Re: Breda Telephone Corp.
CIK No. 0001084448
Report on Form 10-QSB for Period Ended 6/30/00
SEC File No. 0-26525
Ladies and Gentlemen:
On behalf of Breda Telephone Corp., and as part of this transmission for
electronic filing in accordance with Regulation S-T, filed herewith is Breda
Telephone Corp.'s quarterly report on Form 10-QSB for the period ended June 30,
2000.
Please address any inquiries concerning this filing to the undersigned at
515-283-3126, or to Greg Page at 515-283-3165. Written correspondence should be
directed to the named persons at the Nyemaster Law Firm, 700 Walnut, Suite 1600,
Des Moines, Iowa 50309. Our facsimile number for written correspondence is
515-283-3108.
Thank you.
Respectfully,
/s/ Tom Sullivan
---------------------
Tom Sullivan
cc: Breda Telephone Corp.
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2000.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 37,682 shares of common stock,
no par value, at June 30, 2000.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
For the Periods
Ended June 30, 2000 and 1999
and the Year Ended December 31, 1999
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
Contents
Page
Unaudited Condensed Consolidated Financial Statements:
Balance Sheets 3 - 4
Statements of Income 5
Statements of Stockholders' Equity 6
Statements of Cash Flows 7
Notes to Unaudited Condensed Consolidated Financial
Statements 8 - 10
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2000 December 31,
ASSETS (Unaudited) 1999
------ ----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 3,379,744 $ 411,341
Current portion of investments 94,409 94,810
Accounts receivable 689,486 681,675
Income taxes refundable -- 542,330
Interest receivable 67,761 67,580
Inventories 100,186 88,479
Other 88,099 77,527
----------- -----------
4,419,685 1,963,742
----------- -----------
OTHER NONCURRENT ASSETS
Investments, less current portion 4,525,376 4,417,624
Other investments 2,471,811 2,725,488
Intangibles, net of accumulated amortization 1,176,410 1,222,372
Deferred income taxes 60,123 11,360
----------- -----------
8,233,720 8,376,844
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 6,356,940 6,340,193
----------- -----------
TOTAL ASSETS $19,010,345 $16,680,779
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1999
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 284,839 $ 608,412
Accounts payable 448,038 239,787
Accrued taxes 657,796 125,643
Other 124,716 104,258
----------- -----------
1,515,389 1,078,100
----------- -----------
LONG-TERM DEBT, less current portion 5,408,371 6,547,930
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized,
37,682 shares issued and outstanding at $235 and $149
stated value, respectively 8,855,270 5,614,618
Retained earnings 3,231,315 3,440,131
----------- -----------
12,086,585 9,054,749
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,010,345 $16,680,779
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local network services $ 143,357 $ 127,380 $ 279,679 $ 241,378
Network access services 583,127 625,478 1,146,416 1,179,955
Cable television services 264,359 268,789 529,708 523,943
Telemarketing services 73,567 103,996 127,368 220,920
Internet services 160,404 96,661 305,123 181,832
Billing and collection services 17,170 18,422 43,178 43,506
Miscellaneous 249,421 141,897 423,193 315,414
----------- ----------- ----------- -----------
1,491,405 1,382,623 2,854,665 2,706,948
----------- ----------- ----------- -----------
OPERATING EXPENSES
Plant specific operations 466,786 315,736 886,679 623,296
Plant nonspecific operations 30,670 20,384 52,025 45,314
Cost of programming 75,042 73,246 147,363 135,251
Depreciation and amortization 269,933 243,581 529,684 483,854
Customer operations 207,655 182,224 394,489 355,533
Corporate operations 294,050 258,378 530,439 465,108
General taxes 34,510 29,363 68,116 64,830
----------- ----------- ----------- -----------
1,378,646 1,122,912 2,608,795 2,173,186
----------- ----------- ----------- -----------
OPERATING INCOME 112,759 259,711 245,870 533,762
----------- ----------- ----------- -----------
NON-OPERATING INCOME (EXPENSE)
Interest and dividend income 86,613 92,638 158,338 214,987
Loss on sale of investments (2,808) (6,119) (2,808) (6,119)
Gain on sale of DBS investment -- -- -- 7,436,415
Gain on sale of cellular investment 4,900,959 -- 4,900,959 --
Interest expense (132,842) (123,065) (263,633) (248,993)
Income from cellular partnership 83,335 -- 83,335 --
Income from Alpine partnership -- -- 23,508 --
Other 9,112 (24,146) 4,122 (20,248)
----------- ----------- ----------- -----------
4,944,369 (60,692) 4,903,821 7,376,042
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,057,128 199,019 5,149,691 7,909,804
----------- ----------- ----------- -----------
INCOME TAXES 1,993,780 102,054 2,004,809 2,967,413
----------- ----------- ----------- -----------
NET INCOME $ 3,063,348 $ 96,965 $ 3,144,882 $ 4,942,391
=========== =========== =========== ===========
NET INCOME PER SHARE (Note 3) $ 81.29 $ 2.57 $ 83.46 $ 131.02
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
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, 1998 37,722 $ 2,414,208 $ 1,693,818 $ 4,108,026
Total comprehensive income:
Net income 5,065,849 5,065,849
Dividends paid (113,166) (113,166)
Common stock redeemed, net (40) (5,960) (5,960)
Stock value adjustment 3,206,370 (3,206,370)
----------- ----------- ----------- -----------
Balance at December 31, 1999 37,682 5,614,618 3,440,131 9,054,749
Total comprehensive income:
Net income 3,144,882 3,144,882
Dividends paid (113,046) (113,046)
Stock value adjustment 3,240,652 (3,240,652)
----------- ----------- ----------- -----------
Balance at June 30, 2000 37,682 $ 8,855,270 $ 3,231,315 $12,086,585
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,144,882 $ 4,942,391
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 529,684 483,854
Amortization of investment tax credits (4,884) (4,884)
Deferred income taxes (43,879) (6,119)
Gain on sale of DBS investment -- (7,436,415)
Gain on sale of cellular investment (4,900,959) --
Changes in operating assets and liabilities:
Decrease in assets 512,059 12,094
Increase in liabilities 760,862 750,187
----------- -----------
Net cash used in operating activities (2,235) (1,258,892)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (500,469) (554,869)
Salvage, net of removal cost -- 10,677
Purchase of investments (230,264) (5,893,509)
Sale of investments 122,913 433,598
(Increase) decrease in other investments 46,357 (3,869)
Proceeds from sale of DBS investment -- 8,038,197
Proceeds from sale of cellular investment 5,108,279 --
----------- -----------
Net cash provided by investing activities 4,546,816 2,030,225
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of line of credit -- (750,000)
Repayment of long-term debt (1,463,132) (290,228)
Dividends paid (113,046) (113,166)
----------- -----------
Net cash used in financing activities (1,576,178) (1,153,394)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,968,403 (382,061)
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 411,341 782,959
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,379,744 $ 400,898
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 263,633 $ 248,993
Income taxes $ 975,000 $ 1,990,528
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
- 7 -
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 June 30, 2000 and December 31, 1999 and the
results of operations and changes in cash flows for the three months
and six months ended June 30, 2000 and 1999.
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, 1999 audited financial statements. The results of
operations for the period ending June 30, 2000 are not necessarily
indicative of the operating results of the entire year.
NOTE 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>
Six months ended June 30, 2000
Revenues and sales
External customers $ 1,892,130 $ 529,708 $ 432,827 $ 2,854,665
Intersegment -- -- -- --
Segment profit (loss) 3,258,959 (65,228) (48,849) 3,144,882
Six months ended June 30, 1999
Revenues and sales
External customers $ 1,780,178 $ 523,943 $ 402,827 $ 2,706,948
Intersegment -- -- -- --
Segment profit (loss) 328,203 4,621,333 (7,145) 4,942,391
</TABLE>
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. OPERATING SEGMENTS, (Continued)
<TABLE>
<CAPTION>
Local
Exchange
Carriers Broadcast Other Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Three months ended June 30, 2000
Revenues and sales
External customers $ 993,075 $ 264,359 $ 233,971 $ 1,491,405
Intersegment -- -- -- --
Segment profit (loss) 3,128,837 (49,312) (16,177) 3,063,348
Three months ended June 30, 1999
Revenues and sales
External customers $ 913,177 $ 268,789 $ 200,657 $ 1,382,623
Intersegment -- -- -- --
Segment profit (loss) 130,126 (35,394) 2,233 96,965
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Segment Information Three months ended Six months ended
-------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Total revenues and sales for reportable
segments $1,257,434 $1,181,966 $2,421,838 $2,304,121
Other revenues 233,971 200,657 432,827 402,827
Elimination of intersegment revenues
and sales -- -- -- --
---------- ---------- ---------- ----------
Consolidated Revenues $1,491,405 $1,382,623 $2,854,665 $2,706,948
========== ========== ========== ==========
PROFIT:
Total profit for reportable segments $3,063,348 $ 96,965 $3,144,882 $4,942,391
Other profit (loss) -- -- -- --
Non-operating segment -- -- -- --
Minority interest -- -- -- --
---------- ---------- ---------- ----------
Net Income $3,063,348 $ 96,965 $3,144,882 $4,942,391
========== ========== ========== ==========
</TABLE>
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. NET INCOME PER SHARE
Net income per common share for June 30, 2000 and 1999 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 months and six months ended
June 30, 2000 and 1999 were 37,682.
NOTE 4. DISPOSITION OF CELLULAR AND DBS INVESTMENTS
On May 12, 2000, the Company sold all of their outstanding shares of
Central Iowa Cellular, Inc. (CIC). The Company received cash of
$5,108,279 including the majority of the Company's share of the Tower
Net Proceeds. The transaction resulted in a gain of $4,900,959, which
was included in operations during the second quarter of 2000.
On January 11, 1999, the Company sold substantially all of its assets
and liabilities related to the Direct Broadcast Satellite (DBS)
investment. The Company received cash of $8,038,197 and the
transaction resulted in a gain of $7,436,415, which was included in
operations during the first quarter of 1999.
- 10 -
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30,
1999.
There was an increase in total operating revenues for the six-month
period ending June 30, 2000, when compared to the same period in 1999,
of $147,717, or 5.45%. This increase was a combination of increases
and decreases in the services making up operating revenues. While
local network services revenues for the six-month period ending June
30, 2000, increased $38,301, or 15.9%, compared to the six-month
period ending June 30, 1999, the network access services decreased by
$33,539 when comparing these same two six-month periods. The local
network service revenue increase resulted from the increase of 140
customers; the effect of having a full six months of the rate increase
implemented April 1, 1999 recorded in the six-month period ended June
30, 2000; and the rate increase for calling features implemented as
switch conversions were completed in 1999. The network access decrease
of $33,539 or 2.8%, when comparing the six-month period ending June
2000 to the same period in 1999, is attributable to the decline in the
volume of telemarketing calls made by Breda's subsidiary, Pacific
Junction Telemarketing, Inc. Telemarketing services revenue generated
by Pacific Junction also decreased $93,553, or 42.3% for the six-month
period ended June 30, 2000, when compared to the six-month period
ended June 30, 1999. This decrease represents an industry-wide decline
in the use of telemarketing services when comparing the two six-month
periods.
There was an increase in internet services for the six-month period
ending June 30, 2000, when compared to the same period in 1999 of
$123,307, or 67.8%. This increase was a direct correlation to a 61.6%,
or 818 internet lines increase in the customer base when comparing
these two six-month periods. Another significant component of the
overall operating revenue increase was a $107,764, or 34.2% increase
in the miscellaneous revenue when comparing the six-month period
ending June 30, 2000 with the same six-month period in 1999. This
miscellaneous revenue increase was primarily the result of increased
cellular service commissions.
There was an increase in total operating expenses of $435,609, or 20%
for the six-month period ending June 30, 2000, when compared to the
six-month period ending June 30, 1999. All of the components of
operating expense increased when comparing these two six-month
periods. There was a $263,383, or 42.3% increase in plant specific
operations expense when comparing the six-month period ended June 30,
2000, to the six-month period ended June 30, 1999. Of this $263,383
increase,
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<PAGE>
almost $105,792 was attributable to an increase in internet expense to
support the increase of 818 customers. Technician education and
training expense of $19,353 is reflected in the plant specific
expenses for the six-month period ended June 30, 2000, compared to no
expenditures during the six-month period ended June 30, 1999. Cellular
expenses for the six-month time period ended June 30, 2000, as
compared to the six-month time period ended June 30, 1999, increased
plant specific expense by $90,597. This cellular expense increase
resulted from payroll expenditures to staff the new retail store,
which opened April 6, 2000, and to pay advertising costs in direct
correlation to the increase in cellular sales. Plant specific expenses
were also increased by $36,409 in the cable TV operations. While the
winter weather allowed more repair and maintenance work during the
first three months of 2000 as compared to the first three months of
1999, the primary cause of all plant specific increases was from wage
and benefit increases which became effective January 1, 2000. The
telephone systems repair and maintenance expense, and the office
furniture expense together also increased by $10,873 when comparing
the six-month period ended June 30, 2000, to the six-month period
ended June 30, 1999.
Plant nonspecific operations expense increased $6,711 or 14.8%, for
the six-month period ending June 30, 2000, when compared to the
six-month period ending June 30, 1999. The increase resulted from
office equipment leasing contracts, and office equipment maintenance
agreements that are based on volume. There was a $12,112, or 9%,
increase in the cost of programming expense for cable TV services when
comparing the six-month period ended June 30, 2000, with the six-month
period ended June 30, 1999. The programming increase was the result of
programming fee increases. Depreciation and amortization expense
increased $45,830, or 10%, for the six-month period ended June 30,
2000, when compared to the same period in 1999. As noted in prior
reports, the switches in the seven telephone exchanges were replaced
during 1998 and 1999. The six-month period ending June 30, 2000, would
now reflect depreciation on all seven switches as compared to the time
period June 30, 1999, which would show partial year depreciation on
only the switches that were installed by that date. The increase in
customer operations for the six-month period ended June 30, 2000, was
$38,956, or 11%, when compared to the six-month period ended June 30,
1999. However, the telemarketing services customer service expenses
for labor, supplies and telephone expense decreased by $46,523 in
direct correlation to the decrease in telemarketing revenue during the
six-month period ended June 30, 2000, as compared to the six-month
period ended June 30, 1999. All other customer service personnel
expenses increased $75,190 for the six-month period ended June 30,
2000, when compared to the same six month period in 1999 because eight
staff members have been added since October of 1999 for customer
service assistance, computer and billing services, and to staff the
retail store that opened April 6, 2000. Salary increases also became
effective January 1, 2000, which would not have been reflected in the
six-month period ended June 30, 1999. Customer service supply expense
also increased when comparing these two six-month periods because of
the
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<PAGE>
increased customer correspondence generated for notification of cable
channel line-up changes, area code prefix changes, billing procedure
changes and similar customer notifications.
There was an increase of $65,331, or 14%, in corporate operations
expense for the six-month period ended June 30, 2000, as compared to
the six-month period ended June 30, 1999. This increase partially
relates to wage increases effective January 1, 2000, additional
information technology staff members, and legal, accounting and other
expenses incurred with respect to Breda becoming a reporting company
under Securities Exchange Act of 1934. The legal and accounting fees
incurred during the six-month period ended June 30, 2000, included
fees for the preparation of proxy statements, and the annual report to
all shareholders, which were first-time expenses that would not have
been incurred in the six-month period ended June 30, 1999. First time
consultant fees were also incurred during the six-month period ended
June 30, 2000, as compared to the same six-month period in the prior
year for new business venture research and for company-wide job
descriptions, organization structure work and personnel evaluation
program work. Also included in corporate expenditures during the six
month period ended June 30, 2000, which would not have been included
in the six-month period ended June 30, 1999, were fees and
expenditures to investigate a company-wide trademark and logo.
Information system expenses also increased by $20,105 during the
six-month period ended June 30, 2000, when compared to the six-month
period ended June 30, 1999. These expenses resulted from work on
software and hardware upgrades and new operating lease expenditures
for the additional hardware needed to accommodate the company's
growth. Some hardware is now leased for the headquarters office,
satellite offices and the retail outlet.
Non-operating income decreased by $2,472,221, or 33.5%, during the
six-month period ended June 30, 2000, when compared to the same period
in 1999. One factor in this decrease was the result of the $7,436,415
gain on the sale of the direct broadcast satellite operation in
January 1999, and the additional interest income on the funds invested
from that sale. The proceeds of this event were reported during the
six-month time period ended June 30, 1999, and there are no
corresponding proceeds from this one-time event recorded for the
six-month period ended June 30, 2000. However, on May 12, 2000, the
company and all other stockholders sold all of their outstanding
shares of Central Iowa Cellular (CIC). This minority cellular
investment sale resulted in the company receiving cash of $5,108,279
and the transaction resulted in a gain of $4,900,959, which was
included in non-operating income during the six-month period ended
June 30, 2000. The difference in the reportable gains of these two
events totaled $2,535,456. Interest and dividend income decreased by
$56,649 or 26.3% when comparing the two six-month periods because of a
reduction in investments to pay income tax estimates, switch upgrades
and debt reduction. Another factor in the overall non-operating income
decrease was
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<PAGE>
the receipt of investment partnership distributions of $83,335 and
$23,508 during the six-month period ended June 30, 2000, compared to
no partnership distributions in the six-month period ended June 30,
1999. There was also a $23,287 loss on the disposal of switch during
the six-month period ended June 30, 1999, which was included in other
income, with no corresponding event recorded in the six-month period
ended June 30, 2000.
Income taxes decreased by $962,604, or 32.4%, for the six-month period
ended June 30, 2000, when compared to the same period in 1999. The
decrease resulted primarily from the difference in taxable gain on the
Central Iowa Cellular stock sale in May 2000, versus the broadcast
satellite operation taxable gain in January 1999.
Net income decreased $1,797,509 for the six-month period ended June
30, 2000, when compared to the same period in 1999. The decrease was
attributable to the noted decreases in net operating income and
non-operating income as well as the decrease in income taxes mainly
attributable to the difference in taxable gains on the Central Iowa
Cellular stock sale in May 2000, and the broadcast satellite sale in
January 1999.
Liquidity and Capital Resources at Year Ended 1999
Breda's net working capital was a positive $885,642 as of the close of
December 1999. This represents a $1,311,164 increase in net working
capital from year-end 1998.
Liquidity and Capital Resources at Six Months Ended June 30, 2000.
Breda's net working capital was a positive $2,904,296 as of the close
of June 2000. This represents an increase of $2,018,654 in net working
capital from year-end December 1999. Cash and cash equivalents
increased $2,968,403 during the six-month period ended June 30, 2000,
when compared to the year ended December 31, 1999. This increase
resulted primarily from receipt of $5,108,279 from the sale of the
Central Iowa Cellular stock on May 12, 2000, and the subsequent pay
down of variable rate (8.05% - 8.3% at June 30, 2000) long term debt
of $1,243,625 and corresponding interest of $23,838 from Rural
Telephone Finance Cooperative on June 30, 2000. Sale proceeds were
also used to make estimated tax payments of $725,000 in June of 2000.
There were no prepaid income taxes as of June 30, 2000, as compared to
$542,330 at December 31, 1999. These prepayments were applied to
estimated tax payments during the first two quarters of 2000.
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<PAGE>
The current portion of long-term debt decreased by $323,573 as of June
30, 2000, when compared to the year ended December 31, 1999. A portion
of this decrease would be attributable to the payoff of two long-term
loans with Rural Telephone Finance Cooperative in June 2000. Accounts
payable increased $208,251 as of June 30, 2000 as compared to the year
ended December 31, 1999. Some expenditures that were included in this
increase that would not have been applicable to December 31, 1999,
were associated with the purchase of a new software operating system,
the increase in cellular inventory expenditures because of the retail
outlet, and contracted work for boring underground cable.
Three Months Ended June 30, 2000 Compared to the Three Months Ended
June 30, 1999
There was an increase in total operating revenues for the three month
period ended June 30, 2000, when compared to the same period in 1999,
of $108,782, or 7.9%. Operating revenue increases resulted primarily
from a $63,743, or 65.9%, increase in internet revenue during the
three-month period ended June 30, 2000, as compared to the three-month
period ended June 30, 1999, and from a $107,524, or 75.8%, increase in
miscellaneous revenue when comparing these same three-month periods
for 2000 and 1999. The internet revenue increase correlates to an
increase in the customer base, and the miscellaneous income increase
was primarily generated from increased cellular customers during the
three-month period ended June 30, 2000, as compared to the three-month
period ended June 30, 1999. Two other components which caused a
decrease in operating revenues were the decreases in the revenues from
telemarketing services and in access charges. Telemarketing revenues
decreased by $30,429, or 29.3% because of some calling number
unavailability, which resulted in less calling hours. Access charges
revenues decreased by $42,351, or 6.8%, 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 $15,977, or
12.5%, during the three-month period ended June 30, 2000, when
compared to the same period in 1999. This increase was due primarily
to an increase in customers requesting a second line for internet
services, and to calling feature rate increases that were implemented
as switches were replaced during 1999. The three-month period ended
June 30, 2000, would have calling feature revenue from all the
exchanges, as compared to the calling feature revenue in the three
month period ended June 30, 1999, which would only have calling
feature rate increases included for the telephone exchanges where the
switches had been replaced. Cable television services revenue
decreased $4,430, or 1.7% for the three-month period ended June 30,
2000, as compared to the three-month period ended June 30, 1999. This
decrease is the result
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of competition from satellite dish services and seasonal changes in
customers dropping services and adding back the services at a later
date.
There was an increase in total operating expenses for the three-month
period ended June 30, 2000, when compared to the same period in 1999,
of $255,734, or 22.8%. Plant specific operations increased by $151,050
or 47.8% when comparing these two three-month periods. The increase
was partially attributable to increased cellular and internet expenses
to operate a retail outlet to sell cellular and internet services
which opened April 6, 2000. A major component was wage and benefit
costs for outside technicians and cellular/internet personnel because
of wage and benefit increases, which became effective in January 2000.
Costs to open the retail outlet are included in the three-month period
ended June 30, 2000, which would not have been applicable to the
three-month period ended June 30, 1999.
Plant nonspecific operations expense increased $10,286 for the
three-month period ended June 30, 2000, when compared to the
three-month period ended June 30, 1999. The increase resulted from
office equipment leasing contracts, and office equipment maintenance
agreements that are based on volume. Some of these agreements for
additional equipment were not in place during the three-month period
ended June 30, 1999. Depreciation and amortization increased $26,352,
or 10.8%, for the three-month period ended June 30, 2000, when
compared to the same period in 1999. This increase was mainly due to
all seven switches being depreciated during the three-month period
ended June 30, 2000, where only the switches that had been replaced in
1998 and the first six months of 1999 would have been included in the
three-month period ended June 30, 1999. Additional expenditures would
also be included in the three-month period ended June 30, 2000, for
additional furnishings required by the increased number of staff
members.
The increase in customer operations expense for the three-month period
ended June 30, 2000, was $25,431, or 14%, when compared to the
three-month period ended June 30, 1999. The increase was primarily the
result of wage and benefit rate increases that were effective in
January 2000, which would not have been reflected in the three-month
period ended June 30, 1999. Another factor in the increase was the
addition of four full-time equivalents to staff the new retail store,
which opened in April 2000.
There was an increase of $35,672, or 13.8%, in corporate operations
expense for the three-month period ended June 30, 2000, as compared to
the three-month period ended June 30, 1999. This increase resulted
from salary increases effective in January 2000, as well as consultant
fees for corporate organization and new business venture activity.
Information system expenses also increased during the three-month
period ended June 30, 2000, as compared to the three-month period
ended June 30, 1999, because a new computer operating system was
installed, and the Cable TV billing
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<PAGE>
system for approximately 3500 customers, was moved to the headquarters
location and converted from one vendor billing system to the one used
for most of the billing by the rest of the company. The number of
staff members working in the information technology area was also
increased from the same three-month time period a year ago.
Non-operating income increased by $5,005,061 for the three-month
period ended June 30, 2000, as compared to the three-month period
ended June 30, 1999. On May 12, 2000, the Company and all other
stockholders of Central Iowa Cellular, Inc. sold all of their
outstanding shares. This minority cellular investment sale resulted in
the Company receiving a partial payment of $5,108,279 on May 12, 2000.
The partial payment transaction resulted in a gain of $4,900,959,
which was included in non-operating income during the three-month
period ended June 30, 2000, and for which there was no comparable
entry during the three-month period ended June 30, 1999. Subsequent to
June 30, 2000, and immediately prior to filing the June 30, 2000 Form
10-QSB, Prairie Telephone Company received the remaining payment in
the amount of $117,755 which will be classified as an additional gain
from the sale of Central Iowa Cellular, Inc. stock. Other
non-operating income increases resulted from the receipt of $83,335
from a cellular partnership investment during the three-month period
ended June 30, 2000 for which there was no comparable item in the
three-month period ended June 30, 1999. Another non-operating revenue
increase resulted because all switch change-outs had been completed by
December 31, 1999, so while there was a $23,287 loss on the disposal
of switches included in other income in the three-month period ended
June 30, 1999, there was no switch disposal loss in the three-month
period ended June 30, 2000.
Income taxes increased $1,891,726, during the three-month period ended
June 30, 2000, as compared to the three-month period ended June 30,
1999. The increase resulted primarily from the gain on the sale of the
Central Iowa Cellular stock in May 2000, for which there was no
corresponding transaction during the three-month period ended June 30
1999.
While both operating revenues and operating expenses increased for the
three month period ended June 30, 2000, when compared to the
three-month period ended June 30, 1999, the main reason net income
increased $2,966,383 when comparing these same three-month periods,
was because of the gain on the sale of the Central Iowa Cellular
stock.
Other Activities
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
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<PAGE>
shares in any of the various circumstances in which Breda has the
right to purchase those shares. Breda's board of directors most
recently made this determination on June 12, 2000, when the board
adopted a resolution fixing the issuance price and redemption price to
be $235 per share. A discussion of this action by the board of
directors is set forth in Breda's Form 8-K which was filed with the
Securities and Exchange Commission on June 26, 2000.
Breda's primary ongoing 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 were $1,249,414, and are
currently expected to be approximately $628,000 in 2000.
Breda anticipates that substantial expenditures will need to be made
for software upgrades that will become necessary in order for Breda,
Prairie Telephone and Westside Independent Telephone Company to become
compliant with the requirements of the Communications Assistance for
Law Enforcement Act ("CALEA"). CALEA was passed in 1994 in response to
rapid advances in telecommunications technology, such as the
implementation of digital technology and wireless services, that have
threatened the ability of law enforcement officials to conduct
authorized electronic surveillance. CALEA requires telecommunications
carriers to modify their equipment, facilities, and services to ensure
that they are able to comply with authorized electronic surveillance.
These modifications were originally scheduled to be completed by
October 25, 1998, but in accord with an extension granted by the
Federal Communications Commission, must now generally be completed by
June 30, 2000. However, for wireline, cellular, and broadband personal
communications service carriers, implementation of a packet-mode
capability and six Department of Justice/Federal Bureau of
Investigation "punch list" capabilities must be completed by September
30, 2001. Breda's switch vendor is preparing estimates for the cost to
upgrade Breda's, Prairie Telephone's and Westside Independent
Telephone Company's software as necessary to become compliant with
CALEA, but, as indicated, Breda anticipates substantial expenditures
will be necessary, and that those expenditures may be as much as
approximately $200,000.
On June 5, 2000, the CALEA Implementation Section of the FBI informed
Breda, that based on the information provided in accordance with the
Flexible Deployment Assistance Guide, the FBI supports a two-year
extension of the June 30, 2000, compliance date for Breda Telephone
Corporation, Prairie Telephone Company, Inc. and Westside Independent
Telephone Company under section 107(c) of CALEA.
As of June 30, 2000, Breda and its subsidiaries had approximately
$5,693,143 in outstanding loans with the Rural Telephone Finance
Cooperative (the "RTFC"). Of the outstanding debt with the RTFC on
that date, approximately $2,213,578 was at
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<PAGE>
a fixed interest rate of 7.35% per annum, and carried a ten-year term.
The variable rates on the remaining RTFC debt exceed that fixed rate
and could affect future borrowing decisions and the allocation of
outstanding debt between fixed and variable rates. Breda Telephone and
Prairie Telephone also have a line of credit available from RTFC until
January 2001 for $1,000,000. There were no outstanding advances on
this line of credit at June 30, 2000.
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 sold by
GTE and US West in 1999. Those telephone lines were, however, acquired
by other telephone companies. One of the purchasers of some of the
telephone lines of GTE was Iowa Network Services, Inc. Iowa Network
Services, Inc. provides various services to telephone companies,
including Breda, Prairie Telephone and Westside Independent Telephone
Company. Although no definite plans exist, it is possible that Iowa
Network Services, Inc. may consider selling some of those telephone
lines in the next two to five years. If that occurs, Breda, Prairie
Telephone and Westside Independent Telephone Company will consider
pursuing the acquisition of those telephone lines. There is no
assurance, however, that Iowa Network Services, Inc. will ever sell
any of the telephone lines or if it does, that Breda, Prairie
Telephone or Westside Independent Telephone Company 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, Inc. as discussed above.
Breda, Prairie Telephone and Westside Independent Telephone Company
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 no current plans to expand the cable services areas of, or
the cable services provided by Tele-Services, Ltd. Tele-Services does
anticipate, however, and is also presently upgrading some of its
plant, equipment and cable in order to add more channel line-ups so
that it can stay competitive and continue to be able to obtain
programming licenses. The cost of those upgrades in the next twelve
months, however, is estimated to be less than $50,000.
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<PAGE>
Breda and its subsidiaries have and will continue to incur capital
expenditures in connection with upgrading their telephone, cable and
other equipment and systems.
Breda believes that the funds from the sale of its direct broadcast
satellite operation in January of 1999, and the sale of its Central
Iowa Cellular stock in May 2000, 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.
Cautionary Statement on Forward Looking Statements.
This item and other items in this quarterly report contain 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," "thinks," "objectives" 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, views, 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
numerous risks, uncertainties and assumptions, nearly all of which are
beyond the control of Breda and its management. 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;
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<PAGE>
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 employee relations;
o management's business strategies;
o general industry conditions, including consolidations in the
telecommunications and cable industries;
o general economic conditions at the national, regional and
local levels;
o acts or omissions of competitors and other third parties;
o changes in or more 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 of 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 not aware that any governmental authority is
contemplating any proceeding against Breda or any of its property.
Item 2. Changes in Securities.
No material modifications, limitations or qualifications were made to
or placed upon the terms of Breda's shares of common stock during the
period of January 1, 2000 through June 30, 2000.
Breda did not issue any shares of its common stock during the period
of January 1, 2000 through June 30, 2000.
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<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.
The annual meeting of the shareholders of Breda was held on May 17,
2000. The only matters voted upon by the shareholders at the annual
meeting were the election of three directors for Breda and the
ratification of the appointment of Breda's auditors for the year 2000.
Breda's board of directors consists of seven members, divided into
three classes based upon the length of their term. Each member of the
board of directors is elected to a three year term and until his or
her successor is elected, and the terms of office of the directors are
staggered so that three of the directors' terms expire in one year,
two expire the next year, and two expire the following year.
The terms of three of Breda's directors expired at the annual meeting
of the shareholders of Breda. The directors whose terms expired at the
annual meeting were Dean Schettler, John Wenck and Dave Hundling.
There were four nominees for the three director positions to be filled
at the annual meeting of the shareholders. The nominees were the
following individuals:
Rod Doorenbos Dean Schettler
Roger Nieland John Wenck
Dave Hundling determined not to pursue re-election as a director.
Roger Nieland, Dean Schettler and John Wenck were elected to serve as
directors of Breda until the annual meeting of the shareholders of
Breda to be held in the year 2003. The number of votes cast for,
against or withheld, and the number of abstentions and broker
non-votes, with respect to the four nominees for election as directors
of Breda was as follows:
Against Broker
Name For or Withheld Abstentions Non-Votes
---- --- ----------- ----------- ---------
Roger Nieland 192 - - -
Dean Schettler 282 - - -
John Wenck 256 - - -
Rod Doorenbos 185 - - -
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<PAGE>
The other directors continuing in office after the annual meeting of
the shareholders are the following individuals:
Scott Bailey Dave Grabner
Larry Daniel Clifford Neumayer
The only other matter voted upon by the shareholders at the annual
meeting was the ratification of Kiesling Associates, LLP as Breda's
auditors for the year 2000. The number of votes cast for, against or
withheld, and the number of abstentions and broker non-votes,
regarding this matter was as follows:
For Against or Withheld Abstentions Broker Non-Votes
--- ------------------- ----------- ----------------
194 17 93 38
Item 5. Other Information.
Breda does not believe there is any information to report under this
Item.
Item 6. Exhibits and Reports on Form 8-K.
(a) A list of the exhibits included as part of this quarterly report
is set forth in the Exhibit Index which immediately precedes such
exhibits and is incorporated herein by this reference.
(b) The following report on Form 8-K was filed during the quarter
ended June 30, 2000:
Breda filed a report on Form 8-K with the Securities and Exchange
Commission on June 26, 2000. The date of the Form 8-K was June 12,
2000. The item reported in the Form 8-K was the board of directors
adoption of a resolution on June 12, 2000 fixing the issuance price
for newly issued shares of Breda's common stock and the redemption
price for Breda's shares of common stock at $235 per share. The prior
per share price fixed by the board of directors was $180.
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<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: August 7, 2000. By: /s/ Dean Schettler
----------------------------------
Dean Schettler, President
Date: August 7, 2000. By: /s/ Scott Bailey
----------------------------------
Scott Bailey, Treasurer
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<PAGE>
EXHIBIT INDEX
Exhibits to Form 10-QSB
Six Months Ended June 30, 2000
BREDA TELEPHONE CORP
Description of Exhibit Page Number
2. Plan of Acquisition, Disposition,
Reorganization, Arrangement,
Liquidation or Succession
(a) Stock Purchase Agreement dated May 22, 1998, by and between
Arthur Zerwas and Mary Zerwas, Westside Independent
Telephone Company, and Breda Telephone Corporation, along
with the Amendment to the Stock Purchase Agreement dated May
22, 1998. (Filed as Exhibit 2.1 to Breda's Registration
Statement on Form 10-SB, and incorporated herein by this
reference.)
(b) Stock Purchase Agreement dated May 22, 1998, by and between
Arthur Zerwas and Mary Zerwas, and Breda Tele-Services,
Ltd., along with the Amendment to the Stock Purchase
Agreement dated May 22, 1998. (Filed as Exhibit 2.2 to
Breda's Registration Statement on Form 10-SB, and
incorporated herein by this reference.)
(c) Asset Purchase Agreement dated October 6, 1998, by and
between NewPath Communications, L.C. and Tele-Services, Ltd.
(Filed as Exhibit 2.3 to Breda's Registration Statement on
Form 10-SB, and incorporated herein by this reference.)
(d) Asset Purchase Agreement by and between Golden Sky Systems,
Inc. and Breda Telephone Corporation dated as of November
30, 1998, along with the Amendment of Asset Purchase
Agreement dated as of January 11, 1999. (Filed as Exhibit
2.4 to Breda's Registration Statement on Form 10-SB, and
incorporated herein by this reference.)
(e) Stock Purchase Agreement dated March 29, 2000, by and among
AirTouch Iowa, LLC, Central Iowa Cellular, Inc., Prairie
Telephone Company, Inc., Panora Telecommunications, Inc.,
Walnut Creek Communications, Inc.,
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<PAGE>
Minburn Telephone Company, and Interstate Enterprises, Ltd.
(Filed as Exhibit 2.1 to Breda's Form 8-K dated March
29,2000 and filed April 12, 2000, and incorporated herein by
this reference.)
(f) Des Moines Tower Proceeds Agreement dated as of March 29,
2000, by and among AirTouch Com- munications, Inc., Panora
Telecommunications, Inc., Walnut Creek Communications, Inc.,
Minburn Telephone Company, Interstate Enterprises, Ltd. and
Prairie Telephone Company, Inc., along with Exhibits A and B
thereto. (Filed as Exhibit 2.2 to Breda's Form 8-K dated
March 29, 2000 and filed April 12, 2000, incorporated herein
by this reference.)
3. Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of Breda
Telephone Corp. (Filed as Exhibit 3.1 to Breda's
Registration Statement on Form 10-SB, and incorporated
herein by this reference.)
(b) Amended and Restated Bylaws of Breda Telephone Corp. (Filed
as Exhibit 3.2 to Amendment No. 1 to Breda's Registration
Statement on Form 10-SB, and incorporated herein by this
reference.)
10. Material Contracts
(a) Employment Agreement effective April 1, 2000 between Breda
and Robert Boeckman. (Filed as Exhibit 10.1 to Breda's Form
10-QSB for the quarterly period ended March 31, 2000, and
incorporated herein by this reference.)
(b) Employment Agreement effective April 1, 2000 between Breda
and Jane Morlok. (Filed as Exhibit 10.2 to Breda's Form
10-QSB for the quarterly period ended March 31, 2000, and
incorporated herein by this reference.)
*27. Financial Data Schedule
* Included with this filing
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