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 quarterly period ended March 31, 2003
[ ] 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 April 30, 2003, 14,537,144 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 Ended Quarter Ended
March 31, 2003 March 31, 2002
-------------- --------------
Operating revenues:
Local service $14,996 $16,514
Network access service 13,417 13,302
Directory advertising 3,838 3,738
Long distance service 1,253 1,327
Wireless service 6,503 5,326
Internet service 3,714 1,338
Residential broadband service 1,867 -
Business broadband service 750 451
Other 1,091 1,455
------- -------
Total operating revenues 47,429 43,451
Operating expenses:
Cost of services and products 14,705 14,019
Customer operations and selling 8,682 8,116
General and administrative 9,750 5,740
Depreciation and amortization 12,387 10,447
------- -------
Total operating expenses 45,524 38,322
------- -------
Income from operations 1,905 5,129
Other income (expense):
Interest income 83 203
Interest expense (832) (362)
Gain on sale of alarm monitoring assets - 4,436
Other, net (27) (26)
------- -------
Total other (expense)income, net (776) 4,251
------- -------
Income before income taxes 1,129 9,380
Income taxes 454 3,771
------- -------
Net income $ 675 $ 5,609
======= =======
Basic and diluted earnings per share (1) $ 0.05 $ 0.37
======= =======
Cash dividends per share (2) $ 0.25 $ 0.25
======= =======
Shares of common stock used to calculate
earning per share 14,521 15,072
======= =======
(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)
March 31, 2003 December 31, 2002
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 63,807 $ 20,385
Short-term investments 5,976 -
Accounts receivable, net 20,553 19,747
Refundable income tax 8,209 6,868
Inventories 5,280 4,649
Deferred directory costs 4,157 3,657
Prepaid expenses and other current assets 1,887 2,325
-------- --------
Total current assets 109,869 57,631
Property, plant and equipment, net 319,127 320,261
Intangible and other assets:
Wireless licenses, net 13,566 13,566
Goodwill 2,171 2,171
Intangible asset relating to pension
plans 1,507 1,507
Intangible asset relating
to favorable operating leases, net 1,211 1,260
Deferred charges and other assets 752 343
-------- --------
19,207 18,847
-------- --------
$448,203 $396,739
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,243 $ 5,779
Current portion of capital lease
obligations 319 309
Accounts payable and other accrued
liabilities 8,124 7,112
Estimated shareable earnings obligations 11,228 9,350
Advance billings and deferred revenues 9,858 8,142
Accrued pension benefits 7,462 5,613
Accrued compensation 6,199 4,902
-------- --------
Total current liabilities 48,433 41,207
Short-term borrowings refinanced on a
long-term basis - 15,000
Long-term debt 96,364 36,364
Long-term capital lease obligations 527 607
Deferred income taxes 29,416 26,552
Other liabilities and deferred revenues 7,350 8,004
Commitments and contingencies
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
(Amounts in thousands)
March 31, 2003 December 31, 2002
-------------- -----------------
Shareholders' equity:
Common stock, without par value;100,000
shares authorized, 14,537 and 14,529
shares issued and outstanding at
March 31, 2003 and December 31, 2002,
respectively 158,782 158,567
Deferred stock-based compensation (263) (116)
Accumulated other comprehensive loss (1,637) (1,637)
Retained earnings 109,231 112,191
-------- --------
Total shareholders' equity 266,113 269,005
-------- --------
$448,203 $396,739
======== ========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(Amounts in thousands)
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
------------------ ------------------
Net cash provided by
operating activities $ 20,230 $ 12,673
Cash flows from investing activities:
Proceeds from sale of alarm
monitoring division - 4,495
Capital expenditures for property, plant
and equipment (11,253) (10,806)
Purchases of held-to-maturity investments (5,976) (737)
Maturities of held-to-maturity investments - 1,723
Changes in deferred charges and other
assets (409) 54
------- -------
Net cash used in investing activities (17,638) (5,271)
Cash flows from financing activities:
Repayment of short-term borrowings (15,000) -
Proceeds from long-term debt 60,000 -
Principal payments of long-term debt (536) (536)
Dividends paid (3,634) (3,760)
Repurchase of common stock - (10,566)
Proceeds from exercise of stock options - 429
------- -------
Net cash provided by (used in)
financing activities 40,830 (14,433)
------- -------
Increase (decrease) in cash and cash
equivalents 43,422 (7,031)
Cash and cash equivalents at beginning of
period 20,385 54,520
------- -------
Cash and cash equivalents at end of
period $ 63,807 $ 47,489
======= =======
See accompanying notes.
SUREWEST COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of SureWest Communications
(the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
fair presentation of the results for the interim periods shown have been
included. 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 2002 Annual Report on Form 10-K.
The Company is a holding company with wholly-owned subsidiaries that
provide integrated communications services. The Company's principal
operating subsidiary is Roseville Telephone Company ("Roseville
Telephone"). SureWest Directories, Roseville Long Distance Company
("Roseville Long Distance"), SureWest Broadband, SureWest Wireless,
SureWest Televideo ("SureWest Broadband/Residential Services") and
Roseville Alternative Company ("Roseville Alternative") are each
subsidiaries of the Company. The Company expects that the sources of its
revenues and its cost structure may be different in future periods as a
result of its entry into new communications markets.
On January 25, 2002, the Company sold substantially all of the assets of
its alarm monitoring division, which was a component of the Telecom
segment, for approximately $5,150, subject to certain future adjustments,
which are not expected to be material. This sale resulted in a pre-tax gain
of $4,436 during the first quarter of 2002. Through March 31, 2003, the
Company had received cash proceeds of $4,995, of which $4,495 and $500 was
received during the first quarter of 2002 and the fourth quarter of 2001,
respectively, 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 quarter ended March 31, 2002 were $279 (none in 2003).
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.
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 or exceeds 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 quarters ended March 31, 2003 and 2002 had the Company
applied the fair value method to account for stock-based awards to
employees:
Quarter ended Quarter ended
March 31, 2003 March 31, 2002
-------------- --------------
Net income, as reported $ 675 $ 5,609
Add stock-based employee
compensation expense included in
the determination of net
income as reported, net of tax 41 42
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 (360) (296)
-------------- --------------
Pro forma net income $ 356 $ 5,355
============== ==============
Basic net income per share:
As reported $ 0.05 $ 0.37
Pro forma $ 0.02 $ 0.36
Diluted net income per share:
As reported $ 0.05 $ 0.37
Pro forma $ 0.02 $ 0.36
Comprehensive Income
Significant components of the Company's comprehensive income (loss) are as follows:
Three Months Ended
Cumulative March 31,
Amounts 2003 2002
------------------- ----------------- -----------------
Net income $109,231 $ 675 $ 5,609
Minimum pension and
post-retirement
benefit liability
adjustment, net of
income taxes (1,637) - -
--------- -------- --------
Comprehensive income $107,594 $ 675 $ 5,609
========= ========= ========
Cumulative effect of change in accounting principle
The Company adopted SEC Staff Accounting Bulletin ("SAB") 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. Activation
revenue previously deferred in connection with the cumulative effect
adjustment as of January 1, 2000 recognized for the quarters ended March
31, 2003 and 2002 was $128 and $298, respectively. The net effect of these
revenues was to increase net income for the quarters ended March 31, 2003
and 2002 by $77 ($0.01 per share) and $178 ($0.01 per share), respectively.
Reclassifications
Certain amounts in the Company's 2002 condensed consolidated financial
statements have been reclassified to conform with the presentation of its
2003 condensed consolidated financial statements.
2. BUSINESS SEGMENTS
The Company has three reportable business segments: Telecom, Broadband and
Wireless. The Telecom segment primarily provides local, network access and
long distance services, directory advertising services, and the sale of
certain non-regulated products and services principally to customers
residing in Roseville Telephone's service area. The Broadband segment
provides various services including: high-speed and dial-up Internet;
digital cable; local, network access and toll telephone; and managed
services in the greater Sacramento area, principally to customers residing
outside of Roseville Telephone's service area. This segment includes the
Company's subsidiaries SureWest Broadband and SureWest Broadband
Residential Services. SureWest Broadband is comprised, in part, of a
division of Roseville Telephone operating as a Competitive Local Exchange
Carrier. The Wireless segment provides wireless services and the sale of
related communications equipment. Corporate operations represents: cash;
investments; property, plant, and equipment and miscellaneous other assets
not allocated to the segments.
These segments are strategic business units that offer different products
and services. The Company accounts for intersegment revenues and expenses
at prevailing market rates. The Company's business segment information is
as follows (the Company's 2002 business segment information has been
restated to conform to the Company's organizational structure in 2003):
As of and for the
three months ended Corporate Intercompany
March 31, 2003 Telecom Broadband Wireless Operations Eliminations Consolidated
-------- --------- -------- ---------- ------------ ------------
Operating revenues
from external
customers $ 34,595 $ 6,331 $ 6,503 $ - $ - $ 47,429
Intersegment revenues 5,523 528 156 - (6,207) -
Operating expenses 21,475 10,155 7,714 - (6,207) 33,137
Depreciation and
amortization 7,759 849 3,779 - - 12,387
Income (loss) from
operations 10,884 (4,145) (4,834) - - 1,905
Net income 6,369 (2,594) (3,100) - - 675
Total assets $236,687 $ 56,026 $ 89,312 $ 66,178 $ - $ 448,203
As of and for the
three months ended Corporate Intercompany
March 31, 2002 Telecom Broadband Wireless Operations Eliminations Consolidated
------- --------- -------- ---------- ------------ ------------
Operating revenues
from external
customers $ 36,336 $ 1,789 $ 5,326 $ - $ - $ 43,451
Intersegment revenues 3,930 46 92 - (4,068) -
Operating expenses 20,325 2,738 8,880 - (4,068) 27,875
Depreciation and
amortization 6,586 267 3,594 - - 10,447
Income (loss) from
operations 13,355 (1,170) (7,056) - - 5,129
Net income 10,752 (688) (4,455) - - 5,609
Total assets $241,062 $ 29,532 $92,073 $ 39,791 $ - $ 402,458
3. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
is no longer 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 must be subsequently adjusted for changes in
estimated cash flows. The Company adopted SFAS No. 146 on January 1, 2003,
and the adoption of this new standard did not have a material effect on the
Company's first quarter 2003 condensed consolidated financial statements.
On December 31, 2002, the 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 March 31, 2003, 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 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 adopted SFAS No. 143
on January 1, 2003, the adoption of this new standard did not have a
material effect on the Company's first quarter 2003 condensed 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 condensed consolidated financial statements.
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 were effective immediately in 2002. The
Company adopted 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 adoption of the recognition and measurement
provisions of FIN No. 45 did not have a material effect on the Company's
first quarter 2003 condensed consolidated financial statements.
4. ESTIMATED SHAREABLE EARNINGS OBLIGATIONS
Roseville Telephone's revenues from certain telephone services are affected
by rates authorized by various regulatory agencies. Intrastate service
rates are subject to regulation by the California 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 was
returned in the form of a surcredit beginning in January 2002 and ending in
January 2003, totaling approximately $4,600. For the quarter ended March
31, 2003, the remainder of Roseville Telephone's intrastate shareable
earnings obligation of $294 relating to the years 1998 and 1999 was
returned to the consumers.
As a result of periodic cost separation studies, the Company changed its
estimate for a portion of Roseville Telephone's interstate and intrastate
shareable earnings obligations and certain National Exchange Carrier
Association ("NECA") Carrier Common Line ("CCL") accounts receivable
balances during the first quarter of 2003. These changes in accounting
estimates decreased the Company's consolidated revenues by $277 and net
income by $166 ($0.01 per share) for the quarter ended March 31, 2003.
As of March 31, 2003, the Company's condensed consolidated balance sheet
reflected aggregate liabilities of $11,228 relating to Roseville
Telephone's estimated interstate and intrastate shareable earnings
obligations. The calculations supporting these liabilities are very complex
and involve a variety of estimates prior to the ultimate settlement of such
obligations. In addition, Roseville Telephone's interstate shareable
earnings obligations lapse over time if Roseville Telephone's interexchange
carrier and other customers do not claim the amounts ascribed to them.
Accordingly, it is reasonably possible that management's estimates of the
Company's liabilities for interstate and intrastate shareable earnings
obligations could change in the near term, and the amounts involved could
be material.
5. NOTE PURCHASE AGREEMENT
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. 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 used a portion of the proceeds from the issuance
of the Series B Notes to retire certain short-term borrowings, described in
Note 6, which had an aggregate outstanding principal balance of $15,000 as
of December 31, 2002.
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. There were no amounts outstanding
under this credit facility as of March 31, 2003.
7. PRO FORMA STOCK-BASED COMPENSATION INFORMATION
Pro forma information regarding the results of operations and net income
per share (Note 1) is determined as if the Company had accounted for its
employee stock options using the fair value method, and such pro forma
stock-based compensation is amortized to pro forma results of operations
using the straight-line method. Under this method, the fair value of each
option granted is estimated on the date of grant using the Black-Scholes
option valuation model.
The Company uses the intrinsic value method in accounting for its employee
stock options because, as discussed below, the alternative fair value
accounting requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under the intrinsic
value method, when the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
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
estimates, 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 three months ended March 31, 2003 and 2002, the fair value of the
Company's stock-based awards to employees was estimated using the following
weighted-average assumptions:
2003 2002
---- ----
Expected life of options in years 4.0 5.0
Volatility 41.22% 36.77%
Risk-free interest rate 2.11% 4.44%
Expected dividend yield 2.50% 1.67%
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 wireless, Internet, video and
Competitive Local Exchange Carrier operating entities.
Corporate Structure
SureWest Communications (the "Company") is a holding company with wholly-owned
subsidiaries operating in the Telecommunications ("Telecom"), Broadband and
Wireless segments.
The Telecom segment is aligned with specific subsidiaries of the Company that
provide landline telecommunications services, directory advertising, high-speed
Internet, long distance services and certain non-regulated services. Roseville
Telephone Company ("Roseville Telephone"), which is the principal operating
subsidiary of the Telecom segment, provides local and toll telephone services
within its service area, network access services, billing and collection
services, and certain non-regulated services. 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 areas. Roseville Long Distance Company
("Roseville Long Distance"), is engaged in the provision of long distance
services.
The Broadband segment provides various services, including: high-speed and
dial-up Internet; digital cable; local, network access and toll telephone; and
managed services in the greater Sacramento area, principally to customers
residing outside of Roseville Telephone's service area. The Broadband segment
includes the Company's subsidiaries SureWest Broadband and SureWest Televideo
("SureWest Broadband/Residential Services). SureWest Broadband is comprised, in
part, of a division of Roseville Telephone operating as a Competitive Local
Exchange Carrier.
The Wireless segment consists of the Company's subsidiary SureWest Wireless,
which provides wireless services. SureWest Wireless derives its revenue from the
provision of wireless 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.
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.
Results of Operations
Consolidated Results of Operations
The following table summarizes the Company's consolidated financial results for
the quarters ended March 31, 2003 and 2002:
Quarter ending March 31, 2003 2002 $Change %Change
- --------------------------------- ---------------------------------------------------
(Amounts in thousands)
Operating revenues $47,429 $43,451 $ 3,978 9%
Operating expenses 33,137 27,875 5,262 19
Depreciation and amortization 12,387 10,447 1,940 19
Operating income 1,905 5,129 (3,224) (63)
Net income $ 675 $ 5,609 $(4,934) (88)%
Consolidated operating revenues increased $4.0 million during the first quarter
of 2003 compared to the same period in 2002. The increase in consolidated
operating revenues was due to 1) continued additions to the wireless customer
base, with a 23% overall increase in wireless subscribers based on average
subscriber counts, 2) increased revenues due to the acquisition of the SureWest
Broadband/Residential Services business in the third quarter of 2002, 3)
continued growth in Business Broadband service and 4) increased demand for DSL
services and dedicated access. As discussed more fully in Segment Results of
Operations, the increase in operating revenues was offset in part due to changes
in accounting estimates related to a portion of the Company's interstate and
intrastate shareable earnings obligations and certain National Exchange Carrier
Association ("NECA") Common Carrier line ("CCL") accounts receivable balances.
Consolidated operating expenses and depreciation and amortization increased $5.3
million and $1.9 million, respectively, during the first quarter of 2003
compared to the same period in 2002. The increase in operating expenses was due
primarily to 1) increased expenses due to the acquisition of the SureWest
Broadband/Residential Services business in the third quarter of 2002 and 2)
increased depreciation and amortization expense due to additions to property,
plant and equipment and internal-use software during the first quarter of 2003.
These increases were offset in part by decreased sales commissions related to
wireless service and decreased depreciation expense due to a change in
accounting estimate during the fourth quarter of 2002, which increased the
estimated useful lives primarily related to wireless switching and voice email
equipment from five to ten years.
Segment Results of Operations
Telecom
Quarter ending March 31, 2003 2002 $Change %Change
- ------------------------------------------- ------------ ---------------- -------------
(Amounts in thousands)
Local service $14,996 $16,514 $ (1,518) (9)%
Network access service 13,417 13,302 115 0.9
Directory advertising 3,838 3,738 100 3
Long distance service 1,253 1,327 (74) (6)
Other 1,091 1,455 (364) (25)
Total operating revenues
from external customers 34,595 36,336 (1,741) (5)
Intersegment revenues 5,523 3,930 1,593 41
Operating expenses 21,475 20,325 1,150 6
Depreciation and amortization 7,759 6,586 1,173 18
Operating income 10,884 13,355 (2,471) (19)
Net income $ 6,369 $10,752 (4,383) (41)%
Operating revenues
Operating revenues from external customers in the Telecom segment decreased $1.7
million for the quarter ended March 31, 2003 compared to the same period in
2002. Revenues from services subject to regulation, which include local and
network access services, decreased $1.4 million for the quarter ended March 31,
2003 compared to the same period in 2002. This decrease was due in part to an
increase in the Company's provision for its estimated intrastate shareable
earnings obligations resulting in a decrease to consolidated revenues of $429
thousand for the quarter ended March 31, 2003 compared to the same period in
2002. In addition, this decrease was also due to changes in accounting estimates
pertaining to the Company's estimated interstate and intrastate shareable
earning obligations and certain NECA CCL accounts receivable. These changes in
accounting estimates decreased the Company's consolidated revenues and net
income by $277 thousand and $166 thousand ($0.01 per share), respectively,
during the first quarter of 2003. Additionally, commencing in the third quarter
of 2002, Roseville Telephone entered into an intersegment wholesaling
arrangement for its digital subscriber line ("DSL") service, resulting in a
decrease to network access revenues of $1.5 million during the first quarter of
2003. This decrease was offset in part by continued growth and demand for
dedicated access as well as an increase in Roseville Telephone's billing
surcharge.
The Company adopted Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") 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. Activation revenue previously deferred in connection with the cumulative
effect adjustment as of January 1, 2000 recognized for the quarters ended March
31, 2003 and 2002 was $128 thousand and $298 thousand, respectively. The net
effect of these revenues was to increase net income for the quarters ended March
31, 2003 and 2002 by $77 thousand ($0.01 per share) and $178 thousand ($0.01 per
share), respectively.
Directory advertising revenues increased $100 thousand for the quarter ended
March 31, 2003 compared to the same period in 2002 due to increased advertising
sales.
Other operating revenues primarily consist of carrier billing and collection
services, certain non-regulated sales and services, directory and operator
assistance and other miscellaneous services. Other operating revenues decreased
$364 thousand for the quarter ended March 31, 2003 compared to the same period
in 2002. This decrease was due primarily to 1) the sale of the Company's alarm
monitoring division during the first quarter of 2002 and 2) a decrease in demand
for the billing and collection function.
Operating expenses
Operating expenses for the Telecom segment increased $1.2 million for the
quarter ended March 31, 2003, compared to the same period in 2002. Cost of
services and products decreased $316 thousand during the quarter ended March 31,
2003 compared to the same period in 2002 due to reduced spending for minor
materials and contracted services driven by internal efficiencies.
Customer operations and selling expense increased $168 thousand for the quarter
ended March 31, 2003 compared to the same period in 2002 due primarily to
increases in product advertising expenses associated with the directory
advertising business. The Company's pension and post-retirement benefits expense
increased due to decline in the U.S. securities market conditions. Consequently,
the Company's pension and post-retirement plans experienced investment losses
resulting in a decline in the underlying plan assets.
General and administrative expenses increased $1.3 million for the quarter ended
March 31, 2003 compared to the same period in 2002 due primarily to increased
labor costs resulting from an increase in the size of the Company's workforce
and an increase in pension and post-retirement benefits as previously discussed.
Depreciation and amortization increased $1.2 million for the quarter ended March
31, 2003 compared to the same period in 2002 due primarily to additions to
central office assets and internal-use software.
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
the second quarter of 2002, amounts owed 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. As of March 31,
2003, obligations owed by WorldCom to the Company for post-petition services
have been paid on a timely basis.
Revenues from services subject to regulation constituted approximately 60% and
69%, of the Company's total operating revenues for the quarters ended March 31,
2003 and 2002, 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 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 $86 thousand and $163 thousand for
the quarters ended March 31, 2003 and 2002, 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 the first quarter of 2003 or 2002, and the Company is currently seeking
refunds of certain amounts paid in 2001; however, there is presently no
assurance that such amounts are recoverable).
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. 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 March 31, 2003 or results of operations for the three months 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 reductions 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 reductions of revenues of $867 thousand and $438
thousand relating to estimated intrastate shareable earnings obligations during
the quarters ended March 31, 2003 and 2002, respectively.
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 was returned in the form of a
surcredit beginning in January 2002 and ending in January 2003, totaling
approximately $4.6 million. For the quarter ended March 31, 2003, the remainder
of Roseville Telephone's intrastate shareable earnings obligation of $294
thousand relating to the years 1998 and 1999 was returned to the consumers.
As a result of periodic cost separation studies, the Company changed its
estimate for a portion of Roseville Telephone's interstate and intrastate
shareable earnings obligations and certain NECA CCL accounts receivable balances
during the first quarter of 2003. These changes in accounting estimates
decreased the Company's consolidated revenues by $277 thousand and net income by
$166 thousand ($0.01 per share) for the quarter ended March 31, 2003.
As of March 31, 2003, the Company's consolidated balance sheet reflected
aggregate liabilities of $11.2 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.
Broadband
Quarter ending March 31, 2003 2002 $Change %Change
- ----------------------------------- ------------- ------------- ------------- -------
(Amounts in thousands)
Internet service $ 3,714 $ 1,338 $ 2,376 178%
Residential broadband service 1,867 - 1,867 100
Business broadband service 750 451 299 66
Total operating revenues
from external customers 6,331 1,789 4,542 254
Intersegment revenues 528 46 482 1,048
Operating expenses 10,155 2,738 7,417 271
Depreciation and amortization 849 267 582 218
Operating loss (4,145) (1,170) (2,975) (254)
Net loss $(2,594) $ (688) $(1,906) (277)%
Operating revenues
Operating revenues from external customers in the Broadband segment increased
$4.5 million for the quarter ended March 31, 2003 compared to the same period in
2002. The increase in Broadband revenues is due in large part to 1) the purchase
of the SureWest Broadband/Residential Service business during the third quarter
of 2002, 2) an increase in residential and business DSL subscribers and 3) the
commencement of an intersegment wholesale DSL service arrangement with Roseville
Telephone in the fourth quarter of 2002.
Operating expenses
Total operating expenses for the Broadband segment increased $7.4 million for
the quarter ended March 31, 2003 compared to the same period in 2002. Cost of
services and products increased $3.3 million during the quarter ended March 31,
2003 compared to the same period in 2002 due primarily to 1) the purchase of the
SureWest Broadband/Residential Service business during the third quarter of 2002
and 2) increased transport costs.
Customer operations expense, general and administrative expense and depreciation
and amortization increased $1.2 million, $2.9 million and $582 thousand,
respectively, for the quarter ended March 31, 2003 compared to the same period
in 2002. The increases are primarily due to the purchase described above during
the third quarter of 2002 and an increase in depreciation expense resulting from
property, plant and equipment additions at SureWest Broadband.
Wireless
Quarter ending March 31, 2003 2002 $Change %Change
- ------------------------------- ------------ ------------- ------------- -------
(Amounts in thousands)
Wireless revenues
from external customers $ 6,503 $ 5,326 $ 1,177 22%
Intersegment revenues 156 92 64 70
Operating expenses 7,714 8,880 (1,166) (13)
Depreciation and
amortization 3,779 3,594 185 5
Operating loss (4,834) (7,056) 2,222 32
Net loss $(3,100) $(4,455) $ 1,355 30%
Operating revenues
Operating revenues from external customers in the Wireless segment increased
$1.2 million for the quarter ended March 31, 2003, compared to the same period
in 2002. The increase in Wireless revenues is due primarily to 1) continued
additions to the customer base, with an 23% overall increase in wireless
subscribers based on average subscriber counts 2) increased long distance and
roaming, 3) the introduction of new features and 4) a decrease in uncollectible
revenues attributable to fewer write-offs and higher recoveries.
Operating expenses
Total operating expenses for the Wireless segment decreased $1.2 million for the
quarter ended March 31, 2003, compared to the same period in 2002. Cost of
services and products decreased $178 thousand during the quarter ended March 31,
2003 compared to the same period in 2002 due primarily to a decrease in
equipment costs due to a first quarter 2002 promotion including free equipment
with the activation of service and the purchase of a handset, 2) a reduction in
network engineering labor costs due to a modest reduction in the workforce and
3) decreased handset insurance costs due to fewer subscribers taking the feature
and fewer claims submitted. This decrease was offset in part by 1) increased
interconnect usage associated with the increase in subscriber base and 2) an
increase in long distance expense due to an 18% increase in minutes of use.
Customer operations and selling expense decreased $860 thousand for the quarter
ended March 31, 2003 compared to the same period in 2002 due primarily to
decreased dealer commissions and costs related to the customer service and
subscriber billing functions.
Depreciation and amortization
Depreciation and amortization increased $185 thousand for the quarter ended
March 31, 2003 compared to the same period in 2002 due primarily to increases in
wireless property, plant and equipment and amortization of internal-use
software. This increase was partially offset by a change in accounting estimate
during the fourth quarter 2002, increasing the estimated useful lives primarily
related to wireless switching and voice mail equipment from five to ten years.
This change in accounting estimate resulted in decreased depreciation expense of
$243 thousand for the quarter ended March 31, 2003.
Non-operating Items
Interest income and expense, net
Interest expense increased during the quarter ended March 31, 2003 compared to
the same period in 2002 due to the interest on short-term borrowings and the
Company's issuance late in the current year quarter of its unsecured Series B
Senior Notes ("Series B Notes"). Interest income decreased due to lower average
invested balances during the first quarter of 2003 compared to the same period
in 2002.
Income taxes
Income taxes for the quarter ended March 31, 2003, decreased $3.3 million
compared to the same period in 2002, due primarily to a decrease in income
subject to tax. The effective federal and state income tax rates were
approximately 40.2% for the quarters ended March 31, 2003 and 2002.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities was $20.2 million and $12.7 million for the
quarters ended March 31, 2003 and 2002, respectively. Net cash provided by
operating activities in the quarter ended March 31, 2003 was greater than net
income of $675 thousand due to increases in 1) non-cash charges consisting
principally of depreciation and amortization, 2) accrued liabilities, 3)
liabilities related to estimated shareable earnings obligations and 4) deferred
revenues. During the quarter ended March 31, 2003, the Company used cash flows
from operations, proceeds from the issuance of its Series B Notes and existing
cash and cash equivalents to fund 1) capital expenditures of $11.3 million
pertaining to ongoing plant construction projects, 2) dividends of $3.6 million,
3) principal payments of $536 thousand to retire long-term debt and 4) $15
million to retire short-term borrowings.
The Company's most significant use of funds for the remainder of 2003 is
expected to be for 1) budgeted capital expenditures of approximately $49.8
million, 2) scheduled payments of long-term debt of $5.2 million, 3) support of
the operations of SureWest Broadband/Residential Services up to an anticipated
$3.2 million and 4) support of the operations of SureWest Wireless of up to an
anticipated $4.3 million.
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 March 31, 2003, approximately 1 million shares of common stock have been
repurchased through these programs. The Company has remaining authorization from
the Board of Directors to repurchase an additional 469 thousand outstanding
shares as of March 31, 2003.
On March 13, 2003, the Company completed a note purchase agreement for the
issuance of its 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 used a portion of
the proceeds from the issuance of the Series B Notes to retire certain
short-term borrowings, which had 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. There were no amounts outstanding
under this credit facility as of March 31, 2003.
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 $160 thousand as of March 31, 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 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 the first quarter of 2002. Through March 31, 2003, the Company has
received cash proceeds of $5.0 million, of which $4.5 million and $500 thousand
was received during the first quarter of 2002 and the fourth quarter of 2001,
respectively, 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 quarter ended
March 31, 2002 were $279 thousand (none during the quarter ended March 31,
2003).
The Company had cash, cash equivalents and short-term investments at March 31,
2003, of $69.8 million. The Company believes that its working capital position,
the proceeds available from its line of credit facility, operating cash flows
and borrowing capacity are more than sufficient to satisfy its liquidity
requirements in 2003. In addition, the Company believes, given its financial
position and debt-to-equity position, it has substantial additional short and
long-term borrowing capacity.
Critical Accounting Policies and Estimates
Below is a summary of the Company's critical accounting policies and estimates.
Management has discussed development and selection of critical accounting
policies and estimates with its Audit Committee.
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 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 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 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. 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 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
March 31, 2003 or 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 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 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.
o The Company accounts for stock-based awards to employees using the
intrinsic value method, and non-employees using the fair value method.
Under the intrinsic value method, when the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, the Company does not record compensation
expense in its condensed consolidated statements of operations. The Company
uses the intrinsic value method in accounting for employee stock options
because the alternative fair value accounting requires the Company to use
option valuation models that were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. 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 estimates of these valuation models, the Company believes
such existing models do not necessarily provide a reliable single measure
of the fair value of employee stock options.
Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("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 is no longer sufficient to record
a one-time charge for most restructuring activities. Instead, companies
must record exit or disposal costs when they are "incurred" and can be
measured at fair value. In addition, the resultant liabilities must be
subsequently adjusted for changes in estimated cash flows. The Company has
adopted SFAS No. 146 on January 1, 2003, and the adoption of this new
standard did not have a material effect on the Company's first quarter 2003
condensed consolidated financial statements.
On December 31, 2002, the 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 March 31, 2003, 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 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 adopted SFAS No. 143
on January 1, 2003, and the adoption of this new standard did not have a
material effect on the Company's first quarter 2003 condensed 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 condensed consolidated financial statements.
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 were effective immediately in 2002. The
Company adopted 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 adoption of the recognition and measurement
provisions of FIN No. 45 did not have a material effect on the Company's
first quarter 2003 condensed 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, 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 Quarterly Report on Form 10-Q. 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 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. 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. 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.
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 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 March 12, 2003 relating to the
announcement of fourth quarter and full year 2002 financial results.
The Company filed a report on Form 8-K on March 13, 2003 announcing the
completion of a note purchase agreement in connection with the issuance of
its unsecured Series B Senior Notes in the aggregate principal amount of
$60,000,000.
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
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 6 (a))
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 Incorporated by -
26, 2003 (Filed as Exhibit 10(e) to Form 10-K Annual Report reference
of Registrant for the year ended December 31, 2002)
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 6 (a))
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)
99(a) Certification of Brian H. Strom, President and Chief Filed herewith 35
Executive 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 D. Campbell, Executive Vice Filed herewith 36
President 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 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: May 1, 2003 By: /s/BRIAN H. STROM
----------------------------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: May 1, 2003 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: May 1, 2003 By: ___________________________
Brian H. Strom,
President and Chief
Executive Officer
Date: May 1, 2003 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 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: May 1, 2003
/s/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 function):
d. 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
e. 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: May 1, 2003
/s/Michael D. Campbell
Executive 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 March 31, 2003 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.
Date: May 1, 2003
/s/Brian H. Strom
Brian H. Strom
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to SureWest Communications and will be retained by SureWest
Communications and furnished to the Securities and Exchange Commission or its
staff upon request.
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 March 31, 2003 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.
Date: May 1, 2003
/s/Michael Campbell
Michael Campbell
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to SureWest Communications and will be retained by SureWest
Communications and furnished to the Securities and Exchange Commission or its
staff upon request.