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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
SUREWEST COMMUNICATIONS
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(Exact name of registrant as specified in its charter)
California 68-0365195
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Vernon Street, Roseville, California 95678
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 786-6141
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. Yes [X] No [ ]
On March 3, 2003, the registrant had 14,537,144 shares of Common Stock
outstanding and an approximate aggregate public market value of approximately
$316,588,095 (based on 12,781,110 shares of Common Stock held by non-affiliates
and a closing price of $24.77 per share of Common Stock on the Nasdaq National
Market). On June 28, 2002, which was the last business day of the registrant's
most recently completed second fiscal quarter, the registrant had 14,562,689
shares of Common Stock outstanding and its public market value was approximately
$680,964,766 (based on 12,816,954 shares of Common Stock then held by
non-affiliates and a closing price that day of $53.13 per share of Common Stock
on the Nasdaq National Market). These public market value calculations exclude
shares held on the stated dates by registrant's employee benefit plans,
directors and officers on the assumption such shares may be shares owned by
affiliates. (Exclusion from these public market value calculations does not
imply affiliate status for any other purpose).
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 16, 2003.
TABLE OF CONTENTS
ITEM NO. PAGE
PART I
1. Business.................................................................................. 4
2. Properties................................................................................ 8
3. Legal Proceedings......................................................................... 9
4. Submission of Matters to a Vote of Security Holders....................................... 12
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................................................... 14
6. Selected Financial Data................................................................... 14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................... 17
7A. Quantitative and Qualitative Disclosures About Market Risk................................ 36
8. Financial Statements and Supplementary Data............................................... 37
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................................................. 76
PART III
10. Directors and Executive Officers of the Registrant........................................ 76
11. Executive Compensation.................................................................... 76
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................................................ 76
13. Certain Relationships and Related Transactions............................................ 77
14. Controls and Procedures................................................................... 77
15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................................................. 77
SIGNATURES .......................................................................................... 82
CERTIFICATIONS............................................................................................ 85
PART I
Item 1. Business.
SureWest Communications (the "Company") was incorporated in 1995 under the laws
of the State of California to serve as a communications 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, SureWest Broadband, SureWest
Custom Data Services (formerly QuikNet, Inc.), SureWest Wireless, SureWest
Televideo ("SureWest Broadband/Residential Services"), and Roseville Alternative
Company ("Roseville Alternative").
Substantially all of the Company's revenues are in the communications services
industry. Approximately 1%, 3% and 11% of the Company's total operating revenues
in 2002, 2001 and 2000, respectively, were derived from access charges and
charges for other services to SBC Communications Inc. ("SBC") (formerly 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 the 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."). The Company 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 2002 2001 2000
- ------------------------ ---- ---- ----
Revenues from services subject
to regulation 67% 69% 75%
Other revenues 33% 31% 25%
---- ---- ----
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,
network access and toll 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 SBC, 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. In recent years,
Roseville Telephone has experienced a significant increase in competition.
For many years, the area served by Roseville Telephone has experienced
significant residential, commercial and industrial development, although the
pace of development has lessened in recent years, including the year ended
December 31, 2002. Roseville Telephone continues to be engaged in the expansion
of its facilities and operations to meet current and anticipated service demand
increases and to maintain modern and efficient service. Roseville Telephone uses
public streets and highways in the conduct of its public utility telephone
business under a non-exclusive perpetual franchise granted by Section 7901 of
the California Public Utilities Code.
Revenues from services subject to regulation, which include local service,
network access service and toll service revenues, constituted approximately 67%
of the Company's total operating revenues in 2002. Other Roseville Telephone
revenues are derived primarily from the provision of directory advertising
services, billing and collection services, nonregulated sales and services, and
other miscellaneous services. Nonregulated revenues are derived from the sale,
lease and maintenance of telecommunications equipment, payphone services, and
network access services. In addition, nonregulated revenues include the
operations of SureWest Broadband, a Competitive Local Exchange Carrier ("CLEC")
operating as a division of Roseville Telephone, which offers local service,
network access service and toll service to customers in the greater Sacramento
region, excluding Roseville Telephone's service area.
Total revenues from certain 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. Additionally, Roseville Telephone bills
SBC various charges for certain local service and network access service
revenues. Interstate access rates and resulting earnings 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
("NECA"). 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.
Other Operations
SureWest Directories 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.
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. The Company's non-exclusive agreement with Global Crossing expires
in July 2003. On January 28, 2002, Global Crossing filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. Effective December 2002, the Company
entered into a 2-year non-exclusive agreement with Sprint Communications Company
L.P. ("Sprint"), a long-distance service provider, for the right to provide
network transport services to the Company's customers at a fixed price during
the term of the agreement. The Company has a monthly minimum usage requirement
of $25 thousand effective June 2003. The minimum usage requirement for 2003 is
$175 thousand. Rates for the services that will be provided by Sprint are
substantially the same as those offered by Global Crossing. Therefore, the
Company does not believe that Global Crossing's bankruptcy filing will have a
material effect on its consolidated financial position or results of operations.
SureWest Internet provides dial-up Internet service in addition to high speed
Internet service to Roseville Telephone's digital subscriber line ("DSL") and
other high band-width customers.
SureWest Custom Data Services provides legacy Internet services in addition to
custom data solutions, which include collocation and bandwidth.
SureWest Televideo provides bundled high-speed Internet, digital cable and
telephone services under the SureWest Broadband/Residential Services name in the
Sacramento Metropolitan area.
Wireless Operations
SureWest Wireless was formed for the purpose of providing wireless personal
communications services. During 1997, SureWest Wireless purchased from the
F.C.C. licenses to offer wireless 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.
Certain operations of the Company are reliant upon the services provided by
WorldCom, Inc. ("WorldCom"), which filed for bankruptcy protection on July 21,
2002. The Company believes that it can procure services from other
telecommunication providers, if necessary, and that the impact of WorldCom's
bankruptcy filing will not have a material effect on it's consolidated financial
position or results of operations.
Sale of Alarm Monitoring Division
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 2002. Through December 31, 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. The alarm
monitoring assets consisted primarily of customer contracts and equipment, which
had a net book value of approximately $355 thousand as of the date of the sale.
The purchaser of the assets has commenced litigation against the Company
relating to claims in connection with certain contracts assigned to the
purchaser. Given the early stages of the litigation, it is not yet possible to
determine its ultimate outcome. However, the Company does not believe this
litigation will have a material adverse effect on the Company's consolidated
financial position or results of operations. Total operating revenues
attributable to the Company's alarm monitoring division during the years ended
2002, 2001 and 2000 were $279 thousand, $2.5 million and $2.2 million,
respectively.
Acquisition of the Assets of Western Integrated Networks, LLC
On July 12, 2002, the Company purchased substantially all of the assets of
Western Integrated Networks, LLC and certain affiliates (collectively, "WIN") in
a transaction supervised by the United States Bankruptcy Court for the District
of Colorado. The assets of WIN acquired by the Company, consisted principally of
accounts receivable and property, plant and equipment. The purchase price for
the assets of WIN consisted of (i) $12 million in cash, (ii) acquisition related
costs of $560 thousand, and (iii) the assumption of certain liabilities
aggregating $4.6 million relating principally to executory contracts and capital
lease obligations for certain vehicles. Under the terms of the asset purchase
agreement, $1.2 million of the aggregate purchase price was held in an escrow
account to protect the Company in the event of any claims available to the
Company. On January 28, 2003, $150 thousand was released to the Company, and the
balance remains in the escrow account. Prior to December 31, 2002, the Company
sold certain equipment acquired in the transaction for $2.2 million, which
equaled its aggregate carrying value at the date of sale.
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 to permit the Company to
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 earnings from its interest in SVLP constituted
approximately 4% of the Company's income before income taxes in 2000.
Employees
At December 31, 2002, the Company had 944 employees, none of whom are
represented by a union.
Competition
There continues to be increased competition facing telecommunications providers.
As a result of industry, legislative and regulatory developments, the Company
continues to face competitive challenges. These developments, however, have also
provided the Company with significant growth opportunities.
The Company's Telecom operations, a substantial portion of which relates to
Roseville Telephone's historic incumbent local exchange carrier operations,
faces competition from facilities-based competitors, interexchange carriers,
resellers and others. In addition, customers have substituted wireless and
Internet alternatives in place of traditional telephone lines. The Company's
wireless affiliate has benefited from such substitutions. In addition, the
Company's long distance service competes with the largest national providers.
SureWest Wireless is one of nine wireless providers in the Sacramento region.
Accordingly, it faces significant competition from both large national and
regional cellular and PCS providers of wireless services.
The Company's Internet affiliate competes against the largest national providers
of Internet and high-speed data service together with smaller regional
providers.
SureWest Directories faces competition from other directory publishers servicing
the areas covered by the Company's directories, together with competition from
other advertising sources.
While certain of the Company's operations subject to regulation have and may in
the future experience customer reductions from increased competition, the
Company believes that its entry into newer businesses in recent years will
offset customer losses, and that the newer businesses will provide significant
revenue opportunities.
Available information
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to reports filed pursuant to Sections
13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are
available on our website at www.surewest.com, when such reports are available on
the Securities and Exchange Commission website.
Item 2. Properties.
The Company owns and leases office facilities and related equipment for
executive headquarters, administrative personnel, central office buildings, and
operations in Roseville, Citrus Heights, Granite Bay, and other locations in
Sacramento and Placer Counties. The Company's executive headquarters, principal
business and administrative office, and operations facility which are located in
Roseville, consist of 282,000 square feet. The Company leases a 233,000 square
foot facility in McClellan Park for its Broadband operations. 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 Wireless antennas. See Note 10 in the Notes to
Consolidated Financial Statements for information regarding the Company's lease
obligations. 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
wireless antennas, towers, pole lines, head-end, remote terminals, 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 jointly-owned with other entities,
and leases space on facilities 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 indicated 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. 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. In connection with
this proceeding, the P.U.C.'s 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
Decision did not suspend the sharing mechanism as Roseville Telephone had
requested, and further provided 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. Additionally, in accordance with the provisions of
the Decision, the Company recorded certain liabilities and reduction of revenues
relating to estimated intrastate shareable earnings obligations.
Prior to January 1, 2002, Roseville Telephone billed SBC 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
years ended December 31, 2002 and 2001, less than 10% was recorded under these
agreements in each period. In 1999, SBC expressed interest in withdrawing from
the designated carrier plan ("DCP") for Roseville Telephone's toll traffic. The
DCP was a compensation arrangement between Roseville Telephone and SBC for
certain intrastate toll services. Roseville Telephone and SBC agreed to allow
the DCP arrangement to expire in December 2001. The termination of the DCP did
not have a material impact on the Company's consolidated financial position as
of December 31, 2002 or results of operations for the year then ended.
In 1999, SBC also expressed interest in entering into a new, permanent
compensation arrangement for extended area service ("EAS"). At that time, SBC
had been paying Roseville Telephone $11.5 million per year for EAS pursuant to a
Settlement Transition Agreement. In November 2000, the P.U.C. authorized SBC to
terminate its annual EAS payments to Roseville Telephone effective November 30,
2000. The P.U.C. authorized replacement funding to Roseville Telephone on an
interim basis using the current reserve in the California High Cost Fund
("CHCF"). In addition, the P.U.C. opened an Order Instituting Investigation
("OII") for the purpose of determining whether future recovery of all, none, or
a portion of the $11.5 million annual payments previously received from SBC
should come from Roseville Telephone's ratepayers or other regulatory recovery
mechanisms. This proceeding began in 2001, evidentiary hearings were held during
2002, and briefing was completed in February 2003. In this proceeding, the ORA
recommends that the P.U.C. discontinue Roseville Telephone's present interim EAS
funding from the CHCF without replacement revenues from ratepayers. The P.U.C.'s
decision in this matter is expected during 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.
Roseville Telephone's operations may also be impacted by the Telecommunications
Act of 1996 (the "Act"). The Act 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.
Given the ongoing activities of 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.
There are a number of other regulatory proceedings occurring at the federal and
state levels 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 cannot be determined at this time.
The regulatory proceedings occurring at the state and federal levels described
above may also 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 2002.
EXECUTIVE OFFICERS of the registrant
The names, ages and positions of the executive officers of the Company and its
subsidiaries as of March 1, 2003 are as follows:
Name Age Positions and Offices
Thomas E. Doyle 74 Chairman of the Board of Directors (since 2000)
Kirk C. Doyle 49 Vice-Chairman and Secretary (since 2002)
Brian H. Strom 60 President and Chief Executive Officer of the Company (since 1993)
Michael D. Campbell 54 Executive Vice President (since 1996), Chief Financial Officer of the
Company (since 1994) and Treasurer (since 2000)
Jay B. Kinder 58 Senior Vice President and Chief Operating Officer - Roseville Telephone
Company (since 2000)
Bill M. DeMuth 53 Vice President and Chief Technology Officer of the Company (since 2000)
David Marsh 54 Vice President and Chief Information Officer of the Company (since 2000)
Robert M. Burger 46 Senior Vice President and Chief Operating Officer - SureWest Wireless
(since 2000)
Philip D. Germond 53 Vice President, Customer Operations - Roseville Telephone Company (since
2002)
Fred A. Arcuri 50 Senior Vice President and Chief Operating Officer - SureWest Broadband
(since 2001)
Barbara J. Nussbaum 53 Vice President, Administration - of the
Company (since 2002)
Peter C. Drozdoff 47 Vice President, Marketing - of the Company
(since 2002)
Darla J. Yetter 42 Assistant Secretary (since 2000)
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 predecessor plans to the SureWest KSOP (a Company employee benefit
plan) and disclosure, in limited circumstances, of third party transactions. The
price per share for the quarters ended March 31, 2001 and June 30, 2001 was
$40.00.
On September 6, 2001 the Company's common stock began trading on the Nasdaq
National Market ("NASDAQ") under the symbol "SURW". According to the records of
the Company's transfer agent, the Company's approximate number of shareholders
was 7,686 as of March 3, 2003. 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 and each of the four quarters of 2002:
NASDAQ National Market
High Low
September 30, 2001 $45.48 $40.35
December 31, 2001 $58.90 $45.48
March 31, 2002 $56.59 $48.08
June 30, 2002 $57.25 $42.00
September 30, 2002 $53.80 $29.03
December 31, 2002 $40.99 $21.45
The Company paid cash dividends on its common stock of $0.25 per share for each
quarter of 2002 and 2001.
Item 6. Selected Financial Data
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(amounts in thousands, except per share amounts)
Total operating revenues $188,910 $166,234 $143,194 $140,801 $126,682
Gain on sale of investment in
cellular partnership $ - $ - $201,294 $ - $ -
Net income $ 11,249 $ 10,317 $125,793 $ 31,750 $ 25,049
Basic earnings per share(1) $ 0.76 $ 0.67 $ 8.06 $ 2.01 $ 1.58
Diluted earnings per share(1) $ 0.76 $ 0.67 $ 8.05 $ 2.01 $ 1.58
Extraordinary loss, net of tax $ - $ - $(10,932) $ - $ -
Cumulative effect of change
in accounting principle,
net of tax $ - $ - $ (3,273) $ - $ -
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(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 re
troactively:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle $ 11,249 $ 10,317 $ 139,998 $ 31,926 $ 24,749
Net income $ 11,249 $ 10,317 $ 129,066 $ 31,926 $ 24,749
Basic per share amounts:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle $ 0.76 $ 0.67 $ 8.97 $ 2.02 $ 1.56
Net income $ 0.76 $ 0.67 $ 8.27 $ 2.02 $ 1.56
Diluted per share amounts:
Income before extraordinary
loss and cumulative effect
of change in accounting
principle $ 0.76 $ 0.67 $ 8.96 $ 2.02 $ 1.56
Net income $ 0.76 $ 0.67 $ 8.26 $ 2.02 $ 1.56
Cash dividends per share(2) $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 0.85
Property, plant and
equipment, at cost $ 575,581 $ 524,505 $ 469,389 $383,896 $328,437
Total assets $ 398,120 $ 412,343 $ 528,942 $333,187 $315,877
Long-term obligations $ 51,971 $ 42,142 $ 44,285 $ 46,428 $ 48,571
Shares of common stock used
to calculate:
Basic earnings per share(1) 14,728 15,326 15,610 15,815 15,815
Diluted earnings per
share(1) 14,795 15,387 15,630 15,822 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.
Company Overview
Corporate Structure
SureWest Communications (the "Company") is a holding company with wholly-owned
subsidiaries operating in the Telecommunications ("Telecom") and Wireless
segments.
The Telecom segment is aligned with specific subsidiaries of the Company.
Roseville Telephone Company ("Roseville Telephone"), provides local and toll
telephone services, network access services, billing and collection services,
directory advertising services and certain nonregulated services. Nonregulated
revenues include the operations of SureWest Broadband, a Competitive Local
Exchange Carrier ("CLEC") operating as a division of Roseville Telephone, which
offers local service, network access service and toll service to customers in
the greater Sacramento region, excluding Roseville Telephone's service area.
SureWest Directories 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. Roseville Long Distance Company ("Roseville Long Distance"), is engaged in
the provision of long distance services. SureWest Internet is engaged in the
provision of high speed and dial-up Internet services. SureWest Custom Data
Services (formerly QuikNet, Inc.) is engaged in the provision of custom data
solutions. SureWest Televideo ("SureWest Broadband/Residential Services"), a
recently-formed subsidiary of the Company, acquired from Western Integrated
Networks, LLC and affiliates certain assets, which the company is using to
provide high speed Internet, digital cable and telephone services in the
Sacramento area.
The Wireless segment consists of the Company's subsidiary SureWest Wireless,
which provides wireless personal communications services.
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.
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 or 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, and digital
cable 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
The Telecom segment derives its revenue from local service, network access, long
distance services, directory advertising services, Internet services, digital
cable, and the sale of non-regulated products and services.
Certain of the Company's customers have filed for bankruptcy protection in 2002,
the most notable of which was WorldCom, Inc. ("WorldCom"), which, together with
its affiliates, filed for bankruptcy protection on July 21, 2002. As a result of
the WorldCom bankruptcy filing, the Company recognized as bad debt expense in
2002 $1.3 million relating to sums owing from WorldCom to the Company for
services prior to the bankruptcy filing.
With respect to post-petition obligations, WorldCom had proposed pursuant to a
provision of the Bankruptcy Code, and the Bankruptcy Court has agreed, that
utilities are entitled to "adequate assurances" that WorldCom will satisfy its
obligations for post-petition services. In its original filings, WorldCom
proposed its own set of assurances to utilities, but such assurances did not
include either deposits or advance payments. Ultimately, the Bankruptcy Court
granted to all utilities that provide post-petition services to WorldCom,
including the Company, an administrative expense priority claim for all
post-petition services. Although the Bankruptcy Court did not require WorldCom
to provide any deposits or advance payments as adequate assurance of payment, it
did provide, with respect to any post-petition services provided after August
14, 2002, that each utility will have a junior superiority administrative claim
senior to other administrative claims and junior only to the claims of
WorldCom's post-petition lenders. If WorldCom fails to pay for post-petition
services, a utility can either take appropriate action under any applicable
tariff or regulation, or seek, on an expedited basis, an order from the
Bankruptcy Court requiring immediate payment or other relief.
Revenues from services subject to regulation constituted approximately 67%, 69%
and 75% of the Company's total operating revenues in 2002, 2001 and 2000,
respectively. Such revenues, 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 SBC
Communications Inc. ("SBC") (formerly Pacific Bell), long distance carriers,
competitive access providers and subscribers for network access services,
interstate settlement revenues from the National Exchange Carrier Association
("NECA"), and support payments from the Universal Service Fund and a California
High Cost Fund ("CHCF").
Total revenues from certain 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 NECA.
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
January 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 $650 thousand and $3.2 million for
the years ended December 31, 2002 and 2001, respectively, through reductions of
revenues related to Roseville Telephone's estimated interstate shareable
earnings obligations. 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 (no similar payments were
made in 2002 or 2000, and the Company is currently seeking refunds of certain
amounts paid in 2001; however, there is presently no assurance that such amounts
are recoverable). 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.
In May 2002, the D.C. Circuit Court of Appeals (the "Court") issued its decision
in ACS of Anchorage v. F.C.C. The Court determined that a tariff filed properly
under Section 204 "streamlined" procedures and allowed to go into effect without
suspension is deemed lawful, and the carrier is not subsequently obligated to
pay refunds for earnings higher than the permitted rate of return as prescribed
by the F.C.C. for that monitoring period. Subsequent to the Court's decision,
certain telecommunication companies filed a petition for rehearing. In August
2002, the petitions for rehearing were denied by the Court, and later that month
the Court's order became effective. For the monitoring periods 1999 through
2001, Roseville Telephone filed tariffs pursuant to the streamlined procedures
and such tariffs were not suspended or investigated. Consequently, during the
third quarter of 2002, the Company changed its estimate for a portion of
Roseville Telephone's interstate shareable earnings obligations related to those
monitoring periods. This change in accounting estimate increased the Company's
consolidated revenues by $5.1 million and net income by $3.1 million ($0.21 per
share), respectively, for the year ended December 31, 2002.
Prior to January 1, 2002, Roseville Telephone billed SBC 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
years ended December 31, 2002, 2001 and 2000, 1%, 3% and 11%, respectively, was
recorded under these agreements in each period. In 1999, SBC expressed interest
in withdrawing from the designated carrier plan ("DCP") for Roseville
Telephone's toll traffic. The DCP was a compensation arrangement between
Roseville Telephone and SBC for certain intrastate toll services. Roseville
Telephone and SBC agreed to allow the DCP arrangement to expire in December
2001. The termination of the DCP did not have a material impact on the Company's
consolidated financial position as of December 31, 2002 or results of operations
for the year then ended.
In 1999, SBC also expressed interest in entering into a new, permanent
compensation arrangement for extended area service ("EAS"). At that time, SBC
had been paying Roseville Telephone $11.5 million per year for EAS pursuant to a
Settlement Transition Agreement. In November 2000, the P.U.C. authorized SBC to
terminate its annual EAS payments to Roseville Telephone effective November 30,
2000. The P.U.C. authorized replacement funding to Roseville Telephone on an
interim basis using the current reserve in the CHCF. In addition, the P.U.C.
opened an Order Instituting Investigation ("OII") for the purpose of determining
whether future recovery of all, none, or a portion of the $11.5 million annual
payments previously received from SBC should come from Roseville Telephone's
ratepayers or other regulatory recovery mechanisms. This proceeding began in
2001, evidentiary hearings were held during 2002, and briefing was completed in
February 2003. In this proceeding, the Office of Ratepayer Advocates ("ORA")
recommended that the P.U.C. discontinue Roseville Telephone's present interim
EAS funding from the CHCF without replacement revenues from ratepayers. The
P.U.C.'s decision in this matter is expected during 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 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. In connection with
this proceeding, the P.U.C.'s 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 as Roseville Telephone had requested and 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.
Additionally, in accordance with the provisions of the Decision, the Company
recorded liabilities and reduction of revenues of $1.8 million and $6.0 million
relating to estimated intrastate shareable earnings obligations during the years
ended December 31, 2002 and 2001, respectively.
Beginning in January 2002, Roseville Telephone began paying a consumer dividend
for intrastate shareable earnings obligations relating to the years 1998 and
1999. A portion of the consumers' 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 year ended December 31, 2002, $4.3 million had been returned to
consumers.
As of December 31, 2002, the Company's consolidated balance sheet reflected
aggregate liabilities of $9.4 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 earnings obligations could change in the near term, and the
amounts involved could be material.
As a result of the Company's annual cost separation studies, the Company changed
its estimate for a portion of Roseville Telephone's interstate and intrastate
shareable earnings obligations during the fourth quarter of 2002. This change in
accounting estimate increased the Company's consolidated revenues by $1.1
million and net income by $671 thousand ($0.05 per share) for the year ended
December 31, 2002.
Wireless Revenue
The Wireless segment derives its revenue from the provision of wireless digital
personal 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, roaming
service and custom calling features. Wireless services are provided on a
month-to-month basis and are generally billed in advance.
Significant Business Events
Sale of Alarm Monitoring Division
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 2002. Through December 31, 2002, the Company has 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. The alarm
monitoring assets consisted primarily of customer contracts and equipment, which
had a book value of approximately $355 thousand as of the date of the sale. The
purchaser of the assets has commenced litigation against the Company relating to
claims in connection with certain contracts assigned to the purchaser. Given the
early stages of the litigation it is not yet possible to determine its ultimate
outcome. However, the Company does not believe this litigation will have a
material adverse effect on the Company's consolidated financial position or
results of operations. Total operating revenues attributable to the Company's
alarm monitoring division during the years ended 2002, 2001 and 2000 were $279
thousand, $2.5 million and $2.2 million, respectively.
Acquisition of the Assets of Western Integrated Networks, LLC
On July 12, 2002, the Company purchased substantially all of the assets of
Western Integrated Networks, LLC and certain affiliates (collectively, "WIN") in
a transaction supervised by the United States Bankruptcy Court for the District
of Colorado. The assets of WIN acquired by the Company consisted principally of
accounts receivable and property, plant and equipment. The purchase price for
the assets of WIN consisted of (i) $12 million in cash, (ii) acquisition related
costs of $560 thousand, and (iii) the assumption of certain liabilities
aggregating $4.6 million relating principally to executory contracts and capital
lease obligations for certain vehicles. Under the terms of the asset purchase
agreement, $1.2 million of the aggregate purchase price was held in an escrow
account to protect the Company in the event of any claims available to the
Company. On January 28, 2003, $150 thousand was released to the Company, and the
balance remains in the escrow account. Prior to December 31, 2002, the Company
sold certain equipment acquired in the transaction for $2.2 million, which
equaled its aggregate carrying value at the date of sale.
Acquisition of SureWest Custom Data Services
Effective July 31, 2001, the Company acquired all of the outstanding common
stock of SureWest Custom Data Services 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, "Business Combinations." The assets of
SureWest Custom Data Services acquired by the Company, which had an aggregate
fair value of $491 thousand, consisted principally of cash, accounts receivable
and property, plant and equipment. The liabilities of SureWest Custom Data
Services assumed by the Company, which had an aggregate fair value of $534
thousand, consisted principally of accounts payable and long-term debt. As a
result of this acquisition, the Company recorded $2.2 million of goodwill, which
was assigned to the Telecom segment.
Purchase of Wireless Minority Interest
During the second quarter of 2001, the Company acquired from Foresthill
Telephone Co. ("FHT") its 1.8% interest in SureWest Wireless for $2.5 million in
cash. As a result of the acquisition, the Company now owns 100% of SureWest
Wireless. A former member of the Company's Board of Directors was, at the time
of the acquisition, the President and sole shareholder of FHT.
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 ("SVLP")
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. 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 17 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 and Exchange Commission ("SEC") Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements", 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, 2002, 2001 and
2000, the Company recognized $1.9 million, $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 $1.1 million (net of income taxes of $750 thousand), $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, 2002, 2001 and 2000,
respectively.
Results of Operations
2002 versus 2001
Net income for 2002 was $11.2 million, or $0.76 per share, compared with net
income of $10.3 million, or $0.67 per share, for 2001. Operating revenues
increased $22.7 million in 2002, offset by an increase of $19.8 million in
operating expenses, increasing the Company's operating income by $2.9 million,
or 23%, compared to the same period in 2001. The increase in operating income is
due principally to the Company's aggressive expansion into new
telecommunications markets. The continued growth in the Company's wireless, CLEC
and Internet operations resulted in increased operating income of 14%, 9% and
55%, respectively, for the year ended December 31, 2002 compared to the same
period in 2001. In addition, the increase in net income and earnings per share
for 2002 is due in part to the 1) changes in accounting estimate associated with
the Company's interstate and intrastate shareable earnings obligations described
previously, which increased net income by $3.7 million ($0.25 per share) and 2)
the sale of substantially all of the assets of the Company's alarm monitoring
division, which resulted in a $4.4 million pre-tax gain.
Operating Revenues:
Revenues from services subject to regulation, which include local and network
access services, increased $11.7 million, or 10%, compared to 2001. This
increase was due to the combined effects of 1) increased network access revenues
due to expanded demand for DSL services and dedicated access, 2) access line
growth of 2%, and 3) changes in accounting estimate pertaining to the Company's
provision for its estimated interstate and intrastate shareable earnings
obligations. These changes in accounting estimate increased the Company's
consolidated revenues by $6.2 million and net income by $3.7 million ($0.25 per
share) for the year ended December 31, 2002.
Wireless service revenues increased $7.4 million, or 46%, compared to 2001 as a
result of a 28% overall increase in the average subscriber base. The growth in
subscriber base resulted in increased feature, long distance, directory
assistance and activation revenues. 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 $587 thousand, compared to 2001 due to
increased advertising sales. Revenues from non-regulated sales and services
decreased by $1.6 million, or 21%, compared to 2001 due primarily to the sale of
the Company's alarm monitoring division in the first quarter of 2002, offset in
part by an increase in revenues related to the growth of SureWest Broadband, the
Company's CLEC.
Other operating revenues primarily consist of Internet services, long distance
services, custom data services, digital cable, billing and collection services
and other miscellaneous services. Other operating revenues increased $4.6
million, or 33%, compared to 2001 due primarily to continued additions to the
Internet customer base and increased revenues from the additions of SureWest
Custom Data Services in the third quarter of 2001 and SureWest Televideo in the
third quarter of 2002. The increase was offset in part by a decrease in the
Company's billing and collection services revenues as certain interexchange
carriers began to perform their own billing and collection function.
Operating Expenses:
Total operating expenses increased $19.8 million, or 13%, compared to 2001. Cost
of services and products increased $6.7 million, or 12%, during 2002 due
primarily to 1) increased costs in long distance, tower rents, wireless phone
handset subsidies and roaming charges related to the increased demand for
wireless services, 2) increased transport expenses related to the growth of the
Company's CLEC operations, and 3) increased expenses from the additions of
SureWest Custom Data Services in the third quarter of 2001 and SureWest
Televideo in the third quarter of 2002.
Customer operations and selling expense increased $1.7 million, or 5%, during
2002 due primarily to 1) increased customer service, product advertising and
marketing associated with wireless subscriber growth, 2) increased expenses from
the additions of SureWest Custom Data Services in the third quarter of 2001 and
SureWest Televideo in the third quarter of 2002, and 3) increased sales and
advertising expense related to the growth of the Company's CLEC. The increases
were partially offset by decreased dealer commissions related to wireless
service.
General and administrative expenses increased $6.0 million, or 23%, due
primarily to the additions of SureWest Custom Data Services in the third quarter
of 2001 and SureWest Televideo in the third quarter of 2002. In addition,
general and administrative expenses increased during 2002 due to the $1.3
million bad debt expense recognized, associated with access charge billings to a
customer that has filed for bankruptcy protection. In July 2002, WorldCom and
its affiliated companies filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. The Company recognized $1.3 million of bad debt
expense during 2002 relating to the obligations of WorldCom to the Company for
the period prior to the bankruptcy filing. These increases were offset in part
due to one-time expenses incurred during the prior year related to the Company's
name change.
Depreciation and amortization increased $5.3 million, or 13%, during 2002 as a
result of increases in wireless property, plant and equipment, and amortization
of internal-use software. This increase was partially offset by a decrease in
amortization relating to the Company's wireless licenses due to the adoption of
SFAS No. 142 as described below. In addition, during the fourth quarter of 2002,
the Company increased the estimated useful lives primarily related to its
wireless switching and voice mail equipment from five to ten years. This change
in accounting estimate did not have a material impact on the consolidated
financial position or results of operations of the Company for the year ended
December 31, 2002.
Other Income (Expense), Net:
Other income (expense), net, decreased $1.4 million, or 33%, compared to 2001
due primarily to 1) reduced interest income resulting from lower average
invested balances during 2002 and 2) increased interest expense resulting from
higher average short-term borrowings during 2002. This decrease was partially
offset by the gain from the sale of the Company's alarm monitoring division in
January 2002.
Income Taxes:
Income taxes increased $557 thousand, as compared to 2001, due primarily to an
increase in income subject to tax. The effective federal and state income tax
rate was 39.8% in 2002, compared to 40.0% in 2001.
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 was 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 $23.0 million in 2001, offset by an increase of $34.0 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 from services 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,
the Company also experienced 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 $3.5 million, or 34%, 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 SureWest
Custom Data Services and increased dedicated access provided by SureWest
Broadband.
Operating Expenses:
Total operating expenses increased $34.0 million, or 28%, compared to 2000. Cost
of services and products increased $9.4 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 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 30%, 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 $6.1 million, or 31%, during 2001.
These increases were 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 Wireless property, plant and equipment,
amortization of network software and Wireless 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 pre-tax 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 pre-tax gain on the sale of
its interest in SVLP in 2000. The effective federal and state income tax rate
was 40.0% 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 a $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 No. 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 provided by
operating activities was $45.8 million in 2002. Net cash used in operating
activities was $32.9 million in 2001. Net cash provided by operating activities
was $53.1 million in 2000. The increase in cash from operating activities in
2002, compared to 2001, was due primarily to an approximate $90 million payment
of income tax in 2001 related to the sale of the Company's cellular partnership
interest in 2000. The Company used cash flows from operations, proceeds from the
sale of the Company's alarm monitoring division assets, proceeds from short-term
borrowings and existing cash and cash equivalents to fund 1) capital
expenditures of $43.4 million pertaining to ongoing plant construction projects,
2) common stock repurchases of $14.5 million in the open market, 3) common stock
repurchases from one of the Company's employee benefit plans of $15.0 million,
4) dividends of $14.8 million, 5) principal payments of $2.1 million to retire
long-term debt, and 6) the purchase of substantially all of the assets of WIN
for $12.5 million, as described below.
The Company's most significant use of funds in 2003 is expected to be for 1)
budgeted capital expenditures of approximately $61.1 million, 2) scheduled
payments of long-term debt of $5.8 million, 3) support of the operations of
SureWest Broadband/Residential Services up to an anticipated $5.6 million and 4)
support of the operations of SureWest Wireless of up to $5.0 million.
On July 12, 2002, the Company purchased substantially all of the assets of WIN
in a transaction supervised by the United States Bankruptcy Court for the
District of Colorado. The purchase price for the assets of WIN consisted of (i)
$12 million in cash, (ii) direct acquisition costs of $560 thousand, and (iii)
the assumption of certain current liabilities aggregating $4.6 million relating
principally to executory contracts and capital lease obligations. Under the
terms of the asset purchase agreement, $1.2 million of the aggregate purchase
price was held in an escrow account to protect the Company in the event of any
claims available to the Company. On January 28, 2003, $150 thousand was released
to the Company, and the balance remains in the escrow account. Prior to December
31, 2002, the Company sold certain equipment acquired in the transaction for
$2.2 million, which equaled its aggregate carrying value at the date of sale.
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 authorized 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. At present, the reincorporation has not been implemented,
but is anticipated to occur in 2003.
In February 2000, the Board of Directors authorized the repurchase of up to 1
million shares of the Company's common stock. In June 2002, the Board of
Directors approved the repurchase of an additional 500 thousand shares. The
shares are purchased from time to time in the open market or through privately
negotiated transactions subject to overall financial and market conditions.
Additionally, the Company implemented an odd-lot repurchase program during 2001.
Through December 31, 2002, approximately 1 million shares of common stock have
been repurchased through the programs. The Company has remaining authorization
from the Board of Directors to repurchase an additional 469 thousand outstanding
shares.
On March 13, 2003, the Company completed a note purchase agreement for the
issuance of its unsecured Series B Senior Notes ("Series B Notes") in the
aggregate principal amount of $60 million. The Series B Notes have a final
maturity of ten years and an average life of eight years. Interest is payable
semi-annually at a fixed rate of 4.74%. Principal payments are due in equal
annual installments of $12 million commencing in March 2009 and ending in March
2013. The Company will use a portion of the proceeds from the issuance of the
Series B Notes to retire certain short-term borrowings with an aggregate
outstanding principal balance of $15 million as of December 31, 2002.
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. At December 31, 2002, the Company
had utilized $15 million of the borrowing capacity. Interest on such borrowings
is based on a LIBOR-based pricing formula and is payable monthly. The interest
rate as of December 31, 2002 was 2.74%.
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 a fixed
price during the term of the agreement. This agreement expires in July 2003, and
the Company has a minimum remaining aggregate long distance service usage
commitment of approximately $280 thousand as of December 31, 2002. On January
28, 2002, Global Crossing filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Effective December 2002, the Company entered into a 2-year
non-exclusive agreement with Sprint Communications Company L.P. ("Sprint"), a
long-distance service provider, for the right to provide network transport
services to the Company's customers at fixed prices during the term of the
agreement. The Company has a monthly minimum usage requirement of $25 thousand
effective June 2003. The minimum usage requirement for 2003 is $175 thousand.
Rates for the services that will be provided by Sprint are substantially the
same as those offered by Global Crossing. Therefore, the Company does not
believe that Global Crossing's bankruptcy filing will have a material effect on
its consolidated financial position or results of operations.
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 2002. Through December 31, 2002, the Company has 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. The alarm
monitoring assets consisted primarily of customer contracts and equipment, which
had a book value of approximately $355 thousand as of the date of the sale. The
purchaser of the assets has commenced litigation against the Company relating to
claims in connection with certain contracts assigned to the purchaser. Given the
early stages of the litigation, it is not yet possible to determine its ultimate
outcome. However, the Company does not believe this litigation will have a
material adverse effect on the Company's consolidated financial position or
results of operations. Total operating revenues attributable to the Company's
alarm monitoring division during the years ended 2002, 2001 and 2000 were $279
thousand, $2.5 million and $2.2 million, respectively.
The Company had cash and cash equivalents at December 31, 2002, of $20.4
million. Subsequently, the Company received the proceeds from the issuance of
its Series B Notes in the aggregate principal amount of $60.0 million, as
described above. Accordingly, the Company believes that its working capital
position, the proceeds available from the issuance of the Series B Notes,
operating cash flows and borrowing capacity are more than sufficient to satisfy
its liquidity requirements in 2003. While the bankruptcy filing by WorldCom and
its affiliates may subsequently 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. In addition, the Company has borrowing capacity under
its bank business loan agreement, and believes, given its financial position and
debt-to-equity position, it has substantial additional short and long-term
borrowing capacity.
As of December 31, 2002, the Company's contractual obligations were as follows:
2003 2004-2005 2006-2007 Thereafter Total
(amounts in thousands)
Short-term borrowings
refinanced on a
long-term basis $15,000 $ - $ - $ - $15,000
Long-term debt $ 5,779 $7,272 $7,272 $21,820 $42,143
Capital leases $ 309 $ 559 $ 35 $ 13 $ 916
Operating leases $ 4,654 $6,883 $4,329 $ 7,644 $23,510
Unconditional purchase
obligations $ 2,560 $ - $ - $ - $ 2,560
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 greater than one year with such 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 (no similar purchases were made in 2002).
During the second quarter of 2002, the Company repurchased 300 thousand shares
of its common stock from one of its employee benefit plans. The Company utilized
two separate independent third party entities for the purpose of providing
fairness opinions in connection with the transaction. The shares were
repurchased at a price of $50 per share and were retired upon repurchase.
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. Management has discussed development and
selection of critical accounting policies and estimates with its Audit
Committee.
o As discussed more fully in Note 1, 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 As discussed more fully in Note 2, 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 or determinable and (iv) collectibility of the sales price is
reasonably assured.
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 1, the Company states its inventories at
lower of cost or market. In assessing the ultimate recoverability of
inventories, the Company is required to make estimates regarding future
customer demand.
o As discussed more fully in Note 1, property, plant and equipment and
intangible assets are recorded at cost. 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 17. 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 intangible assets.
o As discussed more fully in Notes 1 and 8, 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, 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 As discussed more fully in Note 9, the Company has pension and
post-retirement benefit costs and obligations. The Company's pension and
post-retirement 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
post-retirement benefit costs and obligations.
o As more fully described in Notes 1 and 10, the Company is a party to a
variety of litigation, regulatory proceedings and other contingencies that
arise in the ordinary course of business. The Company is required to assess
the likelihood of any adverse judgments or outcomes to these matters, as
well as potential ranges of probable losses for certain of these matters.
The determination of the liabilities required, if any, for loss
contingencies is made after careful analysis of each individual issue. In
the opinion of management, the ultimate outcome of these matters will not
materially affect the Company's consolidated financial position and results
of operations.
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 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 and LMDS licenses effective January 1, 2002,
which resulted in an increase in the Company's consolidated net income of $305
thousand ($0.02 per share) for the year ended December 31, 2002. The Company's
operating results for the year ended December 31, 2001 included $483 thousand of
amortization related to the Company's wireless and LMDS licenses. In the absence
of such amortization, the Company's adjusted net income for the year ended
December 31, 2001 would have been $10.6 million ($0.69 per share). Beginning in
the first quarter of 2002, the Company's wireless 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 consolidated financial statements as of
and for the year ended December 31, 2002). The goodwill recognized by the
Company in connection with its acquisition of SureWest Custom Data Services in
July 2001 is not being amortized based on the provisions of SFAS Nos. 141 and
142. Instead, under the provisions of SFAS No. 142, goodwill is evaluated at
least annually 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 tests for impairment annually during the fourth
quarter. The Company completed its annual impairment test during the fourth
quarter of 2002 and did not identify any impairment.
On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value method of accounting for stock-based
employee compensation. In addition, it also amends the disclosure provisions of
SFAS No. 123 to require prominent disclosure about the effects on reported net
income including per share amounts, of an entity's accounting policy decisions
with respect to stock-based employee compensation in annual and interim
financial statements. SFAS No. 148 does not amend SFAS No. 123 to require
companies to account for their stock-based employee compensation using the fair
value method. The disclosure provisions of SFAS No. 123 were effective
immediately in 2002. As of December 31, 2002, the Company does not have any
immediate plans to change its method of accounting for stock-based employee
compensation to the fair value method.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with an Exit or Disposal Activity." SFAS No. 146 revises the accounting for exit
and disposal activities under Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)," by extending the period in which expenses related to
restructuring activities are reported. A commitment to a plan to exit an
activity or dispose of long-lived assets will no longer be sufficient to record
a one-time charge for most restructuring activities. Instead, companies will
record exit or disposal costs when they are "incurred" and can be measured at
fair value. In addition, the resultant liabilities will be subsequently adjusted
for changes in estimated cash flows. SFAS No. 146 is effective prospectively for
exit or disposal activities initiated after December 31, 2002. Companies may not
restate previously issued financial statements for the effect of the provisions
of SFAS No. 146, and liabilities that a company previously recorded under EITF
Issue No. 94-3 are grandfathered. The Company has adopted SFAS No. 146 on
January 1, 2003, and it does not believe that the adoption of this new standard
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.
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 2002, the FASB's EITF reached a consensus on EITF Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." Under EITF
Issue No. 00-21, revenue arrangements with multiple deliverables are required to
be divided into separate units of accounting under certain circumstances. The
Company will prospectively adopt EITF Issue No. 00-21 for arrangements entered
into beginning after June 30, 2003, and it does not believe the adoption of this
new guidance will have a material effect on its consolidated financial
statements.
On January 1, 2002, the Company adopted the provision of EITF Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)," dealing with consideration from a vendor to
a reseller under cooperative advertising and other arrangements. This provision
of EITF Issue No. 01-9 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
consolidated financial statements as of and for the year ended December 31,
2002.
In November 2002, the FASB issued interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires certain guarantees to
be recorded at fair value, which is different from current practice, which is
generally to record a liability only when a loss is probable and reasonably
estimable. FIN No. 45 also requires a guarantor to make significant new
disclosures, even when the likelihood of making any payments under the guarantee
is remote. The disclosure provisions of FIN No. 45 are effective immediately in
2002. The Company is required to adopt the recognition and measurement
provisions of FIN No. 45 on a prospective basis with respect to guarantees
issued or modified after December 31, 2002. The Company does not believe the
adoption of the recognition and measurement provisions of FIN No. 45 will have a
material effect on its consolidated financial statements.
Regulatory and Legal Matters
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.
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 ................................... 38
Consolidated Balance Sheets as of December 31, 2002 and 2001 ..... 39
Consolidated Statements of Income for each of the three years
in the period ended December 31, 2002............................. 41
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 2002............. 44
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2002....................... 45
Notes to Consolidated Financial Statements ....................... 48
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, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SureWest
Communications at December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2002 the
Company discontinued the amortization of certain indefinite-lived intangible
assets in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. As discussed in Note 2 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. As
discussed in Note 17 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.
/s/Ernst & Young LLP
Sacramento, California
February 7, 2003,
except for Note 18, as
to which the
date is March 13, 2003
SUREWEST COMMUNICATIONS
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(amounts in thousands)
ASSETS 2002 2001
------ ---- ----
Current assets:
Cash and cash equivalents $ 20,385 $ 54,520
Short-term investments - 1,723
Accounts receivable (less allowances of
$1,705 and $1,068 at December 31,
2002 and 2001, respectively) 21,128 20,282
Refundable income tax 6,868 2,619
Inventories 4,649 3,324
Deferred income tax asset - 640
Deferred directory costs 3,657 3,260
Prepaid expenses and other current assets 2,325 1,726
-------- --------
Total current assets 59,012 88,094
Property, plant and equipment:
In service 553,744 492,323
Under construction 21,837 32,182
-------- --------
575,581 524,505
Less accumulated depreciation 255,320 216,432
-------- --------
320,261 308,073
Intangible and other assets:
Wireless licenses, net 13,566 13,566
Goodwill 2,171 2,171
Intangible asset relating to pension
plans 1,507 -
Intangible asset relating
to favorable operating leases, net 1,260 -
Deferred charges and other assets 343 439
-------- --------
18,847 16,176
-------- --------
$398,120 $412,343
======== ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2002 and 2001
(amounts in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
- ------------------------------------ ---- ----
Current liabilities:
Current portion of long-term debt $ 5,779 $ 2,143
Current portion of capital lease obligations 309 -
Accounts payable and other accrued
liabilities 8,493 11,093
Estimated shareable earnings obligations 9,350 16,597
Advance billings and deferred revenues 8,142 8,144
Accrued pension benefits 5,613 7,714
Accrued compensation 4,902 4,218
-------- --------
Total current liabilities 42,588 49,909
Short-term borrowings refinanced on a
long-term basis 15,000 -
Long-term debt 36,364 42,142
Long-term capital lease obligations 607 -
Deferred income taxes 26,552 11,206
Other liabilities and deferred revenues 8,004 7,293
Commitments and contingencies
Shareholders' equity:
Common stock, without par value; 100,000
shares authorized, 14,529 and 15,110 shares
issued and outstanding at December 31, 2002
and 2001, respectively 158,567 172,083
Deferred stock-based compensation (116) (303)
Accumulated other comprehensive loss (1,637) -
Retained earnings 112,191 130,013
-------- --------
Total shareholders' equity 269,005 301,793
-------- --------
$398,120 $412,343
======== ========
See accompanying notes.
SureWest Communications
consolidated statements of income
Years ended December 31, 2002, 2001 and 2000
(amounts in thousands, except per share amounts)
2002 2001 2000
---- ---- ----
Operating revenues:
Local service $ 67,705 $ 65,524 $ 65,708
Network access service 58,598 49,120 41,357
Wireless service 23,732 16,301 4,922
Directory advertising 14,824 14,237 13,044
Nonregulated sales and
services 5,758 7,330 7,931
Other 18,293 13,722 10,232
-------- -------- --------
Total operating revenues 188,910 166,234 143,194
Operating expenses:
Cost of services and products 61,429 54,686 45,326
Customer operations and selling 34,860 33,175 25,564
General and administrative 31,805 25,769 19,686
Depreciation and amortization 45,126 39,841 28,891
-------- -------- --------
Total operating expenses 173,220 153,471 119,467
-------- -------- --------
Income from operations 15,690 12,763 23,727
Other income (expense):
Interest income 739 4,803 2,814
Interest expense (1,876) (1,314) (4,223)
Equity in earnings of cellular
partnership - - 10,089
Gain on sale of investment in
cellular partnership - - 201,294
Gain on sale of alarm
monitoring assets 4,435 - -
Allowance for funds used during
construction - - 1,219
Other, net (313) 934 234
-------- -------- --------
Total other income, net 2,985 4,423 211,427
-------- -------- --------
Income before income taxes,
extraordinary loss and cumulative
effect of change in accounting
principle 18,675 17,186 235,154
Income taxes 7,426 6,869 95,156
-------- -------- --------
Income before extraordinary loss
and cumulative effect of
change in accounting principle 11,249 10,317 139,998
Extraordinary loss, net of $7,631
tax benefit in 2000 - - (10,932)
See accompanying notes.
SureWest Communications
consolidated statements of income (CONTINUED)
Years ended December 31, 2002, 2001 and 2000
(amounts in thousands, except per share amounts)
2002 2001 2000
---- ---- ----
Cumulative effect of change in
accounting principle, net of
$2,250 tax benefit in 2000 - - (3,273)
--------- --------- --------
Net income $ 11,249 $ 10,317 $125,793
========= ========= ========
Basic per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.76 $ 0.67 $ 8.97
Extraordinary loss,
net of tax benefit - - (0.70)
Cumulative effect of change in
accounting principle, net of tax
benefit - - (0.21)
--------- --------- --------
Net income $ 0.76 $ 0.67 $ 8.06
========= ========= ========
Shares of common stock used to
calculate basic per share
amounts 14,728 15,326 15,610
========= ========= ========
Diluted per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.76 $ 0.67 $ 8.96
Extraordinary loss, net of tax
benefit - - (0.70)
Cumulative effect of change in
accounting principle, net of
tax benefit - - (0.21)
--------- --------- --------
Net income $ 0.76 $ 0.67 $ 8.05
========= ========= ========
Shares of common stock used to
calculate diluted per share
amounts 14,795 15,387 15,630
========= ========= ========
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 $ 11,249 $ 10,317 $139,998
See accompanying notes.
SureWest Communications
consolidated statements of income (CONTINUED)
Years ended December 31, 2002, 2001 and 2000
(amounts in thousands, except per share amounts)
2002 2001 2000
---- ---- ----
Net income $ 11,249 $ 10,317 $129,066
Basic per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.76 $ 0.67 $ 8.97
Net income $ 0.76 $ 0.67 $ 8.27
Diluted per share amounts:
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 0.76 $ 0.67 $ 8.96
Net income $ 0.76 $ 0.67 $ 8.26
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(amounts in thousands)
Deferred Other
Number of Stock-Based Comprehensive Retained
Shares Amount Compensation Loss Earnings Total
------ -------- ------------ ------------- -------- -------
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
Issuance of common stock upon
exercise of options 23 896 - - - 896
Issuance of restricted common
stock 2 46 - - - 46
Repurchase of common
stock (606) (15,149) - - (14,318) (29,467)
Amortization of deferred
stock-based compensation - - 187 - - 187
Tax benefits from stock plans - 691 - - - 691
Minimum pension and post-
retirement benefit obligation
adjustment, net of income taxes - - - (1,637) - (1,637)
Cash dividends - - - - (14,753) (14,753)
Net income - - - - 11,249 11,249
-------- -------- -------- --------- --------- --------
Balance at December 31, 2002 14,529 $158,567 $ (116) $(1,637) $112,191 $269,005
======== ======== ======== ========= ========= ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
Increase (Decrease) in Cash and Cash Equivalents
(amounts in thousands)
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 11,249 $ 10,317 $ 125,793
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 45,126 39,841 28,891
Equity component of allowance
for funds used during construction - - (653)
Provision for deferred income taxes 17,128 10,381 (14,260)
Equity in earnings of cellular
partnership - - (10,089)
Gain on sale of cellular partnership - - (201,294)
Gain on sale of alarm
monitoring assets (4,435) - -
Provision for doubtful accounts 3,811 2,896 836
Stock-based compensation 202 60 -
Other, net (4) 838 (439)
Net changes in:
Receivables (4,269) 1,374 (4,953)
Refundable and accrued income
taxes, net (3,558) (94,669) 92,380
Inventories, prepaid expenses
and other current assets (1,376) (774) (1,482)
Payables, accrued liabilities
and other deferred credits (18,070) (3,160) 24,165
-------- -------- --------
Net cash provided by (used in)
operating activities 45,804 (32,896) 53,100
Cash flows from investing activities:
Purchase of substantially all of
the assets from Western Integrated
Networks, LLC (12,529) - -
Proceeds from the sale of alarm
monitoring assets 4,495 500 -
Purchase of business, net of
cash acquired - (2,091) -
Purchase of minority interest in
subsidiary - (2,500) -
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2001 and 2000
Increase (Decrease) in Cash and Cash Equivalents
(amounts in thousands)
2002 2001 2000
---- ---- ----
Capital expenditures for property,
plant and equipment (43,354) (69,556) (87,234)
Purchase of wireless licenses - - (4,642)
Purchases of held-to-maturity
investments - (8,843) (7,625)
Maturities of held-to-maturity
investments 1,723 14,555 6,654
Investment in cellular partnership - - (9,902)
Return of investment in cellular
partnership - 5,513 18,046
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 192 691 (379)
-------- -------- --------
Net cash provided by (used in)
investing activities (49,473) (46,731) 136,071
Cash flows from financing activities:
Principal payments of long-term
debt (2,142) (2,143) (2,143)
Increase in short-term borrowings 15,000 - 40,000
Repayment of short-term borrowings - - (40,000)
Dividends paid (14,753) (15,342) (15,640)
Proceeds from exercise of stock
options 896 288 -
Repurchase of common stock (29,467) (18,532) (13,124)
Investment in subsidiary by
minority partner - - 805
Other, net - (79) -
--------- --------- ---------
Net cash used in
financing activities (30,466) (35,808) (30,102)
--------- --------- ---------
See accompanying notes.
SUREWEST COMMUNICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2001 and 2000
Increase (Decrease) in Cash and Cash Equivalents
(amounts in thousands)
Increase (decrease) in cash and
cash equivalents (34,135) (115,435) 159,069
Cash and cash equivalents at
beginning of year 54,520 169,955 10,886
--------- --------- ---------
Cash and cash equivalents at
end of year $ 20,385 $ 54,520 $ 169,955
========= ========= =========
See accompanying notes.
SUREWEST COMMUNICATIONS
notes to consolidated financial statements
December 31, 2002, 2001 and 2000
(amounts in thousands, except share and per share amounts)
1. Summary of significant accounting policies
Business and basis of accounting
SureWest Communications (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 Custom
Data Services (formerly QuikNet, Inc.), SureWest Wireless, SureWest
Televideo ("SureWest Broadband/Residential Services") and Roseville
Alternative Company ("Roseville Alternative") are each subsidiaries of the
Company. SureWest Wireless provides wireless personal communication
services. 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 preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ materially from those estimates. The Company's critical
accounting estimates include (i) revenue recognition and the establishment
of estimated shareable earnings obligations and accounts receivable
allowances (Notes 1 and 2), (ii) inventory valuation (Note 1), (iii) useful
life assignments and impairment evaluations associated with property, plant
and equipment and intangible assets (Note 1), (iv) valuation allowances
associated with deferred tax assets (Notes 1 and 8), (v) pension and
post-retirement benefit costs and obligations (Note 9) and (vi) anticipated
outcomes of litigation, regulatory proceedings and other contingencies
(Notes 1 and 10).
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.
Reclassifications
Certain amounts in the 2001 and 2000 consolidated financial statements have
been reclassified to conform with the presentation of the 2002 consolidated
financial statements.
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 certain 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 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. In January 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 $650 and
$3,200 for the years ended December 31, 2002 and 2001, respectively,
through reductions of revenues related to Roseville Telephone's estimated
interstate shareable earnings obligations. 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 (no
similar payments were made in 2002 or 2000, and the Company is currently
seeking refunds of certain amounts paid in 2001; however, there is
presently no assurance that such amounts are recoverable). 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.
In May 2002, the D.C. Circuit Court of Appeals (the "Court") issued its
decision ACS of Anchorage v. F.C.C. The Court determined that a tariff
filed properly under Section 204 "streamlined" procedures and allowed to go
into effect without suspension is deemed lawful, and the carrier is not
subsequently obligated to pay refunds for earnings higher than the
permitted rate of return as prescribed by the F.C.C. for that monitoring
period. Subsequent to the Court's decision, certain telecommunication
companies filed a petition for rehearing. In August 2002, the petitions for
rehearing were denied by the Court, and later that month the Court's order
became effective. For the monitoring periods 1999 through 2001, Roseville
Telephone filed tariffs pursuant to the streamlined procedures and such
tariffs were not suspended or investigated. Consequently, during the third
quarter of 2002, the Company changed its estimate for a portion of
Roseville Telephone's interstate shareable earnings obligations related to
those monitoring periods. This change in accounting estimate increased the
Company's consolidated 2002 revenues by $5,092 and net income by $3,065
($0.21 per share) for the year ended December 31, 2002.
Prior to January 1, 2002, Roseville Telephone billed SBC Communications
Inc. ("SBC") (formerly 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
years ended December 31, 2002, 2001 and 2000, 1%, 3% and 11%, respectively,
was recorded under these agreements in each period. In 1999, SBC expressed
interest in withdrawing from the designated carrier plan ("DCP") for
Roseville Telephone's toll traffic. The DCP was a compensation arrangement
between Roseville Telephone and SBC for certain intrastate toll services.
Roseville Telephone and SBC agreed to allow the DCP arrangement to expire
in December 2001. The termination of the DCP did not have a material impact
on the Company's consolidated financial position as of December 31, 2002 or
results of operations for the year then ended.
In 1999, SBC also expressed interest in entering into a new, permanent
compensation arrangement for extended area service ("EAS"). At that time,
SBC had been paying Roseville Telephone $11,500 per year for EAS pursuant
to a Settlement Transition Agreement. In November 2000, the P.U.C.
authorized SBC to terminate its annual EAS payments to Roseville Telephone
effective November 30, 2000. The P.U.C. authorized replacement funding to
Roseville Telephone on an interim basis using the current reserve in the
California High Cost Fund ("CHCF"). In addition, the P.U.C. opened an Order
Instituting Investigation ("OII") for the purpose of determining whether
future recovery of all, none, or a portion of the $11,500 annual payments
previously received from SBC should come from Roseville Telephone's
ratepayers or other regulatory recovery mechanisms. This proceeding began
in 2001, evidentiary hearings were held during 2002, and briefing was
completed in February 2003. In this proceeding, the Office of Ratepayer
Advocates ("ORA") recommended that the P.U.C. discontinue Roseville
Telephone's present interim EAS funding from the CHCF without replacement
revenues from ratepayers. The P.U.C.'s decision in this matter is expected
during 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 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. In
connection with this proceeding, the P.U.C.'s 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 as Roseville Telephone had
requested and further provided 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. Additionally, in accordance with
the provisions of the Decision, the Company recorded certain liabilities
and reduction of revenues of $1,750 and $6,000 relating to estimated
intrastate shareable earnings obligations during the years ended December
31, 2002 and 2001, respectively.
Beginning in January 2002, Roseville Telephone began paying a consumer
dividend for intrastate shareable earnings obligations relating to the
years 1998 and 1999. A portion of the consumers' 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 year ended December 31, 2002, $4,311
had been returned to consumers.
As of December 31, 2002, the Company's consolidated balance sheet reflected
aggregate liabilities of $9,350 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.
As a result of the Company's annual cost separation studies, the Company
changed its estimate for a portion of Roseville Telephone's interstate and
intrastate shareable earnings obligations during the fourth quarter of
2002. This change in accounting estimate increased the Company's
consolidated revenues by $1,115 and net income by $671 ($0.05 per share)
for the year ended December 31, 2002.
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. There were no short-term investments at
December 31, 2002. Short-term investments at December 31, 2001 had
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, 2002 and 2001, 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, 2002 and 2001 at amortized cost, which
approximates fair market value:
2002 2001
-------- --------
Commercial paper $ - $ 9,450
Money market mutual funds 2,112 32,545
Repurchase agreements - 4,370
-------- --------
$ 2,112 $ 46,365
======== ========
Fair values of financial instruments
As of December 31, 2002 and 2001, the Company's financial instruments
consist of cash, cash equivalents, short-term investments, short-term
borrowings, long-term debt and capital lease obligations. Management
believes the carrying values of cash equivalents and short-term investments
at December 31, 2002 and 2001, 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 $43,728 and
$44,085 at December 31, 2002 and 2001, respectively. The aggregate fair
values of the Company's short-term borrowings and capital lease obligations
were $15,000 and $862 as of December 31, 2002, respectively (none in 2001).
Fair values for cash equivalents and short-term investments were determined
by quoted market prices. Fair values for the long-term debt, short-term
borrowings and capital lease obligations were determined through discounted
cash flow analyses based on the Company's current incremental interest
rates for similar instruments.
Allowance for doubtful accounts
Allowances for doubtful debts are maintained for estimated losses, which
result from the inability of customers to make required payments.
Allowances are based on the likelihood of recoverability of accounts
receivable based on past experience and management's best estimates of
current bad debt exposures.
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
handset and accessory inventories are stated at the lower of average cost
or market value. Inventories at SureWest Internet are comprised of modems,
which are stated at the lower of average cost or market value.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Additions and
substantial improvements are capitalized. Retirements and other reductions
of regulated telephone plant and equipment with a cost of approximately,
$6,470, $14,696 and $2,394 in 2002, 2001 and 2000, 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. The
useful lives of property, plant and equipment are estimated in order to
determine the amount of depreciation and amortization expense to be
recorded. The useful lives are estimated at the time the assets are
acquired and are based on historical experience with similar assets, as
well as taking into account anticipated technological or other changes.
Average annual composite depreciation rates were 7.1%, 7.48% and 7.31%, in
2002, 2001 and 2000, 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 17)
in December 2000, depreciation expense for regulated operations was
computed on a straight-line basis using rates approved by the P.U.C.
Effective November 1, 2002, the Company increased the estimated useful
lives primarily related to its wireless switching and voice mail equipment
from five to ten years. This change in accounting estimate decreased the
Company's 2002 depreciation expense by $206 and increased the Company's
2002 consolidated net income by $124 ($0.01 per share).
Intangible assets
Wireless and LMDS licenses are stated at cost. Accumulated amortization was
$1,195 at December 31, 2002 and 2001.
As described below in "Recent accounting pronouncements", the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1,
2002. The Company has applied the nonamortization provision of SFAS No. 142
to the Company's wireless and LMDS licenses and to the goodwill associated
with the acquisition of SureWest Custom Data Services in periods ending
after December 31, 2001.
Stock-based compensation
The Company accounts for stock-based awards to (i) employees using the
intrinsic value method and (ii) non-employees using the fair value method.
Under the intrinsic value method, when the exercise price of the Company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized. The following
table illustrates the pro forma effect on net income and earnings per share
for the years ended December 31, 2002, 2001 and 2000 had the Company
applied the fair value method to account for stock-based awards to
employees:
2002 2001 2000
---- ---- ----
Net income, as reported $ 11,249 $ 10,317 $125,793
Add stock-based employee
compensation expense included in
the determination of net
income as reported, net of tax 122 36 -
Less stock-based employee
compensation expense that would
have been included in the
determination of net income if
the fair value method had been
applied to all awards,
net of tax (1,303) (849) (364)
--------- -------- --------
Pro forma net income $ 10,068 $ 9,504 $125,429
========= ======== ========
Basic net income per share:
As reported $ 0.76 $ 0.67 $ 8.06
Pro forma $ 0.68 $ 0.62 $ 8.04
Diluted net income per share:
As reported $ 0.76 $ 0.67 $ 8.05
Pro forma $ 0.68 $ 0.62 $ 8.02
Advertising costs
The costs of advertising are charged to expense as incurred. Advertising
expense was $3,659, $3,364 and $2,387 in 2002, 2001 and 2000, respectively.
The Company makes market development funds ("MDF") available to certain
retailers that serve as agents for SureWest Wireless for the reimbursement
of co-branded advertising expenses. To the extent that MDF is used by the
Company's customers for co-branded advertising, and (i) the agents provide
the Company with third-party evidence of such co-branded advertising as
prescribed by Company policy and (ii) the Company can reasonably estimate
the fair value of its portion of the advertising, such amounts are charged
to advertising expense as incurred.
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 bases 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,
-----------------------
2002 2001 2000
---- ---- ----
Basic:
Weighted average shares of common
stock outstanding 14,737 15,338 15,630
Less weighted average shares of
restricted common stock 9 12 20
-------- -------- --------
Weighted average common shares used
in computing basic per share
amounts 14,728 15,326 15,610
======== ======== ========
Diluted:
Weighted average shares of common
stock outstanding 14,737 15,338 15,630
Plus weighted average shares of
common stock from the assumed
exercise of dilutive stock options 58 49 -
-------- -------- --------
Weighted average common shares
used in computing diluted per
share amounts 14,795 15,387 15,630
======== ======== ========
Statements of cash flows information
During 2002, 2001 and 2000, the Company made payments for interest and
income taxes as follows:
2002 2001 2000
---- ---- ----
Interest, net of amounts
capitalized ($1,074 in 2002,
$1,708 in 2001 and none
in 2000) $ 2,485 $ 1,285 $ 3,507
Income taxes $ 2,812 $93,466 $17,070
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 1%, 3% and 11% of the Company's consolidated
operating revenues in 2002, 2001 and 2000, respectively, were derived from
access charges and other charges to SBC. No other customers accounted for
more than 10% of consolidated operating revenues in these years.
Other comprehensive income
Significant components of the Company's other comprehensive income (loss)
are as follows:
Year Ended December 31,
Cumulative
Amounts 2002 2001 2000
----------------- --------------- ---------------- ---------------------
----------------- --------------- ---------------- ---------------------
Net Income $ 112,191 $ 11,249 $ 10,317 $125,793
Minimum pension and
post-retirement benefit
liability adjustment,
net of income taxes of
$1,138 in 2002 (none
in 2001 or 2000) (1,637) (1,637) - -
--------- --------- --------- ---------
Other comprehensive
income $ 110,554 $ 9,612 $ 10,317 $125,793
========= ========= ========= =========
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 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 and
LMDS licenses effective January 1, 2002, which resulted in an increase in
the Company's consolidated net income of $305 ($0.02 per share) for the
year ended December 31, 2002. The Company's operating results for the year
ended December 31, 2001 included $483 of amortization related to the
Company's wireless and LMDS licenses. In the absence of such amortization,
the Company's adjusted net income for the year ended December 31, 2001
would have been $10,600 ($0.69 per share). Beginning in the first quarter
of 2002, the Company's wireless 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 consolidated financial statements as of and
for the year ended December 31, 2002). The goodwill recognized by the
Company in connection with its acquisition of SureWest Custom Data Services
in July 2001 is not being amortized based on the provisions of SFAS Nos.
141 and 142. Instead, under the provisions of SFAS No. 142, goodwill is
evaluated at least annually 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 tests for impairment
annually during the fourth quarter. The Company completed its annual
impairment test during the fourth quarter of 2002 and did not identify any
impairment.
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for
an entity that voluntarily changes to the fair value method of accounting
for stock-based employee compensation. In addition, it also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about
the effects on reported net income, including per share amounts, of an
entity's accounting policy decisions with respect to stock-based employee
compensation in annual and interim financial statements. SFAS No. 148 does
not amend SFAS No. 123 to require companies to account for their
stock-based employee compensation using the fair value method. The
disclosure provisions of SFAS No. 123 were effective immediately in 2002.
As of December 31, 2002, the Company does not have any immediate plans to
change its method of accounting for stock-based employee compensation to
the fair value method.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with an Exit or Disposal Activity." SFAS No. 146 revises the
accounting for exit and disposal activities under Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)," by extending the period in which
expenses related to restructuring activities are reported. A commitment to
a plan to exit an activity or dispose of long-lived assets will no longer
be sufficient to record a one-time charge for most restructuring
activities. Instead, companies will record exit or disposal costs when they
are "incurred" and can be measured at fair value. In addition, the
resultant liabilities will be subsequently adjusted for changes in
estimated cash flows. SFAS No. 146 is effective prospectively for exit or
disposal activities initiated after December 31, 2002. Companies may not
restate previously issued financial statements for the effect of the
provisions of SFAS No. 146, and liabilities that a company previously
recorded under EITF Issue No. 94-3 are grandfathered. The Company has
adopted SFAS No. 146 on January 1, 2003, and it does not believe that the
adoption of this new standard 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.
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 2002, the FASB's EITF reached a consensus on EITF Issue No,
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Under EITF Issue No. 00-21, revenue arrangements with multiple deliverables
are required to be divided into separate units of accounting under certain
circumstances. The Company will prospectively adopt EITF Issue No. 00-21
for arrangements entered into beginning after June 30, 2003, and it does
not believe the adoption of this new guidance will have a material effect
on its consolidated financial statements.
On January 1, 2002, the Company adopted the provision of EITF Issue No.
01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)," dealing with
consideration from a vendor to a reseller under cooperative advertising and
other arrangements. This provision of EITF Issue No. 01-9 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 consolidated financial statements as of and for the year ended
December 31, 2002.
In November 2002, the FASB issued interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
requires certain guarantees to be recorded at fair value, which is
different from current practice, which is generally to record a liability
only when a loss is probable and reasonably estimable. FIN No. 45 also
requires a guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote. The
disclosure provisions of FIN No. 45 are effective immediately in 2002. The
Company is required to adopt the recognition and measurement provisions of
FIN No. 45 on a prospective basis with respect to guarantees issued or
modified after December 31, 2002. The Company does not believe the adoption
of the recognition and measurement provisions of FIN No. 45 will have a
material effect on its consolidated financial statements.
2. 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 or 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, and digital cable, 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.
Certain of the Company's customers have filed for bankruptcy protection in
2002, the most notable of which was WorldCom, Inc. ("WorldCom"), which,
together with its affiliates, filed for bankruptcy protection on July 21,
2002. As a result of the WorldCom bankruptcy filing, the Company
recognized, as bad debt expense in 2002 $1,300 relating to sums owing from
WorldCom to the Company for services prior to the bankruptcy filing.
With respect to post-petition obligations, WorldCom had proposed pursuant
to a 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. In its original filings,
WorldCom proposed its own set of assurances to utilities, but such
assurances did not include either deposits or advance payments. Ultimately,
the Bankruptcy Court granted to all utilities that provide post-petition
services to WorldCom, including the Company, an administrative expense
priority claim for all post-petition services. Although the Bankruptcy
Order did not require WorldCom to provide any deposits or advance payments
as adequate assurance of payment, it did provide, with respect to any
post-petition services provided after August 14, 2002, that each utility
will have a junior superiority administrative claim senior to other
administrative claims and junior only to the claims of WorldCom's
post-petition lenders. If WorldCom fails to pay for post-petition services,
a utility can either take appropriate action under any applicable tariff or
regulation, or seek, on an expedited basis, an order from the Bankruptcy
Court requiring immediate payment or other relief.
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 and Exchange Commission ("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 was $508 ($0.03 per
share). For the years ended December 31, 2002, 2001 and 2000, the Company
recognized $1,875, $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 to increase income by $1,125 (net of income
taxes of $750), $1,025 (net of income taxes of $683) and $1,417 (net of
income taxes of $963) for the years ended December 31, 2002, 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.
3. ASSET PURCHASE
On July 12, 2002, the Company purchased substantially all of the assets of
Western Integrated Networks, LLC and certain affiliates (collectively,
"WIN") in a transaction supervised by the United States Bankruptcy Court
for the District of Colorado. The purchase price for the assets of WIN
consisted of (i) $12,000 in cash, (ii) direct acquisition costs of $560 and
(iii) the assumption of certain current liabilities aggregating $4,579
relating principally to executory contracts and capital lease obligations.
Under the terms of the asset purchase agreement, $1,200 of the aggregate
purchase price was held in an escrow account to protect the Company in the
event of any claims available to the Company. On January 28, 2003, $150 was
released to the Company, and the balance remains in the escrow account.
Prior to December 31, 2002, the Company sold certain equipment acquired in
the transaction for $2,157, which equaled its aggregate carrying value at
the date of sale.
The Company does not believe the assets acquired from WIN constitute a
self-sustaining, integrated set of activities and assets that would
constitute a business, principally due to the absence of an established
customer base at WIN or significant revenue generating activities as of
July 12, 2002. Since July 12, 2002, the Company has been utilizing the
assets acquired from WIN to offer bundled high-speed Internet, digital
cable and telephone services under the SureWest Broadband/Residential
Services name in the Sacramento metropolitan area.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition, July 12, 2002,
based on the Company's preliminary allocation of the aforementioned
purchase price:
Accounts receivable, net $ 615
Equipment held for sale 2,157
Other current assets 943
Property, plant and equipment 12,064
Intangible asset relating
to favorable operating leases 1,360
------
Total assets acquired 17,139
Current liabilities assumed under
executory contracts 3,345
Liabilities assumed under capital
lease obligations 1,064
Other liabilities 170
------
Total liabilities assumed 4,579
------
Net assets acquired $12,560
======
The carrying values of the assets and liabilities of WIN that the Company
is using in its ongoing operations have been preliminarily adjusted in the
accompanying consolidated financial statements based on their estimated
fair values as of July 12, 2002. The equipment purchased from WIN that is
held for sale consists primarily of network assets located in Dallas,
Texas. Such equipment is stated at its estimated fair value less costs of
disposal in the accompanying consolidated financial statements. The Company
expects to complete the sale of such equipment during the first quarter of
2003 at an amount that approximates the aggregate carrying value of this
equipment as of December 31, 2002. The Company's preliminary purchase price
allocation is subject to change when additional information concerning the
fair values of the assets acquired and liabilities assumed from WIN is
obtained.
The property, plant and equipment acquired from WIN consists principally of
a primary processing center, video head end equipment, a fiber-coaxial
cable network located in the Sacramento metropolitan area, software
licenses and office furniture and equipment. The Company is depreciating
these assets on a straight-line basis over estimated useful lives ranging
from three to fifteen years.
In addition, the Company recognized an intangible asset related to
favorable operating leases assumed from WIN. This intangible asset is being
amortized to rent expense over the remaining lease terms, which range from
two to ten years. For the year ended December 31, 2002, the Company
amortized $100 of this intangible asset.
4. SALE OF ALARM MONITORING DIVISION
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 $4,435 during 2002. Through December 31, 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. The alarm monitoring assets consisted primarily of customer
contracts and equipment, which had a net book value of approximately $355
as of the date of the sale. The purchaser of the assets has commenced
litigation against the Company relating to claims in connection with
certain contracts assigned to the purchaser. Given the early stages of the
litigation it is not yet possible to determine its ultimate outcome.
However, the Company does not believe this litigation will have a material
adverse effect on the Company's consolidated financial position or results
of operations. Total operating revenues attributable to the Company's alarm
monitoring division during the years ended 2002, 2001 and 2000 were $279,
$2,530 and $2,247, respectively.
5. ACQUISITION OF BUSINESS AND MINORITY INTEREST
Effective July 31, 2001, the Company acquired all of the outstanding common
stock of SureWest Custom Data Services for $2,100 in cash. The acquisition
was accounted for as a purchase in accordance with SFAS No. 141 "Business
Combinations." The assets of SureWest Custom Data Services acquired by the
Company, which had an aggregate fair value of $491, consisted principally
of cash, accounts receivable and property, plant and equipment. The
liabilities of SureWest Custom Data Services assumed by the Company, which
had an aggregate fair value of $534, consisted principally of accounts
payable and long-term debt. As a result of this acquisition, the Company
recorded $2,171 of goodwill, which was assigned to the Telecom Segment.
None of this goodwill is deductible for tax purposes.
During the second quarter of 2001, the Company acquired from Foresthill
Telephone Co. ("FHT") its 1.8% interest in SureWest Wireless for $2,500 in
cash. As a result of the acquisition, the Company now owns 100% of SureWest
Wireless. A former member of the Company's Board of Directors was, at the
time of the acquisition, the President and sole shareholder of FHT.
6. 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.
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 pre-tax gain of $201,294.
The following table reflects certain unaudited pro forma consolidated
financial information for the year ended December 31, 2000 as if the sale
of the Company's investment in SVLP had occurred prior to January 1, 2000.
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
Consolidated statement of operations data:
Total operating revenues $ 143,194
Income before extraordinary loss
and cumulative effect of change
in accounting principle $ 14,512
Net loss $ (53)
Basic earnings (loss) per share $ -
Diluted earnings (loss) per share $ -
7. CREDIT ARRANGEMENTS
Long-term debt outstanding as of December 31, 2002 and 2001 consisted of
the following:
2002 2001
---- ----
Unsecured Series A Senior Notes, with
interest payable semiannually at a fixed
rate of 6.3%; principal payments are due in
equal annual installments of approximately
$3,636, commencing in December 2003 and
ending in December 2013 $ 40,000 $ 40,000
Unsecured term loan with a bank, with
interest payable quarterly at a Fixed rate
of 6.22%; principal payments are due in
equal quarterly installments of
approximately $536, through December 2003 2,143 4,285
-------- --------
Total long-term debt 42,143 44,285
Less current portion 5,779 2,143
-------- --------
Total long-term debt, net of current portion $ 36,364 $ 42,142
======== ========
At December 31, 2002, the aggregate maturities of long-term debt were
$5,779, in 2003, then $3,636 annually through 2013 totaling $36,364.
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, 2002 and 2001 was unrestricted.
On March 13, 2003, the Company completed a note purchase agreement for the
issuance of its unsecured Series B Senior Notes ("Series B Notes") in the
aggregate principal amount of $60,000 (Note 18) with a maturity of 10
years. The Company will use a portion of the proceeds to retire certain
short-term borrowings with an aggregate outstanding principal balance of
$15,000 as of December 31, 2002. Consequently, such short-term borrowings
have been presented as a long-term liability in the accompanying
consolidated balance sheet as of December 31, 2002.
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. At December 31, 2002, the Company
had utilized $15,000 of the borrowing capacity. Interest on such borrowings
is based on a LIBOR-based pricing formula and is payable monthly. The
interest rate as of December 31, 2002 was 2.74%.
8. INCOME TAXES
Income tax expense consists of the following components:
2002 2001 2000
---- ---- ----
Current expense (benefit):
Federal $ (9,095) $ (4,613) $ 87,013
State (607) 1,101 22,403
-------- -------- --------
Total current expense (benefit) (9,702) (3,512) 109,416
Deferred expense (benefit):
Federal 15,010 10,050 (11,978)
State 2,118 331 (2,282)
-------- -------- --------
Total deferred expense (benefit) 17,128 10,381 (14,260)
-------- -------- --------
Total income tax expense $ 7,426 $ 6,869 $ 95,156
======== ======== ========
Income tax expense differs from that computed by using the statutory
federal tax rate (35% in all years presented) due to the following:
2002 2001 2000
---- ---- ----
Computed at statutory rates $ 6,536 $ 6,015 $82,304
Increase (decrease):
State taxes, net of federal benefit 982 930 13,079
Other, net (92) (76) (227)
-------- -------- --------
Income tax expense $ 7,426 $ 6,869 $95,156
======== ======== ========
Effective federal and state tax rate 39.8% 40.0% 40.5%
======== ======== ========
The significant components of the Company's deferred income tax assets and
liabilities were as follows at December 31, 2002 and 2001:
Deferred Income Taxes
----------------------
2002 2001
---- ----
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Property, plant and
equipment-primarily due to
depreciation differences $ - $32,128 $ - $27,474
Differences in the timing of
recognition of revenues 7,182 - 10,361 -
State franchise taxes - - 640 -
Differences in the
recognition of retirement-
related obligations - - 5,712 -
Other, net 6,432 8,038 1,905 1,710
------- ------- ------- -------
Total 13,614 40,166 18,618 29,184
Less current portion - - 640 -
------- ------- ------- -------
Total deferred income taxes $13,614 $40,166 $17,978 $29,184
======= ======= ======= =======
Net long-term deferred
income tax liability $26,552 $11,206
======= =======
As of December 31, 2002, the Company had net operating loss carryforwards
for federal income 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
$3,286, which will expire in the years 2003 through 2012, if not utilized.
The Company also had research and development tax credit carryforwards of
approximately $100 each for federal and state income tax purposes. The
federal credit will expire in 2022 if it is not utilized. The state credits
have no expiration date.
9. PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company sponsors a noncontributory defined benefit pension plan (the
"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. Pension Plan assets are primarily invested in
collective trust accounts, government and government agency obligations,
publicly traded stocks and bonds and mortgage-related securities.
The Company also has a Supplemental Executive Retirement Plan ("SERP"),
which provides supplemental retirement benefits to certain executives of
the Company. The SERP provides for incremental pension payments partially
to offset the reduction in amounts that would have been payable under the
Pension Plan if it was not for limitations imposed by federal income tax
regulations.
Net periodic pension cost for 2002, 2001 and 2000 under the Pension Plan
and SERP included the following components:
2002 2001 2000
---- ---- ----
Service cost-benefits earned during the
period $ 4,552 $ 4,060 $ 3,652
Interest cost on projected benefit
obligation 6,866 6,394 5,858
Expected return on plan assets (6,368) (6,487) (6,418)
Amortization of transition obligation 510 385 265
-------- -------- --------
Net pension cost $ 5,560 $ 4,352 $ 3,357
======== ======== ========
The following table sets forth the change in benefit obligation, change in
plan assets and funded status of the Pension Plan and SERP as of December
31, 2002 and 2001:
2002 2001
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 95,460 $ 85,807
Service cost 4,552 4,060
Interest cost 6,866 6,394
Plan amendments - 358
Actuarial losses (gain) (4,026) 2,510
Benefits paid (3,999) (3,669)
-------- --------
Benefit obligation at end of year $ 98,853 $ 95,460
======== ========
2002 2001
---- ----
Change in plan assets:
Fair value of plan assets at beginning of year $ 74,019 $ 77,934
Actual return on plan assets (8,158) (4,863)
Company contribution 11,943 4,617
Benefits paid (3,999) (3,669)
-------- --------
Fair value of plan assets at end of year $ 73,805 $ 74,019
======== ========
Funded status:
Funded status of plan at end of year $(25,048) $(21,441)
Unrecognized actuarial loss 22,210 11,861
Unrecognized prior service cost 667 759
Unrecognized net transition obligation 840 1,107
Intangible asset (4,282) -
-------- --------
Accrued benefit cost $ (5,613) $ (7,714)
======== ========
The discount rates used in determining the projected benefit obligation at
December 31, 2002 and 2001 were 6.75% and 7.0%, respectively. The assumed
rates of increase in future compensation levels used to measure the
projected benefit obligation were 5.0% and 6.0% at December 31, 2002 and
2001, respectively. The expected long-term rate of return on plan assets
used in determining net pension cost was 8.5% in 2002 and 2001,
respectively.
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 retirement and
savings features for substantially all employees. The Company approved an
amendment to merge the RSP into the ESOP as of December 31, 2001 and 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.
In addition, effective June 1, 2002, the Company approved an amendment to
establish the SureWest KSOP (the "KSOP"), replacing the ESOP, in order to
allow its participants an opportunity to diversify their retirement
holdings. All of the assets held in the ESOP were transferred to the KSOP.
The Company has retained an investment management company to be the record
keeper and fund manager of the KSOP. Employees may choose from eleven
investment options, including the Company's Stock Fund. The KSOP 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 KSOP provides for voting
rights as to the participant's share of the Company's common stock held by
the KSOP and for certain diversification rights of the participant's
account balances. Aggregate matching contributions made by the Company
under the KSOP, RSP and ESOP were $1,962, $1,725 and $1,645 in 2002, 2001
and 2000, respectively. At December 31, 2002, 9% of the Company's
outstanding shares of common stock was held by the KSOP.
The Company provides certain post-retirement 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 post-retirement benefits costs relating to these
benefits are not significant to the Company's consolidated financial
position and results of operations.
10. COMMITMENTS AND CONTINGENCIES
Capital and operating leases
As a result of the acquisition by SureWest Televideo of certain WIN assets
in July 2002 (Note 3) the Company assumed capital leases for certain
vehicles. These leases bear interest at imputed rates of 6.3% to 16.2% per
annum and expire through December 2010. The capitalized costs and
accumulated amortization related to assets under capital leases were $1,064
and $105, respectively, as of December 31, 2002. The amortization of assets
under capital leases is included in the depreciation and amortization
expense in the accompanying consolidated financial statements
The Company leases certain facilities and equipment used in its operations
under arrangements accounted for as operating leases. The facility leases
generally require the Company to pay operating costs, including property
taxes, insurance and maintenance, and certain of them contain scheduled
rent increases and renewal options. The Company recognizes rent expense on
a straight-line basis over the term of each lease. Total rent expense for
all operating leases was $4,238, $2,999 and $1,957 in 2002, 2001 and 2000,
respectively.
As of December 31, 2002, the Company had various non-cancellable operating
and capital leases with terms greater than one year. Future minimum lease
payments for all non-cancellable operating and capital leases at December
31, 2002 are as follows:
Operating Capital
Leases Leases
-------- --------
2003 $ 4,654 $ 419
2004 3,908 412
2005 2,975 230
2006 2,398 32
2007 1,931 7
Thereafter 7,644 22
-------- --------
$23,510 $ 1,122
Less: amount representing interest 206
--------
Present value of net minimum lease payments 916
Less: current portion 309
--------
$ 607
========
Other commitments
As of December 31, 2002, binding commitments for minimum long distance
service usage, as described below, and future capital expenditures
approximate $2,560 in the aggregate.
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 a fixed price during the term of the agreement. This agreement expires
in July 2003, and the Company has a minimum remaining aggregate long
distance service usage commitment of approximately $280 as of December 31,
2002. On January 28, 2002, Global Crossing filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. Effective December 2002, the
Company entered into a 2-year non-exclusive agreement with Sprint
Communications Company L.P. ("Sprint"), a long-distance service provider,
for the right to provide network transport services to the Company's
customers at fixed prices during the term of the agreement. The Company has
a monthly minimum usage requirement of $25 effective June 2003. The minimum
usage requirement for 2003 is $175. Rates for the services that will be
provided by Sprint are substantially the same as those offered by Global
Crossing. Therefore, the Company does not believe that Global Crossing's
bankruptcy filing will have a material effect on its consolidated financial
position or results of operations.
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.
11. 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 (subject to upward adjustment
based upon the Company's issued and outstanding 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
than 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, 2002 and 2001:
Shares of Option Price
Common Stock Per Share
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
Granted 180,250 $30.07 - $55.74
Exercised (22,805) $39.00 - $40.00
Cancelled (32,210) $39.00 - $50.50
---------
Balance as of December 31, 2002 865,122 $30.07 - $55.74
========
The following is a summary of the status of the stock options outstanding
at December 31, 2002:
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
----------------------------------------------------------------------------- --------------------------------
----------------------------------------------------------------------------- --------------------------------
$30.07 - $30.49 31,000 9.77 $30.35 - $ -
$37.63 - $40.00 626,422 8.02 $39.11 199,579 $39.25
$40.50 - $49.50 83,700 8.88 $43.15 12,676 $42.13
$50.37 - $55.74 124,000 8.89 $50.85 49,836 $50.50
------- -------
$30.07 - $55.74 865,122 8.30 $40.87 262,091 $41.53
====== =======
During the year ended December 31, 2002, the Company issued 1,500 shares of
the Company's restricted common stock, which had a fair market value of $46
as of the date of grant, to certain members of management and outside
counsel. For the year ended December 31, 2001, the Company recorded
deferred stock-based compensation of $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 certain members of management. These amounts were
determined based on the fair market value of such common shares at the date
of grant and are being amortized to operations over the vesting period
(which range from two to 5 years) using a graded vesting method.
Stock-based compensation expense related to these issuances was $202 and
$60 for the years ended December 31, 2002 and 2001, respectively.
Pro forma Stock-Based Compensation Information
Pro forma information regarding the Company's consolidated net income and
earnings per share (Note 1) 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 method 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.
For the years ended December 31, 2002 and 2001, the fair value of the
Company's stock-based awards to employees was estimated using the following
weighted average assumptions:
2002 2001
---- ----
Expected life of options in years 4.0 5.0
Volatility 39.95% 26.7%
Risk-free interest rate 2.54% 4.24%
Expected dividend yield 2.13% 1.76%
12. STOCK REPURCHASE
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. The
shares are purchased from time to time in the open market or through
privately negotiated transactions subject to overall financial and market
conditions. Additionally, the Company implemented an odd-lot repurchase
program during 2001. Through December 31, 2002, approximately 1 million
shares of common stock have been repurchased through the programs. The
Company has remaining authorization from the Board of Directors to
repurchase an additional 469 thousand outstanding shares.
13. 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.
14. BUSINESS SEGMENTS
The Company has two reportable business segments: Telecom and Wireless. The
Telecom segment primarily provides local, network access and long distance
services, directory advertising services, Internet services, digital cable,
and the sale of non-regulated products and services principally to
customers residing in Roseville Telephone's service area and outside area.
The Wireless 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 and 2. The Company accounts for intersegment
sales and transfers at prevailing market rates. Intersegment sales and
transfers between the Telecom and Wireless segments are not significant.
The Company's business segment information is as follows:
2002 Telecom Wireless Consolidated
---- -------- -------- ------------
Total operating revenues $165,178 $ 23,732 $188,910
Depreciation and amortization 30,221 14,905 45,126
Interest income 738 1 739
Interest expense, net of
capitalized interest (451) (1,425) (1,876)
Income (loss) from operations 40,659 (24,969) 15,690
Income tax expense (benefit) 18,177 (10,751) 7,426
Net income (loss) 26,919 (15,670) 11,249
Assets 306,288 91,832 398,120
Capital expenditures 32,704 10,650 43,354
2001 Telecom Wireless Consolidated
---- -------- -------- ------------
Total operating revenues $149,933 $ 16,301 $166,234
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 (loss) from operations 41,680 (28,917) 12,763
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
2000 Telecom Wireless Consolidated
---- ------- -------- ------------
Total operating revenues $138,272 $ 4,922 $143,194
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 (loss) from operations 41,861 (18,134) 23,727
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
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2002 March 31 June 30 September 30 December 31
---- -------- -------- ------------ -----------
Operating revenues $ 43,964 $ 43,793 $ 52,346 $ 48,807
Income from
operations $ 5,129 $ 3,047 $ 7,026 $ 488
Net income $ 5,609 $ 1,703 $ 3,852 $ 85
Basic earnings per
share $ 0.37 $ 0.12 $ 0.26 $ 0.01
Diluted earnings per
share $ 0.37 $ 0.12 $ 0.26 $ 0.01
2001 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Operating revenues $ 42,264 $ 38,336 $ 40,318 $ 45,316
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
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 $4,435 during the quarter ended March 31, 2002.
During the third quarter of 2002, as a result of certain legal and
regulatory developments, the Company changed its estimate for a portion of
Roseville Telephone's interstate shareable earnings obligations related to
the 1999 through 2001 monitoring periods. This change in accounting
estimate increased the Company's consolidated revenues by $5,092 and net
income by $3,065 ($0.21 per share) during the quarter ended September 30,
2002.
As a result of the Company's annual cost separation studies, the Company
changed its estimate for a portion of Roseville Telephone's interstate and
intrastate shareable earnings obligations during the fourth quarter of
2002. This change in accounting estimate increased the Company's
consolidated revenues by $1,115 and net income by $671 ($0.05 per share)
for the quarter ended December 31, 2002.
Effective November 1, 2002, the Company increased the estimated useful
lives primarily related to its wireless switching and voice mail equipment
from five to ten years. This change in accounting estimate decreased the
Company's 2002 depreciation expense by $206 and increased the Company's
consolidated net income by $124 ($0.01 per share) for the quarter ended
December 31, 2002.
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 revenues and net income by $2,150 and $1,290 ($0.08
per share), respectively, for the quarter ended December 31, 2001.
The Company adopted SEC Staff Accounting Bulletin No. 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, ($0.21 per share) in 2000.
For the three-month periods ended March 31, June 30, September 30 and
December 31, 2002 and 2001, the Company recognized the following revenues
that were included in the cumulative effect adjustment as of January 1,
2000:
Three Months Ended:
March 31, 2002 $535
June 30, 2002 $488
September 30, 2002 $449
December 31, 2002 $402
March 31, 2001 $513
June 30, 2001 $462
September 30, 2001 $408
December 31, 2001 $325
The net effect of these revenues in 2002 was to increase net income in the
three-month periods ended March 31, June 30, September 30 and December 31
by $321, $293, $270 and $241, respectively.
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.
16. 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 greater than one year with such
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, (no similar purchases were made during 2002).
On May 31, 2002, the company repurchased 300 thousand shares of its common
stock from one of its employee benefit plans. The Company utilized two
separate independent third party entities for the purpose of providing
fairness opinions in connection with the transaction. The shares were
repurchased at a price of $50 per share and were retired upon purchase.
17. 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
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.
18. SUBSEQUENT EVENT
On March 13, 2003, the Company completed a note purchase agreement for the
issuance of its unsecured Series B Senior Notes ("Senior B Notes") in the
aggregate principal amount of $60,000. The Series B Notes have a final
maturity of ten years and an average life of eight years. Interest is
payable semi-annually at a fixed rate of 4.74%. Principal payments are due
in equal annual installments of $12,000 commencing in March 2009 and ending
in March 2013. The Company will use a portion of the proceeds from the
issuance of the Series B Notes to retire certain short-term borrowings with
an aggregate outstanding principal balance of $15,000 as of December 31,
2002 (Note 7).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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 16, 2003.
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 16, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Equity Compensation Plan Information
The Company maintains the 1999 Restricted Stock Bonus Plan (the "1999 Plan") and
the 2000 Equity Incentive Plan (the "2000 Plan"), pursuant to which it may grant
equity awards to eligible persons. The 1999 Plan and the 2000 Plan were approved
by the Company's shareholders.
The following table provides information about equity awards under the 1999 Plan
and the 2000 Plan.
Number of securities
remaining available
Number of securities for future issuance
to be issued upon Weighted-average under equity
exercise of outstanding exercise price of compensation plans
options, warrants and outstanding options (excluding securities
Plan Category rights warrants and rights reflected in column (a)
(a) (b) (c)
-------------------------- ----------------------- ------------------------
-------------------------- ----------------------- ------------------------
Equity compensation
plans approved by
security holders 865,122 $40.87 223,056
Equity compensation
plans not approved
by security holders - -
------- -------
Total 865,122 $40.87 223,056
======= =======
(1) The 1999 Plan permits only the issuance of Restricted Shares. As of
December 31, 2002, the Company had made Restricted Share grants in
respect of 33,893 shares of the Company's common stock, and 166,107
shares of the Company's common stock remain available under the 1999
Plan.
(2) The 2000 Plan, as originally approved by the Company's shareholders,
contemplated the issuance of up to 800,000 shares of the Company's
common stock. Thereafter, the Company's shareholders approved an
increase to 950,000 shares and the incorporation of an evergreen
provision pursuant to which the number of shares of the Company stock
which shall be made available under the 2000 Plan shall be 950,000
shares plus an annual increase to be added on January 1 of each year
beginning January 1, 2003 equal to the lesser of (i) 149,035 shares,
or (ii) 1% of the outstanding shares.
Additional information required by Item 12 is incorporated herein by reference
from the proxy statement for the annual meeting of the Company's shareholders to
be held on May 16, 2003.
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 16, 2003.
Item 14. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Company management, including the chief executive officer and chief financial
officer, have evaluated the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c). under the Securities Exchange Act of
1934, as amended) as of a date (the "Evaluation Date") within 90 days before the
filing date of this Annual Report on Form 10-K. The chief executive officer and
chief financial officer have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective to ensure that all
material information required to filed in this Annual Report on Form 10-K has
been made known to them in a timely fashion.
Changes in Internal Controls
Subsequent to the Evaluation Date, there were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures.
PART IV
Item 15. 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 2002.
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 15 (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
January 4, 1994 (Filed as Exhibit 10(c) to Form 10-K Annual
Report of Registrant for the year ended December 31, 1993)
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) Supplement to Note Purchase Agreement for Series B Senior Incorporated by -
Notes in the aggregate amount of $60,000,000 dated March reference
13, 2003 (Filed as Exhibit 99.1 to the Form 8-K filed March
13, 2003).
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 15 (A) 3)
Method
Exhibit No. Description of Filing Page
10(d) 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), as amended by Amendment No. 2 dated as of
September 15, 2000, Amendment No. 3 dated as of July 17,
2001, and Amendment No. 4 dated as of June 26, 2000 (Filed
as Exhibit 10(l) to Form 10-Q Quarterly Report of
Registrant for the Quarter ended June 30, 2002).
10(e) Amendment No. 5 to Business Loan Agreement dated February Filed herewith 89
26, 2003.
10(f) 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(g) 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 (h) 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 (i) 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 (j) 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)
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 15 (A) 3)
Method
Exhibit No. Description of Filing Page
10 (k) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Philip D. Germond (Filed as Exhibit reference
10 (j) to Form 10-K Annual Report of Registrant for the
year ended December 31, 2000)
10(l) 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 91
99(a) Certification of Brian Strom, President and Chief Executive Filed herewith 92
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99(b) Certification of Michael Campbell, Executive Vice President Filed herewith 93
and Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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 13, 2003 By: /s/ Brian H. Strom
------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: March 13, 2003 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 13, 2003 /s/ Thomas E. Doyle
-------------------
Thomas E. Doyle,
Chairman of the Board
Date: March 13, 2003 /s/ Brian H. Strom
------------------
Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 13, 2003 /s/ Michael D. Campbell
-----------------------
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Date: March 13, 2003 /s/ John R. Roberts III
-----------------------
John R. Roberts III,
Director
Date: March 13, 2003 /s/ Chris L. Branscum
---------------------
Chris L. Branscum,
Director
Date: March 13, 2003 /s/ Neil J. Doerhoff
--------------------
Neil J. Doerhoff,
Director
Date: March 13, 2003 /s/ Kirk C. Doyle
-----------------
Kirk C. Doyle,
Director
Date: March 13, 2003 /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 13, 2003 By:
---------------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: March 13, 2003 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 13, 2003
-----------------------------
Thomas E. Doyle,
Chairman of the Board
Date: March 13, 2003
-----------------------------
Brian H. Strom,
President and Chief
Executive Officer; Director
Date: March 13, 2003
-----------------------------
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
Date: March 13, 2003
-----------------------------
John R. Roberts III,
Director
Date: March 13, 2003
-----------------------------
Chris L. Branscum,
Director
Date: March 13, 2003
-----------------------------
Neil J. Doerhoff,
Director
Date: March 13, 2003
-----------------------------
Kirk C. Doyle,
Director
Date: March 13, 2003
-----------------------------
Timothy D. Taron,
Director
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brian H. Strom, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of SureWest
Communications;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the periods in this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 13, 2003
Brian H. Strom
President and Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Michael D. Campbell, Executive Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this annual report on Form 10-K of SureWest Communications;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered in
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 13, 2003
Michael D. Campbell
Executive Vice President and
Chief Financial Officer
AMENDMENT NO. 5 TO LOAN AGREEMENT
This Amendment No. 5 (the "Amendment") dated as of February 26, 2003, 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 Paragraph 1.7(a)(i) is hereby amended to read in its entirety as
follows:
(i) standby letters of credit with a maximum maturity not to
extend beyond the Expiration Date. The standby letters of credit may
include a provision providing that the maturity date will be
automatically extended each year for an additional year unless the
Bank gives written notice to the contrary; provided, however, that
each letter of credit must include a final maturity date which will
not be subject to automatic extension.
2.2 Paragraph 7.6(e) is hereby amended to read in its entirety as
follows:
(e) Additional debts with maturities longer than five (5) years
from their respective dates of origination in an aggregate amount not
exceeding One Hundred Million Dollars ($100,000,000) outstanding at
any one time.
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. 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.
5. 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.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
Bank of America, N.A.
/s/Robert L. Munn Jr.
Robert L. Munn, Jr., Senior Vice
President
SureWest Communications
/s/Michael Campbell
Michael D. Campbell, Executive Vice
President, Chief Financial Officer and Treasurer
/s/Brian H. Strom
Brian H. Strom, President and Chief
Executive Officer
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, (2) Registration Statement (Form S-8 No.333-42868) pertaining to
the SureWest Communications 1999 Restricted Stock Bonus Plan and (3)
Registration Statement (Form S-8 No. 333-87222) pertaining to the SureWest KSOP
of our report dated February 7, 2003, except for Note 18, as to which the date
is March 13, 2003, with respect to the consolidated financial statements of
SureWest Communications included in the Annual Report (Form 10-K) for the year
ended December 31, 2002.
/s/Ernst & Young LLP
Sacramento, California
March 13, 2003
EXHIBIT 99 (a)
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SureWest Communications (the "Company"),
on Form 10-K for the period ended December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned, as
the Chief Executive Officer of the Company, hereby certifies pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) and
Section 15(d) 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 operations of the Company.
March 13, 2003
/s/Brian H. Strom
Brian H. Strom
President and Chief Executive Officer
EXHIBIT 99 (b)
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of SureWest Communications (the "Company"),
on Form 10-K for the period ended December 31, 2002 as filed with the Securities
and Exchange Commission of the date hereof (the "Report"), the undersigned, as
the Chief Financial Officer of the Company, hereby certifies pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) and
Section 15(d) 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 operations of the Company.
March 13, 2003
/s/Michael Campbell
Michael Campbell
Executive Vice President and
Chief Financial Officer