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
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to ss.240.14a-12
BREDA TELEPHONE CORP.
(Name of Registrant as Specified In Its Charter)
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(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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May 1, 2002
Dear Shareholders:
You are cordially invited to the annual meeting of Breda Telephone Corp. at
the Christ the King School cafeteria located at 304 North Second Street, Breda,
Iowa, on Tuesday, May 21, 2002 at 7:30 p.m. Lunch will be served.
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
One 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 2002. Your vote in that section of
the ballot means you either agree, disagree or have no opinion on the Board's
action regarding Kiesling Associates, LLP. The other item on the ballot is the
election of directors. There are two candidates for the two director positions
that need to be filled at this year's annual meeting. Please complete your
ballot and return it as instructed on the ballot.
We encourage your attendance at the annual meeting. Some of the information
mailed to you along with this letter 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 Breda Telephone Corp.
Sincerely,
/s/ Dean Schettler
Dean Schettler
President - Board of Directors
BREDA TELEPHONE CORP.
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103 East Main, P.O. Box 190
Breda, Iowa 51436
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 21, 2002
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Notice is hereby given that the Annual Meeting of Shareholders of BREDA
TELEPHONE CORP. will be held at the Christ the King School cafeteria located at
304 North Second Street, Breda, Iowa, on Tuesday, May 21, 2002 at 7:30 p.m.,
Breda local time, for the following purposes:
1. To elect two directors.
2. To ratify the appointment of auditors for the year 2002.
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 9, 2002, 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 THE BALLOT
PROMPTLY IN THE ENCLOSED ENVELOPES. IF YOU DO ATTEND THE MEETING AND DESIRE TO
WITHDRAW YOUR BALLOT, YOU MAY DO SO BY NOTIFYING THE SECRETARY OR ANOTHER
OFFICER OF BREDA TELEPHONE CORP. AT THE COMMENCEMENT OF THE MEETING.
THE BALLOT IS NOT SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF BREDA
TELEPHONE CORP. THE BALLOT IS BEING TRANSMITTED TO SHAREHOLDERS BY BREDA
TELEPHONE CORP. IN ACCORDANCE WITH THE AMENDED AND RESTATED BYLAWS 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 2001, which includes audited
financial statements, is also enclosed.
By Order of the Board of Directors,
/s/ Larry Daniel
Larry Daniel
Secretary
Breda, Iowa
May 1, 2002
BREDA TELEPHONE CORP.
103 East Main
P.O. Box 190
Breda, Iowa 51436
PROXY STATEMENT
Annual Meeting of Shareholders, May 21, 2002
GENERAL INFORMATION
This Proxy Statement and the enclosed ballot are being provided by BREDA
TELEPHONE CORP. (the "Company") for use at the Annual Meeting of Shareholders to
be held on May 21, 2002, at 7:30 p.m. at the Christ the King School cafeteria
located at 304 North Second Street, Breda, Iowa, and any adjournment or
postponement thereof (the "Meeting"). When a ballot is properly executed and
returned, the shares it represents will be voted at the Meeting in accordance
with the instructions contained in the ballot. If a shareholder attends the
Meeting and desires to withdraw the shareholder's ballot, the shareholder may do
so by notifying the Secretary or another officer of the Company at the
commencement of the Meeting. The shareholder will then be provided with another
ballot to complete and deliver to the Secretary at the Meeting. This Proxy
Statement and the accompanying ballot will be first mailed to shareholders on or
about May 1, 2002. 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. The ballot is being transmitted to the shareholders by
the Company in accordance with the Amended and Restated Bylaws of the Company.
VOTING SECURITIES
Only shareholders of record as of the close of business on April 9, 2002 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"). There were 34,738 shares of Common Stock outstanding on April 9, 2002.
Those shares were held by approximately 597 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, and
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 9, 2002, there were 22 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 matter, 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
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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 by notifying the Secretary or
another officer of the Company at the commencement of the Meeting. You will then
be provided with another ballot to complete and deliver to the Secretary at the
Meeting.
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 2002, 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 two 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, 2002, 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, 2002. Two 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.
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Dean Schettler has been a director of the Company since April, 1997. His current
term as a director will end at the annual shareholders meeting which is held in
2003. Mr. Schettler has been the President of the Company since April, 1998. He
has 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 49 years old.
Roger Nieland has been a director of the Company since May, 2000. His current
term as a director will end at the annual shareholders meeting which is held in
2003. He has also served as a director of each of the Company's subsidiaries
since May, 2000. Mr. Nieland is currently self-employed as a farmer, and has
been for at least the last five years. Mr. Nieland has been a director of Iowa
Ethanol Coop since September, 1994. Iowa Ethanol Coop 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 has also served as a trustee for
Wheatland Township, in Carroll County, Iowa. Mr. Nieland is 66 years old.
John Wenck has been a director of the Company since April, 1997. His current
term as a director will end at the annual shareholders meeting which is held in
2003. 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 63 years old.
Larry Daniel has been a director of the Company since April, 1995. His current
term as a director will end at the annual shareholders meeting which is held in
2004. He also has been the Secretary of the Company since April, 1995. He has
also served as a director and the Secretary of each of the Company's
subsidiaries since April, 1995. Mr. Daniel is self-employed as a farmer, and he
has been for at least the last five years. Mr. Daniel is 59 years old.
Charles (Chuck) Thatcher has been a director of the Company since May, 2001. His
current term as a director will end at the annual shareholders meeting which is
held in 2004. He has also served as a director of each of the Company's
subsidiaries since May, 2001. Mr. Thatcher has been an owner of Midwest
Wholesale Building Products in Carroll, Iowa for approximately the last 17
years. Midwest Wholesale Building Products is a wholesaler/retailer of lumber,
building products and materials. Mr. Thatcher is 50 years old.
Nominees for Director
As indicated above, the terms of two directors will expire at the Meeting. Two
directors accordingly need to be elected. The directors who are elected will
serve until the annual meeting of the shareholders of the Company which is held
in 2005. There are two nominees for those two director positions, and the
following paragraphs provide some information regarding those nominees.
Dave Grabner is one of the nominees for election as a director. Mr. Grabner has
been a director of the Company since April, 1999, and the Treasurer of the
Company since May, 2001. He has also served as a director of each of the
Company's subsidiaries since April, 1999, and as the
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Treasurer of each of the Company's subsidiaries since May, 2001. 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 53
years old.
Clifford Neumayer is also a nominee for election as a director. Mr. Neumayer has
been the Vice-President and a director of the Company since April, 1996. He has
also served as a director and the Vice-President of each of the Company's
subsidiaries since April, 1996. Mr. Neumayer has been self-employed as a farmer
since 1970. Mr. Neumayer is 53 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 a total of 19 meetings during 2001. All directors
attended at least 75% of those meetings.
Compensation of the Board of Directors
Since June, 2000, all of the Company's directors have received $125 for each
regular, special and conference call meeting of the board of directors. The
Vice-President, Secretary and Treasurer of the Company also currently receive an
additional $25 for each regular, special and conference call meeting of the
board of directors, and the President of the Company receives an additional $100
per meeting. Those payments are made to those individuals in their capacities as
directors, and are based upon their additional duties at the meetings of the
board of directors. The Company's directors received $100 for each regular,
special and conference call meeting in 1999 and through May, 2000. The
Vice-President, Secretary and Treasurer also received an additional $25 per
meeting in 1999 and 2000. The President received an additional $50 per meeting
in 1999 and through May, 2000.
Since June, 2000, all of the Company's directors have received $150 per day for
all day meetings of the board of directors. The directors received $125 per day
for all day meetings of the board of directors in 1999 and through May, 2000.
Since June, 2000, all of the Company's directors have received $150 for each
outside meeting attended by a director and which lasts over three hours. The
directors received $125 for each such meeting in 1999 and through May, 2000. The
directors receive one-half of their regular meeting rate for each outside
meeting which lasts less than three hours. Outside meetings are not formal
meetings of the board of directors. Examples of outside meetings include
conventions and city council meetings.
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Since October, 2001, directors who serve on a committee have received $150 for
each committee meeting which does not coincide with another meeting of the board
of directors.
The Company's directors are also reimbursed for mileage and for any expenses
paid by them on account of attendance at any meeting of the board of directors
or other meetings attended by them in their capacity as a director of the
Company.
The Company's 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, and hold office 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 and nominees for director 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 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 employed by the Company in various capacities since May,
1982. Prior to January, 1995, he was the Company's assistant manager. He was the
manager of the Company from January, 1995 to March, 1998, at which time he was
given the title chief operating officer. His current titles are chief operations
officer and co-chief executive officer. Mr. Boeckman is 41 years old.
Ms. Morlok became the chief financial officer of the Company on March 30, 1998.
Her current titles are chief financial officer and co-chief executive officer.
Ms. Morlok was the Assistant Administrator/CFO of Manning Regional Healthcare
Center in Manning, Iowa from July, 1987 until March, 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. Ms. Morlok is 48 years old.
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The Company entered into a new employment agreement with both Mr. Boeckman and
Ms. Morlok on September 11, 2001. The employment agreements were not materially
different from the Company's prior employment agreements with Mr. Boeckman and
Ms. Morlok, but each of the employment agreements included compensation
adjustments. As discussed below, the Company is negotiating a new employment
agreement with both Mr. Boeckman and Ms. Morlok.
Mr. Boeckman. Under the terms of Mr. Boeckman's employment agreement, he is
employed in the capacity of chief operations officer and co-chief executive
officer of the Company. Mr. Boeckman is responsible for the day-to-day
operations of the Company under his employment agreement.
Mr. Boeckman's employment agreement terminated by its terms on April 1, 2002,
but the Company has continued its employment of Mr. Boeckman under the other
terms of the employment agreement. As indicated above, the Company is
negotiating a new employment agreement with Mr. Boeckman.
The Company may terminate the employment agreement if Mr. Boeckman is absent
from his employment under the employment agreement by reason of illness or other
incapacity for more than 26 consecutive weeks. The Company will pay Mr. Boeckman
compensation during any such period of illness or incapacity in accordance with
the Company's sick pay policy as then in effect. The Company may also terminate
the employment agreement for cause upon five days written notice to Mr.
Boeckman.
The Company may also terminate the employment agreement at any time, without
cause, by giving 30 days written notice to Mr. Boeckman. In this event, if
requested by the Company, Mr. Boeckman shall continue to render his services and
shall be paid his regular compensation up to the date of termination. In
addition, Mr. Boeckman shall be paid on the date of termination a severance
allowance equal to the amount remaining to be paid under the employment
agreement.
Mr. Boeckman may also terminate the employment agreement, at any time, by giving
60 days notice to the Company. In this event, the Company shall pay Mr. Boeckman
his compensation up to the date of termination, but Mr. Boeckman shall not be
entitled to any severance payment and will not be considered for any performance
bonus.
If Mr. Boeckman's employment terminates by reason of his death, the Company is
only obligated to make whatever payments may be required under its pension plan.
Mr. Boeckman's yearly salary under the employment agreement is $82,560. Mr.
Boeckman may also receive a bonus under the employment agreement. The employment
agreement includes an attachment which sets forth some guidelines which may be
followed by the board of directors in determining whether a bonus will be given
and the amount of the bonus, but the employment agreement provides that the
final determination as to the amount of the bonus rests solely in the discretion
of the board of directors.
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The employment agreement also provides that Mr. Boeckman shall be entitled to
all employee benefits extended to all full time employees of the Company. Some
of those benefits currently include health insurance, life insurance, disability
insurance, cellular phone service, a clothing allowance, free local telephone
service, free internet access and free basic cable service. The Company will
also contribute an amount equal to 8.6% of Mr. Boeckman's annual gross salary to
the defined benefit retirement and security program which is sponsored by the
National Telephone Cooperative Association. The Company will also provide Mr.
Boeckman with the pre-retirement death benefit that is available through the
National Telephone Cooperative Association. Mr. Boeckman is also reimbursed for
all reasonable and appropriate expenses incurred in carrying out his duties
under the employment agreement.
Mr. Boeckman's employment agreement includes a limited noncompete covenant and
confidential information covenant.
Ms. Morlok. Ms. Morlok's employment agreement is similar to Mr. Boeckman's
employment agreement. The primary differences between Ms. Morlok's employment
agreement and Mr. Boeckman's employment agreement are as follows:
o Ms. Morlok's capacities under her employment agreement are chief financial
officer and co-chief executive officer.
o Ms. Morlok has a different annual salary under her employment agreement.
As noted above, both Mr. Boeckman's and Ms. Morlok's employment agreement
terminated by its terms on April 1, 2002. The Company is negotiating new
employment agreements with both Mr. Boeckman and Ms. Morlok, and the Company
does not anticipate any break in service for either Mr. Boeckman or Ms. Morlok.
The Company does not have any written employment agreements with any officers or
any other employees.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership, as of April 9, 2002, of
the Company's Common Stock by each of the directors, director nominees and
executive officers and by the chief operations officer of the Company, and by
the directors, executive officers and chief operations officer as a group:
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Name and Address of Number of Shares
Beneficial Owner Ownership Percent of Class
------------------- --------- ----------------
Dean Schettler 30 .086%
16326 120th St.
Breda, Iowa 51436
Clifford Neumayer 181 .521%
11846 Ivy Avenue
Breda, Iowa 51436
Larry Daniel 2 .006%
15731 Robin Avenue
Glidden, Iowa 51433
John Wenck 6 .017%
23909 140th St.
Carroll, Iowa 51401
Dave Grabner 55* .158%
11098 130th Street
Breda, Iowa 51436
Roger Nieland 110** .317%
13312 Eagle Avenue
Breda, Iowa 51436
Charles Thatcher 2*** .006%
15053 Granite Ave.
Breda, Iowa 51436
Robert Boeckman 30 .086%
23678 150th Street
Carroll, Iowa 51401
All directors, executive officers
and the chief operations officer
as a group (8 persons) 416 1.197%
* One of these shares is held by Mr. Grabner's spouse.
** Forty-three of these shares are held by Mr. Nieland's spouse.
*** One of these shares is held by Mr. Thatcher's spouse.
To the Company's knowledge, no person is the beneficial owner of more than 5% of
the Company's Common Stock.
9
EXECUTIVE COMPENSATION AND BENEFITS
The following summary compensation table shows the compensation paid by the
Company to Robert J. Boeckman, the Company's chief operations officer, in the
2001, 2000 and 1999 fiscal years. Mr. Boeckman's services as the chief
operations officer of the Company are similar to those normally provided by a
chief executive officer of an Iowa corporation.
Summary Compensation Table
Name and Other Annual All Other
Position Year Salary(1) Bonus Compensation(2) Compensation(3)
------------ ---- ------- ----- ------------ ------------
Robert J. Boeckman, 2001 $81,853 $11,200 $2,370 $18,157
Chief Operations Officer 2000 $80,000 $ 2,000 $1,890 $15,703
1999 $74,159 $ -0- $ 617 $14,568
(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 1.12% 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.
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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 2002 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.
AUDIT FEES
The aggregate fees billed for professional services rendered for the audit of
the Company's annual financial statements for the fiscal year ended December 31,
2001, and for the reviews of the financial statements included in the Company's
quarterly reports on Form 10-QSB for that fiscal year, were $87,680. All of such
fees were paid to Kiesling Associates, LLP.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Kiesling Associates, LLP did not render professional services relating to
financial information systems design and implementation during the fiscal year
ended December 31, 2001.
ALL OTHER FEES
The aggregate fees billed by Kiesling Associates, LLP for services rendered to
the Company, other than for the services described above under "Audit Fees", for
the fiscal year ended December 31, 2001, were $27,286.11. The majority of these
fees were for general business consulting.
The Board of Directors has considered whether the provision of those services is
compatible with maintaining Kiesling Associates, LLP's independence.
SHAREHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
To be included in the proxy statement and written ballot for the 2003 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 13, 2003, 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.
11
A copy of the Annual Report to Shareholders for 2001 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 proxy soliciting material.
By order of the Board of Directors,
/s/ Larry Daniel
Larry Daniel
Secretary
Breda, Iowa
May 1, 2002
12
BREDA TELEPHONE CORP.
BALLOT
Annual Meeting of Shareholders
May 21, 2002
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 20, 2002. You also can,
however, deliver the Ballot at the annual meeting. If you return your Ballot and
attend the meeting and desire to change your vote from that indicated on your
Ballot, you may do so by notifying the Secretary or another officer 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 at the meeting.
This Ballot is not solicited on behalf of the Board of Directors of Breda
Telephone Corp. This Ballot is being transmitted to you by Breda Telephone Corp.
in accordance with the Amended and Restated Bylaws of Breda Telephone Corp.
There are two director positions to be filled and there are two nominees to fill
those positions. If you do not vote for one of the nominees for director and
your Ballot is otherwise properly completed and received, it will be deemed that
you have withheld voting in favor of that nominee, but your vote for the other
nominee will still be counted. If you do not vote for either of the nominees for
director and your Ballot is otherwise properly completed and received, it will
be deemed that you have withheld voting in favor of either of the nominees.
Election of Directors
I hereby vote FOR the following nominees for director. (VOTE FOR A NOMINEE BY
PLACING AN "X" IN THE BOX BY THE NAME OF THE NOMINEE)
[_] Dave Grabner
[_] Clifford Neumayer
Ratification of Appointment of Auditors
I hereby vote as follows with respect to the ratification of Kiesling
Associates, LLP to act as independent auditors for Breda Telephone Corp. during
2002:
[_] For [_] Against [_] Abstain
Dated: __________________, 2002.
BREDA TELEPHONE CORP.
2001 ANNUAL REPORT
TO
SHAREHOLDERS
This annual report is being provided to all of the shareholders of Breda
Telephone Corp. ("Breda") in connection with the annual meeting of the
shareholders which will be held at the Christ the King School cafeteria located
at 304 North Second Street, Breda, Iowa, on Tuesday, May 21, 2002, 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.
Various statements in this annual report are 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 are made 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 and varied
risks, uncertainties and assumptions, nearly all of which are beyond the control
of Breda and its management. The risks, uncertainties and assumptions affecting
forward looking statements include, but are not limited to, the following:
o the possible adverse effects to Breda and its subsidiaries which may arise
under the Telecommunications Act of 1996 and the regulations promulgated
under that Act, including increased competition;
o adverse changes by the Federal Communications Commission or other
regulatory authorities to the access charge rates 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;
o reductions in or other changes to governmental programs assisting or
affecting the telecommunications and cable industries, and in particular
programs which aid providers of those services to rural areas; 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
Co., 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.
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 discussed below.
Local Exchange Carrier Services.
Breda, Prairie Telephone and Westside Independent provide telephone services to
the following seven Iowa towns and their surrounding rural areas:
2
o Breda, Iowa o Pacific Junction, Iowa
o Lidderdale, Iowa o Yale, Iowa
o Macedonia, Iowa o Westside, Iowa.
o Farragut, Iowa
Breda provides services to Breda, Lidderdale and Macedonia. Prairie Telephone
provides services to Farragut, Pacific Junction and Yale. Westside Independent
provides services to Westside. The surrounding rural areas that are served are
those within approximately a ten mile to fifteen mile radius of each of the
towns.
All of the towns are in central and southern Iowa.
The primary services provided by Breda, Prairie Telephone and Westside
Independent are providing their subscribers with basic local telephone service
and access services for long distance calls outside the local calling area. As
of December 31, 2001, they were serving approximately 2,649 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.
Revenues are also generated from sales of cellular phones and related service
packages. For example, Breda has an agency agreement with U.S. Cellular which
allows Breda to sell cellular phones and related packages to the public, and
Breda receives commissions on those sales. U.S. Cellular has, however,
previously notified Breda that the agreement would be terminated effective May
31, 2001. U.S. Cellular subsequently proposed a new agreement, but Breda had
serious concerns about that agreement, including the fact that the new agreement
would pay lower commissions to Breda. Breda subsequently received a letter from
U.S. Cellular stating that Breda's current contract with U.S. Cellular would be
extended to December 1, 2001, to attempt to allow the parties to reach an
agreement on open issues. U.S. Cellular has sent Breda another proposed
agreement. Breda expects negotiations to finalize this agreement to occur during
the second quarter of 2002. Breda anticipates that the new agreement will have a
neutral impact on Breda's cellular commissions revenue.
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 in
order to offer any type of service that can be provided through those lines and
facilities. Various regulations have been, and additional regulations still may
be, promulgated by the Federal Communications Commission and state regulatory
agencies to implement various parts of the
3
Act. The regulations could have a material adverse effect, and the Act does open
up Breda, Prairie Telephone and Westside Independent to the possibility of
competition that they were not subject to in the past.
There are numerous telephone companies which have filed to provide telephone
services throughout all of Iowa. If any of those companies choose to provide
service in any of Breda's, Prairie Telephone's or Westside Independent's service
areas, there would be a reduction in revenue. To date, however, no company has
chosen to compete in any of Breda's, Prairie Telephone's or Westside
Independent's service areas. Breda does not know the plans of any companies, but
Breda currently believes the possibility of any company entering any of those
service areas in the near future is small.
Although competition is permitted, Breda, Prairie Telephone and Westside
Independent currently do not, as indicated above, 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 carriers 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 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 technologies which were available at the time of the
preparation of this annual report.
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 and Westside Independent also 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.
4
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.
The competition in all of the areas mentioned in the preceding four paragraphs
is based primarily on cost, service and experience.
The primary regulators of Breda's, Prairie Telephone's and Westside
Independent's telephone services are the Iowa Utilities Board (the "IUB") and
the Federal Communications Commission (the "FCC"). The material areas of
regulation of those services by the IUB and the FCC are discussed later in this
annual report.
Broadcast Services.
Tele-Services owns and operates the cable television systems in the following
eighteen Iowa towns:
o Arcadia o Grand Junction o Riverton
o Auburn o Hamburg o Sidney
o Bayard o Lohrville o Tabor
o Breda o Malvern o Thurman
o Churdan o Neola o Treynor
o Farragut o Oakland o Westside
Tele-Services also owns and operates the cable television system for the town of
Beaver Lake, Nebraska.
As of December 31, 2001, Tele-Services was providing cable television services
to approximately 3,314 subscribers.
Tele-Services derives its principal revenues from monthly fees which are 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 provided by
local exchange carriers ("LECs"). The Act eliminates the prohibition on LEC
provision of video programming in its service area. LECs and others may offer
video programming under regulations that vary according to the type of video
service being provided (radio-based, common carriage, cable TV systems, or open
video systems). Under the Act, regulation is lifted for cable programming, for a
basic service tier that was the only service subject to regulation on December
31, 1994, in any franchise area in which the operator services 50,000 or fewer
subscribers.
5
The Act provides several exceptions for acquisitions and joint ventures (which
to a large extent are prohibited) for certain small and rural systems. These
exceptions are based on annual operating revenues, number of cable subscribers
served, location of the cable subscribers served, and common ownership or
control issues with any of the 50 largest cable TV system operators in existence
on June 1, 1995, and if the cable system operates in a television market not in
the top 100 television markets as of June 1, 1995.
An LEC may obtain, upon agreement with a cable TV operator on rates, terms, and
conditions, the use of the transmission facilities of a cable system extending
from the last multi-user terminal to the premises of the end user, if such use
is reasonably limited in scope and duration, as determined by the FCC. The Act
also permits a LEC to acquire or joint venture under different terms and
conditions in cases where the subject market meets the FCC's definition of
"competitive." Finally, the FCC may waive the acquisition and joint venture
prohibitions if it determines the economic viability of the market merits the
waiver or that a waiver would otherwise be in the public interest, and the local
franchising authority approves.
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.
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 in the near future given, among
other things, the smaller size of the towns and the costs to expand into them.
As indicated, although cable services providers like Tele-Services are subject
to competition from other providers, Tele-Services currently does not have
direct competition from other cable services providers in the towns
Tele-Services now services. There is, however, competition in other forms. For
example, Tele-Services experiences strong competition from wireless and
satellite dish providers. As discussed later in this annual report, that
competition has been increasing in recent years. Various other competitors and
forms of competition are also likely to arise in the future as technological
advances occur in the telecommunications and cable industries.
Tele-Services is regulated by the FCC. The rules and regulations of the FCC
primarily relate to general operational and technical issues, and they do not
affect rates or expansions of service areas. Tele-Services' cable services are
also regulated in the sense that those services are, as noted above, provided
pursuant to franchises or agreements with each of the towns in which
Tele-Services currently provides cable services.
Internet Service Provider.
Breda, Prairie Telephone and Westside Independent also provide internet access
through their telephone lines. They were providing internet access to
approximately 526 subscribers as of
6
December 31, 2001. 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 1,984 subscribers as of
December 31, 2001. BTC is a wholly owned subsidiary of Prairie Telephone.
Breda, Prairie Telephone, Westside Independent and BTC face competition in
providing internet access, and Breda contemplates that the competition in that
area will continue to increase. For example, Breda has been experiencing
price-point competition for Internet services from Iowa Telecom in three
communities since the late fourth quarter 2000. Breda had been the sole provider
of Internet services in those communities until that time. Iowa Telecom
purchased the telephone exchanges for those communities in 1999 and began
operating them on June 1, 2000. In late 2000, Iowa Telecom expanded the services
offered in those communities to include Internet services and at a lower price
than is offered by Breda. As a result, Breda has lost Internet customers in the
three communities.
Breda has investigated and continues to explore re-engineering options and other
help-desk and underlying Internet service provider options that would reduce
Breda's costs in order to allow Breda to compete at a lower price point for
Internet services. One step that Breda has taken to attempt to lower Breda's
underlying Internet costs is through Prairie Telephone's acquisition of a 10%
ownership interest in Desktop Media, L.L.C. Desktop Media, L.L.C. provides both
dial-up and high speed internet access in south central Minnesota, and is a
full-scale internet service provider. Desktop Media, L.L.C. provides internet
service provider support services to Prairie Telephone and the other telephone
companies who have invested in Desktop Media, L.L.C. As indicated, one of the
intended purposes of Prairie Telephone's relationship with Desktop Media, L.L.C.
is to try to lower Breda's and its subsidiaries' costs of providing Internet
services in order to allow them to compete at a lower price point for Internet
services. Breda also reduced its pricing of Internet services and bundled
Internet services with its long distance services in August, 2001 in order to
attempt to compete at a lower price point for Internet services.
Breda, Prairie Telephone and Westside Independent are providing dial-up and high
speed Internet access to their customers. Breda anticipates that there will
continue to be competitive pressure to lower the dial-up rates. Breda also
anticipates that the number of potential customers will continue to increase and
that Internet customers will continue to demand higher Internet speed. BTC is
currently providing high speed Internet access by leasing lines from Qwest. BTC
is in the process of installing equipment in the Qwest central office that will
allow BTC to use a new product that Qwest offers called line sharing. It is
estimated that the capital costs that will be incurred by BTC to switch to the
line sharing product will reach approximately $50,000, and that this conversion
will be completed in the second quarter of 2002. Upon the completion of the
conversion, BTC will be able to offer a more competitively-priced, high speed
Internet service. Breda expects its customer base for high speed Internet to
increase significantly during the remainder of 2002.
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
7
provide telephone services, however, and BTC cannot provide any telephone
services in the state of Iowa without first receiving a certificate of public
convenience and necessity from the IUB and filing the necessary tariffs and
providing 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, however,
provide internet access, as discussed above.
BTC leases part of its business location in Carroll, Iowa to Breda for a retail
store for the sale and lease of telephone, cellular and related equipment and
merchandise. The store opened for business in April, 2000.
Other.
Telemarketing services revenue was generated by Prairie Telephone's subsidiary,
Pacific Junction Telemarketing, Inc. ("Pacific Junction"). On July 26, 2001,
however, Pacific Junction's telemarketing call number supplier (Results
Telemarketing, Inc.) notified Pacific Junction that it would no longer be able
to provide calling numbers to Pacific Junction. Breda and Pacific Junction have
been unable to locate new sources of telemarketing calling numbers, so Pacific
Junction's telemarketing center has not been operating since July 26, 2001.
Breda has determined that it is very unlikely that Pacific Junction's
telemarketing center will ever be reopened. The closing of Pacific Junction's
telemarketing center resulted in the loss of telemarketing services revenue. The
telemarketing calls made by Pacific Junction were primarily intended to provide
a source of access services revenue for Breda, and the closing of the
telemarketing center also accordingly led to a decline in Breda's access
services revenue.
Miscellaneous Business.
Breda and some of its subsidiaries are also engaged in other miscellaneous
businesses.
For example, Breda and its subsidiaries have various miscellaneous investments,
such as in 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.
Some of those investments may be a source of revenue for Breda, Prairie
Telephone and Westside Independent through distributions which may be made by
the entities. None of Breda, Prairie Telephone or Westside Independent controls
any distribution decisions, however, so no distributions are ever guaranteed,
and the timing and amount of any distributions will likely vary greatly from
year to year.
Breda, Prairie Telephone and Westside Independent have also from time to time
received settlement payments from some of their cellular investments. Settlement
payments are generally received for not exercising a right of first refusal to
purchase additional units during a merger or buyout by another company. Breda,
Prairie Telephone and Westside Independent do not control any settlement
payments, and settlement payments are in any event usually one-time events, so
no settlement payments are guaranteed and the timing and amount of any
settlement payments
8
will vary greatly from year to year. For example, no settlement payments were
received in 2000 or 2001.
Breda received an annual fee of $6,000 from Alpine Communications, L.C. in 2001,
in consideration for Breda's chief operations officer serving as an officer of
the management committee of Alpine Communications, L.C.
The value of Breda's, Prairie Telephone's and Westside Independent's underlying
investments in other ventures and in their other investments may also vary
significantly from year to year. They may also face difficulties in realizing
upon some of their investments because there is no public or other active market
for those investments and because some of the entities in which they have
invested have agreements in place which place limitations or restrictions on
Breda's, Prairie Telephone's or Westside Independent's right to transfer their
ownership interests in those entities to third parties. Some of those
limitations and restrictions are in the form of a right of first refusal under
which the entity is given the right to match any offer received by Breda,
Prairie Telephone or Westside Independent.
Service Marks.
Breda filed an application to register the mark "W.I.N. Western Iowa Networks"
with the United States Patent and Trademark Office, and Breda was notified in
late February of 2001 that the Patent and Trademark Office had found no
conflicting marks in its records regarding the mark. Breda accordingly began
utilizing the mark and some related logos during the second quarter of 2001 on
its trucks and other equipment. Breda also implemented an advertising campaign
to create awareness of the mark and to promote its general business and
services. Breda subsequently received notice from the Patent and Trademark
Office that the official notice of publication of the mark took place on
September 18, 2001.
Breda hopes the use of the mark and logos will create an integrated, unified
marketing approach for all of the products and services of Breda and its
subsidiaries and will increase awareness of those products and services. Breda
does not believe the mark and logos have been in use long enough to determine
whether they are fulfilling any of those purposes. Breda has not made any change
in the scope or nature of its or any of its subsidiaries' business in connection
with the adoption and use of the mark and logos.
Employees.
As of December 31, 2001, Breda had 31 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 chief operations officer and the chief
financial officer of Breda.
9
Pacific Junction had 3 full-time employees prior to the closing of its
telemarketing center on July 26, 2001. Given that closing, Pacific Junction did
not have any employees as of December 31, 2001. Pacific Junction did not have
collective bargaining or labor agreements with any of its employees.
Breda also utilizes part-time employees on an as needed basis. Prior to the
closing of its telemarketing center on July 26, 2001, Pacific Junction utilized
up to approximately 17 part time employees at a time, primarily for the purpose
of making telemarketing calls.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview.
This section of this annual report should be read in conjunction with the
"DESCRIPTION OF BUSINESS" section of this annual report and financial statements
and related notes included at the end of this annual report.
Breda's primary source of consolidated revenues is from the telephone services
provided by Breda, Prairie Telephone and Westside Independent.
The operating revenues from 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,
2002, 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 charge
revenues payable by long distance carriers for intrastate and interstate
exchange services provided to those long distance carriers. Access charge
rates may be at a flat or fixed rate or may depend upon usage. Breda,
Prairie Telephone and Westside Independent receive access charge revenues
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 charge revenues for originating and
terminating long distance calls made by their subscribers. The FCC
regulates the amount of the access charge rates that can be charged by
Breda, Prairie Telephone and Westside Independent for interstate long
distance calls. The National Exchange Carrier Association ("NECA") has been
delegated some authority by the FCC regarding the regulation of access
charge rates, but all changes proposed by the National Exchange Carrier
Association must be approved by the FCC. Access charge revenues 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 charge rates by the FCC. Breda anticipates continuing
pressure for the lowering of access charge rates, so future reductions in
access charge rates are likely.
10
The access charge rate payable to telephone companies like Breda, Prairie
Telephone and Westside Independent who utilize the "average schedule" basis
for receiving access charge revenues is based on, among other things, the
number of miles of their cable over which they transfer long distance calls
made by their subscribers. Breda's total access charge revenues have been
increasing in recent years, but Breda believes those increases are
attributable to increased numbers of subscribers, increased calling
patterns and technological advances. There is no assurance that those
trends will continue, and it is in fact 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 indicated above, Breda, Prairie Telephone and Westside Independent
utilize the "average schedule" basis for receiving access charge revenues.
This is the approach taken by most smaller telephone companies. Another
approach currently available for receiving access charge revenues 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 charge rates are based upon, in general, the
average of all of those costs of a sample of telephone companies and
certain other factors intended to take into account the size of the
particular telephone company in question.
On October 20, 2000, a comprehensive access charge rate reform and
deregulation plan for non-price cap, incumbent local exchange carriers
("LECs") was submitted to the FCC by the Multi-Association Group ("MAG").
LECs include most of the small and mid-sized local exchange carriers that
serve rural and insular areas in the U.S., such as Breda, Prairie Telephone
and Westside Independent. MAG is a coalition of the National Rural Telecom
Association, the National Telephone Cooperative Association, the
Organization for the Promotion and Advancement of Small Telecommunications
Companies and the United States Telecom Association.
One of the purposes of MAG was to formulate a comprehensive plan to settle
major proceedings pending at the FCC and complete reforms required by the
Telecommunications Act of 1996. In general terms, the MAG plan was designed
to, among other things, modify interstate access charge rules and universal
service support for non-price cap, incumbent LEC's.
It was originally thought that the FCC would act on the MAG plan within a
time frame such that whatever orders, rules or regulations were issued or
promulgated by the FCC based on or in response to the MAG plan would have
taken effect by July 1, 2001. The FCC did not, however, take any formal
action on the MAG plan until October 11, 2001, when the FCC issued an order
setting out rules which address some aspects of the MAG plan and also a
notice of proposed rule making regarding other aspects of the MAG plan, in
particular the incentive portions of the MAG plan.
The full text of the FCC's order, which runs approximately 160 pages, is
extremely complex, and Breda is still in the process of reviewing various
industry analysts'
11
interpretations of the order and otherwise considering the possible effects
of the order on Breda's and its subsidiaries' business.
The following discussion of the order is only a summary discussion, and is
based substantially on the written summary of the FCC's order that was
included in the November 9, 2001 No. 28 issue of a publication called
"Industry Watch". The Industry Watch publication notes that its summary was
adapted from the FCC's news release. In any event, the following ten
paragraphs summarize some of the more significant portions of the FCC's
order.
The FCC order increases the Subscriber Line Charge ("SLC") caps to the
levels paid by most subscribers nationwide. The residential and single-line
business SLC cap increased to $5.00 on January 1, 2002, and may increase up
to $6.00 on July 1, 2002, and $6.50 on July 1, 2003, subject to a cost
review study for the SLC caps of price-cap carriers. The multi-line
business SLC cap increased to $9.20 on January 1, 2002. Lifeline support
will be increased in an amount equal to any SLC rate increases for
low-income subscribers.
The FCC order allows limited SLC deaveraging, which will give
rate-of-return Local Exchange Carriers (including Breda) pricing
flexibility. The SLC deaveraging method is consistent with the Rural Task
Force's universal service support disaggregation scheme.
The FCC order reforms the local switching and transport rate structure, and
shifts the non-traffic-sensitive costs of local switch line ports to the
common-line category; and reallocates the remaining costs contained in the
Transport Interconnection Charge to other access rate elements. These
measures are intended to align the rate structure more closely with the way
in which costs are incurred and reduce per-minute switched access charges.
The FCC order creates a new universal service support mechanism to convert
implicit support in the rate structure to explicit support available to all
Eligible Telecommunication Carriers ("ETC"). Specifically, Interstate
Common Line Support will replace the carrier common line, which will be
phased out as of July 1, 2003, when SLC caps reach their maximum levels.
The new support mechanism is intended to ensure that changes in the rate
structure do not affect the overall recovery of interstate access costs by
rate of return carriers serving high-cost areas.
The FCC order does not prescribe a single, target rate for per-minute
access charges, either on an optional or a mandatory basis. The FCC order
adopts reforms that will reduce per-minute charges for all rate of return
carriers, while giving them the flexibility to establish rates based on
their own costs in the areas they serve.
The FCC order streamlines the rules for introduction of new access services
by rate of return carriers.
The FCC order terminates the proceeding on the represcription of the
authorized rate of return, which was set at 11.25% in 1990.
12
The FCC order does not adopt MAG proposals to impose new requirements on
Interexchange Carriers; and concludes that the proposed requirements are
unnecessary, inconsistent with the FCC's deregulatory approach, and would
entail undue administrative costs and burdens.
In a Further Notice of Proposed Rulemaking, the FCC asked for additional
comments on the MAG incentive plan and how it might be modified to provide
incentives for cost efficiency gains that will benefit consumers. The
notice also requests further comment on the MAG's proposed changes to the
"all-or-nothing rule," on additional pricing flexibility measures, and on
the continued need for the Long Term Support mechanism in light of the
reforms adopted in the Order.
The FCC's release accompanying the order included the important policy
statement that the actions taken by the FCC in the order largely completed
the interstate access charge and universal service support reforms it
initiated following the passage of the Telecommunications Act.
As indicated above, Breda is still evaluating the FCC's order regarding the
MAG plan. Breda currently believes, however, that the FCC's order on the
MAG plan will not, at least in 2002, have any materially adverse effects on
Breda's or its subsidiaries' revenues. This conclusion is subject to
change, however, upon Breda's completion of its analysis of the FCC's
order, and Breda has not yet reached any determination of the possible
effects of the FCC's order on Breda's and its subsidiaries' revenues in
future years.
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
marketed extended packages and custom calling features to their subscribers
in the hope that they may increase subscriber usage of the 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 have been experiencing increased competition in this area over
the past three years. The competitors include other third parties providing
these services, and competition from the long distance providers themselves
since some providers have decided to handle their own billing and
collection. Other telephone companies have terminated their billing and
collection agreements with AT & T. Breda's billing and collection
agreements will be evaluated in the future for possible termination if
Breda's own market share of long distance customers grows to a point where
doing the billing and collection for larger carriers is no longer
economically
13
feasible.
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 in 1999.
The increase in the combined internet customer base of the companies in 2000 was
only 39.7%, however, even though BTC itself experienced a 55.7% increase in its
customer base during 2000. The increase in the combined internet customer base
of the companies in 2001 further slowed to 7.0%, with BTC's increase being 6.4%.
Future increases in BTC's internet customer base will likely continue to be
lower because BTC's current customer base is limited to Carroll, Iowa and the
surrounding communities. Also, Breda is experiencing price-point competition in
three of the communities where it provides Internet services. Breda also
believes that Breda, Prairie Telephone, Westside Independent and BTC will
continue to face ever increasing competition in providing internet services
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. Similar
percentage increases in the internet customer base of the companies in the
future are therefore not anticipated.
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 IUB. They operate their telephone businesses pursuant to
certificates and various rules and regulations promulgated by the IUB.
Although not anticipated to occur, the IUB could terminate their right to
provide services if they fail to comply with those rules and regulations.
As indicated, 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 to meet at
14
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 designated Breda, Prairie Telephone and Westside Independent as
"eligible telecommunications carriers." This designation 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 designation because they are
rural telephone providers. Although not anticipated to occur, their
designation as an eligible telecommunications carrier could be lost if they
fail to provide the services supported by the universal services program,
and the loss of the designation would result in them no longer being able
to receive universal services funding. Those services are, however,
currently only the basic local telephone services provided by Breda,
Prairie Telephone and Westside Independent. This designation therefore does
not materially affect the operation of their businesses, and the
designation was obtained solely because it was necessary in order to be
eligible to receive universal services funding. Breda, Prairie Telephone
and Westside Independent received, in the aggregate, approximately $79,680
in universal services funding in 1999, $85,223 in 2000 and $90,695 in 2001.
Breda anticipates receiving universal services funding in 2002 in an amount
comparable to that received in 2001.
o Breda, Prairie Telephone and Westside Independent are currently treated as
rural telephone companies under the Telecommunications Act of 1996, which
generally means that they may be exempted from some of the duties imposed
on other telephone companies that might make it easier for potential
competitors to compete with those companies. The IUB may withhold this
exemption, however, if it finds that a request by a potential competitor
for interconnection with Breda's, Prairie Telephone's or Westside
Independent's networks is not unduly economically burdensome, is not
technically unfeasible, and would not affect the provision 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.
15
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 charge rates that can be charged by Breda, Prairie Telephone and
Westside Independent for interstate long distance calls. The regulation of
access charge rates by the FCC is an area of material 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. It is not
possible to accurately predict how the FCC will allocate the support
payment funding in any year, but the amount of support payment funding
received by Breda, Prairie Telephone and Westside Independent will vary
from year to year. For example, Breda, Prairie Telephone, and Westside
Independent received, in the aggregate, $404,136 in support payment funding
in 1999, $410,279 in 2000, and $416,075 in 2001. Those amounts include the
amount of the universal services funding component which is listed in the
above discussion regarding the IUB.
Breda's other primary source of consolidated revenue 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. The FCC now allows
satellite dish providers to provide local channels, which will 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. As indicated, changes in the
telecommunications and cable industry are continually occurring, and
technological advances may provide Tele-Services subscribers with other options.
For example, Iowa Network Services is beginning to offer cable services in Iowa
16
over existing telephone lines, and it is estimated that up to 70 independent
telephone companies in mostly rural Iowa will be able to offer cable television
programming over their telephone lines by 2005. This option, and others which
might arise through other changes or advancements in technology, could have
material adverse effects on Tele-Services in the future. Breda currently
believes, however, that the cable services provided by Tele-Services will
continue to be desirable in the areas served by Tele-Services for at least those
subscribers who desire a lower priced product that allows local channel options.
Tele-Services has worked on consolidating its head-end equipment with the goal
being that the equipment will then be able to serve two or more communities,
instead of just one community as is currently the case. It is hoped that this
consolidation will reduce Tele-Services' maintenance costs for that equipment.
Another difficulty being faced by Tele-Services at the time of the preparation
of this annual report was the continuing 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 continue
to 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 2002, and of any continuing or further head-end
equipment consolidation, are estimated to be less than $200,000.
As noted above in 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. Tele-Services also
hopes to be able to renew or extend the franchises or agreements before they
expire, but no assurance can be given that any 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 providing cable services to that town.
The franchises or agreements with the towns require the giving of notice to the
towns before Tele-Services can change 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 any or all of the
towns.
As discussed above in this annual report, uncertainties continue to exist
regarding the possible effects of the Telecommunications Act of 1996 on the
business of Tele-Services.
17
Tele-Services is regulated by the FCC. The rules and regulations of the FCC
primarily relate to general operational and technical issues, and they do not
currently affect rates or expansions of service areas.
In the past, revenues were also generated from the telemarketing activities of
Pacific Junction. Those activities also provided a source of access charges
revenue for Breda through the telemarketing calls made by Pacific Junction. As
noted above in this annual report, however, Pacific Junction's telemarketing
center was closed on July 26, 2001, and Breda believes it is very unlikely that
Pacific Junction's telemarketing center will ever be reopened.
Other revenues sometimes arise from the investments in various cellular limited
partnerships, as discussed above in this annual report. Other miscellaneous
sources of revenue are also discussed in the financial statements found at the
end of this annual report.
The following table reflects, on a consolidated basis for Breda and its
subsidiaries, the approximate percentage of revenue derived from Breda's and its
subsidiaries' various businesses and investments as of the close of the past two
fiscal years:
2000 2001
------ ------
Local Exchange Carrier(1) 67.4% 67.3%
Broadcast(2) 17.3% 17.0%
Internet Service Provider(3) 10.7% 12.9%
Other (4) 4.6% 2.8%
------ ------
Total 100% 100%
(1) Includes (i) flat monthly fees charged to subscribers by Breda,
Prairie Telephone and Westside Independent for basic local telephone
services, (ii) universal services funding amounts and access charges
payable by long distance carriers for intrastate and interstate
exchange services provided to those long distance carriers, (iii) fees
from long distance providers for billing and collection services for
long distance calls made by subscribers, and (iv) monthly cellular
commissions, advertising fees and miscellaneous revenues.
(2) Includes monthly fees charged for basic and premium cable services.
(3) Includes monthly fees charged for internet services.
(4) Includes revenues from telemarketing services. Pacific Junction's
telemarketing operations were, however, discontinued on July 26, 2001.
Twelve-months ended December 31, 2001 Compared to Twelve-months ended December
31, 2000.
There was a decrease in total operating revenues for the twelve-month period
ended December 31, 2001, when compared to the twelve months ended December 31,
2000, of $167,910, or 2.8%. The segments making up total operating revenue are:
local exchange carrier services, broadcast services, Internet services and other
services revenue.
Local exchange carrier services revenue decreased $123,157, or 3.0%, for the
twelve-month period ended December 31, 2001, when compared to the twelve-month
period ended December
18
31, 2000. The components making up local exchange carrier services revenue are
local network services, network access services, billing and collection services
and miscellaneous income. Those four components are discussed in the following
four paragraphs.
Local network services revenue increased $10,603, or 1.9%, for the twelve-month
period ended December 31, 2001, when compared to the twelve-month period ended
December 31, 2000. This increase resulted from a small increase in the overall
custom calling feature revenues.
Network access revenue decreased $78,751, or 3.1%, when comparing the
twelve-month period ended December 31, 2001, to the twelve-month period ended
December 31, 2000. This decrease was due primarily to two factors. One was the
reduction of access revenue for the months August through December 2001, which
resulted from the closing of Pacific Junction's telemarketing center on July 26,
2001. The other factor was the one-time write-off of Qwest's underpayment of
access charges to Breda, Prairie Telephone and Westside Independent. Pacific
Junction's telemarketing calls had generated an average of approximately $4,400
per month in access revenues for Breda in 2001 through July 2001. As discussed
elsewhere in this annual report, Breda does not believe that Pacific Junction's
telemarketing center will ever be reopened, so no future access revenues will be
generated from Pacific Junction's telemarketing calls. The amount written off by
Breda and its subsidiaries as of December 31, 2001 with respect to Qwest's
underpayment of access charges was $67,671. Qwest filed a Petition for
Declaratory Order on May 19, 2000, with the Iowa Utilities Board with respect to
adjustments Qwest had made related to wireless originated minutes on the access
bills of the Iowa Network Services participating companies in Iowa. The Iowa
Utilities Board ruled in the favor of Qwest, but appeals are now pending with
the Iowa Utilities Board from rural Iowa independent telephone associations.
While the legal process is not yet final, Breda believes it is likely that Breda
and its subsidiaries will continue to experience lower access rate reimbursement
on wireless originating minutes.
Billing and collection service revenue is a function of the amount of billing
and collection services provided by Breda to other carriers such as AT&T. The
billing and collection services revenues decreased $28,092, or 30.9%, for the
twelve-month period ended December 31, 2001, when compared to the twelve-month
period ended December 31, 2000. The decrease is attributable to the fact that
carriers, such as AT&T, are performing more of their own billing and collection
services.
Miscellaneous revenue decreased $26,917, or 3.0%, for the twelve-month period
ended December 31, 2001, when compared with the twelve-month period ended
December 31, 2000. The decrease in miscellaneous revenue resulted primarily from
decreased cellular service commissions and cellular accessories revenue for the
three months ended December 31, 2001. Cellular sales decreased significantly
compared to the prior year due to the economic slowdown that occurred after the
terrorist attacks on September 11, 2001. Breda opened a retail outlet in
Carroll, Iowa in early April 2000, which has significantly expanded its market
penetration in the cellular services arena. There was no comparable revenue
stream from the retail store for the first three months of the twelve-month
period ended December 31, 2000.
19
Broadcast services revenue decreased $48,093, or 4.6%, when comparing the
twelve-month period ended December 31, 2001, to the twelve-month period ended
December 31, 2000. This decrease was directly attributable to a 3.9% decrease in
the customer base when comparing the two twelve-month periods. Breda believes
the decrease in the customer base resulted from competition from satellite dish
providers and the declining population bases in the small rural communities
served by Tele-Services.
There was an increase in Internet services revenue for the twelve-month period
ended December 31, 2001, when compared to the twelve month period ended December
31, 2000, of $113,804, or 17.6%. This increase was due to a 7.0% increase in the
customer base when comparing the two twelve-month periods. Breda reduced its
pricing of Internet services, and bundled Internet services with its long
distance services, in August 2001 in order to attempt to compete at a lower
price point for Internet services. As is discussed elsewhere in this annual
report, in October 2001, Breda switched to a new underlying Internet service
provider and help desk provider in order to attempt to allow Breda to further
reduce costs. While Breda has lost Internet customers because of competition,
Breda's overall Internet operations have continued to grow.
Telemarketing services revenue is reported as other revenue, and it decreased
$110,464, or 39.9%, when comparing the twelve-month period ended December 31,
2001, to the twelve month period December 31, 2000. The decrease is attributable
to the decrease in the volume of telemarketing calls made by Pacific Junction
prior to July 26, 2001, and to the fact that Pacific Junction's telemarketing
center was closed on July 26, 2001. Breda believes it is very unlikely that the
telemarketing center will ever be reopened.
There was an increase in total operating expenses of $115,168, or 2.2%, for the
twelve-month period ended December 31, 2001, when compared to the twelve-month
period ended December 31, 2000. The components making up operating expenses are
cost of services, depreciation and amortization, and selling, general and
administration expenditures. Those components are discussed in the following
paragraphs.
Cost of services expenses increased $40,890, or 1.8%, for the twelve-month
period ended December 31, 2001, when compared to the twelve-month period ended
December 31, 2000. The components making up cost of services are plant specific
operations, plant non-specific operations, programming, and Internet costs.
Those components are discussed in the following four paragraphs.
There was a decrease of $80,001, or 5.1%, in plant specific operations expense
when comparing the twelve-month period ended December 31, 2001, to the
twelve-month period ended December 31, 2000. This decrease was primarily
attributable to decreased cellular operating expense for such items as
inventory, personnel costs, and other expense which had been generated in the
twelve-month period ended December 31, 2000 for the start-up of Breda's retail
outlet. Repairs for central office equipment also decreased for the twelve-month
period ended December 31, 2001, when compared to the twelve-month period ended
December 31, 2000.
20
Plant nonspecific operations expense increased $19,094, or 20.4%, for the
twelve-month period ended December 31, 2001, when compared to the twelve-month
period ended December 31, 2000. The increase is mainly accounted for by rate and
volume increases in utilities and postage.
There was an increase of $29,232, or 9.8%, in programming expense for cable TV
services when comparing the twelve-month period ended December 31, 2001, with
the twelve-month period ended December 31, 2000. The increase resulted from
increases in programming fees.
Internet costs increased by $72,565, or 27.1%, for the twelve-month period ended
December 31, 2001, when compared to the twelve-month period ended December 31,
2000. The increase is directly attributable to the additional costs of providing
Internet services to the increased customer base. The additional costs include
rental of additional fiber lines, help desk and customer services fees from the
underlying Internet service provider, and internal costs to provide customer
service and billing service to the additional customers. As noted previously,
Breda has taken some steps to attempt to reduce its costs to provide Internet
service.
Depreciation and amortization expense increased $27,763, or 2.5%, for the
twelve-month period ended December 31, 2001, when compared to the twelve month
period ended December 31, 2000. The increase reflects increased depreciation
rates on depreciable equipment associated with new technology services, and the
proportionate net overall depreciation of capital improvements made during the
year 2001. Boring equipment, vehicles, and underground plant/sonnet ring were
also purchased and put into operation during the twelve-month period ended
December 31, 2001, which increased the depreciation expense.
Selling, general and administration expenses increased $46,515, or 2.5%, for the
twelve-month period ended December 31, 2001, when compared to the twelve month
period ended December 31, 2000. The customer operations component decreased
$40,965, or 5.4%, when comparing these two twelve-month time periods, and mainly
resulted from decreased labor and benefit costs. A vacant supervisory position
was filled in this department in August 2001. Breda received a 13.0% increase in
its health plan premiums for the year 2001. The corporate operations component
increased $95,694, or 10.2%, during the twelve-month period ended December 31,
2001 when compared to the twelve-month period ended December 31, 2000. The
increase was not attributable to any one item but rather included wage and
benefit increases, management bonuses, consulting services for special projects
and acquisition opportunities, continued SEC filing expenditures, advertising
and promotions for the new mark and logo adopted by Breda, and increased
expenditures for national meetings and educational seminars attended by board
members and management. General taxes paid by Breda decreased $8,214, or 5.1%,
for the twelve-month period ended December 31, 2001, when compared to the
twelve-month period ended December 31, 2000, and resulted from decreased tax
rates levied by the taxing authorities in the various counties.
The net result of the operating services revenue and operating expenses was a
decrease of $283,078, or 33.1%, in operating income for the twelve-month period
ended December 31, 2001, when compared to the twelve-month period ended December
31, 2000.
21
Other income (expense) decreased $4,806,596, or 84.7%, during the twelve-month
period ended December 31, 2001, when compared to the twelve-month period ended
December 31, 2000. The decrease is attributable to the fact that there was no
transaction during 2001 to correspond to the $5,018,714 gain which arose from
the sale of a cellular investment during the twelve-month period ended December
31, 2000. Interest and dividend income decreased $116,524, or 25.3%, for the
twelve-month period ended December 31, 2001 when compared to the twelve-month
period ended December 31, 2000. Interest expense also decreased by $266,830, or
63.1%, when comparing the same twelve-month periods. While the decrease in
interest and dividend income also decreased other income, the decrease in
interest expense resulted in an increase in other income. Both the decrease in
interest and dividend income and the decrease in interest expense resulted from
Breda, Prairie Telephone and Tele-Services paying back $4,999,052 in long term
debt to the Rural Telephone Finance Cooperative during the twelve-month period
ended December 31, 2000. Investments were redeemed to pay approximately
$2,100,000 of this $4,999,052 debt, which resulted in less investment revenue
being generated for the twelve-month period ended December 31, 2001, when
compared to the twelve-month period ended December 31, 2000. The $4,999,052
reduction in variable rate long-term debt also had the effect of reducing
Breda's interest expense by a significant amount. Breda's interest income was
also less in 2001 because of the significantly lower interest rates received on
its investments during that time period as compared to the year 2000.
Income from cellular investments decreased $60,736, or 9.0%, during the
twelve-month period ended December 31, 2001, when compared to the twelve-month
period ended December 31, 2000. The decrease is attributable to the fact that
three cellular investment distributions totaling $674,204 were received during
the twelve months ended December 31, 2000, while only $613,468 of cellular
investment distributions were received during the twelve months ended December
31, 2001. A non-cellular investment distribution of $44,209 was received from
the Alpine investment during the twelve-month period ended December 31, 2001, as
compared to a $23,508 distribution for the twelve-month period ended December
31, 2000. The loss on the sale of investments decreased by $65,352 for the
twelve-month period ended December 31, 2001. As noted previously in this
discussion, investments were redeemed during the twelve-month period ended
December 31, 2000 to pay off approximately $2,100,000 of RTFC long-term debt.
Other items increased $36,495 for the twelve-month period ended December 31,
2001, when compared to the twelve month period ended December 31, 2000, and
reflects income received from the sale of equipment and other miscellaneous
income.
Income taxes decreased $2,038,941 for the twelve-month period ended December 31,
2001, when compared to the twelve months ended December 31, 2000. The decrease
resulted primarily from the fact that there was no transaction in the twelve
months ended December 31, 2001 to correspond to the $5,018,714 taxable gain on
the sale of a cellular investment that occurred during the twelve-month period
ended December 31, 2000.
Net income decreased $3,050,733, or 76.5%, for the twelve-month period ended
December 31, 2001, when compared to the twelve months ended December 31, 2000.
The decrease was primarily attributable to Breda having a net after tax
reportable gain of approximately $3,066,434 from the sale of a cellular
investment in the twelve-month period ended December 31, 2000, but no similar
transaction during the twelve-month period ended December 31, 2000.
22
Liquidity and Capital Resources at Twelve Months Ended December 31, 2001.
Breda's net working capital was a positive $2,664,323 at December 31, 2001. This
represents an increase of $889,545 in net working capital from year-end 2000.
Breda had an increase of $727,002 in current assets during the twelve-month
period ended December 31, 2001, when compared to the twelve months ended
December 31, 2000. The increase resulted from a $692,838 increase in cash and
cash equivalents, and a $366,329 increase in temporary investments. These funds
are being held for the possible redemption of additional shares of stock in
Breda during the normal course of business, and for the payment of the
construction of Breda's new corporate headquarters, which is scheduled for
completion by late third quarter 2002. While inventories increased $970, and
other current assets increased $94,882, those items were offset by a $167,090
decrease in accounts receivable and a $285,185 decrease in prepaid income taxes.
The increase in other current assets of $94,882 reflects the prepayment of
quarterly employee benefit premiums. There was not a corresponding prepayment
amount at year end 2000. The decrease in accounts receivable is attributable to
the receipt of National Exchange Carrier Association reimbursements and the
write-off of the Qwest access underpayments as described earlier in this annual
report. The $285,185 decrease in prepaid income taxes is attributable to the
reduced estimated taxable income for the calendar year 2001. The taxable income
for 2001 was decreased because there was no gain on the sale of a cellular
investment during the twelve-month period ended December 31, 2001, to correspond
to the $5,018,714 gain on the sale of a cellular investment which occurred
during the twelve-month period ended December 31, 2000.
Noncurrent assets, which mainly consist of longer-term investments, decreased
$187,275 during the twelve-month period ended December 31, 2001, when compared
to the twelve months ended December 31, 2000. On May 2, 2001, Prairie Telephone
entered into a contractual agreement to advance $500,000 to Desktop Media,
L.L.C. This transaction is shown as a Note Receivable for $451,502 at December
31, 2001, and for which there is no corresponding amount at December 31, 2000.
The remaining $48,498 is reported as a 10% equity interest in Desktop Media,
L.L.C. and is included in other investments. A corresponding $394,427 decrease
in long-term investments and a $260,280 decrease in other investments offset
this Desktop Media, L.L.C. transaction. The remainder of the overall decrease in
noncurrent assets was caused by the amortization of intangibles and an increase
in deferred income taxes.
Breda's net working capital was a positive $2,664,323 at December 31, 2001, as
compared to $1,774,778 at December 31, 2000. The $889,545 increase in working
capital between the two time periods resulted mainly from the $164,557 decrease
in accounts payable and the net increase in current assets as explained above.
The accounts payable decrease between the twelve-month period ended December 31,
2001 and the twelve months ended December 31, 2000 resulted primarily because of
a $116,794 plant under construction payable on December 31, 2000, which was paid
before December 31, 2001, and the $31,070 reduction in the amount due to the
National Exchange Carrier Association because of payments made during the twelve
months ended December 31, 2001.
23
Common stock had a net increase of $284,815 during the twelve-month period ended
December 31, 2001, when compared to the twelve months ended December 31, 2000.
This increase resulted primarily from two items. One was the $23 per share
increase in outstanding shares value on May 16, 2001, and the other was a
decrease in the number of outstanding shares through the redemption of 2,216
shares of common stock by Breda during the twelve-month period ended December
31, 2001. The decrease in retained earnings during the twelve-month period ended
December 31, 2001, when compared to the twelve months ended December 31, 2000,
is the net effect of the stated value stock adjustment of $851,483, the
dividends paid in 2001 of $111,087, and the year-to-date net income as of
December 31, 2001.
Other.
Breda's primary ongoing capital investment activity will currently continue to
be additions to property, plant and equipment. Capital expenditures for 2000 and
2001 were, respectively, $726,922 and $624,270, and are currently expected to be
approximately $1,341,490 in 2002.
Breda anticipates that substantial expenditures will need to be made for
software upgrades that will be 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. The modifications were originally required
to be completed by October 25, 1998, but in accord with an extension granted by
the FCC, were generally to be completed by June 30, 2001. Industry associations
requested that the FCC extend the June 30, 2001 deadline for wireline carrier
compliance with CALEA until September 30, 2001. For the wireline, cellular, and
broadband personal communications services carriers, implementation of a
packet-mode capability and six Department of Justice/Federal Bureau of
Investigation "punch list" capabilities were originally required to be completed
by September 30, 2001. Industry associations, on behalf of their members, had
requested a blanket extension from the FCC of the CALEA punchlist compliance
deadline of September 30, 2001. The industry associations argued that since the
FBI has not yet completed buy-out agreements with all manufacturers to pay for
CALEA capability software and because the FCC had not begun any proceedings
relating to the four-punchlist capabilities recently vacated and remanded by the
D.C. Court of Appeals, most carriers would not be able to comply with the
September 30, 2001 deadline.
Breda also took action on its own behalf regarding its CALEA compliance by
filing a Petition for Extension with the FCC on June 30, 2001 , asking for a
two-year extension of the CALEA section 103 capability requirements. The
extension was referred to as a section 107c extension. Breda's petition included
a Flexible Deployment Guide, which provided the FBI with specific information
about Breda's switch, the deployed generic, the date the switch will be CALEA
compliant and the number of law enforcement interceptions Breda has had over the
last four years. The FBI made a recommendation to the FCC which supported
Breda's petition, and the
24
FCC has granted Breda an extension for complying with the CALEA section 103
requirements until June 30, 2002. Breda anticipates seeking additional
extensions.
In August of 2001, the FBI released additional CALEA requirements for
packet-mode communications, which include services such as DSL and ISDN. On
September 28, 2001, the FCC released an order which sets out procedures for
companies to supplement their CALEA section 107c petitions to include
packet-mode communications. The supplemental section 107c petitions needed to be
filed with the FCC by November 19, 2001. Breda was in compliance with the
packet-mode requirements as of November 19, 2001. Given the recent conversion to
Desktop Media, L.L.C. as its internet service provider, however, Breda is
investigating any additional action that may be necessary on its part in order
to maintain its adherence to the packet-mode requirements.
Given the terrorist events of September 11, 2001, and the new focus on national
security, however, Breda also anticipates that the FBI and the FCC will push for
nationwide CALEA compliance as early as possible.
Breda anticipates that the cost to upgrade Breda's, Prairie Telephone's and
Westside Independent's software to become compliant with CALEA may be as much as
$950,000.
As of December 31, 2001, Breda had approximately $2,038,990 outstanding on its
one remaining loan from the Rural Telephone Finance Cooperative. The interest
rate on the loan was fixed on July 17, 1998, at 7.35% per annum. Prior to that
date, the loan had a variable interest rate. The loan has a fifteen year term
that matures in September, 2013. Breda and Prairie Telephone also have lines of
credit available from the Rural Telephone Finance Cooperative in the amounts of,
respectively, $1,500,000 and $500,000. Those lines of credit will expire on,
respectively, December 1, 2005 and November 30, 2005. No amounts were
outstanding under either of those lines of credit on December 31, 2001.
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. There are no assurances, however, that any
such opportunities will ever arise or that any such opportunities which do arise
will fit into Breda's strategic plan. For example, Breda submitted a bid to
acquire two independent telephone exchanges in September, 2001, but Breda was
notified on November 7, 2001 that it was not the successful bidder for either of
those exchanges.
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.
Breda and Prairie Telephone have previously 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 has purchased spectrum for
providing personal communications services in some areas in Guthrie County,
Iowa. Breda has also become a member in Carroll County
25
Wireless, L.L.C., which is a limited liability company which has purchased
spectrum for providing personal communications services in Carroll County, Iowa.
Breda has transferred its personal communications services licenses for its
Breda and Lidderdale exchange areas to Carroll County Wireless, L.L.C.
Personal communications services 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, as indicated
above, Breda has transferred the personal communications services licenses it
had acquired for its Breda and Lidderdale exchange areas to Carroll County
Wireless, L.L.C. Breda itself may therefore never directly offer personal
communications services. Breda and Prairie Telephone do not, in any event,
contemplate offering any personal communications services for at least 1 to 3
years, primarily because those services must first be available in surrounding
areas before Breda and Prairie Telephone can provide those services. Guthrie
Group, L.L.C. and Carroll County Wireless, L.L.C. do not contemplate offering
personal communications services for at least 1 to 3 years, for the same
reasons. Breda estimates that it will take at least 1 to 3 years for the
surrounding areas to build out their personal communications systems to the
point where Breda, Prairie Telephone, Guthrie Group, L.L.C. or Carroll County
Wireless, L.L.C. could connect to those systems.
Breda, Prairie Telephone and Westside Independent do not currently own spectrum
for all of the telephone exchange service areas serviced by them, and there is
no guarantee that they will be able to acquire spectrum for all of those areas.
The spectrum they do own is also limited to 10 MHz. As noted above, Breda has
transferred the personal communications services licenses it had acquired for
its Breda and Lidderdale exchange areas to Carroll County Wireless, L.L.C. There
is also no assurance that Guthrie Group, L.L.C. or Carroll County Wireless,
L.L.C. will ever be able to acquire any additional spectrum. Also, Breda,
Prairie Telephone, Westside Independent, Guthrie Group, L.L.C. and Carroll
County Wireless, L.L.C. 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 telephone and cellular
services. 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
methods of attempting to diversify across the various telecommunications methods
which are available today or may become important in the future.
26
There are no current plans to expand the cable services areas of, or the cable
services provided by, Tele-Services.
During the month of July 2001, Breda and its subsidiaries offering Internet
services converted feasible service areas to a virtual internet service product.
This conversion allowed Breda to brand its Internet services as its own even
though the underlying service provider had not changed. Breda reduced its
pricing of Internet services and bundled Internet services with its long
distance services in August of 2001 in order to attempt to compete at a lower
price point for Internet services. On October 31, 2001, Breda converted its
Internet customers on the virtual Internet service product to a new underlying
Internet service provider, Desktop Media, L.L.C. As noted in the following
paragraphs, Prairie Telephone is a part owner of Desktop Media, L.L.C. Breda
hopes that these changes will allow Breda to compete more effectively in the
Internet services market through the generation of cost savings in transport
costs and help desk costs.
On May 2, 2001, a new company called Desktop Media, L.L.C. was formed by a
corporation named Desktop Media, Prairie Telephone and two other telephone
companies. Desktop Media, L.L.C. is a Minnesota limited liability company. Under
agreements signed in connection with the formation of Desktop Media, L.L.C.,
Prairie Telephone became a 10% owner of Desktop Media, L.L.C.
Desktop Media, L.L.C. provides both dial-up and high-speed Internet access in
south central Minnesota. Desktop Media, L.L.C. is a full-scale internet service
provider, which also sells computer hardware and related services. Desktop
Media, L.L.C. has filed applications to provide traditional telephone services
as a competitive local exchange carrier. The overall business plan is based upon
Desktop Media L.L.C. providing data local exchange carrier services. Desktop
Media, L.L.C. has contracted to provide internet service provider support
services to Prairie Telephone and the other two telephone companies who have
invested in Desktop Media, L.L.C.
Under the agreements, Prairie Telephone has advanced Desktop Media, L.L.C.
$500,000 under a promissory note dated May 2, 2001. No interest or principal
payments are required during the first year of the promissory note. In the
second year of the promissory note, Desktop Media, L.L.C. will be required to
pay interest only, which will include all interest deferred during the first
year and interest accruing during the second year. On the first day of the 25th
month following May 2, 2001, a principal payment of $12,000 plus interest will
be due by Desktop Media, L.L.C. with a similar installment payment due on the
first day of each month thereafter until the entire principal and interest
accruing under the promissory note has been paid in full. Desktop Media, L.L.C.
has the option of prepaying all or any part of the principal balance, or accrued
interest, at any time without penalty.
The promissory note has been guaranteed by the manager of Desktop Media, L.L.C.
The manager of Desktop Media, L.L.C. has also guaranteed the loans made by the
other two telephone companies who have invested in Desktop Media, L.L.C. There
is also a management agreement between the manager and Desktop Media, L.L.C.
27
There is no assurance that Desktop Media, L.L.C. will perform according to its
business plan, and there is therefore no assurance that Prairie Telephone will
ever receive any debt repayments or returns or other value from its investment
in Desktop Media, L.L.C. One of the intended purposes of Prairie Telephone's
relationship with Desktop Media, L.L.C. is to try to lower Breda's and its
subsidiaries' costs of providing Internet services in order to allow Breda to
compete at a lower price point for Internet services.
Breda is constructing a new corporate office building on land owned by Breda
which is adjacent to Breda's central office building in Breda, Iowa. The central
office building houses Breda's switch. The new site for the corporate office
building is approximately two blocks away from the present site. The
construction of the new corporate office building is currently anticipated to be
completed in October of 2002, with an estimated total cost for the project not
to exceed $500,000. The new corporate office building will have approximately
7,680 square feet, and will be utilized by Breda, Prairie Telephone and
Tele-Services.
Breda's corporate offices are currently located at 103 East Main, Breda, Iowa,
and those offices are leased by Breda and Prairie Telephone from Tele-Services.
Tele-Services entered into a real estate contract on September 12, 2001 to sell
this property. The total sales price was $200,000, which will be paid in six
installments, with the final installment due on October 15, 2006. The property
is being sold because, as indicated, Breda has determined to build a new
corporate office building on land owned by Breda which is adjacent to Breda's
central office building in Breda, Iowa. Breda and Prairie Telephone will
continue to lease the existing corporate office building from Tele-Services
until the construction of the new building has been completed.
Given that Pacific Junction's telemarketing business was discontinued on July
26, 2001, the lease for Pacific Junction's offices at 120 Main, Breda, Iowa was
not continued beyond its April 1, 2002 scheduled termination date.
BTC owns the real estate and building located at 526 N. Carroll Street, Carroll,
Iowa. The building houses some equipment used by BTC in providing internet
access. A major portion of the building is leased by Breda and is used as a
retail store for the sale and lease of telephone, cellular and related equipment
and merchandise. BTC entered into a lease agreement on November 1, 2001 for
approximately 886 square feet of space in the building adjoining its Carroll
location. The original term of the lease expires on April 30, 2003.
Breda and its subsidiaries have and will continue to incur capital expenditures
in connection with upgrading their telephone, cable and other equipment and
systems.
As an example, Breda upgraded its and its subsidiaries' financial system
software in the third quarter of 2001. Breda needed to upgrade the software in
order to be able to continue to receive support for the software from the
provider of the software. Breda also contemplates converting the financial
software utilized by Westside Independent to the same financial system software
now utilized by Breda and its other subsidiaries in either the second or third
quarter of 2002. The costs of the upgrades and conversions will not be material
to Breda.
28
Breda believes that its present cash position, along with its anticipated normal
operating revenues in 2002, will generate sufficient working capital in 2002 for
Breda and its subsidiaries to meet their current operating needs and maintain
historical fixed asset addition levels.
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 49 President and
Director
Clifford Neumayer 53 Vice-President and
Director
Larry Daniel 59 Secretary and
Director
Dave Grabner 53 Treasurer and
Director
Roger Nieland 66 Director
John Wenck 63 Director
Charles Thatcher 50 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 which is held in 2003. He has also been a
director of each of Breda's subsidiaries since April, 1997, and the President of
each 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.
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 at the annual
meeting of Breda's shareholders which is held in 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.
Larry Daniel has been the Secretary and a director of Breda since April, 1995.
His current term as a director of Breda will end at the annual meeting of
Breda's shareholders which is held in 2004. 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.
29
Dave Grabner has been a director of Breda since April, 1999, and the Treasurer
of Breda since May, 2001. His current term as a director of Breda will end at
the annual meeting of Breda's shareholders which is held in 2002. He has also
served as a director of each of Breda's subsidiaries since April, 1999, and as
the Treasurer of each of Breda's subsidiaries since May, 2001. 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.
Roger Nieland has been a director of Breda since May, 2000. His current term as
a director of Breda will end at the annual meeting of Breda's shareholders which
is held in 2003. He has also served as a director of each of Breda's
subsidiaries since May, 2000. Mr. Nieland is currently self-employed as a
farmer, and has been for at least the last five years. Mr. Nieland has been a
director of Iowa Ethanol Coop since September, 1994. Iowa Ethanol Coop 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 has also served as a
trustee for Wheatland Township, in Carroll County, Iowa.
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 which
is held in 2003. 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.
Charles (Chuck) Thatcher has been a director of Breda since May, 2001. His
current term as a director will end at the annual shareholders meeting which is
held in 2004. He has also served as a director of each of Breda's subsidiaries
since May, 2001. Mr. Thatcher has been an owner of Midwest Wholesale Building
Products in Carroll, Iowa for approximately the last 17 years. Midwest Wholesale
Building Products is a wholesaler/retailer of lumber, building products and
materials.
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.
30
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 41 Chief Operations
Officer
Jane A. Morlok 48 Chief Financial
Officer
Mr. Boeckman has been employed by Breda in various capacities since May, 1982.
Prior to January, 1995, he was Breda's assistant manager. He was the manager of
Breda from January, 1995 to March, 1998, at which time he was given the title
chief operating officer. His current titles are chief operations officer and
co-chief executive officer.
Ms. Morlok became the chief financial officer of Breda on March 30, 1998. Her
current titles are chief financial officer and co-chief executive officer. 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 35,025
shares of its common stock issued and outstanding as of December 31, 2001. Those
shares were held by approximately 595 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 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.
31
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 also 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
o the shareholder dies, unless the heir of the shares of Breda's stock meets
the eligibility requirements for ownership of Breda's stock.
32
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 in March, April or May of
each year, based upon Breda's then most recent year-end audited financial
statements. Breda's fiscal year ends on December 31. The price is then generally
announced and becomes effective at the annual shareholders meeting for that
year. 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 and announces the new price at the next annual shareholders
meeting.
Under this approach, the issuance price and redemption price determined 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 was not based on Breda's book value, but rather was 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
that action because it believed the 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 at that time 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 in early 1999.
The board of directors returned to its historical practices at its meeting on
March 13, 2000, at which time the board of directors adopted a resolution fixing
the issuance price and redemption price for Breda's shares of common stock to be
$180 per share. The $180 amount was determined based upon Breda's 1999 audited
financial statements. The $180 per share price was announced at, and became
effective at, the May 17, 2000 annual meeting of the shareholders of Breda. If
the above described historical practices were followed, the $180 per share
amount would have continued until the next annual determination was made by the
board of directors and announced at the next annual shareholders meeting.
The board of directors determined to depart from its historical practices on
this issue, however, at a meeting of the board of directors held on June 12,
2000. At that meeting, the directors adopted a resolution fixing the issuance
price for newly issued shares of Breda's common stock and the redemption price
for Breda's shares of common stock at $235 per share. The board of directors
took this action because it believed that it was appropriate to make a new
determination of the issuance price and the redemption price to reflect the
receipt by Prairie Telephone of most of the net after-tax proceeds of the sale
by Prairie Telephone of its shares of stock in Central Iowa Cellular, Inc. The
$235 per share amount was determined by taking approximately 75% of the then net
after-tax proceeds of the sale on a per share basis and adding that figure to
the previously determined issuance and redemption price of $180 per share. The
shareholders of Breda were notified of the increase in the issuance price and
the redemption price for Breda's shares of common stock from $180 to $235 per
share by letter dated June 14, 2000.
33
At the time the board made its determination on June 12, 2000, Prairie Telephone
had received, in the aggregate, approximately $5,108,280, before taxes, and it
was estimated that Prairie Telephone would retain approximately $3,147,676 of
that amount, after taxes. For purposes of determining the new issuance price and
redemption price discussed above, Prairie Telephone's basis in its 3,000 shares
of common stock of Central Iowa Cellular, Inc. of approximately $206,770 was
deducted from the after-tax amount of $3,147,676. As indicated, the board of
directors believed this was a material event which made it appropriate to make a
new determination of the issuance price and redemption price for shares of
Breda's common stock.
The board of directors returned to its historical practices at its meeting on
March 12, 2001, at which meeting the board of directors adopted a resolution
fixing the issuance price and redemption price for Breda's shares of common
stock to be $258 per share. The $258 per share amount was determined based upon
Breda's 2000 audited financial statements. The $258 per share price was
announced and became effective at the May 16, 2001 annual meeting of the
shareholders.
The board of directors currently intends to continue to otherwise address this
issue on an annual basis consistent with the above described historical
practices of the board of directors, except that the board of directors may
determine to depart from those historical practices again in the future in the
event of the occurrence of what the board of directors believes are material or
significant events. Accordingly, it is presently contemplated that the board of
directors will establish a new issuance price and redemption price effective at
the 2002 annual meeting of the shareholders, and that the price will be set at
approximately 75% of the book value of Breda as of December 31, 2001. Breda
estimates that the issuance price and redemption price that will be set at the
2002 annual meeting of the shareholders will be approximately $280.
The issuance and redemption price as determined by the board of directors has
increased from $27 per share in 1995 (based on the 1994 year-end audited
financial statements of Breda) to $258 per share pursuant to the May, 2001
action of the board of directors as described above. Breda does not believe that
the amount of this increase is indicative of potential future increases,
however, in particular given that:
o The referenced increase was due primarily to two "one-time" material
events, those being the sale of Breda's direct broadcast satellite
operation and the sale of Prairie Telephone's stock in Central Iowa
Cellular, Inc., and
o Breda does not currently foresee any material increase in revenues from its
or any of its subsidiaries' normal and ordinary course business operations,
and, in fact, sees continuing downside pressure on those revenues.
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 was held in October, 1999, 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, but there are no current plans
to
34
arrange any other auctions in the future. Breda also maintains a list of
shareholders desiring to sell their shares, and 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.
35
No shares were repurchased by Breda during the period of December 31, 1998
through December 31, 1999, except that in November, 1999, Breda did effectuate a
repurchase of forty shares by depositing the purchase price for those forty
shares with the appropriate Iowa authorities under Iowa's escheat laws. The
forty shares were held of record by twenty different shareholders that Breda had
been unable to locate. The purchase price utilized for this purpose was the then
current $149 per share price as established by the board of directors pursuant
to the procedures which are discussed above in this 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.
Over the period of January 1, 2000 through December 31, 2000, Breda repurchased
four hundred forty-one shares of its common stock from fourteen different
shareholders, at a purchase price of $235 per share.
Over the period of January 1, 2001 through June 30, 2001, Breda redeemed two
hundred twenty shares of its common stock from two different shareholders, at a
purchase price of $235 per share. During the quarter ended June 30, 2001, Breda
redeemed one thousand one hundred four shares of its common stock from five
different shareholders, at a purchase price of $258 per share. Over the period
of July 1, 2001 through December 31, 2001, Breda redeemed eight hundred
ninety-two shares of its common stock from nineteen different shareholders, at a
purchase price of $258 per share.
Breda has redeemed a total of two hundred eighty-seven shares of its common
stock over the period of January 1, 2002 through April 9, 2002, from seven
different shareholders, at a purchase price of $258 per share.
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. Some of
those transfers are noted below.
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.
Breda has no plans to and has not agreed to register any of its shares of common
stock under any federal or state securities laws. Since Breda has been subject
to the reporting requirements of the Securities Exchange Act of 1934 for a
period of ninety days, Rule 144 under the Securities Act of 1933 would be
available to permit the resale of shares of common stock by shareholders,
subject to certain restrictions contained in Rule 144, including the requirement
that the shareholder has held his or her shares for a period of at least 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 would be able to resell the
shares without restriction under Rule 144. As discussed above, however, the
governing documents of Breda impose numerous material limitations and
restrictions on a shareholder's ability to sell or transfer any shares of
Breda's common stock, all of which apply regardless of what Rule 144 might
otherwise allow.
36
The marketability and value of Breda's shares of common stock may also be
limited by some of the 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 December 31, 2001, there were 22 shareholders with multiple voting rights
arising from their prior ownership of Class A stock, and they have one vote for
each share of the former Class A stock previously held by them.
An auction was held on October 24, 1999, where shareholders desiring to sell
their shares of Breda's common stock were given the opportunity to sell those
shares to other Breda shareholders desiring to purchase additional shares of
Breda's common stock. Breda paid the costs of the auction, except that the
sellers paid the auction fees and clerking fees related to their shares. The
auction was provided for the convenience of Breda's shareholders, and no shares
were repurchased or issued by Breda pursuant to the auction. A total of 1,924
shares of common stock were sold by 32 different shareholders to 25 other
shareholders of Breda, for purchase prices ranging from $145 per share to $180
per share. As discussed above, Breda had a right of first refusal to purchase
all of the shares sold in the auction, but elected not to exercise its right.
Breda did, however, offer to purchase shares in the auction for $142 per share,
but no shareholder chose to sell the shareholder's shares to Breda at that
price. The $142 figure was approximately 60% of Breda's book value per share as
of the close of the second quarter in 1999. No officers or directors of Breda
sold or purchased any shares in the auction. Breda does not have any plans to
arrange any other auctions in the future.
The board of directors of Breda has also determined to allow shareholders to
advise Breda of the fact that they desire to sell any or all of their shares of
Breda's common stock to any qualified buyer, and to allow qualified buyers to
advise Breda of the fact that they desire to purchase shares of Breda's common
stock from other shareholders of Breda. Breda will keep a list of those
shareholders and qualified buyers, and make the list available to all of the
shareholders and qualified buyers on the list. A qualified buyer is a person who
is a resident of the Breda or Lidderdale telephone exchange areas served by
Breda who subscribes to Breda's telephone services, or an entity which has its
principal place of business in the Breda or Lidderdale telephone exchange areas
served by Breda and which subscribes to Breda's telephone services. A person or
entity cannot, however, be a qualified buyer if the person or entity already
owns more than 1% of the total issued and outstanding shares of common stock of
Breda. Also, a qualified buyer cannot purchase shares from any shareholder of
Breda to the extent that the shares purchased by the qualified buyer would cause
the qualified buyer to own more than 1% of
37
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.
There were five separate sales of shares between shareholders on the list during
the calendar year 2000. Two sales each involved two shares, which were sold for
$235 per share. One sale involved fifty-three shares, which were sold for $235
per share. One sale involved thirty-one shares, which were sold for $155 per
share. One sale involved two shares, which were sold for $149 per share. Breda
elected not to exercise its right of first refusal on these sales.
There were three separate sales of shares between shareholders on the list
during the calendar year 2001. Two sales each involved seven shares, which were
sold for $258 per share. The other sale involved forty-three shares, which were
also sold for $258 per share. Breda elected not to exercise its right of first
refusal on these 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 has only declared and paid four dividends to its shareholders since Breda
was incorporated in 1964. One of those dividends was declared on March 15, 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 also in the amount of
$3.00 per share, for an aggregate dividend of $113,046. The third dividend was
declared on March 12, 2001. The dividend was also in the amount of $3.00 per
share for an aggregate dividend of $111,087. The fourth dividend was declared on
April 8, 2002. It was in the amount of $3.00 per share for an aggregate dividend
of $104,214. The dividend is payable to shareholders of record on April 9, 2002.
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.
38
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 2001. 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 or exchangeable for 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 two fiscal
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.
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, 2001. 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.
103 East Main
P.O. Box 190
Breda, Iowa 51436
The request should be directed to the attention of Dean Schettler, President of
Breda.
FINANCIAL STATEMENTS
The following pages are certain financial statements of Breda with respect
to the years ended December 31, 2000 and December 31, 2001.
[The remainder of this page is intentionally left blank.]
39
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED FINANCIAL STATEMENTS
WITH INDEPENDENT AUDITORS' REPORT
Years Ended December 31, 2001 and 2000
40
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONTENTS
Page
----
Independent Auditors' Report 42
Consolidated Financial Statements:
Consolidated Balance Sheets 43 - 44
Consolidated Statements of Income 45
Consolidated Statements of Stockholders' Equity 46
Consolidated Statements of Cash Flows 47
Notes to Consolidated Financial Statements 48 - 60
41
INDEPENDENT AUDITORS' 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, 2001 and
2000, 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
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. 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, 2001 and 2000, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States of America.
Kiesling Associates, LLP
Emmetsburg, Iowa
February 1, 2002
42
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,797,415 $ 1,104,577
Temporary investments 636,169 269,840
Accounts receivable 536,378 703,468
Interest receivable 75,058 50,800
Prepaid income taxes 51,280 336,465
Inventories 93,028 92,058
Other 100,265 5,383
------------ ------------
3,289,593 2,562,591
------------ ------------
OTHER NONCURRENT ASSETS
Long-term investments 2,494,073 2,888,500
Other investments 2,545,827 2,806,107
Intangibles, net of accumulated amortization 1,018,313 1,107,625
Note receivable 451,502 --
Deferred income taxes 218,837 113,595
------------ ------------
6,728,552 6,915,827
------------ ------------
PROPERTY AND EQUIPMENT 5,609,292 6,176,434
------------ ------------
TOTAL ASSETS $ 15,627,437 $ 15,654,852
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
43
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 126,365 $ 118,300
Accounts payable 199,675 364,232
Accrued taxes 141,439 134,611
Other 157,791 170,670
------------ ------------
625,270 787,813
------------ ------------
LONG-TERM DEBT, less current portion 1,912,625 2,038,990
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized,
35,025 and 37,241 shares issued and outstanding at $258
and $235 stated values, respectively 9,036,450 8,751,635
Retained earnings 4,053,092 4,076,414
------------ ------------
13,089,542 12,828,049
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,627,437 $ 15,654,852
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
44
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001 and 2000
2001 2000
------------ ------------
OPERATING REVENUES $ 5,884,244 $ 6,052,154
------------ ------------
OPERATING EXPENSES
Cost of services 2,275,848 2,234,958
Depreciation and amortization 1,128,785 1,101,022
Selling, general, and administration 1,908,031 1,861,516
------------ ------------
5,312,664 5,197,496
------------ ------------
OPERATING INCOME 571,580 854,658
------------ ------------
OTHER INCOME (EXPENSES)
Interest and dividend income 343,985 460,509
Interest expense (155,731) (422,561)
Loss on sale of investments (1,909) (67,261)
Gains on sales of cellular and DBS investments -- 5,018,714
Income from cellular investments 613,468 674,204
Income from Alpine investment 44,209 23,508
Other, net 23,405 (13,090)
------------ ------------
867,427 5,674,023
------------ ------------
INCOME BEFORE INCOME TAXES 1,439,007 6,528,681
------------ ------------
INCOME TAXES 499,759 2,538,700
------------ ------------
NET INCOME $ 939,248 $ 3,989,981
============ ============
NET INCOME PER COMMON SHARE $ 26.03 $ 106.39
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
45
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
December 31, 2001 and 2000
Common Stock Retained
Shares Amount Earnings Total
------------ ------------ ------------ ------------
Balance at December 31, 1999 37,682 $ 5,614,618 $ 3,440,131 $ 9,054,749
Comprehensive Income:
Net income 3,989,981 3,989,981
Dividends paid (113,046) (113,046)
Common stock redeemed, net (441) (103,635) (103,635)
Stated value stock adjustment 3,240,652 (3,240,652)
------------ ------------ ------------ ------------
Balance at December 31, 2000 37,241 8,751,635 4,076,414 12,828,049
Comprehensive Income:
Net income 939,248 939,248
Dividends paid (111,087) (111,087)
Common stock redeemed, net (2,216) (566,668) (566,668)
Stated value stock adjustment 851,483 (851,483)
------------ ------------ ------------ ------------
Balance at December 31, 2001 35,025 $ 9,036,450 $ 4,053,092 $ 13,089,542
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
46
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 939,248 $ 3,989,981
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,128,785 1,101,022
Amortization of investment tax credits (9,769) (9,769)
Deferred income taxes (95,473) (92,466)
Gains on sales of cellular and DBS investments -- (5,018,714)
Note receivable discount (11,502) --
Equity losses in partnerships 13,395 12,868
Changes in operating assets and liabilities:
(Increase) decrease in assets 332,166 269,417
Increase (decrease) in liabilities (49,578) 78,795
------------ ------------
Net cash provided by operating activities 2,247,272 331,134
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (624,270) (726,922)
Cost of removing plant, net of salvage 30,908 --
Purchase of investments (343,484) (1,201,867)
Proceeds from sale of investments 371,582 2,555,960
Issuance of note receivable (440,000) --
Purchase of other investments (67,805) (300,806)
Sale in other investments 314,690 --
Decrease in intangibles -- 25,436
Proceeds from sale of cellular investment -- 5,226,034
------------ ------------
Net cash provided by (used in) investing activities (758,379) 5,577,835
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock redeemed (566,668) (103,635)
Repayment of long-term debt (118,300) (4,999,052)
Dividends paid (111,087) (113,046)
------------ ------------
Net cash used in financing activities (796,055) (5,215,733)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 692,838 693,236
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,104,577 411,341
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,797,415 $ 1,104,577
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
47
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Breda Telephone Corporation is a provider of telecommunications
exchange and local access services, cable television services, internet
services and telecommunications equipment in a service area located
primarily in western Iowa.
The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles in the United States of America
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 revenues and expenses. Telephone operations
reflect practices appropriate to the telephone industry. The accounting
records of the Company's telephone operations are maintained in accordance
with the Uniform System of Accounts for Class A and B Telephone Companies
prescribed by the Federal Communications Commission (FCC) as modified by
the state regulatory authority.
The accounting records of the Company's cable television operations are
maintained in accordance with the Uniform System of Accounts for Class A
CATV Companies as prescribed by the National Association of Regulatory
Utility Commissioners.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Prairie Telephone Company, Inc.,
Westside Independent 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
Certificates of deposit bought and held by the Company until maturity are
carried at cost, which approximates market.
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.
Nonmarketable equity investments, over which the Company has significant
influence and/or a 20% ownership, are reflected on the equity method. Other
nonmarketable equity investments are stated at cost.
48
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Inventories
Inventories include both merchandise held for resale and materials and
supplies. Merchandise held for resale is recorded at the lower of cost or
market with cost determined by the average cost method. Materials and
supplies are recorded at average cost.
Property and Equipment
Property 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 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
The Company would provide for impairment losses on long-lived assets 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.
Intangibles
In 2001, the Financial Accounting Standards Board Issued Statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangible
Assets" effective for fiscal years beginning after December 15, 2001. Under
the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to periodic
impairment tests in accordance with the Statement. Other intangible assets
will continue to be amortized over their useful lives. The Statement also
broadens the criteria for recording intangible assets separate from
goodwill.
Effective January 1, 2002, all amortization expense on goodwill and
intangible assets with indefinite lives will stop. Amortization of goodwill
and other intangibles was approximately $89,000 in both 2001 and 2000. The
Company has not yet evaluated the impact this statement will have on
results of operations and financial position. During first quarter 2002,
the Company will perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002.
49
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
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 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.
Investment tax credits (ITC), which were deferred prior to the Tax Reform
Act of 1986, are being amortized over the life of the plant which produced
the ITC.
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, cable television service and internet service
revenues are recognized over the period a subscriber is connected to the
network.
Network access and long distance service revenues are derived from charges
for access to the Company's local exchange network. The interstate portion
of access revenues is based, in part, on an average schedule settlement
formula administered by the National Exchange Carrier Association (NECA)
which is regulated by the FCC. The traffic sensitive portion of interstate
access revenues is billed on an individual company access charge structure
as approved by the FCC. The intrastate portion of access revenues is billed
on an individual company tariff access charge structure based on expense
and plant investment of the Company as approved by the state regulatory
authority. The tariffs developed from these formulas are used to charge the
connecting carrier and recognize revenues in the period the traffic is
transported based on the minutes of traffic carried. Long distance revenues
are recognized at the time a call is placed based on the minutes of traffic
processed at tariffed and contracted rates.
Other revenues include 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 customer
accounts.
Reclassifications
Certain reclassifications have been made to the 2000 financial statements
to conform with the 2001 presentation.
50
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 2. TEMPORARY AND LONG-TERM INVESTMENTS
The amortized cost and fair value of certificates of deposit and
investments classified as held-to-maturity and available-for-sale are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
December 31, 2001
Certificates of deposit $ 350,000 $ $ $ 350,000
Held-to-Maturity:
Municipal bonds 2,739,846 49,492 (11,693) 2,777,645
Government securities 40,396 479 40,875
------------ ------------ ------------ ------------
$ 3,130,242 $ 49,971 $ (11,693) $ 3,168,520
============ ============ ============ ============
December 31, 2000
Certificates of deposit $ 350,000 $ $ $ 350,000
Held-to-Maturity:
Municipal bonds 2,497,186 22,772 (23,003) 2,496,955
U.S. Treasury notes 5,000 (139) 4,861
Government securities 266,745 1,249 (1,543) 266,451
Available-for-Sale:
Marketable equity securities 39,409 39,409
------------ ------------ ------------ ------------
$ 3,158,340 $ 24,021 $ (24,685) $ 3,157,676
============ ============ ============ ============
2001 2000
------------ ------------
Amounts classified as:
Current $ 636,169 $ 269,840
Noncurrent 2,494,073 2,888,500
------------ ------------
$ 3,130,242 $ 3,158,340
============ ============
Proceeds from sale of available-for-sale securities were $37,500 in 2001
and the gross realized loss on sale of available-for-sale securities
totaled $1,909. There were no sales of available-for-sale securities during
2000.
Certificates of deposit and investments classified as held-to-maturity at
December 31, 2001, are summarized below by contractual maturity date:
Due in one year or less $ 636,169
Due after one year through five years 1,168,645
Due after five years 1,325,428
----------
$3,130,242
==========
51
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 3. OTHER INVESTMENTS
Other investments include nonmarketable equity securities and certificates,
along with investments in partnerships, limited liability companies and
joint ventures as follows:
2001 2000
---------- ----------
Alpine Communications, L.C $ 781,579 $ 781,579
Rural Telephone Finance Cooperative - certificates 196,003 502,889
RSA #1, Ltd. 348,542 348,542
RSA #7, Ltd. 144,049 144,049
RSA #8, Ltd. 310,491 310,491
NECA Services, Inc. - stock 300,000 300,000
Rural Telephone Bank - stock 165,789 165,789
Quad County Communications 110,531 123,327
Iowa Network Services - stock 78,705 78,705
Carroll County Wireless, L.L.C 30,009 30,599
Guthrie Group, L.L.C 9,129 9,137
Desk Top Media, L.L.C 60,000 --
Other 11,000 11,000
---------- ----------
$2,545,827 $2,806,107
========== ==========
The Company continues to have a 15.77% interest in Alpine Communications,
L.C. (Alpine). The Alpine group operates several telephone exchanges in
eastern Iowa.
The Company's percentage interests in RSA #1, Ltd., RSA #7, Ltd. and RSA
#8, Ltd. are 9.1%, 7.1% and 11.7%, respectively, at December 31, 2001. In
addition, the Company owns a 16.7% interest in RSA #9, Ltd. partnership of
which they have no original cash investment.
Additionally, Westside Independent Telephone Company, a wholly-owned
subsidiary of Breda Telephone Corporation, has a 33.33% ownership interest
in Quad County Communications. This entity owns and operates a fiber optic
network. Condensed financial data for Quad County Communications is as
follows:
2001 2000
--------- ---------
Ordinary net loss $ (38,389) $ (38,604)
========= =========
Current assets $ 18,593 $ 10,832
Non-current assets 322,667 368,988
Current liabilities 9,676 9,846
Non-current liabilities 0 0
The Company's percentage interests in Carroll County Wireless, L.L.C. and
Guthrie Group, L.L.C. are 33.33% and 25%, respectively. Both of these
companies provide personal communication services (PCS). The operations of
these entities are immaterial to the consolidated financial statements.
During 2001, the Company obtained a 10% interest in Desk Top Media, L.L.C.
(Desk Top). Desk Top is a company primarily involved in providing internet
services.
52
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 3. OTHER INVESTMENTS, (Continued)
The investments in Quad County Communications, Carroll County Wireless,
L.L.C. and Guthrie Group, L.L.C. are being accounted for on the equity
method. The remaining investments are accounted for on the cost method.
NOTE 4. INTANGIBLES
In 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. Amortization expense recorded
for both 2001 and 2000 was $78,604. Accumulated amortization as of December
31, 2001 and 2000 was $281,660 and $203,056, respectively.
Additionally in 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. Amortization expense recorded for
both 2001 and 2000 was $10,512. Accumulated amortization as of December 31,
2001 and 2000 was $37,666 and $27,154, respectively.
During 2000, the Company transferred the PCS licenses, originally purchased
for $28,825 and recorded in intangibles, to Carroll County Wireless, L.L.C.
The net value transferred amounted to $25,631 and was recorded as a equity
contribution to the new entity. No gain or loss was recorded on the
transaction.
During 1999, the Company purchased PCS licenses for $2,051, which are also
included net of accumulated amortization within other noncurrent assets on
the balance sheet. The costs are being amortized on the straight-line basis
over ten years. Amortization expense recorded for both 2001 and 2000 was
$195. Accumulated amortization as of December 31, 2001 and 2000 was $495
and $300, respectively.
NOTE 5. NOTE RECEIVABLE
The note receivable at December 31, 2001 represents a promissory note
received from Desk Top Media, L.L.C. The note with an original balance of
$451,502 matures in 2006 and reflects interest at 13%.
53
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment includes the following:
2001 2000
----------- -----------
Telephone Plant in Service :
Land $ 39,008 $ 39,008
Buildings 731,772 729,372
Other general support assets 1,419,467 1,295,196
Central office assets 2,212,489 2,167,819
Cable and wire facilities 4,134,895 4,091,520
Other plant and equipment 693,482 691,000
----------- -----------
9,231,113 9,013,915
----------- -----------
Cable Television Plant in Service:
Franchise 32,992 32,992
Land 8,586 8,586
Buildings 248,855 248,855
Towers, antennas and head end equipment 1,509,394 1,500,538
Cable and wire facilities 1,573,524 1,567,952
Other plant and equipment 193,470 189,320
----------- -----------
3,566,821 3,548,243
----------- -----------
Telemarketing Plant in Service -- 281,538
----------- -----------
Total property and equipment 12,797,934 12,843,696
Less accumulated depreciation 7,471,139 6,825,834
----------- -----------
5,326,795 6,017,862
Plant under construction 282,497 158,572
----------- -----------
$ 5,609,292 $ 6,176,434
=========== ===========
Depreciation on depreciable property resulted in composite rates of 8.1%
and 8.0% for the years ended December 31, 2001 and 2000, respectively.
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
2001 2000
----------- -----------
Rural Telephone Finance Cooperative
7.35% (Fixed Rate) $ 2,038,990 $ 2,157,290
Less current portion (126,365) (118,300)
----------- -----------
$ 1,912,625 $ 2,038,990
=========== ===========
54
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 7. LONG-TERM DEBT, (Continued)
The annual requirements for principal payments on long-term debt for the
next five years are as follows:
Principal
---------
2002 $126,365
2003 134,981
2004 144,183
2005 154,013
2006 164,513
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 beginning two to
three years after date of issue and expiring 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.
The Company has a line of credit with the RTFC for $1,500,000. The approved
line of credit is available until December 1, 2005 at a rate of 5.95% at
December 31, 2001. No funds were advanced under the line at December 31,
2001.
In addition, Prairie Telephone Company, Inc. a wholly-owned subsidiary of
Breda Telephone Corporation, has a line of credit with the RTFC for
$500,000. This approved line of credit is available until November 30, 2005
at a rate of 5.95% at December 31, 2001. No funds were advanced under the
line at December 31, 2001.
NOTE 8. INCOME TAXES
Income taxes reflected in the Consolidated Statements of Income consist of
the following:
2001 2000
--------- -----------
Federal income taxes:
Current tax expense $ 446,358 $ 1,971,403
Deferred tax benefit (70,650) (69,350)
Amortization of investment tax credits (9,769) (9,769)
State income taxes:
Current tax expense 158,643 669,532
Deferred tax benefit (24,823) (23,116)
--------- -----------
Total income tax expense $ 499,759 $ 2,538,700
========= ===========
55
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 8. INCOME TAXES, (Continued)
Deferred federal and state tax liabilities and assets reflected in the
Consolidated Balance Sheets are summarized as follows:
2001 2000
-------- --------
Deferred Tax Liabilities
Federal $187,259 $242,951
State 65,794 80,983
-------- --------
Total Deferred Tax Liabilities 253,053 323,934
-------- --------
Deferred Tax Assets
Federal 374,364 360,981
State 131,534 120,327
-------- --------
Total Deferred Tax Assets 505,898 481,308
-------- --------
Net Deferred Tax Asset $252,845 $157,374
======== ========
Current portion $ -- $ --
Long-term portion 252,845 157,374
-------- --------
Net Deferred Tax Asset $252,845 $157,374
======== ========
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 and the amortization of investment tax credits.
Prepaid income taxes of $51,280 and $336,465 appearing on the consolidated
balance sheets at December 31, 2001 and 2000, respectively, reflect
overpayments of estimated taxes.
The following is a reconciliation of the statutory federal income tax rate
of 34% to the Company's effective income tax rate:
2001 2000
-------- --------
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit 9.6 9.2
Amortization of investment tax credits (.1) (.1)
Dividends received deduction (1.6) (.3)
Tax exempt interest (4.0) (2.1)
Other (3.2) (1.8)
-------- --------
Effective income tax rate 34.7% 38.9%
======== ========
The Company files a consolidated tax return including their subsidiaries,
Prairie Telephone Company, Inc., Westside Independent Telephone Company and
Tele-Services, Ltd.
56
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 9. OPERATING SEGMENTS INFORMATION
The Company organizes its business into three reportable segments: local
exchange carrier (LEC) services, broadcast services and internet service
provider (ISP) services. The LEC services segment provides telephone, data
services and other services to customers in local exchanges. The broadcast
services segment provides cable television services to customers in Iowa
and Nebraska. The ISP services segment provides internet access to
customers within the local exchanges and the surrounding areas. The Company
also had telemarketing services that do not meet the quantitative threshold
for a reportable segment. These services were discontinued during 2001.
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 Internet
Exchange Service
2001 Carrier Broadcast Provider Other Total
---- ------------ ------------ ------------ ------------ ------------
Revenues and sales $ 3,957,357 $ 998,675 $ 761,999 $ 166,213 $ 5,884,244
Intersegment income
and sales -- -- -- -- --
Interest income 334,872 9,113 -- -- 343,985
Interest expense 155,731 -- -- -- 155,731
Depreciation and
Amortization 713,366 328,005 75,249 12,165 1,128,785
Income tax expense
(benefit) 661,885 (64,107) (72,983) (25,036) 499,759
Segment profit (loss) 1,097,629 (92,250) (30,103) (36,028) 939,248
Segment assets 13,336,272 1,536,731 805,410 39,782 15,718,195
Expenditures for
segment assets 507,202 51,077 65,991 -- 624,270
2000
----
Revenues and sales $ 4,080,514 $ 1,046,768 $ 648,195 $ 276,677 $ 6,052,154
Intersegment income
and sales -- -- -- -- --
Interest income 439,389 21,120 -- -- 460,509
Interest expense 386,345 36,216 -- -- 422,561
Depreciation and
Amortization 683,574 344,643 60,333 12,472 1,101,022
Income tax expense
(benefit) 2,691,227 (72,155) (56,547) (23,825) 2,538,700
Segment profit (loss) 4,156,729 (103,833) (28,630) (34,285) 3,989,981
Segment assets 14,328,128 1,808,935 754,682 80,699 16,972,444
Expenditures for
segment assets 515,655 47,429 162,116 1,722 726,922
57
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 9. OPERATING SEGMENTS INFORMATION, (Continued)
Reconciliation of Segment Information 2001 2000
------------ ------------
REVENUES:
Total revenues for reportable segments $ 5,718,031 $ 5,775,477
Other revenues 166,213 276,677
------------ ------------
Consolidated Revenues $ 5,884,244 $ 6,052,154
============ ============
PROFIT:
Total profit for reportable segments $ 975,276 $ 4,024,266
Other profit (loss) (36,028) (34,285)
------------ ------------
Net Income $ 939,248 $ 3,989,981
============ ============
ASSETS:
Total assets for reportable segments $ 15,678,413 $ 16,891,745
Other assets 39,782 80,699
Elimination of intercompany receivables (90,758) (1,317,592)
------------ ------------
Consolidated Assets $ 15,627,437 $ 15,654,852
============ ============
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing and financing activities included $121,030 during the
year ended December 31, 2000, relating to plant and equipment additions
placed in service during 2000, which are reflected in accounts payable at
year end.
Cash paid for interest, net of amounts capitalized for 2001 and 2000,
totaled $155,731 and $422,561, respectively.
Cash paid for income taxes for 2001 and 2000 totaled $367,241 and
$2,435,069, respectively.
NOTE 11. NET INCOME PER COMMON SHARE
Net income per common share for 2001 and 2000 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, 2001 and 2000 were 36,083 and 37,503,
respectively.
NOTE 12. STOCK VALUE ADJUSTMENT
In May 2000, the board of directors authorized a $31 increase in the stated
value of each share of common stock from $149 to $180. There were 37,682
shares outstanding at the time of the value adjustment, which reduced
retained earnings by $1,168,142.
During June 2000, the board of directors authorized an additional $55
increase in the stated value of each share of common stock from $180 to
$235. There were 37,682 shares outstanding at the time of the value
adjustment, which reduced retained earnings by $2,072,510.
During May 2001, the board of directors authorized a $23 increase in the
stated value of each share of common stock from $235 to $258. There were
37,021 shares outstanding at the time of the value adjustment, which
reduced retained earnings by $851,483.
58
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 13. 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 areas of the Breda Telephone Corporation and subscribe to its
telephone services. In addition, new stockholders are limited to
purchasing no more than thirty shares of stock directly from the Breda
Telephone Corporation.
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.
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 Breda Telephone Corporation'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 14. 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 (NTCA). The plan calls
for the Company to contribute 8.6% of each enrolled employees' 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 $80,538 and $84,797 for the years ended
December 31, 2001 and 2000, respectively.
NOTE 15. 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,
internet customers and to telecommunications intrastate and interstate long
distance carriers.
The Company received 41% of its revenues from access revenues and
assistance provided by the Federal Universal Service Fund. As a result of
the Telecommunications Act of 1996, the manner in which access revenues and
Universal Service Funds are determined is currently being modified by
regulatory bodies.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, along with both temporary and long-term investments. The
Company places its cash, cash equivalents and investments in several
financial institutions, which limits the amount of credit exposure in any
one financial institution.
59
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE 15. CONCENTRATIONS OF CREDIT RISK, (Continued)
The Company maintains its cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
NOTE 16. RELATED PARTY
The Company receives commission revenue from RSA #9 Ltd. Partnership (RSA
#9) based on cellular service activation and retention. The Company has a
16.7% ownership interest in RSA #9. Commissions received by the Company for
the years ended December 31, 2001 and 2000 were approximately $575,500 and
$607,000, respectively.
NOTE 17. DISPOSITION OF CORPORATE BUILDING
On September 12, 2001, the Company entered into a contract to sell its
corporate building for $200,000. The Company received a cash deposit of
$20,000 and the contract established payment terms. The Company anticipates
receiving a promissory note for $180,000 at a rate of 7%. The note will be
payable in four equal installments of $20,000, plus interest through 2005
and a final installment of $100,000 plus interest payable in 2006. The
transaction is expected to close during fourth quarter 2002 and will result
in an estimated before tax gain of $104,500.
NOTE 18. DISPOSITION OF CELLULAR AND DBS INVESTMENTS
On May 12, 2000, the Company sold all of their outstanding shares of
Central Iowa Cellular, Inc. (CIC). The Company received cash of $5,108,279,
which included the majority of the Company's share of the Tower Net
Proceeds. The transaction resulted in a gain of $4,900,959, which was
included in operations during the second quarter of 2000. During third
quarter 2000, certain events occurred which made final certain terms of the
sale resulting in the receipt of $117,755, which was classified as an
additional gain on the sale of the cellular investment. In total, the
completed transaction amounted to cash received of $5,226,034 and a
recorded gain on the sale of $5,018,714.
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