10-Q 1 a08-25553_110q.htm 10-Q

 

 

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, 2008

 

or

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-29660

 

SUREWEST COMMUNICATIONS

(Exact name of registrant as specified in its charter)

 

California

 

68-0365195

(State or other jurisdiction

 

(IRS Employer

of incorporation or organization)

 

Identification No.)

 

 

 

200 Vernon Street, Roseville, California

 

95678

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(916) 786-6141

(Registrant’s telephone number, including area code)

 

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    o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o  Accelerated filer x

 

Non-accelerated filer o (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o       No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of October 29, 2008, 13,953,813 shares of the registrant’s Common Stock were outstanding.

 

 

 



 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

PART II - OTHER INFORMATION
 
 
 
 

Item 1.

Legal Proceedings

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 6.

Exhibits

40

 

 

 

SIGNATURES

42

 



 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; Amounts in thousands, except per share amounts)

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Broadband

 

$

36,653

 

$

17,630

 

$

99,295

 

$

51,348

 

Telecom

 

24,108

 

26,197

 

73,336

 

79,807

 

Total operating revenues

 

60,761

 

43,827

 

172,631

 

131,155

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation and amortization)

 

25,091

 

14,445

 

66,459

 

42,865

 

Customer operations and selling

 

7,643

 

6,399

 

23,674

 

19,715

 

General and administrative

 

9,450

 

7,889

 

29,010

 

25,106

 

Depreciation and amortization

 

14,336

 

11,671

 

40,712

 

34,193

 

Total operating expenses

 

56,520

 

40,404

 

159,855

 

121,879

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

4,241

 

3,423

 

12,776

 

9,276

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

35

 

776

 

593

 

2,404

 

Interest expense

 

(2,904

)

(1,698

)

(8,845

)

(4,842

)

Other, net

 

56

 

(132

)

13

 

(283

)

Total other income (expense), net

 

(2,813

)

(1,054

)

(8,239

)

(2,721

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

1,428

 

2,369

 

4,537

 

6,555

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

672

 

680

 

2,095

 

1,584

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

756

 

1,689

 

2,442

 

4,971

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(242

)

(953

)

263

 

(1,398

)

Gain (loss) on sale of discontinued operations

 

(615

)

 

18,362

 

59,902

 

Total discontinued operations

 

(857

)

(953

)

18,625

 

58,504

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(101

)

$

736

 

$

21,067

 

$

63,475

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.05

 

$

0.12

 

$

0.17

 

$

0.35

 

Discontinued operations, net of tax

 

(0.06

)

(0.07

)

1.32

 

4.05

 

Net income (loss) per basic common share

 

$

(0.01

)

$

0.05

 

$

1.49

 

$

4.40

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.05

 

$

0.12

 

$

0.17

 

$

0.34

 

Discontinued operations, net of tax

 

(0.06

)

(0.07

)

1.32

 

4.04

 

Net income (loss) per diluted common share

 

$

(0.01

)

$

0.05

 

$

1.49

 

$

4.38

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

 

$

0.25

 

$

0.50

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

Shares of common stock used to calculate earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

13,970

 

14,459

 

14,138

 

14,441

 

Diluted

 

13,980

 

14,507

 

14,146

 

14,492

 

 

See accompanying notes.

 

1



 

SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,393

 

$

31,114

 

Short-term investments

 

581

 

21,151

 

Accounts receivable, net

 

23,382

 

19,223

 

Income tax receivable

 

2,868

 

1,786

 

Inventories

 

8,419

 

4,251

 

Prepaid expenses

 

4,061

 

3,462

 

Deferred income taxes

 

6,212

 

9,480

 

Other current assets

 

2,907

 

1,309

 

Assets of discontinued operations

 

 

41,147

 

Total current assets

 

50,823

 

132,923

 

 

 

 

 

 

 

Property, plant and equipment, net

 

519,028

 

346,740

 

 

 

 

 

 

 

Intangible and other assets:

 

 

 

 

 

Long-term investments

 

2,763

 

 

Customer relationships, net

 

5,888

 

 

Goodwill

 

48,805

 

2,171

 

Deferred charges and other assets

 

4,327

 

2,933

 

 

 

61,783

 

5,104

 

 

 

$

631,634

 

$

484,767

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

 

$

15,643

 

$

3,642

 

Accounts payable

 

2,468

 

2,544

 

Other accrued liabilities

 

20,036

 

21,258

 

Advance billings and deferred revenues

 

9,293

 

7,288

 

Accrued compensation and pension benefits

 

11,187

 

8,755

 

Liabilities of discontinued operations

 

 

8,969

 

Total current liabilities

 

58,627

 

52,456

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

218,184

 

118,189

 

Deferred income taxes

 

59,564

 

26,030

 

Other liabilities and deferred revenues

 

16,862

 

17,089

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, without par value; 100,000 shares authorized, 13,954 and 14,514 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively

 

146,534

 

158,870

 

Accumulated other comprehensive loss

 

(4,222

)

(3,530

)

Retained earnings

 

136,085

 

115,663

 

Total shareholders’ equity

 

278,397

 

271,003

 

 

 

$

631,634

 

$

484,767

 

 

See accompanying notes.

 

2



 

SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; Amounts in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Net cash provided by continuing operations

 

$

36,617

 

$

32,944

 

Net cash used in discontinued operations

 

(542

)

(40,634

)

Net cash provided by (used in) operating activities

 

36,075

 

(7,690

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Business acquisition, net of cash acquired

 

(181,263

)

 

Proceeds from sale of discontinued operations

 

66,296

 

110,123

 

Capital expenditures for property, plant and equipment

 

(64,567

)

(34,391

)

Purchases of available-for-sale securities

 

 

(123,275

)

Proceeds from sale of available-for-sale securities

 

16,650

 

92,650

 

Net cash (used in) provided by continuing operations

 

(162,884

)

45,107

 

Net cash used in discontinued operations

 

(280

)

(1,230

)

Net cash (used in) provided by investing activities

 

(163,164

)

43,877

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

98,000

 

 

Principal payments of long-term debt and capital lease obligations

 

(16,004

)

(4

)

Proceeds from short-term borrowings

 

60,000

 

 

Repayment of short-term borrowings

 

(30,000

)

 

Dividends paid

 

(7,124

)

(10,849

)

Repurchase of common stock

 

(6,504

)

 

Net cash provided by (used in) financing activities

 

98,368

 

(10,853

)

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(28,721

)

25,334

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

31,114

 

6,371

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

2,393

 

$

31,705

 

 

See accompanying notes.

 

3



 

SUREWEST COMMUNICATIONS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited; Amounts in thousands, except share and per share amounts)

 

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Business and Basis of Accounting

 

SureWest Communications (the “Company”, “we” or “our”) is a holding company with wholly-owned subsidiaries that provide communications services in Northern California and the greater Kansas City, Kansas and Missouri areas (“Kansas City area”). Our operating subsidiaries are SureWest Broadband, SureWest TeleVideo, SureWest TeleVideo of Roseville, SureWest Internet, SureWest Custom Data Services, Everest Broadband, Inc. (“Everest”), SureWest Telephone and SureWest Long Distance. As discussed in Note 2, in February 2008 we acquired 100% of the issued and outstanding stock of Everest.  Further, in May 2008 we sold the operating assets of our Wireless business, SureWest Wireless, and in February 2007 we sold our wholly-owned subsidiary SureWest Directories. Accordingly, the financial results of SureWest Wireless and SureWest Directories have been reported as discontinued operations for all periods presented in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The notes to the condensed consolidated financial statements reflect historical amounts exclusive of discontinued operations, unless otherwise noted. We expect that the sources of our revenues and our cost structure may be different in future periods, both as a result of our entry into new communications markets and competitive forces in each of the markets in which we have operations.

 

In the opinion of management, the accompanying condensed consolidated balance sheets and related interim statements of operations and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP 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. Interim results are not necessarily indicative of results for a full year.  The information presented in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our 2007 Annual Report on Form 10-K filed with the SEC.

 

Fair Value of Financial Instruments

 

We adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”) effective January 1, 2008 for financial assets and liabilities measured on a recurring basis. SFAS 157 applies to all financial assets and financial liabilities that are measured and reported on a fair value basis. There was no impact for adoption of SFAS No. 157 to our condensed consolidated financial statements. SFAS 157 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements.

 

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

4



 

The following table summarizes our financial assets (cash equivalents and investments) measured at fair value on a recurring basis:

 

 

 

As of September 30, 2008,

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

 

$

204

 

$

204

 

$

 

$

 

Equity securities

 

581

 

581

 

 

 

Auction rate securities

 

2,763

 

 

 

2,763

 

 

 

$

3,548

 

$

785

 

$

 

$

2,763

 

 

The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3):

 

 

 

Auction Rate
Securities

 

Beginning Balance at December 31, 2007

 

$

 

Transfers in and/or out of Level 3

 

3,700

 

Unrealized losses included in other comprehensive income

 

(937

)

Ending Balance at September 30, 2008

 

$

2,763

 

 

At September 30, 2008, we held one auction rate security (“ARS”) with an estimated fair value of $2,763, which was measured using Level 3 inputs. The ARS is collateralized by student loans that are guaranteed primarily by a monoline insurance company and partially by the Federal Family Education Loan Program (“FFELP”). Monthly auctions have historically provided a liquid market for these securities. The ARS in our portfolio had a successful auction in January 2008 and as such, its fair value would have been measured using Level 1 inputs at January 1, 2008. However, since February 2008, there has not been a successful auction for this ARS, therefore we transferred this ARS from the Level 1 to the Level 3 category.

 

We obtained a Level 3 valuation from an investment advisor, who utilized a discounted cash flow (“DCF”) approach to arrive at this valuation. To support this valuation, we prepared a separate and comparable DCF model to estimate the fair value of the ARS at September 30, 2008.  The significant estimates that were used as inputs in our DCF model were the credit quality of the issuer, the credit quality of the monoline insurance company, the percentage and the types of guarantees (such as the monoline insurance company and FFELP), interest rates, expected holding period of the ARS, expected future cash flows, and an illiquidity discount factor. This ARS is compared, when possible, to other observable and relevant market data, which are non-existent at this time. Changes in the assumptions of the model based on dynamic market conditions could have a significant impact on the valuation of this security, which may lead us in the future to take an impairment charge for this security.

 

Based on our review of the investment advisors valuation, our DCF model, the inputs to the model and the assessment of fair value as of September 30, 2008, we determined there was a decline in the fair value of the ARS investment of $937.  In determining whether there was an other-than-temporary impairment of the ARS, we applied the accounting literature included in Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) SFAS No.’s 115-1/124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”), and also considered the guidance included in Staff Accounting Bulletin (“SAB”) Topic 5M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities. Under the FSP 115-1and SAB Topic 5M, we resolved that the investment was impaired using the DCF model.  We have deemed this ARS decline in fair value as temporary because we have the ability and intend to hold this security until a successful auction, we sell the security in a secondary market which currently is not active, or it is redeemed by the issuer.  We reclassified the entire ARS investment balance on March 1, 2008 from short-term investments to long-term other assets on our condensed consolidated balance sheet to reflect the lack of liquidity of this investment. We will continue to analyze our ARS each reporting period for impairment and may be required to record an impairment charge in the condensed consolidated statement of operations if the decline in fair value is determined to be other than temporary.

 

In October 2008, we received an offer (the “Offer”) from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”), to sell at par value the ARS originally purchased for $3,700 from UBS at anytime during a two-year period beginning June 30, 2010. The Offer is non-transferable and expires on November 14, 2008. The acceptance of the Offer will likely result in a charge to the condensed consolidated statement of operations for the difference

 

5



 

between the fair value of the Offer and the unrealized loss of $937 on the ARS held at September 30, 2008. We are in the process of evaluating the Offer and its potential impact to our consolidated financial statements.

 

Intangible Assets

 

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) goodwill and intangible assets that are not subject to amortization are tested for impairment at least annually or when events or changes in circumstances indicate that the asset might be impaired. We evaluate the recoverability of our goodwill annually, as of November 30, or more frequently whenever events or changes in circumstances indicate that the asset may be impaired.  However, as a result of declines in the market price of the Company’s common stock, at June 30, 2008, we concluded that this was an indicator of potential impairment of goodwill and therefore, we performed an interim goodwill impairment test.

 

We completed the first step of its interim impairment test, which indicated that the estimated fair value of the reporting units was greater than the net carrying value of the reporting units.  As such, we concluded that our goodwill was not impaired as of June 30, 2008 and we were not required to perform the second step of the evaluation.

 

At September 30, 2008, we reviewed the various inputs and assumptions applied in our June 30, 2008 impairment test to determine if any significant changes had occurred during the third quarter that would impact the analysis.  Based on this review, we concluded that goodwill was not impaired as of September 30, 2008.  The company will perform the required annual goodwill impairnent test as of November 30, 2008, as mentioned above.

 

Stock-based Compensation

 

Stock Plans

 

Our Board of Director’s may grant share-based awards from our two shareholder approved Equity Incentive Plans (the “Stock Plans”) to certain employees, outside directors and consultants of the Company. The Company authorized for future issuance under the Stock Plans approximately 1.9 million shares (subject to upward adjustment based upon our issued and outstanding shares) of authorized, but unissued, common stock. The Stock Plans permit issuance of awards in the form of restricted common stock (“RSAs”), restricted common stock units (“RSUs”), performance shares, stock options and stock appreciation rights. The exercise price per share of the Company’s common stock to be purchased under any incentive stock option shall not be less than 100% of the fair market value of a share of the Company’s common stock on the date of the grant, and the exercise price under a non-qualified stock option shall not be less than 85% of the fair market value of the Company’s common stock at the date of the grant. The term of any stock option shall not exceed 10 years.

 

We account for stock-based compensation for both RSAs and RSUs in accordance with the provisions of SFAS No. 123(R), Share-Based Payments (“SFAS 123(R)”), which requires us to measure the cost of employee services received in exchange for all equity awards granted, including stock options, RSAs and RSUs, based on the fair market value of the award as of the grant date.  We will continue to recognize stock-based compensation on RSAs and RSUs granted prior to the adoption of SFAS 123(R) using the graded vesting method. In accordance with the provisions of SFAS 123(R), we have estimated expected forfeitures based on historical experience and are recognizing compensation expense only for those RSAs and RSUs expected to vest.

 

Restricted Common Stock Awards and Units

 

The following table summarizes the RSAs and RSUs granted to certain eligible participants during the nine-month periods ended September 30, 2008 and 2007:

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

2008

 

Fair Value

 

2007

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

RSAs Granted

 

7,056

 

$

15.59

 

1,338

 

$

23.97

 

RSUs Granted

 

22,240

 

$

8.43

 

5,000

 

$

26.21

 

RSU Dividends

 

802

 

$

8.88

 

 

$

 

Total

 

30,098

 

 

 

6,338

 

 

 

 

There were no RSAs or RSUs granted during the quarters ended September 30, 2008 or 2007.  Stock-based compensation expense for both RSAs and RSUs of $170 and $656 was recorded during the quarter and nine-month period ended September 30, 2008, respectively. During the same prior year periods, we recorded stock based compensation expense of $164 and $818, respectively.  RSAs and RSUs are amortized over their respective vesting periods, which range from immediate vesting to a five-year vesting period.

 

6



 

The following table summarizes the RSA and RSU activity during the nine-month period September 30, 2008:

 

 

 

 

 

Weighted Average

 

Nonvested Shares

 

Shares

 

Grant Date Fair Value

 

 

 

 

 

 

 

Nonvested-January 1, 2008

 

144,935

 

$21.85

 

Granted

 

30,098

 

$10.12

 

Vested

 

(31,619

)

$13.12

 

Forfeited

 

(18,470

)

$24.08

 

Nonvested-September 30, 2008

 

124,944

 

 

 

 

As of September 30, 2008, total unrecognized compensation cost related to nonvested restricted stock was $1,688 and will be recognized over a weighted-average period of approximately two years. The total fair value of RSAs and RSUs vested during the nine-month period ended September 30, 2008 was $415.

 

Stock Options Expense

 

We issue new shares of common stock upon exercise of stock options.  The following table summarizes stock option activity for our stock option plans for the nine-month period ended September 30, 2008:

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

Average

 

Average

 

 

 

 

 

Exercise

 

Remaining

 

Options

 

Shares

 

Price

 

Contractual Life

 

 

 

 

 

 

 

 

 

Outstanding-January 1, 2008

 

362,039

 

$40.38

 

 

 

Forfeited

 

(25,100

)

$40.53

 

 

 

Outstanding-September 30, 2008

 

336,939

 

$40.37

 

3

 

Vested and Exercisable at September 30, 2008

 

336,939

 

$40.37

 

3

 

 

There were no stock options granted, exercised or expired during the nine-month period ended September 30, 2008. In addition, there were no stock options with an exercise price below the market price of the Company’s stock at that date.

 

Per Share Amounts

 

Shares used in the computation of basic earnings (loss) per share are based on the weighted average number of common shares and RSUs outstanding, excluding unvested restricted common shares and unvested RSUs. Shares used in the computation of diluted earnings per share are based on the weighted average number of common shares, restricted common shares and RSUs outstanding, along with other potentially dilutive securities outstanding in each period. Shares used in the computation of diluted loss per share are based on the weighted average number of vested common shares and vested RSUs and exclude potential dilutive common shares, unvested restricted common shares and unvested RSUs outstanding, as the effect is anti-dilutive.

 

Cash dividends per share are based on the actual dividends per share, as declared by our Board of Directors. On each date that we paid a cash dividend to the holders of the Company’s common stock, we credited to the holders of RSUs an additional number of RSUs equal to the total number of whole RSUs and additional RSUs previously credited to the holders, multiplied by the dollar amount of the cash dividend per share of common stock. Any fractional RSUs resulting from such calculation are included in the additional RSUs.

 

7



 

Comprehensive Income

 

The table below presents our comprehensive income, net of taxes:

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net income (loss)

 

$

(101

)

$

736

 

$

21,067

 

$

63,475

 

Unrealized (loss) gain on investment, net of income taxes

 

(89

)

31

 

(692

)

77

 

Comprehensive income (loss)

 

$

(190

)

$

767

 

$

20,375

 

$

63,552

 

 

Accumulated other comprehensive loss consists of adjustments, net of tax related to unrealized gains and losses on available-for-sale securities and minimum pension and post-retirement benefits.

 

Statements of Cash Flows Information

 

During the nine months ended September 30, 2008 and 2007, we made income tax payments of $2,094 and $46,879, respectively.  The decrease in income taxes paid (and corresponding increase in net cash provided by operating activities) was due to additional estimated income tax payments in 2007 primarily as a result of the gain on the sale of SureWest Directories, as discussed in Note 2 below.

 

Reclassifications

 

Certain amounts in our 2007 condensed consolidated financial statements and our previous 2008 interim financial statements have been reclassified to conform to the presentation of our 2008 condensed consolidated financial statements at September 30, 2008, which primarily consists of the effects of reclassifications from presentation of our Wireless business as a discontinued operation.

 

2.     ACQUISITION & DIVESTITURES

 

Acquisition

 

Everest Broadband, Inc.

 

Effective February 13, 2008, we acquired 100% of the issued and outstanding stock of Everest for a total purchase price of $181,700, including transactions costs. Everest is a competitive provider of high-speed data, video and voice services in the greater Kansas City area.

 

The acquisition has been accounted for using the purchase method in accordance with SFAS No. 141, Business Combinations. Accordingly, the net assets acquired were recorded at their estimated fair values and Everest’s operating results are included in our condensed consolidated financial statements from the date of acquisition.

 

The following table summarizes the estimated fair values of the assets and liabilities acquired at the date of acquisition. During the third quarter of 2008, we decreased the valuation of goodwill by $6,600 due to revised valuation estimates.  The decrease was primarily the result of (i) an increased valuation of property, plant and equipment of $3,000, (ii) an increase in deferred taxes of $3,100 and (iii) a decrease in the purchase price due to a change in working capital and other adjustments relating to transaction costs of $500. These values are derived from a preliminary purchase price allocation, which is subject to change based on the final valuations of the acquired real and intangible assets and the completion of final tax returns.  Further, we expect to complete the purchase accounting relating to the Everest acquisition in the fourth quarter of 2008.

 

8



 

 

 

February 13, 2008

 

Current assets

 

$

10,500

 

Property, plant and equipment

 

149,800

 

Intangible assets

 

6,700

 

Goodwill

 

46,600

 

Other long-term assets

 

2,700

 

Total assets acquired

 

216,300

 

 

 

 

 

Current liabilities

 

9,800

 

Long-term liabilities

 

1,300

 

Deferred income taxes

 

23,500

 

Total liabilities acquired

 

34,600

 

Net assets acquired

 

$

181,700

 

 

The acquired intangible assets of approximately $6,700 were derived from the associated value of a significant number of residential and business customers.  The intangible assets are being amortized over the estimated useful life of 5 years. During the quarter and nine-month period ended September 30, 2008, we recorded amortization expense of approximately $334 and $841, respectively, relating to the customer relationships.  Goodwill of $46,600 has been accounted for as an indefinite lived asset and will be tested annually for impairment at November 30 or at interim dates if potential impairment indicators arise.  For further discussion regarding the goodwill impairment testing, see the Intangible Assets section in Note 1 above.

 

In our preliminary purchase accounting we accrued a liability of $1,200 relating to the termination (the “Severance Plan”) of certain members of management of Everest.  The Severance Plan calls for payments to be made over a course of nine to eighteen months and is expected to be completed by August 2009.  For the quarter and nine-month period ended September 30, 2008, $115 and $449, respectively, was paid relating to the Severance Plan.

 

Unaudited Pro Forma Results

 

The following unaudited pro forma information presents our results of operations as if the acquisition of Everest occurred at the beginning of the fiscal periods presented.  The pro forma information below does not purport to present what the actual results would have been if the acquisition had in fact occurred at the beginning of the fiscal periods presented, nor does the information project results for any future period.

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended September 30,

 

 

 

2007

 

2008

 

2007

 

Operating revenues

 

$

58,661

 

$

180,188

 

$

175,230

 

Income from operations

 

5,019

 

14,422

 

14,489

 

Income from continuing operations

 

1,298

 

2,796

 

3,287

 

Net income

 

$

345

 

$

21,421

 

$

61,792

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

0.20

 

$

0.23

 

Net income

 

$

0.02

 

$

1.52

 

$

4.28

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.09

 

$

0.20

 

$

0.23

 

Net income

 

$

0.02

 

$

1.51

 

$

4.26

 

 

9



 

Discontinued Operations

 

SureWest Wireless

 

In May 2008, we completed the sale of the operating assets of our Wireless business, SureWest Wireless, to Verizon Wireless (“Verizon”) for an aggregate cash purchase price of $69,746, resulting in a gain as of September 30, 2008 of $19,179, net of tax.  Under the agreement, Verizon acquired the spectrum licenses and operating assets of SureWest Wireless, excluding our owned communication towers.

 

A portion of the purchase price equal to $3,450 was placed in escrow, half of which will be available after twelve months and the balance of which will be available twenty-four months following the closing, less the amount of any pending claims, in each case, to be held as security for certain losses, if any, incurred by Verizon in the event of (i) any breach of the representations and warranties set forth in the agreement, (ii) any breach or nonperformance of covenants set forth in the agreement and (iii) certain other specified events. The actual gain on sale could vary based on future claims, if any, made against the amounts held in escrow.

 

The results of SureWest Wireless are reported as a discontinued operation in our condensed consolidated financial statements for all periods presented. The operations of our owned communication towers to be retained are included within the Broadband business segment. See Note 9 for further discussion regarding our owned communication towers.

 

At December 31, 2007, the major components of SureWest Wireless’ assets and liabilities to be sold were as follows:

 

 

 

December 31, 2007

 

Accounts receivable, net

 

$

3,422

 

Inventories

 

894

 

Prepaid expenses

 

816

 

Property, plant and equipment, net

 

27,090

 

Wireless licenses, net

 

8,925

 

Total assets

 

$

41,147

 

 

 

 

 

Accounts payable and other accrued liabilities

 

$

2,209

 

Accrued compensation

 

259

 

Advance billings and deferred revenues

 

2,805

 

Deferred income taxes

 

3,696

 

Total liabilities

 

$

8,969

 

 

The following table summarizes the financial information for SureWest Wireless’ operations:

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Operating revenues

 

$

 

$

7,822

 

$

10,055

 

$

23,911

 

Operating expenses including depreciation and amortization

 

407

 

9,365

 

9,684

 

27,895

 

Income (loss) from operations

 

(407

)

(1,543

)

371

 

(3,984

)

Other income (expense)

 

 

 

(7

)

(43

)

Income tax expense (benefit)

 

(165

)

(590

)

101

 

(1,630

)

Income (loss) from discontinued operations

 

$

(242

)

$

(953

)

$

263

 

$

(2,397

)

 

 

 

 

 

 

 

 

 

 

Gain on sale of discontinued operations, net of tax

 

$

202

 

$

 

$

19,179

 

$

 

 

During the quarter ended September 30, 2008, the gain on sale was adjusted as a result of changes in the post-closing working capital calculation and estimated transaction costs.

 

In connection with the sale, we entered into a short-term Transition Services Agreement (“TSA”) with Verizon to provide certain operating services during the transition of the Wireless business to Verizon.  The TSA concluded during the third quarter of 2008.  During the transition period, our Telecommunications (“Telecom”) and Broadband segments provided certain services including long distance and interconnect services to Verizon. The services provided to Verizon and related revenues will diminish now that the conversion of the Wireless customers onto Verizon’s network has been completed.  Such services provided to SureWest Wireless

 

10



 

prior to the sale and eliminated in the condensed consolidated financial statements were $1,869 for the nine-month period ended September 30, 2008 and $1,336 and $4,344 for the quarter and nine-month period ended September 30, 2007, respectively.

 

SureWest Directories

 

In February 2007, GateHouse Media (“GateHouse”) acquired 100% of the stock of SureWest Directories (previously included in the Telecom segment), its directory publishing business, for an aggregate cash purchase price of $110,123, resulting in a gain as of September 30, 2008 of $59,339, net of tax. As part of the transaction, GateHouse became the publisher of the official directory of SureWest Telephone.  The results of SureWest Directories are reported as a discontinued operation in the condensed consolidated financial statements for all periods presented.

 

As part of the sale agreement with GateHouse and pursuant to a separate billing agreement and related procedures, we performed certain billing functions on behalf of GateHouse for a period following the sale date.  The services rendered by the Company on behalf of GateHouse under the billing agreement concluded on December 31, 2007 and we submitted an invoice for payment to GateHouse for $2,200 for the amounts owed to us.  Gatehouse performed an independent analysis of the invoiced amount and has disputed the amount due to us under the billing agreement.  Although management believes that we have fully complied with the terms of the billing agreement, we are no longer reasonably assured of the collectibility of the amount owed to us,  thus, during the quarter ended September 30, 2008 the gain on sale was adjusted.  In the event that we are able to collect any or all of the amounts owed to us from GateHouse under the terms of the billing agreement, the gain on the sale will be adjusted accordingly.  Management does not believe that the amount of any such adjustment will be material to the gain on sale reflected in the 2007 consolidated statement of income.

 

The following table summarizes the financial information for SureWest Directories’ operations for the quarters and nine-month periods ended September 30, 2008 and 2007:

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Directory advertising revenues

 

$

 

$

 

$

 

$

2,939

 

Income before income taxes

 

 

 

 

1,682

 

Income tax expense

 

 

 

 

683

 

Income from discontinued operations

 

 

 

 

999

 

(Loss) gain on sale of discontinued operations, net of taxes

 

$

(817

)

$

 

$

(817

)

$

59,902

 

 

3.     BUSINESS SEGMENTS

 

We have two reportable business segments: Broadband and Telecom. We have aggregated certain of its operating segments within the Broadband and Telecom segments because we believe that such operating segments share similar economic characteristics.  We measure and evaluate the performance of our segments based on income (loss) from operations. 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 our segments.

 

The Broadband segment utilizes fiber-to-the-premise and fiber-to-the-node networks to offer bundled residential and commercial services that include IP-based digital and high-definition television, high-speed internet, Voice over IP, and local and long distance telephone in the greater Sacramento, California and greater Kansas City area.

 

The Telecom segment offers landline telecommunications services, Digital Subscriber Line (“DSL”) service, long distance services and certain non-regulated services operating only in the greater Sacramento area. SureWest Telephone, which is the principal operating subsidiary of the Telecom segment, provides local services, toll telephone services, network access services and certain non-regulated services. SureWest Long Distance is a reseller of long distance services.

 

11



 

As discussed in Note 2, in May 2008, we sold the operating assets of our Wireless business, SureWest Wireless, which was previously reported as a separate reportable segment. The Wireless business sold has been presented as a discontinued operation for all periods presented.  The operations of our owned communication towers to be retained are included within the Broadband business segment.  See Note 9 for further discussion regarding our owned communication towers.

 

These segments are strategic business units that offer different products and services. We account for intersegment revenues and expenses at prevailing market rates.  Our business segment information is as follows:

 

 

 

 

 

 

 

Corporate

 

Discontinued

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Operations

 

Operations

 

Eliminations

 

Consolidated

 

For the three months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

36,653

 

$

24,108

 

$

 

$

 

$

 

$

60,761

 

Intersegment revenues

 

138

 

4,726

 

 

 

(4,864

)

 

Operating expenses*

 

33,013

 

14,035

 

 

 

(4,864

)

42,184

 

Depreciation and amortization

 

10,811

 

3,525

 

 

 

 

14,336

 

Income (loss) from operations

 

(7,033

)

11,274

 

 

 

 

4,241

 

Income (loss) from continuing operations

 

$

(5,801

)

$

6,557

 

$

 

$

 

$

 

$

756

 

 


*Exclusive of depreciation and amortization

 

 

 

 

 

 

 

Corporate

 

Discontinued

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Operations

 

Operations

 

Eliminations

 

Consolidated

 

For the three months ended September 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

17,630

 

$

26,197

 

$

 

$

 

$

 

$

43,827

 

Intersegment revenues

 

142

 

4,779

 

 

 

(4,921

)

 

Operating expenses*

 

18,628

 

15,026

 

 

 

(4,921

)

28,733

 

Depreciation and amortization

 

5,858

 

5,813

 

 

 

 

11,671

 

Income (loss) from operations

 

(6,714

)

10,137

 

 

 

 

3,423

 

Income (loss) from continuing operations

 

$

(4,770

)

$

6,459

 

$

 

$

 

$

 

$

1,689

 

 


*Exclusive of depreciation and amortization

 

 

 

 

 

 

 

Corporate

 

Discontinued

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Operations

 

Operations

 

Eliminations

 

Consolidated

 

As of and for the nine months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

99,295

 

$

73,336

 

$

 

$

 

$

 

$

172,631

 

Intersegment revenues

 

419

 

13,635

 

 

 

(14,054

)

 

Operating expenses*

 

90,626

 

42,571

 

 

 

(14,054

)

119,143

 

Depreciation and amortization

 

29,773

 

10,939

 

 

 

 

40,712

 

Income (loss) from operations

 

(20,685

)

33,461

 

 

 

 

12,776

 

Income (loss) from continuing operations

 

$

(17,115

)

$

19,557

 

$

 

$

 

$

 

$

2,442

 

Total Assets

 

$

833,051

 

$

1,039,334

 

$

648,817

 

$

 

$

(1,889,568

)

$

631,634

 

 


*Exclusive of depreciation and amortization

 

12



 

 

 

 

 

 

 

Corporate

 

Discontinued

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Operations

 

Operations

 

Eliminations

 

Consolidated

 

As of and for the nine months ended September 30, 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

51,348

 

$

79,807

 

$

 

$

 

$

 

$

131,155

 

Intersegment revenues

 

463

 

13,846

 

 

 

(14,309

)

 

Operating expenses*

 

55,492

 

46,503

 

 

 

(14,309

)

87,686

 

Depreciation and amortization

 

16,962

 

17,231

 

 

 

 

34,193

 

Income (loss) from operations

 

(20,643

)

29,919

 

 

 

 

9,276

 

Income (loss) from continuing operations

 

$

(14,491

)

$

19,462

 

$

 

$

 

$

 

$

4,971

 

Total Assets

 

$

479,356

 

$

848,617

 

$

828,303

 

$

44,107

 

$

(1,710,314

)

$

490,069

 

 


*Exclusive of depreciation and amortization

 

4.              REGULATORY MATTERS AND ESTIMATED SHAREABLE EARNINGS OBLIGATIONS

 

Certain of our rates are subject to regulation by the Federal Communications Commission (“FCC”) and the State Commissions. Intrastate service rates are subject to regulation by State Commissions. With respect to toll calls initiated by interexchange carriers’ customers, the interexchange carriers are assessed access charges based on tariffs filed by the Company. Interstate access rates and resultant earnings are subject to regulation by the FCC. With respect to interstate services, SureWest Telephone has detariffed its DSL services and files its own tariff with the FCC for switched and special access services. For interstate common line (“CL”) charges, SureWest Telephone concurs with tariffs filed by the National Exchange Carrier Association (“NECA”). Pending and future regulatory actions may have a material impact on our consolidated financial position and results of operations.

 

FCC Matters

 

The FCC 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 FCC establishes rules that carriers must follow in the preparation of the annual studies. Additionally, under current FCC 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.

 

As a result of periodic cost separation studies required by the FCC, SureWest Telephone changed its estimates for certain NECA CL accounts receivable balances related to current and prior year monitoring periods.  During the nine-month period ended September 30, 2007, these changes in estimates increased our consolidated revenues and income from continuing operations by $663 and net income by $456 ($0.03 per share), respectively.  We did not record any significant changes in estimates during the quarter ended September 30, 2007 or the quarter and nine-month period ended September 30, 2008.

 

California Public Utility Commission (“CPUC”) Matters

 

In 2004, we entered into a settlement agreement (the “Settlement Agreement”), which was ultimately approved by the CPUC, to resolve an ongoing regulatory proceeding with various parties.  The Settlement Agreement resolved past sharing liabilities and suspended future sharing requirements in the intrastate jurisdiction.  In accordance with the Settlement Agreement, SureWest Telephone is returning approximately $6,500 (“Dividend A”), plus interest at the 90-day commercial paper rate for non-financial institutions, which was 2.13% as of September 30, 2008, and an imputed rate of 3.15%, to its end users through a consumer dividend and is recorded as a reduction of the Company’s contractual shareable earnings obligations over a period of approximately four years, which began January 1, 2005.  In addition, SureWest Telephone paid a one-time consumer dividend of $2,600 (“Dividend B”) to consumers to settle the monitoring periods 2000 to 2004 payable over approximately two years, which began January 1, 2005 and was completed in March 2007.  At September 30, 2008, the aggregate contractual shareable earnings obligation for Dividend A was $373 (which is net of an unamortized discount pertaining to imputed interest of $2 at that date).

 

13



 

The following table summarizes the amounts returned to end users through consumer dividends for the quarters and nine-month periods ended September 30, 2008 and 2007:

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Dividend A

 

$

404

 

$

468

 

$

1,253

 

$

1,429

 

Dividend B

 

 

 

 

210

 

Total

 

$

404

 

$

468

 

$

1,253

 

$

1,639

 

 

As part of the Settlement Agreement, SureWest Telephone was to implement an additional annual consumer dividend of $1,300 on January 1, 2007 to end-users receiving SureWest Telephone services subject to sharing on or after that date.  However, this consumer dividend was subject to reduction based upon the results of other pending regulatory proceedings.  Pursuant to a CPUC order in December 2006, beginning in 2007 this dividend was offset by a reduction in our interim draw from the California High Cost Fund (“CHCF”), a program designed by the CPUC to establish a fair and equitable local rate structure and to reduce any disparity in the rates charged by telephone companies serving high-cost areas.  The interim draw from the CHCF was previously authorized by a CPUC decision in August 2005 which allowed SureWest Telephone to continue receiving $11,500 annually from the CHCF to offset its intrastate regulated operating expenses on an interim basis. In August 2006, we requested permission from the CPUC to implement a graduated phase-down of its annual $11,500 interim draw. In December 2006, the CPUC authorized us to offset our interim draw from the CHCF with the aforementioned $1,300 consumer dividend.  In September 2007, the CPUC issued Decision 07-09-002 which provides for SureWest Telephone to phase-down its annual CHCF draw over a five-year period, to end on January 1, 2012.  The phase-down of the interim draw began in January 2007, initially reducing the annual $11,500 interim draw by the aforementioned $1,300 consumer dividend to $10,200. Starting in 2008, the interim CHCF draw is being incrementally reduced by approximately $2,000 annually.

 

In 2006, the CPUC initiated a Rulemaking pursuant to Senate Bill 1276 commencing a review of the CHCF-B program.  The goals of this review included, but were not limited to, adjusting universal service rate support payments to reflect updated operating costs, evaluating whether CHCF-B support levels can be reduced and made more predictable and making the current administration of the program more efficient.  In September 2007, the CPUC approved a decision reforming the industry CHCF-B program which significantly reduced the CHCF-B program fund and its associated surcharge.  The decision reduces the current industry CHCF-B funding level by approximately 74% and orders the reduction to be transitioned over an 18-month period, which began in January 2008 and will end in July 2009.  We received approximately $600 in 2007.  Based on this level of receipts and the threshold transition schedule outlined in the decision, our CHCF-B fund will be reduced approximately 91% and 100% in July 2008 and January 2009, respectively.  Accordingly, our general CHCF-B fund draw will be approximately $300 and $0 in 2008 and 2009, respectively.  Furthermore, the decision lifts the freeze on basic residential rates beginning in January 2009; however, the decision establishes a Phase II of the proceeding in which the CPUC may determine the amount by which we may increase basic residential rates over time, among other issues.  We will continue to evaluate this matter and the potential effects on its consolidated financial position and results of operations.

 

In an ongoing proceeding relating to the New Regulatory Framework (under which SureWest Telephone has been regulated since 1996), the CPUC adopted Decision 06-08-030 in 2006, which grants carriers broader pricing freedom in the provision of telecommunications services, bundling of services, promotions and customer contracts.  This decision adopted a new regulatory framework, the Uniform Regulatory Framework (“URF”), which among other things (i) eliminates price regulation and allows full pricing flexibility for all new and retail services except lifeline and basic residential services which will remain capped at current levels until January 1, 2009, (ii) allows new forms of bundles and promotional packages of telecommunication services, (iii) allocates all gains and losses from the sale of assets to shareholders and (iv) eliminates almost all elements of rate of return regulation, including the calculation of shareable earnings.  On September 18, 2008, the CPUC adopted Decision 08-09-042, which allows URF Incumbent Local Exchange Carriers (“ILECs”) to increase their basic residential rate by up to $3.25 per year over the next two years.  Beginning January 1, 2011, the URF ILECs will be allowed full pricing flexibility for the basic residential rate.  In addition, the Division of Ratepayer Advocates and The Utility Reform Network have

 

14



 

recently submitted various filings to the CPUC in an effort to extend the price freeze on basic residential rates for three years and to determine through further review and public hearings if full pricing flexibility will ensure the availability of affordable, reliable basic residential telephone service. The results of this proceeding and the potential effects on SureWest Telephone cannot yet be determined.

 

5.     INCOME TAXES

 

On January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB No. 109, Accounting for Income Taxes. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of uncertain tax positions.

 

We had a liability for unrecognized tax benefits of approximately $379 and $305 at September 30, 2008 and December 31, 2007, respectively.  The following table provides a reconciliation of the beginning and ending amount of unrecognized tax benefits during the nine-month period ended September 30, 2008:

 

Balance as of December 31, 2007

 

$

305

 

Increases based on tax positions prior to 2008

 

74

 

Unrecognized tax benefits as of September 30, 2008

 

$

379

 

 

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate were $118 and $122 at January 1, 2008 and September 30, 2008, respectively.  It is reasonably possible that a reduction of up to $199 of unrecognized tax benefits related to state deduction and credit issues and associated interest may occur within twelve months as a result of the expiration of the statute of limitations and payment of taxes and interest with amended returns expected to be filed prior to the end of 2008.

 

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.  We did not accrue significant amounts of interest and penalties related to unrecognized tax benefits during the quarter or nine-month period ended September 30, 2008.  As of September 30, 2008, we had approximately $117 of accrued interest and penalties in the unrecognized tax benefits above.

 

As of September 30, 2008, the following tax years and related taxing jurisdictions were open:

 

Tax Year

 

Taxing Jurisdiction

 

2002

 

Federal

 

2003 - 2007

 

Federal and California

 

2006-2007

 

Kansas and Missouri

 

 

For the quarter and nine-month period ended September 30, 2008, our actual tax expense differed from the federal statutory rate due to state taxes, the benefit of certain permanent tax deductions and an increase to state deferred tax expense due to changes in our state tax apportionment factors, interest and penalties.  For the quarter and nine-month period ended September 30, 2007, our actual tax expense differed from the federal statutory rate due to state taxes and the benefit of certain permanent tax deductions.

 

6.     PENSION AND OTHER POST-RETIREMENT BENEFITS

 

We sponsor a noncontributory defined benefit pension plan (the “Pension Plan”) which covers certain eligible employees. Benefits are based on years of service and the employee’s average compensation during the five highest consecutive years of the last ten years of credited service. Our funding policy is to contribute annually an actuarially determined amount consistent with applicable federal income tax regulations. Contributions are intended to provide for benefits attributed to service to date. Pension Plan assets are primarily invested in domestic equity securities, United States government and agency securities and international equity securities.

 

We also have an unfunded Supplemental Executive Retirement Plan (“SERP”), which provides supplemental retirement benefits to certain of our retired executives. The SERP provides for incremental pension payments to partially offset the reduction in amounts that

 

15



 

would have been payable under the Pension Plan if it were not for limitations imposed by federal income tax regulations.

 

In addition, we provide certain post-retirement benefits other than pensions (“Other Benefits Plan”) to certain eligible employees, including life insurance benefits and a stated reimbursement for Medicare supplemental insurance.

 

In recent years, our management substantially modified its employee compensation structure in order to attract and retain the right mix of talent necessary to successfully support the Company.  For that reason, we amended our Pension Plan, SERP and Other Benefits (collectively the “Plans”).  The Plans amendments, effective April 1, 2007, froze the Pension Plan so that no person is eligible to become a new participant in the Plans on or following that date and all future benefit accruals for existing participants under the Plans cease.  The amendments to the Plans were accounted for as plan curtailments, resulting in the recognition of a $574 non-cash pretax curtailment loss ($0.04 per share) reflected in operating expenses in our consolidated statement of operations during the year ended December 31, 2006.

 

We account for our Pension Plan in accordance with SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No’s 87, 88, 106 and 132(R) (“SFAS 158”).  SFAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  The Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.

 

Components of Net Periodic Pension Cost

 

Net periodic pension income recognized in the condensed consolidated statements of operations for the quarters and nine-month periods ended September 30, 2008 and 2007 under the Pension Plan and SERP included the following components:

 

Quarter ended September 30,

 

2008

 

2007

 

Service cost

 

$

 

$

(215

)

Interest cost on projected benefit obligation

 

1,788

 

1,795

 

Expected return on plan assets

 

(2,266

)

(2,330

)

Amortization of:

 

 

 

 

 

Prior service cost

 

 

1

 

Net actuarial loss

 

6

 

5

 

Net periodic pension (income)

 

$

(472

)

$

(744

)

 

Nine months ended September 30,

 

2008

 

2007

 

Service cost

 

$

 

$

878

 

Interest cost on projected benefit obligation

 

5,365

 

5,424

 

Expected return on plan assets

 

(6,798

)

(6,960

)

Amortization of:

 

 

 

 

 

Prior service cost

 

1

 

2

 

Net actuarial loss

 

17

 

15

 

Net periodic pension (income)

 

$

(1,415

)

$

(641

)

 

Net periodic benefit costs related to the Other Benefits Plan were not significant to our condensed consolidated financial statements for the quarters and nine-month periods ended September 30, 2008 or 2007.

 

7.     COMMITMENTS AND CONTINGENCIES

 

Credit Arrangements

 

In May 2007, the Company entered into an Amended and Restated Credit Agreement (“Old Credit Agreement”) to restate and replace the May 2006 credit agreement.  The Old Credit Agreement revised both the Term Loan facility and the Revolving Loan facility (collectively “Loan Facilities”) to principal amounts of $40,000 and up to $60,000, respectively. Principal payments on the outstanding amounts borrowed under the Loan Facilities were due and payable on May 1, 2012. There were no material changes

 

16



 

to interest calculations, interest payments or financial covenants as a result of the Old Credit Agreement.

 

In February 2008, the Company entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”) to restate and replace the Old Credit Agreement. The Credit Agreement terms, among other things (i) revised the amount available under the Term Loan A facility from $40,000 to $120,000, (ii) issued a 1-year $60,000 Term Loan B facility and (iii) modified certain financial covenants. No significant changes were made to the existing Revolving Loan facility. The credit facilities were used in part to acquire Everest and were available for general corporate purposes. The Term Loan A facility and the Revolving Loan facility are due and payable on May 1, 2012.

 

The Term Loan A facility, prior to the Credit Agreement, which had $40,000 outstanding, was extinguished resulting in a loss on extinguishment of debt of $607, which was recorded in the first quarter of 2008. $40,000 of the Credit Agreement borrowings bore interest at a fixed rate of 6.29%. The remaining $80,000 of the Credit Agreement borrowings bore interest based, at our election, on the London Interbank Offered Rate (“LIBOR”) or the bank’s Prime Rate, in either case, plus an applicable margin. The Term Loan B facility was due and payable on February 12, 2009 and included an automatic increase to the applicable interest margins on August 12, 2008 to LIBOR or the bank’s Prime Rate, in either case, plus an applicable margin and another 75 basis points.  On May 14, 2008, the Company repaid $30,000 of the Term Loan B and $16,000 of the Revolving facility with proceeds from the sale of SureWest Wireless.

 

In September 2008, the Company entered into a Third Amended and Restated Credit Agreement (“New Agreement”) to restate and replace the Credit Agreement entered into by the Company and CoBank in February 2008. The New Agreement terms, among other things (i) reflected the repayment of $30,000 of the Term Loan B facility under the Credit Agreement to reduce the principal balance from $60,000 to $30,000, (ii) modified interest margins and (iii) extended the maturity date of the Term Loan B facility to May 1, 2012.

 

The Term Loan A facility which has $120,000 outstanding as of September 30, 2008, has $40,000 at a fixed interest rate of 7.036% and the remaining $80,000 will bear interest based, at the Company’s election, on LIBOR or the bank’s Prime Rate, in either case, plus an applicable margin. As of September 30, 2008, $30,000 and $2,000 were outstanding on the Term Loan B and Revolving Loan facilities, respectively. As of December 31, 2007, $40,000 was outstanding on the Term Loan A facility and no amounts were outstanding under the Revolving Loan facility.

 

The Company’s Series A and Series B Senior Notes and the New Agreement contain financial and operating covenants that may restrict, among other things, the repurchase of the Company’s capital stock, the making of certain other restricted payments and the incurrence of additional indebtedness. The covenants also require the Company to maintain certain financial ratios and minimum levels of tangible net worth. At September 30, 2008 and December 31, 2007, retained earnings of approximately $118,397 and $111,003, respectively, were available for the payments.

 

Litigation, Regulatory Proceedings and Other Contingencies

 

We are subject to certain legal proceedings, Internal Revenue Service examinations and other income tax exposures, 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 our consolidated financial position, results of operations or cash flows.

 

We are also subject to a number of regulatory proceedings occurring at the federal and state levels that may have a material impact on its operations. These regulatory proceedings include, but are not limited to, consideration of changes to the jurisdictional separations process, the interstate universal service fund, intercarrier compensation access charge reform, broadband deployment, the regulation of local exchange carriers and their competitors, including providers of Internet protocol-enabled services, and the provision of video services and competition in the market. The outcomes and impact on our operations due to these proceedings and related court matters cannot be determined at this time.

 

The FCC continues to promulgate rules and regulations on competition, interconnection, access charges, broadband deployment and universal service reform, and the various on-going legal challenges considering the validity of these FCC orders and it is not yet possible to determine fully the impact of the related FCC regulations on our operations.

 

The regulatory proceedings occurring at the state and federal levels described above may also authorize new competition in the provision of regulated services and change the rates and rate structure for regulated services that we furnish, of which the effects on us cannot yet be determined.

 

17



 

8.              RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently Issued Accounting Pronouncements

 

In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early application is not permitted. We are currently evaluating the potential impact, if any, of adopting FSP EITF 03-6-1.

 

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Presents Fairly in Conformity With Generally Accepted Accounting Principles. We are currently evaluating the potential impact, if any, of adopting SFAS 162.

 

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used for purposes of determining the useful life of a recognized intangible asset under SFAS 142.  FSP FAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other U.S. GAAP.  FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. We are currently evaluating the potential impact, if any, of adopting FSP FAS 142-3.

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”), which establishes principles and requirements for how the acquirer (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value to be recognized in earnings until settled.  SFAS 141(R) also requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition.  SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We are currently evaluating the impact this statement will have on its financial position and results of operations, however, the effect will be dependent upon any acquisitions that are made in the future.

 

Recently Adopted Accounting Pronouncements

 

In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements.  In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”).  FSP FAS 157-2 amends SFAS 157 to delay the effective date for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually.  SFAS 157, as amended, is effective for financial statements issued for fiscal years beginning after November 15, 2008, and for interim periods within those fiscal years. Effective for 2008 we adopted SFAS 157, except as it applies to those non-financial assets and non-financial liabilities as noted in FSP FAS 157-2.  The partial adoption of SFAS 157 did not have an impact on our condensed consolidated financial statements. For a more detailed discussion of the effects of applying the provisions of SFAS 157 refer to the Fair Value of Financial Instruments section of Note 1.

 

18



 

In October 2008, the FASB issued FSP FAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP FAS 157-3, clarifies how (i) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (ii) observable market information from an inactive market should be taken into account and (iii) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. We adopted FSP FAS 157-3 for the quarter ended September 30, 2008. The adoption of FSP FAS 157-3 did not have a material impact on our condensed consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”).  This standard permits an entity to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also establishes recognition, presentation and disclosure requirements.  We adopted SFAS 159 effective January 1, 2008 and did not elect the fair value option for its financial instruments. The adoption of SFAS 159 did not have an effect on our condensed consolidated financial statements.

 

In June 2007, the EITF ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment (“EITF 06-11”).  EITF 06-11 provides that realized income tax benefits from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase in additional paid-in capital.  We adopted EITF 06-11 effective January 1, 2008.  The adoption of this standard did not have a material impact on our consolidated financial position and results of operations.

 

9.              SUBSEQUENT EVENT

 

Definitive Agreement to Sell Communication Tower Assets

 

On October 10, 2008, West Coast PCS Structures, LLC (“West Coast PCS”), PCS Structures Towers, LLC (“PCS Towers” and together with West Coast PCS, the “Companies”) and West Coast PCS LLC (“Seller”), each an indirect subsidiary of the Company, entered into a definitive purchase agreement (the “Purchase Agreement”) with GTP Towers I, LLC (“GTP Towers”). Pursuant to this Purchase Agreement GTP Towers agrees to acquire all of the membership interests of West Coast PCS (the “Acquisition”) and an escrow agreement, subject to completion of mutually satisfactory schedules to the Purchase Agreement and execution of the escrow agreement.

 

Prior to and in connection with the consummation of the Acquisition, Seller and the Company’s direct subsidiaries, SureWest Broadband and SureWest Telephone, will contribute and transfer certain wireless telecommunication towers and all related assets and liabilities (“Tower Assets”) to PCS Towers, which on the closing of the Acquisition will be wholly-owned by West Coast PCS.

 

The purchase price in connection with the Acquisition is based on the tower cash flow generated by commenced tenant leases included in the Tower Assets. At the initial closing, Purchaser will pay an amount based on the tower cash flow generated under tenant leases executed and commenced as of five business days prior to the initial closing. During the period from the initial closing until 180 days thereafter, Seller may also receive additional payments with respect to tenant leases for which applications are received prior to the initial closing and tenant leases that are executed but not commenced as of the initial closing, in each case, on the commencement date of such tenant leases. Currently, SureWest expects that the aggregate purchase price of the Acquisition will be in the range of $9,500 to $10,200.

 

The consummation of the Acquisition is subject to the filing of an advice letter with the CPUC, which will be automatically deemed approved 30 days after filing unless suspended by the CPUC, and other customary closing conditions. We expect the initial closing under the Purchase Agreement will occur in the fourth fiscal quarter ending December 31, 2008.

 

19



 

In the fourth quarter of 2008, the Tower Assets to be sold will be presented as discontinued operations and the related assets and liabilities to be sold will be classified as held for sale. At September 30, 2008 and December 31, 2007, the major components of tower assets and liabilities to be sold were as follows:

 

 

 

September 30, 2008

 

December 31, 2007

 

Prepaid expenses

 

$

118

 

$

108

 

Property, plant and equipment, net

 

4,902

 

5,552

 

Total assets

 

$

5,020

 

$

5,660

 

 

 

 

 

 

 

Advance billings and deferred revenues

 

$

509

 

$

563

 

Deferred income tax

 

471

 

887

 

Total liabilities

 

$

980

 

$

1,450

 

 

Presented below is our consolidated income from continuing operations, as included in the condensed consolidated statements of operations for the quarter and nine months ended September 30, 2008 and 2007 on an unaudited proforma basis to reflect the sale of the Tower Assets and the classification of its results of operations as discontinued operations:

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Consolidated income from continuing operations

 

$

756

 

$

1,689

 

$

2,442

 

$

4,971

 

Tower results of operations:

 

 

 

 

 

 

 

 

 

Operating revenues

 

491

 

204

 

1,196

 

655

 

Operating expenses including depreciation and amortization

 

294

 

344

 

954

 

1,007

 

Income (loss) from operations

 

197

 

(140

)

242

 

(352

)

Other income

 

 

 

 

1

 

Income tax expense (benefit)

 

78

 

(55

)

96

 

(139

)

Net income (loss)

 

119

 

(85

)

146

 

(212

)

Consolidated proforma income from continuing operations

 

$

637

 

$

1,774

 

$

2,296

 

$

5,183

 

 

20



 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

(Amounts in thousands, except select operating metrics and share and per share amounts)

 

Certain statements included in this report, 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 our revenue and cost structure resulting from our 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. These forward looking statements generally are identified by the words “believe”, “expect”, “anticipate”, “estimate”, “intend”, “should”, “may”, “will”, “would”, “will be”, “will continue” or similar expressions. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of SureWest Communications to be different from those expressed or implied in the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward—looking statements is included in our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). We disclaim any intention or obligation to update or revise publicly any forward-looking statements.

 

Corporate Structure

 

SureWest Communications (the “Company”, “we” or “our”) is one of the nation’s leading integrated communications providers and is the bandwidth leader in the markets we serve.  We classify our operations in two reportable segments: Broadband and Telecommunications (“Telecom”).

 

The Broadband segment, which generated approximately 58% and 39% of our consolidated revenue for the nine-month periods ended September 30, 2008 and 2007, respectively, utilizes fiber-to-the-premise and fiber-to-the-node networks to offer bundled residential and commercial services that include IP-based digital and high-definition television, high-speed internet, Voice over Internet Protocol (“VoIP”), and local and long distance telephone in the greater Sacramento, California and greater Kansas City, Kansas and Missouri areas (“Kansas City area”).

 

In December 2007, we entered into a definitive agreement to purchase Everest Broadband, Inc. (“Everest” or “Kansas City”). On February 13, 2008 we acquired 100% of the issued and outstanding stock of Everest for a total purchase price of $181,700, including transaction costs. Subsequent to the acquisition, the Kansas City operations have been included in our Broadband segment. Everest is a competitive provider of high-speed data, video and voice services in the greater Kansas City area. The acquisition of Everest accelerates our growth strategy and builds on our status as a leading provider of network services to residential and business customers.

 

The Telecom segment offers landline telecommunications services, Digital Subscriber Line (“DSL”) service, long distance services and certain non-regulated services operating only in the greater Sacramento area. SureWest Telephone, which is the principal operating subsidiary of the Telecom segment, provides local services, toll telephone services, network access services and certain non-regulated services. SureWest Long Distance is a reseller of long distance services.

 

On October 10, 2008, the Company entered into a definitive purchase agreement (the “Purchase Agreement”) to sell its more than fifty owned wireless communications towers (“Tower Assets”) owned by its subsidiary West Coast PCS, LLC “(West Coast PCS”) to GTP Towers I, LLC.  West Coast PCS is a component of our Broadband segment. Upon the closing of this transaction, the Tower Assets of West Coast PCS will include certain wireless telecommunication towers and related assets and liabilities transferred from the Company’s subsidiaries SureWest Telephone and SureWest Broadband. The estimated aggregate purchase price will be based on the tower cash flow generated by commenced tenant leases and is expected to be in the range of $9,500 to $10,200.  The initial closing of the Purchase Agreement is expected to occur in the fourth fiscal quarter ending December 31, 2008.  The net proceeds from the Tower Assets will continue to enhance our financial flexibility as we expand our fiber-based bundled services to a broader service area.

 

21



 

In May 2008, we sold the operating assets of our Wireless business, SureWest Wireless, to Verizon Wireless (“Verizon”) for an aggregate cash purchase price of $69,746, resulting in a gain as of September 30, 2008 of $19,179, net of tax.  Under the agreement, Verizon acquired the spectrum licenses and operating assets of SureWest Wireless, excluding our owned communication towers. SureWest Wireless was previously reported as a separate reportable segment.

 

In February 2007, GateHouse Media acquired 100% of the stock of SureWest Directories (previously included in the Telecom segment), its directory publishing business, for an aggregate cash purchase price of $110,123, resulting in a gain as of September 30, 2008 of $59,339, net of tax. As part of the transaction, GateHouse Media became the publisher of the official directory of SureWest Telephone.

 

We expect that the sources of our revenues and our cost structure may be different in future periods, as a result of our entry into new communications markets, the disposition of non-strategic investments and regulatory and competitive forces in each of the markets in which we have operations.

 

Results of Operations

 

Consolidated Overview

 

The tables below reflect certain financial data (on a consolidated and segment basis) and select operating metrics for each of our reportable segments as of and for the quarters and nine months ended September 30, 2008 and 2007.

 

Financial Data

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

$

 

%

 

 

 

 

 

$

 

%

 

 

 

2008

 

2007

 

Change

 

Change

 

2008

 

2007

 

Change

 

Change

 

Operating revenues (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband

 

$

36,653

 

$

17,630

 

$

19,023

 

108

%

$

99,295

 

$

51,348

 

$

47,947

 

93

%

Telecom

 

24,108

 

26,197

 

(2,089

)

(8

)

73,336

 

79,807

 

(6,471

)

(8

)

Operating revenues

 

60,761

 

43,827

 

16,934

 

39

 

172,631

 

131,155

 

41,476

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband

 

(7,033

)

(6,714

)

(319

)

(5

)

(20,685

)

(20,643

)

(42

)

(0

)

Telecom

 

11,274

 

10,137

 

1,137

 

11

 

33,461

 

29,919

 

3,542

 

12

 

Income from operations

 

4,241

 

3,423

 

818

 

24

 

12,776

 

9,276

 

3,500

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband

 

(5,801

)

(4,770

)

(1,031

)

(22

)

(17,115

)

(14,491

)

(2,624

)

(18

)

Telecom

 

6,557

 

6,459

 

98

 

2

 

19,557

 

19,462

 

95

 

(0

)

Income from continuing operations

 

$

756

 

$

1,689

 

$

(933

)

(55

)%

$

2,442

 

$

4,971

 

$

(2,529

)

(51

)%

 


(1) External customers only

 

22



 

Select Operating Metrics

 

 

 

As of September 30,

 

 

 

2008

 

2007

 

Change

 

% Change

 

Broadband

 

 

 

 

 

 

 

 

 

Total residential subscribers (1)

 

100,600

 

57,200

 

43,400

 

76

%

Broadband residential Revenue-generating units (2)

 

214,200

 

94,700

 

119,500

 

126

 

Data

 

95,700

 

55,000

 

40,700

 

74

 

Video

 

58,500

 

20,100

 

38,400

 

191

 

Voice

 

60,000

 

19,600

 

40,400

 

206

 

Total business customers (3)

 

6,300

 

4,100

 

2,200

 

54

 

 

 

 

 

 

 

 

 

 

 

Telecom

 

 

 

 

 

 

 

 

 

Voice Revenue-generating units (4)

 

58,500

 

71,100

 

(12,600

)

(18

)

Total business customers (3)

 

9,400

 

9,900

 

(500

)

(5

)%

 


(1)

 

Total residential subscribers are customers who receive one or more residential data, video or voice services from SureWest Broadband.

(2)

 

We can deliver multiple services to a customer. Accordingly, we maintain statistical data regarding Revenue-generating units (“RGUs”) for digital video, voice and data, in addition to the number of subscribers. For example, a single customer who purchases digital video, voice and data services would be reflected as three RGUs.

(3)

 

Total business customers are customers who receive business data, voice or video services and represent a unique customer account.

(4)

 

Voice RGUs are residential customers who subscribe to one or more voice access lines.

 

Operating revenues for the Broadband segment increased $19,023 and $47,947 during the quarter and nine-month period ended September 30, 2008, respectively, compared to the same periods in 2007. The Broadband segment results of operations and select operating metrics in the current year compared to the same prior year periods have been impacted by the effects of the Everest acquisition, as described above.  The Kansas City operations contributed approximately $16,508 and $41,050 of operating revenues during the quarter and nine-month period ended September 30, 2008, respectively.  At September 30, 2008, the Kansas City operations accounted for 38,645, 104,659 and 1,973 of the residential subscribers, residential RGUs and business customers, respectively.