U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number: 0-26525
BREDA TELEPHONE CORP.
(Exact name of small business issuer as specified in its charter)
Iowa 42-0895882
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Highway 217 East, P.O. Box 190, Breda, Iowa 51436
(Address of principal executive offices)
(712) 673-2311
(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 37,722 shares of common stock,
no par value, at September 30, 1999.
<PAGE>
BREDA TELEPHONE CORP.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1 - 2
Unaudited Condensed Consolidated Statements of Income 3
Unaudited Condensed Consolidated Statements of
Stockholders' Equity 4
Unaudited Condensed Consolidated Statements of
Cash Flows 5 - 6
Notes to Unaudited Condensed Consolidated
Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
EXHIBITS
Exhibit 27 - Financial Data Schedule
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Condensed Consolidated Balance Sheets
September 30,
1999 December 31,
ASSETS (Unaudited) 1998
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 549,768 $ 782,959
Current portion of investments 90,092 114,550
Accounts receivable 507,502 649,044
Interest receivable 81,526 21,455
Inventories 90,987 80,279
Other 108,584 69,263
----------- -----------
1,428,459 1,717,550
----------- -----------
OTHER NONCURRENT ASSETS
Investments, less current portion 5,588,616 1,530,045
Other investments 2,572,253 2,468,022
Intangibles, net of accumulated amortization 1,081,105 1,753,447
Other, net 6,232 21,390
----------- -----------
9,248,206 5,772,904
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 6,438,004 6,185,874
----------- -----------
TOTAL ASSETS $17,114,669 $13,676,328
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
1999 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1998
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 179,909 $ 465,150
Line of credit -- 750,000
Current portion of long-term debt 655,072 655,072
Accrued taxes 233,243 177,033
Other 103,301 95,817
----------- -----------
1,171,525 2,143,072
----------- -----------
LONG-TERM DEBT, less current portion 6,717,982 7,156,342
----------- -----------
DEFERRED INCOME TAXES 209,468 268,888
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized
37,722 shares issued and outstanding at $82 and $64
stated value, respectively 3,093,204 2,414,208
Retained earnings 5,922,490 1,693,818
----------- -----------
9,015,694 4,108,026
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,114,669 $13,676,328
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Unaudited Condensed Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local network services $ 126,120 $ 96,894 $ 367,498 $ 296,275
Network access services 549,890 663,577 1,729,845 1,898,180
Cable television services 267,613 256,135 791,556 724,100
Telemarketing services 106,030 166,598 326,951 446,706
Internet services 84,548 64,098 266,364 165,529
Direct broadcast services (DBS) -- 331,482 -- 998,288
Billing and collection services 15,711 23,539 59,217 79,447
Miscellaneous 128,738 152,737 444,167 385,046
----------- ----------- ----------- -----------
1,278,650 1,755,060 3,985,598 4,993,571
----------- ----------- ----------- -----------
OPERATING EXPENSES
Plant specific operations 329,616 300,011 957,116 772,695
Plant nonspecific operations 21,865 75,565 67,179 129,711
Cost of programming 45,330 305,506 180,581 864,519
Depreciation and amortization 263,918 224,335 746,625 618,613
Customer operations 175,676 222,538 528,153 615,057
Corporate operations 183,627 151,416 648,735 451,798
General taxes 49,411 62,088 114,240 125,571
----------- ----------- ----------- -----------
1,069,443 1,341,459 3,242,629 3,577,964
----------- ----------- ----------- -----------
OPERATING INCOME 209,207 413,601 742,969 1,415,607
----------- ----------- ----------- -----------
NON-OPERATING INCOME (EXPENSE)
Interest and dividend income 74,004 20,008 287,792 98,891
Gain (loss) on sale of investments (35,304) 369 (41,423) 3,821
Gain on sale of DBS investment -- -- 7,436,415 --
Loss on disposal of assets -- (68,918) (23,287) (68,918)
Loss on extinguishment of debt -- -- -- (66,913)
Interest expense (127,072) (138,943) (374,866) (344,582)
Income from cellular partnership -- 34,873 -- 34,873
Income from cellular settlement -- 409,212 -- 409,212
Other income (expense) (1,547) 6,942 1,492 13,618
----------- ----------- ----------- -----------
(89,919) 263,543 7,286,123 80,002
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 119,288 677,144 8,029,092 1,495,609
----------- ----------- ----------- -----------
INCOME TAXES 40,845 256,310 3,008,258 555,978
----------- ----------- ----------- -----------
NET INCOME $ 78,443 $ 420,834 $ 5,020,834 $ 939,631
=========== =========== =========== ===========
NET INCOME PER SHARE (Note 3) $ 2.08 $ 11.17 $ 133.10 $ 24.93
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Unaudited Condensed Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings Total
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 37,928 $ 1,555,048 $ 1,666,332 $ 3,221,380
Total comprehensive income:
Net income 902,636 902,636
Stock value adjustment 875,150 (875,150)
Common stock redeemed, net (206) (15,990) (15,990)
------------ ------------- ------------ ------------
Balance at December 31, 1998 37,722 2,414,208 1,693,818 4,108,026
Total comprehensive income:
Net income 5,020,834 5,020,834
Stock value adjustment 678,996 (678,996)
Dividends paid ($3/share) (113,166) (113,166)
------------ ------------- ------------ ------------
Balance at September 30, 1999 37,722 $ 3,093,204 $ 5,922,490 $ 9,015,694
============ ============= ============ ============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,020,834 $ 939,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 746,625 631,329
Amortization of investment tax credits (7,327) (7,326)
Deferred income taxes (52,093) --
Gain on sale of DBS investment (7,436,415) --
Changes in operating assets and liabilities:
Decrease in assets 31,442 89,700
Decrease in liabilities (221,547) (287,047)
----------- -----------
Net cash provided by (used in) operating activities (1,918,481) 1,366,287
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (923,714) (928,430)
Salvage, net of cost of removal 10,677 109,192
Purchase of investments (4,034,113) (226,040)
(Increase) decrease in other investments (104,231) 20,218
Additions to start-up costs -- (90,247)
Proceeds from sale of DBS investment 8,038,197 --
----------- -----------
Net cash provided by (used in) investing activities 2,986,816 (1,115,307)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of capital stock -- (17,910)
Proceeds from long-term debt -- 3,650,050
Repayment of line of credit (750,000) --
Repayment of long-term debt (438,360) (3,819,785)
Dividends paid (113,166) --
----------- -----------
Net cash used in financing activities (1,301,526) (187,645)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (233,191) 63,335
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 782,959 612,885
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 549,768 $ 676,220
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
5
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
1999 1998
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 374,866 $ 344,582
Income taxes $2,990,528 $ 606,473
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Other investments acquired through debt financing $ -- $ 191,321
========== ==========
During 1998, the Company purchased all of the capital stock of Westside
Independent Telephone Company and Westside Communications, Inc. for $2,264,327.
The following is a summary of the purchase which was entirely debt financed.
Fair value of telephone plant $ 638,724
Fair value of CATV plant 212,560
Current Assets 38,675
Other Investments 404,472
Goodwill 1,336,083
Current Liabilities (40,759)
Deferred Credits (325,428)
-----------
$ 2,264,327
===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
6
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Notes to Unaudited Condensed Consolidated Financial Statements
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring items) necessary to present fairly the financial
position as of September 30, 1999 and December 31, 1998 and the results of
operations and changes in cash flows for the three and nine months ended
September 30, 1999 and 1998.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1998
audited financial statements. The results of operations for the period
ending September 30, 1999 are not necessarily indicative of the operating
results of the entire year.
2. OPERATING SEGMENTS
------------------
Breda Telephone Corporation organizes its business into two reportable
segments: local exchange carrier (LEC) services and broadcast services. The
LEC services segment provides telephone and data services to customers in
local exchanges located in Central Iowa. The broadcast services segment
provides cable television to customers in Iowa and Nebraska. Breda
Telephone Corporation also has operations in internet and telemarketing
services that do not meet the quantitative thresholds for reportable
segments.
<TABLE>
<CAPTION>
Local
Exchange
Carriers Broadcast Other Total
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Nine months ended September 30, 1999
------------------------------------
Revenues and sales
External customers $ 2,660,505 $ 791,556 $ 533,537 $ 3,985,598
Intersegment -- -- -- --
Segment profit (loss) 413,299 4,630,223 (22,688) 5,020,834
Nine months ended September 30, 1998
------------------------------------
Revenues and sales
External customers $ 2,658,948 $ 1,722,388 $ 612,235 $ 4,993,571
Intersegment -- -- -- --
Segment profit (loss) 881,480 73,904 (15,753) 939,631
</TABLE>
7
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Notes to Unaudited Condensed Consolidated Financial Statements
2. OPERATING SEGMENTS, (Continued)
-------------------------------
<TABLE>
<CAPTION>
Local
Exchange
Carriers Broadcast Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Three months ended September 30, 1999
-------------------------------------
Revenues and sales
External customers $ 829,769 $ 267,613 $ 181,268 $ 1,278,650
Intersegment -- -- -- --
Segment profit (loss) 62,295 8,890 7,258 78,443
Three months ended September 30, 1998
-------------------------------------
Revenues and sales
External customers $ 903,703 $ 587,617 $ 263,740 $ 1,755,060
Intersegment -- -- -- --
Segment profit (loss) 415,947 27,425 (22,538) 420,834
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Segment Information
-------------------------------------
Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Total revenues and sales for
reportable segments $1,097,382 $1,491,320 $3,452,061 $4,381,336
Other revenues 181,268 263,740 533,537 612,235
Elimination of intersegment
revenues and sales -- -- -- --
---------- ---------- ---------- ----------
Consolidated Revenues $1,278,650 $1,755,060 $3,985,598 $4,993,571
========== ========== ========== ==========
PROFIT:
Total profit for reportable segments $ 78,443 $ 420,834 $5,020,834 $ 939,631
Other profit (loss) -- -- -- --
Non-operating segment -- -- -- --
Minority interest -- -- -- --
---------- ---------- ---------- ----------
Net Income $ 78,443 $ 420,834 $5,020,834 $ 939,631
========== ========== ========== ==========
</TABLE>
8
<PAGE>
BREDA TELEPHONE CORPORATION
BREDA, IOWA
Notes to Unaudited Condensed Consolidated Financial Statements
3. NET INCOME PER COMMON STOCK
---------------------------
Net income per common share for 1999 and 1998 was computed by dividing the
weighted average number of shares of common stock outstanding into the net
income. The weighted average number of shares of common stock outstanding
for the three and nine month periods ended September 30, 1999 and 1998 are
37,722 and 37,722 and 37,811 and 37,707, respectively.
4. DISPOSITION OF DBS INVESTMENT
-----------------------------
On January 11, 1999, the Company sold substantially all of its assets and
liabilities of their Direct Broadcast Satellite (DBS) investment. The
Company received cash of $8,274,689; however, $230,000 was paid as a
commission and $6,492 was held in an escrow account until final sale
adjustments were completed. The transaction resulted in a gain of
$7,436,415, which was included in operations during the first quarter of
1999.
5. RECLASSIFICATION
----------------
Certain amounts previously reported for the prior year have been
reclassified to conform to the 1999 presentation.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------------
Results of Operations.
----------------------
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
----------------------------------------------------------------------
September 30, 1998.
-------------------
There was a decrease in total operating revenues for the nine month
period ended September 30, 1999, when compared to the same period in
1998, of $1,007,973, or 20.2%. One factor contributing to the decrease
was the fact that no direct broadcast service revenues were received
after the January 11, 1999 sale of the direct broadcast satellite
operation. For example, during the nine month period ended September
30, 1998, direct broadcast service revenues represented 20.0% of total
operating revenues, or $998,288. Two other important components of the
decrease in total operating revenues were the decreases in the
revenues from telemarketing services and in access charges.
Telemarketing revenues decreased by $119,755, or 26.8%, because of
some calling number unavailability, which resulted in down time.
Access charges revenues decreased by $168,335, or 8.9%, because of a
reduction in the reimbursement rate for interstate access charges and
because of a decline in the volume of telemarketing calls made by
Breda's subsidiary, Pacific Junction. The telemarketing calls made by
Pacific Junction are a major source of access charges revenue.
There was an increase in local network services revenue of $71,223, or
24%, during the nine month period ended September 30, 1999, when
compared to the same period in 1998. This increase was due primarily
to two factors. One was an increase of 340 telephone subscribers,
which resulted from the purchase of Westside Independent Telephone
Company in June of 1998. The other factor was a rate increase, which
went into effect in April, 1999. There was also an increase in cable
television revenues of $67,456, or 9.3%, when comparing the two
periods. This increase resulted primarily from three factors. One was
a rate increase that was effective on April 1, 1999. The second was
the addition of 90 cable subscribers from Auburn, Iowa as of November
1, 1998. The third was the addition of 301 additional cable
subscribers resulting from the acquisition of Westside Communications,
Inc. in June, 1998. There was also an increase in revenues from
internet services of $100,835, or 60.9%, when comparing the two
periods. This increase resulted from an increased customer base.
There was a decrease in total operating expenses of $335,335, or 9.4%,
for the nine month period ended September 30, 1999, when compared to
the same period in 1998. Programming expenses declined by $683,938
when comparing the two periods because of the sale of the direct
broadcast satellite operation. The remaining programming expenses are
attributable to cable television operations. Plant operations expenses
increased by $121,889, or 13.5%, when comparing the two periods. This
increase primarily reflects wage and price increases and additional
expenditures incurred with updating switches in three of the telephone
exchange service areas. There were also additional expenses incurred
during the nine month period ended September 30, 1999 with equipment
updates to add cable television channels in most of the 19 towns
served. Corporation operations expenses increased by $196,937, or
43.6%, when comparing the two periods. This increase relates to wage
increases, additional staff, and legal, accounting and other expenses
incurred with respect to Breda becoming a reporting company under
Securities Exchange Act of 1934. Customer operations expenses
decreased $86,904, or 14.1%, when comparing the two periods. The
decrease resulted from the fact that Breda did not need to provide
customer services for the direct broadcast satellite operation after
the sale of that operation in January, 1999, and from a decrease in
staffing hours for that area. The upgrading of switch equipment and
other capital improvements resulted in
10
<PAGE>
an increase in depreciation expense of $128,012, or 20.7%, again when
comparing the two periods.
Non-operating income before income taxes increased by $7,206,121, or
9007.4%, during the nine month period ended September 30, 1999, when
compared to the same period in 1998. Most of this increase was the
result of the $7,436,415 gain on the sale of the direct broadcast
satellite operation and the additional interest income on the funds
invested from that sale. The nine month period ended September 30,
1998, however, also reflected $34,873 in income from cellular
partnerships and $409,212 from non-recurring cellular settlements. No
similar income was received during the nine month period ended
September 30, 1999.
Income taxes increased by $2,452,280 for the nine month period ended
September 30, 1999, when compared to the same period in 1998. The
increase resulted primarily from taxes on the gain on the sale of the
direct broadcast satellite operation.
Net income increased by $4,081,203 for the nine month period ended
September 30, 1999, when compared to the same period in 1998. The
increase was attributable mainly to the sale of the direct broadcast
satellite operation.
Liquidity and Capital Resources at Year Ended 1998.
---------------------------------------------------
Breda's net working capital was a negative $425,522 as of the close of
December 1998. This represents a decrease of $448,561 in net working
capital from year-end 1997. The negative net working capital at
year-end 1998 was due primarily to timing on the movement of cash. A
$750,000 line of credit advance was taken from the Rural Telephone
Finance Cooperative in December of 1998, and paid back on January 12,
1999.
Liquidity and Capital Resources at Nine Months Ended September 30,
----------------------------------------------------------------------
1999.
-----
Breda had a decrease in cash and cash equivalents of $233,191 during
the nine month period ended September 30, 1999, when compared to the
year ended December 31, 1998. This resulted in a balance of $549,768
as of September 30, 1999. Breda's investments increased, however, by
$4,034,113. The increase in the overall cash and investments resulted
primarily from the proceeds received from the sale of the direct
broadcast satellite operation.
Breda's net working capital was $256,934 at September 30, 1999.
Estimated income tax payments were funded from non-current assets
during this time period. Current liabilities during the nine-month
period ended September 30, 1999 were therefore reduced without a
corresponding reduction in current assets.
Other investments increased by $104,231 for the nine month period
ending September 30, 1999. This increase resulted from an increased
investment in a cellular partnership.
Other Activities
----------------
A final balloon payment of $79,382 is due in October of 1999 under the
real estate contract entered into by Tele-Services for the building
utilized by Breda and Prairie Telephone as their office and
headquarters.
The sale of Breda's direct broadcast satellite operation in January of
1999 generated $8,200,000, before taxes. The after tax amount is
estimated to be approximately $5,200,000.
11
<PAGE>
Breda and its subsidiaries operate in capital-intensive industries.
Their primary source of working capital continues to be revenues from
operating activities. The sale of Breda's direct broadcast satellite
division in January of 1999 also provided a significant source of
working capital and funding for potential future expansions.
Breda and its subsidiaries have and will continue to incur capital
expenditures in connection with their two-year project of upgrading
their telephone, cable, and other equipment and systems for Year 2000
compliance and related FCC requirements.
Breda and its subsidiaries have broken down their assessment,
conversion and remediation, and testing procedures and activities for
Year 2000 compliance into the following three general categories:
o Network systems, which are those systems, components and software
directly affecting telecommunications, transmission or reception.
Network systems includes switching equipment, internet routers,
generators, fiber terminals, receivers, modulators,
de-scramblers, dialers, amplifiers and other telephone and cable
equipment and systems.
o Support systems, which are operations and administrative support
systems. Support systems include billing and accounting and
related computer hardware and software.
o Auxiliary systems, which are internal processes such as payroll
and human resources. Auxiliary systems include telephone,
security and alarm control, environmental control, and equipment
such as postage machine, faxes and copiers.
Breda and its subsidiaries estimate that their assessment of their
Year 2000 risks will be completed by November 30, 1999. The
approximate percentage of assessment activities for each of the above
categories which had been completed at the time of the filing of this
quarterly report were as follows:
o Breda o Prairie Telephone
o Network systems - 90% complete o Network systems - 90% complete
o Support systems - 90% complete o Support systems - 90% complete
o Auxiliary systems - 90% complete o Auxiliary systems - 90% complete
o Westside Independent o Tele-Services and Westside
Communications
o Network systems - 90% complete o Network systems - 90% complete
o Support systems - 90% complete o Support systems - 90% complete
o Auxiliary systems - 90% complete o Auxiliary systems - 90% complete
o BTC o Pacific Junction
o Network systems - 90% complete o Network systems - 90% complete
o Support systems - 90% complete o Support systems - 90% complete
o Auxiliary systems - 90% complete o Auxiliary systems - 90% complete
12
<PAGE>
As shown by the above percentages, the assessment activities for the
network, support and auxiliary systems have been substantially
completed. As indicated above, Breda estimates that all remaining
assessment activities will be completed by November 30, 1999.
Breda's and its subsidiaries' assessment activities also include
assessing the Year 2000 compliance and associated risks of all third
parties and subscribers who are material to their businesses. Breda
believes they have identified all applicable third parties for this
purpose. Breda has obtained written compliance statements from many of
the third parties and is pursuing obtaining statements from the
others. Based on the compliance statements already received from some
of the third parties and from discussions with the other third
parties, Breda believes that all material third parties will timely
achieve Year 2000 compliance with respect to matters affecting Breda's
and its subsidiaries' businesses.
Breda and its subsidiaries do not anticipate any loss of any
subscribers due to Year 2000 issues or risks. Breda also does not
believe that the loss of any particular subscriber, other than Pacific
Junction, would have a material adverse affect on Breda or its
subsidiaries. Pacific Junction's telemarketing services create a major
source of access charges revenue.
Breda and its subsidiaries are in the process of completing all
necessary conversion and remediation activities. Breda estimates that
all remaining conversion and remediation activities will be completed
by November 30, 1999. The approximate percentage of conversion and
remediation activities which had been completed for the network
systems, support systems and auxiliary systems at the time of the
filing of this quarterly report were as follows:
o Breda - 90% complete o Prairie Telephone - 90%
o Westside Independent - 90% complete complete
o Pacific Junction - 90% complete o Tele-Services and Westside
o BTC - 90% complete Communications - 90% complete
As indicated above, Breda estimates that all remaining conversion and
remediation activities will be completed by November 30, 1999.
Breda does not believe that any detailed testing of Breda's and its
subsidiaries' network systems is possible given the nature of those
systems and their interplay with the systems of other third parties.
Breda has, however, been advised by the manufacturer of its telephone
switches that the switches that have been recently installed are all
Year 2000 compliant. As of the time of the filing of this quarterly
report, all switches have been replaced except for one. The remaining
switch will be replaced on November 16, 1999. Breda believes that all
remaining assessment, conversion and remediation activities regarding
all network systems will be completed by November 30, 1999.
The testing of the support systems is an ongoing process, with testing
occurring as the various conversion and remediation processes are
completed. Any replacement components for the support systems are
tested when acquired. The results of all testing of the support
systems to date has been satisfactory to Breda.
The remaining testing on auxiliary systems will be done following the
completion of the assessment, conversion and remediation activities
for the auxiliary systems.
13
<PAGE>
Breda estimates that all remaining testing activities will be
completed by November 30, 1999.
Breda estimates that the aggregate cost for its and its subsidiaries
Year 2000 compliance activities will be approximately $2,000,000 when
completed. It has incurred approximately $1,680,019 to date in
conducting its Year 2000 activities.
Neither Breda nor any of its subsidiaries have any written contingency
plans regarding any Year 2000 issues or problems that may not be
properly remediated. They are in the process of formulating
contingency plans, but they had not been finalized as of the time of
the filing of this quarterly report.
Based on the above information, however, Breda does not anticipate
that Year 2000 issues will have a material adverse effect on Breda,
its subsidiaries or their consolidated financial position, results of
operations or cash flows because it believes that its and its
subsidiaries' equipment, software and other internal computer systems,
and those of the third parties with which they have material dealings,
will achieve Year 2000 compliance before Year 2000 issues will begin
to potentially have an adverse effect. There can be no assurance,
however, that Breda's or its subsidiaries' Year 2000 remediation
efforts, or those of any third parties with which they may deal, will
be properly and timely completed. The failure to do so could have a
material adverse effect on Breda and its subsidiaries.
Breda's primary capital investment activity will currently continue to
be additions to property, plant and equipment. For example, Breda
continues to make investments in state-of-the-art technology in order
to try to offer subscribers the best possible service. Capital
expenditures for 1999 are expected to be over $1,061,000.
Breda believes that the funds from the sale of its direct broadcast
satellite division, along with its anticipated normal operating
revenues, will generate sufficient working capital for Breda and its
subsidiaries to meet their current operating needs and maintain
historical fixed asset addition levels.
Breda also plans to continue to consider expanding its core business
of providing telephone services by looking at any opportunities which
may arise to acquire additional telephone lines. For example, Breda
considered and pursued the acquisition of the telephone lines recently
sold by GTE and US West. Those telephone lines were, however, acquired
by other telephone companies. One of the purchasers of some of the
telephone lines of US West was Iowa Network Services. Iowa Network
Services provides various services to telephone companies, including
Breda, Prairie Telephone and Westside Independent. Although no
definite plans exist, it is possible that Iowa Network Services may
consider selling some of those telephone lines in the next two to five
years. If that occurs, Breda, Prairie Telephone and Westside
Independent will consider pursuing the acquisition of those telephone
lines. There is no assurance, however, that Iowa Network Services will
ever sell any of the telephone lines, or if it does, that Breda,
Prairie Telephone or Westside Independent will determine to pursue
those acquisitions or will be successful in acquiring any lines even
if they determine to pursue them. Breda also has an interest in Alpine
Communications, L.C., which was formed by several independent
telephone companies. Alpine Communications, L.C. has purchased former
US West telephone properties in Iowa. Given the recent acquisitions of
the GTE and US West telephone lines by other telephone companies,
Breda currently does not foresee the possibility of the acquisition of
any additional telephone lines, other than perhaps from Iowa Network
Services as discussed above.
14
<PAGE>
Breda, Prairie Telephone and Westside Independent currently have no
definite plans to provide any material additional or improved services
to their subscribers. This determination may change quickly, however,
given the rapidly changing technology in the telecommunications and
cable industries.
There are also no current plans to expand the cable services areas of,
or the cable services provided by, Tele-Services and Westside
Communications.
Three Months Ended September 30, 1999 Compared to Three Months Ended
----------------------------------------------------------------------
September 30, 1998.
-------------------
There was a decrease in total operating revenues for the three month
period ended September 30, 1999, when compared to the same period in
1998, of $476,410, or 27.1%. The decrease resulted primarily from the
fact that Breda no longer received any revenues from its direct
broadcast satellite operation after the January 11, 1999 sale of that
operation. The three-month period ended September 30, 1999 showed zero
direct broadcast satellite revenues, while the same three-month period
in 1998 showed $331,482. Another important component of the decrease
in total operating revenues was the $60,568 decrease in the
telemarketing revenues. Telemarketing revenues were down because of
some calling number unavailability, which resulted in some down time.
There was an increase in local network services revenue of $29,226, or
30.2%, during the three month period ended September 30, 1999, when
compared to the same period in 1998. This increase was due primarily
to an increase in customers requesting a second line for internet
services and to a rate increase, which was effective in April, 1999.
There was a decrease in network access services revenue of $113,687
for the three month period ended September 30, 1999, when compared to
the same period in 1998. This decrease resulted primarily from a
decrease in the number of calls made by the telemarketing operation.
The telemarketing calls made by the telemarketing operation are a
major source of access revenues. Access revenue was also affected by
an access rate reimbursement decrease, which went into effect in July,
1999. There was an increase in cable television revenues of $11,478,
or 4.5%, when comparing the two periods. This increase resulted
primarily from two factors. One was a rate increase that was effective
April 1, 1999. The other was the addition of 90 cable customers from
Auburn, Iowa, as of November 1, 1998. The revenues from Internet
services increased $20,450, or 31.9%, over the three-month period a
year ago because of an increased customer base.
There was a decrease in total operating expenses for the three month
period ended September 30, 1999, when compared to the same period in
1998, of $272,016, or 20.3%. Programming expenses declined by $260,176
when comparing these two periods because of the sale of the direct
broadcast satellite operation. Plant operations expenses decreased by
$24,095, or 6.4%, when comparing the two periods. This decrease
primarily reflects some staffing changes and timing differences on
repair and maintenance expenditures. Corporate operations expenses
increased by $32,211, or 21.3%, when comparing the two periods. This
increase reflects wage increases, additional staff, and legal,
accounting and other expenses related to the need for Breda to become
a reporting company under the Securities Exchange Act of 1934.
Customer operations expenses decreased $46,862, or 21.1% when
comparing the two periods. This decrease was primarily due to the fact
that Breda was no longer required to provide customer service for the
direct broadcast satellite operation after the sale of that operation
in January, 1999, and from a decrease in the staffing in that area.
The upgrading of switch equipment and other capital improvements
resulted in an increase in depreciation expense of $39,583, or 17.6%,
again when comparing the two periods.
15
<PAGE>
Non-operating income before income taxes increased by $353,462, or
134.1%, during the three month period ended September 30, 1999, when
compared to the same period in 1998. In the three month period ended
September 30, 1998, however, Breda had received $444,085 in cellular
partnership income and non-recurring cellular settlements. No similar
income was received in the similar period in 1999. Losses on the sale
of investments and additional interest expenses were offset by the
increase in dividend and interest income from the proceeds invested
from the sale of the direct broadcast satellite operation.
Income taxes decreased by $215,465 for the three month period ended
September 30, 1999, when compared to the same period in 1998. This
resulted primarily from the $557,856 decrease in overall income before
income taxes.
As a result, net income decreased $342,391 during the three-month
period ended September 30, 1999, when compared to the same period in
1998.
Forward Looking Statements.
---------------------------
This item and other items in this quarterly report may contain certain
forward looking statements that involve and are subject to various
risks, uncertainties and assumptions. Forward looking statements
include, but are not limited to, statements with respect to
anticipated future trends in revenues and net income, projections
concerning operations and cash flow, growth and acquisition
opportunities, management's plans and intentions for the future, and
other similar forecasts and statements of expectation. Words such as
"expects," "estimates," "plans," "anticipates," "contemplates,"
"predicts," "intends," "believes," "seeks," "should" and other similar
expressions or variations thereof are intended to identify forward
looking statements. Forward looking statements made by Breda and its
management are based on estimates, projections, beliefs and
assumptions made or existing at the time of such statements and are
not guarantees of future results or performance. Breda disclaims any
obligation to update or revise any forward looking statements based on
the occurrence of future events, the receipt of new information, or
otherwise.
Actual future performance, outcomes and results may differ materially
from those expressed in forward looking statements as a result of a
number of risks, uncertainties and assumptions. The risks,
uncertainties and assumptions affecting forward looking statements
include, but are not limited to:
o the possible adverse effects to Breda and its subsidiaries which
may arise under the regulations which will be promulgated under
the Telecommunications Act of 1996, including increased
competition;
o adverse changes by the Federal Communications Commission in the
rates of the access charges that can be charged by Breda and its
subsidiaries to long distance carriers;
o technological advances in the telecommunications and cable
industries which may replace or otherwise adversely affect in a
material way the existing technologies utilized by Breda and its
subsidiaries;
o potential adverse effects resulting from Year 2000 compliance
issues;
o general industry and economic conditions;
o acts or omissions of third parties which are beyond the control
of Breda;
16
<PAGE>
o changes in or further governmental regulations and policies; and
o continued availability of financing, and on favorable terms.
The discussion of Breda's financial condition and results of
operations should also be read in conjunction with the financial
statements and related notes included in Item 1 above in this
quarterly report.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
Breda currently is not aware of any pending legal proceeding to which
Breda is a party or to which any of Breda's property is subject, other
than routine litigation that is incidental to its business. Breda
currently is also not aware that any governmental authority is
contemplating any legal proceeding against Breda or any of its
property.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
Each shareholder of Breda is entitled to only one vote on each matter
presented for the vote of shareholders, regardless of the number of
shares of common stock held by the shareholder. There were, however,
two exceptions.
One exception is that each shareholder who previously held Class A
stock of Breda has one vote for each share of Class A stock held by
the shareholder on February 28, 1995, and until one of the following
events occurs:
o the shareholder no longer receives services from Breda,
o the shareholder no longer resides in the Breda or Lidderdale
telephone exchange areas served by Breda,
o the shareholder dies, or
o the shareholder transfers the shareholder's shares to someone
else.
This exception has not been changed.
The other exception was that shareholders who were not receiving
services from Breda did not have any voting rights. On October 11,
1999, the Board of Directors of Breda adopted a resolution
discontinuing this exception, and from and as of October 11, 1999,
shareholders who were not receiving services from Breda had the same
voting rights as the other shareholders. In other words, they became
entitled to one vote on each matter presented for the vote of the
shareholders, regardless of the number of shares of common stock held
by them.
As of September 30, 1999, there were 118 shareholders who previously
had no voting rights because of the fact they were not receiving
services from Breda. The Board of Directors' action therefore resulted
in an additional 118 shareholders having voting rights. As of
September 30, 1999, there were 550 shareholders in Breda who had
voting rights, so after the Board of Directors' action there was a
total of 668 shareholders with voting rights.
Breda has not issued any shares of its common stock in 1999, through
September 30, 1999.
17
<PAGE>
Item 3. Defaults Upon Senior Securities.
--------------------------------
There has been no material default or any material arrearage or
delinquency by Breda of the type required to be reported under this
item.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters have been submitted to a vote of the shareholders of Breda
during the period of July 1, 1999 through September 30, 1999.
Item 5. Other Information.
------------------
Tele-Services, Ltd. is a wholly-owned subsidiary of Breda which
provides cable television services to sixteen towns in Iowa and one
town in Nebraska. Westside Communications, Inc. is a wholly-owned
subsidiary of Tele-Services which provides cable television services
to two Iowa towns. On October 11, 1999, the board of directors of
Westside Communications, and Tele-Services, as the sole shareholder of
Westside Communications, voted to dissolve and liquidate Westside
Communications. Articles of Dissolution will be filed with the Iowa
Secretary of State before the close of November. After that filing,
all of Westside Communications' assets will be transferred to, and all
of its liabilities will be assumed by, Tele-Services. The dissolution
of Westside Communications and the transfer of its assets to
Tele-Services and the assumption of its liabilities by Tele-Services
will not have any material adverse effect on the operations or
financial condition of Tele-Services. The dissolution is being
effectuated primarily for administrative convenience.
An auction was held on October 24, 1999, where shareholders desiring
to sell their shares of Breda's common stock were given the
opportunity to sell those shares to other Breda shareholders desiring
to purchase additional shares of Breda's common stock. Breda
facilitated and paid the costs of the auction, except that the sellers
paid the auction fees and clerking fees related to their shares. The
auction was provided for the convenience of Breda's shareholders, and
no shares were repurchased or issued by Breda pursuant to the auction.
A total of 1,924 shares of common stock were sold by 32 different
shareholders to 25 other shareholders of Breda, for purchase prices
ranging from $145 per share to $180 per share. Breda had a right of
first refusal to purchase all of the shares sold in the auction, but
elected not to exercise its right. No officers or directors of Breda
sold or purchased any shares in the auction. Breda does not have any
plans to arrange any other auctions in the future.
Breda's board of directors determines the purchase price payable for
newly-issued shares of Breda's common stock. Breda's board of
directors also determines the redemption price that will be paid by
Breda if it elects to redeem a shareholder's shares in any of the
circumstances in which Breda has the right to purchase those shares.
Breda has that right if:
o the shareholder is no longer receiving services from Breda,
unless the shareholder already was not receiving services from
Breda on February 28, 1995;
o the shareholder no longer resides in the Breda or Lidderdale
telephone exchange areas served by Breda, unless the shareholder
already resided outside those areas on February 28, 1995; or
o the shareholder dies, unless the heir of the shares of Breda's
stock meets the eligibility requirements for ownership of Breda's
stock.
18
<PAGE>
The board of directors has historically established the issuance price
and the redemption price at approximately 75% of the book value of
Breda. The board of directors has historically made this determination
at or around the annual meeting of the board, which is generally held
in April, based upon Breda's then most recent year- end audited
financial statements. The issuance price and the redemption price as
so determined by the board of directors then generally applies until
the board of directors makes a new determination at or around the next
annual meeting of the board. The board of directors departed from this
historical practice, however, on November 2, 1999, by adopting a
resolution fixing the issuance price for newly- issued shares and the
redemption price to be $149 per share. The $149 amount is roughly
based upon the average sales price per share in the auction of $150.58
per share. It is not based on Breda's book value. The board of
directors took this action because it believed the above-referenced
auction provided it with a basis to make a more current determination
on this issue. The board of directors intends to otherwise address
this issue on an annual basis, however, consistent with the
above-described historical practices of the board of directors.
The board of directors of Breda has also determined to allow
shareholders to advise Breda of the fact that they desire to sell any
or all of their shares of Breda's common stock to any qualified buyer,
and to allow qualified buyers to advise Breda of the fact that they
desire to purchase shares of Breda's common stock from other
shareholders of Breda. Breda will keep a list of those shareholders
and qualified buyers, and make the list available to all of the
shareholders and qualified buyers on the list. A qualified buyer is a
person who is a resident of the Breda or Lidderdale telephone exchange
areas served by Breda who subscribes to Breda's telephone services, or
an entity which has its principal place of business in the Breda or
Lidderdale telephone exchange areas served by Breda and which
subscribes to Breda's telephone services. A person or entity cannot,
however, be a qualified buyer if the person or entity already owns
more than 1% of the total issued and outstanding common stock of
Breda. Also, a qualified buyer cannot purchase shares from any
shareholder of Breda to the extent that the shares purchased by the
qualified buyer would cause the qualified buyer to own more than 1% of
the total issued and outstanding common stock of Breda. If a person
owns 5% or more of the ownership interests of an entity which owns
shares of Breda's common stock, the shares of Breda's common stock
held by that entity and by the person will be added together for
determining whether the 1% limitation is exceeded. The 1% limitation
is set forth in the Amended and Restated Articles of Incorporation of
Breda. The terms of any sale between a shareholder and a qualified
buyer will be negotiated by them, and no one will be required to sell
or buy any shares because their name is on the list. Breda also
retains its right to purchase any shares being sold by any shareholder
to any qualified buyer under the right of first refusal granted to
Breda in its Amended and Restated Articles of Incorporation.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
The only exhibit being filed along with this quarterly report is a
Financial Data Schedule, at Exhibit 27.
Breda did not file any reports on Form 8-K during the period of July
1, 1999 through September 30, 1999.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BREDA TELEPHONE CORP.
Date: November 10, 1999. By: /s/ Dean Schettler
-----------------------------
Dean Schettler, President
Date: November 10, 1999. By: /s/ Scott Bailey
-----------------------------
Scott Bailey, Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Breda
Telephone Corp.'s financial statements for the third quarter ended September 30,
1999 and the year ended December 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 782,959 549,768
<SECURITIES> 1,644,595 5,678,708
<RECEIVABLES> 670,499 589,028
<ALLOWANCES> 0 0
<INVENTORY> 80,279 90,987
<CURRENT-ASSETS> 1,717,550 1,428,459
<PP&E> 6,185,874 6,438,004
<DEPRECIATION> 775,293 746,625
<TOTAL-ASSETS> 13,676,328 17,114,669
<CURRENT-LIABILITIES> 2,143,072 1,171,525
<BONDS> 0 0
0 0
0 0
<COMMON> 2,414,208 3,093,204
<OTHER-SE> 1,693,818 5,922,490
<TOTAL-LIABILITY-AND-EQUITY> 13,676,328 17,114,669
<SALES> 0 0
<TOTAL-REVENUES> 2,998,767 3,985,598
<CGS> 0 0
<TOTAL-COSTS> 1,956,397 3,242,629
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 396,234 374,866
<INCOME-PRETAX> 1,515,505 8,029,092
<INCOME-TAX> 612,869 3,008,258
<INCOME-CONTINUING> 902,636 5,020,834
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 902,636 5,020,834
<EPS-BASIC> 5.79 133.10
<EPS-DILUTED> 5.79 133.10
</TABLE>
