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
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|
95678
|
(Address of
principal executive offices)
|
|
(Zip Code)
|
|
|
|
(916)
786-6141
|
(Registrants
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 issuers classes of common stock, as of the
latest practicable date.
As of October 29,
2008, 13,953,813 shares of the registrants Common Stock were outstanding.
TABLE OF CONTENTS
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Page
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PART I -
FINANCIAL INFORMATION
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|
|
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Item 1.
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Financial
Statements
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1
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|
Item 2.
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Managements
Discussion and Analysis of Financial Condition and Results of Operations
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21
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Item 3.
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Quantitative and
Qualitative Disclosures About Market Risk
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37
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Item 4.
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Controls and
Procedures
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37
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PART II -
OTHER INFORMATION
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Item 1.
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Legal Proceedings
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39
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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39
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Item 6.
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Exhibits
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40
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SIGNATURES
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42
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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
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|
$
|
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
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|
14,445
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|
66,459
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|
42,865
|
|
Customer
operations and selling
|
|
7,643
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|
6,399
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|
23,674
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|
19,715
|
|
General and
administrative
|
|
9,450
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|
7,889
|
|
29,010
|
|
25,106
|
|
Depreciation and
amortization
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|
14,336
|
|
11,671
|
|
40,712
|
|
34,193
|
|
Total operating
expenses
|
|
56,520
|
|
40,404
|
|
159,855
|
|
121,879
|
|
|
|
|
|
|
|
|
|
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|
Income
from operations
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|
4,241
|
|
3,423
|
|
12,776
|
|
9,276
|
|
|
|
|
|
|
|
|
|
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|
Other income
(expense):
|
|
|
|
|
|
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Interest income
|
|
35
|
|
776
|
|
593
|
|
2,404
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|
Interest expense
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|
(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
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|
4,537
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|
6,555
|
|
|
|
|
|
|
|
|
|
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Income tax expense
|
|
672
|
|
680
|
|
2,095
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|
1,584
|
|
|
|
|
|
|
|
|
|
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|
Income
from continuing operations
|
|
756
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|
1,689
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|
2,442
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|
4,971
|
|
|
|
|
|
|
|
|
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|
Discontinued
operations, net of tax:
|
|
|
|
|
|
|
|
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|
Income (loss)
from discontinued operations
|
|
(242
|
)
|
(953
|
)
|
263
|
|
(1,398
|
)
|
Gain (loss) on
sale of discontinued operations
|
|
(615
|
)
|
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|
18,362
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|
59,902
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|
Total
discontinued operations
|
|
(857
|
)
|
(953
|
)
|
18,625
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|
58,504
|
|
|
|
|
|
|
|
|
|
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|
Net
income (loss)
|
|
$
|
(101
|
)
|
$
|
736
|
|
$
|
21,067
|
|
$
|
63,475
|
|
|
|
|
|
|
|
|
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|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
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|
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
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|
$
|
1.49
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|
$
|
4.40
|
|
|
|
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|
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Diluted
earnings per common share:
|
|
|
|
|
|
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|
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
|
|
|
|
|
|
|
|
|
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|
Dividends
per share
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|
$
|
|
|
$
|
0.25
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|
$
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0.50
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$
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0.75
|
|
|
|
|
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|
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|
Shares
of common stock used to calculate earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
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|
13,970
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|
14,459
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|
14,138
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|
14,441
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|
Diluted
|
|
13,980
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|
14,507
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|
14,146
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|
14,492
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|
See accompanying
notes.
1
SUREWEST
COMMUNICATIONS
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited;
Amounts in thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
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|
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 Managements 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 managements own
assumptions used to measure assets and liabilities at fair value. A financial
asset or liabilitys 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 Companys 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 Directors
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Everests 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 Verizons 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 Telephones 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 Companys 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 companys 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 employees 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 Nos 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 banks
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 banks 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 Companys election, on LIBOR or the banks
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 Companys 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 Companys 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
SECs 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) managements 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 Companys
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.
MANAGEMENTS 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 forwardlooking 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 nations 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 Companys 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.
At September 30, 2008, the Broadband segment experienced a 76%
annual increase in the number of residential subscribers compared to the same
date in the prior year. In the Sacramento market, both data and video RGUs
increased 9% and 17%, respectively, 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 due to 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.
In March 2008, we launched our new VoIP Digital Phone product in
the Sacramento market, including the Telecom segment service territory. We anticipate that this offering will result
in elevated take rates and an increase in broadband residential triple-play
RGUs, while successfully mitigating access line losses in the Telecom segment
by migrating these customers to voice RGUs in the Broadband segment. At September 30, 2008, Broadband voice
RGUs in the Sacramento market increased 33% compared to the same date in the
prior year.
We will continue to invest in success-based capital and building and
deploying the broadband infrastructure while focusing on the generation of new
customers and increasing residential penetration on existing marketable homes.
Operating revenues in the Telecom segment decreased
$2,089 and $6,471 during the quarter and nine-month period ended September 30,
2008, respectively, compared to the same periods in 2007. Residential revenues
accounted for nearly all of the decrease in operating revenues in the current
year. Residential services were largely
impacted by our customers migration
toward alternative communication services, including those offered by our
Broadband segment, which contributed to an approximate 18% decline in the
Telecom segment voice RGUs as of September 30, 2008 compared to September 30,
2007. As well, some competitors
initiated marketing campaigns to include voice services targeted directly to
residential subscribers within SureWest Telephones service area. In an effort
to mitigate future operating revenue and voice RGU declines, we now offer
various flat-rate and bundled service
23
packages and have introduced a broadband VoIP service
to customers residing within SureWest Telephones service area. The decrease in operating revenues was also
impacted by continued scheduled reductions in California High Cost Fund (CHCF)
subsidies of approximately $510 and $1,530 during the quarter and nine-month
period ended September 30, 2008, respectively, compared to the same prior
year periods.
Consolidated operating expenses, excluding depreciation and
amortization, increased $13,451 and $31,457 during the quarter and nine-month
period ended September 30, 2008, respectively, compared to the same
periods in 2007. Our Broadband segment accounted for substantially all of the
increases in our consolidated operating expenses primarily as a result of the
Kansas City operations, which accounted for $12,175 and $29,013 of the quarter
and nine-month period increase, respectively. Cost of services and products
expense increased $10,646 and $23,594 during the quarter and nine-month period
ended September 30, 2008, respectively, compared to the same periods in
2007 primarily as a result of the Kansas City operations as well as increases
in programming costs related to the growth in Broadband subscribers. Customer
operations and selling expense increased $1,244 and $3,959 during the quarter
and nine-month period ended September 30, 2008, respectively, compared to
the same periods in 2007 due primarily to an increase in sales and advertising
costs to promote subscriber growth and new product offerings within the
Broadband segment. General and administrative expenses increased $1,561 and
$3,904 during the quarter and nine-month period ended September 30, 2008,
respectively, compared to the same periods in 2007. Excluding the addition of
the operations for Kansas City, which accounted for $1,570 and $3,844 of the
quarter and nine-month period increase, respectively, general and
administrative expenses were consistent with the prior year periods as savings
from a reduction in headcount and overhead costs was offset by an increase in
consulting and advisory fees related to strategic initiatives.
The increase in the consolidated operating expenses during the nine
months ended September 30, 2008 compared to the same prior year period was
offset by a decline 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). During 2007,
we substantially modified our employee compensation structure in order to
attract and retain the right mix of talent necessary to successfully support a
company which is significantly expanding and growing. As a result, we amended
the Plans, effective April 1, 2007, which 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. As a result of the amendments to the Plans and final actuarial
calculations, consolidated operating expenses decreased $715 during the nine
months ended September 30, 2008, compared to the same prior year
period. See Note 6 for more
information on the Plans.
Our consolidated depreciation and amortization expense increased $2,665
and $6,519 during the quarter and nine-month period ended September 30,
2008, respectively, compared to the same periods in 2007 due to the continued
network build-out and success-based capital projects undertaken within the
residential broadband service territories and the Kansas City operations.
Reclassification
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. In addition, the calculation
of certain select operating metrics has been revised over time to reflect the
current view of our business.
Accordingly, where necessary, prior period metric calculations have been
revised to conform to current practice.
Effects
of Strategic Corporate Actions
Our acquisition of Everest and divestiture of SureWest Wireless will
yield various impacts to our financial statements and results of operations in
2008.
As discussed above, we purchased Everest in February 2008. As a result, the Broadband segment operating
revenues and income from operations increased approximately $41,050 and $2,303,
respectively, during the nine-month period ended September 30, 2008
24
compared to the same period in 2007. The Everest acquisition has
facilitated the rapid expansion of our geographic footprint and overall
services targeted to businesses, while more than doubling the number of our
triple-play residential subscribers, as evidenced by the increase in RGUs of
nearly 126% at September 30, 2008 compared to the same period last
year. The acquisition was largely funded
by a financing agreement we entered into in February 2008. Accordingly, subsequent to the closing of the
transaction we experienced increased interest expense resulting from the
financing agreement. Our ability to
continue to successfully integrate the Kansas City operations will depend on a
number of factors, including our ability to devote adequate personnel to the integration
process while still managing our current operations effectively. We do not
anticipate difficulties integrating the acquired business; however such
difficulties could increase our costs or adversely impact our ability to
operate our business.
The sale of the operating assets of our Wireless business, SureWest
Wireless, has also affected our financial statements and results of operations
subsequent to the closing of the transaction, which occurred on May 9,
2008. The results of SureWest Wireless are
reported as a discontinued operation in our condensed consolidated financial
statements for all periods presented.
Income (loss) from discontinued operations was $(242) and $263 for the
quarter and nine-month period ended September 30, 2008, respectively, and
$(953) and $(2,397) for the same prior year periods. See Note 2 for a summary of the Wireless
business operating results included in discontinued operations.
Segment Results of Operations
Broadband
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
$
|
|
%
|
|
|
|
|
|
$
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data
|
|
$
|
10,147
|
|
$
|
6,929
|
|
$
|
3,218
|
|
46
|
%
|
$
|
29,143
|
|
$
|
20,089
|
|
$
|
9,054
|
|
45
|
%
|
Video
|
|
10,599
|
|
3,743
|
|
6,856
|
|
183
|
|
28,552
|
|
10,994
|
|
17,558
|
|
160
|
|
Voice
|
|
5,334
|
|
2,077
|
|
3,257
|
|
157
|
|
14,322
|
|
6,126
|
|
8,196
|
|
134
|
|
Total
residential revenues
|
|
26,080
|
|
12,749
|
|
13,331
|
|
105
|
|
72,017
|
|
37,209
|
|
34,808
|
|
94
|
|
Business
|
|
9,284
|
|
4,414
|
|
4,870
|
|
110
|
|
23,970
|
|
12,753
|
|
11,217
|
|
88
|
|
Access
|
|
428
|
|
89
|
|
339
|
|
381
|
|
1,054
|
|
228
|
|
826
|
|
362
|
|
Other
|
|
861
|
|
378
|
|
483
|
|
128
|
|
2,254
|
|
1,158
|
|
1,096
|
|
95
|
|
Total operating
revenues
from
external customers
|
|
36,653
|
|
17,630
|
|
19,023
|
|
108
|
|
99,295
|
|
51,348
|
|
47,947
|
|
93
|
|
Intersegment
revenues
|
|
138
|
|
142
|
|
(4
|
)
|
(3
|
)
|
419
|
|
463
|
|
(44
|
)
|
(10
|
)
|
Operating
expenses*
|
|
33,013
|
|
18,628
|
|
14,385
|
|
77
|
|
90,626
|
|
55,492
|
|
35,134
|
|
63
|
|
Depreciation and
amortization
|
|
10,811
|
|
5,858
|
|
4,953
|
|
85
|
|
29,773
|
|
16,962
|
|
12,811
|
|
76
|
|
Loss from
operations
|
|
(7,033
|
)
|
(6,714
|
)
|
(319
|
)
|
(5
|
)
|
(20,685
|
)
|
(20,643
|
)
|
(42
|
)
|
(0
|
)
|
Loss from
continuing operations
|
|
$
|
(5,801
|
)
|
$
|
(4,770
|
)
|
$
|
(1,031
|
)
|
(22
|
)%
|
$
|
(17,115
|
)
|
$
|
(14,491
|
)
|
$
|
(2,624
|
)
|
(18
|
)%
|
*Exclusive of
depreciation and amortization
Operating Revenues
Operating revenues from external customers in the Broadband segment
increased $19,203 and $47,947 in the quarter and nine-month period ended September 30,
2008, respectively, compared to the same periods in 2007. Our Kansas City operations, as described
above, contributed $16,508 and $41,050 of operating revenues in the quarter and
nine-month period ended September 30, 2008, respectively.
Broadband residential revenues increased $13,331 and $34,808 in the
quarter and nine-month period ended September 30, 2008, respectively,
compared to the same periods in 2007; of which $12,128 and $30,946, was
attributable to the Kansas City operations.
Broadband residential subscribers and RGUs increased 76% and 126%,
respectively, as of September 30, 2008 compared to the same period in 2007. We anticipate continued growth in residential
broadband RGUs and average revenue per user resulting from the HD DVR and VoIP
Digital Phone
25
services, which were recently launched in the Sacramento market. SureWest Digital Phone presents the Company
with a more competitive triple-play offering with increased options and
multiple packages.
Residential data revenues increased $3,218 and $9,054 in the quarter
and nine-month period ended September 30, 2008, respectively, compared to
the same periods in 2007. Data RGUs in
the Sacramento market increased 9% as of September 30, 2008 compared to
the same period in 2007, which was reflective of our ability to offer
subscribers superior high-speed data products and other enhanced services. The reliability and high speeds of the data
service in both the Sacramento and Kansas City markets enhance other services
such as the SureWest Digital Phone, where customers manage phone services
through the online SureWest portal. The
remaining increase in Data revenues was due to the Kansas City operations.
Residential video revenues increased $6,856 and $17,588 in the quarter
and nine-month period ended September 30, 2008, respectively, compared to
the same periods in 2007. In the
Sacramento market, the Broadband segment experienced a 17% growth in Video RGUs
as of September 30, 2008 compared to the same period in 2007 due in part
to demand for our new product offerings and other enhanced services and
features such as HD DVR and additional high definition content. In addition, effective January 2008
video rates increased 10%. The remaining
increase was the result of our Kansas City operations.
Residential voice revenues increased $3,257 and $8,196 in the quarter
and nine-month period ended September 30, 2008, respectively, compared to
the same periods in 2007. The increase
was due in part to the growth in voice RGUs, of which the growth in the
Sacramento market was 33% as of September 30, 2008 compared to the same period
in 2007. In March 2008, we launched
our new VoIP Digital Phone product in the Sacramento market, including the
Telecom service territory. We anticipate
that this offering will result in elevated take rates and an increase in
Broadband residential triple-play RGUs.
Business revenues increased $4,870 and $11,217 in the quarter and
nine-month period ended September 30, 2008, respectively, compared to the
same periods in 2007. Business customers
increased 54% as of September 30, 2008 compared to the same period in
2007. We continue to expand our business
broadband services in Sacramento; however a significant portion of the business
revenue growth was due to our Kansas City operations.
Operating Expenses
Total operating expenses
in the Broadband segment increased $14,385 and $35,134 in the quarter and
nine-month period ended September 30, 2008, respectively, compared to the
same periods in 2007. The increase in
operating expenses was offset in part by a decline in the costs related to the
Plans of $239 for the nine months ended September 30, 2008, as described
in the Consolidated Overview section above.
Cost of services and
products (exclusive of depreciation and amortization) increased $10,606 and
$23,841 in the quarter and nine-month period ended September 30, 2008,
respectively, compared to the same periods in 2007. The increase in costs in the current year
periods was primarily due to Kansas City operations, contributing $8,556 and
$20,573 in additional expenses, respectively.
The increase was also attributable to (i) an increase in
programming, transport and access costs related to the growth in Broadband
subscribers, residential broadband RGUs and business customers and (ii) an
increase in maintenance costs corresponding to the increased subscriber count,
as well as the expanded network footprint.
Customer operations
expense increased $1,889 and $5,268 in the quarter and nine-month period ended September 30,
2008, respectively, compared to the same periods in 2007. Substantially all of the increase in the
current year period was attributable to our Kansas City operations resulting,
in part, from increased radio and television advertising in the Kansas City
market. We have experienced a modest increase in the California market in sales
and advertising costs to promote subscriber growth, as well as new and existing
product offerings.
General and administrative expense increased $1,890 and $6,025 in the
quarter and nine-month period ended September 30, 2008, respectively,
compared to the same periods in 2007 primarily due to increases in (i) information
technology costs related to system maintenance and development, including
integration of Kansas City operations and increased production support projects
and (ii) consulting and advisory fees. During the quarter and nine-month
period ended September 30, 2008, Kansas City operations contributed $1,570
and $3,844, respectively, to the increase in general and administrative
expenses.
Depreciation and
amortization increased $4,953 and $12,811 in the quarter and nine-month period
ended September 30, 2008, respectively, compared to the same periods in
2007 due to the continued expansion of the broadband network and success based
capital projects. Our Kansas City
operations increased depreciation and amortization expense by $4,060 and $9,734
during the
26
quarter and nine-month
period ended September 30, 2008, respectively.
Telecom
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
$
|
|
%
|
|
|
|
|
|
$
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
7,805
|
|
$
|
9,769
|
|
$
|
(1,964
|
)
|
(20
|
)%
|
$
|
25,230
|
|
$
|
30,642
|
|
$
|
(5,412
|
)
|
(18
|
)%
|
Business
|
|
10,051
|
|
9,259
|
|
792
|
|
9
|
|
28,894
|
|
28,047
|
|
847
|
|
3
|
|
Access
|
|
5,914
|
|
6,842
|
|
(928
|
)
|
(14
|
)
|
18,297
|
|
20,234
|
|
(1,937
|
)
|
(10
|
)
|
Other
|
|
338
|
|
327
|
|
11
|
|
3
|
|
915
|
|
884
|
|
31
|
|
4
|
|
Total operating
revenues
from
external customers
|
|
24,108
|
|
26,197
|
|
(2,089
|
)
|
(8
|
)
|
73,336
|
|
79,807
|
|
(6,471
|
)
|
(8
|
)
|
Intersegment
revenues
|
|
4,726
|
|
4,779
|
|
(53
|
)
|
(1
|
)
|
13,635
|
|
13,846
|
|
(211
|
)
|
(2
|
)
|
Operating
expenses*
|
|
14,035
|
|
15,026
|
|
(991
|
)
|
(7
|
)
|
42,571
|
|
46,503
|
|
(3,932
|
)
|
(8
|
)
|
Depreciation and
amortization
|
|
3,525
|
|
5,813
|
|
(2,288
|
)
|
(39
|
)
|
10,939
|
|
17,231
|
|
(6,292
|
)
|
(37
|
)
|
Income from
operations
|
|
11,274
|
|
10,137
|
|
1,137
|
|
11
|
|
33,461
|
|
29,919
|
|
3,542
|
|
12
|
|
Income from
continuing operations
|
|
$
|
6,557
|
|
$
|
6,459
|
|
$
|
98
|
|
2
|
%
|
$
|
19,557
|
|
$
|
19,462
|
|
$
|
95
|
|
0
|
%
|
*Exclusive of
depreciation and amortization
Operating Revenues
Operating revenues from external customers in the Telecom segment
decreased $2,089 and $6,471 in the quarter and nine-month period ended September 30,
2008, respectively, compared to the same periods in 2007. SureWest Telephone
continues to experience decreases in residential revenue due to competition
from wireless, wireline competitors and cable providers, contributing to an
approximate 18% decline in residential voice RGUs. In addition, some competitors initiated
marketing campaigns to include voice services targeted directly to residential
subscribers within SureWest Telephones service area. We continue to mitigate additional voice
operating revenue losses through our VoIP phone service now offered to
customers within the Telecom service area through our SureWest Broadband
segment. As a result, we expect a
portion of the Telecom segments voice revenue will continue to shift to the
VoIP service being offered by our Broadband segment.
Business revenues have increased $792 and $847 in the quarter and
nine-month period ended September 30, 2008, respectively, compared to the
same periods in 2007, despite the strong competitive pressures discussed
above. While the business customer base
has declined 5% as of September 30, 2008 compared to the same prior year
period, the continued strong demand for data services and the increasing
requirement for businesses to network multiple locations in order to share data
have mostly alleviated the business revenue losses which could have resulted
from the decline in the customer base. In addition, subsequent to the sale of
our Wireless business on May 9, 2008 to Verizon, SureWest Telephone
recorded additional business revenues of approximately $850 for long distance
services provided to Verizon during the transition of the wireless business to
Verizon, which concluded during the third quarter of 2008.
Access revenues, which
include switched access revenue, interstate common line (CL) revenue and
draws from the CHCF decreased by $928 and $1,937 during the quarter and nine
months ended September 30, 2008, respectively, compared to the same prior
year periods. As anticipated, subsidies
received from the CHCF have decreased.
Switched access revenues also declined with the reduction of residential
voice services. These decreases were
partially offset during 2008 by an increase in interstate CL settlements
received from National Exchange Carrier Association (NECA) as a result of an
increase in regulatory costs and associated rate base. See the Regulatory Matters
section below for a more detailed discussion regarding
SureWest Telephones regulated revenues.
27
Operating
Expenses
Operating expenses for
the Telecom segment decreased $991 and $3,932 in the quarter and nine-month
period ended September 30, 2008, respectively, compared to the same
periods in 2007. The decrease was due in part to $476 in cost savings
realized through the Plans, during the nine months ended September 30,
2008, as described in the Consolidated Overview section above.
Cost of services and
products (exclusive of depreciation and amortization) decreased $453 in the nine-month
period ended September 30, 2008 compared to the same period in 2007. This
decrease was due primarily to the decline in local and long distance expenses
as a result of the decrease in (i) residential and business services and (ii) long
distance minutes of use.
Customer operations
expense decreased $645 and $1,289 in the quarter and nine-month period ended September 30,
2008, respectively, compared to the same periods in 2007. The decrease was primarily due to (i) a
decline in labor costs resulting from reductions in headcount and (ii) an
increase in capitalized project support costs in 2008.
General and
administrative expense decreased $358 and $2,190 in the quarter and nine-month
period ended September 30, 2008, respectively, compared to the same
periods in 2007. The decrease was
primarily due to the incurrence of costs in 2007 related to (i) information
technology projects including costs associated with various system developments
and automation projects and related maintenance contracts and (ii) legal
and advisory fees for certain regulatory matters.
Depreciation and
amortization decreased $2,288 and $6,292 in the quarter and nine-month period
ended September 30, 2008, respectively, compared to the same periods in
2007. This decrease was due primarily to
a majority of the circuit and digital switch equipment becoming fully
depreciated during the second half of 2007 and a significant portion of general
purpose software becoming fully depreciated early in the third quarter of 2008.
Regulatory
Matters
Revenues from services subject to regulation constituted approximately
35% and 38% of our total operating revenues from continuing operations for the
quarter and nine-month period ended September 30, 2008, respectively. For the same prior year periods, revenues and
services subject to regulation constituted approximately 54% and 55% of our
total operating revenues from continuing operations. Those revenues, which
include local service, network access service and toll service, are derived
from various sources, including:
·
business and residential subscribers, for basic
exchange services;
·
surcharges, mandated by State Commissions;
·
long distance carriers, for network access service;
·
competitive access providers and commercial
enterprises, for network access service;
·
interstate pool settlements from NECA;
·
support payments from federal or state programs, and
·
support payments from the CHCF, recovering costs of
services including extended area service.
Significant portions of our telephone rates and charges are subject to
regulation by the Federal Communications Commission (FCC) and State
Commissions. Rates and charges are based on various tariffs filed by the
Company and others, including those filed by the NECA for interstate CL
charges. Pending and future regulatory actions, with respect to these and other
matters and the filing of new or amended tariffs, may have a material impact on
our consolidated financial position and results of operations.
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 CL charges, SureWest Telephone concurs with
tariffs filed by 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 Telephones 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
28
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 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 Companys 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).
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 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.
Comments in the CHCF-B rulemaking were filed in September 2006 and
in April 2007. 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.
29
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 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.
Other Regulatory Matters
There are a number of other regulatory proceedings occurring at the
federal and state levels that may have a material impact on us. 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 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.
Non-operating Items
Other
Income and Expense, Net
Consolidated interest income decreased $741 and $1,811 during the
quarter and nine-month period ended September 30, 2008, respectively,
compared to the same periods in 2007.
This decrease was mostly due to the use of cash and short-term
investments to fund the acquisition of Everest. Consolidated interest expense
increased $1,206 and $4,003 during the quarter and nine-month period ended September 30,
2008, respectively, compared to the same periods in 2007. The increase was attributable to increased
principal balances.
Income
Taxes
Income taxes increased
$511 for the nine-month period ended September 30, 2008 compared to the
same period in 2007. The effective federal and state income tax rates for
continuing operations were approximately 46.2% and 24.2% for the nine-month
periods ended September 30, 2008 and 2007, respectively. The increase in income tax expense and tax
rates in the current year period compared to the prior year period was due
primarily to an increase in deferred state income tax expense related to state
tax apportionment changes.
Liquidity
and Capital Resources
Overview
We generate a significant
cash flow from operating activities. The
proceeds from monetizing our non strategic investments have also provided us
with a significant source of cash flow.
We believe that we will be able to meet our current and long-term
liquidity and capital requirements, through our cash flow from operating
activities, existing cash, cash equivalents and investments; through available
borrowings under our existing credit facilities; and through our ability to
obtain future external financing. Our
primary use of cash in 2008 has been for the acquisition of Everest, capital
expenditures, scheduled payments of long-term debt, planned share repurchases
and the payment of cash dividends. We anticipate continuing to use a
substantial portion of our cash flow to fund our
30
capital expenditures,
invest in new business opportunities, fund network expansion and modernization,
scheduled payments of long-term debt and fund the authorized share repurchase
plan.
The following table
summarizes our cash flows:
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
Cash Flows
Provided By (Used In)
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
36,617
|
|
$
|
32,944
|
|
$
|
3,673
|
|
Discontinued
operations
|
|
(542
|
)
|
(40,634
|
)
|
40,092
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
(162,884
|
)
|
45,107
|
|
(207,991
|
)
|
Discontinued
operations
|
|
(280
|
)
|
(1,230
|
)
|
950
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
98,368
|
|
(10,853
|
)
|
109,221
|
|
|
|
|
|
|
|
|
|
(Decrease)
Increase In Cash and Cash Equivalents
|
|
$
|
(28,721
|
)
|
$
|
25,334
|
|
$
|
(54,055
|
)
|
Cash Flows Provided By Operating
Activities
Net cash provided by
continuing operating activities was $36,617 for the nine-month period ended September 30,
2008. Significant adjustments to net
income to arrive at cash provided by operating activities include (i) non-cash
charges of $40,712 consisting primarily of depreciation and amortization due to
capital investments principally in the Broadband segment, (ii) net income
from continuing operations of $2,442 and (iii) a decrease in trade and
miscellaneous accounts receivable of $1,044 as a result of the timing in the
collection of receivables from regulatory agencies. Cash provided by operating activities was
offset in part by a decrease in (i) accounts payable and accrued
liabilities of $5,867 related to the timing of outstanding obligations for
inventory and capital project expenditures and (ii) contractual shareable
earnings obligations of $1,253.
Net cash provided by
discontinued operations increased $40,092 due to additional estimated income
tax payments made in 2007 primarily as a result of the gain on the sale of
SureWest Directories.
Cash Flows Used In Investing
Activities
.
Net cash used in continuing
investing activities for the nine-month period ended September 30, 2008
was $162,884. The increase in cash used
in investing activities was primarily attributable to the acquisition of
Everest for $181,263, net of cash acquired, but was offset in part by the net
proceeds of $66,296 received from the sale of SureWest Wireless.
Sale of SureWest Wireless
In May 2008, we sold the operating assets of our Wireless
business, SureWest Wireless, to Verizon for an aggregate cash purchase price of
$69,746. 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. See Note 2 for more
information on the escrow. Proceeds from the sale of the Wireless business
were, in part, used to repay a portion of the Credit Agreement described below.
Auction Rate Security
At September 30, 2008, we held one auction rate security (ARS)
with an estimated fair value of $2,763. 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). Monthly
auctions have historically provided a liquid market for these securities. The
ARS in our portfolio had a successful auction in January 2008 however,
since February 2008 there has not been a successful auction for this
ARS. 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),
31
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. 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 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 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.
Cash Flows Provided By Financing
Activities
Net cash provided by
financing activities consists primarily of our proceeds from short and
long-term borrowings offset by cash payment for dividends and planned
repurchases of the Companys common stock.
Long-term Debt
In February 2008,
we entered into a Second Amended and Restated Credit Agreement (Credit
Agreement) to restate and replace the credit agreement entered into by the
Company in May 2007. 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 $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 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 banks 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 banks Prime Rate, in either case, plus an applicable
margin and another 75 basis points. 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 SureWest Wireless.
In September 2008,
we 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 Companys election, on LIBOR or the banks 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.
32
Debt Covenants
Our Series A
and Series B Senior Notes and the New Agreement contain financial and
operating covenants that may restrict, among other things, repurchase of the
Companys 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,
2008 and December 31, 2007, retained earnings of $118,397 and $111,003,
respectively, were available for the payments described above. As of September 30,
2008, we were in compliance with all of our debt covenants.
Share Repurchase Program and Dividends
Our Board of Directors has authorized the repurchase of up to
2.5 million shares of our common stock. Shares are purchased from time to
time in the open market or through privately negotiated transactions, subject
to overall financial and market conditions. Starting in the first quarter of
2000 through September 30, 2008, approximately 1.8 million shares of common
stock had been repurchased. As of September 30, 2008, we had remaining
authorization from the Board of Directors to repurchase approximately 719
thousand additional outstanding shares. We repurchased approximately 48
thousand and 553 thousand shares in the quarter and nine months ended September 30,
2008, respectively. We did not
repurchase any shares during the same prior year periods. The purchase of
common shares did not have substantive effect on the average number of common
shares outstanding or the calculation of basic and diluted earnings per share
for the quarters or nine-month periods ended September 30, 2008 or 2007.
In April 2008, our Board of Directors announced the decision to
discontinue dividend payments for the foreseeable future in an effort to foster
our growth strategy by reinvesting the approximate $14,500 of annual dividend
distributions back into the Company. The
cash dividend of $0.25 per share, paid on June 16, 2008 to shareholders of
record at the close of business on May 15, 2008, was the last dividend
paid to shareholders in the foreseeable future.
The reinstatement of future dividend payments is at the discretion of
our Board of Directors.
Sufficiency
of Cash Resources
We had cash, cash
equivalents and short-term investments at September 30, 2008 of
$2,974. We believe given our financial
position and debt-to-equity position, that we have substantial additional
long-term borrowing capacity of approximately $58,000 available to us through
our Revolving Loan facility. Accordingly, we believe our operating cash flows
and our borrowing capacity are sufficient to satisfy our liquidity requirements
for the next twelve months, while maintaining adequate cash and cash
equivalents.
A substantial portion of
the 2008 budgeted capital expenditures is at our discretion and dependent upon
our working capital position, operating cash flows and ability to borrow. We
can modify our planned construction and commitments if the results of
operations or available capital so require. We are required to comply with its
cable franchise agreements to continue its build-out in the franchise areas.
Our most significant use
of funds in the remainder of 2008 is expected to be for (i) budgeted
capital expenditures of up to $24,500 and (ii) scheduled payments of
long-term debt of $3,636. As discussed below, throughout the year we may
repurchase shares of its common stock in the open market at the prevailing
market price up to an amount authorized by the Board of Directors.
Working
Capital
Our working capital
deficit was $7,804 at September 30, 2008.
The decrease in working capital during the nine months ended September 30,
2008 was primarily attributable to the acquisition of Everest in February 2008
for $181,700, as discussed in Note 2. The purchase of Everest resulted in a
decrease in cash, cash equivalents, short-term investments and an increase in
debt, as described above.
As noted above, in May 2008 we sold the operating assets of our
Wireless business for an aggregate cash purchase price of $69,746 and used
$46,000 of the proceeds from the sale to repay a portion of the Credit
Agreement. See Notes 2 and 7 for more information on the Wireless business and
Credit Agreements.
Other factors
affecting working capital at September 30, 2008 were as follows: (i) principal
payments on our Series B Notes, which will commence in March 2009,
have been classified as short-term, (ii) repurchases of our common stock
and (iii) the payment of dividends.
33
Contractual
Obligations
There have been no
significant changes to our Contractual Obligations table in Part II,
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our 2007 Annual Report on Form 10-K,
other than those resulting from changes in the amount of outstanding debt. As
of the nine-month period ended September 30, 2008, debt increased by
$112,000, as compared to December 31, 2007, from $121,818 to
$233,818. The increase in long-term debt
was used primarily to fund the acquisition in February 2008 and general
corporate purposes. As of September 30,
2008, future debt payments plus interest were as follows:
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
Long-term debt
|
|
$
|
6,649
|
|
$
|
28,565
|
|
$
|
27,767
|
|
$
|
26,969
|
|
$
|
172,028
|
|
$
|
16,150
|
|
$
|
278,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plan
As required, we contribute to the Pension Plan and Other Benefits
Plans, which provide retirement benefits to certain eligible employees.
Contributions are intended to provide for benefits attributed to service to
date. Our funding policy is to contribute annually an actuarially determined
amount consistent with applicable federal income tax regulations. As discussed
in the Consolidated Overview section above, we stopped accruing benefits for
active participants effective April 1, 2007. We believe that future
funding requirements will decrease significantly as a result of the freeze of
the Plans. We will continue to evaluate the future funding requirements of the
Plans and fund them as deemed necessary. We do not expect to make any
contributions during 2008. See Note 6 of the Notes to the Condensed
Consolidated Financial Statements for a more detailed discussion regarding our
Pension and Other Benefits Plans.
Regulatory
Matters
As discussed more fully in the Regulatory
Matters section above, the CPUC issued certain final decisions which
will (i) phase down our current annual CHCF draw of $11,500, over a 5-year
period ending on January 1, 2012 and (ii) decrease the CHCF-B
industry funding level, which will reduce our current annual receipt of
approximately $300 to zero over an 18-month period anticipated to end in 2009.
Critical
Accounting Estimates
Our condensed
consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. These estimates and assumptions are affected by managements
application of accounting policies. Our judgments are based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
estimates about the carrying values of assets and liabilities that are not
readily apparent from other sources. For a full discussion of our accounting
estimates and assumptions that we have identified as critical in the preparation
of our condensed consolidated financial statements, please refer to our 2007
Annual Report on Form 10-K.
As discussed in
Note 1 of the condensed consolidated financial statements, in accordance
with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), goodwill
is reviewed for impairment annually or more frequently if an event occurs or
circumstances change that would reduce the fair value below its carrying value.
However, as a result of declines in the market price of the Companys 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.
The impairment test for
goodwill requires us to estimate the fair value at the reporting unit level. We
have allocated our goodwill to the Telephone reporting unit and the Kansas City
Broadband reporting unit. The Telephone reporting unit includes SureWest
Telephone and certain related non-regulated services. The Kansas City Broadband
reporting unit is comprised of the Kansas City Broadband operating segment
which is a component of the Broadband reporting segment.
34
The carrying value of our
goodwill allocated to the Telephone reporting unit was $2,171 as of June 30,
2008. When determining the fair value,
the use of different estimates or assumptions within the discounted cash flow
model could result in a different fair value. For example, we used a discount
rate of 14.0% and a terminal growth rate of -4% in its assessment of fair
value in 2008, which was consistent with our November 30, 2007 valuation.
At June 30, 2008 the fair value of the Telephone reporting unit was
$178,600 and the associated carrying value was $21,500. If the discount rate
were to increase 2%, the fair value of the Telephone reporting unit would
decrease by approximately $13,000, but would not result in an impairment of
goodwill.
The carrying value of our
goodwill allocated to the Kansas City Broadband reporting unit, based on
preliminary purchase accounting allocations, was $53,169 as of June 30, 2008.
When determining the fair value, the use of different estimates or assumptions
within the discounted cash flow model could result in a different fair value.
For example, we used a discount rate of 14.0% and an exit EBITDA multiple of
7.0 in our assessment of fair value in 2008. At June 30, 2008 the fair value of
the Kansas City Broadband reporting unit was $255,400 and the associated
carrying value was $182,100. If the discount rate were to increase 2%, the fair
value of the Kansas City Broadband reporting unit would decrease by
approximately $22,300, but would not result in an impairment of goodwill.
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 impairment test as of November 30, 2008.
Recent
Accounting Pronouncements
Recently Issued Accounting Pronouncements
In June 2008, the
Financial Accounting Standards Board (FASB) issued FASB Staff Position (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.
All prior-period earnings per share data presented shall be adjusted
retrospectively. 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 accounting principles generally accepted in the United States (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 Presents Fairly in Conformity With Generally Accepted Accounting Principles
.
SFAS 162 is effective 60 days following the SECs 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.
35
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 No. 157,
Fair Value Measurements
(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 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.
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) managements 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 g on our consolidated financial position and results of
operations.
Regulatory
and Legal Matters
Significant portions of
our telephone rates and charges are subject to regulation by the FCC and State
Commissions. Rates and charges are based
on various tariffs filed by SureWest and others, including those filed by the
NECA for CL charges. Pending and future
regulatory actions, with respect to these and other matters and the filing of
new or amended tariffs, may have a material impact on our consolidated
financial position and results of operations.
Our financial condition
and results of operations have been and will be affected by recent and future
proceedings before State
36
Commissions and FCC.
Pending before the FCC and State Commissions are proceedings, which are
considering:
·
additional
rules governing the opening of markets to competition and the regulation
of the competing telecommunications providers;
·
the
nature and extent of the compensation, if any, to be paid by carriers and other
providers to one another for network use, and the sums to be recovered through
end users and other sources;
·
the
goals and definition of universal telephone service in a changing environment,
including examination of subsidy support mechanisms for subscribers of different
carriers (including incumbent carriers) and in various geographic areas;
·
rules that
will provide non-discriminatory access by competing service providers to the
network capabilities of local exchange carriers; and
·
the
regulated rates and earnings of SureWest Telephone.
There are a number of
pending and anticipated other regulatory proceedings occurring at the federal
and state levels that may have a material impact on us. These regulatory
proceedings also include newer issues, such as consideration of broadband
deployment and regulation of Internet Protocol-enabled services. The outcomes
and impact on us and our operations from these proceedings and related court
matters cannot be determined at this time.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our 2007 Annual Report on
Form 10-K contains certain disclosures about our limited exposure to
market risk for changes in interest rates. There have been no material
changes to the information provided which would require additional disclosures
as of the date of this filing except as noted below.
At September 30, 2008, we held one auction rate security (ARS)
with an estimated fair value of $2,763. 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). Monthly
auctions have historically provided a liquid market for these securities. 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. The credit
rating on the monoline insurance company is currently rated AA by the major
rating agencies. The ARS is 10%
guarantee by FFELP. 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 (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
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.
ITEM 4. CONTROLS AND
PROCEDURES.
Evaluation of disclosure controls and procedures
Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based upon, and as of the
date of this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, our disclosure controls and procedures were
effective, at the reasonable assurance level, to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act is authorized, recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission (the SEC) rules and forms.
37
Our assessment of the
internal control structure excluded Everest Broadband, Inc. (Everest)
which was acquired on February 13, 2008.
For the period subsequent to the purchase date, Everest had net revenues
of $41,050 and total assets of $219,641, which are included in our condensed
consolidated financial statements as of and for the nine months ended September 30,
2008. Under guidelines established by the SEC, companies are allowed to exclude
acquisitions from their assessment of internal control over financial reporting
during the first year of an acquisition while integrating the acquired company.
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide
reasonable assurance to our management, Board of Directors and Audit Committee
regarding the reliability of financial reporting and the preparation of
published financial statements in accordance with generally accepted accounting
principles.
Change in internal control over
financial reporting
During the nine-month
period ended September 30, 2008, we had the following changes relating to
its controls over financial reporting
:
·
In
January 2008, we announced the sale of the assets of SureWest
Wireless. We have concluded that the
announcement of the sale and subsequent completion of the sale on May 9,
2008, has not materially affected our internal controls over financial
reporting.
·
In
February 2008, we completed the outsourcing of our payroll function. As part of the outsourcing assessment
process, management has reviewed the controls in place at the outsource
providers locations and evaluated our internal controls over financial
reporting. Based on our review and assessment of the controls over the
payroll process, we have concluded that the outsourcing of the payroll process
has not materially affected our internal controls over financial reporting.
·
As
noted above, our assessment of the internal control structure excluded Everest
which was acquired on February 13, 2008. Under guidelines established by
the SEC, companies are permitted to exclude acquisitions from their assessment
of internal control over financial reporting during the first year of an
acquisition while integrating the acquired company. During the integration period management is
developing additional controls to ensure the financial information provided by
Everest is complete and accurate in all material respects.
·
Our
Principal Financial Officer, Senior Vice President and Chief Financial Officer
Philip A. Grybas, resigned from his position on March 25, 2008. Our Vice
President, Finance, Dan Bessey, assumed the position of the Principal Financial
Officer on that same date. We believe
that the change in officers has not materially affected our internal controls
over financial reporting or disclosure controls and procedures. We will continue to monitor this change in
officers for any potential impacts to our internal controls.
·
Except
as noted above, there have been no other changes in our internal control over
financial reporting during the nine-month period ended September 30, 2008
that has materially affected, or is reasonably likely to materially affect, our
control over financial reporting.
Limitations on the effectiveness
of controls
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control system was
designed to provide reasonable assurance to our management, Board of Directors
and Audit Committee regarding the reliability of financial reporting and the
preparation of published financial statements in accordance with generally
accepted accounting principles.
38
PART II OTHER INFORMATION
ITEM 1
.
LEGAL PROCEEDINGS.
Refer to Notes 4 and 7 to
our condensed consolidated financial statements of the Quarterly Report on Form 10-Q
for a discussion of recent developments related to our regulatory and legal
proceedings.
ITEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Period
|
|
(a) Total Number
of Shares
Purchased
|
|
(b) Average
Price Paid
per Share
|
|
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
|
|
(d) Shares
Available for
Repurchase under
the Plan
|
|
July 1,
2008 - July 31, 2008
|
|
48,176
|
|
$
|
7.97
|
|
1,780,853
|
|
719,147
|
|
August 1,
2008 - August 31, 2008
|
|
314
|
|
$
|
8.05
|
|
1,781,167
|
|
718,833
|
|
September 1,
2008 - September 30, 2008
|
|
|
|
$
|
|
|
1,781,167
|
|
718,833
|
|
39
ITEM
6. EXHIBITS.
(a)
Index
to Exhibits.
Exhibit
No.
|
|
Description
|
|
Method
of Filing
|
|
|
|
|
|
3.1
|
|
Articles of
Incorporation of Registrant, together with Certificate of Amendment of
Articles of Incorporation dated January 25, 1996 and Certificate of
Amendment of Articles of Incorporation dated June 21, 1996 (Filed as
Exhibit 3(a) to Form 10-Q Quarterly Report for the quarter
ended September 30, 1996)
|
|
Incorporated
by reference
|
|
|
|
|
|
3.2
|
|
Certificate of
Amendment of Articles of Incorporation dated May 18, 2001 (Filed as Exhibit 3(b)
to Form 10-Q Quarterly Report for the quarter ended June 30, 2001)
|
|
Incorporated
by reference
|
|
|
|
|
|
3.3
|
|
Bylaws of Registrant
(Filed as Exhibit 3(b) to Form 10-K Annual Report of the
Registrant for the year ended December 31, 2000)
|
|
Incorporated
by reference
|
|
|
|
|
|
4.1
|
|
Amended and Restated
Rights Agreement, inclusive of Amendment 1 (Filed as Exhibit 4.1 to
Form 8-A/A filed March 12, 2008 and as Exhibit 9.01 to
Form 8-K filed May 1, 2008)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.1
|
|
Second Amended and
Restated Credit Agreement dated as of February 13, 2008 among SureWest
Communications and CoBank, ACB (Filed as Exhibit 10.1 to Form 8-K
filed February 15, 2008)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.2
|
|
Third Amended and
Restated Credit Agreement dated as of September 19, 2008 among SureWest
Communications and CoBank, ACB (Filed as Exhibit 10.1 to Form 8-K
filed September 24, 2008)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.3
|
|
Change in Control
Agreement dated January 31, 2008 between Registrant and Steven C. Oldham
(Filed as Exhibit 10.11 to Form 10-K Annual Report of the
Registrant for the year ended December 31, 2007)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.4
|
|
Change in Control
Agreement dated January 31, 2008 between Registrant and Officers (Filed
as Exhibit 10.12 to Form 10-K Annual Report of the Registrant for
the year ended December 31, 2007)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.5
|
|
Membership Interest
Purchase Agreement among West Coast PCS Structures, LLC, PCS Structures
Towers, LLC, West Coast PCS LLC and GTP Towers I, LLC dated October 10,
2008 (Filed as Exhibit 2.1 to Form 8-K filed October 14, 2008)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.6
|
|
Asset Purchase Agreement
among SureWest Wireless, West Coast PCS LLC, SureWest Communications and
Cellco Partnership d/b/a Verizon Wireless dated January 18, 2008 (Filed
as Exhibit 2.1 to Form 8-K filed January 22, 2008)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.7
|
|
Purchase and Sale
Agreement among Everest Broadband, Inc., the Equity Holders of Everest
Broadband, Inc. and SureWest Communications dated December 6, 2007
(Filed as Exhibit 2.1 to Form 8-K filed December 7, 2007)
|
|
Incorporated
by reference
|
|
|
|
|
|
10.8
|
|
Severance Agreement
dated March 25, 2008 between SureWest Communications and Philip A.
Grybas (Filed as Exhibit 10.6 to Form 10-Q Quarterly Report for the
quarter ended March 31, 2008)
|
|
Incorporated
by reference
|
|
|
|
|
|
31.1
|
|
Certification of
Steven C. Oldham, President and Chief Executive Officer, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
|
|
|
31.2
|
|
Certification of Dan
T. Bessey, Vice President and Chief Financial Officer, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
40
Exhibit
No.
|
|
Description
|
|
Method
of Filing
|
|
|
|
|
|
32.1
|
|
Certification of
Steven C. Oldham, President and Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
|
|
|
32.2
|
|
Certification of Dan
T. Bessey, Vice President and Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
41
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
SUREWEST COMMUNICATIONS
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
By:
|
/s/ STEVEN C.
OLDHAM
|
|
|
Steven C.
Oldham,
|
|
|
President and
Chief
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
By:
|
/s/ DAN T.
BESSEY
|
|
|
Dan T. Bessey,
|
|
|
Vice President
and
|
|
|
Chief Financial
Officer
|
|
|
|
|
|
|
Date: November 3, 2008
|
|
|
42
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