-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TosdbguV9RUiMQDKUqb6XDnOowyq8lZG018Tk3Z9uzzmmezq+bLLGqRqC68bB1/n qtJOcBPQYjLFis7gqQqyiA== 0000085153-96-000002.txt : 19960329 0000085153-96-000002.hdr.sgml : 19960329 ACCESSION NUMBER: 0000085153-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROSEVILLE TELEPHONE CO CENTRAL INDEX KEY: 0000085153 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 940817190 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00556 FILM NUMBER: 96539865 BUSINESS ADDRESS: STREET 1: P O BOX 969 CITY: ROSEVILLE STATE: CA ZIP: 95678-0969 BUSINESS PHONE: 9167861407 MAIL ADDRESS: STREET 1: P O BOX 969 CITY: ROSEVILLE STATE: CA ZIP: 95678-0969 10-K 1 1 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, 1995 [ ] 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) 786-6141 Securities registered pursuant to Section 12(g) of the Act: Common Stock - Without Par Value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate 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. [ ] 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 $321,755,075 as of February 29, 1996. As of February 29, 1996, 14,915,424 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 21, 1996. TABLE OF CONTENTS ITEM NO. PAGE PART I 1.Business 3 2.Properties 5 3.Legal Proceedings 5 4.Submission of Matters to a Vote of Security Holders 8 PART II 5.Market for Registrant's Common Equity and Related Stockholder Matters 9 6.Selected Financial Data 9 7.Management's Discussion and Analysis of Financial Condition and Results of Operations 10 8.Financial Statements and Supplementary Data 16 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35 PART III 10.Directors and Executive Officers of the Registrant 35 11.Executive Compensation 35 12.Security Ownership of Certain Beneficial Owners and Management 35 13.Certain Relationships and Related Transactions 35 PART IV 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 35 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, 1995, 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 the manner in which certain local exchange services presently provided solely by the Company 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". In February 1996, Congress passed the Telecommunications Act of 1996 which significantly changed the regulatory environment for telecommunications companies. As a result of the Telecommunications Act, specific telephone and cable television services historically provided exclusively by one company may be provided by competing companies. The Company is actively evaluating the financial viability of various opportunities in the long-distance and wireless telecommunications segments as well as the cable television industry. The Company, with an approximate 23.5% equity interest, is one of four limited partners of Sacramento-Valley Limited Partnership (the "Cellular 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 Cellular Partnership also operates in the Tehama, Sierra and Storey (Carson City) Rural Statistical Areas ("RSA"). AirTouch Cellular is the sole general partner of the Cellular 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 one license to provide cellular services to a wireline carrier and one license to a non-wireline carrier. The Cellular 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 of total operating revenues of the Company contributed by various sources, excluding revenues from the Company's ownership interest in the Cellular Partnership. % of Total Operating Revenues Revenues 1995 1994 1993 - ------------------------ ---- ---- ---- Rate regulated revenues 82% 85% 85% Other revenues 18% 15% 15% ---- ---- ---- Total operating revenues 100% 100% 100% ==== ==== ==== As indicated above, revenues from rate regulated services, which include local service, network access service and long distance service revenues, constituted approximately 82% of the Company's total operating revenues in 1995. Other revenues consist primarily of directory advertising services, billing and collection services, nonregulated services and other miscellaneous revenues. Nonregulated revenues are derived from the sale, lease and maintenance of telecommunications equipment, and the provision of alarm monitoring services. Substantially all of the Company's revenues are from communications and related services. Approximately 24%, 34% and 36% of the Company's consolidated operating revenues in 1995, 1994 and 1993, respectively, were derived from access charges and charges for other services to, and transition contract payments from Pacific Bell pursuant to certain agreements. Approximately 10% of the Company's consolidated operating revenues in 1994 and 1993 (7% in 1995) 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. Total rate regulated revenues from telephone services are affected by rates authorized by various regulatory agencies. Intrastate service rates are subject to regulation by the P.U.C. The Company is currently engaged in a rate proceeding before the P.U.C. and expects a final decision by the end of 1996. The Company has agreements with Pacific Bell relating to extended area service settlements and a significant portion of network access and long distance revenues. With respect to intrastate toll calls, interexchange carriers are assessed access charges based on tariffs filed by Pacific Bell. With respect to interstate services, the Company has filed its own tariff with the F.C.C. for all elements of access services except carrier common line charges, for 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. For further discussion regarding the Company's rate regulated revenues, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations". 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, 1995, the Company had 521 employees, 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. The Company's 68,000 square foot principal business office and administrative headquarters and 128,000 square foot operations facility are located in Roseville. Other land is held for future expansion. The Company has appropriate easements, rights of way and other arrangements for the accommodation of its pole lines 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 Cellular 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 affect the Company prospectively and are not expected to affect the Company's 1995 financial statements. 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. It has announced that in the course of this investigation it will consider the manner in which certain services presently provided solely by the Company within its local exchange area should be opened to competition. On September 15, 1994, the P.U.C. adopted Decision 94-09-065, its opinion in this matter with respect to competition within each Local Access and Transport Area ("LATA") and rate design issues. The order revised basic exchange, toll, access, private line, and service connection rates and authorized competition for toll and toll-like services within the Company's LATA effective January 1, 1995. Based on calculations by the P.U.C., these ordered changes were expected to result in a net reduction in the Company's 1995 rate regulated revenues of approximately $5.3 million. In addition, the order as amended required the Company to submit an application for a general rate case and proposal for a new regulatory framework. This application, which was filed on May 15, 1995, included a request for a revenue increase of approximately $11 million. On November 13, 1995, the Division of Ratepayer Advocates ("D.R.A."), submitted its report on the Company's application in the rate case and proposed an approximate $10 million reduction in the Company's rates and charges. The Company disagrees with the D.R.A.'s proposal and provided its response to the P.U.C. on January 12, 1996. Hearings on the issues commenced February 13, 1996 and the Company expects a final decision by the end of 1996. On April 7, 1993, the P.U.C. opened an investigation and rulemaking proceeding (R. 93-04-003) to establish rules necessary to provide nondiscriminatory access by competing service providers to the network capabilities of local exchange carriers necessary to ensure fair competition in accordance with the mandate of Public Utilities Code Section 2282.5. In connection with this proceeding, the P.U.C. issued a further order on August 5, 1993 proposing additional rules for implementation of the open access principles proposed in its open access proceeding. On April 26, 1995, the P.U.C. adopted Decision 95-04-073, an interim opinion governing the provision of expanded interconnection and restructuring of local transport rates by Pacific Bell and GTE California. On December 6, 1995, the P.U.C. adopted Decision 95-12-016 which adopted principles to govern the development of cost studies for the basic network functions of the local exchange networks of Pacific Bell and GTE California. In this order, the P.U.C. ordered the Company to participate in the process of developing these cost studies in anticipation of a possible order that the Company designate and be bound for two years by the results of the cost studies for a comparable Pacific Bell or GTE California wire center and to develop a proposal for how to account for shared and common costs, including overhead. Also, on December 6, 1995, the P.U.C. adopted Decision 95-12-020 which modified the rate structure previously adopted for local transport in order to bring it into parity with that adopted by the F.C.C. in its own proceedings on local transport restructuring. These proceedings may broaden the scope of competition in the provision of intrastate services, the effects of which on the Company cannot presently be determined. In November 1993, the P.U.C. issued a report to the Governor of the State of California entitled "Enhancing California's Competitive Strength: A Strategy For Telecommunications Infrastructure" in which it proposes to open all markets to competition and aggressively streamline regulation to accelerate the pace of innovation in the telecommunications marketplace. In connection with this report, on December 21, 1994, the P.U.C. adopted Decision 94-12-053, an initial procedural plan to facilitate opening local exchange telecommunications markets to competition by January 1, 1997. In this decision, the Commission expressed its intent to implement local exchange competition, intraLATA presubscription, open access to local exchange carrier networks based on an unbundled basis, and reform of the new regulatory framework for local exchange carriers. In conjunction with these proceedings, the P.U.C. adopted Rulemaking 95-01-020 and Investigation 95-01-021 on January 24, 1995, an order instituting investigation and rulemaking to consider the goals of and definition of universal telephone service in a changing telecommunications environment, including examination of subsidy support mechanisms and issues of "carrier of last resort" and "franchise" obligations. After reviewing comments, the P.U.C. issued Decision 95-07-050 on July 19, 1995 setting forth a set of proposed rules pertaining to universal service responsibilities in a competitive environment. Proceedings in connection with establishing the mechanisms for calculating and funding future subsidy support mechanisms are continuing. The Company anticipates that further orders will be issued in this proceeding during 1996 which may result in changes in intrastate telecommunication regulation, the effects of which on the Company cannot yet be determined. On April 26, 1995, the P.U.C. adopted Rulemaking 95-04-043 and Investigation 95- 04-044, an order instituting investigation and rulemaking to develop and adopt rules for local exchange competition. On July 24, 1995, the P.U.C. issued Decision 95-07-054 opening Pacific Bell and GTE California territories to competition under interim rules by facilities-based competitors on January 1, 1996 and by resale competitors on March 31, 1996. Additional interim rules governing interconnection and related matters were adopted on December 20, 1995 in Decision 95-12-057 approving the applications of an initial group of facilities-based local service competitors. On February 23, 1996, the P.U.C. adopted Decision 96-02-072 approving the applications of an initial group of resale competitors. A companion decision establishing the rates to be paid by resale competitors for interconnection and related services was adopted on March 13, 1996 to be effective March 31, 1996. While the orders issued to date on local service competition do not apply to the Company's territory, the P.U.C. has expressed its intention to open all telecommunications markets, including the Company's territory, to competition by January 1, 1997. The P.U.C. is anticipated to hold proceedings during 1996 to establish the rules for local service competition in the Company's territory. 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, consideration of changes to the interstate universal service fund and the regulation of local exchange carriers. In addition, the F.C.C. periodically establishes the authorized rate of return for interstate access services. Since January 1, 1991, the F.C.C. has established an 11.25% rate of return for interstate access services. In addition, in September 1992, the F.C.C. issued an order granting to competitors expanded interconnection rights to facilities of local exchange carriers with annual revenues from regulated operations in excess of $100 million. These rules were overturned by the United States Court of Appeals. The F.C.C. issued new rules to comply with the decision of the Court of Appeals. While not yet applicable to the Company, these rules will permit competitors to terminate facilities on terms and conditions equivalent to those which would apply if they were permitted to terminated their facilities in telephone company central offices. The Company's operations may also be impacted by the recently enacted Telecommunications Act of 1996. Given its recent enactment, and the commencement of proceedings by the F.C.C. to promulgate rules and regulations thereunder, it is not yet possible to comprehend fully the impact of the Telecommunications Act on the Company's operations. These proceedings may broaden the scope of competition in the provision of regulated services and change the rates and rate structure for regulated services furnished by the Company, the effects of which on the Company cannot yet be determined. On May 16, 1995, the Company filed an application with the P.U.C. requesting authorization to implement an Agreement and Plan of Reorganization (the "Plan") approved by the Company's shareholders on June 16, 1995, which would result in a holding company. The Company intends to proceed with the reorganization after approval of the Plan by the P.U.C. The decision to approve the creation of a holding company structure was determined independently from and not as a result of any other regulatory proceedings. In addition, it is not anticipated that the holding company structure would have any impact upon any such proceedings. The eventual impact on the Company of the effect of all the proceedings described above cannot presently be determined. 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 1995. 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 $24 per share from the beginning of the first quarter of 1994 through the beginning of the fourth quarter of 1995, and approximately $25 per share thereafter. The Company's approximate number of shareholders was 9,600 as of February 29, 1996. The Company pays quarterly cash dividends on its common stock. The Company paid cash dividends of $.15 per share for each quarter during 1994 and 1995. Item 6. Selected Financial Data. 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Total operating revenues $ 102,661 $ 102,963 $ 96,780 $ 92,280 $ 88,461 Net income $ 18,507 $ 20,355 $ 22,518 $ 21,816 $ 19,940 Net income per share of common stock (1) $ 1.24 $ 1.39 $ 1.55 $ 1.50 $ 1.37 Cash dividends per share of common stock (2) $ .58 $ .55 $ .53 $ .50 $ .48 Property, plant and equipment, at cost $ 263,210 $ 243,774 $ 228,927 $ 203,379 $ 181,552 Total assets $ 256,889 $ 246,808 $ 226,459 $ 190,760 $ 165,380 Long-term debt $ 33,750 $ 37,321 $ 40,000 $ 25,000 $ 13,270 Shares of common stock used to calculate net income per share (1) 14,915,424 14,615,424 14,515,424 14,515,424 14,515,424 (1)Shares used in the computation of net income per share of common stock are based on the weighted average number of shares outstanding in each period after giving retroactive effect to a 3% stock dividend issued in 1995 and 5% stock dividends issued in 1994, 1993 and 1992. (2)Cash dividends per share of common stock are based on the actual dividends per share, as declared by the Company's Board of Directors, after giving retroactive effect to stock dividends. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Overview Roseville Telephone Company (the "Company") is an independent telecommunications company that is primarily engaged in providing traditional telephone service in Roseville, California and adjacent communities. The Company's service area continues to experience strong economic growth, which is reflected in the 6% increase in access lines in 1995. In addition to the Company's local telephone operations, the Company has an approximate 23.5% interest in the Sacramento- Valley Limited Partnership (the "Cellular Partnership"), which provides cellular telephone service principally in California. Revenues from rate regulated services, which include local service, network access service and long distance service revenues, constitute approximately 82% of the Company's total operating revenues in 1995. Rate regulated revenues are derived from various sources, including billings to business and residential subscribers for basic exchange services, extended area service charges and transition revenues from Pacific Bell, P.U.C. mandated surcharges, billings to Pacific Bell, long distance carriers and subscribers for network access services, interstate settlement revenues from the National Exchange Carrier Association, and support payments from the interstate Universal Service Fund and California High Cost Fund. The Company bills Pacific Bell various charges for certain local service, network access service and long distance service revenues pursuant to agreements (the "Pacific Bell Agreements") that arose as a result of the termination on January 1, 1992 of previous revenue sharing arrangements with Pacific Bell. Of the Company's total revenues in 1995, 1994 and 1993, 24%, 34% and 36%, respectively, were recorded under the Pacific Bell Agreements. Included in such amounts were transition revenues of $8.2 million, $16.5 million, and $16.5 million in 1995, 1994 and 1993, respectively. The transition revenues are anticipated to be approximately $8.2 million in 1996. Beginning in 1997 such revenues will be reduced by approximately $2.0 million per year until ultimately eliminated. In September 1994, the P.U.C. issued the Implementation Rate Decision ("IRD Decision"), which authorized toll competition within each Local Access Transport Area ("LATA") commencing January 1, 1995. The IRD Decision ordered decreases in the Company's network access rates and other charges to interexchange carriers beginning January 1, 1995. Such decreases and the reduction in transition revenues discussed above were intended to be partially offset by ordered increases in basic exchange rates and revenues from other sources. Based on calculations by the P.U.C., these ordered changes were expected to result in a net reduction in the Company's 1995 rate regulated revenues of approximately $5.3 million, which includes the effects of the reduction in transition revenues of $8.3 million mentioned above. However, the actual net reduction in revenues for 1995 was $6.7 million. In accordance with the IRD Decision, the Company filed a rate case with the P.U.C. on May 15, 1995, in which the Company requested a revenue increase of approximately $11 million. On November 13, 1995, the P.U.C.'s Division of Ratepayer Advocates ("D.R.A.") submitted its report on the Company's application in the rate case and proposed an approximate $10 million reduction in the Company's annual rates and charges. The Company disagrees with the D.R.A.'s proposal and provided its response to the P.U.C. on January 12, 1996. Hearings on the issues commenced in February 1996 and the Company expects a final decision by the end of 1996. The ultimate outcome of the rate case, and its effect on the Company's consolidated financial position and results of operations, cannot presently be determined. However, any consequences of the rate case would be accounted for at or following the time a final decision is rendered. 1995 versus 1994 Net income for 1995 was $18.5 million or $1.24 per share, compared with net income of $20.4 million or $1.39 per share for 1994. The decline in net income and net income per share from 1994 to 1995 was principally due to the IRD Decision. Operating Revenues: The ordered changes in the sources of the Company's rate regulated revenues resulting from the IRD Decision significantly affected the comparability between 1995 and 1994 of the related revenue categories in the Company's consolidated income statements. Total rate regulated revenues decreased $3.6 million or 4% from 1994. The decline resulted primarily from a $6.7 million reduction in rate regulated revenues as a result of the IRD Decision, which exceeded the P.U.C.'s estimated impact of $5.3 million. The P.U.C. had projected that intraLATA toll calling volumes, from which the Company derives network access service revenues from Pacific Bell, would be stimulated by lower intraLATA toll rates ordered in the IRD Decision for Pacific Bell. However, actual calling volumes in 1995 were far below the levels forecasted by the P.U.C. and thus below the level necessary to limit the net reduction in the Company's revenues to $5.3 million. The $6.7 million reduction in rate regulated revenues resulting from the IRD Decision was partially offset by the effects of 1) access line growth of approximately 6% and increased custom calling, voice mail and enhanced network service revenues, which increased revenues by approximately $1.5 million, and 2) an increase of $1.2 million in special access revenues arising from several new commercial customers. Nonregulated sales and service revenues increased $3.1 million or 78% over 1994. This increase was principally due to the sale of a large telephone system to a commercial customer. Operating Expenses: Operating expenses in 1995 increased approximately $7.9 million or 11% compared to 1994. Plant operations increased $1.7 million during 1995 due to 1) costs associated with a larger work force, 2) switching software expenditures, 3) maintenance costs associated with the severe weather and flooding in January 1995, and 4) normal inflationary factors. Depreciation expense increased approximately $1.5 million during 1995 as a result of higher average plant levels. Customer operations expense increased $1.1 million during 1995 primarily due to increased labor costs. General and administrative expense increased $1.3 million during 1995 due to higher costs associated with the Company's involvement in numerous state and federal regulatory proceedings including the Company's rate proceeding. Cost of nonregulated sales and service increased $2.3 million during 1995 due primarily to the sale of a large telephone system to a commercial customer. Other Income, Net: Other income, which consists primarily of income attributable to the Company's interest in the Cellular Partnership and interest income from cash equivalents and short-term investments, increased $5.1 million over 1994. The increase was primarily due to an increase in income of $4.5 million attributable to the Company's interest in the Cellular Partnership and an increase of approximately $617,000 in interest income attributable to larger average invested balances. Other expense consists primarily of interest expense on long-term debt, which remained at essentially the same level in 1995 and 1994. Income Taxes: Income taxes in 1995 decreased approximately $1.2 million compared to 1994 due to the decrease in income subject to tax. The effective federal and state income tax rate was approximately 40.6% in 1995 compared to 40.5% in 1994. 1994 versus 1993 Operating Revenues: Total rate regulated revenues increased $5.5 million or 7% over 1993. Local service revenues decreased slightly to $36.7 million in 1994 due to positive settlement adjustments recorded in 1993 for extended area service revenues, which did not reoccur in 1994. This decrease was largely offset by the effects of 5% growth in access lines in 1994. Network access revenues increased $5.7 million or 15% over 1993, primarily due to growth in minutes of use volumes and higher interstate settlements from the National Exchange Carrier Association, which contributed approximately equally to such revenue growth. Long distance revenues, comprised largely of transition revenues from Pacific Bell, remained at essentially the same level in 1994 and 1993. Operating Expenses: Operating expenses in 1994 increased approximately $9.1 million or 15% compared to 1993. Depreciation expense increased approximately $5.7 million in 1994, of which $3.7 million was attributable to depreciation rate changes authorized by the P.U.C. and the balance was related to larger average plant levels. Customer operations expenses increased by $1.0 million and general and administrative expense increased by $2.4 million, primarily due to normal inflationary factors combined with a larger workforce to serve the Company's increasing customer base. In addition, the increase in general and administrative expense was partially a result of the Company's increased involvement in numerous federal and state regulatory proceedings and efforts to enhance the Company's existing information systems. Other Income, Net: Other income increased $75,000 over 1993. Increased interest income due to larger invested balances and rising market interest rates was offset by reductions in Allowance for Funds Used During Construction ("AFUDC") due to the completed construction of an operations facility in the fourth quarter of 1993. Other expense consists primarily of interest expense on long-term debt, which increased $852,000 over 1993 due to increased average borrowings. Income Taxes: Income taxes in 1994 decreased approximately $1.5 million compared to 1993 due to the decrease in income subject to tax. The effective federal and state income tax rate was 40.5% in 1994 compared to 40.6% in 1993. Liquidity and Capital Resources As reflected in the Consolidated Statements of Cash Flows, net cash provided by operating activities amounted to $32.8 million, $36.7 million and $36.6 million in 1995, 1994 and 1993, respectively. The Company used cash flows from operations and existing cash, cash equivalents and short-term investments to fund 1) capital expenditures of $24.3 million pertaining to ongoing plant construction projects, 2) a deposit of $9 million to participate in the F.C.C. auction for personal communication service licences, 3) dividends of $8.8 million, and 4) principal payments of $2.7 million to retire long-term debt. The Company's most significant use of funds in 1996 is expected to be for 1) budgeted capital expenditures of approximately $25 million for central office equipment, cable and wire facilities, and general purpose assets, and 2) scheduled payments of long-term debt of $3.6 million. It is anticipated that the Company's capital requirements in 1996 will be met from cash flows from operations, existing cash, cash equivalents and short-term investments and the refund of the $9 million deposit as a result of the Company's withdrawal from the F.C.C. auction described above. 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 current and future rate cases and the extent to which increased rates can be translated into improved earnings. Other Financial Information A number of telecommunications companies, including all of the Regional Bell Operating Companies, have determined that they no longer meet the criteria of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71"), which requires companies meeting the criteria to give effect in their financial statements to certain actions of regulators. However, because such telecommunications companies are significantly different from the Company in the level and nature of competition they experience and in the nature and mix of services they offer, the Company believes it continues to meet the criteria of SFAS No. 71. Accordingly, the Company's consolidated financial statements have been prepared on that basis. For example, amounts charged to operations for depreciation expense reflect estimated lives and methods prescribed by regulators rather than those consisting of useful and economic lives that might otherwise apply to nonregulated enterprises. 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. If it becomes no longer reasonable to assume that the Company can recover its costs of providing regulated services through rates charged to customers, whether resulting from the effects of increased competition or specific regulatory actions, SFAS No. 71 would no longer apply. In the future, should the Company determine it no longer meets the SFAS No. 71 criteria, a material, extraordinary, noncash charge would result. The approximate amount of the Company's net regulatory asset at December 31, 1995 was between $5 million and $13 million, consisting principally of property, plant and equipment. The estimate for property, plant and equipment was calculated based upon a projection of useful lives which may be affected by the increasing competition and rapid changes in the telecommunications industry referred to above. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), which is effective for the Company in 1996. Under SFAS No. 121, companies are required to recognize impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. SFAS No. 121 requires the impairment loss to be recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. Given the uncertainties relating to the outcome of the Company's rate proceeding before the P.U.C., the future effect, if any, of applying SFAS No. 121 cannot be determined at this time. Regulatory Matters On May 16, 1995, the Company filed an application with the P.U.C. requesting authorization to implement an Agreement and Plan of Reorganization (the "Plan") approved by the Company's shareholders on June 16, 1995, which would result in a holding company. The Company intends to proceed with the reorganization after approval of the Plan by the P.U.C. The decision to approve the creation of a holding company structure was determined independently from and not as a result of any other regulatory proceedings. In addition, it is not anticipated that the holding company structure would have any impact upon any such proceedings. In February 1996, Congress passed the Telecommunications Act of 1996 (the "Act") which significantly changed the regulatory environment for telecommunications companies. As a result of the Act, specific telephone and cable television services historically provided exclusively by one company may be provided by competing companies. The Company is actively evaluating the financial viability of various opportunities in the long-distance and wireless telecommunications segments as well as the cable television industry. The Company's financial condition and results of operations continues to be affected by recent and future proceedings by the P.U.C. and F.C.C. The P.U.C. authorized competition for intraLATA toll service effective January 1, 1995, accompanied with rate changes affecting the Company's toll, access, private line and basic exchange revenue. In addition to the Company's rate case described above, pending before the P.U.C. are proceedings which are considering: The opening of all markets to competition by January 1, 1997 and aggressively streamlining regulation to accelerate the pace of innovation in the California telecommunications marketplace The goals and definition of universal telephone service in a changing environment, including examination of subsidy support mechanisms for subscribers in high cost areas and issues of "carrier of last resort" and "franchise" obligations Rules that will provide non-discriminatory access by competing service providers to the network capabilities of local exchange carriers The eventual impact on the Company of the effect of all the proceedings described above cannot presently be determined. Item 8. Financial Statements and Supplementary Data. Page Report of independent auditors 17 Consolidated balance sheets as of December 31, 1995 and 1994 18 Consolidated statements of income for each of the three years in the period ended December 31, 1995 20 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1995 21 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1995 22 Notes to consolidated financial statements 24 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, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Roseville Telephone Company at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ERNST & YOUNG LLP Sacramento, California February 29, 1996 ROSEVILLE TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 ASSETS 1995 1994 ------ ----- ----- Current assets: Cash and cash equivalents $24,854,000 $21,282,000 Short-term investments 1,748,000 13,689,000 Refundable deposit 8,960,000 - Accounts receivable (less allowances of $54,000 and $66,000, respectively) 13,687,000 15,565,000 Refundable income taxes 1,287,000 - Inventories 2,189,000 1,302,000 Deferred income tax asset 982,000 1,106,000 Prepaid expenses and other current assets 419,000 435,000 ----------- ----------- Total current assets 54,126,000 53,379,000 Property, plant and equipment: In service 259,201,000 239,380,000 Under construction 4,009,000 4,394,000 ----------- ----------- 263,210,000 243,774,000 Less accumulated depreciation 84,985,000 70,415,000 ----------- ----------- 178,225,000 173,359,000 Investments and other assets: Cellular partnership 23,292,000 18,447,000 Deferred charges and other assets 1,246,000 1,623,000 ----------- ----------- 24,538,000 20,070,000 ----------- ----------- $256,889,000 $246,808,000 =========== =========== See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, 1995 and 1994 LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 ------------------------------------ ---- ---- Current liabilities: Current portion of long-term debt $ 3,571,000 $ 2,679,000 Accounts payable and other accrued liabilities 4,220,000 3,863,000 Payables to telecommunications entities 6,011,000 6,880,000 Advance billings and customer deposits 1,809,000 1,860,000 Accrued income taxes - 345,000 Accrued pension cost 2,916,000 1,815,000 Accrued compensation 3,111,000 2,880,000 ----------- ----------- Total current liabilities 21,638,000 20,322,000 Long-term debt 33,750,000 37,321,000 Deferred income taxes 21,857,000 21,010,000 Other liabilities and deferred credits 3,301,000 3,480,000 Commitments and contingencies (Notes 1 and 7) Minority interest in subsidiary 1,950,000 - Shareholders' equity: Common stock, without par value; 20,000,000 shares authorized, 14,915,424 shares issued and outstanding (14,484,953 shares in 1994) 166,676,000 156,345,000 Retained earnings 7,717,000 8,330,000 ----------- ----------- Total shareholders' equity 174,393,000 164,675,000 ----------- ----------- $256,889,000 $246,808,000 =========== =========== See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1995, 1994 and 1993 1995 1994 1993 ---- ---- ---- Operating revenues: Local service $47,431,000 $ 36,679,000 $ 36,883,000 Network access service 32,438,000 43,197,000 37,466,000 Long distance service 4,189,000 7,749,000 7,781,000 ----------- ------------ ----------- Total rate regulated revenues 84,058,000 87,625,000 82,130,000 Directory advertising 6,387,000 6,059,000 6,085,000 Nonregulated sales and service 6,987,000 3,925,000 3,516,000 Other 5,229,000 5,354,000 5,049,000 ----------- ----------- ----------- Total operating revenues 102,661,000 102,963,000 96,780,000 Operating expenses: Plant operations 21,984,000 20,263,000 20,962,000 Depreciation 19,574,000 18,121,000 12,453,000 Customer operations 12,791,000 11,718,000 10,717,000 General and administrative 15,656,000 14,363,000 11,951,000 Cost of nonregulated sales and services 5,007,000 2,678,000 2,176,000 Property and miscellaneous taxes 1,747,000 1,760,000 1,571,000 ----------- ------------ ----------- Total operating expenses 76,759,000 68,903,000 59,830,000 ----------- ------------ ----------- Income from operations 25,902,000 34,060,000 36,950,000 Other income (expense): Interest income 1,825,000 1,208,000 285,000 Interest expense (3,012,000) (3,072,000) (2,220,000) Equity in earnings of cellular partnership 6,183,000 1,662,000 1,579,000 Allowance for funds used during construction 399,000 425,000 1,356,000 Other, net (156,000) (62,000) (48,000) ----------- ------------ ----------- Total other income, net 5,239,000 161,000 952,000 ----------- ----------- ----------- Income before income taxes 31,141,000 34,221,000 37,902,000 Income taxes 12,634,000 13,866,000 15,384,000 ----------- ----------- ----------- Net income $18,507,000 $ 20,355,000 $ 22,518,000 ============ ============ ============ Per share of common stock: Net income $1.24 $1.39 $1.55 ===== ===== ===== Cash dividends $ .58 $ .55 $ .53 ===== ===== ===== Shares of common stock used to calculate net income per share 14,915,424 14,615,424 14,515,424 ============ ============ ============ See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1995, 1994 and 1993 Common Stock ------------------------- Number of Retained Shares Amount earnings Total ------------ ------------ ------------ ------------ 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 Sale of common stock to Retirement Supplement Plan 400,000 9,600,000 - 9,600,000 5% stock dividend, at fair value: Shares 685,759 16,458,000 (16,458,000) - Cash in lieu of fractional shares - - (101,000) (101,000) Cash dividends - - (8,100,000) (8,100,000) Net income - - 20,355,000 20,355,000 ----------- ----------- ----------- ----------- Balance at December 31, 1994 14,484,953 156,345,000 8,330,000 164,675,000 3% stock dividend, at fair value: Shares 430,471 10,331,000 (10,331,000) - Cash in lieu of fractional shares - - (98,000) (98,000) Cash dividends - - (8,691,000) 8,691,000) Net income - - 18,507,000 18,507,000 ----------- ----------- ----------- ---------- Balance at December 31, 1995 14,915,424 $ 166,676,000 $7,717,000 $174,393,000 ============ ============ ============ =========== See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1995, 1994 and 1993 Increase (Decrease) in Cash and Cash Equivalents 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income $18,507,000 $20,355,000 $22,518,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 19,574,000 18,121,000 12,453,000 Equity component of allowance for funds used during construction (314,000) (322,000) (976,000) Provision (benefit) for deferred income taxes 848,000 (12,000) 2,525,000 Equity in earnings of cellular partnership (6,183,000) (1,662,000) (1,579,000) Provision for doubtful accounts 183,000 283,000 106,000 Other, net 183,000 176,000 121,000 Net changes in: Accounts receivable 1,695,000 261,000 (1,198,000) Refundable income taxes (1,287,000) 944,000 (944,000) Inventories, prepaid expenses and other current assets (871,000) (188,000) 591,000 Payables, accrued liabilities and other deferred credits 795,000 (1,570,000) 3,082,000 Accrued income taxes (345,000) 345,000 (52,000) ----------- ----------- ----------- Net cash provided by operating activities 32,785,000 36,731,000 36,647,000 Cash flows from investing activities: Capital expenditures for property, plant and equipment (24,309,000) (22,763,000) (35,484,000) Purchases of held-to-maturity investments (5,672,000) (44,333,000) (8,920,000) Maturities of held-to-maturity investments 17,613,000 39,564,000 - Investment in cellular partnership (2,402,000) (1,678,000) (1,387,000) Return of investment in cellular partnership 3,740,000 2,220,000 1,410,000 Refundable deposit (8,960,000) - - Other, net 295,000 295,000 (863,000) ----------- ----------- ----------- Net cash used in investing activities (19,695,000) (26,695,000) (45,244,000) See accompanying notes. ROSEVILLE TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1995, 1994 and 1993 Increase (Decrease) in Cash and Cash Equivalents 1995 1994 1993 ---- ---- ---- Cash flows from financing activities: Proceeds of long-term debt $ - $ - $ 15,000,000 Principal payments of long-term debt (2,679,000) - - Dividends paid and fractional share amounts (8,789,000) (8,201,000) (7,756,000) Sale of common stock - 9,600,000 - Investment in subsidiary by minority partners 1,950,000 - - ----------- ----------- ----------- Net cash provided by (used in) financing activities (9,518,000) 1,399,000 7,244,000 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 3,572,000 11,435,000 (1,353,000) Cash and cash equivalents at beginning of year 21,282,000 9,847,000 11,200,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $24,854,000 $21,282,000 $9,847,000 =========== =========== =========== See accompanying notes. ROSEVILLE TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 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 Roseville, California and adjacent communities. Communications and related services include local and toll telephone services, network access services, billing and collection services, directory advertising services and certain nonregulated services. The Company engages in nonregulated activities including the sale, lease and maintenance of telecommunications equipment, and the provision of alarm monitoring services. 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 consolidated financial statements were prepared in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A number of telecommunications companies, including all of the Regional Bell Operating Companies, have determined that they no longer meet the criteria of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71"), which requires companies meeting the criteria to give effect in their financial statements to certain actions of regulators. However, because such telecommunications companies are significantly different from the Company in the level and nature of competition they experience and in the nature and mix of services they offer, the Company believes it continues to meet the criteria of SFAS No. 71. Accordingly, the Company's consolidated financial statements have been prepared on that basis. For example, amounts charged to operations for depreciation expense reflect estimated lives and methods prescribed by regulators rather than those consisting of useful and economic lives that might otherwise apply to nonregulated enterprises. 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. If it becomes no longer reasonable to assume that the Company can recover its costs of providing regulated services through rates charged to customers, whether resulting from the effects of increased competition or specific regulatory actions, SFAS No. 71 would no longer apply. In the future, should the Company determine it no longer meets the SFAS No. 71 criteria, a material, extraordinary, noncash charge would result. The approximate amount of the Company's net regulatory asset at December 31, 1995 was between $5 million and $13 million, consisting principally of property, plant and equipment. The estimate for property, plant and equipment was calculated based upon a projection of useful lives which may be affected by the increasing competition and rapid changes in the telecommunications industry referred to above. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Principles of consolidation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a majority-owned limited liability company. All significant intercompany transactions have been eliminated. Cash equivalents and short-term investments The Company invests its excess cash in high-quality debt instruments and certain other investments. The Company considers highly liquid investments with maturities of three months or less from the acquisition date of the instrument to be cash equivalents. Short-term investments at December 31, 1995 consist of U.S. government and agency securities with maturities greater than 90 days; however, none of the Company's investments have maturities greater than one year. The Company has no investments in equity securities. Fair values of financial instruments As of December 31, 1995 and 1994, the Company's financial instruments consist of cash, cash equivalents, short-term investments and long-term debt. Management believes that the carrying values of cash equivalents and short-term investments at December 31, 1995 and 1994, which are at amortized cost, approximated their fair values at such dates. The aggregate fair value of the Company's long-term debt (including current maturities) was approximately $39,000,000 and $38,400,000 at December 31, 1995 and 1994, respectively. Fair values for cash equivalents and short- term investments were determined by quoted market prices and for long-term debt by a discounted cash flow analysis based on the Company's current incremental borrowing rates for similar instruments. Inventories Telephone construction inventories consist of materials and supplies, which are stated at average cost. Equipment and other nonregulated inventory held for resale are stated at the lower of average cost or market. Property, plant and equipment Property, plant and equipment is recorded at cost. Retirements and other reductions of regulated telephone plant and equipment with a cost of approximately $4,958,000, $8,093,000 and $9,886,000 in 1995, 1994 and 1993, 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. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"), which is effective for the Company in 1996. Under SFAS No. 121, companies are required to recognize impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED) by those assets are less than the carrying amount of those assets. SFAS No. 121 requires the impairment loss to be recognized to the extent the carrying amount of the assets exceeds the fair value of the assets. Given the uncertainties relating to the outcome of the Company's rate proceeding before the P.U.C., the future effect, if any, of applying SFAS No. 121 cannot be determined at this time. 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 position. The Company bills Pacific Bell various charges for certain local service, network access service and long distance service revenues pursuant to agreements (the "Pacific Bell Agreements") that arose as a result of the termination on January 1, 1992 of previous revenue sharing arrangements with Pacific Bell. Of the Company's total revenues in 1995, 1994 and 1993, 24%, 34% and 36%, respectively, were recorded under the Pacific Bell Agreements. Included in such amounts were transition revenues of $8,200,000, $16,500,000, and $16,500,000 in 1995, 1994 and 1993, respectively. The transition revenues are anticipated to be approximately $8,200,000 in 1996. Beginning in 1997 such revenues will be reduced by approximately $2,000,000 per year until ultimately eliminated. In September 1994, the P.U.C. issued an Implementation Rate Design Decision (the "IRD Decision") which authorized toll competition within each Local Access Transport Area commencing January 1, 1995. The IRD Decision ordered decreases in the Company's access rates and other charges to interexchange carriers beginning January 1, 1995. Such decreases and the reduction in transition revenues discussed above were partially offset by ordered increases in basic exchange rates and revenues from other sources. Based on calculations by the P.U.C., these ordered changes were expected to result in a net reduction in the Company's 1995 rate regulated revenues of approximately $5,300,000, which includes the effects of the reduction in transition revenues of $8,300,000 mentioned above. However, the actual net reduction in revenues for 1995 was $6,700,000. In accordance with the IRD Decision, the Company filed a rate case with the P.U.C. on May 15, 1995, in which the Company requested a revenue increase of approximately $11 million. On November 13, 1995, the P.U.C.'s Division of Ratepayer Advocates ("D.R.A.") submitted its report on the Company's application in the rate case and proposed an approximate $10 million reduction in the Company's annual rates and charges. The Company disagrees with the D.R.A.'s proposal and provided its response to the P.U.C. on January 12, 1996. Hearings on the issues commenced in January 1996 and the Company expects a final decision by the end of 1996. The ultimate outcome of the rate case, and its effect on the Company's consolidated financial position and results of operations, cannot presently be determined. However, any consequences of the rate case would be accounted for at or following the time a final decision is rendered. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 8.07%, 7.99% and 6.56% in 1995, 1994 and 1993, 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." Income taxes The Company accounts for income taxes using the liability method, which requires deferred tax assets and liabilities to be recorded for the expected future tax consequences of events that have been included in the financial statements and tax returns. Additionally, the liability method requires adjustments of deferred tax assets and liabilities for changes in tax laws or rates and requires recognition of a regulatory asset or liability when it is probable that deferred taxes would be reflected in future rates of regulated companies. Per share amounts Net income per share of common stock is based on the weighted average number of shares outstanding each year after giving retroactive effect to stock dividends. Cash dividends per share is based on the actual dividends per share, as declared by the Company's board of directors, after giving retroactive effect to stock dividends. Statements of cash flows information During the years ended December 31, 1995, 1994 and 1993, the Company made payments for interest and income taxes as follows (in thousands): 1995 1994 1993 ---- ---- ---- Interest (net of amounts capitalized) $ 2,915 $ 3,606 $ 1,747 Income taxes $13,441 $12,589 $13,855 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 1995 and 1994, all securities are designated as held-to-maturity as management believes it has the positive intent and ability to hold the securities until maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, as well as any interest on the securities, is included in interest income. Following is a summary of the Company's investments at December 31, 1995 and 1994 by major security type at amortized cost which approximates fair value (in thousands): 1995 1994 ---- ---- Commercial paper $ 19,970 $ 23,612 Repurchase agreements 1,501 1,657 U.S. government and agency securities 1,748 - Other unsecured corporate notes 502 4,360 --------- --------- $ 23,721 $ 29,629 ========= ========= Amounts included in cash and cash equivalents $ 21,973 $ 15,940 Amounts included in short-term investments 1,748 13,689 --------- --------- $ 23,721 $ 29,629 ========= ========= 3. INVESTMENT IN CELLULAR PARTNERSHIP The Company has an approximate 23.5% interest in the Sacramento-Valley Limited Partnership (the "Cellular Partnership"), which is accounted for using the equity method. The Cellular Partnership operates a cellular mobile radiotelephone system principally in California. The Company's portion of undistributed earnings of the Cellular Partnership included in the Company's consolidated shareholders' equity at December 31, 1995 amounted to $7,737,000. Summarized unaudited financial information for the Cellular Partnership is as follows (in thousands): Balance sheet information as of December 31, 1995 and 1994: 1995 1994 ---- ---- Current assets $ 24,183 $ 19,341 Noncurrent assets, primarily cellular plant $ 100,372 $ 89,592 Current liabilities $ 24,371 $ 29,568 Noncurrent liabilities $ 861 $ 760 3. INVESTMENT IN CELLULAR PARTNERSHIP (CONTINUED) Income statement information for the years ended December 31, 1995, 1994 and 1993: 1995 1994 1993 ---- ---- ---- Net revenues $ 124,393 $ 87,894 $ 68,123 Costs and expenses 98,048 80,812 61,391 --------- --------- --------- Net income $ 26,345 $ 7,082 $ 6,732 ========= ========= ========= 4. LONG-TERM DEBT Long-term debt outstanding as of December 31, 1995 and 1994 consisted of the following: (In thousands) 1995 1994 ---- ---- Unsecured term loan 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 approximately $893,000 through April 2002. $ 22,321 $ 25,000 Unsecured term loan with a bank, with interest payable quarterly at a fixed rate of 6.22%; principal payments are due in equal quarterly installments of approximately $536,000, commencing in March 1997, and ending in December 2003. 15,000 15,000 -------- ------ 37,321 40,000 Less current portion 3,571 2,679 -------- -------- $ 33,750 $ 37,321 ======== ======== At December 31, 1995, the aggregate maturity requirements on all long-term debt are $3,571,000 in 1996 and $5,716,000 in each of the years 1997 through 2000. 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, 1995 was unrestricted. 5. INCOME TAXES The income tax provisions consist of the following components (in thousands): 1995 1994 1993 ----- ----- ---- Current expense: Federal $ 8,979 $ 10,718 $ 9,633 State 2,807 3,160 3,226 --------- --------- --------- 11,786 13,878 12,859 Deferred expense (benefit): Federal 792 (80) 2,266 State 56 68 259 --------- --------- --------- 848 (12) 2,525 --------- --------- --------- $ 12,634 $ 13,866 $ 15,384 ========= ========= ========= The income tax provisions differ from those computed by using the statutory federal rate (35% in all years presented) for the following reasons (in thousands): 1995 1994 1993 ---- ---- ---- Computed at statutory rates $ 10,899 $ 11,977 $ 13,266 Increase (decrease): State taxes, net of federal benefit 1,861 2,098 2,265 Other, net (126) (209) (147) -------- -------- -------- Income tax provision $ 12,634 $ 13,866 $ 15,384 ======== ======== ======== Effective federal and state rate 40.6% 40.5% 40.6% ===== ===== ===== 5. INCOME TAXES (CONTINUED) The significant components of the Company's deferred income tax assets and liabilities were as follows at December 31, 1995 and 1994 (in thousands): Deferred Income Taxes ---------------------- 1995 1994 ---- ---- Assets Liabilities Assets Liabilities ------ ----------- ------ ---------- Property, plant and equipment - primarily due to depreciation differences $ - $ 21,747 $ - $ 21,869 Differences in the timing of recognition of revenues 2,636 - 2,850 - Cellular partnership - 4,218 - 3,088 State franchise taxes 982 - 1,106 - Other, net 2,091 619 1,820 723 -------- -------- -------- --------- Total 5,709 26,584 5,776 25,680 Less current portion 982 - 1,106 - -------- ------- ------- ------- $ 4,727 $ 26,584 $ 4,670 $ 25,680 ======== ======== ======== ======== Net long-term deferred income tax liability $ 21,857 $ 21,010 ======== ======== As of December 31, 1995 and 1994, there was no valuation allowance for deferred tax assets. 6. PENSION AND OTHER POSTRETIREMENT 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. 6. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) Net periodic pension cost for the years ended December 31, 1995, 1994 and 1993 includes the following components (in thousands): 1995 1994 1993 ---- ---- ---- Service cost-benefits earned during the period $2,416 $2,376 $2,149 Interest cost on projected benefit obligation 3,830 3,493 3,131 Actual (return) loss on plan assets (7,741) 600 (2,313) Net amortization and deferral 5,664 (2,311) 910 ------ ------ ------ Net pension cost $4,169 $4,158 $3,877 ====== ====== ====== The following table sets forth the defined benefit plan's funded status and amounts recognized in the consolidated balance sheets as of December 31, 1995 and 1994 (in thousands): 1995 1994 ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $30,848 $26,085 Nonvested benefit obligation 7,439 6,315 ------- ------- Accumulated benefit obligation $38,287 $32,400 ======= ======= Plan assets at fair value $42,022 $32,549 Less projected benefit obligation (58,774) (49,345) ------- ------- Projected benefit obligation in excess of plan assets (16,752) (16,796) Unrecognized net loss 11,125 12,002 Unrecognized transition obligation 2,711 2,979 ------- ------- Accrued pension cost $(2,916) $(1,815) ======= ======= The discount rates used in determining the projected benefit obligation at December 31, 1995 and 1994 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, 1995 and 1994. The expected long-term rate of return on plan assets used in determining net pension cost was 8.5% in 1995 and 8% in 1994 and 1993. Changes in the discount rate and expected long-term rate of return on plan assets decreased pension cost $720,000 in 1995, which was largely offset by increased amortization of plan experience losses. 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 6. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) 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 amounted to approximately $1,137,000, $1,043,000 and $903,000 in 1995, 1994 and 1993, respectively. At December 31, 1995, 9% of the Company's outstanding shares of common stock were held by the retirement supplement plan. The Company provides certain postretirement benefits other than pensions to substantially all employees, including life insurance benefits and a stated reimbursement for Medicare supplemental insurance. The benefit obligations and annual postretirement benefits costs relating to these benefits are not significant to the Company's consolidated financial position and results of operations. 7. 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 $394,000, $387,000 and $1,137,000 in 1995, 1994 and 1993, respectively. At December 31, 1995, 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, 1996 approximate $25 million. Binding commitments for such planned expenditures at December 31, 1995 were approximately $4 million. 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 position or results of operations of the Company. 8. 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 in Note 1 - Revenues, approximately 24%, 34% and 36% of the Company's consolidated operating revenues in 1995, 1994, and 1993, respectively, were derived from access charges and other charges to, and transition contract payments from Pacific Bell pursuant to the Pacific Bell Agreements. Approximately 10% of the Company's consolidated operating revenues in 1994 and 1993 (7% in 1995) were derived from the provision of 8. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS (CONTINUED) 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. Incorporated herein by reference from the proxy statement for the annual meeting of the Company's shareholders to be held on June 21, 1996. 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 21, 1996. 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 21, 1996. 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 The financial statements listed in the accompanying Index to Financial Statements are filed as part of this annual report. 3. Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this annual report. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 1995. ROSEVILLE TELEPHONE COMPANY INDEX TO FINANCIAL STATEMENTS (Item 14(a) 1 and 2) PAGE Report of independent auditors 17 Consolidated balance sheets as of December 31, 1995 and 1994 18 Consolidated statements of income for each of the three years in the period ended December 31, 1995 20 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1995 21 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1995 22 Notes to consolidated financial statements 24 All schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 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 Incorporated - National Trust and Savings Association, by reference dated January 4, 1994, with respect to $15,000,000 term loan (Filed as Exhibit 10(c) to Form 10-K Annual Report for the year ended December 31, 1993) 21(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) 23.01 Consent of Ernst & Young LLP, Independent Filed Auditors herewith 27 Financial Data Schedule Filed herewith SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROSEVILLE TELEPHONE COMPANY (Registrant) Date: March 26, 1996 By: /s/ Brian H. Strom Brian H. Strom, President and Chief Executive Officer Date: March 26, 1996 By: /s/Michael D. Campbell Michael D. Campbell, Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 26, 1996 /s/ Robert L. Doyle Robert L. Doyle, Chairman of the Board Date: March 26, 1996 /s/ Brian H. Strom Brian H. Strom, President and Chief Executive Officer; Director Date: March 26, 1996 /s/ Michael D. Campbell Michael D. Campbell, Vice President and Chief Financial Officer Date: March 26, 1996 /s/ Thomas E. Doyle Thomas E. Doyle, Director Date: March 26, 1996 /s/ Ralph E. Hoeper Ralph E. Hoeper, Director Date: March 26, 1996 /s/ John R. Roberts III John R. Roberts III, Director SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROSEVILLE TELEPHONE COMPANY (Registrant) Date: March 26, 1996 By: Brian H. Strom, President and Chief Executive Officer Date: March 26, 1996 By: Michael D. Campbell, Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 26, 1996 Robert L. Doyle, Chairman of the Board Date: March 26, 1996 Brian H. Strom, President and Chief Executive Officer; Director Date: March 26, 1996 Michael D. Campbell, Vice President and Chief Financial Officer Date: March 26, 1996 Thomas E. Doyle, Director Date: March 26, 1996 Ralph E. Hoeper, Director Date: March 26, 1996 John R. Roberts III, Director Exhibit 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-4 No. 33-58271) of Roseville Comtech and in the related Prospectus of our report dated February 29, 1996, with respect to the consolidated financial statements of Roseville Telephone Company included in this Annual Report (Form 10-K) for the year ended December 31, 1995. /s/ERNST & YOUNG LLP Sacramento, California March 26, 1996 EX-27 2
OPUR1 YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 178225000 23292000 54126000 1246000 0 256889000 166676000 0 7717000 174393000 0 0 33750000 0 0 0 3571000 0 0 0 45175000 256889000 102661000 12634000 0 61103000 25902000 5239000 31141000 3012000 18507000 0 18507000 8789000 0 32785000 1.24 0
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