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 September 30, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 November 3, 2003, 14,541,488 shares of the registrant's Common Stock were
outstanding.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited).................................................... 3
Notes To Condensed Consolidated Financial Statements....................................................... 6
Item 2. Management's Discussion And Analysis of Financial Condition and Results of Operations...................... 14
Item 4. Controls And Procedures.................................................................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 28
Item 6. Exhibits And Reports On Form 8-K........................................................................... 30
SIGNATURES............................................................................................................... 34
CERTIFICATIONS........................................................................................................... 36
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Amounts in thousands, except per share amounts)
Quarter Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
--------------------------- -------------------------------
Operating revenues:
Local service $ 16,021 $ 16,592 $ 47,309 $ 49,542
Network access service 12,035 19,261 39,436 45,406
Directory advertising 3,792 3,600 11,335 10,954
Long distance service 1,293 1,394 3,803 4,053
Wireless service 6,995 5,790 20,184 17,059
Internet service 4,068 1,751 11,739 4,512
Residential broadband service 2,454 1,357 6,597 1,357
Business broadband service 927 605 2,594 1,634
Other 1,317 1,250 3,623 3,652
-------- -------- -------- --------
Total operating revenues 48,902 51,600 146,620 138,169
Operating expenses:
Cost of services and products 15,242 15,247 43,894 43,711
Customer operations and selling 8,488 8,911 25,577 24,242
General and administrative 8,611 8,473 28,218 21,597
Depreciation and amortization 12,884 11,943 37,782 33,417
-------- -------- -------- --------
Total operating expenses 45,225 44,574 135,471 122,967
-------- -------- -------- --------
Income from operations 3,677 7,026 11,149 15,202
Other income (expense):
Interest income 104 60 541 488
Interest expense (1,242) (535) (3,336) (1,234)
Gain on sale of alarm monitoring assets - - - 4,435
Other, net 2 (131) (54) (238)
-------- -------- -------- --------
Total other (expense) income, net (1,136) (606) (2,849) 3,451
-------- -------- -------- --------
Income before income taxes 2,541 6,420 8,300 18,653
Income taxes 1,039 2,568 3,410 7,489
-------- -------- -------- --------
Net income $ 1,502 $ 3,852 $ 4,890 $ 11,164
======== ======== ======== ========
Basic and diluted earnings per share (1) $ 0.10 $ 0.26 $ 0.34 $ 0.75
======== ======== ======== ========
Cash dividends per share (2) $ 0.25 $ 0.25 $ 0.75 $ 0.75
======== ======== ======== ========
Shares of common stock used to calculate earnings
per share 14,521 14,534 14,521 14,870
======== ======== ======== ========
(1) Shares used in the computation of basic earnings per share are based on the
weighted average number of common shares outstanding, excluding unvested
restricted common shares. Shares used in the computation of diluted
earnings per share are based on the weighted average number of common and
other potentially dilutive securities outstanding in each period.
(2) Cash dividends per share are based on the actual dividends per share, as
declared by the Company's Board of Directors.
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 40,298 $ 20,385
Short-term investments 11,942 -
Accounts receivable, net 20,152 19,747
Refundable income taxes 5,692 6,868
Inventories 6,603 4,649
Deferred directory costs 4,435 3,657
Prepaid expenses and other current assets 3,415 2,325
-------- --------
Total current assets 92,537 57,631
Property, plant and equipment, net 333,662 320,261
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 685 1,260
Deferred charges and other assets 688 343
--------- ---------
18,617 18,847
--------- ---------
$ 444,816 $ 396,739
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,172 $ 5,779
Current portion of long-term capital lease obligations 319 309
Accounts payable and other accrued liabilities 9,236 7,112
Estimated shareable earnings obligations 12,920 9,350
Advance billings and deferred revenues 9,659 8,142
Accrued pension benefits 5,273 5,613
Accrued compensation 5,728 4,902
-------- --------
Total current liabilities 47,307 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 372 607
Deferred income taxes 29,855 26,552
Other liabilities and deferred revenues 7,757 8,004
Commitments and contingencies
Shareholders' equity:
Common stock, without par value; 100,000 shares authorized, 14,537 and
14,529 shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively 158,771 158,567
Deferred stock-based compensation (151) (116)
Accumulated other comprehensive loss (1,637) (1,637)
Retained earnings 106,178 112,191
--------- ---------
Total shareholders' equity 263,161 269,005
--------- ---------
$ 444,816 $ 396,739
========= =========
See accompanying notes.
SUREWEST COMMUNICATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(Amounts in thousands)
Nine Months Ended September 30,
2003 2002
---------------- --------------
Net cash provided by operating activities $ 50,830 $ 28,601
Cash flows from investing activities:
Purchase of substantially all of the assets of Western Integrated
Networks, LLC (62) (12,277)
Proceeds from sale of alarm monitoring division - 4,495
Capital expenditures for property, plant and equipment (51,013) (34,761)
Purchases of short-term investments (47,363) -
Maturities of held-to-maturity investments 35,421 1,723
Changes in deferred charges and other assets (31) 633
--------- ---------
Net cash used in investing activities (63,048) (40,187)
Cash flows from financing activities:
Increase in short-term borrowings - 15,000
Repayment of short-term borrowings (15,000) -
Proceeds from long-term debt 60,000 -
Principal payments of long-term debt (1,607) (1,606)
Debt issuance costs (359) -
Dividends paid (10,903) (11,120)
Repurchase of common stock - (29,463)
Proceeds from exercise of stock options - 896
--------- ---------
Net cash provided by (used in) financing activities 32,131 (26,293)
--------- ---------
Increase (decrease) in cash and cash equivalents 19,913 (37,879)
Cash and cash equivalents at beginning of period 20,385 54,520
--------- ---------
Cash and cash equivalents at end of period $ 40,298 $ 16,641
========= =========
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 filed with the SEC.
The Company is a holding company with wholly-owned subsidiaries that provide
integrated communications services. The Company's principal operating subsidiary
is SureWest Telephone (formerly known as Roseville Telephone Company). SureWest
Directories, SureWest Long Distance (formerly known as Roseville Long Distance
Company), SureWest Broadband, SureWest Wireless and SureWest Televideo
("SureWest Broadband/Residential Services") 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, both as a result of its entry into
new communications markets and competitive forces in each of the markets in
which the Company has operations.
Effective October 27, 2003, the Company changed the names of the remaining
subsidiaries that did not bear the SureWest name. The name change affected
Roseville Telephone Company, now SureWest Telephone, and Roseville Long Distance
Company, now SureWest Long Distance.
During the quarter ended September 30, 2003, the Company entered into a 20-year
nonmonetary transaction with a third party involving the exchange of certain
fiber optic capacity and collocation rights. Because this nonmonetary
transaction did not represent the culmination of an earnings process, no
revenues or expenses have been or will be recorded by the Company pursuant to
this transaction. In addition, there was no indicated loss on this exchange of
productive rights.
On July 12, 2002, the Company purchased substantially all of the assets of
Western Integrated Networks, LLC and certain affiliates (collectively, "WIN") in
a transaction supervised by the United States Bankruptcy Court for the District
of Colorado. The purchase price for the assets of WIN consisted of (i) $12,000
in cash, (ii) direct acquisition costs of $622 and (iii) the assumption of
certain current liabilities aggregating $4,717 relating principally to executory
contracts and capital lease obligations.
Prior to July 12, 2003, the Company obtained additional information regarding
the fair values of certain assets acquired and liabilities assumed from WIN.
Accordingly, the Company prospectively adjusted the preliminary purchase price
allocation in connection with the preparation of its second quarter 2003
condensed consolidated financial statements. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition, July 12, 2002, based on the Company's final allocation of the
aforementioned purchase price:
Accounts receivable, net $ 615
Equipment held for sale 2,573
Other current assets 931
Property, plant and equipment 12,327
Intangible asset relating to favorable operating leases 893
--------
Total assets acquired 17,339
Current liabilities assumed under executory contracts 3,483
Liabilities assumed under capital lease obligations 1,064
Other liabilities 170
--------
Total liabilities assumed 4,717
--------
Net assets acquired $ 12,622
========
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. This sale resulted in a pre-tax gain of $4,435 during
2002. Through September 30, 2003, the Company had received cash proceeds of
$4,995, of which $4,495 and $500 were received during 2002 and the fourth
quarter of 2001, respectively. 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 commenced
litigation against the Company relating to claims under the asset agreement,
generally in connection with certain contracts assigned to the purchaser. On
July 17, 2003, the Company and the purchaser settled the litigation and the
Company agreed to pay the purchaser $375. Accordingly, the Company accrued this
settlement liability as of June 30, 2003 through a charge to general and
administrative expense for the three months ended June 30, 2003 and subsequently
paid the settlement during the third quarter of 2003. Total operating revenues
attributable to the Company's alarm monitoring division during the quarter and
year to date periods ended September 30, 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
reincorporation 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 and nine months ended September 30, 2003 and 2002 had the Company
applied the fair value method to account for stock-based awards to employees:
Quarter Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
---------------------------- -------------------------------
Net income, as reported $ 1,502 $ 3,852 $ 4,890 $ 11,164
Add stock-based employee compensation
expense included in the determination of
net income as reported, net of tax 24 22 100 94
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 (324) (332) (1,030) (944)
---------- ---------- --------- ----------
Pro forma net income $ 1,202 $ 3,542 $ 3,960 $ 10,314
========== ========== ========= ==========
Basic and diluted net income per share:
As reported $ 0.10 $ 0.26 $ 0.34 $ 0.75
Pro forma $ 0.08 $ 0.24 $ 0.27 $ 0.69
Pro Forma Stock-based Compensation Information
Pro forma information regarding the results of operations and net income per
share 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 and the assumptions
listed below.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes option valuation model requires the
input of highly subjective assumptions, including the expected life of the
option.
For the quarters and nine months ended September 30, 2003 and 2002, the fair
value of the Company's stock-based awards to employees was estimated using the
following weighted-average assumptions:
Quarter Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
--------------------------- -------------------------------
Expected life of options in years - 3.8 4.0 4.1
Volatility - 40.34% 42.48% 39.34%
Risk-free interest rate - 2.45% 1.79% 3.02%
Expected dividend yield - 2.21% 2.50% 2.07%
Comprehensive Income
Significant components of the Company's comprehensive income (loss) are as
follows:
Nine Months Ended
Cumulative Quarter Ended September 30, September 30,
Amounts 2003 2002 2003 2002
----------- --------------------------- --------------------------
Net income $ 106,178 $ 1,502 $ 3,852 $ 4,890 $ 11,164
Minimum pension and
post-retirement benefit
liability adjustment, net
of income taxes (1,637) - - - -
--------- --------- --------- --------- ---------
Comprehensive income $ 104,541 $ 1,502 $ 3,852 $ 4,890 $ 11,164
========= ========= ========= ========= =========
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.
For the three-month periods ended March 31, June 30, and September 30, 2003 and
2002, the Company recognized the following revenues that were included in the
cumulative effect adjustment as of January 1, 2000:
Three Months Ended:
March 31, 2003 $128
June 30, 2003 $114
September 30, 2003 $96
March 31, 2002 $298
June 30, 2002 $251
September 30, 2002 $212
The net effect of these revenues in 2003 was to increase net income in the
three-month periods ended March 31, June 30, and September 30 by $75, $68 and
$57, respectively.
The net effect of these revenues in 2002 was to increase net income in the
three-month periods ended March 31, June 30, and September 30 by $178, $150 and
$127, respectively.
Adjustments and Reclassifications
Certain amounts in the Company's 2002 condensed consolidated financial
statements have been adjusted to eliminate certain intercompany accounts that
were not previously eliminated. These adjustments pertained to 1) the Company's
2002 accounts receivable and accounts payable balances and 2) certain of the
Company's 2002 revenue and expense balances. However, such adjustments had no
effect on the Company's condensed consolidated working capital, shareholders'
equity, income from operations or net income in prior periods. The respective
balances as of December 31, 2002 and for the three and nine months ended
September 30, 2002, as previously reported and adjusted are as follows:
As of December 31, 2002
Previously Reported Adjusted
--------------------------------
Accounts receivable, net $21,128 $19,747
Accounts payable $ 8,493 $ 7,112
Three Months Ended September 30, 2002 Nine Months Ended September 30, 2002
Previously Reported Adjusted Previously Reported Adjusted
------------------------------------- ------------------------------------
Operating Revenues:
Local service $16,918 $16,592 $ 50,479 $ 49,542
Network access service 19,321 19,261 45,524 45,406
Wireless service 5,917 5,790 17,377 17,059
Directory advertising 3,600 3,600 10,954 10,954
Nonregulated sales and service 1,502 1,431 4,140 3,953
Other 5,088 4,926 11,629 11,255
------- ------- -------- --------
Total Operating Revenues $52,346 $51,600 $140,103 $138,169
======= ======= ======== ========
Operating Expenses:
Cost of services and products $16,096 $15,247 $44,694 $43,711
Customer operations and selling 8,578 8,911 24,593 24,242
General and administrative 8,703 8,473 22,197 21,597
Depreciation and amortization 11,943 11,943 33,417 33,417
------- ------- -------- --------
Total Operating Expenses $45,320 $44,574 $124,901 $122,967
======= ======= ======== ========
Certain amounts in the Company's 2002 condensed consolidated financial
statements have been reclassified to conform to the presentation of the
Company's 2003 condensed consolidated financial statement presentation following
the restructuring of the Company's reportable business segments.
2. BUSINESS SEGMENTS
The Company has three reportable business segments: Telecommunications
("Telecom"), Broadband and Wireless. 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. SureWest Telephone, which is the principal
operating subsidiary of the Telecom segment, provides local and toll telephone
services, network access services, billing and collection services, and certain
non-regulated services. SureWest Directories publishes and distributes SureWest
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
SureWest Telephone's service areas. SureWest Long Distance provides 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 SureWest Telephone's service area. The Broadband
segment includes the Company's subsidiaries SureWest Broadband and SureWest
Broadband/Residential Services. SureWest Broadband is comprised, in part, of a
division of SureWest 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. Corporate operations
are allocated to the appropriate segment except for: cash; investments; certain
property, plant, and equipment and miscellaneous other assets which are not
allocated to the segments. However, the investment income associated with cash
and investments held by Corporate Operations is included in the results of the
operations of the Company's segments. The Company evaluates the performance of
its segments based on income (loss) from operations.
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):
Corporate Intercompany
Telecom Broadband Wireless Operations Eliminations Consolidated
------- --------- -------- ---------- ------------ ------------
For the three months ended
September 30, 2003:
Operating revenues from external
customers $ 34,458 $ 7,449 $ 6,995 $ - $ - $ 48,902
Intersegment revenues 5,760 456 169 - (6,385) -
Operating expenses 19,676 10,421 8,629 - (6,385) 32,341
Depreciation and amortization 7,811 1,148 3,925 - - 12,884
Income (loss) from operations 12,731 (3,664) (5,390) - - 3,677
Net income (loss) $ 7,500 $ (2,546) $ (3,452) $ - $ - $ 1,502
For the three months ended
September 30, 2002:
Operating revenues from external
customers $ 42,097 $ 3,714 $ 5,789 $ - $ - $ 51,600
Intersegment revenues 3,976 720 128 - (4,824) -
Operating expenses 21,268 7,544 8,643 - (4,824) 32,631
Depreciation and amortization 7,212 864 3,867 - - 11,943
Income (loss) from operations 17,593 (3,974) (6,593) - - 7,026
Net income (loss) $ 10,423 $ (2,402) $ (4,169) $ - $ - $ 3,852
As of and for the nine months ended
September 30, 2003:
Operating revenues from external
customers $ 105,506 $ 20,930 $ 20,184 $ - $ - $ 146,620
Intersegment revenues 17,150 1,238 471 - (18,859) -
Operating expenses 61,147 30,965 24,436 - (18,859) 97,689
Depreciation and amortization 23,261 2,962 11,559 - - 37,782
Income (loss) from operations 38,248 (11,759) (15,340) - - 11,149
Net income (loss) 22,596 (7,867) (9,839) - - 4,890
Total assets $ 568,025 $ 96,891 $ 132,605 $ 61,043 $ (413,748) $ 444,816
As of and for the nine months ended
September 30, 2002:
Operating revenues from external
customers $ 113,607 $ 7,504 $ 17,058 $ - $ - $ 138,169
Intersegment revenues 11,687 837 319 - (12,843) -
Operating expenses 63,652 13,303 25,438 - (12,843) 89,550
Depreciation and amortization 20,724 1,504 11,189 - - 33,417
Income (loss) from operations 40,918 (6,466) (19,250) - - 15,202
Net income (loss) 27,243 (3,851) (12,228) - - 11,164
Total assets $ 510,796 $ 59,188 $ 132,452 $ 12,495 $ (314,408) $ 400,523
3. RECENT ACCOUNTING PRONOUNCEMENTS
On May 15, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity, such as mandatorily
redeemable equity instruments. The adoption of SFAS No. 150 had no effect on the
Company's condensed consolidated financial position as of September 30, 2003 or
the condensed consolidated results of its operations for the three and nine
months then ended.
In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities," and interpretation of Accounting Research
Bulletin ("ARB") No. 51, "Consolidated Financial Statements." FIN No. 46 applies
to any business enterprise that has a controlling interest, contractual
relationship or other business relationship with a variable interest entity
("VIE") and establishes guidance for the consolidation of VIEs that function to
support the activities of the primary beneficiary. The Company believes it has
no investments in, or contractual or other business relationships with, VIEs.
Therefore, the pending adoption of FIN No. 46 is not expected to effect the
Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with an Exit or Disposal Activity." SFAS No. 146 revises the accounting for exit
and disposal activities under Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)," by extending the period in which expenses related to
restructuring activities are reported. A commitment to a plan to exit an
activity or dispose of long-lived assets 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 condensed consolidated financial statements as of and for the
quarter and nine-month period ended September 30, 2003.
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. The Company intends to change its method of
accounting on a prospective basis for stock-based employee compensation to the
fair value method during the fourth quarter of 2003 and does not believe this
change will have a material effect on the Company's condensed consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company adopted SFAS No. 143 on January 1, 2003. The
adoption of this new standard did not have a material effect on the Company's
condensed consolidated financial statements as of and for the quarter and
nine-month period ended September 30, 2003.
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 adopted EITF Issue No. 00-21 on a prospective basis for arrangements
entered into after June 30, 2003. The Company has determined that the sale of
its wireless handsets and the associated phone service provided by the Wireless
segment should be considered separate units of accounting under EITF 00-21.
Accordingly, beginning on July 1, 2003, the Company began applying EITF 00-21 to
all wireless handset sales below cost, which approximates fair value in the
absence of an activation "subsidy," and it receives an up-front fee of any kind
(e.g., a service activation fee). The application of EITF 00-21 will result in
the immediate recognition of all or a portion of such up-front fees as equipment
sales revenue. Additionally, if the Company activates wireless service for a
customer, but does not concurrently provide the customer with a handset, any
up-front fees received will continue to be deferred and amortized over the
expected term of the customer relationship, in accordance with SAB No. 101. The
Company provides a general right of return within the first 30 days of service
for a 100% refund of the handset cost. The estimated equipment return allowance
associated with this right of return is not material to the equipment revenue of
the Wireless segment. The adoption of EITF Issue No. 00-21 did not have a
material effect on the Company's condensed consolidated financial statements as
of and for the quarter and nine-month period ended September 30, 2003.
In November 2002, the FASB issued 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 condensed consolidated
financial statements as of and for the quarter and nine-month period ended
September 30, 2003.
4. ESTIMATED SHAREABLE EARNINGS OBLIGATIONS
SureWest 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 ("P.U.C.").
Beginning in January 2002, SureWest 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 (of which $294 was returned during January 2003). In
September 2003, the P.U.C. issued a draft resolution requiring SureWest
Telephone to pay a consumer dividend for intrastate overearnings totaling
approximately $483 relating to the year 2002. A portion of the consumer's
intrastate service charges will be returned to the consumer's in the form of a
surcredit over approximately two months beginning November 1, 2003, pending
final resolution of the draft resolution.
As a result of periodic cost separation studies, the Company changed its
estimates for a portion of SureWest 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 and third quarters of 2003. These changes in accounting estimates
decreased the Company's consolidated revenues by $277 and net income by $166
($0.01 per share) during the first quarter of 2003 and increased the Company's
consolidated revenues and net income by $246 and $145 ($0.01per share),
respectively, during the third quarter of 2003. For the nine months ended
September 30, 2003, these changes in accounting estimates decreased the
Company's consolidated revenues by $31 and net income by $21, respectively.
During the year ended December 31, 2001, SureWest Telephone made payments to
certain telecommunications companies aggregating $6,800. No similar payments
were made during the quarter or nine-month periods ended September 30, 2003 or
2002. The payments related to interstate shareable earnings obligations for the
monitoring period 1999-2000. On June 26, 2003, the Company entered into a Final
Settlement Agreement (the "Settlement Agreement") to recover $1,950 of the
amount paid to a telecommunications company in 2001. Therefore, the Company
recognized a receivable from this telecommunications company in the amount of
$1,950 as of June 30, 2003 through a credit to network access service revenues
for the three months ended June 30, 2003. The Company received the funds
pursuant to the Settlement Agreement on July 8, 2003. The Company is currently
seeking a similar refund from another telecommunications company. However, the
recoverability of the remaining funds cannot presently be determined as the
telecommunications company from which the Company is seeking a refund has filed
for bankruptcy protection.
During the third quarter of 2002, as a result of certain legal and regulatory
developments, the Company changed its estimate for a portion of SureWest
Telephone's interstate shareable earnings obligations for the monitoring periods
1999-2001. This change in accounting estimate increased the Company's
consolidated revenues by $5,092 and net income by $3,048 during the third
quarter of 2002 ($0.21 per share and $0.20 per share for the quarter and nine
months ended September 30, 2002, respectively).
As of September 30, 2003, the Company's condensed consolidated balance sheet
reflected aggregate liabilities of $12,920 relating to SureWest 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,
SureWest Telephone's interstate shareable earnings obligations lapse over time
if SureWest 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 September 30, 2003.
7. CONTINGENCIES
The Company is subject to certain legal and regulatory proceedings, Internal
Revenue Service and regulatory examinations and other claims arising in the
ordinary course of its business. In the opinion of management, the ultimate
outcome of these matters will not materially affect the consolidated financial
position or results of operations of the Company.
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 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. SureWest
Telephone (formerly known as Roseville Telephone Company), which is the
principal operating subsidiary of the Telecom segment, provides local and toll
telephone services, network access services, billing and collection services,
and certain non-regulated services. SureWest Directories publishes and
distributes SureWest 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 SureWest Telephone's service areas. SureWest Long Distance (formerly
known as Roseville Long Distance Company), provides 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 SureWest 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 SureWest 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.
Effective October 27, 2003, the Company changed the names of the remaining
subsidiaries that did not bear the SureWest name. The name change effected
Roseville Telephone Company, now SureWest Telephone, and Roseville Long Distance
Company, now SureWest Long Distance.
The Company expects that the sources of its revenues and its cost structure may
be different in future periods, both as a result of its entry into new
communications markets and competitive forces in each of the markets in which
the Company has operations.
Results of Operations
Consolidated Results of Operations
The following table summarizes the Company's consolidated financial results for
the quarters and nine months ended September 30, 2003 and 2002:
Quarter Ended Nine-Month Period
September 30, Ended September 30,
------------- --------------------
2003 2002 $Change %Change 2003 2002 $Change %Change
---- ---- ------- ------- ---- ---- ------- -------
(Amounts in millions)
Operating revenues $48.9 $51.6 $(2.7) (5)% $146.6 $138.2 $ 8.4 6%
Operating expenses 32.4 32.7 (0.3) (1) 97.7 89.6 8.1 9
Depreciation and 12.9 11.9 1.0 8 37.8 33.4 4.4 13
amortization
Operating income 3.6 7.0 (3.4) (49) 11.1 15.2 (4.1) (27)
Net income $ 1.5 $ 3.9 $(2.4) (62)% $ 4.9 $ 11.2 $(6.3) (56)%
Consolidated operating revenues decreased $2.7 million and increased $8.4
million during the quarter and nine-month periods ended September 30, 2003,
respectively, compared to the same periods in 2002. The increase in consolidated
operating revenues in the nine-month period 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 associated with the
acquisition of the SureWest Broadband/Residential Services assets in the third
quarter of 2002, 3) continued growth in Business Broadband service, 4) increased
demand for DSL services and dedicated access and 5) a Final Settlement Agreement
(the "Settlement Agreement") the Company entered into during the quarter ended
June 30, 2003. As discussed in greater detail in the Regulatory Matters section,
the Settlement Agreement provided for a $1.95 million refund from another
telecommunications company for a payment made by the Company in 2001 related to
interstate shareable earnings obligations. Also discussed more fully in the
Regulatory Matters section, the decrease in operating revenues for the quarter
ended September 30, 2003 was due in part to a change in estimate during the
third quarter of 2002 reversing $5.1 million of revenues previously reserved for
SureWest Telephone's interstate shareable earnings obligations.
Consolidated operating expenses, including depreciation and amortization,
increased $651 thousand and $12.5 million, respectively, during the quarter and
nine-month periods ended September 30, 2003 compared to the same periods in
2002. The increase in operating expenses was due primarily to 1) increased
expenses associated with the acquisition of the SureWest Broadband/Residential
Services assets in the third quarter of 2002, 2) increased medical and liability
insurance costs and 3) increased depreciation and amortization expense due to
additions to property, plant and equipment, including internal-use software.
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 from five
to ten years the estimated useful lives related primarily to wireless switching
and voice mail equipment.
Segment Results of Operations
Telecom
Quarter Ended Nine-Month Period
September 30, Ended September 30,
--------------- -------------------
2003 2002 $Change %Change 2003 2002 $Change %Change
---- ---- ------- ------- ---- ---- ------- -------
(Amounts in millions)
Local service $16.0 $16.6 $(0.6) (4)% $47.3 $49.5 $(2.2) (4)%
Network access service 12.0 19.3 (7.3) (38) 39.4 45.4 (6.0) (13)
Directory advertising 3.8 3.6 0.2 6 11.3 10.9 0.4 4
Long distance service 1.3 1.4 (0.1) (7) 3.8 4.1 (0.3) (7)
Other 1.3 1.2 0.1 8 3.7 3.7 - -
Total operating revenues from
external customers 34.4 42.1 (7.7) (18) 105.5 113.6 (8.1) (7)
Intersegment revenues 5.8 4.0 1.8 45 17.2 11.7 5.5 47
Operating expenses 19.7 21.3 (1.6) (8) 61.2 63.7 (2.5) (4)
Depreciation and amortization 7.8 7.2 0.6 8 23.3 20.7 2.6 13
Operating income 12.7 17.6 (4.9) (28) 38.2 40.9 (2.7) (7)
Net income $ 7.5 $ 10.4 $(2.9) (28)% $22.6 $27.2 $(4.6) (17)%
Operating Revenues
Operating revenues from external customers in the Telecom segment decreased $7.7
million and $8.1 million for the quarter and nine-month period ended September
30, 2003, respectively, compared to the same periods in 2002. Revenues from
services subject to regulation, which include local and network access services,
decreased $7.9 million and $8.2 million for the quarter and nine-month period
ended September 30, 2003, respectively, compared to the same periods in 2002.
The decrease in the nine-month results was primarily due to the combined effects
of 1) a $1.1 million increase in the Company's provision for its estimated
intrastate shareable earnings obligations compared to the same period in 2002
and 2) changes in accounting estimates pertaining to the Company's estimated
interstate and intrastate shareable earning obligations and certain NECA CCL
accounts receivable that 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 and increased the Company's consolidated
revenues and net income by $246 thousand and $145 thousand ($0.01 per share),
respectively, during the third quarter of 2003. For the nine months ended
September 30, 2003, these changes in accounting estimates decreased the
Company's consolidated revenues by $31 thousand and net income by $21 thousand,
respectively. As discussed in greater detail in the Regulatory Matters section,
the Company changed its estimate during the third quarter of 2002 for a portion
of SureWest Telephone's interstate shareable earnings obligations related to
those monitoring periods. For the quarter and nine-months ended September 30,
2002, this change in accounting estimate increased the Company's consolidated
revenues by $5.1 million and net income by $3.0 million ($0.21 per share and
$0.20 per share), respectively.
The Company's operating revenues were also affected by SureWest Telephone's
wholesaling arrangement, commencing in the fourth quarter of 2002, for its
digital subscriber line ("DSL") service, resulting in a decrease to network
access revenues of $1.5 million and $4.6 million, respectively, during the
quarter and nine-month period ended September 30, 2003. This decrease was offset
in part by continued growth and demand for dedicated access as well as an
increase in SureWest Telephone's billing surcharge. The decrease in operating
revenues in the Telecom segment was also offset, in part, by the $1.95 million
Settlement Agreement. The Settlement Agreement resulted in a refund to the
Company of a portion of a prior payment to a telecommunications company related
to interstate shareable earnings obligations for the monitoring period
1999-2000.
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 $3.3 million, net of tax, ($0.21 per share)
in 2000.
For the three-month periods ended March 31, June 30, and September 30, 2003 and
2002, the Company recognized the following revenues that were included in the
cumulative effect adjustment as of January 1, 2000:
Three Months Ended:
March 31, 2003 $128 thousand
June 30, 2003 $114 thousand
September 30, 2003 $ 96 thousand
March 31, 2002 $298 thousand
June 30, 2002 $251 thousand
September 30, 2002 $212 thousand
The net effect of these revenues in 2003 was to increase net income in the
three-month periods ended March 31, June 30 and September 30 by $75 thousand,
$68 thousand and $57 thousand, respectively.
The net effect of these revenues in 2002 was to increase net income in the
three-month periods ended March 31, June 30 and September 30 by $178 thousand,
$150 thousand and $127 thousand, respectively.
Directory advertising revenues increased $192 thousand and $381 thousand for the
quarter and nine-month period ended September 30, 2003, respectively, compared
to the same periods in 2002 due to increased advertising sales.
Operating Expenses
Operating expenses for the Telecom segment decreased $1.6 million and $2.5
million for the quarter and nine-month period ended September 30, 2003,
respectively, compared to the same periods in 2002. Cost of services and
products decreased $564 thousand and $2.0 million during the quarter and
nine-month period ended September 30, 2003, respectively, compared to the same
periods in 2002. These decreases were due primarily to 1) reduced spending for
minor materials and contracted services driven by internal efficiencies and 2) a
decrease in corporate operations rent expense as a result of economies of scale.
Customer operations and selling expense decreased $710 thousand and $1.2 million
for the quarter and nine-month period ended September 30, 2003, respectively,
compared to the same periods in 2002 due primarily to 1) internal efficiencies
resulting from integrated customer support systems and productivity gains and 2)
a decrease in print and radio advertising costs. General and administrative
expenses decreased $317 thousand for the quarter ended September 30, 2003
compared to the same period in 2002. This decrease was due primarily to bad debt
expense recognized during 2002 associated with access charge billings to an
interexchange carrier that filed for bankruptcy protection. For the nine-month
period ended September 30, 2003, general and administrative expenses increased
$702 thousand. This increase was due primarily to 1) a $375 thousand one-time
settlement reached in connection with the litigation arising from the agreement
for the sale of alarm monitoring assets during 2002, 2) increases in medical and
liability insurance costs and 3) an increase in the size of the Company's
workforce.
Depreciation and amortization increased $598 thousand and $2.6 million for the
quarter and nine-month period ended September 30, 2003, respectively, compared
to the same periods in 2002 due primarily to additions to central office assets,
cable and wire facilities and internal-use software.
Certain of the Company's customers 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
bankruptcy filing, the Company recognized as bad debt expense $243 thousand and
$1.3 million for the quarter and nine months ended September 30, 2002,
respectively, relating to 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. 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 all utilities 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 September 30, 2003, obligations owed by WorldCom to the Company for
post-petition services have been paid on a timely basis.
Regulatory Matters
Revenues from services subject to regulation constituted approximately 57% and
59% of the Company's total operating revenues for the quarter and nine-month
period ended September 30, 2003, respectively. In the prior year periods,
revenues from services subject to regulation constituted approximately 69% of
the Company's total operating revenues for the quarter and nine-month period.
Such revenues, which include local service, network access service and toll
service, 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 SureWest Telephone. Interstate access rates and resulting
earnings are subject to regulation by the Federal Communications Commission
("F.C.C."). With respect to interstate services, SureWest Telephone has filed
its own tariff with the F.C.C. for all elements of access services except
carrier common line charges, for which SureWest Telephone concurs with tariffs
filed by NECA.
The F.C.C. monitors SureWest Telephone's interstate earnings through the use of
annual cost separation studies prepared by SureWest 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,
SureWest 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 SureWest 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 SureWest Telephone's estimated
interstate shareable earnings obligations of $86 thousand and $163 thousand for
the quarters ended September 30, 2003 and 2002, respectively, through reductions
of revenues. For the nine-month periods ended September 30, 2003 and 2002, the
Company recognized liabilities relating to SureWest Telephone's estimated
interstate shareable earnings obligations of $257 thousand and $488 thousand,
respectively, through reductions of revenues. During the year ended December 31,
2001, SureWest Telephone made payments to certain telecommunications companies
aggregating $6.8 million. No similar payments were made during the quarter or
nine-month periods ended September 30, 2003 or 2002. The payments related to
interstate shareable earnings obligations for the monitoring period 1999-2000.
On June 26, 2003, the Company entered into a Settlement Agreement to recover
$1.95 million of the amount paid to a telecommunications company in 2001.
Therefore, the Company recognized a receivable from this telecommunications
company in the amount of $1.95 million as of June 30, 2003 through a credit to
network access service revenues for the three months ended June 30, 2003. The
Company received the funds pursuant to the Settlement Agreement on July 8, 2003.
The Company is currently seeking a similar refund from another
telecommunications company. However, the recoverability of the remaining funds
cannot presently be determined, as the telecommunications company from which the
Company is seeking a refund has filed for bankruptcy protection.
In May 2002, the D.C. Circuit Court of Appeals (the "Court") issued its decision
in ACS of Anchorage v. F.C.C. The Court determined that a tariff filed properly
under Section 204 "streamlined" procedures and allowed to go into effect without
suspension is deemed lawful, and the carrier is not subsequently obligated to
pay refunds for earnings higher than the permitted rate of return as prescribed
by the F.C.C. for that monitoring period. Subsequent to the Court's decision,
certain telecommunication companies filed a petition for rehearing. In August
2002, the petitions for rehearing were denied by the Court, and later that month
the Court's order became effective. For the monitoring periods 1999 through
2001, SureWest Telephone filed tariffs pursuant to the streamlined procedures
and such tariffs were not suspended or investigated. Consequently, during the
third quarter of 2002, the Company changed its estimate for a portion of
SureWest Telephone's interstate shareable earnings obligations related to those
monitoring periods. For the quarter and nine-months ended September 30, 2002,
this change in accounting estimate increased the Company's consolidated revenues
by $5.1 million and net income by $3.0 million ($0.21 per share and $0.20 per
share), respectively.
Prior to January 1, 2002, SureWest 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 SureWest Telephone's
toll traffic. The DCP was a compensation arrangement between SureWest Telephone
and SBC for certain intrastate toll services. SureWest 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 September 30, 2003 or results of operations for the nine-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 SureWest 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 SureWest Telephone effective November 30,
2000. The P.U.C. authorized replacement funding to SureWest 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 SureWest 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 SureWest 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
SureWest Telephone cannot yet be determined.
In 1996, the P.U.C. issued a decision in connection with SureWest Telephone's
general rate proceeding, which authorized SureWest Telephone to implement a New
Regulatory Framework ("NRF") for services furnished within SureWest Telephone's
service area in order to accommodate market and regulatory movement toward
competition and greater pricing flexibility. Under the NRF, SureWest Telephone
is subject to ongoing monitoring and reporting requirements, including a sharing
mechanism whereby SureWest 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, SureWest
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 SureWest
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 SureWest Telephone had requested and the P.U.C. ruled that SureWest
Telephone must change the method used to allocate costs for services provided by
SureWest 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 $959 thousand and $2.6 million relating to
estimated intrastate shareable earnings obligations during the quarter and
nine-month period ended September 30, 2003. For the quarter and nine-month
period ended September 30, 2002, the Company recorded a liability through
reductions of revenues of $438 thousand and $1.3 million respectively, relating
to estimated intrastate shareable earnings obligations.
Beginning in January 2002, SureWest 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 (of which $294 thousand was returned during 2003).
In September 2003, the P.U.C. issued a draft resolution requiring SureWest
Telephone to pay a consumer dividend for intrastate overearnings totaling
approximately $483 thousand relating to 2002. A portion of the consumer's
intrastate service charges will be returned to the consumer's in the form of a
surcredit over approximately two months beginning November 1, 2003 pending final
resolution of the draft resolution.
As a result of periodic cost separation studies, the Company changed its
estimates for a portion of SureWest Telephone's interstate and intrastate
shareable earnings obligations and certain NECA CCL accounts receivable balances
during the first and third quarters 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) during the first quarter of 2003 and
increased the Company's consolidated revenues by $246 thousand and net income by
$145 thousand ($0.01 per share), respectively, during the third quarter of 2003.
For the nine months ended September 30, 2003, these changes in accounting
estimates decreased the Company's consolidated revenues by $31 thousand and net
income by $21 thousand, respectively.
As of September 30, 2003, the Company's consolidated balance sheet reflected
aggregate liabilities of $12.9 million relating to SureWest 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,
SureWest Telephone's interstate shareable earnings obligations lapse over time
if SureWest 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 Ended Nine-Month Period
September 30, Ended September 30,
-------------- -------------------
2003 2002 $Change %Change 2003 2002 $Change %Change
---- ---- ------- ------- ---- ---- ------- -------
(Amounts in millions)
Internet service $ 4.1 $ 1.7 $ 2.4 141% $ 11.7 $ 4.5 $ 7.2 160%
Residential Broadband service 2.5 1.4 1.1 79 6.6 1.4 5.2 371
Business Broadband service 0.9 0.6 0.3 50 2.6 1.6 1.0 63
Total operating revenues from
external customers 7.5 3.7 3.8 103 20.9 7.5 13.4 179
Intersegment revenues 0.4 0.7 (0.3) (43) 1.2 0.8 0.4 50
Operating expenses 10.4 7.5 2.9 38 31.0 13.3 17.7 133
Depreciation and amortization 1.2 0.9 0.3 33 2.9 1.5 1.4 93
Operating loss (3.7) (4.0) 0.3 (8) (11.8) (6.5) (5.3) 82
Net loss $(2.5) $(2.4) $(0.1) 4% $ (7.9) $(3.8) $(4.1) 108%
Operating Revenues
Operating revenues from external customers in the Broadband segment increased
$3.8 million and $13.4 million for the quarter and nine-month period ended
September 30, 2003, respectively, compared to the same periods in 2002. The
increase in Broadband revenues is due in large part to 1) increased revenues
associated with the purchase of the SureWest Broadband/Residential Services
assets during the third quarter of 2002, 2) a 78% increase in the number of
subscribers of SureWest Broadband/Residential Services, 3) continued addition to
the residential and business DSL subscriber customer base, with a 34% increase
in Broadband subscribers based on average subscriber counts for the nine-months
ended September 30, 2003 compared to the same period in 2002, 4) the continued
expansion of the Business Broadband services and 5) the commencement of a
wholesale DSL service arrangement with SureWest Telephone in the fourth quarter
of 2002.
Operating Expenses
Total operating expenses for the Broadband segment increased $3.2 million and
$19.1 million for the quarter and nine-month period ended September 30, 2003,
respectively, compared to the same periods in 2002. Cost of services and
products increased $1.8 million and $8.4 million during the quarter and
nine-month period ended September 30, 2003, respectively, compared to the same
periods in 2002 due primarily to 1) increased expenses associated with the
purchase of the SureWest Broadband/Residential Services assets during the third
quarter of 2002, 2) increased transport costs and 3) the commencement of a
wholesale DSL service arrangement with SureWest Telephone in the fourth quarter
of 2002. These increases were partially offset by a decrease in the number of
modems expensed in the 2003 periods due to a leasing program implemented in the
current year. In addition, there was a 65% decrease in the cost of the modems
from the prior year. Customer operations expense, general and administrative
expense and depreciation and amortization increased $739 thousand, $326 thousand
and $285 thousand, respectively, for the quarter ended September 30, 2003
compared to the same period in 2002. For the nine-month period ended September
30, 2003, customer operations expense, general and administrative expense and
depreciation and amortization increased $3.3 million, $6.0 million and $1.4
million, respectively. The increases are primarily due to the asset purchase
described above during the third quarter of 2002, the related significant
increase in the size of the Company's workforce, increased medical and liability
insurance costs and an increase in depreciation expense resulting from property,
plant and equipment additions at SureWest Broadband, including DSL modems leased
to customers.
Wireless
Quarter Ended Nine-Month Period
September 30, Ended September 30,
------------- -------------------
2003 2002 $Change %Change 2003 2002 $Change %Change
---- ---- ------- ------- ---- ---- ------- -------
(Amounts in millions)
Wireless revenues from
external customers $ 7.0 $ 5.8 $1.2 21% $ 20.2 $ 17.1 $3.1 18%
Intersegment revenues 0.2 0.1 0.1 100 0.5 0.3 0.2 67
Operating expenses 8.7 8.7 - - 24.4 25.4 (1.0) (4)
Depreciation and amortization 3.9 3.8 0.1 3 11.6 11.2 0.4 4
Operating loss (5.4) (6.6) 1.2 (18) (15.3) (19.2) 3.9 (20)
Net loss $(3.5) $(4.1) $0.6 (15)% $ (9.8) $(12.2) $2.4 (20)%
Operating Revenues
Operating revenues from external customers in the Wireless segment increased
$1.2 million and $3.1 million for the quarter and nine-month period ended
September 30, 2003, respectively, compared to the same periods in 2002. The
increase in Wireless revenues is due primarily to 1) continued additions to the
customer base, with a 23% overall increase in wireless subscribers based on
average subscriber counts for the nine-month period ended September 30, 2003
compared to the same period in 2002, 2) increased long distance and roaming
revenues, 3) the introduction of new features and 4) a decrease in uncollectible
revenues.
Operating Expenses
Total operating expenses for the Wireless segment increased $14 thousand and
decreased $1.0 million for the quarter and nine-month period ended September 30,
2003, respectively, compared to the same periods in 2002. Cost of services and
products decreased $258 thousand and $359 thousand during the quarter and
nine-month period ended September 30, 2003, respectively, compared to the same
period in 2002. This decrease was due primarily to 1) lower demand for directory
assistance resulting from a 10% decrease in call counts, 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 claims submitted and
outsourcing of the insurance function to a third party. This decrease was offset
in part by increased interconnect usage associated with the increase in
subscriber base and increased tower rents due to the addition of cell cites.
Customer operations and selling expense increased $129 thousand for the quarter
ended September 30, 2003 compared to the same period in 2002 due primarily to
increased promotional activity in the current year quarter. For the nine-month
period ended September 30, 2003, customer operations and selling expense
decreased $627 thousand compared to the same period in 2002 due primarily to 1)
decreased dealer commissions resulting from increased direct channel customer
additions and a modest reduction in the customer service workforce. These
decreases were offset in part by an increase subscriber billing costs associated
with the growth in the Wireless customer base.
Depreciation and Amortization
Depreciation and amortization increased $58 thousand and $369 thousand for the
quarter and nine-month period ended September 30, 2003, respectively, compared
to the same periods 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 from five to ten years the estimated useful lives related
primarily to wireless switching and voice mail equipment. This change in
accounting estimate resulted in decreased depreciation expense of $304 thousand
and $846 thousand for the quarter and nine-month period ended September 30,
2003.
Local Number Portability
Effective November 24, 2003, the F.C.C. has mandated that wireless carriers
provide for local number portability ("LNP"). LNP would allow subscribers to
keep their wireless phone numbers while switching to a different service
provider. The eventual impact of this mandate on the Company's consolidated
financial condition and results of operations cannot presently be determined.
Non-operating Items
Interest Income and Expense, Net
Interest expense increased $707 thousand and $2.1 million during the quarter and
nine-month period ended September 30, 2003, respectively, compared to the same
periods in 2002 due to the Company's issuance in March 2003 of its unsecured
Series B Senior Notes ("Series B Notes").
Income Taxes
Income taxes for the quarter and nine-month period ended September 30, 2003,
decreased $1.5 million and $4.1 million, respectively, compared to the same
periods in 2002, due primarily to corresponding decreases in income subject to
tax. The effective federal and state income tax rates were approximately 41.1%
and 40.1% for the nine-month periods ended September 30, 2003 and 2002,
respectively.
Liquidity and Capital Resources
As reflected in the Condensed Consolidated Statements of Cash Flows, net cash
provided by operating activities was $50.8 million and $28.6 million for the
nine-month periods ended September 30, 2003 and 2002, respectively. The increase
in cash provided by operating activities for the current year compared to the
same period in the prior year was due primarily to 1) increases in liabilities
related to the Company's pension obligation, 2) increases in liabilities related
to the Company's estimated shareable earnings obligations and 3) increases in
accrued liabilities. Net cash provided by operating activities during the
nine-month period ended September 30, 2003 was greater than net income of $4.9
million due to 1) non-cash charges consisting principally of depreciation and
amortization, 2) increases in accrued liabilities, 3) increases in liabilities
related to estimated shareable earnings obligations and 4) increases in deferred
revenues. During the nine-month period ended September 30, 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
$51 million pertaining to ongoing plant construction projects, 2) dividends of
$10.9 million, 3) principal payments of $1.6 million 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 $19.5
million, 2) scheduled payments of long-term debt of $4.2 million, 3) support of
the operations of SureWest Broadband/Residential Services up to an anticipated
$2.5 million and 4) support of the operations of SureWest Wireless up to an
anticipated $1.6 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
reincorporation 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 September 30, 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 September 30, 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 September 30, 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 was due to expire in July
2003, however the terms of the agreement were extended twelve months to July 11,
2004. The Company has a minimum remaining aggregate long distance service usage
commitment of approximately $120,000 and $255,000 for the years 2003 and 2004,
respectively. 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's monthly minimum usage requirement is $25
thousand effective June 2003. The minimum usage requirement is $175 thousand and
$300 thousand for the years ended 2003 and 2004, respectively. As of September
30, 2003, the Company has a minimum remaining aggregate long distance usage
commitment of approximately $75 thousand for the year ended 2003. Rates for the
services 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.
The Company executed a surety and indemnification agreement in the amount of
$500 thousand related to a Facility License Agreement entered into during the
third quarter of 2003. In addition, the Company has certain other guarantees
surrounding its cable franchise licenses.
During the quarter ended September 30, 2003, the Company entered into a 20-year
nonmonetary transaction with a third party involving the exchange of certain
fiber optic capacity and collocation rights. Because this nonmonetary
transaction did not represent the culmination of an earnings process, no
revenues or expenses have been or will be recorded by the Company pursuant to
this transaction. In addition, there was no indicated loss on this exchange of
productive rights.
On July 12, 2002, the Company purchased substantially all of the assets of
Western Integrated Networks, LLC and certain affiliates (collectively, "WIN") in
a transaction supervised by the United States Bankruptcy Court for the District
of Colorado. The purchase price for the assets of WIN consisted of (i) $12
million in cash, (ii) direct acquisition costs of $622 thousand and (iii) the
assumption of certain current liabilities aggregating $4.7 million relating
principally to executory contracts and capital lease obligations.
Prior to July 12, 2003, the Company obtained additional information regarding
the fair values of certain assets acquired and liabilities assumed from WIN.
Accordingly, the Company prospectively adjusted the preliminary purchase price
allocation in connection with the preparation of its second quarter 2003
condensed consolidated financial statements. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed at the date
of acquisition, July 12, 2002, based on the Company's final allocation of the
aforementioned purchase price:
(Amounts in thousands)
Accounts receivable, net $ 615
Equipment held for sale 2,573
Other current assets 931
Property, plant and equipment 12,327
Intangible asset relating to favorable operating leases 893
--------
Total assets acquired 17,339
Current liabilities assumed under executory contracts 3,483
Liabilities assumed under capital lease obligations 1,064
Other liabilities 170
--------
Total liabilities assumed 4,717
--------
Net assets acquired $ 12,622
========
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. This sale resulted in a pre-tax gain of $4.4 million
during 2002. Through September 30, 2003, the Company has received cash proceeds
of $5.0 million, of which $500 thousand and $4.5 million were received during
2002 and the fourth quarter of 2001, related to the sale of the alarm monitoring
division assets. The alarm monitoring assets consisted primarily of customer
contracts and equipment, which had a book value of approximately $355 thousand
as of the date of the sale. The purchaser of the assets commenced litigation
against the Company relating to claims under the asset agreement, generally in
connection with certain contracts assigned to the purchaser. On July 17, 2003,
the Company and the purchaser settled the litigation and the Company agreed to
pay the purchaser $375 thousand. Accordingly, the Company accrued this
settlement liability as of June 30, 2003 through a charge to general and
administrative expense for the three months ended June 30, 2003 and subsequently
paid the settlement during the third quarter. Total operating revenues
attributable to the Company's alarm monitoring division during the quarter and
year to date periods ended September 30, 2002 were $279 thousand (none during
2003).
The Company had cash, cash equivalents and short-term investments at September
30, 2003, of $52.2 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 for the remainder of 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 the Company's Audit Committee.
o Total revenues from telephone services are affected by rates authorized by
various regulatory agencies. The F.C.C. monitors SureWest Telephone's
interstate earnings through the use of annual cost separation studies
prepared by SureWest 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,
SureWest Telephone is subject to ongoing monitoring and reporting
requirements by the P.U.C., including a sharing mechanism whereby SureWest
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 SureWest 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. 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 bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse. The
Company does not have a valuation allowance on its deferred tax asset as of
September 30, 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
On May 15, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards for classifying and measuring as
liabilities certain financial instruments that embody obligations of the issuer
and have characteristics of both liabilities and equity, such as mandatorily
redeemable equity instruments. The adoption of SFAS No. 150 had no effect on the
Company's condensed consolidated financial position as of September 30, 2003 or
the condensed consolidated results of its operations for the three and nine
months then ended.
In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities, " and interpretation of Accounting Research
Bulletin ("ARB") No. 51, "Consolidated Financial Statements." FIN No. 46 applies
to any business enterprise that has a controlling interest, contractual
relationship or other business relationship with a variable interest entity
("VIE") and establishes guidance for the consolidation of VIEs that function to
support the activities of the primary beneficiary. The Company believes it has
no investments in, or contractual or other business relationships with, VIEs.
Therefore, the pending adoption of FIN No. 46 is not expected to effect the
Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with an Exit or Disposal Activity." SFAS No. 146 revises the accounting for exit
and disposal activities under Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)," by extending the period in which expenses related to
restructuring activities are reported. A commitment to a plan to exit an
activity or dispose of long-lived assets 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 condensed consolidated financial statements as of and for the
quarter and nine-month period ended September 30, 2003.
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. The Company intends to change its method of
accounting for stock-based employee compensation on a prospective basis to the
fair value method during the fourth quarter of 2003 and does not believe this
change will have a material effect on the Company's condensed consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The Company adopted SFAS No. 143 on January 1, 2003. The
adoption of this new standard did not have a material effect on the Company's
condensed consolidated financial statements as of and for the quarter and
nine-month period ended September 30, 2003.
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 adopted EITF Issue No. 00-21 on a prospective basis for arrangements
entered into after June 30, 2003. The Company has determined that the sale of
its wireless handsets and the associated phone service provided by the Wireless
segment should be considered separate units of accounting under EITF 00-21.
Accordingly, beginning on July 1, 2003, the Company began applying EITF 00-21 to
all wireless handset sales below cost, which approximates fair value in the
absence of an activation "subsidy," and it receives an up-front fee of any kind
(e.g., a service activation fee). The application of EITF 00-21 will result in
the immediate recognition of all or a portion of such up-front fees as equipment
sales revenue. Additionally, if the Company activates wireless service for a
customer, but does not concurrently provide the customer with a handset, any
up-front fees received will continue to be deferred and amortized over the
expected term of the customer relationship, in accordance with SAB No. 101. The
Company provides a general right of return within the first 30 days of service
for a 100% refund of the handset cost. The estimated equipment return allowance
associated with this right of return is not material to the equipment revenue of
the Wireless segment. The adoption of EITF Issue No. 00-21 did not have a
material effect on the Company's condensed consolidated financial statements as
of and for the quarter and nine-month period ended September 30, 2003.
In November 2002, the FASB issued 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 condensed consolidated
financial statements as of and for the quarter and nine-month period ended
September 30, 2003.
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-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on that evaluation, the chief executive officer and
chief financial officer have concluded that the Company's disclosure controls
and procedures are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time period specified in
SEC rules and forms.
Changes in Internal Controls
In response to the enactment of the Sarbanes-Oxley Act and the promulgation of
various rules and regulations, the Company reviewed its internal controls and
disclosure controls and procedures, and also formally established a disclosure
committee comprised of members of management of the Company. While the Company
believes that its existing disclosure controls and procedures were more than
adequate to assure compliance with the Company's disclosure obligations, the
Company formalized and documented existing procedures as a result of the review.
In addition, in the quarter ended September 30, 2003, the Company completed the
implementation of new human resources and financial information systems. The
project, which was initiated in advance of the Sarbanes-Oxley Act, was part of
the Company's continuing commitment to the most efficient informational
technology. Other than as described above, there have been no significant
changes in the Company's internal control over financial reporting or in other
factors, which could, or could be reasonably likely to, significantly affect
internal control over financial reporting subsequent to the date of the
evaluation.
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.
In 1996, the P.U.C. issued a decision in connection with SureWest Telephone's
general rate proceeding, which authorized SureWest Telephone to implement a New
Regulatory Framework ("NRF") for services furnished within SureWest Telephone's
service area in order to accommodate market and regulatory movement toward
competition and greater pricing flexibility. Under the NRF, SureWest Telephone
is subject to ongoing monitoring and reporting requirements, including a sharing
mechanism whereby SureWest 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, SureWest
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 SureWest 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 SureWest Telephone had
requested, and further provided that SureWest Telephone must change the method
used to allocate costs for services provided by SureWest 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 reductions of
revenues relating to estimated intrastate shareable earnings obligations.
Prior to January 1, 2002, SureWest 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 SureWest Telephone's
toll traffic. The DCP was a compensation arrangement between SureWest Telephone
and SBC for certain intrastate toll services. SureWest 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 SureWest 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 SureWest Telephone effective November 30,
2000. The P.U.C. authorized replacement funding to SureWest 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 SureWest 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 SureWest 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
SureWest Telephone cannot yet be determined.
SureWest 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 SureWest 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 SureWest 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 SureWest 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 SureWest 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 SureWest Telephone, the effects of which on SureWest 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 August 5, 2003 relating to the
announcement of second quarter 2003 financial results.
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 reference
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 SureWest Telephone Company with Bank of Incorporated by -
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)
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, 2002 (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) SureWest KSOP (Filed as Exhibit 4.1 to Registration Incorporated by -
Statement on Form S-8 [No. 333-87222]) reference
10(i) 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(j) 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(k) 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(l) 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(m) 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)
31(a) Certification of Brian H. Strom, President and Chief Filed herewith 36
Executive Officer, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31(b) Certification of Michael D. Campbell, Executive Vice Filed herewith 37
President and Chief Financial Officer, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32(a) Certification of Brian H. Strom, President and Chief Filed herewith 38
Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32(b) Certification of Michael D. Campbell, Executive Vice Filed herewith 39
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: November 3, 2003 By: /s/BRIAN H. STROM
----------------------------------------
Brian H. Strom,
President and Chief
Executive Officer
Date: November 3, 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: November 3, 003 By: /s/BRIAN H. STROM
----------------------------------------
President and Chief
Executive Officer
Date: November 3, 2003 By: /s/MICHAEL D. CAMPBELL
----------------------------------------
Executive Vice President
and Chief Financial Officer
EXHIBIT 31(a)
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e)):
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 3, 2003
By: /s/BRIAN H. STROM
----------------------------------------
President and Chief Executive Officer
EXHIBIT 31(b)
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)):
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 3, 2003
By: /s/MICHAEL D. CAMPBELL
----------------------------------------
Executive Vice President and
Chief Financial Officer
EXHIBIT 32 (a)
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SureWest Communications (the
"Company"), on Form 10-Q for the period ended September 30, 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: November 3, 2003
By: /s/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 32 (b)
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SureWest Communications (the
"Company"), on Form 10-Q for the period ended September 30, 2003 as filed with
the Securities and Exchange Commission of the date hereof (the "Report"), the
undersigned, as the Executive Vice President and Chief Financial Officer of the
Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) and
Section 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: November 3, 2003
By: /s/MICHAEL D. CAMPBELL
----------------------------------------
Michael D. 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