UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-556
SUREWEST COMMUNICATIONS
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 68-0365195
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Vernon Street, Roseville, California 95678
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 786-6141
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - Without Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 2002, 14,529,019 shares of the registrant's Common Stock were
outstanding.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------- ------------- ------------- -------------
Operating revenues:
Local service $16,918 $16,929 $50,479 $48,785
Network access service 19,321 11,389 45,524 34,263
Wireless service 5,917 3,267 17,377 12,054
Directory advertising 3,600 3,598 10,954 10,894
Nonregulated sales and service 1,502 1,725 4,140 5,124
Other 5,088 3,410 11,629 9,798
------ ------ ------- -------
Total operating revenues 52,346 40,318 140,103 120,918
Operating expenses:
Cost of services and products 16,096 14,938 44,694 41,488
Customer operations and selling 8,578 7,459 24,593 23,847
General and administrative 8,703 6,215 22,197 18,268
Depreciation and amortization 11,943 10,087 33,417 29,141
------- ------- ------- -------
Total operating expenses 45,320 38,699 124,901 112,744
------- ------- ------- -------
Income from operations 7,026 1,619 15,202 8,174
Other income (expense):
Interest income 60 785 488 4,326
Interest expense (535) (15) (1,234) (334)
Gain on sale of alarm
monitoring assets - - 4,435 -
Other, net (131) (27) (238) 997
------- ------- ------- -------
Total other income (expense),
Net (606) 743 3,451 4,989
------- ------- ------- -------
Income before income taxes 6,420 2,362 18,653 13,163
Income taxes 2,568 915 7,489 5,255
------- ------- ------- -------
Net income $ 3,852 $ 1,447 $11,164 $ 7,908
======= ======= ======= =======
Basic and diluted earnings per
share (1): $ .26 $ .09 $ .75 $ .51
Cash dividends per share (2) $ .25 $ .25 $ .75 $ .75
======= ======= ======= =======
Shares of common stock used to
calculate earnings per share 14,534 15,290 14,870 15,366
======= ======= ======= =======
(1) Shares used in the computation of basic earnings per share are based on the
weighted average number of common shares outstanding, excluding unvested
restricted common shares. Shares used in the computation of diluted
earnings per share are based on the weighted average number of common and
other potentially dilutive securities outstanding in each period.
(2) Cash dividends per share are based on the actual dividends per share, as
declared by the Company's Board of Directors.
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,641 $54,520
Short-term investments - 1,723
Accounts receivable, net 24,068 20,282
Refundable income tax 9,769 2,619
Inventories 3,501 3,324
Deferred income tax asset 641 640
Deferred directory costs 3,729 3,260
Prepaid expenses and other current assets 2,885 1,726
-------- --------
Total current assets 61,234 88,094
Property, plant and equipment, net 323,901 308,073
Investments and other assets:
Wireless licenses, net 13,566 13,566
Goodwill 2,171 2,171
Deferred charges and other assets 416 439
-------- --------
16,153 16,176
-------- --------
$401,288 $412,343
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 15,000 $ -
Current portion of long-term debt 2,143 2,143
Accounts payable and accrued liabilities 8,470 11,093
Estimated shareable earnings obligations 10,943 16,597
Advance billings and deferred revenues 8,657 8,144
Accrued pension cost 3,000 6,551
Accrued compensation 5,466 4,218
-------- --------
Total current liabilities 53,679 48,746
Long-term debt 40,536 42,142
Deferred income tax 24,197 11,206
Other liabilities and deferred revenues 9,404 8,456
Shareholders' equity:
Common Stock, without par value;
100,000 shares authorized,14,529 and
15,110 shares issued and
outstanding at September 30, 2002 and
December 31, 2001, respectively 157,876 172,083
Deferred stock-based compensation (146) (303)
Retained earnings 115,742 130,013
-------- --------
Total shareholders' equity 273,472 301,793
-------- --------
$401,288 $412,343
======== ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(Amounts in thousands)
Nine Months Nine Months
Ended Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net cash provided by (used in)
operating activities $ 28,577 $(46,830)
Cash flows from investing activities:
Purchase of substantially
all of the assets from Western
Integrated Networks, LLC (12,277) -
Proceeds from sale of alarm monitoring
assets 4,495 -
Purchase of SureWest Custom Data Services,
net of cash acquired - (2,128)
Purchase of minority interest in
wireless subsidiary - (2,500)
Capital expenditures for property, plant
and equipment (34,761) (48,724)
Purchases of held-to-maturity investments - (5,749)
Maturities of held-to-maturity investments 1,723 7,435
Changes in deferred charges and other
assets 657 179
------- -------
Net cash used in investing activities (40,163) (51,487)
Cash flows from financing activities:
Increase in short-term borrowings 15,000 -
Principal payments of long-term debt (1,606) (1,609)
Dividends paid (11,120) (11,554)
Repurchase of common stock (29,463) (9,957)
Proceeds from exercise of stock options 896 -
------- -------
Net cash used in financing activities (26,293) (23,120)
------- -------
Decrease in cash and cash equivalents (37,879) (121,437)
Cash and cash equivalents at beginning of
period 54,520 169,955
------- -------
Cash and cash equivalents at end of
period $ 16,641 $ 48,518
======= =======
See accompanying notes.
SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of SureWest Communications
(the "Company") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC") and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results for the interim
periods shown. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such SEC rules and regulations and
accounting principles applicable for interim periods. Management believes
that the disclosures made are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2001 Annual Report on Form 10-K.
The Company is a holding company with subsidiaries that provide integrated
communications services. The Company's wholly-owned principal operating
subsidiary is Roseville Telephone Company ("Roseville Telephone"). SureWest
Directories, Roseville Long Distance Company ("Roseville Long Distance"),
SureWest Internet, SureWest Broadband, SureWest Custom Data Services
(formerly QuikNet, Inc), SureWest Wireless, SureWest Televideo ("SureWest
Broadband/ Residential Services") and Roseville Alternative Company
("Roseville Alternative") are each wholly-owned subsidiaries of the
Company. SureWest Wireless provides wireless personal communication
services ("PCS"). The Company expects that the sources of its revenues and
its cost structure may be different in future periods as a result of its
entry into new communications markets.
On January 25, 2002, the Company sold substantially all of the assets of
its alarm monitoring division, which was a component of the Telecom
segment, for approximately $5,150, subject to certain future adjustments,
which are not expected to be material. This sale resulted in a pre-tax gain
of $4,435 during the quarter ended March 31, 2002. Through September 30,
2002, the Company had received cash proceeds of $4,995, of which $500 was
received during the fourth quarter of 2001, related to the sale of the
alarm monitoring division assets. 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. Total operating revenues
attributable to the Company's alarm monitoring division during the quarter
ended September 30, 2001 were $655 (none in the third quarter of 2002). For
the nine-month periods ended September 30, 2002 and 2001, total operating
revenues attributable to the Company's alarm monitoring division were $279
and $1,869, respectively.
On May 17, 2002, the Company's shareholders approved a proposal to change
the Company's state of incorporation from California to Delaware. In
addition, the shareholders approved an increase of the Company's Common
Stock from 100 million shares to 200 million shares with a par value of
$0.01 and also authorized 10 million shares of preferred stock with a par
value of $0.01. The enactment of the aforementioned approvals was left to
the discretion of the Board of Directors. At present, these approvals have
not been implemented.
On May 31, 2002, the Company repurchased 300 thousand shares of its common
stock from one if its employee benefit plans at a price of $50.00 per
share. The shares were retired upon repurchase.
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 Statement of Financial
Accounting Standards ("SFAS") No. 141. The tangible assets of SureWest
Custom Data Services acquired by the Company, aggregating $491, consisted
principally of cash, accounts receivable and property plant and equipment.
The liabilities of SureWest Custom Data Services assumed by the Company,
aggregating $534, consisted principally of accounts payable and long-term
debt. As a result of the purchase price allocation associated with this
acquisition, the Company recorded $2,200 of goodwill.
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. The acquisition of this minority interest was accounted for as a
purchase. 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.
Certain amounts in the Company's 2001 condensed consolidated financial
statements have been reclassified to conform with the presentation of its
2002 condensed consolidated financial statements.
2. BUSINESS SEGMENTS
The Company has two reportable business segments: Telecom and PCS. The
Telecom segment primarily provides local, network access and long distance
services, directory advertising services, Internet services, 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 PCS segment provides wireless personal communications services and the
sale of related communications equipment. The Company evaluates the
performance of these business segments based on income (loss) from
operations.
These segments are strategic business units that offer different products
and services. The accounting policies of these segments are the same as
those described in Note 1 - Summary of Significant Accounting Policies. The
Company accounts for intersegment sales and transfers at prevailing market
rates. Intersegment sales and transfers between the Telecom and PCS
segments are not significant. The Company's business segment information is
as follows:
Three months ended
September 30, 2002 Telecom PCS Consolidated
---------- --------- ------------
Operating revenues $ 46,429 $ 5,917 $ 52,346
Depreciation and amortization 8,076 3,867 11,943
Income (loss) from operations 13,619 (6,593) 7,026
Three months ended
September 30, 2001 Telecom PCS Consolidated
---------- --------- ------------
Operating revenues $ 37,051 $ 3,267 $ 40,318
Depreciation and amortization 7,285 2,802 10,087
Income (loss) from operations 9,926 (8,307) 1,619
At September 30, 2002 and for
the nine months ended Telecom PCS Consolidated
---------- --------- ------------
Operating revenues $ 122,726 $ 17,377 $ 140,103
Depreciation and amortization 22,228 11,189 33,417
Income (loss) from operations 34,452 (19,250) 15,202
Assets 309,296 91,992 401,288
At September 30, 2001 and for
the nine months ended Telecom PCS Consolidated
--------- -------- ------------
Operating revenues $ 108,864 $ 12,054 $ 120,918
Depreciation and amortization 21,131 8,010 29,141
Income (loss) from operations 29,328 (21,154) 8,174
Assets 326,700 89,741 416,441
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, $700 of which was deposited with WIN
during the second quarter of 2002, (ii) direct acquisition costs of $429
and (iii) the assumption of certain current liabilities aggregating $3,363
relating principally to executory contracts. Under the terms of the asset
purchase agreement, $1,200 of the aggregate purchase price is being held in
an escrow account for 180 days subsequent to July 12, 2002, to protect the
Company in the event of any breaches by WIN.
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 $ 465
Equipment held for sale, net 1,159
Other current assets 800
Property, plant and equipment 13,368
------
Total assets acquired 15,792
Current liabilities assumed under
executory contracts 3,193
Other liabilities 170
------
Total liabilities assumed 3,363
------
Net assets acquired $12,429
------
------
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 condensed 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 facility plant located
in Dallas, Texas. Such equipment is stated at its estimated fair value less
costs of disposal in the accompanying condensed consolidated financial
statements. The Company expects to complete the sale of such equipment
during the first quarter 2003 at an amount that approximates the aggregate
carrying value of this equipment as of September 30, 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 headend 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.
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets, on January 1, 2002. SFAS
No. 142 addresses accounting and reporting for acquired goodwill and other
intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
The Company believes its wireless PCS and LMDS licenses have indefinite
lives because such licenses can be renewed indefinitely at little cost.
Accordingly, the Company has applied the nonamortization provision of SFAS
No. 142 to the Company's wireless PCS and LMDS licenses effective January
1, 2002, which resulted in an increase in the Company's consolidated net
income of $76 ($0.01 per share) and $227 ($0.02 per share) for the quarter
and nine months ended September 30, 2002, respectively. The Company's
operating results for the quarter and nine months ended September 30, 2001
included $126 and $356 of amortization related to the Company's wireless
PCS and LMDS licenses. In the absence of such amortization, the Company's
adjusted net income for the quarter and nine months ended September 30,
2001 would have been $1,524 ($0.10 per share) and $8,122 ($0.53 per share),
respectively. Beginning in the first quarter of 2002, the Company's
wireless PCS and LMDS licenses are carried at the lower of cost or fair
value (the application of this provision of SFAS No. 142 had no effect on
the Company's condensed consolidated financial statements as of and for the
three and nine months ended September 30, 2002). The goodwill recognized by
the Company in connection with its acquisition of SureWest Custom Data
Services in July 2001 is not being amortized under the provision of SFAS
142. According to the provisions of SFAS No. 142, goodwill is evaluated for
impairment in a two-step process. The first step screens for potential
impairment and the second step measures any impairment loss resulting from
step one. The Company completed step one of the transitional impairment
test during the quarter ended June 30, 2002. The Company did not identify
any impairment as a result of this step. SFAS No. 142 requires that
goodwill be tested for impairment annually, or more frequently if
impairment indicators arise. The Company does not presently believe that
any impairment indicators exist. Commencing in 2002, the Company will test
for impairment annually during the fourth quarter.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company is required to adopt SFAS No. 143 on January
1, 2003, and it does not believe the adoption of SFAS No. 143 will have a
material effect on its consolidated financial statements.
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and provides a single accounting model for
long-lived assets to be disposed of. The adoption of SFAS No. 144 did not
have a material effect on the Company's consolidated financial statements.
On January 1, 2002, the Company adopted the provision of the FASB's
Emerging Issues Task Force ("EITF") Issue 00-25, "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer," dealing
with consideration from a vendor to a reseller under cooperative
advertising and other arrangements. This provision of EITF Issue 00-25
states that consideration from a vendor to a resel1er of the vendor's
products or services is presumed to be a reduction of the selling price of
the vendor's products or services, unless the vendor (i) receives an
identifiable benefit in return for the consideration and (ii) can
reasonably estimate the fair value of the benefit received. If the amount
of consideration paid by the vendor exceeds the estimated fair value of the
benefit received, the excess amount is to be recorded by the vendor as a
reduction of revenues. The application of this new guidance did not have a
material effect on the Company's condensed consolidated financial
statements as of and for the quarter and nine months ended September 30,
2002.
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 EITF Issue 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 94-3 are
grandfathered. The Company will adopt 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.
5. ESTIMATED SHAREABLE EARNINGS OBLIGATIONS
As discussed more fully in Management's Discussion and Analysis, Roseville
Telephone's revenues from telephone services are affected by rates
authorized by various regulatory agencies. Intrastate service rates are
subject to regulation by the Public Utilities Commission. Beginning in
January 2002, Roseville Telephone began paying a consumer dividend for
intrastate overearnings relating to the years 1998 and 1999. A portion of
the consumer's intrastate service charges will be returned in the form of a
surcredit over 12 months or until a threshold of $4,600 is met. For the
quarter and nine-month period ended September 30, 2002, $1,087 and $3,234,
respectively, has been returned to the consumers.
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 $3,048 ($0.21 per share and $0.20 per share for the quarter and
nine months ended September 30, 2002, respectively).
As of September 30, 2002, the Company's condensed consolidated balance
sheet reflected aggregate liabilities of $10,943 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.
6. LINE OF CREDIT
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 September 30, 2002 the Company
had utilized $15,000 of the borrowing capacity. Interest on such borrowing
is based on a LIBOR-based pricing formula and is payable monthly. The
interest rate as of September 30, 2002 was 2.74%.
7. 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 September 30, 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.
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain information included in the Company's quarterly report on Form 10-Q,
including that which relates to the impact on future revenue sources and
potential sharing obligations of pending and future regulatory orders, continued
expansion of the telecommunications network and expected changes in the sources
of the Company's revenue and its cost structure resulting from the its entrance
into new communications markets, are forward looking statements and are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Such forward looking statements are subject to a number of risks,
assumptions and uncertainties that could cause the Company's actual results to
differ from those projected in such forward looking statements.
Important factors that could cause actual results to differ from those set forth
in the forward looking statements include, but are not limited to: advances in
telecommunications technology, changes in the telecommunications regulatory
environment, changes in the financial stability of other telecommunications
providers who are customers of the Company, changes in competition in markets in
which the Company operates, adverse circumstances affecting the economy in
California in general, and in the Sacramento, California Metropolitan area in
particular, the availability of future financing, changes in the demand for
services and products, new product and service development and introductions,
pending and future litigation and unanticipated changes in the growth of the
Company's emerging businesses, including the PCS, Internet, video and
Competitive Local Exchange Carrier operating entities.
Results of Operations
General
SureWest Communications (the "Company") is a holding company with subsidiaries
operating in the Telecommunications ("Telecom") and Personal Communications
Services ("PCS") segments.
The Telecom segment is aligned with specific subsidiaries of the Company.
Roseville Telephone Company ("Roseville Telephone"), a wholly-owned subsidiary
of the Company, provides local and toll telephone services, network access
services, billing and collection services, directory advertising services and
certain nonregulated services. SureWest Directories, a wholly-owned subsidiary
of the Company, publishes and distributes Roseville Telephone's directory
including the sale of yellow pages advertising. SureWest Directories is also
engaged in the business of producing, publishing and distributing directories in
other Northern California communities outside of Roseville Telephone's service
area. The Company's wholly-owned subsidiary, Roseville Long Distance Company
("Roseville Long Distance"), is engaged in the provision of long distance
services. The Company's wholly-owned subsidiary, SureWest Internet is engaged in
the provision of high speed and dial-up Internet services. The Company's
wholly-owned subsidiary SureWest Custom Data Services (formerly QuikNet, Inc.)
is engaged in the provision of custom data services. SureWest Televideo
("SureWest Broadband/Residential Services"), a recently-formed wholly-owned
subsidiary of the Company, acquired from Western Integrated Networks, LLC and
affiliates the assets necessary to provide high speed Internet, digital cable
and telephone services in the Sacramento area.
The PCS segment consists of the Company's wholly-owned subsidiary SureWest
Wireless, which provides wireless PCS.
The Company expects that the sources of its revenues and its cost structure may
be different in future periods as a result of its entry into new communications
markets.
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 tangible assets of WIN acquired by the Company, aggregating
$15.8 million, consisted principally of accounts receivable, property, plant and
equipment, and inventory. The purchase price for the assets of WIN consisted of
(i) $12 million in cash, $700 thousand of which was deposited with WIN during
the second quarter of 2002, (ii) acquisition related costs of $429 thousand, and
(iii) the assumption of certain liabilities aggregating $3.4 million relating
principally to executory contracts. Under the terms of the asset purchase
agreement, $1.2 million of the aggregate purchase price is being held in an
escrow account for 180 days to protect the Company in the event of any breaches
by WIN.
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. The tangible assets of SureWest Custom
Data Services acquired by the Company, aggregating $491 thousand, consisted
principally of cash, accounts receivable and property plant and equipment. The
liabilities of SureWest Custom Data Services assumed by the Company, aggregating
$534 thousand, consisted principally of accounts payable and long-term debt. As
a result of the purchase price allocation associated with this acquisition, the
Company recorded $2.2 million of goodwill.
Purchase of Wireless PCS Minority Interest
During the second quarter of 2001, the Company acquired from Foresthill
Telephone Co. ("FHT") its 1.8% interest in 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.
Telecom Revenue Overview
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 protection on July 21, 2002. As a result of the
WorldCom bankruptcy filing, the Company recognized in the quarters ended June
30, 2002 and September 30, 2002, as bad debt expense, sums owing from WorldCom
to the Company for services in the period prior to the bankruptcy filing.
With respect to post-petition obligations, WorldCom 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. The Bankruptcy Court's Order established a process
for utilities, like Roseville Telephone, to object to WorldCom's proposal,
including a deadline of August 6, 2002 for filings in opposition to WorldCom's
proposal, and a related hearing date of August 12, 2002. In an order originally
entered on August 14, 2002 (the "Bankruptcy Order"), 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.
The Bankruptcy Order also provided that upon WorldCom's failure 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 70% of
the Company's total operating revenues for the quarters ended September 30, 2002
and 2001. For the nine-month periods ended September 30, 2002 and 2001, revenues
subject to regulation constituted approximately 69% of the Company's total
operating revenues. Revenues subject to regulation, which include local service,
network access service, and toll service revenues generated by Roseville
Telephone, are derived from various sources, including billings to business and
residential subscribers for basic exchange services, extended area service
charges, surcharges mandated by the California Public Utilities Commission
("P.U.C."), billings to Pacific Bell, a wholly-owned subsidiary of SBC
Communications Inc., long distance carriers, competitive access providers and
subscribers for network access services, interstate settlement revenues from the
National Exchange Carrier Association, and support payments from the Universal
Service Fund and a California High Cost Fund.
Total revenues from 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 the National Exchange Carrier Association.
The F.C.C. monitors Roseville Telephone's interstate earnings through the use of
annual cost separation studies prepared by Roseville Telephone, which utilize
estimated cost information and projected demand usage. The F.C.C establishes
rules that carriers must follow in the preparation of the annual studies. On
January 23, 2001, the F.C.C. issued a Memorandum Opinion and Order to another
telephone company in which it clarified how Internet traffic, which the F.C.C.
had prior to that date characterized as largely interstate in nature, should be
treated. Additionally, under current F.C.C. rules governing rate making,
Roseville Telephone is required to establish interstate rates based on projected
demand usage for its various services and determine the actual earnings from
these rates once actual volumes and costs are known.
During 2000 and 2001, Internet traffic and DSL service grew substantially, far
exceeding Roseville Telephone's estimates, which resulted in actual earnings
exceeding the levels allowed by the F.C.C. Based on preliminary cost studies,
the Company recognized liabilities relating to Roseville Telephone's estimated
interstate shareable earnings obligations of $163 thousand for the quarter ended
September 30, 2002 (none in the third quarter of 2001) through reductions of
revenues. For the nine-month periods ended September 30, 2002 and 2001, the
company recognized liabilities relating to Roseville Telephone's estimated
interstate shareable earnings obligation of $1.4 million and $3.2 million,
respectively, through reductions of revenues related to Roseville Telephone's
estimated interstate shareable earnings obligations.
On May 21, 2002, the D.C. Circuit Court of Appeals (the"Court") issued its
decision in the case of 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 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. On August 12, 2002, the petitions for rehearing were denied by the
Court. On August 28, 2002 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 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 $3.0 million
($0.21 per share and $0.20 per share for the quarter and nine months ended
September 30, 2002, respectively).
Prior to January 1, 2002, Roseville Telephone billed Pacific Bell various
charges for certain local service and network access service revenues in
accordance with certain agreements as described below. Of the Company's total
revenues for the quarters and nine-month periods ended September 30, 2002 and
2001, less than 10% was recorded under these agreements in each period. In 1999,
Pacific Bell expressed interest in withdrawing from the designated carrier plan
("DCP") for Roseville Telephone's toll traffic and to enter into a new,
permanent compensation arrangement for extended area service ("EAS"). The DCP
was a compensation arrangement between Roseville Telephone and Pacific Bell for
certain intralata toll services. Pacific Bell also paid Roseville Telephone
$11.5 million per year for EAS pursuant to a Settlement Transition Agreement. In
November 2000, the P.U.C. authorized Pacific Bell to terminate its annual EAS
payments to Roseville Telephone effective November 30, 2000. The P.U.C.
authorized replacement funding on an interim basis using the current reserve in
the California High Cost Fund, and denied permanent replacement funding. The
P.U.C. also opened an Order Instituting Investigation for the purpose of
determining whether recovery of all, none, or a portion of the $11.5 million
annual payments should come from Roseville Telephone's ratepayers or other
regulatory recovery mechanisms. These proceedings began in 2001 and will be
conducted through 2003. During the quarter ended June 30, 2002, the Office of
Ratepayer Advocates ("ORA") of the PUC issued an audit report in response to the
P.U.C.'s Order Instituting Investigation (OII) relating to Roseville Telephone.
The ORA audit report recommends that the CPUC discontinue Roseville Telephone's
present EAS funding from the CHCF. The P.U.C.'s final judgment regarding the
aforementioned ORA audit report is not expected until 2003. The P.U.C. has made
no indication as to what, if any, changes will be forthcoming relating to EAS
revenues. The results of these proceedings and their potential effects on
Roseville Telephone cannot yet be determined. In addition, since the DCP
arrangement with Pacific Bell expired in December 2001, Roseville Telephone now
bills and keeps its customers toll traffic. The termination of the DCP and
transition to a bill and keep arrangement did not have a material impact on the
Company's consolidated financial position as of September 30, 2002 or results of
operations for the quarter and nine months then ended.
In 1996, the P.U.C. issued a decision in connection with Roseville Telephone's
general rate proceeding, which authorized Roseville Telephone to implement a New
Regulatory Framework ("NRF") for services furnished within Roseville Telephone's
service area in order to accommodate market and regulatory movement toward
competition and greater pricing flexibility. Under the NRF, Roseville Telephone
is subject to ongoing monitoring and reporting requirements, including a sharing
mechanism whereby Roseville Telephone is required to share earnings with
customers through a reduction of revenues if its earned annual rate-of-return
exceeds that authorized by the P.U.C.
In accordance with the requirements of its general rate case order, Roseville
Telephone filed an application for review of its NRF in 1999. This proceeding
considered modifications to the NRF structure, including potential changes to
the current monitoring and reporting requirements, the earnings sharing
mechanism and related matters. In addition, the P.U.C.'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 and the P.U.C. ruled that
Roseville Telephone must change the allocation method used to allocate costs for
services provided by Roseville Telephone to its affiliates, the treatment of
certain directory revenues and the treatment of internal-use software costs.
Additionally, in accordance with the provisions of the Decision, the Company
recorded liabilities and reductions of revenues of $438 thousand and $1.3
million relating to estimated intrastate shareable earnings during the quarter
and nine-month period ended September 30, 2002. For the quarter and nine-month
periods ended September 30, 2001, the Company recorded liabilities through
reductions of revenues of $950 thousand and $5.1 million, respectively, relating
to estimated intrastate shareable earnings obligations.
Beginning in January 2002, Roseville Telephone began paying a consumer dividend
for intrastate overearnings relating to the years 1998 and 1999. A portion of
the consumer's intrastate service charges will be returned in the form of a
surcredit over 12 months or until a threshold of $4.6 million is met. For the
quarter and nine-month periods ended September 30, 2002, approximately $1.1
million and $3.2 million, respectively, has been returned to consumers.
As of September 30, 2002, the Company's condensed consolidated balance sheet
reflected aggregate liabilities of $10.9 million relating to Roseville
Telephone's estimated interstate and intrastate shareable earnings obligations.
The calculations supporting these liabilities are very complex and involve a
variety of estimates prior to the ultimate settlement of such obligations. In
addition, Roseville Telephone's interstate shareable earnings obligations lapse
over time if Roseville Telephone's interexchange carrier and other customers do
not claim the amounts ascribed to them. Accordingly, it is reasonably possible
that management's estimates of the Company's liabilities for interstate and
intrastate shareable earning obligations could change in the near term, and the
amounts involved could be material.
PCS Revenue Overview
The PCS segment derives its revenue from the provision of wireless digital
personnel communication services and the sale of handsets and related
communications equipment. Revenues include wireless voice services, sales of
handsets and related accessories, long distance, telephone insurance, roaming
services, and custom calling features. Wireless services are provided on a
month-to-month basis and are generally billed in advance.
Quarter and nine months ended September 30, 2002 and 2001
Operating Revenues:
Revenues subject to regulation, which include local and network access services,
increased $7.9 million and $13.0 million, or 28% and 16%, for the quarter and
nine-month periods ended September 30, 2002, respectively, compared to the same
periods in 2001. This increase was due to the combined effects of 1) increased
network access revenues due to the expanded demand for DSL services and
dedicated access, 2) access line growth of 2%, and 3) a reduction in the
Company's provision for its estimated interstate and intrastate shareable
earnings obligations. In addition, operating revenues increased in part due to a
reduction in the Company's estimate pertaining to a portion of the Company's
interstate shareable earnings obligations related to the 1999 through 2001
monitoring periods. The change in accounting estimate increased the Company's
consolidated revenues by $5.1 million and net income by $3.0 million ($0.21 per
share and $0.20 per share for the quarter and nine months ended September 30,
2002, respectively).
Wireless service revenues increased $2.7 million and $5.3 million, or 81% and
44%, in the quarter and nine-month periods ended September 30, 2002,
respectively, compared to the same periods in 2001, as a result of continued
additions to the customer base.
Revenues from non-regulated sales and services decreased $223 thousand and $984
thousand, or 13% and 19%, for the quarter and nine-month periods ended September
30, 2002, respectively, compared to the same periods in 2001. This decrease was
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 competitive local exchange carrier
("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 $1.7
million and $1.8 million, or 49% and 19%, for the quarter and nine-month periods
ended September 30, 2002, respectively, compared to the same periods in 2001.
This increase was 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 service revenues due to certain interexchange carriers taking back
their billing and collection function.
Operating Expenses:
Total operating expenses increased $6.6 million and $12.2 million, or 17% and
11%, for the quarter and nine-month periods ended September 30, 2002,
respectively, compared to the same periods in 2001. Cost of services and
products increased $1.2 million and $3.2 million, or 8%, for the quarter and
nine-month periods ended September 30, 2002, respectively, due primarily to 1)
increased costs in long distance, tower rents, wireless phone handset subsidies
and roaming charges related to the increased demand for SureWest Wireless
services, 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 transport expenses related to the growth of
SureWest Broadband.
Customer operations and selling expense increased $1.1 million and $746
thousand, or 15% and 3%, for the quarter and nine-month periods ended September
30, 2002 compared to the same periods in 2001. This increase was due primarily
to 1) increased customer service and billing expense associated with Internet
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 SureWest Broadband. This increase was partially offset by decreased
dealer commissions and bad debt expenses recognized during 2001 related to
wireless service.
General and administrative expenses increased $2.5 million and $3.9 million, or
40% and 22%, for the quarter and nine-month periods ended September 30, 2002,
respectively, compared to the same periods in 2001. These increases were due
primarily to the additions of SureWest Custom Data Services in the third quarter
of 2001 and SureWest Televideo in during the third quarter of 2002, as well as
bad debt expense recognized during the second quarter of 2002 associated with
access charge billings to a customer that has filed for bankruptcy protection.
On July 21, 2002, WorldCom, Inc. and its affiliated companies filed for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. The
Company recognized $1.1 million of bad debt expense during the second quarter of
2002 and $243 thousand and $1.3 million for the quarter and nine months ended
September 30, 2002, respectively, relating to the obligations of WorldCom, Inc.
to the Company for the period prior to the bankruptcy filing.
Depreciation and amortization increased $1.9 million and $4.3 million, or 18%
and 15%, for the quarter and nine-month periods ended September 30, 2002,
respectively, compared to the same periods in 2001, as a result of increases in
PCS property, plant and equipment, and amortization of network software. This
increase was partially offset by a decrease in amortization relating to the
Company's wireless licenses due to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142 as described below.
Other Income (Expense), Net:
Other income (expense), net, decreased $1.3 million and $1.5 million, or 182%
and 31%, for the quarter and nine-month periods ended September 30, 2002,
respectively, compared to the same periods in 2001. This decrease was due
primarily to lower average invested balances during 2002 due to the sale of the
Company's cellular partnership interest during the fourth quarter of 2000. This
decrease was partially offset by the gain from the sale of the Company's alarm
monitoring division of $4.4 million in January 2002.
Income Taxes:
Income taxes for the quarter and nine-month periods ended September 30, 2002,
increased $1.7 million and $2.2 million, or 181% and 43%, respectively, compared
to the same periods in 2001, due primarily to an increase in income subject to
tax. The effective federal and state income tax rates were approximately 40.1%
and 39.9% for the nine-month periods ended September 30, 2002 and 2001,
respectively.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities was $28.6 million for the nine-month period
ended September 30, 2002. Net cash used in operating activities was $46.8
million for the nine-month period ended September 30, 2001. The increase in cash
from operating activities for the nine-month period ended September 30, 2002,
compared to the same period in 2001, was due primarily to a $90 million payment
of income tax in 2001 related to the sale of the Company's cellular partnership
interest in 2000. During the nine-month period ended September 30, 2002, the
Company used cash flows from operations and existing cash and cash equivalents
to fund 1) capital expenditures of $34.8 million pertaining to ongoing plant
construction projects, 2) common stock repurchases of $14.5 million, 3) common
stock repurchases from one of the Company's employee benefit plans of $15
million, 4) dividends of $11.1 million, 5) principal payments of $1.6 million to
retire long-term debt, and 6) $12.3 million for the purchase of substantially
all of the assets of Western Integrated Networks, LLC ("WIN"), as described
below.
The Company's most significant use of funds for the balance of 2002 is expected
to be for 1) budgeted capital expenditures of approximately $24.5 million, 2)
scheduled payments of long-term debt of $536 thousand, 3) support of the
operations of SureWest Wireless of up to $1.6 million 4) support of the
operations of SureWest Broadband/Residential Services of up to $2.7 million.
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, $700 of which was deposited with WIN during the second quarter of 2002,
(ii) direct acquisition costs of $429 and (iii) the assumption of certain
current liabilities aggregating $3,363 relating principally to executory
contracts. Under the terms of the asset purchase agreement, $1,200 of the
aggregate purchase price is being held in an escrow account for 180 days
subsequent to July 12, 2002,to protect the Company in the event of any breaches
by WIN.
On May 17, 2002, the Company's shareholders approved a proposal to change the
Company's state of incorporation from California to Delaware. In addition, the
shareholders approved an increase of the Company's Common Stock from 100 million
shares to 200 million shares with a par value of $0.01 and also authorized 10
million shares of preferred stock with a par value of $0.01. The enactment of
the aforementioned approvals was left to the discretion of the Board of
Directors. At present, these approvals have not been implemented.
In February 2000, the Board of Directors authorized the repurchase of up to 1
million shares of Company common stock. In June, 2002, the Board of Directors
approved the repurchase of an additional 500 thousand shares. 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
September 30, 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.
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 September 30, 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 September 30, 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 fixed
prices during the term of the agreement. For the year 2002, the Company has a
minimum aggregate long distance service usage commitment of approximately $1.6
million. On January 28, 2002, Global Crossing filed for protection under Chapter
11 of the U.S. Bankruptcy Code. The Company is presently unable to determine the
impact, if any, that Global Crossing's bankruptcy filing will have on the
Company's long distance operations. However, the Company believes that it could
procure long distance network transport services from other telecommunications
providers. If the Company must procure network transport services from another
telecommunications provider, rates for such service may be higher than those
offered by Global Crossing. However, the Company believes that the impact on its
results of operations resulting from any potential change in transport rates
would not be material.
On January 25, 2002, the Company sold substantially all of the assets of its
alarm monitoring division, which was a component of the Telecom segment, for
approximately $5.2 million, subject to certain future adjustments, which are not
expected to be material. This sale resulted in a pre-tax gain of $4.4 million
during the quarter ended March 31, 2002. Through September 30, 2002, the Company
had received cash proceeds of $5.0 million, of which $500 thousand was received
during the fourth quarter of 2001, related to the sale of the alarm monitoring
division assets. 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. Total operating revenues attributable to the
Company's alarm monitoring division during the quarter ended September 30, 2001
were $655 thousand (none in the third quarter of 2002). For the nine-month
periods ended September 30, 2002 and 2001, total operating revenues attributable
to the Company's alarm monitoring division were $279 thousand and $1.9 million,
respectively.
The Company had cash and cash equivalents at September 30, 2002, of $16.6
million. In addition, the Company has borrowing capacity under the
aforementioned business loan agreement, and believes, given its financial
position and debt-to-equity position, it has substantial additional short and
long-term borrowing capacity. Accordingly, the Company believes that its working
capital position, operating cash flows and borrowing capacity are more than
sufficient to satisfy its liquidity requirements in 2002. While the reported
bankruptcy filing by WorldCom, Inc. and its affiliates may continue to have an
adverse effect on the Company's results of operations, the Company does not
currently believe that the WorldCom bankruptcy will impair in any way the
Company's ability to satisfy its liquidity requirements. The Company is
considering other sources of external financing for the purposes of funding
future capital expenditures and potential investments including the possible
incurrence of additional long-term indebtedness.
Critical Accounting Policies and Estimates
Below is a summary of the Company's critical accounting policies and estimates:
o Total revenues from telephone services are affected by rates authorized by
various regulatory agencies. The F.C.C. monitors Roseville Telephone's
interstate earnings through the use of annual cost separation studies
prepared by Roseville Telephone, which utilize estimated cost information
and projected demand usage. The F.C.C. establishes rules that carriers must
follow in the preparation of the annual studies. In addition, under NRF,
Roseville Telephone is subject to ongoing monitoring and reporting
requirements by the P.U.C., including a sharing mechanism whereby Roseville
Telephone may be required to share earnings with customers based on its
earned annual rate-of return. The calculations supporting the liabilities
associated with the Company's estimated shareable earnings obligations are
very complex and involve a variety of estimates prior to the ultimate
settlement of such obligations. Accordingly, it is reasonably possible that
management's estimates of Roseville Telephone's shareable earnings
obligations could change in the near term, and the amounts involved could
be material.
o The Company recognizes revenue when (i) persuasive evidence of an
arrangement between the Company and the customer exists, (ii) delivery of
the product to the customer has occurred or service has been provided to
the customer, (iii) the price to the customer is fixed and determinable and
(iv) collectibility of the sales price is reasonably assured.
o Property, plant and equipment and intangible assets are recorded at cost.
Additions and substantial improvements are capitalized. Retirements and
other reductions of regulated telephone plant and equipment are charged
against accumulated depreciation with no gain or loss recognized in
accordance with the composite group remaining life methodology utilized for
telephone plant assets. When property applicable to non-telephone
operations is sold or retired, the asset and related accumulated
depreciation are removed from the accounts and the associated gain or loss
is recognized. Property, plant and equipment and intangible assets are
depreciated or amortized using the straight-line method over their
estimated economic lives, certain of which were significantly revised in
the fourth quarter of 2000. In assessing the recoverability of the
Company's property, plant and equipment and intangible assets, which
consist of wireless licenses and goodwill, the Company must make
assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates and
assumptions change in the future, the Company may be required to record
impairment charges relating to its property, plant and equipment and
intangible assets. Also, see the further discussion below concerning the
adoption of SFAS Nos. 142 and 144 during the first quarter of 2002.
o The Company accounts for income taxes using the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse. The
Company does not have a valuation allowance on its deferred tax asset as of
September 30, 2002 because it believes it is more likely than not that such
deferred tax asset will be realized. Should the Company determine that it
would not be able to realize all or part of its deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income
in the period in which the determination was made.
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the potential inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
o The Company has pension and postretirement benefit costs and obligations.
The Company's pension and postretirement benefit obligations are
actuarially determined based on estimates of discount rates, long-term
rates of return on plan assets and increases in future compensation levels.
Changes in these estimates and other factors could significantly impact the
Company's pension and postretirement benefit costs and obligations.
Other Financial Information
Recent accounting pronouncements
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets, on
January 1, 2002. SFAS No. 142 addresses accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." The Company believes its wireless PCS and LMDS licenses
have indefinite lives because such licenses can be renewed indefinitely at
little cost. Accordingly, the Company has applied the nonamortization provision
of SFAS No. 142 to the Company's wireless PCS and LMDS licenses effective
January 1, 2002, which resulted in an increase in the Company's consolidated net
income of $76 thousand ($0.01 per share) and $227 thousand ($0.02 per share) for
the quarter and nine months ended September 30, 2002, respectively. The
Company's operating results for the quarter and nine months ended September 30,
2001 included $126 thousand and $356 thousand of amortization related to the
Company's wireless PCS and LMDS licenses. In the absence of such amortization,
the Company's adjusted net income for the quarter and nine months ended
September 30, 2001 would have been $1.5 million ($0.10 per share) and $8.1
million ($0.53 per share) respectively, respectively. Beginning in the first
quarter of 2002, the Company's wireless PCS and LMDS licenses are carried at the
lower of cost or fair value (the application of this provision of SFAS No. 142
had no effect on the Company's condensed consolidated financial statements as of
and for the three and nine months ended September 30, 2002). The goodwill
recognized by the Company in connection with its acquisition of SureWest Custom
Data Services in July 2001, is not being amortized under the provision of SFAS
142. According to the provisions of SFAS No. 142, goodwill is evaluated for
impairment in a two-step process. The first step screens for potential
impairment and the second step measures any impairment loss resulting from step
one. The Company completed step one of the transitional impairment test during
the quarter ended June 30, 2002. The Company did not identify any impairment as
a result of this step. SFAS No. 142 requires that goodwill be tested for
impairment annually, or more frequently if impairment indicators arise. The
Company does not presently believe that any impairment indicators exist.
Commencing in 2002, the Company will test for impairment annually during the
fourth quarter.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company is required to
adopt SFAS No. 143 on January 1, 2003, and it does not believe the adoption of
SFAS No. 143 will have a material effect on its consolidated financial
statements.
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and provides a single accounting model for long-lived assets to
be disposed of. The application of SFAS No. 144 did not have a material effect
on the Company's consolidated financial statements.
On January 1, 2002, the Company adopted the provision of the FASB'S Emerging
Issues Task Force ("EITF") Issue 00-25, "Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer," dealing with
consideration from a vendor to a reseller under cooperative advertising and
other arrangements. This provision of EITF Issue 00-25 states that consideration
from a vendor to a resel1er of the vendor's products or services is presumed to
be a reduction of the selling price of the vendor's products or services, unless
the vendor (i) receives an identifiable benefit in return for the consideration
and (ii) can reasonably estimate the fair value of the benefit received. If the
amount of consideration paid by the vendor exceeds the estimated fair value of
the benefit received, the excess amount is to be recorded by the vendor as a
reduction of revenues. The application of this new guidance did not have a
material effect on the Company's condensed consolidated financial statements as
of and for the nine months ended September 30, 2002.
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 EITF Issue 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 94-3 are grandfathered. The Company will
adopt 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.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Company management, including the chief executive officer and chief financial
officer, after evaluating the Company's "disclosure controls and procedures" (as
defined in Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c)
and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this Quarterly Report on Form 10-Q, 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 Quarterly
Report on Form 10-Q 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 II
Item 1. Regulatory and Legal Proceedings.
Except for the proceedings described below and in Part I, the Company is not
aware of any material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which it is a party or to which any of
its property is subject.
Roseville Telephone is subject to regulation by the F.C.C. and P.U.C. In the
past, there have been various proceedings before these agencies to which
Roseville Telephone has been a party.
In 1996, Congress passed the Telecommunications Act of 1996 (the "Act"), which
significantly changed the regulatory environment for telecommunications
companies. Beginning in 1996, the F.C.C. conducted proceedings and adopted
orders implementing the Act's provisions to open local exchange service markets,
such as the market of Roseville Telephone, to competition. These proceedings and
orders address interconnection, access charges and universal service. With
respect to local competition, the F.C.C. rules outline pricing methodologies for
the states to follow when setting rates for incumbent carriers (such as
Roseville Telephone) to charge competitors for resale, interconnection and
unbundled network elements.
In January 2001, the United States Supreme Court granted a petition for writ of
certiorari to review certain aspects of the implementation of the Act. On May
13, 2002, the court issued its decision upholding the F.C.C.'s TELRIC pricing
model and its rule requiring ILECs to bundle uncombined network elements when
requested by CLECs. On May 24, 2002, the United States Court of Appeals for the
District of Columbia Circuit set aside two F.C.C. orders implementing provisions
of the Telecommunications Act of 1996 that direct the Commission to determine
what network elements ILECs must make available for lease to CLECs. On September
5, 2002, the Court denied rehearing of this order but granted a stay of its
effective date until January 2, 2003 to permit the F.C.C. to review its rules.
On June 18, 2002, the United States Court of Appeals for the District of
Columbia denied challenges to the F.C.C.'s collocation rules.
Given the Act's relatively recent enactment, the ongoing actions taken by the
F.C.C. to promulgate rules and regulations on interconnection access charges and
universal service reform, and the various on-going legal challenges considering
the validity of these F.C.C. orders, it is not yet possible to determine fully
the impact of the Act and related F.C.C. regulations on Roseville Telephone's
operations.
The Company's financial condition and results of operations have been and will
be affected by recent and future proceedings before the P.U.C. and F.C.C.
Pending before the F.C.C. and P.U.C. are proceedings which are considering:
o Additional rules governing the opening of markets to competition
o The goals and definition of universal telephone service in a changing
environment, including examination of subsidy support mechanisms for
subscribers of different carriers (including the incumbent carriers)
and in various geographic areas.
o Rules that will provide non-discriminatory access by competing service
providers to the network capabilities of local exchange carriers
The eventual impact on the Company of the effect of all the proceedings
described above cannot presently be determined.
Item 6. Exhibits and Reports on Form 8-K.
a) See Index to Exhibits.
b) Reports on Form 8-K:
The Company filed a report on Form 8-K on July 29, 2002 related to the
acquisition of substantially all of the assets of WINfirst.
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 6 (a))
Method
Exhibit No. Description of Filing Page
3(a) Articles of Incorporation of Registrant, together with Incorporated by -
Certificate of Amendment of Articles of Incorporation dated reference
January 25, 1996 and Certificate of Amendment of Articles
of Incorporation dated June 21, 1996 (Filed as Exhibit 3(a)
to Form 10-Q Quarterly Report for the quarter ended
September 30, 1996)
3(b) Certificate of Amendment of Articles of Incorporation dated Incorporated by -
May 18, 2001 (Filed as Exhibit 3(b) to Form 10-Q Quarterly reference
Report for the quarter ended June 30, 2001)
3(c) Bylaws of Registrant (Filed as Exhibit 3(b)to Form 10-K Incorporated by -
Annual Report of the Registrant for the year ended December reference
31, 2000)
4(a) Shareholder Rights Plan (Filed as Exhibit 2.1 to Form 8-A Incorporated by -
Registration Statement under the Securities Act of 1934) reference
10(a) Credit Agreement of Roseville Telephone Company with Bank Incorporated by -
of America National Trust and Savings Association, dated reference
March 27, 1992, with respect to $25,000,000 term loan
(Filed as Exhibit 10(a) to Form 10-Q Quarterly Report of
Registrant for the quarter ended March 31, 1992)
10(b) Note Purchase Agreement for Series A Senior Notes in the Incorporated by -
aggregate amount of $40,000,000 dated December 9, 1998 reference
(Filed as Exhibit 10(b) to Form 10-K Annual Report of
Registrant for the year ended December 31, 1998)
10(c) Operating Agreement of West Coast PCS LLC (Filed as Incorporated by -
Exhibit 10(c) to Form 10-K Annual Report of Registrant for reference
the year ended December 31, 1997)
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 6 (a))
Method
Exhibit No. Description of Filing Page
10(d) 1999 Restricted Stock Bonus Plan (Filed as Exhibit 10(d) to Incorporated by -
Form 10-K Annual Report of Registrant for the year ended reference
December 31, 1998)
10(e) 2000 Equity Incentive Plan (Filed as Incorporated -
Exhibit 10 (e) to form 10-K Annual Report of Registrant for by reference
the year ended December 31, 1999)
10(f) Business Loan Agreement of Registrant with Bank of America, Incorporated by -
dated March 15, 2000, as amended by Amendment No. 1 dated reference
as of April 10, 2000 (Filed as Exhibit 10 (f) to Form 10-Q
Quarterly Report of Registrant for the quarter ended March
31, 2000)
10(g) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Brian H. Strom (Filed as Exhibit 10 reference
(g) to Form 10-K Annual Report of Registrant for the year
ended December 31, 2000)
10(h) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Michael D. Campbell (Filed as reference
Exhibit 10 (h) to Form 10-K Annual Report of Registrant for
the year ended December 31, 2000)
10(i) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Jay B. Kinder (Filed as Exhibit 10 reference
(i) to Form 10-K Annual Report of Registrant for the year
ended December 31, 2000)
10(j) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and Fred Arcuri reference
(Filed as exhibit 10 (j) to Form 10-Q
Quarterly Report of Registrant for the
quarter ended March 31, 2002)
SUREWEST COMMUNICATIONS
INDEX TO EXHIBITS
(Item 6 (a))
Method
Exhibit No. Description of Filing Page
10(k) Letter agreement dated January 16, 2001 Incorporated by -
between Registrant and David Marsh reference
(Filed as exhibit 10 (k) to Form 10-Q
Quarterly Report of Registrant for the
quarter ended March 31, 2002)
10(l) Business Loan Agreement of Registrant with Bank of America, Incorporated by -
dated March 15, 2000, as amended by Amendment No. 2 dated reference
as of September 15, 2000; as amended by Amendment No. 3
dated as of July 17, 2001 and as amended by Amendment No. 4
dated as of June 26, 2002 (Filed as exhibit 10(l) to form
10-Q Quarterly Report of Registrant for the quarter ended
June 30, 2002)
99(a) Certification of Brian Strom, President and Chief Executive Filed herewith 32
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, Vice President and Chief Filed herewith 33
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 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: October 31, 2002 By: /s/BRIAN H. STROM
Brian H. Strom,
President and Chief
Executive Officer
Date: October 31, 2002 By: /s/MICHAEL D. CAMPBELL
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUREWEST COMMUNICATIONS
(Registrant)
Date: October 31, 2002 By: ___________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: October 31, 2002 By: ___________________________
Michael D. Campbell,
Executive Vice President
and Chief Financial Officer
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 quarterly report on Form 10-Q of SureWest
Communications;
2. Based on my knowledge, this quarterly 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 period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: October 31, 2002
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 quarterly report on Form 10-Q of SureWest
Communications;
2. Based on my knowledge, this quarterly 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 period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 we 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: October 31, 2002
Michael D. Campbell
Vice President and Chief Financial Officer
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 Quarterly Report of SureWest Communications (the
"Company"), on Form 10-Q for the period ended September 30, 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.
October 31, 2002
/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 Quarterly Report of SureWest Communications (the
"Company"), on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission of the date hereof (the "Report"), the
undersigned, as the Chief Executive Officer on 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.
October 31, 2002
/s/Michael Campbell
Michael Campbell
Vice President and Chief Financial Officer