U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999.
[_] Transition Report Under 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.
(Name of small business issuer in its charter)
Iowa 42-0895882
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Highway 217 East, P.O. Box 190, Breda, Iowa 51436
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (712) 673-2311
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Check whether the registrant (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_____
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State registrant's revenues for its most recent fiscal year: $5,290,546
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates: $5,550,399, as of March 1, 2000. The registrant's stock
is not listed on any exchange or otherwise publicly traded, and the value of the
registrant's stock for this purpose has been based upon the current $149 per
share redemption price of the registrant's stock as determined by its board of
directors. In determining this figure, the registrant has assumed that all of
its directors and officers and its manager and co-manager are affiliates, but
this assumption shall not apply to or be conclusive for any other purpose.
State the number of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date: 37,682 shares of common
stock, no par value, at March 1, 2000.
Transitional Small Business Disclosure Format: Yes _____ No __X__
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BREDA TELEPHONE CORP.
1999 FORM 10-KSB - TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business...................................... 1
Item 2. Description of Property...................................... 2
Item 3. Legal Proceedings............................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.......... 21
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters.................................................... 21
Item 6. Management's Discussion and Analysis or Plan of
Operation.................................................. 28
Item 7. Financial Statements......................................... 39
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 60
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section
16(a) of the Exchange Act.................................. 61
Item 10. Executive Compensation....................................... 63
Item 11. Security Ownership of Certain Beneficial Owners
and Management............................................. 67
Item 12. Certain Relationships and Related Transactions............... 68
Item 13. Exhibits and Reports on Form 8-K............................. 69
(i)
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Cautionary Statement on Forward Looking Statements.
Certain statements in this annual report, including statements in Item 1
and Item 6, 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, 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;
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 laws, rules, regulations or policies;
and
o continued availability of financing, and on favorable terms.
(ii)
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PART I
Item 1. Description of Business.
General.
Breda Telephone Corp. is an Iowa corporation with its principal
offices in Breda, Iowa. Breda was incorporated in 1964 to provide
local telephone services to Breda, Iowa and the surrounding rural
area.
Breda's principal business is still providing telephone services.
Telephone services are also now provided by two of Breda's wholly
owned subsidiaries, Prairie Telephone Company, Inc. and Westside
Independent Telephone Company. A total of seven Iowa towns and their
surrounding rural areas currently receive telephone services from
Breda, Prairie Telephone or Westside Independent.
Prairie Telephone is an Iowa corporation that was incorporated in
1968.
Westside Independent is an Iowa corporation that was incorporated in
1957. Breda acquired the stock of Westside Independent in June, 1998.
Breda's acquisition of Westside Independent is discussed below.
Another of Breda's wholly owned subsidiaries, Tele-Services, Ltd.,
provides cable television services to eighteen towns in Iowa and one
town in Nebraska. Tele-Services is an Iowa corporation. It was
incorporated in 1983.
Westside Communications, Inc. was a wholly owned subsidiary of
Tele-Services that provided cable television services to two Iowa
towns. Westside Communications was dissolved effective December 2,
1999, and all of its assets were transferred to, and all of its
liabilities were assumed by, Tele-Services at that time. The
dissolution of Westside Communications and the transfer of its assets
to Tele-Services and the assumption of its liabilities by
Tele-Services did not have any material adverse effect on the
operations or financial condition of Tele-Services. The dissolution
was effectuated primarily for administrative convenience.
Tele-Services had acquired the stock of Westside Communications in
June, 1998. Tele-Services' acquisition of Westside Communications is
discussed below.
Breda's and its subsidiaries' telephone and cable television
businesses are discussed in more detail below. Some of the other
miscellaneous business operations of Breda and its subsidiaries are
also briefly discussed below.
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Telephone Services.
Breda, Prairie Telephone and Westside Independent provide telephone
services to the following seven Iowa towns and their surrounding rural
areas:
o Breda, Iowa o Pacific Junction, Iowa
o Lidderdale, Iowa o Yale, Iowa
o Macedonia, Iowa o Westside, Iowa.
o Farragut, Iowa
Breda provides services to Breda, Lidderdale and Macedonia. Prairie
Telephone provides services to Farragut, Pacific Junction and Yale.
Westside Independent provides services to Westside. The surrounding
rural areas that are served are those within approximately a ten mile
to fifteen mile radius of each of the towns.
All of the towns are in central and southern Iowa.
The primary services provided by Breda, Prairie Telephone and Westside
Independent are providing their subscribers with basic local telephone
service and access services for long distance or other calls outside
the local calling area. As of December 31, 1999, they were serving
approximately 2,642 telephone numbers and related access lines. Breda,
Prairie Telephone and Westside Independent derive their principal
revenues from providing these services.
They also provide other telephone related services. For example, they
sell and lease telephone equipment to their subscribers, provide
inside wiring and other installation, maintenance and repair services
to their subscribers, and provide custom calling services to their
subscribers. They also derive revenues from providing billing and
collection services for some long distance carriers for the long
distance calls made by their subscribers.
Breda, Prairie Telephone and Westside Independent are all subject to
regulation by the Iowa Utilities Board (IUB). They operate their
telephone businesses pursuant to certificates and various rules and
regulations promulgated by the IUB. Although not anticipated to occur,
the IUB could terminate their right to provide services if they fail
to comply with those rules and regulations.
As indicated above, the IUB regulates or has the authority to regulate
many aspects of Breda's, Prairie Telephone's and Westside
Independent's telephone businesses. The material areas of regulation
are as follows:
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o Breda, Prairie Telephone and Westside Independent are treated as
"service regulated" telephone companies by the IUB, which means
that they must comply with the IUB's rules and regulations
regarding the quality of the services and facilities provided to
subscribers. The regulations establish minimum standards of
quality for the services and facilities provided by Breda,
Prairie Telephone and Westside Independent. Their existing
services and facilities meet those standards. The regulations
also require them to maintain and repair their existing
facilities as necessary in order to continue to meet at least
those minimum standards. The regulations also establish time
frames within which Breda, Prairie Telephone and Westside
Independent must respond to requests for services from their
subscribers. The regulations can be amended to increase the
minimum standards or to require that additional services be made
available to subscribers. Past amendments have not, however,
caused any material difficulties for Breda, Prairie Telephone or
Westside Independent.
o The IUB must approve of any expansion in the telephone service
areas currently served by Breda, Prairie Telephone and Westside
Independent. The primary factors that will be considered by the
IUB in the event of a request for an expansion will be the
managerial, financial and technical abilities of Breda, Prairie
Telephone or Westside Independent, as the case may be. Although
they do not anticipate material difficulties in the event of any
proposed expansion, there is no assurance that any future
proposed expansion in the service areas of Breda, Prairie
Telephone or Westside Independent will be approved by the IUB.
(FCC approval for any proposed expansion will also be necessary,
as discussed below.)
o The IUB has certified Breda, Prairie Telephone and Westside
Independent as "eligible carriers." This certification allows
them to receive the universal services funding component of the
support payment funding program administered by the Federal
Communications Commission. Breda, Prairie Telephone and Westside
Independent were able to obtain the certification because they
are rural telephone providers. They do not anticipate any loss of
that certification, but the loss of the certification would
result in them no longer receiving the universal services funding
component under the referenced FCC program. Although also not
anticipated to occur, they will also lose the right to receive
universal services funding if they do not provide certain
services supported by the universal services program. Those
services are, however, currently only the basic local telephone
services provided by Breda, Prairie Telephone and Westside
Independent. This certification therefore does not materially
affect the operation of their businesses, and the certification
was obtained solely because it was necessary in order to be
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eligible to receive universal services funding. They received, in
the aggregate, approximately $83,814 in universal services
funding in 1998, and $79,680 in 1999. The FCC's allocation of
universal services funding and of the other two components of the
support payment funding program to the numerous eligible
recipients is discussed below.
o Breda, Prairie Telephone and Westside Independent are currently
treated as rural telephone companies under the Telecommunications
Act of 1996, which generally means that they may be exempted from
some of the duties imposed on other telephone companies that
might make it easier for potential competitors to compete with
those companies. The IUB may withhold this exemption, however, if
it finds that a request by a potential competitor for
interconnection with Breda's, Prairie Telephone's or Westside
Independent's networks is not unduly economically burdensome, is
not technically unfeasible, and would not affect the provisions
of universal service. It is not possible to accurately predict
whether a competitor will ever request interconnection or whether
the request would be granted by the IUB. If a request is made and
the IUB withholds this exemption, however, Breda, Prairie
Telephone and Westside Independent would face competition in
providing telephone services that they have not faced in the
past.
Breda, Prairie Telephone and Westside Independent are also subject to
regulation by the Federal Communications Commission. The material
areas of regulation by the FCC are as follows:
o The FCC regulates the amount of access charges that can be
charged by Breda, Prairie Telephone and Westside Independent for
interstate long distance calls. The National Exchange Carrier
Association has been delegated some authority by the FCC
regarding the regulation of access charges rates, but all changes
proposed by NECA must be approved by the FCC. The regulation of
access charges is an area of particular concern to Breda, Prairie
Telephone and Westside Independent, and is discussed below and in
the "Overview" section in Item 6 of this annual report.
o The FCC must approve of any expansion in the telephone service
areas currently served by Breda, Prairie Telephone and Westside
Independent. The primary factors that will be considered by the
FCC in the event of a request for an expansion will be the
managerial, financial and technical abilities of Breda, Prairie
Telephone or Westside Independent, as the case may be, and the
antitrust implications of the expansion. Although they do not
anticipate any material difficulties in the event of any proposed
expansion, there is no guarantee that any future proposed
expansion in the service areas of Breda, Prairie Telephone or
Westside Independent will be approved by the FCC.
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o The FCC regulates the amount of support payment funding that will
be received by Breda, Prairie Telephone and Westside Independent.
The FCC does so primarily by targeting how the support payment
funding received from the National Exchange Carriers Association
and the Universal Service Administrative Company will be
allocated among the various possible recipients of the funding.
The allocation may vary from year to year depending on the FCC's
determination. For example, the most recent allocation targeted a
larger percentage of the universal services funding component
than in the past to schools and libraries because of the FCC's
determination of a need by those entities for expansion of lines
for computers and Internet access. It is not possible to
accurately predict how the FCC will allocate the support payment
funding in any year, and although Breda, Prairie Telephone and
Westside Independent currently contemplate being recipients of
the funding in every year, the amount of support payment funding
received by them will likely vary from year to year. For example,
Breda, Prairie Telephone, and Westside Independent received, in
the aggregate, $538,818 in support payment funding in 1998, but
they received $404,136 in 1999. Those amounts include the amount
of the universal services funding component which is listed in
the above discussion regarding the IUB. Breda, Prairie Telephone
and Westside Independent do not believe, however, that any
variance will materially affect their business.
The regulation of access charges is an area of particular concern to
Breda, Prairie Telephone and Westside Independent because they derive
a substantial amount of their overall revenues from access charges.
They receive access charges from long distance carriers (sometimes
referred to in the telephone industry as "inter-exchange carriers" or
"IXCs") for providing intrastate and interstate exchange services to
those long distance carriers. In more basic terms, they receive access
charges for originating and terminating long distance calls made by
their subscribers. The amount of access charges that can be charged
for interstate long distance calls is determined by rates established
by the FCC. The FCC can change those rates at any time, and recent
changes have lowered access rates. Breda anticipates that there may be
further reductions in access rates over the next several years. Since
access charges constitute a substantial portion of Breda's, Prairie
Telephone's and Westside Independent's total revenues, this is an area
of material risk to them. A further discussion of this issue is found
in the "Overview" section in Item 6 of this annual report.
Pacific Junction Telemarketing Center, Inc. is a wholly owned
subsidiary of Prairie Telephone. Pacific Junction provides
telemarketing services, and the telemarketing calls made by Pacific
Junction are a major source of access charges revenue for Breda.
Pacific Junction experienced calling number unavailability during
1999, which resulted in less hours spent on the phone making
telemarketing calls, and thereby less access charges revenue for
Breda. It is common in the industry for small telemarketing firms like
Pacific Junction to contract with a vendor who solicits calling lists
and programs from major companies. Because Pacific Junction's vendor,
Aegis, began operating its own calling centers
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and did not have a surplus of numbers to contract out to smaller
telemarketing firms, Pacific Junction terminated its relationship with
Aegis in May, 1999, and instead contracted with Results Telemarketing,
Inc. to provide telemarketing calling leads. Results Telemarketing,
Inc., however, also has its own telemarketing centers, and has
struggled to provide a continuous supply of telemarketing numbers to
Pacific Junction. Also, the telemarketing industry as a whole has
experienced a downturn in companies using telemarketing services in
their telemarketing programs. Pacific Junction is therefore soliciting
free-lance work and new vendor contacts, but expects the next twelve
months to not show a substantial change in telemarketing revenue.
Breda, Prairie Telephone and Westside Independent each have agreements
with Iowa Network Services. Under those agreements, Iowa Network
Services provides Breda, Prairie Telephone and Westside Independent
with the lines and services necessary for them to provide their
telephone subscribers with, among other things, caller ID services and
what is sometimes referred to in the telephone industry as
"centralized equal access." As a practical matter, that access is what
allows their subscribers to choose long distance carriers, which right
is required to be given to subscribers by law. Breda's, Prairie
Telephone's and Westside Independent's telephone systems are tied into
Iowa Network Services' fiber optic network and switches. Although it
is not anticipated to occur, if their agreements with Iowa Network
Services were terminated, it would be difficult for them to find a
replacement for Iowa Network Services, and it would be costly for them
to internalize all of those services. Prairie Telephone and Westside
Independent are each shareholders of Iowa Network Services. Prairie
Telephone and Westside Independent each currently own less than 1% of
Iowa Network Services' outstanding stock.
Telephone services providers like Breda, Prairie Telephone and
Westside Independent are subject to competition from other providers.
As a result of the Telecommunications Act of 1996, telephone companies
are no longer afforded exclusive franchise service areas. Under that
Act, competitors can now offer telephone services to Breda's, Prairie
Telephone's and Westside Independent's subscribers, and also request
access to their lines and network facilities. The Act contemplates
that various regulations will be promulgated by the FCC and state
regulatory agencies to implement various parts of the Act, such as
regulations setting out the procedures and methods for implementing
and promoting competition in the telephone industry, and standards for
wholesale pricing, interconnection rates and for local network rates.
Some of those regulations had still not been finalized at the time of
the preparation of this annual report, and some legal and court
actions have been taken by some regulators and others in the telephone
industry challenging some aspects of some of the proposed regulations
and procedures. Until those regulations are finalized, it is not
possible to predict how the Telecommunications Act of 1996 may affect
Breda, Prairie Telephone, Westside Independent and their telephone
businesses. The regulations could, however, have a material adverse
effect, and the Act does open up Breda, Prairie Telephone and Westside
Independent to competition that they were not subject to in the past.
Although competition is permitted, Breda, Prairie Telephone and
Westside Independent currently do not have direct competition in
providing basic local telephone service in their
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existing service areas. They do, however, experience competition in
providing access services and other services to long distance
carriers. For example, they experience competition in providing access
services for long distance when their subscribers use private line
transport, switched voice and data services, microwave, or cellular or
personal communications service. In those cases, the subscriber is not
using Breda's, Prairie Telephone's or Westside Independent's networks
or switches, so they cannot charge access charges to the long distance
carrier. Various other competitors and forms of competition are also
likely to arise in the future as technological advances occur in the
telecommunications and cable industries.
Some of the cellular ventures in which Breda, Prairie Telephone and
Westside Independent have invested or may later invest in may provide
cellular services in the telephone exchange areas serviced by them. As
indicated in the preceding paragraph, cellular services are
competitive with the telephone services provided by Breda, Prairie
Telephone and Westside Independent. Breda does not believe, however,
that investments in cellular ventures are inconsistent or in conflict
with Breda's, Prairie Telephone's or Westside Independent's overall
business. Breda also believes those investments are one method of
attempting to diversify across the various telecommunications methods
which are available today.
Breda, Prairie Telephone and Westside Independent also experience
competition in providing billing and collection services to long
distance carriers. The competition is from third parties who provide
similar services. The long distance carriers are also starting to
provide their own billing and collection services, rather than
contracting for those services with others like Breda, Prairie
Telephone and Westside Independent. Directory advertising is also now
subject to competition because the Telecommunications Act of 1996
prohibits Breda, Prairie Telephone and Westside Independent from
requiring exclusive listings in their phone books. Breda, Prairie
Telephone, Westside Independent and BTC face competition in the sale
and lease of telephone, cellular and related equipment because there
are numerous competitors who sell and lease telephone, cellular and
related equipment. (BTC is a subsidiary of Prairie Telephone, and is
discussed below.) Breda, Prairie Telephone, Westside Independent and
BTC also face competition in providing internet access, although the
competition was not very intense or expansive as of the time of the
preparation of this annual report. The cellular ventures in which
Breda, Prairie Telephone and Westside Independent have invested face
competition in providing cellular services and equipment from various
competitors offering cellular and personal communication services.
Competition in all of the foregoing areas is based primarily on cost,
service and experience.
Broadcast Services.
Tele-Services owns and operates the cable television systems in the
following eighteen Iowa towns:
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o Arcadia o Grand o Oakland
o Auburn Junction o Riverton
o Bayard o Hamburg o Sidney
o Breda o Lohrville o Tabor
o Churdan o Malvern o Thurman
o Farragut o Neola o Treynor
o Westside
Tele-Services also owns and operates the cable television system for
the town of Beaver Lake, Nebraska.
As of December 31, 1999, Tele-Services was providing cable television
services to approximately 3,534 subscribers.
Tele-Services derives its principal revenues from monthly fees charged
to its cable subscribers for basic and premium cable services provided
to those subscribers.
Tele-Services provides cable services to each of the towns pursuant to
franchises or agreements with each of those towns. Those various
franchises or agreements will expire by their terms in the following
months:
o Arcadia - June, 2009 o Lohrville - March, 2008
o Auburn - January, 2004 o Malvern - October, 2001
o Bayard - May, 2008 o Neola - September, 2002
o Beaverlake - December, 2008 o Oakland - July, 2001
o Breda - Year-to-Year Basis* o Riverton - February, 2013
o Churdan - June, 2008 o Sidney - February, 2005
o Farragut - January, 2009 o Tabor - September, 2001
o Grand Junction - May, 2008 o Thurman - February, 2013
o Hamburg-Year-to-Year Basis* o Treynor - October, 2022
o Westside - June, 2009
* These agreements are in the process of being renewed and are
currently continued on a year-to-year basis.
Tele-Services does not anticipate that any of its franchises or
agreements will be terminated before the above normal expiration
dates. Tele-Services also hopes to be able to renew or extend the
franchises or agreements before they expire, but no assurance can be
given that any franchises or agreements can or will be renewed or
extended.
The termination of a franchise or agreement would allow that town to
deny Tele-Services access to its cables for maintenance and services
purposes. This would create difficulties
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for Tele-Services in properly serving its subscribers, and, in
general, providing cable services to that town.
The franchises or agreements with the towns require the giving of
notice to the towns before Tele-Services can change their cable
services rates, and some of those franchises or agreements may require
the approval of the town for any increases in those rates. Although
Tele-Services does not anticipate any material difficulties with any
future proposed rate increases, there can be no guarantee that future
proposed increases can be implemented in all of the towns.
The Telecommunications Act of 1996 also applies to cable services
providers, and cable services providers such as Tele-Services are
therefore subject to competition from other providers. As discussed
above in this Item regarding the telephone services provided by Breda,
Prairie Telephone and Westside Independent, various regulations are to
be promulgated under that Act, but some of those regulations had still
not been finalized at the time of the preparation of this annual
report, and some legal and court actions have been taken by some
regulators and others challenging some aspects of some of the proposed
regulations and procedures. Until those regulations are finalized, it
is not possible to predict how the Telecommunications Act of 1996 may
affect Tele-Services and its cable business. The regulations could,
however, have a material adverse effect. Breda currently contemplates,
however, that any competition in the cable industry arising as a
result of the Telecommunications Act of 1996 may occur at a slower
pace than will be the case for telephone services providers, in
particular in rural areas like those served by Tele-Services. One
result of the Telecommunications Act of 1996 with respect to cable
services providers is that telephone services must be allowed to be
provided through the cable of cable services providers.
Tele-Services' franchises or agreements with the towns do not grant
Tele-Services the exclusive right to provide cable services in the
towns, and other cable service providers can provide cable services in
the towns. There currently are not, however, any other cable service
providers in any of the towns. Although difficult to predict,
Tele-Services currently does not contemplate any competitor coming
into the towns given, among other things, the smaller size of the
towns and the costs to expand into them.
As indicated, although cable services providers like Tele-Services are
subject to competition from other providers, Tele-Services currently
does not have direct competition from other cable services providers
in the towns Tele-Services now services. There is, however,
competition in other forms. For example, Tele-Services experiences
strong competition from wireless and satellite dish providers. As
discussed in Item 6 of this annual report, that competition has been
increasing in recent years. Various other competitors and forms of
competition are also likely to arise in the future as technological
advances occur in the telecommunications and cable industries.
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Tele-Services is regulated by the FCC. The rules and regulations of
the FCC primarily relate to general operational and technical issues,
and they do not affect rates or expansions of service areas. As
discussed above, Tele-Services' cable services are also regulated in
the sense that those services are provided pursuant to franchises or
agreements with each of the towns in which Tele-Services currently
provides cable services.
Miscellaneous Businesses.
Breda and some of its subsidiaries are also engaged in other
miscellaneous businesses.
For example, Breda, Prairie Telephone and Westside Independent also
provide internet access through their telephone lines to subscribers
desiring that access. They were providing internet access to
approximately 485 subscribers as of December 31, 1999. Internet access
is also provided by BTC, Inc. in some areas which are outside of the
telephone exchange areas currently served by Breda, Prairie Telephone
and Westside Independent. The area served by BTC is currently limited
to Carroll, Iowa and various communities surrounding Carroll, Iowa.
BTC provided internet access to approximately 1,197 subscribers as of
December 31, 1999. BTC is a wholly owned subsidiary of Prairie
Telephone. BTC is an Iowa corporation that was incorporated in 1997.
BTC was organized primarily to explore the possibility of becoming a
competitive local exchange carrier in some Iowa communities which are
not served by Breda, Prairie Telephone or Westside Independent. No
firm decision has been made as to whether BTC will ever attempt to
provide telephone services, however, and BTC cannot provide any
telephone services in the state of Iowa without first filing
satisfactory tariff information with the IUB and the filing and giving
of various required notices. BTC would also need to raise significant
additional capital and/or obtain third party financing before BTC
would be able to finance the construction and start up of a new
telephone business. BTC does provide internet access, as discussed in
the preceding paragraph. BTC also plans to use part of its business
location in Carroll, Iowa as a retail store for the sale and lease of
telephone, cellular and related equipment and merchandise. It is
contemplated that the store will open for business in April, 2000.
Breda and Prairie Telephone have purchased spectrum from Iowa Wireless
Inc. for providing personal communications services in the Breda,
Lidderdale and Yale telephone exchange areas. Iowa Wireless Inc. is a
subsidiary of Iowa Network Services, Inc. Spectrum is bandwidth
allocated by the FCC to provide data and voice communication. The
bandwidth of a transmitted communications signal is a measure of the
range of frequencies the signal occupies. In the communications
industry, this measurement is defined as megahertz. Iowa Wireless Inc.
held the 30 MHz license for the Breda, Lidderdale and Yale telephone
exchange areas, and Breda and Prairie Telephone purchased 10 MHz
licenses for those areas from Iowa Wireless Inc. on March 26, 1999.
They purchased 10 MHz licenses because that was the only license being
offered by Iowa Wireless Inc. at that time. Each independent telephone
company in Iowa had first opportunity to purchase the
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spectrum in its local exchange areas for $3.50 per pop (population).
Prairie Telephone purchased its Yale exchange pops at $3.50 each, for
a total of $2,051. At that time, a limited liability company was
formed by some of the independent telephone companies who were
eligible and desired to own spectrum to provide personal
communications services in the areas that were close to their own
local exchange areas. The companies included Prairie Telephone and the
telephone companies for the Casey, Menlo, and Panora, Iowa, areas. The
limited liability company was named the Guthrie Group, L.L.C., and
Prairie Telephone purchased 100 units in Guthrie Group, L.L.C. for
$10,000. The personal communications service licenses owned by Prairie
Telephone and the other independent telephone companies which became
members of Guthrie Group, L.L.C. will not be included in the Guthrie
Group, L.L.C. As of the time of the preparation of this annual report,
Guthrie Group, L.L.C. had acquired spectrum for some telephone
exchange areas located in Guthrie County, Iowa.
Breda also purchased the personal communications service licenses for
its Breda and Lidderdale exchange areas for $3.50 per pop, totaling
$5,383. Discussions have taken place regarding the formation of a
limited liability company which would include Breda and some other
independent telephone companies as members and which might acquire
spectrum for personal communications service or otherwise invest in
personal communications service ventures. No limited liability company
had been formed and no other agreements had been reached at the time
of the preparation of this annual report, however, but under the
current discussions Breda and the other members would contribute their
personal communications service licenses to the limited liability
company and be equal owners of the limited liability company.
Personal communications service ("PCS") is a relatively new area in
the telecommunications industry. It is a wireless voice and data
service somewhat similar to cellular telephone service, but
emphasizing personal service and extended mobility. It is sometimes
referred to as digital cellular (although cellular systems can also be
digital). Like cellular, PCS is for mobile users and requires a number
of antennas to blanket an area of coverage. As a user moves through
and between service areas, the user's phone signal is picked up by the
nearest antenna and then forwarded to a base station that connects to
the wired network. The phone itself is slightly smaller than a
cellular phone. PCS is being introduced first in highly urban areas
for large numbers of users. The "personal" in PCS distinguishes this
service from cellular by emphasizing that, unlike cellular, which was
designed for car phone use with transmitters emphasizing coverage of
highways and roads, PCS is designed for greater user mobility. It
generally requires more cell transmitters for coverage, but has the
advantage of fewer blind spots. Technically, cellular systems in the
United States operate in the 824-849 megahertz (MHz) frequency bands;
while PCS operates in the 1850-1990 MHz bands. Several technologies
are used for PCS in the United States, including Cellular Digital
Packet Data and Global System for Mobile communication. Global System
for Mobile is more commonly used in Europe and elsewhere, and is the
technology that is being employed by Iowa Wireless Inc. Although
difficult to predict, personal communications services may become very
important in the future and may be highly competitive with current
cellular services. Breda and Prairie Telephone have not made any firm
decision on whether they will ever offer any personal communications
services, and they do not in any event contemplate offering any
personal communications services for at least one to two years,
primarily because those services must first be available in
surrounding areas before Breda
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and Prairie Telephone can provide those services. Breda, Prairie
Telephone and Westside Independent do not currently own spectrum for
all of the telephone exchange service areas currently serviced by
them, and there is no guarantee that they will be able to acquire
spectrum for all of those areas. Also, Breda, Prairie Telephone and
Westside Independent will face competition in providing personal
communications services because no exclusive rights can be acquired
with respect to that technology.
Pacific Junction Telemarketing Center, Inc. is a wholly owned
subsidiary of Prairie Telephone. Pacific Junction provides general
telemarketing services from its offices in Breda, Iowa. Although
Pacific Junction can provide telemarketing services to various
customers, it currently receives primarily all of its revenues from
one customer. Pacific Junction is an Iowa corporation that was
incorporated in 1987. The long distance telemarketing calls made by
Pacific Junction are a major source of access charges revenue for
Breda.
Revenues are also generated from sales of cellular phones and related
service packages.
Revenues may also arise from investments in other entities which
provide cellular phone services or which invest in other cellular
phone or telecommunications ventures. For example, Prairie Telephone
has made investments in RSA #1, Ltd. and RSA #7, Ltd. Those entities
are Iowa limited partnerships which provide cellular services in rural
areas in central and southern Iowa. Prairie Telephone also owns 20% of
the outstanding stock of Central Iowa Cellular, Inc. Central Iowa
Cellular, Inc. owns a 24% partner interest in Des Moines MSA General
Partnership. Des Moines MSA General Partnership provides cellular
services to customers within the Des Moines, Iowa metropolitan area.
Prairie Telephone also owns .67% of Iowa Network Services' outstanding
stock. Westside Independent owns .45% of Iowa Network Services'
outstanding stock.
Breda has made an investment in RSA #9, Ltd. and RSA #8, Ltd. Westside
Independent has also made an investment in RSA #8, Ltd. RSA #8, Ltd.
and RSA #9, Ltd. provide cellular services in rural areas in southern
and central Iowa. Breda also owns 15.79% of the membership interests
in Alpine Communications, L.C. Alpine Communications, L.C. provides
telecommunications exchange and local access services, long distance
service, and cable television service in a service area located
primarily in Clayton County in northeastern Iowa and Monona County in
western Iowa.
Some of the above investments may be a source of revenue for Breda,
Prairie Telephone and Westside Independent through distributions which
may be made by the entities. None of Breda, Prairie Telephone or
Westside Independent controls any distribution decisions, however, so
no distributions are ever guaranteed, and the timing and amount of any
distributions may therefore vary greatly from year to year. Breda,
Prairie Telephone and Westside Independent have also received
settlement payments from some of their cellular investments.
Settlement payments are unusual items which generally result from
payments received for not
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exercising a right of first refusal to purchase additional units
during a merger or buyout by another company. Breda, Prairie Telephone
and Westside Independent do not control any settlement payments, and
settlement payments are in any event usually one-time events, so no
settlement payments are guaranteed and the timing and amount of any
settlement payments will vary greatly from year to year. Breda,
Prairie Telephone and Westside Independent received the aggregate
distributions and settlements payments noted below from the entities
noted below for the years 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
o RSA #1, Ltd. Distribution 20,000 43,392 73,108
Settlement -0- 29,545 -0-
o RSA #7, Ltd. Distribution 26,072 66,581 -0-
Settlement -0- 26,667 -0-
o RSA #8, Ltd. -0- -0- -0-
o RSA #9, Ltd. Distribution -0- -0- 50,001
o Iowa Network Services Dividends 6,561 6,561 4,374
(Breda & Westside)
o Des Moines MSA General Distribution 27,993 -0- -0-
Partnership/Central Settlement -0- 353,000 -0-
Iowa Cellular, Inc.
</TABLE>
Breda has not received any distributions from Alpine Communications,
L.C. Breda has, however, received an annual fee of $5,000 from Alpine
Communications, L.C. in consideration for Breda's manager serving as a
manager for Alpine Communications, L.C. Breda has also received
$24,000 in each of 1998 and 1999 in consideration for Breda's manager
serving on the board of directors of Central Iowa Cellular, Inc.
The value of Breda's, Prairie Telephone's and Westside Independent's
underlying investments in the above ventures and in their other
investments may also vary significantly from year to year. They may
also face difficulties in realizing upon some of their investments
because there is no public or other active market for those
investments and because some of the entities in which they have
invested have agreements in place which place limitations or
restrictions on Breda's, Prairie Telephone's or Westside Independent's
right to transfer their ownership interests in those entities to third
parties. Most of those limitations and restrictions are in the form of
a right of first refusal under which the entity is given the right to
match any offer received by Breda, Prairie Telephone or Westside
Independent.
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Prairie Telephone is currently in the process of negotiating the sale
of its stock in Central Iowa Cellular, Inc. to AirTouch. A definitive
agreement has not been reached with AirTouch, and there is no
assurance or guarantee whatsoever that any agreement will be reached,
but under the current discussions Prairie Telephone may sell all of
its shares of stock in Central Iowa Cellular, Inc. to AirTouch for
approximately $5,350,000.
Breda and its subsidiaries also have various other miscellaneous
investments. Those investments are described in the financial
statements included in Item 7 of this annual report.
Neither Breda nor any of its subsidiaries engage in any material
research and development activities.
Employees.
As of December 31, 1999, Breda had 24 full time employees. Breda
employs all of those employees, but those employees also provide the
labor and services for Prairie Telephone, Westside Independent,
Tele-Services and BTC. The salaries and other costs and expenses of
the employees are allocated among Breda and its subsidiaries based on
time sheet allocations. There currently are not any collective
bargaining or other labor agreements with any of Breda's employees,
and only two of Breda's employees have written employment agreements.
Those employment agreements are with the manager and the co-manager of
Breda.
Pacific Junction had 3 full-time employees as of December 31, 1999.
Pacific Junction currently has no collective bargaining or labor
agreements with any of its employees.
Breda and Pacific Junction also utilize part-time employees on an as
needed basis. Pacific Junction utilizes up to approximately seventeen
part time employees at a time, primarily for the purpose of making
telemarketing calls.
Acquisitions.
As indicated above, Breda acquired all of the issued and outstanding
stock of Westside Independent on June 1, 1998. Westside Independent
was serving approximately 342 telephone numbers and related access
lines at that time. The total purchase price paid by Breda was
$2,010,038. Westside Independent also redeemed some of its shares of
outstanding stock as part of the transaction. The aggregate redemption
price paid by Westside Independent for those shares was $918,875.17.
The purchase price (excluding the redemption amount paid by Westside
Independent) exceeded the fair value of the net assets of Westside
Independent, as shown on Westside Independent's financial statements,
by $1,178,472. The excess was recorded as goodwill and is being
amortized on a straight-line basis over a period of fifteen years. As
discussed above, Westside
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Independent provides telephone services to subscribers in Westside,
Iowa and its surrounding rural areas.
In a related transaction, Tele-Services acquired all of the issued and
outstanding stock of Westside Communications, Inc. on June 1, 1998.
Westside Communications, Inc. owned and operated the cable television
systems in Westside, Iowa, and Arcadia, Iowa. The number of
subscribers for cable television services in those towns at that time
was approximately 297. The total cost of the acquisition was $254,289,
which exceeded the fair value of the net assets of Westside
Communications, Inc., as shown on its financial statements, by
$157,611. The excess was recorded as goodwill and is being amortized
on a straight-line basis over a period of fifteen years. As discussed
above, Westside Communications, Inc. was held as a wholly owned
subsidiary of Tele-Services until December 2, 1999, at which time
Westside Communications, Inc. was dissolved. Westside Communications,
Inc.'s cable operations are now operated by and through Tele-
Services.
On October 31, 1998, Tele-Services purchased the Auburn, Iowa cable
television system from NewPath Communications, L.C. The number of
cable subscribers in Auburn, Iowa at that time was approximately 91.
The purchase price was $64,610. Tele-Services also assumed the
obligations and liabilities of NewPath Communications, L.C. which were
to arise after the closing:
o under its franchise with the city of Auburn and under certain
leases; and
o for the performance and delivery of services to subscribers to
the cable system.
Each of the above transactions was treated as a business combination
accounted for as a purchase.
Sale of Direct Broadcast Satellite Operation.
On January 11, 1999, Breda sold substantially all of its assets
comprising its direct broadcast satellite operation. The purchase
price received by Breda was $8,274,689. The sale resulted in a pre-tax
gain of $7,436,415, which was included in Breda's operations during
the first quarter of 1999. The buyer also assumed:
o Breda's obligations to its direct broadcast satellite services
subscribers for refundable deposits and advance payments made by
those subscribers; and
o Breda's obligations otherwise arising after the closing date of
the sale under Breda's various licenses and contracts related to
its direct broadcast satellite business and assets.
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<PAGE>
Breda also executed a noncompetition agreement as part of the
transaction.
Breda's direct broadcast satellite operation included its licenses to
provide direct broadcast satellite services in five Iowa counties and
four counties in Nebraska. At the time of the sale, Breda was
providing direct broadcast satellite services to approximately 4,048
subscribers.
One factor which caused Breda to sell the direct broadcast satellite
operation was Breda's determination that the purchase price offered by
the buyer was quite favorable. Breda had also determined that the cash
available from the sale would provide it with funds for possible
acquisition of additional telephone lines in areas that Breda knew
were going to become available from GTE and US West after the closing
of the sale. Breda believed that the sale of the direct broadcast
satellite operation would also be beneficial to Breda because it would
allow Breda to focus on its core business of providing telephone
services. Another factor contributing to the sale was the
consolidation occurring in the direct broadcast satellite industry,
which Breda believed would make it more difficult for Breda to
efficiently compete in the industry. Breda's original contract for its
direct broadcast satellite operation was also nearing renewal, and
there was some uncertainty concerning its renewal. This uncertainty
also contributed to the decision to sell the operation.
Item 2. Description of Property.
Breda and some of its subsidiaries own or lease various real estate.
The following paragraphs briefly describe that real estate and how the
real estate is currently used.
Breda owns or leases the following real estate:
o Breda's corporate offices are located at Highway 217 East, Breda,
Iowa. The real estate and building are leased by Breda and
Prairie Telephone from Tele-Services. The aggregate monthly
rental payable by both Breda and Prairie Telephone under the
lease is $1,000. They also pay utilities and insurance. The lease
has a one-year term, and automatically renews for additional one-
year terms. The building has approximately 4,560 square feet.
Breda and Prairie Telephone utilize the entire building.
o Breda owns certain real estate and a warehouse which is also
located at Highway 217 East, Breda, Iowa. The warehouse has
approximately 6,720 square feet, and is used primarily for
storage of inventory and various equipment (trucks, generators,
trailers, plows, etc.).
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o Breda owns certain real estate and a building located just east
of Breda, Iowa. The building houses equipment used to switch,
record and transmit telephone calls. This type of equipment is
sometimes referred to in the industry as "central office
equipment." The equipment is used in providing telephone services
to Breda and the surrounding rural area. The building has
approximately 960 square feet.
o Breda owns the real estate and building located at 109 West
Second Street, Lidderdale, Iowa. The building houses equipment
used to switch, record and transmit telephone calls. The
equipment is used in providing telephone services to Lidderdale
and the surrounding rural area. The building has approximately
600 square feet.
o Breda owns the real estate and building located at 310 Main
Street, Macedonia, Iowa. The building houses equipment used to
switch, record and transmit telephone calls. The equipment is
used in providing telephone services to Macedonia and the
surrounding rural area. The building has approximately 600 square
feet.
Prairie Telephone owns or leases the following real estate:
o Prairie Telephone's corporate offices are located at Highway 217
East, Breda, Iowa. The real estate and building are leased by
Prairie Telephone and Breda from Tele-Services, as described
above.
o Prairie Telephone owns the real estate and building located at
508 Dupont Street, Farragut, Iowa. The building houses equipment
used to switch, record and transmit telephone calls. The
equipment is used in providing telephone services to Farragut and
the surrounding rural area. The building has approximately 2,400
square feet.
o Prairie Telephone owns a warehouse which is also located at 508
Dupont Street, Farragut, Iowa. The warehouse has approximately
2,600 square feet, and is used for storage of inventory and
equipment (trucks, generators, trailers, plows, etc.).
o Prairie Telephone owns the real estate and building located at
707 Phillips Street, Farragut, Iowa. The building was formerly
used to house equipment used in providing telephone services, but
is currently vacant.
o Prairie Telephone owns the real estate and building located at
804 Washington Avenue, Pacific Junction, Iowa. The building
houses equipment used to
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<PAGE>
switch, record and transmit telephone calls. The equipment is
used in providing telephone services to Pacific Junction and the
surrounding rural area. The building has approximately 2,000
square feet.
o Prairie Telephone owns the real estate and building located at
600 Washington Street, Pacific Junction, Iowa. The building was
formerly used to house equipment used in providing telephone
services, but is currently vacant.
o Prairie Telephone owns the real estate and building located at
226 Main, Yale, Iowa. The building houses equipment used to
switch, record and transmit telephone calls. The equipment is
used in providing telephone services to Yale and the surrounding
rural area. The building has approximately 1,125 square feet.
Pacific Junction's (Prairie Telephone's wholly-owned subsidiary)
offices are located at 120 Main, Breda, Iowa. The real estate and
building are leased by Pacific Junction. The aggregate monthly rental
payable by Pacific Junction under the lease is $500. Pacific Junction
also pays real estate taxes, utilities and all other expenses. The
term of the lease runs until March 31, 2001. The building has
approximately 1,679 square feet. Pacific Junction utilizes all of the
building.
BTC owns the real estate and building located at 526 N. Carroll
Street, Carroll, Iowa. The building houses some equipment used by BTC
in providing internet access, but it was initially acquired and is
still being held for potential future use by BTC if and when BTC
provides any telephone services. BTC was also remodeling part of the
building at the time of the preparation of this annual report into a
retail store for the sale and lease of telephone, cellular and related
equipment and merchandise. It is contemplated that the store will open
for business in April, 2000. BTC's building has approximately 1,804
square feet.
Westside Independent owns the real estate and building located at 131
South Main Street, Westside, Iowa. The building is used for Westside's
corporate offices, and also houses equipment used to switch, record
and transmit telephone calls. The equipment is used in providing
telephone services to Westside and the surrounding rural area. The
building also houses some equipment used by Tele-Services in its cable
business. The building has approximately 1,600 square feet.
Tele-Services owns the following real estate:
o Tele-Services owns certain real estate and a building located at
Highway 217 East, Breda, Iowa. This property serves as the
corporate offices of Breda and Prairie Telephone, and is leased
to them by Tele-Services. The lease is briefly described above in
the description of Breda's properties.
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<PAGE>
o Tele-Services also owns buildings located in eighteen different
towns which house some equipment used to receive, descramble and
transmit television signals. This type of equipment is sometimes
referred to in the industry as "head-end equipment." The
buildings each have approximately 150 square feet. The buildings
are located on real estate in each of the eighteen towns, which
is generally made available to Tele-Services under its franchise
agreement with those towns. Tele-Services' use of some of the
real estate is pursuant to an oral agreement. Some of the real
estate is owned by the towns. Tele-Services pays a very nominal
consideration for the use of some of the real estate, and in some
cases is not required to pay any consideration. Tele-Services
does not believe it will be difficult or cost prohibitive to
obtain other real estate for the buildings or the equipment, if
that became necessary for some reason.
All of the real estate and substantially all of the other assets of
Breda, Prairie Telephone and Tele-Services are subject to mortgages
and security agreements given by those corporations to the Rural
Telephone Finance Cooperative to stand as security and collateral for
the loans made by the Rural Telephone Finance Cooperative to Breda,
Prairie Telephone and Tele-Services. The loans are also each evidenced
by a loan agreement and a secured promissory note. The principal
amounts available under the loan agreements were $2,421,053 and
$2,361,153 for Breda, $1,444,545 for Prairie Telephone, and $2,040,000
for Tele-Services.
Tele-Services cannot, however, request any further advances under its
loan agreement, and the aggregate principal amount outstanding under
Tele-Services' loan agreement and secured promissory note as of March
1, 2000 was $994,264.
The loan agreement given by both Breda and Prairie Telephone was given
for the purpose of repaying their existing lines of credit with the
Rural Telephone Finance Cooperative and consolidating their other
outstanding loans, and the aggregate amount outstanding under that
loan agreement as of March 1, 2000 was $2,211,926 for Breda, and
$1,353,248 for Prairie Telephone.
Breda's other loan agreement allowed it to borrow funds for purposes
of the purchase of Westside Independent by Breda and the purchase of
Westside Communications, Inc. by Tele-Services. The aggregate amount
outstanding under that loan agreement as of March 1, 2000 was
$2,268,040.
Breda's mortgages and security agreements also secure a 1993 loan from
the Rural Telephone Finance Cooperative in the aggregate principal
amount of $722,250. The loan was granted for Breda to finance the
purchase of its former direct broadcast satellite division. The
aggregate amount outstanding under that loan as of March 1, 2000 was
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$328,864.
Prairie Telephone and Breda also have lines of credit available from
the Rural Telephone Finance Cooperative in the amounts of,
respectively, $250,000 and $750,000. Those lines of credit are subject
to renewal on an annual basis, and will currently expire in January of
2001. The lines of credit are also secured by the mortgages and
security interests discussed above.
The Rural Telephone Finance Cooperative required Westside Independent
to execute a guaranty of the loan made by the Rural Telephone Finance
Cooperative to Breda to finance the purchase of Westside Independent
by Breda and the purchase of Westside Communications by Tele-Services.
Westside Independent's guaranty is secured by a mortgage and security
agreement which covers its real estate and substantially all of its
other assets.
Breda believes that its real estate, buildings and other improvements
and the real estate, buildings and other improvements of its
subsidiaries are adequate to conduct their businesses as conducted or
proposed to be conducted on the date of the filing of this annual
report with the SEC. Breda also believes that its and its
subsidiaries' buildings and improvements have been maintained in good
repair and condition, ordinary wear and tear and depreciation
excepted. Breda also believes the buildings and improvements are
adequately insured.
Breda, Prairie Telephone and Westside Independent also each own
various equipment used to switch, record and transmit telephone calls
in the areas serviced by them. BTC also owns certain equipment. This
equipment is all housed in buildings owned or leased by them, as
discussed above. Breda believes that the normal and ordinary useful
life of this type of equipment is approximately 5-12 years. The
current equipment was purchased at various times over the period of
1998 to 1999. Breda believes the equipment is now in good operating
condition and repair, considering ordinary wear and tear and
depreciation. Breda, Prairie Telephone, Westside Independent and BTC
also own miscellaneous lines, cables and other equipment used to
provide telephone services and internet access.
Tele-Services owns various equipment used to receive, descramble and
transmit cable signals, including various electronic receiving
equipment and electronic conductors and devices. The equipment is
sometimes called "head end" equipment. The equipment is located in
various towns as discussed above. Tele-Services also owns other
miscellaneous cables and equipment used in its business.
Breda, Prairie Telephone, Westside Independent, Tele-Services, and BTC
also hold various easements for their various telephone and cable
lines and other property. Some of those easements are on or across
real estate of the cities or other governmental
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authorities whose areas are being served, and others are on or across
private property.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the shareholders of Breda,
through the solicitation of proxies or otherwise, during the three
months ended December 31, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Breda is authorized to issue 5,000,000 shares of common stock. Breda
had 37,682 shares of its common stock issued and outstanding as of
March 1, 2000. Those shares were held by approximately 630 different
shareholders.
Breda's common stock is not listed on any exchange, and there is no
public trading market for Breda's common stock. Breda has also not
agreed to register any shares of its common stock under any federal or
state securities laws. An investment in Breda's common stock is also
not a liquid investment because the Restated Articles of Incorporation
of Breda establish various conditions on the issuance of, and various
restrictions on the transfer of, shares of its common stock. Those
conditions and restrictions are summarized in the following
paragraphs.
The common stock can only be issued to:
o residents of the Breda or Lidderdale telephone exchange areas
served by Breda who subscribe to Breda's telephone services, and
o entities which have their principal place of business in the
Breda or Lidderdale telephone exchange areas served by Breda and
which subscribe to Breda's telephone services.
As indicated, only residents of the Breda and Lidderdale telephone
exchange service areas served by Breda are eligible to purchase stock.
Although Breda also provides telephone services to Macedonia, Iowa and
the surrounding area, residents of Macedonia, Iowa and
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the surrounding rural area cannot acquire any shares of common stock
of Breda even if they are receiving telephone services from Breda.
Subscribers to any services from any of Breda's subsidiaries also
cannot buy common stock of Breda unless they otherwise meet the
requirements discussed above in this paragraph.
Since approximately January 1, 1996, no person has been allowed to
purchase more than thirty shares of common stock from Breda. A
shareholder can own more than thirty shares, subject to the 1%
limitation discussed in the following paragraph, but only thirty
shares can be acquired through issuance of the shares by Breda.
No shareholder may own more than 1% of the total issued and
outstanding common stock of Breda, unless:
o the shareholder already exceeded that percentage on February 28,
1995, or
o the shareholder goes over 1% as a result of Breda redeeming
shares of its common stock from other shareholders.
In either of those cases, the shareholder may not increase the
percentage of shares owned by the shareholder. If a shareholder 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 shareholder will be added together for
determining whether the 1% limitation is exceeded.
There can generally only be one shareholder for each telephone number
served by Breda. There can also generally only be one shareholder for
each household receiving telephone services from Breda, even if the
household has more than one telephone number.
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
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o the shareholder dies, unless the heir of the shares of Breda's
stock meets the eligibility requirements for ownership of Breda's
stock.
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 or May based upon Breda's then most recent year-end audited
financial statements. Breda's fiscal year ends on December 31. 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.
Under this approach, the issuance price and redemption price
determined by the board of directors at or around its annual meeting
in 1995, 1996, 1997, 1998 and 1999 was, respectively, $27, $31, $41,
$64 and $82. The board of directors departed from its 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 not based on Breda's
book value, but rather is roughly based upon the average sales price
of $150.58 per share in the auction that was held in October of 1999.
The auction is discussed below. 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 also believed it was appropriate to make a new
determination of the issuance price and redemption price given the
sale of Breda's direct broadcast satellite operation. The sale of that
operation resulted in a pre-tax gain of $7,436,415. The sale was not
included in Breda's books until the first quarter of 1999, however,
and was therefore not included in the 1998 year-end financial
statements utilized by the board of directors in establishing the $82
purchase price at or around the 1999 annual meeting of the board of
directors. The board of directors currently intends to otherwise
address this issue on an annual basis, however, consistent with the
above-described historical practices of the board of directors.
Accordingly, it is contemplated that the board of directors will
establish a new issuance price and redemption price at or around the
2000 annual meeting of the board of directors, and that the price will
be set at approximately 75% of the book value of Breda as of December
31, 1999. Breda estimates that the issuance price and redemption price
that will be set at or around the 2000 annual meeting of the board of
directors will be approximately $180. The board of directors may,
however, change or depart from any of the practices described in this
paragraph at any time and in its discretion.
Since there is no public trading market or any other principal market
for Breda's common stock, repurchases of common stock by Breda
currently is the primary method for a shareholder to be able to sell
the shareholder's shares. As discussed below, an auction at which
shareholders desiring to sell their shares of Breda's common stock
were given the opportunity to sell those shares to other Breda
shareholders was held in October of 1999, but there are no current
plans to arrange any other auctions in the future. Breda also
maintains a list of shareholders desiring to sell their shares, and of
other shareholders
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desiring to purchase those shares, as discussed below.
In any of the circumstances where Breda has the right to redeem a
shareholder's shares, a shareholder may, with the consent of Breda's
board of directors, transfer the shareholder's shares to another
person who is eligible to be a shareholder by reason of the fact that
the person is receiving services from Breda and is residing in the
Breda or Lidderdale telephone exchange areas served by Breda.
No shareholder can sell or transfer any of his or her shares of Breda
to any person who is not eligible to be a shareholder in Breda by
reason of the fact that the person is receiving services from Breda
and is residing in the Breda or Lidderdale telephone exchange areas
served by Breda, with one exception. The exception is that a person
who was a shareholder on July 20, 1995, may make a one time transfer
of the shares held by the person on that date to a family member of
the shareholder (which means a spouse, natural born or adopted child,
grandchild, parent, grandparent, or sibling) even if the family member
is not receiving services from Breda and is not residing in the Breda
or Lidderdale telephone exchange areas served by Breda. These
transfers are not subject to Breda's right of first refusal described
in the following paragraph. Any family member receiving shares by this
process does not have the same right, however, and can only sell or
transfer the shares in accordance with the Amended and Restated
Articles of Incorporation of Breda.
Any shareholder who wants to sell or transfer his or her shares in
Breda to another shareholder or person who is eligible to be a
shareholder must first give Breda the right to purchase the shares. In
this case, the shareholder must give Breda at least sixty days prior
written notice of the proposed sale, including a copy of the written
offer to purchase the shares. Breda may elect to purchase the shares
for the same price offered to the shareholder at any time within sixty
days after it receives the notice from the shareholder. If Breda
elects to buy the shares, it must pay the purchase price in full upon
the shareholder surrendering the stock certificates for the shares to
Breda.
Breda's bylaws may also contain provisions restricting the transfer of
shares. The current bylaws do not contain any restrictions, other than
some of those described in this annual report, but the bylaws can be
amended by the directors or shareholders at any time.
Over the period of January 1, 1996 through June 24, 1996, Breda
repurchased four hundred and twenty-four shares of its common stock
from two shareholders, at a purchase price of $27 per share. Over the
period of June 25, 1996 through February 20, 1997, Breda repurchased
seven hundred and eighty-nine shares from nine different shareholders,
at a purchase price of $31 per share. Over the period of February 21,
1997 through March 1, 1998, Breda repurchased one thousand nine
hundred and ninety-six shares of its common stock from fourteen
different shareholders, at a purchase price of $41 per share. Over the
period of March 2, 1998 through December 31, 1998, Breda
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repurchased three hundred and fifty-eight shares of its common stock
from five different shareholders, at a purchase price of $64 per
share. No shares were repurchased by Breda during the period of
December 31, 1998 through December 31, 1999, except that in November,
1999, Breda did effectuate a repurchase of forty shares by depositing
the purchase price for those forty shares with the appropriate Iowa
authorities under Iowa's escheat laws. The forty shares were held of
record by twenty different shareholders that Breda had been unable to
locate. The purchase price utilized for this purpose was the then
current $149 per share price as established by the board of directors
pursuant to the procedures which are discussed above in this Item.
Breda also deposited the amount of the April 21, 1999 dividend that
was otherwise payable on the forty shares. The total amount deposited
by Breda was $6,080, with $120 of that amount being for the April 21,
1999 dividend.
There may have been transfers among the shareholders of Breda during
the above periods for which Breda did not exercise its right of first
refusal.
Breda's ability to repurchase any of its shares is subject to certain
restrictions in its loan agreements with the RFTC. Those restrictions
are discussed below in this Item.
Breda has not agreed to register any of its shares of common stock
under any federal or state securities laws. After Breda has been
subject to the reporting requirements of the Securities Exchange Act
of 1934 for a period of ninety days, Rule 144 under the Securities Act
of 1933 will be available to permit the resale of shares of common
stock by shareholders, subject to certain restrictions contained in
Rule 144, including the requirement that the shareholder has held his
or her shares for a period of one year prior to the date of resale.
Once a shareholder (other than a shareholder who is an officer or
director of Breda) has held his or her shares of common stock for a
period of two years, the shareholder will be able to resell the shares
without restriction under Rule 144.
The marketability and value of Breda's shares of common stock may also
be limited by other terms of the common stock. For example, each
shareholder is entitled to only one vote on each matter presented to
the shareholders, regardless of the number of shares of common stock
held by the shareholder, with one exception regarding shareholders who
previously held Class A stock of Breda. Those shareholders have one
vote for each share of former Class A stock previously held by them on
February 28, 1995, until one of the following occurs:
o the shareholder no longer receives service from Breda,
o the shareholder no longer resides in the Breda or Lidderdale
telephone exchange area served by Breda,
o the shareholder dies, or
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o the shareholder transfers the shareholder's shares to someone
else
As of March 1, 2000, there were 21 shareholders with multiple voting
rights arising from their prior ownership of Class A stock, and they
have one vote for each share of the former Class A stock previously
held by them.
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 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. As discussed above, Breda had a right of
first refusal to purchase all of the shares sold in the auction, but
elected not to exercise its right. Breda did, however, offer to
purchase shares in the auction for $142 per share, but no shareholder
chose to sell the shareholder's shares to Breda at that price. The
$142 figure was approximately 60% of Breda's book value per share as
of the close of the second quarter in 1999. 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.
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 shares of 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 shares of 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
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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.
Two separate sales of shares have occurred between shareholders on the
list. One sale involved two shares, which were sold for $149 per
share. The other sale involved 31 shares, which were sold for $150 per
share. Breda elected not to exercise its right of first refusal on
either of those sales.
Breda does not participate in, and has no responsibility for,
negotiating the terms and conditions of any sale of shares between
anyone on the list. Breda did, however, advise its shareholders by
letter in February, 2000, that it recommended that shareholders cease
buying and selling shares until Breda was able to share information
with the shareholders concerning some corporate actions that could
affect the value of Breda's common stock. Breda did not identify those
corporate actions in the letter, but the corporate actions that Breda
was making reference to in that letter was the potential sale of
Prairie Telephone's stock in Central Iowa Cellular, Inc., which is
discussed in Item 1 of this annual report. Although no letter of
intent or any other agreements for the sale of that stock had been
entered into at the time of the letter to the shareholders, Prairie
Telephone had been contacted about the possibility of selling its
shares in Central Iowa Cellular, Inc. at that time. Breda will advise
its shareholders of the terms of that transaction if and when it has
been finalized.
Through December 31, 1999, Breda had only declared and paid one
dividend to its shareholders since Breda was incorporated in 1964. The
dividend was declared on April 21, 1999. It was in the amount of $3.00
per share, for an aggregate dividend of $113,166.
Payment of dividends is within the discretion of Breda's board of
directors, and out of funds legally available therefore as provided in
the Iowa Business Corporation Act. Breda's ability to declare and pay
dividends is also restricted by some of the covenants in its loan
agreements with the RFTC. Under those agreements, Breda may not pay
any dividends without the prior written approval of the RFTC unless,
after the payment, Breda is in compliance with the various ratios, net
worth and margin requirements set forth in the loan agreements. Breda
also may not pay any dividends if Breda is in default under the loan
agreements or if the payment of the dividends would cause Breda to be
in breach of the loan agreements.
Those restrictions in the RFTC loan agreements also apply to Breda's
purchase or redemption of any of its stock and to any other
distributions to its shareholders, so the restrictions may preclude
Breda from being able to repurchase its shares of stock as otherwise
discussed in this Item.
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Breda does not currently believe, however, that the restrictions in
the RFTC loan agreements will preclude Breda from paying any dividends
or distributions or from repurchasing any of its shares of common
stock, should Breda otherwise determine to do so.
No shares of stock were issued by Breda in all of 1999. There are
currently no outstanding warrants, options or other rights to purchase
any shares of common stock of Breda, and there are also currently no
outstanding securities which are convertible into common stock of
Breda. Breda's shares of common stock are not convertible into any
other securities.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview.
This Item 6 should be read in conjunction with the financial
statements and related notes included in Item 7 of this annual report.
Breda's primary source of revenues on a consolidated basis with its
subsidiaries is from the telephone services provided by Breda, Prairie
Telephone and Westside Independent.
The operating revenues from their telephone services are primarily
derived from the following types of fees and charges:
o Flat monthly fees charged to subscribers for basic local
telephone services. As of March 1, 2000, those fees varied from
approximately $11.50 to $35.00 per month. The monthly fee is
higher for subscribers who elect to have additional services and
features, such as custom features.
o Access charges payable by long distance carriers for intrastate
and interstate exchange services provided to those long distance
carriers. Access charges may be at a flat, fixed rate or may
depend upon usage. As discussed above in Item 1 of this annual
report, access rates are subject to regulation by the FCC. Access
charges constitute a substantial part of Breda's, Prairie
Telephone's and Westside Independent's revenues, and a material
risk to them arises from the regulation of access charges rates
by the FCC. A recent change in the FCC's regulations led to a
reduction in the access charges received by Breda, Prairie
Telephone and Westside Independent, and is discussed in the next
paragraph. As is also discussed below, Breda anticipates
continuing pressure for the lowering of access charges rates, so
further reductions in access charges rates is a possibility.
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The amount of access charges payable to telephone companies like
Breda, Prairie Telephone and Westside Independent who utilize the
"average schedule" basis for receiving access charges is based
on, among other things, the number of miles of their cable over
which they transfer long distance calls made by their
subscribers. The FCC approved some changes proposed by NECA
regarding this practice effective in July, 1998. Under the
changes, Breda, Prairie Telephone and Westside Independent now
receive a substantially lower access charge rate for any miles of
cable over 100 miles. The access charge rate for any miles of
cable over 100 miles became approximately $.05 per mile under the
changes, rather than the rate of approximately $1.00 per mile
which previously applied and which still currently applies to
miles of cable up to 100 miles. These reductions did not have a
material adverse effect, however, given that total access
revenues have been increasing in recent years. Breda believes
those increases are, however, attributable to increased numbers
of subscribers, increased calling patterns and technological
advances. There is no assurance that these trends will continue,
and it is unlikely that there will be any further material
increases in the number of subscribers without the acquisition of
additional calling areas by Breda, Prairie Telephone or Westside
Independent. As discussed below, however, they currently do not
foresee the possibility of any such acquisitions.
As indicated above, Breda, Prairie Telephone and Westside
Independent utilize the "average schedule" basis for receiving
access charges. This is the approach taken by most smaller
telephone companies. Another approach currently available for
receiving access charges is the "cost" approach. Telephone
companies make filings with the FCC which set forth their costs
of providing long distance services. Under the average schedule
approach, access charges are based upon, in general, the average
of all of those costs and certain other factors intended to take
into account the size of the particular telephone company in
question.
It is difficult to predict what, if any, future changes will be
made by the FCC in its regulations governing access charges
rates, other than that if future changes are made, they will
likely have the result of lowering Breda's, Prairie Telephone's
and Westside Independent's total access charges revenue. Breda
believes that there will be continuing pressure by the FCC and
other regulatory authorities to lower access charges rates over
the next one to four years. Breda also anticipates, however, that
there will be significant resistance in the telephone industry to
any further lowering of access charges rates, and Breda does not
anticipate any material reduction in access charges rates in the
next twelve months. As indicated above, however, it is difficult
to predict what changes will be made in access charges rates,
other than that any
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changes will be to lower access charges rates. Those reductions
could be material and have a material adverse effect on Breda's,
Prairie Telephone's and Westside Independent's business.
If future adverse changes occur, one option Breda may consider is
changing from the average schedule basis to the cost basis for
receiving access charges. If Breda determines to consider this
option, it contemplates utilizing the services of third parties
who have experience in studying these two options and advising as
to what option is the best approach for the telephone company in
question. There is no guarantee, however, that a change from the
average schedule to the cost basis will offset any adverse
changes in the regulations of the FCC governing access charges
rates, or that even if this change is beneficial at one time,
that subsequent changes in the FCC's regulations will not cause
the average schedule basis to once again be more favorable to
Breda, Prairie Telephone and Westside Independent. If Breda,
Prairie Telephone and Westside Independent ever elect to change
to the cost basis, however, the FCC's current regulations would
not allow them to change back to the average schedule basis
because the FCC currently treats this change as a one time,
permanent election.
o Revenue from the sale and lease of customer premises telephone
equipment and other similar items and other miscellaneous
customer services, such as custom calling services. Since the
completion of the upgrading of their telephone switches in 1998
and 1999, Breda, Prairie Telephone and Westside Independent have
had the capability to offer many more custom calling features to
their subscribers. Breda, Prairie Telephone and Westside
Independent have been marketing extended packages and custom
calling features to their subscribers in the hope that may
increase and maximize subscriber usage of the newly available
packages and features. Revenues from custom calling services are
not, however, ever anticipated to be a major or material source
of revenue.
o Fees from long distance providers for billing and collection
services for long distance calls made by subscribers. Breda,
Prairie Telephone and Westside Independent are experiencing
increased competition in this area. As discussed in Item 1 of
this annual report, their competitors include other third parties
providing these services, and competition from the long distance
providers themselves since some providers have decided to handle
their own billing and collection.
Breda, Prairie Telephone, Westside Independent and BTC each generate
revenues from providing internet access and from sales and leases of
other equipment and facilities for private line data transmission,
such as local area networks, virtual private networks and
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wide area networks. During 1999, there was an increase of
approximately 65% in the combined internet customer base of Breda,
Prairie Telephone, Westside Independent and BTC. BTC itself
experienced an increase of approximately 68% in its internet customer
base. BTC's current customer base is limited to Carroll, Iowa and the
surrounding communities. Although they did not face any material
competition in providing internet access in their service areas at the
time of the preparation of this annual report, Breda believes that
Breda, Prairie Telephone, Westside Independent and BTC will face
increased competition in the future through, among possibly other
things, the increased provision of internet access and services
through cable; technological advances that may allow cable access and
services to be provided through new methods; and mergers and
consolidations within the telecommunications industry which may create
new competitors with expanded resources and the ability to provide
expanded services.
Breda's other primary source of revenue on a consolidated basis with
its subsidiaries is generated from Tele-Services' cable business.
Tele-Services' operating revenues arise primarily from monthly fees
for basic and premium cable services provided to its cable
subscribers. Tele-Services' main competition at the time of the
preparation of this annual report was from satellite dish providers.
Recent actions by the FCC have allowed satellite dish providers to
provide local channels, which could have an adverse effect on Tele-
Services, given that its ability to provide local channels was, in the
past, one reason subscribers might choose Tele-Services' cable
services over a satellite dish. Other rulings and decisions by the FCC
are possible, and may provide satellite dish providers, or other
providers as changes in the telecommunications and cable industry
occur, with equal or greater advantages than Tele-Services can offer
to its subscribers, which could obviously have an adverse effect on
Tele-Services' business. Breda currently believes, however, that the
cable services provided by Tele-Services will continue to be desirable
for at least those subscribers who desire a lower priced product that
allows local channel options. Another difficulty being faced by
Tele-Services at the time of the preparation of this annual report was
the trend of the companies which provide programming licensing to
cable services providers to require the cable services providers to
include particular channels on their systems as a condition of
receiving a programming license. Tele-Services anticipates that it
will need to upgrade its plant, equipment and cables 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.
Other revenues arise from the telemarketing activities of Pacific
Junction and investments in various cellular limited partnerships and
cellular corporations. Those sources of revenue are briefly discussed
in Item 1 of this annual report. Other miscellaneous sources of
revenue are also discussed in the financial statements found at
Section 7 of this annual report.
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The following table reflects, on a consolidated basis for Breda and
its subsidiaries, the percentage of revenue derived from Breda's and
its subsidiaries' various businesses and investments as of the close
of the past two fiscal years:
1998 1999
---- ----
Local Network(1) 6.1% 9.7%
Network Access(2) 37.8% 42.1%
Billing and Collection(3) 1.5% 1.4%
Cable and Direct Broadcast
Satellite Services(4) 33.1% 19.8%
Telemarketing Services(5) 8.9% 7.5%
Miscellaneous(6) 12.6% 19.5%
----- -----
Total 100% 100%
(1) Includes flat monthly fees charged to subscribers by Breda,
Prairie Telephone and Westside Independent for basic local
telephone services.
(2) Includes universal services funding amounts and access charges
payable by long distance carriers for intrastate and interstate
exchange services provided to those long distance carriers.
(3) Includes fees from long distance providers for billing and
collection services for long distance calls made by subscribers.
(4) Includes monthly fees charged for basic and premium cable
services, and direct broadcast satellite services. The direct
broadcast satellite operation was sold in January, 1999.
(5) Includes revenues from telemarketing services.
(6) Includes monthly fees charged for internet services, cellular
commissions, advertising fees, and miscellaneous revenues.
Year Ended December 31, 1998 to Year Ended December 31, 1999.
There was a decrease in total operating revenues for the twelve month
period ended December 31, 1999, when compared to the same period in
1998, of $1,255,034, or 19.2%. The significant 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 twelve month period ended
December 31, 1998, direct broadcast service revenues represented 18.2%
of total operating revenues, or $1,191,897. 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 of Pacific Junction decreased by
$182,674, or 31.4%, because of some calling number unavailability,
which resulted in Pacific Junction not being able to make
telemarketing calls. Access charges revenues decreased by $240,877, or
9.8%, 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
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Junction are estimated to represent approximately 5% of the total
consolidated access revenue in 1999.
There was an increase in local network services revenue of $115,430,
or 29%, during the twelve month period ended December 31, 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 $77,976, or
8%, 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
$183,434, or 83.6%, when comparing the two periods. This increase
resulted from an increased customer base.
There was a decrease in total operating expenses of $601,874, or
11.8%, for the twelve month period ended December 31, 1999, when
compared to the same period in 1998. Programming expenses declined by
$936,283, or 77.7%, 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 increased by $39,627, or 2.8%, when comparing the two
periods. This increase primarily reflects wage and price increases.
The increase would have been higher, but the additional expenditures
incurred with updating switches in four of the telephone exchange
service areas in 1999 have been capitalized. There were also
additional expenses incurred during the twelve month period ended
December 31, 1999 with equipment updates to add cable television
channels in most of the 19 towns served by Tele-Services. Corporate
operations expenses increased by $290,777, or 43.4%, when comparing
the two periods. This increase relates to expenditures and benefits
for additional staff for a full year in 1999, as compared to a partial
year in 1998. Legal, accounting and other expenses were increased due
to Breda becoming a reporting company under Securities Exchange Act of
1934. It is estimated that these types of expenditures totaled
approximately $125,000 in 1999. These types of expenses will be an
ongoing operating expense for Breda. Breda also invested in computer
training for its office staff members and in switch training for its
technicians with the installation of the upgraded switches. The
education expenses were approximately $25,000 for the twelve-month
period ending December 31, 1999. Customer operation expenses decreased
by $108,795, or 13.4%, when comparing the two periods. The decrease
resulted partially from the fact that Breda did not need to provide
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customer services for the direct broadcast satellite operation after
the sale of that operation in January, 1999. The main decrease in
customer operation expense was caused by a decrease in Pacific
Junction's telemarketing payroll expenditures, which decrease resulted
from the unavailability of numbers for calling. The upgrading of
switch equipment and other capital improvements resulted in an
increase in depreciation expense of $105,047, or 11.6%, again when
comparing the two periods.
Non-operating income before income taxes increased by $7,330,637, or
12,014.9%, during the twelve month period ended December 31, 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 interest income increase of $271,719 on
the funds invested from that sale. The twelve-month period ended
December 31, 1999, reflected a $13,136 increase in income from
cellular partnerships when compared to the same period in 1998.
However, the twelve month period ended December 31, 1999, also
reflected no income from non-recurring cellular partnership
settlements, as compared to the twelve month period ended December 31,
1998, which showed a $409,212 income from that source. The loss on the
disposal of assets in 1999 and 1998 was, respectively, $73,996 and
$118,443, and resulted from writing off the undepreciated basis in the
old switches that were replaced in 1999 and 1998. The loss on the sale
of investments in 1999 of $78,771, as compared to a $8,853 gain in
1998, was a result of the liquidation of investments not held to
maturity to pay income taxes on the sale of the satellite operation.
Interest expense increased $15,816, or 3.2%, for the twelve month
period ended December 31, 1999, when compared to the same period in
1998. There was no increase in outstanding debt, and this increase
resulted from the increase in the variable interest rate payable on
some of the outstanding debt with the RFTC, which is discussed below
and in Item 2 of this Annual Report.
Income taxes increased by $2,514,264 for the twelve-month period ended
December 31, 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 $4,163,213 for the twelve-month period ended
December 31, 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 Twelve Months Ended December 31,
1999.
Breda's net working capital was a positive $885,642 as of the close of
December 1999. This represents an increase of $1,311,164 in net
working capital from year-end 1998. The positive working capital at
year-end 1999 was due mainly to two factors. One factor was a $796,660
combined decrease in the current portion of long-term debt and the
absence of an outstanding line of credit balance. A $750,000 line of
credit advance was taken from the Rural Telephone Finance Cooperative
in December of 1998, and paid back on
34
<PAGE>
January 12, 1999. The second factor was a $542,330 overpayment of
income taxes showing as a current asset on the balance sheet on
December 31, 1999.
Breda had a decrease in cash and cash equivalents of $371,618 during
the twelve months ended December 31, 1999, when compared to the year
ended December 31, 1998. This resulted in a balance of $411,341 as of
December 31, 1999. While Breda's current investments decreased by
$19,740, its overall current and long-term investments increased by
$2,867,839. The increase in the overall cash and investments resulted
primarily from the proceeds received from the sale of the direct
broadcast satellite operation after income taxes were paid. A small
portion of those proceeds was used to finance the seven switch
conversions completed in 1998 and 1999.
Breda's net working capital was a positive $885,642 at December 31,
1999. Estimated income tax payments were funded from non-current
assets during this time period and prepaid income taxes of $542,330
are reflected in current assets as of December 31, 1999. These prepaid
taxes will be used to offset the first Year 2000 estimated income tax
installment due in April 2000. Breda has a $750,000 line of credit
with Rural Telephone Finance Cooperative and Prairie Telephone has a
line of credit with Rural Telephone Finance Cooperative for $250,000.
It is anticipated that these options will be investigated for
quarterly income tax payments in lieu of redeeming held-to-maturity
investments. Overall current liabilities decreased by $1,064,972 for
the twelve months ended December 31, 1999, as compared to the year
ended December 31, 1998. Accounts payable decreased by $225,363,
mainly due to the fact that there were no outstanding direct broadcast
satellite programming fees for the last month of the fiscal year,
given the sale of the direct broadcast satellite operation on January
11, 1999. As previously noted, there was also a zero balance for the
line of credit as of December 31, 1999, as compared to $750,000 on
December 31, 1998. Other investments increased by $257,466 for the
twelve-month period ending December 31, 1999. This increase resulted
from increased investments in cellular partnerships.
A final balloon payment of $79,382 was made in October of 1999 on the
real estate contract entered into by Tele-Services for the building
utilized by Breda and Prairie Telephone as their office and
headquarters.
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 $528,000 in 2000.
35
<PAGE>
Breda does anticipate that substantial expenditures will need to be
made for software upgrades that will become necessary in order for
Breda, Prairie Telephone and Westside Independent 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 FCC,
must now generally be completed by June 30, 2000. However, for
wireline, cellular, and broadband personal communications services
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 is
currently seeking estimates for the cost to upgrade Breda's, Prairie
Telephone's and Westside Independent's software as necessary to become
compliant with the Act, but, as indicated, Breda anticipates
substantial expenditures will be necessary, and that those
expenditures may be as much as approximately $200,000. Breda does,
however, intend to attempt to seek an extension of the time period in
which Breda, Prairie Telephone and Westside Independent must become
compliant with the Act, so that the software upgrades necessary to
become compliant with the Act can be made over an extended basis and
as part of the software enhancements that will be necessary as part of
Breda's, Prairie Telephone's and Westside Independent's normal
operations. If Breda were granted that extension, it is estimated that
the extension would be for a one- year period.
As of December 31, 1999, Breda and its subsidiaries had approximately
$7,156,342 in outstanding loans with the Rural Telephone Finance
Cooperative. Those loans are discussed in more detail in Item 2 of
this annual report. Of the outstanding debt with the RFTC on that
date, approximately $2,268,040 was at a fixed interest rate of 7.35%
per annum, and carried a ten year term. The variable rates on the
remaining RFTC debt exceed that fixed rate and could affect future
borrowing decisions and the allocation of outstanding debt between
fixed and variable rates.
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. As discussed
elsewhere, 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
36
<PAGE>
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.
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.
As discussed in Item 1 of this annual report, Breda and Prairie
Telephone have purchased spectrum for providing personal communication
services in the Breda, Lidderdale and Yale telephone exchange areas.
Prairie Telephone has also become a member in Guthrie Group, L.L.C.,
which is a limited liability company which was organized to purchase
spectrum for providing personal communications services in the Guthrie
County, Iowa area. Breda is also currently contemplating becoming a
member in a limited liability company which may acquire spectrum for
providing personal communication services in other areas. Personal
communication services is a relatively new area in the
telecommunications industry and includes wireless voice and data
communication. Although difficult to predict, personal communication
services may become very important in the future and may be highly
competitive with current cellular services. Breda and Prairie
Telephone have not made any firm decision on whether they will ever
offer any personal communication services, and they do not in any
event contemplate offering any personal communication services for at
least one to two years, primarily because those services must first be
available in surrounding areas before Breda and Prairie Telephone can
provide those services. Breda estimates that it will take at least one
to two years for the surrounding areas to build out their personal
communication systems to the point where Breda and Prairie Telephone
could connect to those systems. Breda, Prairie Telephone and Westside
Independent do not currently own spectrum for all of the telephone
exchange service areas currently serviced by them, and there is no
guarantee that they will be able to acquire spectrum for all of those
areas. Also, Breda, Prairie Telephone and Westside Independent will
face competition in providing personal communication services because
no exclusive rights can be acquired with respect to personal
communication services. The area of personal communication
37
<PAGE>
services is therefore an uncertain area for Breda, Prairie Telephone
and Westside Independent.
Personal communication services are competitive with the telephone
services otherwise provided by Breda, Prairie Telephone and Westside
Independent. Breda does not believe, however, that investments in
personal communication services or in ventures which may be involved
in personal communication services are inconsistent or in conflict
with Breda's, Prairie Telephone's or Westside Independent's overall
business. Breda also believes positioning itself to be able to offer
personal communication services or investing in other ventures which
may offer personal communication services are a method of attempting
to diversify across the various telecommunications methods which are
available today or may become important in the future.
To date neither Breda nor any of its subsidiaries has experienced any
material difficulties regarding Year 2000 issues.
There are no current plans to expand the cable services areas of, or
the cable services provided by, Tele-Services and Westside
Communications.
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 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.
38
<PAGE>
Item 7. Financial Statements.
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
WITH INDEPENDENT AUDITOR'S REPORTS
39
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONTENTS
Page
Independent Auditor's Report 41
Consolidated Financial Statements:
Consolidated Balance Sheets 42-43
Consolidated Statements of Income 44
Consolidated Statements of Stockholders' Equity 45
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 47-59
40
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Breda Telephone Corporation and Subsidiaries
Breda, Iowa
We have audited the accompanying consolidated balance sheets of Breda Telephone
Corporation (an Iowa corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Breda Telephone
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Emmetsburg, Iowa
February 18, 2000
41
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
------ ----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 411,341 $ 782,959
Current portion of investments 94,810 114,550
Accounts receivable 681,675 649,044
Income taxes refundable 542,330 --
Interest receivable 67,580 21,455
Inventories 88,479 80,279
Other 77,527 69,263
----------- -----------
1,963,742 1,717,550
----------- -----------
OTHER NONCURRENT ASSETS
Investments, less current portion 4,417,624 1,530,045
Other investments 2,725,488 2,468,022
Intangibles, net of accumulated amortization 1,222,372 1,753,447
Deferred income taxes 11,360 --
Other -- 21,390
----------- -----------
8,376,844 5,772,904
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 6,340,193 6,185,874
----------- -----------
TOTAL ASSETS $16,680,779 $13,676,328
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
42
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 608,412 $ 655,072
Line of credit -- 750,000
Accounts payable 239,787 465,150
Accrued taxes 125,643 177,033
Other 104,258 95,817
----------- -----------
1,078,100 2,143,072
----------- -----------
LONG-TERM DEBT, less current portion 6,547,930 7,156,342
----------- -----------
DEFERRED INCOME TAXES -- 268,888
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized
37,682 and 37,722 shares issued and outstanding at $149
and $64 stated value, respectively 5,614,618 2,414,208
Retained earnings 3,440,131 1,693,818
----------- -----------
9,054,749 4,108,026
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,680,779 $13,676,328
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
43
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999 and 1998
1999 1998
----------- -----------
OPERATING REVENUES
Local network services $ 512,829 $ 397,399
Network access services 2,224,956 2,465,833
Cable television services 1,047,667 969,691
Telemarketing services 398,763 581,437
Internet services 402,730 222,176
Direct broadcast services (DBS) -- 1,191,897
Billing and collection services 75,926 100,570
Miscellaneous 627,675 616,577
----------- -----------
5,290,546 6,545,580
----------- -----------
OPERATING EXPENSES
Plant specific operations 1,313,580 1,161,568
Plant nonspecific operations 99,353 202,533
Cost of programming 268,932 1,214,420
Depreciation and amortization 1,012,964 907,917
Customer operations 701,364 810,159
Corporate operations 961,065 670,288
General taxes 151,355 143,602
----------- -----------
4,508,613 5,110,487
----------- -----------
OPERATING INCOME 781,933 1,435,093
----------- -----------
OTHER INCOME (EXPENSE)
Interest and dividend income 473,964 202,245
Interest expense (503,302) (487,486)
Interest capitalized 26,441 --
Gain on sale of DBS investment 7,436,415 --
Gain (loss) on sale of investments (78,771) 8,853
Loss on disposal of assets (73,996) (118,443)
Loss on extinguishment of debt -- (66,913)
Income from cellular partnership 123,109 109,973
Income from cellular settlement -- 409,212
Loss on joint venture, net (15,864) (15,702)
Other income 3,654 19,274
----------- -----------
7,391,650 61,013
----------- -----------
INCOME BEFORE INCOME TAXES 8,173,583 1,496,106
----------- -----------
INCOME TAXES 3,107,734 593,470
----------- -----------
NET INCOME $ 5,065,849 $ 902,636
=========== ===========
NET INCOME PER COMMON SHARE $ 134.44 $ 23.86
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
44
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
<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
Comprehensive income:
Net income 902,636 902,636
Common stock redeemed, net (206) (15,990) (15,990)
Stated value stock adjustment 875,150 (875,150)
---------- ----------- ----------- ----------
Balance at December 31, 1998 37,722 2,414,208 1,693,818 4,108,026
Comprehensive income:
Net income 5,065,849 5,065,849
Dividends paid ($3/share) (113,166) (113,166)
Common stock redeemed, net (40) (5,960) (5,960)
Stated value stock adjustment 3,206,370 (3,206,370)
---------- ----------- ----------- ----------
Balance at December 31, 1999 37,682 $ 5,614,618 $ 3,440,131 $9,054,749
========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
45
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,065,849 $ 902,636
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,012,964 907,917
Amortization of investment tax credits (9,769) (9,769)
Deferred income taxes (270,479) (146,224)
Gain on sale of DBS investment (7,436,415) --
Loss on disposal of assets 73,996 118,443
Change in method of accounting -- 49,115
Changes in operating assets and liabilities:
(Increase) decrease in assets (656,382) 109,690
Decrease in liabilities (268,312) (410,324)
----------- -----------
Net cash provided by (used in) operating activities (2,488,548) 1,521,484
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,249,414) (1,955,965)
Salvage, net of removal cost 6,475 162,377
Purchase of investments (2,867,839) 122,925
Increase in other investments (257,466) (99,961)
Purchase of intangibles (28,825) --
Proceeds from sale of DBS investment 8,038,197 --
----------- -----------
Net cash provided by (used in) investing activities 3,641,128 (1,770,624)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock redeemed (5,960) (15,990)
Proceeds from long-term debt -- 3,650,050
Proceeds from line of credit -- 750,000
Repayment of long-term debt (655,072) (3,964,846)
Repayment of line of credit (750,000) --
Dividends paid (113,166) --
----------- -----------
Net cash provided by (used in) financing activities (1,524,198) 419,214
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (371,618) 170,074
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 782,959 612,885
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 411,341 $ 782,959
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
46
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Breda Telephone Corporation is a provider of telecommunications
exchange and local access services, cable television services,
telemarketing services, internet services and telecommunications
equipment in a service area located primarily in west central Iowa.
The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles and reflect practices
appropriate to the telephone and cable television industries.
Management uses estimates and assumptions in preparing its
consolidated financial statements. Those estimates and assumptions
affect the reported amounts of assets and liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities.
Telephone operations reflect practices appropriate to the telephone
industry. The accounting records of the Company are maintained in
accordance with the Uniform System of Accounts for Class A and B
Telephone Companies prescribed by the Federal Communications
Commission as modified by the Iowa State Utilities Division (ISUD).
Principles of Consolidation
The consolidated financial statements include the accounts of Breda
Telephone Corporation and its wholly-owned subsidiaries, Prairie
Telephone Company, Inc., Westside Telephone Company, and
Tele-Services, Ltd. (herein referred to as "the Company"). All
material intercompany transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less
at the time of purchase are considered cash equivalents.
Investments
Debt and marketable equity securities bought and held principally for
selling in the near future are classified as trading securities and
carried at fair value. Unrealized holding gains and losses on trading
securities are reported in earnings. Debt and marketable equity
securities classified as available-for-sale are carried at fair value
with unrealized holding gains and losses recorded as a separate
component of stockholders' equity. Debt securities for which the
Company has both the positive intent and ability to hold to maturity
are classified as held-to-maturity and are carried at amortized cost.
The Company used the FIFO method of computing realized gains and
losses.
Non-marketable equity investments, over which the Company has
significant influence or a 20% ownership, are reflected on the equity
method. Other non-marketable equity investments are stated at cost.
47
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Property, Plant and Equipment
Property, plant and equipment are capitalized at original cost,
including the capitalized cost of salaries and wages, materials,
certain payroll taxes, and employee benefits.
The Company provides for depreciation for financial reporting purposes
on the straight-line method by the application of rates based on the
estimated service lives of the various classes of depreciable
property. These estimates are subject to change in the near term.
Renewals and betterments of units of property are charged to telephone
plant in service. When telephone plant is retired, its cost is removed
from the asset account and charged against accumulated depreciation
together with removal cost less any salvage realized. No gains or
losses are recognized in connection with routine retirements of
depreciable telephone property. Repairs and renewals of minor items of
property are included in plant specific operations expense.
Repairs of other property, as well as renewals of minor items of
property are included in plant specific operations expense. A gain or
loss is recognized when other property is sold or retired.
Long-Lived Assets, Including Intangibles
The Company would provide for impairment losses on long-lived assets,
including intangibles used in operations, when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Based on current conditions, management does not believe any of its
long-lived assets are impaired.
Income Taxes
Income taxes are accounted for using a liability method and provide
for the tax effects of transactions reported in the consolidated
financial statements including both taxes currently due and deferred.
Deferred taxes are adjusted to reflect deferred tax consequences at
current enacted tax rates. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities arise from differences
between the basis of property, plant and equipment and partnership
profits and losses. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled.
Revenue Recognition
The Company recognizes revenues when earned regardless of the period
in which they are billed. The Company is required to provide telephone
service to subscribers within its defined service territory.
Local network service, internet service and cable television service
revenues are recognized over the period a subscriber is connected to
the network.
48
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Network access revenues are derived from charges for access to the
Company's local exchange network. The interstate portion of network
access revenues are received through pooling arrangements administered
by the National Exchange Carrier Association (NECA) based on average
schedule formulas. The intrastate portion of network access revenues
are billed based upon the Company's tariff for access charges filed
with the ISUD. The charges developed from these tariffs are used to
bill the connecting long distance provider and revenues are recognized
in the period the traffic is transported based on the minutes of
traffic carried.
Other revenues include telemarketing services and contractually
determined arrangements for the provision of billing and collecting
services and are recognized in the period when the services are
performed.
The Company uses the reserve method to recognize uncollectible
accounts receivable.
Reclassifications
Certain reclassifications have been made to the 1998 financial
statements to conform with the 1999 presentation.
NOTE 2. INVESTMENTS
The amortized cost and fair value of investments classified as
held-to-maturity and available-for-sale are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
----------------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Held-to-Maturity:
Municipal Bonds $4,361,468 $ 2,050 $ (141,995) $4,221,523
U.S. Treasury Notes 59,894 (5,908) 53,986
Government Securities 51,663 (3,506) 48,157
Available-for-Sale:
Marketable equity securities 39,409 (1,534) 37,875
---------- --------- ----------- ----------
$4,512,434 $ 2,050 $ (152,943) $4,361,541
========== ========= =========== ==========
December 31, 1998
-----------------
Held-to-Maturity:
Municipal Bonds $1,518,112 $ 18,566 $ (1,213) $1,535,465
U.S. Treasury Notes 35,195 1,893 37,088
Government Securities 51,879 (1,316) 50,563
Available-for-Sale:
Marketable equity securities 39,409 529 39,938
---------- --------- ----------- ----------
$1,644,595 $ 20,988 $ (2,529) $1,663,054
========== ========= =========== ==========
</TABLE>
49
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 2. INVESTMENTS, (Continued)
1999 1998
---------- ----------
Amounts classified as:
Current $ 94,810 $ 114,550
Noncurrent 4,417,624 1,530,045
---------- ----------
$4,512,434 $1,644,595
========== ==========
There were no sales of available-for-sale securities during 1999 or
1998 and; therefore, no proceeds nor any realized gains or losses for
either year.
Investments classified as held-to-maturity at December 31, 1999, are
summarized below by contractual maturity date:
Due in one year or less $ 55,401
Due after one year through five years 1,789,955
Due after five years 2,627,669
----------
$4,473,025
==========
NOTE 3. OTHER INVESTMENTS
Other investments include non-marketable equity securities and
certificates, along with capital contributions to partnerships and
limited liability companies, and joint ventures as shown below:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Alpine Communications, L.C $ 781,579 $ 600,000
Rural Telephone Finance Cooperative - certificates 533,319 538,422
RSA #1, Ltd. 348,542 348,542
RSA #7, Ltd. 144,049 144,049
RSA #8, Ltd. 310,491 210,129
Central Iowa Cellular, Inc. 206,770 206,770
Rural Telephone Bank - stock 164,841 162,806
Quad County Communications 136,192 152,057
Iowa Network Services - stock 78,705 78,705
Other 21,000 26,542
---------- ----------
$2,725,488 $2,468,022
========== ==========
</TABLE>
The Company has a 15.79% interest in Alpine Communications, L.C.
(Alpine). The Alpine group includes several Independent Telephone
Companies whom have formed an entity and have purchased U.S. West
telephone properties in Iowa.
The Company's percentage interests in RSA #1, Ltd., RSA #7, Ltd., RSA
#8, Ltd. and Central Iowa Cellular, Inc. (Des Moines MSA) partnerships
are 9.2%, 7.1%, 11.7% and 4.8%, respectively at December 31, 1999. In
addition, the Company owns a 16.7% interest in RSA #9, Ltd.
partnership of which they have no original cash investment.
50
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 3. OTHER INVESTMENTS, (Continued)
Additionally, Westside Independent Telephone Company, a wholly-owned
subsidiary of Breda Telephone Corporation, has a 33.33% ownership
interest in Quad County Communications. Condensed financial data for
Quad County Communications is as follows:
1999 1998
--------- ---------
Ordinary income (loss) $ (47,593) $ (47,190)
Interest income -- 85
--------- ---------
Net income (loss) $ (47,593) $ (47,105)
========= =========
Current assets $ 5,924 $ 5,625
Non-current assets 415,109 461,729
Current liabilities 12,456 11,184
Non-current liabilities 0 0
The investment in Quad County Communications is being accounted for on
the equity method. The remaining investments are accounted for on the
cost method.
NOTE 4. INTANGIBLES
During 1999, the Company purchased PCS licenses for $28,825. The costs
are being amortized on the straight-line basis over ten years. The
amount charged to expense and accumulated amortization during 1999 was
$1,442.
On June 1, 1998, the Company acquired 100% ownership of Westside
Independent Telephone Company. The total cost of the acquisition
exceeded the fair value of the net assets of Westside Independent
Telephone Company by $1,178,472. This excess was recorded as goodwill
and is being amortized on the straight-line basis over fifteen years.
Accumulated amortization as of December 31, 1999 and 1998 was $124,452
and $45,848, respectively.
Additionally on June 1, 1998, Tele-Services, Ltd., a wholly-owned
subsidiary of Breda Telephone Corporation, acquired 100% ownership of
Westside Communications, Inc. The total cost of the acquisition
exceeded the fair value of the net assets of Westside Communications,
Inc. by $157,611. This excess was also recorded as goodwill and is
being amortized on the straight-line basis over fifteen years.
Accumulated amortization as of December 31, 1999 and 1998 was $16,642
and $6,130, respectively.
In 1992, the Company entered into an agreement with the National Rural
Telecommunications Cooperative (NRTC) for the exclusive right to
market and sell Direct Broadcast Service (DBS) to certain residences
in ten Iowa and Nebraska counties. The agreement remains in effect for
ten years from the service commencement date or until the satellite is
removed, which ever occurs earlier. The DBS distribution rights of
$640,012 are being amortized on the straight-line basis over fifteen
years. Accumulated amortization at December 31, 1998 was $170,670 and
amortization expense for 1998 was $42,668. See note sixteen for
disposition of DBS investment.
51
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
1999 1998
----------- -----------
Telephone Plant in Service -
Land $ 39,008 $ 39,008
Buildings 694,945 687,545
Other general support assets 988,906 880,367
Central office assets 2,098,570 1,981,453
Cable and wire facilities 3,651,397 3,546,900
Other plant and equipment 588,439 484,891
----------- -----------
8,061,265 7,620,164
----------- -----------
Cable Television Plant in Service -
Franchise 32,992 32,992
Land 8,586 8,586
Buildings 237,557 237,557
Towers, antennas and head end equipment 1,473,562 1,458,476
Cable and wire facilities 1,558,797 1,537,812
Other plant and equipment 189,320 207,492
----------- -----------
3,500,814 3,482,915
----------- -----------
DBS Plant in Service -
Leased dishes -- 319,940
----------- -----------
Total property, plant and equipment 11,562,079 11,423,019
Less accumulated depreciation 5,221,886 5,237,145
----------- -----------
$ 6,340,193 $ 6,185,874
=========== ===========
Application of rates to the various classes of plant produced a
composite rate of depreciation on average depreciable plant for the
years ended December 31, 1999 and 1998 of 8.0% and 7.6%, respectively.
52
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
----------- -----------
Rural Telephone Finance Cooperative
7.25% (Variable Rate) $ 328,864 $ 459,342
7.00% (Variable Rate) 994,264 1,172,817
6.95% (Variable Rate) 1,353,248 1,415,110
6.95% (Variable Rate) 2,211,926 2,313,042
7.35% (Fixed Rate) 2,268,040 2,371,721
Building Mortgage Note - 7.00% -- 79,382
----------- -----------
Total long-term debt 7,156,342 7,811,414
Less current portion (608,412) (655,072)
----------- -----------
$ 6,547,930 $ 7,156,342
=========== ===========
The annual requirements for principal payments on long-term debt for
the next five years are as follows:
Principal
---------
2000 $608,412
2001 643,059
2002 579,166
2003 561,969
2004 562,809
Substantially all assets of the Company are pledged as security for
the long-term debt under certain loan agreements with the Rural
Telephone Finance Cooperative (RTFC). These mortgage notes are to be
repaid in equal quarterly installments covering principal and interest
and expire by the year 2013.
The security and loan agreements underlying the RTFC notes contain
certain restrictions on distributions to stockholders, investment in,
or loans to others, and payment of management fees or an increase in
management fees. The Company is restricted from making any
distributions, except as might be specifically authorized in writing
in advance by the RTFC noteholders, unless minimum net worth exceeds
40% and distributions are limited to certain levels of prior year cash
margins. In addition, the Company is required to achieve a debt
service coverage ratio of not less than 1.25 and a times interest
earned ratio of not less than 1.5. These ratios are to be determined
by averaging each of the two highest annual ratios during the three
most recent fiscal years.
The Company received approval on a line of credit from the RTFC for
$750,000. The approved line of credit was available until January 13,
2000 at a rate of 7.6%. The Company had not drawn down any funds as of
December 31, 1999. The line of credit has been renewed for an
additional twelve month period.
53
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6. LONG-TERM DEBT, (Continued)
In addition, Prairie Telephone Company, Inc. a wholly-owned subsidiary
of Breda Telephone Corporation, received approval on a line of credit
from the RTFC for $250,000. This approved line of credit was also
available until January 13, 2000 at a rate of 7.6%. The Company had
not drawn down any funds as of December 31, 1999. The line of credit
has been renewed for an additional twelve month period.
At December 31, 1998, the Company had an outstanding line of credit
balance with the RTFC of $750,000. The principal and interest, at a
rate of 6.7%, was paid during first quarter 1999.
NOTE 7. INCOME TAXES
Income taxes reflected in the Consolidated Statements of Income
consist of the following:
1999 1998
----------- ---------
Federal income taxes -
Current tax expense $ 2,584,445 $ 562,083
Deferred tax benefit (205,565) (109,668)
Amortization of investment tax credits (9,769) (9,769)
State income taxes -
Current tax expense 803,537 187,380
Deferred tax benefit (64,914) (36,556)
----------- ---------
Total income tax expense $ 3,107,734 $ 593,470
=========== =========
Deferred federal and state tax liabilities and assets are summarized
as follows:
1999 1998
----------- ---------
Deferred Tax Liabilities
Federal $ 296,855 $ 411,632
State 93,744 137,211
----------- ---------
Total Deferred Tax Liabilities 390,599 548,843
----------- ---------
Deferred Tax Assets
Federal 346,185 257,453
State 109,322 85,818
----------- ---------
Total Deferred Tax Assets 455,507 343,271
----------- ---------
Net Deferred Tax (Liability) Asset $ 64,908 $(205,572)
=========== =========
Current portion $ -- $ --
Long-term portion 64,908 (205,572)
----------- ---------
Net Deferred Tax (Liability) Asset $ 64,908 $(205,572)
=========== =========
The tax provision differs from the expense that would result from
applying the federal statutory rates to income before taxes as the
result of state income taxes being deductible in determining taxable
income and the amortization of investment tax credits.
54
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 7. INCOME TAXES, (Continued)
The following is a reconciliation of the statutory federal income tax
rate of 34% to the Company's effective income tax rate:
1999 1998
------ ------
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit 5.1 6.4
Amortization of investment tax credits (1.1) (1.2)
Amortization of goodwill -- .5
------ ------
Effective income tax rate 38.0% 39.7%
====== ======
NOTE 8. OPERATING SEGMENTS INFORMATION
The Company organizes its business into two reportable segments: local
exchange carrier (LEC) services and broadcast services. The LEC
services segment provides telephone, data and other services to
customers in local exchanges. The broadcast services segment provides
cable television to customers in Iowa and Nebraska and during 1998
included DBS. The Company also has operations in internet and
telemarketing services that do not meet the quantitative thresholds
for reportable segments.
The Company's reportable business segments are strategic business
units that offer different products and services. Each reportable
segment is managed separately primarily because of different products,
services and regulatory environments. LEC segments have been
aggregated because of their similar characteristics.
The segment's accounting policies are the same as those described in
the summary of significant accounting policies.
<TABLE>
<CAPTION>
Local
Exchange
1999 Carriers Broadcast Other Total
------------------------------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Revenues and sales $ 3,551,877 $1,047,667 $ 691,002 $ 5,290,546
Intersegment revenue and sales -- -- -- --
Interest and dividend income 458,901 15,063 -- 473,964
Interest expense 429,750 73,552 -- 503,302
Depreciation and amortization 634,664 344,195 34,105 1,012,964
Income tax expense (benefit) 363,435 2,786,595 (42,296) 3,107,734
Segment profit (loss) 552,861 4,578,358 (65,370) 5,065,849
Segment assets 14,346,890 1,845,056 735,919 16,927,865
Expenditures for segment assets 1,071,365 37,512 140,537 1,249,414
</TABLE>
55
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 8. OPERATING SEGMENTS INFORMATION, (Continued)
<TABLE>
<CAPTION>
Local
Exchange
1998 Carriers Broadcast Other Total
---- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenues and sales $ 3,653,189 $ 2,161,588 $ 730,803 $ 6,545,580
Intersegment revenue and sales -- -- -- --
Interest and dividend income 180,710 19,966 1,569 202,245
Interest expense 396,234 91,252 -- 487,486
Depreciation and amortization 506,279 386,241 15,397 907,917
Income tax expense (benefit) 670,706 (48,580) (28,656) 593,470
Segment profit (loss) 1,080,635 (136,905) (41,094) 902,636
Segment assets 10,128,218 2,963,322 708,829 13,800,369
Expenditures for segment assets 1,258,653 206,030 491,282 1,955,965
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Segment Information 1999 1998
------------------------------------- ------------ ------------
<S> <C> <C>
REVENUES:
Total revenues for reportable segments $ 4,599,544 $ 5,814,777
Other revenues 691,002 730,803
------------ ------------
Consolidated Revenues $ 5,290,546 $ 6,545,580
============ ============
PROFIT:
Total profit for reportable segments $ 5,131,219 $ 943,730
Other profit (loss) (65,370) (41,094)
------------ ------------
Net Income $ 5,065,849 $ 902,636
============ ============
ASSETS:
Total assets for reportable segments $ 16,191,946 $ 13,091,540
Other assets 735,919 708,829
Elimination of intercompany receivables (247,086) (124,041)
------------ ------------
Consolidated Assets $ 16,680,779 $ 13,676,328
============ ============
</TABLE>
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities included $191,321 during
the year ended December 31, 1998, relating to plant and equipment
additions placed in service during 1998 which are reflected in the
outstanding line of credit at year end.
Additionally, 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.
56
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION, (Continued)
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
===========
Cash paid for interest, net of amounts capitalized for 1999 and 1998,
totaled $476,861 and $487,486, respectively.
Cash paid for income taxes and estimated income taxes for 1999 and
1998 totaled $3,990,528 and $981,473, respectively.
NOTE 10. NET INCOME PER COMMON SHARE
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 years ended December 31, 1999 and 1998 were 37,682
and 37,831, respectively.
NOTE 11. STATED VALUE STOCK ADJUSTMENT
During 1999, the board of directors authorized an additional $85.00
increase in the stated value of each share of common stock from $64.00
to $149.00. There were 37,722 shares outstanding at the time of the
value adjustment, which reduced retained earnings by $3,206,370.
The 1998 authorized increase was $23.00 and increased the stated value
of each share of common stock from $41.00 to $64.00. There were 38,050
shares outstanding at the time of the value adjustment, which reduced
retained earnings by $875,150.
NOTE 12. STOCK RESTRICTIONS
The Company has one class of common stock. Each stockholder is
entitled to one vote regardless of the number of shares owned.
Restrictions on the stock include the following:
o Individuals purchasing new shares of stock must be living within
the service area of the Company and subscribe to the Company's
telephone services. In addition, new stockholders are limited to
purchasing no more than thirty shares of stock directly from the
Company.
o Stockholders are limited to ownership of not more than one
percent of the outstanding shares of stock unless ownership was
prior to the restated Articles of Incorporation.
o Stockholders shall not sell any shares of stock owned unless the
Company has been given first right of refusal.
o In households with multiple individuals, only one person must be
deemed the subscriber of Company services.
57
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 12. STOCK RESTRICTIONS, (Continued)
o A one-time stock transfer to a family member (spouse, child,
grandchild, parent, grandparent, or sibling) is allowed even if
such transferee resides outside of the telephone exchange service
area and is not a subscriber of the Company's telephone services.
o Stock transfers require the consent of the board of directors.
The Company may adopt bylaws which may further restrict the transfer
or ownership of capital stock of the Company.
NOTE 13. EMPLOYEE BENEFIT PLAN
The Company adopted for its employees who have met certain eligibility
requirements, a defined benefit retirement and security program
sponsored by the National Telephone Cooperative Association. The
multi-employer plan calls for the Company to contribute 8.6% of each
enrolled employee's annual gross salary. As a condition of
participation, each participating employee must also contribute a
minimum 3% of their annual gross salary. Contributions made by the
Company totaled $63,722 and $63,045 for the years ended December 31,
1999 and 1998, respectively.
NOTE 14. CONCENTRATIONS OF CREDIT RISK
The Company grants credit to local telephone service and cable
television service customers, all of whom are located in the
franchised service areas, and to telecommunications intrastate and
interstate long distance carriers.
The Company has received approximately 42% of its operating revenues
from access revenues and assistance provided by the Federal Universal
Service Fund. The manner in which access revenues are determined by
regulatory bodies and universal service funding is determined for
qualifying organizations is currently being modified as a result of
the Telecommunications Act of 1996.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, along with both current and noncurrent investments. The
Company places its cash, cash equivalents and investments in several
financial institutions which limits the amount of credit exposure in
any one financial institution.
Additionally, Pacific Junction Telemarketing Center, Inc. wholly-owned
subsidiary of Prairie Telephone Company, Inc., received nearly all of
its telemarketing service revenues from one customer during both 1999
and 1998; however, it was a different customer each year. For the
years ended December 31, 1999 and 1998, the telemarketing service
revenues from the major customer were $226,243 and $579,836,
respectively. At December 31, 1999 and 1998, the amount due from each
respective customer, included in accounts receivable on the balance
sheet, was $46,305 and $101,676, respectively.
58
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 15. ACQUISITIONS
On June 1, 1998, Breda Telephone Corporation acquired Westside
Independent Telephone Company in a business combination accounted for
as a purchase. The Company purchased stock and the purchase price was
then allocated to the respective assets acquired in the transaction
based on fair value. Westside Independent Telephone Company owns and
provides the telephone service in Westside, Iowa. The operations of
Westside Independent Telephone Company are included in the
accompanying financial statements since the date of acquisition. The
total cost of the acquisition was $2,010,038, which exceeded the fair
value of the net assets of Westside Independent Telephone Company by
$1,178,472. The excess was recorded as goodwill and is being amortized
on the straight-line basis over fifteen years.
Additionally on June 1, 1998 in a related transaction, Tele-Services,
Ltd., a wholly-owned subsidiary of Breda Telephone Corporation,
acquired Westside Communications, Inc. in a business combination also
accounted for as a purchase. Tele-Services, Ltd. also purchased stock
and the purchase price was then allocated to the respective assets
acquired in the transaction based on fair value. Westside
Communications, Inc. owned and operated the cable television systems
in Westside and Arcadia, Iowa. The operations of Westside
Communications, Inc. are included in the accompanying financial
statements since the date of acquisition, as well. The total cost of
the acquisition was $254,289, which exceeded the fair value of the net
assets of Westside Communications, Inc. by $157,611. The excess was
recorded as goodwill and is being amortized on the straight-line basis
over fifteen years.
The total cost of both acquisitions was $2,264,327 and the total
goodwill recorded was $1,336,083. See note four for additional details
regarding both transactions.
On October 31, 1998, Tele-Services, Ltd. purchased the Auburn cable
television system from New Path Communications, L.C. This business
combination was also accounted for as a purchase. The purchase price
of $64,610 was allocated to the respective assets purchased and two
months of operations were recorded as of December 31, 1998.
Assuming these acquisitions had occurred on January 1, 1998, unaudited
pro forma consolidated revenues for the year ended December 31, 1998
would have been $6,713,000. After considering pro forma adjustments,
such as additional amortization expense as a result of goodwill and
certain other acquisition related transactions, pro forma income and
earnings per share would not have been materially different from the
reported amounts for 1998. The unaudited pro forma amounts are not
indicative of what the actual consolidated results of operations might
have been if the acquisitions had been effective at the beginning of
1998.
NOTE 16. DISPOSITION OF DBS INVESTMENT
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.
NOTE 17. SUBSEQUENT EVENT
Subsequent to year-end, the Company and all other stockholders of
Central Iowa Cellular, Inc. (CIC) have reached a tentative agreement
with a qualified purchaser to sell all of the outstanding shares of
CIC stock. The transaction, which requires various regulatory
approvals, is expected to close during the second quarter of 2000. The
sale will be a cash transaction, resulting in an estimated after tax
gain of $3,500,000.
59
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Breda has not had any change in its accountants during the last three
years, or any disagreements with its accountants during that period
which are of the type required to be disclosed under this Item.
Anderson and Company, in Emmetsburg, Iowa, has served as Breda's
accounting firm for over 20 years. Anderson and Company was merged
into Kiesling Associates LLP, effective as of June 1, 1999. Kiesling
Associates LLP's principal office is located in Madison, Wisconsin. It
also has offices in other cities, including Des Moines, Iowa, and
Emmetsburg, Iowa. The merger of Anderson and Company into Kiesling
Associates LLP
60
<PAGE>
did not arise from any disagreements with Breda and was otherwise
unrelated to Breda, and Breda has engaged Kiesling Associates LLP as
Breda's accounting firm.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Directors and Officers.
The directors and executive officers of Breda are as follows:
Name Age Position(s)
---- --- -----------
Dean Schettler 47 President and
Director
Clifford Neumayer 51 Vice-President and
Director
Larry Daniel 57 Secretary and
Director
Scott Bailey 37 Treasurer and
Director
Dave Hundling 52 Director
John Wenck 61 Director
Dave Grabner 51 Director
Dean Schettler has been the President and a director of Breda since
April, 1997. His current term as a director will end in May, 2000. He
has also held each of those positions with each of Breda's
subsidiaries since April, 1997. Mr. Schettler has been employed by
Pella Corporation, Pella, Iowa, since August, 1986. He was a moulder
technician until August, 1997. Since that time he has been a
production coordinator. Pella Corporation is a window and door
manufacturer.
Clifford Neumayer has been the Vice-President and a director of Breda
since April, 1996. His current term as a director of Breda will end in
April, 2002. He has also held each of those positions with each of
Breda's subsidiaries since April, 1996. Mr. Neumayer has been self
employed as a farmer since 1970.
61
<PAGE>
Larry Daniel has been the Secretary and a director of Breda since
April, 1995. His current term as a director of Breda will end in
April, 2001. He has also held each of those positions with each of
Breda's subsidiaries since April, 1995. Mr. Daniel is a self-employed
farmer, and has been for at least the last five years.
Scott Bailey has been a director of Breda since April, 1998. His
current term as a director of Breda will end in April, 2001. He has
also served as a director of each of Breda's subsidiaries since April,
1998. He has been Breda's treasurer, and the treasurer of Breda's
subsidiaries since April, 1999. Mr. Bailey was the finance manager of
marketing and sales for Pella Corporation, Pella, Iowa, from August,
1993, to September, 1995. He has been a controller for Pella
Corporation since September, 1995 to the present. Pella Corporation is
a window and door manufacturer.
Dave Hundling has been a director of Breda since April, 1997. His
current term as a director of Breda will end in May, 2000. He has also
served as a director of each of Breda's subsidiaries since April,
1997. Mr. Hundling is also a self employed farmer, and has been for at
least the last five years.
John Wenck has been a director of Breda since April, 1997. His current
term as a director of Breda will end in May, 2000. He has also served
as a director of each of Breda's subsidiaries since April, 1997. Mr.
Wenck is currently self employed as a farmer. He was also previously
employed by the United Parcel Service as a delivery driver.
Dave Grabner has been a director of Breda since April, 1999. His
current term as a director of Breda will end in April, 2002. He has
also served as a director of each of Breda's subsidiaries since April,
1999. Mr. Grabner is currently self employed as an electrician, and
has been for at least the last five years. He was also previously
self-employed as a farmer.
The number of directors for Breda is currently fixed at seven. Each of
Breda's directors is elected to a three year term and until his or her
successor is elected. The terms of the directors of Breda are
staggered, so that approximately one-third of the directors are
elected each year. If a person has served for three consecutive terms
as a director, that person must be off the board for at least one year
before the person can again be elected as a director. Each director of
Breda must also be a shareholder of Breda, and a director shall
automatically cease to be a director if he or she sells or transfers
all of his or her shares of common stock in Breda. Each director must
also be at least 18 years of age.
The officers of Breda are elected annually by the board of directors
at its annual meeting, and hold office until the next annual meeting
of the board of directors and until their successor is chosen.
Officers may also be removed by the board of directors at any time,
with or without cause. Each officer must also be a director and a
shareholder of Breda.
62
<PAGE>
Breda believes that two of its employees are and will continue to make
a significant contribution to its business. Those employees are as
follows:
Name Age Position
---- --- --------
Robert J. Boeckman 38 Manager
Jane A. Morlok 46 Co-Manager
Both Mr. Boeckman and Ms. Morlok are employed pursuant to employment
agreements with Breda. Those employment agreements are discussed in
Item 10 of this annual report.
Mr. Boeckman has been employed by Breda in various capacities since
May, 1982. Prior to January, 1995, he was Breda's assistant manager.
He has been the manager since January, 1995, and he was also given the
title of chief operating officer in March, 1998.
Ms. Morlok has been the co-manager of Breda since March 30, 1998. Ms.
Morlok was the assistant administrator/CFO of Manning Regional
Healthcare Center in Manning, Iowa from July of 1987 until March 20,
1998. Her responsibilities in that position included budgeting,
reimbursement and rate setting for the hospital and nursing home run
by the Manning Regional Healthcare Center, as well as daily general
ledger operations and IRS filings. She also provided similar services
to several other affiliated corporations.
Section 16(a) Beneficial Ownership Reporting Compliance.
Two of Breda's directors, Clifford Neumayer and David Grabner, filed
amendments to their initial Form 3 filings with the SEC on March 10,
2000. The purpose of Mr. Neumayer's amendment was to delete the
information in Mr. Neumayer's Form 3 which stated that he had
beneficial ownership of fifteen shares of Breda's common stock which
were held by another individual and one share held by a partnership.
After further review, it was determined that the individual did not
own any shares of Breda's common stock, and that Mr. Neumayer was not
one of the partners of the partnership. The purpose of Mr. Grabner's
amendment was to add the information that Mr. Grabner beneficially
owns the one share of Breda's common stock that is held by Mr.
Grabner's spouse.
Item 10. Executive Compensation.
Summary Compensation Table.
The following summary compensation table shows the compensation paid
by Breda to Robert J. Boeckman, Breda's manager, in the 1999, 1998 and
1997 fiscal years. Mr. Boeckman's services as the manager of Breda are
similar to those normally provided by
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<PAGE>
the chief executive officer of an Iowa corporation.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Other Annual All Other
Position Year Salary(1) Bonus Compensation(2) Compensation(3)
-------- ---- --------- ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert J. Boeckman, 1999 $74,159 $ -0- $ 617 $14,568
Manager 1998 $70,700 $2,000 $4,737 $13,951
1997 $67,142 $2,000 $3,015 $13,157
</TABLE>
(1) This amount includes a contribution by Mr. Boeckman of 3% of his
annual gross salary pursuant to Breda's defined benefit retirement and
security program, which is sponsored by the National Telephone
Cooperative Association. As a condition of participation in that
program, Mr. Boeckman must contribute a minimum of 3% of his annual
gross salary. See also the "All Other Compensation" column above.
(2) This amount includes payments to Mr. Boeckman by Breda from a fund
established by Breda based upon sales of cell phones. The fund is
allocated equally among the employees employed at Breda's and Westside
Independent's offices. All employees share in the fund even if they
are not involved in the sale of cell phones. Mr. Boeckman is not
involved in those sales. The amount also includes a yearly clothing
allowance and the estimated yearly value of services provided to Mr.
Boeckman by Breda or its subsidiaries at no cost. Those services are
local telephone service, basic cable service, internet access, and
cellular phone service.
(3) This amount represents contributions by Breda on behalf of Mr.
Boeckman to Breda's defined benefit retirement and security program,
which is sponsored by the National Telephone Cooperative Association.
The program requires Breda to contribute an amount equal to 8.6% of
Mr. Boeckman's annual gross salary. See also footnote 1 above
regarding Mr. Boeckman's contributions to the program. This amount
also includes a long term disability contribution of 1.02% of salary
and employer-paid premiums on health, life and accidental death and
dismemberment insurance.
Dean Schettler is the president of Breda. No information is provided
for Mr. Schettler in the summary compensation table because he does
not receive compensation in his capacity as the president of Breda.
Mr. Schettler does receive compensation for his services as a director
of Breda. The compensation payable to directors is discussed below.
No officer's or employee's total annual salary, bonus and other annual
compensation exceeded $100,000 during any of the 1997, 1998 or 1999
fiscal years.
Director Compensation.
All of Breda's directors currently receive $100 for each regular,
special and conference call meeting of the board of directors. The
vice-president, secretary and treasurer of Breda also currently
receive an additional $25 for each regular, special and conference
call meeting of the board of directors, and the president of Breda
receives an additional $50
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<PAGE>
per meeting. Those payments are made to those individuals in their
capacities as directors, and are based upon their additional duties at
the meetings of the board of directors. Breda's directors received the
same amounts in 1998, except that the vice-president of Breda did not
receive an additional $25 per meeting in 1998.
All of Breda's directors currently receive $125 per day for all day
meetings of the board of directors. The directors also received $125
per day for all day meetings of the board of directors in 1998.
All of Breda's directors also currently receive $125 for each outside
meeting attended by a director and which lasts over three hours. The
directors receive one-half of their regular meeting rate for each
outside meeting which lasts less than three hours. Outside meetings
are not formal meetings of the board of directors. Examples of outside
meetings include conventions and city council meetings.
Breda's directors are also reimbursed for mileage and for any expenses
paid by them on account of attendance at any meeting of the board of
directors or other meetings attended by them in their capacity as a
director of Breda.
Breda's directors may also receive internet access from Breda or its
subsidiaries at no cost. The current estimated yearly value of
internet access is $300. They were also entitled to receive internet
access in 1998.
Employment Agreements.
Breda has entered into employment agreements with Robert Boeckman,
Breda's manager, and with Jane Morlok, Breda's co-manager. Those
employment agreements are discussed below. Breda is in the process of
negotiating a new employment agreement with both Mr. Boeckman and Ms.
Morlok, but no definitive agreements had been reached at the time of
the preparation of this annual report.
Mr. Boeckman. Mr. Boeckman is responsible for the day-to-day
operations of Breda under his employment agreement. The term of the
employment agreement will currently end on December 31, 2001. The
employment agreement will automatically extend for successive one year
periods, however, unless Breda or Mr. Boeckman provides the other with
written notice prior to April 1 in any year of their desire to
terminate the employment agreement at the end of that year. Breda may
also terminate the employment agreement for any reason, including a
breach or default by Mr. Boeckman, by giving Mr. Boeckman at least
ninety days notice of his last day of employment with Breda.
Mr. Boeckman's salary is increased under the employment agreement
effective January 1 of each year to an amount equal to the previous
year's salary, plus 3 1/2% of the previous year's salary, and the
additional amount determined by multiplying the previous year's
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<PAGE>
salary by the percentage increase as shown in the U.S. Department of
Labor cost of living index for the previous year. In other words, Mr.
Boeckman's yearly salary is increased by 3 1/2% percent plus a cost of
living increase based on any increase in the U.S. Department of
Labor's cost of living index.
If Mr. Boeckman becomes totally disabled, he will continue to receive
his then current salary until benefits under Breda's disability
program become payable to him.
If he dies while employed, Mr. Boeckman's estate or other designated
beneficiary will receive his salary up to the date of death, and an
additional six months of salary at the rate at the time of death and
the salary equivalent of all accrued unused vacation time at the date
of death.
If Breda terminates Mr. Boeckman's employment without cause, Mr.
Boeckman will receive a payment from Breda of an amount equal to the
remaining salary that would have been paid to him up to the then
expiration date of the employment agreement.
Mr. Boeckman may terminate his employment with Breda if there is a
change in the majority ownership of Breda. In that event, Mr. Boeckman
will be entitled to receive a payment from Breda of an amount equal to
the remaining salary that would have been paid to him up to the then
expiration date of the employment agreement.
Mr. Boeckman is also reimbursed by Breda under the employment
agreement for all necessary and reasonable expenses incurred by him in
performing services for Breda.
Mr. Boeckman is also entitled to the same benefits and under the same
conditions as are available to other full time employees of Breda.
Some of those benefits include life insurance and disability
insurance, and participation in Breda's defined benefit retirement and
security program. Breda contributes an amount equal to 8.6% of Mr.
Boeckman's annual gross salary under that program.
Mr. Boeckman may also receive an annual bonus in the discretion of
Breda's board of directors. He received a $2,000 bonus in each of 1997
and 1998.
Ms. Morlok. Ms. Morlok is employed as Breda's co-manager under her
employment agreement. The term of the employment agreement will end on
March 30, 2000. It is contemplated that Ms. Morlok will continue to be
employed as Breda's co-manager after that date on a month-to-month
basis. Breda may terminate Ms. Morlok's employment at any time for any
reason by giving her thirty days prior written notice. In that case,
however, Breda must pay Ms. Morlok an amount equal to the remaining
salary that would have been paid to her through the normal termination
date of the employment agreement. Breda may also terminate the
employment agreement on five days prior written notice if the
termination is for cause. The employment agreement will also terminate
thirteen
66
<PAGE>
weeks after Ms. Morlok is determined to be totally disabled.
Ms. Morlok's current annual salary under the employment agreement is
$61,000. Her salary is reviewed at least every six months.
She also receives various other benefits under the employment
agreement, such as three weeks paid vacation per year; health,
disability and life insurance; a death benefit; participation in
Breda's defined benefit retirement and security program; a clothing
allowance; and free local telephone and basic cable services.
Breda does not have any written employment agreements with any
officers or any other employees.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Breda is only authorized to issue common stock.
The following table sets forth some information on the percentage
ownership of Breda's common stock as of March 1, 2000 by:
o each person known by Breda to be the beneficial owner of more
than 5% of Breda's common stock;
o each of Breda's directors;
o each of Breda's officers;
o the person employed by Breda as its manager; and
o all directors and officers of Breda and the manager of Breda as a
group.
Security Ownership Table
Name and Address of
Beneficial Owner Number of Shares Percentage Ownership
---------------- ---------------- --------------------
Dean Schettler 30 .08%
16326 120th St.
Breda, Iowa 51436
Clifford Neumayer 181 .48%
11846 Ivy Avenue
Breda, Iowa 51436
67
<PAGE>
Larry Daniel 2 .005%
15731 Robin Avenue
Glidden, Iowa 51433
Dave Hundling 108 .29%
12245 Birch Avenue
Breda, Iowa 51436
John Wenck 6 .02%
23909 140th St.
Carroll, Iowa 51401
Scott Bailey 20 .05%
12424 120th Street
Breda, Iowa 51436
Dave Grabner 55* .15%
11098 130th Street
Breda, Iowa 51436
Robert Boeckman 30 .08%
23678 150th Street
Carroll, Iowa 51401
All directors and officers 432 1.15%
and the manager as a group
(8 persons)
* One of these shares is held by Mr. Grabner's spouse.
To Breda's knowledge, no person is the beneficial owner of more than
5% of Breda's common stock.
Item 12. Certain Relationships and Related Transactions.
Breda has not been a party to any transaction during the last two
years, or proposed transaction, of the type required to be disclosed
under this Item. The transactions to which this Item applies are
transactions involving Breda and in which any of the following types
of persons had or is to have a direct or indirect material interest:
o any director or officer of Breda,
o any nominee for election as a director of Breda,
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<PAGE>
o any beneficial owner of more than 5% of Breda's common stock, or
o any member of the immediate family of any person referred to
above.
Item 13. Exhibits and Reports on Form 8-K.
Exhibits.
The following are the exhibits to this annual report.
Exhibit No. Description of Exhibit
2.1 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, File No. 0-26525, and
incorporated herein by this reference.)
2.2 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, File No.
0-26525, and incorporated herein by this
reference.)
2.3 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, File
No. 0-26525, and incorporated herein by this
reference.)
2.4 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, File No.
0-26525, and incorporated herein by this
reference.)
3.1 Amended and Restated Articles of Incorporation of
Breda Telephone Corp. (Filed as Exhibit 3.1 to
Breda's Registration
69
<PAGE>
Statement on Form 10-SB, File No. 0-26525, and
incorporated herein by this reference.)
3.2 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, File
No. 0-26525, and incorporated herein by this
reference.)
**10.1 Employment Contract between Breda and Robert
Boeckman (Filed as Exhibit 10.1 to Breda's
Registration Statement on Form 10-SB, File No.
0-26525, and incorporated herein by this
reference.)
**10.2 Employment Agreement between Breda and Jane Morlok
(Filed as Exhibit 10.2 to Breda's Registration
Statement on Form 10-SB, File No. 0-26525, and
incorporated herein by this reference.)
21 List of Subsidiaries. (Filed as Exhibit 21 to
Breda's Registration Statement on Form 10-SB, File
No. 0-26525, and incorporated herein by this
reference.)
*27 Financial Data Schedule.
* Included with this filing.
** Management contracts or compensatory plan or arrangement required
to be filed as exhibits pursuant to Item 13(a) of Form 10-KSB.
Reports on Form 8-K.
Breda did not file any reports on Form 8-K during the three months
ended December 31, 1999.
70
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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: March 28, 2000. By: /s/ Dean Schettler
------------------------------
Dean Schettler, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Clifford Neumayer By: /s/ Larry Daniel
--------------------------------- -----------------------------
Clifford Neumayer, Vice-President Larry Daniel, Secretary
and Director and Director
Date: March 28, 2000. Date: March 28, 2000.
By: /s/ Dave Hundling By: /s/ John Wenck
--------------------------------- -----------------------------
Dave Hundling, Director John Wenck, Director
Date: March 28, 2000. Date: March 28, 2000.
By: /s/ Dean Schettler By: /s/ Dave Grabner
--------------------------------- -----------------------------
Dean Schettler, President Dave Grabner, Director
and Director
Date: March 28, 2000. Date: March 28, 2000.
By: /s/ Scott Bailey /s/ Robert J. Boeckman
--------------------------------- ----------------------------------
Scott Bailey, Treasurer Robert J. Boeckman, Manager
and Director
Date: March 28, 2000. Date: March 28, 2000.
/s/ Jane Morlok
----------------------------------
Jane Morlok, Co-Manager
Date: March 28, 2000.
71
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Breda
Telephone Corporation's financial statements for the years ended December
31, 1999 and 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 782,959 411,341
<SECURITIES> 1,644,595 4,512,434
<RECEIVABLES> 670,499 1,291,585
<ALLOWANCES> 0 0
<INVENTORY> 80,279 88,479
<CURRENT-ASSETS> 1,717,550 1,963,742
<PP&E> 6,185,874 6,340,193
<DEPRECIATION> 775,293 1,012,964
<TOTAL-ASSETS> 13,676,328 16,680,779
<CURRENT-LIABILITIES> 2,143,072 1,078,100
<BONDS> 0 0
0 0
0 0
<COMMON> 2,414,208 5,614,618
<OTHER-SE> 1,693,818 3,440,131
<TOTAL-LIABILITY-AND-EQUITY> 13,676,328 16,680,779
<SALES> 0 0
<TOTAL-REVENUES> 6,545,580 5,290,546
<CGS> 0 0
<TOTAL-COSTS> 5,110,487 4,508,613
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 487,486 503,302
<INCOME-PRETAX> 1,496,106 8,173,583
<INCOME-TAX> 593,470 3,107,734
<INCOME-CONTINUING> 902,636 5,065,849
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 902,636 5,065,849
<EPS-BASIC> 23.86 134.44
<EPS-DILUTED> 23.86 134.44
</TABLE>
