorized a
program to repurchase up to 1,000 shares of the Company's outstanding
common stock.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information regarding the executive officers of the Company, see "Executive
Officers of the Registrant" at the end of Part I of this report. Other
information required by this item is incorporated herein by reference from the
proxy statement for the annual meeting of the Company's shareholders to be held
on May 19, 2000.
Item 11. Executive Compensation.
Incorporated herein by reference from the proxy statement for the annual meeting
of the Company's shareholders to be held on May 19, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference from the proxy statement for the annual meeting
of the Company's shareholders to be held on May 19, 2000.
Item 13. Certain Relationships and Related Transactions.
Incorporated herein by reference from the proxy statement for the annual meeting
of the Company's shareholders to be held on May 19, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) 1 and 2. Financial Statements
The financial statements listed in the
accompanying Index to Financial Statements
are filed as part of this annual report.
3. Exhibits
The exhibits listed on the accompanying
Index to Exhibits are filed as part of
this annual report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
fourth quarter of 1999.
(c) Separate Financial Statements of Subsidiaries
Not Consolidated and Fifty Percent or Less Owned
Persons
The financial statements of a 50% or less
owned unconsolidated company are submitted
inasmuch as the registrant's equity in the
income before income taxes of such company
exceeds 20% of the total consolidated income
before income taxes of the registrant:
1. Financial Statements and Financial Statement
Schedule of Sacramento-Valley Limited Partnership
are included herewith beginning on page 47:
Page
----
Report of Independent Accountants 46
Consolidated Balance Sheets at
December 31, 1999 and 1998 47
Consolidated Statements of Income
for the Years Ended December 31, 1999,
1998 and 1997 48
Consolidated Statements of Partners'
Capital for the Years Ended December 31,
1999, 1998 and 1997 49
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999,
1998 and 1997 50
Notes to Consolidated Financial
Statements 51
Schedule II - Valuation and Qualifying
Account for the years ended December 31,1999
1998 and 1997 57
ROSEVILLE COMMUNICATIONS COMPANY
INDEX TO FINANCIAL STATEMENTS
(Item 14(a) 1 and 2)
PAGE
----
Report of Independent Auditors ..................................... 22
Consolidated statements of income for each of the three years
in the period ended December 31, 1999 .............................. 23
Consolidated balance sheets as of December 31, 1999 and 1998 ....... 24
Consolidated statements of shareholders' equity for each of
the three years in the period ended December 31, 1999 .............. 26
Consolidated statements of cash flows for each of the three
years in the period ended December 31, 1999 ........................ 27
Notes to consolidated financial statements ......................... 29
All schedules are omitted since the required information is not present or is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements and notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Partners of Sacramento-Valley Limited Partnership and subsidiary:
We have audited the accompanying consolidated balance sheet of Sacramento-Valley
Limited Partnership (the "Partnership") and subsidiary as of December 31, 1999,
and the related consolidated statements of income, changes in partners' capital,
and cash flows and the financial statement schedule I - valuation and qualifying
account for the year then ended. These financial statements and the financial
statement schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audit. The
consolidated financial statements and the financial statement schedule of the
Partnership for the years ended December 31, 1998 and 1997 were audited by other
auditors whose report, dated March 1, 1999, expressed an unqualified opinion on
those statements and the financial statement schedule.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Partnership and subsidiary as
of December 31, 1999, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 8, 2000
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(In thousands)
ASSETS 1999 1998
---- ----
CURRENT ASSETS:
Cash $ 17 $ 36
Accounts receivable, net of allowance for doubtful
accounts of $2,159 and $1,823, respectively 24,524 21,658
Due from general partner 12,383 7,362
Inventories 4,174 9,361
Other current assets 3,142 1,147
-------- --------
Total current assets 44,240 39,654
PROPERTY, PLANT AND EQUIPMENT, Net 150,774 141,109
FCC LICENSES, Net 9,886 10,204
OTHER NONCURRENT ASSETS 1,012 1,091
-------- --------
TOTAL ASSETS $205,912 $191,968
======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable, trade $ 21,364 $ 28,228
Deferred revenue 4,639 3,307
Accrued commissions 2,356 3,109
Accrued employee benefits 2,550 1,988
Accrued taxes 1,902 2,289
Other current liabilities 1,232 1,159
-------- --------
Total current liabilities 34,043 40,080
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 201 178
-------- --------
PARTNERS' CAPITAL:
General partner 88,896 75,663
Limited partners 82,772 76,047
-------- --------
Total partners' capital 171,668 151,710
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $205,912 $191,968
======== ========
See notes to consolidated financial statements.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
1999 1998 1997
---- ---- ----
OPERATING REVENUE $215,105 $195,624 $173,616
-------- -------- --------
OPERATING EXPENSES:
Cost of revenues 56,684 47,801 35,385
Selling, general and administrative:
General partner and affiliates 15,681 10,371 8,162
Other 73,769 75,670 68,265
Depreciation and amortization 25,900 25,522 19,179
-------- -------- --------
Total operating expenses 172,034 159,364 130,991
-------- -------- --------
OPERATING INCOME 43,071 36,260 42,625
OTHER INCOME 2,136 - -
INTEREST INCOME ON AMOUNTS DUE
FROM GENERAL PARTNER 600 615 371
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY (109) (80 (53)
-------- -------- --------
NET INCOME $ 45,698 $ 36,795 $ 42,943
======== ======== ========
ALLOCATION OF NET INCOME:
General partner $ 22,793 $ 18,352 $ 21,418
Limited partners 22,905 18,443 21,525
-------- -------- --------
TOTAL $ 45,698 $ 36,795 $ 42,943
======== ======== ========
See notes to consolidated financial statements.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
General
Partner Limited Partners
-------- ----------------------------------------------
Centennial
Cellular
Telephone
Company of Roseville Evans GTE
AirTouch Sacramento Telephone Cellular Wireless
Cellular Valley Company Inc. Inc. Total
------- ------- ------- ------ ------ --------
Partners' capital,
December 31, 1996 $55,560 $26,150 $26,150 $2,450 $1,093 $111,403
Contributions 5,343 2,514 2,514 236 105 10,712
Distributions (12,130) (5,709) (5,709) (535) (238) (24,321)
Net income 21,418 10,080 10,080 945 420 42,943
------- ------- ------- ------ ------ --------
Partners' capital,
December 31, 1997 70,191 33,035 33,035 3,096 1,380 140,737
Contributions 1,489 701 701 66 29 2,986
Distributions (14,369) (6,761) (6,761) (635) (282) (28,808)
Net income 18,352 8,636 8,636 811 360 36,795
------- ------- ------- ------ ------ --------
Partners' capital,
December 31, 1998 75,663 35,611 35,611 3,338 1,487 151,710
Contributions 6,542 3,079 3,079 288 128 13,116
Distributions (16,102) (7,577) (7,577) (710) (316) (32,282)
Contributions
due from limited
partners - (3,079) (3,079) (288) (128) (6,574)
Net income 22,793 10,726 10,726 1,006 447 45,698
------- ------- ------- ------ ------ --------
Partners' capital,
December 31, 1999 $88,896 $38,760 $38,760 $3,634 $1,618 $171,668
See notes to consolidated financial statements.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,698 $ 36,795 $ 42,943
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 25,900 25,522 19,179
Minority interest in net income of
consolidated subsidiary 109 80 53
Loss on sale of equipment 171 975 113
Changes in assets and liabilities:
Accounts receivable, net (2,866) 2,546 (611)
Inventories 5,187 (498) (5,619)
Other current assets (1,995) 1,694 (886)
Other noncurrent assets 79 (135) (104)
Accounts payable, trade (4,413) (4,584) 3,294
Deferred revenue 1,332 373 1,070
Accrued commissions (753) (156) (630)
Accrued employee benefits 562 (666) 65
Accrued taxes (387) (3,919) 4,461
Other current liabilities 73 103 (4)
-------- -------- --------
Cash flows provided by operating activities 68,697 58,130 63,324
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (31,430) (41,245) (38,665)
Proceeds from sale of equipment 103 104 83
Change in due from general partner (5,021) 8,908 (11,097)
-------- -------- --------
Cash flows used in investing activities (36,348) (32,233) (49,679)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from partners - 2,986 10,712
Distributions to partners (32,282) (28,808) (24,321)
Distributions to minority interest in
consolidated subsidiary (86) (57) (34)
-------- -------- --------
Cash flows used in financing activities (32,368) (25,879) (13,643)
-------- -------- --------
NET CHANGE IN CASH (19) 18 2
CASH, Beginning of year 36 18 16
-------- -------- --------
CASH, End of year $ 17 $ 36 $ 18
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS-
Acquisition of property, plant and equipment
included in accounts payable, trade at year-end $ 5,495 $ 7,946 $ 15,147
======== ======== ========
Contribution of property, plant and equipment
by the General Partner $ 6,542 $ - $ -
======== ======== ========
See notes to consolidated financial statements.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
1. DESCRIPTION OF PARTNERSHIP AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sacramento-Valley Limited Partnership (the "Partnership") was formed on
April 2, 1984 under the laws of the State of California and provides
wireless telecommunications services in the Northern California and
Northern Nevada areas. The Partnership's ownership interests are as
follows:
General Partner:
AirTouch Cellular, wholly-owned by a subsidiary of
Vodafone AirTouch Plc. ("Vodafone AirTouch") 49.878%
Limited Partners:
Centennial Cellular Telephone Company of Sacramento Valley 23.472%
Roseville Telephone Company 23.472%
Evans Cellular Inc. 2.200%
GTE Wireless, Inc. 0.978%
Profits and losses are allocated based on respective partnership
interests. Capital calls and distributions are made quarterly, at the
discretion of the General Partner.
Financial Statement Presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Conformity with GAAP requires
the use of estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Redding MSA Limited Partnership ("RMLP") and the Partnership. The
Partnership owns a 97.1% interest in RMLP. All significant intercompany
transactions have been eliminated.
Inventory
Inventory consists of wireless communications equipment (primarily
handsets). Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out or average method. Any losses
on the sales of handsets to customers are recognized at the time of
sale.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful life
of the asset. Land is not depreciated. Gains and losses on disposals are
included in income at amounts equal to the difference between the net
book value of the disposed assets and the proceeds received upon
disposal. Expenditures for replacements and improvements are
capitalized, while expenditures for maintenance and repairs are charged
against earnings as incurred. Assets under construction are not
depreciated until placed into service.
FCC Licenses
The Federal Communications Commission ("FCC") issues cellular licenses
that enable U.S. cellular carriers to provide service in specific
Cellular Geographic Service Areas. A cellular license is issued
conditionally for ten years. Historically, the FCC has routinely granted
license renewals providing the licensees have complied with applicable
rules, policies, and the Communications Act of 1934, as amended. The
Partnership records FCC licenses at cost and believes it has complied
and intends to continue to comply with applicable standards. The
Partnership amortizes the FCC licenses using the straight-line method
over 40 years. Accumulated amortization of FCC licenses totaled $2,827
and $2,509 at December 31, 1999 and 1998, respectively. Related
amortization expense was $318, $318 and $321 in 1999, 1998 and 1997,
respectively.
Valuation of Long-Lived Assets
The Partnership periodically reviews the carrying value of long-lived
assets and certain identifiable intangible assets, including FCC
licenses, for impairment when events or changes in circumstances
indicate that the book value of an asset may not be recoverable. An
impairment loss is recognized whenever the review demonstrates that the
book value of a long-lived asset is not recoverable.
Revenue Recognition
Operating revenues primarily consist of billings to customers for
monthly access charges, cellular airtime usage, prepaid airtime usage,
long distance and roamer charges. Revenues are recognized as services
are provided.
Unbilled revenues, resulting from cellular service provided from the
billing cycle date to the end of each period and from other cellular
carriers' customers using the Partnership's cellular systems for the
last half of each period, are estimated and recorded as receivables.
Unearned monthly access charges relating to periods after period end are
deferred.
Concentration of Credit Risk
Due to the diversity and large number of customers within the
Partnership's service area, concentrations of credit risk with respect
to trade receivables are limited. The Partnership performs ongoing
credit evaluations of its customers and in certain circumstances obtains
refundable deposits. The Partnership maintains reserves for potential
credit losses and, historically, such losses have been within
management's expectations.
Income Taxes
No provisions have been made for federal or state income taxes since
such taxes, if any, are the responsibility of the individual partners.
Advertising Costs
The Partnership expenses advertising costs as incurred. Advertising
expense was $10,269, $9,484 and $9,652 in 1999, 1998 and 1997,
respectively.
Reclassifications
Certain reclassifications of the 1998 financial statements have been
made to conform to the 1999 presentation. The reclassifications have not
affected previously reported net income or Partners' capital.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
December 31,
Depreciable ------------
Lives (Years) 1999 1998
Land $ 37 $ 37
Buildings and leasehold improvements 5-18 36,205 33,322
Cellular plant and equipment 5-10 204,103 183,215
Other equipment and furniture 2-5 20,417 22,356
Construction in progress 23,160 15,885
Total 283,922 254,815
------- -------
Less accumulated depreciation 133,148 113,706
-------- -------
Property, plant and equipment, net $150,774 $141,109
======== =======
Related depreciation expense was $25,582, $25,204 and $18,858 in 1999,
1998 and 1997, respectively.
3. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Partnership leases various facilities and equipment under
noncancelable lease arrangements. Most leases contain renewal options
for varying periods. Related rent expense under all operating leases was
$4,824, $4,760 and $4,334 in 1999, 1998 and 1997, respectively.
Future minimum lease payments required under noncancelable operating
leases with an initial term of one year or more at December 31, 1999
were:
2000 $ 5,460
2001 4,031
2002 4,640
2003 4,263
2004 4,147
Thereafter 35,987
------
Total minimum lease payments $58,528
=======
Contingencies
In December of 1998, the Partnership was named as a defendant in a class
action lawsuit, Parrish versus AirTouch Cellular. The lawsuit alleges
that the defendant conspired to fix prices of cellular services across
California, and seeks damages up to $100,000. The Partnership intends to
defend itself vigorously. While the outcome is uncertain, management
does not believe that this proceeding will have a material adverse
effect on the Partnership's financial position or results of operations
.
The Partnership is also involved in a lawsuit with Roseville Telephone
Company, a limited partner in the Partnership. The lawsuit is based on
allegations of misconduct relative to the Partnership Agreement. The
lawsuit also seeks the right for Roseville to operate its PCS licenses
within certain markets in which the Partnership operates. The
Partnership intends to defend itself vigorously and does not believe
that these proceedings will have a material adverse effect on the
Partnership's financial position or results of operations.
The Partnership is subject to state regulation of the "terms and
conditions" of cellular service other than rates and market entry and is
party to various legal proceedings in the ordinary course of business.
Although the ultimate resolution of these proceedings cannot be
ascertained, management does not believe they will have a materially
adverse effect on the financial position or results of operations of the
Partnership.
4. RELATED PARTY TRANSACTIONS
The General Partner is reimbursed for all Partnership expenditures made
as General Partner. As provided in the Partnership agreement, certain
system operations and selling, general and administrative expenses
incurred by the General Partner on behalf of the Partnership are passed
through to the Partnership.
The Partnership participates in a centralized cash management
arrangement with the General Partner. The General Partner pays or
charges the Partnership monthly interest, computed using the General
Partner's average borrowing rate (5.09% and 5.63% at December 31, 1999
and 1998, respectively) on the amounts due to or from the Partnership.
In December 1999, the General Partner contributed network equipment with
an appraised fair market value of $6,542 to the Partnership. As a
result, the General Partner issued a capital call that required the
Limited Partners to contribute cash of $6,574, to maintain their
respective ownership percentages. As of December 31, 1999, the
contributions had not been received. These amounts were recorded as
contributions in the period, with the related receivable amounts being
shown as a reduction in Partners' Capital. All requested contributions
were received by March 16, 2000.
5. MCI COMMUNICATIONS SETTLEMENT
In December 1999, the Partnership settled all outstanding litigation
with MCI Communications pertaining to a contract breach regarding retail
kiosks. As a result of this settlement, the Partnership was awarded
$2,136, that was recorded as other income in the financial statements.
The cash payment was received in January 2000.
6. MAJOR SUPPLIER
The Partnership purchases substantially all of its network equipment
from one supplier.
7. SUBSEQUENT EVENTS
In January 2000, Vodafone AirTouch entered in to a tower sublease
agreement ("the Agreement") with American Tower Corporation ("American
Tower"). Concurrent with the original sublease agreement, American Tower
also entered a build-to-suit agreement whereby American Tower has an
exclusive right to construct new towers in certain domestic markets to
Vodafone AirTouch's specifications that will be leased to Vodafone
AirTouch. The term of the Agreement differs for leased sites versus
sites owned by the company and ranges up to 99 years. Under the
Agreement, Vodafone AirTouch will transfer the right to lease available
space on up to 2,100 cellular towers owned by Vodafone AirTouch in
exchange for a cash payment of approximately $380 per tower. Vodafone
AirTouch will also receive a warrant to purchase 3,000,000 shares of
American Tower Corporation Class A Common Stock (subject to reduction if
fewer than 2,100 towers are subleased). Vodafone AirTouch will be
required to pay American Tower a monthly maintenance fee of
approximately $1.5 per tower for the existing physical space used by
their cellular equipment. Vodafone AirTouch will retain title to the
tower equipment and will have the right of first refusal for leasing
additional space on the tower. Up to approximately one hundred sixty
(160) towers owned and operated by the Partnership and subsidiary are
included in the above transaction. The Partnership is entitled to
payments of approximately $380 per tower subleased to American Tower
under the terms of the Agreement. The Partnership is also entitled to a
proportionate share of the warrants issued. The Agreement is expected to
close in multiple tranches during the year 2000.
In September 1999, Vodafone AirTouch and Bell Atlantic Corporation
("Bell Atlantic") entered into an Alliance Agreement under which
Vodafone AirTouch would contribute its U.S. wireless interest to the
existing Cellco Partnership ("Cellco"), an existing general partnership
formed by Bell Atlantic, in exchange for a partnership interest in
Cellco, subject to certain regulatory and other approvals. Upon
obtaining such approvals, as applicable, Vodafone Air Touch's interest
in the Partnership and subsidiary will be contributed to Cellco as part
of the Alliance Agreement. The Alliance Agreement is expected to close
in the second quarter of 2000.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNT
YEARS ENDED DCEMBER 31, 1999, 1998 AND 1997
(In thousands)
Balance at Charged to Balance
Beginning of Costs and At end
Period Expenses Deductions of Period
------------ ---------- ---------- ---------
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts $1,823 $4,286 $(3,950) (a) $2,159
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $1,964 $4,289 $(4,430) (a) $1,823
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $1,305 $3,247 $(2,588) (a) $1,964
(a) Amounts reflect items written off, net of recoveries.
ROSEVILLE COMMUNICATIONS COMPANY
INDEX TO EXHIBITS
(Item 14(a) 3)
Method
Exhibit No. Description of Filing Page
- ----------- ---------- --------- ----
3(a) Articles of Incorporation of the Incorporated by -
Company, together with Certificate of reference
Amendment of Articles of Incorporation
dated 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 Filed herewith 63
4(a) Shareholder Rights Plan(Filed as Exhibit Incorporated by -
2.1 to Form 8-A Registration Statement reference
under the Securities Act of 1934)
10(a) Sacramento-Valley Limited Partnership Incorporated by -
Agreement, dated April 4, 1984 (Filed as reference
Exhibit I to Form 10-Q Quarterly Report
of Roseville Telephone Company
for the quarter ended March 31, 1984)
10(b) Credit Agreement of Roseville Telephone Incorporated by -
Company with Bank of America National reference
Trust and Savings Association, dated
March 27, 1992, with respect 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 Incorporated by -
Senior Notes in the aggregate amount of reference
$40,000,000 dated December 9, 1998
(Filed as Exhibit 10(c) to Form 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 by -
(Filed as Exhibit 10(d) to Form 10-K reference
Annual Report of Roseville
Communications Company for the year
ended December 31, 1997)
10(e) 1999 Restricted Stock Bonus Plan (Filed Incorporated by -
as Exhibit 10(e) to Form 10-K Annual reference
Report of Roseville Communications Company
for the year ended December 31, 1998)
10(f) 2000 Equity Incentive Plan Filed herewith 101
21(a) List of subsidiaries Filed herewith 117
27 Financial Data Schedule Filed herewith -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 22, 2000 By: /s/ Brian H. Strom
------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: March 22, 2000 By: /s/Michael D. Campbell
----------------------
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 22, 2000 /s/ Robert L. Doyle
-------------------
Robert L. Doyle,
Chairman of the Board
Date: March 22, 2000 /s/ Brian H. Strom
------------------
Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 22, 2000 /s/ Michael D. Campbell
-----------------------
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Date: March 22, 2000 /s/ Thomas E. Doyle
-------------------
Thomas E. Doyle,
Director
Date: March 22, 2000 /s/ Ralph E. Hoeper
-------------------
Ralph E. Hoeper,
Director
Date: March 22, 2000 /s/ John R. Roberts III
-----------------------
John R. Roberts III,
Director
Date: March 22, 2000 /s/ Chris L. Branscum
---------------------
Chris L. Branscum,
Director
Date: March 22, 2000 /s/ Neil J. Doerhoff
--------------------
Neil J. Doerhoff,
Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 22, 2000 By: --------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: March 22, 2000 By: --------------------
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 22, 2000
Robert L. Doyle,
Chairman of the Board
Date: March 22, 2000
Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 22, 2000
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Date: March 22, 2000
Thomas E. Doyle,
Director
Date: March 22, 2000
Ralph E. Hoeper,
Director
Date: March 22, 2000
John R. Roberts III,
Director
Date: March 22, 2000
Chris L. Branscum,
Director
Date: March 22, 2000
Neil J. Doerhoff,
Director