UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________________ to ____________________
Commission file number: 0-26525
BREDA TELEPHONE CORP.
(Exact name of small business issuer as specified in its charter)
Iowa 42-0895882
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Highway 217 East, P.O. Box 190, Breda, Iowa 51436
(Address of principal executive offices)
(712) 673-2311
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 37,243 shares of common stock,
no par value, at September 30, 2000.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
For the Periods
Ended September 30, 2000 and 1999
and the Year Ended December 31, 1999
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
Contents
--------
Page
Unaudited Condensed Consolidated Financial Statements:
Balance Sheets 3 - 4
Statements of Income 5
Statements of Stockholders' Equity 6
Statements of Cash Flows 7
Notes to Unaudited Condensed Consolidated Financial
Statements 8 - 10
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
ASSETS (Unaudited) 1999
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,807,582 $ 411,341
Current portion of investments 114,872 94,810
Accounts receivable 788,712 681,675
Income taxes refundable -- 542,330
Interest receivable 74,981 67,580
Inventories 108,515 88,479
Other 86,988 77,527
----------- -----------
2,981,650 1,963,742
----------- -----------
OTHER NONCURRENT ASSETS
Investments, less current portion 4,544,321 4,417,624
Other investments 2,476,811 2,725,488
Intangibles, net of accumulated amortization 1,153,446 1,222,372
Deferred income taxes -- 11,360
----------- -----------
8,174,578 8,376,844
----------- -----------
PROPERTY AND EQUIPMENT, NET 6,163,772 6,340,193
----------- -----------
TOTAL ASSETS $17,320,000 $16,680,779
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1999
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 218,759 $ 608,412
Accounts payable 231,854 239,787
Accrued taxes 167,108 125,643
Other 179,295 104,258
----------- -----------
797,016 1,078,100
----------- -----------
LONG-TERM DEBT, less current portion 4,098,564 6,547,930
----------- -----------
DEFERRED CREDITS 26,331 --
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized and 37,243 and
37,682 shares issued and outstanding at $235 and $149
stated value, respectively 8,752,105 5,614,618
Retained earnings 3,645,984 3,440,131
----------- -----------
12,398,089 9,054,749
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,320,000 $16,680,779
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-4-
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Local network services $ 141,585 $ 126,120 $ 421,264 $ 367,498
Network access services 673,513 549,890 1,819,929 1,729,845
Cable television services 262,173 267,613 791,881 791,556
Telemarketing services 78,040 106,030 205,408 326,951
Internet services 166,299 103,008 471,422 284,841
Billing and collection services 22,621 15,711 65,799 59,217
Miscellaneous 221,386 110,278 644,579 425,690
----------- ----------- ----------- -----------
1,565,617 1,278,650 4,420,282 3,985,598
----------- ----------- ----------- -----------
OPERATING EXPENSES
Plant specific operations 451,219 329,616 1,337,898 957,116
Plant nonspecific operations 23,497 21,865 75,522 67,179
Cost of programming 78,547 45,330 225,910 180,581
Depreciation and amortization 285,476 263,918 815,160 746,625
Customer operations 187,138 175,676 581,627 528,153
Corporate operations 205,443 183,627 735,882 648,735
General taxes 52,406 49,411 120,522 114,240
----------- ----------- ----------- -----------
1,283,726 1,069,443 3,892,521 3,242,629
----------- ----------- ----------- -----------
OPERATING INCOME 281,891 209,207 527,761 742,969
----------- ----------- ----------- -----------
NON-OPERATING INCOME (EXPENSE)
Interest and dividend income 105,618 74,004 263,956 287,792
Interest expense (118,166) (127,072) (381,799) (374,866)
Loss on sale of investments (375) (35,304) (3,183) (41,423)
Gain on sale of DBS investment -- -- -- 7,436,415
Gain on sale of cellular investment 117,755 -- 5,018,714 --
Income from cellular partnerships 349,440 -- 432,775 --
Income from Alpine partnership -- -- 23,508 --
Other (1,520) (1,547) 2,602 (21,795)
----------- ----------- ----------- -----------
452,752 (89,919) 5,356,573 7,286,123
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 734,643 119,288 5,884,334 8,029,092
----------- ----------- ----------- -----------
INCOME TAXES 319,974 40,845 2,324,783 3,008,258
----------- ----------- ----------- -----------
NET INCOME $ 414,669 $ 78,443 $ 3,559,551 $ 5,020,834
=========== =========== =========== ===========
NET INCOME PER SHARE (Note 3) $ 11.09 $ 2.08 $ 94.69 $ 133.10
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-5-
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 37,722 $ 2,414,208 $ 1,693,818 $ 4,108,026
Total comprehensive income:
Net income 5,065,849 5,065,849
Dividends paid (113,166) (113,166)
Common stock redeemed, net (40) (5,960) (5,960)
Stock value adjustment 3,206,370 (3,206,370)
----------- ----------- ----------- -----------
Balance at December 31, 1999 37,682 5,614,618 3,440,131 9,054,749
Total comprehensive income:
Net income 3,559,551 3,559,551
Dividends paid (113,046) (113,046)
Common stock redeemed, net (439) (103,165) (103,165)
Stock value adjustment 3,240,652 (3,240,652)
----------- ----------- ----------- -----------
Balance at September 30, 2000 37,243 $ 8,752,105 $ 3,645,984 $12,398,089
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-6-
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,559,551 $ 5,020,834
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 815,160 746,625
Amortization of investment tax credits (7,327) (7,327)
Deferred income taxes 37,691 (52,093)
Gain on sale of DBS investment -- (7,436,415)
Gain on sale of cellular investment (5,018,714) --
Changes in operating assets and liabilities:
Decrease in assets 398,394 31,442
Increase (decrease) in liabilities 108,569 (221,547)
----------- -----------
Net cash used in operating activities (106,676) (1,918,481)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (562,485) (923,714)
Cost of removing plant, net of salvage -- 10,677
Purchase of investments (287,201) (6,003,790)
Sale of investments 140,442 1,969,677
(Increase) decrease in other investments 41,357 (104,231)
Proceeds from sale of DBS investment -- 8,038,197
Proceeds from sale of cellular investment 5,226,034 --
----------- -----------
Net cash provided by investing activities 4,558,147 2,986,816
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock redeemed, net (103,165) --
Repayment of line of credit -- (750,000)
Repayment of long-term debt (2,839,019) (438,360)
Dividends paid (113,046) (113,166)
----------- -----------
Net cash used in financing activities (3,055,230) (1,301,526)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,396,241 (233,191)
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 411,341 782,959
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,807,582 $ 549,768
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 381,799 $ 374,866
Income taxes $ 1,700,000 $ 2,990,528
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
-7-
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only normal recurring items) necessary to present fairly the financial
position as of September 30, 2000 and December 31, 1999 and the results of
operations for the three months and nine months ended September 30, 2000
and 1999 and change in cash flows for the nine months ended September 30,
2000 and 1999.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1999
audited financial statements. The results of operations for the period
ending September 30, 2000 are not necessarily indicative of the operating
results of the entire year.
NOTE 2. OPERATING SEGMENTS
Breda Telephone Corporation organizes its business into two reportable
segments: local exchange carrier (LEC) services and broadcast services. The
LEC services segment provides telephone and data services to customers in
local exchanges located in central Iowa. The broadcast services segment
provides cable television to customers in Iowa and Nebraska. Breda
Telephone Corporation also has operations in internet and telemarketing
services that do not meet the quantitative thresholds for reportable
segments.
<TABLE>
<CAPTION>
Local
Exchange
Carriers Broadcast Other Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Nine months ended September 30, 2000
------------------------------------
Revenues and sales
External customers $ 2,951,571 $ 791,881 $ 676,830 $ 4,420,282
Intersegment -- -- -- --
Segment profit (loss) 3,692,210 (83,866) (48,793) 3,559,551
Nine months ended September 30, 1999
------------------------------------
Revenues and sales
External customers $ 2,582,250 $ 791,556 $ 611,792 $ 3,985,598
Intersegment -- -- -- --
Segment profit (loss) 377,985 4,630,223 12,626 5,020,834
</TABLE>
-8-
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. OPERATING SEGMENTS, (Continued)
<TABLE>
<CAPTION>
Local
Exchange
Carriers Broadcast Other Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Three months ended September 30, 2000
-------------------------------------
Revenues and sales
External customers $ 1,059,105 $ 262,173 $ 244,339 $ 1,565,617
Intersegment -- -- -- --
Segment profit (loss) 465,923 (18,638) (32,616) 414,669
Three months ended September 30, 1999
-------------------------------------
Revenues and sales
External customers $ 801,999 $ 267,613 $ 209,038 $ 1,278,650
Intersegment -- -- -- --
Segment profit (loss) 49,782 8,890 19,771 78,443
<CAPTION>
Reconciliation of Segment Information Three months ended Nine months ended
------------------------------------- September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Total revenues and sales for reportable
segments $ 1,321,278 $ 1,069,612 $ 3,743,452 $ 3,373,806
Other revenues 244,339 209,038 676,830 611,792
Elimination of intersegment revenues
and sales -- -- -- --
----------- ----------- ----------- -----------
Consolidated Revenues $ 1,565,617 $ 1,278,650 $ 4,420,282 $ 3,985,598
=========== =========== =========== ===========
PROFIT:
Total profit for reportable segments $ 447,285 $ 58,672 $ 3,608,344 $ 5,008,208
Other profit (loss) (32,616) 19,771 (48,793) 12,626
Non-operating segment -- -- -- --
Minority interest -- -- -- --
----------- ----------- ----------- -----------
Net Income $ 414,669 $ 78,443 $ 3,559,551 $ 5,020,834
=========== =========== =========== ===========
</TABLE>
-9-
<PAGE>
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. NET INCOME PER COMMON STOCK
Net income per common share for September 30, 2000 and 1999 was computed by
dividing the weighted average number of shares of common stock outstanding
into the net income. The weighted average number of shares of common stock
outstanding for the three and nine months ended September 30, 2000 are
37,408 and 37,591, respectively. For both the three and nine months ended
September 30, 1999, the weighted average number of shares of common stock
outstanding were 37,722.
NOTE 4. DISPOSITION OF CELLULAR AND DBS INVESTMENTS
On May 12, 2000, the Company sold all of their outstanding shares of
Central Iowa Cellular, Inc. (CIC). The Company received cash of $5,108,279,
which included the majority of the Company's share of the Tower Net
Proceeds. The transaction resulted in a gain of $4,900,959, which was
included in operations during the second quarter of 2000. During third
quarter 2000, certain events occurred which made final certain terms of the
sale resulting in the receipt of $117,755, which was classified as an
additional gain on the sale of the cellular investment. In total, the
completed transaction amounted to cash received of $5,226,034 and a
recorded gain on the sale of $5,018,714.
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 5. RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 presentation.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Nine Months Ended September 30, 2000 compared to Nine Months ended
September 30, 1999.
There was an increase in total operating revenues for the nine-month period
ended September 30, 2000, when compared to the same period in 1999, of
$434,684, or 10.9%.
Local network services revenue increased $53,766, or 14.6%, for the
nine-month period ended September 30, 2000, when compared to the same
period in 1999. Approximately $20,076 of the $53,766 increase was caused by
additional revenue generated by the addition of calling features as switch
conversions were completed in 1999. The remaining increase resulted from
the addition of 116 telephone customers and the effect of having a full
nine months of the rate increase implemented April 1, 1999, recorded in the
nine-month period ended September 30, 2000. Network access revenue
increased $90,084, or 5.2%, when comparing the nine-month period ended
September 30, 2000, to the nine-month period ended September 30, 1999. This
increase was due to additional lines and facilities in the Yale telephone
exchange now being eligible for NECA pool reimbursements, and because
Breda, Prairie Telephone Company, Inc. and Westside Independent Telephone
Company had a retroactive one-time adjustment to estimated SS7 connectivity
revenues.
Cable television services revenues were static when comparing the
nine-month period ended September 30, 2000, to the nine-month period ended
September 30, 1999.
Telemarketing services revenue decreased $121,543, or 37.2%, when comparing
the period ended September 30, 2000, to the same period in 1999. The
decrease is attributable to the decline in the volume of telemarketing
calls made by Breda's subsidiary, Pacific Junction Telemarketing Center,
Inc. The decline in the volume of telemarketing calls is attributable to
Pacific Junction Telemarketing Center, Inc. receiving less telemarketing
leads from the company Pacific Junction Telemarketing Center, Inc. has
contracted with to provide it with telemarketing leads, which is Results
Telemarketing, Inc. Pacific Junction Telemarketing Center, Inc. is
considering licensing some of its telemarketing representatives as a means
to increase the availability of calling numbers, because some telemarketing
programs require a licensed agent. Pacific Junction Telemarketing Center,
Inc. also continues to seek supplemental programs to augment the
telemarketing leads provided by Results Telemarketing, Inc.
-11-
<PAGE>
There was an increase in Internet services for the nine-month period ended
September 30, 2000, when compared to the same period in 1999, of $186,581,
or 65.5%. This increase was due to an increase in the customer base of an
additional 738 Internet lines, which was a 49.9% increase in lines, when
comparing the two nine-month periods.
Another significant component of the overall operating revenue increase was
an increase of $218,889, or 51.4%, in miscellaneous revenue when comparing
the nine-month period ended September 30, 2000, with the nine-month period
ended September 30, 1999. The increase in miscellaneous revenue was
primarily the result of increased cellular service commissions.
There was an increase in total operating expenses of $649,892, or 20%, for
the nine-month period ended September 30, 2000, when compared to the
nine-month period ended September 30, 1999. All of the components of the
operating expenses increased when comparing the two nine-month periods.
There was a $380,782, or 39.8%, increase in plant specific operations
expense when comparing the nine-month period ended September 30, 2000, to
the nine-month period ended September 30, 1999. Of this $380,782 increase,
approximately $109,091 was additional facility operating expenditures to
support the increase of the 738 new Internet customers, $56,631 was cable
TV generated expenses for head-end equipment and underground cable
maintenance performed during the summer months, and approximately $187,500
was additional cellular operating expenses, such as inventory and
advertising expenses.
Plant nonspecific operating expense increased $8,343, or 12.4%, for the
nine-month period ended September 30, 2000, when compared to the nine-month
period ended September 30, 1999. The increase was attributable mainly to
additional furnishings, office supplies and expenditures to outfit Breda's
retail outlet in Carroll, Iowa, which opened in April 2000.
There was a $45,329, or 25.1%, increase in programming expense for cable TV
services when comparing the nine-month period ended September 30, 2000,
with the nine-month period ended September 30, 1999. The programming
increase was the result of programming fee increases and the timing
differences of free programming promotion offers between the two nine-month
time periods.
Depreciation and amortization expense increased $68,535, or 9.2%, for the
nine-month period ended September 30, 2000, when compared to the same
period in 1999. The switches in Breda's, Prairie Telephone Company, Inc.'s
and Westside Independent Telephone Company, Inc.'s seven telephone
exchanges were replaced during 1998 and 1999. The nine-month period ended
September 30, 2000 reflected depreciation on all seven new switches, while
the time period ended September 30, 1999, only reflected partial year
depreciation on the new switches that had been
-12-
<PAGE>
installed by that date.
Customer operations expense for the nine-month period ended September 30,
2000, increased $53,474, or 10.1%, when compared to the nine-month period
ended September 30, 1999. The telemarketing services customer service
expenses for labor, supplies and telephone expense decreased, however, by
$60,895 during the nine-month period ended September 30, 2000, as compared
to the nine-month period ended September 30, 1999. This decrease was due
primarily to the decrease in the number of telemarketing calls made by
Pacific Junction Telemarketing Center, Inc. Customer service expenses
increased for all other services by $114,369, when comparing the two
nine-month time periods. Eight staff members have been added since October
1999 for customer service assistance, computer and billing services, and to
staff the retail store that opened in Carroll, Iowa on April 6, 2000.
Salary increases also became effective January 1, 2000. A software
conversion was also done for the cable TV system in the second quarter of
2000, and those conversion costs and related consultant costs are included
in the nine-month period ended September 30, 2000. There also continues to
be increased customer service expense generated by increased customer
correspondence, newsletters, notification of cable channel line-up changes,
area code prefix changes, billing procedure changes and similar customer
notifications.
There was an increase of $87,147, or 13.4%, in corporate operations expense
for the nine-month period ended September 30, 2000, as compared to the
nine-month period ended September 30, 1999. This increase partially relates
to wage increases effective January 1, 2000, additional information
technology staff members, and legal, accounting and other expenses incurred
with respect to Breda's continuing obligations as a reporting company under
the Securities Exchange Act of 1934. The legal and accounting fees incurred
during the nine-month period ended September 30, 2000, included fees for
the preparation of Breda's proxy statement, and the annual report to the
shareholders, which were first-time expenses that were not incurred in the
nine-month period ended September 30, 1999. First time consultant fees were
also incurred during the nine-month period ended September 30, 2000 for new
business venture research and for job descriptions, organization structure
work and personnel evaluation program work. Other corporate operations
expenses incurred during the nine-month period ended September 30, 2000,
were fees and expenditures to investigate the use of trademarks and logos.
Information system expenses also increased during the nine-month period
ended September 30, 2000, when compared to the nine-month period ended
September 30, 1999. These expenses resulted from work on software and
hardware upgrades and the resultant new operating lease expenditures for
the additional hardware needed to accommodate Breda's and its subsidiaries
growth. Some hardware is now leased for the headquarters office, satellite
offices and the retail outlet.
Non-operating income decreased by $1,929,550, or 26.5%, during the
nine-month period ended September 30, 2000, when compared to the same
period in 1999.
-13-
<PAGE>
One factor in this decrease was the result of the $7,436,415 gain on
Breda's sale of the direct broadcast satellite operation in January 1999,
and the additional interest income on the funds invested from that sale.
The proceeds of that one-time event are included for the nine-month period
ended September 30, 1999. On May 12, 2000, however, Prairie Telephone
Company, Inc. sold all of its shares of stock in Central Iowa Cellular,
Inc. (CIC). This sale resulted in Prairie Telephone Company, Inc. receiving
cash of $5,226,034. The gain on this sale of $5,018,714 was included in
non-operating income during the nine-month period ended September 30, 2000,
and there was no corresponding entry for the nine-month period ended
September 30, 1999. The difference in the net gain on these two events in
the two comparable nine-month periods accounted for a $2,417,701 decrease
in non-operating income for the nine-month period ended September 30, 2000,
when compared to the nine-month period ended September 1999.
There was also income from cellular partnerships of $432,775, and of
$23,508 from Alpine Communications, L.C., during the nine-month period
ended September 30, 2000. There were no corresponding proceeds in the
nine-month period ended September 30, 1999.
The remaining $31,868 net decrease in net operating income for the
nine-month period ended September 30, 2000, as compared to the same
nine-month period in 1999, resulted from a combination of factors. There
was additional miscellaneous income of $24,397, as compared to the figures
for the nine-month period ended September 30, 1999, which included a
one-time $23,287 loss on the disposal of a switch. There was also, however,
a $23,836 decrease in interest and dividend income, a $6,933 increase in
interest expense, and a $38,240 decrease in the loss on the sale of
investments for the nine-month period ended September 30, 2000, when
compared to the same period in the prior year.
Income taxes decreased by $683,475, or 22.7%, for the nine-month period
ended September 30, 2000, when compared to the same period in 1999. The
decrease resulted primarily from the difference in taxable gain on the sale
of the CIC stock in May 2000, versus the broadcast satellite operation
taxable gain in January 1999.
Net income decreased $1,461,283 for the nine-month period ended September
30, 2000, when compared to the same period in 1999. The decrease was
attributable to the noted decreases in net operating income and
non-operating income as well as the decrease in income taxes.
Liquidity and Capital Resources at Year Ended 1999.
Breda's net working capital was a positive $885,642 as of the close of
December 1999. This represents a $1,311,164 increase in net working capital
from year-end 1998.
-14-
<PAGE>
Liquidity and Capital Resources at Nine Months Ended September 30, 2000.
Breda's net working capital was a positive $2,184,634 as of September 30,
2000. This represents an increase of $1,298,992 in net working capital from
year-end December 1999. Cash and cash equivalents increased $1,396,241
during the nine-month period ended September 30, 2000, when compared to the
year ended December 31, 1999. This increase resulted primarily from the
partial receipt of $5,108,279 from the sale of the CIC stock on May 12,
2000, and the subsequent pay down of variable rate (8.05% - 8.2% at
September 30, 2000) long term debt of $2,564,378 and corresponding interest
of $56,978 to Rural Telephone Finance Cooperative on June 30, 2000 and
September 30, 2000. The CIC stock sale proceeds were also used to make
federal estimated tax payments of $1,300,000 during the nine-month period
ended September 2000.
With the pay-off of long term debt, the current portion of long-term debt
decreased by $389,653 as of the close of September 30, 2000, when compared
to year-end December 31, 1999. Both accrued taxes and other liabilities
showed an increase as of September 30, 2000, when compared to year-end
December 1999, and were the result of timing differences on accrued payroll
and benefits.
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999.
There was an increase in total operating revenues for the three-month
period ended September 30, 2000, when compared to the same period in 1999,
of $286,967, or 22.4%.
Operating revenue increases resulted primarily from three sources: (i) a
$123,623, or 22.5%, increase in network access services revenues, (ii) a
$63,291, or 61.4%, increase in Internet service revenues, and (iii) a
$111,108, or 100.8%, increase in miscellaneous revenue. The Internet
services revenue increase was a direct result of an increased customer
base. The miscellaneous revenue increase resulted from increased cellular
sales commissions received from U.S. Cellular because of increased cellular
sales. Network access service revenue increased due to additional lines and
facilities in the Yale telephone exchange now being eligible for NECA pool
reimbursements, and because Breda, Prairie Telephone Company, Inc. and
Westside Independent Telephone Company had a retroactive one-time
adjustment from NECA for SS7 connectivity.
One component which caused a decrease in operating revenues, was the
decrease in the revenue from telemarketing services. Telemarketing revenues
decreased $27,990, or 26.4%, when comparing the three-month period ended
September 30, 2000, to the three-month period ended September 30, 1999.
This decrease in telemarketing revenues continues the trend in the decline
in the volume of telemarketing calls made by Breda's subsidiary, Pacific
Junction Telemarketing Center, Inc. Pacific Junction
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Telemarketing Center, Inc. is considering licensing some of its
telemarketing representatives in order to increase the availability of
calling numbers, because some telemarketing programs require a licensed
agent. Pacific Junction Telemarketing Center, Inc. also continues to seek
supplemental programs to augment the telemarketing leads provided by
Results Marketing, Inc.
There was an increase in local network services revenue of $15,465, or
12.3%, during the three-month period ended September 30, 2000, when
compared to the same period in 1999. The increase was due primarily to an
increase in customers requesting a second line for Internet services, and
to calling feature rate increases that were implemented as switches were
replaced during 1999. The three-month period ended September 30, 2000,
reflects calling feature revenue from all the exchanges, while the calling
feature revenue in the three-month period ended September 30, 1999, only
reflects calling feature rate increases for the telephone exchanges where
the switches had been replaced before that date.
Cable television services revenue decreased $5,440, or 2%, for the
three-month period ended September 30, 2000, as compared to the three-month
period ended September 30, 1999. This decrease is believed to be the result
of competition from satellite dish services.
There was an increase in total operating expenses for the three-month
period ended September 30, 2000, when compared to the same period in 1999,
of $214,283, or 20%.
Plant specific expenses increased by $121,603, or 36.9%, when comparing the
two three-month periods. The increase was partially attributable to
increased cellular and Internet expenses incurred to operate the retail
outlet which was opened in April 2000 in Carroll, Iowa, to sell cellular
and Internet services. Internet related expenditures also increased when
comparing the three-month period ended September 30, 2000, to the
three-month period ended September 30, 1999, because of the growth in the
number of Internet customers. Another component of the plant specific
expense increase resulted from increased wage and benefit costs for outside
technicians and cellular/internet personnel which became effective in
January 2000. Costs to operate the retail outlet are included in the
three-month period ended September 30, 2000, which would not have been
applicable to the three-month period ended September 30, 1999.
Plant nonspecific operations expense increased $1,632, or 7.5%, for the
three-month period ended September 30, 2000, when compared to the
three-month period ended September 30, 1999. The increase was attributable
mainly to additional furnishings, office supplies and expenditures to
outfit additional office space at Breda's retail outlet in Carroll, Iowa.
Programming costs increased $33,217, or 73.3%, for the three-month period
ended September 30, 2000, when compared to the three-month period ended
September 30, 1999. The increase was caused partially by rate increases,
but was mainly the result of timing differences in the reporting and
recording of these costs.
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Depreciation and amortization increased $21,558, or 8.2%, for the
three-month period ended September 30, 2000, when compared to the same
period in 1999. This increase was mainly due to all seven new switches
being depreciated during the three-month period ended September 30, 2000,
while only the switches that had been replaced in 1998 and the first nine
months of 1999 were included in the three-month period ended September 30,
1999.
There were also additional expenditures included in the three-month period
ended September 30, 2000, for additional supplies required by the increased
number of staff members.
Customer operations expense for the three-month period ended September 30,
2000, increased $11,462, or 6.5%, when compared to the three-month period
ended September 30, 1999. The increase results from wage and benefit rate
increases that were effective in January 2000. Another factor in the
increase was the addition of four full-time equivalents to staff the new
retail store in Carroll, Iowa, which opened in April 2000.
There was an increase of $21,816, or 11.9%, in corporate operations expense
for the three-month period ended September 30, 2000, as compared to the
three-month period ended September 30, 1999. This increase resulted from
salary increases effective in January 2000, as well as consultant fees for
new business venture research. Information system expenses also increased
during the three-month period ended September 30, 2000, as compared to the
three-month period ended September 30, 1999, because of computer hardware
operating leases and software consultant fees.
Non-operating income increased by $542,671 for the three-month period ended
September 30, 2000, as compared to the three-month period ended September
30, 1999. On May 12, 2000, Prairie Telephone Company, Inc. sold all of its
shares of stock in CIC. This sale resulted in Prairie Telephone Company,
Inc. receiving a partial payment of $5,108,279 on May 12, 2000. The partial
payment resulted in a gain of $4,900,959, which was included in
non-operating income during the three-month period ended June 30, 2000.
With the occurrence of certain events in the third quarter, additional
terms of the sale were finalized, and on August 8, 2000, Prairie Telephone
Company, Inc. received an additional payment in the amount of $117,755,
which was classified as additional gain from the sale of the CIC stock in
the three-month period ended September 30, 2000. There was no comparable
entry during the three-month period ended September 30, 1999.
Other non-operating income increases resulted from the receipt of $349,440
from cellular partnership investments during the three-month period ended
September 30, 2000, for which there was no comparable entry in the
three-month period ended September 30, 1999. Interest and dividend income
increased $31,614, or 42.7%, for the three-month period ended September 30,
2000, when compared to the three-month period ended September 30, 1999. The
increase mainly resulted from the temporary increase in investments from
the cash received on the sale of the CIC stock
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until some of those sale proceeds were used for long term debt pay down.
Interest expense decreased $8,906, or 7%, during the three-month period
ended September 30, 2000, when compared to the same period in the prior
year. While the variable interest rate increased in the year 2000 as
compared to 1999, there was less principal outstanding, and two variable
rate loans had been paid off as of June 30, 2000.
Loss on the sale of investments decreased $34,929, or 99%, during the
three-month period ended September 30, 2000, when compared to the same
three-month period in 1999. This decrease is the result of investment
redemption timing and the market value at the time of the redemption.
Income taxes increased $279,129 for the three-month period ended September
30, 2000, as compared to the three-month period ended September 30, 1999.
The increase is attributable to the increase in net operating income and
the increase in non-operating income as discussed above.
Net income increased $336,226 for the three-month period ended September
30, 2000, when compared to the same period in 1999. The increase was
attributable to the $72,684 increase in net operating income and the
increase in non-operating income, which included the income from the
cellular partnership investments and the additional gain on the sale of the
CIC stock. There were no comparable entries in the three-month period
ending September 30, 1999.
Other Activities.
Breda's primary ongoing capital investment activity will currently continue
to be additions to property, plant and equipment. For example, Breda
continues to make investments in state-of-the-art technology in order to
try to offer subscribers the best possible service. Capital expenditures
for 1999 were $1,249,414, and are currently expected to be approximately
$628,000 in 2000.
Breda anticipates that substantial expenditures will need to be made for
software upgrades that will become necessary in order for Breda, Prairie
Telephone Company, Inc. and Westside Independent Telephone Company to
become compliant with the requirements of the Communications Assistance for
Law Enforcement Act ("CALEA"). CALEA was passed in 1994 in response to
rapid advances in telecommunications technology, such as the implementation
of digital technology and wireless services, that have threatened the
ability of law enforcement officials to conduct authorized electronic
surveillance. CALEA requires telecommunications carriers to modify their
equipment, facilities, and services to ensure that they are able to comply
with authorized electronic surveillance. These modifications were
originally scheduled to be completed by October 25, 1998, but in accord
with an extension granted by the FCC, were generally to have been completed
by June 30, 2000. However, for wireline, cellular, and broadband personal
communications service carriers, implementation of a packet-mode capability
and six Department of Justice/Federal Bureau of Investigation "punch list"
capabilities were to have been completed by September 30, 2001.
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On June 5, 2000, however, the CALEA Implementation Section of the FBI
informed Breda that, based on the information provided in accordance with
the Flexible Deployment Assistance Guide, the FBI supports a two-year
extension of the June 30, 2000, compliance date under section 107 of CALEA
for Breda, Prairie Telephone Company, Inc. and Westside Independent
Telephone Company.
Breda's switch vendor is preparing estimates for the cost to upgrade
Breda's, Prairie Telephone Company, Inc.'s and Westside Independent
Telephone Company's software as necessary to become compliant with CALEA,
but, as indicated, Breda anticipates substantial expenditures will be
necessary, and that those expenditures may be as much as approximately
$350,000.
As of September 30, 2000, Breda and its subsidiaries had approximately
$4,300,000 in outstanding loans with the Rural Telephone Finance
Cooperative (the "RTFC"). Of the outstanding debt with the RTFC on that
date, $2,185,666 was at a fixed interest rate of 7.35% per annum, and
carried a ten-year term. The variable rates on the remaining RTFC debt
exceed that fixed rate and could affect future borrowing decisions and the
allocation of outstanding debt between fixed and variable rates. Breda and
Prairie Telephone Company, Inc. also have a line of credit available from
the RTFC until January 2001 for $1,000,000. There were no outstanding
advances on this line of credit at September 30, 2000. Breda and Prairie
Telephone Company, Inc. plan to increase the latter line of credit from the
RTFC to $2,000,000, and to extend the time frame to 60 months, instead of
12 months, effective January 1, 2001.
On October 16, 2000, Breda paid off a variable rate (8.30% as of October 1,
2000) long-term debt to the RFTC of $2,131,590. Thus, Breda's only
remaining long-term debt as of October 16, 2000, was $2,185,667 from the
RFTC at a fixed rate of 7.35% per annum, and which carries a ten-year term.
Breda also plans to continue to consider expanding its core business of
providing telephone services by looking at any opportunities which may
arise to acquire additional telephone lines. For example, Breda considered
and pursued the acquisition of the telephone lines sold by GTE and US West
in 1999. Those telephone lines were, however, acquired by other telephone
companies. One of the purchasers of some of the telephone lines of GTE was
Iowa Network Services, Inc. Iowa Network Services, Inc. provides various
services to telephone companies, including Breda, Prairie Telephone
Company, Inc. and Westside Independent Telephone Company. Although no
definite plans exist, it is possible that Iowa Network Services, Inc. may
consider selling some of those telephone lines in the next two to five
years. If that occurs, Breda, Prairie Telephone Company, Inc. and Westside
Independent Telephone Company will consider pursuing the acquisition of
those telephone lines. There is no assurance, however, that Iowa Network
Services, Inc. will ever sell any of the telephone lines or if it does,
that Breda, Prairie Telephone Company, Inc. or Westside Independent
Telephone Company will determine to pursue those acquisitions or will be
successful in acquiring any lines even if they determine to pursue them.
Breda also has an interest in Alpine Communications, L.C., which was formed
by several independent telephone
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companies. Alpine Communications, L.C. has purchased former US West
telephone properties in Iowa. Given the recent acquisitions of the GTE and
US West telephone lines by other telephone companies, Breda currently does
not foresee the possibility of the acquisition of any additional telephone
lines, other than perhaps from Iowa Network Services, Inc. as discussed
above.
Other than as discussed above, Breda, Prairie Telephone Company, Inc. and
Westside Independent Telephone Company currently have no definite plans to
provide any material additional or improved services to their subscribers.
This determination may change quickly, however, given the rapidly changing
technology in the telecommunications and cable industries.
There are no current plans to expand the cable services areas of, or the
cable services provided by, Tele-Services, Ltd. Tele-Services, Ltd. is,
however, presently upgrading some of its plant, equipment and cable in
order to add more channel line-ups so that it can stay competitive and
continue to be able to obtain programming licenses. The cost of those
upgrades in the next twelve months, however, is estimated to be less than
$50,000.
Breda and its subsidiaries have and will continue to incur capital
expenditures in connection with upgrading their telephone, cable and other
equipment and systems.
Breda believes that the funds from the sale of its direct broadcast
satellite operation in January of 1999, and the sale of Prairie Telephone
Company, Inc.'s shares of stock in CIC in May 2000, along with its
anticipated normal operating cash flows, will generate sufficient working
capital for Breda and its subsidiaries to meet their current operating
needs and maintain historical fixed asset addition levels.
Cautionary Statement on Forward Looking Statements.
This item and other items in this quarterly report contain forward looking
statements that involve and are subject to various risks, uncertainties and
assumptions. Forward looking statements include, but are not limited to,
statements with respect to anticipated future trends in revenues and net
income, projections concerning operations and cash flow, growth and
acquisition opportunities, management's plans and intentions for the
future, and other similar forecasts and statements of expectation. Words
such as "expects," "estimates," "plans," "anticipates," "contemplates,"
"predicts," "intends," "believes," "seeks," "should," "thinks,"
"objectives" and other similar expressions or variations thereof are
intended to identify forward looking statements. Forward looking statements
made by Breda and its management are based on estimates, projections,
views, beliefs and assumptions made or existing at the time of such
statements and are not guarantees of future results or performance. Breda
disclaims any obligation to update or revise any forward looking statements
based on the occurrence of future events, the receipt of new information,
or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward looking statements as a result of numerous
risks, uncertainties
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and assumptions, nearly all of which are beyond the control of Breda and
its management. The risks, uncertainties and assumptions affecting forward
looking statements include, but are not limited to:
o the possible adverse effects to Breda and its subsidiaries which
may arise under the regulations which will be promulgated under
the Telecommunications Act of 1996, including increased
competition;
o adverse changes by the Federal Communications Commission in the
rates of the access charges that can be charged by Breda and its
subsidiaries to long distance carriers;
o technological advances in the telecommunications and cable
industries which may replace or otherwise adversely affect in a
material way the existing technologies utilized by Breda and its
subsidiaries;
o employee relations;
o management's business strategies;
o general industry conditions, including consolidations in the
telecommunications and cable industries;
o general economic conditions at the national, regional and local
levels;
o acts or omissions of competitors and other third parties;
o changes in or more governmental regulations and policies; and
o continued availability of financing, and on favorable terms.
The discussion of Breda's financial condition and results of operations
should also be read in conjunction with the financial statements and
related notes included in Item 1 of this quarterly report.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Breda currently is not aware of any pending legal proceeding to which Breda
is a party or to which any of Breda's property is subject, other than
routine litigation that is incidental to its business. Breda currently is
not aware that any governmental authority is contemplating any proceeding
against Breda or any of its property.
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Item 2. Changes in Securities.
No material modifications, limitations or qualifications were made to or
placed upon the terms of Breda's shares of common stock during the period
of July 1, 2000 through September 30, 2000.
Breda did not issue any shares of its common stock during the period of
July 1, 2000 through September 30, 2000.
Item 3. Defaults Upon Senior Securities.
There has been no material default or any material arrearage or delinquency
by Breda of the type required to be reported under this Item.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the shareholders of Breda during the
period of July 1, 2000 through September 30, 2000.
Item 5. Other Information.
During the quarter ended September 30, 2000, Breda redeemed 439 shares of
its common stock from thirteen different shareholders at $235 per share,
for a total amount of $103,165. The $235 per share price is the redemption
amount which was last established by the board of directors of Breda on
June 12, 2000.
There were transfers of shares of Breda's common stock during the quarter
ended September 30, 2000 with respect to which Breda did not exercise its
right of first refusal on those shares.
Item 6. Exhibits and Reports on Form 8-K.
(a) A list of the exhibits included as part of this quarterly report is
set forth in the Exhibit Index which immediately precedes such
exhibits and is incorporated herein by this reference.
(b) Breda did not file any reports on Form 8-K during the period of July
1, 2000 through September 30, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BREDA TELEPHONE CORP.
Date: November 13, 2000. By: /s/ Dean Schettler
-------------------------------
Dean Schettler, President
Date: November 13, 2000. By: /s/ Scott Bailey
-------------------------------
Scott Bailey, Treasurer
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EXHIBIT INDEX
Exhibits to Form 10-QSB
Nine Months Ended September 30, 2000
BREDA TELEPHONE CORP.
Description of Exhibit Page Number
2. Plan of Acquisition, Disposition,
Reorganization, Arrangement,
Liquidation or Succession
(a) Stock Purchase Agreement dated May 22, 1998, by and between Arthur
Zerwas and Mary Zerwas, Westside Independent Telephone Company, and
Breda Telephone Corporation, along with the Amendment to the Stock
Purchase Agreement dated May 22, 1998. (Filed as Exhibit 2.1 to
Breda's Registration Statement on Form 10-SB, and incorporated herein
by this reference.)
(b) Stock Purchase Agreement dated May 22, 1998, by and between Arthur
Zerwas and Mary Zerwas, and Breda Tele-Services, Ltd., along with the
Amendment to the Stock Purchase Agreement dated May 22, 1998. (Filed
as Exhibit 2.2 to Breda's Registration Statement on Form 10-SB, and
incorporated herein by this reference.)
(c) Asset Purchase Agreement dated October 6, 1998, by and between NewPath
Communications, L.C. and Tele-Services, Ltd. (Filed as Exhibit 2.3 to
Breda's Registration Statement on Form 10-SB, and incorporated herein
by this reference.)
(d) Asset Purchase Agreement by and between Golden Sky Systems, Inc. and
Breda Telephone Corporation dated as of November 30, 1998, along with
the Amendment of Asset Purchase Agreement dated as of January 11,
1999. (Filed as Exhibit 2.4 to Breda's Registration Statement on Form
10-SB, and incorporated herein by this reference.)
(e) Stock Purchase Agreement dated March 29, 2000, by and among AirTouch
Iowa, LLC, Central Iowa Cellular, Inc., Prairie Telephone Company,
Inc., Panora Tele-
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communications, Inc., Walnut Creek Communications, Inc., Minburn
Telephone Company, and Interstate Enterprises, Ltd. (Filed as Exhibit
2.1 to Breda's Form 8-K dated March 29,2000 and filed April 12, 2000,
and incorporated herein by this reference.)
(f) Des Moines Tower Proceeds Agreement dated as of March 29, 2000, by and
among AirTouch Communications, Inc., Panora Telecommunications, Inc.,
Walnut Creek Communications, Inc., Minburn Telephone Company,
Interstate Enterprises, Ltd. and Prairie Telephone Company, Inc.,
along with Exhibits A and B thereto. (Filed as Exhibit 2.2 to Breda's
Form 8-K dated March 29, 2000 and filed April 12, 2000, and
incorporated herein by this reference.)
3. Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of Breda Telephone
Corp. (Filed as Exhibit 3.1 to Breda's Registration Statement on Form
10-SB, and incorporated herein by this reference.)
(b) Amended and Restated Bylaws of Breda Telephone Corp. (Filed as Exhibit
3.2 to Amendment No. 1 to Breda's Registration Statement on Form
10-SB, and incorporated herein by this reference.)
10. Material Contracts
(a) Employment Agreement effective April 1, 2000 between Breda and Robert
Boeckman. (Filed as Exhibit 10.1 to Breda's Form 10-QSB for the
quarterly period ended March 31, 2000, and incorporated herein by this
reference.)
(b) Employment Agreement effective April 1, 2000 between Breda and Jane
Morlok. (Filed as Exhibit 10.2 to Breda's Form 10-QSB for the
quarterly period ended March 31, 2000, and incorporated herein by this
reference.)
*27. Financial Data Schedule
* Included with this filing
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