SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-12
[_] Confidential, For Use of the
Commission Only (as Permitted
by Rule 14a.6(e)(2))
BREDA TELEPHONE CORP.
(Name of Registrant as Specified In Its Charter)
---------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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April 28, 2000
Dear Shareholders:
You have received a thick package of information along with your ballot
this year!
The enclosed information is required to be sent along with your ballot
because Breda Telephone Corp. is now a reporting company under the Securities
Exchange Act of 1934. In addition to this letter, you should find the following
documents:
1. Notice of Annual Meeting
2. Proxy Statement
3. Ballot
4. Annual Report
5. Ballot envelopes
While the ballot process has not changed, the ballot itself looks
different. One new item on the ballot is the Ratification of Appointment of
Auditors. Breda's Board of Directors has hired Kiesling Associates, LLP to
perform the independent audit of Breda Telephone Corp. in 2000. Your vote in
that section means you either agree, disagree or have no opinion on the Board's
action regarding Kiesling Associates, LLP. The first part of the ballot
regarding voting for directors will be familiar. There are four candidates for
three positions so please complete your ballots and return them as instructed on
the ballot.
You are cordially invited to the annual meeting of Breda Telephone Corp. at
the American Legion Hall located at 208 Main, Breda, Iowa, on Wednesday, May 17,
2000 at 7:30 p.m. Lunch will be served.
We encourage your attendance at the annual meeting. Some of the information
mailed to you will be covered at the annual meeting so please bring your package
of information along to the meeting.
We look forward to seeing you at the annual meeting as we share information
on another great year at Breda Telephone Corp.
Sincerely,
/s/ Dean Schettler
Dean Schettler
President - Board of Directors
BREDA TELEPHONE CORP.
Highway 217 East, P.O. Box 190
Breda, Iowa 51436
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 17, 2000
Notice is hereby given that the Annual Meeting of Shareholders of BREDA
TELEPHONE CORP. will be held at the American Legion Hall located at 208 Main,
Breda, Iowa, on Wednesday, May 17, 2000 at 7:30 p.m., Breda local time, for the
following purposes.
1. To elect three directors.
2. To ratify the appointment of auditors for the year 2000.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Only shareholders of record at the close of business on April 10, 2000, will be
entitled to notice of and to vote at the meeting or any adjournment thereof.
Shareholders are cordially invited to attend the meeting in person. WHETHER OR
NOT YOU WILL BE ABLE TO ATTEND THE MEETING IN PERSON, PLEASE DATE YOUR BALLOT,
INDICATE YOUR CHOICE ON THE MATTERS TO BE VOTED UPON, AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPES. IF YOU DO ATTEND THE MEETING AND DESIRE TO WITHDRAW YOUR
BALLOT, YOU MAY DO SO.
THE BALLOT IS NOT SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF BREDA
TELEPHONE CORP.
The accompanying Proxy Statement describes in more detail the matters to be
acted upon at the meeting.
A copy of the Annual Report to Shareholders for 1999, including audited
financial statements, is also enclosed.
By Order of the Board of Directors
Larry Daniel
Secretary
Breda, Iowa
April 28, 2000
BREDA TELEPHONE CORP.
PROXY STATEMENT
Annual Meeting of Shareholders, May 17, 2000
GENERAL INFORMATION
This Proxy Statement and the enclosed ballot are being provided by BREDA
TELEPHONE CORP. (the "Company"), Highway 217 East, P.O. Box 190, Breda, Iowa,
51436, for use at the Annual Meeting of Shareholders to be held May 17, 2000, at
7:30 p.m. at the American Legion Hall located at 208 Main, Breda, Iowa, and any
adjournment thereof (the "Meeting"). When such ballot is properly executed and
returned, the shares it represents will be voted at the Meeting in accordance
with the instructions contained therein. This Proxy Statement and the
accompanying ballot will be first mailed to shareholders on or about April 28,
2000. The cost of the distribution and handling of the ballots will be borne by
the Company. The ballot is not solicited on behalf of the Board of Directors of
the Company.
VOTING SECURITIES
Only shareholders of record as of the close of business on April 10, 2000 will
be entitled to notice of and to vote at the Meeting.
The Company has a single class of common stock, without par value, ("Common
Stock"), of which 37,682 shares were outstanding on April 10, 2000. Those shares
were held by approximately 630 different shareholders. Each shareholder is
entitled to only one vote on each matter presented to shareholders, regardless
of the number of shares of Common Stock held by the shareholder, with one
exception regarding shareholders who previously held shares of the Company's
Class A stock. Those shareholders have one vote for each share of former Class A
stock previously held by them on February 28, 1995, until one of the following
occurs: the shareholder no longer receives service from the Company; the
shareholder no longer resides in the Breda, Iowa or Lidderdale, Iowa telephone
exchange area served by the Company; the shareholder dies; or the shareholder
transfers the shareholder's shares to another person. As of April 10, 2000,
there were 21 shareholders with multiple voting rights arising from their prior
ownership of Class A stock, and they have one vote for each share of the former
Class A stock previously held by them.
Any number of shareholders of the Company present in person or represented by
proxy at the Meeting will constitute a quorum for the transaction of business at
the Meeting, unless the representation of a different number is required by law,
in which case the representation of the number so required shall constitute a
quorum. Votes withheld for any director, abstentions and broker-dealer non-votes
represented at the Meeting will be counted for quorum purposes, but will not be
counted as votes cast with respect to any matter to come before the Meeting and
will not affect the outcome of any matter. If a quorum exists, directors will be
elected by a plurality of the votes cast. Shareholder action on other matters,
including appointment of the auditors, will be approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless a greater
number is required by law or the Company's Amended and Restated Articles of
Incorporation.
Under the Company's Amended and Restated Bylaws, voting by shareholders on any
question or in any election is required to be taken by written ballot. The
Amended and Restated Bylaws also require that the written ballots be mailed by
regular mail to all shareholders. The written ballots are to be accompanied by a
self-addressed, stamped envelope. The envelopes are to be addressed to a post
office box at the Carroll, Iowa post office. Any written ballots dropped off at
the Company's offices prior to the corresponding shareholders meeting are
delivered to that post office box, where practicable. The Company's Amended and
Restated Bylaws also provide for a ballot committee of six individuals,
comprised of two shareholders appointed by the Board of Directors on an annual
basis, an accountant from the accounting firm doing the annual audit of the
Company, legal counsel as appointed by the Board of Directors, and two other
shareholders. The latter two shareholders appoint their own replacements for the
next year. The ballot committee has sole control over the post office box and
ballots, and is responsible for removing the ballots from the post office box
and tallying the votes represented by the ballots. The results of the vote by
the ballots have historically been determined prior to the meeting of the
shareholders, and announced at the meeting. Given this practice, the Company
does not call for votes of the shareholders at any meeting, and no vote of the
shareholders will accordingly be taken at the Meeting. Shareholders are
therefore strongly
encouraged to timely mail their written ballots. Shareholders will, however, be
permitted to present their ballots at the Meeting, and if you attend the Meeting
and desire to withdraw your ballot, you may do so.
Given the requirement in the Company's Amended and Restated Bylaws that all
voting by the shareholders be by written ballot and that all written ballots be
mailed by regular mail to all shareholders prior to the meeting, no other
shareholder action will be able to be taken at the Meeting, other than the
election of directors and the ratification of the appointment of the Company's
auditors for 2000, as discussed in this Proxy Statement.
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of seven members, divided into
three classes based upon the length of their term. Each member of the Board of
Directors is elected to a three year term and until his or her successor is
elected, and the terms of office of the directors are staggered so that three of
the directors' terms expire in one year, two expire the next year, and two
expire the following year. As discussed below, the terms of three directors will
expire at the Meeting.
Each director must also be a shareholder of the Company, and a director will
automatically cease to be a director if he or she sells or transfers all of his
or her shares of Common Stock. Each director must also be at least 18 years old.
Also, if a person has served for three consecutive terms as a director, that
person must be off the Board for at least one year before the person can again
be elected as a director.
The Company has established a nomination process for determining the nominees
for directors of the Company. Under that process, a person meeting the
qualifications set forth in the preceding paragraph can be nominated to serve as
a director of the Company if at least three shareholders nominate that person
and provide a nominating petition to the Company. The Company notified its
shareholders by letter in February, 2000, that any one wishing to nominate
themselves to serve as a director, or another shareholder to serve as a
director, needed to submit a nominating petition to the Company by no later than
March 31, 2000. Four individuals were nominated to serve as a director through
this process. Those individuals are identified below.
Although the Board anticipates that all nominees will be able to serve, in the
event any one or more nominees should be unable to do so, any vote for a nominee
who, prior to election, is determined to be unable to serve, will not be counted
and will not be cast for any other nominee.
Directors Continuing in Office
The following information is furnished for each person who will continue as a
director following the Meeting.
Scott Bailey has been a director of the Company since April, 1998. His current
term as a director of the Company will end in 2001. He has also served as a
director of each of the Company's
2
subsidiaries since April, 1998. He has been the Company's treasurer, and the
treasurer of the Company's subsidiaries since April, 1999. Mr. Bailey was the
finance manager of marketing and sales for Pella Corporation, Pella, Iowa, from
August, 1993, to September, 1995. He has been a controller for Pella Corporation
since September, 1995 to the present. Pella Corporation is a window and door
manufacturer. Mr. Bailey is 37 years old.
Larry Daniel has been the Secretary and a director of the Company since April,
1995. His current term as a director of the Company will end in 2001. He has
also held each of those positions with each of the Company's subsidiaries since
April, 1995. Mr. Daniel is a self employed farmer, and has been for at least the
last five years. Mr. Daniel is 57 years old.
Dave Grabner has been a director of the Company since April, 1999. His current
term as a director of the Company will end in 2002. He has also served as a
director of each of the Company's subsidiaries since April, 1999. Mr. Grabner is
currently self employed as an electrician, and has been for at least the last
five years. He was also previously self-employed as a farmer. Mr. Grabner is 51
years old.
Clifford Neumayer has been the Vice-President and a director of the Company
since April, 1996. His current term as a director of the Company will end in
2002. He has also held each of those positions with each of the Company's
subsidiaries since April, 1996. Mr. Neumayer has been self employed as a farmer
since 1970. Mr. Neumayer is 51 years old.
Directors Who Will Not Continue in Office
Dave Hundling is also currently a director of the Company. Mr. Hundling's term
as a director will expire at the Meeting, but Mr. Hundling has determined to not
pursue re-election as a director. He has been a director of the Company since
April, 1997. He has also served as a director of each of the Company's
subsidiaries since April, 1997. Mr. Hundling is also a self employed farmer, and
has been for at least the last five years. Mr. Hundling is 52 years old.
Nominees for Director
As indicated above, the terms of three directors will expire at the Meeting.
Three directors accordingly need to be elected. The directors who are elected
will serve until the annual meeting of the Company to be held in 2003. There are
four nominees for those three director positions, and the following information
is provided regarding those nominees.
Rod Doorenbos is one of the nominees for election as a director. He was
previously a director and the treasurer of the Company. He held those positions
from the annual meeting of the shareholders of the Company which was held in
1996 until the annual meeting of the shareholders which was held in 1999. He was
also a director and the treasurer of the Company's subsidiaries during that same
time period. Mr. Doorenbos is currently the sole shareholder and chief executive
officer of Agri- Enterprises, Inc., and has been since the organization of
Agri-Enterprises, Inc. in March, 1976. Until June, 1998, Agri-Enterprises, Inc.
was engaged in various agricultural activities, including grain marketing and
storage. Mr. Doorenbos was responsible for all aspects of Agri-Enterprises,
Inc.'s
3
activities during that time period. Since June, 1998, Mr. Doorenbos has been a
consultant and business appraiser for Agri-Enterprises, Inc. He is also
currently a member of the Institute of Business Appraisers and is working toward
a Certified Business Appraiser designation from that organization. Mr. Doorenbos
is 55 years old.
Roger Nieland is also a nominee for election as a director. Mr. Nieland is
currently self-employed as a farmer, and has been for at least the last five
years. He has been a trustee for Wheatland Township, in Carroll County, Iowa,
for approximately ten years. The trustees' duties include managing the funds of
the township, enforcing its rules, and overseeing certain disputes within the
township. Mr. Nieland's term as a trustee will expire in June, 2000. He has also
been a director of Iowa Ethanol Co-Op for the last three years. Iowa Ethanol
Co-Op has organized the start-up of a corn milling plant in Glidden, Iowa. The
corn milling plant operates under the name Iowa Corn Processors. Mr. Nieland is
64 years old.
Dean Schettler is another nominee for election as a director. He has been a
director of the Company since April, 1997, and the president of the Company
since April, 1998. He has also been a director of each of the Company's
subsidiaries since April, 1997, and the president of the subsidiaries since
April, 1998. Mr. Schettler has been employed by Pella Corporation, Pella, Iowa,
since August, 1986. He was a moulder technician until August, 1997. Since that
time he has been a production coordinator. Pella Corporation is a window and
door manufacturer. Mr. Schettler is 47 years old.
John Wenck is also a nominee for election as a director. He has been a director
of the Company since April, 1997. He has also served as a director of each of
the Company's subsidiaries since April, 1997. Mr. Wenck is currently self
employed as a farmer. He was also previously employed by the United Parcel
Service as a delivery driver. Mr. Wenck is 61 years old.
Directors of the Company's Subsidiaries
The directors of the Company have historically also served as the directors for
the Company's five direct and indirect wholly owned subsidiaries. The nominees
who are elected to serve as a director of the Company will accordingly also be
elected by the Company or the applicable subsidiary of the Company to serve as a
director of each of those five subsidiaries.
Committees of the Board of Directors
The Board of Directors does not have any standing Audit, Nominating or
Compensation Committee, or any other committees performing similar functions.
Meetings of the Board of Directors
The Board of Directors held 22 meetings during 1999. All directors attended at
least 75% of those meetings.
Compensation of the Board of Directors
All of the Company's directors receive $100 for each regular, special and
conference call meeting of the Board of Directors. The vice-president, secretary
and treasurer of the Company also currently
4
receive an additional $25 for each regular, special and conference call meeting
of the Board, and the president of the Company receives an additional $50 per
meeting. Those payments are made to those individuals in their capacities as
directors, and are based upon their additional duties at the meetings of the
Board.
All of the Company's directors also currently receive $125 per day for all day
meetings of the Board.
All of the Company's directors also currently receive $125 per day for each
outside meeting of the Board lasting over 3 hours. The directors receive
one-half of the regular meeting rate for each outside meeting which lasts less
than three hours. Outside meetings are not formal meetings of the Board of
Directors. Examples of outside meetings include conventions and city council
meetings.
Directors are also reimbursed for mileage and any expenses paid by them on
account of attendance at any meeting of the Board or other meetings attended by
them in their capacity as a director of the Company.
Directors may also receive internet access from the Company or its subsidiaries
at no cost. The current estimated yearly value of internet access is $300.
Executive Officers of the Company
The executive officers of the Company are elected annually by the Board of
Directors at its annual meeting, and hold office until the next annual meeting
of the Board of Directors and until their successors are chosen. Any officer may
be removed by the Board of Directors at any time, with or without cause. Each
officer must also be a director and a shareholder of the Company. The officers
of the Company as of the time of the mailing of this proxy statement are
identified in the above discussion of the directors of the Company. The officers
of the Company have historically also served as the officers for each of the
Company's five direct and indirect wholly owned subsidiaries.
Significant Employees
The Company also has two employees who the Company believes make a significant
contribution to its business. Those employees are Robert J. Boeckman and Jane A.
Morlok.
Mr. Boeckman has been the Manager of the Company since January, 1995. He was
also given the title of chief operating officer in March, 1998. Mr. Boeckman is
38 years old.
Ms. Morlok has been Co-Manager of the Company since March 30, 1998. She was the
Assistant Administrator/CFO of Manning Regional Healthcare Center in Manning,
Iowa from July, 1987 until March, 1998. Ms. Morlok is 46 years old.
The Company has an employment agreement with Mr. Boeckman. Mr. Boeckman is
responsible for the day-to-day operations of the Company under the employment
agreement. The term of Mr. Boeckman's employment agreement will end on December
31, 2001. The employment agreement will automatically extend for successive one
year periods, however, unless the Company or Mr.
5
Boeckman provides the other with written notice prior to April 1 in any year of
their desire to terminate the employment agreement at the end of that year. The
Company may also terminate the employment agreement for any reason, including a
breach or default by Mr. Boeckman, by giving Mr. Boeckman at least 90 days
notice of his last day of employment with the Company.
Mr. Boeckman's yearly salary under the employment agreement is increased
effective January 1 of each year by 3 1/2 percent of the prior year's salary,
plus a cost of living increase based on the percentage increase in the U.S.
Department of Labor's cost of living index for the previous year.
Mr. Boeckman may also receive an annual bonus or other similar payments in the
discretion of the Company's Board of Directors.
If Mr. Boeckman becomes totally disabled, he will continue to receive his then
current salary until benefits under the Company's disability program become
payable to him. If he dies while employed, Mr. Boeckman's estate or other
designated beneficiary will receive his salary up to the date of death, and an
additional six months of salary at the rate at the time of death and the salary
equivalent of all accrued unused vacation time at the date of death.
If Mr. Boeckman's employment is terminated without cause, Mr. Boeckman will
receive a payment from the Company of an amount equal to the remaining salary
that would have been paid to him up to the then expiration date of the
employment agreement.
Mr. Boeckman may terminate his employment with the Company if there is a change
in the majority ownership of the Company. In that event, Mr. Boeckman will be
entitled to receive a payment from the Company of an amount equal to the
remaining salary that would have been paid to him up to the then expiration date
of the employment agreement.
Mr. Boeckman is also entitled to the same benefits and under the same conditions
as are available to other full time employees of the Company. Some of those
benefits include health insurance, life insurance and disability insurance, and
participation in the Company's defined benefit retirement and security program.
The Company contributes an amount equal to 8.6% of Mr. Boeckman's annual gross
salary under that program.
Mr. Boeckman is also reimbursed by the Company under the employment agreement
for all necessary and reasonable expenses incurred by him in performing services
for the Company.
Mr. Boeckman also receives local telephone service, basic cable service,
internet access and cellular phone service from the Company or its subsidiaries
at no cost. He also receives a yearly clothing allowance.
The Company is in the process of negotiating a new employment agreement with Mr.
Boeckman, but no definitive agreement had been reached at the time of the
mailing of this proxy statement.
6
Ms. Morlok has been employed under an employment agreement which was to end on
March 30, 2000. The Company is in the process of negotiating a new employment
agreement with Ms. Morlok, but no definitive agreement had been reached at the
time of the mailing of this Proxy Statement. Her employment with the Company is
currently continuing under her current employment agreement, but on a
month-to-month basis.
The Company may terminate Ms. Morlok's employment at any time, and for any
reason, by giving her 30 days prior written notice. In that event, however, the
Company must pay Ms. Morlok an amount equal to the remaining salary that would
have been paid to her through the normal termination date of the employment
agreement. The Company may also terminate the employment agreement on five days
prior written notice if the termination is for cause. The employment agreement
will also terminate thirteen weeks after Ms. Morlok is determined to be totally
disabled.
Ms. Morlok receives various benefits under the employment agreement in addition
to her salary, such as three weeks paid vacation per year; health, disability
and life insurance; a death benefit; participation in the Company's defined
benefit retirement and security program; a clothing allowance; and free local
telephone services.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial security ownership, as of April
10, 2000, of the Company's Common Stock by the directors, director nominees,
executive officers and the manager of the Company, both individually and as a
group:
Name and Address of Number of Shares
Beneficial Owner Ownership Percent of Class
---------------- --------- ----------------
Dean Schettler 30 .08%
16326 120th St
Breda, Iowa 51436
Clifford Neumayer 181 .48%
11846 Ivy Avenue
Breda, Iowa 51436
Larry Daniel 2 .005%
15731 Robin Avenue
Glidden, Iowa 51433
Dave Hundling 108 .29%
12245 Birch Avenue
Breda, Iowa 51436
7
John Wenck 6 .02%
23909 140th St
Carroll, Iowa 51401
Scott Bailey 20 .05%
12424 120th Street
Breda, Iowa 51436
Dave Grabner 55* .15%
11098 130th Street
Breda, Iowa 51436
Robert Boeckman 30 .08%
23678 150th Street
Carroll, Iowa 51401
Rod Doorenbos 377** 1%
104 Maple
Breda, Iowa 51436
Roger Nieland 67 .18%
13312 Eagle Avenue
Breda, Iowa 51436
All directors, director nominees, 876 2.32%
executive officers and the
manager as a group (10 persons)
* One of these shares is held by Mr. Grabner's spouse.
** Thirty of these shares are held by Agri-Enterprises, Inc., and
two of these shares are held by Agri-Services, a sole
proprietorship.
To the Company's knowledge, no person is the beneficial owner of more than 5% of
the Company's Common Stock.
EXECUTIVE COMPENSATION AND BENEFITS
The following table shows the compensation paid by the Company to Robert J.
Boeckman, the Company's manager, in the 1999, 1998 and 1997 fiscal years. Mr.
Boeckman's services as the manager of the Company are similar to those normally
provided by a chief executive officer of an Iowa corporation.
8
Summary Compensation Table
Name and Other Annual All Other
Position Year Salary(1) Bonus Compensation(2) Compensation(3)
-------- ---- --------- ----- --------------- ---------------
Robert J. Boeckman, 1999 $74,159 -0- $ 617 $14,568
Manager 1998 $70,700 $ 2,000 $ 4,737 $13,951
1997 $67,142 $ 2,000 $ 3,015 $13,157
(1) This amount includes a contribution by Mr. Boeckman of 3% of his annual
gross salary pursuant to the Company's defined benefit retirement and
security program, which is sponsored by the National Telephone Cooperative
Association. As a condition of participation in that program, Mr. Boeckman
must contribute a minimum of 3% of his annual gross salary. See also the
"All Other Compensation" column above.
(2) This amount includes payments to Mr. Boeckman by the Company from a
fund established by the Company based upon sales of cell phones. The fund
is allocated equally among the employees employed at the Company's and
Westside Independent Telephone Company's offices. All employees share in
the fund even if they are not involved in the sale of cell phones. Mr.
Boeckman is not involved in those sales. The amount also includes a yearly
clothing allowance and the estimated yearly value of services provided to
Mr. Boeckman by the Company or its subsidiaries at no cost. Those services
are local telephone service, basic cable service, internet access, and
cellular phone service.
(3) This amount represents contributions by the Company on behalf of Mr.
Boeckman to the Company's defined benefit retirement and security program,
which is sponsored by the National Telephone Cooperative Association. The
program requires the Company to contribute an amount equal to 8.6% of Mr.
Boeckman's annual gross salary. See also footnote 1 above regarding Mr.
Boeckman's contributions to the program. This amount also includes a long
term disability contribution of 1.02% of salary and employer-paid premiums
on health, life and accidental death and dismemberment insurance.
Dean Schettler is the president of the Company. No information is provided for
Mr. Schettler in the above Summary Compensation Table because he does not
receive compensation in his capacity as the president of the Company. Mr.
Schettler does receive compensation for his services as a director of the
Company. The compensation payable to directors is discussed above.
No other executive officer's or significant employee's total annual salary,
bonus and other annual compensation exceeded $100,000 during any of the 1997,
1998 or 1999 fiscal years.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Two of the Company's directors, Clifford Neumayer and David Grabner, filed
amendments to their initial Form 3 filings with the SEC on March 10, 2000. The
purpose of Mr. Neumayer's amendment was to delete the information in Mr.
Neumayer's Form 3 which stated that he had beneficial ownership of fifteen
shares of the Company's Common Stock which were held by another individual and
one share held by a partnership. After further review, it was determined that
the individual did not own any shares of the Company's Common Stock, and that
Mr. Neumayer was not one of the partners of the partnership. The purpose of Mr.
Grabner's amendment was to add the information
9
that Mr. Grabner beneficially owns the one share of the Company's Common Stock
that is held by Mr. Grabner's spouse.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed the accounting firm of Kiesling Associates,
LLP to act as independent auditors for the Company during 2000 and is requesting
ratification by the shareholders. The Company knows of no direct or material
indirect financial interests of Kiesling Associates, LLP in the Company.
Representatives of Kiesling & Associates LLP are expected to be present at the
Meeting and may make a statement, if they desire to do so, and will be available
to respond to appropriate questions.
SHAREHOLDER PROPOSALS
To be included in the proxy statement and written ballot for the 2001 annual
meeting of the shareholders, shareholder proposals intended to be presented at
that meeting must be received by the Company at its principal office no later
than January 19, 2001, and must otherwise be in compliance with applicable
securities laws.
OTHER MATTERS
Management does not know of any matters to be presented at the Meeting other
than those stated above. As discussed in the Section above entitled Voting
Securities, given the requirement that all voting by the shareholders must be by
written ballots which have been mailed to the shareholders prior to the meeting
at which the action is to be taken, no other matters can be properly acted upon
by the shareholders at the Meeting.
A copy of the Annual Report to Shareholders for 1999 is mailed to shareholders
together with this Proxy Statement. The Annual Report is not incorporated in
this Proxy Statement and is not to be considered a part of the proxy soliciting
material.
By order of the Board of Directors,
Larry Daniel
Secretary
Breda, Iowa
April 28, 2000
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BREDA TELEPHONE CORP.
1999 ANNUAL REPORT
TO
SHAREHOLDERS
This annual report is being provided to all of the shareholders of Breda
Telephone Corp. ("Breda") in connection with the 1999 annual meeting of the
shareholders which will be held at the American Legion Hall located at 208 Main,
Breda, Iowa, on Wednesday, May 17, 2000, at 7:30 p.m. This annual report is not
incorporated into the proxy statement and is not proxy soliciting material.
Cautionary Statement on Forward Looking Statements.
Certain statements in this annual report contain forward looking statements
that involve and are subject to various risks, uncertainties and assumptions.
Forward looking statements include, but are not limited to, statements with
respect to anticipated future trends in revenues and net income, projections
concerning operations and cash flow, growth and acquisition opportunities,
management's plans and intentions for the future, and other similar forecasts
and statements of expectation. Words such as "expects," "estimates," "plans,"
"anticipates," "contemplates," "predicts," "intends," "believes," "seeks,"
"should," "thinks," "objectives" and other similar expressions or variations
thereof are intended to identify forward looking statements. Forward looking
statements made by Breda and its management are based on estimates, projections,
views, beliefs and assumptions made or existing at the time of such statements
and are not guarantees of future results or performance. Breda disclaims any
obligation to update or revise any forward looking statements based on the
occurrence of future events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from
those expressed in forward looking statements as a result of numerous risks,
uncertainties and assumptions, all of which are beyond the control of Breda and
its management. The risks, uncertainties and assumptions affecting forward
looking statements include, but are not limited to:
o the possible adverse effects to Breda and its subsidiaries which may
arise under the regulations which will be promulgated under the
Telecommunications Act of 1996, including increased competition;
o adverse changes by the Federal Communications Commission in the rates
of the access charges that can be charged by Breda and its
subsidiaries to long distance carriers;
o technological advances in the telecommunications and cable industries
which may replace or otherwise adversely affect in a material way the
existing technologies utilized by Breda and its subsidiaries;
o employee relations;
o management's business strategies;
o general industry conditions, including consolidations in the
telecommunications and cable industries;
o general economic conditions at the national, regional and local
levels;
o acts or omissions of competitors and other third parties;
o changes in or more governmental laws, rules, regulations or policies;
and
o continued availability of financing, and on favorable terms.
DESCRIPTION OF BUSINESS
General.
Breda is an Iowa corporation with its principal offices in Breda, Iowa.
Breda's principal business is providing telephone services. Telephone services
are also provided by two of Breda's wholly owned subsidiaries, Prairie Telephone
Company, Inc. ("Prairie Telephone") and Westside Independent Telephone Company
("Westside Independent"). A total of seven Iowa towns and their surrounding
rural areas currently receive telephone services from Breda, Prairie Telephone
or Westside Independent.
Another of Breda's wholly owned subsidiaries, Tele-Services, Ltd.
("Tele-Services"), provides cable television services to eighteen towns in Iowa
and one town in Nebraska.
Westside Communications, Inc. ("Westside Communications") was a wholly owned
subsidiary of Tele-Services that provided cable television services to two Iowa
towns. Westside Communications was dissolved effective December 2, 1999, and all
of its assets were transferred to, and all of its liabilities were assumed by,
Tele-Services at that time. The dissolution of Westside Communications and the
transfer of its assets to Tele-Services and the assumption of its liabilities by
Tele-Services did not have any material adverse effect on the operations or
financial condition of Tele-Services. The dissolution was effectuated primarily
for administrative convenience.
Breda's and its subsidiaries' telephone and cable television businesses are
discussed in more detail below. Some of the other miscellaneous business
operations of Breda and its subsidiaries are also briefly discussed below.
Telephone Services.
Breda, Prairie Telephone and Westside Independent provide telephone services to
the following seven Iowa towns and their surrounding rural areas:
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o Breda, Iowa
o Lidderdale, Iowa
o Macedonia, Iowa
o Farragut, Iowa
o Pacific Junction, Iowa
o Yale, Iowa
o Westside, Iowa.
Breda provides services to Breda, Lidderdale and Macedonia. Prairie Telephone
provides services to Farragut, Pacific Junction and Yale. Westside Independent
provides services to Westside. The surrounding rural areas that are served are
those within approximately a ten mile to fifteen mile radius of each of the
towns.
All of the towns are in central and southern Iowa.
The primary services provided by Breda, Prairie Telephone and Westside
Independent are providing their subscribers with basic local telephone service
and access services for long distance or other calls outside the local calling
area. As of December 31, 1999, they were serving approximately 2,642 telephone
numbers and related access lines. Breda, Prairie Telephone and Westside
Independent derive their principal revenues from providing these services.
They also provide other telephone related services. For example, they sell and
lease telephone equipment to their subscribers, provide inside wiring and other
installation, maintenance and repair services to their subscribers, and provide
custom calling services to their subscribers. They also derive revenues from
providing billing and collection services for some long distance carriers for
the long distance calls made by their subscribers.
Telephone services providers like Breda, Prairie Telephone and Westside
Independent are subject to competition from other providers. As a result of the
Telecommunications Act of 1996, telephone companies are no longer afforded
exclusive franchise service areas. Under that Act, competitors can now offer
telephone services to Breda's, Prairie Telephone's and Westside Independent's
subscribers, and also request access to their lines and network facilities. The
Act contemplates that various regulations will be promulgated by the FCC and
state regulatory agencies to implement various parts of the Act, such as
regulations setting out the procedures and methods for implementing and
promoting competition in the telephone industry, and standards for wholesale
pricing, interconnection rates and for local network rates. Some of those
regulations had still not been finalized at the time of the preparation of this
annual report, and some legal and court actions have been taken by some
regulators and others in the telephone industry challenging some aspects of some
of the proposed regulations and procedures. Until those regulations are
finalized, it is not possible to predict how the Telecommunications Act of 1996
may affect Breda, Prairie Telephone, Westside Independent and their telephone
businesses. The regulations could, however, have a material adverse effect, and
the Act does open up Breda, Prairie Telephone and Westside Independent to
competition that they were not subject to in the past.
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Although competition is permitted, Breda, Prairie Telephone and Westside
Independent currently do not have direct competition in providing basic local
telephone service in their existing service areas. They do, however, experience
competition in providing access services and other services to long distance
carriers. For example, they experience competition in providing access services
for long distance when their subscribers use private line transport, switched
voice and data services, microwave, or cellular or personal communications
service. In those cases, the subscriber is not using Breda's, Prairie
Telephone's or Westside Independent's networks or switches, so they cannot
charge access charges to the long distance carrier. Various other competitors
and forms of competition are also likely to arise in the future as technological
advances occur in the telecommunications and cable industries.
Some of the cellular ventures in which Breda, Prairie Telephone and Westside
Independent have invested or may later invest in may provide cellular services
in the telephone exchange areas serviced by them. As indicated in the preceding
paragraph, cellular services are competitive with the telephone services
provided by Breda, Prairie Telephone and Westside Independent. Breda does not
believe, however, that investments in cellular ventures are inconsistent or in
conflict with Breda's, Prairie Telephone's or Westside Independent's overall
business. Breda also believes those investments are one method of attempting to
diversify across the various telecommunications methods which are available
today.
Breda, Prairie Telephone and Westside Independent also experience competition in
providing billing and collection services to long distance carriers. The
competition is from third parties who provide similar services. The long
distance carriers are also starting to provide their own billing and collection
services, rather than contracting for those services with others like Breda,
Prairie Telephone and Westside Independent. Directory advertising is also now
subject to competition because the Telecommunications Act of 1996 prohibits
Breda, Prairie Telephone and Westside Independent from requiring exclusive
listings in their phone books. Breda, Prairie Telephone, Westside Independent
and BTC, Inc. face competition in the sale and lease of telephone, cellular and
related equipment because there are numerous competitors who sell and lease
telephone, cellular and related equipment. (BTC, Inc. is a subsidiary of Prairie
Telephone, and is discussed below.) Breda, Prairie Telephone, Westside
Independent and BTC, Inc. also face competition in providing internet access,
although the competition was not very intense or expansive as of the time of the
preparation of this annual report. The cellular ventures in which Breda, Prairie
Telephone and Westside Independent have invested face competition in providing
cellular services and equipment from various competitors offering cellular and
personal communications services. Competition in all of the foregoing areas is
based primarily on cost, service and experience.
Cable Services.
Tele-Services owns and operates the cable television systems in the following
eighteen Iowa towns:
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o Arcadia
o Auburn
o Bayard
o Breda
o Churdan
o Farragut
o Grand Junction
o Hamburg
o Lohrville
o Malvern
o Neola
o Oakland
o Riverton
o Sidney
o Tabor
o Thurman
o Treynor
o Westside
Tele-Services also owns and operates the cable television system for the town of
Beaver Lake, Nebraska.
As of December 31, 1999, Tele-Services was providing cable television services
to approximately 3,534 subscribers.
Tele-Services derives its principal revenues from monthly fees charged to its
cable subscribers for basic and premium cable services provided to those
subscribers.
Tele-Services provides cable services to each of the towns pursuant to
franchises or agreements with each of those towns.
The Telecommunications Act of 1996 also applies to cable services providers, and
cable services providers such as Tele-Services are therefore subject to
competition from other providers. As discussed above regarding the telephone
services provided by Breda, Prairie Telephone and Westside Independent, various
regulations are to be promulgated under that Act, but some of those regulations
had still not been finalized at the time of the preparation of this annual
report, and some legal and court actions have been taken by some regulators and
others challenging some aspects of some of the proposed regulations and
procedures. Until those regulations are finalized, it is not possible to predict
how the Telecommunications Act of 1996 may affect Tele-Services and its cable
business. The regulations could, however, have a material adverse effect. Breda
currently contemplates, however, that any competition in the cable industry
arising as a result of the Telecommunications Act of 1996 may occur at a slower
pace than will be the case for telephone services providers, in particular in
rural areas like those served by Tele-Services. One result of the
Telecommunications Act of 1996 with respect to cable services providers is that
telephone services must be allowed to be provided through the cable of cable
services providers.
Tele-Services' franchises or agreements with the towns do not grant
Tele-Services the exclusive right to provide cable services in the towns, and
other cable service providers can provide cable services in the towns. There
currently are not, however, any other cable service providers in any of the
towns. Although difficult to predict, Tele-Services currently does not
contemplate any competitor coming into the towns given, among other things, the
smaller size of the towns and the costs to expand into them.
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As indicated, although cable services providers like Tele-Services are subject
to competition from other providers, Tele-Services currently does not have
direct competition from other cable services providers in the towns
Tele-Services now services. There is, however, competition in other forms. For
example, Tele-Services experiences strong competition from wireless and
satellite dish providers. Various other competitors and forms of competition are
also likely to arise in the future as technological advances occur in the
telecommunications and cable industries.
Miscellaneous Businesses.
Breda and some of its subsidiaries are also engaged in other miscellaneous
businesses.
For example, Breda, Prairie Telephone and Westside Independent also provide
internet access through their telephone lines to subscribers desiring that
access. They were providing internet access to approximately 485 subscribers as
of December 31, 1999. Internet access is also provided by BTC, Inc. ("BTC") in
some areas which are outside of the telephone exchange areas currently served by
Breda, Prairie Telephone and Westside Independent. The area served by BTC is
currently limited to Carroll, Iowa and various communities surrounding Carroll,
Iowa. BTC provided internet access to approximately 1,197 subscribers as of
December 31, 1999. BTC is a wholly owned subsidiary of Prairie Telephone.
BTC was organized primarily to explore the possibility of becoming a competitive
local exchange carrier in some Iowa communities which are not served by Breda,
Prairie Telephone or Westside Independent. No firm decision has been made as to
whether BTC will ever attempt to provide telephone services, however, and BTC
cannot provide any telephone services in the state of Iowa without first filing
satisfactory tariff information with the Iowa Utilities Board and the filing and
giving of various required notices. BTC would also need to raise significant
additional capital and/or obtain third party financing before BTC would be able
to finance the construction and start up of a new telephone business. BTC does
provide internet access, as discussed in the preceding paragraph. BTC also plans
to use part of its business location in Carroll, Iowa as a retail store for the
sale and lease of telephone, cellular and related equipment and merchandise. It
is contemplated that the store will open for business in April, 2000.
Breda and Prairie Telephone have purchased spectrum from Iowa Wireless Inc. for
providing personal communications services in the Breda, Lidderdale and Yale
telephone exchange areas. Iowa Wireless Inc. is a subsidiary of Iowa Network
Services, Inc. Spectrum is bandwidth allocated by the Federal Communications
Commission to provide data and voice communication. The bandwidth of a
transmitted communications signal is a measure of the range of frequencies the
signal occupies. In the communications industry, this measurement is defined as
megahertz. Iowa Wireless Inc. held the 30 MHz license for the Breda, Lidderdale
and Yale telephone exchange areas, and Breda and Prairie Telephone purchased 10
MHz licenses for those areas from Iowa Wireless Inc. on March 26, 1999. They
purchased 10 MHz licenses because that was the only license being offered by
Iowa Wireless Inc. at that time. Each independent telephone company in Iowa had
first
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opportunity to purchase the spectrum in its local exchange areas for $3.50 per
pop (population). Prairie Telephone purchased its Yale exchange pops at $3.50
each, for a total of $2,051. At that time, a limited liability company was
formed by some of the independent telephone companies who were eligible and
desired to own spectrum to provide personal communications services in the areas
that were close to their own local exchange areas. The companies included
Prairie Telephone and the telephone companies for the Casey, Menlo, and Panora,
Iowa, areas. The limited liability company was named the Guthrie Group, L.L.C.,
and Prairie Telephone purchased 100 units in Guthrie Group, L.L.C. for $10,000.
The personal communications service licenses owned by Prairie Telephone and the
other independent telephone companies which became members of Guthrie Group,
L.L.C. will not be included in the Guthrie Group, L.L.C. As of the time of the
preparation of this annual report, Guthrie Group, L.L.C. had acquired spectrum
for some telephone exchange areas located in Guthrie County, Iowa.
Breda purchased the personal communications service licenses for its Breda and
Lidderdale exchange areas for $3.50 per pop, totaling $5,383. Discussions have
taken place regarding the formation of a limited liability company which would
include Breda and some other independent telephone companies as members and
which might acquire spectrum for personal communications service or otherwise
invest in personal communications service ventures. No limited liability company
had been formed and no other agreements had been reached at the time of the
preparation of this annual report, however, but under the current discussions
Breda and the other members would contribute their personal communications
service licenses to the limited liability company and be equal owners of the
limited liability company.
Personal communications service ("PCS") is a relatively new area in the
telecommunications industry. It is a wireless voice and data service somewhat
similar to cellular telephone service, but emphasizing personal service and
extended mobility. It is sometimes referred to as digital cellular (although
cellular systems can also be digital). Like cellular, PCS is for mobile users
and requires a number of antennas to blanket an area of coverage. As a user
moves through and between service areas, the user's phone signal is picked up by
the nearest antenna and then forwarded to a base station that connects to the
wired network. The phone itself is slightly smaller than a cellular phone. PCS
is being introduced first in highly urban areas for large numbers of users. The
"personal" in PCS distinguishes this service from cellular by emphasizing that,
unlike cellular, which was designed for car phone use with transmitters
emphasizing coverage of highways and roads, PCS is designed for greater user
mobility. It generally requires more cell transmitters for coverage, but has the
advantage of fewer blind spots. Technically, cellular systems in the United
States operate in the 824- 849 megahertz (MHz) frequency bands; while PCS
operates in the 1850-1990 MHz bands. Several technologies are used for PCS in
the United States, including Cellular Digital Packet Data and Global System for
Mobile communication. Global System for Mobile is more commonly used in Europe
and elsewhere, and is the technology that is being employed by Iowa Wireless
Inc. Although difficult to predict, personal communications services may become
very important in the future and may be highly competitive with current cellular
services. Breda and Prairie Telephone have not made any firm decision on whether
they will ever offer any personal communications services, and they do not in
any event contemplate offering any personal communications services
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for at least one to two years, primarily because those services must first be
available in surrounding areas before Breda and Prairie Telephone can provide
those services.
Breda, Prairie Telephone and Westside Independent do not currently own spectrum
for all of the telephone exchange service areas currently serviced by them, and
there is no guarantee that they will be able to acquire spectrum for all of
those areas. Also, Breda, Prairie Telephone and Westside Independent will face
competition in providing personal communications services because no exclusive
rights can be acquired with respect to that technology.
Pacific Junction Telemarketing Center, Inc. ("Pacific Junction") is a wholly
owned subsidiary of Prairie Telephone. Pacific Junction provides telemarketing
services, and the telemarketing calls made by Pacific Junction are a major
source of access charges revenue for Breda. Pacific Junction experienced calling
number unavailability during 1999, which resulted in less hours spent on the
phone making telemarketing calls, and thereby less access charges revenue for
Breda.
It is common in the industry for small telemarketing firms like Pacific Junction
to contract with a vendor who solicits calling lists and programs from major
companies. Because Pacific Junction's vendor, Aegis, began operating its own
calling centers and did not have a surplus of numbers to contract out to smaller
telemarketing firms, Pacific Junction terminated its relationship with Aegis in
May, 1999, and instead contracted with Results Telemarketing, Inc. to provide
telemarketing calling leads. Results Telemarketing, Inc. also has, however, its
own telemarketing centers, and has struggled to provide a continuous supply of
telemarketing numbers to Pacific Junction. Also, the telemarketing industry as a
whole has experienced a downturn in companies using telemarketing services in
their telemarketing programs. Pacific Junction is therefore soliciting
free-lance work and new vendor contacts, but expects the next twelve months to
not show a substantial change in telemarketing revenue.
Revenues are also generated from sales of cellular phones and related service
packages.
Revenues may also arise from investments in other entities which provide
cellular phone services or which invest in other cellular phone or
telecommunications ventures. Some of those investments are noted in the
financial statements included at the end of this annual report.
The revenues from those investments can be in the form of distributions which
may be made by the entities. For example, Breda, Prairie Telephone and Westside
Independent received, in the aggregate, approximately $127,483 in distributions
from some of the cellular ventures in which they have invested. None of Breda,
Prairie Telephone or Westside Independent controls, however, any distribution
decisions, so no distributions are ever guaranteed, and the timing and amount of
any distributions may therefore vary greatly from year to year. Breda, Prairie
Telephone and Westside Independent have also received, in the past, settlement
payments from some of their cellular investments. Settlement payments are
unusual items which generally result from payments received for not exercising a
right of first refusal to purchase additional units during a merger or buyout by
another company. They did not receive any settlement payments in 1999, but they
received, in the
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aggregate, approximately $409,212 in settlement payments in 1998. Breda, Prairie
Telephone and Westside Independent do not control any settlement payments, and
settlement payments are in any event usually one-time events, so no settlement
payments are guaranteed and the timing and amount of any settlement payments
will vary greatly from year to year.
Breda received annual fees of, respectively, $5,000 and $24,000 in 1999 from two
entities in which Breda is an investor. Those fees were paid in consideration
for Breda's manager serving as a manager for one of those entities, and for
Breda's manager serving on the board of directors of the other entity.
Breda and its subsidiaries also have various other miscellaneous investments.
Those investments are described in the financial statements included at the end
of this annual report.
Employees.
As of December 31, 1999, Breda had 24 full time employees. Breda employs all of
those employees, but those employees also provide the labor and services for
Prairie Telephone, Westside Independent, Tele-Services and BTC. The salaries and
other costs and expenses of the employees are allocated among Breda and its
subsidiaries based on time sheet allocations. There currently are not any
collective bargaining or other labor agreements with any of Breda's employees,
and only two of Breda's employees have written employment agreements. Those
employment agreements are with the manager and the co-manager of Breda.
Pacific Junction had 3 full-time employees as of December 31, 1999. Pacific
Junction currently has no collective bargaining or labor agreements with any of
its employees.
Breda and Pacific Junction also utilize part-time employees on an as needed
basis. Pacific Junction utilizes up to approximately seventeen part time
employees at a time, primarily for the purpose of making telemarketing calls.
Sale of Direct Broadcast Satellite Operation.
On January 11, 1999, Breda sold substantially all of its assets comprising its
direct broadcast satellite operation. The purchase price received by Breda was
$8,274,689. The sale resulted in a pre-tax gain of $7,436,415, which was
included in Breda's operations during the first quarter of 1999. The buyer also
assumed:
o Breda's obligations to its direct broadcast satellite services
subscribers for refundable deposits and advance payments made by those
subscribers; and
o Breda's obligations otherwise arising after the closing date of the
sale under Breda's various licenses and contracts related to its
direct broadcast satellite business and assets.
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Breda also executed a noncompetition agreement as part of the transaction.
Breda's direct broadcast satellite operation included its licenses to provide
direct broadcast satellite services in five Iowa counties and four counties in
Nebraska. At the time of the sale, Breda was providing direct broadcast
satellite services to approximately 4,048 subscribers.
One factor which caused Breda to sell the direct broadcast satellite operation
was Breda's determination that the purchase price offered by the buyer was quite
favorable. Breda had also determined that the cash available from the sale would
provide it with funds for possible acquisition of additional telephone lines in
areas that Breda knew were going to become available from GTE and US West after
the closing of the sale. Breda believed that the sale of the direct broadcast
satellite operation would also be beneficial to Breda because it would allow
Breda to focus on its core business of providing telephone services. Another
factor contributing to the sale was the consolidation occurring in the direct
broadcast satellite industry, which Breda believed would make it more difficult
for Breda to efficiently compete in the industry. Breda's original contract for
its direct broadcast satellite operation was also nearing renewal, and there was
some uncertainty concerning its renewal. This uncertainty also contributed to
the decision to sell the operation.
Pending Sale of Prairie Telephone's Stock in Central Iowa Cellular, Inc.
Prairie Telephone has investments in other entities which provide cellular phone
services or which invest in other cellular phone or telecommunications ventures.
One of those investments is in the common stock of Central Iowa Cellular, Inc.
Central Iowa Cellular, Inc. is an Iowa corporation that was incorporated in
December of 1983. Central Iowa Cellular, Inc. was organized by Prairie Telephone
and some other Iowa based independent telephone companies. Prairie Telephone
owns 3,000 shares of common stock of Central Iowa Cellular, Inc. Those 3,000
shares constitute 20% of the total issued and outstanding shares of stock of
Central Iowa Cellular, Inc.
Central Iowa Cellular, Inc. was organized for the purpose of becoming a partner
in Des Moines MSA General Partnership. Des Moines MSA General Partnership is an
Iowa partnership which provides cellular telephone services to customers within
the Des Moines, Iowa metropolitan area. Central Iowa Cellular, Inc. owns 24% of
the partnership interests in Des Moines MSA General Partnership. The remaining
76% of the partnership interests in Des Moines MSA General Partnership are owned
by AirTouch Iowa, LLC, a Delaware limited liability company.
On March 29, 2000, AirTouch Iowa, LLC, Central Iowa Cellular, Inc., Prairie
Telephone, and the other shareholders of Central Iowa Cellular, Inc. entered
into a Stock Purchase Agreement whereby AirTouch Iowa, LLC will, subject to the
satisfaction of the various conditions set forth in the Stock Purchase
Agreement, acquire all of the issued and outstanding shares of stock of Central
Iowa Cellular, Inc. from all of its shareholders, including Prairie Telephone.
After the closing of the Stock
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Purchase Agreement, AirTouch Iowa, LLC will own all of the issued and
outstanding shares of stock of Central Iowa Cellular, Inc., and will thereby
acquire the 24% of the partnership interests of Des Moines MSA General
Partnership which are owned by Central Iowa Cellular, Inc.
Under the Stock Purchase Agreement, Prairie Telephone will sell all of its 3,000
shares of common stock in Central Iowa Cellular, Inc. to AirTouch Iowa, LLC for
$5,100,000. The purchase price was a negotiated price that Prairie Telephone and
Breda Telephone Corp. believe is representative of the fair value of Prairie
Telephone's shares of stock in Central Iowa Cellular, Inc., and no formula or
other fixed or identifiable principles were utilized in establishing the
purchase price. The purchase price will be payable to Prairie Telephone in full
at the closing of the Stock Purchase Agreement, by wire transfer of immediately
available funds.
The closing is to occur on the later to occur of:
o five business days after the satisfaction of all conditions set forth
in the Stock Purchase Agreement, and
o the earlier of (i) five business days after the date of the Stage I
Closing, as that term is defined in the U.S. Wireless Alliance
Agreement dated September 21, 1999 by and between Bell Atlantic
Corporation and Vodafone AirTouch, Plc, and (ii) April 30, 2000.
The obligation of AirTouch Iowa, LLC, Prairie Telephone and the other
shareholders of Central Iowa Cellular, Inc. to close the sale of stock
contemplated by the Stock Purchase Agreement is subject to various conditions,
including satisfaction of all of the filing and other requirements under the
Hart-Scott-Rodino Act. The Stock Purchase Agreement is subject to termination if
any of those conditions precedent are not satisfied, and there can be no
guarantee that all of the conditions precedent will be satisfied. Breda and
Prairie Telephone currently contemplate, however, that all of the conditions
precedent will be satisfied, and that the transactions contemplated by the Stock
Purchase Agreement will close within approximately 4 to 6 weeks of the date of
the execution of the Stock Purchase Agreement.
The purchase price payable for Prairie Telephone's shares will be reduced in the
amount of Prairie Telephone's pro rata portion of the Hart-Scott-Rodino Act
filing fees. The Stock Purchase Agreement provides in this regard that AirTouch
Iowa, LLC has the right to reduce the total purchase price payable by it for all
of the shares of the issued and outstanding stock of Central Iowa Cellular, Inc.
in an amount equal to 24% of such filing fees, but not including legal fees.
Prairie Telephone will be responsible for 20% of that amount. Prairie Telephone
does not contemplate that the amount will be material. Prairie Telephone is also
responsible for any transfer taxes or fees as may be due in connection with the
sale of its shares of common stock in Central Iowa Cellular, Inc. to AirTouch
Iowa, LLC. Prairie Telephone does not contemplate that any of those taxes or
fees will be material in amount.
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Some of the various representations, warranties and covenants given and made by
Central Iowa Cellular, Inc. and the shareholders of Central Iowa Cellular, Inc.
in the Stock Purchase Agreement are made jointly and severally, so Prairie
Telephone may have liability for a breach of the Stock Purchase Agreement by
Central Iowa Cellular, Inc. or any one or more of the other shareholders of
Central Iowa Cellular, Inc.
Prairie Telephone also entered into a Des Moines Tower Proceeds Agreement dated
as of March 29, 2000, in connection with the Stock Purchase Agreement. The
parties to the Des Moines Tower Proceeds Agreement are Prairie Telephone, the
other shareholders of Central Iowa Cellular, Inc., and AirTouch Communications,
Inc. The Des Moines Tower Proceeds Agreement has two primary purposes.
One is to address the August 6, 1999 sublease agreement that was entered into by
Des Moines MSA General Partnership with AirTouch Communications, Inc., American
Tower Corporation and American Tower L.P. Under that sublease agreement,
American Tower L.P. is obligated, subject to the satisfaction of certain
conditions, to pay Des Moines MSA General Partnership for subleases on certain
wireless communication towers. Under the Des Moines Tower Proceeds Agreement,
AirTouch Communications, Inc. agrees that it will pay to each shareholder of
Central Iowa Cellular, Inc. its proportionate share of the Tower Net Proceeds
received by AirTouch Communications, Inc. from American Tower L.P. under the
sublease agreement for the towers listed in the Des Moines Tower Proceeds
Agreement. The term "Tower Net Proceeds" is defined to mean 24% of the gross
cash proceeds received by AirTouch Communications, Inc. under the sublease
agreement, minus 24% of certain fees. Prairie Telephone's proportionate share of
the Tower Net Proceeds will be 20% of those proceeds. Prairie Telephone
estimates that it will receive approximately $438,857 in Tower Net Proceeds
payments.
The second primary purpose of the Des Moines Tower Proceeds Agreement is to
address the repurchase of the warrants to purchase stock of American Tower
Corporation that are currently held by Des Moines MSA General Partnership. The
aggregate purchase price payable for the warrants will be the monetization value
multiplied by 343 for each of the towers listed in the Des Moines Tower Proceeds
Agreement. The term "monetization value" means the average closing price of
American Tower Corporation's stock, as quoted on the principal stock exchange or
National Market System upon which such stock is traded, for the five trading
days immediately preceding the closing date of the Stock Purchase Agreement,
minus $22. Prairie Telephone's proportionate share of these payments will be
20%, which is, again, based upon its 20% ownership of the total issued and
outstanding shares of stock of Central Iowa Cellular, Inc. It is difficult to
predict the amount of payments that will be received by Prairie Telephone given
that the method of determining the monetization value depends upon the average
closing price of American Tower Corporation's stock over the five trading days
immediately preceding the closing date of the Stock Purchase Agreement, and the
closing date may not occur for at least up to four to six weeks from the date of
the execution of the Stock Purchase Agreement on March 29, 2000. Prairie
Telephone estimates, however, that the aggregate payment to be received by it in
this regard may range anywhere from $25,000 to $35,000.
12
The closing of the Des Moines Tower Proceeds Agreement is also subject to
various conditions, and it is likely that the transactions contemplated by the
Des Moines Tower Proceeds Agreement will not close unless and until the closing
of the transactions contemplated by the Stock Purchase Agreement.
The negotiations for the sale of the issued and outstanding shares of stock in
Central Iowa Cellular, Inc. initially began and arose out of the proposed
assignment and transfer by AirTouch Iowa, LLC of its interest in Des Moines MSA
General Partnership to another entity. Prairie Telephone and the other
shareholders of Central Iowa Cellular, Inc. took the position that the proposed
assignment granted them a right of first refusal and possibly other rights under
their agreement with AirTouch Iowa, LLC. Prairie Telephone and the other
shareholders of Central Iowa Cellular, Inc. determined, however, after
negotiations, to sell their shares of stock in Central Iowa Cellular, Inc. to
AirTouch Iowa, LLC rather than attempting to enforce their rights of first
refusal. The primary factor which caused Prairie Telephone to reach this
determination was Prairie Telephone's and Breda Telephone Corp.'s determination
that the purchase price offered by AirTouch Iowa, LLC was favorable.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview.
This section of this annual report should be read in conjunction with the
financial statements and related notes included at the end of this annual
report.
Breda's primary source of revenues on a consolidated basis with its subsidiaries
is from the telephone services provided by Breda, Prairie Telephone and Westside
Independent.
The operating revenues from their telephone services are primarily derived from
the following types of fees and charges:
o Breda, Prairie Telephone and Westside Independent receive flat monthly
fees charged to subscribers for basic local telephone services. As of
March 1, 2000, those fees varied from approximately $11.50 to $35.00
per month. The monthly fee is higher for subscribers who elect to have
additional services and features, such as custom features.
o Breda, Prairie Telephone and Westside Independent receive access
charges from long distance carriers (sometimes referred to in the
telephone industry as "inter-exchange carriers" or "IXCs") for
providing intrastate and interstate exchange services to those long
distance carriers. In more basic terms, they receive access charges
for originating and terminating long distance calls made by their
subscribers. The Federal Communications Commission (the "FCC")
regulates the amount of access charges that can be charged by Breda,
Prairie Telephone and Westside Independent for interstate long
distance calls. The National Exchange Carrier Association
13
("NECA") has been delegated some authority by the FCC regarding the
regulation of access charges rates, but all changes proposed by NECA
must be approved by the FCC. Access charges constitute a substantial
part of Breda's, Prairie Telephone's and Westside Independent's
revenues, and a material risk to them arises from the regulation of
access charges rates by the FCC. The FCC can change the access charges
rates at any time, and a recent change in the FCC's regulations led to
a reduction in the access charges received by Breda, Prairie Telephone
and Westside Independent, and is discussed in the next paragraph. As
is also discussed below, Breda anticipates continuing pressure for the
lowering of access charges rates, so further reductions in access
charges rates are a possibility.
The amount of access charges payable to telephone companies like
Breda, Prairie Telephone and Westside Independent who utilize the
"average schedule" basis for receiving access charges is based on,
among other things, the number of miles of their cable over which they
transfer long distance calls made by their subscribers. The FCC
approved some changes proposed by NECA regarding this practice
effective in July, 1998. Under the changes, Breda, Prairie Telephone
and Westside Independent now receive a substantially lower access
charge rate for any miles of cable over 100 miles. The access charge
rate for any miles of cable over 100 miles became approximately $.05
per mile under the changes, rather than the rate of approximately
$1.00 per mile which previously applied and which still currently
applies to miles of cable up to 100 miles. These reductions did not
have a material adverse effect, however, given that total access
revenues have been increasing in recent years. Breda believes those
increases are, however, attributable to increased numbers of
subscribers, increased calling patterns and technological advances.
There is no assurance that these trends will continue, and it is
unlikely that there will be any further material increases in the
number of subscribers without the acquisition of additional calling
areas by Breda, Prairie Telephone or Westside Independent. As
discussed below, however, they currently do not foresee the
possibility of any such acquisitions.
As indicated above, Breda, Prairie Telephone and Westside Independent
utilize the "average schedule" basis for receiving access charges.
This is the approach taken by most smaller telephone companies.
Another approach currently available for receiving access charges is
the "cost" approach. Telephone companies make filings with the FCC
which set forth their costs of providing long distance services. Under
the average schedule approach, access charges are based upon, in
general, the average of all of those costs and certain other factors
intended to take into account the size of the particular telephone
company in question.
It is difficult to predict what, if any, future changes will be made
by the FCC in its regulations governing access charges rates, other
than that if future changes are made, they will likely have the result
of lowering Breda's, Prairie Telephone's and Westside
14
Independent's total access charges revenue. Breda believes that there
will be continuing pressure by the FCC and other regulatory
authorities to lower access charges rates over the next one to four
years. Breda also anticipates, however, that there will be significant
resistance in the telephone industry to any further lowering of access
charges rates, and Breda does not anticipate any material reduction in
access charges rates in the next twelve months. As indicated above,
however, it is difficult to predict what changes will be made in
access charges rates, other than that any changes will be to lower
access charges rates. Those reductions could be material and have a
material adverse effect on Breda's, Prairie Telephone's and Westside
Independent's business.
If future adverse changes occur, one option Breda may consider is
changing from the average schedule basis to the cost basis for
receiving access charges. If Breda determines to consider this option,
it contemplates utilizing the services of third parties who have
experience in studying these two options and advising as to what
option is the best approach for the telephone company in question.
There is no guarantee, however, that a change from the average
schedule to the cost basis will offset any adverse changes in the
regulations of the FCC governing access charges rates, or that even if
this change is beneficial at one time, that subsequent changes in the
FCC's regulations will not cause the average schedule basis to once
again be more favorable to Breda, Prairie Telephone and Westside
Independent. If Breda, Prairie Telephone and Westside Independent ever
elect to change to the cost basis, however, the FCC's current
regulations would not allow them to change back to the average
schedule basis because the FCC currently treats this change as a one
time, permanent election.
o Breda, Prairie Telephone and Westside Independent receive revenue from
the sale and lease of customer premises telephone equipment and other
similar items and other miscellaneous customer services, such as
custom calling services. Since the completion of the upgrading of
their telephone switches in 1998 and 1999, Breda, Prairie Telephone
and Westside Independent have had the capability to offer many more
custom calling features to their subscribers. Breda, Prairie Telephone
and Westside Independent have been marketing extended packages and
custom calling features to their subscribers in the hope that may
increase and maximize subscriber usage of the newly available packages
and features. Revenues from custom calling services are not, however,
ever anticipated to be a major or material source of revenue.
o Breda, Prairie Telephone and Westside Independent receive fees from
long distance providers for billing and collection services for long
distance calls made by subscribers. Breda, Prairie Telephone and
Westside Independent are experiencing increased competition in this
area. As discussed in the "DESCRIPTION OF BUSINESS" section in this
annual report, their competitors include other third
15
parties providing these services, and competition from the long
distance providers themselves since some providers have decided to
handle their own billing and collection.
o Breda, Prairie Telephone and Westside Independent receive payments
under the support payment funding program administered by the Federal
Communications Commission. Those payments and that program are
discussed in more detail below.
Breda, Prairie Telephone, Westside Independent and BTC each generate revenues
from providing internet access and from sales and leases of other equipment and
facilities for private line data transmission, such as local area networks,
virtual private networks and wide area networks. During 1999, there was an
increase of approximately 65% in the combined internet customer base of Breda,
Prairie Telephone, Westside Independent and BTC. BTC itself experienced an
increase of approximately 68% in its internet customer base. BTC's current
customer base is limited to Carroll, Iowa and the surrounding communities.
Although they did not face any material competition in providing internet access
in their service areas at the time of the preparation of this annual report,
Breda believes that Breda, Prairie Telephone, Westside Independent and BTC will
face increased competition in the future through, among possibly other things,
the increased provision of internet access and services through cable;
technological advances that may allow cable access and services to be provided
through new methods; and mergers and consolidations within the
telecommunications industry which may create new competitors with expanded
resources and the ability to provide expanded services.
The following matters also need to be kept in mind when considering the
telephone and other services provided by Breda, Prairie Telephone and Westside
Independent:
o Breda, Prairie Telephone and Westside Independent are all subject to
regulation by the Iowa Utilities Board (the "IUB"). They operate their
telephone businesses pursuant to certificates and various rules and
regulations promulgated by the IUB. Although not anticipated to occur,
the IUB could terminate their right to provide services if they fail
to comply with those rules and regulations.
The IUB regulates or has the authority to regulate many aspects of
Breda's, Prairie Telephone's and Westside Independent's telephone
businesses. The material areas of regulation by the IUB are described
in the following paragraphs.
Breda, Prairie Telephone and Westside Independent are treated as
"service regulated" telephone companies by the IUB, which means that
they must comply with the IUB's rules and regulations regarding the
quality of the services and facilities provided to subscribers. The
regulations establish minimum standards of quality for the services
and facilities provided by Breda, Prairie Telephone and Westside
Independent. Their existing services and facilities meet those
standards. The regulations also require them to maintain and repair
their existing facilities as necessary in order to continue
16
to meet at least those minimum standards. The regulations also
establish time frames within which Breda, Prairie Telephone and
Westside Independent must respond to requests for services from their
subscribers. The regulations can be amended to increase the minimum
standards or to require that additional services be made available to
subscribers. Past amendments have not, however, caused any material
difficulties for Breda, Prairie Telephone or Westside Independent.
The IUB must approve of any expansion in the telephone service areas
currently served by Breda, Prairie Telephone and Westside Independent.
The primary factors that will be considered by the IUB in the event of
a request for an expansion will be the managerial, financial and
technical abilities of Breda, Prairie Telephone or Westside
Independent, as the case may be. Although they do not anticipate
material difficulties in the event of any proposed expansion, there is
no assurance that any future proposed expansion in the service areas
of Breda, Prairie Telephone or Westside Independent will be approved
by the IUB. (FCC approval for any proposed expansion will also be
necessary, as discussed below.)
The IUB has certified Breda, Prairie Telephone and Westside
Independent as "eligible carriers." This certification allows them to
receive the universal services funding component of the support
payment funding program administered by the FCC. Breda, Prairie
Telephone and Westside Independent were able to obtain the
certification because they are rural telephone providers. They do not
anticipate any loss of that certification, but the loss of the
certification would result in them no longer receiving the universal
services funding component under the referenced FCC program. Although
also not anticipated to occur, they will also lose the right to
receive universal services funding if they do not provide certain
services supported by the universal services program. Those services
are, however, currently only the basic local telephone services
provided by Breda, Prairie Telephone and Westside Independent. This
certification therefore does not materially affect the operation of
their businesses, and the certification was obtained solely because it
was necessary in order to be eligible to receive universal services
funding. They received, in the aggregate, approximately $79,680 in
universal services funding in 1999. The FCC's allocation of universal
services funding and of the other two components of the support
payment funding program to the numerous eligible recipients is
discussed below.
o Breda, Prairie Telephone and Westside Independent are currently
treated as rural telephone companies under the Telecommunications Act
of 1996, which generally means that they may be exempted from some of
the duties imposed on other telephone companies that might make it
easier for potential competitors to compete with those companies. The
IUB may withhold this exemption, however, if it finds that a request
by a potential competitor for interconnection with Breda's, Prairie
Telephone's or Westside Independent's networks is not unduly
economically
17
burdensome, is not technically unfeasible, and would not affect the
provisions of universal service. It is not possible to accurately
predict whether a competitor will ever request interconnection or
whether the request would be granted by the IUB. If a request is made
and the IUB withholds this exemption, however, Breda, Prairie
Telephone and Westside Independent would face competition in providing
telephone services that they have not faced in the past.
o Breda, Prairie Telephone and Westside Independent are also subject to
regulation by the FCC. The material areas of regulation by the FCC are
described in the following paragraphs.
As discussed above, the FCC (along with NECA) regulates the amount of
access charges that can be charged by Breda, Prairie Telephone and
Westside Independent for interstate long distance calls. The
regulation of access charges is an area of particular concern to
Breda, Prairie Telephone and Westside Independent, and is discussed
above.
The FCC must approve of any expansion in the telephone service areas
currently served by Breda, Prairie Telephone and Westside Independent.
The primary factors that will be considered by the FCC in the event of
a request for an expansion will be the managerial, financial and
technical abilities of Breda, Prairie Telephone or Westside
Independent, as the case may be, and the antitrust implications of the
expansion. Although they do not anticipate any material difficulties
in the event of any proposed expansion, there is no guarantee that any
future proposed expansion in the service areas of Breda, Prairie
Telephone or Westside Independent will be approved by the FCC.
The FCC regulates the amount of support payment funding that will be
received by Breda, Prairie Telephone and Westside Independent. The FCC
does so primarily by targeting how the support payment funding
received from NECA and the Universal Service Administrative Company
will be allocated among the various possible recipients of the
funding. The allocation may vary from year to year depending on the
FCC's determination. For example, the most recent allocation targeted
a larger percentage of the universal services funding component than
in the past to schools and libraries because of the FCC's
determination of a need by those entities for expansion of lines for
computers and Internet access. It is not possible to accurately
predict how the FCC will allocate the support payment funding in any
year, and although Breda, Prairie Telephone and Westside Independent
currently contemplate being recipients of the funding in every year,
the amount of support payment funding received by them will likely
vary from year to year. For example, Breda, Prairie Telephone, and
Westside Independent received, in the aggregate, $538,818 in support
payment funding in 1998, but they received $404,136 in 1999. Those
amounts include the amount of the universal services funding component
which is listed in the
18
above discussion regarding the IUB. Breda, Prairie Telephone and
Westside Independent do not believe, however, that any variance will
materially affect their business.
o As discussed above in the "DESCRIPTION OF BUSINESS" section of this
annual report, numerous uncertainties exist regarding the possible
effects of the Telecommunications Act of 1996 on the business of
Breda, Prairie Telephone and Westside Independent. For example, that
Act may open up Breda, Prairie Telephone and Westside Independent to
competition that they were not subject to in the past.
Breda's other primary source of revenue on a consolidated basis with its
subsidiaries is generated from Tele-Services' cable business. Tele-Services'
operating revenues arise primarily from monthly fees for basic and premium cable
services provided to its cable subscribers. Tele-Services' main competition at
the time of the preparation of this annual report was from satellite dish
providers. Recent actions by the FCC have allowed satellite dish providers to
provide local channels, which could have an adverse effect on Tele-Services,
given that its ability to provide local channels was, in the past, one reason
subscribers might choose Tele-Services' cable services over a satellite dish.
Other rulings and decisions by the FCC are possible, and may provide satellite
dish providers, or other providers as changes in the telecommunications and
cable industry occur, with equal or greater advantages than Tele-Services can
offer to its subscribers, which could obviously have an adverse effect on
Tele-Services' business. Breda currently believes, however, that the cable
services provided by Tele-Services will continue to be desirable for at least
those subscribers who desire a lower priced product that allows local channel
options. Another difficulty being faced by Tele-Services at the time of the
preparation of this annual report was the trend of the companies which provide
programming licensing to cable services providers to require the cable services
providers to include particular channels on their systems as a condition of
receiving a programming license. Tele-Services anticipates that it will need to
upgrade its plant, equipment and cables in order to add more channel line-ups so
that it can stay competitive and continue to be able to obtain programming
licenses. The cost of those upgrades in the next twelve months, however, is
estimated to be less than $50,000.
As discussed above in the "DESCRIPTION OF BUSINESS" section of this Annual
Report, Tele-Services provides cable services to the various towns pursuant to
franchises or agreements with each of those towns. Tele-Services does not
anticipate that any of those franchises or agreements will be terminated before
their normal expiration dates, and Tele-Services also hopes to be able to renew
or extend the franchises or agreements before they expire. No assurance can be
given, however, that any franchise or agreement with any town can or will be
renewed or extended.
The termination of a franchise or agreement would allow that town to deny
Tele-Services access to its cables for maintenance and services purposes. This
would create difficulties for Tele-Services in properly serving its subscribers,
and, in general, providing cable services to that town.
19
The franchises or agreements with the towns require the giving of notice to the
towns before Tele-Services can change its cable services rates for those towns,
and some of those franchises or agreements may require the approval of the town
for any increases in those rates. Although Tele-Services does not anticipate any
material difficulties with any future proposed rate increases, there can be no
guarantee that future proposed increases can be implemented in all of the towns.
As discussed above in the "DESCRIPTION OF BUSINESS" section of this annual
report, numerous uncertainties exist regarding the possible effects of the
Telecommunications Act of 1996 on the business of Tele-Services. For example,
that Act may open up Tele-Services to competition that it was not subject to in
the past.
Tele-Services is regulated by the FCC. The rules and regulations of the FCC
primarily rate to general operational and technical issues, and they do not
currently affect rates or expansions of service areas.
Other revenues arise from the telemarketing activities of Pacific Junction, as
discussed above in the "DESCRIPTION OF BUSINESS" section of this annual report.
Although Pacific Junction can provide telemarketing services to various
customers, as of the time of the preparation of this annual report, Pacific
Junction was receiving primarily all of its revenues from one customer. As also
discussed above in the "DESCRIPTION OF BUSINESS" section of this annual report,
Pacific Junction has in the past been heavily dependent upon third party vendors
for soliciting calling lists and telemarketing programs from major companies,
and Pacific Junction's current vendor has struggled to provide Pacific Junction
with a continuous supply of telemarketing numbers. Pacific Junction is therefore
soliciting free-lance work and new vendor contacts. Breda and Pacific Junction
do not, however, expect the next 12 months to show a substantial change in
telemarketing revenue. The telemarketing calls made by Pacific Junction are also
a major source of access charges revenue for Breda.
Other revenues arise from the investments in various cellular limited
partnerships and cellular corporations. Those sources of revenue are briefly
discussed above in the "DESCRIPTION OF BUSINESS" section of this annual report.
Other miscellaneous sources of revenue are also discussed in the financial
statements found at the end of this annual report.
As also discussed above in the "DESCRIPTION OF BUSINESS" section of this annual
report, Prairie Telephone has entered into a Stock Purchase Agreement with
AirTouch Iowa, LLC whereby Prairie Telephone will sell all of its 3,000 shares
of common stock in Central Iowa Cellular, Inc. to AirTouch Iowa, LLC for
approximately $5,100,000. Prairie Telephone may also receive up to approximately
$473,857 under the Des Moines Tower Proceeds Agreement that Prairie Telephone
entered into with AirTouch Communications, Inc. as part of that transaction. As
also discussed above in the "DESCRIPTION OF BUSINESS" section of this annual
report, however, the closing of those agreements and transactions is subject to
various conditions precedent. Although there can be no guarantee that all of
those conditions precedent will be satisfied, Breda and Prairie Telephone
20
currently contemplate that all of those conditions precedent will be satisfied
and that the agreements and the transactions contemplated by the agreements will
close in approximately 4 to 6 weeks from the date of the execution of the
agreements, which was on March 29, 2000.
The following table reflects, on a consolidated basis for Breda and its
subsidiaries, the percentage of revenue derived from Breda's and its
subsidiaries' various businesses and investments as of the close of the past two
fiscal years:
1998 1999
---- ----
Local Network(1) 6.1% 9.7%
Network Access(2) 37.8% 42.1%
Billing and Collection(3) 1.5% 1.4%
Cable and Direct Broadcast
Satellite Services(4) 33.1% 19.8%
Telemarketing Services(5) 8.9% 7.5%
Miscellaneous(6) 12.6% 19.5%
---- -----
Total 100% 100%
(1) Includes flat monthly fees charged to subscribers by Breda, Prairie
Telephone and Westside Independent for basic local telephone services.
(2) Includes universal services funding amounts and access charges payable
by long distance carriers for intrastate and interstate exchange
services provided to those long distance carriers.
(3) Includes fees from long distance providers for billing and collection
services for long distance calls made by subscribers.
(4) Includes monthly fees charged for basic and premium cable services, and
direct broadcast satellite services. The direct broadcast satellite
operation was sold in January, 1999.
(5) Includes revenues from telemarketing services.
(6) Includes monthly fees charged for internet access, cellular
commissions, advertising fees, and miscellaneous revenues.
Year Ended December 31, 1998 to Year Ended December 31, 1999.
There was a decrease in total operating revenues for the twelve month period
ended December 31, 1999, when compared to the same period in 1998, of
$1,255,034, or 19.2%. The significant factor contributing to the decrease was
the fact that no direct broadcast service revenues were received after the
January 11, 1999 sale of the direct broadcast satellite operation. For example,
during the twelve month period ended December 31, 1998, direct broadcast service
revenues represented 18.2% of total operating revenues, or $1,191,897. Two other
important components of the decrease in total operating revenues were the
decreases in the revenues from telemarketing services and in access charges.
Telemarketing revenues of Pacific Junction decreased by $182,674, or 31.4%,
because of some calling number unavailability, which resulted in Pacific
Junction not being able to make telemarketing calls. Access charges revenues
decreased by $240,877, or 9.8%, because of a reduction in the reimbursement rate
for interstate access charges and because of a decline in the
21
volume of telemarketing calls made by Breda's subsidiary, Pacific Junction. The
telemarketing calls made by Pacific Junction are estimated to represent
approximately 5% of the total consolidated access revenue in 1999.
There was an increase in local network services revenue of $115,430, or 29%,
during the twelve month period ended December 31, 1999, when compared to the
same period in 1998. This increase was due primarily to two factors. One was an
increase of 340 telephone subscribers, which resulted from Breda's purchase of
Westside Independent in June of 1998. The other factor was a rate increase,
which went into effect in April 1999.
There was also an increase in cable television revenues of $77,976, or 8%, when
comparing the two periods. This increase resulted primarily from three factors.
One was a rate increase that was effective on April 1, 1999. The second was the
addition of 90 cable subscribers from Auburn, Iowa as of November 1, 1998. The
third was the addition of 301 additional cable subscribers resulting from
Tele-Services' acquisition of Westside Communications in June, 1998. As
discussed above in the "DESCRIPTION OF BUSINESS" section of this annual report,
Westside Communications was subsequently merged into Tele-Services in December,
1999.
There was also an increase in revenues from internet services of $183,434, or
83.6%, when comparing the two periods. This increase resulted from an increased
customer base.
There was a decrease in total operating expenses of $601,874, or 11.8%, for the
twelve month period ended December 31, 1999, when compared to the same period in
1998. Programming expenses declined by $936,283, or 77.7%, when comparing the
two periods because of the sale of the direct broadcast satellite operation. The
remaining programming expenses are attributable to cable television operations.
Plant operations increased by $39,627, or 2.8%, when comparing the two periods.
This increase primarily reflects wage and price increases. The increase would
have been higher, but the additional expenditures incurred with updating
switches in four of the telephone exchange service areas in 1999 have been
capitalized. There were also additional expenses incurred during the twelve
month period ended December 31, 1999 with equipment updates to add cable
television channels in most of the 19 towns served by Tele-Services. Corporate
operations expenses increased by $290,777, or 43.4%, when comparing the two
periods. This increase relates to expenditures and benefits for additional staff
for a full year in 1999, as compared to a partial year in 1998. Legal,
accounting and other expenses were increased due to Breda becoming a reporting
company under Securities Exchange Act of 1934. It is estimated that these types
of expenditures totaled approximately $125,000 in 1999. These types of expenses
will be an ongoing operating expense for Breda. Breda also invested in computer
training for its office staff members and in switch training for its technicians
with the installation of the upgraded switches. The education expenses were
approximately $25,000 for the twelve-month period ending December 31, 1999.
Customer operation expenses decreased by $108,795, or 13.4%, when comparing the
two periods. The decrease resulted partially from the fact that Breda did not
need to provide customer services for the direct broadcast satellite operation
after the sale of that operation in January, 1999. The main decrease in customer
operation expense was caused by a decrease in Pacific Junction's telemarketing
22
payroll expenditures, which decrease resulted from the unavailability of numbers
for calling. The upgrading of switch equipment and other capital improvements
resulted in an increase in depreciation expense of $105,047, or 11.6%, again
when comparing the two periods.
Non-operating income before income taxes increased by $7,330,637, or 12,014.9%,
during the twelve month period ended December 31, 1999, when compared to the
same period in 1998. Most of this increase was the result of the $7,436,415 gain
on the sale of the direct broadcast satellite operation and the interest income
increase of $271,719 on the funds invested from that sale. The twelve-month
period ended December 31, 1999, reflected a $13,136 increase in income from
cellular partnerships when compared to the same period in 1998. However, the
twelve month period ended December 31, 1999, also reflected no income from
non-recurring cellular partnership settlements, as compared to the twelve month
period ended December 31, 1998, which showed a $409,212 income from that source.
The loss on the disposal of assets in 1999 and 1998 was, respectively, $73,996
and $118,443, and resulted from writing off the undepreciated basis in the old
switches that were replaced in 1999 and 1998. The loss on the sale of
investments in 1999 of $78,771, as compared to a $8,853 gain in 1998, was a
result of the liquidation of investments not held to maturity to pay income
taxes on the sale of the satellite operation. Interest expense increased
$15,816, or 3.2%, for the twelve month period ended December 31, 1999, when
compared to the same period in 1998. There was no increase in outstanding debt,
and this increase resulted from the increase in the variable interest rate
payable on some of Breda's and its subsidiaries' outstanding debt with the Rural
Telephone Finance Cooperative.
Income taxes increased by $2,514,264 for the twelve-month period ended December
31, 1999, when compared to the same period in 1998. The increase resulted
primarily from taxes on the gain on the sale of the direct broadcast satellite
operation.
Net income increased by $4,163,213 for the twelve-month period ended December
31, 1999, when compared to the same period in 1998. The increase was
attributable mainly to the sale of the direct broadcast satellite operation.
Liquidity and Capital Resources at Twelve Months Ended December 31, 1999.
Breda's net working capital was a positive $885,642 as of the close of December
1999. This represents an increase of $1,311,164 in net working capital from
year-end 1998. The positive working capital at year-end 1999 was due mainly to
two factors. One factor was a $796,660 combined decrease in the current portion
of long-term debt and the absence of an outstanding line of credit balance. A
$750,000 line of credit advance was taken from the Rural Telephone Finance
Cooperative in December of 1998, and paid back on January 12, 1999. The second
factor was a $542,330 overpayment of income taxes showing as a current asset on
the balance sheet on December 31, 1999.
Breda had a decrease in cash and cash equivalents of $371,618 during the twelve
months ended December 31, 1999, when compared to the year ended December 31,
1998. This resulted in a
23
balance of $411,341 as of December 31, 1999. While Breda's current investments
decreased by $19,740, its overall current and long-term investments increased by
$2,867,839. The increase in the overall cash and investments resulted primarily
from the proceeds received from the sale of the direct broadcast satellite
operation after income taxes were paid. A small portion of those proceeds was
used to finance the seven switch conversions completed in 1998 and 1999.
Breda's net working capital was a positive $885,642 at December 31, 1999.
Estimated income tax payments were funded from non-current assets during this
time period and prepaid income taxes of $542,330 are reflected in current assets
as of December 31, 1999. These prepaid taxes will be used to offset the first
Year 2000 estimated income tax installment due in April 2000. Breda has a
$750,000 line of credit with Rural Telephone Finance Cooperative and Prairie
Telephone has a line of credit with Rural Telephone Finance Cooperative for
$250,000. It is anticipated that the use of those lines of credit will be
considered for quarterly income tax payments in lieu of redeeming held-
to-maturity investments. Overall current liabilities decreased by $1,064,972 for
the twelve months ended December 31, 1999, as compared to the year ended
December 31, 1998. Accounts payable decreased by $225,363, mainly due to the
fact that there were no outstanding direct broadcast satellite programming fees
for the last month of the fiscal year, given the sale of the direct broadcast
satellite operation on January 11, 1999. As previously noted, there was also a
zero balance for the line of credit as of December 31, 1999, as compared to
$750,000 on December 31, 1998. Other investments increased by $257,466 for the
twelve-month period ending December 31, 1999. This increase resulted from
increased investments in cellular partnerships.
A final balloon payment of $79,382 was made in October of 1999 on the real
estate contract entered into by Tele-Services for the building utilized by Breda
and Prairie Telephone as their office and headquarters.
Breda's primary ongoing capital investment activity will currently continue to
be additions to property, plant and equipment. For example, Breda continues to
make investments in state-of-the-art technology in order to try to offer
subscribers the best possible service. Capital expenditures for 1999 were
$1,249,414, and are currently expected to be approximately $528,000 in 2000.
Breda anticipates that substantial expenditures will need to be made for
software upgrades that will become necessary in order for Breda, Prairie
Telephone and Westside Independent to become compliant with the requirements of
the Communications Assistance for Law Enforcement Act ("CALEA"). CALEA was
passed in 1994 in response to rapid advances in telecommunications technology,
such as the implementation of digital technology and wireless services, that
have threatened the ability of law enforcement officials to conduct authorized
electronic surveillance. CALEA requires telecommunications carriers to modify
their equipment, facilities, and services to ensure that they are able to comply
with authorized electronic surveillance. These modifications were originally
scheduled to be completed by October 25, 1998, but in accord with an extension
granted by the FCC, must now generally be completed by June 30, 2000. However,
for wireline, cellular, and broadband personal communications service carriers,
implementation of a packet-mode capability and six Department of Justice/Federal
Bureau of Investigation "punch list" capabilities
24
must be completed by September 30, 2001. Breda is currently seeking estimates
for the cost to upgrade Breda's, Prairie Telephone's and Westside Independent's
software as necessary to become compliant with the Act, but, as indicated, Breda
anticipates substantial expenditures will be necessary, and that those
expenditures may be as much as approximately $200,000. Breda does, however,
intend to attempt to seek an extension of the time period in which Breda,
Prairie Telephone and Westside Independent must become compliant with the Act,
so that the software upgrades necessary to become compliant with the Act can be
made over an extended basis and as part of the software enhancements that will
be necessary as part of Breda's, Prairie Telephone's and Westside Independent's
normal operations. If Breda were granted that extension, it is estimated that
the extension would be for a one-year period.
As of December 31, 1999, Breda and its subsidiaries had approximately $7,156,342
in outstanding loans with the Rural Telephone Finance Cooperative (the "RTFC").
Of the outstanding debt with the RTFC on that date, approximately $2,268,040 was
at a fixed interest rate of 7.35% per annum, and carried a ten year term. The
variable rates on the remaining RTFC debt exceed that fixed rate and could
affect future borrowing decisions and the allocation of outstanding debt between
fixed and variable rates.
Breda also plans to continue to consider expanding its core business of
providing telephone services by looking at any opportunities which may arise to
acquire additional telephone lines. For example, Breda considered and pursued
the acquisition of the telephone lines sold by GTE and US West in 1999. Those
telephone lines were, however, acquired by other telephone companies. One of the
purchasers of some of the telephone lines of GTE was Iowa Network Services, Inc.
Iowa Network Services, Inc. provides various services to telephone companies,
including Breda, Prairie Telephone and Westside Independent. Although no
definite plans exist, it is possible that Iowa Network Services, Inc. may
consider selling some of those telephone lines in the next two to five years. If
that occurs, Breda, Prairie Telephone and Westside Independent will consider
pursuing the acquisition of those telephone lines. There is no assurance,
however, that Iowa Network Services, Inc. will ever sell any of the telephone
lines, or if it does, that Breda, Prairie Telephone or Westside Independent will
determine to pursue those acquisitions or will be successful in acquiring any
lines even if they determine to pursue them. Breda also has an interest in
Alpine Communications, L.C., which was formed by several independent telephone
companies. Alpine Communications, L.C. has purchased former US West telephone
properties in Iowa. Given the recent acquisitions of the GTE and US West
telephone lines by other telephone companies, Breda currently does not foresee
the possibility of the acquisition of any additional telephone lines, other than
perhaps from Iowa Network Services, Inc. as discussed above.
Breda, Prairie Telephone and Westside Independent currently have no definite
plans to provide any material additional or improved services to their
subscribers. This determination may change quickly, however, given the rapidly
changing technology in the telecommunications and cable industries.
As discussed above in the "DESCRIPTION OF BUSINESS" section of this annual
report, Breda and
25
Prairie Telephone have purchased spectrum for providing personal communications
services in the Breda, Lidderdale and Yale telephone exchange areas. Prairie
Telephone has also become a member in Guthrie Group, L.L.C., which is a limited
liability company which was organized to purchase spectrum for providing
personal communications services in the Guthrie County, Iowa area. Breda is also
currently contemplating becoming a member in a limited liability company which
may acquire spectrum for providing personal communications services in other
areas. Personal communications service is a relatively new area in the
telecommunications industry and includes wireless voice and data communication.
Although difficult to predict, personal communications services may become very
important in the future and may be highly competitive with current cellular
services. Breda and Prairie Telephone have not made any firm decision on whether
they will ever offer any personal communications services, and they do not in
any event contemplate offering any personal communications services for at least
one to two years, primarily because those services must first be available in
surrounding areas before Breda and Prairie Telephone can provide those services.
Breda estimates that it will take at least one to two years for the surrounding
areas to build out their personal communications systems to the point where
Breda and Prairie Telephone could connect to those systems. Breda, Prairie
Telephone and Westside Independent do not currently own spectrum for all of the
telephone exchange service areas currently serviced by them, and there is no
guarantee that they will be able to acquire spectrum for all of those areas.
Also, Breda, Prairie Telephone and Westside Independent will face competition in
providing personal communications services because no exclusive rights can be
acquired with respect to personal communications services. The area of personal
communications services is therefore an uncertain area for Breda, Prairie
Telephone and Westside Independent.
Personal communications services are competitive with the telephone services
otherwise provided by Breda, Prairie Telephone and Westside Independent. Breda
does not believe, however, that investments in personal communications services
or in ventures which may be involved in personal communications services are
inconsistent or in conflict with Breda's, Prairie Telephone's or Westside
Independent's overall business. Breda also believes positioning itself to be
able to offer personal communications services or investing in other ventures
which may offer personal communications services are a method of attempting to
diversify across the various telecommunications methods which are available
today or may become important in the future.
To date neither Breda nor any of its subsidiaries has experienced any material
difficulties regarding Year 2000 issues.
There are no current plans to expand the cable services areas of, or the cable
services provided by, Tele-Services.
Breda and its subsidiaries have and will continue to incur capital expenditures
in connection with upgrading their telephone, cable and other equipment and
systems.
Breda believes that the funds from the sale of its direct broadcast satellite
division, along with its anticipated normal operating revenues, will generate
sufficient working capital for Breda and its
26
subsidiaries to meet their current operating needs and maintain historical fixed
asset addition levels. This belief will be further strengthened if the sale of
Prairie Telephone's stock in Central Iowa Cellular, Inc. is completed, as
discussed above, because that transaction will result in Prairie Telephone
receiving, in the aggregate, approximately $5,593,000, before taxes, and
approximately $3,525,000 after taxes.
DIRECTORS AND OFFICERS
The directors and executive officers of Breda as of the time of the preparation
of this annual report were as follows:
Name Age Position(s)
---- --- -----------
Dean Schettler 47 President and
Director
Clifford Neumayer 51 Vice-President and
Director
Larry Daniel 57 Secretary and
Director
Scott Bailey 37 Treasurer and
Director
Dave Hundling 52 Director
John Wenck 61 Director
Dave Grabner 51 Director
Dean Schettler has been a director of Breda since April, 1997, and the President
of Breda since April, 1998. His current term as a director will end at the
annual meeting of Breda's shareholders in May, 2000. He has also been a director
of each of Breda's subsidiaries since April, 1997, and the president of each of
those subsidiaries since April, 1998. Mr. Schettler has been employed by Pella
Corporation, Pella, Iowa, since August, 1986. He was a moulder technician until
August, 1997. Since that time he has been a production coordinator. Pella
Corporation is a window and door manufacturer.
Clifford Neumayer has been the Vice-President and a director of Breda since
April, 1996. His current term as a director of Breda will end in April, 2002. He
has also held each of those positions with each of Breda's subsidiaries since
April, 1996. Mr. Neumayer has been self employed as a farmer since 1970.
27
Larry Daniel has been the Secretary and a director of Breda since April, 1995.
His current term as a director of Breda will end in April, 2001. He has also
held each of those positions with each of Breda's subsidiaries since April,
1995. Mr. Daniel is a self-employed farmer, and has been for at least the last
five years.
Scott Bailey has been a director of Breda since April, 1998. His current term as
a director of Breda will end in April, 2001. He has also served as a director of
each of Breda's subsidiaries since April, 1998. He has been Breda's treasurer,
and the treasurer of Breda's subsidiaries since April, 1999. Mr. Bailey was the
finance manager of marketing and sales for Pella Corporation, Pella, Iowa, from
August, 1993, to September, 1995. He has been a controller for Pella Corporation
since September, 1995 to the present. Pella Corporation is a window and door
manufacturer.
Dave Hundling has been a director of Breda since April, 1997. His current term
as a director of Breda will end at the annual meeting of Breda's shareholders in
May, 2000. He has also served as a director of each of Breda's subsidiaries
since April, 1997. Mr. Hundling is also a self employed farmer, and has been for
at least the last five years.
John Wenck has been a director of Breda since April, 1997. His current term as a
director of Breda will end at the annual meeting of Breda's shareholders in May,
2000. He has also served as a director of each of Breda's subsidiaries since
April, 1997. Mr. Wenck is currently self employed as a farmer. He was also
previously employed by the United Parcel Service as a delivery driver.
Dave Grabner has been a director of Breda since April, 1999. His current term as
a director of Breda will end in April, 2002. He has also served as a director of
each of Breda's subsidiaries since April, 1999. Mr. Grabner is currently self
employed as an electrician, and has been for at least the last five years. He
was also previously self-employed as a farmer.
The number of directors for Breda is currently fixed at seven. Each of Breda's
directors is elected to a three year term and until his or her successor is
elected. The terms of the directors of Breda are staggered, so that three of the
directors' terms expire in one year, two expire the next year, and two expire
the following year. If a person has served for three consecutive terms as a
director, that person must be off the board for at least one year before the
person can again be elected as a director. Each director of Breda must also be a
shareholder of Breda, and a director shall automatically cease to be a director
if he or she sells or transfers all of his or her shares of common stock in
Breda. Each director must also be at least 18 years of age.
The officers of Breda are elected annually by the board of directors at its
annual meeting, and hold office until the next annual meeting of the board of
directors and until their successors are chosen. Officers may be removed by the
board of directors at any time, with or without cause. Each officer must also be
a director and a shareholder of Breda. The officers of Breda are identified in
the above table and discussions.
28
Breda believes that two of its employees are making, and will continue to make,
a significant contribution to its business. Those employees are as follows:
Name Age Position
---- --- --------
Robert J. Boeckman 38 Manager
Jane A. Morlok 46 Co-Manager
Mr. Boeckman has been employed by Breda in various capacities since May, 1982.
Prior to January, 1995, he was Breda's assistant manager. He has been the
manager since January, 1995, and he was also given the title of chief operating
officer in March, 1998.
Ms. Morlok has been the co-manager of Breda since March 30, 1998. Ms. Morlok was
the assistant administrator/CFO of Manning Regional Healthcare Center in
Manning, Iowa from July of 1987 until March 20, 1998. Her responsibilities in
that position included budgeting, reimbursement and rate setting for the
hospital and nursing home run by the Manning Regional Healthcare Center, as well
as daily general ledger operations and IRS filings. She also provided similar
services to several other affiliated corporations.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Breda is authorized to issue 5,000,000 shares of common stock. Breda had 37,682
shares of its common stock issued and outstanding as of March 1, 2000. Those
shares were held by approximately 630 different shareholders.
Breda's common stock is not listed on any exchange, and there is no public
trading market for Breda's common stock. Breda has also not agreed to register
any shares of its common stock under any federal or state securities laws. An
investment in Breda's common stock is also not a liquid investment because the
Amended and Restated Articles of Incorporation of Breda establish various
conditions on the issuance of, and various restrictions on the transfer of,
shares of its common stock. Those conditions and restrictions are summarized in
the following paragraphs.
The common stock can only be issued to:
o residents of the Breda or Lidderdale telephone exchange areas served
by Breda who subscribe to Breda's telephone services, and
o entities which have their principal place of business in the Breda or
Lidderdale telephone exchange areas served by Breda and which
subscribe to Breda's telephone services.
29
As indicated, only residents of the Breda and Lidderdale telephone exchange
service areas served by Breda are eligible to purchase stock. Although Breda
also provides telephone services to Macedonia, Iowa and the surrounding area,
residents of Macedonia, Iowa and the surrounding rural area cannot acquire any
shares of common stock of Breda even if they are receiving telephone services
from Breda. Subscribers to any services from any of Breda's subsidiaries also
cannot buy common stock of Breda unless they otherwise meet the requirements
discussed above in this paragraph.
Since approximately January 1, 1996, no person has been allowed to purchase more
than thirty shares of common stock from Breda. A shareholder can own more than
thirty shares, subject to the 1% limitation discussed in the following
paragraph, but only thirty shares can be acquired through issuance of the shares
by Breda.
No shareholder may own more than 1% of the total issued and outstanding common
stock of Breda, unless:
o the shareholder already exceeded that percentage on February 28, 1995,
or
o the shareholder goes over 1% as a result of Breda redeeming shares of
its common stock from other shareholders.
In either of those cases, the shareholder may not increase the percentage of
shares owned by the shareholder. If a shareholder owns 5% or more of the
ownership interests of an entity which owns shares of Breda's common stock, the
shares of Breda's common stock held by that entity and by the shareholder will
be added together for determining whether the 1% limitation is exceeded.
There can generally only be one shareholder for each telephone number served by
Breda. There can also generally only be one shareholder for each household
receiving telephone services from Breda, even if the household has more than one
telephone number.
Breda's board of directors determines the purchase price payable for
newly-issued shares of Breda's common stock. Breda's board of directors also
determines the redemption price that will be paid by Breda if it elects to
redeem a shareholder's shares in any of the circumstances in which Breda has the
right to purchase those shares. Breda has that right if:
o the shareholder is no longer receiving services from Breda, unless the
shareholder already was not receiving services from Breda on February
28, 1995;
o the shareholder no longer resides in the Breda or Lidderdale telephone
exchange areas served by Breda, unless the shareholder already resided
outside those areas on February 28, 1995; or
30
o the shareholder dies, unless the heir of the shares of Breda's stock
meets the eligibility requirements for ownership of Breda's stock.
The board of directors has historically established the issuance price and the
redemption price at approximately 75% of the book value of Breda. The board of
directors has historically made this determination at or around the annual
meeting of the board, which is generally held in April or May, based upon
Breda's then most recent year-end audited financial statements. Breda's fiscal
year ends on December 31. The issuance price and the redemption price as so
determined by the board of directors then generally applies until the board of
directors makes a new determination at or around the next annual meeting of the
board. Under this approach, the issuance price and redemption price determined
by the board of directors at or around its annual meeting in 1995, 1996, 1997,
1998 and 1999 was, respectively, $27, $31, $41, $64 and $82.
The board of directors departed from its historical practice, however, on
November 2, 1999, by adopting a resolution fixing the issuance price for
newly-issued shares and the redemption price to be $149 per share. The $149
amount is not based on Breda's book value, but rather is roughly based upon the
average sales price of $150.58 per share in the auction that was held in October
of 1999. The auction is discussed below. The board of directors took this action
because it believed the above-referenced auction provided it with a basis to
make a more current determination on this issue. The board of directors also
believed it was appropriate to make a new determination of the issuance price
and redemption price given the sale of Breda's direct broadcast satellite
operation. The sale of that operation resulted in a pre-tax gain of $7,436,415.
The sale was not included in Breda's books until the first quarter of 1999,
however, and was therefore not included in the 1998 year-end financial
statements utilized by the board of directors in establishing the $82 purchase
price at or around the 1999 annual meeting of the board of directors. The board
of directors currently intends to otherwise address this issue on an annual
basis, however, consistent with the above-described historical practices of the
board of directors. Accordingly, it is contemplated that the board of directors
will establish a new issuance price and redemption price at or around the 2000
annual meeting of the board of directors, and that the price will be set at
approximately 75% of the book value of Breda as of December 31, 1999. Breda
estimates that the issuance price and redemption price that will be set at or
around the 2000 annual meeting of the board of directors will be approximately
$180. Any amounts received in connection with the sale of Prairie Telephone's
shares of stock in Central Iowa Cellular, Inc. will not be included in
determining that price, because those amounts will not be included in the
December 31, 1999 financial statements.
The board of directors may, however, change or depart from any of the practices
described in the preceding paragraphs at any time and in its discretion.
Since there is no public trading market or any other principal market for
Breda's common stock, repurchases of common stock by Breda currently is the
primary method for a shareholder to be able to sell the shareholder's shares. As
discussed below, an auction at which shareholders desiring to sell their shares
of Breda's common stock were given the opportunity to sell those shares to other
Breda shareholders was held in October of 1999, but there are no current plans
to arrange any other auctions in the future. Breda also maintains a list of
shareholders desiring to sell their shares, and
31
of other shareholders desiring to purchase those shares, as discussed below.
In any of the circumstances where Breda has the right to redeem a shareholder's
shares, a shareholder may, with the consent of Breda's board of directors,
transfer the shareholder's shares to another person who is eligible to be a
shareholder by reason of the fact that the person is receiving services from
Breda and is residing in the Breda or Lidderdale telephone exchange areas served
by Breda.
No shareholder can sell or transfer any of his or her shares of Breda to any
person who is not eligible to be a shareholder in Breda by reason of the fact
that the person is receiving services from Breda and is residing in the Breda or
Lidderdale telephone exchange areas served by Breda, with one exception. The
exception is that a person who was a shareholder on July 20, 1995, may make a
one time transfer of the shares held by the person on that date to a family
member of the shareholder (which means a spouse, natural born or adopted child,
grandchild, parent, grandparent, or sibling) even if the family member is not
receiving services from Breda and is not residing in the Breda or Lidderdale
telephone exchange areas served by Breda. These transfers are not subject to
Breda's right of first refusal described in the following paragraph. Any family
member receiving shares by this process does not have the same right, however,
and can only sell or transfer the shares in accordance with the Amended and
Restated Articles of Incorporation of Breda.
Any shareholder who wants to sell or transfer his or her shares in Breda to
another shareholder or person who is eligible to be a shareholder must first
give Breda the right to purchase the shares. In this case, the shareholder must
give Breda at least sixty days prior written notice of the proposed sale,
including a copy of the written offer to purchase the shares. Breda may elect to
purchase the shares for the same price offered to the shareholder at any time
within sixty days after it receives the notice from the shareholder. If Breda
elects to buy the shares, it must pay the purchase price in full upon the
shareholder surrendering the stock certificates for the shares to Breda.
Breda's bylaws may also contain provisions restricting the transfer of shares.
The current bylaws do not contain any restrictions, other than some of those
described in this annual report, but the bylaws can be amended by the directors
or shareholders at any time.
Over the period of January 1, 1996 through June 24, 1996, Breda repurchased four
hundred and twenty-four shares of its common stock from two shareholders, at a
purchase price of $27 per share. Over the period of June 25, 1996 through
February 20, 1997, Breda repurchased seven hundred and eighty-nine shares from
nine different shareholders, at a purchase price of $31 per share. Over the
period of February 21, 1997 through March 1, 1998, Breda repurchased one
thousand nine hundred and ninety-six shares of its common stock from fourteen
different shareholders, at a purchase price of $41 per share. Over the period of
March 2, 1998 through December 31, 1998, Breda repurchased three hundred and
fifty-eight shares of its common stock from five different shareholders, at a
purchase price of $64 per share. No shares were repurchased by Breda during the
period of December 31, 1998 through December 31, 1999, except that in November,
1999, Breda did effectuate a repurchase of forty shares by depositing the
purchase price for those forty shares with the appropriate Iowa authorities
under Iowa's escheat laws. The forty shares were held of record by
32
twenty different shareholders that Breda had been unable to locate. The purchase
price utilized for this purpose was the then current $149 per share price as
established by the board of directors pursuant to the procedures which are
discussed above in this section of this annual report. Breda also deposited the
amount of the April 21, 1999 dividend that was otherwise payable on the forty
shares. The total amount deposited by Breda was $6,080, with $120 of that amount
being for the April 21, 1999 dividend.
There may have been transfers among the shareholders of Breda during the above
periods for which Breda did not exercise its right of first refusal.
Breda's ability to repurchase any of its shares is subject to certain
restrictions in its loan agreements with the RTFC. Those restrictions are
discussed below in this item.
Breda has not agreed to register any of its shares of common stock under any
federal or state securities laws. Rule 144 under the Securities Act of 1933 will
permit the resale of shares of common stock by shareholders, subject to certain
restrictions contained in Rule 144, including the requirement that the
shareholder has held his or her shares for a period of one year prior to the
date of resale. Once a shareholder (other than a shareholder who is an officer
or director of Breda) has held his or her shares of common stock for a period of
two years, the shareholder will be able to resell the shares without restriction
under Rule 144.
The marketability and value of Breda's shares of common stock may also be
limited by other terms of the common stock. For example, each shareholder is
entitled to only one vote on each matter presented to the shareholders,
regardless of the number of shares of common stock held by the shareholder, with
one exception regarding shareholders who previously held Class A stock of Breda.
Those shareholders have one vote for each share of former Class A stock
previously held by them on February 28, 1995, until one of the following occurs:
o the shareholder no longer receives service from Breda,
o the shareholder no longer resides in the Breda or Lidderdale telephone
exchange area served by Breda,
o the shareholder dies, or
o the shareholder transfers the shareholder's shares to someone else.
As of March 1, 2000, there were 21 shareholders with multiple voting rights
arising from their prior ownership of Class A stock, and they have one vote for
each share of the former Class A stock previously held by them.
An auction was held on October 24, 1999, where shareholders desiring to sell
their shares of Breda's common stock were given the opportunity to sell those
shares to other Breda shareholders desiring to purchase additional shares of
Breda's common stock. Breda paid the costs of the auction, except that the
sellers paid the auction fees and clerking fees related to their shares. The
auction was provided for the convenience of Breda's shareholders, and no shares
were repurchased or issued by
33
Breda pursuant to the auction. A total of 1,924 shares of common stock were sold
by 32 different shareholders to 25 other shareholders of Breda, for purchase
prices ranging from $145 per share to $180 per share. As discussed above, Breda
had a right of first refusal to purchase all of the shares sold in the auction,
but elected not to exercise its right. Breda did, however, offer to purchase
shares in the auction for $142 per share, but no shareholder chose to sell the
shareholder's shares to Breda at that price. The $142 figure was approximately
60% of Breda's book value per share as of the close of the second quarter in
1999. No officers or directors of Breda sold or purchased any shares in the
auction. Breda does not have any plans to arrange any other auctions in the
future.
The board of directors of Breda has also determined to allow shareholders to
advise Breda of the fact that they desire to sell any or all of their shares of
Breda's common stock to any qualified buyer, and to allow qualified buyers to
advise Breda of the fact that they desire to purchase shares of Breda's common
stock from other shareholders of Breda. Breda will keep a list of those
shareholders and qualified buyers, and make the list available to all of the
shareholders and qualified buyers on the list. A qualified buyer is a person who
is a resident of the Breda or Lidderdale telephone exchange areas served by
Breda who subscribes to Breda's telephone services, or an entity which has its
principal place of business in the Breda or Lidderdale telephone exchange areas
served by Breda and which subscribes to Breda's telephone services. A person or
entity cannot, however, be a qualified buyer if the person or entity already
owns more than 1% of the total issued and outstanding shares of common stock of
Breda. Also, a qualified buyer cannot purchase shares from any shareholder of
Breda to the extent that the shares purchased by the qualified buyer would cause
the qualified buyer to own more than 1% of the total issued and outstanding
shares of common stock of Breda. If a person owns 5% or more of the ownership
interests of an entity which owns shares of Breda's common stock, the shares of
Breda's common stock held by that entity and by the person will be added
together for determining whether the 1% limitation is exceeded. The 1%
limitation is set forth in the Amended and Restated Articles of Incorporation of
Breda. The terms of any sale between a shareholder and a qualified buyer will be
negotiated by them, and no one will be required to sell or buy any shares
because their name is on the list. Breda also retains its right to purchase any
shares being sold by any shareholder to any qualified buyer under the right of
first refusal granted to Breda in its Amended and Restated Articles of
Incorporation.
Two separate sales of shares have occurred between shareholders on the list. One
sale involved two shares, which were sold for $149 per share. The other sale
involved 31 shares, which were sold for $150 per share. Breda elected not to
exercise its right of first refusal on either of those sales.
Breda does not participate in, and has no responsibility for, negotiating the
terms and conditions of any sale of shares between anyone on the list. Breda
did, however, advise its shareholders by letter in February, 2000, that it
recommended that shareholders cease buying and selling shares until Breda was
able to share information with the shareholders concerning some corporate action
that could affect the value of Breda's common stock. Breda did not identify the
corporate action in the letter, but the corporate action that Breda was making
reference to in that letter was the potential sale of Prairie Telephone's stock
in Central Iowa Cellular, Inc., which is discussed elsewhere in this annual
report. Although no letter of intent or any other agreements for the sale of
that stock had been
34
entered into at the time of the letter to the shareholders, Prairie Telephone
had been contacted about the possibility of selling its shares in Central Iowa
Cellular, Inc. at that time.
Through December 31, 1999, Breda had only declared and paid two dividends to its
shareholders since Breda was incorporated in 1964. The first dividend was
declared on April 21, 1999. It was in the amount of $3.00 per share, for an
aggregate dividend of $113,166. The second dividend was declared on March 13,
2000. It was in the amount of $3.00 per share, for an aggregate dividend of
$113,046.
Payment of dividends is within the discretion of Breda's board of directors, and
out of funds legally available therefore as provided in the Iowa Business
Corporation Act. Breda's ability to declare and pay dividends is also restricted
by some of the covenants in its loan agreements with the RTFC. Under those
agreements, Breda may not pay any dividends without the prior written approval
of the RTFC unless, after the payment, Breda is in compliance with the various
ratios, net worth and margin requirements set forth in the loan agreements.
Breda also may not pay any dividends if Breda is in default under the loan
agreements or if the payment of the dividends would cause Breda to be in breach
of the loan agreements.
Those restrictions in the RTFC loan agreements also apply to Breda's purchase or
redemption of any of its stock and to any other distributions to its
shareholders, so the restrictions may preclude Breda from being able to
repurchase its shares of stock as otherwise discussed in this section of this
annual report.
Breda does not currently believe, however, that the restrictions in the RTFC
loan agreements will preclude Breda from paying any dividends or distributions
or from repurchasing any of its shares of common stock, should Breda otherwise
determine to do so.
No shares of stock were issued by Breda in all of 1999. There are currently no
outstanding warrants, options or other rights to purchase any shares of common
stock of Breda, and there are also currently no outstanding securities which are
convertible into common stock of Breda. Breda's shares of common stock are not
convertible into any other securities.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Breda has not had any change in its accountants during the last three years, or
any disagreements with its accountants during that period which are of the type
required to be disclosed under this section of this annual report.
Anderson and Company, in Emmetsburg, Iowa, has served as Breda's accounting firm
for over 20 years. Anderson and Company was merged into Kiesling Associates LLP,
effective as of June 1, 1999. Kiesling Associates LLP's principal office is
located in Madison, Wisconsin. It also has offices in other cities, including
Des Moines, Iowa, and Emmetsburg, Iowa. The merger of Anderson
35
and Company into Kiesling Associates LLP did not arise from any disagreements
with Breda and was otherwise unrelated to Breda, and Breda has engaged Kiesling
Associates LLP as Breda's accounting firm.
AVAILABILITY OF OTHER INFORMATION
Breda will provide to each shareholder, upon the written request of the
shareholder, a copy of Breda's annual report on Form 10-KSB for the year ended
December 31, 1999. The annual report on Form 10-KSB will be provided without
charge. Shareholders should direct any written request to Breda at the following
address:
Breda Telephone Corp.
Highway 217 East
P.O. Box 190
Breda, Iowa 51436
The request should be directed to the attention of Dean Schettler.
FINANCIAL STATEMENTS
The following pages set forth certain financial statements of Breda with
respect to the years ended December 31, 1998 and December 31, 1999.
[The remainder of this page is intentionally left blank.]
36
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
WITH INDEPENDENT AUDITOR'S REPORTS
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONTENTS
Page
Independent Auditor's Report 1
Consolidated Financial Statements:
Consolidated Balance Sheets 2-3
Consolidated Statements of Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Breda Telephone Corporation and Subsidiaries
Breda, Iowa
We have audited the accompanying consolidated balance sheets of Breda Telephone
Corporation (an Iowa corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Breda Telephone
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Emmetsburg, Iowa
February 18, 2000
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
------ ----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 411,341 $ 782,959
Current portion of investments 94,810 114,550
Accounts receivable 681,675 649,044
Income taxes refundable 542,330 --
Interest receivable 67,580 21,455
Inventories 88,479 80,279
Other 77,527 69,263
----------- -----------
1,963,742 1,717,550
----------- -----------
OTHER NONCURRENT ASSETS
Investments, less current portion 4,417,624 1,530,045
Other investments 2,725,488 2,468,022
Intangibles, net of accumulated amortization 1,222,372 1,753,447
Deferred income taxes 11,360 --
Other -- 21,390
----------- -----------
8,376,844 5,772,904
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 6,340,193 6,185,874
----------- -----------
TOTAL ASSETS $16,680,779 $13,676,328
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
- 2 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ----------- -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 608,412 $ 655,072
Line of credit -- 750,000
Accounts payable 239,787 465,150
Accrued taxes 125,643 177,033
Other 104,258 95,817
----------- -----------
1,078,100 2,143,072
----------- -----------
LONG-TERM DEBT, less current portion 6,547,930 7,156,342
----------- -----------
DEFERRED INCOME TAXES -- 268,888
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized
37,682 and 37,722 shares issued and outstanding at $149
and $64 stated value, respectively 5,614,618 2,414,208
Retained earnings 3,440,131 1,693,818
----------- -----------
9,054,749 4,108,026
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,680,779 $13,676,328
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
- 3 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999 and 1998
1999 1998
----------- -----------
OPERATING REVENUES
Local network services $ 512,829 $ 397,399
Network access services 2,224,956 2,465,833
Cable television services 1,047,667 969,691
Telemarketing services 398,763 581,437
Internet services 402,730 222,176
Direct broadcast services (DBS) -- 1,191,897
Billing and collection services 75,926 100,570
Miscellaneous 627,675 616,577
----------- -----------
5,290,546 6,545,580
----------- -----------
OPERATING EXPENSES
Plant specific operations 1,313,580 1,161,568
Plant nonspecific operations 99,353 202,533
Cost of programming 268,932 1,214,420
Depreciation and amortization 1,012,964 907,917
Customer operations 701,364 810,159
Corporate operations 961,065 670,288
General taxes 151,355 143,602
----------- -----------
4,508,613 5,110,487
----------- -----------
OPERATING INCOME 781,933 1,435,093
----------- -----------
OTHER INCOME (EXPENSE)
Interest and dividend income 473,964 202,245
Interest expense (503,302) (487,486)
Interest capitalized 26,441 --
Gain on sale of DBS investment 7,436,415 --
Gain (loss) on sale of investments (78,771) 8,853
Loss on disposal of assets (73,996) (118,443)
Loss on extinguishment of debt -- (66,913)
Income from cellular partnership 123,109 109,973
Income from cellular settlement -- 409,212
Loss on joint venture, net (15,864) (15,702)
Other income 3,654 19,274
----------- -----------
7,391,650 61,013
----------- -----------
INCOME BEFORE INCOME TAXES 8,173,583 1,496,106
----------- -----------
INCOME TAXES 3,107,734 593,470
----------- -----------
NET INCOME $ 5,065,849 $ 902,636
=========== ===========
NET INCOME PER COMMON SHARE $ 134.44 $ 23.86
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
- 4 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
Common Stock Retained
Shares Amount Earnings Total
---------- ----------- ----------- ----------
Balance at December 31, 1997 37,928 $ 1,555,048 $ 1,666,332 $3,221,380
Comprehensive income:
Net income 902,636 902,636
Common stock redeemed, net (206) (15,990) (15,990)
Stated value stock adjustment 875,150 (875,150)
---------- ----------- ----------- ----------
Balance at December 31, 1998 37,722 2,414,208 1,693,818 4,108,026
Comprehensive income:
Net income 5,065,849 5,065,849
Dividends paid ($3/share) (113,166) (113,166)
Common stock redeemed, net (40) (5,960) (5,960)
Stated value stock adjustment 3,206,370 (3,206,370)
---------- ----------- ----------- ----------
Balance at December 31, 1999 37,682 $ 5,614,618 $ 3,440,131 $9,054,749
========== =========== =========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
- 5 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,065,849 $ 902,636
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,012,964 907,917
Amortization of investment tax credits (9,769) (9,769)
Deferred income taxes (270,479) (146,224)
Gain on sale of DBS investment (7,436,415) --
Loss on disposal of assets 73,996 118,443
Change in method of accounting -- 49,115
Changes in operating assets and liabilities:
(Increase) decrease in assets (656,382) 109,690
Decrease in liabilities (268,312) (410,324)
----------- -----------
Net cash provided by (used in) operating activities (2,488,548) 1,521,484
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,249,414) (1,955,965)
Salvage, net of removal cost 6,475 162,377
Purchase of investments (2,867,839) 122,925
Increase in other investments (257,466) (99,961)
Purchase of intangibles (28,825) --
Proceeds from sale of DBS investment 8,038,197 --
----------- -----------
Net cash provided by (used in) investing activities 3,641,128 (1,770,624)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock redeemed (5,960) (15,990)
Proceeds from long-term debt -- 3,650,050
Proceeds from line of credit -- 750,000
Repayment of long-term debt (655,072) (3,964,846)
Repayment of line of credit (750,000) --
Dividends paid (113,166) --
----------- -----------
Net cash provided by (used in) financing activities (1,524,198) 419,214
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (371,618) 170,074
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 782,959 612,885
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 411,341 $ 782,959
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
- 6 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Breda Telephone Corporation is a provider of telecommunications
exchange and local access services, cable television services,
telemarketing services, internet services and telecommunications
equipment in a service area located primarily in west central Iowa.
The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles and reflect practices
appropriate to the telephone and cable television industries.
Management uses estimates and assumptions in preparing its
consolidated financial statements. Those estimates and assumptions
affect the reported amounts of assets and liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities.
Telephone operations reflect practices appropriate to the telephone
industry. The accounting records of the Company are maintained in
accordance with the Uniform System of Accounts for Class A and B
Telephone Companies prescribed by the Federal Communications
Commission as modified by the Iowa State Utilities Division (ISUD).
Principles of Consolidation
The consolidated financial statements include the accounts of Breda
Telephone Corporation and its wholly-owned subsidiaries, Prairie
Telephone Company, Inc., Westside Telephone Company, and
Tele-Services, Ltd. (herein referred to as "the Company"). All
material intercompany transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less
at the time of purchase are considered cash equivalents.
Investments
Debt and marketable equity securities bought and held principally for
selling in the near future are classified as trading securities and
carried at fair value. Unrealized holding gains and losses on trading
securities are reported in earnings. Debt and marketable equity
securities classified as available-for-sale are carried at fair value
with unrealized holding gains and losses recorded as a separate
component of stockholders' equity. Debt securities for which the
Company has both the positive intent and ability to hold to maturity
are classified as held-to-maturity and are carried at amortized cost.
The Company used the FIFO method of computing realized gains and
losses.
Non-marketable equity investments, over which the Company has
significant influence or a 20% ownership, are reflected on the equity
method. Other non-marketable equity investments are stated at cost.
- 7 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Property, Plant and Equipment
Property, plant and equipment are capitalized at original cost,
including the capitalized cost of salaries and wages, materials,
certain payroll taxes, and employee benefits.
The Company provides for depreciation for financial reporting purposes
on the straight-line method by the application of rates based on the
estimated service lives of the various classes of depreciable
property. These estimates are subject to change in the near term.
Renewals and betterments of units of property are charged to telephone
plant in service. When telephone plant is retired, its cost is removed
from the asset account and charged against accumulated depreciation
together with removal cost less any salvage realized. No gains or
losses are recognized in connection with routine retirements of
depreciable telephone property. Repairs and renewals of minor items of
property are included in plant specific operations expense.
Repairs of other property, as well as renewals of minor items of
property are included in plant specific operations expense. A gain or
loss is recognized when other property is sold or retired.
Long-Lived Assets, Including Intangibles
The Company would provide for impairment losses on long-lived assets,
including intangibles used in operations, when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Based on current conditions, management does not believe any of its
long-lived assets are impaired.
Income Taxes
Income taxes are accounted for using a liability method and provide
for the tax effects of transactions reported in the consolidated
financial statements including both taxes currently due and deferred.
Deferred taxes are adjusted to reflect deferred tax consequences at
current enacted tax rates. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities arise from differences
between the basis of property, plant and equipment and partnership
profits and losses. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled.
Revenue Recognition
The Company recognizes revenues when earned regardless of the period
in which they are billed. The Company is required to provide telephone
service to subscribers within its defined service territory.
Local network service, internet service and cable television service
revenues are recognized over the period a subscriber is connected to
the network.
- 8 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Network access revenues are derived from charges for access to the
Company's local exchange network. The interstate portion of network
access revenues are received through pooling arrangements administered
by the National Exchange Carrier Association (NECA) based on average
schedule formulas. The intrastate portion of network access revenues
are billed based upon the Company's tariff for access charges filed
with the ISUD. The charges developed from these tariffs are used to
bill the connecting long distance provider and revenues are recognized
in the period the traffic is transported based on the minutes of
traffic carried.
Other revenues include telemarketing services and contractually
determined arrangements for the provision of billing and collecting
services and are recognized in the period when the services are
performed.
The Company uses the reserve method to recognize uncollectible
accounts receivable.
Reclassifications
Certain reclassifications have been made to the 1998 financial
statements to conform with the 1999 presentation.
NOTE 2. INVESTMENTS
The amortized cost and fair value of investments classified as
held-to-maturity and available-for-sale are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
----------------- ---------- --------- ----------- ----------
Held-to-Maturity:
Municipal Bonds $4,361,468 $ 2,050 $ (141,995) $4,221,523
U.S. Treasury Notes 59,894 (5,908) 53,986
Government Securities 51,663 (3,506) 48,157
Available-for-Sale:
Marketable equity securities 39,409 (1,534) 37,875
---------- --------- ----------- ----------
$4,512,434 $ 2,050 $ (152,943) $4,361,541
========== ========= =========== ==========
December 31, 1998
-----------------
Held-to-Maturity:
Municipal Bonds $1,518,112 $ 18,566 $ (1,213) $1,535,465
U.S. Treasury Notes 35,195 1,893 37,088
Government Securities 51,879 (1,316) 50,563
Available-for-Sale:
Marketable equity securities 39,409 529 39,938
---------- --------- ----------- ----------
$1,644,595 $ 20,988 $ (2,529) $1,663,054
========== ========= =========== ==========
- 9 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 2. INVESTMENTS, (Continued)
1999 1998
---------- ----------
Amounts classified as:
Current $ 94,810 $ 114,550
Noncurrent 4,417,624 1,530,045
---------- ----------
$4,512,434 $1,644,595
========== ==========
There were no sales of available-for-sale securities during 1999 or
1998 and; therefore, no proceeds nor any realized gains or losses for
either year.
Investments classified as held-to-maturity at December 31, 1999, are
summarized below by contractual maturity date:
Due in one year or less $ 55,401
Due after one year through five years 1,789,955
Due after five years 2,627,669
----------
$4,473,025
==========
NOTE 3. OTHER INVESTMENTS
Other investments include non-marketable equity securities and
certificates, along with capital contributions to partnerships and
limited liability companies, and joint ventures as shown below:
1999 1998
---------- ----------
Alpine Communications, L.C $ 781,579 $ 600,000
Rural Telephone Finance Cooperative - certificates 533,319 538,422
RSA #1, Ltd. 348,542 348,542
RSA #7, Ltd. 144,049 144,049
RSA #8, Ltd. 310,491 210,129
Central Iowa Cellular, Inc. 206,770 206,770
Rural Telephone Bank - stock 164,841 162,806
Quad County Communications 136,192 152,057
Iowa Network Services - stock 78,705 78,705
Other 21,000 26,542
---------- ----------
$2,725,488 $2,468,022
========== ==========
The Company has a 15.79% interest in Alpine Communications, L.C.
(Alpine). The Alpine group includes several Independent Telephone
Companies whom have formed an entity and have purchased U.S. West
telephone properties in Iowa.
The Company's percentage interests in RSA #1, Ltd., RSA #7, Ltd., RSA
#8, Ltd. and Central Iowa Cellular, Inc. (Des Moines MSA) partnerships
are 9.2%, 7.1%, 11.7% and 4.8%, respectively at December 31, 1999. In
addition, the Company owns a 16.7% interest in RSA #9, Ltd.
partnership of which they have no original cash investment.
- 10 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 3. OTHER INVESTMENTS, (Continued)
Additionally, Westside Independent Telephone Company, a wholly-owned
subsidiary of Breda Telephone Corporation, has a 33.33% ownership
interest in Quad County Communications. Condensed financial data for
Quad County Communications is as follows:
1999 1998
--------- ---------
Ordinary income (loss) $ (47,593) $ (47,190)
Interest income -- 85
--------- ---------
Net income (loss) $ (47,593) $ (47,105)
========= =========
Current assets $ 5,924 $ 5,625
Non-current assets 415,109 461,729
Current liabilities 12,456 11,184
Non-current liabilities 0 0
The investment in Quad County Communications is being accounted for on
the equity method. The remaining investments are accounted for on the
cost method.
NOTE 4. INTANGIBLES
During 1999, the Company purchased PCS licenses for $28,825. The costs
are being amortized on the straight-line basis over ten years. The
amount charged to expense and accumulated amortization during 1999 was
$1,442.
On June 1, 1998, the Company acquired 100% ownership of Westside
Independent Telephone Company. The total cost of the acquisition
exceeded the fair value of the net assets of Westside Independent
Telephone Company by $1,178,472. This excess was recorded as goodwill
and is being amortized on the straight-line basis over fifteen years.
Accumulated amortization as of December 31, 1999 and 1998 was $124,452
and $45,848, respectively.
Additionally on June 1, 1998, Tele-Services, Ltd., a wholly-owned
subsidiary of Breda Telephone Corporation, acquired 100% ownership of
Westside Communications, Inc. The total cost of the acquisition
exceeded the fair value of the net assets of Westside Communications,
Inc. by $157,611. This excess was also recorded as goodwill and is
being amortized on the straight-line basis over fifteen years.
Accumulated amortization as of December 31, 1999 and 1998 was $16,642
and $6,130, respectively.
In 1992, the Company entered into an agreement with the National Rural
Telecommunications Cooperative (NRTC) for the exclusive right to
market and sell Direct Broadcast Service (DBS) to certain residences
in ten Iowa and Nebraska counties. The agreement remains in effect for
ten years from the service commencement date or until the satellite is
removed, which ever occurs earlier. The DBS distribution rights of
$640,012 are being amortized on the straight-line basis over fifteen
years. Accumulated amortization at December 31, 1998 was $170,670 and
amortization expense for 1998 was $42,668. See note sixteen for
disposition of DBS investment.
- 11 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
1999 1998
----------- -----------
Telephone Plant in Service -
Land $ 39,008 $ 39,008
Buildings 694,945 687,545
Other general support assets 988,906 880,367
Central office assets 2,098,570 1,981,453
Cable and wire facilities 3,651,397 3,546,900
Other plant and equipment 588,439 484,891
----------- -----------
8,061,265 7,620,164
----------- -----------
Cable Television Plant in Service -
Franchise 32,992 32,992
Land 8,586 8,586
Buildings 237,557 237,557
Towers, antennas and head end equipment 1,473,562 1,458,476
Cable and wire facilities 1,558,797 1,537,812
Other plant and equipment 189,320 207,492
----------- -----------
3,500,814 3,482,915
----------- -----------
DBS Plant in Service -
Leased dishes -- 319,940
----------- -----------
Total property, plant and equipment 11,562,079 11,423,019
Less accumulated depreciation 5,221,886 5,237,145
----------- -----------
$ 6,340,193 $ 6,185,874
=========== ===========
Application of rates to the various classes of plant produced a
composite rate of depreciation on average depreciable plant for the
years ended December 31, 1999 and 1998 of 8.0% and 7.6%, respectively.
- 12 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
----------- -----------
Rural Telephone Finance Cooperative
7.25% (Variable Rate) $ 328,864 $ 459,342
7.00% (Variable Rate) 994,264 1,172,817
6.95% (Variable Rate) 1,353,248 1,415,110
6.95% (Variable Rate) 2,211,926 2,313,042
7.35% (Fixed Rate) 2,268,040 2,371,721
Building Mortgage Note - 7.00% -- 79,382
----------- -----------
Total long-term debt 7,156,342 7,811,414
Less current portion (608,412) (655,072)
----------- -----------
$ 6,547,930 $ 7,156,342
=========== ===========
The annual requirements for principal payments on long-term debt for
the next five years are as follows:
Principal
---------
2000 $608,412
2001 643,059
2002 579,166
2003 561,969
2004 562,809
Substantially all assets of the Company are pledged as security for
the long-term debt under certain loan agreements with the Rural
Telephone Finance Cooperative (RTFC). These mortgage notes are to be
repaid in equal quarterly installments covering principal and interest
and expire by the year 2013.
The security and loan agreements underlying the RTFC notes contain
certain restrictions on distributions to stockholders, investment in,
or loans to others, and payment of management fees or an increase in
management fees. The Company is restricted from making any
distributions, except as might be specifically authorized in writing
in advance by the RTFC noteholders, unless minimum net worth exceeds
40% and distributions are limited to certain levels of prior year cash
margins. In addition, the Company is required to achieve a debt
service coverage ratio of not less than 1.25 and a times interest
earned ratio of not less than 1.5. These ratios are to be determined
by averaging each of the two highest annual ratios during the three
most recent fiscal years.
The Company received approval on a line of credit from the RTFC for
$750,000. The approved line of credit was available until January 13,
2000 at a rate of 7.6%. The Company had not drawn down any funds as of
December 31, 1999. The line of credit has been renewed for an
additional twelve month period.
- 13 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 6. LONG-TERM DEBT, (Continued)
In addition, Prairie Telephone Company, Inc. a wholly-owned subsidiary
of Breda Telephone Corporation, received approval on a line of credit
from the RTFC for $250,000. This approved line of credit was also
available until January 13, 2000 at a rate of 7.6%. The Company had
not drawn down any funds as of December 31, 1999. The line of credit
has been renewed for an additional twelve month period.
At December 31, 1998, the Company had an outstanding line of credit
balance with the RTFC of $750,000. The principal and interest, at a
rate of 6.7%, was paid during first quarter 1999.
NOTE 7. INCOME TAXES
Income taxes reflected in the Consolidated Statements of Income
consist of the following:
1999 1998
----------- ---------
Federal income taxes -
Current tax expense $ 2,584,445 $ 562,083
Deferred tax benefit (205,565) (109,668)
Amortization of investment tax credits (9,769) (9,769)
State income taxes -
Current tax expense 803,537 187,380
Deferred tax benefit (64,914) (36,556)
----------- ---------
Total income tax expense $ 3,107,734 $ 593,470
=========== =========
Deferred federal and state tax liabilities and assets are summarized
as follows:
1999 1998
----------- ---------
Deferred Tax Liabilities
Federal $ 296,855 $ 411,632
State 93,744 137,211
----------- ---------
Total Deferred Tax Liabilities 390,599 548,843
----------- ---------
Deferred Tax Assets
Federal 346,185 257,453
State 109,322 85,818
----------- ---------
Total Deferred Tax Assets 455,507 343,271
----------- ---------
Net Deferred Tax (Liability) Asset $ 64,908 $(205,572)
=========== =========
Current portion $ -- $ --
Long-term portion 64,908 (205,572)
----------- ---------
Net Deferred Tax (Liability) Asset $ 64,908 $(205,572)
=========== =========
The tax provision differs from the expense that would result from
applying the federal statutory rates to income before taxes as the
result of state income taxes being deductible in determining taxable
income and the amortization of investment tax credits.
- 14 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 7. INCOME TAXES, (Continued)
The following is a reconciliation of the statutory federal income tax
rate of 34% to the Company's effective income tax rate:
1999 1998
------ ------
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit 5.1 6.4
Amortization of investment tax credits (1.1) (1.2)
Amortization of goodwill -- .5
------ ------
Effective income tax rate 38.0% 39.7%
====== ======
NOTE 8. OPERATING SEGMENTS INFORMATION
The Company organizes its business into two reportable segments: local
exchange carrier (LEC) services and broadcast services. The LEC
services segment provides telephone, data and other services to
customers in local exchanges. The broadcast services segment provides
cable television to customers in Iowa and Nebraska and during 1998
included DBS. The Company also has operations in internet and
telemarketing services that do not meet the quantitative thresholds
for reportable segments.
The Company's reportable business segments are strategic business
units that offer different products and services. Each reportable
segment is managed separately primarily because of different products,
services and regulatory environments. LEC segments have been
aggregated because of their similar characteristics.
The segment's accounting policies are the same as those described in
the summary of significant accounting policies.
Local
Exchange
1999 Carriers Broadcast Other Total
------------------------------- ----------- ---------- --------- -----------
Revenues and sales $ 3,551,877 $1,047,667 $ 691,002 $ 5,290,546
Intersegment revenue and sales -- -- -- --
Interest and dividend income 458,901 15,063 -- 473,964
Interest expense 429,750 73,552 -- 503,302
Depreciation and amortization 634,664 344,195 34,105 1,012,964
Income tax expense (benefit) 363,435 2,786,595 (42,296) 3,107,734
Segment profit (loss) 552,861 4,578,358 (65,370) 5,065,849
Segment assets 14,346,890 1,845,056 735,919 16,927,865
Expenditures for segment assets 1,071,365 37,512 140,537 1,249,414
- 15 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 8. OPERATING SEGMENTS INFORMATION, (Continued)
Local
Exchange
1998 Carriers Broadcast Other Total
---- ----------- ----------- --------- -----------
Revenues and sales $ 3,653,189 $ 2,161,588 $ 730,803 $ 6,545,580
Intersegment revenue and sales -- -- -- --
Interest and dividend income 180,710 19,966 1,569 202,245
Interest expense 396,234 91,252 -- 487,486
Depreciation and amortization 506,279 386,241 15,397 907,917
Income tax expense (benefit) 670,706 (48,580) (28,656) 593,470
Segment profit (loss) 1,080,635 (136,905) (41,094) 902,636
Segment assets 10,128,218 2,963,322 708,829 13,800,369
Expenditures for segment assets 1,258,653 206,030 491,282 1,955,965
Reconciliation of Segment Information 1999 1998
------------------------------------- ------------ ------------
REVENUES:
Total revenues for reportable segments $ 4,599,544 $ 5,814,777
Other revenues 691,002 730,803
------------ ------------
Consolidated Revenues $ 5,290,546 $ 6,545,580
============ ============
PROFIT:
Total profit for reportable segments $ 5,131,219 $ 943,730
Other profit (loss) (65,370) (41,094)
------------ ------------
Net Income $ 5,065,849 $ 902,636
============ ============
ASSETS:
Total assets for reportable segments $ 16,191,946 $ 13,091,540
Other assets 735,919 708,829
Elimination of intercompany receivables (247,086) (124,041)
------------ ------------
Consolidated Assets $ 16,680,779 $ 13,676,328
============ ============
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities included $191,321 during
the year ended December 31, 1998, relating to plant and equipment
additions placed in service during 1998 which are reflected in the
outstanding line of credit at year end.
Additionally, during 1998 the Company purchased all of the capital
stock of Westside Independent Telephone Company and Westside
Communications, Inc. for $2,264,327. The following is a summary of the
purchase which was entirely debt financed.
- 16 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION, (Continued)
Fair value of telephone plant $ 638,724
Fair value of CATV plant 212,560
Current Assets 38,675
Other Investments 404,472
Goodwill 1,336,083
Current Liabilities (40,759)
Deferred Credits (325,428)
-----------
$ 2,264,327
===========
Cash paid for interest, net of amounts capitalized for 1999 and 1998,
totaled $476,861 and $487,486, respectively.
Cash paid for income taxes and estimated income taxes for 1999 and
1998 totaled $3,990,528 and $981,473, respectively.
NOTE 10. NET INCOME PER COMMON SHARE
Net income per common share for 1999 and 1998 was computed by dividing
the weighted average number of shares of common stock outstanding into
the net income. The weighted average number of shares of common stock
outstanding for the years ended December 31, 1999 and 1998 were 37,682
and 37,831, respectively.
NOTE 11. STATED VALUE STOCK ADJUSTMENT
During 1999, the board of directors authorized an additional $85.00
increase in the stated value of each share of common stock from $64.00
to $149.00. There were 37,722 shares outstanding at the time of the
value adjustment, which reduced retained earnings by $3,206,370.
The 1998 authorized increase was $23.00 and increased the stated value
of each share of common stock from $41.00 to $64.00. There were 38,050
shares outstanding at the time of the value adjustment, which reduced
retained earnings by $875,150.
NOTE 12. STOCK RESTRICTIONS
The Company has one class of common stock. Each stockholder is
entitled to one vote regardless of the number of shares owned.
Restrictions on the stock include the following:
o Individuals purchasing new shares of stock must be living within
the service area of the Company and subscribe to the Company's
telephone services. In addition, new stockholders are limited to
purchasing no more than thirty shares of stock directly from the
Company.
o Stockholders are limited to ownership of not more than one
percent of the outstanding shares of stock unless ownership was
prior to the restated Articles of Incorporation.
o Stockholders shall not sell any shares of stock owned unless the
Company has been given first right of refusal.
o In households with multiple individuals, only one person must be
deemed the subscriber of Company services.
- 17 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 12. STOCK RESTRICTIONS, (Continued)
o A one-time stock transfer to a family member (spouse, child,
grandchild, parent, grandparent, or sibling) is allowed even if
such transferee resides outside of the telephone exchange service
area and is not a subscriber of the Company's telephone services.
o Stock transfers require the consent of the board of directors.
The Company may adopt bylaws which may further restrict the transfer
or ownership of capital stock of the Company.
NOTE 13. EMPLOYEE BENEFIT PLAN
The Company adopted for its employees who have met certain eligibility
requirements, a defined benefit retirement and security program
sponsored by the National Telephone Cooperative Association. The
multi-employer plan calls for the Company to contribute 8.6% of each
enrolled employee's annual gross salary. As a condition of
participation, each participating employee must also contribute a
minimum 3% of their annual gross salary. Contributions made by the
Company totaled $63,722 and $63,045 for the years ended December 31,
1999 and 1998, respectively.
NOTE 14. CONCENTRATIONS OF CREDIT RISK
The Company grants credit to local telephone service and cable
television service customers, all of whom are located in the
franchised service areas, and to telecommunications intrastate and
interstate long distance carriers.
The Company has received approximately 42% of its operating revenues
from access revenues and assistance provided by the Federal Universal
Service Fund. The manner in which access revenues are determined by
regulatory bodies and universal service funding is determined for
qualifying organizations is currently being modified as a result of
the Telecommunications Act of 1996.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, along with both current and noncurrent investments. The
Company places its cash, cash equivalents and investments in several
financial institutions which limits the amount of credit exposure in
any one financial institution.
Additionally, Pacific Junction Telemarketing Center, Inc. wholly-owned
subsidiary of Prairie Telephone Company, Inc., received nearly all of
its telemarketing service revenues from one customer during both 1999
and 1998; however, it was a different customer each year. For the
years ended December 31, 1999 and 1998, the telemarketing service
revenues from the major customer were $226,243 and $579,836,
respectively. At December 31, 1999 and 1998, the amount due from each
respective customer, included in accounts receivable on the balance
sheet, was $46,305 and $101,676, respectively.
- 18 -
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 15. ACQUISITIONS
On June 1, 1998, Breda Telephone Corporation acquired Westside
Independent Telephone Company in a business combination accounted for
as a purchase. The Company purchased stock and the purchase price was
then allocated to the respective assets acquired in the transaction
based on fair value. Westside Independent Telephone Company owns and
provides the telephone service in Westside, Iowa. The operations of
Westside Independent Telephone Company are included in the
accompanying financial statements since the date of acquisition. The
total cost of the acquisition was $2,010,038, which exceeded the fair
value of the net assets of Westside Independent Telephone Company by
$1,178,472. The excess was recorded as goodwill and is being amortized
on the straight-line basis over fifteen years.
Additionally on June 1, 1998 in a related transaction, Tele-Services,
Ltd., a wholly-owned subsidiary of Breda Telephone Corporation,
acquired Westside Communications, Inc. in a business combination also
accounted for as a purchase. Tele-Services, Ltd. also purchased stock
and the purchase price was then allocated to the respective assets
acquired in the transaction based on fair value. Westside
Communications, Inc. owned and operated the cable television systems
in Westside and Arcadia, Iowa. The operations of Westside
Communications, Inc. are included in the accompanying financial
statements since the date of acquisition, as well. The total cost of
the acquisition was $254,289, which exceeded the fair value of the net
assets of Westside Communications, Inc. by $157,611. The excess was
recorded as goodwill and is being amortized on the straight-line basis
over fifteen years.
The total cost of both acquisitions was $2,264,327 and the total
goodwill recorded was $1,336,083. See note four for additional details
regarding both transactions.
On October 31, 1998, Tele-Services, Ltd. purchased the Auburn cable
television system from New Path Communications, L.C. This business
combination was also accounted for as a purchase. The purchase price
of $64,610 was allocated to the respective assets purchased and two
months of operations were recorded as of December 31, 1998.
Assuming these acquisitions had occurred on January 1, 1998, unaudited
pro forma consolidated revenues for the year ended December 31, 1998
would have been $6,713,000. After considering pro forma adjustments,
such as additional amortization expense as a result of goodwill and
certain other acquisition related transactions, pro forma income and
earnings per share would not have been materially different from the
reported amounts for 1998. The unaudited pro forma amounts are not
indicative of what the actual consolidated results of operations might
have been if the acquisitions had been effective at the beginning of
1998.
NOTE 16. DISPOSITION OF DBS INVESTMENT
On January 11, 1999, the Company sold substantially all of its assets
and liabilities related to the Direct Broadcast Satellite (DBS)
investment. The Company received cash of $8,038,197 and the
transaction resulted in a gain of $7,436,415, which was included in
operations during the first quarter of 1999.
NOTE 17. SUBSEQUENT EVENT
Subsequent to year-end, the Company and all other stockholders of
Central Iowa Cellular, Inc. (CIC) have reached a tentative agreement
with a qualified purchaser to sell all of the outstanding shares of
CIC stock. The transaction, which requires various regulatory
approvals, is expected to close during the second quarter of 2000. The
sale will be a cash transaction, resulting in an estimated after tax
gain of $3,500,000.
- 19 -
BREDA TELEPHONE CORP.
BALLOT
Annual Meeting of Shareholders
May 17, 2000
This Ballot is provided to you as a shareholder of Breda Telephone Corp. The
shares held by you will be voted in accordance with your instructions provided
on this Ballot if the Ballot is properly completed and timely submitted. You
should complete and date this Ballot and place it in the enclosed envelope
marked "Ballot". You should then place the sealed ballot envelope in the other
enclosed self-addressed, stamped envelope which has the control number on it.
You should return the Ballot so that it will be received at the post office box
noted on the control number envelope by 5:00 p.m. on May 16, 2000. You also can,
however, deliver the Ballot at the annual meeting. If you return your Ballot and
attend the meeting and desire to change the voting of your shares from that
indicated on your Ballot, you may do so by notifying the Secretary of Breda
Telephone Corp. at the commencement of the meeting and you will be provided with
another Ballot to complete and deliver to the Secretary of the meeting.
This Ballot is not solicited on behalf of the Board of Directors of Breda
Telephone Corp.
You may vote for no more than three of the nominees for director noted below. If
you vote for more than three of the nominees, your vote will not be counted and
it will be deemed that you have withheld voting your shares in favor of any
nominee. Also, if you do not vote for any of the nominees for director and your
Ballot is otherwise properly completed and received, it will be deemed that you
have withheld voting your shares in favor of any nominee.
Election of Directors
I hereby vote my shares of Breda Telephone Corp. FOR the following nominees for
director. (VOTE FOR NO MORE THAN THREE NOMINEES BY PLACING AN "X" IN THE BOX BY
THE NOMINEES YOU ARE VOTING FOR)
|_| Rod Doorenbos
|_| Roger Nieland
|_| Dean Schettler
|_| John Wenck
Ratification of Appointment of Auditors
I hereby vote my shares of Breda Telephone Corp. as follows with respect to the
ratification of Kiesling Associates, LLP to act as independent auditors for the
Company during 2000:
|_| For |_| Against |_| Abstain
Dated: __________________, 2000.