UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Amendment No. 1
| T | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ______________
Commission File Number: 0-26525
BREDA TELEPHONE CORP.
(Exact name of registrant as specified in its charter)
____________________
| Iowa | 42-0895882 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| | |
| 112 East Main, P.O. Box 190, Breda, Iowa | 51436 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (712) 673-2311
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
| | Large accelerated filer | o | Accelerated filer | o |
| | | | | |
| | Non-accelerated filer | o | Smaller reporting company | T |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $16,692,252 as of June 30, 2009. The registrant's stock is not listed on an exchange or otherwise publicly traded, and the value of the registrant's stock for this purpose has been based upon the $547 per share redemption price of the registrant's stock as determined by its board of directors and that was in effect on June 30, 2009. In determining this value, the registrant has assumed that all of its directors and officers, including its chief executive officer, chief operations officer and chief financial officer, are affiliates, but this assumption shall not apply to or be conclusive for any other purpose.
The number of shares outstanding of each of the registrant's classes of common stock as of March 1, 2010 was 26,032 shares of Class A and 4,819 shares of Class B.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission with respect to the 2010 annual meeting of the shareholders of the registrant are incorporated by reference into Item 11 of Part III of this Form 10-K.
Explanatory Note
Breda Telephone Corp. (“Breda”) is filing this Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 which was originally filed with the Securities and Exchange Commission on March 31, 2010 (the “Original 10-K) to amend the Original 10-K by substituting the Report of Independent Registered Public Accounting Firm in “Item 8 Financial Statements” for the Report of Independent Registered Public Accounting Firm contained in Item 8 in the Original 10-K.
More specifically, this Amendment No. 1:
a) adds and includes the unqualified audit opinion of Kiesling Associates LLP for the year ending December 31, 2008, in place of the qualified opinion filed with the Original 10-K, and, other than the audit opinion for the year ending December 31, 2008, there were no changes to the financial statements themselves. There is no change in the qualified audit opinion of Kiesling Associates LLP for the year ending December 31, 2009 filed with the Original 10-K.
b) restates Item 9A(T). Controls and Procedures to disclose that Breda’s disclosure controls and procedures and internal controls over financial reporting were not effective as of the end of the fiscal year December 31, 2009. Per Rule 13a-15(e), Breda’s disclosure controls and procedures and internal controls over financial reporting were not effective since Breda was not able to obtain an unqualified audit report from Kiesling Associates LLP due to their inability to examine evidence regarding the investments and earnings in Hilbert Communications LLC, RSA 7 Limited Partnership, Iowa 8 Monona Limited Partnership, and RSA No. 9 Limited Partnership.
The original audit opinion was dated March 30, 2010. The attached opinion is dated March 30, 2010 except for Note 4, as to which the date is May 28, 2010. In the report dated March 30, 2010 Kiesling expressed an opinion that they were unable to examine evidence regarding the investments and earnings of Iowa 7, Iowa 8, Iowa 9, and Spiralight Networks. As of the date of this opinion for Note 4, Kiesling was able to obtain audited financial statements for 2008 supporting the Company’s investments in Iowa 7, Iowa 8, Iowa 9, and Spiralight Networks as described in Note 4.
Except with respect to the scope of the opinion, there were no changes to the March 30, 2010 audit opinion.
| Item 8. | Financial Statements. |
Breda Telephone Corp.
And Subsidiaries
Breda, IA
Consolidated Financial Statements
For the Years
Ended December 31, 2009 and 2008
BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA
Contents
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2009 and 2008, 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 did not audit the 2008 financial statements of Iowa RSA 7 (Iowa 7), Iowa 8 Monona Limited Partnership (Iowa 8), RSA No. 9 Limited Partnership (Iowa 9), and Spiralight Network LLC (SN), the investments in which, as discussed in Note 4 to the financial statements, are accounted for by the equity method of accounting. The investments in Iowa 7, Iowa 8, Iowa 9 and SN were $3,161,819 as of December 31, 2008, and the equity in their net income was $1,134,097 for the year then ended. The financial statements of Iowa 7, Iowa 8, Iowa 9, and SN were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Iowa 7, Iowa 8, Iowa 9, and SN, is based solely on the report of the other auditors.
Except as discussed in the following paragraph, we conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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.
We were unable to perform audit procedures for 2009 supporting the Company's investments in Hilbert Communications LLC, RSA 7 Limited Partnership, Iowa 8 Monona Limited Partnership, and RSA No. 9 Limited Partnership stated at $3,446,578 at December 31, 2009, or its equity in earnings in such partnerships of $977,537, which is included in net income for the year ended as described in Note 4 to the financial statements.
In our report dated March 30, 2010 we expressed an opinion that we were unable to examine evidence regarding the investments and earnings of RSA 7 Limited Partnership and Iowa 8 Monona Limited Partnership. As of the date of this opinion we were able to obtain audited financial statements for 2008 supporting the Company’s investments in RSA 7 Limited Partnership and Iowa 8 Monona Limited Partnership as described in Note 4.
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence regarding the investment and earnings of Hilbert Communications LLC, RSA 7 Limited Partnership, Iowa 8 Monona Limited Partnership, and RSA No. 9 Limited Partnership, 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, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Kiesling Associates LLP
West Des Moines, Iowa
March 30, 2010
(except for Note 4, as to which the date is May 28, 2010)
BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and December 31, 2008
| | | December 31, | | | December 31, | |
| | | 2009 | | | 2008 (Restated) | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 4,987,960 | | | $ | 1,317,462 | |
| Marketable securities | | | 490,724 | | | | 604,435 | |
| Accounts receivable, net of allowances of $159,831 and $3,415,824 in 2009 and 2008, respectively | | | 1,928,483 | | | | 3,290,640 | |
| Interest receivable | | | 62,693 | | | | 81,730 | |
| Notes receivable, less impairment of $445,253 in 2008 | | | - | | | | 73,759 | |
| Inventory, at average cost | | | 297,678 | | | | 227,731 | |
| Prepaid income taxes | | | 1,310,951 | | | | 406,451 | |
| Other | | | 291,977 | | | | 112,438 | |
| Deferred income taxes | | | 58,862 | | | | 718,595 | |
| | | | 9,429,328 | | | | 6,833,241 | |
| | | | | | | | | |
| OTHER NONCURRENT ASSETS | | | | | | | | |
| Marketable securities | | | 5,223,501 | | | | 5,440,550 | |
| Investments in unconsolidated affiliates at equity | | | 8,537,047 | | | | 8,525,861 | |
| Other investments at cost | | | 655,542 | | | | 673,590 | |
| Goodwill | | | 918,715 | | | | 896,812 | |
| | | | 15,334,805 | | | | 15,536,813 | |
| | | | | | | | | |
| PROPERTY, PLANT AND EQUIPMENT | | | 8,102,372 | | | | 6,857,853 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 32,866,505 | | | $ | 29,227,907 | |
| | | | | | | | | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Current portion of long-term debt | | $ | 14,144 | | | $ | 200,507 | |
| Accounts payable | | | 2,091,609 | | | | 1,751,822 | |
| Accrued taxes | | | 157,740 | | | | 191,943 | |
| Other | | | 136,722 | | | | 124,536 | |
| | | | 2,400,215 | | | | 2,268,808 | |
| | | | | | | | | |
| LONG-TERM DEBT, less current portion | | | 1,548,575 | | | | 750,988 | |
| | | | | | | | | |
| OTHER NONCURRENT LIABILITIES | | | 2,468,101 | | | | 1,947,128 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY | | | | | | | | |
| Common stock, Class A - no par value, 5,000,000 shares authorized, 26,109 and 27,924 shares issued and outstanding at $547 and $509 stated values, respectively | | | 14,281,623 | | | | 14,213,316 | |
| Common stock, Class B - no par value, 5,000,000 shares authorized, 4,742 and 2,927 shares issued and outstanding at $547 and $509 stated values, respectively | | | 2,593,874 | | | | 1,489,843 | |
| Retained earnings | | | 9,508,416 | | | | 8,421,630 | |
| | | | 26,383,913 | | | | 24,124,789 | |
| | | | | | | | | |
| MINORITY INTEREST | | | 65,701 | | | | 136,194 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 32,866,505 | | | $ | 29,227,907 | |
The accompanying notes are an integral part of these consolidated financial statements.
BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended 2009 and 2008
| | | For the Years Ended | |
| | | 2009 | | | 2008 (Restated) | |
| | | | | | | |
| OPERATING REVENUES | | $ | 9,069,766 | | | $ | 9,687,237 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Cost of services | | | 4,550,643 | | | | 5,226,498 | |
| Depreciation and amortization | | | 1,040,454 | | | | 979,478 | |
| Selling, general, and administrative | | | 2,510,292 | | | | 2,367,572 | |
| | | | 8,101,389 | | | | 8,573,548 | |
| | | | | | | | | |
| OPERATING INCOME | | | 968,377 | | | | 1,113,689 | |
| | | | | | | | | |
| OTHER INCOME (EXPENSES) | | | | | | | | |
| Interest and dividend income | | | 391,559 | | | | 442,989 | |
| Gain on sale of investments | | | 7,513 | | | | 6,018 | |
| Gain or (Loss) on disposal of assets | | | (71,883 | ) | | | 15,561 | |
| Interest expense | | | (26,321 | ) | | | (77,354 | ) |
| Income from equity investments | | | 1,827,141 | | | | 1,749,349 | |
| Gain or (Loss) on impairment of note receivable | | | 445,253 | | | | (443,013 | ) |
| Other, net | | | (39,770 | ) | | | (45,717 | ) |
| | | | 2,533,492 | | | | 1,647,833 | |
| | | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | 3,501,869 | | | | 2,761,522 | |
| | | | | | | | | |
| INCOME TAXES | | | 998,335 | | | | 830,299 | |
| | | | | | | | | |
| NET INCOME BEFORE MINORITY INTEREST | | | 2,503,534 | | | | 1,931,223 | |
| | | | | | | | | |
| MINORITY INTEREST | | | 2,398 | | | | (2,668 | ) |
| | | | | | | | | |
| NET INCOME | | $ | 2,505,932 | | | $ | 1,928,555 | |
| | | | | | | | | |
| NET INCOME PER COMMON SHARE | | $ | 81.23 | | | $ | 62.50 | |
| | | | | | | | | |
| DIVIDENDS PER COMMON SHARE | | $ | 8.00 | | | $ | 8.00 | |
The accompanying notes are an integral part of these consolidated financial statements.
BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
| | | Common Stock, A and B Class | | | Retained Earnings | | | Total | |
| | | Shares | | | Amount | | | | | |
| | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 30,936 | | | $ | 14,137,752 | | | $ | 8,344,135 | | | $ | 22,481,887 | |
| | | | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | 1,928,555 | | | | 1,928,555 | |
| | | | | | | | | | | | | | | | | |
| Dividends paid | | | | | | | | | | | (246,808 | ) | | | (246,808 | ) |
| | | | | | | | | | | | | | | | | |
| Common stock redeemed, net | | | (85 | ) | | | (38,845 | ) | | | | | | | (38,845 | ) |
| | | | | | | | | | | | | | | | | |
| Stated value stock adjustment | | | | | | | 1,604,252 | | | | (1,604,252 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2008 | | | 30,851 | | | | 15,703,159 | | | | 8,421,630 | | | | 24,124,789 | |
| | | | | | | | | | | | | | | | | |
| Comprehensive income: | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | 2,505,932 | | | | 2,505,932 | |
| | | | | | | | | | | | | | | | | |
| Dividends paid | | | | | | | | | | | (246,808 | ) | | | (246,808 | ) |
| | | | | | | | | | | | | | | | | |
| Common stock redeemed, net | | | | | | | | | | | | | | | - | |
| | | | | | | | | | | | | | | | | |
| Stated value stock adjustment | | | | | | | 1,172,338 | | | | (1,172,338 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| Balance at December 31, 2009 | | | 30,851 | | | $ | 16,875,497 | | | $ | 9,508,416 | | | $ | 26,383,913 | |
The accompanying notes are an integral part of these consolidated financial statements.
BREDA TELEPHONE CORP. AND SUBSIDIARIES BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2009 and 2008
| | | 2009 | | | 2008 (Restated) | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net income | | $ | 2,505,932 | | | $ | 1,928,555 | |
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 1,040,454 | | | | 979,478 | |
| Minority interest | | | (2,398 | ) | | | 2,668 | |
| Deferred income taxes | | | 1,180,707 | | | | 29,220 | |
| Amortization of investment premium/discount - net | | | 36,764 | | | | 43,363 | |
| Equity income in unconsolidated affiliates, net of distributions received of $1,831,455 and $2,529,549 in 2009 and 2008, respectively | | | 4,314 | | | | 780,200 | |
| (Gain) or loss on disposal of property | | | 71,883 | | | | (15,561 | ) |
| (Gain) or loss on impairment of note receivable | | | (445,253 | ) | | | 445,253 | |
| Gain on sale of marketable securities | | | (7,513 | ) | | | (6,018 | ) |
| Changes in assets and liabilities: | | | | | | | | |
| (Increase) or decrease in assets | | | 205,305 | | | | (2,108,704 | ) |
| Increase or (decrease) in liabilities | | | (3,824 | ) | | | 703,518 | |
| | | | | | | | | |
| Net cash provided by operating activities | | $ | 4,586,371 | | | $ | 2,781,972 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Capital expenditures | | | (2,114,856 | ) | | | (2,763,749 | ) |
| Proceeds from the sale of assets | | | 79,594 | | | | 18,835 | |
| Purchase of marketable securities | | | (598,466 | ) | | | (419,433 | ) |
| Purchase of equity investments | | | (15,500 | ) | | | (1,422,000 | ) |
| Purchase of other investments - at cost | | | (6,055 | ) | | | (15,621 | ) |
| Purchase of investment in a subsidiary | | | (68,095 | ) | | | - | |
| Proceeds from the sale of marketable securities | | | 899,975 | | | | 2,192,168 | |
| Proceeds from the sale of other investments - at cost | | | 24,103 | | | | 28,197 | |
| Proceeds from the receipt of principal on note receivable | | | 519,011 | | | | 254,384 | |
| Issuance of notes receivable | | | - | | | | (39,012 | ) |
| Net cash used in investing activities | | $ | (1,280,289 | ) | | $ | (2,166,231 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Repayment of long term debt | | | (953,105 | ) | | | (187,710 | ) |
| Proceeds from the issuance of long term debt | | | 1,564,329 | | | | - | |
| Common stock redeemed, net | | | - | | | | (38,845 | ) |
| Dividends paid | | | (246,808 | ) | | | (246,808 | ) |
| Net cash provided by (used in) financing activities | | $ | 364,416 | | | $ | (473,363 | ) |
| | | | | | | | | |
| Net Increase in Cash and Cash Equivalents | | $ | 3,670,498 | | | $ | 142,378 | |
| | | | | | | | | |
| Cash and Cash Equivalents at Beginning of Period | | | 1,317,462 | | | | 1,175,084 | |
| | | | | | | | | |
| Cash and Cash Equivalents at End of Period | | $ | 4,987,960 | | | $ | 1,317,462 | |
| | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information | | | | | | | | |
| Cash paid during the period for: | | | | | | | | |
| Interest | | $ | 26,321 | | | $ | 77,354 | |
| Income taxes | | $ | 722,128 | | | $ | 1,388,117 | |
The accompanying notes are an integral part of these consolidated financial statements.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Business
The Breda Telephone Corporation (herein referred to as “the Company”) is a provider of telecommunications exchange and local access services, long distance services, cable television services and Internet services in a service area located primarily in western Iowa. The Company is also involved in retail sales of cellular equipment and service plans for cellular partnerships of which it owns interests, and sales of other telecommunications equipment.
Basis of Presentation
The accounting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America. Management uses estimates and assumptions in preparing its consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent revenues and expenses. Telephone operations reflect practices appropriate to the telephone industry. The accounting records of the telephone companies are maintained in accordance with the Uniform System of Accounts for Class A and B Telephone Companies prescribed by the Federal Communications Commission (FCC) as modified by the state regulatory authority.
The accounting records for the Company’s cable television operations are maintained in accordance with the Uniform System of Accounts for CATV Companies prescribed by the National Association of Regulatory Utility Commissioners.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries, Prairie Telephone Co., Inc., Tele-Services, Ltd., and Westside Independent Telephone Company. The financial statements of Prairie Telephone Co., Inc. include the accounts of Prairie and its 100% owned subsidiary, BTC, Inc. All material intercompany transactions have been eliminated in consolidation. The consolidated financial statements also include the accounts of the Company’s 66 2/3% owned subsidiary, Carroll County Wireless, L.L.C.
Cash Equivalents
All highly liquid investments with a maturity of three months or less at the time of purchase are considered cash equivalents.
Investments
Marketable debt and 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. Marketable debt and 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.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Investments, (Continued)
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 uses the specific identification method of computing realized gains and losses.
Nonmarketable equity investments, over which the Company has significant influence or a 20% ownership, are reflected on the equity method. Other nonmarketable equity investments are stated at cost.
Inventory
Inventory includes both merchandise held for resale and material and supplies. Merchandise held for resale is recorded at the lower of cost or market with cost determined by the average cost method. Materials and supplies, used in the construction of the Company’s facilities to provide telecommunications services, are recorded at average cost.
Goodwill
Goodwill is deemed to have an indefinite life and is stated at the lower of cost or fair value. The asset is subject to periodic impairment tests.
Property, Plant and Equipment
Telephone and cable television plant 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 and cable television plant in service. When plant is retired, its cost is removed from the asset account and charged against accumulated depreciation less any salvage realized. No gains or losses are recognized in connection with routine retirements of depreciable property.
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.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Long-Lived Assets
The Company would provide for impairment losses on long-lived assets when indicators of impairment are present and the estimated undiscounted cash flows 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 taxes arise from differences between the book and tax basis of plant assets, certain investments, receivables and goodwill. 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, Internet and cable television service revenues are recognized over the period a subscriber is connected to the network.
Network access and long distance service revenues are derived from charges for access to the Company’s local exchange network. The interstate portion of access revenues is based on an average schedule settlement formula administered by the National Exchange Carrier Association (NECA), which is regulated by the FCC. The intrastate portion of access revenues is billed based upon the Company’s tariff for access charges filed with the Iowa Utilities Board (IUB). 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. Long distance revenues are recognized at the time a call is placed based on the minutes of traffic processed at contracted rates.
Cellular sales and commission revenues are recognized at the time of customer activation.
The Company uses the reserve method to recognize uncollectible customer accounts.
Fair Value Measurements
Recent accounting guidance for financial assets and liabilities presented at fair value defines “fair value”, establishes a framework for measuring fair value, and expands disclosures related to fair value measurements. The guidance does not expand the use of fair value measurements in financial statements, but rather standardizes its definition and application in generally accepted accounting principles. The guidance provides for the use of three levels of input in determining fair value measurements. (Level 1 – quoted market prices; Level 2 – observable inputs of quoted market prices for similar or inactive items; and Level 3 – unobservable inputs.) The company deferred until January 1, 2009 the adoption of this guidance for all non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis. This includes goodwill, intangibles and non-financial long-lived assets that are measured at fair value in impairment testing.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Reclassifications
Certain reclassifications have been made to the 2008 consolidated financial statements to conform with the 2009 presentation. More specifically, with the purchase of an additional one-third interest in Carroll County Wireless, L.L.C. in January 2009, Breda owns a 66 2/3% interest in Carroll County Wireless, L.L.C as of December 31, 2009. Prior to 2009, this investment had been accounted for using the equity method. In order to conform with the 2009 presentation, Breda’s 33.33% interest in Carroll County Wireless at December 31, 2008 is also presented in the financial statements using the consolidation method.
The table below outlines the effect of these changes to the financial statements:
| | | Difference | |
| Total assets | | $ | 136,195 | |
| Total liabilities and equity | | | 136,195 | |
| | | | | |
| | | | | |
| | | Difference | |
| Operating revenues | | $ | 45,656 | |
| Operating expenses | | | 41,671 | |
| Operating income | | | 3,985 | |
| Income before income taxes | | | 2,668 | |
| NOTE 2. | MARKETABLE SECURITIES |
The amortized cost and fair value of held-to-maturity securities are:
| | | Unamortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Held-to-Maturity: | | | | | | | | | | | | |
| Municipal bonds | | $ | 3,581,827 | | | $ | 131,229 | | | $ | (5,206 | ) | | $ | 3,707,850 | |
| Government securities | | | 2,132,398 | | | | 31,147 | | | | (15,761 | ) | | | 2,147,784 | |
| | | $ | 5,714,225 | | | $ | 162,376 | | | $ | (20,967 | ) | | $ | 5,855,634 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Held-to-Maturity: | | | | | | | | | | | | | | | | |
| Municipal bonds | | $ | 3,641,774 | | | $ | 77,334 | | | $ | (37,007 | ) | | $ | 3,682,101 | |
| Government securities | | | 2,403,211 | | | | 13,958 | | | | (181,424 | ) | | | 2,235,745 | |
| | | $ | 6,044,985 | | | $ | 91,292 | | | $ | (218,431 | ) | | $ | 5,917,846 | |
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | | | | | | | |
| Amounts classified as: | | | | | | | | | | | | | | | | |
| Current | | $ | 490,724 | | | $ | 604,435 | | | | | | | | | |
| Noncurrent | | | 5,223,501 | | | | 5,440,550 | | | | | | | | | |
| Total | | $ | 5,714,225 | | | $ | 6,044,985 | | | | | | | | | |
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 2. | MARKETABLE SECURITIES (Continued) |
The amortized cost and fair value of marketable debt securities at December 31, 2009, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
| | | Unamortized Cost | | | Fair Value | |
| Due in one year or less | | $ | 490,724 | | | $ | 502,517 | |
| Due after one year through three years | | | 1,249,076 | | | | 1,299,387 | |
| Due after three years through five years | | | 1,116,373 | | | | 1,160,268 | |
| Due after five years | | | 2,858,052 | | | | 2,893,462 | |
| | | $ | 5,714,225 | | | $ | 5,855,634 | |
Management evaluates the need for recording an other than temporary impairment for these investments annually. Based on the nature and financial information available for each individual investment, the length of time and extent of its fair value being below cost (generally less than twelve months at December 31, 2009) and the Company’s ability and intent to hold the investments for a sufficient time to allow for the recovery of the cost of the investment, an other than temporary impairment has not been recognized as of December 31, 2009.
Investments measured at fair value are valued at level one in the fair value hierarchy.
Notes receivable consist of the following:
| | | December 31, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Spiralight Network, LLC - 8.5% | | | - | | | | 519,012 | |
| Less impairment | | | - | | | | (445,253 | ) |
| | | | - | | | | 73,759 | |
| Less current portion | | | - | | | | (73,759 | ) |
| | | $ | - | | | $ | - | |
The Company originated a promissory note to its unconsolidated affiliate, Spiralight Network, LLC, on September 5, 2007. The original amount of the note was $480,000 and accrued interest from September 5, 2007, at a rate of 8.5 percent per annum until payment was scheduled to be made in full on September 14, 2008. On September 14, 2008, the due date was extended one year, and $39,012 of accrued interest from September 5, 2007 through September 14, 2008, was added to the original note, bringing the note balance to $519,012. Interest was to continue to accrue at 8.5 percent per annum until the loan was paid in full on September 14, 2009. The note could be prepaid. The Company had a 35.29% ownership interest in Spiralight Network, LLC. On December 31, 2008, the Company recorded an allowance against the note of $445,253, to offset additional losses in 2008 exceeding the Company’s equity basis in Spiralight. The note was repaid in September 2009, and the Company reversed the allowance that was recorded in 2008.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
INVESTMENTS IN UNCONSOLIDATED AFFILIATES AT EQUITY
Investments in unconsolidated affiliates at equity include investments in partnerships, limited liability companies and joint ventures as follows:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Alpine Communications, L.C. | | $ | 3,389,504 | | | $ | 3,085,415 | |
| West Iowa Cellular, Inc. | | | 1,547,040 | | | | 1,632,882 | |
| RSA #1, Ltd. | | | 1,660,481 | | | | 1,561,117 | |
| RSA #7, Ltd. | | | 594,949 | | | | 555,730 | |
| RSA #9, Ltd. | | | 1,011,261 | | | | 973,207 | |
| Quad County Communications | | | 14,955 | | | | 37,021 | |
| Guthrie Group, L.L.C. | | | 25,529 | | | | 31,488 | |
| Bug Tussel Wireless, L.L.C. | | | - | | | | 649,001 | |
| Spiralight Network, L.L.C. | | | - | | | | - | |
| Hilbert Communications, L.L.C. | | | 293,328 | | | | - | |
| | | $ | 8,537,047 | | | $ | 8,525,861 | |
The Company has a 22.27% ownership interest in Alpine Communications, L.C. (Alpine) at December 31, 2009 and December 31, 2008. Alpine owns and operates several wireline telephone exchanges in northeastern Iowa, and also provides Internet and cable television services in and around its wireline service territory.
The following is a summary of condensed financial information pertaining to the company described above as of December 31, 2009 and 2008 and the twelve months then ended.
| | | Alpine Communications, L.C. | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Assets | | $ | 23,955,426 | | | $ | 24,706,029 | |
| Liabilities | | | 11,979,642 | | | | 13,928,446 | |
| Equity | | $ | 11,975,784 | | | $ | 10,777,583 | |
| | | | | | | | | |
| Revenues | | $ | 8,142,250 | | | $ | 7,981,757 | |
| Expenses | | | 6,594,048 | | | | 6,196,723 | |
| Net Income | | $ | 1,548,202 | | | $ | 1,785,034 | |
The Company’s percentage ownership interests in partnerships providing cellular telephone services within their respective service areas at December 31, 2009 and 2008 are as follows:
| West Iowa Cellular, Inc., | | | 25.0 | % |
| RSA #1, Ltd. | | | 10.3 | % |
| RSA #7, Ltd. | | | 7.1 | % |
| RSA #9, Ltd. | | | 16.7 | % |
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 4. | OTHER INVESTMENTS (Continued) |
The following is a summary of condensed financial information pertaining to the companies described above as of December 31, 2009 and 2008 and the twelve months then ended.
| 2009 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | West Iowa Cellular, Inc. | | | RSA #1 | | | RSA #7 | | | RSA #9 | |
| | | | | | | | | | | | | |
| Assets | | $ | 6,670,576 | | | $ | 17,039,404 | | | $ | 11,163,461 | | | $ | 8,339,709 | |
| Liabilities | | | 482,417 | | | | 1,860,827 | | | | 2,848,034 | | | | 2,272,264 | |
| Equity | | $ | 6,188,159 | | | $ | 15,178,577 | | | $ | 8,315,427 | | | $ | 6,067,445 | |
| | | | | | | | | | | | | | | | | |
| Revenues | | $ | 3,850,976 | | | $ | 10,800,091 | | | $ | 22,982,136 | | | $ | 15,284,205 | |
| Expenses | | | 1,594,348 | | | | 8,238,302 | | | | 16,454,488 | | | | 11,616,136 | |
| Net Income | | $ | 2,256,628 | | | $ | 2,561,789 | | | $ | 6,527,648 | | | $ | 3,668,069 | |
| 2008 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | West Iowa Cellular, Inc. | | | RSA #1 | | | RSA #7 | | | RSA #9 | |
| | | | | | | | | | | | | |
| Assets | | $ | 6,942,909 | | | $ | 15,635,382 | | | $ | 10,806,436 | | | $ | 7,822,542 | |
| Liabilities | | | 411,378 | | | | 1,413,854 | | | | 3,039,166 | | | | 1,983,413 | |
| Equity | | $ | 6,531,531 | | | $ | 14,221,528 | | | $ | 7,767,270 | | | $ | 5,839,129 | |
| | | | | | | | | | | | | | | | | |
| Revenues | | $ | 3,675,022 | | | $ | 10,374,220 | | | $ | 21,795,116 | | | $ | 13,048,641 | |
| Expenses | | | 1,511,719 | | | | 7,008,521 | | | | 16,138,900 | | | | 9,353,024 | |
| Net Income | | $ | 2,163,303 | | | $ | 3,365,699 | | | $ | 5,656,216 | | | $ | 3,695,617 | |
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 4. | OTHER INVESTMENTS (Continued) |
The Company has a 33.33% ownership interest in Quad County Communications (Quad County) at December 31, 2009 and 2008. This entity owns and operates a fiber optic network.
The following is a summary of condensed financial information pertaining to the company described above as of December 31, 2009 and 2008 and the twelve months then ended.
| | | Quad County Communications | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Assets | | $ | 49,189 | | | $ | 116,125 | |
| Liabilities | | | 4,324 | | | | 5,061 | |
| Equity | | $ | 44,865 | | | $ | 111,064 | |
| | | | | | | | | |
| Revenues | | $ | 24,214 | | | $ | 35,407 | |
| Expenses | | | 116,030 | | | | 67,330 | |
| Net Income | | $ | (91,816 | ) | | $ | (31,923 | ) |
The Company has a 33.33% interest in Guthrie Group, L.L.C. at December 31, 2009 and 2008. The Company’s percentage interest in Carroll County Wireless, L.L.C. was 66.67% at December 31, 2009 and 33.33% at December 31, 2008. As a result of the change in ownership interest, the Company’s investment in Carroll County Wireless, L.L.C. is now accounted for using the consolidation method, beginning January 1, 2009. Both companies have purchased the licenses to provide personal communication services (PCS); however, neither company has begun providing PCS services as of December 31, 2009.
As discussed in Note 1, with the purchase of an additional one-third interest in Carroll County Wireless, L.L.C. in January 2009, Breda owns a 66 2/3% interest in Carroll County Wireless, L.L.C as of December 31, 2009. Prior to 2009, this investment had been accounted for using the equity method. In order to conform with the 2009 presentation, Breda’s 33.33% interest in Carroll County Wireless at December 31, 2008 is also presented in the financial statements using the consolidation method.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 4. | OTHER INVESTMENTS (Continued) |
The following is a summary of condensed financial information pertaining to the companies described above as of December 31, 2009 and 2008 and the twelve months then ended.
| 2009 | | | | | | |
| | | | | | | |
| | | Carroll County Wireless, L.L.C. | | | Guthrie Group, L.L.C. | |
| | | | | | | |
| Assets | | $ | 197,099 | | | $ | 69,587 | |
| Liabilities | | | - | | | | - | |
| Equity | | $ | 197,099 | | | $ | 69,587 | |
| | | | | | | | | |
| Revenues | | $ | 33,615 | | | $ | 3,850 | |
| Expenses | | | 40,808 | | | | 44,217 | |
| Net Income | | $ | (7,193 | ) | | $ | (40,367 | ) |
| 2008 | | | | | | |
| | | | | | | |
| | | Carroll County Wireless, L.L.C. | | | Guthrie Group, L.L.C. | |
| | | | | | | |
| Assets | | $ | 204,291 | | | $ | 94,463 | |
| Liabilities | | | - | | | | - | |
| Equity | | $ | 204,291 | | | $ | 94,463 | |
| | | | | | | | | |
| Revenues | | $ | 45,671 | | | $ | 4,814 | |
| Expenses | | | 41,671 | | | | 37,017 | |
| Net Income | | $ | 4,000 | | | $ | (32,203 | ) |
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 4. | OTHER INVESTMENTS (Continued) |
Effective January 15, 2009, Prairie Telephone and all unit holders in Spiralight Network, L.L.C. and in Bug Tussel Wireless, L.L.C., in addition to all unit holders in various other telecommunications entities, executed an Exchange Agreement with Hilbert Communications, LLC., whereby Prairie Telephone and the other holders received units in Hilbert Communications, LLC in exchange for the units they owned in the various telecommunications entities. The following companies became wholly-owned subsidiaries of Hilbert Communications pursuant to this transaction: Bug Tussel Wireless, LLC; Spiralight Network, LLC; Intelegra, LLC; Dakota Wireless, LLC; Michigan Wireless, LLC; and JustKake Investments, LLC. The transfers of ownership of Dakota Wireless Group, LLC and JustKake Investments ,LLC are subject to FCC approval, and which such approval had not been received as of December 31, 2009. Therefore, Dakota Wireless Group, LLC and JustKake Investments, LLC have not exchanged their member company interests for units in Hilbert Communications and are not considered subsidiaries of Hilbert Communications as of December 31, 2009. Prior to the transaction with Hilbert Communications, Prairie Telephone owned approximately 9.94% of the units of Bug Tussel Wireless, LLC and approximately 35.29% of the interests in Spiralight Network, LLC. Prairie Telephone owned 6.32% of the outstanding units of Hilbert Communications, LLC as of December 31, 2009.
The Company had a 9.94% ownership interest in Bug Tussel Wireless LLC (Bug Tussel) at December 31, 2008, and January 15, 2009. Bug Tussel has constructed a wireless network in rural Wisconsin, which provides roaming services to cellular carriers offering service in the state.
The following is a summary of condensed financial information pertaining to the company described above as of January 15, 2009 and December 31, 2008 and the 15-day period for 2009 and the twelve months then ended for 2008.
| | | Bug Tussel Wireless, L.L.C. | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Assets | | $ | 17,355,477 | | | $ | 17,627,571 | |
| Liabilities | | | 12,296,277 | | | | 12,955,330 | |
| Equity | | $ | 5,059,200 | | | $ | 4,672,241 | |
| | | | | | | | | |
| Revenues | | $ | 316,766 | | | $ | 14,031,407 | |
| Expenses | | | 618,104 | | | | 14,256,407 | |
| Net Income | | $ | (301,338 | ) | | $ | (225,000 | ) |
The Company had a 35.29% ownership interest in Spiralight Networks LLC (Spiralight) at December 31, 2008, and January 15, 2009. Spiralight provides fiber optic transport services in Wisconsin, Illinois and Minnesota.
This investment is accounted for under the equity method with the Company recognizing its proportionate share of income and losses to the extent that the investment exceeds losses. Accordingly, the recorded investment amount in Spiralight was eliminated at June 30, 2008. At December 31, 2008, additional losses in excess of the basis totaling $484,264 were applied against the outstanding note receivable. This note receivable was repaid in September 2009, and the allowance recorded against the receivable was reversed, as noted earlier.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 4. | OTHER INVESTMENTS (Continued) |
The following is a summary of condensed financial information pertaining to the company described above as of January 15, 2009 and December 31, 2008 and the 15-day period for 2009 and the twelve months then ended for 2008.
| | | Spiralight Network, L.L.C. | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Assets | | $ | 2,787,947 | | | $ | 2,100,128 | |
| Liabilities | | | 4,704,486 | | | | 3,251,268 | |
| Equity | | $ | (1,916,539 | ) | | $ | (1,151,140 | ) |
| | | | | | | | | |
| Revenues | | $ | 136,469 | | | $ | 3,236,060 | |
| Expenses | | | 250,049 | | | | 5,886,060 | |
| Net Income | | $ | (113,580 | ) | | $ | (2,650,000 | ) |
The Company had a 6.32% ownership interest in Hilbert Communications, LLC (Hilbert) at December 31, 2009. Hilbert provides fiber optic transport services in Wisconsin, Illinois and Minnesota; provides roaming services to cellular carriers on their wireless network in Wisconsin; provides cellular services to retail customers in Wisconsin; provides wireless industry consulting services to carriers at any location; and provides all services as previously provided by the wholly-owned subsidiaries.
| | | Hilbert Communications, L.L.C. | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Assets | | $ | 32,474,471 | | | $ | | |
| Liabilities | | | 5,468,799 | | | | | |
| Equity | | $ | 27,005,672 | | | $ | - | |
| | | | | | | | | |
| Revenues | | $ | 15,973,227 | | | $ | | |
| Expenses | | | 20,832,084 | | | | | |
| Net Income | | $ | (4,858,857 | ) | | $ | - | |
Partnership investments above with less than a 20% ownership are carried at equity due to the level of influence the Company has with respect to each investment. Investments in limited liability companies are on the equity method if ownership is more than 3-5%.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 4. | OTHER INVESTMENTS (Continued) |
LONG-TERM INVESTMENTS AT COST
Long-term investments at cost include nonmarketable equity securities and certificates as follows:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Solix, Inc. | | $ | 300,000 | | | $ | 300,000 | |
| Rural Telephone Finance Cooperative - certificates | | | 164,823 | | | | 171,110 | |
| Iowa Network Services - stock | | | 78,706 | | | | 78,705 | |
| NRTC Patronage Capital - certificates | | | 20,339 | | | | 32,390 | |
| Other | | | 91,674 | | | | 91,385 | |
| | | $ | 655,542 | | | $ | 673,590 | |
As of December 31, 2009, the Company had $655,542 in cost method investments. Management determined it is not practical to estimate fair value, or it was unnecessary to evaluate these investments for impairment as no identified adverse event or changes in circumstances were observed. In accordance with generally accepted accounting principles the Company is not required to estimate fair value under these conditions.
Because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs, management has determined it is not practical to estimate the fair value of these cost and equity method investments. However, management believes that the carrying amount of these investments at December 31, 2009, included in other investments is not impaired.
Goodwill consists of the following:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Balance, beginning of year | | $ | 896,812 | | | $ | 896,812 | |
| Goodwill acquired | | | 21,903 | | | | - | |
| Goodwill impairment | | | - | | | | - | |
| Balance, end of year | | $ | 918,715 | | | $ | 896,812 | |
The Company annually assesses its recorded balances of goodwill and indefinite lived intangible assets. As a result, the Company determined no impairment needed to be recorded for the years ended December 31, 2009 and 2008. The goodwill acquired in 2009 came from the Company’s purchase of an additional one-third interest in Carroll County Wireless, L.L.C.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 6. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment includes the following:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Telephone plant in service: | | | | | | |
| Land | | $ | 42,817 | | | $ | 43,408 | |
| Buildings | | | 1,601,653 | | | | 1,488,045 | |
| Other general support assets | | | 2,310,370 | | | | 2,433,732 | |
| Central office assets | | | 5,356,121 | | | | 5,566,624 | |
| Cable and wire facilities | | | 6,254,357 | | | | 6,025,376 | |
| Other plant and equipment | | | 1,159,874 | | | | 1,148,988 | |
| | | | 16,725,192 | | | | 16,706,173 | |
| | | | | | | | | |
| Cable television plant in service: | | | | | | | | |
| Land | | $ | 1,000 | | | $ | 8,846 | |
| Buildings | | | 43,313 | | | | 132,673 | |
| Other plant and equipment | | | 172,522 | | | | 182,497 | |
| Towers, antennas and head end equipment | | | 321,877 | | | | 1,613,382 | |
| Cable and wire facilities | | | 330,138 | | | | 1,573,544 | |
| Franchises | | | 5,992 | | | | 30,092 | |
| | | | 874,842 | | | | 3,541,034 | |
| | | | | | | | | |
| Total property, plant and equipment | | | 17,600,034 | | | | 20,247,207 | |
| Less accumulated depreciation | | | 11,571,548 | | | | 13,744,653 | |
| | | | 6,028,486 | | | | 6,502,554 | |
| Plant under construction | | | 2,073,886 | | | | 355,299 | |
| | | $ | 8,102,372 | | | $ | 6,857,853 | |
Telephone cable and wire facilities of approximately $852,000 were fully or nearly fully depreciated in 2009. Depreciation on depreciable property resulted in composite rates of 5.5% and 5.2% for 2009 and 2008, respectively.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
Income taxes reflected in the Consolidated Statements of Income consist of the following:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Federal income taxes: | | | | | | |
| Current tax expense | | $ | (161,525 | ) | | $ | 509,074 | |
| Deferred tax expense | | | 823,893 | | | | 55,623 | |
| State income taxes: | | | | | | | | |
| Current tax expense | | | (20,847 | ) | | | 292,005 | |
| Deferred tax expense | | | 356,814 | | | | (26,403 | ) |
| Total income tax expense | | $ | 998,335 | | | $ | 830,299 | |
Deferred federal and state tax liabilities and assets reflected in the Consolidated Balance Sheets are summarized as follows:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Deferred tax liabilities | | | | | | |
| Federal | | $ | 1,860,341 | | | $ | 1,645,669 | |
| State | | | 637,491 | | | | 538,397 | |
| Total deferred tax liabilities | | | 2,497,832 | | | | 2,184,066 | |
| | | | | | | | | |
| Deferred tax assets | | | | | | | | |
| Federal | | | (62,143 | ) | | | (671,364 | ) |
| State | | | (26,450 | ) | | | (284,169 | ) |
| Total deferred tax assets | | | (88,593 | ) | | | (955,533 | ) |
| | | | | | | | | |
| Net deferred tax liabilities | | $ | 2,409,239 | | | $ | 1,228,533 | |
| | | | | | | | | |
| Current portion | | $ | (58,862 | ) | | $ | (718,595 | ) |
| Long-term portion | | | 2,468,101 | | | | 1,947,128 | |
| Net deferred tax liability | | $ | 2,409,239 | | | $ | 1,228,533 | |
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| 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:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Statutory federal income tax rate | | | 34.0 | % | | | 34.0 | % |
| State income taxes, net of federal benefit | | | 10.1 | % | | | 10.1 | % |
| Amortization of bond premiums | | | 4.9 | % | | | 1.0 | % |
| Dividends received deduction | | | -8.0 | % | | | -8.0 | % |
| Tax exempt interest | | | -9.1 | % | | | -9.1 | % |
| Other | | | -3.4 | % | | | 2.1 | % |
| Effective income tax rate | | | 28.5 | % | | | 30.1 | % |
The Company files consolidated tax returns including their subsidiaries, Prairie Telephone Co., Inc., Westside Independent Telephone Company, and Tele-Services, Ltd. BTC, Inc. is a subsidiary of Prairie Telephone Co., Inc.
Long-term debt consists of:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Rural Telephone Finance Cooperative (RTFC) | | | | | | |
| 7.00% (Variable Rate) | | | - | | | | 951,495 | |
| Rural Utilities Service (RUS) | | | 1,562,719 | | | | - | |
| | | | 1,562,719 | | | | 951,495 | |
| | | $ | | | | $ | | |
| Less current portion | | | 14,144 | | | | 200,507 | |
| | | $ | 1,548,575 | | | $ | 750,988 | |
The annual requirements for principal payments on long-term debt for the next five years are as follows:
| 2010 | | $ | 14,144 | |
| 2011 | | | 59,145 | |
| 2012 | | | 60,294 | |
| 2013 | | | 62,958 | |
| 2014 | | | 65,562 | |
| 2015 and After | | | 1,300,616 | |
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 8. | LONG-TERM DEBT (Continued) |
Prepayment of all remaining principal and interest on the RTFC loan was made on April 30, 2009, in addition to a prepayment fee of $4,513.01.
The Company has two lines of credit with the RTFC. The first line of credit is for $1,500,000 and is available until November 15, 2010. The second line of credit with the RTFC is for $500,000 and is available until November 30, 2010. The interest rate at December 31, 2009 for both lines of credit is 4.75%. No funds were advanced under either line of credit at December 31, 2009.
As of December 31, 2009, BTC, Inc. had outstanding $1,562,719 of long-term debt with the Rural Utilities Service. Each advance on this pre-approved $10,000,000 rural broadband access loan carries its own interest rate for the term of the individual loan advance. BTC, Inc. received its first loan advance in the amount of $1,000,000 on October 2, 2009, and this loan advance carries a fixed interest rate of 3.918%. BTC, Inc.’s second loan advance in the amount of $564,329 was received on December 11, 2009, and carries a fixed interest rate of 4.315%. The RUS advances are to be paid in monthly installments covering principal and interest beginning twelve months from the date of receipt of the first loan advance. The principal and interest will be paid in full on all advances at April 28, 2029. During the first twelve months after the receipt of the first loan advance, monthly payments of interest only are required. Principal of $1,610 was paid on the first RUS loan advance as of December 31, 2009.
The security and loan agreements underlying the Rural Utilities Service notes contain certain restrictions on distributions to stockholders, investment in or loans to others, payment of management fees or issuance of any new or preferred stock. BTC, Inc. is restricted from making any distributions, except as might be specifically authorized in writing in advance by the Rural Utilities Service note holders. The borrower may make a distribution after 75% of the loan funds have been expended as approved if after such distribution, the Borrower’s Net Worth is equal to at least twenty percent (20%) of its Total Assets and the amount of all such distributions during the calendar year does not exceed twenty-five percent (25%) of the borrower’s net income or net margins for the prior calendar year. BTC, Inc. is required to achieve a times interest earned ratio of not less than 2.0 beginning December 31, 2010.
| NOTE 9. | OPERATING SEGMENTS INFORMATION |
The Company organizes its business into three reportable segments: local exchange carrier (LEC) services, broadcast services and Internet service provider (ISP) services. The LEC services segment provides telephone, data services and other services to customers in local exchanges. The broadcast services segment provides cable television services to customers in Iowa and Nebraska. The ISP services segment provides Internet access to customers within the local exchanges and the surrounding areas.
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.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 9. | OPERATING SEGMENTS INFORMATION (Continued) |
Each segment’s accounting policies is the same as described in the summary of significant accounting policies.
| 2009 | | Local Exchange Carrier | | | Broadcast | | | Internet Service Provider | | | Total | |
| | | | | | | | | | | | | |
| Revenues and sales | | $ | 7,917,048 | | | $ | 382,498 | | | $ | 770,220 | | | $ | 9,069,766 | |
| Interest income | | | 348,770 | | | | 10,348 | | | | 32,441 | | | | 391,559 | |
| Interest expense | | | (26,317 | ) | | | - | | | | (4 | ) | | | (26,321 | ) |
| Depreciation and amortization | | | 890,583 | | | | 24,561 | | | | 125,310 | | | | 1,040,454 | |
| Income tax expense (benefit) | | | 874,067 | | | | (144,616 | ) | | | 268,884 | | | | 998,335 | |
| Segment profit (loss) | | | 2,976,009 | | | | (178,202 | ) | | | (291,875 | ) | | | 2,505,932 | |
| Segment assets | | | 27,682,775 | | | | 458,343 | | | | 4,725,387 | | | | 32,866,505 | |
| Expenditures for segment assets | | | 1,355,088 | | | | 6,341 | | | | 753,427 | | | | 2,114,856 | |
| | | | | | | | | | | | | | | | | |
| 2008 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Revenues and sales | | $ | 8,322,715 | | | $ | 651,163 | | | $ | 713,359 | | | $ | 9,687,237 | |
| Interest income | | | 407,154 | | | | 16,962 | | | | 18,873 | | | | 442,989 | |
| Interest expense | | | (77,354 | ) | | | - | | | | - | | | | (77,354 | ) |
| Depreciation and amortization | | | 802,801 | | | | 35,478 | | | | 141,199 | | | | 979,478 | |
| Income tax expense (benefit) | | | 866,403 | | | | (174,132 | ) | | | 138,028 | | | | 830,299 | |
| Segment profit (loss) | | | 2,453,972 | | | | (193,502 | ) | | | (331,915 | ) | | | 1,928,555 | |
| Segment assets | | | 24,845,441 | | | | 536,311 | | | | 3,846,155 | | | | 29,227,907 | |
| Expenditures for segment assets | | | 3,021,452 | | | | (75,806 | ) | | | (181,897 | ) | | | 2,763,749 | |
| NOTE 10. | NET INCOME PER COMMON SHARE |
Net income per common share for 2009 and 2008 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, 2009 and 2008 were 30,851 and 30,859, respectively.
| NOTE 11. | STOCK VALUE ADJUSTMENT |
During April 2009, the board of directors authorized a $38 increase in the stated value of each share of common stock from $509 to $547. There were 30,851 shares outstanding at the time of the value adjustment, which reduced retained earnings by $1,172,338.
During March 2008, the board of directors authorized a $52 increase in the stated value of each share of common stock from $457 to $509. There were 30,851 shares outstanding at the time of the value adjustment, which reduced retained earnings by $1,604,252.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 12. | STOCK RESTRICTIONS |
The Company’s Articles of Restatement became effective on March 29, 2007. One of the changes originating with the Articles of Restatement was the addition of a second class of common stock. The Company is authorized to issue 10,000,000 shares, comprised of the following two classes: (i) 5,000,000 shares of Class A Common Stock, no par value; and (ii) 5,000,000 shares of Class B Common Stock, no par value.
The Class A Common Stock is comprised of the following three series:
| | (i) | Series 1 – these shares represent Class A shares issued after March 29, 2007. These shares have voting rights of one vote per shareholder, regardless of the number of Class A shares held. |
| | (ii) | Series 2 – these shares were issued and outstanding immediately prior to the March 29, 2007 effective date and with respect to which the holders of such shares had one vote per shareholder, regardless of the number of Class A shares held. The shares had previously been shares of the former Class A stock of the Corporation that were issued and outstanding on February 28, 1995. |
| | (iii) | Series 3 – these shares were issued and outstanding immediately prior to the March 29, 2007 effective date and with respect to which the holders of such shares had one vote for each such share. The shares had previously been shares of the former Class A stock of the Corporation that were issued and outstanding on February 28, 1995. These shares have voting rights of one vote per share. |
The Class B Common Stock represent non-voting shares issued after March 29, 2007.
Restrictions on the stock include the following:
| | · | Individuals purchasing Class A, Series 1 stock must be living within the Breda and Lidderdale service areas of the Company and subscribe to its telephone services. Individuals or entities can purchase Class B, non-voting stock without service area or service participation restrictions. |
| | · | Shareholders are individually limited to ownership of not more than one percent of the joint outstanding Class A and Class B stock unless ownership was prior to the Articles of Restatement. There may be two stockholders per household and their joint ownership may not exceed two percent of the joint outstanding Class A and Class B stock. |
| | · | Shareholders shall not sell any shares of stock owned unless the Company has been given first right of refusal. |
| | · | Stock transfers require 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 BENEFITS |
The Company has a defined benefit pension plan covering most employees. The multi employer retirement program is with the National Telephone Cooperative Association (NTCA) and has been approved by the Internal Revenue Service. Pension costs expensed and capitalized for 2009 and 2008 were $133,248 and $128,624, respectively. The Company makes annual contributions to the plan equal to amounts accrued for pension expense.
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
| NOTE 14. | ASSET RETIREMENT OBLIGATION |
Generally accepted accounting principles require entities to record the fair value of a liability for legal obligations associated with an asset retirement in the period in which the obligations are incurred. When the liability is initially recorded, the entity capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset.
The Company has determined it does not have a material legal obligation to remove long-term assets and accordingly, there have been no liabilities recorded for the years ended December 31, 2009 and 2008.
| NOTE 15. | RELATED PARTY TRANSACTIONS |
The Company receives commission revenue from RSA #9, Ltd. Partnership (RSA #9) based on cellular service activation and retention. The Company has a 16.7% ownership interest in RSA #9. Commissions received by the Company for the years ended December 31, 2009 and 2008 were approximately $1,269,259 and $1,281,000, respectively. At December 31, 2009 and 2008, $136,131 and $172,796 were due from RSA #9 for commissions.
| NOTE 16. | CONCENTRATIONS OF CREDIT RISK |
The Company grants credit to local service customers, all of whom are located in the service area, broadcast customers, Internet customers and telecommunications intrastate and interstate long distance carriers.
The Company received 52% of its 2009 revenues from access revenues and assistance provided by the Federal Universal Service Fund. As a result of the Telecommunications Act of 1996, the manner in which access revenues and Universal Service Funds are determined is currently being modified by regulatory bodies.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, along with both temporary and long-term 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.
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
The Company routes conference bridging minutes of use through its switch in Carroll, Iowa. The Company generates revenues from this service based on tariffed rates per minutes of use, which is charged to interexchange carriers. In April 2007 certain interexchange carriers began disputing the charges and the volume of minutes on which the charges were billed, and stopped payment until the dispute could be settled. The Company has reached agreements with two of its major carriers and the Company is currently corresponding with the remaining interexchange carriers regarding the payment of the unpaid access charges. The Company’s estimated unpaid access charges resulting from conference bridge services as of December 31, 2009 is $1,346,320. The Company has accrued additional accounts payable for related costs associated with the conference bridge minutes of $1,295,378 as of December 31, 2009.
| NOTE 17. | NONCASH INVESTING ACTIVITIES |
Noncash investing activities included $321,594 during the year ended December 31, 2009 relating to plant and equipment additions placed in service during 2009, which are reflected in accounts payable at year-end.
| Item 9A(T). | Controls and Procedures.Evaluation of Disclosure Controls and Procedures |
The principal executive officer and the principal financial officer of Breda have evaluated the effectiveness of Breda's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2009, and they have concluded that the disclosure controls and procedures are not effective.
Management's Annual Report on Internal Control Over Financial Reporting
The management of Breda is responsible for establishing and maintaining adequate internal control over financial reporting for Breda. Breda's internal control system was designed to, in general, provide reasonable assurance to Breda's management and board of directors regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Breda's management assessed the effectiveness of Breda's internal control over financial reporting as of December 31, 2009. Based on that assessment, Breda's management has determined that as of December 31, 2009, Breda's internal control over financial reporting was not effective.
This annual report does not include an attestation report of Breda's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by Breda's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit Breda to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting
No change in Breda's system of internal control over financial reporting occurred during the period of October 1, 2009 through December 31, 2009 that has materially affected, or is reasonably likely to materially affect, Breda's internal control over financial reporting.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | BREDA TELEPHONE CORP. |
| | | |
| | | |
Date: September 10, 2010 | By: | /s/ Charles Deisbeck |
| | | Charles Deisbeck, Chief Executive Officer |
| | | |
| | By: | /s/ Jane Morlok |
| | | Jane Morlok, Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ Daniel Nieland | | By: | /s/ Neil Kanne |
| | Daniel Nieland, Vice President and Director | | | Neil Kanne, Secretary and Director |
| | Date: September 10, 2010 | | | Date: September 10, 2010 |
| | | | | |
| By: | /s/ Rick Anthofer | | By: | /s/ Daniel McDermott |
| | Rick Anthofer, Treasurer and Director | | | Daniel McDermott, Director |
| | Date: September 10, 2010 | | | Date: September 10, 2010 |
| | | | | |
| By: | /s/ Clifford Neumayer | | By: | /s/ Dean Schettler |
| | Clifford Neumayer, Director | | | Dean Schettler, President andDirector |
| | Date: September 10, 2010 | | | Date: September 10, 2010 |
| | | | | |
| By: | /s/ David Grabner | | By: | /s/ Jane Morlok |
| | David Grabner, Director | | | Jane Morlok, Chief Financial Officer |
| | Date: September 10, 2010 | | | Date: September 10, 2010 |
| | | | | |
| By: | /s/ Charles Deisbeck | | | |
| | Charles Deisbeck, Chief Executive Officer | | | |
| | Date: September 10, 2010 | | | |
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