12
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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
SUREWEST COMMUNICATIONS
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0365195
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Vernon 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 plans,
directors and officers may be deemed shares held by affiliates), was as of March
1,2002. As of March 1, 2002, 15,008,630 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into Part III hereof are portions of the registrant's
definitive proxy statement issued in connection with the annual meeting of
registrant's shareholders to be held May 17, 2002.
TABLE OF CONTENTS
ITEM NO. PAGE
PART I
1. Business..................................................... 3
2. Properties................................................... 6
3. Legal Proceedings............................................ 6
4. Submission of Matters to a Vote of Security Holders......... .9
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 12
6. Selected Financial Data.................................. 12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 15
7A. Quantitative and Qualitative Disclosures About Market
Risk.................................................... 29
8. Financial Statements and Supplementary Data.............. 30
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................ 65
PART III
10. Directors and Executive Officers of the Registrant....... 65
11. Executive Compensation................................... 65
12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 65
13. Certain Relationships and Related Transactions........... 65
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 65
SIGNATURES ......................................................... 90
PART I
Item 1. Business
SureWest Communications, formerly Roseville Communications Company, (the
"Company") was incorporated in 1995 under the laws of the State of California as
a holding company. The Company's wholly-owned subsidiaries include Roseville
Telephone Company ("Roseville Telephone"), SureWest Directories, Roseville Long
Distance Company ("Roseville Long Distance"), SureWest Internet, QuikNet, Inc.
("QuikNet"), SureWest Wireless and Roseville Alternative Company ("Roseville
Alternative").
Substantially all of the Company's revenues are in the communications services
industry. Approximately 3%, 11% and 11% of the Company's total operating
revenues in 2001, 2000 and 1999, respectively, were derived from access charges
and charges for other services to Pacific Bell, a wholly- owned subsidiary of
SBC Communications Inc. ("Pacific Bell"), pursuant to certain agreements as
described below. No other customer accounted for more than 10% of consolidated
operating revenues during these years.
The Company currently generates a majority of its revenues from services subject
to regulation by the California Public Utilities Commission ("P.U.C.") and the
Federal Communications Commission ("F.C.C."), but expects that its proportionate
share of revenues from nonregulated businesses will be greater in future years
as a result of its entry into new businesses and the impact of competition on
its regulated operations. The table that follows reflects the percentage of
total operating revenues of the Company contributed by various sources.
% of Total Operating Revenues
Revenues 2001 2000 1999
- ------------------------ ---- ---- ----
Revenues subject to regulation 69% 75% 80%
Other revenues 31% 25% 20%
---- ---- ----
Total operating revenues 100% 100% 100%
Telecom Operations
The Company's principal regulated operating subsidiary, Roseville Telephone, is
engaged in the business of furnishing communications services, mainly local and
toll telephone service and network access services, in a territory covering
approximately 83 square miles in Placer and Sacramento Counties, California.
Toll service to points outside Roseville Telephone's service area is furnished
through connection in Roseville with facilities of Pacific Bell, AT&T and other
interexchange carriers. The City of Roseville, which is centrally located in
Roseville Telephone's service area, is 18 miles northeast of Sacramento. During
2000 and 2001, Roseville Telephone experienced a significant increase in
competition.
For many years, including the year ended December 31, 2001, the area served by
Roseville Telephone has experienced significant residential, commercial and
industrial development. Roseville Telephone continues to be engaged in the
expansion of its facilities and operations to meet current and anticipated
service demand increases and to maintain modern and efficient service. Roseville
Telephone uses public streets and highways in the conduct of its public utility
telephone business under a non-exclusive perpetual franchise granted by Section
7901 of the California Public Utilities Code.
Revenues subject to regulation, which include local service, network access
service and toll service revenues, constituted approximately 69% of the
Company's total operating revenues in 2001. Other Roseville Telephone revenues
consist primarily of directory advertising services, billing and collection
services, nonregulated sales and services and other miscellaneous revenues.
Nonregulated revenues are derived from the sale, lease and maintenance of
telecommunications equipment, payphone services, alarm monitoring services and
network access services. In addition, SureWest Broadband, a Competitive Local
Exchange Carrier ("CLEC") operating as a non-regulated division of Roseville
Telephone, offers local service, network access service and toll service to
customers in the greater Sacramento region, excluding Roseville Telephone's
service area. In December 2001, the Company entered into an agreement to sell
its alarm monitoring business, which consisted principally of customer contracts
and equipment which had no book value as of December 31, 2001. The transaction
was consummated in January 2002. As a result, Roseville Telephone no longer
provides alarm monitoring services.
Total 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. With respect to intrastate toll calls, interexchange carriers are
assessed access charges based on tariffs filed by Roseville Telephone.
Additionally, Roseville Telephone bills Pacific Bell various charges for certain
local service and network access service revenues. Interstate access rates and
resulting earnings are subject to regulation by the Federal Communications
Commission ("F.C.C."). With respect to interstate services, Roseville Telephone
has filed its own tariff with the F.C.C. for all elements of access services
except carrier common line charges, for which Roseville Telephone concurs with
tariffs filed by the National Exchange Carrier Association. Interstate access
charges and carrier common line revenues are based on extensive annual cost
separation studies which utilize estimated cost information and projected demand
usage. Additionally, as discussed in "Item 3 - Legal Proceedings", in December
1996, the P.U.C. issued a decision regarding Roseville Telephone's authorized
revenue levels and regulatory framework. Roseville Telephone's future operations
may be impacted by several proceedings pending before the F.C.C. and the P.U.C.
addressing interconnection, access charges and universal service. See "Item 3 -
Legal Proceedings" and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion regarding
Roseville Telephone's revenues subject to regulation and the competitive
environment in which Roseville Telephone operates.
In addition to its regulatory authority with respect to Roseville Telephone's
rates, the P.U.C. also has the power, among other things, to establish the terms
and conditions of service, to prescribe uniform systems of accounts to be kept
by public utilities and to regulate the mortgaging or disposition of public
utility properties.
In February 1996, Congress passed the Telecommunications Act of 1996 (the "Act")
which significantly changed the regulatory environment for telecommunications
companies. See "Item 3 - Legal Proceedings" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussion regarding the impact of the Act.
PCS Operations
SureWest Wireless is the manager of and owns 100% of West Coast PCS LLC ("West
Coast"), which does business using the SureWest Wireless name and was formed for
the purpose of providing wireless personal communications services ("PCS").
During 1997, West Coast purchased from the F.C.C. licenses to offer PCS services
in four Basic Trading Areas located in central California including the cities
of Sacramento, Stockton, Modesto and Yuba City. Each license represents 10
megahertz of spectrum which offers digital wireless technology capable of
providing both voice and data transmission. SureWest Wireless commenced
deployment of the network infrastructure in 1998 and initiated wireless
telecommunications services with telephone, paging and voicemail capabilities in
June 1999.
Other Operations
SureWest Directories publishes and distributes Roseville Telephone's directory
including the sale of yellow pages advertising previously provided by an
unaffiliated company. SureWest Directories is also engaged in the business of
producing, publishing and distributing directories in other Northern California
communities.
Roseville Long Distance provides long distance services using a fiber-optic
network owned by Global Crossing Ltd. ("Global Crossing"), providing
international, interstate and intrastate long distance service, calling card and
800 services. On January 28, 2002, Global Crossing filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. The Company is presently unable to
determine the impact, if any, that Global Crossing's bankruptcy filing will have
on the Company's long distance operations. However, the Company believes that it
could procure long distance network transport services from other
telecommunications providers. In the event the Company must procure network
transport services from another telecommunications provider, rates for such
service may be higher than those offered by Global Crossings. However, the
Company believes that the impact on its results of operations resulting from any
potential change in transport rates will not be material.
SureWest Internet provides high speed Internet service to Roseville Telephone's
digital subscriber line ("DSL") and other high band-width customers.
In July 2001, the Company purchased QuikNet, which also provides high speed
Internet services in addition to custom data solutions.
Sale of Cellular Partnership Interest in Sacramento-Valley Limited Partnership
On November 3, 2000, two of the Company's subsidiaries sold their collective 24%
cellular partnership interest in Sacramento-Valley Limited Partnership ("SVLP")
to Verizon Wireless for approximately $236.2 million so that the Company could
concentrate on its wireless services provided by SureWest Wireless. The sale
resulted in a pre-tax gain of $201.3 million, which was recognized in the fourth
quarter of 2000.
The Company's equity in the earnings of SVLP constituted approximately 4% and
19% of the Company's income before income taxes in 2000 and 1999, respectively.
Employees
At December 31, 2001, the Company had 817 employees, none of whom are
represented by a union.
Item 2. Properties
The Company owns central office buildings and related equipment in Roseville,
Citrus Heights, Granite Bay, and other locations in Sacramento and Placer
Counties. The Company's 68,000 square foot principal business office and
executive headquarters and 214,000 square foot operations and administrative
facility are located in Roseville. The Company has appropriate easements, rights
of way and other arrangements for the accommodation of its pole lines,
underground conduits, aerial and underground cables and wires, and PCS antennas.
In addition to land and structures, the Company's property consists of equipment
required in providing communication services. This includes central office
equipment, customer premises equipment and connections, radio and PCS antennas,
towers, pole lines, aerial and underground cable and wire facilities, vehicles,
furniture and fixtures and other equipment. The Company also owns certain other
communications equipment held as inventory for sale or lease.
In addition to plant and equipment that it wholly-owns, the Company utilizes
poles, towers and cable and conduit systems wholly-owned by, or jointly-owned
with, other entities and leases space on facilities wholly or jointly-owned by
the Company to other entities. These arrangements are in accordance with written
agreements customary in the industry.
Item 3. Legal Proceedings
Except for the proceedings described below, the Company is not aware of any
material pending legal proceedings, other than ordinary routine litigation
incidental to its business, to which it is a party or to which any of its
property is subject.
As appears in Item 1, above, Roseville Telephone is subject to regulation by the
F.C.C. and P.U.C. In the past, there have been various proceedings before these
agencies to which Roseville Telephone has been a party. Reference is made to
Item 1 for further information regarding the nature of the jurisdiction of the
F.C.C. and P.U.C. over the business and operations of Roseville Telephone.
In 1996, the P.U.C. issued a decision in connection with Roseville Telephone's
general rate proceeding, which authorized Roseville Telephone to implement a New
Regulatory Framework ("NRF") for services furnished within Roseville Telephone's
service area in order to accommodate market and regulatory movement toward
competition and greater pricing flexibility. In accordance with the requirements
of its general rate case order, Roseville Telephone filed an application for
review of its NRF in 1999. This proceeding considered modifications to the NRF
structure, including potential changes to the current monitoring and reporting
requirements, the earnings sharing mechanism, and related matters. In accordance
with NRF, Roseville Telephone is subject to, among other things, a sharing
mechanism whereby Roseville Telephone is required to share earnings with
customers through a reduction to revenues if its earned annual rate of return
exceeds that authorized by the P.U.C. In addition, the P.U.C. Office of
Ratepayer Advocates ("ORA") undertook a verification audit of Roseville
Telephone's non-regulated and affiliated transactions pursuant to the general
rate case and other P.U.C. orders. In June 2001, the P.U.C. adopted its decision
in this matter (the "Decision"). The P.U.C. ruled that Roseville Telephone must
change the method used to allocate costs for services provided by Roseville
Telephone to its affiliates, the treatment of certain directory revenues and the
treatment of internal-use software costs. The Decision did not suspend the
sharing mechanism and required Roseville Telephone to further amend its
intrastate shareable earnings filing for 1998 and 1999 and recognize additional
shareable earnings obligations in its consolidated financial statements, which
were recorded through a reduction of revenues. In December 2001, the P.U.C.
denied Roseville Telephone's application for rehearing of the Decision.
In 1999, Pacific Bell expressed interest in withdrawing from the designated
carrier plan ("DCP") for Roseville Telephone's toll traffic and to enter into a
new, permanent compensation arrangement for extended area service ("EAS"). The
DCP is a compensation arrangement between Roseville Telephone and Pacific Bell
for certain intralata toll services. Pacific Bell also paid Roseville Telephone
$11.5 million per year for EAS pursuant to a Settlement Transition Agreement. In
November 2000, the P.U.C. authorized Pacific Bell to terminate its annual EAS
payments to Roseville Telephone effective November 30, 2000. The P.U.C.
authorized replacement funding on an interim basis using the current reserve in
the California High Cost Fund-B and denied permanent replacement funding. The
P.U.C. also opened an Order Instituting Investigation for the purposes of
determining whether recovery of all, none, or a portion of the $11.5 million
annual payments should come from Roseville Telephone's ratepayers or other
regulatory recovery mechanisms. These proceedings began in 2001 and will be
conducted through 2003. The P.U.C. has made no indication as to what, if any,
changes will be forthcoming relating to EAS replacement revenues. The results of
these proceedings and their potential effects on Roseville Telephone can not yet
be determined. In addition, since the DCP arrangement with Pacific Bell expired
in December 2001, Roseville Telephone now bills and keeps its customers toll
traffic. The impact of ending the DCP arrangement and moving to a bill and keep
basis on Roseville Telephone's results of operations is not material.
There are a number of regulatory proceedings occurring at the federal and court
level that may have a material impact on Roseville Telephone. These regulatory
proceedings include, but are not limited to, consideration of changes to the
jurisdictional separations process, the interstate universal service fund,
access charge reform and the regulation of local exchange carriers. The outcomes
and impact on Roseville Telephone's operations of these proceedings and related
court matters involving local service competition, access reform, and universal
service, cannot be determined at this time.
Roseville Telephone's operations may also be impacted by the Telecommunications
Act of 1996 (the "Act"). Beginning in 1996, the F.C.C. adopted orders
implementing the Act's provisions to open local exchange service markets to
competition. The F.C.C. rules outline pricing methodologies for the states to
follow when setting rates for resale, interconnection and unbundled network
elements. In 1997, the United States Court of Appeals for the Eighth Circuit
found that the F.C.C. exceeded its jurisdiction in connection with some of its
orders implementing the Act. In early 1999, the United States Supreme Court
reversed the Eighth Circuit's determinations that the F.C.C. lacked authority to
implement the Act by adopting local pricing standards or to bar incumbent local
exchange carriers from separating already-combined unbundled network elements
("UNEs") before offering them to competitors. The Supreme Court also reinstated
the agency's "pick-and-choose" rules. However, the Supreme Court invalidated the
F.C.C.'s original list of UNEs, saying the F.C.C. had failed to determine that
those elements were necessary for competitors to offer service. The F.C.C. has
opened a proceeding to review this issue in light of the Supreme Court's order,
and in 1999, adopted an order identifying UNEs that ILECs must make available to
competitors.
In 2000, the United States Court of Appeals for the Eighth Circuit vacated the
FCC's Total Element Long Run Incremental Cost ("TELRIC") pricing standard for
determining the price that ILECs can charge to CLECs seeking use of unbundled
network elements. The Supreme Court decision also remanded the reasonableness of
TELRIC pricing back to the Eighth Circuit for determination. In addition, the
Circuit's decision also vacated, among other things, the FCC's rules which
define "avoided retail costs" for purposes of determining wholesale rates, the
FCC's proxy prices, the FCC's rules which addressed the identification of
additional network elements to be unbundled, and the FCC's superior quality and
additional combinations rules.
In January 2001, the United States Supreme Court granted a petition for writ of
certiorari to review the Eighth Circuit's opinion with respect to (1) whether
the appeals court erred in holding that the Act "forecloses the cost methodology
adopted by the FCC, which is based on the efficient replacement cost of existing
technology" for determining what new entrants must pay ILECs for
interconnection; (2) whether the appeals court erred in holding that neither the
constitution nor the Act requires an ILEC's "historical costs" to be taken into
account in setting the rates it can charge for access to network elements; and
(3) whether the Act prohibits regulators from requiring that incumbents "combine
certain previously uncombined network elements" when the new entrant requests
the combination and offers to pay for the extra work.
In 1997, the F.C.C. adopted orders on access charge reform and a new universal
service program. The F.C.C.'s order on access charge reform generally removed
from minute-of-use access charges costs that are not incurred on a
per-minute-of-use basis. The F.C.C. also adopted changes to its interstate rate
structure for transport services which are designed to move the charges for
these services to more cost-based levels. The F.C.C.'s order on universal
service reformed the existing system of universal service in a manner that will
permit local telephone markets to move to a competitive arena. In 1999, the
United States Court of Appeals for the Fifth Circuit issued an opinion
addressing challenges to the F.C.C.'s universal service order. The Court
rejected challenges on technical issues such as the F.C.C.'s use of models in
determining universal service. The Court ruled, however, that the F.C.C. can't
use intrastate revenues in determining a carriers' universal service
contribution and rejected the so-called flowback method of collecting universal
service contributions through access charges. To implement the Fifth Circuit's
decision, the F.C.C. adopted an order in 1999 making revisions to its rules,
requiring, among other things, that ILECs recover their universal service
contributions either through interstate access charges or interstate end-user
charges based on interstate and international end-user telecommunications
revenues only. In October, 1999, the Commission adopted two orders in connection
with universal service reform. In the first order, the F.C.C. completed
development of the cost model to be used as a basis for federal universal
service support. In the second order, the F.C.C. adopted a methodology based on
the results of the cost model to calculate the level of support for non-rural
carriers serving high-cost areas and that federal universal service support is
portable among all eligible telecommunications carriers. If a competitor
acquires a subscriber line from an incumbent receiving support, the competitor
receives the incumbent's federal universal service support for that line. In
November 2001, the F.C.C. released its Order on the Multi-Association Group
("MAG") Plan. The F.C.C. order reformed the interstate access charge and
universal service support system for incumbent local exchange carriers ("ILECs")
subject to rate-of-return regulation making modifications to ILECs access rate
structures, end user charges and support mechanisms. In addition, the F.C.C.
terminated its open proceeding on the represcription of the authorized rate of
return which results in the authorized rate of return of 11.25% for interstate
access services.
Given the Act's relatively recent enactment and the on-going regulatory
proceedings and legal changes to the F.C.C.'s orders, it is not yet possible to
determine fully the impact of the Act and related F.C.C. regulations on
Roseville Telephone's operations.
The regulatory proceedings occurring at the state and federal levels described
above may broaden the scope of competition in the provision of regulated
services and change the rates and rate structure for regulated services
furnished by Roseville Telephone, the effects of which on Roseville Telephone
cannot yet be determined.
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 2001.
EXECUTIVE OFFICERS of the registrant
The names, ages and positions of the executive officers of the Company and its
subsidiaries as of March 1, 2002 are as follows:
Name Age Principal occupation and business experience for past
five years
Thomas E. Doyle 73 Chairman of the Board of Directors (since August 2000);
Vice Chairman (1998 to 2000); Vice President (1972 -
2000) and Secretary-Treasurer (1965 - 2000) of the
Company
Brian H. Strom 59 President and Chief Executive Officer of the Company
(since 1993)
Michael D. Campbell 53 Executive Vice President and Chief Financial Officer of
the Company (since 1996) and Treasurer (since 2000);
Vice President and Chief Financial Officer of the
Company (1994 to 1996)
Jay B. Kinder 57 Executive Vice President and Chief Operating Officer -
Roseville Telephone Company (since December 2000); Vice
President, Customer Services (1996 to 2000) and
Director of Marketing and Planning (1993 to 1996) of
Roseville Telephone Company
Bill M. DeMuth 52 Vice President and Chief Technology Officer of the
Company (since October 2000); Executive Director,
Network Services - Roseville Telephone Company
(1998 to October 2000); Director, Network Services
(1997 to 1998) and Manager, Network Maintenance and
Planning (1994 to 1997) of Roseville Telephone Company
David Marsh 53 Vice President and Chief Information Officer of the
Company (since December 2000); President and Chief
Executive Officer RnetEC, Inc (1999 to 2000); Chief
Information Officer - Pierce Leahy (1994 to 1999)
Robert M. Burger 45 Vice President and Chief Operating Officer - SureWest
Wireless (since June 2000); General Manager of SureWest
Wireless (1998 to 2000); Chief Financial Officer,
Fourth Communications Network, Inc. (1997 to 1998);
Vice President Finance and Business Communications,
Fourth Communications Network, Inc. (1996 to 1997);
General Manager - Central California/Northern Nevada,
Nextel Communications (1995 to 1996);
Name Age Principal occupation and business experience for past
five years
Philip D. Germond 52 Vice President, Customer Operations - Roseville
Telephone Company (since January 2002); Vice President,
Customer Services and Marketing - Roseville Telephone
Company (2000 - January 2002); Vice President, Marketing
(1997 to December, 2000); Director of Marketing and
Sales of Roseville Telephone Company (1996 to 1997)
Fred A. Arcuri 49 Vice President and Chief Operating Officer - SureWest
Broadband (since June 2001); Vice President and Chief
Operating Officer - SureWest Internet (since June 2000);
Executive Director of Emerging Businesses (1999 to
2000); Director of Marketing and Product Development
(1998 to 1999), and Product and Service Manager (1995 to
1998) of Roseville Telephone Company
Neil J. Doerhoff 49 Secretary of the Company (since August 2000); Financial
Consultant (since 2001); Corporate Secretary, Raley's
(1987 - 2001)
Darla J. Yetter 41 Assistant Secretary of the Company (since August 2000);
Assistant to the President and Chief Executive Officer
(since 1994)
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock was traded on the over-the-counter market prior to
September 6, 2001. As a result of the minimal number of stock transactions, the
Company's information with respect to price per share was derived from reports
provided by the Company's Retirement Supplement Plan, Employee Stock Ownership
Plan and disclosure, in limited circumstances, of third party transactions. The
following table sets forth the quarterly price per share from January 1, 2000
through June 30, 2001:
Per Share Amount
Quarter ended 2001 2000
March 31 $40 $34
June 30 $40 $37
September 30 N/A $38
December 31 N/A $38
On September 6, 2001 the Company's common stock began trading on the Nasdaq
National Market ("NASDAQ"), under the symbol "SURW". The following table
represents the high and low sales price of the Company's common stock as
reported on the NASDAQ for the third and fourth quarters of 2001:
NASDAQ National Market
High Low
September 30, 2001 $45.48 $40.35
December 31, 2001 $58.90 $45.48
As of March 1, 2002 the Company's approximate number of shareholders was 7,948.
The Company paid cash dividends on its common stock of $.25 per share for each
quarter of 2001 and 2000.
Item 6. Selected Financial Data
2001 2000 1999 1998 1997
(amounts in thousands, except per share amounts)
Total operating revenues $166,965 $143,316 $140,801 $126,682 $114,888
Gain on sale of investment in
cellular partnership $ - $201,294 - - -
Net income $ 10,317 $125,793 $ 31,750 $ 25,049 $ 22,971
Basic earnings per share(1) $ 0.67 $ 8.06 $ 2.01 $ 1.58 $ 1.45
Diluted earnings per share(1) $ 0.67 $ 8.05 $ 2.01 $ 1.58 $ 1.45
Extraordinary loss, net of tax $ - $(10,932) $ - $ - $ -
Cumulative effect of change
in accounting principle,
net of tax $ - $ (3,273) $ - $ - $ -
2001 2000 1999 1998 1997
(amounts in thousands, except per share amounts)
Extraordinary loss, net of
tax, per share (basic and
diluted) $ - $ (0.70) $ - $ - $ -
Cumulative effect of change
in accounting principle,
net of tax, per share,
(basic and diluted) $ - $ (0.21) $ - $ - $ -
Pro forma amounts assuming the
accounting change is applied
retroactively:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle $ 10,317 $ 139,998 $ 31,926 $ 24,749 $ 22,373
Net income $ 10,317 $ 129,066 $ 31,926 $ 24,749 $ 22,373
Basic per share amounts:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle $ 0.67 $ 8.97 $ 2.02 $ 1.56 $ 1.41
Net income $ 0.67 $ 8.27 $ 2.02 $ 1.56 $ 1.41
Diluted per share amounts:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle $ 0.67 $ 8.96 $ 2.02 $ 1.56 $ 1.41
Net income $ 0.67 $ 8.26 $ 2.02 $ 1.56 $ 1.41
Cash dividends per share(2) $ 1.00 $ 1.00 $ 1.00 $ 0.85 $ 0.63
Property, plant and
equipment, at cost $ 524,505 $ 469,389 $383,896 $328,437 $297,057
Total assets $ 412,343 $ 528,942 $333,187 $315,877 $276,297
Long-term debt $ 42,142 $ 44,285 $ 46,428 $ 48,571 $ 22,322
Shares of common stock used
to calculate:
Basic earnings per share(1) 15,326 15,610 15,815 15,815 15,815
Diluted earnings per
share(1) 15,387 15,630 15,822 15,815 15,815
(1) Shares used in the computation of basic earnings per share are based on the
weighted average number of common shares outstanding, excluding unvested
restricted common shares. Shares used in the computation of diluted
earnings per share are based on the weighted average number of common and
other potentially dilutive securities outstanding in each period.
(2) Cash dividends per share are based on the actual dividends per share, as
declared by the Company's Board of Directors.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Company Overview
SureWest Communications, formerly Roseville Communications Company, (the
"Company") is a holding company with subsidiaries operating in the
Telecommunications ("Telecom") and Personal Communications Services ("PCS")
segments.
The Telecom segment is aligned with specific subsidiaries of the Company.
Roseville Telephone Company ("Roseville Telephone"), a wholly-owned subsidiary
of the Company, provides local and toll telephone services, network access
services, billing and collection services, directory advertising services and
certain nonregulated services. SureWest Directories, a wholly-owned subsidiary
of the Company, publishes and distributes Roseville Telephone's directory,
including the sale of yellow pages advertising. SureWest Directories is also
engaged in the business of producing, publishing and distributing directories in
other Northern California communities. The Company's wholly-owned subsidiary,
Roseville Long Distance Company ("Roseville Long Distance"), is engaged in the
provision of long distance services. The Company's wholly-owned subsidiaries,
SureWest Internet and QuikNet, Inc. ("QuikNet"), are engaged in the provision of
high speed Internet services.
The PCS segment consists of the Company's wholly-owned subsidiary, SureWest
Wireless. SureWest Wireless is the owner of West Coast PCS LLC, which does
business using the SureWest Wireless name and provides wireless PCS.
The Company expects that the sources of its revenues and its cost structure will
be different in future periods as a result of its entry into new communications
markets.
Revenue Recognition
The Company recognizes revenue when (i) persuasive evidence of an arrangement
between the Company and the customer exists, (ii) delivery of the product to the
customer has occurred or service has been provided to the customer, (iii) the
price to the customer is fixed and determinable and (iv) collectibility of the
sales price is reasonably assured. Certain revenues derived principally from
local telephone, dedicated network access, data communications and wireless
services are billed in advance and recognized in subsequent periods when the
services are provided. Revenues derived from other telecommunications services,
principally network access, long distance, billing and collection services,
Internet access service, digital subscriber line ("DSL"), wireless PCS and alarm
monitoring services, are recognized monthly as services are provided.
Incremental direct costs of telecommunications service activation are charged to
expense in the period in which they are incurred. Directory publication revenues
and costs related to publishing and distributing directories are recognized
using the "circulation period" method, under which revenues and related costs
are recognized ratably over the expected useful life of the directory, generally
one year from the date of publication. For all other operations, revenue is
recognized when products are delivered or services are rendered to customers.
Telecom Revenue Overview
The Telecom segment derives its revenue from services subject to regulation,
long distance services, directory advertising services, Internet services and
the sale of non-regulated products and services.
Revenues from services subject to regulation constituted approximately 69%, 75%
and 80% of the Company's total operating revenues in 2001, 2000 and 1999,
respectively. Revenues subject to regulation, which include local service,
network access service, and toll service revenues generated by Roseville
Telephone, are derived from various sources, including billings to business and
residential subscribers for basic exchange services, extended area service
charges, surcharges mandated by the California Public Utilities Commission
("P.U.C."), billings to Pacific Bell, a wholly-owned subsidiary of SBC
Communications Inc., long distance carriers, competitive access providers and
subscribers for network access services, interstate settlement revenues from the
National Exchange Carrier Association, and support payments from the Universal
Service Fund and a California High Cost Fund.
Total 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. With respect to toll calls initiated by customers of interexchange
carriers, interexchange carriers are assessed access charges based on tariffs
filed by Roseville Telephone. Interstate access rates and resulting earnings are
subject to regulation by the Federal Communications Commission ("F.C.C."). With
respect to interstate services, Roseville Telephone has filed its own tariff
with the F.C.C. for all elements of access services except carrier common line
charges, for which Roseville Telephone concurs with tariffs filed by the
National Exchange Carrier Association.
The FCC monitors Roseville Telephone's interstate earnings through the use of
annual cost separation studies prepared by Roseville Telephone which utilizes
estimated cost information and projected demand usage. The FCC establishes rules
that carriers must follow in the preparation of the annual studies. On January
23, 2001, the FCC issued a Memorandum Opinion and Order to another telephone
company in which it clarified how Internet traffic, which the FCC had prior to
that date characterized as largely interstate in nature, should be treated for
rate making purposes. Additionally, under current FCC rules governing rate
making, Roseville Telephone is required to establish interstate rates based on
projected demand usage for its various services at the beginning of each year
and determine the actual earnings from these rates at the end of the year once
actual volumes and costs are known.
When Roseville Telephone completed its first analysis of 2000 actual interstate
earnings and the true-up analysis of 1999 interstate earnings in January 2001,
those studies reflected the FCC's January 2001 clarification order on Internet
traffic and actual traffic and cost levels. During the latter half of the 1999
through 2000 monitoring period and the year ended 2001, Internet traffic and DSL
service grew substantially, far exceeding Roseville Telephone's estimates. The
combination of the increase in actual volumes relating to Internet traffic and
DSL services over the original estimates and the FCC's alternative treatment of
Internet traffic resulted in actual earnings exceeding the levels allowed by the
FCC. Based on the preliminary cost studies for the 1999 through 2000 monitoring
period and the year ended December 31, 2001, the Company recognized liabilities
relating to Roseville Telephone's estimated interstate shareable earnings
obligations of $8.1 million and $3.2 million during the fourth quarter of 2000
and the year ended December 31, 2001, respectively, through reductions to
revenues. During the year ended December 31, 2001, Roseville Telephone made
payments to certain telecommunications companies aggregating $6.8 million
relating to a portion of these obligations. In addition, during the fourth
quarter of 2001, the Company changed its estimate relating to a portion of
Roseville Telephone's interstate shareable earnings obligations, principally due
to the closing of the 1997 through 1998 monitoring period. This change in
accounting estimate increased the Company's consolidated 2001 revenues and net
income by $2.2 million and $1.3 million ($0.08 per share), respectively.
Roseville Telephone bills Pacific Bell various charges for certain local service
and network access service revenues as described below. Of the Company's total
revenues in 2001, 2000 and 1999, 3%, 11% and 11%, respectively, were recorded
under these agreements. In 1999, Pacific Bell expressed interest in withdrawing
from the designated carrier plan ("DCP") for Roseville Telephone's toll traffic
and to enter into a new, permanent compensation arrangement for extended area
service ("EAS"). The DCP is a compensation arrangement between Roseville
Telephone and Pacific Bell for certain intralata toll services. Pacific Bell
also paid Roseville Telephone $11.5 million per year for EAS pursuant to a
Settlement Transition Agreement. In November 2000, the P.U.C. authorized Pacific
Bell to terminate its annual EAS payments to Roseville Telephone effective
November 30, 2000. The P.U.C. authorized replacement funding on an interim basis
using the current reserve in the California High Cost Fund, and denied permanent
replacement funding. The P.U.C. also opened an Order Instituting Investigation
for the purpose of determining whether recovery of all, none, or a portion of
the $11.5 million annual payments should come from Roseville Telephone's
ratepayers or other regulatory recovery mechanisms. These proceedings began in
2001 and will be conducted through 2003. The P.U.C. has made no indication as to
what, if any, changes will be forthcoming relating to EAS revenues. The results
of these proceedings and their potential effects on Roseville Telephone can not
yet be determined. In addition, since the DCP arrangement with Pacific Bell
expired in December 2001, Roseville Telephone now bills and keeps its customers
toll traffic. The impact of ending the DCP arrangement and moving to a bill and
keep basis on Roseville Telephone's results of operations is not material.
In 1996, the P.U.C. issued a decision in connection with Roseville Telephone's
general rate proceeding, which authorized Roseville Telephone to implement a New
Regulatory Framework ("NRF") for services furnished within Roseville Telephone's
service area in order to accommodate market and regulatory movement toward
competition and greater pricing flexibility. Under the NRF, Roseville Telephone
is subject to ongoing monitoring and reporting requirements, including a sharing
mechanism whereby Roseville Telephone may be required to share earnings with
customers based on its earned annual rate-of-return.
In accordance with the requirements of its general rate case order, Roseville
Telephone filed an application for review of its NRF in 1999. This proceeding
considered modifications to the NRF structure, including potential changes to
the current monitoring and reporting requirements, the earnings sharing
mechanism and related matters. In accordance with NRF, Roseville Telephone is
subject to, among other things, a sharing mechanism whereby Roseville Telephone
may be required to share earnings with customers through a reduction to revenues
if its earned annual rate-of-return exceeds that authorized by the P.U.C. In
addition, the P.U.C. Office of Ratepayer Advocates ("ORA") undertook a
verification audit of Roseville Telephone's non-regulated and affiliated
transactions pursuant to the general rate case and other P.U.C. orders. In June
2001, the P.U.C. adopted its decision in this matter (the "Decision"). The
P.U.C. ruled that Roseville Telephone must change the allocation method used to
allocate costs for services provided by Roseville Telephone to its affiliates,
the treatment of certain directory revenues and the treatment of internal-use
software costs. The Decision did not suspend the sharing mechanism and required
Roseville Telephone to further amend its intrastate shareable earnings filing
for 1998 and 1999 to provide an additional $1.0 million in shareable earnings,
which was recorded during the three months ended June 30, 2001 as a reduction of
revenues. Additionally, in accordance with the provisions of the Decision, the
Company recorded additional liabilities and reductions of revenues of $5.0
million relating to estimated shareable earnings during 2001. In December, 2001,
the P.U.C. denied the application for rehearing of the Decision filed by
Roseville Telephone.
As of December 31, 2001, the Company's consolidated balance sheet reflected
aggregate liabilities of $16.6 million relating to Roseville Telephone's
estimated interstate and intrastate shareable earnings obligations. The
calculations supporting these liabilities are very complex and involve a variety
of estimates prior to the ultimate settlement of such obligations. In addition,
Roseville Telephone's interstate shareable earnings obligations lapse over time
if Roseville Telephone's interexchange carrier and other customers do not claim
the amounts ascribed to them. Accordingly, it is reasonably possible that
management's estimates of the Company's liabilities for interstate and
intrastate shareable earning obligations could change in the near term, and the
amounts involved could be material.
PCS Revenue Overview
The PCS segment derives its revenue from the provision of wireless digital
personnel communication services and the sale of handsets and related
communications equipment. Revenues include wireless voice services, sales of
handsets and related accessories, long distance, telephone insurance and custom
calling features. Wireless services are provided on a month-to-month basis and
are generally billed in advance.
Acquisition of QuikNet
Effective July 31, 2001, the Company acquired all of the outstanding common
stock of QuikNet for $2.1 million in cash. The acquisition was accounted for as
a purchase in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141. The tangible assets of QuikNet acquired by the Company,
aggregating $498 thousand, consisted principally of cash, accounts receivable
and property, plant and equipment. The liabilities of QuikNet assumed by the
Company, aggregating $534 thousand, consisted principally of accounts payable
and long-term debt. As a result of the preliminary purchase price allocation
associated with the acquisition, the Company recorded $2.2 million of goodwill.
Purchase of Wireless PCS Minority Interest
During the second quarter of 2001, the Company acquired from Foresthill
Telephone Co. ("FHT") its 1.8% interest in West Coast PCS LLC, ("West Coast"),
for $2.5 million in cash. The acquisition of this minority interest was
accounted for as a purchase. As a result of the acquisition, the Company now
owns 100% of West Coast. A former member of the Company's Board of Directors
was, at the time of the acquisition, the President and sole shareholder of FHT.
Other Related Party Transactions
An officer of the Company is also a member of the Board of Directors of a local
banking institution. As of December 31, 2000, the Company had a $15 million
certificate of deposit with a term of greater than one year with the
aforementioned banking institution. In the fourth quarter of 2001, the Company
redeemed this certificate of deposit for an amount equal to its historical
carrying value, including accrued interest.
A member of the Company's Board of Directors is also an executive officer and
director of a certain entity from which the Company purchased approximately $545
thousand and $1.0 million in telecommunications equipment during 2001 and 2000,
respectively.
Sale of Cellular Partnership Interest
On November 3, 2000, two of the Company's subsidiaries sold their collective 24%
cellular partnership interest in Sacramento-Valley Limited Partnership to
Verizon Wireless for approximately $236.2 million, resulting in a pre-tax gain
of $201.3 million, which was recognized in the fourth quarter of 2000. As of
December 31, 2000 the Company had a $5.5 million receivable from Verizon
Wireless, which originated prior to the sale. The Company collected the balance
of this receivable during 2001.
The Company believes that the sale of the limited partnership interest furthered
its strategy to focus resources on expansion of the Company's own wireless
operation, SureWest Wireless, and other of the Company's emerging business
operations.
Extraordinary Loss
As described in Note 2 to the Consolidated Financial Statements of the Company,
Roseville Telephone discontinued applying SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," in December 2000. Management determined
that, primarily as a result of a significant increase in competition within
Roseville Telephone's service area, the application of SFAS No. 71 was no longer
appropriate for Roseville Telephone. As a result of the discontinuation of SFAS
No. 71 accounting by Roseville Telephone, the Company recorded an extraordinary
non-cash charge of $10.9 million, which is net of related tax benefits of $7.6
million, in December 2000.
Cumulative Effect of a Change in Accounting Principle
During the fourth quarter of 2000, the Company changed its method of accounting,
retroactive to January 1, 2000, for up-front fees associated with
telecommunications service activation in accordance with the guidance contained
in the Securities Exchange Commission ("SEC") Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), which was issued by
the SEC in December 1999. Previously, the Company had recognized such up-front
fees as revenues upon activation of service. Under the new accounting method,
the Company now recognizes up-front fees associated with service activation over
the expected duration of the customer relationships. The cumulative effect of
the change on prior years resulted in a charge to 2000 income of $3.3 million
(net of income taxes of $2.3 million). The effect of the change on the year
ended December 31, 2000 was to decrease income before extraordinary loss and the
cumulative effect of the accounting change by $508 thousand ($0.03 per share).
For the years ended December 31, 2001 and 2000, the Company recognized $1.7
million and $2.4 million, respectively, of revenues previously deferred in
connection with the cumulative effect adjustment as of January 1, 2000. The
effect of that revenue was to increase income by $1.0 million (net of income
taxes of $683 thousand) and $1.4 million (net of income taxes of $963 thousand)
for the years ended December 31, 2001 and 2000, respectively.
2001 versus 2000
Net income for 2001 was $10.3 million, or $0.67 per share, compared with net
income of $125.8 million, or $8.06 per share, for 2000. The decrease in net
income and earnings per share for 2001 is due principally to the sale of the
Company's limited partnership interest in SVLP in 2000, which resulted in a
$201.3 million pre-tax gain. The gain was offset in part by a one-time, non-cash
extraordinary loss relating to the discontinuance of SFAS No. 71 accounting of
$10.9 million, net of taxes, and the cumulative effect of a change in accounting
principle of $3.3 million, net of taxes. There was also an increase in operating
revenues of $23.6 million in 2001, offset by an increase of $34.6 million in
operating expenses due principally to the Company's aggressive expansion into
new telecommunications markets including, wireless, Internet, broadband and data
services.
Operating Revenues:
Revenues subject to regulation, which include local and network access services,
increased in the aggregate by $7.6 million, or 7%, compared to 2000. This
increase was due to the combined effects of 1) increased network access revenues
due to expanded demand for DSL services and dedicated access and increased
minutes of use volumes 2) increases in custom calling, voice mail and other
enhanced network services, and 3) access line growth of 1%. In addition, this
increase was due to i) reduced interstate and intrastate shareable earnings
obligations in 2001 that the Company was required to record as a reduction of
operating revenues in 2001, and ii) an increase in operating revenues relating
to a reduction in the Company's estimate pertaining to a portion of the
Company's interstate shareable earnings obligations, principally due to the
closing of the 1997 through 1998 monitoring period and therefore resulting in an
increase in revenues. The change in accounting estimate increased the Company's
consolidated 2001 revenues and net income by $2.2 million and $1.3 million
($0.08 per share), respectively.
Wireless service revenues increased $11.4 million compared to 2000 as a result
of continued additions to the customer base. Wireless revenues in 2001 were
negatively impacted by billings to certain customers of $2.2 million that did
not meet all of the criteria for revenue recognition due to collection concerns.
Directory advertising revenues increased $1.2 million, or 9%, compared to 2000
due to increased advertising sales and the introduction of an additional
directory in March 2001. Revenues from non-regulated sales and services
decreased by $601 thousand, or 8%, compared to 2000 due primarily to the effects
of lower sales of telecommunications equipment.
Other operating revenues primarily consist of Internet services, long distance
services, billing and collection services and other miscellaneous services.
Other operating revenues increased $4.1 million, or 40%, compared to 2000 due
primarily to an increase in the market penetration of long distance services,
continued additions to the Internet customer base, the acquisition of QuikNet
and increased dedicated access provided by SureWest Broadband.
Operating Expenses:
Total operating expenses increased $34.6 million, or 29%, compared to 2000. Cost
of services and products increased $9.7 million, or 21%, during 2001 due
primarily to an increase in tower rents, handset costs and roaming charges
related to the continuing expansion of the coverage area and increased demand
for SureWest Wireless service. In addition, there were increases in transport
costs associated with long distance services, and modem and transport costs
related to Internet services.
Customer operations and selling expense increased $7.6 million, or 31%, during
2001 due primarily to $1.2 million of bad debt expense associated with wireless
services, increased dealer commissions and subscriber billing associated with an
increase in wireless customers.
General and administrative expenses increased $6.3 million, or 32%, during 2001.
These increases are due primarily to increased labor costs resulting from an
increase in the size of the company's workforce as a result of expanded
operations, an acquired business, and normal compensation increases. In
addition, there were increases to fulfill strategic planning and growth
objectives.
Depreciation and amortization increased $10.9 million, or 38%, during 2001 as a
result of increases in Telecom and PCS property, plant and equipment,
amortization of network software and PCS licenses, and a reduction in estimated
useful lives of certain elements of property and equipment in connection with
the discontinuance of applying regulatory accounting in December 2000.
Other Income, Net:
Other income, net, decreased $207.0 million, compared to 2000 due principally to
the $201.3 million gain on the sale of the Company's interest in SVLP in 2000.
Excluding the gain on the sale of the Company's investment in SVLP and the
Company's equity in earnings in SVLP in 2000, other income, net, increased $4.4
million, compared to 2000. Interest income increased $2.0 million, or 71%,
during 2001 as a result of larger average invested balances. Interest expense
decreased $2.9 million, or 69%, compared to 2000 due to a decrease in the
Company's average outstanding balances on its long-term debt and a change in the
presentation of capitalized interest from the prior year as a result of the
Company's discontinuance of SFAS No. 71 accounting in 2000.
Income Taxes:
Income taxes decreased $88.3 million, as compared to 2000, due primarily to
taxes recognized from the Company's $201.3 million gain on the sale of its
interest in SVLP in 2000. The effective federal and state income tax rate was
40% in 2001, compared to 40.5% in 2000.
Extraordinary Loss:
Roseville Telephone discontinued applying SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," in December 2000 as described above,
which resulted in the recognition of $10.9 million extraordinary loss, net of
tax.
Cumulative Effect of a Change in Accounting Principle:
During the fourth quarter of 2000, the Company changed its method of accounting,
retroactive to January 1, 2000 for up-front fees associated with
telecommunications service activation in accordance with the guidance contained
in SAB 101, which was issued by the SEC in December 1999, as described above.
2000 versus 1999
Net income for 2000 was $125.8 million, or $8.06 per share, compared with net
income of $31.7 million, or $2.01 per share, for 1999. The increase in net
income and earnings per share for 2000 was due principally to the pre-tax gain
of $201.3 million from the sale of the Company's limited partnership interest in
SVLP. This gain was offset by a one-time non-cash extraordinary loss relating to
the discontinuance of SFAS No. 71 of $10.9 million, net of taxes, and the
cumulative effect of a change in accounting principle of $3.3 million, net of
taxes. There was also a modest increase in operating revenues of $2.5 million,
offset by an increase of $21.7 million in operating expenses due principally to
the Company's aggressive expansion into new telecommunications markets including
wireless, Internet, broadband and data services.
Operating Revenues:
Revenues subject to regulation, which include local and network access services,
decreased in the aggregate by $5.1 million, or 5%, compared to 2000. This
decrease was due to reductions to operating revenues of $11.3 million relating
to the Company's estimated interstate and intrastate sharing obligations noted
above, and one-time positive adjustments of $1.4 million recorded in 1999
relating to interstate access settlements and a modification by the P.U.C. to
Roseville Telephone's rate case decision. Revenue subject to regulation also
decreased due to the implementation of SAB 101, as discussed both above and
below. These decreases in local and network access service revenues were
partially offset by the combined effects of 1) access lines growth of 2%, 2)
increases in custom calling, voice mail and other enhanced network services, 3)
increased network access revenues due to expanded demand for data services and
larger minutes-of-use volumes and 4) the introduction of DSL services in August
1999.
Wireless services revenues increased $4.3 million compared to 1999 due to the
introduction of wireless service in June of 1999.
Directory advertising revenues increased $55 thousand, or less than 1%, compared
to 1999 due to a modest increase in advertising sales relating to independent
directories published outside of Roseville Telephone's service area. Revenues
from non-regulated sales and services increased by $1.6 million, or 26%,
compared to 1999 due primarily to the effects of several large equipment sales.
Other operating revenues primarily consist of Internet services, long distance
services, billing and collection services and other miscellaneous services.
Other operating revenues increased $1.6 million, or 18%, compared to 1999 due
primarily to an increase in the market penetration of long distance services and
the introduction of Internet services in August of 1999.
Operating Expenses:
Total operating expenses increased $21.7 million, or 22%, compared to 1999. Cost
of services and products increased $9.1 million, or 24%, during 2001 due
primarily to an increase in tower rents related to the continuing expansion of
the coverage area of SureWest Wireless, transport costs associated with long
distance services, and modem and transport costs related to Internet services.
Customer operations expense increased $7.2 million, or 42%, during 2000 due
primarily to marketing and advertising costs associated with wireless services
and increased labor costs relating to customer support activities associated
with Internet services.
General and administrative expenses decreased $1.1 million, or 5%, during 2000.
Increases in various general and administrative costs during 2000 compared to
1999 were offset by costs related to computer upgrades in 1999 which did not
occur in 2000.
Depreciation and amortization increased $6.5 million, or 29%, during 2001 as a
result of an increase in telephone and wireless plant and the amortization of
network software and PCS licenses.
Other Income, Net:
Other income, net, increased $201.4 million, compared to 1999 due principally to
the $201.3 million pre-tax gain on the sale of the Company's interest in SVLP.
Excluding the gain on the sale of the Company's investment in SVLP, other
income, net, increased $60 thousand, or less than 1%, compared to 1999. Interest
income increased $1.1 million, or 63%, during 2000 as a result of larger average
invested balances. Interest expense increased $758 thousand, or 22%, compared to
1999 due to an increase in the Company's average outstanding balances on its
credit facility during 2000.
Income Taxes:
Income taxes increased $73.9 million compared to 1999 due primarily to the
Company's $201.3 million pre-tax gain on the sale of its interest in SVLP. The
effective federal and state income tax rate was 40.5% in 2000 compared to 40.1%
in 1999.
Extraordinary Loss:
Roseville Telephone discontinued applying SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," in December 2000 as described above,
which resulted in the recognition of $10.9 million extraordinary loss, net of
tax.
Cumulative Effect of a Change in Accounting Principle:
During the fourth quarter of 2000, the Company changed its method of accounting,
retroactive to January 1, 2000 for up-front fees associated with
telecommunications service activation in accordance with the guidance contained
in SAB 101 which was issued by the SEC in December 1999, as described above.
Liquidity and Capital Resources
As reflected in the consolidated statements of cash flows, net cash used in
operating activities was $32.9 million in 2001. Net cash provided by operating
activities was $53.1 million and $42.7 million in 2000 and 1999, respectively.
The decrease in cash from operating activities in 2001, compared to 2000 was due
primarily to an approximate $90 million payment of income tax related to the
sale of the Company's cellular partnership interest in 2000. The Company used
cash flows from operations and existing cash and cash equivalents to fund 1)
capital expenditures of $69.6 million pertaining to ongoing plant construction
projects, 2) common stock repurchases of $18.5 million 3) dividends of $15.3
million, 4) principal payments of $2.1 million to retire long-term debt, 5) the
purchase from Foresthill Telephone Co. of its interest in SureWest Wireless for
$2.5 million and 6) the purchase of QuikNet for $2.1 million.
In February 2000, the Board of Directors authorized the repurchase of up to one
million shares of the Company's common stock. Additionally, the Company
implemented an odd lot repurchase program during 2001. The shares are purchased
from time to time in the open market or through privately negotiated
transactions subject to overall financial and market conditions. Through
December 31, 2001, approximately 742 thousand shares of common stock have been
repurchased through both programs. As a result, the Company has authorization
from the Board of Directors to repurchase an additional 275 thousand outstanding
shares.
In March 2000, the Company entered into a business loan agreement with a bank
for a $30 million line of credit with a term of three years. In September 2000,
the bank temporarily amended the credit facility increasing the borrowing
capacity from $30 million to $50 million through December 30, 2001. As of
December 31, 2001, the amount available under the credit facility was $30
million and there were no amounts outstanding under this line at December 31,
2001 or 2000.
The Company's most significant use of funds in 2002 is expected to be for 1)
budgeted capital expenditures of approximately $54.2 million, 2) net operating
expenditures of up to $6.1 million relating to SureWest Wireless, 3) scheduled
payments of long-term debt of $2.1 million, and 4) the purchase by the Company
of shares of its outstanding common stock pursuant to the repurchase program.
In 2000, the Company entered into a 3-year non-exclusive agreement with Global
Crossing Ltd. ("Global Crossing"), a long distance service provider, for the
right to provide long distance service to the Company's customers at fixed
prices during the term of the agreement. As of December 31, 2001, the Company
had a minimum aggregate long distance service usage commitment of approximately
$1.6 million. On January 28, 2002, Global Crossing filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. The Company is presently unable to
determine the impact, if any, that Global Crossing's bankruptcy filing will have
on the Company's long distance operations. However, the Company believes that it
could procure long distance network transport services from other
telecommunications providers. In the event the Company must procure network
transport services from another telecommunications provider, rates for such
service may be higher than those offered by Global Crossings. However, the
Company believes that the impact on its results of operations resulting from any
potential change in transport rates will not be material.
On December 6, 2001, the Company entered into an agreement with a third party to
sell substantially all of the assets (which consisted principally of customer
contracts and equipment, which had no net book value as of December 31, 2001) of
the Company's alarm monitoring division, which is an element of the Telecom
segment. The total sales price for the Company's alarm monitoring assets was
approximately $5.3 million, subject to certain future adjustments. As of
December 31, 2001, the Company had received a deposit in the amount of $500
thousand from the purchaser of the Company's alarm monitoring assets. The sale
of the Company's alarm monitoring assets was consummated on January 25, 2002.
Total operating revenues attributable to the Company's alarm monitoring division
during 2001, 2000 and 1999 were $2.5 million, $2.2 million and $2.0 million,
respectively.
The Company had cash, cash equivalents and short-term investments at December
31, 2001, in excess of $56.2 million. In addition, the Company has borrowing
capacity under the aforementioned business loan agreement, and believes, given
its financial position and debt-to-equity position, it has substantial
additional short and long-term borrowing capacity. Accordingly, the Company
believes that its working capital position, operating cash flows and borrowing
capacity are more than sufficient to satisfy its liquidity requirements in 2002.
The Company may consider other sources of external financing for the purposes of
funding future capital expenditures and potential investments.
Critical Accounting Policies and Estimates
Below is a summary of the Company's critical accounting policies and estimates,
which are more fully described in the referenced notes to the Company's
consolidated financial statements:
o As discussed more fully in Note 1, total revenues from telephone services
are affected by rates authorized by various regulatory agencies. The FCC
monitors Roseville Telephone's interstate earnings through the use of
annual cost separation studies prepared by Roseville Telephone, which
utilize estimated cost information and projected demand usage. The FCC
establishes rules that carriers must follow in the preparation of the
annual studies. In addition, under NRF, Roseville Telephone is subject to
ongoing monitoring and reporting requirements by the PUC, including a
sharing mechanism whereby Roseville Telephone may be required to share
earnings with customers based on its earned annual rate-of return. The
calculations supporting the liabilities associated with the Company's
estimated shareable earnings obligations are very complex and involve a
variety of estimates prior to the ultimate settlement of such obligations.
Accordingly, it is reasonably possible that management's estimates of
Roseville Telephone's shareable earnings obligations could change in the
near term, and the amounts involved could be material.
o As discussed more fully in Note 3, the Company recognizes revenue when (i)
persuasive evidence of an arrangement between the Company and the customer
exists, (ii) delivery of the product to the customer has occurred or
service has been provided to the customer, (iii) the price to the customer
is fixed and determinable and (iv) collectibility of the sales price is
reasonably assured.
o As discussed more fully in Note 1, property, plant and equipment and
intangible assets are recorded at cost. Additions and substantial
improvements are capitalized. Retirements and other reductions of regulated
telephone plant and equipment are charged against accumulated depreciation
with no gain or loss recognized in accordance with the composite group
remaining life methodology utilized for telephone plant assets. When
property applicable to non-telephone operations is sold or retired, the
asset and related accumulated depreciation are removed from the accounts
and the associated gain or loss is recognized. Property, plant and
equipment and intangible assets are depreciated or amortized using the
straight-line method over their estimated economic lives, certain of which
were significantly revised in the fourth quarter of 2000, as more fully
described in Note 2. In assessing the recoverability of the Company's
intangible assets, which consist of wireless licenses and goodwill, the
Company must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If
these estimates and assumptions change in the future, the Company may be
required to record impairment charges relating to its intangible assets.
See further discussion below concerning the pending adoption of SFAS Nos.
142 and 144 and the Company's framework for evaluating the impairment of
long-lived assets in periods ending after December 31, 2001.
o As discussed more fully in Note 1, the Company accounts for income taxes
using the liability method. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using
the enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. The Company does not have a valuation
allowance on its deferred tax asset as of December 31, 2001 because it
believes it is more likely than not that such deferred tax asset will be
realized. Should the Company determine that it would not be able to realize
all or part of its deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period in which the
determination was made.
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the potential inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
o As discussed more fully in Note 8, the Company has pension and
postretirement benefit costs and obligations. The Company's pension and
postretirement benefit obligations are actuarially determined based on
estimates of discount rates, long-term rates of return on plan assets and
increases in future compensation levels. Changes in these estimates and
other factors could significantly impact the Company's pension and
postretirement benefit costs and obligations.
Recent accounting pronouncements
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. SFAS No. 133 standardizes the
accounting for derivatives and hedging activities and requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities at fair value. Changes in the fair value of derivatives
that do not meet the hedge accounting criteria are required to be reported in
operations. The adoption of SFAS No. 133 had no effect on the Company's
consolidated financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangibles
Assets." SFAS No. 141 eliminates the pooling-of-interests method of accounting
for business combinations, except for qualifying business combinations that were
initiated prior to July 1, 2001. The Company has applied the provisions of SFAS
No. 141 to its acquisition of QuikNet, which occurred on July 31, 2001.
Consequently, the goodwill recognized by the Company in connection with its
acquisition of QuikNet is not being amortized, but rather is reviewed annually
for impairment, or more frequently, if impairment indicators arise, based on the
guidance in SFAS No. 142. The Company will adopt SFAS No. 142 on January 1,
2002. The Company believes its wireless PCS and LMDS licenses have indefinite
lives because such licenses can be renewed indefinitely at little cost.
Accordingly, the application of the nonamortization provision of SFAS No. 142 to
the Company's wireless PCS licenses (the Company's wireless LMDS licenses were
not in service or being amortized as of December 31, 2001) is expected to result
in an increase in the Company's consolidated net income of $290 thousand ($0.02
per share)in 2002. Beginning in the first quarter of 2002, the Company's
wireless PCS and LMDS licenses will be carried at the lower of cost or fair
value. The Company will test goodwill for impairment using the two-step process
described in SFAS No. 142. The first step is to screen for potential impairment,
while the second step measures the amount of the impairment, if any. The Company
expects to perform the first of the required impairment tests of goodwill and
indefinite-lived intangible assets as of January 1, 2002 in the first quarter of
2002. The Company does not presently believe that any material impairment
charges will result from these transitional impairment tests.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company is required to adopt SFAS No. 143 on January 1,
2003, and it does not believe the adoption of SFAS No. 143 will have a material
effect on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and provides a single accounting model for long-lived assets to be disposed
of. The Company is required to adopt SFAS No. 144 on January 1, 2002, and it
does not believe the adoption of SFAS No. 144 will have a material effect on its
consolidated financial statements.
In April 2001, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus regarding the provision in EITF Issue 00-25, "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer," dealing with
consideration from a vendor to a reseller under cooperative advertising and
other arrangements. This provision of EITF Issue 00-25 states that consideration
from a vendor to a resel1er of the vendor's products or services is presumed to
be a reduction of the selling price of the vendor's products or services, unless
the vendor (i) receives an identifiable benefit in return for the consideration
and (ii) can reasonably estimate the fair value of the benefit received. If the
amount of consideration paid by the vendor exceeds the estimated fair value of
the benefit received, the excess amount is to be recorded by the vendor as a
reduction of revenues. The Company is required to adopt this provision of EITF
Issue 00-25 on January 1, 2002, and it does not believe the adoption of this new
guidance will have a material effect on its consolidated financial statements.
Regulatory and Legal Matters
In 1996, Congress passed the Telecommunications Act of 1996 (the "Act") which
significantly changed the regulatory environment for telecommunications
companies. Beginning in 1996, the F.C.C. conducted proceedings and adopted
orders implementing the Act's provisions to open local exchange service markets,
such as the market of Roseville Telephone, to competition. These proceedings and
orders address interconnection, access charges and universal service. With
respect to local competition the F.C.C. rules outline pricing methodologies for
the states to follow when setting rates for incumbent carriers (such as
Roseville Telephone) to charge competitors for resale, interconnection and
unbundled network elements.
In January 2001, the United States Supreme Court granted a petition for writ of
certiorari to review certain aspects of the implementation of the Act. In
particular, the United States Supreme Court will consider whether the Act:
1) precludes the F.C.C. from requiring incumbent local exchange carriers, such
as Roseville Telephone, from using a pricing methodology in determining
what new entrants must pay that is based upon a hypothetical, most
efficient network configuration, rather than the incumbent carrier's
historical cost;
2) requires the "historical costs" of the incumbent carrier (such as Roseville
Telephone) to be taken into account in setting the rates that the incumbent
can charge the new entrants for access to network elements; and
3) prohibits regulators from requiring that incumbents (such as Roseville
Telephone) combine previously uncombined network elements when the new
entrant requests the combination and offers to pay for the extra work.
Given the Act's relatively recent enactment, the ongoing actions taken by the
F.C.C. to promulgate rules and regulations on interconnection access charges and
universal service reform, and the various on-going legal challenges considering
the validity of these F.C.C. orders, it is not yet possible to determine fully
the impact of the Act and related F.C.C. regulations on Roseville Telephone's
operations.
The Company's financial condition and results of operations have been and will
be affected by recent and future proceedings before the P.U.C. and F.C.C.
Pending before the F.C.C. and P.U.C. are proceedings which are considering:
o Additional rules governing the opening of markets to competition
o The goals and definition of universal telephone service in a changing
environment, including examination of subsidy support mechanisms for
subscribers of different carriers (including the incumbent carriers)
and in various geographic areas.
o Rules that will provide non-discriminatory access by competing service
providers to the network capabilities of local exchange carriers
The eventual impact on the Company of the effect of all the proceedings
described above cannot presently be determined.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with interest rate movements.
However, the Company's market risk disclosure pursuant to Item 7A is not
material and therefore not required.
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Auditors .................................... 31
Consolidated Balance Sheets as of December 31, 2001 and 2000 ...... 32
Consolidated Statements of Income for each of the three years
in the period ended December 31, 2001 ............................. 34
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 2001 ............. 37
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2001 ................. 38
Notes to Consolidated Financial Statements ........................ 40
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SureWest Communications
We have audited the accompanying consolidated balance sheets of SureWest
Communications as of December 31, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The 1999 consolidated
financial statements of Sacramento-Valley Limited Partnership (a partnership in
which the Company had an approximate 24% interest through November 3, 2000 -
Note 5) have been audited by other auditors whose report has been furnished to
us; insofar as our opinion on the 1999 consolidated financial statements relates
to data included for Sacramento-Valley Limited Partnership, it is based solely
on their report.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of SureWest Communications at December 31,
2001 and 2000, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, in 2000 the
Company discontinued accounting for the operations of its local
telecommunications subsidiary in accordance with Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation. As discussed in Note 3 to the consolidated financial statements, in
2000 the Company changed its method of accounting for revenue recognition in
accordance with guidance contained in SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements.
/s/Ernst & Young LLP
Sacramento, California
February 8, 2002
SUREWEST COMMUNICATIONS
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(amounts in thousands)
ASSETS 2001 2000
------ ---- ----
Current assets:
Cash and cash equivalents $ 54,520 $169,955
Short-term investments 1,723 7,435
Accounts receivable (less allowances of
$1,068 and $142 at December 31, 2001 and
2000, respectively) 20,282 24,515
Receivable relating to cellular partnership - 5,513
Refundable income tax 2,619 -
Inventories 3,324 3,696
Deferred income tax asset 640 6,613
Deferred directory costs 3,260 4,133
Prepaid expenses and other current assets 1,726 547
-------- --------
Total current assets 88,094 222,407
Property, plant and equipment:
In service 492,323 445,057
Under construction 32,182 24,332
-------- --------
524,505 469,389
Less accumulated depreciation 216,432 191,408
-------- --------
308,073 277,981
Investments and other assets:
Long-term certificate of
deposit with related party - 15,155
Wireless licenses, net 13,566 12,929
Goodwill 2,171 -
Deferred charges and other assets 439 470
-------- --------
16,176 28,554
-------- --------
$412,343 $528,942
======== ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2001 and 2000
(amounts in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
- ------------------------------------ ---- ----
Current liabilities:
Current portion of long-term debt $ 2,143 $ 2,143
Accounts payable and other accrued
liabilities 11,093 14,784
Estimated shareable earnings obligations 16,597 16,316
Advance billings and deferred revenues 8,144 7,445
Accrued income taxes - 92,050
Accrued pension cost 6,551 7,061
Accrued compensation 4,218 3,742
-------- --------
Total current liabilities 48,746 143,541
Long-term debt 42,142 44,285
Deferred income taxes 11,206 6,626
Other liabilities and deferred revenues 8,456 7,918
Minority interest in subsidiary - 1,570
Shareholders' equity:
Common stock, without par value; 100,000
shares authorized, 15,110 and 15,510 shares
issued and outstanding at December 31, 2001
and 2000, respectively 172,083 181,547
Deferred stock-based compensation (303) -
Retained earnings 130,013 143,455
-------- --------
Total shareholders' equity 301,793 325,002
-------- --------
$412,343 $528,942
======== ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(amounts in thousands, except per share amounts)
2001 2000 1999
---- ---- ----
Operating revenues:
Local service $ 65,524 $ 65,708 $ 68,605
Network access service 49,120 41,357 43,531
Wireless Service 16,301 4,922 610
Directory advertising 14,237 13,044 12,989
Nonregulated sales and
services 7,330 7,931 6,284
Other 14,453 10,354 8,782
-------- -------- --------
Total operating revenues 166,965 143,316 140,801
Operating expenses:
Cost of services and products 56,352 46,662 37,558
Customer operations and selling 31,991 24,350 17,108
General and administrative 26,018 19,686 20,805
Depreciation and amortization 39,841 28,891 22,378
-------- -------- --------
Total operating expenses 154,202 119,589 97,849
-------- -------- --------
Income from operations 12,763 23,727 42,952
Other income (expense):
Interest income 4,803 2,814 1,725
Interest expense (1,314) (4,223) (3,465)
Equity in earnings of cellular
partnership - 10,089 10,129
Gain on sale of investment in
cellular partnership - 201,294 -
Allowance for funds used during
construction - 1,219 1,530
Other, net 934 234 154
-------- -------- --------
Total other income, net 4,423 211,427 10,073
-------- -------- --------
Income before income taxes,
extraordinary loss and cumulative
effect of change in accounting
principle 17,186 235,154 53,025
Income taxes 6,869 95,156 21,275
-------- -------- --------
Income before extraordinary loss
and cumulative effect of
change in accounting principle 10,317 139,998 31,750
Extraordinary loss, net of $7,631
tax benefit - (10,932) -
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(amounts in thousands, except per share amounts)
2001 2000 1999
---- ---- ----
Cumulative effect of change in
accounting principle, net of
$2,250 tax benefit - (3,273) -
-------- -------- --------
Net income $ 10,317 $125,793 $ 31,750
======== ======== ========
Basic per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.67 $ 8.97 $ 2.01
Extraordinary loss,
net of tax benefit - (0.70) -
Cumulative effect of change in
accounting principle, net of tax
benefit - (0.21) -
--------- --------- ---------
Net income $ 0.67 $ 8.06 $ 2.01
========= ========= =========
Shares of common stock used to
calculate basic per share
amounts 15,326 15,610 15,815
========= ========= =========
Diluted per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.67 $ 8.96 $ 2.01
Extraordinary loss, net of tax
benefit - (0.70) -
Cumulative effect of change in
accounting principle, net of
tax benefit - (0.21) -
--------- --------- ---------
Net income $ 0.67 $ 8.05 $ 2.01
========= ========= =========
Shares of common stock used to
calculate diluted per share
amounts 15,387 15,630 15,822
========= ========= =========
Dividends per share $ 1.00 $ 1.00 $ 1.00
========= ========= =========
Pro forma amounts assuming the
accounting change is applied
retroactively:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 10,317 $139,998 $ 31,926
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(amounts in thousands, except per share amounts)
2001 2000 1999
---- ---- ----
Net income $ 10,317 $129,066 $ 31,926
Basic per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.67 $ 8.97 $ 2.02
Net income $ 0.67 $ 8.27 $ 2.02
Diluted per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.67 $ 8.96 $ 2.02
Net income $ 0.67 $ 8.26 $ 2.02
See accompanying notes
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
(amounts in thousands)
Common Stock
-------------------
Deferred
Number of Stock-Based Retained
Shares Amount Compensation Earnings Total
------ -------- ------------ -------- -------
Balance at December 31, 1998 15,815 $189,171 $ - $ 22,118 $211,289
Issuance of restricted common
stock 13 383 - - 383
Cash dividends - - - (15,822) (15,822)
Net income - - - 31,750 31,750
------ -------- ------ -------- --------
Balance at December 31, 1999 15,828 189,554 - 38,046 227,600
Issuance of restricted common
stock 11 373 - - 373
Repurchase of common
stock (329) (8,380) - (4,744) (13,124)
Cash dividends - - - (15,640) (15,640)
Net income - - - 125,793 125,793
--------- -------- ------ --------- --------
Balance at December 31, 2000 15,510 181,547 - 143,455 325,002
Issuance of common stock upon
exercise of options 7 288 - - 288
Issuance of restricted common
stock 8 363 (363) - -
Repurchase of common
stock (415) (10,115) - (8,417) (18,532)
Amortization of deferred
stock-based compensation - - 60 - 60
Cash dividends - - - (15,342) (15,342)
Net income - - - 10,317 10,317
-------- -------- ------- --------- --------
Balance at December 31, 2001 15,110 $172,083 $ (303) $130,013 $301,793
======== ======== ======= ========= ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
Increase (Decrease) in Cash and Cash Equivalents
(amounts in thousands)
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 10,317 $ 125,793 $ 31,750
Adjustments to reconcile net
income to net cash provided by (used
in) operating activities:
Extraordinary loss, net of
tax benefit - 10,932 -
Cumulative effect of a change
in accounting principle, net
of tax benefit - 3,273 -
Depreciation and amortization 39,841 28,891 22,378
Equity component of allowance
for funds used during construction - (653) (643)
Provision for deferred income taxes 10,381 (14,260) 1,495
Equity in earnings of cellular
partnership - (10,089) (10,129)
Gain on sale of cellular partnership - (201,294) -
Provision for doubtful accounts 2,896 836 638
Amortization of deferred stock-based
compensation 60 - -
Other, net 838 (439) 69
Net changes in:
Receivables 1,374 (4,953) (4,186)
Refundable and accrued income
taxes, net (94,669) 92,380 639
Inventories, prepaid expenses
and other current assets (774) (1,482) (826)
Payables, accrued liabilities
and other deferred credits (3,160) 24,165 1,523
-------- -------- -------
Net cash provided by (used in)
operating activities (32,896) 53,100 42,708
Cash flows from investing activities:
Purchase of business, net of
cash acquired (2,091) - -
Purchase of minority interest in
subsidiary (2,500) - -
Capital expenditures for property,
plant and equipment (69,556) (87,234) (58,402)
Deposit 500 - -
Purchase of wireless licenses - (4,642) -
Purchases of held-to-maturity
investments (8,843) (7,625) (8,022)
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
Increase (Decrease) in Cash and Cash Equivalents
(amounts in thousands)
2001 2000 1999
---- ---- ----
Maturities of held-to-maturity
Investments 14,555 6,654 5,800
Investment in cellular partnership - (9,902) -
Return of investment in cellular
partnership 5,513 18,046 7,578
Investment in long-term
certificate of deposit with
related party - (15,000) -
Redemption of long-term certificate of
deposit with related party 15,000 - -
Proceeds from sale of investment
in cellular partnership - 236,153 -
Other, net 691 (379) 349
-------- -------- -------
Net cash provided by (used in)
investing activities (46,731) 136,071 (52,697)
Cash flows from financing activities:
Principal payments of long-term
debt (2,143) (2,143) (2,143)
Increase in short-term borrowings - 40,000 -
Repayment of short-term borrowings - (40,000) -
Dividends paid (15,342) (15,640) (15,822)
Proceeds from exercise of stock
options 288 - -
Repurchase of common stock (18,532) (13,124) -
Investment in subsidiary by
minority partner - 805 -
Other, net (79) - -
--------- --------- --------
Net cash used in
financing activities (35,808) (30,102) (17,965)
--------- --------- --------
Increase (decrease) in cash and
cash equivalents (115,435) 159,069 (27,954)
Cash and cash equivalents at
beginning of year 169,955 10,886 38,840
--------- --------- --------
Cash and cash equivalents at
end of year $ 54,520 $ 169,955 $ 10,886
========= ========= ========
See accompanying notes.
SUREWEST COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
(dollars in thousands, except per share amounts)
1. Summary of significant accounting policies
Business and basis of accounting
SureWest Communications, formerly Roseville Communications Company, (the
"Company") is a holding company with subsidiaries that provide integrated
communications services. The Company's wholly-owned principal operating
subsidiary is Roseville Telephone Company ("Roseville Telephone"). SureWest
Directories, Roseville Long Distance Company ("Roseville Long Distance"),
SureWest Internet, QuikNet, Inc. ("QuikNet"), SureWest Wireless and
Roseville Alternative Company ("Roseville Alternative") are each
wholly-owned subsidiaries of the Company. SureWest Wireless is the manager
of and owns 100% of West Coast PCS LLC, which does business using the
SureWest Wireless name and provides wireless personal communication
services ("PCS"). The Company expects that the sources of its revenues and
its cost structure may be different in future periods as a result of its
entry into new communications markets.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, 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.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
Regulation and estimated shareable earnings obligations
Certain of the Company's rates are subject to regulation by the Federal
Communications Commission ("F.C.C.") and the California Public Utilities
Commission ("P.U.C."). Pending and future regulatory actions may have a
material impact on the Company's consolidated financial position and
results of operations.
Total 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. With respect to toll calls initiated by customers
of interexchange carriers, interexchange carriers are assessed access
charges based on tariffs filed by Roseville Telephone. Interstate service
rates are subject to regulation by the F.C.C. With respect to interstate
services, Roseville Telephone has filed its own tariff with the F.C.C. for
all elements of access services except carrier common line charges, for
which Roseville Telephone concurs with tariffs filed by the National
Exchange Carrier Association.
1. Summary of significant accounting policies (CONTINUED)
The FCC monitors Roseville Telephone's interstate earnings through the use
of annual cost separation studies prepared by Roseville Telephone which
utilize estimated cost information and projected demand usage. The FCC
establishes rules that carriers must follow in the preparation of the
annual studies. On January 23, 2001, the FCC issued a Memorandum Opinion
and Order to another telephone company in which it clarified how Internet
traffic, which the FCC had prior to that date characterized as largely
interstate in nature, should be treated for rate making purposes.
Additionally, under current FCC rules governing rate making, Roseville
Telephone is required to establish interstate rates based on projected
demand usage for its various services at the beginning of each year and
determine the actual earnings from these rates at the end of the year once
actual volumes and costs are known.
When Roseville Telephone completed its first analysis of 2000 actual
interstate earnings and the true-up analysis of 1999 interstate earnings in
January 2001, those studies reflected the FCC's January 2001 clarification
order on Internet traffic and actual traffic and cost levels. During the
latter half of the 1999 through 2000 monitoring period and the year ended
2001, Internet traffic and DSL service grew substantially, far exceeding
Roseville Telephone's estimates. The combination of the increase in actual
volumes relating to Internet traffic and DSL services over the original
estimates and the FCC's alternative treatment of Internet traffic resulted
in actual earnings exceeding the levels allowed by the FCC. Based on the
preliminary cost studies for the 1999 through 2000 monitoring period and
the year ended December 31, 2001, the Company recognized liabilities
relating to Roseville Telephone's estimated interstate shareable earnings
obligations of $8,100 and $3,200 during the fourth quarter of 2000 and the
year ended December 31, 2001, respectively, through reductions to revenues.
During the year ended December 31, 2001, Roseville Telephone made payments
to certain telecommunications companies aggregating $6,800 relating to a
portion of these obligations. In addition, during the fourth quarter of
2001, the Company changed its estimate relating to a portion of Roseville
Telephone's interstate shareable earnings obligations, principally due to
the closing of the 1997 through 1998 monitoring period. This change in
accounting estimate increased the Company's consolidated 2001 revenues and
net income by $2,150 and $1,290 ($0.08 per share), respectively.
Roseville Telephone bills Pacific Bell, a wholly-owned subsidiary of SBC
Communications Inc., various charges for certain local service and network
access service revenues pursuant to certain agreements described below. Of
the Company's total revenues in 2001, 2000 and 1999, 3%, 11% and 11%,
respectively, were recorded under these agreements. In 1999, Pacific Bell
expressed interest in withdrawing from the designated carrier plan ("DCP")
for Roseville Telephone's toll traffic and to enter into a new, permanent
compensation arrangement for extended area service ("EAS"). The DCP is a
compensation arrangement between Roseville Telephone and Pacific Bell for
certain intralata toll services. Pacific Bell also paid Roseville Telephone
$11,500 per year for EAS pursuant to a Settlement Transition Agreement. In
November 2000, the P.U.C. authorized Pacific Bell to terminate its annual
EAS payments to Roseville Telephone effective November 30, 2000. The P.U.C.
authorized replacement funding on an interim basis using the current
reserve in the California High Cost Fund and denied permanent replacement
funding.
1. Summary of significant accounting policies (CONTINUED)
The P.U.C. also opened an Order Instituting Investigation for the purposes
of determining whether recovery of all, none, or a portion of the $11,500
annual payments should come from Roseville Telephone's ratepayers or other
regulatory recovery mechanisms. These proceedings began in 2001 and will be
conducted through 2003. The P.U.C. has made no indication as to what, if
any, changes will be forthcoming relating to EAS revenues. The results of
these proceedings and their potential effects on Roseville Telephone can
not yet be determined. In addition, since the DCP arrangement with Pacific
Bell expired in December 2001, Roseville Telephone now bills and keeps its
customers toll traffic. The impact of ending the DCP arrangement and moving
to a bill and keep basis on Roseville Telephone's results of operations is
not material.
In 1996, the P.U.C. issued a decision in connection with Roseville
Telephone's general rate proceeding, which authorized Roseville Telephone
to implement a New Regulatory Framework ("NRF") for services furnished
within Roseville Telephone's service area in order to accommodate market
and regulatory movement toward competition and greater pricing flexibility.
Under the NRF, Roseville Telephone is subject to ongoing monitoring and
reporting requirements, including a sharing mechanism whereby Roseville
Telephone may be required to share earnings with customers based on its
earned annual rate-of-return.
In accordance with the requirements of its general rate case order,
Roseville Telephone filed an application for review of its NRF in 1999.
This proceeding considered modifications to the NRF structure, including
potential changes to the current monitoring and reporting requirements, the
earnings sharing mechanism, and related matters. In accordance with NRF,
Roseville Telephone is subject to, among other things, a sharing mechanism
whereby Roseville Telephone may be required to share earnings with
customers through a reduction to revenues if its earned annual rate of
return exceeds that authorized by the P.U.C. In addition, the P.U.C. Office
of Ratepayer Advocates ("ORA") undertook a verification audit of Roseville
Telephone's non-regulated and affiliated transactions pursuant to the
general rate case and other P.U.C. orders. In June 2001, the P.U.C. adopted
its decision in this matter (the "Decision"). The P.U.C. ruled that
Roseville Telephone must change the method used to allocate costs for
services provided by Roseville Telephone to its affiliates, the treatment
of certain directory revenues and the treatment of internal-use software
costs. The Decision did not suspend the sharing mechanism and required
Roseville Telephone to further amend its intrastate shareable earnings
filing for 1998 and 1999 to provide an additional $1,000 in shareable
earnings, which was recorded during the three months ended June 30, 2001 as
a reduction of revenues. Additionally, in accordance with the provisions of
the Decision, the Company recorded additional liabilities and reductions of
revenues of approximately $5,000 relating to estimated shareable earnings
during 2001. In December 2001, the P.U.C. denied the application for
rehearing of the Decision filed by Roseville Telephone.
As of December 31, 2001, the Company's consolidated balance sheet reflected
aggregate liabilities of $16,597 relating to Roseville Telephone's
estimated interstate and intrastate shareable earnings obligations. The
calculations supporting these liabilities are very
1. Summary of significant accounting policies (CONTINUED)
complex and involve a variety of estimates prior to the ultimate settlement
of such obligations. In addition, Roseville Telephone's interstate
shareable earnings obligations lapse over time if Roseville Telephone's
interexchange carrier and other customers do not claim the amounts ascribed
to them. Accordingly, it is reasonably possible that management's estimates
of the Company's liabilities for interstate and intrastate shareable
earnings obligations could change in the near term, and the amounts
involved could be material.
Cash equivalents and short-term investments
The Company invests its excess cash in high-quality debt instruments and
money market mutual funds. 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,
2001 and 2000 have maturities ranging from greater than 90 days to less
than one year.
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, 2001 and 2000, all securities are designated as
held-to-maturity because management has the positive intent and ability to
hold the securities until maturity. Held-to-maturity securities are stated
at cost, adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization and accretion, as well as any interest on
the securities, is included in interest income.
The following is a summary of the Company's cash equivalents and short-term
investments as of December 31, 2001 and 2000 at amortized cost, which
approximates fair market value:
2001 2000
-------- --------
Commercial paper $ 9,450 $104,447
Money market mutual funds 32,545 61,808
Repurchase agreements 4,370 1,635
-------- --------
$ 46,365 $167,890
======== ========
Fair values of financial instruments
As of December 31, 2001 and 2000, the Company's financial instruments
consist of cash, cash equivalents, short-term investments, a long-term
certificate of deposit with a related party and long-term debt. Management
believes the carrying values of cash equivalents, short-term investments
and the long-term certificate of deposit with a related party at December
31, 2001 and 2000, which are at amortized cost, approximated their fair
values at such dates. The aggregate fair value of the Company's long-term
debt (including current maturities) was approximately $44,085 and $44,739
at December 31, 2001 and 2000, respectively. Fair values for cash
equivalents and short-term investments were determined by quoted market
prices. Fair values for the long-term certificate of deposit with a related
party and long-term debt were determined through discounted cash flow
analyses based on the Company's current incremental interest rates for
similar instruments.
1. Summary of significant accounting policies (CONTINUED)
Inventories
Telephone construction inventories consist of materials and supplies, which
are stated at average cost. Nonregulated wireline equipment inventory held
for resale is stated at the lower of average cost or market value. Wireless
PCS handset and accessory inventories are stated at the lower of cost or
replacement value.
Property, plant and equipment
Property, plant and equipment is recorded at cost. The cost of additions
and substantial improvements to property, plant and equipment is
capitalized. The cost of maintenance and repairs is charged to operating
expense when incurred. Retirements and other reductions of regulated
telephone plant and equipment with a cost of approximately $14,696, $2,394
and $3,586 in 2001, 2000 and 1999, respectively, were charged against
accumulated depreciation with no gain or loss recognized in accordance with
the composite group remaining life methodology utilized for telephone plant
assets. When property applicable to non-telephone operations is sold or
retired, the asset and related accumulated depreciation are removed from
the accounts and the associated gain or loss is recognized.
Property, plant and equipment is depreciated using the straight-line method
over their estimated economic lives, which range from 3 to 40 years.
Average annual composite depreciation rates were 7.48%, 7.31%, and 6.74% in
2001, 2000 and 1999, respectively. Prior to Roseville Telephone's
discontinuance of Statement of Financial Accounting Standards ("SFAS") No.
71, "Accounting for the Effects of Certain Types of Regulation" (Note 2) in
December 2000, depreciation expense for regulated operations was computed
on a straight-line basis using rates approved by the P.U.C.
Intangible Assets
Wireless PCS and LMDS licenses are stated at cost. Wireless PCS licenses
are amortized over their estimated useful lives of 20 years using the
straight-line method. Accumulated amortization was $1,195 and $713 at
December 31, 2001 and 2000, respectively.
As described below under "Recent accounting pronouncements" and in Note 4,
the goodwill recognized in connection with the acquisition of QuikNet in
July 2001 is stated at cost and is not being amortized.
Stock-based compensation
The Company accounts for stock-based awards to employees and others in
accordance with Accounting Principles Board Option No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), and related interpretations. The
pro forma disclosures required by SFAS No. 123, "Accounting for Stock-Based
Compensation," are included in Note 10.
1. Summary of significant accounting policies (CONTINUED)
Advertising costs
The costs of advertising are charged to expense as incurred. Advertising
expense was $3,364, $2,387 and $1,351 in 2001, 2000 and 1999, respectively.
Income taxes
The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Per share amounts
Basic per share amounts are computed using the weighted average number of
shares of the Company's common stock outstanding, less the weighted average
number of unvested restricted common shares outstanding during the period.
Diluted per share amounts are determined in the same manner as basic per
share amounts, except the number of weighted average common shares used in
the computations (i) includes unvested restricted common shares outstanding
and (ii) is increased assuming the exercise of dilutive stock options using
the treasury stock method.
The following table presents the calculations of weighted average common
shares used in the computations of basic and diluted per share amounts
presented in the accompanying consolidated statements of income:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Basic:
Weighted average shares of common
stock outstanding 15,338 15,630 15,822
Less weighted average shares of
restricted common stock
12 20 7
-------- -------- --------
Weighted average common shares used
in computing basic per share
amounts
15,326 15,610 15,815
======== ======== ========
Diluted:
Weighted average shares of common
stock outstanding 15,338 15,630 15,822
Plus weighted average shares of
common stock from the assumed
1. Summary of significant accounting policies (CONTINUED)
2001 2000 1999
---- ---- ----
exercise of dilutive stock options 49 - -
-------- -------- --------
Weighted average common shares used
in computing diluted per share
amounts
15,387 15,630 15,822
======== ======== ========
Statements of cash flows information
During 2001, 2000 and 1999, the Company made payments for interest and
income taxes as follows:
2001 2000 1999
---- ---- ----
Interest, net of amounts
capitalized ($1,708 in 2001 -
none in 2000 and 1999) $ 1,285 $ 3,507 $ 2,552
Income taxes $93,466 $17,070 $19,141
Concentrations of credit risk and significant customer
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 adequate allowances for doubtful accounts have
been provided.
Approximately 3%, 11% and 11% of the Company's consolidated operating
revenues in 2001, 2000 and 1999, respectively, were derived from access
charges and other charges to Pacific Bell. No other customers accounted for
more than 10% of consolidated operating revenues in these years.
Recent accounting pronouncements
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. SFAS No. 133
standardizes the accounting for derivatives and hedging activities and
requires that all derivatives be recognized in the statement of financial
position as either assets or liabilities at fair value. Changes in the fair
value of derivatives that do not meet the hedge accounting criteria are
required to be reported in operations. The adoption of SFAS No. 133 had no
effect on the Company's consolidated financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangibles Assets." SFAS No. 141 eliminates the pooling-of-interests
method of accounting for business combinations, except for qualifying
business combinations that were initiated prior to July 1, 2001. The
Company has applied the provision of SFAS No. 141 to its acquisition of
QuikNet, which occurred on July 31, 2001. Consequently, the goodwill
recognized by the Company in connection with its acquisition of QuikNet is
not being amortized, but rather is reviewed annually for impairment, or
more frequently, if impairment indicators arise, based on
1. Summary of significant accounting policies (CONTINUED)
the guidance in SFAS No. 142. The Company will adopt SFAS No. 142 on
January 1, 2002. The Company believes its wireless PCS and LMDS licenses
have indefinite lives because such licenses can be renewed indefinitely at
little cost. Accordingly, the application of the nonamortization provision
of SFAS No. 142 to the Company's wireless PCS licenses (the Company's
wireless LMDS licenses were not in service or being amortized as of
December 31, 2001) is expected to result in an increase in the Company's
consolidated net income of $290 ($0.02 per share) in 2002. Beginning in the
first quarter of 2002, the Company's wireless PCS and LMDS licenses will be
carried at the lower of cost or fair value. The Company will test goodwill
for impairment using the two-step process described in SFAS No. 142. The
first step is to screen for potential impairment, while the second step
measures the amount of the impairment, if any. The Company expects to
perform the first of the required impairment tests of goodwill and
indefinite-lived intangible assets as of January 1, 2002 in the first
quarter of 2002. The Company does not presently believe that any material
impairment charges will result from these transitional impairment tests.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The Company is required to adopt
SFAS No. 143 on January 1, 2003, and it does not believe the adoption of
SFAS No. 143 will have a material effect on its consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and provides a single accounting model for
long-lived assets to be disposed of. The Company is required to adopt SFAS
No. 144 on January 1, 2002, and it does not believe the adoption of SFAS
No. 144 will have a material effect on its consolidated financial
statements.
In April 2001, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus regarding the provision in EITF Issue 00-25, "Vendor Income
Statement Characterization of Consideration from a Vendor to a Retailer,"
dealing with consideration from a vendor to a reseller under cooperative
advertising and other arrangements. This provision of EITF Issue 00-25
states that consideration from a vendor to a resel1er of the vendor's
products or services is presumed to be a reduction of the selling price of
the vendor's products or services, unless the vendor (i) receives an
identifiable benefit in return for the consideration and (ii) can
reasonably estimate the fair value of the benefit received. If the amount
of consideration paid by the vendor exceeds the estimated fair value of the
benefit received, the excess amount is to be recorded by the vendor as a
reduction of revenues. The Company is required to adopt this provision of
EITF Issue 00-25 on January 1, 2002, and it does not believe the adoption
of this new guidance will have a material effect on its consolidated
financial statements.
1. Summary of significant accounting policies (CONTINUED)
Reclassifications
Certain amounts in the 2000 and 1999 consolidated financial statements have
been reclassified to conform with the presentation of the 2001 consolidated
financial statements.
2. Discontinuance of Regulatory Accounting
In December 2000, management determined that, primarily as a result of a
significant increase in competition within Roseville Telephone's service
area, the application of SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," was no longer appropriate for Roseville
Telephone. As a result of the discontinuation of SFAS No. 71 accounting by
Roseville Telephone, the Company recorded an extraordinary non-cash charge
of $10,932, which is net of related tax benefits of $7,631, in December
2000.
The components of this charge are as follows:
Change in plant-related balances $19,573
Elimination of regulatory assets and liabilities, net $(1,010)
Total pre-tax charge $18,563
Total after-tax charge $10,932
The change in plant-related balances primarily represents an increase in
accumulated depreciation of $19,573 for the removal of an embedded
regulatory asset resulting from the use of regulatory lives for
depreciation of property, plant and equipment, which have typically been
longer than the respective estimated economic lives. The following is a
comparison of new depreciation lives to those prescribed by regulators for
selected plant categories:
Average Lives in Years
----------------------
Plant Category Regulator Estimated
-------------- Prescribed Economic
---------- --------
Buildings 38 35
Digital switches 13-16 10
Digital circuits 9 9
DSL equipment 9 3
Fiber optic cable 25 20
Conduit 45 40
Metallic cable 17 15
The discontinuance of SFAS No. 71 accounting by Roseville Telephone also
required the Company to eliminate from its consolidated balance sheet at
December 31, 2000 the effects of any other actions of regulators that had
been recognized by Roseville Telephone as assets and liabilities pursuant
to SFAS No. 71, but would not have been recognized as assets and
liabilities by non-regulated enterprises in general. As of December 31,
2000, prior to the discontinuance of SFAS No. 71 accounting, Roseville
Telephone had recorded a net regulatory liability of $1,010, the majority
of which related to the regulatory treatment of certain pension costs. Also
included in Roseville Telephone's regulatory asset and liability
2. Discontinuance of Regulatory Accounting (CONTINUED)
elimination adjustment are certain insignificant income tax-related
regulatory assets and liabilities. Additionally, concurrent with its
discontinuation of SFAS No. 71 accounting, Roseville Telephone began
accounting for interest on funds borrowed to finance construction projects
as an increase in property, plant and equipment and a reduction of interest
expense. Previously, under the provisions of SFAS No. 71, Roseville
Telephone accounted for the capitalization of both interest and equity
costs allowed by regulators during periods of construction as other income
and an addition to the cost of plant constructed.
The discontinuation of SFAS No. 71 accounting by Roseville Telephone had no
effect on the accounting for any of the Company's other subsidiaries.
3. REVENUE RECOGNITION
The Company recognizes revenue when (i) persuasive evidence of an
arrangement between the Company and the customer exists, (ii) delivery of
the product to the customer has occurred or service has been provided to
the customer, (iii) the price to the customer is fixed and determinable and
(iv) collectibility of the sales price is reasonably assured. Certain
revenues derived principally from local telephone, dedicated network
access, data communications and wireless services are billed in advance and
recognized in subsequent periods when the services are provided. Revenues
derived from other telecommunications services, principally network access,
long distance, billing and collection services, Internet access service,
DSL, wireless PCS and alarm monitoring services, are recognized monthly as
services are provided. Incremental direct costs of telecommunications
service activation are charged to expense in the period in which they are
incurred. Directory publication revenues and costs related to publishing
and distributing directories are recognized using the "circulation period"
method, under which revenues and related costs are recognized ratably over
the expected useful life of the directory, generally one year from the date
of publication. For all other operations, revenue is recognized when
products are delivered or services are rendered to customers.
During the fourth quarter of 2000, the Company changed its method of
accounting, retroactive to January 1, 2000, for up-front fees associated
with telecommunications service activation in accordance with the guidance
contained in SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." Previously, the Company had recognized such up-front
fees as revenues upon activation of service. Under the new accounting
method, the Company now recognizes up-front fees associated with service
activation over the expected duration of the customer relationships, which
presently ranges from one to five years, using the straight-line method.
The cumulative effect of the change on prior years resulted in a charge to
income of $3,273 (net of income taxes of $2,250), which is included in net
income for the year ended December 31, 2000. The effect of the change on
the year ended December 31, 2000 was to decrease income before
extraordinary loss and the cumulative effect of the accounting change by
$508 ($0.03 per share). For the years ended December 31, 2001 and 2000, the
Company recognized $1,708 and $2,380, respectively, of revenues that were
included in the cumulative effect adjustment as of January 1, 2000. The
effect of those revenues was
3. REVENUE RECOGNITION (CONTINUED)
to increase income by $1,025 (net of income taxes of $683) and $1,417 (net
of income taxes of $963) for the years ended December 31, 2001 and 2000,
respectively. The pro forma amounts presented in the accompanying
consolidated statements of income were calculated assuming the accounting
change was made retroactively to prior periods.
4. ACQUISITION OF BUSINESS AND MINORITY INTEREST
On July 31, 2001, the Company acquired 100% of the outstanding common
shares of QuikNet for $2,091 in cash. The results of QuikNet's operations
have been included in the Company's consolidated financial statements in
periods ending subsequent to July 31, 2001. QuikNet is a provider of high
speed Internet services in Northern California.
The acquisition of QuikNet enables the Company to increase its dial-up
customer base and provide custom data services.
The following table summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of acquisition, July 31,
2001, based on the Company's preliminary allocation of the purchase price:
Cash $ 37
Accounts receivable, net of allowance 39
Property, plant and equipment 257
Goodwill 2,171
Deferred tax benefit 121
Prepaid expenses and other current assets 37
--------
Total assets acquired 2,662
Accounts payable and other accrued liabilities 378
Deferred revenue 90
Long-term debt 66
--------
Total liabilities assumed 534
--------
Net assets acquired $ 2,128
========
The $2,171 of goodwill was assigned to the Telecom segment, none of which
is expected to be deductible for tax purposes.
On April 30, 2001, the Company acquired Foresthill Telephone Co.'s ("FHT")
1.8% interest in SureWest Wireless for $2,500 in cash. The acquisition was
accounted for as a purchase. Consequently, the $1,120 difference between
the historical carrying value of this minority interest and its fair value
was recorded by the Company as an increase to the carrying value of its
wireless PCS licenses. As a result of this acquisition, the Company now
owns 100% of SureWest Wireless. A former member of the Company's board of
directors was the president, at the time of the acquisition, and sole
shareholder of FHT.
5. INVESTMENT IN SACRAMENTO-VALLEY LIMITED PARTNERSHIP ("SVLP")
Roseville Telephone and Roseville Alternative, with an aggregate equity
interest of approximately 24%, were limited partners of SVLP, a limited
partnership formed for the operation of a cellular telephone system
principally in California. The Company accounted for its investment in SVLP
using the equity method.
Unaudited summarized balance sheet information for SVLP as of December 31,
2000 was as follows:
Current assets $ 35,515
Noncurrent assets, primarily cellular plant $ 184,409
Current liabilities $ 45,209
Noncurrent liabilities $ 46,432
Summarized income statement information for SVLP for the years ended
December 31, 2000 and 1999 was as follows:
Unaudited
2000 1999
---- ----
Net revenues $ 227,333 $215,105
Costs and expenses, net 183,070 169,407
--------- --------
Net Income $ 44,263 $ 45,698
========= =========
On November 3, 2000, Roseville Telephone and Roseville Alternative sold
their collective 24% interest in SVLP to Verizon Wireless for approximately
$236,150, resulting in a gain of $201,294. As of December 31, 2000, the
Company had a $5,513 receivable from Verizon Wireless that originated prior
to the sale. The Company collected the balance of this receivable during
2001.
The following table reflects certain unaudited pro forma consolidated
financial information for each of the two years in the period ended
December 31, 2000 as if the sale of the Company's investment in SVLP had
occurred prior to January 1, 1999. Such unaudited pro forma consolidated
financial information excludes any income that could have been earned, or
expenses that could have been avoided, based upon management's use of the
proceeds from this transaction.
2000 1999
---- ----
Consolidated statement of operations data:
Total operating revenues $ 143,316 $ 140,801
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 14,512 $ 25,685
Net income (loss) $ (53) $ 25,685
Basic earnings (loss) per share $ - $ 1.62
Diluted earnings (loss) per share $ - $ 1.62
6. CREDIT ARRANGEMENTS
Long-term debt outstanding as of December 31, 2001 and 2000 consisted of
the following:
2001 2000
---- ----
Unsecured Series A Senior Notes, with
interest payable semiannually at a
fixed rate of 6.3%; principal payments are
due in equal annual installments of
approximately $3,636, commencing in
December 2003 andending in December 2013 $ 40,000 $ 40,000
Unsecured term loan with a bank, with
interest payable quarterly at a fixed
rate of 6.22%; principal payments are due
in equal quarterly installments of
approximately $536, through December 2003 4,285 6,428
-------- --------
Total long-term debt 44,285 46,428
Less current portion 2,143 2,143
-------- --------
Total long-term debt, net of current portion $ 42,142 $ 44,285
======== ========
At December 31, 2001, the aggregate maturities of long-term debt were
$2,143 in 2002, $5,779 in 2003 and $3,636 in 2004 through 2013.
Certain of the aforementioned credit arrangements contain various positive
and negative covenants with respect to cash flow coverage, tangible net
worth and leverage ratio. These provisions could restrict the payment of
dividends in certain circumstances; however, the entire amount of retained
earnings at December 31, 2001 and 2000 was unrestricted.
In March 2000, the Company entered into a business loan agreement with a
bank for a $30,000 line of credit with a term of three years. In September
2000, the bank temporarily amended the credit facility increasing the
borrowing capacity from $30,000 to $50,000 through December 30, 2001. As of
December 31, 2001, the amount available under the credit facility was
$30,000 and there were no amounts outstanding under this credit facility at
December 31, 2001 and 2000.
7. INCOME TAXES
Income tax expense consists of the following components:
2001 2000 1999
---- ---- ----
Current expense (benefit):
Federal $ (4,613) $ 87,013 $ 15,267
State 1,101 22,403 4,513
--------- --------- ---------
Total current expense (benefit) (3,512) 109,416 19,780
Deferred expense (benefit):
Federal 10,050 (11,978) 1,526
State 331 (2,282) (31)
--------- --------- ---------
Total deferred expense (benefit) 10,381 (14,260) 1,495
--------- --------- ---------
Total income tax expense $ 6,869 $ 95,156 $ 21,275
========= ========= =========
Income tax expense differs from that computed by using the statutory
federal tax rate (35% in all years presented) due to the following:
2001 2000 1999
---- ---- ----
Computed at statutory rates $ 6,015 $82,304 $18,559
Increase (decrease):
State taxes, net of federal benefit 930 13,079 2,913
Other, net (76) (227) (197)
-------- -------- --------
Income tax expense $ 6,869 $95,156 $21,275
======== ======== ========
Effective federal and state tax rate 40.0% 40.5% 40.1%
======== ======== ========
7. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred income tax assets and
liabilities were as follows at December 31, 2001 and 2000:
Deferred Income Taxes
----------------------
2001 2000
---- ----
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Property, plant and
equipment-primarily due to
depreciation differences $ - $27,474 $ - $21,573
Differences in the timing of
recognition of revenues 10,361 - 10,778 -
State franchise taxes 640 - 6,613 -
Differences in the
recognition of retirement-
related obligations 5,712 - 5,692 -
Other, net 1,905 1,710 1,034 2,557
------- ------- ------- -------
Total 18,618 29,184 24,117 24,130
Less current portion 640 - 6,613 -
------- ------- ------- -------
Total deferred income taxes $17,978 $29,184 $17,504 $24,130
======= ======= ======= =======
Net long-term deferred
income tax liability $11,206 $ 6,626
======= =======
As of December 31,2001, the Company had net operating loss carryforwards
for federal tax purposes of approximately $390 which will expire in the
years 2018 through 2021, if not utilized. The Company also had net
operating loss carryforwards for state income tax purposes of approximately
$218 which will expire in the years 2003 through 2011, if not utilized.
8. 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.
Net periodic pension cost for 2001, 2000 and 1999 included the following
components:
2001 2000 1999
---- ---- ----
Service cost-benefits earned during the
period $ 3,962 $ 3,561 $ 3,750
Interest cost on projected benefit
obligation 6,249 5,722 5,298
Expected return on plan assets (6,485) (6,418) (5,964)
Amortization of transition obligation 271 154 265
-------- -------- --------
Net pension cost $ 3,997 $ 3,019 $ 3,349
======== ======== ========
The following table sets forth the change in benefit obligation, change in
plan assets and funded status as of December 31, 2001 and 2000:
2001 2000
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 83,858 $ 73,949
Service cost 3,962 3,561
Interest cost 6,249 5,722
Plan amendments 415 123
Actuarial losses (gain) 2,770 3,178
Benefits paid (3,559) (2,675)
-------- --------
Benefit obligation at end of year $ 93,695 $ 83,858
======== ========
8. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
2001 2000
---- ----
Change in plan assets:
Fair value of plan assets at beginning of year $ 77,934 $ 76,723
Actual return on plan assets (4,863) 2,799
Company contribution 4,507 1,087
Benefits paid (3,559) (2,675)
-------- --------
Fair value of plan assets at end of year $ 74,019 $ 77,934
======== ========
Funded status:
Funded status of plan at end of year $(19,676) $ (5,924)
Unrecognized actuarial loss 11,507 (2,613)
Unrecognized prior service cost 511 101
Unrecognized net transition obligation 1,107 1,375
-------- --------
Accrued benefit cost $ (6,551) $ (7,061)
======== ========
The discount rates used in determining the projected benefit obligation at
December 31, 2001 and 2000 were 7.0% and 7.25%, respectively. The assumed
rate of increase in future compensation levels used to measure the
projected benefit obligation was 6.0% at both December 31, 2001 and 2000.
The expected long-term rate of return on plan assets used in determining
net pension cost was 8.5% in 2001, 2000 and 1999.
Prior to December 31, 2001, the Company maintained two defined contribution
retirement plans, the Employee Stock Ownership Plan ("ESOP") and the
Retirement Supplement Plan ("RSP") which together provided a retirement and
savings feature for substantially all employees. As of December 31, 2001,
the Company approved an amendment to merge the RSP into the ESOP. In
addition, effective January 2002, the Company approved an amendment to
change the structure of the Company's provision to match employee
contributions to the ESOP from one-half of an employee's contributions, to
a dollar-for-dollar match up to six percent of an employee's salary.
The ESOP will continue to have both a retirement and savings feature. The
retirement feature allows for qualified tax deferred contributions by
employees under Section 401(k) of the Internal Revenue Code (the "Code").
The ESOP provides for voting rights as to the participant's share of the
Company's common stock held by the ESOP and for certain diversification
rights of participant's account balances. Matching contributions made by
the Company under the RSP and ESOP amounted to $1,725, $1,645 and $1,499 in
2001, 2000 and 1999, respectively. At December 31, 2001, 11% of the
Company's outstanding shares of common stock were held by the ESOP.
8. PENSION AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
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.
9. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases certain facilities and equipment used in its operations
under arrangements accounted for as operating leases and reflects lease
payments as rental expense for the periods to which they relate. Total rent
expense was $2,999, $1,957 and $602 in 2001, 2000 and 1999, respectively.
As of December 31, 2001 the Company had various non-cancellable operating
leases with terms greater than one year. Future minimum lease payments for
all non cancellable operating leases at December 31, 2001 are as follows:
2002 $ 2,533
2003 2,446
2004 1,978
2005 1,195
2006 619
Thereafter 3,089
------
Total $11,860
======
Other commitments
As of December 31, 2001, binding commitments for future capital
expenditures approximate $6,400.
In 2000, the Company entered into a 3-year non-exclusive agreement with
Global Crossing Ltd. ("Global Crossing"), a long distance service provider,
for the right to provide long distance service to the Company's customers
at fixed prices during the term of the agreement. As of December 31, 2001,
the Company had a minimum aggregate long distance service usage commitment
of approximately $1,600. The service usage fee paid for the years ended
December 31, 2001 and 2000, were consistent with the minimum commitment
obligation at December 31, 2001. On January 28, 2002, Global Crossing filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company is
presently unable to determine the impact, if any, that Global Crossing's
bankruptcy filing will have on the Company's long distance operations.
However, the Company believes that it could procure long distance network
transport services from other telecommunications providers. In the event
the Company must procure network transport services from another
telecommunications provider, rates for such service may be higher than
those offered by Global Crossings. However, the Company believes that the
impact on its results of operations resulting from any potential change in
transport rates will not be material.
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation, regulatory proceedings and other contingencies
The Company is subject to certain legal and regulatory proceedings,
Internal Revenue Service examinations, and other claims arising in the
ordinary course of its business. In the opinion of management, the ultimate
outcome of these matters will not materially affect the consolidated
financial position or results of operations of the Company.
10. EQUITY INCENTIVE PLANS
The Company has adopted two equity incentive plans (the "Plans") for
certain employees, outside directors, and consultants of the Company, which
were approved by the shareholders. The Company authorized for future
issuance under the Plans one million shares of authorized, but unissued,
common stock. The Plans permit issuance by the Company of awards in the
form of restricted shares, stock units, performance shares, stock options
and stock appreciation rights. The exercise price per share of the
Company's common stock purchasable under any stock option shall not be less
the 100% of the fair market value of a share of the Company's common stock
on the date of the grant, and the exercise price under a non-qualified
stock option shall not be less than 85% of the fair market value of the
Company's common stock on the date of the grant.
The following table summarizes stock option activity for the years ended
December 31, 2001 and 2000:
Shares of Option Price
Common Stock Per Share
_____________ ___________
Balance as of December 31, 1999 - -
Granted 631,200 $39.00 - $42.00
Exercised - -
Cancelled (18,700) $39.00 - $42.00
Balance as of December 31, 2000 612,500 $39.00 - $42.00
Granted 169,800 $39.00 - $50.50
Exercised (6,678) $39.00 - $42.00
Cancelled (35,735) $39.00 - $50.50
Balance as of December 31, 2001 739,887 $39.00 - $50.50
10. EQUITY INCENTIVE PLANS (CONTINUED)
The following is a summary of status of the stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
----------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Of Shares Life Price Of Shares Price
----------------------------------------------------------------- --------------------------------
----------------------------------------------------------------- --------------------------------
$39.00 - $39.75 464,437 8.58 $39.23 102,532 $39.22
$40.00 - $42.00 154,950 9.00 $40.30 9,500 $40.32
$49.25 - $50.50 120,500 9.95 $50.44 - $ -
$39.00 - $50.50 739,887 8.89 $41.28 112,032 $39.31
During the year ended December 31, 2001, the Company recorded deferred
stock-based compensation of approximately $363 as a result of issuing 8,450
shares of the Company's restricted common stock to members of the Company's
Board of Directors and Chief Executive Officer. This amount was determined
based on the fair market value of such common shares at the date of grant
and is being amortized to operations over the vesting periods (which range
from 2 to 5 years) using a graded vesting method. Amortization of deferred
stock-based compensation for the year ended December 31, 2001, was
approximately $60.
Pro forma Stock-Based Compensation Information
Pro forma information regarding the Company's consolidated net income and
earnings per share is determined as if the Company had accounted for its
employee stock options using the fair value method. Under this method, the
fair value of each option granted is estimated on the date of grant using
the Black-Scholes valuation model.
The Company uses the intrinsic value method in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under the intrinsic
value method, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock of the date of
grant, no compensation expense is recognized.
The aforementioned option valuation models were developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because the Company's employee stock options
have characteristics significantly different from those of traded options
and because changes in the subjective input assumptions can materially
affect the fair value of the estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of the Company's employee stock options.
10. EQUITY INCENTIVE PLANS (CONTINUED)
For the years ended December 31, 2001 and 2000, the fair value of the
Company's stock-based awards to employees was estimated using the following
weighted average assumptions:
2001 2000
Expected life of options in years 5.0 5.2
Volatility 26.7% 20.0%
Risk-free interest rate 4.24% 6.05%
Expected dividend yield 1.76% 2.5%
The weighted average fair value of employee stock options granted during
the years ended December 31, 2001 and 2000 was $12.25 and $8.84,
respectively. For pro forma purposes, the estimated fair value of the
Company's stock based awards to employees is amortized using the
straight-line method, which would reduce net income by approximately $849
and $364 for the years ended December 31, 2001 and 2000, respectively. The
result of applying the fair value method to the Company's employee stock
option grants would have decreased basic earnings per share by $0.06 per
share and $0.02 per share for the years ended December 31, 2001, and 2000,
respectively. The result of applying the fair value method to the Company's
employee stock option grants would have decreased diluted earnings per
share by $0.06 per share and $0.02 per share for the years ended December
31, 2001, and 2000, respectively.
11. STOCK REPURCHASE
In February 2000, the Board of Directors authorized the repurchase of up to
one million shares of the Company's common stock. Additionally, the Company
implemented an oddlot repurchase program during 2001. The shares are
purchased from time to time in the open market or through privately
negotiated transactions subject to overall financial and market conditions.
Through December 31, 2001, approximately 742 shares of common stock have
been repurchased through both programs. As a result, the Company had
authorization from the Board of Directors to repurchase an additional 275
outstanding shares.
12. SHAREHOLDER RIGHTS PLAN AND CHANGE IN CONTROL AGREEMENT
The Company has a Shareholder Rights Plan wherein shareholders of the
Company receive rights to purchase the Company's common stock, or an
acquirer's common stock, at a discount in certain events involving an
acquisition of 20% or more of the Company's common stock by any person or
group in a transaction not approved by the Company's Board of Directors.
The rights expire in March 2008.
The Company has change in control agreements with approximately 20
employees, which provide upon (1) a change in control of the Company and
(2) a constructive termination of employment, the payment of a severance
benefit approximately equal to twice the employee's annual compensation.
13. BUSINESS SEGMENTS
The Company has two reportable business segments: Telecom and PCS. The
Telecom segment primarily provides local, network access and long distance
services, directory advertising services, Internet services and the sale of
non-regulated products and services principally to customers residing in
Roseville Telephone's service area. The PCS segment provides personal
communications services and the sale of related communications equipment.
The Company evaluates the performance of these business segments based on
income (loss) from operations.
These segments are strategic business units that offer different products
and services. The accounting policies of these segments are the same as
those described in Notes 1-3. The Company accounts for intersegment sales
and transfers at prevailing market rates. Intersegment sales and transfers
between the Telecom and PCS segments are not significant. The Company's
business segment information is as follows:
2001 Telecom PCS Consolidated
Total operating revenues $150,664 $ 16,301 $166,695
Depreciation and amortization 28,007 11,834 39,841
Interest income 4,803 - 4,803
Interest expense, net of
capitalized interest 446 (1,760) (1,314)
Income tax expense (benefit) 19,324 (12,455) 6,869
Net income (loss) 28,441 (18,124) 10,317
Assets 320,836 91,507 412,343
Capital expenditures 40,711 28,845 69,556
13. BUSINESS SEGMENTS (CONTINUED)
2000 Telecom PCS Consolidated
Total operating revenues $138,394 $ 4,922 $143,316
Depreciation and amortization 22,747 $ 6,144 28,891
Income from unconsolidated
businesses 10,089 - 10,089
Interest income 2,814 - 2,814
Interest expense (1,629) (2,594) (4,223)
Income tax expense (benefit) 103,282 (8,126) 95,156
Extraordinary loss, net of
tax (10,932) - (10,932)
Cumulative effect of change
in accounting principle,
net of tax (3,273) - (3,273)
Net income (loss) 137,618 (11,825) 125,793
Assets 452,814 76,128 528,942
Capital expenditures 45,973 41,261 87,234
1999 Telecom PCS Consolidated
Total operating revenues $140,191 $ 610 140,801
Depreciation and amortization 20,765 1,613 22,378
Income from unconsolidated
businesses 10,129 - 10,129
Interest income 1,725 - 1,725
Interest expense (2,660) (805) (3,465)
Income tax expense (benefit) 23,791 (2,516) 21,275
Net income (loss) 37,927 (6,177) 31,750
Assets 294,782 38,405 333,187
Investments in unconsolidated
businesses 38,426 - 38,426
Capital expenditures 34,762 23,640 58,402
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Operating revenues $42,434 $38,621 $40,674 $45,236
Income from
operations 6,056 499 1,619 4,589
Net income $ 4,986 $ 1,475 $ 1,447 $ 2,409
Basic earnings per
share $ 0.32 $ 0.10 $ 0.09 $ 0.16
Diluted earnings per
share $ 0.32 $ 0.10 $ 0.09 $ 0.16
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
2000 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Operating revenues $36,837 $37,535 $38,987 $29,957
Income (loss) from operations 9,304 9,437 9,717 (4,731)
Income before extraordinary loss
and cumulative effect of accounting
change 7,610 7,313 7,456 117,619
Extraordinary loss, net of tax - - - (10,932)
Cumulative effect of accounting
change, net of tax (3,273) - - -
Net income $ 4,337 $ 7,313 $ 7,456 $106,687
Basic earnings per share:
Income before extraordinary loss
and cumulative effect of
accounting
change, net of tax $ 0.48 $ 0.47 $ 0.48 $ 7.54
Extraordinary loss, net of tax - - - (0.70)
Cumulative effect of accounting
change, net of tax (0.21) - - -
Net income $ 0.27 $ 0.47 $ 0.48 $ 6.84
Diluted earnings per share:
Income before extraordinary loss
and cumulative effect of
accounting
change, net of tax $ 0.49 $ 0.47 $ 0.48 $ 7.52
Extraordinary loss, net of tax - - - (0.70)
Cumulative effect of accounting
change, net of tax (0.21) - - -
Net income $ 0.28 $ 0.47 $ 0.48 $ 6.82
During the fourth quarter of 2001, the Company changed its estimate
relating to a portion of Roseville Telephone's interstate shareable
earnings obligations, principally due to the closing of the 1997 through
1998 monitoring period. This change in accounting estimate increased the
Company's consolidated 2001 revenues and net income by $2,150 and $1,290
($0.08 per share), respectively.
The Company adopted SAB 101, "Revenue Recognition in Financial Statements,"
effective January 1, 2000, which requires non-recurring revenues associated
with service and activation charges to be deferred. The cumulative effect
of this change in accounting principle was $3,273, net of tax, or ($0.21)
per share in 2000.
For the three-month periods ended March 31, June 30, September 30 and
December 31, 2001 and 2000, the Company recognized the following revenues
that were included in the cumulative effect adjustment as of January 1,
2000:
14.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
Three Months Ended:
March 31, 2001 $513
June 30, 2001 $462
September 30, 2001 $408
December 31, 2001 $325
March 31, 2000 $652
June 30, 2000 $620
September 30, 2000 $578
December 31, 2000 $530
The net effect of these revenues in 2001 was to increase net income in the
three-month periods ended March 31, June 30, September 30 and December 31
by $308, $277, $245 and $195, respectively.
The net effect of these revenues in 2000 was to increase net income in the
three-month periods ended March 31, June 30, September 30 and December 31
by $388, $369, $344 and $316, respectively.
15. OTHER RELATED PARTY TRANSACTIONS
An officer of the Company is also a member of the Board of Directors of a
local banking institution. As of December 31, 2000 the Company had a
$15,000 certificate of deposit with a term of greater than one year with
the aforementioned banking institution. In the fourth quarter of 2001, the
Company redeemed this certificate of deposit for an amount equal to its
historical carrying value, including accrued interest.
A member of the Company's Board of Directors is also an executive officer
and director of a certain entity from which the Company purchased
approximately $545 and $1,000 in telecommunications equipment during 2001
and 2000, respectively.
16. SUBSEQUENT EVENT
On December 6, 2001, the Company entered into an agreement with a third
party to sell substantially all of the assets (which consisted principally
of customer contracts and equipment, which had no net book value as of
December 31, 2001) of the Company's alarm monitoring division, which is an
element of the Telecom segment. The total sales price for the Company's
alarm monitoring assets was approximately $5,300, subject to certain future
adjustments. As of December 31, 2001, the Company had received a deposit in
the amount of $500 from the purchaser of the Company's alarm monitoring
assets. The sale of the Company's alarm monitoring assets was consummated
on January 25, 2002.
Total operating revenues attributable to the Company's alarm monitoring
division during 2001, 2000 and 1999 were $2,530, $2,247 and $2,046,
respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant
For information regarding the executive officers of the Company, see
"Executive Officers of the Registrant" at the end of Part I of this report.
Other information required by this item is incorporated herein by reference
from the proxy statement for the annual meeting of the Company's
shareholders to be held on May 17, 2002.
Item 11. Executive Compensation.
Incorporated herein by reference from the proxy statement for the annual
meeting of the Company's shareholders to be held on May 17, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated herein by reference from the proxy statement for the annual
meeting of the Company's shareholders to be held on May 17, 2002.
Item 13. Certain Relationships and Related Transactions.
Incorporated herein by reference from the proxy statement for the annual
meeting of the Company's shareholders to be held on May 17, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1 and 2. Financial Statements
None
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 2001.
(c) Separate financial statement of subsidiaries not consolidated and
fifty percent or less owned persons.
The audited financial statements of a 50% or less owned unconsolidated
company are submitted inasmuch as the report of registrant's
independent auditors indicates reliance on an audit of the 50% or less
owned unconsolidated company's consolidated financial statements for
the year ended December 31, 1999 that was performed by other auditors.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(In thousands)
ASSETS
CURRENT ASSETS:
Cash $ 9
Accounts receivable, net of allowance for doubtful
accounts of $1,080 25,668
Due from general partner 9,288
Other current assets 550
----------
Total current assets 35,515
PROPERTY, PLANT AND EQUIPMENT, Net 173,934
OTHER ASSETS, net of accumulated amortization of $3,050 10,475
----------
TOTAL ASSETS $219,924
==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 16,806
Deferred revenue 5,794
Distributions payable 21,161
Other current liabilities 1,448
-----------
Total current liabilities 45,209
-----------
DEFERRED REVENUE 46,355
-----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 77
-----------
PARTNERS' CAPITAL:
General partner 127,030
Limited partners 1,253
-----------
Total partners' capital 128,283
-----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 219,924
===========
See notes to consolidated financial statements.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
(In thousands)
OPERATING REVENUE $ 227,333
-----------
OPERATING EXPENSES:
Cost of revenues 65,089
Selling, general and administrative 93,853
Depreciation and amortization 25,296
-----------
Total operating expenses 184,238
-----------
OPERATING INCOME 43,095
INTEREST INCOME ON AMOUNTS DUE
FROM GENERAL PARTNER 1,202
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY (34)
-----------
NET INCOME $ 44,263
===========
ALLOCATION OF NET INCOME:
General partner $ 23,935
Limited partners 20,328
-----------
TOTAL $ 44,263
===========
See notes to consolidated financial statements
SACRAMENTO-VALLEY LIMITED PARTNERSHIP
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 2000
(in thousands)
Partners' Partners'
Capital Capital
December 31, Net Sale of December 31,
1999 Contributions Distributions Income Interest 2000
General Partners:
AirTouch Cellular $ 88,896 $ 1,746 $ (49,216) $ 23,935 $ 61,669 $ 127,030
Limited Partners:
Centennial Cellular
Telephone Company
of Sacramento
Valley 38,760 3,901 (23,034) 9,685 (29,312)
Roseville Telephone
Company 38,760 3,901 (23,160) 9,537 (29,038)
Evans Cellular, Inc. 3,634 365 (1,354) 674 (3,319)
GTE Wireless Inc. 1,618 162 (959) 432 1,253
-
----------- ---------- ----------- -------- ---------- ----------
Total $ 171,668 $ 10,075 $ (97,723) 44,263 $ - $ 128,283
=========== ========= =========== ======== ========= ==========
See notes to consolidated financial statements
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,263
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 25,296
Minority interest in net income of consolidated subsidiary 34
Changes in assets and liabilities:
Accounts receivable, net (1,144)
Other current assets 2,592
Other assets 200
Accounts payable and accrued expenses (11,366)
Deferred revenue (3,157)
Other current liabilities 216
--------
Cash flows provided by operating activities 56,934
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (48,233)
Change in due from general partner 7,269
--------
Cash flows used in investing activities (40,964)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from partners 10,075
Distributions to partners (76,562)
Distributions to minority interest in consolidated subsidiary (158)
Proceeds from sublease of towers 50,667
========
Cash flows used in financing activities (15,978)
--------
NET CHANGE IN CASH (8)
CASH, Beginning of year 17
---------
CASH, End of year $ 9
=========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Distributions not paid as of December 31, 2000 $21,161
=========
See notes to consolidated financial statements
SACRAMENTO-VALLEY LIMITED PARTNERSHIP
AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000
(In thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Sacramento-Valley Limited Partnership (the "Partnership")
was formed on April 2, 1984. The principal activity of the Partnership is
providing cellular service in the Northern California area. The
Partnership's ownership percentages at December 31, 2000 are as follows:
AirTouch Cellular, wholly-owned by a subsidiary of Verizon Wireless -
General Partner 99.022%
GTE Wireless, Inc. - Limited Partner 0.978%
On April 3, 2000, Vodafone Group Plc ("Vodaphone") (formerly the parent of
the General Partner) and Verizon Communications combined their U.S.
Cellular, PCS, and paging business ("Vodaphone Acquisition"). This venture,
Cellco ("Verizon Wireless") offers nationwide wireless services. Verizon
Communications and Vodafone own 55% and 45%, respectively, of Verizon
Wireless.
Principles of Consolidation
The consolidated financial statements include the accounts of the Redding
MSA Limited Partnership ("RMLP") and the Partnership. The Partnership owns
a 97.1% interest in RMLP. All significant intercompany transactions have
been eliminated.
Trade Receivables
The Partnership generally does not require collateral. Receivables
generally are due within 30 days.
Revenue Recognition
The Partnership earns revenue by providing access to the cellular network
(access revenue), for usage of the cellular network (airtime/usage
revenue), which includes roaming and cellular long distance revenue. Access
revenue is billed one month in advance and is recognized when earned; the
unearned portion is included in accrued liabilities. Airtime/usage revenue,
roaming revenue and long distance revenue are recognized when the service
is rendered and included in accounts receivable. Equipment sales revenue is
recognized when the equipment is delivered to and accepted by the customer.
The Partnership's revenue recognition policies are in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements."
Depreciation
Depreciation of property and equipment is provided on the straight-line
method over estimated useful lives as follows: Years
Buildings and leasehold improvements 5 - 18
Cellular plant and equipment 5 - 10
Other equipment and furniture 2 - 5
Amortization
Other assets includes FCC license cost, which are amortized using the
straight line method over a term not to exceed 40 years.
Long-Lived Assets
Partnership follows the provisions of the Financial Accounting Standards
Board ("FASB") Statement No. 121, Accounting for the Impairment of
"Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present. As December 31, 2000,
management believes that there was not any impairment of the Partnership's
long-lived assets.
Income Taxes
No provision for income taxes has been made in the financial statements of
the Partnership. The Partnership has no tax liability since taxable income
or losses are allocated to the partners.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires 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.
New Accounting Pronouncements
In June 1998, the FASB issued a Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
requiring all derivative instruments be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Partnership is
not required to adopt SFAS No. 133 until October 1, 2000. As of September
30, 2000, management believes that adoption of SFAS No. 133 will not have a
material effect on its financial statements.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
December 31, 2000
Land $ 37
Buildings and leasehold improvements 39,993
Cellular plant and equipment 246,361
Other equipment and furniture 21,392
Construction in progress 23,861
Total 331,644
Less accumulated depreciation 157,710
Property, plant and equipment, net $173,934
=========
Related depreciation expense was $24,975.
In August 1999, Vodafone signed a definitive agreement with American Tower
Corporation ("ATC") for the sublease of all unused space on approximately
2,100 of its communication towers in exchange for $800,000 plus a five-year
warrant to purchase 3 million ATC shares at $22 per share. The transaction
is being closed in phases starting in the first quarter of 2000. In
connection with the Vodafone Acquisition, the agreement was assumed by
Verizon Wireless. The terms of the agreement differ for lease communication
towers versus those owned and ranges from 20 to 99 years. Verizon will be
required to pay ATC a monthly maintenance fee of approximately $1.5 per
tower for the existing physical space used by their cellular equipment. Up
to approximately one hundred fifty (150) towers owned and operated by the
Partnership and subsidiary are included in the above transaction. As of
December 31, 2000, 133 towers owned and operated by the Partnership have
been subleased. The Partnership has received approximately $50,667 which
has been recorded as deferred revenue and is being amortized on the
straight-line method over the term of the agreement.
2. COMMITMENTS
Lease Commitments
The Partnership leases various facilities and equipment under
noncancellable lease arrangements. Most leases contain renewal options for
varying periods. Related rent expense under all operating leases was
$5,413.
Future minimum lease payments required under noncancellable operating
leases with an initial term of one year or more at December 31, 2000 were:
2001 $6,157
2002 5,780
2003 5,514
2004 5,129
2005 4,854
Thereafter 29,278
Total minimum lease payments $ 56,712
========
3. DUE FROM GENERAL PARTNER
Under the terms of a management agreement, cash receipts and disbursements
are processed on behalf of the Partnership through the General Partner's
cash accounts. As a result, the Partnership maintains a due to/from account
with the General Partner which reflects the net cash activity related to
the Partnership's operations. The Partnership pays/earns interest on
amounts due to/from the General Partner at a rate equal to the General
Partner's average borrowing rate (6.5% at December 31, 2000). There were no
advances from the General Partner outstanding at the year ended December
31, 2000; accordingly, there was no related interest expense. Interest
income from the General Partner was $1,202 for the year ended December 31,
2000.
5. RELATED PARTY TRANSACTIONS
Certain services are performed on behalf of the Partnership by the General
Partner under the management agreement. These services include legal and
accounting, engineering and marketing, general and administrative, and
property and equipment acquisition. The Partnership is charged for these
services at the General Partner's cost. The financial statements include
expenses of $18,720, pursuant to the management agreement.
6. VALUATION AND QUALIFYING ACCOUNT
Balance Additions Write-Offs Balance
Beginning Charged to Net of at End
of the Year Operations Recoveries of the Year
Accounts receivable allowance $ 2,159 $ 2,549 $(3,628) $ 1,080
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
Consolidated Financial Statements for
the Year Ended December 31, 1999 and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Partners of Sacramento-Valley Limited Partnership and subsidiary:
We have audited the accompanying consolidated balance sheet of Sacramento-Valley
Limited Partnership (the "Partnership") and subsidiary as of December 31, 1999,
and the related consolidated statements of income, changes in partners' capital,
and cash flows and the financial statement schedule I - valuation and qualifying
account for the year then ended. These financial statements and the financial
statement schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sacramento-Valley Limited
Partnership and subsidiary as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
March 8, 2000
SACRAMENTO-VALLEY LIMITED PARTNERSHIP
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(In thousands)
ASSETS
CURRENT ASSETS:
Cash $ 17
Accounts receivable, net of allowance for doubtful
accounts of $2,159 24,524
Due from general partner 12,383
Inventories 4,174
Other current assets 3,142
----------
Total current assets 44,240
PROPERTY, PLANT AND EQUIPMENT, Net 150,774
FCC LICENSES, NET 9,886
OTHER NONCURRRENT ASSETS 1,012
----------
TOTAL ASSETS $205,912
==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable, trade $ 21,364
Deferred revenue 4,639
Accrued commissions 2,356
Accrued employee benefits 2,550
Accrued taxes 1,902
Other current liabilities 1,232
-----------
Total current liabilities 34,043
-----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 201
-----------
PARTNERS' CAPITAL:
General partner 88,896
Limited partners 82,772
-----------
Total partners' capital 171,668
-----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 205,912
===========
See notes to consolidated financial statements.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(In thousands)
OPERATING REVENUE $ 215,105
-----------
OPERATING EXPENSES:
Cost of revenues 56,684
Selling, general and administrative:
General partner and affiliates 15,681
Other 73,769
Depreciation and amortization 25,900
-----------
Total operating expenses 172,034
-----------
OPERATING INCOME 43,071
OTHER INCOME 2,136
INTEREST INCOME ON AMOUNTS DUE
FROM GENERAL PARTNER 600
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED SUBSIDIARY (109)
-----------
NET INCOME $ 45,698
===========
ALLOCATION OF NET INCOME:
General partner $ 22,793
Limited partners 22,905
-----------
TOTAL $ 45,698
===========
See notes to consolidated financial statements
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1999
(in thousands)
General
Partner Limited Partners
-------- -----------------------------------------------
Centennial
Cellular
Telephone
Company of Roseville Evans GTE
AirTouch Sacramento Telephone Cellular Wireless
Cellular Valley Company Inc. Inc. Total
-------- --------- ---------- -------- --------- ------
Partners' capital,
January 1, 1999 $75,663 $35,611 $35,611 $3,338 $1,487 $151,710
Contributions 6,542 3,079 3,079 288 128 13,116
Distributions (16,102) (7,577) (7,577) (710) (316) (32,282)
Contributions
due from limited
partners - (3,079) (3,079) (288) (128) (6,574)
Net Income 22,793 10,726 10,726 1,006 447 45,698
-------- -------- ------- ------ ------ --------
Partner's capital,
December 31, 1999 $88,896 $38,760 $38,760 $3,634 $1,618 $171,668
======= ======= ======= ====== ====== ========
See notes to consolidated financial statements
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,698
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 25,900
Minority interest in net income of
consolidated subsidiary 109
Loss of sale on equipment 171
Changes in assets and liabilities:
Accounts receivable, net (2,866)
Inventories 5,187
Other current assets (1,995)
Other noncurrent assets 79
Accounts payable, trade (4,413)
Deferred revenue 1,332
Accrued commissions (753)
Accrued employee benefits 562
Accrued taxes (387)
Other current liabilities 73
--------
Cash flows provided by operating activities 68,697
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (31,430)
Proceeds from sale of equipment 103
Change in due from general partner (5,021)
--------
Cash flows used in investing activities (36,348)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (32,282)
Distributions to minority interest
in consolidated subsidiary (86)
--------
Cash flows used in financing activities (32,368)
--------
NET CHANGE IN CASH (19)
CASH, Beginning of year 36
--------
CASH, End of year $ 17
========
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
(In thousands)
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: -
Acquisition of property, plant and equipment included
in accounts payable, trade at year-end $ 5,495
========
Contribution of property, plant and equipment by $ 6,542
the General Partner ========
See notes to consolidated financial statements
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 (In thousands)
1. DESCRIPTION TO OF PARTNERSHIP AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Sacramento-Valley Limited Partnership (the "Partnership") was formed on
April 2, 1984 under the laws of the State of California and provides
wireless telecommunications services in the Northern California area. The
Partnership's ownership interests are as follows:
General Partner:
AirTouch Cellular, wholly-owned by a subsidiary of
Vodafone AirTouch Plc. ("Vodafone AirTouch") 49.878%
Limited Partners:
Centennial Cellular Telephone Company of Sacramento Valley 23.472%
Roseville Telephone Company. 23.472%
Evans Cellular, Inc. 2.200%
GTE Wireless, Inc. 0.978%
Profits and losses are allocated based on respective partnership interests.
Capital calls and distributions are made quarterly, at the discretion of
the General Partner.
Financial Statement Presentation
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Conformity with GAAP requires the
use of estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates
Principles of Consolidation
The consolidated financial statements include the accounts of the Redding
MSA Limited Partnership ("RMLP") and the Partnership. The Partnership owns
a 97.1% interest in RMLP. All significant intercompany transactions have
been eliminated.
Inventory
Inventory consists of wireless communications equipment (primarily
handsets). Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out or average method. Any losses on
the sales of handsets to customers are recognized at the time of sale.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful life of
the asset. Land is not depreciated. Gains and losses on disposals are
included in income at amounts equal to the difference between the net book
value of the disposed assets and the proceeds received upon disposal.
Expenditures for replacements and improvements are capitalized, while
expenditures for maintenance and repairs are charged against earnings as
incurred. Assets under construction are not depreciated until placed into
service.
FCC Licenses
The Federal Communications Commission ("FCC") issues cellular licenses that
enable U.S. cellular carriers to provide service in specific Cellular
Geographic Service Areas. A cellular license is issued conditionally for
ten years. Historically, the FCC has routinely granted license renewals
providing the licensees have complied with applicable rules, policies, and
the Communications Act of 1934, as amended. The Partnership records FCC
licenses at cost and believes it has complied and intends to continue to
comply with applicable standards. The Partnership amortizes the FCC
licenses using the straight-line method over 40 years. Accumulated
amortization of FCC licenses totaled $2,827 at December 31, 1999. Related
amortization expense was $318 in 1999.
Valuation of Long-lived Assets
The Partnership periodically reviews the carrying value of long-lived
assets and certain identifiable intangible assets, including FCC licenses,
for impairment when events or changes in circumstances indicate that the
book value of an asset may not be recoverable. An impairment loss is
recognized whenever the review demonstrates that the book value of a
long-lived asset is not recoverable.
Revenue Recognition
Operating revenues primarily consist of charges to customers for monthly
access charges, cellular airtime usage, prepaid airtime usage, long
distance and roamer charges. Revenues are recognized as services are
provided.
Unbilled revenues, resulting from cellular service provided from the
billing cycle date to the end of each period and from other cellular
carriers' customers using the Partnership's cellular systems for the last
half of each period, are estimated and recorded as receivables. Unearned
monthly access charges relating to periods after period end are deferred.
Concentration of Credit Risk
Due to the diversity and large number of customers within the Partnership's
service area, concentrations of credit risk with respect to trade
receivables are limited. The Partnership performs ongoing credit
evaluations of its customers and in certain circumstances obtains
refundable deposits. The Partnership maintains reserves for potential
credit losses and, historically, such losses have been within management's
expectations.
Income Taxes
No provisions have been made for federal or state income taxes since such
taxes, if any, are the responsibility of the individual partners.
Advertising Costs
The Partnership expenses advertising costs as incurred. Advertising expense
was $10,269 in 1999.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
Depreciable December 31,
Lives (Years) 1999
Land $ 37
Buildings and leasehold improvements 5-18 36,205
Cellular plant and equipment 5-10 204,103
Other equipment and furniture 2-5 20,417
Construction in progress 23,160
Total 283,922
Less accumulated depreciation 133,148
Property, plant and equipment, net $105,774
Related depreciation expense was $25,582 in 1999.
3. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Partnership leases various facilities and equipment under noncancelable
lease arrangements. Most leases contain renewal options for varying
periods. Related rent expense under all operating leases was $4,824 in
1999.
Future minimum lease payments required under noncancelable operating leases
with an initial term of one year or more at December 31, 1999 were:
2000 $5,460
2001 4,031
2002 4,640
2003 4,263
2004 4,147
Thereafter 35,987
Total minimum lease payments $ 58,528
========
CONTINGENCIES
In December of 1998, the Partnership was named as a defendant in a class
action lawsuit, Parrish versus AirTouch Cellular. The lawsuit alleges that
the defendant conspired to fix prices of cellular services across
California, and seeks damages up to $100,000. The Partnership intends to
defend itself vigorously. While the outcome is uncertain, management does
not believe that this proceeding will have a material adverse effect on the
Partnership's financial position or results of operations.
The Partnership is subject to state regulation of the "terms and
conditions" of cellular service other than rates and market entry and is
party to various legal proceedings in the ordinary course of business.
Although the ultimate resolution of these proceedings cannot be
ascertained, management does not believe they will have a materially
adverse effect on the financial position or results of operations of the
Partnership.
4. RELATED PARTY TRANSACTIONS
The General Partner is reimbursed for all Partnership expenditures made as
General Partner. As provided in the Partnership agreement, certain system
operations and selling, general and administrative expenses incurred by the
General Partner on behalf of the Partnership are passed through to the
Partnership.
The Partnership participates in a centralized cash management arrangement
with the General Partner. The General Partner pays or charges the
Partnership monthly interest, computed using the General Partner's average
borrowing rate (5.09% at December 31, 1999) on the amounts due to or from
the Partnership.
In December 1999, the General Partner contributed network equipment with an
appraised fair market value of $6,542 to the Partnership. As a result, the
General Partner issued a capital call which required the Limited Partners
to contribute cash of $6,574, to maintain their respective ownership
percentages. As of December 31, 1999, the contributions had not been
received. These amounts are due from the Limited Partners on March 13,
2000, and were recorded as contributions in the period, with the related
receivable amounts being shown as a reduction in Partners' Capital.
5. MCI COMMUNICATIONS SETTLEMENT
In December 1999, the Partnership settled all outstanding litigation with
MCI Communications pertaining to a contract breach regarding retail kiosks.
As a result of this settlement, the Partnership was awarded $2,136, which
was recorded as other income in the financial statements. The cash payment
was received in January 2000
6. MAJOR SUPPLIER
The Partnership purchases substantially all of its network equipment from
one supplier.
7. SUBSEQUENT EVENTS
In January 2000, Vodafone AirTouch entered in to a tower sub-lease
agreement ("the Agreement") with American Tower Corporation ("American
Tower"). Concurrent with the original sublease agreement, American Tower
also entered a build-to-suit agreement whereby American Tower has an
exclusive right to construct new towers in certain domestic markets to
Vodafone AirTouch's specifications that will be leased to Vodafone
AirTouch. The term of the Agreement differs for leased sites versus sites
owned by the company and ranges up to 99 years. Under the Agreement
Vodafone AirTouch will transfer the right to lease available space on up to
2,100 cellular towers owned by Vodafone AirTouch in exchange for a cash
payment of approximately $380 per tower. Vodafone AirTouch will also
receive a warrant to purchase 3,000,000 shares of American Tower
Corporation Class A Common Stock (subject to reduction if fewer than 2,100
towers are sublease). Vodafone AirTouch will be required to pay American
Tower a monthly maintenance fee of approximately $1.5 per tower for the
existing physical space used by their cellular equipment. Vodafone AirTouch
will retain title to the tower equipment and will have the right of first
refusal for leasing additional space on the tower. Up to approximately one
hundred sixty (160) towers owned and operated by the Partnership and
subsidiary are included in the above transaction. The Partnership is
entitled to payments of approximately $380 per tower subleased to American
Tower under the terms of the Agreement. The Partnership is also entitled to
a proportionate share of the warrants issued. The Agreement is expected to
close in multiple tranches during the year 2000.
In September 1999, Vodafone AirTouch and Bell Atlantic Corporation ("Bell
Atlantic") entered into an Alliance Agreement under which Vodafone
AirTouch. Would contribute its U.S. wireless interest to the existing
Cellco Partnership ("Cellco"), an existing general partnership formed by
Bell Atlantic, in exchange for a partnership interest in Cellco, subject to
certain regulatory and other approvals. Upon obtaining such approvals, as
applicable, Vodafone Air Touch's interest in the Partnership and
subsidiary, will be contributed to Cellco as part of the Alliance
Agreement. The Alliance Agreement is expected to close in the second
quarter of 2000.
SACRAMENTO-VALLEY LIMITED PARTNERSHIP AND SUBSIDIARY
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNT
YEAR ENDED DECEMBER 31, 1999 (In thousands)
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
YEAR ENDED DECEMBER 31, 1999:
Allowance for
doubtful accounts $ 1,823 $ 4,286 $(3,950)(a) $ 2,159
(a) Amounts reflect items written off, net of recoveries.
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 14 (A) 3)
Method
Exhibit No. Description of Filing Page
----------- ----------- --------- ----
3(a) Articles of Incorporation of Registrant, together with Incorporated by -
Certificate of Amendment of Articles of Incorporation dated reference
January 25, 1996 and Certificate of Amendment of Articles
of Incorporation dated June 21, 1996 (Filed as Exhibit 3(a)
to Form 10-Q Quarterly Report for the quarter ended
September 30, 1996)
3(b) Certificate of Amendment of Articles of Incorporation dated Incorporated by -
May 18, 2001 (Filed as Exhibit 3(b) to Form 10-Q Quarterly reference
Report for the quarter ended June 30, 2001)
3(c) Bylaws of Registrant (Filed as Exhibit 3(b)to Form 10-K Incorporated by -
Annual Report of the Registrant for the year ended December reference
31, 2000)
4(a) Shareholder Rights Plan(Filed as Exhibit 2.1 to Form 8-A Incorporated by -
Registration Statement under the Securities Act of 1934) reference
10(a) Credit Agreement of Roseville Telephone Company with Bank Incorporated by -
of America National Trust and Savings Association, dated reference
March 27, 1992, with respect to $25,000,000 term loan
(Filed as Exhibit 10(a) to Form 10-Q Quarterly Report of
Registrant for the quarter ended March 31, 1992)
10(b) Note Purchase Agreement for Series A Senior Notes in the Incorporated by -
aggregate amount of $40,000,000 dated December 9, 1998 reference
(Filed as Exhibit 10(b) to Form 10-K Annual Report of
Registrant for the year ended December 31, 1998)
10(c) Operating Agreement of West Coast PCS LLC (Filed as Incorporated by -
Exhibit 10(c) to Form 10-K Annual Report of Registrant for reference
the year ended December 31, 1997)
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 14 (A) 3)
Method
Exhibit No. Description of Filing Page
10(d) 1999 Restricted Stock Bonus Plan (Filed as Exhibit 10(d) to Incorporated by -
Form 10-K Annual Report of Registrant for the year ended reference
December 31, 1998)
10(e) 2000 Equity Incentive Plan (Filed as Incorporated -
Exhibit 10 (e) to form 10-K Annual Report of Registrant for by reference
the year ended December 31, 1999)
10(f) Business Loan Agreement of Registrant with Bank of America, Incorporated by -
dated March 15, 2000, as amended by Amendment No. 1 dated reference
as of April 10, 2000 (Filed as Exhibit 10 (f) to Form 10-Q
Quarterly Report of Registrant for the quarter ended March
31, 2000)
10 (g) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Brian H. Strom (Filed as Exhibit 10 reference
(g) to Form 10-K Annual Report of Registrant for the year
ended December 31, 2000)
10 (h) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Michael D. Campbell (Filed as reference
Exhibit 10 (h) to Form 10-K Annual Report of Registrant for
the year ended December 31, 2000)
10 (i) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Jay B. Kinder (Filed as Exhibit 10 reference
(i) to Form 10-K Annual Report of Registrant for the year
ended December 31, 2000)
10 (j) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Phillip D. Germond (Filed as Exhibit reference
10 (j) to Form 10-K Annual Report of Registrant for the
year ended December 31, 2000)
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 14 (A) 3)
Method
Exhibit No. Description of Filing Page
10 (k) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Robert M. Burger (Filed as Exhibit reference
10 (k) to Form 10-K Annual Report of Registrant for the
year ended December 31, 2000)
23.1 Consent of Ernst & Young LLP, Independent Auditors Filed herewith 94
23.2 Independent Auditors Consent Filed herewith 95
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.
SUREWEST COMMUNICATIONS
(Registrant)
Date: March 15, 2002 By: /s/ Brian H. Strom
Brian H. Strom,
President and Chief
Executive Officer
Date: March 15, 2002 By: /s/Michael D. Campbell
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 15, 2002 /s/ Thomas E. Doyle
Thomas E. Doyle,
Chairman of the Board
Date: March 15, 2002 /s/ Brian H. Strom
Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 15, 2002 /s/ Michael D. Campbell
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Date: March 15, 2002 /s/ John R. Roberts III
John R. Roberts III,
Director
Date: March 15, 2002 /s/ Chris L. Branscum
Chris L. Branscum,
Director
Date: March 15, 2002 /s/ Neil J. Doerhoff
Neil J. Doerhoff,
Director
Date: March 15, 2002 /s/ Kirk C. Doyle
Kirk C. Doyle,
Director
Date: March 15, 2002 /s/ Timothy D. Taron
Timothy D. Taron,
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.
SUREWEST COMMUNICATIONS
(Registrant)
Date: March 15, 2002 By: Brian H. Strom,
President and Chief
Executive Officer
Date: March 15, 2002 By: Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 15, 2002 Thomas E. Doyle,
Chairman of the Board
Date: March 15, 2002 Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 15, 2002 Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Date: March 15, 2002 John R. Roberts III,
Director
Date: March 15, 2002 Chris L. Branscum,
Director
Date: March 15, 2002 Neil J. Doerhoff,
Director
Date: March 15, 2002 Kirk C. Doyle,
Director
Date: March 15, 2002 Timothy D. Taron,
Director
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the (1) Registration Statement
(Form S-8 No. 333-42870) pertaining to the SureWest Communications 2000 Equity
Incentive Plan and (2) Registration Statement (Form S-8 No.333-42868) pertaining
to the SureWest Communications 1999 Restricted Stock Bonus Plan of our report
dated February 8, 2002, with respect to the consolidated financial statements of
SureWest Communications included in the Annual Report (Form 10-K) for the year
ended December 31, 2001.
/s/Ernst & Young LLP
Sacramento, California
March 20, 2002
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in these Registration Statements of
SureWest Communications, formerly known as Roseville Communications Company,
(the "Company") on Form S-8 (Nos. 333-42868 and 333-42870) of our report dated
March 8, 2000 on the consolidated financial statements of Sacramento Valley
Limited Partnership and subsidiary, appearing in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
/s/Deloitte & Touche
San Francisco, California
March 21, 2002