-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, qoiWvxesUPtOve5WIrqdJqFvahbexioL9v62TCuIwAmvXrVpuLcD28ao4gYjVaY8 PmWQqfxXvOIsB4cVpk+/AQ== 0000085153-94-000009.txt : 19940331 0000085153-94-000009.hdr.sgml : 19940331 ACCESSION NUMBER: 0000085153-94-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROSEVILLE TELEPHONE CO CENTRAL INDEX KEY: 0000085153 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 940817190 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 000-00556 FILM NUMBER: 94518244 BUSINESS ADDRESS: STREET 1: P O BOX 969 CITY: ROSEVILLE STATE: CA ZIP: 95678-0969 BUSINESS PHONE: 9167861407 10-K 1 THE 10-K DOCUMENT FOR 1993 FILING 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, 1993 [ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-556 ROSEVILLE TELEPHONE COMPANY (Exact name of registrant as specified in its charter) California 94-0817190 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 211 Lincoln Street, Roseville, California 95678 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (916) 786-6161 Securities registered pursuant to Section 12(g) of the Act: Common Stock - Without Par Value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate 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 plan, directors and officers may be deemed shares held by affiliates), was $284,099,400 as of February 28, 1994. As of February 28, 1994, 13,399,194 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 June 17, 1994. TABLE OF CONTENTS ITEM NO. PAGE PART I 1.Business 2.Properties 3.Legal Proceedings 4.Submission of Matters to a Vote of Security Holders PART II 5.Market for Registrant's Common Equity and Related Stockholder Matters 6.Selected Financial Data 7.Management's Discussion and Analysis of Financial Condition and Results of Operations 8.Financial Statements and Supplementary Data 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III 10.Directors and Executive Officers of the Registrant 11.Executive Compensation 12.Security Ownership of Certain Beneficial Owners and Management 13.Certain Relationships and Related Transactions PART IV 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K PART I Item 1. Business. Roseville Telephone Company (the "Company"), incorporated under the laws of the State of California in 1914, 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 the Company's own area is furnished through connection at Roseville with facilities of Pacific Bell, AT&T, and other interexchange carriers. The City of Roseville, which is centrally located in the Company's service area, is 18 miles northeast of Sacramento. During recent years, including the year ended December 31, 1993, the area served by the Company has experienced both land subdividing activity for home building purposes and significant commercial and industrial development. The Company 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. Currently, no other telephone company operates in the area served by the Company. However, the Company's future operations may be impacted by several proceedings pending before the Public Utilities Commission of the State of California (the "P.U.C.") which are considering whether certain services presently provided solely by the Company within its "Local Access Transport Area" ("LATA") 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." The Company, with a 23.5% equity interest, is one of four limited partners of Sacramento-Valley Limited Partnership (the "Partnership"), a California limited partnership formed for the construction and operation of a cellular mobile radiotelephone system, which now operates in the following Standard Metropolitan Statistical Areas ("SMSA"): Sacramento Reno Stockton Yuba City - Marysville Modesto Redding - Chico In addition, the Partnership also operates in the Tehama, Sierra and Storey (Carson City) Rural Statistical Areas ("RSA"). PacTel Cellular, a wholly owned subsidiary of the Pacific Telesis Group, is the sole general partner of the Partnership and responsible for the construction, operation, maintenance and marketing of the cellular mobile radiotelephone system. In each SMSA and RSA, the Federal Communications Commission (the "F.C.C.") has granted or will grant one license to provide cellular services to a wireline carrier and one license to a non-wireline carrier. The Partnership is the wireline carrier licensee for each SMSA and RSA in which it operates and competes with the non-wireline licensee in each of those areas. The table that follows reflects the percentage amounts of operating revenues of the Company contributed by various services, excluding income from the Partnership. Network Access and Local Telephone Long Distance Year Service Service Miscellaneous ---- ------- ------- ------------- 1993 38.1% 46.8% 15.1% 1992 35.9% 49.1% 15.0% 1991 33.0% 53.3% 13.7% 1990 34.5% 51.7% 13.8% 1989 34.5% 50.0% 15.5% As indicated above, revenues from local, network access and long distance services constituted approximately 85% of the Company's total operating revenues in 1993. Miscellaneous operating revenues include primarily revenues from billing and collection services and directory advertising services, in addition to revenues from nonregulated activities. Nonregulated revenues are derived from the sale, lease and maintenance of telecommunications equipment, and the provision of alarm monitoring and paging services. Revenues from telephone service are affected by rates authorized by various regulatory agencies. The Company's local service rates are subject to regulation by the P.U.C. As discussed more fully in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations", the Company completed negotiations with Pacific Bell concerning new compensation agreements, the effects of which were first realized in 1992, that affected extended area service settlements and a significant portion of network access and long distance revenues. With respect to calls terminating outside the Company's LATA, access charges to interexchange carriers are assessed based on tariffs filed by Pacific Bell for intrastate services. With respect to interstate services, the Company has filed its own tariff with the F.C.C. for all elements of access except carrier common line charges, with respect to which the Company 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. Substantially all of the Company's revenues were from communications and related services. As discussed more fully in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations", approximately 36% and 34% of the Company's consolidated operating revenues in 1993 and 1992, respectively, were derived from access charges and charges for other services to, and transition contract payments from Pacific Bell pursuant to certain agreements (such amounts represented less than 10% of the Company's consolidated operating revenues in 1991). Approximately 10%, 10% and 11% of the Company's consolidated operating revenues in 1993, 1992 and 1991, respectively, were derived from the provision of services to AT&T. The revenues from services provided to AT&T were received primarily from access charges, but also included revenues from the provision of operator, billing and collection, and other interexchange services. No other customers accounted for more than 10% of consolidated operating revenues. In addition to its regulatory authority with respect to rates, the P.U.C. also has the power, among other things, to establish the terms and conditions of service, to regulate securities issues, to prescribe uniform systems of accounts to be kept by public utilities and to regulate the mortgaging or disposition of public utility properties. The Company 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. At December 31, 1993, the Company employed 463 persons, none of whom is represented by any union. Item 2. Properties. The Company owns central office buildings and related equipment in Roseville, Citrus Heights, Granite Bay, and other locations in Placer County, and completed construction of a new 135,000 square foot operations facility in November 1993. The Company's 68,000 square foot principal business office and administrative headquarters is 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 and underground conduits and for its aerial and underground cables and wires. In addition to land and structures, the Company's property consists of equipment required in providing telephone service. This includes central office equipment, customer premises equipment and connections, radio antennas, 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. The Partnership 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, the Company 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 the Company 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 the Company. The regulatory proceedings discussed below relate to matters which may effect the Company prospectively and are not expected to effect the Company's 1993 financial statements. In March 1985, the P.U.C. commenced an investigation into the "rates, tolls, rules, charges, operations, costs, separations, intercompany settlements, contracts, service and facilities of the operations of independent telephone companies" (I. 85-03-078), and consolidated this investigation with Application No. 85-01-034 of Pacific Bell. In connection with the application, the P.U.C. issued an interim rate design effective in 1988 for Pacific Bell which resulted in a local rate increase for the Company and a decrease in settled toll revenues. The P.U.C. has stated that it will order a final rate design during 1994, in conjunction with I. 87-11-033 discussed below, which could have a material impact on the sources and amount of the Company's revenues. The P.U.C. has instituted an investigation (I. 87-11-033) into the manner in which it regulates local exchange carriers, including the Company. In the course of this investigation, it will consider whether certain services presently provided solely by the Company within its LATA should be open to competition. In the course of this current proceeding the Company has proposed adjustments to its rates that would maintain revenues at their present level, while the P.U.C. staff has proposed a revenue reduction of approximately $6 million. A July 1991 decision of the P.U.C. ordered a phase-down of settlement pool payments after January 1, 1993. The Company completed negotiations and has entered into new agreements with Pacific Bell to replace these settlement procedures effective as of January 1, 1992. In addition, the July 1991 decision expressed the Commission's expectation that the Company will file a general rate proceeding, including a request for regulation under the new incentive-based regulatory framework. As a result of delays in issuing a final order, the Company expects to submit a test year 1995 general rate case application during calendar year 1994. In April 1993, the P.U.C. opened an investigation and rulemaking proceeding (R. 93-04-003) to establish rules that will provide non-discriminatory access by competing service providers to the network capabilities of local exchange carriers. The P.U.C. proposed applying these rules to the five largest local exchange carriers in California, including the Company. In connection with this proceeding, the P.U.C. issued a further order in August 1993 proposing additional rules to allow broader competition in the provision of specific special access and switched transport services. The Company has filed comments and expects a decision during 1994. In November 1993, the P.U.C. issued a report to the Governor of the State of California in which it proposed opening all markets to competition by January 1, 1997. Specifically, the P.U.C. proposed streamlining regulation and eliminating all remaining legal barriers to competition for telecommunications services in order to accelerate the pace of innovation in the California telecommunications marketplace. There are a number of regulatory proceedings occurring at the federal level that may have a material impact on the Company. These regulatory proceedings include, but are not limited to, implementation of revised separations procedures that shift revenue requirements and costs between interstate and intrastate jurisdictions and implementation of revised procedures to allocate costs between regulated and non-regulated operations. In addition, the F.C.C. periodically establishes the authorized rate of return for interstate access services, which in 1994 will remain at the 1993 rate of 11.25%. In September 1992, the F.C.C. issued an order, which is currently under appeal, granting to competitors expanded interconnection rights to the facilities of local exchange carriers with annual revenues from regulated operations in excess of $100 million. While not yet applicable to the Company, this order will permit competitors to terminate their own facilities in telephone company central offices to which the order applies. In addition, the F.C.C. initiated a separate notice of proposed rulemaking establishing a two-phased proceeding to modify interstate access rate structures to further competition in the provision of interstate services. These two proceedings may broaden the scope of competition in the provision of interstate services, the effects of which on the Company cannot yet be determined. The Company is subject to certain legal 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. 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 1993. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of the executive officers of the Company as of March 14, 1994 are as follows: Name Age Office Robert L. Doyle(1) 75 Chairman of the Board; President and Chief Executive Officer from 1954 to 1993 Brian H. Strom 51 President and Chief Executive Officer (since December 1993); Vice President and Chief Financial Officer from 1989 to 1993 A. A. Johnson 72 Executive Vice President and Chief Operating Officer (since December 1993); Vice President-Operations from 1989 to 1993 Thomas E. Doyle(1) 65 Vice President (since 1972) and Secretary-Treasurer (since 1965) Michael D. Campbell 45 Vice President and Chief Financial Officer (since March 1994); Partner, Ernst & Young, from 1983 to 1994. (1) Robert L. Doyle and Thomas E. Doyle are brothers. 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 and disclosure, in limited circumstances, of third party transactions. Retirement Supplement Plan transactions in the Company's Common Stock were effected at approximately $22 per share in all quarters of 1992 through January 1993, approximately $23 per share from the balance of the first quarter through the beginning of the fourth quarter of 1993 and approximately $24 per share thereafter. As of February 28, 1994, the approximate number of holders of the Company's Common Stock was 9,500. The Company pays quarterly cash dividends on its Common Stock. The Company paid cash dividends of $.15 per share for each quarter during 1992 and 1993. Item 6. Selected Financial Data. 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Total operating revenues $ 96,780 $ 92,280 $ 88,461 $ 73,629 $ 61,293 Net income $ 22,518 $ 21,816 $ 19,940 $ 16,830 $ 14,740 Net income per share of common stock (1) $ 1.68 $ 1.63 $ 1.49 $ 1.26 $ 1.14 Cash dividends per share of common stock (1) $ .58 $ .55 $ .53 $ .50 $ .40 Property, plant and equipment, at cost $ 228,927 $ 203,379 $ 181,552 $ 159,880 $144,001 Total assets (2) $ 226,459 $ 190,760 $ 165,380 $ 143,264 $131,268 Long-term debt $ 40,000 $ 25,000 $ 13,270 $ 5,590 $ 6,400 Shares of common stock used to calculate per share data (1) 13,399,194 13,399,194 13,399,194 13,399,194 12,940,861 (1)Shares used in the computation of net income and cash dividends per share of common stock are based on the weighted average number of shares outstanding in each period after giving retroactive effect to 5% stock dividends issued in 1993, 1992, 1991 and 1990. (2)The 1989 through 1992 total asset amounts have been conformed to the presentation of the 1993 amount. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations 1993 versus 1992 Operating Revenues: In years prior to 1992, a significant portion of the Company's network access and long distance service revenues, as well as certain portions of local service revenues, resulted from the Company's participation in pooling and settlement arrangements. Such arrangements are processes whereby amounts billed by local exchange carriers are reported to the pool and ultimately divided among the pool participants on the basis of a pool-wide rate of return. Beginning in 1992, there was a significant shift in the sources of these revenues as a result of the Company's tentative agreements with Pacific Bell (the "Pacific Bell Agreements"), effective concurrently with the Company's exit from the intrastate settlement pools. Of the Company's total revenues in 1993 and 1992, 36% and 34%, respectively, was recorded under these tentative agreements. Definitive agreements were executed in February 1994 and had no significant effect on revenues recorded in 1993 and 1992 under the tentative agreements. In addition, certain billings to interexchange carriers previously reported to and divided by the pool are now retained by the Company. Under the Pacific Bell Agreements, the Company billed Pacific Bell various charges in connection with the provision of services within the Company's Local Access Transport Area, one of ten in California. In addition, as a result of the Pacific Bell Agreements the Company recognized transition revenues of $16.5 million and $15 million in 1993 and 1992, respectively, which will be reduced over an approximate six year period, commencing in a year to be determined by future regulatory developments, and ultimately eliminated. To avoid potential adverse effects on future results of operations, the Company must either seek adjustments to tariffed rates for services, increase productivity or both. Local service revenues increased approximately $3.8 million, or 11% over 1992. Of the total increase, approximately $2.3 million was related to an increase in extended area service revenues recognized under the Pacific Bell Agreements discussed above. In addition, local service revenues were positively affected by a 5% growth in access lines and increased revenues associated with custom calling and enhanced network services. Network access and long distance revenues result from charges assessed to carriers and end users for use of the local exchange network and from transition revenues described above. In 1993, network access revenues increased slightly to $37.5 million, reflecting growth in minutes of use volumes and higher interstate settlements from the National Exchange Carrier Association. Positive settlement adjustments which were recorded in 1992 and did not reoccur in 1993 reduced the effect of this increase and also caused a decrease in long distance revenues. Long distance revenues, comprised largely of transition revenues from Pacific Bell, decreased $727,000 to $7.8 million. Operating Expenses: Operating expenses in 1993 increased approximately $5.1 million or 9% compared to 1992. The increase in operating expenses was due primarily to a combination of 1) software purchases and improvements in the Company's data systems to implement movement from a mainframe platform to a client/server platform and to implement a wide area network, 2) higher costs associated with the Company's numerous regulatory proceedings, 3) higher pension costs resulting from changes in actuarial assumptions, 4) normal inflationary factors, and 5) increased costs associated with serving a larger number of access lines. Depreciation expense increased as a result of increased plant levels. Other Income (Expense): Other income, which consists primarily of income attributable to the Company's interest in Sacramento-Valley Limited Partnership, interest income from cash equivalents and short-term investments and allowance for funds used during construction (AFUDC), increased $2.4 million over 1992, due primarily to improved results of operations of the partnership and a significant increase in AFUDC due to the construction of the Company's new Industrial Avenue facility. Other expense consists primarily of interest expense arising from the $25,000,000 long-term debt facility obtained in March 1992 and the $15,000,000 facility obtained in November 1993. Total interest expense was approximately $2.2 million compared to $2.1 million in 1992 resulting from a combination of slightly increased average borrowings offset by lower interest rates. Income Taxes: Income tax expense for 1993 increased approximately $932,000 due to the increase in income subject to tax and an increase in the effective tax rate resulting from the implementation of the Revenue Reconciliation Act of 1993 which retroactively increased the corporate federal income tax rate to 35% beginning January 1, 1993. The effective federal and state income tax rate was 40.6% compared to 39.9% in 1992. 1992 versus 1991 Operating Revenues: The Pacific Bell Agreements, effective beginning in 1992, as previously discussed, significantly affected the comparability of certain revenue categories between 1992 and 1991. Local service revenues increased approximately $3.9 million, or 13% over 1991. Of this total increase, $2.0 million was due to increased extended area service revenues recognized under the Pacific Bell Agreements. Additionally, local service revenues were positively affected by a 4% growth in access lines and increased custom calling and enhanced network service revenues. In 1992, long distance service revenues resulted primarily from transition revenues. In the aggregate, network access and long distance service revenues decreased $1.8 million or 4%. In 1991, the Company received approximately $4 million from the California High Cost Fund ("CHCF"), and did not request CHCF support for 1992. This decrease was partially offset by an increase in interstate switched access revenues due to increases in minutes of use volumes and in tariffed rates, and higher settlements from the National Exchange Carrier Association. The remaining increase in network access revenues and the remaining decrease in long distance service revenues was due to the shift in the sources of these revenues as described above. Operating Expenses: Total operating expenses in 1992 remained at essentially the same level as in 1991. The cost of services and products decreased by $1.6 million primarily due to decreases in network software expense and the cost of sales associated with lower nonregulated equipment sales volumes. Depreciation expense increased by $1.5 million due to an increase in average plant in service. General and administrative expenses decreased due to the incurrence of nonrecurring information management expenses in 1991. Other Income (Expense): Other income (expense), net increased approximately $973,000 over 1991, due primarily to an increase in interest expense of $1.1 million as a result of the Company's incurrence of $25 million in long-term indebtedness in March 1992 for major construction projects and general corporate purposes. Income Taxes: Income tax expense for 1992 increased approximately $1.2 million due principally to the increase in income subject to tax. The effective federal and state income tax rate was 39.9% in both 1992 and 1991. Liquidity and Capital Resources As reflected in the Consolidated Statements of Cash Flows, the Company's operations continue to provide positive cash flows. Net cash provided by operating activities amounted to $36.6 million, $31.4 million and $33.2 million in 1993, 1992 and 1991, respectively. The increase in 1993 was due primarily to increases in net income, payables, accrued liabilities and other deferred credits. During 1993, the Company utilized cash flows from operations and existing cash and cash equivalents to fund capital expenditures in the amount of $35.5 million and cash dividends of $7.8 million. Capital expenditures were larger in 1993 than the $22.6 million in 1992 and the $25.9 million in 1991 due to the completion in 1993 of the new Industrial Avenue facility. In February 1992, the Company received authority from the P.U.C. to issue and sell up to an aggregate $40 million of its long-term notes. The Company issued the initial $25 million in March 1992, and the remaining $15 million in November 1993. The Company's most significant use of funds in 1994 is expected to be for budgeted capital expenditures of approximately $21.5 million for central office equipment and cable and wire facilities. It is anticipated that the Company's capital requirements in 1994 will be met from cash flows from operations and existing cash, cash equivalents and short-term investments. The Company does not presently anticipate that it will commence any securities offerings in 1994. Inflation While the Company is not immune from increased costs brought on by inflation and regulatory requirements, the impact of such items on the Company's operations and financial condition depends partly on results of future rate cases and the extent to which increased rates can be translated into improved earnings. Regulatory Matters The Company's financial condition is and continues to be affected by recent and future proceedings by the P.U.C. Pending before the P.U.C. are proceedings which are considering: Broad competition for the first time within the Company's LATA with regard to IntraLATA toll Rate design proposals by all California local exchange carriers to revise toll, access, private line and basic exchange rates Rules that will provide non-discriminatory access by competing service providers to the network capabilities of local exchange carriers Rules that will allow non-discriminatory open access to the local exchange company's central office and authorize broader competition for intrastate switched transport services The P.U.C. has expressed its expectation that the Company will file an application for a general rate proceeding and its election under the new incentive-based regulatory framework for telephone utilities. The Company anticipates submitting a test year 1995 general rate case application during calendar year 1994. The potential future impact of this proceeding can not be determined. In November 1993, the P.U.C. issued a report to the Governor of the State of California in which it proposes to open all markets to competition by January 1, 1997 and aggressively streamline regulation to accelerate the pace of innovation in the California telecommunications marketplace. The P.U.C. plans to consider these proposals in future proceedings. The Company believes it meets the criteria of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71"), which requires the Company to give effect in its financial statements to certain actions of regulators. Accordingly, the Company's consolidated financial statements have been prepared on that basis. As a result of increasing competition and rapid changes in the telecommunications industry, the Company periodically monitors whether it continues to meet the criteria which require the use of SFAS No. 71. In the future, should the Company determine it no longer meets the SFAS No. 71 criteria, a material, extraordinary, noncash charge would result. Item 8. Financial Statements and Supplementary Data. Page Report of independent auditors Consolidated balance sheets as of December 31, 1993 and 1992 Consolidated statements of income for each of the three years in the period ended December 31, 1993 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1993 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1993 Notes to consolidated financial statements REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Roseville Telephone Company We have audited the accompanying consolidated balance sheets of Roseville Telephone Company as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Roseville Telephone Company at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG Sacramento, California February 25, 1994 ROSEVILLE TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 ASSETS 1993 1992 ------ ------ ----- Current assets: Cash and cash equivalents $ 9,847,000 $ 11,200,000 Short-term investments 8,920,000 - Accounts receivable (less allowances of $47,000 and $94,000, respectively) 16,109,000 15,017,000 Refundable income taxes 944,000 - Inventories 1,115,000 860,000 Deferred income tax asset 1,129,000 1,029,000 Prepaid pension cost - 824,000 Prepaid expenses and other current assets 434,000 456,000 ------------ ------------ Total current assets 38,498,000 29,386,000 Property, plant and equipment: In service 226,170,000 189,447,000 Under construction 2,757,000 13,932,000 ------------ ------------ 228,927,000 203,379,000 Less accumulated depreciation 60,356,000 58,694,000 ------------ ------------ 168,571,000 144,685,000 Investments and other assets: Cellular partnership 17,327,000 15,771,000 Deferred charges and other assets 2,063,000 918,000 ------------ ------------ 19,390,000 16,689,000 ------------ ------------ $226,459,000 $190,760,000 ============ ============ See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, 1993 and 1992 LIABILITIES AND SHAREHOLDERS' EQUITY 1993 1992 ------------------------------------ ---- ---- Current liabilities: Accounts payable and other accrued liabilities $ 7,908,000 $4,777,000 Net payables to telecommunications entities 6,569,000 7,531,000 Advance billings and customer deposits 1,375,000 1,394,000 Accrued income taxes - 52,000 Accrued pension cost 603,000 - Accrued compensation 2,688,000 2,398,000 ------------ ------------ Total current liabilities 19,143,000 16,152,000 Long-term debt 40,000,000 25,000,000 Commitments and contingencies (Notes 1 and 5) Deferred credits and other liabilities: Deferred income taxes 20,071,000 18,225,000 Deferred investment tax credits 885,000 1,103,000 Other 3,439,000 2,121,000 ------------ ------------ 24,395,000 21,449,000 Shareholders' equity: Common stock, without par value; 20,000,000 shares authorized, 13,399,194 shares issued and outstanding (12,765,141 shares in 1992) 130,287,000 115,704,000 Retained earnings 12,634,000 12,455,000 ------------ ------------ Total shareholders' equity 142,921,000 128,159,000 ------------ ------------ $226,459,000 $190,760,000 ============ ============ See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1993, 1992 and 1991 1993 1992 1991 ---- ---- ---- Operating revenues: Local service $36,883,000 $33,108,000 $29,173,000 Network access service 37,466,000 36,807,000 31,587,000 Long distance service 7,781,000 8,508,000 15,539,000 Directory advertising 6,085,000 5,592,000 4,755,000 Other 8,565,000 8,265,000 7,407,000 ------------ ------------ ----------- Total operating revenues 96,780,000 92,280,000 88,461,000 Operating expenses: Cost of services and products 23,138,000 21,454,000 23,063,000 Depreciation 12,453,000 12,249,000 10,725,000 Customer operations 10,717,000 9,533,000 9,208,000 General and administrative 11,951,000 9,947,000 10,450,000 Other 1,571,000 1,575,000 1,555,000 ------------ ------------ ------------ Total operating expenses 59,830,000 54,758,000 55,001,000 ------------ ------------ ------------ Income from operations 36,950,000 37,522,000 33,460,000 Other income (expense): Interest income 285,000 403,000 59,000 Interest expense (2,220,000) (2,056,000) (992,000) Equity in earnings of cellular partnership 1,579,000 66,000 484,000 Allowance for funds used during construction 1,356,000 393,000 315,000 Other, net (48,000) (60,000) (147,000) ------------ ------------ ------------ Total other income (expense), net 952,000 (1,254,000) (281,000) ------------ ------------ ------------ Income before income taxes 37,902,000 36,268,000 33,179,000 Income taxes 15,384,000 14,452,000 13,239,000 ------------ ------------ ----------- Net income $22,518,000 $21,816,000 $19,940,000 ============ ============ =========== Per share of common stock: Net income $1.68 $1.63 $1.49 ===== ===== ===== Cash dividends $ .58 $ .55 $ .53 ===== ===== ===== Shares of common stock used to calculate per share data 13,399,194 13,399,194 13,399,194 ============ ============ =========== See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1993, 1992 and 1991 Common Stock ------------------------- Number of Retained Shares Amount earnings Total ------------ ------------ ------------ ------------ Balance at December 31, 1990 11,586,000 $89,763,000 $11,068,000 $100,831,000 5% stock dividend, at fair value: Shares 575,251 12,655,000 (12,655,000) - Cash in lieu of fractional shares - - (89,000) (89,000) Cash dividends - - (6,952,000) (6,952,000) Net income - - 19,940,000 19,940,000 ------------ ------------ ------------ ------------ Balance at December 31, 1991 12,161,251 102,418,000 11,312,000 113,730,000 5% stock dividend, at fair value: Shares 603,890 13,286,000 (13,286,000) - Cash in lieu of fractional shares - - (91,000) (91,000) Cash dividends - - (7,296,000) (7,296,000) Net income - - 21,816,000 21,816,000 ----------- ------------ ------------ ------------ Balance at December 31, 1992 12,765,141 115,704,000 12,455,000 128,159,000 5% stock dividend, at fair value: Shares 634,053 14,583,000 (14,583,000) - Cash in lieu of fractional shares - - (97,000) (97,000) Cash dividends - - (7,659,000) (7,659,000) Net income - - 22,518,000 22,518,000 ----------- ------------ ------------ ------------ Balance at December 31, 1993 13,399,194 $130,287,000 $12,634,000 $142,921,000 =========== ============ ============ ============ See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1993, 1992 and 1991 Increase (Decrease) in Cash and Cash Equivalents 1993 1992 1991 ---- ---- ---- Cash flows from operating activities: Net income $22,518,000 $21,816,000 $19,940,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,453,000 12,249,000 10,725,000 Equity component of allowance for funds used during construction (976,000) (322,000) (277,000) Amortization of investment tax credits (218,000) (217,000) (222,000) Provision for deferred income taxes 2,743,000 2,912,000 1,625,000 Equity in earnings of cellular partnership (1,579,000) (66,000) (484,000) Other, net 121,000 105,000 219,000 Net changes in: Accounts receivable, net (1,092,000) (2,401,000) (1,132,000) Refundable income taxes (944,000) - - Inventories, prepaid expenses and other current assets 591,000 756,000 (1,468,000) Payables, accrued liabilities and other deferred credits 3,082,000 (2,320,000) 3,734,000 Accrued income taxes (52,000) (1,134,000) 586,000 ----------- ----------- ----------- Net cash provided by operating activities 36,647,000 31,378,000 33,246,000 Cash flows from investing activities: Capital expenditures for property, plant and equipment (35,484,000) (22,588,000) (25,865,000) Purchases of short-term investments (8,920,000) - - Investment in cellular partnership (1,387,000) (1,721,000) (4,218,000) Return of investment in cellular partnership 1,410,000 - - Other, net (863,000) (402,000) 152,000 ----------- ------------ ----------- Net cash used in investing activities (45,244,000) (24,711,000) (29,931,000) See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1993, 1992 and 1991 Increase (Decrease) in Cash and Cash Equivalents 1993 1992 1991 ---- ---- ---- Cash flows from financing activities: Proceeds of short-term borrowings - - 4,550,000 Proceeds of long-term debt 15,000,000 25,000,000 - Principal payments of long-term debt - (13,270,000) (1,180,000) Dividends paid and fractional share amounts (7,756,000) (7,387,000) (7,041,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities 7,244,000 4,343,000 (3,671,000) Increase (decrease) in cash and cash equivalents (1,353,000) 11,010,000 (356,000) Cash and cash equivalents at beginning of year 11,200,000 190,000 546,000 ----------- ----------- ---------- Cash and cash equivalents at end of year $9,847,000 $11,200,000 $ 190,000 =========== =========== ========== See accompanying notes. ROSEVILLE TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993, 1992 and 1991 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and basis of accounting Roseville Telephone Company (the "Company") is engaged in the business of furnishing communications and related services principally within its service area in Northern California. The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed for telephone companies by the Federal Communications Commission (the "F.C.C"). The Company believes it meets the criteria of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71"), which requires the Company to give effect in its financial statements to certain actions of regulators. Accordingly, the Company's consolidated financial statements have been prepared on that basis. As a result of increasing competition and rapid changes in the telecommunications industry, the Company periodically monitors whether it continues to meet the criteria which require the use of SFAS No. 71. In the future, should the Company determine it no longer meets the SFAS No. 71 criteria, a material, extraordinary, noncash charge would result. The Company engages in nonregulated activities through its RCC Communications division ("RCC"). Products and services provided by RCC include the sale, lease and maintenance of telecommunications equipment, and the provision of alarm monitoring and paging services. Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany transactions have been eliminated. The Company's 23.5% interest in the Sacramento- Valley Limited Partnership is accounted for using the equity method. The Company's portion of undistributed earnings of this partnership included in the Company's consolidated retained earnings at December 31, 1993 amounted to approximately $3,075,000. Cash equivalents and short-term investments The Company invests its excess cash in various investment grade, short- term, interest-bearing investments. As of December 31, 1993, cash equivalents and short-term investments consist of an interest-bearing cash account and commercial paper. The Company has not experienced any losses on such investments. For purposes of reporting cash flows, the Company considers highly liquid investments with original maturities of three months or less as cash equivalents. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair values of financial instruments As of December 31, 1993 and 1992, the Company's financial instruments consist of cash, cash equivalents, short-term investments and long-term debt. Management of the Company believes that their carrying amounts approximate their fair values as of December 31, 1993 and 1992. Fair values for 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 of approximately $9,886,000, $947,000 and $4,353,000 in 1993, 1992 and 1991, 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. Investment tax credits Investment tax credits on utility property acquired subsequent to 1980 were deferred and are being amortized to income over the productive lives of the related property for rate-making and financial reporting purposes. For tax return purposes, investment tax credits reduced federal income tax expense in the year they arose or became available. The Tax Reform Act of 1986 effectively eliminated investment tax credits after December 31, 1985. Revenues The Company is subject to regulation by the F.C.C. and the Public Utilities Commission of the State of California (the "P.U.C."). Pending and future regulatory actions may have a significant impact on the Company's future operations and financial condition. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In years prior to 1992, a significant portion of the Company's network access and long distance service revenues, as well as certain portions of local service revenues, resulted from the Company's participation in pooling and settlement arrangements. Such arrangements are processes whereby amounts billed by local exchange carriers are reported to the pool and ultimately divided among the pool participants on the basis of a pool- wide rate of return. Beginning in 1992, there was a significant shift in the sources of these revenues as a result of the Company's tentative agreements with Pacific Bell (the "Pacific Bell Agreements"), effective concurrently with the Company's exit from the intrastate settlement pools. Of the Company's total revenues in 1993 and 1992, 36% and 34%, respectively, was recorded under these tentative agreements. Definitive agreements were executed in February 1994 and had no significant effect on revenues recorded in 1993 or 1992 under the tentative agreements. In addition, certain billings to interexchange carriers previously reported to and divided by the pool are now retained by the Company. Under the Pacific Bell Agreements, the Company billed Pacific Bell various charges in connection with the provision of services within the Company's Local Access Transport Area, one of ten in California. In addition, as a result of the Pacific Bell Agreements the Company recognized transition revenues of $16.5 million and $15 million in 1993 and 1992, respectively, which will be reduced over an approximate six year period, commencing in a year to be determined by future regulatory developments and ultimately eliminated. To avoid potential adverse effects on future results of operations, the Company must either seek adjustments of tariffed rates for services, increase productivity or both. The implementation of the Pacific Bell Agreements significantly affected the comparability of certain revenue categories between 1992 and 1991. Depreciation 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 6.56%, 6.75% and 6.55% in 1993, 1992 and 1991, respectively. The cost of property, plant and equipment used in nonregulated activities is depreciated over their estimated useful lives, which range from 3 to 5 years, on a straight-line basis. Allowance for funds used during construction The F.C.C. and the P.U.C. allow the Company 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." 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income taxes Effective January 1, 1993, the Company prospectively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") and, accordingly, the Company's prior consolidated financial statements were not restated. SFAS No. 109 requires companies to record deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns. Additionally, SFAS No. 109 requires adjustments of deferred tax assets and liabilities for changes in tax laws or rates (such as the Revenue Reconciliation Act of 1993), 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. The adoption of SFAS No. 109 and the implementation of the Revenue Reconciliation Act of 1993 did not have a material effect on the Company's consolidated financial position or results of operations. Prior to January 1, 1993, deferred income taxes were provided in accordance with Accounting Principles Board Opinion No. 11 ("APB No. 11")for the tax effect of all timing differences between financial statement income and taxable income, except for items that were not allowable by the P.U.C. as deferred tax expense for rate-making purposes. Per share amounts Net income and cash dividends per share of common stock are based on the weighted average number of shares outstanding each year after giving retroactive effect to stock dividends. Statements of cash flows information During 1993, 1992 and 1991, the Company made payments for interest and income taxes as follows (in thousands): 1993 1992 1991 ---- ---- ---- Interest (net of amounts capitalized) $ 1,747 $ 1,497 $ 1,049 Income taxes $13,855 $ 12,891 $11,250 Reclassifications Certain amounts in the 1992 and 1991 consolidated financial statements have been reclassified to conform with the presentation of the 1993 consolidated financial statements. 2. LONG-TERM DEBT Long-term debt outstanding as of December 31, 1993 consisted of the following: $25,000,000 under an unsecured, long-term credit arrangement with a bank, with interest payable quarterly at rates increasing from 8.16% to 8.46% during the period of the loan. Principal payments are due in equal quarterly installments of $893,000, commencing in June 1995, and ending in April 2002. On November 17, 1993, the Company borrowed $15,000,000 under an unsecured, long-term credit arrangement with a bank. Borrowings under the new credit arrangement bear interest, which is payable quarterly, at a fixed rate of 6.22%. Principal payments are due in equal quarterly installments of $536,000, commencing in March 31, 1997, and ending in December 2003. At December 31, 1993, the aggregate maturity requirements on all long-term debt are $2,679,000, $3,572,000, $5,716,000, and $5,716,000 in 1995, 1996, 1997 and 1998, respectively. 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, 1993 was unrestricted. 3. INCOME TAXES The income tax provisions consist of the following components (in thousands): 1993 1992 1991 ---- ---- ---- Current expense: Federal $9,633 $8,730 $8,810 State 3,226 3,027 3,026 ------- ------- ------- 12,859 11,757 11,836 Deferred expense: Federal 2,484 2,552 1,550 State 259 360 75 ------ ------- ------- 2,743 2,912 1,625 Amortization of investment tax credits (218) (217) (222) -------- ------- ------- $15,384 $14,452 $13,239 ======== ======= ======= The income tax provisions differ from those computed by using the statutory federal rate (35% in 1993, and 34% in 1992 and 1991) for the following reasons (in thousands): 1993 1992 1991 ---- ---- ---- Computed at statutory rates $13,266 $12,331 $11,281 Increase (decrease): State taxes, net of federal benefit 2,265 2,235 2,047 Benefit of the rate differential applied to reversing timing differences (115) (207) (325) Other, net (32) 93 236 ------- ------- ------- Income tax provision $15,384 $14,452 $13,239 ======= ======= ======= Effective federal and state rate 40.6% 39.9% 39.9% ======= ======= ======= 3. INCOME TAXES (CONTINUED) The significant components of the Company's deferred income tax assets and liabilities were as follows at December 31, 1993 (in thousands): Deferred Income Taxes ---------------------- Assets Liabilities ------ ----------- Property, plant and equipment - primarily due to depreciation differences $ - $ 21,614 Differences in the timing of recognition of revenues 2,871 - Cellular partnership - 2,708 State franchise taxes 1,129 - Other, net 1,380 - ---------- ---------- Total 5,380 24,322 Less current portion 1,129 - ----------- ---------- $ 4,251 $ 24,322 =========== ========== Net long-term deferred income tax liability $ 20,071 ========== As of January 1, 1993 and December 31, 1993, there was no valuation allowance for deferred tax assets. 3. INCOME TAXES (CONTINUED) During 1992 and 1991, in accordance with APB No. 11, the deferred income tax provisions resulted from differences in the timing of recognizing certain revenues and expenses for financial reporting and income tax purposes. The components of the aggregate deferred income tax provisions were as follows (in thousands): 1992 1991 ---- ---- Tax depreciation in excess of book depreciation $ 1,759 $ 2,268 Differences in the timing of recognition of revenues 504 (633) Differences between book and tax income (loss) attributable to the Company's investment in a cellular partnership 736 260 Benefit of the rate differential applied to reversing timing differences (207) (325) Other, net 120 55 --------- ---------- Deferred income tax provision $ 2,912 $ 1,625 ========= ========== 4. PENSION, OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 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 the years ended December 31, 1993, 1992 and 1991 includes the following components (in thousands): 1993 1992 1991 ---- ---- ---- Service cost-benefits earned during the period $2,149 $1,544 $1,252 Interest cost on projected benefit obligation 3,131 2,727 2,252 Actual return on plan assets (2,313) (1,592) (3,113) Net amortization and deferral 910 (80) 1,786 ------- ------- ------- Net pension cost $3,877 $2,599 $2,177 ======= ======= ======= The following table sets forth the defined benefit plan's funded status and amounts recognized in the consolidated balance sheets as of December 31, 1993 and 1992 (in thousands): 1993 1992 ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $29,717 $25,054 Nonvested benefit obligation 646 483 --------- -------- Accumulated benefit obligation $30,363 $25,537 ========= ======== Plan assets at fair value $31,369 $27,659 Less projected benefit obligation (47,383) (39,609) -------- -------- Projected benefit obligation in excess of plan assets (16,014) (11,950) Unrecognized net loss 12,614 9,260 Unrecognized transition obligation 3,247 3,514 -------- -------- Prepaid (accrued) pension cost $ (603) $ 824 ======== ======== 4. PENSION, OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED) The discount rates used in determining the projected benefit obligation at December 31, 1993 and 1992 were 7% and 7.5%, respectively. The assumed rate of increase in future compensation levels used to measure the projected benefit obligation was 6% at December 31, 1993 and 1992. The expected long-term rate of return on plan assets used in determining net pension cost was 8% in 1993, and 8.5% in 1992 and 1991. Changes in the discount rate and expected long-term rate of return on plan assets increased pension cost $1,054,000 in 1993. The Company also maintains a retirement supplement plan providing both a retirement and savings feature for substantially all employees. The retirement feature allows for tax deferred contributions by employees under Section 401(k) of the Internal Revenue Code. Subject to certain limitations, one-half of all employee contributions made to the retirement supplement plan are matched by the Company. Such matching contributions, as defined in the plan, amounted to approximately $903,000, $731,000 and $623,000 in 1993, 1992 and 1991, respectively. At December 31, 1993, 7% of the Company's outstanding shares of common stock were held by the retirement supplement plan. Effective January 1, 1993, the Company adopted Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106") and No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112"). SFAS No. 106 requires accrual of the expected ultimate cost of providing benefits during the years that the employee renders the necessary service. Prior to the Company's adoption of SFAS No. 106, the cost of postretirement benefits was generally recognized as paid. Presently, the Company provides certain postretirement benefits other than pensions to substantially all employees, including a stated reimbursement for Medicare supplemental insurance and life insurance benefits. SFAS No. 112 establishes certain requirements for accounting for benefits provided to former or inactive employees after employment but before retirement. The adoption of SFAS No. 106 and No. 112 did not have a material effect on the Company's consolidated financial position or results of operations. 5. 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 rental expense amounted to $1,137,000, $936,000 and $961,000 in 1993, 1992 and 1991, respectively. At December 31, 1993, the aggregate minimum rental commitments under noncancellable operating lease obligations are not significant. Other commitments The Company's budgeted capital expenditures for the year ending December 31, 1994 approximate $21.5 million. Binding commitments for such planned expenditures at December 31, 1993 were not significant. Litigation The Company is subject to certain legal 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 condition or results of operations of the Company. 6. CONCENTRATIONS OF CREDIT RISK 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. As discussed more fully in Note 1 - Revenues, approximately 36% and 34% of the Company's consolidated operating revenues in 1993 and 1992, respectively, were derived from access charges and other charges to, and transition contract payments from Pacific Bell pursuant to the Pacific Bell Agreements (such amounts represented less than 10% of the Company's consolidated operating revenues in 1991). Approximately 10%, 10% and 11% of the Company's consolidated operating revenues in 1993, 1992 and 1991, respectively, were derived from the provision of services to AT&T. The revenues from services provided to AT&T were received primarily from access charges, but also included revenues from the provision of operator, billing and collection, and other interexchange services. No other customers accounted for more than 10% of consolidated operating revenues. 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 June 17, 1994. 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 June 17, 1994. 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 June 17, 1994. Item 13. Certain Relationships and Related Transactions. None. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1 and 2. Financial Statements and Financial Statement Schedules The financial statements and schedules listed in the accompanying Index to Financial Statements and Financial Statement Schedules 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 1993. ROSEVILLE TELEPHONE COMPANY INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (Item 14(a) 1 and 2) PAGE Report of independent auditors 14 Consolidated balance sheets as of December 31, 1993 and 1992 15 Consolidated statements of income for each of the three years in the period ended December 31, 1993 17 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1993 18 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1993 19 Notes to consolidated financial statements 21 Financial statement schedules for each of the three years in the period ended December 31, 1993 V Property, plant and equipment 34 VI Accumulated depreciation 36 VIII Valuation and qualifying accounts 37 IX Short-term borrowings 38 X Supplementary income statement information 39 All other 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. ROSEVILLE TELEPHONE COMPANY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT Years ended December 31, 1993, 1992 and 1991 (In thousands) Balance Net Other Balance at additions changes at beginning (transfers) Retire- - add end of Classification of period at cost ments (deduct) period --------------- --------- ---------- --------- --------- --------- Year ended December 31, 1993: In service: Land $ 3,908 $ - $ - $ - $ 3,908 Buildings 28,777 24,232 4 - 53,005 Central office equipment 63,968 12,638 8,951 - 67,655 Cable and wire facilities 75,351 5,220 578 - 79,993 Furniture and office equipment 10,650 4,341 278 - 14,713 Vehicles and other work equipment 4,634 511 75 - 5,070 Nonregulated equipment 2,159 693 1,026 - 1,826 --------- --------- -------- -------- -------- 189,447 47,635 10,912 - 226,170 Under construction 13,932 (11,175) - - 2,757 --------- --------- -------- -------- -------- $203,379 $ 36,460 $ 10,912 $ - $228,927 ======== ========= ======== ======== ======== Year ended December 31, 1992: In service: Land $ 3,909 $ - $ 1 $ - $ 3,908 Buildings 28,127 651 1 - 28,777 Central office equipment 62,229 2,126 387 - 63,968 Cable and wire facilities 69,254 6,397 300 - 75,351 Furniture and office equipment 9,499 1,296 145 - 10,650 Vehicles and other work equipment 4,247 500 113 - 4,634 Nonregulated equipment 1,855 440 136 - 2,159 ---------- --------- -------- --------- -------- 179,120 11,410 1,083 - 189,447 Under construction 2,432 11,500 - - 13,932 ---------- ---------- -------- --------- --------- $ 181,552 $ 22,910 $ 1,083 $ - $203,379 ========== ========== ========= ========= ========= ROSEVILLE TELEPHONE COMPANY SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Years ended December 31, 1993, 1992 and 1991 (In thousands) Balance Net Other Balance at additions changes at beginning (transfers) Retire- - add end of Classification of period at cost ments (deduct) period --------------- --------- ---------- --------- --------- --------- Year ended December 31, 1991: In service: Land $ 2,436 $ 1,473 $ - $ - $ 3,909 Buildings 26,086 2,071 30 - 28,127 Central office equipment 51,390 13,720 2,881 - 62,229 Cable and wire facilities 63,347 6,334 427 - 69,254 Furniture and office equipment 8,896 1,421 818 - 9,499 Vehicles and other work equipment 3,971 473 197 - 4,247 Nonregulated equipment 1,634 338 117 - 1,855 --------- --------- --------- --------- -------- 157,760 25,830 4,470 - 179,120 Under construction 2,120 312 - - 2,432 --------- --------- --------- --------- -------- $159,880 $ 26,142 $ 4,470 $ - $181,552 ========= ========= ========= ========= ======== ROSEVILLE TELEPHONE COMPANY SCHEDULE VI - ACCUMULATED DEPRECIATION Years ended December 31, 1993, 1992 and 1991 (In thousands) Balance Net Other Balance at additions changes at beginning (transfers) Retire- - add end of Classification of period at cost ments (deduct) period --------------- --------- ---------- --------- --------- --------- Year ended December 31, 1993: Buildings $ 6,944 $ 900 $ 6 $ - $ 7,838 Central office equipment 22,655 5,977 8,735 - 19,897 Cable and wire facilities 20,616 3,152 639 - 23,129 Furniture and office equipment 4,331 1,624 279 - 5,676 Vehicles and other work equipment 2,220 413 50 - 2,583 Nonregulated equipment 1,928 387 1,082 - 1,233 --------- --------- -------- --------- --------- $ 58,694 $ 12,453 $10,791 $ - $60,356 ========= ========= ======== ========= ========= Year ended December 31, 1992: Buildings $ 6,103 $ 841 $ - $ - $ 6,944 Central office equipment 16,910 6,009 264 - 22,655 Cable and wire facilities 18,068 2,930 382 - 20,616 Furniture and office equipment 3,069 1,405 143 - 4,331 Vehicles and other work equipment 1,934 384 98 - 2,220 Nonregulated equipment 1,339 680 91 - 1,928 --------- --------- -------- --------- -------- $47,423 $ 12,249 $ 978 $ - $58,694 ======== ======== ======== ========= ======== Year ended December 31, 1991: Buildings $ 5,347 $ 785 $ 29 $ - $ 6,103 Central office equipment 14,345 5,234 2,669 - 16,910 Cable and wire facilities 15,861 2,704 497 - 18,068 Furniture and office equipment 2,577 1,308 816 - 3,069 Vehicles and other work equipment 1,752 355 173 - 1,934 Nonregulated equipment 1,067 339 67 - 1,339 --------- --------- --------- --------- --------- $ 40,949 $ 10,725 $ 4,251 $ - $ 47,423 ========= ========= ========= ========= ========= (1)Sales and retirements are net of salvage value and costs of removal. ROSEVILLE TELEPHONE COMPANY SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1993, 1992 and 1991 (In thousands) Additions ------------------------ Balance at Charged to Charged to Balance at beginning of costs and other end of Description period expenses accounts(1) Deductions(2) period - ----------- ------------ ----------- ----------- ------------- ------------ Allowance for doubtful accounts: 1993 $ 94 $106 $122 $275 $ 47 ==== ==== ==== ==== ==== 1992 $162 $ 87 $116 $271 $ 94 ==== ==== ==== ==== ==== 1991 $235 $ 69 $244 $386 $162 ==== ==== ==== ==== ==== (1) Represents collection of accounts previously written-off. (2) Represents accounts written-off. ROSEVILLE TELEPHONE COMPANY SCHEDULE IX - SHORT-TERM BORROWINGS Years ended December 31, 1993, 1992 and 1991 (In thousands) Weighted Maximum Average average Balance Weighted amount amount interest at end average outstanding outstanding rate Category of aggregate of interest during the during the during the short-term borrowings period rate period period(1) period(2) - --------------------- ------- ----- ------- --------- --------- Year ended December 31, 1993 - ---------------------------- Not applicable $ - -% $ - $ - -% Year ended December 31, 1992 - ---------------------------- Not applicable(3) $ - -% $ - $ - -% Year ended December 31, 1991 - ---------------------------- Bank line of credit agreement $ -(3) 5.25% $ 13,500 $ 5,587 6.97% (1)The average amount of short-term borrowings during each period was determined by multiplying the amount of each advance during the period by the percentage of the period for which it was outstanding. (2)The approximate weighted average interest rate for each period was determined by dividing interest expense applicable to the borrowing by the average amount outstanding during the period. (3)Borrowings outstanding under this bank line of credit agreement at December 31, 1991, and subsequent thereto until its refinancing in March 1992 on a long-term basis, were classified as long-term debt in the Company's Consolidated Balance Sheet. ROSEVILLE TELEPHONE COMPANY SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION Years ended December 31, 1993, 1992 and 1991 (In thousands) Charged to costs and expenses ----------------------------- Year ended December 31, ----------------------- 1993 1992 1991 ---- ----- ---- 1. Taxes, other than payroll and income taxes $1,571 $1,575 $1,555 Maintenance and repairs is the primary component of plant operations expense, which is included in "Cost of services and products" in the Company's Consolidated Statements of Income. Plant operations expense amounted to $12,911,000, $11,397,000 and $12,419,000 in 1993, 1992 and 1991, respectively. Depreciation and amortization of intangible assets, preoperating costs and similar deferrals, royalties paid and advertising costs incurred were insignificant in each year presented. 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 TELEPHONE COMPANY (Registrant) Date: March 25, 1994 By: /s/ Robert L. Doyle Robert L. Doyle, Chairman of the Board Date: March 25, 1994 By: /s/ Brian H. Strom Brian H. Strom, President and Chief Executive 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 25, 1994 By: /s/ Robert L. Doyle Robert L. Doyle, Chairman of the Board Date: March 25, 1994 By: /s/ Brian H. Strom Brian H. Strom, President and Chief Executive Officer (Chief Financial Officer and Principal Accounting Officer); Director Date: March 25, 1994 /s/ Thomas E. Doyle Thomas E. Doyle Director Date: March 25, 1994 /s/ Ralph E. Hoeper Ralph E. Hoeper, Director Date: March 25, 1994 /s/ John R. Roberts III John R. Roberts III Director ROSEVILLE TELEPHONE COMPANY INDEX TO EXHIBITS (Item 14(a) 3) Method Exhibit No. Description of Filing Page ----------- ----------- --------- ---- 3(a) Restated Articles of Incorporation of the Incorporated - Company (Filed as Exhibit I to Form 10-Q by reference Quarterly Report for the quarter ended June 30, 1980), together with Certificate of Amendment amending such Restated Articles of Incorporation (as filed with Exhibit 3(a) to Form 10-K Annual Report for the year ended December 31, 1982), and Certificate of Amendment further amending such Restated Articles of Incorporation, as amended (Filed as Exhibit 3A to Form 10-K Annual Report for the year ended December 31, 1983) 3(b) Certificate of Amendment of Articles of Incorporated - Incorporation (Filed as Exhibit 3(b) to by reference Form 10-K Annual Report for the year ended December 31, 1988) 3(c) Bylaws of the Company, as amended to date Incorporated - (Filed as Exhibit 3(c)to Form 10-K Annual by reference Report for the year ended December 31, 1988) 10(a) Sacramento-Valley Limited Partnership Incorporated - Agreement, dated April 4, 1984 (Filed as by reference Exhibit I to Form 10-Q Quarterly Report for the quarter ended March 31, 1984) 10(b) Credit Agreement with Bank of America Incorporated - National Trust and Savings Association, by reference dated March 27, 1992, with respect to $25,000,000 term loan. (Filed as Exhibit 10(a) to Form 10-Q Quarterly Report for the quarter ended March 31, 1992) 10(c) Credit Agreement with Bank of America Filed - National Trust and Savings Association, herewith dated January 4, 1994, with respect to $15,000,000 term loan. 22(a) List of subsidiaries (Filed as Exhibit Incorporated - 22(a) to Form 10-K Annual Report for the by reference year ended December 31, 1981) 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 TELEPHONE COMPANY (Registrant) Date: March 25, 1994 By: Robert L. Doyle, Chairman of the Board Date: March 25, 1994 By: Brian H. Strom, President and Chief Executive 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 25, 1994 Robert L. Doyle, Chairman of the Board Date: March 25, 1994 Brian H. Strom, President and Chief Executive Officer (Chief Financial Officer and Principal Accounting Officer); Director Date: March 25, 1994 Thomas E. Doyle, Director Date: March 25, 1994 Ralph E. Hoeper, Director Date: March 25, 1994 John R. Roberts III, Director EX-1 2 CREDIT AGREEMENT EXHIBIT 10(C) Credit Agreement This Agreement is entered into as of January 4, 1994, effective as of November 12, 1993, between Roseville Telephone Company ("Borrower") and Bank of America National Trust and Savings Association ("Bank"). 1. Definitions and Financial Requirements. 1.1 Definitions. The following terms have the meanings indicated for purposes of this Agreement: "Business Day" means a day other than Saturday or Sunday on which Bank is open for business in San Francisco, California. "Cash Flow" means the sum of net income (before income taxes and interest expense), depreciation and amortization. "Cash Flow Coverage Ratio" means, for any period, the ratio of Cash Flow during such period to the sum of (a) the current portion of long-term debt paid during such period, plus (b) interest expense for such period. "Closing Date" means the date of this Agreement. "Compliance Certificate" means the certificate in the form of Exhibit A. "Effective Date" means November 12, 1993. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" means any event listed in Article 9. "Fixed Rate" means 5.47% per annum. "Leverage Ratio" means the ratio of total liabilities to Tangible Net Worth. "Money Market" means the domestic certificate of deposit market, the eurodollar deposit market or other appropriate money market designated by Bank. "Money Market Rate" means the fixed interest rate per annum which Bank determines could be obtained by reinvesting a specified Prepaid Installment in the Money Market from the date of prepayment through the applicable Original Payment Date. "Non-Essential Assets" means fixed or capital assets which are worn or obsolete and are not necessary for business activities and operations. "Original Payment Date" (collectively "Original Payment Dates") means, as of the date of any prepayment by Borrower, each date subsequent thereto on which principal of the Term Loan is to be paid in accordance with Paragraph 2.4. "Person" means any individual, association, joint venture, partnership, joint stock company, corporation, trust, business trust, government, governmental authority, regulatory authority or other entity. "Prepaid Installment" means, for each prepayment made by Borrower, the portion of such prepayment allocated to each Original Payment Date. To calculate the Prepaid Installment, the aggregate amount of such prepayment is divided by the number of Original Payment Dates. The resulting quotient is the amount of the Prepaid Installment for each Original Payment Date. "Plan" means any employee pension benefit plan maintained or contributed to by Borrower or by any trade or business (whether or not incorporated) under common control (as defined in Section 4001(b) of ERISA) with Borrower and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Reference Rate" means the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its Reference Rate. The Reference Rate is a rate set by Bank based upon various factors including Bank's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans. Bank may price loans at, above or below the Reference Rate. Any change in the Reference Rate shall take effect on the day specified in the public announcement of such change. "SEC" means the Securities and Exchange Commission. "Subsidiary" means any association, corporation or other entity of which Borrower owns, directly or indirectly, more than 50% of the voting shares thereof or which Borrower otherwise controls. "Tangible Net Worth" means total assets (exclusive of goodwill, patents, trademarks, trade names, organization expense, treasury shares, unamortized debt discount and premium, deferred charges (other than those recoverable in regulatory proceedings) and other like intangibles) less all liabilities (including accrued and deferred income taxes and subordinated liabilities). "Term Date" means November 12, 1993, the Business Day on which Bank disbursed to Borrower the Term Loan. "Term Loan" means the loan provided under Article 2. "Treasury Rate" means the interest rate yield for U.S. Government Treasury Securities which Bank determines could be obtained by reinvesting a specified Prepaid Installment in such securities from the date of prepayment through the applicable Original Payment Date. 1.2 Financial Requirements. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all financial information required under this Agreement shall be prepared and all financial computations required under this Agreement shall be made in accordance with generally accepted accounting principles consistently applied. 2. The Term Loan. 2.1 Commitment for the Term Loan. On the Term Date, Bank loaned to Borrower in one disbursement the total principal amount of $15,000,000. Such loan shall be the Term Loan hereunder. The interest rate for the Term Loan shall be based on the Fixed Rate, and the Term Loan shall be subject to the terms and conditions of this Agreement. 2.2 Reserved. 2.3 Interest on the Term Loan. (a) The outstanding principal amount of the Term Loan shall bear interest from the Term Date until payment in full at the Fixed Rate plus 0.75% (computed on the basis of a 360 day year and actual days elapsed). (b) Borrower shall pay interest on the outstanding principal amount of the Term Loan on the last day of each calendar quarter, beginning with the first such date after the disbursement by Bank to Borrower of the Term Loan, and upon payment in full of the Term Loan. 2.4 Principal on the Term Loan. Borrower shall pay the principal amount of the Term Loan in 28 substantially equal quarterly installments commencing on March 31, 1997, on the last day of each successive calendar quarter thereafter, and on December 1, 2003, on which day the entire balance of principal and interest then unpaid shall be due and payable. 2.5 Prepayment of the Term Loan. (a) Borrower may at any time prepay the Term Loan, in whole or in part, in the minimum amount of $1,000,000 or a multiple thereof. (b) Each prepayment shall be made upon the irrevocable written notice of Borrower received by Bank not later than 12:00 p.m. San Francisco time five Business Days prior to prepayment. The notice of prepayment shall specify the date and the amount of the prepayment. If a prepayment is being made in conjunction with a scheduled principal payment required under Paragraph 2.4, the notice of prepayment should set forth such information, and the definition of "Original Payment Date" for such prepayment shall be adjusted to reflect such information. (c) Each prepayment of the Term Loan, whether voluntary, by reason of acceleration or otherwise, shall be accompanied by payment of all accrued interest on the amount of the prepayment and the prepayment fee described below. (d) To determine the prepayment fee due from Borrower upon each prepayment made in accordance with subparagraph (b) ("Total Prepayment Fee"), a prepayment fee shall be calculated separately for each Prepaid Installment in accordance with the steps set forth in (d)(i) through (d)(iii) below. The Total Prepayment Fee will be the aggregate amount of each separate calculation pertaining to each Prepaid Installment. (i) First, determine the amount of interest which would have accrued each calendar quarter on the Prepaid Installment had it remained outstanding until the applicable Original Payment Date, using the rates per annum set forth in Paragraph 2.3(a); (ii) Second, subtract from each quarterly interest amount determined in (d)(i) above the amount of interest which would accrue for that Prepaid Installment if it were reinvested from the date of prepayment through the applicable Original Payment Date, using the following rate: (A) if the applicable Original Payment Date is more than five years after the date of prepayment: the Treasury Rate plus 0.25% (computed on the basis of a 360 day year and actual days elapsed); or (B) if the applicable Original Payment Date is five years or less after the date of prepayment: the Money Market Rate (computed on the basis of a 360 day year and actual days elapsed); (iii) Third, if (d)(i) minus (d)(ii) for the Prepaid Installment is greater than zero, discount the quarterly differences to the date of prepayment by the rate used in (d)(ii) above. The sum of the discounted quarterly differences is the prepayment fee for that Prepaid Installment. (e) Bank may adjust the Treasury Rate and Money Market Rate to reflect the compounding, accrual basis, or other costs of the Term Loan. Each of the rates is Bank's estimate only and Bank is under no obligation to actually reinvest any prepayment. The rates shall be based on information from either the Telerate or Reuters information services, The Wall Street Journal, or other information sources Bank deems appropriate. (f) Borrower acknowledges that prepayment of the Term Loan may result in Bank incurring certain additional costs, expenses and liabilities. Borrower therefore agrees to pay the Total Prepayment Fee for each prepayment and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and liabilities of Bank. 2.6 Arrangement Fee. Borrower shall pay to Bank on the Closing Date a non-refundable arrangement fee of $75,000. 3. Disbursements and Payments. 3.1 Lending Branch. The disbursement of the Term Loan by Bank and each payment by Borrower under this Agreement shall be made for the account of such branch of Bank as it shall designate from time to time. 3.2 Loan Account. Principal, interest and other sums owing to Bank under this Agreement shall be evidenced by entries in records maintained by Bank. Each payment on and any other credits with respect to principal, interest and other sums under this Agreement shall be evidenced by entries in such records. 3.3 Immediately Available Funds; Disbursements and Payments. The disbursement of the Term Loan by Bank and each payment by Borrower under this Agreement shall be made in immediately available funds (or such other funds as Bank may require) at such branch of Bank or such other place as Bank may from time to time select. Each payment by Borrower may be made only on a Business Day. If the day on which a payment would fall due is not a Business Day, the day on which such payment is due shall be the next succeeding Business Day. Each payment shall be made without setoff or counterclaim not later than 12:00 p.m. San Francisco time on the day such payment is due. All sums received after such time shall be deemed received on the next Business Day and interest and fees shall accrue on such sums at the applicable rate for the additional day or days. 3.4 Default Interest. Any principal not paid on the date when due, or any interest or other sum payable by Borrower hereunder if not paid on the date which is five days from when due, shall bear interest (payable on demand) from such date until payment in full (computed daily on the basis of a 360 day year and actual days elapsed) at a rate per annum equal to the Reference Rate plus two percentage points. 3.5 Interest Rate Calculations. All interest rate calculations hereunder shall be made on the basis of a 360 day year and actual days elapsed, which results in greater interest than if a 365/66 day year were used. 4. Taxes, Costs and Capital Adequacy. 4.1 Taxes. Borrower agrees to make all payments or reimbursements under this Agreement free and clear of any deduction for any present or future taxes and agrees to pay any present or future taxes or charges with respect to such payments or reimbursements which may be imposed by any government authority, except net income taxes of Bank imposed by any jurisdiction. On request of Bank, Borrower will provide Bank with original tax receipts, notarized copies of tax receipts, or such other documentation as will prove payment of tax in a court of law applying the United States Federal Rules of Evidence for all taxes paid by Borrower. 4.2 Costs. Borrower shall reimburse or compensate Bank, upon demand by Bank from time to time, for all costs incurred, losses suffered and payments made by Bank which are applied or allocated by Bank to the Term Loan (all as determined by Bank in its sole and absolute discretion) by reason of: (a) any and all present and future reserve, deposit or similar requirements against (or against any class of or change in or in the amount of) assets or liabilities of, or commitments or extensions of credit by, Bank; (b) compliance by Bank with any directive, requirement or request from any governmental or regulatory authority, whether or not having the force of law. 4.3 Capital Adequacy. If Bank determines that any law, rule, regulation or guideline regarding capital adequacy affects or would affect the amount of capital required to be maintained by Bank or any corporation controlling Bank and Bank determines (taking into consideration Bank's policies with respect to capital adequacy and Bank's desired return on capital) that the amount of required capital is increased as a result of Bank's obligations under this Agreement, then, upon demand by Bank from time to time, Borrower shall pay Bank additional amounts sufficient as specified by Bank to compensate Bank for such increase. 5. Conditions Precedent. This Agreement shall take effect on the Closing Date, but effective as of the Effective Date, subject to the conditions precedent that, on or before the Closing Date, there shall have been delivered to Bank, in form and substance satisfactory to Bank: 5.1 Opinion of Borrower's Counsel. A written opinion, dated the Closing Date, of counsel for Borrower (which counsel must be satisfactory to Bank), which opinion may be qualified to the extent approved by Bank and shall cover such legal matters relating hereto as Bank may reasonably request; 5.2 Borrower's Corporate Resolution. A copy of a resolution or resolutions passed by the Board of Directors of Borrower, certified by the Secretary or an Assistant Secretary of Borrower as being in full force and effect on the Closing Date, authorizing the borrowing provided for herein and the execution, delivery and performance of this Agreement and any instrument or agreement required hereunder; 5.3 Borrower's Incumbency Certificate. A certificate, signed by the Secretary or an Assistant Secretary of Borrower and dated the Closing Date, as to the incumbency, and containing the specimen signature or signatures, of the person or persons authorized to execute and deliver this Agreement and any instrument or agreement required hereunder on behalf of Borrower; 5.4 Borrower's Compliance Certificate. A completed Compliance Certificate, signed on behalf of Borrower by its chief financial officer and calculated as of December 31, 1992, dated the Closing Date; 5.5 Approvals and Consents. Certified copies of all approvals, consents, exemptions and other actions by, and notices to and filings with, any governmental or regulatory authority and any trustee or holder of any indebtedness or obligation of Borrower which, in Bank's opinion, are required in connection with any transaction contemplated hereby; 5.6 Evidence of No Material Adverse Change. A certificate signed on behalf of Borrower by its chief financial officer stating that since December 31, 1992 there has been no material adverse change in Borrower's consolidated financial condition or results of operations or ability to perform its obligations under this Agreement or under any instrument or agreement required hereunder; 5.7 Fees. The arrangement fee; and 5.8 Other Evidence Bank May Require. Such other evidence as Bank may reasonably request to establish the consummation of the transactions contemplated hereby, the taking of all proceedings in connection herewith and compliance with the conditions set forth in this Agreement. 6. Representations and Warranties. Borrower represents and warrants that: 6.1 Organization of Borrower. Borrower is a corporation duly organized and existing under the laws of California, and is properly licensed, qualified and in good standing in every jurisdiction in which it is doing business; 6.2 Authorization of Agreement. The execution, delivery and performance of this Agreement and any instrument or agreement required hereunder are within Borrower's powers, have been duly authorized, and are not in conflict with the terms of any charter, bylaw or other organization papers of Borrower, or any instrument or agreement to which Borrower is a party or by which Borrower is bound or affected; 6.3 Government Approvals. No approval, consent, exemption or other action by, or notice to or filing with (other than a Form 8-K Current Report which Borrower may determine to file with the SEC to disclose the execution of this Agreement and notification to the PUC (as hereinafter defined), which notice Borrower shall give promptly after the Closing Date), any governmental or regulatory authority is necessary in connection with the execution, delivery, performance or enforcement of this Agreement or any instrument or agreement required hereunder, except as may have been obtained and certified copies of which have been delivered to Bank; 6.4 Compliance with Laws. There is no law, rule or regulation, nor is there any judgment, decree or order of any court or governmental or regulatory authority binding on Borrower which would be contravened by the execution, delivery, performance or enforcement of this Agreement or any instrument or agreement required hereunder; 6.5 Investment Company Act. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940; 6.6 Enforceability of Agreement. This Agreement is a legal, valid and binding agreement of Borrower, enforceable against Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable; 6.7 Title to Property. Borrower has good and marketable title to its property free and clear of all security interests, liens, encumbrances and rights of others, except for: (a) taxes which have resulted in a lien but are not yet delinquent; and (b) security interests, liens and encumbrances permitted under Paragraph 8.3, none of which secure revolving lines of credit or term indebtedness extended by banks or other lenders to Borrower; and the execution, delivery, performance or enforcement of this Agreement or any instrument or agreement required hereunder will not result in the creation of any security interest, lien, encumbrance or right of another except in favor of Bank; 6.8 Hazardous Materials. Borrower is in compliance with all federal, state and local laws, rules and regulations relating to hazardous or toxic materials, substances or wastes; 6.9 No Litigation. (a) Excluding for purposes of this subparagraph (a) only any proceedings, claims or disputes before or involving the Public Utilities Commission of the State of California ("PUC"), there are no actions, proceedings, claims or disputes pending or, to the knowledge of Borrower, threatened against or affecting Borrower or its property, the adverse determination of which might materially adversely affect Borrower's consolidated financial condition or results of operations or Borrower's ability to perform its obligations hereunder or under any instrument or agreement required hereunder; (b) There are no actions, proceedings, claims or disputes before or involving the PUC pending or, to the knowledge of Borrower, threatened against or affecting Borrower or its property, the adverse determination of which might materially adversely affect Borrower's consolidated financial condition or its ability to perform its obligations hereunder or under any instrument or agreement required hereunder; (c) There are no actions, proceedings, claims or disputes pending or, to the knowledge of Borrower, threatened against or affecting Borrower or its property, alleging violation of any federal, state, or local law, rule or regulation relating to hazardous or toxic materials, substances or wastes; 6.10 Events of Default. No event has occurred or would result from the incurring of obligations by Borrower under this Agreement which is, or upon the lapse of time or notice or both would become, an Event of Default; 6.11 Regulation U. The proceeds of the Term Loan will not be used, directly or indirectly, to purchase or carry any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System or any successor regulation) or to extend credit to others for the purpose of purchasing or carrying any margin stock; 6.12 Taxes. All payments under or in respect of this Agreement and any instrument or agreement required hereunder are exempt from tax other than taxes on net income imposed by the country or any subdivision of the country in which Bank's principal office or actual lending office is located; 6.13 Subsidiaries. Borrower has one Subsidiary, RTC Communications Corp., which has no contracts and which engages in no business activities; 6.14 Financial Information. All financial statements dated December 31, 1992, information and data furnished by Borrower to Bank prior to the Closing Date are complete, and such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the consolidated financial condition and results of operations of Borrower as of such date. Since December 31, 1992 there has been no material adverse change in Borrower's consolidated financial condition or results of operations or ability to perform its obligations under this Agreement or under any instrument or agreement required hereunder. Borrower has no contingent obligations, liabilities for taxes or other outstanding financial obligations which are material in the aggregate, except as disclosed in such statements, information and data. 7. Positive Covenants. Borrower covenants and agrees that so long as the Term Loan shall remain available, and until the full and final payment of all obligations of Borrower under this Agreement and any instrument or agreement required hereunder, it will: 7.1 Payment. Pay interest and principal on the Term Loan and all other sums outstanding under or in respect of this Agreement and any instrument or agreement required hereunder in accordance with the terms hereof and thereof; 7.2 Use of Proceeds. Use the proceeds of the Term Loan for general corporate purposes; 7.3 Cash Flow Coverage Ratio. Achieve on a consolidated basis on the last day of each calendar quarter, for the 12-month period ending on such day, a Cash Flow Coverage Ratio of at least 2.0 to 1.0; 7.4 Tangible Net Worth. Maintain at all times on a consolidated basis Tangible Net Worth of at least 90% of Tangible Net Worth on June 30, 1993 plus the sum of 40% of net income after income taxes (without subtracting losses) earned in each calendar quarter commencing after June 30, 1993 and the net proceeds from any equity securities issued after June 30, 1993; 7.5 Notices. Promptly give written notice to Bank of: (a) all actions, proceedings, claims or disputes affecting Borrower (other than actions, proceedings, claims or disputes before or involving the PUC or the Federal Communications Commission ("FCC")) where the amount claimed is $1,000,000 or more; (b) any substantial dispute which may exist between Borrower and any governmental or regulatory authority; (c) any labor controversy resulting in or threatening to result in a strike, work stoppage, boycott, shutdown or other labor disruption against or involving Borrower; (d) (i) all significant developments in the actions, proceedings, claims or disputes before or involving the PUC or the FCC which are disclosed in Borrower's 10-K Annual Report filed with the SEC for the fiscal year ending December 31, 1992, (ii) all actions, proceedings, claims or disputes before or involving the PUC or the FCC which arise subsequent to the Closing Date and which Borrower anticipates will be disclosed in the next Form 10-K Annual Report which Borrower is required to file with the SEC, and (iii) all significant developments pertaining to items in subparagraph (ii); (e) any reportable event under Section 4043(b)(5), (6) or (9) of ERISA with respect to any Plan, any decision to terminate or withdraw from a Plan, the commencement of any proceeding with respect to a Plan under Section 4042 of ERISA, or any material increase in the actuarial present value of unfunded vested benefits under any Plan over the preceding year; (f) as required under Paragraph 2.3(c); (g) any Event of Default or any event which, upon the lapse of time or notice or both, would become an Event of Default; and (h) any matter which has resulted or might result in a material adverse change in Borrower's consolidated financial condition or results of operations or Borrower's ability to perform its obligations hereunder or under any instrument or agreement required hereunder; (i) copies of the reports pertaining to the execution of this Agreement which Borrower submits to the PUC or one of its divisions in accordance with the PUC's order with respect to Application 91-11-045, and evidence of the PUC's or such division's receipt of same; 7.6 Financial Statements, Reports, Etc. Deliver to Bank in form and detail satisfactory to Bank, and in such number of copies as Bank may request: (a) as soon as available but no later than 60 days after the end of each of the first three quarters of each of its fiscal years, Borrower's balance sheet as of the end of such quarter, and Borrower's statements of income, retained earnings and cash flows for such quarter and that portion of the fiscal year ending with such quarter, prepared on a consolidated basis, all as set forth in Borrower's Form 10-Q Quarterly Report filed with the SEC for such quarter, and a certificate signed on behalf of Borrower by its chief financial officer stating that such financial statements fairly present the consolidated financial condition and results of operations of Borrower during such quarter and were prepared in accordance with generally accepted accounting principles consistently applied; (b) as soon as available but no later than 120 days after the end of each of its fiscal years, a complete copy of Borrower's audited financial statements, which shall include at least Borrower's balance sheet as of the end of such year, and Borrower's statements of income, retained earnings and cash flows for such year, prepared on a consolidated basis, and the opinion of an independent certified public accountant selected by Borrower and satisfactory to Bank stating that Borrower's financial statements fairly present the consolidated financial condition and results of operations of Borrower and were prepared in accordance with generally accepted accounting principles consistently applied, all as set forth in Borrower's Form 10-K Annual Report filed with the SEC for such fiscal year. The opinion of such certified public accountant shall not be qualified or limited because of a restricted or limited examination by such accountant of any material portion of Borrower's records; (c) at the same time as the deliveries made to Bank by Borrower pursuant to subparagraphs (a) and (b) above, a completed Compliance Certificate signed on behalf of Borrower by its chief financial officer and calculated as of the end of such quarter or year; (d) as soon as distributed to Borrower's shareholders, a copy of any interim financial statements furnished by Borrower to its shareholders; (e) as soon as filed with the Securities and Exchange Commission, a copy of each Form 8-K Current Report, Form 10-K Annual Report, Annual Report to Shareholders, Proxy Statement and Registration Statement; (f) such other statements, lists of property and accounts, budgets, forecasts or reports as Bank may reasonably request; 7.7 Cooperation. Perform, on request of Bank and at Borrower's expense, such acts as may be reasonably necessary or advisable to carry out the intent of this Agreement; 7.8 Existence, Etc. Maintain and preserve its existence and all rights, privileges and franchises now enjoyed, and keep all its properties in good working order and condition; provided, however, that Borrower may dissolve RTC Communications Corp.; 7.9 Payment of Obligations. Pay all obligations, including tax claims, when due, except such as may be contested in good faith or as to which a bona fide dispute may exist; 7.10 Compliance with Laws. Comply with all laws, rules, regulations, orders and directions of any governmental or regulatory authority having jurisdiction over it or its business; 7.11 Insurance. Maintain and keep in force in adequate amounts such insurance as is usual in its business; 7.12 Maintain Books and Records; Inspection Rights. Maintain adequate books, accounts and records in accordance with generally accepted accounting principles consistently applied, and permit employees or agents of Bank at any reasonable time to inspect its properties, and to examine and audit its books, accounts and records and make copies and memoranda thereof. 8. Negative Covenants. Borrower covenants and agrees that, so long as the Term Loan shall remain available, and until full and final payment of all obligations of Borrower under this Agreement and any instrument or agreement required hereunder, it will not: 8.1 Leverage Ratio. Permit at any time its Leverage Ratio to exceed 0.75 to 1.0; 8.2 Reserved. 8.3 Other Security Interests. Create, assume or suffer to exist any security interest, lien (including the lien of an attachment, judgment or execution) or encumbrance, securing a charge or obligation, on or of any of its property, whether now owned or hereafter acquired, except: (a) any security interests, liens or encumbrances disclosed to Bank prior to the Closing Date; (b) liens for current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty, or the validity of which is being contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof; (c) deposits or pledges to secure: (i) statutory obligations; (ii) surety or appeal bonds; (iii) bonds for release of attachment, stay of execution or injunction; or (iv) performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or for purposes of like general nature in the ordinary course of its business as presently conducted; (d) purchase money security interests or mortgages in or against property hereafter acquired if the liability secured does not exceed 100% of the cost thereof and the security interest does not extend beyond the property purchased; (e) security interests, liens or encumbrances on margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System or any successor regulation); (f) involuntary liens which do not give rise to an Event of Default under Paragraph 9.4; 8.4 Liquidation; Merger, Etc. Liquidate or dissolve, or enter into any merger, consolidation, reorganization, partnership, joint venture or other combination other than in the ordinary course of business as presently conducted, or sell, lease, exchange, transfer or otherwise dispose of all or substantially all of its property; provided, however, that (a) Borrower may enter into mergers after the Closing Date so long as (i) Borrower is the surviving party to any such merger, and (ii) the primary business activity or operation of the entity(ies) merging into Borrower is substantially related to Borrower's business activities and operations as of the Closing Date; (b) Borrower may enter into any partnership or joint venture if to do so would be in the ordinary course of its business as conducted as of the Closing Date; 8.5 Sale of Property for Fair Consideration. Sell, lease, exchange, transfer or otherwise dispose of any of its property except for full, fair and reasonable consideration, provided, however, that this Paragraph shall not apply to Non-Essential Assets; 8.6 Sale of Fixed or Capital Assets. Sell, lease, exchange, transfer or otherwise dispose of all or substantially all of its fixed or capital assets, or enter into any sale and leaseback agreement covering any of its fixed or capital assets, provided, however, that this Paragraph shall not apply to Non-Essential Assets; 8.7 Purchase of Property. Purchase or otherwise acquire the property or business of, or any shares or other forms of ownership interest in, make any capital contributions to or loans or extensions of credit, or otherwise invest in, any Person; provided, however, that this Paragraph shall not be deemed to prohibit the purchase or acquisition of the property or business of or any form of ownership interest in any entity if such entity's primary business activity or operation is substantially related to Borrower's business activities and operations as of the Closing Date; 8.8 Contracts. Enter into any contracts, leases, indentures, or other agreements except in the ordinary course of its business as conducted as of the Closing Date; 8.9 Change in Business. Engage in any business activities or operations substantially different from or unrelated to its business activities and operations as of the Closing Date. 9. Events of Default. The occurrence of any of the following events shall terminate any obligation on the part of Bank to make or continue the Term Loan and, at the option of Bank, shall make all interest and principal remaining on the Term Loan and all other sums outstanding under or in respect of this Agreement immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character: 9.1 Nonpayment-Principal. Borrower fails to pay, when due, any installment of principal under this Agreement in accordance with the terms hereof; 9.2 Nonpayment-Interest and Other Sums. Borrower fails to pay, within five days after the date when due, any installment of interest or any other sum under this Agreement in accordance with the terms hereof; 9.3 Misrepresentation. Any representation or warranty herein or in any agreement, instrument or certificate executed pursuant hereto or in connection with any transaction contemplated hereby proves to have been false or misleading in any material respect when made or when deemed to have been made; 9.4 Involuntary Liens. Any involuntary lien or liens in the aggregate amount of $1,000,000 or more, of any kind or character, attaches to any property of Borrower and remains unvacated or unbonded for a period of 30 days, except for taxes due but not in default; 9.5 Judgments. A judgment or judgments or arbitration award or awards is entered against Borrower in the aggregate amount of $1,000,000 or more on a claim or claims not covered by insurance and remains unpaid, unvacated, unbonded or unstayed for a period of 60 days; 9.6 Voluntary Bankruptcy. Borrower is generally not paying or admits in writing its inability to pay its debts as such debts become due, or files any petition or action for relief under any bankruptcy, reorganization, arrangement, insolvency, or moratorium law or any other law for the relief of, or relating to, debtors, or requests the appointment of a custodian, receiver or trustee (or other similar official) to take possession, custody or control of any of its property, or enters into any composition with creditors, or makes any assignment for the benefit of creditors, or takes any corporate action in furtherance of any of the foregoing; 9.7 Involuntary Bankruptcy. An involuntary petition is filed against Borrower under any bankruptcy, reorganization, arrangement, insolvency, or moratorium law or any other law for the relief of, or relating to, debtors, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of Borrower, unless such petition or appointment is set aside or withdrawn or ceases to be in effect within 60 days from the date of said filing or appointment; 9.8 Condemnation. All, or in the opinion of Bank substantially all, of the property of Borrower is condemned, seized or appropriated; 9.9 Regulatory Action. Any governmental or regulatory authority takes or institutes action which, in the opinion of Bank, will materially adversely affect Borrower's consolidated financial condition or results of operations or ability to perform its obligations hereunder or under any instrument or agreement required hereunder; 9.10 Cross Default. Any breach or default occurs under any other agreement or agreements involving the borrowing of money or the extension of credit under which Borrower may be obligated as borrower, instalment purchaser or guarantor, if such breach or default consists of the failure to pay any indebtedness when due or if such breach or default permits or causes (or upon the lapse of time or notice or both would permit or cause) the acceleration of any indebtedness or the termination of any commitment to lend or to extend credit; 9.11 Breach of Other Obligations. Any breach or default occurs under any other obligation of Borrower to Bank or any subsidiary or affiliate of Bank; 9.12 ERISA Termination. Any Plan termination or any full or partial withdrawal from a Plan or Plans occurs which could result in liability of Borrower to the Pension Benefit Guaranty Corporation or to the Plan or Plans in the aggregate amount of $10,000,000 or more, or the actuarial present value of unfunded vested benefits under all Plans shall exceed 10% of Borrower's Tangible Net Worth (determined on a consolidated basis); 9.13 Material Adverse Change. Any material adverse change occurs in Borrower's consolidated financial condition or results of operations or ability to perform its obligations hereunder or under any instrument or agreement required hereunder; 9.14 Other Defaults. Borrower breaches, or defaults under, any term, condition, provision, representation, warranty or covenant contained in this Agreement not specifically referred to in this Article. 10. Miscellaneous. 10.1 Notices. Any communications between the parties hereto to be given in writing shall be given by mailing the same, postage prepaid, or by telex, cable, facsimile or personal delivery to each party at its address set forth on the signature pages hereto, or to such other addresses as either party may in writing hereafter indicate. Any communications between the parties hereto to be given by telephone shall be confirmed immediately in writing by the party initiating the telephone call. 10.2 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that Borrower shall not assign this Agreement or any of the rights of Borrower hereunder without the prior written consent of Bank. 10.3 Participations. (a) Bank may from time to time sell, assign, grant participations in, or otherwise transfer to any bank (a "Participant") all or part of the obligations of Borrower to Bank under this Agreement. (b) Borrower agrees that each transfer of its obligations under this Agreement will give rise to a direct obligation of Borrower to the Participant and that Participant shall have the same rights and benefits under this Agreement as it would have if it were party to this Agreement. (c) Bank shall remain liable for the performance of all of its obligations under this Agreement notwithstanding any transfer by Bank of Borrower's obligations under this Agreement, unless Borrower, Bank and Participant agree to the contrary in writing. (d) Borrower authorizes Bank to disclose to any prospective Participant and any Participant any and all confidential information in Bank's possession concerning Borrower and this Agreement, subject to such prospective Participant and Participant executing a confidentiality agreement substantially in the form of Exhibit B. Bank shall not be responsible if such prospective Participant or Participant fails to comply with the confidentiality agreement. 10.4 Novations. (a) Bank may from time to time assign to any bank (an "Assignee") all or part of the obligations of Borrower to Bank under this Agreement and delegate to Assignee all or a proportionate part of the obligations of Bank to Borrower under this Agreement. (b) The effectiveness of each such assignment and delegation is subject to the prior written consent of Borrower (whose consent will not be unreasonably withheld). (c) Borrower agrees that each such assignment and delegation will give rise to a direct obligation of Borrower to Assignee and that Assignee shall have the same rights and benefits and obligations under this Agreement as it would have if it were party to this Agreement. Borrower agrees that each such assignment and delegation will release and discharge Bank from Bank's obligations to Borrower under this Agreement with respect to the portion of Bank's obligations delegated to Assignee. (d) Borrower authorizes Bank to disclose to any prospective Assignee and any Assignee any and all confidential information in Bank's possession concerning Borrower and this Agreement, subject to such prospective Assignee and Assignee executing a confidentiality agreement substantially in the form of Exhibit B. Bank shall not be responsible if such prospective Assignee or Assignee fails to comply with the confidentiality agreement. 10.5 Setoff. Borrower authorizes Bank and each Participant and each Assignee, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or otherwise, against any property of Borrower which may be in the hands of Bank or such Participant or such Assignee, respectively. 10.6 Confidentiality. Bank agrees to maintain confidentiality with respect to all information which is furnished by or on behalf of Borrower to Bank under this Agreement, except to the extent such information: (a) was or becomes generally available to the public other than as a result of a disclosure by Bank; (b) was or becomes available on a non-confidential basis from a source other than Borrower, provided that such source is not bound by a confidentiality agreement with Borrower known to Bank; (c) is disclosed by Bank: (i) to any governmental or regulatory authority in the course of its duties; (ii) pursuant to subpoena or other legal process; (iii) to legal counsel and other advisors retained by Bank; (iv) to any Person and in any proceeding necessary in Bank's judgment to protect Bank's interest in connection with any claim or dispute involving Bank; or (v) to any prospective Participant or Assignee and any Participant or Assignee. 10.7 Waivers; Writing Required. No delay or omission by Bank to exercise any right under this Agreement shall impair any such right, nor shall it be construed to be a waiver thereof. No waiver of any single breach or default under this Agreement shall be deemed a waiver of any other breach or default. Any amendment or waiver of any provision of this Agreement must be in writing to be effective. 10.8 Remedies. All rights and remedies provided in this Agreement and any instrument or agreement required hereunder are cumulative and are not exclusive of any rights or remedies otherwise provided by law. Any single or partial exercise of any right or remedy shall not preclude the further exercise thereof or the exercise of any other right or remedy. 10.9 Costs and Expenses. Borrower agrees to pay to Bank on demand from time to time all costs, expenses and attorneys' fees (including allocated costs for in-house legal services) incurred by Bank in connection with (a) the preparation of this Agreement and of any waivers and amendments, (b) the administration of this Agreement and any waivers and amendments, but not including any charges for time allocated by Bank personnel (other than in- house legal staff) to routine ongoing operations with respect to this Agreement, (c) enforcement of this Agreement and any instrument or agreement required hereunder, and (d) in connection with any refinancing or restructuring of the Term Loan in the nature of a "work-out"; provided, however, that Borrower's reimbursement of Bank for attorneys' fees (including allocated costs for in-house legal services) incurred by Bank in connection with the preparation of this Agreement shall not exceed $10,000. 10.10 Indemnification for Hazardous Substances. Borrower shall indemnify Bank and its directors, officers, agents, employees and counsel against and hold Bank and each such person harmless from any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever (including attorneys' fees and allocated costs for in-house legal services) arising out of or attributable to the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence on, under or about Borrower's operations or property or property leased by Borrower of any material, substance or waste which is or becomes designated as hazardous or toxic under any federal, state or local law, rule or regulation. 10.11 Indemnification for Use of Proceeds of Term Loan. Borrower shall indemnify Bank and its directors, officers, agents, employees and counsel against and hold Bank and each such person harmless from any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever (including attorneys' fees and allocated costs for in-house legal services) arising out of or incurred in connection with Borrower's use or proposed use of the proceeds of the Term Loan for any purpose, including the purchase or other acquisition of any shares or other forms of ownership interest in any Person (or to refinance any indebtedness incurred for such purpose). 10.12 Paragraph Headings. Paragraph headings are for reference only, and shall not affect the interpretation or meaning of any provision of this Agreement. Unless otherwise provided, references to Articles, Paragraphs and Exhibits shall be deemed reference to Articles, Paragraphs and Exhibits of this Agreement. 10.13 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.14 Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 10.15 Governing Law. This Agreement, and any instrument or agreement required hereunder, shall be governed by and construed under the laws of the State of California. 10.16 Entire Agreement. This Agreement and any instrument, agreement or document attached hereto or referred to herein (a) integrate all the terms and conditions mentioned herein or incidental hereto, (b) supersede all oral negotiations and prior writings with respect to the subject matter hereof, and (c) are intended by the parties as the final expression of the agreement with respect to the terms and conditions set forth in this Agreement and any such instrument, agreement or document and as the complete and exclusive statement of the terms agreed to by the parties. In the event of any conflict between the terms, conditions and provisions of this Agreement and any such instrument, agreement or document, the terms, conditions and provisions of this Agreement shall prevail. In Witness Whereof, the parties hereto have executed this Agreement by their duly authorized officers as of the day and year first above written, effective for all purposes as of November 12, 1993. BANK OF AMERICA NATIONAL TRUST ROSEVILLE TELEPHONE COMPANY AND SAVINGS ASSOCIATION By By Title Title By By Title Title Address for notices: Address for notices: 555 California St., 41st Floor 211 Lincoln Street San Francisco, CA 94104 Roseville, CA 95678 Attn: S. DeMarti, #3838 CONTENTS SECTION PAGE INTRODUCTION RECITALS 1. Definitions and Financial Requirements 1.1 Definitions 1.2 Financial Requirements 2. The Term Loan 2.1 Commitment for the Term Loan 2.2 Reserved 2.3 Interest on the Term Loan 2.4 Principal on the Term Loan 2.5 Prepayment of the Term Loan 2.6 Arrangement Fee 3. Disbursements and Payments 3.1 Lending Branch 3.2 Loan Account 3.3 Immediately Available Funds; Disbursements and Payments 3.4 Default Interest 3.5 Interest Rate Calculations 4. Taxes, Costs and Capital Adequacy 4.1 Taxes 4.2 Costs 4.3 Capital Adequacy 5. Conditions Precedent 5.1 Opinion of Borrower's Counsel 5.2 Borrower's Corporate Resolution 5.3 Borrower's Incumbency Certificate 5.4 Borrower's Compliance Certificate 5.5 Approvals and Consents 5.6 Evidence of No Material Adverse Change 5.7 Fees 5.8 Other Evidence Bank May Require 6. Representations and Warranties 6.1 Organization of Borrower 6.2 Authorization of Agreement 6.3 Government Approvals 6.4 Compliance with Laws 6.5 Investment Company Act 6.6 Enforceability of Agreement 6.7 Title to Property 6.8 Hazardous Materials 6.9 No Litigation 6.10 Events of Default 6.11 Regulation U 6.12 Taxes 6.13 Subsidiaries 6.14 Financial Information 7. Positive Covenants 7.1 Payment 7.2 Use of Proceeds 7.3 Cash Flow Coverage Ratio 7.4 Tangible Net Worth 7.5 Notices 7.6 Financial Statements, Reports, Etc. 7.7 Cooperation 7.8 Existence, Etc. 7.9 Payment of Obligations 7.10 Compliance with Laws 7.11 Insurance 7.12 Maintain Books and Records; Inspection Rights 8. Negative Covenants 8.1 Leverage Ratio 8.2 Reserved 8.3 Other Security Interests 8.4 Liquidation; Merger, Etc. 8.5 Sale of Property for Fair Consideration 8.6 Sale of Fixed or Capital Assets 8.7 Purchase of Property 8.8 Contracts 8.9 Change in Business 9. Events of Default 9.1 Nonpayment-Principal 9.2 Nonpayment-Interest and Other Sums 9.3 Misrepresentation 9.4 Involuntary Liens 9.5 Judgments 9.6 Voluntary Bankruptcy 9.7 Involuntary Bankruptcy 9.8 Condemnation 9.9 Regulatory Action 9.10 Cross Default 9.11 Breach of Other Obligations 9.12 ERISA Termination 9.13 Material Adverse Change 9.14 Other Defaults 10. Miscellaneous 10.1 Notices 10.2 Successors and Assigns 10.3 Participations 10.4 Novations 10.5 Setoff 10.6 Confidentiality 10.7 Waivers; Writing Required 10.8 Remedies 10.9 Costs and Expenses 10.10 Indemnification for Hazardous Substances 10.11 Indemnification for Use of Proceeds of Term Loan 10.12 Paragraph Headings 10.13 Severability 10.14 Counterparts 10.15 Governing Law 10.16 Entire Agreement EXHIBITS Exhibit A Compliance Certificate Exhibit B Confidentiality Agreement ============================================================================= CREDIT AGREEMENT dated as of January 4, 1994 between ROSEVILLE TELEPHONE COMPANY as Borrower and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ============================================================================= -----END PRIVACY-ENHANCED MESSAGE-----