SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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Check the appropriate box:
|_| Preliminary Proxy Statement
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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)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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0-11.
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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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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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(4) Date Filed:
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May 2, 2005
Dear Shareholders:
You are cordially invited to the annual meeting of Breda Telephone Corp.
at the corporate office of Breda Telephone Corp. located at 112 East Main,
Breda, Iowa, on Tuesday, May 17, 2005 at 7:30 p.m. Lunch will be served. Breda
Telephone Corp.'s office is identified by the Western Iowa Networks sign in
front of the office. "Western Iowa Networks" is a service mark of Breda
Telephone Corp.
The following documents are being provided to you along with this letter:
1. Notice of Annual Meeting of Shareholders
2. Proxy Statement
3. Ballot
4. 2004 Annual Report
5. Two ballot envelopes
One item on the ballot is the Ratification of Appointment of Auditors.
Breda Telephone Corp.'s Board of Directors has retained Kiesling Associates LLP
to act as independent auditors for Breda Telephone Corp. during 2005. 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 in 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/Clifford Neumayer
-------------------------------------
Clifford Neumayer
President - Board of Directors
BREDA TELEPHONE CORP.
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112 East Main, P.O. Box 190
Breda, Iowa 51436
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 17, 2005
-----------------------
Notice is hereby given that the Annual Meeting of Shareholders of BREDA
TELEPHONE CORP. will be held at the corporate office of Breda Telephone Corp.
located at 112 East Main, Breda, Iowa, on Tuesday, May 17, 2005 at 7:30 p.m.,
Breda, Iowa local time, for the following purposes:
1. To elect two directors.
2. To ratify the appointment of auditors for the year 2005.
3. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Only shareholders of record at the close of business on April 12, 2005, will be
entitled to notice of and to vote at the meeting or any adjournment or
postponement 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 MAIL 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. YOU WILL
THEN BE PROVIDED WITH ANOTHER BALLOT TO COMPLETE AND DELIVER TO THE SECRETARY AT
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 2004 Annual Report to Shareholders, which includes audited
financial statements, is also enclosed.
By Order of the Board of Directors,
/s/John Wenck
----------------------------------------
John Wenck
Secretary
Breda, Iowa
May 2, 2005
BREDA TELEPHONE CORP.
112 East Main
P.O. Box 190
Breda, Iowa 51436
PROXY STATEMENT
Annual Meeting of Shareholders, May 17, 2005
GENERAL INFORMATION
This Proxy Statement and the enclosed ballot are being provided by BREDA
TELEPHONE CORP. ("Breda") for use at the Annual Meeting of Shareholders to be
held on May 17, 2005, at 7:30 p.m. at the corporate office of Breda located at
112 East Main, Breda, Iowa, and any adjournment or postponement thereof (the
"Meeting"). If a ballot is properly completed and timely 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 Breda 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 2, 2005. The cost of the
distribution and handling of this Proxy Statement and the ballots will be borne
by Breda. The ballot is not solicited on behalf of the Board of Directors of
Breda. The ballot is being transmitted to the shareholders by Breda in
accordance with the Amended and Restated Bylaws of Breda.
VOTING SECURITIES
Only shareholders of record as of the close of business on April 12, 2005 will
be entitled to notice of and to vote at the Meeting.
Breda's authorized stock currently consists of a single class of common stock,
with no par value ("Common Stock"). There were 31,170 shares of Common Stock
outstanding on April 12, 2005. Those shares were held by 563 different
shareholders. 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 shares of Breda's former Class A stock. Those shareholders have
one vote for each share of former Class A stock that was held by them on
February 28, 1995, and continuing until one of the following occurs: (1) the
shareholder no longer receives service from Breda; (2) the shareholder no longer
resides in the Breda, Iowa or Lidderdale, Iowa telephone exchange area served by
Breda; (3) the shareholder dies; or (4) the shareholder transfers the
shareholder's shares to another person. As of April 12, 2005, there were 22
shareholders who still had one vote for each share of the former Class A stock
that was held by them on February 28, 1995. Those 22 shareholders held a total
of 61 shares of the former Class A stock on that date.
Any number of shareholders of Breda 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 required by law shall constitute a
quorum. Breda does not, however, believe a different number is required by law
for any of the matters scheduled to be presented to the shareholders at the
Meeting. 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
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 Breda's
Amended and Restated Articles of Incorporation. Breda does not believe that a
greater number is required by law or the Amended and Restated Articles of
Incorporation for the vote on the ratification of the appointment of auditors
for Breda for the year 2005.
Under Breda'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
Breda's offices prior to the corresponding shareholders meeting are delivered to
that post office box, where practicable. Breda'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 Breda, 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 for 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, Breda does not call for votes of the shareholders at any meeting, and
no vote of the shareholders will accordingly be taken at the Meeting.
Shareholders are therefore strongly encouraged to timely mail their written
ballots. Shareholders will, however, be permitted to present their ballots at
the Meeting, and if you attend the Meeting and desire to withdraw your ballot,
you may do so by notifying the Secretary or another officer of Breda 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 Breda'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 shareholder action
will be able to be taken at the Meeting other than the election of directors and
the ratification of the appointment of Breda's auditors for 2005.
ELECTION OF DIRECTORS
The Board of Directors of Breda consists of seven members. Each member of the
Board of Directors is elected to a three year term and until his or her
successor is elected, or until his or her death, resignation or removal. 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.
Each director must also be a shareholder of Breda, 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 terms of two directors will expire at the Meeting, so one of the purposes of
the Meeting is to elect two directors. The nominees for those two director
positions are identified below.
Breda has established a nomination process for determining the nominees for
directors of Breda. Under that process, a person meeting the qualifications set
forth in the preceding paragraphs can be nominated to serve as a director of
Breda if at least three shareholders nominate that person and provide a
nominating petition to Breda. Breda notified its shareholders by letter in
February, 2005, 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 Breda by no later than March 31, 2005. Two individuals
were nominated to serve as a director through this process, and those
individuals are identified below.
Although the Board anticipates that both of the nominees will be able to serve,
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 the other nominee.
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Directors Continuing in Office.
The following information is furnished for each person who will continue as a
director following the Meeting.
Dean Schettler has been a director of Breda since April, 1997. His current term
as a director will end at the annual shareholders meeting which will be held in
2006. He has also been a director of each of Breda's subsidiaries since April,
1997. Mr. Schettler was the president of Breda and each of Breda's subsidiaries
from May 11, 1998 through June 9, 2003, and he has been the vice-president of
Breda and each of Breda's subsidiaries since June 9, 2003. Mr. Schettler has
been employed by Pella Corporation, in 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 52 years old.
John Wenck has been a director of Breda since April, 1997. His current term as a
director of Breda will end at the annual shareholders meeting which will be held
in 2006. He has also served as a director of each of Breda's subsidiaries since
April, 1997. Mr. Wenck has been the secretary of Breda and each of Breda's
subsidiaries since June 8, 2004. Mr. Wenck has been self-employed as a farmer
for approximately 30 years. He was also previously employed by the United Parcel
Service as a delivery driver. Mr. Wenck is 66 years old.
Rick Anthofer has been a director of Breda since August, 2003. His current term
as a director will end at the annual shareholders meeting which will be held in
2006. Mr. Anthofer has also been a director of each of Breda's subsidiaries
since August, 2003. Mr. Anthofer has been the vice president of Breda Savings
Bank in Breda, Iowa, since approximately September 15, 1999. He was an
agricultural and commercial loan officer and an assistant vice president at
Carroll County State Bank in Carroll, Iowa for approximately 13 years prior to
that time. Mr. Anthofer has also been a member of the Breda, Iowa City Council
since 1988. Mr. Anthofer is 48 years old.
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
will be held in 2007. 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 20
years. Midwest Wholesale Building Products is a wholesaler/retailer of lumber,
building products and materials. Mr. Thatcher is 53 years old.
Neil Kanne has been a director of Breda since May, 2004. His current term as a
director will end at the annual shareholders meeting which will be held in 2007.
Mr. Kanne has also been a director of each of Breda's subsidiaries since May,
2004. Mr. Kanne has been self-employed as a farmer for approximately the last 34
years. Mr. Kanne is 58 years old.
Director Not Continuing in Office.
Clifford Neumayer has been a director of Breda and each of Breda's subsidiaries
since April, 1996. He was the vice president of Breda and each of Breda's
subsidiaries from May 7, 1996 through June 9, 2003, and he has been the
president of Breda and each of Breda's subsidiaries since June 9, 2003. Mr.
Neumayer has been self-employed as a farmer since 1970. Mr.
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Neumayer is 56 years old. Mr. Neumayer's term as a director of Breda will end at
the Meeting. He has served three consecutive terms as a director, and under
Breda's policies, Mr. Neumayer must be off the board of directors for at least
one year. Mr. Neumayer is therefore not eligible to be, and is not, a nominee
for election as a director at the Meeting.
Nominees for Director.
The terms of two directors will expire at the Meeting, so two directors
accordingly need to be elected at the Meeting. The individuals who are elected
to those two director positions will serve until the annual shareholders meeting
which will be held in 2008. There are two nominees for those two director
positions, and the following two 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 Breda since April, 1999, and the treasurer of Breda since
June 11, 2001. Mr. Grabner's current term as a director of Breda will end at the
Meeting. He has also been a director of each of Breda's subsidiaries since
April, 1999, and the treasurer of each of Breda's subsidiaries since June 11,
2001. Mr. Grabner has been self-employed as an electrician for approximately 34
years. He was also previously self-employed as a farmer. Mr. Grabner is 56 years
old.
Daniel Nieland is also a nominee for election as a director. Mr. Nieland has
never held any positions with Breda or any of its subsidiaries. He has been
self-employed as a farmer since 1978. He has served as a board member of Mt.
Carmel Mutual Insurance Association in Breda, Iowa since approximately 1988. Mr.
Nieland is 48 years old.
Directors of Breda's Subsidiaries.
The directors of Breda have historically also served as the directors for
Breda's four direct and indirect wholly owned subsidiaries. The nominees who are
elected to serve as a director of Breda will accordingly also be elected by
Breda or the applicable subsidiary of Breda to serve as a director of each of
those four subsidiaries.
Committees of the Board of Directors.
Breda does not have a separately-designated standing audit committee of the
Board of Directors, and Breda's entire Board of Directors performs any functions
that would otherwise be performed by a separately-designated standing audit
committee.
Breda's Board of Directors has determined that Breda does not have an audit
committee financial expert, as that term is defined in Item 401(e)(2) of
Regulation S-B, serving on the Board of Directors. There are various factors
which may contribute to the fact that Breda does not have an audit committee
financial expert serving on its Board of Directors. For example, although Breda
is subject to the reporting requirements of the Securities Exchange Act of 1934,
it is a relatively small company, and its corporate offices are located in a
small, rural community in Iowa, both of which facts limit its ability to
identify and to attract an audit committee financial expert. Also, under Breda's
governing documents, an individual can only be a director of Breda if the
individual is a shareholder of Breda, and an individual can only be a
shareholder of Breda if the individual is a resident of the Breda, Iowa or
Lidderdale, Iowa telephone exchange areas served by Breda and subscribes to
Breda's telephone services. There is therefore a very limited pool of
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individuals who are even eligible to be considered for a director position with
Breda. Also, no shareholder may own more than 1% of the total issued and
outstanding Common Stock, with certain very limited exceptions; there are
various restrictions on a shareholder's right to sell and assign shares of
Common Stock; and each shareholder is generally entitled to only one vote on
each matter submitted to the shareholders, regardless of the number of shares of
Common Stock held by the shareholder. Those restrictions may limit the number of
individuals who desire to be a shareholder of Breda. Further, all nominees for
election as a director of Breda are nominated by the shareholders, and the
shareholders may not take into consideration some of the particular issues that
are raised or attempted to be addressed by the Securities Exchange Act of 1934
and its implementing regulations. Breda's Board of Directors believes that all
of these factors make it unlikely that Breda will have an audit committee
financial expert serving on the Board of Directors in future years.
Breda does not have a standing nominating committee of the Board of Directors,
or any committee performing similar functions.
The Board of Directors believes that it is appropriate for Breda to not have a
standing nominating committee because Breda has an established shareholder
nomination process for determining the nominees for election as a director of
Breda. The process has been utilized since Breda was organized, but there is no
charter or other document setting out the process. Under that process, Breda
notifies all of its shareholders by letter that anyone wishing to nominate
themselves to serve as a director, or another shareholder to serve as a
director, must submit a nominating petition to Breda. Breda forwarded that
letter to its shareholders on February 28, 2005 with respect to the Meeting. The
letter informed the shareholders that anyone wishing to nominate themselves to
serve as a director, or another shareholder to serve as a director, needed to
submit a nominating petition to Breda by no later than March 31, 2005, and that
any shareholder could obtain a nominating petition by contacting Breda. A
nominating petition must be signed by at least three shareholders of Breda, so
in order for a person to become a nominee for election as a director, at least
three shareholders must be willing to sign a nominating petition. One of those
shareholders may, however, be the nominee. Each nominee must also meet the
qualification requirements for election as a director set out at the beginning
of this Section of this Proxy Statement. If a person is properly and timely
nominated by the shareholders and meets the qualification requirements for a
director, the person will be presented as a nominee for election as a director.
The directors therefore do not, in their capacity as directors, participate in
the consideration of director nominees, other than to perhaps at times confirm
that the nominees have been properly and timely nominated and meet the
qualification requirements for election as a director. The latter determinations
are, however, generally made by an officer of Breda or by the chief operations
officer or chief financial officer of Breda. As previously noted, however, each
director may, in his or her capacity as a shareholder, nominate himself or
herself or another shareholder for election as a director pursuant to the
above-described nomination process. As noted previously, David Grabner and
Daniel Nieland have been nominated for election as a director at the Meeting
pursuant to the nomination process described in this paragraph.
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There were no material changes in 2004 to the procedures by which the
shareholders of Breda may designate the nominees for election to Breda's Board
of Directors.
Breda does have a standing compensation committee comprised of three members of
Breda's Board of Directors. The members of the compensation committee are
appointed annually by the Board of Directors at its annual organizational
meeting, which is generally held in June. The compensation committee considers
compensation matters with respect to Robert Boeckman and Jane Morlok, Breda's
chief operations officer and chief financial officer, including their annual
bonus, and makes recommendations regarding those compensation matters to the
Board of Directors. The members of the compensation committee that were
appointed in June, 2003 were John Wenck, Charles Thatcher and Roger Nieland.
Larry Daniel was appointed to fill the vacancy on the compensation committee
caused by Roger Nieland's death in July, 2003. The members of the compensation
committee that were appointed in June, 2004 were John Wenck, Charles Thatcher
and Rick Anthofer. The compensation committee as appointed in June, 2003 held
one committee meeting during 2004. The compensation committee as appointed in
June, 2004 also held one committee meeting during 2004.
Meetings of the Board of Directors; Attendance of Shareholder Annual Meetings.
The Board of Directors held a total of 17 meetings during 2004. Each director
attended at least 75% of those meetings and of all meetings of any committees of
the Board of Directors on which the director served during 2004.
Breda does not have any policy with regard to directors' attendance at annual
meetings of the shareholders. Breda does, however, encourage all of its
directors to attend the annual meeting of shareholders, and all of the directors
attended the annual shareholders meeting in 2004.
Shareholder Communications to the Board of Directors.
Breda's Amended and Restated Bylaws provide that any shareholder desiring to
send communications to the Board of Directors may do so in writing by either
delivering the writing to Breda's corporate office at 112 East Main, P.O. Box
190, Breda, Iowa 51436, or by mailing the writing to that address, in either
case, to the attention of the President of Breda. Breda will send a copy of each
such writing directly to each director.
Compensation of the Board of Directors.
Since June 1, 2003, all of Breda's directors have received $150 for each
regular, special and conference call meeting of the Board of Directors. The
vice-president, secretary and treasurer of Breda also currently receive an
additional $25 for each regular, special and conference call meeting of the
Board of Directors, and the president of Breda receives an additional $100 per
meeting. Those payments are, however, made to those individuals in their
capacities as directors, and are based upon their additional duties at the
meetings of the Board of Directors. Breda's directors received $125 for each
regular, special and conference call meeting from June, 2001 through May, 2003.
Breda's directors received $100 for each regular, special and conference call
meeting in 1999 and through May, 2001. The vice president, secretary and
treasurer also received an additional $25 per meeting from May, 1999 through
May, 2001. The president received an additional $50 per meeting from May, 1999
through May, 2001.
6
Since June, 2001, all of Breda's directors have received $150 per day for
attending all day industry meetings related to Breda's or its subsidiaries'
businesses. The meetings are not generally formal meetings of the Board of
Directors, but the meetings are attended by the directors in their capacity as a
director of Breda. The directors received $125 per day for such all day meetings
from May, 1999 through May, 2001.
Since June, 2001, all of Breda'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, 2001. 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 and meetings for purposes of ballot counting.
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.
Breda's directors are also reimbursed for mileage and for any expenses incurred
by them on account of attendance at any meeting of the Board of Directors or
other meetings attended by them in their capacity as a director of Breda.
Breda's directors may also receive dial-up or high speed internet access from
Breda or its subsidiaries at no cost. The current estimated yearly value of
internet access is $300 for dial-up and $720 for high speed. The directors have
been entitled to receive internet access since 1999.
The directors also became entitled to receive local telephone service from Breda
or its subsidiaries at no cost, effective as of June 1, 2003. The current
estimated yearly value of local telephone service is $228.
Executive Officers of Breda.
The executive officers of Breda are elected annually by the Board of Directors
at its annual organizational meeting, and hold office until the next annual
organizational meeting of the Board of Directors and until their respective
successors are chosen or until their death, resignation or removal. The annual
organizational meeting of the Board of Directors is the first regularly
scheduled meeting of the Board of Directors which is held after the annual
shareholders meeting, and is generally held in June of each year. 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 Breda. The officers of
Breda 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 Breda. The
officers of Breda have historically also served as the officers for each of
Breda's four direct and indirect wholly owned subsidiaries.
Significant Employees.
Breda has two employees who Breda believes make a significant contribution to
its business. Those employees are Robert J. Boeckman and Jane A. Morlok.
7
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. Mr. Boeckman is 43 years old.
Ms. Morlok became the chief financial officer of Breda on March 20, 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 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. Ms. Morlok is 51 years old.
Breda entered into a new employment agreement with both Mr. Boeckman and Ms.
Morlok on July 1, 2003, but the employment agreements were effective as of
January 1, 2003 for purposes of salary, bonuses and for establishing the term of
the employment agreements.
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 Breda.
Mr. Boeckman is responsible for the day-to-day operations of Breda under his
employment agreement.
Mr. Boeckman's employment agreement is for a three year term commencing
effective January 1, 2003 and accordingly will terminate on December 31, 2005
unless the employment agreement is earlier terminated in accordance with the
employment agreement. Breda may terminate the employment agreement if Mr.
Boeckman is absent from his employment by reason of illness or other incapacity
for more than 26 consecutive weeks. Breda will pay Mr. Boeckman compensation
during any such period of illness or incapacity in accordance with Breda's sick
pay policy as then in effect. Breda may also terminate the employment agreement
for cause upon five days written notice to Mr. Boeckman. The employment
agreement provides that "for cause" includes, without limitation:
o Fraud or theft,
o Falsifying records,
o Refusal to carry out a specific order of the Board of Directors,
o Abuse, discrimination, or harassment of another employee,
o Unauthorized dissemination of records or information,
o Divulging confidential information,
o Possession of illegal drugs or weapons while on Breda property,
8
o Conviction of a crime, the nature of which would be calculated to render
an employee undesirable as a co-manager and detrimental to the best
interests of Breda, and
o Using or possessing intoxicants or narcotics of any kind while on Breda
premises or being at work under the influence of such substances.
Breda 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
Breda, 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 terminate the employment agreement, at any time, by giving 60
days notice to Breda. In this event, Breda 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, Breda is only
obligated to make whatever payments may be required under its pension plan.
Mr. Boeckman's yearly salary under the employment agreement was $90,000 for the
2004 calendar year. Mr. Boeckman's salary under the employment agreement for the
2005 calendar year is $92,500. Mr. Boeckman may also receive a bonus under the
employment agreement. The employment agreement includes an attachment which sets
forth some methodologies and procedures which may be followed by the board of
directors in determining whether a bonus will be paid to Mr. Boeckman with
respect to a calendar year 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. The employment
agreement provides that any bonus with respect to the 2004 and 2005 calendar
years will be determined by measuring cash flow generated from operations and
value added calculations, and that the amount of bonus that may be received by
Mr. Boeckman with respect to the 2004 and 2005 calendar years will increase by
5% to 25% of his annual salary. Mr. Boeckman's bonus for 2004 was $12,600.
The employment agreement also provides that Mr. Boeckman shall be entitled to
all employee benefits extended to all full time employees of Breda. Some of the
benefits currently provided to Mr. Boeckman 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.
Breda 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. Breda 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.
9
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's yearly salary under her employment agreement was
$83,000 for the calendar year 2004, and is $84,500 for the 2005
calendar year. Ms. Morlok's bonus for 2004 was $11,620.
Breda does not have any written employment agreements with any officers or any
other employees.
Security Ownership of Management.
The following table sets forth the percentage ownership of Breda's Common Stock
as of April 12, 2005 by:
o Each of Breda's directors;
o Each of Breda's officers;
o The chief operations officer of Breda;
o Each nominee for director; and
o All directors and officers of Breda and the chief operations officer
of Breda as a group.
Security Ownership Table
------------------------
Name and Address of
Beneficial Owner Number of Shares Percent of Class
---------------- ---------------- ----------------
Dean Schettler 30 .0962%
16326 120th St.
Breda, Iowa 51436
Clifford Neumayer 181 .5807%
11846 Ivy Avenue
Breda, Iowa 51436
John Wenck 6 .0193%
23909 140th St.
Carroll, Iowa 51401
10
Dave Grabner 55* .1765%
11098 130th Street
Breda, Iowa 51436
Rick Anthofer 3 .0096%
301 N. 4th
Breda, Iowa 51436
Charles Thatcher 2** .0064%
15053 Granite Avenue
Breda, Iowa 51436
Neil Kanne 2 .0064%
12828 Phoenix Avenue
Carroll, Iowa 51401
Robert Boeckman 30 .0962%
23678 150th Street
Carroll, Iowa 51401
Daniel Nieland 1 .0032%
12192 Ivy Avenue
Breda, Iowa 51436
All directors, officers and
the chief operations officer
as a group (8 persons) 309 .9913%
* One of these shares is held by Mr. Grabner's spouse.
** One of these shares is held by Mr. Thatcher's spouse.
All of the above shares of Common Stock are directly owned by the listed
individuals, except only as noted with respect to Mr. Grabner and Mr. Thatcher.
Jane Morlok, Breda's chief financial officer, does not own any shares of Common
Stock.
To Breda's knowledge, no person or group is the beneficial owner of more than 5%
of Breda's Common Stock, and no person or group holds more than 5% of Breda's
Common Stock under a voting trust or similar agreement.
EXECUTIVE COMPENSATION AND BENEFITS
The following summary compensation table shows the compensation paid by Breda to
Robert J. Boeckman, Breda's chief operations officer, and to Jane Morlok,
Breda's chief financial officer, in the 2004, 2003 and 2002 fiscal years. Mr.
Boeckman's services as the chief operations officer
11
of Breda are similar to those normally provided by the 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, 2004 $89,906 $12,600 $1,344 $26,226
Chief Operations 2003 $87,490 $11,900 $1,508 $21,061
Officer 2002 $84,341 $ 9,082 $1,795 $18,067
Jane Morlok, 2004 $82,934 $11,600 $1,380 $22,004
Chief Financial 2003 $81,425 $ 9,600 $1,521 $20,246
Officer 2002 $78,602 $ 8,250 $1,808 $17,282
(1) This amount includes contributions of 3% of annual gross salary pursuant
to Breda's defined benefit retirement and security program, which is
sponsored by the National Telephone Cooperative Association. As a
condition of participation in that program, participants must contribute a
minimum of 3% of annual gross salary. See also the "All Other
Compensation" column above.
(2) This amount includes payments by Breda from a fund established by Breda
based upon sales of cell phones. The fund is allocated equally among the
employees employed at Breda. All employees share in the fund even if they
are not involved in the sale of cell phones. Neither Mr. Boeckman nor Ms.
Morlok are involved in those sales. The amounts also include a yearly
clothing allowance and the estimated yearly value of services provided to
Mr. Boeckman or Ms. Morlok by Breda or its subsidiaries at no cost. Those
services are local telephone service, basic cable service, internet
access, and cellular phone service.
(3) This amount represents contributions by Breda to Breda's defined benefit
retirement and security program, which is sponsored by the National
Telephone Cooperative Association. The program requires Breda to
contribute an amount equal to 8.6% of a participant's annual gross salary.
Breda is also required to contribute a 2.32% surcharge on all employee and
employer contributions for plan years 2004 through 2007 in order to meet
current and projected funding requirements. See also footnote 1 above
regarding participants' contributions to the program. This amount also
includes a long term disability contribution of 1.76% of salary and
employer-paid premiums on health, life and accidental death and
dismemberment insurance.
Clifford Neumayer is currently the president of Breda. No information is
provided for Mr. Neumayer in the summary compensation table because he does not
receive compensation in his capacity as the president of Breda. Mr. Neumayer
does receive compensation for his services as a director of Breda. The
compensation payable to directors is discussed elsewhere in this Proxy
Statement. Dean Schettler also served as the president of Breda for a portion of
2003, but no information is provided for Mr. Schettler in the summary
compensation table for the same reason as set forth for Mr. Neumayer.
Breda may terminate its employment agreement with Mr. Boeckman and its
employment agreement with Ms. Morlok at any time, without cause, by giving 30
days written notice to Mr. Boeckman or Ms. Morlok. In this event, however, Breda
must pay Mr. Boeckman or Ms. Morlok, as the case may be, on the date of
termination, a severance allowance equal to the
12
amount remaining to be paid, if any, under their employment agreement.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has retained the accounting firm of Kiesling Associates
LLP to act as independent auditors for Breda during 2005 and is requesting
ratification of that action by the shareholders. Breda knows of no direct or
material indirect financial interests of Kiesling Associates LLP in Breda or any
of Breda's subsidiaries. One or more representatives of Kiesling Associates LLP
are expected to be present at the Meeting and will have the opportunity to make
a statement at the Meeting, if they desire to do so, and are also expected to be
available to respond to appropriate questions.
DISCLOSURE OF INDEPENDENT AUDITOR FEES
The following paragraphs describe the aggregate fees that were billed to Breda
by Kiesling Associates LLP for the fiscal years ended December 31, 2003 and
December 31, 2004.
Audit Fees.
Breda was billed $32,520 and $51,450 for, respectively, the fiscal years ended
December 31, 2003 and December 31, 2004 for the audit of Breda's annual
financial statements and review of the financial statements included in Breda's
quarterly reports on Form 10-QSB or services that are normally provided in
connection with statutory and regulatory filings or engagements for those two
fiscal years.
Audit Related Fees.
Breda was billed $45,875 and $22,775 for, respectively, the fiscal years ended
December 31, 2003 and December 31, 2004 for assurance and related services that
were related to the performance of the audit or review of Breda's financial
statements and which are not reported under "Audit Fees" above. The nature of
those services was compliance, assurance and review work in connection with SEC
filings.
Tax Fees.
Breda was billed $3,225 and $4,100 for, respectively, the fiscal years ended
December 31, 2003 and December 31, 2004 for tax compliance, tax advice and tax
planning services. The nature of those services was tax return and estimated tax
preparation work.
All Other Fees.
Breda was billed $10,180 and $10,624 for, respectively, the fiscal years ended
December 31, 2003 and December 31, 2004 for products and services which are not
described under "Audit Fees", "Audit Related Fees" or "Tax Fees" above. The
nature of those products and services was consulting on industry related issues.
Breda's Board of Directors has considered whether the provision of those
services is compatible with maintaining Kiesling Associates LLP's independence.
Each specific engagement of Kiesling Associates LLP is approved by the Board of
Directors of Breda, and the Board of Directors does not have any pre-approval
policies or procedures
13
described in 17 CFR 210.2-01(c)(7)(i) with respect to the provision of any
services by Kiesling Associates LLP. None of the services described in "Audit
Related Fees," "Tax Fees" or "All Other Fees" above were approved by Breda's
Board of Directors pursuant to 17 CFR 210.2-01(c)(7)(i)(C).
AUDIT COMMITTEE REPORT
As previously noted in this Proxy Statement, Breda does not have a
separately-designated standing audit committee of the Board of Directors, and
Breda's entire Board of Directors performs any functions that would otherwise be
performed by a separately-designated standing audit committee. Breda's Board of
Directors has not adopted a written charter with respect to the Board of
Directors' performance of audit committee type functions. Audit committee
functions include overseeing the accounting and financial reporting processes of
Breda and audits of the financial statements of Breda.
The Board of Directors has reviewed and discussed Breda's audited financial
statements for the year ended December 31, 2004 with management of Breda and
Kiesling Associates LLP, Breda's independent auditors. The Board of Directors
has also discussed with Kiesling Associates LLP the matters required to be
discussed by Statement on Auditing Standards No. 61 ("Communication With Audit
Committees"). The Board of Directors has also received the written disclosures
and the letter from Kiesling Associates LLP required by Independence Standards
Board Standard No. 1 ("Independence Discussions With Audit Committees"), and has
discussed with Kiesling Associates LLP that firm's independence. Based on the
review and the discussions referred to in this paragraph, the Board of Directors
determined that Breda's audited financial statements be included in Breda's
Annual Report on Form 10-KSB for the year ended December 31, 2004 for filing
with the Securities and Exchange Commission.
The name of each director of Breda is as follows:
Clifford Neumayer Neal Kanne
Dean Schettler Charles Thatcher
Dave Grabner Rick Anthofer
John Wenck
SHAREHOLDER PROPOSALS FOR 2006 ANNUAL MEETING
In order for a proposal of any shareholder pursuant to the procedures prescribed
in Rule 14a-8 under the Securities Exchange Act of 1934, as amended, to be
presented for inclusion in Breda's proxy statement and the ballot for the annual
meeting of shareholders to be held in 2006, the proposal must be received at
Breda's principal executive office by no later than January 5, 2006. Any such
proposal will need to comply with the regulations of the Securities and Exchange
Commission regarding the inclusion of shareholder proposals in Breda's proxy
materials.
Any shareholder proposal submitted outside the processes of Rule 14a-8 shall be
considered untimely unless received at Breda's principal office by no later than
March 15, 2006.
14
All proposals should be directed to Breda at Breda's principal executive office
located at 112 E. Main, P.O. Box 190, Breda, Iowa, to the attention of Breda's
President. It is suggested that proposals be sent by certified mail, return
receipt requested.
OTHER MATTERS
Management does not know of any matters to be presented at the Meeting other
than the two matters noted in this Proxy Statement. Also, as discussed in the
Section above entitled "VOTING SECURITIES," given the requirement that all
voting by the shareholders must be by written ballots which have been mailed to
the shareholders prior to the meeting at which the action is to be taken, no
other matters can be properly acted upon by the shareholders at the Meeting.
A copy of the 2004 Annual Report to Shareholders 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/John Wenck
-----------------------------------
John Wenck
Secretary
Breda, Iowa
May 2, 2005
15
BREDA TELEPHONE CORP.
BALLOT
Annual Meeting of Shareholders
May 17, 2005
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 this Ballot is properly completed and timely returned to Breda
Telephone Corp. You must complete and date this Ballot and place it in the
enclosed envelope marked "Ballot". You must then place the sealed ballot
envelope in the other enclosed self-addressed, stamped envelope which has the
control number on it. You must mail this 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 17,
2005, or you can deliver this Ballot in person at the annual meeting. If you
mail this Ballot to Breda Telephone Corp. and attend the meeting and desire to
change your vote from that indicated on this 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 a particular nominee for director and
this 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 any of the nominees for
director and this Ballot is otherwise properly completed and received, it will
be deemed that you have withheld voting in favor of any of the nominees.
Election of Directors
I hereby vote FOR the following nominees for director. (TO VOTE FOR A NOMINEE,
PLACE AN "X" IN THE BOX BY THE NAME OF THE NOMINEE)
|_| David J. Grabner
|_| Daniel Nieland
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 2005:
|_| For |_| Against |_| Abstain
Dated: __________________, 2005.
BREDA TELEPHONE CORP.
2004 ANNUAL REPORT
TO
SHAREHOLDERS
This annual report is being provided to the shareholders of Breda
Telephone Corp. ("Breda") in connection with the annual meeting of the
shareholders which will be held at Breda's corporate office located at 112 East
Main, Breda, Iowa, on Tuesday, May 17, 2005, 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 discussions and statements in this annual report are or contain
forward looking statements that involve and are subject to various risks,
uncertainties and assumptions. Forward looking statements include, but are not
limited to, statements with respect to financial results and condition;
anticipated future trends in business, revenues or net income; projections
concerning operations and cash flow; business, growth and acquisition
opportunities and strategies; management's plans and intentions for the future;
competitive position; and other forecasts, projections and statements of
expectation. Words such as "expects," "estimates," "plans," "will,"
"anticipates," "contemplates," "forecasts," "predicts," "projects," "prospects,"
"possible," "hopeful," "intends," "believes," "seeks," "should," "thinks,"
"objectives" and other similar expressions or variations of those words or those
types of words help identify forward looking statements. Forward looking
statements are made based on numerous and varied estimates, projections, views,
beliefs, strategies 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
factors, risks and uncertainties, some that are known and some that are not, and
nearly all of which are beyond the control of Breda and its management. It is
not possible to predict or identify all such factors, risks and uncertainties,
but some of the factors, risks and uncertainties affecting forward looking
statements include, but are not limited to, the following:
o adverse changes by the Federal Communications Commission, the Iowa
Utilities Board or other regulatory authorities to the access charge
rates that can be charged by Breda and its subsidiaries to long
distance carriers or to the rules and other requirements regarding
access charge rates or access charges, whether instituted by the
regulatory authorities or at the request or by reason of court or
other actions taken by long distance carriers or other interested
persons;
o technological advances in the telecommunications, cable and related
industries, which are always occurring and at an ever increasing
rate, and any one or more of which may replace or otherwise
adversely affect in a material way the existing technologies
utilized by Breda and its subsidiaries;
o changes in employee relations, including the loss of a key employee
or employees;
o industry conditions and occurrences, including bankruptcies and
insolvencies of long distance carriers (such as Global Crossing and
WorldCom), and consolidations in the telecommunications and cable
industries, which generally result in competitors which are larger
and better financed and with greater geographic reach, allowing them
to compete over broader areas and more effectively;
o economic conditions at the national, regional and local levels,
which are always somewhat uncertain given that many different
tangible and intangible factors and occurrences can affect the
economy;
o political conditions and occurrences at the international, national,
regional and local levels, including rumors about, or threats and/or
acts of, terrorism or war;
o the general emotions and psychology of the economy, the markets and
consumers, which can at times seem to be totally unrelated to actual
economic or market conditions or other more tangible factors;
o litigation;
o inaccurate assumptions or predictions by management;
o the ability to enter into and maintain agreements which are
necessary to provide services, and on terms which are favorable to
Breda;
o ever increasing costs and expenses which are necessary to Breda's
and its subsidiaries' businesses but which are outside of Breda's
control, such as health and other insurance costs;
o new third parties entering into Breda's or any of its subsidiaries'
marketing or service areas;
o acts or omissions of existing and/or new competitors and other third
parties, including offering lower prices or new or substitute
products or services and their use of new marketing strategies and
approaches;
o the risks associated with technological requirements, technology
substitution and changes and other technological developments;
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, cable and related industries, and
in particular programs which aid providers of those services to
rural areas;
2
o the continued availability of financing, and on terms which are
favorable to Breda, and the cost of financing and consequences of
leverage; and
o the effects of ever increasing and changing competition and
relationships with other carriers and other parties, including
competition or relationships which result in Breda or its
subsidiaries having to develop new pricing for services, such as
interexchange access charges and wireless access charges, or new
marketing strategies or new product offerings, and the related risk
that Breda or its subsidiaries will not be able to respond on a
timely or profitable basis to competitive changes or pressures.
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 three of Breda's wholly owned subsidiaries, Prairie
Telephone Co., Inc. ("Prairie Telephone"), Westside Independent Telephone
Company ("Westside Independent") and BTC, Inc. A total of eight Iowa towns and
their surrounding rural areas currently receive telephone services from Breda,
Prairie Telephone, Westside Independent or BTC, Inc.
BTC, Inc. has provided internet access services in the Carroll, Iowa market area
since 1997. BTC, Inc. also provides internet access services to the customers of
Breda, Prairie Telephone and Westside Independent who subscribe for internet
services. BTC, Inc. has provided long distance services in the Carroll, Iowa
market area since July, 2000. BTC, Inc. also provides long distance services to
the customers of Breda, Prairie Telephone and Westside Independent who subscribe
for long distance services. BTC, Inc. has offered local telephone services in
the Carroll, Iowa market area as a competitive local exchange carrier since
October, 2003. BTC, Inc. is a wholly owned subsidiary of Prairie Telephone.
Tele-Services, Ltd. ("Tele-Services") is also a wholly owned subsidiary of
Breda. Tele-Services provides cable television services to eighteen towns in
Iowa and one town in Nebraska.
Breda's and its subsidiaries' telephone, internet services 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, Westside Independent and BTC, Inc. provide telephone
services to the following eight Iowa towns and their surrounding rural areas:
3
o Breda, Iowa o Pacific Junction, Iowa
o Lidderdale, Iowa o Yale, Iowa
o Macedonia, Iowa o Westside, Iowa
o Farragut, Iowa o Carroll, Iowa
All of the towns are in central and southern 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, and BTC, Inc. provides services to Carroll. The
surrounding rural areas that are served are those within approximately a ten
mile to fifteen mile radius of each of the towns.
The primary services of Breda, Prairie Telephone, Westside Independent and BTC,
Inc. are providing their subscribers with basic local telephone service and
access services for long distance calls outside the local calling area. Breda,
Prairie Telephone and Westside Independent derive their principal revenues from
providing those services. As of December 31, 2004, they were serving
approximately 3,226 telephone numbers and related access lines. They were
serving approximately 2,882 telephone numbers and related access lines as of
December 31, 2003.
BTC, Inc.'s principal revenue sources in 2004 were from providing Internet
services, long distance services, basic local telephone service and access
services for long distance calls. BTC, Inc. provides Internet services and long
distance services for its own customers and for the customers of Breda, Prairie
Telephone and Westside Independent.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. also provide other
telephone related services. For example, they sell and lease telephone equipment
to their subscribers, provide inside wiring and other installation, maintenance
and repair services to their subscribers, and provide custom calling services to
their subscribers. They also derive revenues from providing billing and
collection services for some long distance carriers for the long distance calls
made by their subscribers.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. are all subject to
regulation by the Iowa Utilities Board (the "IUB"). They operate their telephone
businesses pursuant to certificates and various rules and regulations
promulgated by the IUB. Although not anticipated to occur, the IUB could
terminate their right to provide services if they fail to comply with those
rules and regulations. The areas regulated by the IUB include:
o regulating the access charge rate that can be charged by Breda,
Prairie Telephone, Westside Independent and BTC, Inc. for intrastate
long distance calls;
o establishing minimum standards for the quality of the services and
facilities provided by Breda, Prairie Telephone, Westside
Independent and BTC, Inc.;
o the approval of any expansion beyond the telephone service areas
currently served by Breda, Prairie Telephone, Westside Independent
and BTC, Inc.;
4
o the treatment of Breda, Prairie Telephone, Westside Independent and
BTC, Inc. as rural telephone companies under the Telecommunications
Act of 1996, including the authority to make some determinations
regarding whether they should be exempt them from certain duties and
requirements under that Act; and
o the designation of Breda, Prairie Telephone and Westside Independent
as "eligible telecommunications carriers", which designation allows
them to receive the universal services funding component of the
support payment funding program administered by the Federal
Communications Commission.
They received universal services funding of $814,188, in the aggregate, in 2004.
A competitive local exchange carrier, such as BTC, Inc., is only eligible to
receive universal service funds if the incumbent local exchange carrier receives
those funds. Qwest is the incumbent local exchange carrier in the Carroll, Iowa
market, and is not eligible for universal services funding. BTC, Inc. therefore
is also not eligible for universal service funding.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. are also subject to
regulation by the Federal Communications Commission (the "FCC"). The areas
regulated by the FCC include:
o regulating the access charge rate that can be charged by Breda,
Prairie Telephone, Westside Independent and BTC, Inc. for interstate
long distance calls;
o the approval of any expansion beyond the telephone service areas
currently served by Breda, Prairie Telephone, Westside Independent
and BTC, Inc.; and
o the amount of support payment funding that will be received by
Breda, Prairie Telephone and Westside Independent.
They received $1,495,150, in the aggregate, in support payment funding in 2004.
The latter amount includes, however, the $814,188 universal services funding
component which is noted in the preceding paragraph. A telephone company must be
a member of the National Exchange Carriers Association in order to receive
support payment funding. BTC, Inc. is not eligible to be a member of the
National Exchange Carriers Association because, among other reasons, BTC, Inc.
is not an incumbent local exchange carrier. BTC, Inc. therefore does not receive
support payment funding.
The regulation of access charge rates is an area of particular concern to Breda
because a substantial amount of Breda's total consolidated revenues are derived
from access charge revenues. Breda, Prairie Telephone, Westside Independent and
BTC, Inc. 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 and received by their
subscribers. The FCC regulates the access charge rate that can be charged for
interstate long distance calls, and the IUB regulates the access charge rate
that can be charged for intrastate long distance calls. The FCC and the IUB can
change those rates at any time, and the more recent changes have lowered access
charge
5
rates. As discussed below in the MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION section of this annual report,
Breda believes there may be further reductions in both interstate and intrastate
access charge rates in the somewhat near future.
Telephone services providers like Breda, Prairie Telephone, Westside Independent
and BTC, Inc. 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, Westside Independent's and
BTC, Inc.'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. The Act and the regulations promulgated by the FCC
and state regulatory agencies to implement various parts of the Act could have a
material adverse effect on Breda, Prairie Telephone, Westside Independent and
BTC, Inc. because they open up Breda, Prairie Telephone, Westside Independent
and BTC, Inc. to competition that they were not subject to in the past.
One recent example of the increased competition in Iowa occurred on October 18,
2004, when the IUB issued an Order Approving an Amendment to the Approved
Application for Public Convenience to MCC Telephony of Iowa ("MCC") to provide
service in any area of Iowa where MCC affiliates own and operate a cable system
and offer high-speed cable modems. MCC is a subsidiary of Mediacom that intends
to provide VoIP (voice over internet protocol) service. The IUB had approved an
earlier application of MCC to serve only those areas currently served by Qwest.
Mediacom is the cable service provider in BTC, Inc.'s Carroll, Iowa market area.
Another example of the increased competition threat in Iowa was the deregulation
actions taken by the IUB during 2004. One of the IUB's rulings deregulated 20
actual exchanges instead of specific services. The IUB also decided to
deregulate rates, but maintain service regulation, in 19 of these individual
exchanges where a competitor had overbuilt an exchange and the competitor had
obtained over 50% of the market share. The IUB found that effective competition
existed in these exchanges and that the exchanges should be deregulated, but
that the IUB would maintain mechanisms to monitor the competition and service in
the exchanges. The IUB decided to require that a deregulation accounting be
filed by the deregulated company, although it appears that the IUB may agree to
accept cost-allocation manuals from the company in place of an actual
deregulation accounting plan. The IUB also deregulated the Council Bluffs
exchange, both for rates and service. The IUB did not deregulate the Sioux City
business market because the competition was not facilities-based and because of
uncertainty in the regulations of unbundled network elements. The IUB also did
not deregulate second lines because of a lack of evidence supporting the
existence of effective competition.
Breda and Prairie Telephone joined with eight other independent telephone
companies in southwest Iowa in 2004 in putting together a network, called the
South West Iowa Network, to provide and improve the delivery of voice, data and
video services over a fiber optic-based infrastructure. The South West Iowa
Network is supported by Iowa Network Services, and collectively provides service
in 28 exchanges in southwest Iowa. This network will be used to deliver the
triple-play (voice, data and video), as well as to provide a scalable converged
infrastructure for each company to connect to other companies and services
outside Iowa. Breda
6
and Prairie Telephone have three exchanges connected to this network in
southwest Iowa. Additional construction was completed during 2004, and the
network became operational on October 24, 2004.
There are numerous telephone companies which have filed to provide telephone
services throughout all of Iowa, and Breda anticipates that more of those types
of filings will be made by other telephone companies. 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 2005 is small.
BTC, Inc., however, provides telephone services in the Carroll, Iowa market
area, and there are already other companies providing telephone services in that
area. Breda also believes that there will be additional local exchange carriers
entering the Carroll, Iowa market area in 2005. For example, Mediacom, which is
the 9th largest cable television operator in the United States and the local
cable provider in the Carroll, Iowa market, has expressed an intention to
provide a phone service offering through Mediacom's partnership with Sprint. MCC
(a Mediacom subsidiary) filed a voice exchange tariff and service territory maps
with the IUB on December 27, 2004, and the IUB approved the tariff and maps on
March 14, 2005. The providing of voice exchange tariffs and service territory
maps are usually the last steps required by the IUB before a provider actually
begins providing service. The IUB also granted MCC a certificate of public
convenience to offer service in numerous areas throughout Iowa. Breda believes
that Mediacom and MCC will roll out their voice offering along with a high-speed
internet offering in the Carroll, Iowa market, and Mediacom has recently been
quoted as indicating that it will begin deploying those services in Iowa in the
near future.
Breda also anticipates that it will face new competition from other providers of
newer VoIP (voice over internet protocol) technologies, such as Vonnage and
Skype, in all of its exchanges. Breda anticipates that Mediacom's and any such
other offerings will result in a reduction of revenue. A reduction in revenue
will also result if any other telephone companies at some point determine to
provide services in any of Breda's, Prairie Telephone's, Westside Independent's
or BTC, Inc.'s service areas.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. experience
competition in providing access services and other services to long distance
carriers. For example, they experience competition in providing access services
for long distance when their subscribers use private line transport, switched
voice and data services, microwave, or cellular or personal communications
service. In those cases, the subscriber is not using Breda's, Prairie
Telephone's, Westside Independent's or BTC, Inc.'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 continue to occur in the telecommunications and cable
industries.
Another factor faced by Breda, Prairie Telephone, Westside Independent and BTC,
Inc. is the declining population base in the small, rural communities served by
them, which adversely affects their current and prospective customer base.
7
An industry issue that had significant ramifications for Breda, Prairie
Telephone and Westside Independent during 2004 was number portability. Number
portability provides residential and business telephone customers with the
ability to retain their existing telephone numbers when switching from one
telephone service provider to another. Number portability was one of the
obligations that the Telecommunications Act of 1996 imposed on all local
exchange carriers, and the Act required the FCC to promulgate rules to implement
the number portability requirements. The number portability requirements are
viewed as consistent with the purpose of the Act, which is to, in general,
facilitate competition, because consumers might be reluctant to switch local
exchange carriers if they have to change their telephone number.
The FCC's rules obligate incumbent local exchange carriers, such as Breda,
Prairie Telephone and Westside Independent, to port numbers when the carrier
receives a specific request from another telecommunications carrier (wireline or
wireless) for number portability capability. The rules give incumbent local
exchange carriers a maximum period of 180 days to implement number portability
capability following receipt of a request, with the actual permissible time
period dependent on the extent of the upgrades required to their switch in order
to be able to provide number portability. Because of the small number of
customers in the rural exchanges who would want to port their numbers, small
rural carriers had hoped to delay the costs of the upgrades until they needed to
change out their switches.
On February 18, 2004, two Iowa industry associations, the Iowa
Telecommunications Association and the Rural Iowa Independent Telephone
Association, filed a petition with the IUB that requested a waiver of the
wireless-wireline number portability rules on behalf of all 2% or less carriers
in Iowa. Breda, Prairie Telephone and Westside Independent were included in
these joint filings.
The IUB initially responded to the petition by issuing a 180 day temporary
suspension of the wireless-wireline number portability rule, and later issued an
order requiring all companies participating in the petition to provide the IUB
with various company-specific information, including the number of customers of
the company, the cost of number portability implementation and expected costs
per customer that would be reflected in the number portability cost recovery
charge authorized by the FCC. Breda, Prairie Telephone and Westside Independent
all submitted their individualized data in response to the IUB's order in July
of 2004. The IUB issued its final order in response to the petition on October
6, 2004. Under the IUB's order, all companies participating in the petition were
given extensions ranging from six months to 18 months from the date of the IUB
order, or in some cases until six months after the company received a bona fide
request for number portability from a wireless carrier. Breda and Prairie
Telephone were classified in the group receiving a six month extension, and
Westside Independent was classified in the group receiving a one year extension.
On October 26, 2004, the Iowa Telecommunications Association and the Rural Iowa
Independent Telephone Association filed an application for rehearing of the
IUB's October 6, 2004 order. The application requested the IUB to reconsider its
order and to clarify various other matters.
8
As noted above, Breda and Prairie Telephone received six-month extensions, and
Westside Independent received a twelve-month extension. Software upgrades and
service agreements to implement number portability for Breda, Prairie Telephone
and Westside Independent had all been completed in preparation for the six-month
extension date of April 6, 2005. Final routing and translation work was being
scheduled as the last outstanding process for number portability implementation
when word was received on March 11, 2005, that the U.S. Court of Appeals for the
DC Circuit had suspended the FCC's November 10, 2003 Intermodal LNP Order
implementing wireline to wireless local number portability. The court ruled that
the FCC failed to follow regulatory guidelines designed to examine the impact of
its orders on small businesses such as rural carriers. The court sent the FCC's
Order back to the FCC with directions to prepare a final regulatory flexibility
analysis showing the impact of its Order on small carriers and their customers,
and until that analysis is complete, the court stayed the effect of the Order
solely as it applied to those carriers that qualified as small entities under
the regulatory flexibility analysis. Under that analysis, a wireline
telecommunications carrier with 1,500 or fewer employees is defined as a small
entity. The IUB subsequently reported that the court ruling would suspend LNP
implementation in Iowa until further notice from the FCC.
While Breda anticipates that number portability implementation in Iowa is merely
delayed until after the regulatory flexibility analysis is prepared, it has
stopped all number portability compliance work. Breda estimates its cost to
complete the remaining translation and routing work to become number portability
compliant is less than $10,000. BTC, Inc. already has the hardware and software
capabilities and is able to port customer telephone numbers.
The Communications Assistance For Law Enforcement Act was passed in 1994 and
sets forth the assistance capabilities that telecommunications carriers need to
maintain so that they can support law enforcement in the conduct of lawfully
authorized electronic surveillance. Breda, Prairie Telephone and Westside
Independent have been granted various extensions from time to time for
compliance with the various requirements of the Act. Breda received notification
from the FBI on September 16, 2004 that the FBI would grant Breda, Prairie
Telephone and Westside Independent another extension until June 30, 2006 for
certain of the remaining deployment schedules under the Act. The FCC decides
whether or not to grant any such extension, but Breda anticipates that the FCC
will follow the FBI's approach. As of the time of the preparation of this annual
report, however, Breda has received no further documentation from the FCC. BTC,
Inc. receives its switching services from Breda, and BTC, Inc. is covered under
the deployment schedule (including any extensions of the schedule) for Breda's
switch.
On March 1, 2005, Breda's board of directors authorized Prairie Telephone's
purchase of 5,000 units of Bug Tussel Wireless, L.L.C. Bug Tussel Wireless,
L.L.C. is located in Green Bay, Wisconsin, and its operating plan involves
erecting tower sites for wireless services. Prairie Telephone's investment of
$200,000 was made in March 2005, and Prairie Telephone currently owns 7.87% of
the issued and outstanding units of Bug Tussel Wireless, L.L.C. This investment
will be accounted for using the equity method of accounting.
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 and by BTC, Inc. Cellular services are competitive with
the telephone services provided by Breda, Prairie
9
Telephone, Westside Independent and BTC, Inc. Breda does not believe, however,
that investments in cellular ventures are inconsistent or in conflict with
Breda's, Prairie Telephone's, Westside Independent's or BTC, Inc.'s overall
business, in particular because 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.
The cellular ventures in which Breda, Prairie Telephone and Westside Independent
have invested continue to face ever increasing and changing competition in
providing cellular services and equipment from the various competitors offering
cellular and personal communication services.
Revenues are also generated from sales of cellular phones and related service
packages which are made pursuant to Breda's June 1, 1999 agency agreement with
U.S. Cellular. The agreement allows Breda to sell cellular phones and related
packages to the public, and Breda receives commissions on those sales. Breda and
U.S. Cellular have been attempting to negotiate a new agreement since
approximately May of 2001. U.S. Cellular has provided Breda with at least two
proposed new agreements, but Breda did not execute either of those agreements
because Breda had serious concerns about the agreements, including that Breda
would receive lower commissions under the new agreements. Although it is likely
that some form of new agreement will need to be entered into with U.S. Cellular
at some point, Breda's position is that it is continuing to operate under its
June 1, 1999 agency agreement with U.S. Cellular. The agency agreement provides
that it automatically renews for a period of one year on each June 1, unless
either Breda or U.S. Cellular gives the other written notice of nonrenewal at
least thirty days before the end of the current one year term, but subject to
immediate termination if there is a material breach of the agency agreement. As
indicated above, Breda anticipates that a new agency agreement will need to be
entered into with U.S. Cellular at some point. Breda is hopeful, however, that
any new agreement will, at worst, have a neutral impact on Breda's cellular
commissions revenue.
Breda's sub-agent for U.S. Cellular Services terminated its contractual
arrangement with Breda on September 17, 2004. Breda presently has no plans to
recruit a new sub-agent because Breda already has two retail outlets in the
Carroll, Iowa market that was served by this sub-agent. The two retail outlets
are located at Breda's and BTC, Inc.'s office in Carroll, Iowa and the Wal-Mart
Store in Carroll, Iowa.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. also sell and lease
telephone, cellular and related equipment. They face competition in this area
because there are numerous competitors who sell and lease that equipment.
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. Some long
distance carriers are also now providing their own billing and collection
services, rather than contracting for those services with others like Breda,
Prairie Telephone and Westside Independent.
10
Directory advertising is also now subject to competition because the
Telecommunications Act of 1996 prohibits Breda, Prairie Telephone, Westside
Independent and BTC, Inc. from requiring exclusive listings in their phone
books.
The competition in most of the areas mentioned in the preceding paragraphs
centers primarily around cost, service and experience.
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, 2004, Tele-Services was providing cable television services
to approximately 2,665 subscribers. Tele-Services was providing cable television
services to approximately 2,858 subscribers as of December 31, 2003.
Tele-Services derives its principal revenues from the 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. Those various franchises or
agreements will expire by their terms in the following months:
o Arcadia - August, 2009 o Malvern - October, 2016
o Auburn - January, 2009 o Neola - September, 2005
o Bayard - May, 2008 o Riverton - June, 2013
o Beaver Lake - December, 2006 o Oakland - November, 2009
o Breda - Year-to-Year Basis o Sidney - October, 2010
o Churdan - June, 2008 o Tabor - September, 2016
o Farragut - January, 2008 o Thurman - December, 2015
o Grand Junction - May, 2008 o Treynor - October, 2020
o Hamburg - Year-to-Year Basis o Westside - June, 2009
o Lohrville - March, 2008
11
Tele-Services does not anticipate that any of its franchises or agreements will
be terminated before the above normal expiration dates. Tele-Services also hopes
to be able to renew or extend the franchises or agreements before they expire,
but no assurance can be given that any franchises or agreements can or will be
renewed or extended.
The termination of a franchise or agreement would allow that town to deny
Tele-Services access to its cables for maintenance and services purposes, which
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 their cable services rates, and some of
those franchises or agreements may require the approval of the town for any
increases in those rates. Although Tele-Services does not anticipate any
material difficulties with any future proposed rate increases, there is no
guarantee that future proposed increases can be implemented in any of the towns.
Tele-Services did implement rate increases in 2004 as part of Tele-Services'
adding various channels to its line-up in 14 of the 19 communities that are
served by Tele-Services. The channel additions were completed in 11 communities
by May 1, 2004, and by June 30, 2004 for the remaining 3 communities which
received the additional channels. The rate increases were implemented effective
May 1, 2004 in the communities which were receiving the additional channels by
that date, and the rate increases were implemented on July 1, 2004 for the
communities which received the channel additions in May and June of 2004. Local
channels were also added in six of the communities 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 cable services competitor coming into the towns given, among
other things, the smaller size of the towns.
Tele-Services does face competition in other forms. For example, Tele-Services
experiences strong competition from wireless and satellite dish providers, and
that competition has been increasing in recent years. The FCC began to allow
satellite dish providers to provide local channels in 1999. This fact has had an
adverse effect on Tele-Services because 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 or other providers with equal or
greater advantages than Tele-Services can offer to its subscribers, which could
have further adverse effects on Tele-Services' business. The telecommunications
and cable industry are also continually changing, and technological advances may
provide Tele-Services subscribers with other options. For example, Iowa Network
Services is offering cable services in Iowa 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.
12
Another issue faced by Tele-Services is the declining population base in the
small rural communities served by Tele-Services, which results in a lower
potential customer base for Tele-Services.
Tele-Services is also faced with the need to upgrade its plant, equipment and
cables in order to add more channel lineups so that it can stay competitive and
continue to be able to obtain programming licenses. As noted above,
Tele-Services did add additional channels to its line-up in 2004, which required
Tele-Services to upgrade some of its cable TV systems and install additional
equipment and electronics. Those upgrades and installations were completed
during the second quarter of 2004. Tele-Services also combined the head-ends on
two of its systems into one head-end during the first quarter of 2004, which has
allowed three communities to be served by one head-end, and for those three
communities to receive local channel services. Tele-Services is continuing to
evaluate the possibility of other head-end combinations. The primary goal of
Tele-Services in consolidating its head-end equipment is for the equipment to be
able to serve two or more communities, instead of just one community, with the
intended result of lower maintenance costs for the equipment. The cost of
Tele-Services upgrades in 2004 was approximately $100,100, and is estimated to
be approximately $205,200 for 2005.
Tele-Services is regulated by the FCC. The rules and regulations of the FCC
primarily relate to general operational and technical issues, and they do not
affect rates or expansions of service areas. As discussed above, Tele-Services'
cable services are also regulated in the sense that those services are provided
pursuant to franchises or agreements with each of the towns in which
Tele-Services currently provides cable services.
Internet Service Provider.
BTC, Inc. provides dial-up and high speed internet access services to its
customers and to customers of Breda, Prairie Telephone and Westside Independent.
BTC, Inc. was providing internet access to approximately 1,837 subscribers as of
December 31, 2004. Of that amount, approximately 1,211 were subscribers from
BTC, Inc.'s Carroll, Iowa market area. BTC, Inc. was providing internet access
services to approximately 2,026 subscribers as of December 31, 2003, with
approximately 1,434 of those subscribers being from BTC, Inc.'s Carroll, Iowa
market area. The area served by BTC is currently limited to Carroll, Iowa and
various communities surrounding Carroll, Iowa.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. continue to face
ever increasing competition in providing dial-up and high speed internet access.
For example, Breda has been experiencing price-point competition for Internet
services from Iowa Telecom in three communities since the late fourth quarter
2000, and Breda has lost Internet customers in those three communities. BTC,
Inc. is experiencing intense pricing and free services competition in providing
internet access in its Carroll, Iowa market. There are at least five competitors
in this relatively small market area, and BTC, Inc. experienced a 19.2% decrease
in its dial-up customer base in this market during the calendar year 2004. BTC,
Inc. had experienced a 18.9% decrease in its dial-up customer base in the
Carroll, Iowa market area in 2003, and a 15.5% decrease in 2002.
13
Breda continues to investigate new technology and product offerings in the
Internet field that it can provide to its customers, or that could be considered
value-added features to its already existing product. For example, Breda began
offering a dial-up accelerator product in June 2004, which allows Internet
service providers, such as BTC, Inc., to deliver data services over their
existing dial-up and wireless networks at up to six times the normal speed. This
type of service would be considered an upgrade from dial-up, but not a
replacement for the high speed Internet service. Based on the initial customer
demand for this service, Breda anticipates that there will be good future demand
for this product from its dial-up customers.
Breda also entered into a marketing and distribution agreement with the National
Rural Telecommunications Cooperative ("NRTC") on May 13, 2004, for the
distribution of satellite and high speed Internet service. One reason Breda
entered into this agreement was so that Breda would have a means to provide high
speed Internet service to its rural customers, who may otherwise lack the
opportunity to obtain high speed Internet service through existing broadband
options, such as cable modem, DSL, and wireless, because of distance and
location factors. NRTC has a master distribution agreement with WildBlue
Communications, Inc., through which NRTC has obtained rights to market, promote,
sell and distribute satellite-based Internet access services and related
products to end users in the continental United States, including through NRTC's
eligible members, such as Breda. Breda also entered into an agreement with
DIRECTV, Inc. to offer direct broadcast satellite service (video) in conjunction
with its satellite Internet service. The Anik F2 satellite was launched by
August 30, 2004, and WildBlue is testing its gateways. Breda anticipates that
all testing will be completed in its gateway by May 1, 2005, and that Breda will
be able to provide this service to its customers on or about May 15, 2005.
Breda still believes, however, that it will need to continue to pursue new
marketing approaches in order to attempt to retain and increase its Internet
customer base, and that there will be continuing competitive pressures to lower
dial-up rates and to provide higher speed Internet access.
Breda expects the overall potential customer base for Internet access to
continue to increase, but it is becoming more difficult to predict if Breda or
its subsidiaries will experience any increases in their Internet customer base
given the increasingly competitive pressures in this area. It is also possible
that Breda and its subsidiaries might continue to experience declines in their
Internet customer base. Also, as noted above, competitive pressures regarding
pricing may lead to little or no growth, or even declines, in Internet service
revenues, even if Breda is successful in increasing its Internet customer base.
Miscellaneous Business.
Breda and some of its subsidiaries are also engaged in other miscellaneous
businesses.
For example, in March of 1999, Prairie Telephone acquired spectrum for providing
personal communications services in the Yale telephone exchange area. Spectrum
is bandwidth allocated by the FCC which can be used in the transmission of
voice, data and television communication.
14
Prairie Telephone is also one of the members of Guthrie Group, L.L.C. Guthrie
Group, L.L.C. has acquired spectrum for some telephone exchange areas located in
Guthrie County, Iowa.
Breda also acquired spectrum in 1999 for providing personal communications
services in the Breda and Lidderdale exchange areas. Breda is a member of
Carroll County Wireless, L.L.C., and Breda later sold that spectrum to Carroll
County Wireless, L.L.C., at Breda's cost. The two other telephone companies who
are members of Carroll County Wireless, L.L.C. also sold their respective
personal communications services licenses to Carroll County Wireless, L.L.C. at
their cost. Carroll County Wireless, L.L.C. also acquired other personal
communications services licenses for various areas in Carroll County, Iowa, and
Carroll County Wireless, L.L.C. currently holds personal communications services
licenses for nearly all of Carroll County, Iowa.
Both Breda and Prairie Telephone obtained their personal communications services
spectrum from Iowa Wireless, which was formed by Western Wireless Corporation
and Iowa Network Services, Inc. The original Participation Agreement called for
Iowa Wireless, which changed its name to i wireless in early 2004, to
disaggregate/partition and sell to the individual equity holders of Iowa Network
Services, Inc. up to ten MHz in certain defined areas. A separate Spectrum
Partitioning Agreement required i wireless and the spectrum acquiring telcos,
such as Breda and Prairie Telephone, to construct facilities by June 23, 2000 to
serve with a signal level sufficient to provide adequate service to at least
one-third of the total population of the Des Moines Major Trading Area covering
the combined A Block spectrum licensed service areas of Iowa Wireless, Western
PCS 1 Corporation and the participating telcos. Build-out provisions in the
agreement also required that two-thirds of the total population of the Des
Moines Majoring Area covering the same combined service areas of Iowa Wireless,
Western PCS 1 and the telcos have a signal level sufficient to provide adequate
service by June 23, 2005.
The members of both Carroll County Wireless, L.L.C. and Guthrie Group, L.L.C.
have recently authorized the funding to erect their first tower in their
respective service areas in order to meet the June 23, 2005 deadline. Prairie
Telephone paid its proportionate share of the first Guthrie Group L.L.C. capital
call, which was $50,000, in February 2005. Breda also paid its proportionate
share of the first Carroll County Wireless, L.L.C. capital call, which was
$30,000, in February 2005.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. 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. Also, Breda, Prairie Telephone, Westside Independent and BTC, Inc.
will face competition in providing personal communications services because no
exclusive rights can be acquired with respect to that technology.
Prairie Telephone became a 10% owner of Desktop Media, L.L.C. on May 2, 2001. At
that time, Breda received its help desk services for Breda's Internet customers
from Desktop Media, L.L.C. Breda now uses Caleris, Inc. to provide its help desk
services. Prairie Telephone also loaned $500,000 to Desktop Media, L.L.C. on May
2, 2001, and advanced an additional $45,307 on June 9, 2004 to fund operational
expenses until service revenues were collected. On September 17, 2003, Prairie
Telephone signed a principal deferral agreement with Desktop Media, L.L.C.
15
which deferred the principal payments due in the months of September through
December 2003, and which also provided that Prairie Telephone's ownership in
Desktop Media, L.L.C. would be increased from 10% to 17% if at any time in the
year 2004 Desktop Media, L.L.C. was not able to generate a minimum sustainable
monthly profit of $36,000, or was unable to make a regularly scheduled principal
payment. Both of these stipulations were not met in the first quarter of 2004,
and Prairie Telephone accordingly acquired an additional 7% ownership of Desktop
Media, L.L.C.
The outstanding balance on Prairie Telephone's loans to Desktop Media, L.L.C. as
of December 31, 2004, was $444,974. Prairie Telephone authorized the initiation
of a default process against Desktop Media, L.L.C. in February 2005, and Prairie
Telephone, along with the other two lenders, are proceeding with this legal
action. Prairie Telephone does not know at this time if it will be able to
recover all of the monies due on the loans.
Revenues may also arise from investments in other entities which provide
cellular phone services or which invest in other cellular phone or
telecommunications ventures. For example, Prairie Telephone currently owns
approximately 10.28% of RSA #1, Ltd. and approximately 7.07% of RSA #7, Ltd.
Those entities are Iowa limited partnerships which provide cellular services in
rural areas in central and southern Iowa.
Prairie Telephone also owns .67% of Iowa Network Services' outstanding stock.
Westside Independent owns .45% of Iowa Network Services' outstanding stock.
Breda is an investor in RSA #9, Ltd. and West Iowa Cellular, Inc. Westside
Independent is also an investor in West Iowa Cellular, Inc. West Iowa Cellular,
Inc. and RSA #9, Ltd. provide cellular services in rural areas in southern and
central Iowa.
Breda also owns 17.4229% of the membership interests in Alpine Communications,
L.C., which provides telecommunications exchange and local access services, long
distance service, and cable television service in service areas located
primarily in Clayton County in northeastern Iowa. Alpine Communications sold its
consulting division to Iowa Telecom during 2003, and moved its corporate
headquarters from Des Moines, Iowa to its facilities in Clayton County, Iowa.
Breda's share of the earnings or losses of some of these investments is reported
on Breda's income statement on the equity basis. Some of the investments may be
a source of cash flow for Breda, Prairie Telephone and Westside Independent
through distributions which may be made by the entities. Breda, Prairie
Telephone and Westside Independent do not, however, control any distribution
decisions for any of those entities, so no distributions are ever guaranteed,
and the timing and amount of any distributions will likely vary greatly from
year to year.
Breda receives a nominal annual fee from Alpine Communications, L.C. in
consideration for Breda's chief operations officer serving as an officer of the
management committee of Alpine Communications, L.C.
16
The value of Breda's, Prairie Telephone's and Westside Independent's investments
in the above entities and of their other investments may 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 their ability 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.
Breda, Prairie Telephone and Westside Independent each own 10,000 shares of
common stock in NECA Services, Inc. ("NSI"), which is a for-profit corporation
that was organized to carry on and expand various business opportunities which
may from time to time be presented to the National Exchange Carrier Association,
Inc. ("NECA"). NSI's officers are also the officers of NECA, and they have
experience in the telecommunications industry. It is currently contemplated that
non-regulated business opportunities will be conducted by NSI so that NECA can
concentrate on its traditional core tariff and pooling services. For example,
the NECA board has authorized the assignment of certain National Exchange
Carrier Association contracts to NSI, which include the contract with the
Universal Service Administrative Company for support of the federal schools and
libraries and rural health care universal service programs.
There is no assurance that any of Breda, Prairie Telephone or Westside
Independent will ever receive any returns on or other value from their
investment in NSI, whether by distributions or increases in the value of NSI's
common stock. The board of directors of NSI did, however, declare a $.50 per
share dividend in 2003 and a $.75 per share dividend in 2004.
There are substantial restrictions imposed upon the ability to transfer shares
in NSI, all of which potentially adversely affect the value and marketability of
the NSI stock.
Breda and its subsidiaries also have various other miscellaneous investments.
Some of those investments are described in the financial statements included at
the end of this annual report.
Neither Breda nor any of its subsidiaries engage in any material research and
development activities.
Service Marks.
Breda has registered the mark "W.I.N. Western Iowa Networks" with the United
States Patent and Trademark Office, and Breda and its subsidiaries have all
conducted their businesses under the names "W.I.N." or "Western Iowa Networks"
since the second quarter of 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.
17
Employees.
As of December 31, 2004, Breda had 35 full time employees, and no part time
employees. Breda employs all of those employees, but the employees also provide
the labor and services for Prairie Telephone, Westside Independent,
Tele-Services and BTC, Inc. 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. Breda may utilize
part-time employees on an as needed basis.
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 with the financial
statements and related notes found at the end of this annual report.
Breda organizes its business into three reportable segments. Those segments are
local exchange carrier services, broadcast services, and Internet service
provider services. Breda has organized its business into those segments because
the segments are each strategic business units that are managed separately and
that offer different products and services in different regulatory environments.
The local exchange carrier services segment provides telephone, data services,
and other services to customers in the local exchanges served by Breda and its
telephone subsidiaries. Breda has offered local exchange carrier services in the
Carroll, Iowa market area since October, 2003, through BTC, Inc. Breda also
provides long distance services to its customers in the local exchanges served
by Breda and its subsidiaries. The broadcast services segment provides cable
television services to customers in a total of eighteen towns in Iowa and one
town in Nebraska. The Internet service provider services segment provides
Internet access to customers in the local exchanges and the surrounding areas
and in the Carroll, Iowa market area through BTC, Inc.
The segments in which Breda and its subsidiaries operate are as follows:
Local Exchange Carrier
Breda
Prairie Telephone
Westside Independent
BTC, Inc.
18
Broadcast Services
Tele-Services
Internet Service Provider
BTC, Inc.
BTC, Inc. is a subsidiary of Prairie Telephone. BTC, Inc. provides Internet
services to its customers and to the customers of Breda, Prairie Telephone and
Westside Independent who subscribe for Internet services. As noted above, BTC,
Inc. is also a local exchange carrier providing local and long distance
telephone services to customers in the Carroll, Iowa market area, where Qwest is
the incumbent local exchange carrier.
Breda and its subsidiaries all conduct business under the names "W.I.N." or
"Western Iowa Networks".
Breda's primary source of consolidated revenues is from the telephone services
provided by Breda, Prairie Telephone, Westside Independent and BTC, Inc. The
operating revenues from telephone services are primarily derived from the
following types of fees and charges:
o Flat monthly fees charged to subscribers for basic local
telephone services. As of March 1, 2005, those fees varied
from approximately $11.50 to $35.00 per month. The monthly fee
is higher for subscribers who elect to have additional
services and features, such as custom features.
o Access 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.
The access charge rate payable to telephone companies like
Breda, Prairie Telephone, Westside Independent and BTC, Inc.
which utilize the "average schedule" basis for receiving
inter-state access charge revenues, is currently 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 had been
increasing in past years, and that trend continued in 2004 due
to traffic routing changes and because BTC, Inc. began to
offer local phone service in the Carroll, Iowa market in
October 2003. Customers that moved their service from the
incumbent local carrier to BTC, Inc. also usually selected
Breda's long distance service, which has increased the overall
number of customers utilizing Breda's network to make long
distance calls. The increased customer count has increased the
overall minutes of use for long distance calls, which has
increased Breda's access revenue. Breda has, however, seen
some decrease in its minutes of use because of competition
from wireless carriers offering calling plans with such
features as unlimited nights and weekend calls. Those types of
features lead customers having both wireless and wireline
service to use their wireless calling plans to make long
distance calls, which results in less traffic being carried
over the
19
wireline networks. Also, the IUB has ruled that wireless
traffic is considered local traffic, so the wireless carriers
are not entering into interconnection agreements with the
wireline carriers for use of their networks. The wireline
carriers, such as Breda, accordingly receive less traffic over
their networks, and received no payment for the traffic that
the wireless carriers routed over the wireline networks from
April 1999 until May 2004, when, as noted later in this annual
report, Breda negotiated reciprocal transport and termination
agreements with some of the wireless carriers. Breda is not
able to quantify the dollars that Breda and its subsidiaries
did not receive for wireless traffic over that period of time.
As indicated above, Breda, Prairie Telephone and Westside
Independent utilize the "average schedule" basis for receiving
inter-state access charge revenues. This is the approach taken
by most smaller telephone companies. Another approach
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
across a sample of telephone companies and certain other
factors intended to take into account the size of the
particular telephone company in question.
As noted previously in this annual report, access charge
revenues constitute a substantial part of Breda's consolidated
revenues, and the regulation of access charge rates by the FCC
and the IUB creates a material risk to Breda and its
subsidiaries.
The FCC issued a press release on February 10, 2005, in which
the FCC announced its plan to replace the current intercarrier
compensation system. The current intercarrier compensation
system distinguishes between different types of carriers and
services, such as local and long-distance or wireless and
wireline, and the FCC's press release indicated that the FCC
plans to replace the current system with a unified
intercarrier compensation system. It is Breda's understanding
that the FCC plans to initiate a rule making proceeding to
consider this matter and that the questions that the FCC will
examine may include the effect that any change in the
compensation system will have on consumers and the universal
service fund. The FCC has indicated that it will be
particularly receptive to any plans that offer expanded
choices and lower rates to rural consumers.
It is also Breda's understanding that the FCC will use the
rule making proceeding to seek comment on the following seven
plans which have been proposed or supported by various
participants in the industry:
o Intercarrier Compensation Forum, which represents
nine carriers. This plan would reduce most per
minute termination rates to zero over a six year
period of time.
20
o Alliance for Rational Intercarrier Compensation,
which represents certain small rural providers
which are serving high-cost areas. This plan would
unify per-minute rates at a level based on a
carrier's embedded costs.
o Expanded Portland Group, which is comprised of
certain small and mid-size rural local exchange
carriers. This plan includes two phases which
would eventually convert per-minute intercarrier
charges to capacity-based charges.
o Cost-based Intercarrier Compensation Coalition,
which represents certain competitive local
exchange carriers. This plan would create a
cost-based termination rate in each geographic
area for all types of traffic.
o Home Telephone Company and PBT Telecon. This plan
would replace the current system with
connection-based intercarrier charges.
o Western Wireless. This plan would reduce
intercarrier charges in equal steps over four
years to bill-and-keep arrangements.
o National Association of State Utility Consumer
Advocates. This plan would reduce certain
intercarrier rate levels over a five year period.
It is contemplated that the FCC may also consider and request
comments on a plan that is being drafted by the National
Association of Regulatory Utility Commissioners. Breda
understands that the plan being drafted by the National
Association of Regulatory Utility Commissioners will attempt
to blend together the various proposed plans for intercarrier
compensation reform that have already been presented to the
FCC. It is also Breda's understanding that the Iowa
Telecommunications Association and the Rural Iowa Independent
Telephone Association are working with the National
Association of Regulatory Utility Commissioners to attempt to
avoid any drastic reduction in access charges.
Breda cannot predict at this time which proposal may be viewed
more favorably by the FCC, when the FCC may commence formal
rule making proceedings regarding the proposals or how long
the rule making process might take. Breda does believe,
however, that changes in interstate access charge rates may
occur, and that if any of the plans known today are adopted,
as currently proposed, there will be substantial reductions in
Breda's access revenues. Since access charge revenues
constitute a substantial portion of Breda's total consolidated
revenues, this is an area of material risk to Breda and its
subsidiaries.
Breda and its subsidiaries are also subject to risk regarding
changes in intrastate access charge rates because concerns
have been raised by the Iowa legislature and the IUB regarding
intrastate rates, and whether alternative intrastate
intercarrier compensation mechanisms should be investigated. A
joint task force comprised of representatives from the Iowa
Telecommunications Association and the Rural Iowa
21
Independent Telephone Association was formed in the spring of
2003 to compile data from local telephone companies, which
data was to be used to document and study the cost of access
and to make recommendations regarding Iowa access rates. Two
industry consulting firms were involved with this task force,
and the committee looked not only at the justification of the
present intrastate access rates received by local telephone
companies, but also at other revenue recovery alternatives.
The joint task force completed its initial study in May, 2004
and found that the overall results showed costs both higher
and lower than the current intrastate access rates, and that
the cost per minute for intrastate access fell within a range
of $.02 to $.16. The task force is continuing to study the
impact of the facts that the results did not include data from
38 Iowa companies, and that declining minutes of use will
increase the average cost. The joint task force has been
holding regional meetings and conferences to educate and
present its information to the members of the Iowa
Telecommunications Association and the Rural Iowa Independent
Telephone Association members on the issues and elements of
their recommendation.
Breda does not believe that any increase in intrastate access
rates will be recommended by the task force and that, at best,
intrastate access rates will stay the same. It is also
possible, however, that intrastate access rates will be
lowered, and that if that occurs, it will have a negative
impact on Breda's and its subsidiaries' operating income.
Breda does not believe, however, that it is possible to
predict at this time whether intrastate access rates will be
lowered, or if intrastate access rates are lowered, the amount
of the decrease in those rates. It is therefore uncertain at
this time whether this issue will result in an adverse effect
on Breda's operating income. Breda does, however, anticipate
continuing pressure for the lowering of intrastate access
charge rates.
Another revenue recovery issue present in the industry since
April 1999 has been the nonpayment of access revenue by
wireless carriers on traffic originating and terminating
within the same major trading area (intraMTA). Breda and other
local exchange carriers have not received payment for the
termination of this wireless traffic over their networks to
the end user. A joint task force of industry representatives
and the Iowa Telecommunications Association had been working
since the spring of 2003 to negotiate with wireless carriers
on this issue. In late April 2004, the ITA Wireless
Termination negotiating committee was successful in reaching
an agreement with four wireless carriers - U.S. Cellular,
Verizon Wireless, Sprint PCA and Midwest Wireless. The intent
of the joint task force had been that any independent
telephone company who wished to participate in the negotiated
wireless termination agreements with one of these carriers
could "opt in" to one of the wireless termination agreements
already on file at the IUB. In July 2004, the negotiating
committee learned that the wireless carriers had rejected the
idea of allowing independent phone companies to "opt in" to
one of the wireless termination agreements already on file at
the IUB. The latter fact meant that any independent telephone
company that wished to participate in the wireless termination
agreements with Midwest Wireless, Verizon, US Cellular and
Sprint
22
needed to execute their own separate agreement with each
wireless carrier. The ITA Wireless Termination negotiating
committee continued its efforts to pursue past compensation
from the wireless carriers for minutes from April 1999 to
March 31, 2004, and also continued its attempts to convince
the remaining wireless carriers, including AT&T and Nextel, to
sign the "model" agreement. I Wireless agreed to be bound by
the model agreement in January 2005.
On August 6, 2004, the board of directors of the Rural Iowa
Independent Telephone Association approved the filing of a
model wireless termination tariff, and the tariff was filed
with the IUB on August 10, 2004. If the tariff would have been
approved by the IUB, it would have given independent local
telephone companies another option in resolving the wireless
terminating traffic issue because the companies would have
been able to choose to adopt the tariff or to enter into the
model wireless termination agreement. The tariff would also
have provided authority for billing the wireless service
providers that did not sign an agreement but continued to
terminate traffic on an independent telephone company's
network. The tariff would have specified that the traffic
covered by the tariff was subject to a service establishment
charge and a per minute of use charge. The tariff would have
also provided billing information, allowed verification of the
information, and discontinuance of service if the wireless
company failed to pay as required under the tariff.
On August 31, 2004, the Iowa Telecom Association filed a
Petition for Arbitration with the IUB seeking compensation for
terminating wireless traffic from 1999 to May 2004 from US
Cellular, Verizon and Sprint PCS. The Iowa Telecon Association
had calculated the total amount of identified wireless traffic
for the entire Iowa independent industry at approximately $6.5
million. On September 15, 2004, the wireless carriers filed
their responses to the Petition, including a denial that they
owed anything, and a claim that the IUB had no jurisdiction
over the matter.
On November 19, 2004 the IUB dismissed the Petition filed by
the Iowa Telecon Association on the basis that the IUB had no
jurisdiction over the matter. On December 9, 2004, the Iowa
Telecon Association filed an application for rehearing, but
the application for rehearing was denied by the IUB on January
6, 2005.
In late February 2005, the FCC issued a Declaratory Ruling and
Order in an attempt to clarify some of the intercarrier
compensation disputes surrounding wireless terminating
traffic. Under the Order, existing tariffs would not be
illegal and collections under those tariffs could be retained
by rural independent telephone companies, but new tariffs
would no longer be valid and companies would need to reach
negotiated agreements to exchange the traffic.
Because of the above regulatory activities, Breda began
negotiations with the five wireless carriers who had adopted
the ITA Model Wireless Termination Agreement, and by late
January 2005 had signed agreements with Sprint, US Cellular,
i-wireless
23
and Midwest Wireless for each of Breda, Prairie Telephone,
Westside Independent and BTC, Inc. The agreements with Sprint,
US Cellular and i-wireless became effective as of May 1, 2004,
and the Midwest Wireless agreement became effective January
27, 2005. Breda continues to negotiate with Verizon, and
anticipates that an agreement will be signed with Verizon for
each Breda, Prairie Telephone and Westside Independent within
30 days. Verizon will not sign a Wireless Termination
Agreement with BTC, Inc. since it is a competitive local
exchange carrier.
The agreements generally provide for compensation on only a
going forward basis. The agreements provide for significantly
less revenue per minute, and are reciprocal compensation
agreements, which means generally that each of the two
carriers receives compensation from the other carrier for the
transport and termination on each carrier's network facilities
of IntraMTA telecommunications traffic that originates on the
network facilities of the other carrier.
o Revenue from the sale and lease of customer premises telephone
equipment and other similar items and other miscellaneous
customer services, such as custom calling services. Since the
completion of the upgrading of their telephone switches in
1998 and 1999, Breda, Prairie Telephone and Westside
Independent have had the capability and are offering many more
custom calling features to their subscribers. BTC, Inc. also
offers custom calling features to its subscribers. Revenues
from custom calling features are not, however, a material
source of revenue.
o Fees from long distance providers for billing and collection
services for long distance calls made by subscribers. Breda,
Prairie Telephone and Westside Independent have been
experiencing increased competition in this area over the past
three years. Their competitors include other third parties
providing these services, and competition from the long
distance providers themselves since some providers have
decided to handle their own billing and collection. Breda may
at some point make a determination to stop providing billing
and collection services for other carriers.
o Fees from per minute rate plans and calling plan fees on long
distance calls made by subscribers of Breda, Prairie
Telephone, Westside Independent and BTC, Inc. Breda
experienced a 44.5% increase in its long distance customer
base from December of 2002 to December of 2003, and a 50.7%
increase from December of 2003 to December of 2004.
o Breda, Prairie Telephone, Westside Independent and BTC, Inc.
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. They are, however,
experiencing intense services and pricing competition in
providing Internet access.
24
Breda's other primary source of consolidated revenue is generated from
Tele-Services' cable business. Tele-Services' operating revenues are generated
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 has
allowed satellite dish providers to provide local channels since 1999. This fact
has had an adverse effect on Tele-Services because 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 or other providers with equal or
greater advantages than Tele-Services can offer to its subscribers, which could
result in further adverse effects on Tele-Services' business. The
telecommunications and cable industries are also continually changing, and
technological advances may provide Tele-Services' subscribers with other
options, which could have material adverse effects on Tele-Services.
Tele-Services is also faced with a declining population base in its service
areas, which results in a lower potential customer base.
Another issue faced by Tele-Services is that the companies which provide
programming licensing to cable services providers are requiring 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 will continue to be able to obtain programming
licenses and in order to stay competitive.
Other miscellaneous sources of revenue are discussed in the financial statements
included at the end of this annual report.
The following table reflects, on a consolidated basis for Breda and its
subsidiaries, the approximate percentage of Breda's and its subsidiaries'
aggregate revenue which was derived from the three segments described above and
from investments as of the close of each of the past two fiscal years:
2003 2004
---- ----
Local Exchange Carrier (1) 75.5% 78.5%
Broadcast (2) 14.5% 12.5%
Internet Service Provider (3) 10.0% 9.0%
---- ----
Total 100% 100%
(1) This segment includes (i) flat monthly fees charged to subscribers
by Breda, Prairie Telephone, Westside Independent and BTC, Inc. 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, (iv) per minute
25
rates and calling plans rates for long distance services, and (v)
monthly cellular commissions, advertising fees, and miscellaneous
revenues. BTC, Inc. began providing local telephone services in
October, 2003. Prior to that time, BTC, Inc. only provided long
distance services and Internet services.
(2) This segment includes monthly fees charged for basic and premium
cable services.
(3) This segment includes monthly fees charged for Internet services.
Twelve-months ended December 31, 2004 Compared to Twelve-months ended December
31, 2003
NET INCOME
Consolidated net income for the twelve-month period ended December 31, 2004 was
$1,393,675, which was a $204,169, or 17.2%, increase when compared to the
$1,189,506 of consolidated net income for the twelve-month period ended December
31, 2003.
The $204,169 increase in net income resulted from the following three factors:
1) Consolidated operating income, which is Operating Revenues less
Operating Expenses, generated from the local exchange carrier
segment, the broadcast services segment, and the Internet service
provider segment increased $133,734, or 18.7%, for the twelve-month
period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003.
2) Other income (expense), which includes items such as interest and
dividend income, income from equity investments, interest expense,
and gains (losses) on the sale of investments and property,
increased $193,323, or 16.3%, for the twelve-month period ended
December 31, 2004, when compared to the twelve-month period ended
December 31, 2003.
3) Income taxes increased $84,295, or 11.9%, for the twelve-month
period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003.
OPERATING REVENUES
There was an increase in total operating revenues for the twelve-month period
ended December 31, 2004, when compared to the twelve-month period ended December
31, 2003, of $509,749, or 8.1%. The segments making up total operating revenues
and their contributions to the $509,749 increase between the two periods are as
follows: local exchange carrier services - $591,689; broadcast services -
($59,601); and Internet service provider services - ($22,339).
26
Local Exchange Carrier Services - $591,689
Local exchange carrier services revenue accounted for 78.5% of the operating
revenue in the twelve-month period ended December 31, 2004. The components of,
and their contributions to, the $591,689 increase in local exchange carrier
services revenue for the twelve-months ended December 31, 2004, when compared to
the twelve-months ended December 31, 2003, are as follows: local network
services - $134,720; network access services - $480,170; long distance services
- - $130,405; billing and collection services - ($3,771); cellular services -
($108,196); and miscellaneous - ($41,639).
Local network services increased 22.6% and network access services revenues
increased 20.1% in the twelve-month period ended December 31, 2004, when
compared to the twelve-month period ended December 31, 2003. The increase in
local network services revenues and a portion of the increase in network access
services revenues were the result of new customers in the Carroll, Iowa market
area which were generated after BTC, Inc., began offering local exchange carrier
services in October 2003. There was no corresponding customer base for nine of
the twelve months in the twelve-month period ended December 31, 2003. Also, the
remaining three months of the twelve-month period ended December 31, 2003, would
reflect customer counts not comparable to the last three months of the
twelve-month period December 31, 2004, because customers were added as they were
converted to Breda's service during this period.
Breda also received a 24-month true-up adjustment in the amount of $148,362 from
the NECA pool for the time period April 2002 through April 2004, which is
reflected in the network access services revenues. The adjustment was received
in May 2004 after Breda incorporated a line haul lease agreement that Breda had
in place with another independent telephone provider during that time period.
Breda continues to receive additional monthly line haul compensation from the
NECA pool of approximately $6,000 per month because of this line haul lease
arrangement, and Breda anticipates continuing to receive these revenues on a
going forward basis.
Breda has had lower access revenues in both 2003 and 2004 because Qwest no
longer pays access revenue for traffic originating with a wireless carrier that
uses Qwest to deliver the traffic back to a number served by local exchange
carriers, such as Breda, Prairie Telephone, and Westside Independent, who
participate in the use of the switching and network facilities offered by Iowa
Network Services.
Access charges constitute a substantial part of Breda's, Prairie Telephone's and
Westside Independent's revenues, and a material risk to them arises from the
regulation of access charge rates and universal service funding by the FCC. As
previously noted, Breda anticipates changes in state and federal access charge
rates, and that reductions in access charge rates may be likely. The universal
service funds are also now being paid out to more telecommunication providers,
and Breda anticipates that there may also be changes in the future on how
universal service funds are disbursed.
Breda's long distance services revenue continues to grow because of the increase
in its customer base for those services. Breda believes that long distance
services should continue to be a growth area for Breda in 2005 as Breda
continues to market this service as both a stand-alone
27
service and as part of a package with other services, such as Internet services.
There was a 125.4% increase in long distance services revenues for the
twelve-month period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003. The increase is a direct reflection of the 50.7%
increase in Breda's long distance customer base, which has mainly resulted from
new customers in the Carroll, Iowa area taking this service as part of a bundled
service package which includes local exchange service and Internet service
provider services.
The $108,196, or 8.4%, decrease in cellular sales revenue for the twelve-month
period ended December 31, 2004, when compared to the twelve-month period ended
December 31, 2003, reflects the decreased sales from all of Breda's service
locations for the twelve months ended 2004. Breda began offering two-year
contracts, instead of one-year contracts, in August 2002, when U.S. Cellular
revamped its commission structure to encourage two-year contracts. Breda
generates retention commissions when a customer extends the term of the
customer's existing cellular services contract or enters into a new contract to
continue the customer's cellular services. The customers with one-year contracts
expiring in 2003 continued to generate retention contracts, but those contracts
and other new contracts are now on a two-year term. Breda has accordingly
experienced a time gap between when customers would normally be entering new
contracts if they had one-year contracts versus when they would enter into new
contracts if they had two-year contracts. The change in contract length has
therefore caused a delay in new contract sign-up for retentionable contracts.
Customers may migrate to new contracts without penalty once they have fulfilled
eighty percent of the original contract term, so the first customers obtaining
two-year contracts in 2002 were eligible for new contracts beginning in May and
June of 2004. Breda has seen some increase in retention contracts during the
months since May 2004, and expects its retention commissions to go back to more
customary levels in the coming months. Breda has, however, also experienced some
saturation in its cellular market and has seen a small decrease in first-time
customer contracts.
Other factors contributing to the decrease in cellular sales revenue during the
twelve-month period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003, were the down time caused by the hiring and
training of a new outside cellular sales person, and the change in focus to the
new services offered by BTC, Inc.'s entry into the local exchange services
market in Carroll, Iowa by two outside sales people, who had originally spent
their sales efforts on cellular services.
Miscellaneous revenue decreased $41,639, or 13.4%, for the twelve-month period
ended December 31, 2004, when compared to the twelve-month period ended December
31, 2003. Breda performed fiber installation contractual work for an outside
corporation in the first quarter of 2003, which generated approximately $50,000
in miscellaneous revenue, before materials, equipment and labor costs. There was
no corresponding work or revenue in the twelve-month period ended December 31,
2004. Breda also received a Qwest refund on co-location expenditures of
approximately $28,229 during the second quarter of 2003. There was no
corresponding entry in the twelve-month period ended December 31, 2004. Breda
did, however, generate almost $15,000 of additional revenue from the sale of key
systems during the twelve-month period ended December 31, 2004, when compared to
the twelve-month period ended
28
December 31, 2003. Breda also generated more revenue from miscellaneous fiber
lease rental during the twelve-month period ended December 31, 2004.
Broadcast Services ($59,601)
Broadcast services revenue decreased $59,601, or 6.6%, for the twelve-month
period ended December 31, 2004, when compared to the twelve-month period ended
December 31, 2003. Breda's subsidiary, Tele-Services, continues to face
competition from satellite providers that can now include local channels in
their package offerings. Tele-Services experienced a 7.4% decrease in its
customer base when comparing the twelve-month period ended December 31, 2004, to
the twelve-month period ended December 31, 2003. Another factor faced by
Tele-Services is the declining population base in the small rural communities
served by Tele-Services, which adversely affects Tele-Services' current and
prospective customer base. Tele-Services has combined head-ends in Breda,
Arcadia, and Westside in order to reduce its operating costs through
consolidation of equipment and maintenance costs. Breda is continuing to explore
other consolidation opportunities in the other 16 communities that are served by
Tele-Services.
Tele-Services added channels in the latter part of the first quarter of 2004 in
14 of the 19 communities that are served by Tele-Services. Tele-Services
finalized and implemented most of those channel additions, and the corresponding
rate increases, by July 1, 2004. Local channels have been added in 6 additional
communities, and Breda hopes to generate customer loyalty through this avenue of
information on local community events, as well as the weather, and local news.
Breda is also implementing paid advertising opportunities for businesses and
individuals on the local channels in the communities that have the local
channels.
Internet Services ($22,339)
Internet services revenue decreased $22,339, or 3.6%, for the twelve-month
period ended December 31, 2004, when compared to the twelve-month period ended
December 31, 2003. The decrease is directly attributable to the decrease in BTC,
Inc.'s Internet dial-up customer service base, which decrease is the result of
the intense competition by multiple suppliers in the Carroll, Iowa market area.
Breda began bundling Internet services with long distance services and lowered
its pricing for Internet services in 2001 in response to competitive pressures.
Breda has continued with these programs in 2003 and 2004. The programs have,
however, resulted in reduced Internet revenues in both 2003 and 2004 given the
lower pricing by Breda for Internet services under those programs. Breda is
gaining high-speed Internet customers in the Carroll, Iowa area because BTC,
Inc. is offering bundled services packages that include Internet services, as
well as local telephone and other communication services. While new customers
subscribing for those bundled services have helped stem the decrease in Internet
services revenue occurring in 2004, Breda was forced by competitive pressures to
reduce its pricing on its high speed Internet services as of October 1, 2004.
This price decrease is reflected in Internet services revenue during the last
quarter of 2004.
29
OPERATING EXPENSES
There was an increase in total operating expenses of $376,015, or 6.8%, for the
twelve-month period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003. The components making up operating expenses are
as follows: cost of services, depreciation and amortization, and selling,
general and administration expenditures.
Cost of services increased $340,762, or 12.8%, for the twelve-month period ended
December 31, 2004, when compared to the twelve-month period ended December 31,
2003. The major components of the increase in cost of services resulted from
increased cable TV programming costs of $22,782, decreased Internet provision
costs of $168,298, increased cellular services costs of $81,984, increased long
distance provisioning costs of $104,704 and increased plant related costs of
$299,590. Internet provision costs decreased because Breda is no longer
dependent on purchasing specialized circuits from Qwest in order to provide
Internet service in the Carroll, Iowa market. As noted previously, Breda began
offering local exchange carrier services in the Carroll, Iowa area through its
subsidiary, BTC, Inc., in October 2003. In order to provide local exchange
carrier services in the Carroll, Iowa market, Breda had to install circuits and
trunks between the present independent local exchange carrier (Qwest) and
Breda's switch. Breda is able to provide Internet service to the Carroll, Iowa
market over those same trunks, which has significantly reduced Breda's
underlying circuit cost to provide Internet services. As noted previously, Breda
experienced a 125.4% increase in its long distance services revenue during the
twelve month period ended December 31, 2004, when compared to the twelve month
period ended December 31, 2003. Since Breda is a reseller of long distance
services, its corresponding cost of purchasing those services for resale
directly correlates to the increased customer base and usage for those services.
Breda's cellular costs increased because of the added labor and benefit costs
which were associated with managing and selling those services. Breda also
experienced an increase in the average cost of the phones purchased to provide
access to the new features rolled out by U.S. Cellular in the twelve-month
period ended December 31, 2004. Also included in increased plant specific costs
are one-time installation costs that Breda pays to Qwest for the provisioning of
the underlying loop so that BTC, Inc. can offer competitive local telephone
service in the Carroll, Iowa market area. These charges are paid to Qwest for
each new customer that BTC, Inc. obtains. The cost of utilities, repairs and
maintenance, payroll expenses, long distance costs, cable TV programming, and
key system costs all increased to net against the decrease in Internet provision
costs, resulting in an overall $340,762 increase in cost of services for the
twelve-month period ended December 31, 2004.
Depreciation and amortization expense decreased $33,491, or 3.2%, for the
twelve-month period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003. While depreciation increased by approximately
$37,180 because of capital investments in plant to provide the new service
offerings in the Carroll, Iowa market, Breda's telephone service plant in its
older exchanges are beginning to be fully depreciated which resulted in an
offsetting decrease in depreciation and amortization expense of almost $75,000.
Investments in plant assets begun in 2004 will be completed in 2005, and will
result in additional depreciation expense during the 2005 year.
30
Selling, general and administration expenses increased $68,744, or 3.8%, for the
twelve-month period ended December 31, 2004, when compared to the same
twelve-month period in 2003. Customer operations increased $73,811, or 9.7%, for
the twelve-month period ended December 31, 2004, when compared to the same
twelve-month period in 2003. These increased costs were mainly attributable to
the increased labor, benefits, and advertising costs to service customers in
BTC, Inc.'s roll-out of its competitive local exchange services in the Carroll,
Iowa market. Property taxes also increased $36,440, or 27.7%, in the
twelve-month period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003. Corporate operation costs decreased $41,507, or
4.5%, in the twelve-month period ended December 31, 2004, when compared to the
twelve-month period ended December 31, 2003, and was attributable to a decrease
in legal, accounting, and computer leasing fees, and the decrease in labor and
benefit costs when the corporate department was short-staffed for a period of
three months during 2004.
OPERATING INCOME
The net result of the operating revenue and operating expenses was a increase of
$133,734, or 18.7%, in operating income for the twelve-month period ended
December 31, 2004, when compared to the same twelve-month period in 2003.
OTHER INCOME (EXPENSE)
Other income (expense) increased $193,323, or 16.3%, during the twelve-month
period ended December 31, 2004, when compared to the same twelve-month period in
2003. The increase was mainly attributable to three items. The first item is
interest and dividend income, which increased $111,420, or 40.1%, when comparing
the twelve-month period ended December 31, 2004, to the twelve-month period
ended December 31, 2003. The increase in interest and dividend income was due to
the increased investments in both temporary investments and marketable
securities on which Breda generates interest income. Breda also reported $52,336
of National Rural Telecommunications Cooperative patronage capital as interest
and dividend income during the twelve-month period ended December 31, 2004.
There was no corresponding entry during the twelve-month period ended December
31, 2003.
The second item is income from equity investments, which increased $276,172, or
26.6%, during the twelve-month period ended December 31, 2004, when compared to
the same twelve-month period in 2003. The income from equity investments
reported on Breda's financial statements is Breda's pro-rata share of the net
income or net loss of each equity investment, based on Breda's percentage of
ownership in each equity investment. The increase in equity investments reported
on Breda's income statement for the twelve-month period ended December 31, 2004
is a reflection of the net increases and decreases in the net operating income
of Breda's equity investments. Most of Breda's equity investments are in
cellular partnerships. The cellular partnerships have been under market pressure
from carriers such as AT&T, Sprint and Verizon, to renegotiate their roaming
contracts at lower rates. As a result, the cellular partnerships making up
Breda's equity investments are receiving less roaming revenue, even though the
number of customers and the minutes of use have increased. Breda anticipates
that these downward marketing pressures on roaming rates will continue for the
foreseeable future.
31
The third item is a $172,974 loss on a note receivable, which was recorded
during the twelve-month period ended December 31, 2004, and for which there was
no corresponding loss during the twelve-month period ended December 31, 2003.
Breda determined that its investment in Desktop Media, LLC, which is evidenced
by a note receivable on Breda's balance sheet, should be reviewed, and Breda
subsequently recorded an allowance on this note receivable. Breda determined
that for financial statement purposes, this allowance would allow for a
conservative estimate of the remaining collectible amount in default
proceedings. Breda will attempt to recover all monies invested in Desktop Media,
LLC through both the note receivable of $444,974 and the capital investment of
$60,000.
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE
Income before income taxes increased $327,057, or 17.2%, for the twelve-month
period ended December 31, 2004, when compared to the twelve-month period ended
December 31, 2003. The $327,057 increase was the result of a $133,734 increase
in operating income and a $193,323 increase in other income (expense).
INCOME TAXES
Income taxes increased $84,295, or 11.9%, for the twelve-month period ended
December 31, 2004, when compared to the same period in 2003. The increase is a
direct reflection of the increased income generated in the twelve-month period
ended December 31, 2004. The effective tax rate in 2004 was 35.7%, versus 37.4%
in 2003. The effective tax rate differs from the U.S. statutory rate due to
state income taxes, and the proportion of investments with state tax exemptions.
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The net income before cumulative effect of change in accounting principle, net
of tax, increased $242,762, or 20.4%, for the twelve-month period ended December
31, 2004, when compared to the twelve-month period ended December 31, 2003.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX
In March 2004, the Emerging Issues Task Force modified guidance related to
accounting for investments in limited liability companies with an effective date
for periods beginning after June 15, 2004. Accordingly, January 1, 2004, Breda
changed the method of accounting for its investment in Desktop Media, L.L.C.
from the cost method to the equity method.
In connection with the change to the equity method, Breda recorded a cumulative
adjustment of ($60,000), net of $21,407 tax, reflecting the prior years'
proportionate share of income and losses.
32
NET INCOME
Net income increased $204,169, or 17.2%, for the twelve-month period ended
December 31, 2004, when compared to the same period in 2003.
Liquidity and Capital Resources at Twelve-months ended December 31, 2004
Cash Flows
Cash flows from operations continue to be a steady source of funds for Breda.
Cash provided from operations for the twelve-month periods ended December 31,
2004 and December 31, 2003, was, respectively, $2,223,960 and $2,414,760. The
cash flows from operations for the twelve-month period ended December 31, 2004
were primarily attributable to a positive net income of $1,393,675, plus the
addition of non-cash expenses of $1,628,397 from depreciation, amortization,
deferred income taxes, amortization of investment tax credits, note receivable
discount, loss on impairment of note receivable, and cumulative effect of
accounting change, which were then offset by $737,497 of non-cash, equity income
in unconsolidated affiliates. The net increase in assets and liabilities of
$60,615 was also subtracted from net income to generate the net cash provided by
operating activities of $2,223,960.
The cash flows from operations for the twelve-month period ended December 31,
2003 were primarily attributable to a positive net income of $1,189,506, plus
the addition of non-cash expenses of $1,382,873 from depreciation, amortization,
deferred income taxes, amortization of investment tax credits, and notes
receivable discount, which were then offset by $362,616 of non-cash, equity
income in unconsolidated affiliates. The net decrease in assets and liabilities
of $204,997 was also added to generate the net cash provided by operating
activities of $2,414,760.
Cash used in investing activities was $1,987,889 for the twelve-month period
ended December 31, 2004, and $1,617,133 for the twelve-month period ended
December 31, 2003. Capital expenditures relating to ongoing business were
$585,873 for the twelve-month period ended December 31, 2004, and $1,008,124 for
the twelve-month period ended December 31, 2003. A building was purchased for
the relocation of Breda's and BTC, Inc.'s Carroll, Iowa services and operations
for $246,000 in January 2003. Breda received $160,000 in February 2003, as an
early payoff of a building contract note receivable. Capital used in investing
activities in 2003 included an additional $125,500 investment in RSA #1, Ltd. by
Prairie Telephone in November 2003. Breda expects capital expenditures for
non-building expenditures in 2005 to be higher than those made in 2004 because
Breda has determined to add switching capabilities to its Carroll, Iowa
marketing area.
Prairie Telephone advanced an additional $45,307 on its notes receivable to
Desktop Media, L.L.C. during the twelve-month period ended December 31, 2004.
Prairie Telephone also received payment on the outstanding Desktop Media, L.L.C.
note receivable of $52,333 during the twelve-month period ended December 31,
2004. Principal payments on the Desktop Media, L.L.C. note receivable of $48,000
had also been made during the twelve-month period ended December 31, 2003, in
addition to the $160,000 early payoff of a contract receivable by the purchaser
of Breda's former office building.
33
Cash used in financing activities was $404,817 for the twelve-month period ended
December 31, 2004, and $624,811 for the twelve-month period ended December 31,
2003. During the twelve-month period ended December 31, 2004, cash was used to
repay $144,183 of borrowings from the RTFC, to redeem common stock for $166,155,
and to pay dividends to the shareholders of $94,479. Breda used cash in 2003 to
repay $134,981 of RTFC long-term debt, to redeem common stock for $391,394, and
to pay dividends to the shareholders of $98,436. Breda funds the redemption of
its stock from its cash flows from operations. Breda redeemed 524 shares and
1,306 shares in, respectively, 2004 and 2003.
Working Capital
Working capital was $1,641,455 as of December 31, 2004, compared to working
capital of $1,839,172 as of December 31, 2003. The ratio of current assets to
current liabilities was 3.3 to 1.0 as of December 31, 2004, and 4.0 to 1.0 as of
December 31, 2003.
Breda had a $115,828 decrease in current assets during the twelve-month period
ended December 31, 2004, when compared to the year ended December 31, 2003. The
decrease in current assets was mainly attributable to a $297,644 decrease in
cash and temporary investments and a $92,494 increase in accounts receivable.
Cash was used to purchase $1,488,816 in long-term investments. Customer accounts
receivable as of December 31, 2004 were comparable to customer accounts
receivable as of December 31, 2003. The $92,494 increase in accounts receivable
was mainly attributable to the increased amounts owed to Breda and its
subsidiaries from interexchange carriers for the use of Breda's networks to
carry the interexchange carrier traffic to Breda's end users. Almost half of the
increase in the interexchange carrier receivable was attributable to one
carrier, AT&T, with whom Breda continues to work with in an attempt to receive
payment. AT&T initiated a billing dispute and requested verification of billed
rates for Breda's telephone services which were provided in the Carroll, Iowa,
area since October 2003. Breda has proved that Breda billed AT&T according to
the tariffed rates, and Breda is continuing to dialogue with AT&T to receive
payment on these charges. Other current assets increased $32,101 during the
twelve-month period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003. Other current assets are made up of prepaid
expenses such as computer maintenance fees, and employee benefit premiums which
are paid in advance for 2005, in the latter part of 2004. While the cash outlay
occurred in 2004, the expense will be recorded in 2005. Breda has determined to
enter the satellite Internet business by offering the National Rural Telephone
Coop product called Wildblue. Breda has recorded the $18,000 service
participation fee, which was required for participation and paid on May 20,
2004, as an Other Current Asset until such time as the program is launched in
2005.
Noncurrent assets, which mainly consist of longer-term investments, increased
$1,993,544 during the twelve-month period ended December 31, 2004, when compared
to the twelve-month period ended December 31, 2003. Prairie Telephone loaned
$500,000 to Desktop Media, L.L.C. on May 2, 2001, and advanced an additional
$45,307 on June 9, 2004 to fund operational expenses until revenues were
collected for services provided. This note is shown net of unamortized discounts
of $6,423 and $16,866, respectively, December 31, 2004 and December 31, 2003,
net of principal repayments of $52,333 and $48,000 respectively, December 31,
2004
34
and December 31, 2003, and net of an allowance of $172,974 as of December 31,
2004. $121,577 is included in long-term note receivables, and $144,000 is
included in short-term note receivables as of December 31, 2004. Breda's other
investments at cost decreased $63,212 for the twelve-month period ended December
31, 2004, when compared to the twelve-month period ended December 31, 2003,
because Prairie Telephone's investment in Desktop Media, L.L.C. is now reported
with the investments in unconsolidated affiliates at equity instead of with the
investments reported at cost. On September 17, 2003 Prairie Telephone had signed
a principal deferral agreement with Desktop Media, L.L.C. which deferred the
principal payments due in the months of September through December 2003, and
which also provided that Prairie Telephone's ownership in Desktop Media, L.L.C.
would be increased from 10% to 17% if at any time in the year 2004 Desktop
Media, L.L.C. was not able to generate a minimum sustainable monthly profit of
$36,000 or was unable to make a regularly scheduled principal payment. Both of
those stipulations were not met in the first quarter of 2004, and Prairie
Telephone accordingly acquired an additional 7% ownership of Desktop Media,
L.L.C.
Investments in unconsolidated affiliates at equity increased $737,497 for the
twelve-month period ended December 31, 2004, when compared to the twelve-month
period ended December 31, 2003. This increase represents Breda's pro rata share
of the net income or net loss of each equity investment, based on Breda's
percentage of ownership in each equity investment during the twelve-month period
ended December 31, 2004.
Current liabilities increased $81,889 for the twelve-month period ended December
31, 2004, when compared to the twelve-month period ended December 31, 2003.
Accounts payable increased $38,705, and represented a timing difference from
when invoices were received to when they were paid. Almost $22,000 of the
accounts payable increase was for programming fees invoices which had not been
received in time to be paid before December 31, 2004. Accrued taxes increased
$92,377 for the twelve-month period ended December 31, 2004, when compared to
the year ended December 31, 2003. The increase was caused by the increase in
accruals for federal and state income taxes as of December 31, 2004.
Common stock had a net increase of $558,138 during the twelve-month period ended
December 31, 2004, when compared to the twelve-month period ended December 31,
2003. The net overall increase resulted from the decrease in the number of
outstanding shares through the redemption of 524 shares of common stock at an
aggregate redemption price of $166,155, and the restatement of the outstanding
shares of stock on May 18, 2004 to a per share price of $326, or a total
adjustment of $724,293. The prior redemption value had been $303 per share. The
increase of $574,903 in retained earnings during the twelve-month period ended
December 31, 2004, when compared to the twelve-month period ended December 31,
2003, is the net effect of the $94,479 in dividends paid on April 1, 2004, the
year-to-date net income as of December 31, 2004 of $1,393,675, and the $724,293
stated value stock adjustment for the outstanding shares on May 18, 2004.
Breda anticipates that Breda's operational, investing and financing activities
will continue to mirror the activities of 2004, and that Breda's needs will be
funded internally through operations and temporary investments.
35
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)
---- --- -----------
Clifford Neumayer 56 President and
Director
Dean Schettler 52 Vice-President
and Director
Dave Grabner 56 Treasurer and
Director
Charles Thatcher 53 Director
Rick Anthofer 48 Director
John Wenck 66 Secretary and
Director
Neil Kanne 58 Director
Clifford Neumayer has been a director of Breda since April, 1996. His current
term as a director will end at the annual shareholders meeting which will be
held in 2005. He has also been a director of each of Breda's subsidiaries since
April, 1996. Mr. Neumayer was the Vice-President of Breda and each of Breda's
subsidiaries from May 7, 1996 through June 9, 2003, and he has been the
President of Breda and each of Breda's subsidiaries since June 9, 2003. Mr.
Neumayer has been self employed as a farmer since 1970.
Dean Schettler has been a director of Breda since April, 1997. His current term
as a director will end at the annual shareholders meeting which is held in 2006.
He has also been a director of each of Breda's subsidiaries since April, 1997.
Mr. Schettler was the President of Breda and each of Breda's subsidiaries from
May 11, 1998 through June 9, 2003, and he has been the Vice-President of Breda
and each of Breda's subsidiaries since June 9, 2003. 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.
Dave Grabner has been a director of Breda since April, 1999, and the Treasurer
of Breda since June, 2001. His current term as a director of Breda will end at
the annual shareholders meeting which will be held in 2005. He has also been a
director of each of Breda's subsidiaries since April, 1999, and the Treasurer of
each of Breda's subsidiaries since June, 2001. Mr. Grabner has been
self-employed as an electrician for approximately 34 years. He was also
previously
36
self-employed as a farmer.
Charles (Chuck) Thatcher has been a director of Breda since May, 2001. He was
re-elected as a director at the May 18, 2004 annual meeting of the shareholders,
and his current term as a director of Breda will end at the annual shareholders
meeting which will be held in 2007. 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 20
years. Midwest Wholesale Building Products is a wholesaler/retailer of lumber,
building products and materials.
Rick Anthofer was elected as a director of Breda by the board of directors at
its August 12, 2003 meeting to fill the vacancy that had been created by the
death of Roger Nieland, with Mr. Anthofer to serve until the annual shareholders
meeting which would be held in 2004. Mr. Anthofer was also elected as a director
of each of Breda's subsidiaries in August, 2003.
Mr. Anthofer was elected to serve the remaining two years of the three year term
of Mr. Nieland at the annual meeting of the shareholders which was held on May
18, 2004, and his term as a director will end at the annual meeting of the
shareholders which is held in 2006. Mr. Anthofer has been the vice president of
Breda Savings Bank, Breda, Iowa, since approximately September 15, 1999. He was
an agricultural and commercial loan officer and an assistant vice president at
Carroll County State Bank in Carroll, Iowa, for approximately thirteen years
prior to that time. Mr. Anthofer has also been a member of the Breda, Iowa City
Council since 1988. Mr. Anthofer had been a nominee for election as a director
of Breda in 2001.
John Wenck has been a director of Breda since April, 1997, and his current term
as a director of Breda will end at the annual shareholders meeting which is held
in 2006. He has also served as a director of each of Breda's subsidiaries since
May, 1997. Mr. Wenck has been the Secretary of Breda and each of Breda's
subsidiaries since June 2004. Mr. Wenck is currently self-employed as a farmer.
He was also previously employed by the United Parcel Service as a delivery
driver.
Neil Kanne was elected as a director of Breda at the annual meeting of Breda's
shareholders which was held on May 18, 2004, and his term as a director will end
at the annual shareholders meeting which will be held in 2007. Mr. Kanne also
became a director of each of Breda's subsidiaries in May, 2004. Mr. Kanne has
been self-employed as a farmer for approximately the last 34 years.
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 or until his or her death, resignation or removal. 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.
37
The officers of Breda are elected annually by the board of directors at its
annual organizational meeting, and hold office until the next annual
organizational meeting of the board of directors and until their successors are
chosen or until their death, resignation or removal. The annual organizational
meeting of the board of directors is the first regularly scheduled meeting of
the board of directors which follows the annual shareholders meeting, and is
generally held in June. 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 Breda. The officers of Breda are identified in the above table
and discussions.
Breda believes that two of its employees make a significant contribution to its
business. Those employees are as follows:
Name Age Position
---- --- --------
Robert J. Boeckman 43 Chief Operations
Officer and Co-Chief
Executive Officer
Jane A. Morlok 51 Chief Financial
Officer and Co-Chief
Executive 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 20, 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 31,170
shares of its common stock issued and outstanding as of December 31, 2004. Those
shares were held by approximately 563 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
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
38
conditions and restrictions are summarized in the following paragraphs.
The common stock can only be issued to:
o residents of the Breda or Lidderdale telephone exchange areas
served by Breda who subscribe to Breda's telephone services,
and
o entities which have their principal place of business in the
Breda or Lidderdale telephone exchange areas served by Breda
and which subscribe to Breda's telephone services.
As indicated, only residents of the Breda and Lidderdale telephone exchange
service areas served by Breda are eligible to purchase stock. Although Breda
also provides telephone services to Macedonia, Iowa and the surrounding area,
residents of Macedonia, Iowa and 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 cannot
buy common stock of Breda unless they also 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 the issuance of the
shares by Breda. Breda has not issued any shares since 1998, and Breda presently
has no plans to issue any additional shares.
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
39
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.
The board of directors has historically established the issuance price and the
redemption price at approximately 75% of the book value of Breda, but in 2002,
the board began to establish those prices at approximately 70% 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 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 that it was appropriate to make a new determination of the issuance
price and redemption price given the sale of Breda's direct broadcast satellite
operation on January 11, 1999. 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, and was therefore not included in the 1998 year-end financial
statements which had been 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 annual shareholders meeting for 2001.
40
The board of directors determined to again 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.
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 has followed Breda's historical practices since that
time, by announcing a new issuance and redemption price of:
o $258 per share at the May 16, 2001 annual meeting of the
shareholders,
o $280 per share at the May 21, 2002 annual meeting of the
shareholders,
o $303 per share at the May 20, 2003 annual meeting of the
shareholders, and
o $326 per share at the May 18, 2004 annual meeting of the
shareholders.
The per share amount was established based upon Breda's book value as reflected
in its most recent year-end audited financial statements, consistent with
Breda's historical practices, except that, since 2002, the redemption price has
been set at approximately 70% of the book value of Breda.
The board of directors currently intends to continue to address this issue on an
annual basis consistent with the above described historical practices of the
board of directors, but 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. The
board of directors will, accordingly, establish a new issuance price and
redemption price effective at the 2005 annual meeting of the shareholders, and
that price will be set at
41
approximately 70% of the book value of Breda as of December 31, 2004. Breda
estimates that the issuance price and redemption price that will be set at the
2005 annual meeting of the shareholders will be approximately $357.00.
The issuance and redemption price as determined by the board of directors has
increased from $27 per share in 1995 to the current $326 per share amount which
was established at the 2004 annual meeting of the shareholders. 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.
Breda's repurchases of its common stock are discussed below in this section.
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. There are no current plans,
however, to arrange any other auctions in the future. Breda does maintain 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, 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.
42
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. 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.
Given that repurchases of common stock by Breda currently are the primary method
for a shareholder to be able to sell the shareholder's shares, the following
paragraphs provide additional information on Breda's purchases of its common
stock from its shareholders from 1996 through 2004.
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 of its
common stock from nine different shareholders, at a purchase price of $31 per
share. Over the period of February 21, 1997 through March 1, 1998, Breda
repurchased one thousand nine hundred and ninety-six shares of its common stock
from fourteen different shareholders, at a purchase price of $41 per share. Over
the period of March 2, 1998 through December 31, 1998, Breda repurchased three
hundred and fifty-eight shares of its common stock from five different
shareholders, at a purchase price of $64 per share.
No shares were repurchased by Breda in 1999, except that in November, 1999,
Breda effectuated 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 $149 per share. 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.
During 2000, Breda repurchased four hundred forty-one shares of its common stock
from fourteen different shareholders, at a purchase price of $235 per share.
During 2001, Breda repurchased a total of 2,216 shares of its common stock from
twenty-six different shareholders. Two hundred twenty of those shares were
purchased at $235 per share, and the rest of those shares (1,996) were purchased
at $258 per share.
Breda repurchased a total of 2,025 shares of its common stock during 2002 from
thirty-two different shareholders. Two hundred eighty-seven of those shares were
purchased for $258 per share. The rest of those shares (1,738) were purchased
for $280 per share.
43
Breda repurchased a total of 1,306 shares of its common stock during 2003 from
23 different shareholders. One hundred eighty-eight of those shares were
purchased at $280 per share, and the rest of those shares (1,118) were purchased
for $303 per share.
During 2004, Breda repurchased a total of 524 shares of its common stock from 13
different shareholders. Two hundred three of those shares were purchased at $303
per share. The rest of those shares (321) were purchased for $326 per share.
There were transfers among the shareholders of Breda during some of 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 in this Item.
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 over 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 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.
The marketability and value of Breda's shares of common stock may also be
limited or adversely affected 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,
and continuing 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, 2004, there were 22 shareholders with multiple voting rights
arising from their prior ownership of the former Class A stock, and they have
one vote for each share of the former Class A stock that was held by them on
February 28, 1995. Those 22 shareholders held a total of 61 shares of Class A
stock on that date.
44
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 determined in late 1999 to allow shareholders to
advise Breda of the fact that they desire to sell any or all of their shares of
Breda's common stock to any qualified buyer, and to allow qualified buyers to
advise Breda of the fact that they desire to purchase shares of Breda's common
stock from other shareholders of Breda. Breda will keep a list of those
shareholders and qualified buyers, and make the list available to all of the
shareholders and qualified buyers on the list. A qualified buyer is a person who
is a resident of the Breda or Lidderdale telephone exchange areas served by
Breda who subscribes to Breda's telephone services, or an entity which has its
principal place of business in the Breda or Lidderdale telephone exchange areas
served by Breda and which subscribes to Breda's telephone services.
A person or entity cannot, however, be a qualified buyer if the person or entity
already owns more than 1% of the total issued and outstanding shares of common
stock of Breda. Also, a qualified buyer cannot purchase shares from any
shareholder of Breda to the extent that the shares purchased by the qualified
buyer would cause the qualified buyer to own more than 1% of the total issued
and outstanding shares of common stock of Breda. If a person owns 5% or more of
the ownership interests of an entity which owns shares of Breda's common stock,
the shares of Breda's common stock held by that entity and by the person will be
added together for determining whether the 1% limitation is exceeded. The 1%
limitation is set forth in the Amended and Restated Articles of Incorporation of
Breda.
The terms of any sale between a shareholder and a qualified buyer will be
negotiated by them, and no one is required to sell or buy any shares because
their name is on the list. Breda also retains its right to purchase any shares
which are intended to be 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.
During the calendar year 2000, five separate sales of shares occurred between
shareholders on the list. 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 any of these shares.
45
During the calendar year 2001, three separate sales of shares occurred between
shareholders on the list. 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 any of these shares.
During the calendar year 2002, three separate sales of shares occurred between
shareholders on the list. Two sales involved two shares which were sold for $258
per share. The other sale involved three shares which were also sold for $258
per share. Breda elected not to exercise its right of first refusal on any of
these shares.
During the calendar year 2003, one sale occurred between shareholders on the
list. The sale involved two shares, which were sold for $280 per share. Breda
elected not to exercise its right of first refusal on any of these shares.
There were no sales of shares between shareholders on the list during the
calendar year 2004.
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 declared seven dividends to its shareholders since Breda was
incorporated in 1964. The dividends are as follows:
o The first dividend was declared on March 15, 1999, and was in
the amount of $3 per share, resulting in an aggregate dividend
of $113,166.
o The second dividend was declared on March 13, 2000, and was in
the amount of $3 per share, resulting in an aggregate dividend
of $113,046.
o The third dividend was declared on March 12, 2001, and was in
the amount of $3 per share, resulting in an aggregate dividend
of $111,087.
o The fourth dividend was declared on April 8, 2002, and was in
the amount of $3 per share, resulting in an aggregate dividend
of $104,214.
o The fifth dividend was declared on March 10, 2003, and was in
the amount of $3 per share, resulting in an aggregate dividend
of $98,436.
o The sixth dividend was declared on March 16, 2004, and was in
the amount of $3 per share, resulting in an aggregate dividend
of $94,479.
o The seventh dividend was declared on March 1, 2005, and was in
the amount of $7 per share, resulting in an aggregate dividend
of $218,190.
Payment of dividends is within the discretion of Breda's board of directors, and
out of funds legally available therefor as provided in the Iowa Business
Corporation Act. Breda's ability to
46
declare and pay dividends is also restricted by some of the covenants in its
loan agreements with the Rural Telephone Finance Cooperative ("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.
The 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 also preclude Breda from being able to
repurchase its shares of stock as otherwise discussed in this section.
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 2004. 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 or exchangeable into or for common stock of Breda. Breda's shares of
common stock are not convertible into any other securities.
AVAILABILITY OF OTHER INFORMATION
Breda will provide to a 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, 2004. The annual report on Form 10-KSB will be provided without
charge. Shareholders should direct any such written request to Breda at the
following address:
Breda Telephone Corp.
112 East Main
P.O. Box 190
Breda, Iowa 51436
The request should be directed to the attention of Clifford Neumayer, President
of Breda.
47
FINANCIAL STATEMENTS
The following pages are certain financial statements of Breda with respect
to the years ended December 31, 2003 and December 31, 2004.
[The remainder of this page is intentionally left blank.]
48
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
49
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
Contents
Page
Independent Auditors' Report 51
Consolidated Financial Statements:
Consolidated Balance Sheets 52 - 53
Consolidated Statements of Income 54
Consolidated Statements of Stockholders' Equity 55
Consolidated Statements of Cash Flows 56 - 57
Notes to Consolidated Financial Statements 58 - 74
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Breda Telephone Corporation and Subsidiaries
Breda, Iowa
We have audited the accompanying consolidated balance sheets of Breda Telephone
Corporation (an Iowa corporation) and subsidiaries as of December 31, 2004 and
2003, 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 2004 and 2003, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ Kiesling Associates LLP
West Des Moines, Iowa
January 27, 2005
51
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,036,804 $ 1,205,550
Marketable securities 232,645 361,543
Accounts receivable 656,036 563,542
Interest receivable 65,210 52,742
Current portion of note receivable 144,000 144,000
Inventory, at average cost 103,617 108,007
Other 57,508 25,407
Deferred income taxes 49,143 --
----------- -----------
2,344,963 2,460,791
----------- -----------
OTHER NONCURRENT ASSETS
Marketable securities 5,417,170 3,928,354
Investments in unconsolidated affiliates at equity 4,679,772 3,942,275
Other investments at cost 793,935 857,147
Goodwill 896,812 896,812
Note receivable, less allowance of $172,974 in 2004 121,577 291,134
----------- -----------
11,909,266 9,915,722
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 4,703,083 5,141,009
----------- -----------
TOTAL ASSETS $18,957,312 $17,517,522
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
52
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 154,013 $ 144,183
Accounts payable 272,507 233,802
Accrued taxes 198,969 106,592
Other 78,019 137,042
----------- -----------
703,508 621,619
----------- -----------
LONG-TERM DEBT, less current portion 1,479,448 1,633,461
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES 876,668 497,795
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized, 31,170
and 31,694 shares issued and outstanding at $326 and $303 stated
values, respectively 10,161,420 9,603,282
Retained earnings 5,736,268 5,161,365
----------- -----------
15,897,688 14,764,647
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,957,312 $17,517,522
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
53
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004 and 2003
2004 2003
----------- -----------
OPERATING REVENUES $ 6,774,357 $ 6,264,608
----------- -----------
OPERATING EXPENSES
Cost of services 3,012,257 2,671,495
Depreciation and amortization 1,023,799 1,057,290
Selling, general, and administrative 1,890,344 1,821,600
----------- -----------
5,926,400 5,550,385
----------- -----------
OPERATING INCOME 847,957 714,223
----------- -----------
OTHER INCOME (EXPENSES)
Interest and dividend income 389,110 277,690
Interest expense (126,737) (136,909)
Income from equity investments 1,315,574 1,039,402
Loss on note receivable (172,974) --
Other, net (26,179) 5,288
----------- -----------
1,378,794 1,185,471
----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 2,226,751 1,899,694
----------- -----------
INCOME TAXES 794,483 710,188
----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,432,268 1,189,506
----------- -----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (38,593) --
----------- -----------
NET INCOME $ 1,393,675 $ 1,189,506
=========== ===========
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER COMMON SHARE $ 45.70 $ 36.89
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (1.23) --
----------- -----------
NET INCOME PER COMMON SHARE $ 44.47 $ 36.89
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
54
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
December 31, 2004 and 2003
Common Stock
-------------------------- Retained
Shares Amount Earnings Total
------------ ------------ ------------ ------------
Balance at December 31, 2002 33,000 $ 9,240,000 $ 4,824,971 $ 14,064,971
Comprehensive income:
Net income 1,189,506 1,189,506
Dividends paid (98,436) (98,436)
Common stock redeemed, net (1,306) (391,394) (391,394)
Stated value stock adjustment 754,676 (754,676)
------------ ------------ ------------ ------------
Balance at December 31, 2003 31,694 9,603,282 5,161,365 14,764,647
Comprehensive income:
Net income 1,393,675 1,393,675
Dividends paid (94,479) (94,479)
Common stock redeemed, net (524) (166,155) (166,155)
Stated value stock adjustment 724,293 (724,293)
------------ ------------ ------------ ------------
Balance at December 31, 2004 31,170 $ 10,161,420 $ 5,736,268 $ 15,897,688
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
55
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 and 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,393,675 $ 1,189,506
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting principle 60,000 --
Depreciation and amortization 1,023,799 1,057,290
Deferred income taxes 391,836 349,694
Amortization of investment tax credits (9,769) (9,769)
Equity income in unconsolidated affiliates, net of distributions
received of $578,077 and $676,786 in 2004 and 2003, respectively (737,497) (362,616)
Note receivable discount (10,443) (14,342)
Loss on impairment of note receivable 172,974 --
Changes in assets and liabilities:
(Increase) Decrease in:
Receivables (104,962) 287,437
Prepayments (32,102) 61,174
Inventory 4,390 (16,893)
Increase (Decrease) in:
Accounts payable 38,705 (29,077)
Accrued taxes 92,377 (60,152)
Other (59,023) (37,492)
----------- -----------
Net cash provided by operating activities 2,223,960 2,414,760
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (585,873) (1,008,124)
Purchase of investments (2,161,504) (1,747,160)
Purchase of equity investments -- (125,500)
Purchase of other investments - at cost (3,537) (3,566)
Issuance of notes receivable (45,307) --
Proceeds from the sale of investments 749,250 1,052,898
Proceeds from the sale of other investments - at cost 6,749 6,319
Collections of note receivable 52,333 208,000
----------- -----------
Net cash used in investing activities (1,987,889) (1,617,133)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long term debt (144,183) (134,981)
Common stock redeemed, net (166,155) (391,394)
Dividends paid (94,479) (98,436)
----------- -----------
Net cash used in financing activities $ (404,817) $ (624,811)
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
56
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 and 2003
2004 2003
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents $ (168,746) $ 172,816
Cash and Cash Equivalents at Beginning of Year 1,205,550 1,032,734
----------- ----------
Cash and Cash Equivalents at End of Year $ 1,036,804 $1,205,550
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
57
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Breda Telephone Corporation (herein referred to as "the Company") is a
provider of telecommunications exchange and local access services, cable
television services and internet services in a service area located
primarily in western Iowa. The company is also involved in retail sales of
cellular equipment and service plans for cellular partnerships of which it
owns interests, and sales of other telecommunications equipment.
Basis of Presentation
The accounting policies of the Company and its subsidiaries conform to
accounting principles generally accepted in the United States of America.
Management uses estimates and assumptions in preparing its consolidated
financial statements. Those estimates and assumptions affect the reported
amounts of assets, liabilities, revenues, and expenses, and the disclosure
of contingent revenues and expenses. Telephone operations reflect
practices appropriate to the telephone industry. The accounting records of
the telephone companies are maintained in accordance with the Uniform
System of Accounts for Class A and B Telephone Companies prescribed by the
Federal Communications Commission (FCC) as modified by the state
regulatory authority.
The accounting records for the Company's cable television operations are
maintained in accordance with the Uniform System of Accounts for CATV
Companies prescribed by the National Association of Regulatory Utility
Commissioners.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its 100% owned subsidiaries, Prairie Telephone Company, Inc.,
Tele-Services, Ltd., and Westside Independent Telephone Company. All
material intercompany transactions have been eliminated in consolidation.
Cash Equivalents
All highly liquid investments with a maturity of three months or less at
the time of purchase are considered cash equivalents.
Investments
Marketable debt and equity securities bought and held principally for
selling in the near future are classified as trading securities and
carried at fair value. Unrealized holding gains and losses on trading
securities are reported in earnings. Marketable debt and equity securities
classified as available-for-sale are carried at fair value with unrealized
holding gains and losses recorded as a separate component of stockholders'
equity.
58
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments, (Continued)
Debt securities for which the Company has both the positive intent and
ability to hold to maturity are classified as held-to-maturity and are
carried at amortized cost. The Company uses the FIFO method of computing
realized gains and losses.
Nonmarketable equity investments, over which the Company has significant
influence or a 20% ownership, are reflected on the equity method. Other
nonmarketable equity investments are stated at cost.
Inventory
Inventory includes both merchandise held for resale and material and
supplies. Merchandise held for resale is recorded at the lower of cost or
market with cost determined by the average cost method. Materials and
supplies, used in the construction of the Company's facilities to provide
telecommunications services, are recorded at average cost.
Goodwill
Goodwill is deemed to have an indefinite life and is stated at the lower
of cost or fair value. The asset is subject to periodic impairment tests.
Property, Plant and Equipment
Telephone and cable television plant are capitalized at original cost
including the capitalized cost of salaries and wages, materials, certain
payroll taxes, employee benefits and interest incurred during the
construction period.
The Company provides for depreciation for financial reporting purposes on
the straight-line method by the application of rates based on the
estimated service lives of the various classes of depreciable property.
These estimates are subject to change in the near term.
Renewals and betterments of units of property are charged to telephone and
cable television plant in service. When plant is retired, its cost is
removed from the asset account and charged against accumulated
depreciation less any salvage realized. No gains or losses are recognized
in connection with routine retirements of depreciable property. Repairs
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.
59
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived Assets
The Company would provide for impairment losses on long-lived assets when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Based on current conditions, management does not believe
any of its long-lived assets are impaired.
Income Taxes
Income taxes are accounted for using a liability method and provide for
the tax effects of transactions reported in the consolidated financial
statements including both taxes currently due and deferred. Deferred taxes
are adjusted to reflect deferred tax consequences at current enacted tax
rates. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred taxes arise from
differences between the book and tax basis of plant assets, partnership
investments and goodwill. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which
will either be taxable or deductible, when the assets and liabilities are
recovered or settled.
Investment tax credits (ITC), which were deferred prior to the Tax Reform
Act of 1986, are being amortized over the regulatory 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, internet and cable television service revenues are
recognized over the period a subscriber is connected to the network.
Network access and long distance service revenues are derived from charges
for access to the Company's local exchange network. The interstate portion
of access revenues is based on an average schedule settlement formula
administered by the National Exchange Carrier Association (NECA) which is
regulated by the FCC. The intrastate portion of access revenues is billed
based upon the Company's tariff for access charges filed with the Iowa
Utilities Board (IUB). The charges developed from these tariffs are used
to bill the connecting long distance provider and revenues are recognized
in the period the traffic is transported based on the minutes of traffic
carried. Long distance revenues are recognized at the time a call is
placed based on the minutes of traffic processed at contracted rates.
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. Cellular sales and commission
revenues are recognized at the time the customer signs up for service.
60
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company uses the reserve method to recognize uncollectible customer
accounts.
Reclassifications
Certain reclassifications have been made to the 2003 consolidated
financial statements to conform with the 2004 presentation.
NOTE 2. MARKETABLE SECURITIES
The amortized cost and fair value of held-to-maturity securities are:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 2004
Held-to-Maturity:
Municipal bonds $ 5,451,900 $ 84,889 $ (33,005) $ 5,503,784
Government securities 197,915 394 (3,110) 195,199
----------- ----------- ----------- -----------
$ 5,649,815 $ 85,283 $ (36,115) $ 5,698,983
=========== =========== =========== ===========
December 31, 2003
Held-to-Maturity:
Municipal bonds $ 4,070,876 $ 127,532 $ (34,429) $ 4,163,979
Government securities 219,021 -- (3,830) 215,191
----------- ----------- ----------- -----------
$ 4,289,897 $ 127,532 $ (38,259) $ 4,379,170
=========== =========== =========== ===========
2004 2003
----------- -----------
Amounts classified as:
Current $ 232,645 $ 361,543
Noncurrent 5,417,170 3,928,354
----------- -----------
Total $ 5,649,815 $ 4,289,897
=========== ===========
61
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 2. MARKETABLE SECURITIES (Continued)
The amortized cost and fair value of marketable debt securities at
December 31, 2004, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because the issuers of
the securities may have the right to prepay obligations without prepayment
penalties.
Amortized Cost Fair Value
-------------- ------------
Due in one year or less $ 232,645 $ 234,743
Due after one year through three years 1,541,591 1,565,335
Due after three years through five years 909,062 930,168
Due after five years 2,966,517 2,968,737
---------- ----------
$5,649,815 $5,698,983
========== ==========
NOTE 3. NOTE RECEIVABLE
Note receivable consists of the following:
2004 2003
--------- --------
Desktop Media, L.L.C - 5.25% $ 438,551 $435,134
Allowance (172,974) --
--------- --------
265,577 435,134
Less current portion 144,000 144,000
--------- --------
$ 121,577 $291,134
========= ========
The note with Desktop Media, L.L.C., (Desktop) had an original balance of
$500,000 and matures in 2006. Interest on the note balance accrues at the
rate of prime plus 1 percent (prime + 1%) per annum. The interest rate is
adjusted on the anniversary of the note. The note is shown net of
unamortized discounts of $6,423 and $16,866 at December 31, 2004 and 2003,
respectively. Principal payments of $12,000 plus interest are due the
first of each month beginning May of 2003 and shall be due each month
thereafter until paid in full. On September 17, 2003 the Company signed a
principal deferral agreement with Desktop to defer principal payments due
in the months of September through December 2003.
The Company has recorded an allowance on the note receivable due to the
fact that it has not received the scheduled monthly principal payments
required by the note agreement. Desktop has not generated sufficient cash
flows to be able to make the required principal payments. The Company has
recorded this allowance based on its estimate of amounts that it may
possibly be unable to collect on this note receivable.
During 2004, the Company advanced an additional $45,307 to Desktop and
received collections of $52,333.
62
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 4. OTHER INVESTMENTS
INVESTMENTS IN UNCONSOLIDATED AFFILIATES AT EQUITY
Investments in unconsolidated affiliates at equity include investments in
partnerships, limited liability companies and joint ventures as follows:
2004 2003
---------- ----------
Alpine Communications, L.C $1,596,610 $1,300,446
West Iowa Cellular, Inc. 903,684 704,972
RSA #1, Ltd. 990,394 836,306
RSA #7, Ltd. 295,099 275,062
RSA #9, Ltd 786,056 704,737
Quad County Communications 73,607 86,350
Carroll County Wireless, L.L.C 25,193 25,273
Guthrie Group, L.L.C 9,129 9,129
---------- ----------
$4,679,772 $3,942,275
========== ==========
The Company has a 17.42% ownership interest in Alpine Communications, L.C.
(Alpine) at December 31, 2004 and 2003. Alpine owns and operates several
wireline telephone exchanges in northeastern Iowa, along with providing
internet and cable television services in and around its wireline service
territory.
The following is a summary of condensed financial information pertaining
to the company described above as of September 30, 2004 and 2003 and the
twelve months then ended.
2004 2003
----------- -----------
Assets $18,866,021 $18,293,619
Liabilities 10,652,925 11,771,548
----------- -----------
Equity $ 8,213,096 $ 6,522,071
=========== ===========
Revenues $ 7,439,098 $ 7,206,047
Expenses 5,148,073 6,133,493
----------- -----------
Net Income $ 2,291,025 $ 1,072,554
=========== ===========
The Company's percentage ownership interests in West Iowa Cellular, Inc.,
RSA #1, Ltd., RSA #7, Ltd., and RSA #9, Ltd. are 25%, 10.3%, 7.1% and
16.7%, respectively, at December 31, 2004 and 2003. All of these
partnerships provide cellular telephone services within their respective
rural service areas.
63
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 4. OTHER INVESTMENTS (Continued)
The following is a summary of condensed financial information pertaining
to the companies described above as of September 30, 2004 and 2003 and the
twelve months then ended.
2004
West Iowa
Cellular, Inc. RSA #1 RSA #7 RSA #9
------------- ------------- ------------- -------------
Assets $ 3,876,815 $ 11,142,981 $ 7,994,111 $ 5,966,686
Liabilities 262,082 2,423,724 3,251,422 1,250,446
------------- ------------- ------------- -------------
Equity $ 3,614,733 $ 8,719,257 $ 4,742,689 $ 4,716,240
============= ============= ============= =============
Revenues $ 1,407,450 $ 6,652,260 $ 11,920,318 $ 9,727,747
Expenses 612,604 5,415,231 9,213,821 7,873,008
------------- ------------- ------------- -------------
Net Income $ 794,846 $ 1,237,029 $ 2,706,497 $ 1,854,739
============= ============= ============= =============
2003
West Iowa
Cellular, Inc. RSA #1 RSA #7 RSA #9
------------- ------------- ------------- -------------
Assets $ 2,526,844 $ 12,455,479 $ 7,877,097 $ 5,641,403
Liabilities 201,742 2,478,047 3,333,830 913,065
------------- ------------- ------------- -------------
Equity $ 2,325,102 $ 9,977,432 $ 4,543,267 $ 4,728,338
============= ============= ============= =============
Revenues $ 1,943,467 $ 8,134,324 $ 10,501,008 $ 8,638,319
Expenses 1,771,848 3,057,513 8,210,286 7,522,836
------------- ------------- ------------- -------------
Net Income $ 171,619 $ 5,076,811 $ 2,290,722 $ 1,115,483
============= ============= ============= =============
Additionally, the Company has a 17% ownership in Desktop at December 31,
2004 and a 10% ownership at December 31, 2003. The ownership percentage
increased due to Desktop being unable to meet the covenant requirements
outlined in the principal deferral agreement. Desktop operates in
southeastern Minnesota and is a provider of internet and telephone
services.
This investment is accounted for under the equity method with the Company
recognizing their proportionate share of income and losses to the extent
that the investment exceeds losses. Accordingly, the recorded investment
amount in Desktop has been eliminated at December 31, 2004.
64
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 4. OTHER INVESTMENTS (Continued)
The following is a summary of condensed financial information pertaining
to the company described above as of December 31, 2004 and the twelve
months then ended.
2004
-----------
Assets $ 821,038
Liabilities 1,881,144
-----------
Equity $(1,060,106)
===========
Revenues $ 2,244,734
Expenses 2,254,831
-----------
Net Loss $ (10,097)
===========
Additionally, the Company has a 33.33% ownership interest in Quad County
Communications (Quad County) at December 31, 2004 and 2003. This entity
owns and operates a fiber optic network.
The following is a summary of condensed financial information pertaining
to the company described above as of December 31, 2004 and 2003 and the
twelve months then ended.
2004 2003
--------- ---------
Assets $ 228,123 $ 266,352
Liabilities 7,302 7,302
--------- ---------
Equity $ 220,821 $ 259,050
========= =========
Revenues $ 20,762 $ 21,547
Expenses 58,991 58,710
--------- ---------
Net Loss $ (38,229) $ (37,163)
========= =========
The Company's percentage interests in Carroll County Wireless, L.L.C. and
Guthrie Group, L.L.C. are 33.33% and 25%, respectively, at December 31,
2004 and 2003. Both companies have purchased the licenses to provide
personal communication services (PCS); however, neither company has begun
providing PCS services as of December 31, 2004. The operations of these
entities are immaterial to the consolidated financial statements.
Investments above with less than a 20% ownership are carried at equity due
to the level of influence the Company has with respect to each investment.
65
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 4. OTHER INVESTMENTS (Continued)
LONG-TERM INVESTMENTS AT COST
Long-term investments at cost include nonmarketable equity securities and
certificates as follows:
2004 2003
-------- --------
NECA Services, Inc. - stock $300,000 $300,000
Rural Telephone Finance Cooperative - certificates 186,062 189,317
Rural Telephone Bank - stock 165,789 165,789
Iowa Network Services - stock 78,705 78,705
Desktop Media, L.L.C -- 60,000
NRTC Patronage Capital - certificates 52,379 52,336
Other 11,000 11,000
-------- --------
$793,935 $857,147
======== ========
NOTE 5. GOODWILL
Goodwill consists of the following:
2004 2003
-------- --------
Balance, Beginning of Year $896,812 $896,812
Goodwill acquired -- --
Goodwill impairment -- --
-------- --------
Balance, End of Year $896,812 $896,812
======== ========
The Company annually accesses its recorded balances of goodwill and
indefinite lived intangible assets. As a result, the Company determined no
impairment needed to be recorded for the years ended December 31, 2004 and
2003.
66
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
2004 2003
----------- -----------
Telephone plant in service:
Land $ 41,508 $ 41,508
Buildings 1,585,126 1,580,697
Other general support assets 1,623,841 1,571,269
Central office assets 2,842,957 2,618,151
Cable and wire facilities 4,666,076 4,452,624
Other plant and equipment 872,009 838,091
----------- -----------
11,631,517 11,102,340
----------- -----------
Cable television plant in service:
Land 6,086 6,086
Buildings 127,937 127,937
Other plant and equipment 156,799 180,098
Towers, antennas and head end equipment 1,583,090 1,516,105
Cable and wire facilities 1,597,823 1,573,524
Franchises 32,992 32,992
----------- -----------
3,504,727 3,436,742
----------- -----------
Total property, plant and equipment 15,136,244 14,539,082
Less accumulated depreciation 10,433,161 9,468,930
----------- -----------
4,703,083 5,070,152
Plant under construction -- 70,857
----------- -----------
$ 4,703,083 $ 5,141,009
=========== ===========
Telephone cable and wire facilities of approximately $675,000 and cable
television head end equipment of approximately $500,000 was fully
depreciated in 2004. Depreciation on depreciable property resulted in
composite rates of 7.2% and 7.5% for 2004 and 2003, respectively.
67
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 7. INCOME TAXES
Income taxes reflected in the Consolidated Statements of Income consist of
the following:
2004 2003
-------------------------
Federal income taxes:
Current tax expense $ 323,950 $ 238,562
Deferred tax expense 299,445 264,048
Amortization of investment tax credits (9,769) (9,769)
State income taxes:
Current tax expense 88,466 131,701
Deferred tax expense 92,391 85,646
--------- ---------
Total income tax expense $ 794,483 $ 710,188
========= =========
Deferred federal and state tax liabilities and assets reflected in the
Consolidated Balance Sheets are summarized as follows:
2004 2003
-------------------------
Deferred Tax Liabilities
Federal $ 758,905 $ 426,338
State 227,196 139,907
--------- ---------
Total Deferred Tax Liabilities 986,101 566,245
--------- ---------
Deferred Tax Assets
Federal (123,446) (90,324)
State (39,831) (44,934)
--------- ---------
Total Deferred Tax Assets (163,277) (135,258)
--------- ---------
Net Deferred Tax Liabilities $ 822,824 $ 430,987
========= =========
Current Portion $ (49,143) $ --
Long-term Portion 871,967 430,987
--------- ---------
Net Deferred Tax Liabilities $ 822,824 $ 430,987
========= =========
The tax provision differs from the expense that would result from applying
the federal statutory rates to income before income taxes as the result of
state income taxes and the amortization of investment tax credits.
Cash paid for income taxes and estimated income taxes for 2004 and 2003
totaled $310,000 and $425,260, respectively.
68
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 7. INCOME TAXES (Continued)
The following is a reconciliation of the statutory federal income tax rate
of 34% to the Company's effective income tax rate:
2004 2003
------ ------
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit 10.1% 10.1%
Amortization of investment tax credits (0.1)% (0.1)%
Dividends received deduction (1.5)% (1.4)%
Tax exempt interest (5.0)% (3.7)%
Other (1.7)% (1.5)%
------ ------
Effective income tax rate 35.8% 37.4%
====== ======
The Company files consolidated tax returns including their subsidiaries,
Prairie Telephone Company, Inc., Westside Independent Telephone Company
and Tele-Services, Ltd.
NOTE 8. LONG-TERM DEBT
Long-term debt consists of:
2004 2003
---------- ----------
Rural Telephone Finance Cooperative
7.35% (Fixed Rate) $1,633,461 $1,777,644
Less current portion 154,013 144,183
---------- ----------
$1,479,448 $1,633,461
========== ==========
The annual requirements for principal payments on long-term debt for the
next five years are as follows:
2005 $ 154,013
2006 164,513
2007 175,729
2008 187,710
2009 200,507
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.
69
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 8. LONG-TERM DEBT (Continued)
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
6.4% at December 31, 2004. No funds were advanced under the line at
December 31, 2004.
In addition, the Company 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 6.4% at December 31, 2004. No funds were advanced under the line
at December 31, 2004.
Cash paid for interest net of amounts capitalized for 2004 and 2003
totaled $126,737 and $136,909, respectively.
NOTE 9. OPERATING SEGMENTS INFORMATION
The Company organizes its business into three reportable segments: local
exchange carrier (LEC) services, broadcast services and internet service
provider (ISP) services. The LEC services segment provides telephone, data
services and other services to customers in local exchanges. The broadcast
services segment provides cable television services to customers in Iowa
and Nebraska. The ISP services segment provides internet access to
customers within the local exchanges and the surrounding areas.
The Company's reportable business segments are strategic business units
that offer different products and services. Each reportable segment is
managed separately primarily because of different products, services and
regulatory environments. LEC segments have been aggregated because of
their similar characteristics.
70
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 9. OPERATING SEGMENTS INFORMATION (Continued)
The segment's accounting policies are the same as those described in the
summary of significant accounting policies.
Local Internet
Exchange Service
2004 Carrier Broadcast Provider Other Total
------------------------------- ----------- ----------- ----------- ----------- -----------
Revenues and sales $ 5,320,184 $ 849,691 $ 604,482 $ -- $ 6,774,357
Intersegment income and sales -- -- -- -- --
Interest income 381,895 7,057 158 -- 389,110
Interest expense 126,737 -- -- -- 126,737
Depreciation and amortization 690,546 254,777 78,476 -- 1,023,799
Income tax expense (benefit) 943,381 (139,049) (9,849) -- 794,483
Segment profit (loss) 1,610,939 (208,573) (8,691) -- 1,393,675
Segment assets 16,391,555 1,063,416 1,502,341 -- 18,957,312
Expenditures for segment assets 360,566 97,231 128,076 -- 585,873
2003
-------------------------------
Revenues and sales $ 4,728,495 $ 909,292 $ 626,821 $ -- $ 6,264,608
Intersegment income and sales -- -- -- -- --
Interest income 273,485 4,052 152 -- 277,689
Interest expense 136,909 -- -- -- 136,909
Depreciation and amortization 680,483 257,039 119,768 -- 1,057,290
Income tax expense (benefit) 919,171 (100,238) (108,745) -- 710,188
Segment profit (loss) 1,490,238 (144,246) (156,486) -- 1,189,506
Segment assets 14,882,852 1,267,811 1,366,859 -- 17,517,522
Expenditures for segment assets 325,645 30,828 651,651 -- 1,008,124
71
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 9. OPERATING SEGMENTS INFORMATION (Continued)
Reconciliation of Segment Information 2004 2003
------------------------------------- ----------- -----------
REVENUES:
Total revenues for reportable segments $ 6,774,357 $ 6,264,608
Other revenues -- --
----------- -----------
Consolidated Revenues $ 6,774,357 $ 6,264,608
=========== ===========
PROFIT:
Total profit for reportable segments $ 1,393,675 $ 1,189,506
Other profit (loss) -- --
----------- -----------
Net Income $ 1,393,675 $ 1,189,506
=========== ===========
ASSETS:
Total assets for reportable segments $18,957,312 $17,517,522
Other assets -- --
Elimination of intercompany receivables -- --
----------- -----------
Consolidated Assets $18,957,312 $17,517,522
=========== ===========
NOTE 10. NET INCOME PER COMMON SHARE
Net income per common share for 2004 and 2003 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, 2004 and 2003 were 31,337 and 32,241,
respectively.
NOTE 11. STOCK VALUE ADJUSTMENT
During May 2004, the board of directors authorized a $23 increase in the
stated value of each share of common stock from $303 to $326. There were
31,491 shares outstanding at the time of the value adjustment, which
reduced earnings by $724,293.
During May 2003, the board of directors authorized a $23 increase in the
stated value of each share of common stock from $280 to $303. There were
32,812 shares outstanding at the time of the value adjustment, which
reduced earnings by $754,676.
72
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 12. STOCK RESTRICTIONS
The Company has one class of common stock. Each stockholder is entitled to
one vote regardless of the number of shares owned. Restrictions on the
stock include the following:
o Individuals purchasing new shares of stock must be living within the
service 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
as 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 for shareholders of record for
the shares they held in 1995 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 consent of the board of directors.
The Company may adopt bylaws, which may further restrict the transfer or
ownership of capital stock of the Company.
NOTE 13. EMPLOYEE BENEFITS
The Company has a defined benefit pension plan covering most employees.
The multi employer retirement programs are with the National Telephone
Cooperative Association (NTCA) and have been approved by the Internal
Revenue Service. Pension costs expensed and capitalized for 2004 and 2003
were $136,127 and $92,016, respectively. The Company makes annual
contributions to the plan equal to amounts accrued for pension expense.
NOTE 14. ASSET RETIREMENT OBLIGATION
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting
for Asset Retirement Obligations," requires entities to record the fair
value of a liability for legal obligations associated with an asset
retirement in the period in which the obligations are incurred. When the
liability is initially recorded, the entity capitalizes the cost of the
asset retirement obligation by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over
the useful life of the related asset.
The Company has determined it does not have a material legal obligation to
remove long-lived assets and accordingly, there have been no liabilities
recorded for the years ended December 31, 2004 and 2003.
73
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
NOTE 15. RELATED PARTY TRANSACTIONS
The Company receives commission revenue from RSA #9, Ltd. Partnership (RSA
#9) based on cellular service activation and retention. The Company has a
16.7% ownership interest in RSA #9. Commissions received by the Company
for the years ended December 31, 2004 and 2003 were approximately $936,000
and $1,018,000, respectively. At December 31, 2004 and 2003, $120,301 and
$102,754 were due from RSA #9 for commissions.
NOTE 16. CONCENTRATIONS OF CREDIT RISK
The Company grants credit to local service customers, all of whom are
located in the service area, broadcast customers, internet customers and
telecommunications intrastate and interstate long distance carriers.
The Company received 42% of its 2004 revenues from access revenues and
assistance provided by the Federal Universal Service Fund. As a result of
the Telecommunications Act of 1996, the manner in which access revenues
and Universal Service Funds are determined is currently being modified by
regulatory bodies.
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, along with both temporary and long-term investments. The
Company places its cash, cash equivalents and investments in several
financial institutions which limits the amount of credit exposure in any
one financial institution.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
NOTE 17. CHANGE IN ACCOUNTING PRINCIPLE
In March 2004, the Emerging Issues Task Force (EITF) modified guidance
related to accounting for investments in limited liability companies with
an effective date for periods beginning after June 15, 2004. Accordingly,
July 1, 2004, the Company changed the method of accounting for its
investment in Desktop from the cost method to the equity method.
In connection with the change to the equity method, the Company recorded a
cumulative adjustment that reduced net income by $38,593, which is
presented net of income taxes of $21,407. This represents the Company's
proportionate share of losses in Desktop through June 30, 2004.
74