UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 30, 2002
[ ] 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 2002, 14,566,181 shares of the registrant's Common Stock were
outstanding.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Operating revenues:
Local service $16,748 $13,783 $33,561 $31,856
Network access service 12,516 11,745 25,845 22,874
Wireless service 6,042 4,085 11,460 8,787
Directory advertising 3,616 3,748 7,354 7,296
Nonregulated sales and service 1,340 1,694 2,638 3,399
Other 3,531 3,281 6,899 6,388
------- ------- ------- -------
Total operating revenues 43,793 38,336 87,757 80,600
Operating expenses:
Cost of services and products 14,507 13,577 28,598 26,550
Customer operations and selling 7,614 8,351 16,015 16,388
General and administrative 7,598 6,497 13,494 12,053
Depreciation and amortization 11,027 9,412 21,474 19,054
------- ------- ------- -------
Total operating expenses 40,746 37,837 79,581 74,045
------- ------- ------- -------
Income from operations 3,047 499 8,176 6,555
Other income (expense):
Interest income 225 966 428 3,541
Interest expense (337) (57) (699) (319)
Gain on sale of alarm
monitoring assets (1) - 4,435 -
Other, net (81) 1,063 (107) 1,024
------- ------- ------- -------
Total other income (expense),
Net (194) 1,972 4,057 4,246
------- ------- ------- -------
Income before income taxes 2,853 2,471 12,233 10,801
Income taxes 1,150 996 4,921 4,340
------- ------- ------- -------
Net income $ 1,703 $ 1,475 $ 7,312 $ 6,461
======= ======== ======= =======
Basic and diluted earnings per
share (1): $ .12 $ .10 $ .49 $ .42
Cash dividends per share (2) $ .25 $ .25 $ .50 $ .50
======= ======== ======= =======
Shares of common stock used to
calculate earnings per share 14,775 15,360 15,006 15,415
======= ======== ======= =======
(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.
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 17,079 $54,520
Short-term investments - 1,723
Accounts receivable, net 19,954 20,282
Refundable income tax 1,633 2,619
Inventories 3,162 3,324
Deferred income tax asset 641 640
Deferred directory costs 3,933 3,260
Prepaid expenses and other current assets 1,484 1,726
-------- --------
Total current assets 47,886 88,094
Property, plant and equipment, net 313,072 308,073
Investments and other assets:
Wireless licenses, net 13,566 13,566
Goodwill 2,171 2,171
Deferred charges and other assets 1,132 439
-------- --------
16,869 16,176
-------- --------
$377,827 $412,343
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,143 $ 2,143
Accounts payable and accrued liabilities 7,440 11,093
Estimated shareable earnings obligations 16,522 16,597
Advance billings and deferred revenues 9,128 8,144
Accrued pension cost 1,155 6,551
Accrued compensation 4,081 4,218
-------- --------
Total current liabilities 40,469 48,746
Long-term debt 41,071 42,142
Deferred income tax 13,494 11,206
Other liabilities and deferred revenues 8,543 8,456
Shareholders' equity:
Common Stock, without par value;
100,000 shares authorized, 14,563 and
15,110 shares issued and
outstanding at June 30, 2002 and
December 31, 2001, respectively 158,675 172,083
Deferred stock-based compensation (183) (303)
Retained earnings 115,758 130,013
-------- --------
Total shareholders' equity 274,250 301,793
-------- --------
$377,827 $412,343
======== ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(Amounts in thousands)
Six Months Six Months
Ended Ended
June 30, 2002 June 30, 2001
-------------- --------------
Net cash provided by (used in)
operating activities $ 19,681 $(63,818)
Cash flows from investing activities:
Deposit for the purchase of substantially
all of the assets from Western
Integrated Networks, LLC (700) -
Purchase of minority interest in
wireless subsidiary - (2,500)
Capital expenditures for property, plant
and equipment (26,602) (36,178)
Purchases of held-to-maturity investments - (5,161)
Maturities of held-to-maturity investments 1,723 7,435
Proceeds from sale of alarm monitoring
assets 4,495 -
Changes in deferred charges and other
assets 6 16
------- -------
Net cash used in investing activities (21,078) (36,388)
Cash flows from financing activities:
Principal payments of long-term debt (1,071) (1,071)
Dividends paid (7,479) (7,725)
Repurchase of common stock (28,220) (7,358)
Proceeds from exercise of stock options 726 -
------- -------
Net cash used in financing activities (36,044) (16,154)
------- -------
Decrease in cash and cash equivalents (37,441) (116,360)
Cash and cash equivalents at beginning of
period 54,520 169,955
------- -------
Cash and cash equivalents at end of
period $17,079 $53,595
======= =======
See accompanying notes.
SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of SureWest Communications
(the "Company") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC") and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results for the interim
periods shown. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such SEC rules and regulations and
accounting principles applicable for interim periods. Management believes
that the disclosures made are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2001 Annual Report on Form 10-K.
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, SureWest Broadband, SureWest Custom Data Services
(formerly QuikNet, Inc), SureWest Wireless, SureWest Televideo (d.b.a.
"SureWest Broadband/ Residential Services") and Roseville Alternative
Company ("Roseville Alternative") are each wholly-owned subsidiaries of the
Company. SureWest Wireless 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.
On January 25, 2002, the Company sold substantially all of the assets of
its alarm monitoring division, which was a component of the Telecom
segment, for approximately $5,150, subject to certain future adjustments,
which are not expected to be material. This sale resulted in a pre-tax gain
of $4,436 during the quarter ended March 31, 2002. Through June 30, 2002,
the Company had received cash proceeds of $4,995, of which $500 was
received during the fourth quarter of 2001, related to the sale of the
alarm monitoring division assets, which consisted primarily of customer
contracts and equipment, which had a net book value of approximately $355
as of the date of the sale. Total operating revenues attributable to the
Company's alarm monitoring division during the quarter ended June 30, 2001
were $627 (none in the second quarter of 2002). For the six-month periods
ended June 30, 2002 and 2001, total operating revenues attributable to the
Company's alarm monitoring division were $279 and $1,214, respectively.
On May 17, 2002, the Company's shareholders approved a proposal to change
the Company's state of incorporation from California to Delaware. In
addition, the shareholders approved an increase of the Company's Common
Stock from 100 million shares to 200 million shares with a par value of
$0.01 and also authorized 10 million shares of preferred stock with a par
value of $0.01. The enactment of the aforementioned approvals was left to
the discretion of the Board of Directors. As of August 1, 2002, these
approvals have not been implemented.
On May 31, 2002, the Company repurchased 300,000 shares of its common stock
from one if its employee benefit plans at a price of $50.00 per share.
Certain amounts in the Company's 2001 condensed consolidated financial
statements have been reclassified to conform with the presentation of its
2002 condensed consolidated financial statements.
2. 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 Note 1 - Summary of Significant Accounting Policies. The
Company accounts for intersegment sales and transfers at prevailing market
rates. Intersegment sales and transfers between the Telecom and PCS
segments are not significant. The Company's business segment information is
as follows:
Three months ended
June 30, 2002 Telecom PCS Consolidated
--------- -------- ------------
Operating revenues $ 37,751 $ 6,042 $ 43,793
Depreciation and amortization 7,299 3,728 11,027
Income (loss) from operations 8,647 (5,600) 3,047
Three months ended
June 30, 2001 Telecom PCS Consolidated
--------- -------- ------------
Operating revenues $ 34,251 $ 4,085 $ 38,336
Depreciation and amortization 6,762 2,650 9,412
Income (loss) from operations 7,996 (7,497) 499
At June 30, 2002 and for the
six months ended Telecom PCS Consolidated
--------- -------- ------------
Operating revenues $ 76,297 $ 11,460 $ 87,757
Depreciation and amortization 14,152 7,322 21,474
Income (loss) from operations 20,833 (12,657) 8,176
Assets 284,886 92,941 377,827
At June 30, 2001 and for the
six months ended Telecom PCS Consolidated
--------- -------- ------------
Operating revenues $ 71,813 $ 8,787 $ 80,600
Depreciation and amortization 13,845 5,209 19,054
Income (loss) from operations 19,402 (12,847) 6,555
Assets 329,495 88,729 418,224
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets, on January 1, 2002. SFAS
No. 142 addresses accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
The Company believes its wireless PCS and LMDS licenses have indefinite
lives because such licenses can be renewed indefinitely at little cost.
Accordingly, the Company has applied the nonamortization provision of SFAS
No. 142 to the Company's wireless PCS and LMDS licenses effective January
1, 2002, which resulted in an increase in the Company's consolidated net
income of $76 and $152 ($0.01 per share in both periods) for the quarter
and six months ended June 30, 2002, respectively. The Company's operating
results for the quarter and six months ended June 30, 2001 included $118
and $230 of amortization related to the Company's wireless PCS and LMDS
licenses. In the absence of such amortization, the Company's adjusted net
income for the quarter and six months ended June 30, 2001 would have been
$1,546 ($0.10 per share) and $6,597 ($0.43 per share). Beginning in the
first quarter of 2002, the Company's wireless PCS and LMDS licenses are
carried at the lower of cost or fair value (the application of this
provision of SFAS No. 142 had no effect on the Company's condensed
consolidated financial statements as of and for the three and six months
ended June 30, 2002). According to the provisions of SFAS No. 142 goodwill
is evaluated for impairment in a two-step process. The first step screens
for potential impairment and the second step measures any impairment loss
resulting from step one. The Company completed step one of the transitional
impairment test during the quarter ended June 30, 2002. The Company did not
identify any impairment as a result of this step. SFAS No. 142 requires
that goodwill be tested for impairment annually, or more frequently if
impairment indicators arise. The Company does not presently believe that
any impairment indicators exist. Commencing in 2002, the Company will test
for impairment annually at the beginning of the fourth quarter.
In August 2001, the Financial Accounting Standards Board ("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.
On January 1, 2002, the Company adopted 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 adoption of SFAS No. 144 did not
have a material effect on the Company's consolidated financial statements.
On January 1, 2002, the Company adopted the provision of the FASB's
Emerging Issues Task Force ("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 application of this new guidance did not have a
material effect on the Company's condensed consolidated financial
statements as of and for the quarter and six months ended June 30, 2002.
4. SHAREABLE EARNINGS OBLIGATIONS
Beginning in January 2002, Roseville Telephone began paying a consumer
dividend for intrastate overearnings relating to the years 1998 and 1999. A
portion of the consumer's intrastate service charges will be returned in
the form of a surcredit over 12 months or until a threshold of $4,600 is
met. For the quarter and six-month period ended June 30, 2002, $1,359 and
$2,147, respectively, has been returned to the consumers.
As of June 30, 2002, the Company's condensed consolidated balance sheet
reflected aggregate liabilities of $16,522 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 earnings
obligations could change in the near term, and the amounts involved could
be material.
5. SUBSEQUENT EVENTS
Effective July 12, 2002, the Company acquired substantially all of the
assets of Western Integrated Networks, LLC ("WIN")and certain affiliates
for $12 million plus the assumption of certain liabilities under executory
contracts. In accordance with the acquisition agreement, on the closing
date $10.8 million (including the deposit described below) was paid in
cash, and $1.2 million is being held in an escrow account for 180 days to
protect the Company in the event of certain breaches by WIN under the
agreement. The aggregate purchase price included a $700 initial deposit
delivered to WIN on June 21, 2002. WIN, which operated under the "WINfirst"
name, had filed a voluntary petition for reorganization under Chapter 11 of
U.S. Bankruptcy Code on March 11, 2002. Subsequently, the United States
Bankruptcy Court for the District of Colorado issued the Sale Approval
Order. The asset acquisition includes a dedicated fiber coaxial cable
network that passes 42,000 homes, plus a network operations center, a call
center, video head end (the originating point for television signals),
processing and distribution equipment, and the lease on an 180,000 square
foot state-of-the-art facility. Since July 12, 2002, the Company has been
offering bundled high-speed Internet, cable television and telephone
services under the name SureWest Broadband/Residential Services.
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 July 2002,
the bank amended the credit facility increasing the borrowing capacity from
$30,000 to $50,000 through June 1, 2004. There were no amounts outstanding
under this line at June 30, 2002.
SUREWEST COMMUNICATIONS
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain information included in the Company's quarterly report on Form 10-Q,
including that which relates to the impact on future revenue sources and
potential sharing obligations of pending and future regulatory orders, continued
expansion of the telecommunications network and expected changes in the sources
of the Company's revenue and its cost structure resulting from the its entrance
into new communications markets, are forward looking statements and are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Such forward looking statements are subject to a number of risks,
assumptions and uncertainties that could cause the Company's actual results to
differ from those projected in such forward looking statements.
Important factors that could cause actual results to differ from those set forth
in the forward looking statements include, but are not limited to: advances in
telecommunications technology, changes in the telecommunications regulatory
environment, changes in the financial stability of other telecommunications
providers who are customers of the Company, changes in competition in markets in
which the Company operates, adverse circumstances affecting the economy in
California in general, and in the Sacramento, California Metropolitan area in
particular, the availability of future financing, changes in the demand for
services and products, new product and service development and introductions,
pending and future litigation and unanticipated changes in the growth of the
Company's emerging businesses, including the PCS, Internet and Competitive Local
Exchange Carrier operating entities.
Results of Operations
General
SureWest Communications (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 outside of Roseville Telephone's service
area. The Company's wholly-owned subsidiary, Roseville Long Distance Company
("Roseville Long Distance"), is engaged in the provision of long distance
services. The Company's wholly-owned subsidiary, SureWest Internet is engaged in
the provision of high speed Internet services. The Company's wholly-owned
subsidiary SureWest Custom Data Services (formerly QuikNet, Inc.) is engaged in
the provision of custom data services. SureWest Televideo (d.b.a. "SureWest
Broadband/Residential Services"), a recently-formed wholly-owned subsidiary of
the Company, acquired from Western Integrated Networks, LLC and affiliates the
assets necessary to provide high speed Internet, cable television and telephone
services in the Sacramento area.
The PCS segment consists of the Company's wholly-owned subsidiary SureWest
Wireless, which provides wireless 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.
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. 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.
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.
Certain of the Company's interexchange carriers have filed for bankruptcy
protection in 2002, the most notable of which was WorldCom, Inc. ("WorldCom"),
which, together with its affiliates, filed for protection on July 21, 2002. As a
result of the WorldCom bankruptcy filing, the Company recognized in the quarter
ended June 30, 2002, as bad debt expense, sums owing from WorldCom to the
Company for services in the period prior to the bankruptcy filing.
With respect to post-petition obligations, WorldCom has proposed pursuant to a
special provision of the Bankruptcy Code, and the Bankruptcy Court has agreed,
utilities are entitled to "adequate assurances" that WorldCom will satisfy its
obligations for post-petition services. If assurances are not provided, then
arguably utilities can refuse to continue the provision of services to WorldCom.
In its original filings, WorldCom proposed its own set of assurances to
utilities, but such assurances did not include either deposits or advance
payments. The Bankruptcy Court's Order establishes a process for utilities, like
the Company, to object to WorldCom's proposal, including a deadline of August 6,
2002 for filings in opposition to WorldCom's proposal, and a related hearing
date of August 12, 2002. The Company is currently considering its options in
connection with the bankruptcy proceeding, including the possibility of joining
with other similarly situated incumbent local exchange carriers, and seeking
appropriate relief beyond WorldCom's proposal, to assure payment for the
Company's services subsequent to July 21, 2002, or alternatively, proposing the
ultimate termination of services to WorldCom.
Revenues from services subject to regulation constituted approximately 67% of
the Company's total operating revenues for the quarters ended June 30, 2002 and
2001. For the six-month periods ended June 30, 2002 and 2001, revenues subject
to regulation constituted approximately 68% of the Company's total operating
revenues. 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 F.C.C. 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 F.C.C establishes
rules that carriers must follow in the preparation of the annual studies. On
January 23, 2001, the F.C.C. issued a Memorandum Opinion and Order to another
telephone company in which it clarified how Internet traffic, which the F.C.C.
had prior to that date characterized as largely interstate in nature, should be
treated. Additionally, under current F.C.C. rules governing rate making,
Roseville Telephone is required to establish interstate rates based on projected
demand usage for its various services and determine the actual earnings from
these rates once actual volumes and costs are known.
During 2000 and 2001, Internet traffic and DSL service grew substantially, far
exceeding Roseville Telephone's estimates, which resulted in actual earnings
exceeding the levels allowed by the F.C.C. Based on preliminary cost studies,
the Company recognized liabilities relating to Roseville Telephone's estimated
interstate shareable earnings obligations of $1.0 million and $1.4 million for
the quarters ended June 30, 2002 and 2001, respectively, through reductions of
revenues. For the six-month periods ended June 30, 2002 and 2001, the company
recognized liabilities relating to Roseville Telephone's estimated interstate
shareable earnings obligation of $1.2 million and $3.2 million, respectively,
through reductions of revenues, related to Roseville Telephone's estimated
interstate shareable earnings obligations.
Prior to January 1, 2002, Roseville Telephone billed Pacific Bell various
charges for certain local service and network access service revenues in
accordance with certain agreements as described below. Of the Company's total
revenues for the quarters and six-month periods ended June 30, 2002 and 2001,
less than 10% was recorded under these agreements in each period. 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
was 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. During the quarter ended June 30, 2002, the Office of
Ratepayer Advocates ("ORA") of the PUC issued an audit report in response to the
P.U.C.'s Order Instituting Investigation (OII) relating to RTC. The ORA audit
report recommends that the CPUC discontinue RTC's present EAS funding from the
CHCF. The P.U.C.'s final judgment regarding the aforementioned ORA audit report
is not expected until 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 cannot 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 termination of the DCP and transition to a bill and keep
arrangement did not have a material impact on the Company's consolidated
financial position as of June 30, 2002 or results of operations for the quarter
and six months then ended.
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 is required to share earnings with
customers through a reduction of revenues if its earned annual rate-of-return
exceeds that authorized by the P.U.C.
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 addition, the P.U.C. 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
Decision did not suspend the sharing mechanism and 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.
Additionally, in accordance with the provisions of the Decision, the Company
recorded liabilities and reductions of revenues of $438 thousand and $875
thousand relating to estimated intrastate shareable earnings during the quarter
and six-month period ended June 30, 2002. For the quarter ended June 30, 2001,
the Company recorded a liability through a reduction of revenues of $4.1 million
relating to estimated interstate shareable earnings obligations (none in the
first quarter of 2001).
Beginning in January 2002, Roseville Telephone began paying a consumer dividend
for intrastate overearnings relating to the years 1998 and 1999. A portion of
the consumer's intrastate service charges will be returned in the form of a
surcredit over 12 months or until a threshold of $4.6 million is met. For the
quarter and six-month periods ended June 30, 2002, approximately $1.4 million
and $2.1 million, respectively, has been returned to consumers.
As of June 30, 2002, the Company's condensed consolidated balance sheet
reflected aggregate liabilities of $16.5 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.
Quarter and six months ended June 30, 2002 and 2001
Operating Revenues:
Revenues subject to regulation, which include local and network access services,
increased $3.7 million and $4.7 million, or 15% and 9%, for the quarter and
six-month periods ended June 30, 2002, respectively, compared to the same
periods in 2001. This increase was due to the combined effects of 1) increased
network access revenues due to the expanded demand for DSL services and
dedicated access, 2) increases in custom calling and other enhanced network
services, 3) access line growth of 2%, and 4) a reduction in the Company's
provision for its estimated interstate and intrastate shareable earnings
obligations.
Wireless service revenues increased $2.0 million and $2.7 million, or 48% and
30%, in the quarter and six-month periods ended June 30, 2002, respectively,
compared to the same periods in 2001, as a result of continued additions to the
customer base.
Revenues from non-regulated sales and services decreased $354 thousand and $761
thousand, or 21% and 22%, for the quarter and six-month periods ended June 30,
2002, respectively, compared to the same periods in 2001, due primarily to the
sale of the Company's alarm monitoring division in the first quarter of 2002.
Other operating revenues primarily consist of Internet services, long distance
services, billing and collection services and other miscellaneous services.
Other operating revenues increased $250 thousand and $511 thousand, or 8% for
the quarter and six-month periods ended June 30, 2002, compared to the same
periods in 2001, due primarily to an increase in the market penetration of long
distance services, continued additions to the Internet customer base, and
increased revenues from the addition of SureWest Custom Data Services in the
third quarter of 2001.
Operating Expenses:
Total operating expenses increased $2.9 million and $5.5 million, or 8% and 7%,
for the quarter and six-month periods ended June 30, 2002, respectively,
compared to the same periods in 2001. Cost of services and products increased
$930 thousand and $2.0 million, or 7% and 8%, for the quarter and six-month
periods ended June 30, 2002, respectively, due primarily to 1) increased costs
in long distance, tower rents, and roaming charges related to the continuing
expansion of the coverage area and increased demand for SureWest Wireless
services, 2) increased expenses from the addition of SureWest Custom Data
Services in the third quarter of 2001, and 3) modem and transport costs related
to Internet services. These increases were partially offset by the sale of the
Company's alarm monitoring division in the first quarter of 2002.
Customer operations and selling expense decreased $737 thousand and $373
thousand, or 9% and 2%, for the quarter and six-month periods ended June 30,
2002 compared to the same periods in 2001 due primarily to decreased dealer
commissions for wireless service. This decrease was partially offset by 1)
increased customer service expense associated with Internet subscriber growth,
and 2) increased expenses from the addition of SureWest Custom Data Services in
the third quarter of 2001.
General and administrative expenses increased $1.1 million and $1.4 million, or
17% and 12%, for the quarter and six-month periods ended June 30, 2002,
respectively, compared to the same periods in 2001. These increases were due
primarily to the bad debt expense recognized during the second quarter of 2002
associated with access charge billings to an interexchange carrier that has
filed for bankruptcy protection. On July 21, 2002, WorldCom, Inc. and its
affiliated companies filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. The bad debt expense recognized during the second
quarter includes $1.1 million relating to obligations of WorldCom, Inc. to the
Company for the period prior to the bankruptcy filing.
Depreciation and amortization increased $1.6 million and $2.4 million, or 17%
and 13%, for the quarter and six-month periods ended June 30, 2002,
respectively, compared to the same periods in 2001, as a result of increases in
PCS property, plant and equipment, and amortization of network software. This
increase was partially offset by a decrease in amortization relating to the
Company's wireless licenses due to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142 as described below.
Other Income (Expense), Net:
Other income (expense), net, decreased $2.2 million and $189 thousand, or 110%
and 4%, for the quarter and six-month periods ended June 30, 2002, respectively,
compared to the same periods in 2001. This decrease was primarily due to lower
average invested balances during 2002 due to the sale of the Company's cellular
partnership interest during the fourth quarter of 2000. This decrease was
partially offset by the gain from the sale of the Company's alarm monitoring
division of $4.4 million in January 2002.
Income Taxes:
Income taxes for the quarter and six-month periods ended June 30, 2002,
increased $154 thousand and $581 thousand, or 15% and 13%, respectively,
compared to the same periods in 2001, due primarily to an increase in income
subject to tax. The effective federal and state income tax rate was
approximately 40.2% for the six-month periods ended June 30, 2002 and 2001.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities was $19.7 million for the six-month period
ended June 30, 2002. Net cash used in operating activities was $63.8 million for
the six-month period ended June 30, 2001. The increase in cash from operating
activities for the six-month period ended June 30, 2002, compared to the same
period in 2001, was due primarily to a $90 million payment of income tax in 2001
related to the sale of the Company's cellular partnership interest in 2000.
During the six-month period ended June 30, 2002, the Company used cash flows
from operations and existing cash and cash equivalents to fund 1) capital
expenditures of $26.6 million pertaining to ongoing plant construction projects,
2) common stock repurchases of $13.2 million, 3) common stock repurchases from
one of the Company's employee benefit plans of $15 million, 4) dividends of $7.5
million, 5) principal payments of $1.1 million to retire long-term debt, and 6)
a $700 thousand deposit for the purchase of substantially all of the assets of
Western Integrated Networks, LLC ("WIN"), as described below.
The Company's most significant use of funds for the balance of 2002 is expected
to be for 1) remaining $11.3 million purchase price of WIN plus the assumption
of certain liabilities under executory contracts, 2) remaining budgeted capital
expenditures of approximately $40.0 million, 3) remaining scheduled payments of
long-term debt of $1.1 million, 4) net operating expenditures of up to $3.2
million relating to SureWest Wireless, and 5) net operating expenditures of up
to $7.2 million relating to SureWest Broadband/Residential Services.
Effective July 12, 2002, the Company acquired substantially all of the assets of
WIN for $12 million plus the assumption of certain liabilities under executory
contracts. Since the acquisition the Company has been offering bundled
high-speed Internet, cable television and telephone services under the name
SureWest Broadband/Residential Services. The aggregate purchase price included a
$700 thousand initial deposit delivered to WIN on June 21, 2002.
On May 17, 2002, the Company's shareholders approved a proposal to change the
Company's state of incorporation from California to Delaware. In addition, the
shareholders approved an increase of the Company's Common Stock from 100 million
shares to 200 million shares with a par value of $0.01 and also authorized 10
million shares of preferred stock with a par value of $0.01. The enactment of
the aforementioned approvals was left to the discretion of the Board of
Directors. As of August 1, 2002, these approvals have not been implemented.
In February 2000, the Board of Directors authorized the repurchase of up to 1
million shares of Company common stock. In June, 2002, the Board of Directors
approved the repurchase of an additional 500 thousand shares. 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 June
30, 2002, approximately 1 million shares of common stock have been repurchased
through the programs. The Company has authorization from the Board of Directors
to repurchase an additional 508 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 July 2002, the
bank amended the credit facility increasing the borrowing capacity from $30
million to $50 million through June 1, 2004. There were no amounts outstanding
under this line at June 30, 2002.
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. For the year 2002, the Company has 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 Crossing. However, the Company believes that the impact
on its results of operations resulting from any potential change in transport
rates would not be material.
On January 25, 2002, the Company sold substantially all of the assets of its
alarm monitoring division, which was a component of the Telecom segment, for
approximately $5.2 million, subject to certain future adjustments, which are not
expected to be material. This sale resulted in a pre-tax gain of $4.4 million
during the quarter ended March 31, 2002. Through June 30, 2002, the Company had
received cash proceeds of $5.0 million, of which $500 thousand was received
during the fourth quarter of 2001, related to the sale of the alarm monitoring
division assets, which consisted primarily of customer contracts and equipment,
which had a book value of approximately $355 thousand as of the date of the
sale. Total operating revenues attributable to the Company's alarm monitoring
division during the quarter ended June 30, 2001 were $627 thousand (none in the
second quarter of 2002). For the six-month periods ended June 30, 2002 and 2001,
total operating revenues attributable to the Company's alarm monitoring division
were $279 thousand and $1.2 million, respectively.
The Company had cash and cash equivalents at June 30, 2002, of $17.1 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. While the reported bankruptcy filing by
WorldCom, Inc. and its affiliates may continue to have an adverse effect on the
Company's results of operations, the Company does not currently believe that the
WorldCom bankruptcy will impair in any way the Company's ability to satisfy its
liquidity requirements. The Company may consider other sources of external
financing for the purposes of funding future capital expenditures and potential
investments including the possible incurrence of additional long-term
indebtedness.
Critical Accounting Policies and Estimates
Below is a summary of the Company's critical accounting policies and estimates:
o Total revenues from telephone services are affected by rates authorized by
various regulatory agencies. The F.C.C. 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 F.C.C. 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 P.U.C., 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 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 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. In assessing the recoverability of the
Company's property, plant and equipment and 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 property, plant and equipment and
intangible assets. See further discussion below concerning the adoption of
SFAS Nos. 142 and 144 during the first quarter of 2002.
o 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
June 30, 2002 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 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.
Other Financial Information
Recent accounting pronouncements
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets, on
January 1, 2002. SFAS No. 142 addresses accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." The Company believes its wireless PCS and LMDS licenses
have indefinite lives because such licenses can be renewed indefinitely at
little cost. Accordingly, the Company has applied the nonamortization provision
of SFAS No. 142 to the Company's wireless PCS and LMDS licenses effective
January 1, 2002, which resulted in an increase in the Company's consolidated net
income of $76 thousand and $152 thousand ($0.01 per share in both periods) for
the quarter and six months ended June 30, 2002, respectively. The Company's
operating results for the quarter and six months ended June 30, 2001 included
$118 thousand and $230 thousand of amortization related to the Company's
wireless PCS and LMDS licenses. In the absence of such amortization, the
Company's adjusted net income for the quarter and six months ended June 30, 2001
would have been $1.5 million ($0.10 per share) and $6.6 million ($0.43 per
share). Beginning in the first quarter of 2002, the Company's wireless PCS and
LMDS licenses are carried at the lower of cost or fair value (the application of
this provision of SFAS No. 142 had no effect on the Company's condensed
consolidated financial statements as of and for the three and six months ended
June 30, 2002). According to the provisions of SFAS No. 142, goodwill is
evaluated for impairment in a two-step process. The first step screens for
potential impairment and the second step measures any impairment loss resulting
from step one. The Company completed step one of the transitional impairment
test during the quarter ended June 30, 2002. The Company did not identify any
impairment as a result of this step. SFAS No. 142 requires that goodwill be
tested for impairment annually, or more frequently if impairment indicators
arise. The Company does not presently believe that any impairment indicators
exist. Commencing in 2002, the Company will test for impairment annually at the
beginning of the fourth quarter.
In August 2001, the Financial Accounting Standards Board ("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.
On January 1, 2002, the Company adopted 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 application of SFAS No. 144 did not have a material effect
on the Company's consolidated financial statements.
On January 1, 2002, the Company adopted the provision of the FASB'S Emerging
Issues Task Force ("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 application of this new guidance did not have a
material effect on the Company's condensed consolidated financial statements as
of and for the six months ended June 30, 2002.
PART II
Item 1. Regulatory and Legal Proceedings.
Except for the proceedings described below and in Part I, the Company is not
aware of any material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which it is a party or to which any of
its property is subject.
Roseville Telephone is subject to regulation by the F.C.C. and P.U.C. In the
past, there have been various proceedings before these agencies to which
Roseville Telephone has been a party.
In 1996, Congress passed the Telecommunications Act of 1996 (the "Act"), which
significantly changed the regulatory environment for telecommunications
companies. Beginning in 1996, the F.C.C. 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. On May
13, 2002, the court issued its decision upholding the F.C.C.'s TELRIC pricing
model and its rule requiring ILECs to bundle uncombined network elements when
requested by CLECs. On May 24, 2002, the United States Court of Appeals for the
District of Columbia Circuit set aside two F.C.C. orders implementing provisions
of the Telecommunications Act of 1996 that direct the Commission to determine
what network elements ILECs must make available for lease to CLECs. On June 18,
2002, the United States Court of Appeals for the District of Columbia denied
challenges to the F.C.C.'s collocation rules.
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 4. Submission of Matters to a Vote of Security Holders.
On May 17, 2002, the Company held its regularly scheduled Annual Meeting of
Shareholders, at which the shareholders:
(1) Elected a Board of seven (7) Directors;
(2) Considered and acted upon an amendment to the Company's 2000 Equity
Incentive Plan to increase the number of shares available thereunder and to
extend the year of termination until 2012;
(3) Considered and acted upon a proposal to change the Company's state of
incorporation from California to Delaware; and
(4) Considered and acted upon the setting of the number of authorized shares of
Common Stock at 200,000,000 shares and to authorize 10,000,000 shares of
Preferred Stock.
The seven nominees to serve, as directors, which constituted the existing Board
of Directors, were all reelected to serve as directors, by the following votes
(out of 14,912,038).
Broker Non-
Votes
and
Votes Votes Withheld Abstentions
Director For
------------ ----------- ---------- -----------
Thomas E. Doyle 12,598,857 357,094 N/A
Kirk C. Doyle 12,586,839 369,112 N/A
Brian H. Strom 12,570,034 385,917 N/A
John R. Roberts III 12,604,602 351,349 N/A
Chris L. Branscum 12,584,972 370,979 N/A
Timothy D. Taron 12,578,239 377,712 N/A
Neil J. Doerhoff 12,592,504 363,447 N/A
The proposal to approve an amendment to the Company's 2000 Equity Incentive Plan
to increase the number of shares available thereunder and to extend the year of
termination until 2012:
For Against/Withheld Abstentions Broker Non-Votes
---------- ---------------- ----------- ----------------
10,156,323 814,291 645,605 N/A
The proposal to change the Company's state of incorporation from California to
Delaware:
For Against/Withheld Abstentions Broker Non-Votes
---------- ---------------- ----------- ----------------
9,457,848 1,454,463 703,908 N/A
The proposal to set the number of authorized shares of common stock at
200,000,000 shares and to authorize 10,000,000 share of preferred stock:
For Against/Withheld Abstentions Broker Non-Votes
---------- ---------------- ----------- ----------------
9,599,236 1,356,767 660,216 N/A
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) See Index to Exhibits.
b) Reports on Form 8-K:
The Company filed a report on Form 8-K on May 15, 2002 announcing its
preliminary discussions regarding an acquisition out of bankruptcy of a
business providing voice, data, and video services in Sacramento,
California.
The Company filed a report on Form 8-K on May 31, 2002 relating to the
announcement of the Company's repurchase of 300,000 shares of its common
stock from one of its employee benefit plans at a price of $50.00 per
share.
The Company filed a report on Form 8-K on June 19, 2002 announcing its
execution of an asset purchase agreement to acquire assets from Western
Integrated Networks, Inc. ("WINfirst"). WINfirst is in the business of
providing voice, data, and video services in Sacramento, California.
The Company filed a report on Form 8-K on June 27, 2002 related to the
announcement of the Company's Board of Directors approval of the repurchase
of up to an additional 500,000 shares of the Company's common stock.
The Company filed a report on Form 8-K on July 29, 2002 related to the
acquisition of substantially all of its assets of WINfirst.
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 6 (a))
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 6 (a))
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 Fred Arcuri reference
(Filed as exhibit 10 (j) to Form 10-Q Quarterly Report of
Registrant for the quarter ended March 31, 2002)
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 6 (a))
Method
Exhibit No. Description of Filing Page
10 (k) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and David Marsh reference
(Filed as exhibit 10 (k) to Form 10-Q Quarterly Report of
Registrant for the quarter ended March 31, 2002)
10 (l) Business Loan Agreement of Registrant with Bank of America, Filed herewith 29-37
dated March 15, 2000, as amended by Amendment No. 2 dated
as of September 15, 2000; as amended by Amendment No. 3
dated as of July 17, 2001 and as amended by Amendment No. 4
dated as of June 26, 2002
signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUREWEST COMMUNICATIONS
(Registrant)
Date: August 1, 2002 By: /s/BRIAN H. STROM
--------------------------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: August 1, 2002 By: /s/MICHAEL D. CAMPBELL
--------------------------------------
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUREWEST COMMUNICATIONS
(Registrant)
Date: August 2, 1002 By: ___________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: August 2, 2002 By: ___________________________
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
CERTIFICATION BY PRINCIPAL EXECUTIVE
OFFICER AND PRINCIPAL FINANCIAL OFFICER
I, Brian H. Strom, President and Chief Executive Officer, certify that, based
upon a review of SureWest Communication's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002 (the "Report"):
(1) the Report fully complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of the operations of SureWest
Communications.
/s/ Brian H. Strom
Brian H. Strom
President and Chief Executive Officer
Date: August 1, 2002
I, Michael D. Campbell, Executive Vice President and Chief Financial Officer,
certify that, based upon a review of SureWest Communication's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002 (the "Report"):
(1) the Report fully complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of the operations of SureWest
Communications.
/s/ Michael D. Campbell
Michael D. Campbell
Executive Vice President and Chief
Financial Officer
Date: August 1, 2002
AMENDMENT NO. 2 TO LOAN AGREEMENT
This Amendment No. 2 (the "Amendment") dated as of September 15, 2000, is
between Bank of America, N.A. (the "Bank") and Roseville Communications Company
(the "Borrower")
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of March 15, 2000 as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 Subparagraphs (a) of Paragraph 1.1of the Agreement is amended to
read in its entirety as follows:
"(a)During the availability period described below, the
Bank will provide a line of credit to the Borrower. The
amount of the line of credit (the `Commitment') is equal to
the amounts indicated for each period specified below:
Period Amount
From the date of this Agreement
through December 30, 2001 $50,000,000
From December 31, 2001
and thereafter $30,000,000"
2.2 Subparagraph (a) of Paragraph 1.3 of the Agreement is amended to
read in its entirety as follows:
"(a) Unless the Borrower elects an optional interest
rate as described below, the interest rate is the Bank's
Prime Rate plus/minus the Applicable Margin as defined
below."
2.3 Subparagraph (b) of Paragraph 1.5 of the Agreement is amended to
read in its entirety as follows:
"(b) the LIBOR Rate plus the Applicable Margin as
defined below."
2.4 A new Paragraph 1.6 is added to the Agreement which reads in its
entirety as follows:
"1.6 Applicable Margin. The Applicable Margin shall be
the following amounts per annum, based upon the ratio of
Funded Debt to EBIDTA (as defined in Paragraph 7.4 of the
Agreement), as set forth in the most recent financial
statement received by the Bank as required in the Covenants
section; provided, however, that, until the Bank receives
the most recent financial statement, such amounts shall be
those indicated for pricing level 1 set forth below:
Applicable Margin
Pricing (in percentage points per annum)
Level Ratio Prime Rate +/- LIBOR Rate +
----- ----- -------------- ------------
1 <1.50:1.0 -0.50% 0.75%
-
2 <2.00:1.0 but > .50:1.0 -0.25% 1.00%
-
3 <2.50:1.0 but > .00:1.0 +0.00% 1.25%
-
Note: "<" denotes "less than or equal to" and ">"
denotes "greater than." -
The Applicable Margin shall be in effect from the date the
most recent financial statement is received by the Bank
until the date the next financial statement is received;
provided, however, that if the Borrower fails to timely
deliver the next financial statement, the Applicable Margin
from the date such financial statement was due until the
date such financial statement is received by the Bank shall
be the highest pricing level set forth above."
2.5 In Paragraph 7.3 of the Agreement, the amount "One Hundred
Ninety Million Dollars ($190,000,000)" is substituted for the amount
"One Hundred Eighty Million Dollars ($180,000,000)".
2.6 In Paragraph 7.4 of the Agreement is amended to read in its
entirety as follows:
"7.4 Funded Debt to EBITDA Ratio. To maintain on a
consolidated basis a ratio of Funded Debt to EBITDA not
exceeding 2.50:1.0.
`Funded Debt' means all outstanding indebtedness for
borrowed money and other interest-bearing indebtedness,
including current and long term indebtedness.
`EBITDA' means the sum of net income before taxes, plus
interest expense, plus depreciation, depletion, amortization
and other non-cash charges.
This ratio will be calculated at the end of each fiscal
quarter, using the results of that quarter and each of the 3
immediately preceding quarters."
2.7 Subparagraph (f) is added to Paragraph 7.6 of the
Agreement, which shall read as follows:
(f) Additional debts of Roseville Telephone Company for
the acquisition of fixed assets which do not exceed Five
Million Dollars ($5,000,000) outstanding at anyone time.
2.8 Subparagraph (c) is added to paragraph 7.7 of the
Agreement, which shall read as follows:
"(c) Additional purchase money security interest
incurred by Roseville Telephone Company in equipment or
other personal property fixed assets acquired after the date
of that certain Amendment No. 2 to this Agreement, if the
total principal amount of debts secured by such liens does
not exceed Five Million Dollars ($5,000,000) at any one
time"
2.9 Subparagraph (f) of Paragraph 7.18 is amended to read in its
entirety as follows:
"(f) voluntarily suspended its business at any time."
2.10 Subparagraph (g) is added to Paragraph 7.18 of the
Agreement, which shall read as follows:
"(g) acquire or purchase a business or its assets for a
consideration, including assumption of direct or contingent
debt, in excess of Ten Million Dollars ($10,000,000 in the
aggregate"
3. Representations and Warranties. When the Borrower signs this
Amendment, the Borrower represents and warrants to the Bank that: (a)
there is no event which is, or with notice or lapse of time or both
would be, a default under the Agreement except those events, if any,
that have been disclosed in writing to the Bank or waived in writing
by the Bank, (b) the representations and warranties in the Agreement
are true as of the date of this Amendment as if made on the date of
this Amendment, (c) this Amendment is within the Borrower's powers,
has been duly authorized, and does not conflict with any of the
Borrower's organizational papers, and (d) this Amendment does not
conflict with any law, agreement, or obligation by which the Borrower
is bound.
4. Conditions. This Amendment will be effective when the Bank
receives the following items, in form and content acceptable to the
Bank:
(4.1) A Corporate Resolution to Obtain Credit certified
by the Borrower's Corporate Secretary in the amount of Fifty
Million Dollars ($50,000,000).
5. Effect of Amendment. Except as provided in this Amendment, all
of the terms and conditions of the Agreement shall remain in full
force and effect.
This Amendment is executed as of the date stated at the beginning
of this Amendment.
Bank of America, N.A.
By_________________________
Robert L. Munn, Jr.
Senior Vice President
Roseville Communications Company
By__________________________
Michael D. Campbell
Executive Vice President, Chief
Financial Officer and Treasurer
AMENDMENT NO. 3 TO LOAN AGREEMENT
This Amendment No. 3 (the "Amendment") dated as of July 17, 2001, is
between Bank of America, N.A. (the "Bank") and Roseville Communications Company
(the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of March 15, 2000 as previously amended (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the
Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 Paragraph 1.1 (b) is amended to read in its entirety as follows:
(b) This is a revolving line of credit providing for cash
advances and letters of credit. During the availability period, the
Borrower may repay principal amounts and reborrow them.
2.2 A new Paragraph 1.7 is added to the Agreement, which reads in its
entirety as follows:
(a) This line of credit may be used for financing:
(i) standby letters of credit with a maximum maturity not to
extend beyond the Expiration Date.
(ii) The amount of letters of credit outstanding at any time
(including amounts drawn on letters of credit and not yet
reimbursed) may not exceed Five Hundred Thousand and 00/100
Dollars ($500,000.00)
(b) The Borrower agrees:
(i) any sum drawn under a letter of credit may, at the option of
the Bank, be added to the principal amount outstanding under
this Agreement. The amount will bear interest and be due as
described elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately
prepay and make the Bank whole for any outstanding letters
of credit.
(iii)the issuance of any letter of credit and any amendment to a
letter of credit is subject to the Bank's written approval
and must be in form and content satisfactory to the Bank and
in favor of a beneficiary acceptable to the Bank.
(iv) to sign the Bank's form Application and Agreement for
Standby Letter of Credit.
(v) to pay any issuance and/or other fees that the Bank notifies
the Borrower will be charged for issuing and processing
letters of credit for the Borrower.
(vi) to allow the Bank to automatically charge its checking
account for applicable fees, discounts, and other charges.
3. Representations and Warranties. When the Borrower signs this Amendment,
the Borrower represents and warrants to the Bank that: (a) there is no event
which is, or with notice or lapse of time or both would be, a default under the
Agreement except those events, if any, that have been disclosed in writing to
the Bank or waived in writing by the Bank, (b) the representations and
warranties in the Agreement are true as of the date of this Amendment as if made
on the date of this Amendment, (c) this Amendment is within the Borrower's
powers, has been duly authorized, and does not conflict with any of the
Borrower's organizational papers and (d) this Amendment does not conflict with
any law, agreement, or obligation by which the Borrower is bound.
5. Effect of Amendment. Except as provided in this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
Bank of America, N.A.
By_________________________
Robert L. Munn, Jr.
Senior Vice President
Roseville Communications Company
By__________________________
Brian H. Strom, President, CEO
AMENDMENT NO. 4 TO LOAN AGREEMENT
This Amendment No. 4 (the "Amendment") dated as of June 26, 2002, is
between Bank of America, N.A. (the "Bank") and SureWest Communications (the
"Borrower"), formerly known as Roseville Communications Company.
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of March 15, 2000 (together with any previous amendments, the
"Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 The second sentence of Paragraph 1.1(a) is amended to read in its
entirety as follows:
The amount of the line of credit (the "Commitment") is Fifty
Million Dollars ($50,000,000.00).
2.2 In Paragraph 1.2, the date "June 1, 2003" is changed to "June 1,
2004."
2.3 Paragraph 7.3 is hereby amended to read in its entirety as
follows:
7.3 Tangible Net Worth. To maintain on a consolidated basis
Tangible Net Worth equal to at least Two Hundred Twenty Five
Million Dollars ($225,000,000).
"Tangible Net Worth" means the value of the Borrower's total
assets (including leaseholds and leasehold improvements and
reserves against assets but excluding goodwill, patents,
trademarks, trade names, organization expense, unamortized debt
discount and expense, capitalized or deferred research and
development costs, deferred marketing expenses, and other like
intangibles, and monies due from affiliates, officers, directors,
employees, shareholders, members or managers of the Borrower)
less total liabilities, including but not limited to accrued and
deferred income taxes, but excluding the non-current portion of
Subordinated Liabilities. "Subordinated Liabilities" means
liabilities subordinated to the Borrower's obligations to the
Bank in a manner acceptable to the Bank in its sole discretion.
2.4 In Paragraph 7.5, the amount "Fifteen Million Dollars
($15,000,000)" is changed to "Seven Million Five Hundred Thousand Dollars
($7,500,000)."
2.5 Paragraphs 7.6(f) and 7.7(c) are deleted.
2.6 In Paragraph 7.18(g), the amount "Ten Million Dollars
($10,000,000)" is changed to "Twenty Five Million Dollars ($25,000,000)."
2.7 New Paragraph 8.12 is added to the Agreement and reads in its
entirety as follows:
8.12 Debts/Security Interests (Roseville Telephone Company).
Roseville Telephone Company ("RTC") has outstanding at any one
time debts for the acquisition of equipment or other personal
property fixed assets that exceed Five Million Dollars
($5,000,000), or RTC creates, assumes, or allows any security
interest or lien on such fixed assets except for purchase money
security interests that secure only the permitted debts incurred
for the acquisition of such fixed assets.
3. Representations and Warranties. When the Borrower signs this
Amendment, the Borrower represents and warrants to the Bank that: (a) there
is no event which is, or with notice or lapse of time or both would be, a
default under the Agreement except those events, if any, that have been
disclosed in writing to the Bank or waived in writing by the Bank, (b) the
representations and warranties in the Agreement are true as of the date of
this Amendment as if made on the date of this Amendment, (c) this Amendment
does not conflict with any law, agreement, or obligation by which the
Borrower is bound, and (d) this Amendment is within the Borrower's powers,
has been duly authorized, and does not conflict with any of the Borrower's
organizational papers.
4. Conditions. This Amendment will be effective when the Bank receives
the following item, in form and content acceptable to the Bank:
(a) Corporate Resolution to Obtain Credit certified by the
Borrower's Corporate Secretary in the amount of Fifty Million
Dollars ($50,000,000).
5. Effect of Amendment. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.
6. Counterparts. This Amendment may be executed in counterparts, each
of which when so executed shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
7. FINAL AGREEMENT. This written Amendment represents the final
agreement between and among the parties hereto and may not be contradicted
by evidence of prior, contemporaneous, or subsequent oral agreements
between or among the parties. There are no unwritten oral agreements
between or among the parties.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
Bank of America, N.A.
By________________________
John Grauten
Senior Vice President
SureWest Communications
By_________________________
Michael D. Campbell
Executive Vice President,
Chief Financial Officer and
Treasurer
SureWest Communications
By________________________
Brian H. Strom
President, CEO