-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cv4jtRTE2ZqYPYfgzDmMGE5CwrOMY6KrdRDufaxeu/frcQYDg20raeSM6FM6Y4hD yQV/XOZxTHiH2yUztSDbAw== 0001104659-09-061272.txt : 20091030 0001104659-09-061272.hdr.sgml : 20091030 20091029202353 ACCESSION NUMBER: 0001104659-09-061272 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20090930 FILED AS OF DATE: 20091030 DATE AS OF CHANGE: 20091029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUREWEST COMMUNICATIONS CENTRAL INDEX KEY: 0000943117 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 680365195 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29660 FILM NUMBER: 091145820 BUSINESS ADDRESS: STREET 1: 211 LINCOLN ST CITY: ROSEVILLE STATE: CA ZIP: 95678-0969 BUSINESS PHONE: 9167861407 MAIL ADDRESS: STREET 1: 211 LINCOLN ST CITY: ROSEVILLE STATE: CA ZIP: 95678-0969 FORMER COMPANY: FORMER CONFORMED NAME: ROSEVILLE COMMUNICATIONS CO DATE OF NAME CHANGE: 19960827 FORMER COMPANY: FORMER CONFORMED NAME: ROSEVILLE COMTECH DATE OF NAME CHANGE: 19950328 10-Q 1 a09-30973_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, 2009

 

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.)

 

8150 Industrial Avenue, Building A, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  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

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

On October 23, 2009, the registrant had 14,168,990 shares of Common Stock 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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

 

 

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

35

Item 6.

Exhibits

35

SIGNATURES

36

 



 

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,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Broadband

 

$

40,175

 

$

36,280

 

$

119,656

 

$

98,412

 

Telecom

 

19,354

 

23,990

 

61,745

 

73,023

 

Total operating revenues

 

59,529

 

60,270

 

181,401

 

171,435

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

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

 

24,563

 

24,941

 

74,695

 

65,808

 

Customer operations and selling

 

9,017

 

7,655

 

25,597

 

23,674

 

General and administrative

 

8,073

 

9,438

 

26,260

 

29,010

 

Depreciation and amortization

 

15,260

 

14,219

 

44,298

 

40,361

 

Total operating expenses

 

56,913

 

56,253

 

170,850

 

158,853

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

2,616

 

4,017

 

10,551

 

12,582

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

28

 

35

 

99

 

593

 

Interest expense

 

(3,046

)

(2,904

)

(8,402

)

(8,845

)

Other, net

 

205

 

56

 

33

 

13

 

Total other income (expense), net

 

(2,813

)

(2,813

)

(8,270

)

(8,239

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

(197

)

1,204

 

2,281

 

4,343

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

14

 

582

 

1,514

 

1,970

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

(211

)

622

 

767

 

2,373

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of tax:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

 

(108

)

(69

)

332

 

Gain (loss) on sale of discontinued operations

 

 

(615

)

2,568

 

18,362

 

Total discontinued operations

 

 

(723

)

2,499

 

18,694

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(211

)

$

(101

)

$

3,266

 

$

21,067

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.02

)

$

0.04

 

$

0.05

 

$

0.17

 

Discontinued operations, net of tax

 

 

(0.05

)

0.18

 

1.32

 

Net income (loss) per basic and diluted common share

 

$

(0.02

)

$

(0.01

)

$

0.23

 

$

1.49

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

 

$

 

$

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

Shares of common stock used to calculate earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

13,936

 

13,970

 

13,973

 

14,138

 

Diluted

 

13,936

 

13,980

 

13,973

 

14,146

 

 

See accompanying notes.

 

1



 

SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; Amounts in thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,138

 

$

2,840

 

Short-term investments

 

4,243

 

610

 

Accounts receivable, net

 

20,878

 

21,415

 

Income tax receivable

 

3,656

 

6,391

 

Inventories

 

5,188

 

6,527

 

Prepaid expenses

 

3,922

 

4,539

 

Deferred income taxes

 

3,785

 

2,989

 

Other current assets

 

1,777

 

1,752

 

Assets of discontinued operations

 

 

5,002

 

Total current assets

 

50,587

 

52,065

 

 

 

 

 

 

 

Property, plant and equipment, net

 

523,873

 

523,231

 

 

 

 

 

 

 

Intangible and other assets:

 

 

 

 

 

Long-term investments

 

 

3,508

 

Customer relationships, net

 

4,151

 

5,062

 

Goodwill

 

45,814

 

45,814

 

Deferred charges and other assets

 

2,338

 

4,129

 

 

 

52,303

 

58,513

 

 

 

$

626,763

 

$

633,809

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

 

$

15,638

 

$

15,643

 

Accounts payable

 

3,191

 

2,798

 

Other accrued liabilities

 

20,517

 

19,050

 

Advance billings and deferred revenues

 

8,535

 

8,960

 

Accrued compensation

 

8,708

 

11,292

 

Liabilities of discontinued operations

 

 

453

 

Total current liabilities

 

56,589

 

58,196

 

 

 

 

 

 

 

Long-term debt

 

211,045

 

226,045

 

Deferred income taxes

 

50,836

 

46,358

 

Accrued pension and other post-retirement benefits

 

38,338

 

36,046

 

Other liabilities and deferred revenues

 

4,979

 

5,819

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, without par value; 100,000 shares authorized, 14,169 and 14,082 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

 

146,587

 

146,558

 

Accumulated other comprehensive loss

 

(19,272

)

(19,248

)

Retained earnings

 

137,661

 

134,035

 

Total shareholders’ equity

 

264,976

 

261,345

 

 

 

$

626,763

 

$

633,809

 

 

See accompanying notes.

 

2



 

SUREWEST COMMUNICATIONS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; Amounts in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Net cash provided by continuing operations

 

$

52,571

 

$

34,746

 

Net cash used in discontinued operations

 

(514

)

(184

)

Net cash provided by operating activities

 

52,057

 

34,562

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Business acquisition, net of cash acquired

 

 

(179,750

)

Proceeds from sale of discontinued operations

 

10,947

 

66,296

 

Proceeds from the sale of property and equipment

 

850

 

 

Capital expenditures for property, plant and equipment

 

(43,363

)

(64,567

)

Purchases of available-for-sale securities

 

(25

)

 

Proceeds from sale of available-for-sale securities

 

 

16,650

 

Net cash used in continuing operations

 

(31,591

)

(161,371

)

Net cash used in discontinued operations

 

 

(280

)

Net cash used in investing activities

 

(31,591

)

(161,651

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

10,500

 

98,000

 

Proceeds from short-term borrowings

 

 

60,000

 

Principal payments on long-term debt and capital lease obligations

 

(25,505

)

(16,004

)

Repayment of short-term borrowings

 

 

(30,000

)

Dividends paid

 

 

(7,124

)

Repurchases and surrenders of common stock

 

(1,163

)

(6,504

)

Net cash (used in) provided by financing activities

 

(16,168

)

98,368

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

4,298

 

(28,721

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,840

 

31,114

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

7,138

 

$

2,393

 

 

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 operating subsidiaries that provide communications services in Northern California, primarily the greater Sacramento region, and the greater Kansas City, Kansas and Missouri areas (“Kansas City area”). Our operating subsidiaries are SureWest Broadband, SureWest TeleVideo, SureWest Internet, SureWest Custom Data Services, SureWest Kansas, Inc. (formerly “Everest Broadband, Inc.” with its various direct and indirect subsidiaries, “SureWest Kansas” or the “Kansas City operations”), SureWest Telephone and SureWest Long Distance.

 

In February 2008 we acquired 100% of the issued and outstanding stock of Everest Broadband Inc. (“Everest”) and in May 2008 we sold the operating assets of our Wireless business, SureWest Wireless. Further, in October of 2008 we entered into a definitive purchase agreement to sell our communication tower assets and completed the transaction on February 27, 2009. Accordingly, the financial results of SureWest Wireless and our communication tower assets have been reported as discontinued operations for all periods presented in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 360, Property, Plant and Equipment (formerly Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets). The notes to condensed consolidated financial statements reflect historical amounts exclusive of discontinued operations, unless otherwise noted.

 

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” or “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. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the issuance date, October 29, 2009.  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 2008 Annual Report on Form 10-K filed with the SEC.

 

Stock-based Compensation

 

Stock Plan

 

Our Board of Directors may grant share-based awards from our shareholder approved Equity Incentive Plan; the 2000 Equity Incentive Plan (the “Stock Plan”) to certain of our employees, outside directors and consultants. The Stock Plan permits issuance of awards in the form of restricted common stock (“RSAs”), restricted common stock units (“RSUs”), performance shares, stock options and stock appreciation rights. Under the Stock Plan, approximately 2.0 million shares of our common stock were authorized for issuance, including those outstanding as of September 30, 2009.

 

Restricted Common Stock Awards and Units

 

We measure the fair value of the RSAs and RSUs based upon the market price of the underlying common stock as of the date of the grant.  RSAs and RSUs are amortized over their respective vesting periods, generally from immediate vest to a five-year vesting period using the straight-line method.  We have estimated expected forfeitures based on historical experience and are recognizing compensation expense only for those RSAs and RSUs expected to vest.

 

4



 

The following table summarizes the grants that occurred under the Stock Plan during the quarters and nine-month periods ended September 30, 2009 and 2008:

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

Grant Date

 

 

 

2009

 

Fair Value

 

2008

 

Fair Value

 

2009

 

Fair Value

 

2008

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSAs Granted

 

 

$

 

 

$

 

166,506

 

$

11.56

 

7,056

 

$

15.59

 

RSUs Granted

 

 

$

 

 

$

 

72,443

 

$

11.56

 

22,240

 

$

8.43

 

RSU Dividends

 

500

 

$

11.86

 

 

$

 

8,470

 

$

9.79

 

802

 

$

8.88

 

Total

 

500

 

 

 

 

 

 

247,419

 

 

 

30,098

 

 

 

 

RSU Dividends consist of dividends that were previously granted to the holders of RSUs, which have fully vested and were released during the quarters and nine-month periods ended September 30, 2009 and 2008 in accordance with the underlying award agreement.  Stock-based compensation expense for both RSAs and RSUs of $443 and $1,515 was recorded during the quarter and nine-month period ended September 30, 2009, respectively.  During the same prior year periods, we recorded stock-based compensation expense of $170 and $656, respectively.

 

The following table summarizes the RSA and RSU activity during the nine-month period ended September 30, 2009:

 

 

 

 

 

Weighted Average

 

Nonvested Shares

 

Shares

 

Grant Date Fair Value

 

 

 

 

 

 

 

Nonvested-January 1, 2009

 

269,038

 

$

14.98

 

Granted

 

247,419

 

$

11.50

 

Vested

 

(79,843

)

$

12.36

 

Forfeited

 

(3,063

)

$

18.36

 

Nonvested-September 30, 2009

 

433,551

 

$

13.45

 

 

As of September 30, 2009, total unrecognized compensation costs related to nonvested restricted stock was $4,871 and will be recognized over a weighted-average period of approximately 2.91 years. The total fair value of RSAs and RSUs vested during the nine-month period ended September 30, 2009 was $987.

 

Stock Options

 

In 2003, we ceased granting stock options and have since granted RSAs and RSUs as part of our equity compensation plans. We issue new shares of common stock upon exercise of stock options. 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 ten years.  There were no stock options granted or exercised during the quarters or nine-month periods ended September 30, 2009 and 2008. The aggregate intrinsic value is calculated as the difference between the exercise price of the stock options and the quoted price of our common stock.  There were no options that were in-the-money as of September 30, 2009 and 2008.

 

The following table summarizes stock option activity for the nine-month period ended September 30, 2009:

 

 

 

 

 

Weighted

 

Weighted

 

 

 

 

 

Average

 

Average

 

 

 

 

 

Exercise

 

Remaining

 

Options

 

Shares

 

Price

 

Contractual Life

 

 

 

 

 

 

 

 

 

Outstanding-January 1, 2009

 

335,839

 

$

40.37

 

 

 

Expired

 

(17,250

)

 

 

 

Outstanding-September 30, 2009

 

318,589

 

$

40.45

 

2

 

Vested and Exercisable at September 30, 2009

 

318,589

 

$

40.45

 

2

 

 

5



 

Per Share Amounts

 

Shares used in the computation of basic earnings (loss) per share are based on the weighted average number of RSAs and RSUs outstanding, excluding unvested RSAs and unvested RSUs. Shares used in the computation of diluted earnings per share are based on the weighted average number of RSAs and RSUs outstanding, along with other potentially dilutive securities outstanding in each period.

 

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 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, divided by the Company’s stock price on the dividend payment date. Based on a decision of our Board of Directors to discontinue dividend payments for the foreseeable future, we have not paid a cash dividend since June 2008.

 

Other Comprehensive Income

 

Significant components of our other comprehensive income are as follows:

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income (loss)

 

$

(211

)

$

(101

)

$

3,266

 

$

21,067

 

Unrealized holding losses on available-for-sale investments, net of tax

 

(5

)

(89

)

(40

)

(692

)

Reclassification adjustment for losses included in net income, net of tax

 

 

 

16

 

 

Comprehensive income (loss)

 

$

(216

)

$

(190

)

$

3,242

 

$

20,375

 

 

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

 

Reclassifications

 

Certain amounts in our 2008 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2009 condensed consolidated financial statements, which consists of the effects of reclassifications from the presentation of our Tower Assets as a discontinued operation.

 

2.   INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Investments

 

The following is a summary of our short-term available-for-sale investments:

 

 

 

As of September 30, 2009

 

As of December 31, 2008

 

 

 

Adjusted
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Market
Value

 

Adjusted
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Market
Value

 

Equity securities

 

$

645

 

$

 

$

(77

)

$

568

 

$

648

 

$

 

$

(38

)

$

610

 

 

As of September 30, 2009, the decline in the fair value of our short-term available-for-sale investments had been in a continuous loss position for more than twelve months and as of December 31, 2008, the value of these investments had been in a continuous loss position for less than twelve months. We concluded that the gross unrealized losses of our equity securities are temporary.  Also, the extent of the decline, both in dollars and percentages of cost is not considered significant.  The unrealized losses, net of tax, on our short-term available-for-sale investments were recorded as a component of other comprehensive income at such dates. We determined the fair value of our short-term equity security investments by quoted market prices.

 

6



 

Fair Value of Financial Instruments

 

In accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) (formerly SFAS No. 157, Fair Value Measurements), we measure our cash equivalents (money market funds) and short-term investments (equity securities, auction rate security and put option) at fair value.  ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. 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. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.

 

Level 3 — Unobservable inputs which are supported by little or no market activity.

 

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

 

 

 

As of September 30, 2009

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Money market funds

 

$

1,338

 

$

1,338

 

$

 

$

 

Equity securities

 

568

 

568

 

 

 

Auction rate securities

 

3,054

 

 

 

3,054

 

Put Option

 

621

 

 

 

621

 

 

 

$

5,581

 

$

1,906

 

$

 

$

3,675

 

 

Fair values for cash equivalents and equity securities in short-term investments were determined by quoted market prices. Fair values for the auction rate security and put option were determined based on discounted cash flow (“DCF”) models, as described below.

 

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):

 

 

 

2009

 

2008

 

 

 

Put Option

 

Auction Rate
Securities

 

Auction Rate
Securities

 

Beginning balance at January 1st

 

$

1,383

 

$

2,125

 

$

 

Transfers in and/or out of Level 3

 

 

 

3,700

 

Losses included in other comprehensive income

 

 

 

(440

)

Gains (losses) included in earnings

 

(745

)

745

 

 

Balance at March 31st

 

638

 

2,870

 

3,260

 

 

 

 

 

 

 

 

 

Losses included in other comprehensive income

 

 

 

(414

)

Gains (losses) included in earnings

 

(41

)

162

 

 

Balance at June 30th

 

597

 

3,032

 

2,846

 

 

 

 

 

 

 

 

 

Losses included in other comprehensive income

 

 

 

(83

)

Gains included in earnings

 

24

 

22

 

 

Balance at September 30th

 

$

621

 

$

3,054

 

$

2,763

 

 

As of September 30, 2009, we held one $3,700 par value auction rate security (“ARS”) with an estimated fair value of $3,054, which was measured using Level 3 inputs. This 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”).

 

7



 

We prepared a DCF model to estimate the fair value of the ARS as of September 30, 2009.  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. We compare this ARS, when possible, to other observable and relevant market data. Changes in the assumptions of the model are based on dynamic market conditions which could have a significant impact on the valuation of this security and may result in impairment charges for this security in the future.

 

Based on our review of our DCF model, the inputs to the model and the assessment of fair value as of September 30, 2009, we determined there was an increase in the fair value of the ARS investment of $22 and $929 during the quarter and nine months ended September 30, 2009, respectively.  Accordingly, the increase in fair value has been recorded as a gain to other income (expense), other, net, in the condensed consolidated statements of operations in 2009.

 

As of December 31, 2008, we classified the ARS as a long-term asset on our condensed consolidated balance sheet.  We did not expect to need to access these funds in the short-term; however, in the event we needed to access these funds, they were not expected to be accessible until one of the following occurs: a successful auction, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities mature. In addition, the underlying maturities of the securities are greater than 20 years.  Since June 30, 2009, we have classified the ARS as a current asset in short-term investments on our condensed consolidated balance sheet, as a result of our Right, as described below. We continue to earn and receive interest on our ARS, as specified in the terms of the prospectus.

 

In November 2008, we accepted an offer (“Right” or “Put Option”) from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”), entitling us to sell at par value our ARS originally purchased from UBS at anytime during a two-year period from June 30, 2010 through July 2, 2012. Although we expect to sell our ARS under the Right, if the Right is not exercised before July 2, 2012, it will expire and UBS will have no further rights or obligation to buy our ARS.  If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, then we may incur further losses on the carrying value of the ARS.

 

Prior to accepting the Right, we recorded our ARS as an available-for-sale investment, and therefore, recorded resulting unrealized gains or losses, net of tax, in accumulated other comprehensive income. In connection with the acceptance of the Right in November 2008, we transferred our ARS, subject to the Right, from available-for-sale to trading in accordance with ASC Topic 320, Investment-Debt and Equity Securities (formerly SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). The transfer to trading securities reflects management’s intent to exercise the Right during the period June 30, 2010 to July 2, 2012.  As a result of this put option period, we continue to classify this Right (put option) as a current asset in short-term investments on our condensed consolidated balance sheet as of September 30, 2009.

 

Upon transfer of the ARS to trading securities in November 2008, we recognized a loss of $1,575, included in other income (expense), other, net, for the amount of the unrealized loss not previously recognized in earnings. The enforceability of the Right results in a put option and is recognized as a separate freestanding asset and is accounted for separately from the ARS investment. We elected to measure the Right at fair value under ASC Topic 825, Financial Instruments (formerly SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115), which permits an entity to elect the fair value option for recognized financial assets, in order to match the changes in the fair value of the ARS.  Based on data available as of December 31, 2008, we valued the Right using a DCF approach which included estimates of interest rates, timing and amount of cash flow, adjusted for any bearer risk associated with UBS’s financial ability to repurchase the ARS beginning June 30, 2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change. As of December 31, 2008, we recorded $1,383 as the fair value of the Right asset and classified it as a long-term investment on the consolidated balance sheet, with a corresponding credit to other income (expense), other, net, in the consolidated statement of income for the year ended December 31, 2008.  The recording of the realized gain (fair value) of the Right during the year ended December 31, 2008 largely offset the realized loss on the ARS during that same period.

 

As of September 30, 2009, we estimated the fair value of the Right to be $621, which was measured using Level 3 inputs.  We prepared a DCF model to value the Right as of September 30, 2009.  Based on our DCF model, the inputs to the model and the assessment of fair value as of September 30, 2009, we determined there was a decline in the fair value of the Right of $24 and $762 during the quarter and nine months ended September 30, 2009, respectively.  Accordingly, these changes in fair value have been recorded to other income (expense), other, net, in the condensed consolidated statements of operations in 2009.  The recording of the realized loss on the Right during the nine months ended September 30, 2009, largely offsets the realized gain on the ARS during that same period.

 

8



 

We will continue to analyze our ARS and Right (put option) each reporting period for additional changes in fair value and will record those gains or losses in the condensed consolidated statements of operations.

 

Fair Value of Debt and Capital Leases

 

We had no short-term borrowings as of September 30, 2009 and December 31, 2008. The fair value of our long-term debt and capital leases was estimated using a DCF analyses based on incremental borrowing rates for similar types of borrowing arrangements.

 

 

 

As of September 30, 2009

 

As of December 31, 2008

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Long-term debt and capital leases (including current maturities)

 

$

226,683

 

$

227,493

 

$

241,688

 

$

238,471

 

 

3.   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 of $18,864, net of tax.  Under the agreement, Verizon acquired the spectrum licenses and operating assets of SureWest Wireless, excluding our owned communication towers.  See the Communication Tower Assets section below for further discussion regarding our owned communication towers.  SureWest Wireless was previously reported as a separate reportable segment.

 

A portion of the purchase price equal to $3,450 was placed in escrow, half of which was received during the quarter ended June 30, 2009 and the balance of which will be available during the second quarter of 2010, 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 have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented.

 

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

 

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

Operating revenues

 

$

 

$

 

$

10,055

 

Operating expenses including depreciation and amortization

 

407

 

 

9,684

 

Income (loss) from operations

 

(407

)

 

371

 

Other income (expense)

 

 

 

(7

)

Income tax expense (benefit)

 

(165

)

 

147

 

Income (loss) from discontinued operations

 

$

(242

)

$

 

$

217

 

 

 

 

 

 

 

 

 

Gain on sale of discontinued operations, net of tax

 

$

202

 

$

43

 

$

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. Such services, which were provided to SureWest Wireless prior to the sale and eliminated in our condensed consolidated financial statements, were $1,869 for the nine-month period ended September 30, 2008.

 

9



 

Communication Tower Assets

 

In February 2009, we sold our fifty-two wireless communications towers (“Tower Assets”) owned by our subsidiary West Coast PCS, LLC (“West Coast PCS”) to Global Tower Partners. West Coast PCS was a component of our Broadband segment. The sale was completed for an aggregate cash purchase price of $9,222, based on the tower cash flow generated by commenced tenant leases, resulting in a gain of $2,525, net of tax.

 

The results of the Tower Assets have been reported as a discontinued operation in our condensed consolidated financial statements for all periods presented.

 

At December 31, 2008, the major components of the Tower Assets and liabilities to be sold were as follows:

 

 

 

December 31, 2008

 

Prepaid expenses

 

$

98

 

Property, plant and equipment, net

 

4,904

 

Total assets

 

$

5,002

 

 

 

 

 

Other liabilities and deferred revenues

 

$

453

 

Total liabilities

 

$

453

 

 

The following table summarizes the financial information for the Tower Assets operations:

 

 

 

Quarter
Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2008

 

2009

 

2008

 

Operating revenues

 

$

491

 

$

249

 

$

1,196

 

Operating expenses including depreciation and amortization

 

267

 

365

 

1,002

 

Income (loss) from operations

 

224

 

(116

)

194

 

Income tax expense (benefit)

 

90

 

(47

)

79

 

Income (loss) from discontinued operations

 

$

134

 

$

(69

)

$

115

 

 

 

 

 

 

 

 

 

Gain on sale of discontinued operations, net of tax

 

$

 

$

2,525

 

$

 

 

SureWest Directories

 

In 2007, we sold 100% of the stock of SureWest Directories, our directory publishing business, for an aggregate cash purchase price of $110,123, resulting in a gain of $59,339, net of tax. During the quarter ended, September 30, 2008, the gain on sale was reduced by $817 related to disputed claims owed to us under a transitional service agreement for billing services performed after the sale date. The results of SureWest Directories are reported as a discontinued operation in the condensed consolidated financial statements for all periods presented.

 

4.   BUSINESS SEGMENTS

 

We have two reportable business segments: Broadband and Telecom. We have aggregated certain of our 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 many of our bundled residential and commercial services that include Internet Protocol-based digital and high-definition television, high-speed internet, Voice over Internet Protocol and local and long distance telephone in the greater Sacramento region and 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.

 

10



 

As discussed in Note 3, 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.

 

These segments are strategic business units that offer different products and services. The accounting policies of these segments are the same as those described in Note 1. We account for intersegment revenues and expenses at prevailing market rates.  Our business segment information is as follows:

 

 

 

 

 

 

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Eliminations

 

Consolidated

 

For the three months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

40,175

 

$

19,354

 

$

 

$

59,529

 

Intersegment revenues

 

93

 

5,043

 

(5,136

)

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of services and products*

 

22,801

 

6,110

 

(4,348

)

24,563

 

Customer operations and selling

 

7,051

 

2,608

 

(642

)

9,017

 

General and administrative

 

4,763

 

3,456

 

(146

)

8,073

 

Depreciation and amortization

 

12,199

 

3,061

 

 

15,260

 

Income (loss) from operations

 

(6,546

)

9,162

 

 

2,616

 

Income (loss) from continuing operations

 

$

(5,619

)

$

5,408

 

$

 

$

(211

)

 


*Exclusive of depreciation and amortization

 

 

 

 

 

 

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Eliminations

 

Consolidated

 

For the three months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

36,280

 

$

23,990

 

$

 

$

60,270

 

Intersegment revenues

 

138

 

4,706

 

(4,844

)

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of services and products*

 

21,605

 

7,314

 

(3,978

)

24,941

 

Customer operations and selling

 

5,757

 

2,588

 

(690

)

7,655

 

General and administrative

 

5,482

 

4,132

 

(176

)

9,438

 

Depreciation and amortization

 

10,700

 

3,519

 

 

14,219

 

Income (loss) from operations

 

(7,126

)

11,143

 

 

4,017

 

Income (loss) from continuing operations

 

$

(5,856

)

$

6,478

 

$

 

$

622

 

 


*Exclusive of depreciation and amortization

 

11



 

 

 

 

 

 

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Eliminations

 

Consolidated

 

For the nine months ended September 30, 2009:

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

119,656

 

$

61,745

 

$

 

$

181,401

 

Intersegment revenues

 

278

 

14,898

 

(15,176

)

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of services and products*

 

68,524

 

18,944

 

(12,773

)

74,695

 

Customer operations and selling

 

19,779

 

7,784

 

(1,966

)

25,597

 

General and administrative

 

15,301

 

11,396

 

(437

)

26,260

 

Depreciation and amortization

 

35,102

 

9,196

 

 

44,298

 

Income (loss) from operations

 

(18,772

)

29,323

 

 

10,551

 

Income (loss) from continuing operations

 

$

(15,901

)

$

16,668

 

$

 

$

767

 

 


*Exclusive of depreciation and amortization

 

 

 

 

 

 

 

Intercompany

 

 

 

 

 

Broadband

 

Telecom

 

Eliminations

 

Consolidated

 

For the nine months ended September 30, 2008:

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

98,412

 

$

73,023

 

$

 

$

171,435

 

Intersegment revenues

 

419

 

13,609

 

(14,028

)

 

Operating expenses

 

 

 

 

 

 

 

 

 

Cost of services and products*

 

56,377

 

20,762

 

(11,331

)

65,808

 

Customer operations and selling

 

17,001

 

8,825

 

(2,152

)

23,674

 

General and administrative

 

16,574

 

12,981

 

(545

)

29,010

 

Depreciation and amortization

 

29,440

 

10,921

 

 

40,361

 

Income (loss) from operations

 

(20,561

)

33,143

 

 

12,582

 

Income (loss) from continuing operations

 

$

(17,017

)

$

19,390

 

$

 

$

2,373

 

 


*Exclusive of depreciation and amortization

 

5.  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 the current and prior year monitoring periods.  During the quarter and nine-month period ended September 30, 2009, these changes in estimates decreased our consolidated revenues and income from continuing operations by $583 and $562 and net income by $335 ($0.02 per share) and $323 ($0.02 per share), respectively.  We did not record any significant changes in estimates during the quarter and nine-month period ended September 30, 2008.

 

12



 

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 returned approximately $6,500, plus interest at the 90-day commercial paper rate for non-financial institutions and an imputed rate of 3.15%, to its end-users through a consumer dividend.  The surcredit was recorded as a reduction of our contractual shareable earnings obligations over a period of approximately four years, which began January 1, 2005.  During the first quarter of 2009 and prior to the cessation of the surcredit on February 9, 2009, we returned approximately $165. For the quarter and nine-month period ended September 30, 2008, we returned approximately $404 and $1,253, respectively, to end users through the consumer dividends.

 

As part of the Settlement Agreement, SureWest Telephone was required 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.  In December 2006, the CPUC authorized us to offset our annual $11,500 interim draw from the California High Cost Fund (“CHCF”) with the aforementioned $1,300 consumer dividend Settlement Agreement.  The CHCF was previously authorized by the CPUC to offset SureWest Telephone’s intrastate regulated operating expenses on an interim basis. In September 2007, the CPUC issued Decision 07-09-002 which provides for SureWest Telephone to phase-down our annual CHCF interim draw by approximately $2,000 over a five-year period to end on January 1, 2012.  Our 2008 interim CHCF draw was $8,160 and we anticipate our 2009 interim CHCF draw will be approximately $6,120.

 

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 basic residential services, which can only be raised up to $3.25 per year for 2009 and 2010 as described below, (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.

 

6.   INCOME TAXES

 

Our effective federal income tax rates for continuing operations were 66.4% and 45.4% for the nine-month period ended September 30, 2009 and 2008, respectively. For the nine-month period ended September 30, 2009, our actual tax expense differed from the federal statutory rate primarily due to state taxes and permanent differences resulting from the decrease between the grant and vesting prices of RSAs and RSUs that vested during the current year period.

 

We had a liability for unrecognized tax benefits of approximately $200 and $257 at September 30, 2009 and December 31, 2008, 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, 2009:

 

Balance at December 31, 2008

 

$

257

 

Additions based on prior year tax positions

 

4

 

Reductions based on prior year tax positions

 

(61

)

Balance at September 30, 2009

 

$

200

 

 

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 quarters and nine-month periods ended September 30, 2009 and 2008, respectively.  As of September 30, 2009, we had approximately $60 of accrued interest and approximately $40 of penalties in the amount disclosed above for unrecognized tax benefits.

 

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate were $126 and $123 at September 30, 2009 and December 31, 2008, respectively.

 

13



 

As of September 30, 2009, the following tax years and related taxing jurisdictions were open:

 

Tax Year

 

Taxing Jurisdiction

 

2002 - 2008

 

Federal

 

2004 - 2008

 

California

 

2006 - 2008

 

Kansas and Missouri

 

 

7.          PENSION AND OTHER POST-RETIREMENT BENEFITS

 

We maintain 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, fixed income and international equity securities.

 

We also maintain 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 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 of our California location, including life insurance benefits and a stated reimbursement for Medicare supplemental insurance.

 

In recent years, we substantially modified our employee compensation structure in order to attract and retain the right mix of talent necessary to successfully support our operations.  For that reason, we amended our Pension Plan, SERP and Other Benefits (collectively the “Plans”).  The amendments to the Plans, effective April 1, 2007, froze the Plans so that no person is eligible to become a new participant on or following that date and all future benefit accruals for existing participants under the Plans cease.

 

We account for our Pension Plan in accordance with ASC Topic 715, Compensation-Retirement Benefits (“ASC 715”) (formerly SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106 and 132(R)).  ASC 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position, to recognize changes in that funded status in the year in which the changes occur through comprehensive income and 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

 

The following table summarizes the benefit costs (income) related to our Pension and SERP Plans:

 

Quarter ended September 30,

 

2009

 

2008

 

Interest cost on projected benefit obligation

 

$

1,809

 

$

1,788

 

Expected return on plan assets

 

(1,672

)

(2,266

)

Amortization of:

 

 

 

 

 

Prior service cost

 

1

 

 

Net actuarial loss

 

648

 

6

 

Net periodic pension expense (income)

 

$

786

 

$

(472

)

 

Nine months ended September 30,

 

2009

 

2008

 

Interest cost on projected benefit obligation

 

$

5,426

 

$

5,365

 

Expected return on plan assets

 

(5,014

)

(6,798

)

Amortization of:

 

 

 

 

 

Prior service cost

 

2

 

1

 

Net actuarial loss

 

1,944

 

17

 

Net periodic pension expense (income)

 

$

2,358

 

$

(1,415

)

 

14



 

Net periodic benefit costs related to the Other Benefits Plan were not significant to our condensed consolidated financial statements for the quarters or nine-month periods ended September 30, 2009 and 2008.

 

8.          COMMITMENTS AND CONTINGENCIES

 

Credit Arrangements

 

In February 2008, we entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”) to restate and replace a May 2007 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) established a 1-year $60,000 Term Loan B facility and (iii) modified certain financial covenants. No significant changes were made to the existing $60,000 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 in February 2008 resulting in a loss on extinguishment of debt of $607, which was recorded as a component of interest expense in the first quarter of 2008. $40,000 of the Credit Agreement borrowings bore interest at a fixed rate. 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 automatic increases to the applicable interest margins. On May 14, 2008, we repaid $30,000 of the Term Loan B and $16,000 of the Revolving facility with proceeds from the sale of the operating assets of our Wireless business, SureWest Wireless.

 

In September 2008, we entered into a Third Amended and Restated Credit Agreement (“New Agreement”) to restate and replace the Credit Agreement. 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.

 

As of September 30, 2009, $120,000, $30,000 and $10,500 were outstanding on the Term Loan A, Term Loan B and Revolving Loan facilities, respectively.

 

Our 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 us to maintain certain financial ratios and minimum levels of tangible net worth. At September 30, 2009 and December 31, 2008, retained earnings of $104,976 and $101,345, respectively, were available for the payments described above. As of September 30, 2009, we were in compliance with all of our debt covenants.

 

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 our 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 our 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. New proceedings to promote broadband deployment and to apply non-discrimination principles to providers of Internet services are in their early stages. 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.  There are various on-going legal challenges considering the validity of these FCC orders.  As a result, 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 cannot yet be determined.

 

15



 

9.          RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently Issued Accounting Pronouncements

 

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”).  ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is allocated across the separately identified deliverables.  ASU 2009-13 significantly expands the disclosures requirements for multiple-deliverable revenue arrangements.  ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date.  Early adoption is permitted, provided that the guidance is retroactively applied to the beginning of the year of adoption. We are currently evaluating the impact this update will have on our consolidated financial statements.

 

In September 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value (“ASU 2009-05”).  ASU 2009-05 amends ASC 820 to provide guidance concerning the measurement of liabilities at fair value. ASU 2009-05 is effective for the first reporting period beginning after issuance or the quarter ended December 31, 2009 for a calendar year company. We are currently evaluating the impact this update will have on our consolidated financial statements.

 

In December 2008, the FASB issued guidance to require disclosure of additional information about assets held in a defined benefit pension or other postretirement plan (formerly Staff Position (“FSP”) FAS No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets) currently included in ASC 715. Specifically, this guidance requires an employer to disclose (i) investment policies and strategies including target allocation percentages, (ii) major categories of plan assets, (iii) inputs and valuation techniques used to measure the fair value of plan assets and (iv) significant concentration of risk within plan assets. The additional disclosure requirements are effective for fiscal years ending after December 15, 2009, with earlier application permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In June 2009, the FASB issued an accounting standard, currently included in ASC Topic 105, Generally Accepted Accounting Principles (“ASC 105”), which established only two levels of GAAP, authoritative and nonauthoritative (formerly SFAS No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162). The FASB ASC became the only source of authoritative nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants.  All other nongrandfathered, non-SEC accounting literature not included in the ASC will become nonauthoritative.  ASC 105 was effective for financial statements issued in interim or annual reporting periods ending after September 15, 2009.  The ASC was not intended to change or alter existing GAAP, consequently our adoption of ASC 105 did not have a material impact on our condensed consolidated financial statements.

 

In May 2009, the FASB issued guidance, currently included in ASC Topic 855, Subsequent Events, which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued (formerly SFAS No. 165, Subsequent Events). This guidance requires disclosure of the date through which subsequent events have been evaluated, as well as whether that is the date the financial statements were issued or the date the financial statements were available to be issued. The provisions of this guidance were effective for interim or annual financial periods ending after June 15, 2009.  Our adoption of this guidance did not have a material impact on our condensed consolidated financial position and results of operations.

 

In April 2009, the FASB issued three accounting standards that were intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. The provisions included in these standards were intended to (i) clarify the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured (formerly FSP FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly), currently included in ASC 820, (ii) establish a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income (formerly FSP FAS No. 115-2 and FSP FAS No. 124-2, Recognition of Other-Than-Temporary Impairment), currently included in ASC Topic 320, Investments-Debt and Equity Securities and (iii) require fair value disclosures in interim periods for all financial instruments within the scope of ASC Topic 825, Financial Instruments (formerly FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments). Our adoption of the provisions of these standards, on April 1, 2009, did not have a material impact on our condensed consolidated financial position and results of operations.

 

In November 2008, the Emerging Issues Task Force (“EITF”) reached a consensus (formerly EITF No. 08-7, Accounting for Defensive Intangible Assets) which requires the acquirer of a defensive intangible asset to account for a defensive intangible asset as a separate unit of accounting and assign a useful life for a defensive intangible asset according to the entity’s consumption of the expected benefits related to that asset, currently included in ASC Topic 350, Intangibles-Goodwill and Other (“ASC 350”). Our adoption of this provision, on January 1, 2009 did not have a material impact on our condensed consolidated financial position and results of operations.

 

16



 

In June 2008, the FASB issued guidance which 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 ASC Topic 260, Earnings Per Share (formerly FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities). Under this guidance, 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.  Our adoption of the requirements of this guidance, on January 1, 2009, did not have a material impact on our condensed consolidated financial position and results of operations.

 

In April 2008, the FASB issued guidance which 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 ASC 350 (formerly FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets). This guidance was intended to improve the consistency between the useful life of a recognized intangible asset under ASC 350 and the period of expected cash flows used to measure the fair value of the asset under ASC Topic 805, Business Combinations (“ASC 805”), and other U.S. GAAP.  Our adoption of this guidance, on January 1, 2009, did not have a material impact on our condensed consolidated financial position and results of operations.

 

In February 2008, the FASB issued guidance which amended ASC 820 to delay the effective date until January 1, 2009 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 (formerly FSP No. FAS 157-2, Effective Date of FASB Statement No. 157).  ASC 820, as amended, was effective for financial statements issued for fiscal years beginning after November 15, 2008 and for interim periods within those fiscal years.  Our adoption of the provisions of this pronouncement, on January 1, 2009, did not have a material impact on our condensed consolidated financial position and results of operations.

 

In December 2007, the FASB issued an accounting standard which establishes principles and requirements for how the acquirer recognizes and measures, in its financial statements, the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree in a business combination, currently included in ASC 805, Business Combinations (formerly SFAS No. 141(R), Business Combinations).  This standard also establishes principles around how goodwill acquired in a business combination or gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination. In addition, this standard requires acquisition-related transaction and restructuring costs to be expensed rather than treated as part of the cost of the acquisition.  In April 2009, the FASB issued an amendment to this standard by establishing a model to account for certain pre-acquisition contingencies (formerly FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies).  Under the amendment, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period.  If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria requirements of ASC Topic 450, Contingencies.  Our adoption of the standard and amendment, on January 1, 2009, did not have a material impact on our condensed consolidated financial position and results of operations.

 

17



 

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, the impact of current economic conditions, uncertainties and other factors that may cause actual results, performance or achievements of SureWest Communications (the “Company, “we” or “our”) 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 2008 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. Management’s Discussion and Analysis should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes to the financial statements (“Notes”) as of and for the nine months ended September 30, 2009 included in Item 1 of this Quarterly Report on Form 10-Q.

 

Overview

 

We are one of the leading integrated communications providers and are the bandwidth leader in the markets we serve.  We provide voice, video and data services, either individually or as bundled services to residential and business customers in the greater Sacramento, California and greater Kansas City, Kansas and Missouri areas (“Kansas City area”). We deploy our services by combining fiber-to the-home (“FTTH”) facilities with the use of Internet Protocol (“IP”) based communications protocol.  Our advanced telecommunications networks give us a competitive edge that enables us to provide our customers with higher data speeds for internet service and deploy multiple services at superior quality through our high bandwidth capacity.  Our IP based communication protocol enables us to provide dedicated bandwidth at symmetrical data speeds to each of our customers in the greater Sacramento, California area. We classify our operations in two reportable segments: Broadband and Telecommunications (“Telecom”).

 

Our Broadband segment earns revenues primarily through subscriptions to our video, high-speed Internet and digital phone services.  Our video services range from a limited basic service to a full digital cable service.  Many of our services are delivered utilizing fiber-to-the-premise and fiber-to-the-node networks, which allow us to offer a high quality experience with our digital TV Packages. Our full digital cable service provides access to over 340 and 260 channels in our California and Kansas City area markets, respectively, including premium and pay-per-view channels (which include concerts, wrestling, boxing, sporting events and movies); video on demand (“VOD”) service (which allows access to a library of movies and the ability to start a selection at any time and to pause, rewind and fast-forward and replay); premium VOD channels, music channels and an interactive, on-screen program guide (which allows the subscriber to navigate the channel lineup and the video on demand library).  Digital cable subscribers can also subscribe to additional digital cable services, including a digital video recorder (“DVR”) (which allows subscribers to record two programs at the same time and pause, replay and rewind “live” television) and high-definition (“HD”) television (“HDTV”), which provides multiple channels in high definition.

 

Our high-speed Internet service can provide Internet access at symmetrical speeds of up to 50 Mbps, depending on the level of service selected.  As of September 30, 2009, approximately 32% of the homes in the areas we serve subscribed to one of our high-speed Internet services.  In March 2008, we launched our new Voice over Internet Protocol (“VoIP”) digital phone product in the Sacramento market.  Our digital phone service is available in packages ranging from basic service to unlimited local and domestic long distance calling plans.  Nearly all of our digital phone service plans include an extensive array of calling features including caller identification and call waiting, Find Me/Follow Me, sequential ringing and selective call acceptance and rejection.  As of September 30, 2009, approximately 13% of the homes in our Sacramento market have subscribed to our new VoIP phone service.

 

18



 

Our Telecom segment, which operates only in the Sacramento area, offers a broad selection of telecommunications services including traditional landline voice services, Digital Subscriber Line (“DSL”), long distance services and certain non-regulated services. Traditional landline services are offered from basic local service to bundled packages ranging from unlimited local calling to unlimited local and domestic long distance calling plans.  Our voice products include long distance services and value-added services such as voicemail, call waiting, caller identification and many other calling feature options.  Long distance services are offered by our subsidiary SureWest Long Distance, which is a reseller of long distance services.

 

Current Business Developments

 

In February 2009, we sold our fifty-two wireless communications towers (“Tower Assets”) owned by our subsidiary West Coast PCS, LLC (“West Coast PCS”) to Global Tower Partners. West Coast PCS was a component of our Broadband segment. The sale was completed for an aggregate cash purchase price of $9,222, based on the tower cash flow generated by commenced tenant leases, resulting in a gain of $2,525, net of tax. Proceeds from the sale of the Tower Assets were used to repay a portion of outstanding long-term debt.

 

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 of $18,864, 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.

 

On February 13, 2008, we acquired 100% of the issued and outstanding stock of Everest Broadband, Inc. (“Everest”, “SureWest Kansas” or the “Kansas City operations”) for a total purchase price of $181,459, including transaction costs. Subsequent to the acquisition, the Kansas City operations have been included in our Broadband segment. SureWest Kansas is a competitive provider of high-speed data, video and voice services in the greater Kansas City area. The addition of our Kansas City operations accelerates our growth strategy and has positioned us as a premier provider of network services to residential and business customers in the markets we serve.

 

Results of Operations

 

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, 2009 and 2008.

 

Financial Data

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

$

 

%

 

 

 

 

 

$

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

2009

 

2008

 

Change

 

Change

 

Operating revenues (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband

 

$

40,175

 

$

36,280

 

$

3,895

 

11

%

$

119,656

 

$

98,412

 

$

21,244

 

22

%

Telecom

 

19,354

 

23,990

 

(4,636

)

(19

)

61,745

 

73,023

 

(11,278

)

(15

)

Operating revenues

 

59,529

 

60,270

 

(741

)

(1

)

181,401

 

171,435

 

9,966

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband

 

(6,546

)

(7,126

)

580

 

8

 

(18,772

)

(20,561

)

1,789

 

9

 

Telecom

 

9,162

 

11,143

 

(1,981

)

(18

)

29,323

 

33,143

 

(3,820

)

(12

)

Income from operations

 

2,616

 

4,017

 

(1,401

)

(35

)

10,551

 

12,582

 

(2,031

)

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Broadband

 

(5,619

)

(5,856

)

237

 

4

 

(15,901

)

(17,017

)

1,116

 

7

 

Telecom

 

5,408

 

6,478

 

(1,070

)

(17

)

16,668

 

19,390

 

(2,722

)

(14

)

Income (loss) from continuing operations

 

$

(211

)

$

622

 

$

(833

)

(134

)%

$

767

 

$

2,373

 

$

(1,606

)

(68

)%

 


(1) External customers only

 

19



 

Select Operating Metrics

 

 

 

As of September 30,

 

 

 

2009

 

2008

 

Change

 

% Change

 

Broadband

 

 

 

 

 

 

 

 

 

Total residential subscribers (1)

 

102,500

 

100,600

 

1,900

 

2

%

Broadband residential revenue-generating units (2)

 

227,200

 

214,200

 

13,000

 

6

 

Data

 

97,700

 

95,700

 

2,000

 

2

 

Video

 

59,200

 

58,500

 

700

 

1

 

Voice

 

70,300

 

60,000

 

10,300

 

17

 

Total business customers (3)

 

7,000

 

6,300

 

700

 

11

 

 

 

 

 

 

 

 

 

 

 

Telecom

 

 

 

 

 

 

 

 

 

Voice revenue-generating units (4)

 

41,300

 

58,500

 

(17,200

)

(29

)

Total business customers (3)

 

8,700

 

9,400

 

(700

)

(7

)%

 


(1)             Total residential subscribers are customers who receive one or more residential data, video or voice services from one of our subsidiaries in the Broadband segment.

 

(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 distinct customer account.

 

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

 

Consolidated Overview

 

Operating Revenues

 

Operating revenues in the Broadband segment increased $3,895 and $21,244 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008. The Broadband segment results of operations in the current year periods compared to the same prior year periods have been impacted by the effects of the Everest acquisition in February 2008, as described above.

 

At September 30, 2009, the Broadband segment experienced a 2% annual increase in the number of residential subscribers compared to the prior year. Data and video RGUs increased 2% and 1%, respectively, compared to 2008 which was reflective of our ability to offer subscribers high-speed data, HDTV, HD DVR and other enhanced services.  In addition, Broadband operating revenues increased as a result of higher pricing for video and data services in 2009, as well as the continued expansion of the broadband network and growth in the demand for digital video, voice and data offered as a bundled triple-play package.

 

The introduction of our VoIP Digital Phone product in the Sacramento market during 2008, including in the Telecom segment service territory, has resulted in an elevated take rate and an increase in broadband residential triple-play RGUs, while mitigating nearly half of the access line losses in the Telecom segment by migrating those customers to voice RGUs in the Broadband segment.  Broadband voice RGUs in the Sacramento market increased 17% as of September 30, 2009 compared to the same prior year period.

 

We will continue to invest in success-based capital to develop and enhance the broadband infrastructure and the services we offer, while focusing on the generation of new customers and increasing residential penetration on existing marketable homes.

 

Operating revenues in the Telecom segment decreased $4,636 and $11,278 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008. Residential services were largely impacted by our customer’s migration toward alternative communication services, including those offered by our Broadband segment, which contributed to an approximate 29% decline in the Telecom segment voice RGUs as of September 30, 2009 compared to the same period in 2008.  In an effort to mitigate future operating revenue and voice RGU declines, we offer various flat-rate and bundled service packages and provide a broadband VoIP service to customers residing within SureWest Telephone’s service area.  The decrease in operating revenues was also impacted by the scheduled reduction in California High Cost Fund (“CHCF”) subsidies of approximately $510 and $1,530 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008.  See the Regulatory Matters section below for a further discussion regarding the regulatory subsidies we receive.

 

20



 

Operating Expenses

 

Consolidated operating expenses, excluding depreciation and amortization, decreased $381 and increased $8,060 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008. The Broadband segment accounted for substantially all of the year-over-year increase in our consolidated operating expenses primarily as a result of the addition and growth of our Kansas City operations. The increase in operating expenses in the current year periods from the Broadband segment was offset in part by a decline in operating expenses in the Telecom segment resulting from the decline in Telecom operating revenues and voice RGUs.

 

Cost of services and products expense decreased $378 and increased $8,887 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008.  The change was largely due to increases in programming and network costs related to providing video services and to the growth in Broadband subscribers, which were reduced in part by savings in property maintenance costs through a consolidation of office space and cost cutting initiatives. Customer operations and selling expense increased $1,362 and $1,923 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008 due in part to an increase in labor costs as a result of the addition and growth in our Kansas City Operations as well as an increase in pension costs as described below. General and administrative expenses decreased $1,365 and $2,750 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008 primarily as a result of (i) a decline in consulting and advisory fees related to strategic initiatives and (ii) information technology costs related to production support projects in the prior year periods.

 

The increase in the consolidated operating expenses in 2009 compared to 2008 was also due to an increase in the costs associated with our defined benefit pension plan (the “Pension Plan”), Supplemental Executive Retirement Plan and certain post-retirement benefits other than pensions (“Other Benefits Plan”) (collectively the “Plans”). As a result of an increase in costs related to the Plans, consolidated operating expenses increased $1,101 and $3,324 during the quarter and nine-month period ended September 30, 2009 compared to the same periods in 2008. See Note 7 for more information on the Plans.

 

Our consolidated depreciation and amortization expense increased $1,041 and $3,937 during the quarter and nine-month period ended September 30, 2009, respectively, compared to the same periods in 2008.  The increase in depreciation and amortization expense was primarily due to the addition and growth of our Kansas City operations, continued network build-out and success-based capital projects undertaken within the residential broadband service territories; however, was partially offset by certain Telecom assets becoming fully depreciated in the current year period.

 

Reclassifications

 

Certain amounts in our 2008 condensed consolidated financial statements have been reclassified to conform to the presentation of our 2009 condensed consolidated financial statements, which primarily consists of the effects of reclassifications from presentation of our Tower Assets as a discontinued operation.

 

21



 

Segment Results of Operations

 

Broadband

 

 

 

Quarter Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

$

 

%

 

 

 

 

 

$

 

%

 

 

 

2009

 

2008

 

Change

 

Change

 

2009

 

2008

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Data

 

$

11,236

 

$

10,348

 

$

888

 

9

%

$

33,183

 

$

29,475

 

$

3,708

 

13

%

Video

 

11,711

 

10,264

 

1,447

 

14

 

35,395

 

27,998

 

7,397

 

26

 

Voice

 

6,442

 

5,542

 

900

 

16

 

19,435

 

14,686

 

4,749

 

32

 

Total residential revenues

 

29,389

 

26,154

 

3,235

 

12

 

88,013

 

72,159

 

15,854

 

22

 

Business

 

10,018

 

9,271

 

747

 

8

 

29,218

 

23,993

 

5,225

 

22

 

Access

 

427

 

414

 

13

 

3

 

1,209

 

1,004

 

205

 

20

 

Other

 

341

 

441

 

(100

)

(23

)

1,216

 

1,256

 

(40

)

(3

)

Total operating revenues from external customers

 

40,175

 

36,280

 

3,895

 

11

 

119,656

 

98,412

 

21,244

 

22

 

Intersegment revenues

 

93

 

138

 

(45

)

(33

)

278

 

419

 

(141

)

(34

)

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services and products*

 

22,801

 

21,605

 

1,196

 

6

 

68,524

 

56,377

 

12,147

 

22

 

Customer operations and selling

 

7,051

 

5,757

 

1,294

 

22

 

19,779

 

17,001

 

2,778

 

16

 

General and administrative

 

4,763

 

5,482

 

(719

)

(13

)

15,301

 

16,574

 

(1,273

)

(8

)

Depreciation and amortization

 

12,199

 

10,700

 

1,499

 

14

 

35,102

 

29,440