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 18, 2004, 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 to Breda, 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 1,
2004. 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 14, 2004 will
be entitled to notice of and to vote at the Meeting.
Breda has a single class of common stock, without par value ("Common Stock").
There were 31,491 shares of Common Stock outstanding on April 14, 2004. Those
shares were held by 567 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 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 14, 2004,
there were 22 shareholders with multiple voting rights arising from their prior
ownership of Class A stock, and they have one vote for each share of the former
Class A stock 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 so required 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 2004.
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
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control over the post office box and ballots, and is responsible for removing
the ballots from the post office box and tallying the votes represented by the
ballots. The results of the vote by the ballots have historically been
determined prior to the meeting of the shareholders, and announced at the
meeting. Given this practice, 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 2004.
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.
One of the purposes of the Meeting is to elect three directors. Two of those
directors need to be elected because the term of two existing directors will
expire at the Meeting. The third director to be elected at the Meeting will be
elected to serve the remaining two years of the three year term of Roger
Nieland, who passed away unexpectedly on July 8, 2003. The nominees for those
three 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 paragraph 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, 2004, 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, 2004. Three individuals
were nominated to serve as a director through this process. Those individuals
are identified below.
3
Although the Board anticipates that all nominees will be able to serve, in the
event any one or more of the nominees should be unable to do so, any vote for a
nominee who, prior to election, is determined to be unable to serve, will not be
counted and will not be cast for any other nominee.
Directors Continuing in Office.
The following information is furnished for each person who will continue as a
director following the Meeting.
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 is 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. Mr. Neumayer is 55 years
old.
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 is 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 33 years. He was also
previously self-employed as a farmer. Mr. Grabner is 55 years old.
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. Mr. Schettler
is 51 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 is held in
2006. He has also served as a director of each of Breda's subsidiaries since
April, 1997. Mr. Wenck has been self-employed as a farmer for approximately 29
years. He was also previously employed by the United Parcel Service as a
delivery driver. Mr. Wenck is 64 years old.
Director Not Continuing in Office.
Larry Daniel has been a director of Breda since April, 1995, and the Secretary
since May, 1996. He has also been a director of each of Breda's subsidiaries
since April, 1995, and the Secretary of each of the subsidiaries since May,
1996. Mr. Daniel has been a self-employed farmer for approximately 39 years. Mr.
Daniel is 61 years old. Mr. Daniel's term as a director of Breda will end at the
2004 annual meeting of the shareholders. He has served three consecutive terms
as a director, and under Breda's policies Mr. Daniel must be off the Board of
Directors for at least one year. Mr. Daniel is therefore not a nominee for
election as a director at the 2004 annual meeting of the shareholders.
4
Director Elected to Fill Vacant Director Position.
Roger Nieland, one of Breda's directors, passed away unexpectedly on July 8,
2003. Mr. Nieland had been a director of Breda since May, 2000, and he had been
elected to serve another three year term as a director at the May 20, 2003
annual meeting of the shareholders of Breda. Breda's Board of Directors has the
authority to fill any vacancy occurring on the Board of Directors through death
by the affirmative vote of a majority of the remaining directors, but a director
elected by the Board of Directors to fill a vacancy can only serve as a director
until the next election of directors by the shareholders, at which time the
shareholders must elect a director to serve for the remainder of the three year
term of the vacant directorship. The Board of Directors exercised that authority
at its August 12, 2003 meeting by electing Rick Anthofer to fill the vacancy
created by Mr. Nieland's death until 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 directors who are elected to
those two director positions will serve until the annual shareholders meeting
which is held in 2007. There are two nominees for those two director positions,
and the following two paragraphs provide some information regarding those
nominees.
Charles (Chuck) Thatcher is one of the nominees for election as a director. Mr.
Thatcher has been a director of Breda since May, 2001. 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 19 years. Midwest Wholesale Building Products is a
wholesaler/retailer of lumber, building products and materials. Mr. Thatcher is
52 years old.
Neil Kanne is also a nominee for election as a director. Mr. Kanne has never
held any positions with Breda or any of its subsidiaries. He has been self
employed as a farmer for at least the last five years. Mr. Kanne is 57 years
old.
As noted above, the shareholders also need to elect a director to serve the
remaining two years of the three year term of Roger Nieland, who died
unexpectedly on July 8, 2003. The director elected to this director position
will serve until the annual shareholders meeting which is held in 2006.
Rick Anthofer has been nominated to fill this director position. Mr. Anthofer
has been a director of Breda since August 12, 2003, when he was elected as a
director by the Board of Directors to fill the vacancy created by the death of
Roger Nieland. He has also been a director of each of Breda's subsidiaries since
August 12, 2003. 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 is 47 years old.
5
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
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 27, 2004 with respect to the Meeting. The
letter informed the shareholders that anyone wishing to nominate
6
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, 2004, 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 simply 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 for election as a director pursuant to
the above-described shareholder nomination process.
There were no material changes in 2003 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 June organizational meeting.
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 from June of 2002 through June of 2003 were Clifford Neumayer, Roger
Nieland and Charles Thatcher. 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 Mr. Nieland's death in July, 2003. The compensation
committee as appointed in June, 2002, held three committee meetings during 2003.
No meetings were held during 2003 by the compensation committee as appointed in
June, 2003.
Meetings of the Board of Directors; Attendance of Shareholder Annual Meetings.
The Board of Directors held a total of 20 meetings during 2003. 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 2003.
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 2003.
7
Shareholder Communications to the Board of Directors.
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 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.
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. The directors have been entitled to receive internet
access since 1999.
8
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 $222.
Executive Officers of Breda.
The executive officers of Breda are elected annually by the Board of Directors,
and hold office until their successors are chosen or until their death,
resignation or removal. 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.
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 42 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 50 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. Breda does not believe the employment agreements were
materially different from Breda's prior employment agreements with Mr. Boeckman
and Ms. Morlok, but each of the employment agreements did include compensation
adjustments and longer terms.
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
9
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,
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 is $87,500 for the
calendar year 2003, and is increased to $90,000 and $92,500 for, respectively,
the 2004 and 2005 calendar years. 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 the 2003 calendar year and the amount of the bonus,
10
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.
Mr. Boeckman's bonus for 2003 was $11,900. 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.
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.
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 is $81,500 for
the calendar year 2003, and is increased to $83,000 and $84,500 for,
respectively, the 2004 and 2005 calendar years. Ms. Morlok's bonus for
2003 was $9,600.
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 14, 2004 by:
o Each of Breda's directors;
o Each nominee for director;
o Each of Breda's officers;
o The chief operations officer of Breda; and
o All directors and officers of Breda and the chief operations officer
of Breda as a group.
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Security Ownership Table
Name and Address of
Beneficial Owner Number of Shares Percentage Ownership
------------------- ---------------- --------------------
Dean Schettler 30 .0953%
16326 120th St
Breda, Iowa 51436
Clifford Neumayer 181 .5748%
11846 Ivy Avenue
Breda, Iowa 51436
Larry Daniel 4 .0127%
15731 Robin Avenue
Glidden, Iowa 51433
John Wenck 6 .0191%
23909 140th St
Carroll, Iowa 51401
Dave Grabner 55* .1747%
11098 130th Street
Breda, Iowa 51436
Rick Anthofer 3 .0095%
301 N. 4th
Breda, Iowa 51436
Charles Thatcher 2** .0064%
15053 Granite Avenue
Breda, Iowa 51436
Robert Boeckman 30 .0953%
23678 150th Street
Carroll, Iowa 51401
Neil Kanne 2 .0064%
12828 Phoenix Avenue
Carroll, Iowa 51401
12
All directors, officers and
the chief operations officer
as a group (8 persons) 311 .988%
* 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, in the 2003, 2002 and 2001
fiscal years, and to Jane Morlok, Breda's chief financial officer, in the 2003
and 2002 fiscal years. Mr. Boeckman's services as the chief operations officer
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, 2003 $87,490 $11,900 $1,508 $21,061
Chief Operations 2002 $84,341 $ 9,082 $1,795 $18,067
Officer 2001 $81,853 $11,200 $2,370 $18,157
Jane Morlok, 2003 $81,425 $ 9,600 $1,521 $20,246
Chief Financial 2002 $78,602 $ 8,250 $1,808 $17,282
Officer
(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
13
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.
See also footnote 1 above regarding participants' contributions to the
program. This amount also includes a long term disability contribution of
1.53% of salary and employer-paid premiums on health, life and accidental
death and dismemberment insurance.
Clifford Neumayer is 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 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 2004 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, 2002 and
December 31, 2003.
Audit Fees.
Breda was billed $60,460 and $32,520 for, respectively, the fiscal years ended
December 31, 2002 and December 31, 2003 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 $29,920 and $45,875 for, respectively, the fiscal years ended
December 31,
14
2002 and December 31, 2003 for assurance and related services that were
reasonably 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 $2,750 and $3,225 for, respectively, the fiscal years ended
December 31, 2002 and December 31, 2003 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 $14,375 and $10,180 for, respectively, the fiscal years ended
December 31, 2002 and December 31, 2003 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 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, 2003 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, 2003 for filing
with the Securities and Exchange Commission.
15
The name of each director of Breda is as follows:
Clifford Neumayer Larry Daniel
Dean Schettler Charles Thatcher
Dave Grabner Rick Anthofer
John Wenck
SHAREHOLDER PROPOSALS FOR 2005 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 2005, the proposal must be received at
Breda's principal executive office by no later than January 5, 2005. 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 16, 2005.
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. 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 2003 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/ Larry Daniel
-----------------------------------
Larry Daniel
Secretary
Breda, Iowa
May 1, 2004
16
BREDA TELEPHONE CORP.
BALLOT
Annual Meeting of Shareholders
May 18, 2004
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 return 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 18,
2004, or you can deliver this Ballot at the annual meeting. If you return 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 three director positions to be filled and there are three 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 or nominees 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. Note that Rick Anthofer is the nominee to serve for the remainder of
the three year term of the director position formerly held by Roger Nieland.
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)
|_| Charles (Chuck) Thatcher
|_| Neil Kanne
|_| Rick Anthofer
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
2004:
|_| For |_| Against |_| Abstain
Dated: __________________, 2004.
BREDA TELEPHONE CORP.
2003 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 18, 2004, 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 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 may 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 favorable terms;
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 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 or new third parties entering into Breda's or any of its
subsidiaries' marketing or service areas;
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;
o the continued availability of financing, and on favorable terms, and
the cost of financing and consequences of leverage; and
2
o the effects of ever increasing and changing competition and
relationships with other carriers and other parties, including
competition or relationships which require Breda or its subsidiaries
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, and long distance services since approximately July, 2000. BTC, Inc.
began to also offer local telephone services in the Carroll, Iowa market area as
a competitive local exchange carrier in October, 2003.
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 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:
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
3
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. As noted above, BTC, Inc.
began offering local exchange carrier services in the Carroll, Iowa market area
in October of 2003. Prior to that time, BTC, Inc. only offered long distance
services and Internet services in the Carroll, Iowa market area.
The primary services provided by 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. As
of December 31, 2003, they were serving approximately 2,882 telephone numbers
and related access lines. Breda, Prairie Telephone and Westside Independent
derive their principal revenues from providing those services.
BTC, Inc.'s principal revenue sources in 2003 were from providing Internet and
long distance services. BTC, Inc. provides Internet services and long distance
services for its own customers and for the customers of Breda, Prairie Telephone
and Westside Independent. As noted above, BTC, Inc. did not offer local
telephone services until October of 2003.
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 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.;
o the treatment of Breda, Prairie Telephone, Westside Independent and
BTC, Inc. as rural telephone companies under the Telecommunications
Act of 1996, which may at times exempt them from certain
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
4
services funding component of the support payment funding program
administered by the Federal Communications Commission.
They received universal services funding of $806,146, in the aggregate, in 2003.
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 amount of the access charge rates 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 $1,421,167, in the aggregate, in support payment funding in 2003.
The latter amount includes, however, the $806,146 universal services funding
component which is noted in the preceding paragraph.
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 access charge rate that can be charged for interstate long
distance calls is determined by the FCC. The FCC can change those rates at any
time, and the more recent changes have lowered access charge rates. There are
also some studies being conducted in Iowa as to whether there should be changes
regarding intra-state access rates. Breda anticipates that there may be further
reductions in access charge rates over the next several years. 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.
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.
5
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 2004 is small. BTC, Inc. provides telephone services in the
Carroll, Iowa market area. There are already other companies providing telephone
services in that area, but Breda believes that the likelihood of additional
local exchange carriers entering the Carroll, Iowa market area in 2004 is small.
If any other telephone companies at some point determine to provide service in
any of Breda's, Prairie Telephone's, Westside Independent's or BTC, Inc.'s
service areas, there could be a reduction in revenue.
Breda, Prairie Telephone, Westside Independent and BTC, Inc. also 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.
Another industry issue that could have future, significant ramifications for
Breda and its subsidiaries is number portability requirements. 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. Congress enacted the Telecommunications
Act of 1996 to establish a national framework that promotes competition and
reduces regulation in the telecommunications markets. The Act requires that
local exchange carriers, such as Breda and it's telephone-related subsidiaries,
open up their networks to local competition. The Act imposed new obligations and
responsibilities on telecommunications carriers, particularly incumbent local
exchange carriers. Number portability was one of the obligations that the Act
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 purposes of the Act
because consumers might be reluctant to switch local exchange carriers if they
have to change their telephone number, so number portability is viewed as
facilitating competition.
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.
6
An incumbent local exchange carrier's number portability obligations were
initially centered on responding to porting requests from other wireline
carriers. In late 2003, however, the FCC released a Memorandum Opinion and Order
and Further Notice of Rulemaking which clarified the circumstances under which
its number portability rules apply to requests from wireless carriers. The
determination of when an incumbent local exchange carrier must comply with a
request for number portability from a wireless carrier depends upon the timing
of the request, the type of carrier involved and whether the carrier is located
within one of the 100 largest metropolitan statistical areas. The FCC's
Memorandum Opinion and Order required or clarified that:
o As of November 24, 2003, wireline carriers that have received a
request to port numbers in one of the 100 largest metropolitan
statistical areas must port numbers to wireless carriers where the
requesting wireless carrier's "coverage area" overlaps the
geographic location of the rate center in which the customer's
wireline number is provisioned, thus clarifying that the requesting
wireless carrier does not need to have a point of interconnection in
the wireline local exchange carrier rate center.
o The porting-in (wireless) carrier must maintain the number's
original rate center designation following the port so that the
calls to the ported number will continue to be rated as they were
prior to porting.
o The definition of the wireless "coverage area" is the area in which
wireless service can be received from the wireless carrier.
o Wireline carriers may not require wireless carriers to enter into
interconnection agreements as a precondition to porting between
carriers.
o Wireline carriers operating outside the 100 largest metropolitan
statistical areas are not required to port numbers to wireless
carriers until May 24, 2004 or six months after receipt of a porting
request from another carrier, whichever is later, which is the
earliest date that wireless carriers serving these areas are
required to implement number portability.
o Wireline carriers (both inside and outside of the 100 largest
metropolitan statistical areas) may file petitions with the FCC or
the state public utility board for a waiver of their obligation to
port numbers to wireless carriers if they can provide credible
evidence demonstrating that porting is not technically feasible.
Of the exchanges served by Breda, Prairie Telephone, Westside Independent and
BTC, Inc., only the Pacific Junction exchange falls within one of the 100
largest metropolitan service areas. The area includes Omaha, Nebraska.
The IUB filed comments with the FCC in the matter of "Telephone Number
Portability, CTIA's Petitions for Declaratory Ruling" on February 4, 2004. In
their comments, the IUB expressed concern regarding the recovery of nonrecurring
and recurring costs associated with providing wireless porting, especially for
Iowa's rural exchanges where the access line counts are small.
7
Prior to that time, various industry organizations cooperated in the filing of
an "Emergency Joint Petition for Partial Stay and Clarification" with the FCC.
The Petition asked the FCC not to enforce its wireless-wireline number
portability order for companies that serve less than 2% of the nation's
subscriber lines. On March 4, 2004, two Iowa industry associations, the Iowa
Telecom Association and the Rural Iowa Independent Telephone Association, filed
a petition with the IUB that requested a waiver of modification of the
intermodal local number portability rules on behalf of all 2% carriers in Iowa.
Breda, Prairie Telephone and Westside Independent have requested these
associations to include Breda, Prairie Telephone and Westside Independent in
these joint filings.
Breda is currently unable to determine the potential number of requests Breda
might receive for wireless number portability, or otherwise what impact the
FCC's mandate will have on Breda's customer base. Breda has, however, already
received requests for number portability from wireless carriers in Breda's
wireless service areas. The most recent requests from wireless carriers do
appear to meet the FCC's rules for a bona fide request. Breda is continuing to
work with consultants and others within the industry to determine the needed
facility upgrades and to finalize the costs associated with implementing number
portability so that it will be able to comply with the regulatory directives
regarding number portability as they continue to be established and clarified.
Breda received notification from the FBI on April 15, 2003, that the FBI would
grant Breda, Prairie Telephone and Westside Independent an extension until June
30, 2004 for certain of their remaining deployment schedules under the
Communications Assistance For Law Enforcement Act. The FCC decides whether or
not to grant any such extension. At the time of this filing, no further
correspondence had been received from the FCC, but Breda contemplates that the
FCC will approve the FBI's determination or that additional time will otherwise
be granted by the FCC, if necessary. BTC, Inc. receives its switching services
from Breda, and is covered under the deployment schedule extension for Breda's
switch. The Communications Assistance for Law Enforcement Act was passed by
Congress 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, Westside Independent and BTC, Inc. have been granted
various extensions for compliance with the various requirements of that Act.
Breda has licensed software that will allow it to become compliant with the Act
within a short period of time should the FBI make a request for support. Breda
also believes that it will be able to obtain an extension beyond the current
June 30, 2004 compliance date, should that become necessary.
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 Telephone, Westside
Independent and BTC, Inc, but Breda does not believe 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. 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.
8
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
in 2004, 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 in 2004. Breda is hopeful, however, based on its
past negotiations with U.S. Cellular, that any new agreement will, at worst,
have a neutral impact on Breda's cellular commissions revenue.
Breda expanded its cellular retail activities in Carroll, Iowa in late 2002 by
taking over the management of a U.S. Cellular kiosk located in the Wal-Mart
store in Carroll, Iowa on August 1, 2002. Breda believes this location has
played a key part in the increase that occurred in Breda's cellular services
revenues in 2003 because the location has added the "spontaneous" or "impulse"
purchase market to its cellular sales activities.
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. The long
distance carriers are also starting to provide their own billing and collection
services, rather than contracting for those services with others like Breda,
Prairie Telephone and Westside Independent.
Directory advertising is also now subject to competition because the
Telecommunications Act of 1996 prohibits Breda, Prairie Telephone, 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.
9
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, 2003, Tele-Services was providing cable television services
to approximately 2,858 subscribers.
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, 2004
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
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.
10
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 has initiated plans to add channels and to enact rate increases in
2004 in eleven of the nineteen towns in which it provides cable services.
Tele-Services anticipates that those rate increases will not be opposed or
denied by any of those eleven towns.
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.
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. The cost of Tele-Services
upgrades in 2003 was approximately $30,828, and is estimated to be approximately
$142,200 for 2004.
Tele-Services is continuing to work with an engineering firm to review its
systems and to work on consolidating its head-end equipment with the goal being
that the equipment will then be able to serve two or more communities, instead
of just one community as is currently the case, and to lower maintenance costs
for that equipment. There has not, however, been any economically feasible
option identified from these reviews up to this point. Tele-Services is
upgrading some of its cable TV systems and installing additional equipment and
electronics in fourteen of the
11
nineteen towns in which Tele-Services provides cable services in order to be
able to provide more channel line-up options in those towns.
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 2,026 subscribers as of
December 31, 2003. Of that amount, approximately 1,434 were subscribers 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. Breda had been the sole provider of Internet services in those communities
until that time. Iowa Telecom purchased the telephone exchanges for those
communities in 1999 and began operating them on June 1, 2000. In late 2000, Iowa
Telecom expanded the services offered in those communities to include Internet
services and at a lower price than is offered by Breda. As a result, Breda has
lost Internet customers in the three communities. As another example, 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 an 18.9% decline
in its dial-up customer base in this market during the calendar year 2003. BTC,
Inc. had experienced a 15.5% decline in its dial-up customer base in the
Carroll, Iowa market area in 2002.
Breda is pursuing marketing approaches to attempt to retain and increase its
internet customer base, but Breda believes there will be continuing competitive
pressures to lower dial-up rates and to provide higher speed Internet access.
One step that Breda had taken to lower Breda's underlying Internet costs was
through Prairie Telephone's acquisition in October of 2001 of a 10% ownership
interest in Desktop Media, L.L.C. Desktop Media, L.L.C. provided Internet
service provider support services to Breda and Breda's subsidiaries from
approximately November 1, 2001 through March 4, 2003, at which time Breda moved
its end user help-desk technical support to eCi Technical Support Solutions.
(Prairie Telephone retained its 10% ownership interest in Desktop Media, L.L.C.)
Breda's desire to further lower its underlying Internet costs in order to
compete at a lower price point for Internet services was a critical factor in
the move to eCi. Two other factors were Breda's desire to offer its Internet
customers 24-hour a day, 7-day a week end user help-desk technical support, and
to be able to brand these services under its own name for customer service
continuity. eCi Technical Support Solutions sold its interest in its technical
support division to Caleris, Inc. on
12
December 31, 2003. Breda has been satisfied with the services provided by
Caleris, Inc., and contemplates continuing to obtain technical support services
through Caleris, Inc.
Breda reduced its pricing of Internet services and bundled Internet services
with its long distance services in August, 2001 in order to attempt to compete
at a lower price point for Internet services. Breda's reduction of its pricing
has led to a decrease in Breda's overall revenue from Internet service fees.
Breda has also prepared other bundled service packages which include Internet
services. Those packages began to be offered by BTC, Inc. along with the
start-up of BTC, Inc.'s local telephone services in October, 2003.
Breda expects the overall potential customer base for Internet access to
continue to increase, but it is becoming more difficult to predict what
increases, if any, Breda or its subsidiaries might experience 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.
Other.
BTC, Inc. was the successful bidder at an auction on December 23, 2002, for a
commercial building located at 603 N. Adams, Carroll, Iowa. The closing date for
the transaction was January 20, 2003, and Breda and BTC, Inc. moved their
Carroll, Iowa operations to this new location on October 4, 2003. The building
has approximately 4,450 square feet, which is over two times the space of the
former location in Carroll. The new building allowed BTC, Inc. and Breda to
consolidate their operations in the Carroll, Iowa market. The new location is
also affording Breda the opportunity to expand its service offerings in the
Carroll market. Breda uses a portion of the building as a retail store for the
sale and lease of telephone, cellular and related equipment and merchandise.
Breda had used a portion of BTC, Inc.'s former building in Carroll since April,
2000 for the same purposes.
Pacific Junction Telemarketing, Inc. was dissolved on April 24, 2003. Pacific
Junction was a wholly owned subsidiary of Prairie Telephone. Pacific Junction
operated a telemarketing business until July 26, 2001. The business was
discontinued because Pacific Junction's telemarketing call number supplier
(Results Telemarketing, Inc.) had notified Pacific Junction that it would no
longer be able to provide calling numbers to Pacific Junction, and Breda and
Pacific Junction were unable to locate new sources of telemarketing calling
numbers. The closing of Pacific Junction's telemarketing center resulted in the
loss of telemarketing services revenue and local network services revenue. The
telemarketing calls made by Pacific Junction were primarily intended to provide
a source of access services revenue for Breda, and the closing of the
telemarketing center also accordingly led to a decline in Breda's access
services revenue.
Miscellaneous Business.
Breda and some of its subsidiaries are also engaged in other miscellaneous
businesses.
For example, in March of 1999 Prairie Telephone acquired spectrum for providing
personal communications services in the Yale telephone exchange area. Spectrum
is bandwidth allocated
13
by the FCC which can be used in the transmission of voice, data and television
communication. Prairie Telephone is also one of 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.
Although difficult to predict, personal communications services may become very
important in the future and may be highly competitive with current cellular
services. Breda and Prairie Telephone have not made any firm decision on whether
they will ever offer any personal communications services, and, as indicated
above, Breda has transferred the personal communications services licenses it
held for its Breda and Lidderdale exchange areas to Carroll County Wireless,
L.L.C. Breda itself will therefore likely never directly offer any personal
communications services. Breda and Prairie Telephone estimate that, in any
event, it will take at least one to three years for the surrounding areas to
build out their personal communications systems to the point where Prairie
Telephone, Guthrie Group, L.L.C. or Carroll County Wireless, L.L.C. could
connect to those systems and be able to begin to provide personal communications
services.
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.
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 is an investor in
RSA #1, Ltd. and RSA #7, Ltd. Those entities are Iowa limited partnerships which
provide cellular services in rural areas in central and southern Iowa. Prairie
Telephone exercised its right of first refusal and purchased its portion of Air
Touch's interest in RSA #1, Ltd. on December 12, 2003. The purchase price was
$125,000. The purchase resulted in Prairie Telephone obtaining an additional
1.14% interest in RSA #1, Ltd., which increased Prairie Telephone's total
interest in RSA #1, Ltd. to 10.28%.
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 RSA #8, Ltd. Westside Independent is
also an investor in RSA #8, Ltd. RSA #8, Ltd. and RSA #9, Ltd. provide cellular
services in rural areas in southern and central Iowa.
14
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 a quarterly 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.
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 NECA, whether by distributions or increases in the value of NECA's
common stock. The board of directors of NECA did, however, declare a $.50 per
share dividend payable on April 1, 2003 to the shareholders of record on March
1, 2003. Breda also received notification in March, 2004, that the board of
directors of NECA declared a $.75 per share dividend, payable on April 1, 2004.
There are substantial restrictions imposed upon the ability to transfer shares
in NECA, all of which potentially adversely affect the value and marketability
of the NECA stock.
15
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.
Employees.
As of December 31, 2003, Breda had 36 full time employees, and 2 part time
employees. Breda employs all of those employees, but those employees also
provide the labor and services for Prairie Telephone, Westside Independent,
Tele-Services and BTC, 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 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. Breda
also began to offer local exchange carrier services in the Carroll, Iowa market
area in October, 2003, through BTC, Inc. Breda also provides long distance
services to its customers in the local exchanges, and has provided long distance
services in the Carroll, Iowa market area through BTC, Inc. since July, 2000.
The
16
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. BTC, Inc. is a wholly owned subsidiary of Prairie Telephone.
The segments in which Breda and its subsidiaries operate are as follows:
Local Exchange Carrier
Breda
Prairie Telephone
Westside Independent
BTC, Inc.
Broadcast Services
Tele-Services
Internet Service Provider
BTC, Inc.
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, 2004, 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. Those services are, in general terms, originating
and terminating long distance calls made by subscribers of the long
distance carriers. Access charge rates may be at a flat or fixed
rate or may depend upon usage. As previously discussed in this
annual report, interstate and intrastate access charge rates are
subject to regulation by various governmental authorities. Access
charge revenues constitute a substantial part of Breda's
consolidated revenues, and a material risk to Breda arises from the
regulation of access charge rates by those authorities. Breda
anticipates continuing pressure for the lowering of state and
federal access charge rates, so future reductions in access charge
rates are likely.
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 access charge revenues,
is based on, among other things, the number of
17
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 recent years, but Breda's access revenue
decreased in 2003. Breda believes the decrease is primarily
attributable to increased wireless competitors offering calling
plans with features such 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
wireline networks. Also, the Iowa Utilities Board 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 are presently receiving no payment for the traffic that the
wireless carriers route over the wireline networks. Various industry
associations and their consultants are continuing their negotiations
with wireless carriers to attempt to obtain some compensation for
wireline carriers for the termination of the wireless traffic on the
wireline networks. Breda is not able to quantify the dollars that
Breda and its subsidiaries are not receiving for this wireless
traffic at this time, but any access revenue that could be
negotiated from the wireless carriers would have a positive effect
on Breda's access revenue.
Breda's recent past increases in access charge revenues were
attributable to increased numbers of subscribers, increased calling
patterns and technological advances. As noted above, those trends
did not continue in 2003. It is also unlikely that there will be any
material increases in the number of subscribers without the
acquisition of additional calling areas.
As indicated above, Breda, Prairie Telephone, Westside Independent
and BTC, Inc. utilize the "average schedule" basis for receiving
access charge revenues. This is the approach taken by most smaller
telephone companies. Telephone companies make filings with the FCC,
which set forth their costs of providing long distance services.
Under the average schedule approach, access charge rates are based
upon, in general, the average of all of those costs of a sample of
telephone companies and certain other factors intended to take into
account the size of the particular telephone company in question.
Another approach available for receiving access charge revenues is
the "cost" approach.
On October 20, 2000, a comprehensive access charge rate reform and
deregulation plan for non-price cap, incumbent local exchange
carriers (LECs) was submitted to the FCC by the Multi-Association
Group (MAG). LECs include most of the small and mid-sized local
exchange carriers that service rural and insular areas in the U.S.,
such as Breda, Prairie Telephone, Westside Independent and BTC, Inc.
MAG was a coalition of the National Rural Telecom Association, the
National Telephone Cooperative Association, the Organization for the
Promotion and Advancement of Small Telecommunications Companies and
the United States Telecom Association.
One of the purposes of MAG was to formulate a comprehensive plan to
settle major proceedings pending at the FCC and complete reforms
required by the Telecommunications Act of 1996. In general terms,
the MAG plan was designed to,
18
among other things, modify interstate access charge rules and
universal service support for LECs.
The FCC's October 11, 2001 order on the MAG plan became effective on
July 1, 2002. Breda and its subsidiaries did not experience any
materially adverse effects on their revenues from the FCC's order
during the 2003 calendar year, and Breda currently believes that the
FCC's order will also not have any materially adverse effects on
Breda's or its subsidiaries' revenues in 2004.
As noted above, Breda also anticipates pressure for the lowering of
state access charge rates. For example, concerns have been raised by
the Iowa Legislature as well as the Iowa Utilities Board regarding
intra-state access rates, and whether alternative intrastate
inter-carrier compensation mechanisms should be investigated. A
joint task force comprised of representatives from the Iowa Telecom
Association and the Rural Iowa Independent Telephone Association has
been formed to compile data from the local telephone companies, such
as Breda, in order to document not only the justification of the
present intra-state access rates received by local telephone
companies, but also to look at other revenue alternatives. Two
industry consulting firms also worked with this joint task force.
The task force has completed its analysis, and is in the process of
presenting its findings and report to the Iowa Telecom Association,
the Rural Independent Telephone Association and various telephone
companies. After receiving their responses, it is contemplated that
a final report will be presented to the Iowa Utilities Board.
Based on the preliminary report, Breda does not believe that any
increase in intra-state access rates will be recommended by the task
force and that, at best, intra-state access rates will stay the
same. It is also possible, however, that intra-state access rates
will be lowered, and if that occurs, it will have a negative impact
on Breda's revenues. Breda does not believe that it is possible to
predict at this time whether intra-state 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
revenues.
Another issue relevant to intra-state access revenue is the fact
that Qwest has begun minute-of-use studies with the twenty companies
in Iowa which have the highest number of intrastate minutes being
billed to Qwest. Breda is one of those twenty companies. Based on
preliminary discussions and research with Qwest and Iowa Network
Services (which submits minutes of use information to Breda for
billing purposes), it has been preliminarily determined that Qwest
had not routed some of its traffic according to the Local Exchange
Routing Guide because Qwest had routed some of its traffic to
Breda's switch that should, instead, have been routed to a cellular
switch. Qwest has rerouted this cellular traffic so it no longer
goes through Breda's switch, and Breda estimates that it will lose
approximately $200,000 per year of intrastate access revenue from
Qwest because of this traffic rerouting. Breda is not currently
aware of any plans to make any retroactive adjustments to Breda's
intrastate access revenues from Qwest based upon the results of the
Qwest study. Breda's consultant is continuing to work with Qwest on
this issue and on the discounting of Breda's carrier access invoices
for wireless service provider minutes. Qwest is,
19
however, now routing its traffic in accordance with the Local
Exchange Routing Guide.
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 47.5%
increase in its long distance customer base from December of 2001 to
December of 2002, and a 44.5% increase from December of 2002 to
December of 2003.
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. As previously noted in this annual report,
they are experiencing intense services and pricing competition in
providing Internet access.
Breda's other primary source of consolidated revenue is generated from
Tele-Services' cable business. Tele-Services' operating revenues arise primarily
from monthly fees for basic and premium cable services provided to its cable
subscribers. Tele-Services' main competition at the time of the preparation of
this annual report was from satellite dish providers. The FCC 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.
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
20
advancements in technology, could have material adverse effects on Tele-Services
in the future. Breda currently believes, however, that the cable services
provided by Tele-Services will continue to be desirable in the areas served by
Tele-Services for at least those subscribers who desire a lower priced product
that allows local channel options.
Tele-Services is continuing to work with an engineering firm to review its
systems and to work on consolidating its head-end equipment with the goal being
that the equipment will then be able to serve two or more communities, instead
of just one community as is currently the case, and to lower maintenance costs
for that equipment. There has not, however, been any economically feasible
option identified from these reviews up to this point. Tele-Services is
installing additional equipment and electronics in order to be able to provide
more channel line-up options to subscribers in fourteen of the nineteen towns
served by Tele-Services. Tele-Services hopes to complete those installations by
May, 2004.
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.
Other miscellaneous sources of revenue are noted or discussed in the
"DESCRIPTION OF BUSINESS" section of this annual report and in the financial
statements found at the end of this annual report.
The following table reflects, on a consolidated basis for Breda and its
subsidiaries, the approximate percentage of Breda's and its subsidiaries'
aggregate revenue as of the close of each of the past two fiscal years which was
derived from the three reportable segments of Breda which are noted above:
2002 2003
---- ----
Local Exchange Carrier (1) 71.6% 75.2%
Broadcast (2) 16.3% 14.7%
Internet Service Provider (3) 12.1% 10.1%
----- -----
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 rates and calling plans rates for
long distance services, and (v) monthly cellular commissions,
advertising fees, and miscellaneous revenues.
21
(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, 2003 Compared to Twelve-months ended December
31, 2002
NET INCOME
Consolidated net income for the twelve-month period ended December 31, 2003 was
$1,189,506, which was a $28,915, or 2.4%, decrease when compared to the
$1,218,421 of consolidated net income for the twelve-month period ended December
31, 2002.
The $28,915 decrease in net income resulted from the following four 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 decreased $105,797, or 12.9%, for the twelve-month
period ended December 31, 2003, when compared to the twelve-month
period ended December 31, 2002.
2) Other income (expense), which includes such items as interest and
dividend income, income from equity investments, interest expense,
and gains (losses) on the sale of investments and property,
increased $24,042, or 2.1%, for the twelve-month period ended
December 31, 2003, when compared to the twelve-month period ended
December 31, 2002.
3) Income taxes increased $17,928, or 2.6%, for the twelve-month period
ended December 31, 2003, when compared to the twelve-month period
ended December 31, 2002.
4) The cumulative effect of an accounting change, net of tax, of
$70,768 during the twelve-month period ended December 31, 2002,
reflects an impairment of goodwill from the implementation of
Statement of Financial Accounting Standard 142 on January 1, 2002.
There were no material accounting changes during 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, 2003, when compared to the twelve-month period ended December
31, 2002, of $208,892, or 3.5%. The segments making up total operating revenues
and their contributions to the $208,892 increase between the two periods are as
follows: local exchange carrier services - $374,143; broadcast services -
($66,044); and Internet services - ($99,207).
22
Local Exchange Carrier Services - $374,143
Local exchange carrier services revenue accounted for 75.2% of the operating
revenue in the twelve-month period ended December 31, 2003. The components of,
and their contributions to, the $374,143 increase in local exchange carrier
services revenue for the twelve-months ended December 31, 2003, when compared to
the twelve-months ended December 31, 2002, are as follows: local network
services - $17,167; network access services - ($146,469); long distance services
- ($6,581); cellular services - $384,667; and miscellaneous - $125,359.
Local network services revenue was similar for the twelve-month periods ended,
respectively, December 31, 2003 and December 31, 2002, with a 3.0% increase
during the twelve-month period ended December 31, 2003. The increase is mainly
attributable to the start-up of BTC, Inc.'s competitive local exchange carrier
operation in Carroll, Iowa, in October 2003, which resulted in the addition of
new local exchange customers. Network access services revenue, however,
decreased $146,469, or 5.8%, during the twelve-month period ended December 31,
2003, when compared to the same twelve-month period in 2002. The decrease in
network access revenue is mainly volume related, as discussed previously in this
annual report. Breda, Prairie Telephone and Westside Independent wrote off
$46,166 in access revenue in 2003 that became uncollectible when Touch America
and One Star filed for bankruptcy protection, which resulted in lower access
revenues for the twelve-month period ended December 31, 2003. Breda had also
written off uncollectible access revenue during 2002 from the bankruptcy filings
of WorldCom and Global Crossing. Breda has also had lower access revenue in both
2002 and 2003 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. Accordingly, during the
years ended December 31, 2003 and 2002, Breda has reduced its network access
revenue by approximately $169,000 and $72,000 respectively related to estimated
wireless terminating access, which was billed but not collectible. Access
charges constitute a substantial part of Breda's, Prairie Telephone's and
Westside Independent's revenues, and a material risk to them also arises from
the regulation of access charge rates by the FCC. Breda anticipates continuing
pressure for the lowering of state and federal access charge rates, and future
reductions in access charge rates are likely.
Breda's long distance services customer base continues to grow, and Breda
believes that long distance services should be a growth area for Breda in 2004
as Breda continues to market this service as both a stand-alone service and as
part of a package with other services, such as Internet. Breda anticipates
growth particularly in the local exchange area of Carroll, Iowa, which is served
through BTC, Inc. As noted above, BTC, Inc. began offering local exchange
carrier services in the Carroll, Iowa market area in October 2003. The
twelve-month period ended December 31, 2003, however, reflected a 6.0% decrease
in long distance services revenues, when compared to the twelve-month period
ended December 31, 2002. While Breda's overall long distance customer base
increased 44.5% for the twelve-month period ended December 31, 2003, Breda is
experiencing an industry-wide phenomenon of an overall decrease in minutes of
use by its long distance customers. As discussed previously in this annual
report, Breda believes the wide area calling rate plans offered by its wireless
competitors is a big reason for the decrease in Breda's total long distance
minutes.
23
Breda expanded its cellular retail operations in Carroll, Iowa by taking over
the management of a U.S. Cellular kiosk located in the Wal-Mart store in
Carroll, Iowa, on August 1, 2002. The $384,667, or 42.2%, increase in cellular
services revenue for the twelve-month period ended December 31, 2003, when
compared to the twelve-month period December 31, 2002, reflects the increased
sales generated through Breda's two Carroll, Iowa locations and the increased
sales generated through the efforts of outside sales staff, who travel and make
direct contact with potential customers.
Miscellaneous revenue increased $125,359, or 84.5%, for the twelve-month period
ended December 31, 2003, when compared to the twelve-month period ended December
31, 2002. Four items made up most of this increase for the twelve-month period
ended December 31, 2003. The first item was the performance of fiber
installation contractual work for an outside corporation, which generated
$50,000 in miscellaneous revenue, before materials, equipment and labor costs.
The second item was the receipt of a Qwest refund on co-location expenditures of
approximately $28,229. Breda also performed boring and related services for
neighboring telephone companies, which generated almost $15,000 in miscellaneous
revenue. Breda received $21,250 through an Iowa Jobs Training Program for its
partnership with the Des Moines Area Community College in a multi-year
educational training program for its employees. The project was approved by the
Iowa Department of Economic Development.
Broadcast Services ($66,044)
Broadcast services revenue decreased $66,044, or 6.8%, for the twelve-month
period ended December 31, 2003, when compared to the twelve-month period ended
December 31, 2002. Tele-Services continues to face competition from satellite
providers that can now include local channels in their package offerings.
Tele-Services experienced an 11.7% decrease in its customer base when comparing
the twelve-month period ended December 31, 2003, to the twelve-month period
ended December 31, 2002. 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.
Internet Services ($99,207)
Internet services revenue decreased $99,207, or 13.7%, for the twelve-month
period ended December 31, 2003, when compared to the twelve-month period ended
December 31, 2002. The decrease is directly attributable to the 14.6% decrease
in BTC, Inc.'s Internet service customer base when comparing the two
twelve-month periods. The decrease in BTC, Inc.'s customer base is the result of
the intense competition by multiple Internet service 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 2002 and 2003.
The programs have, however, resulted in reduced Internet services revenue in
both 2002 and 2003 given the lower pricing by Breda for Internet services under
those programs. Breda is gaining high-speed Internet customers due to the
October, 2003 start-up of BTC, Inc.'s local exchange carrier services in the
Carroll, Iowa area because BTC, Inc. is offering bundled services packages that
include Internet, as well as local telephone and other communication services.
24
OPERATING EXPENSES
There was an increase in total operating expenses of $314,689, or 6.1%, for the
twelve-month period ended December 31, 2003, when compared to the twelve-month
period ended December 31, 2002. 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 $278,551, or 12.0%, for the twelve-month period ended
December 31, 2003, when compared to the twelve-month period ended December 31,
2002. Most of the increase in cost of services was caused by increased cellular
services costs of $313,943. Breda's cellular revenue increased $384,667, or
42.2%, for the twelve-month period ended December 31, 2003, when compared to the
twelve-month period ended December 31, 2002. Cellular service costs increased
56.4%, however, as part of providing those increased services during the
twelve-month period ended December 31, 2003. The cost of cable TV services and
the cost of Internet services decreased 1% and 13.2%, respectively, for the
twelve-month period ended December 31, 2003, when compared to the twelve-month
period ended December 31, 2002. The decrease in those costs was a function of a
decreased customer base for the year ended December 31, 2003.
Most of the remaining increase in cost of services for the twelve-month period
ended December 31, 2003, when compared to the twelve-month period ended December
31, 2002, was the result of costs incurred in preparing and moving Breda's and
BTC, Inc.'s Carroll, Iowa operations to a new building in Carroll, Iowa and
operating costs for BTC, Inc. during the final testing processes for the
start-up of BTC, Inc.'s local exchange carrier services. There are no
corresponding expenses for the twelve-month period ended December 31, 2002.
Depreciation and amortization expense decreased $13,279, or 1.2%, for the
twelve-month period ended December 31, 2003, when compared to the twelve-month
period ended December 31, 2002. The decrease is attributable to the fact that
some of Breda's assets have reached their maximum depreciable life, so even
though the assets are still in use, there is no further depreciation expense
that can be taken on the assets. Breda expended funds for facilities and
equipment for BTC, Inc.'s operations, but those assets were not operational
until October, 2003. The twelve-month period ended December 31, 2003 includes
depreciation for only the period of time that those assets were in use during
2003.
Selling, general and administration expenses increased $49,417, or 2.8%, for the
twelve-month period ended December 31, 2003, when compared to the same
twelve-month period in 2002. The increase was mainly the result of consulting
fees generated in connection with the start-up of BTC, Inc.'s local exchange
carrier services, and overall increased labor and benefit costs.
OPERATING INCOME
The net result of the operating revenue and operating expenses was a decrease of
$105,797, or 12.9%, in operating income for the twelve-month period ended
December 31, 2003, when compared to the same twelve-month period in 2002.
25
OTHER INCOME (EXPENSE)
Other income (expense) increased $24,042, or 2.1%, during the twelve-month
period ended December 31, 2003, when compared to the same twelve-month period in
2002. The increase was mainly attributable to three items. The first item is
interest and dividend income, which decreased $21,586, or 7.2%, when comparing
the twelve-month period ended December 31, 2003, to the twelve-month period
ended December 31, 2002. The decrease in interest and dividend income was mainly
due to lower interest income rates available on investments during the
twelve-month period ended December 31, 2003, as compared to the rates available
during the twelve-month period ended December 31, 2002. The second item is
income from equity investments, which increased $120,891, or 13.2%, during the
twelve-month period ended December 31, 2003, when compared to the same
twelve-month period in 2002. 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, 2003, 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,
which have been under market pressure from carriers such as AT&T, Sprint and
Verizon, to renegotiate their roaming contract. The new roaming contracts have
been negotiated at lower rates. As a result, the cellular investments 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. The third item was a $84,925, or 94.1%, decrease in other
net miscellaneous income during the twelve-month period ended December 31, 2003,
when compared to the same twelve-month period in 2002. Tele-Services recognized
a $102,986 gain on the sale of its former corporate office building at 103 East
Main in Breda, Iowa on October 1, 2002. The gain was included in the
twelve-month period ended December 31, 2002, and there is no corresponding entry
during the twelve-month period ended December 31, 2003.
INCOME BEFORE INCOME TAXES
Income before income taxes decreased $81,755, or 4.1%, for the twelve-month
period ended December 31, 2003, when compared to the twelve-month period ended
December 31, 2002. The $81,755 decrease was the result of the $105,797 decrease
in operating income and the $24,042 increase in other income (expense).
NET INCOME
Income before income taxes decreased $81,755, or 4.1%, for the twelve-month
period ended December 31, 2003, when compared to the twelve-month period ended
2002. Income taxes, however, increased $17,928, or 2.6%, when comparing the two
twelve-month time periods. The effective tax rate in 2003 was 37.4%, versus
34.9% in 2002. 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.
26
The cumulative effect of an accounting change, net of tax, of $70,768 during the
twelve-month period ended December 31, 2002, reflects an impairment of goodwill,
for which there was no corresponding entry during the twelve-month period ended
December 31, 2003. The Financial Accounting Standards Board issued Financial
Accounting Statement No. 142 in August, 2001 relating to the treatment of
goodwill, and those new accounting principles were incorporated into Breda's
financial statement beginning January 1, 2002. Under those accounting
principles, Breda is no longer able to expense over a fifteen-year period the
portion of the Westside purchase price which had been allocated to goodwill. The
goodwill is now reviewed annually for impairment, that is, written down and
expensed against earnings, only in the periods in which the recorded value of
goodwill is more than its fair value. Financial Accounting Statement No. 142
requires that Breda recognize an impairment loss when the carrying amount of
goodwill is greater than its implied fair value. These tests have been applied
to the goodwill and intangible assets of Breda and its subsidiaries, and the
net-of-tax impairment expense incurred at January 1, 2002 was Breda's estimate
of the expense to offset earnings for the carrying amount of the Westside
purchase goodwill attributable to broadcast services which was in excess of the
fair value of that asset based on discounted cash flow valuation upon
implementation of SFAS 142.
Net income decreased $28,915, or 2.4%, for the twelve-month period ended
December 31, 2003, when compared to the same period in 2002.
Liquidity and Capital Resources at Twelve Months ended December 31, 2003
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,
2003 and December 31, 2002, was, respectively, $2,414,760 and $1,650,381. 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, note receivable discount, and amortization of investment
tax credits, which were then offset by $362,616 (net of cash distributions
received of $676,786) of non-cash, equity income in unconsolidated affiliates.
The net decrease in assets and liabilities of $204,997 was also added to net
income to generate the net cash provided by operating activities of $2,414,760.
The cash flows from operations for the twelve-month period ended December 31,
2002 were primarily attributable to a positive net income of $1,218,421, plus
the addition of non-cash expenses of $1,044,249 from depreciation, amortization,
note receivable discount, and deferred income taxes, the addition of the
$102,611 gain on Tele-Services' sale of its former corporate office, the
addition of $119,945 from the cumulative effect of an accounting change, plus
the net effect of a $223,850 increase in operating assets and a $110,252
increase in operating liabilities, less the $721,247 of non-cash equity income
in unconsolidated affiliates.
Cash used in investing activities was $1,617,133 for the twelve-month period
ended December 31, 2003, and $1,623,797 for the twelve-month period ended
December 31, 2002. Capital expenditures relating to ongoing business were
$1,008,124 for the twelve-month period ended December 31, 2003, and $754,895 for
the twelve-month period ended December 31, 2002. A
27
new corporate office building was constructed in Breda, Iowa in 2002 at a cost,
including furnishings and fixtures, of $480,000. 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, which is reflected in the increased capital
expenditures for the twelve-month period ended December 31, 2003, when compared
to the twelve-month period ended December 31, 2002. Breda received $160,000 in
February, 2003 as an early payoff of a building contract note receivable.
Breda's capital expenditures in 2003 were at a similar level to those made in
2002, after exclusion of the building purchase for $246,000. Capital used in
investing activities in 2002 included an additional $248,273 investment in
Alpine Communications L.C. and capital used in investing activities in 2003
included an additional $125,500 investment in RSA #1, Ltd. by Prairie Telephone
in November, 2003.
Cash used in financing activities was $624,811 in 2003, and $791,265 in 2002.
Breda used cash in 2003 to repay $134,981 of borrowings from the RTFC, to redeem
common stock for $391,394, and to pay dividends of $98,436. Breda used cash in
2002 to repay $126,365 of long-term debt, to redeem common stock for $560,686,
and to pay dividends of $104,214. Breda funds the redemption of its stock from
cash flows from operations. Breda redeemed 1,306 shares and 2,025 shares in,
respectively, 2003 and 2002.
Working Capital
Working capital was $1,839,171 as of December 31, 2003, compared to working
capital of $1,950,070 as of December 31, 2002. The ratio of current assets to
current liabilities was 4.0 to 1.0 as of December 31, 2003, and 3.6 to 1.0 as of
December 31, 2002.
Breda had a $228,418 decrease in current assets during the twelve-month period
ended December 31, 2003, when compared to the twelve months ended December 31,
2002. The decrease in current assets was mainly attributable to a $75,300
increase in cash and temporary investment, which was offset by a $272,126
decrease in accounts receivable. Customer accounts receivable as of December 31,
2003 were comparable to customer accounts receivable as of December 31, 2002.
The $272,126 decrease in accounts receivable was mainly attributable to a
$201,897 reduction in the amount of outstanding payments due to Breda from
interexchange carriers, and a decrease of $65,357 in the commissions due to
Breda under its agency contract with U.S. Cellular.
Noncurrent assets, which mainly consist of longer-term investments, increased
$1,107,819 during the twelve-month period ended December 31, 2003, when compared
to the twelve months ended December 31, 2002. Long term investments increased
$791,778 during the twelve-month period ended December 31, 2003, when compared
to the twelve months ended December 31, 2002. On May 2, 2001, Prairie Telephone
loaned $500,000 to Desktop Media, L.L.C. The note is shown net of unamortized
discounts of $16,866 and $31,208 at, respectively, December 31, 2003 and
December 31, 2002. $291,134 of the note is included in long-term note
receivables, and $144,000 of the note is included in short-term note receivables
as of December 31, 2003. Investments in unconsolidated affiliates at equity
increased $488,116 for the twelve-month period ended December 31, 2003, when
compared to the twelve months ended December 31, 2002. The 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, 2003.
28
Tele-Services entered into a five-year contract with Toyne, Inc. in September,
2001, pursuant to which Tele-Services sold its corporate office building to
Toyne, Inc. for $200,000. Tele-Services received a cash payment on October 1,
2002, and the remaining $160,000 balance was shown as $140,000 in long-term note
receivables and $20,000 in short-term note receivables on Breda's balance sheet
as of December 31, 2002. The $160,000 balance was paid in full on February 14,
2003.
Current liabilities decreased $117,519 for the twelve-month period ended
December 31, 2003, when compared to the twelve months ended December 31, 2002.
Accounts payable decreased $29,077. A $3.00 per share dividend, for an aggregate
amount of $98,436, was declared by Breda's board of directors to shareholders of
record on March 10, 2003, and the dividend was paid on April 1, 2003. Accrued
taxes decreased $60,487 for the twelve-month period ended December 31, 2003,
when compared to the twelve months ended December 31, 2002.
Common stock had a net increase of $363,282 during the twelve-month period ended
December 31, 2003, when compared to the twelve months ended December 31, 2002.
The increase resulted primarily from two items. One was the $23 per share
increase in outstanding shares value on May 20, 2003, and the other was a
decrease in the number of outstanding shares through the redemption of 1,306
shares of common stock by Breda during the twelve month period ended December
31, 2003. The increase in retained earnings of $336,394 during the twelve month
period ended December 31, 2003, when compared to the twelve months ended
December 31, 2002, is the net effect of the stated value stock adjustment of
$754,676, the dividends paid in 2003 of $98,436, and the year-to-date net income
as of December 31, 2003 of $1,189,506.
Breda anticipates that its 2004 operational, investing and financing activities
will be similar to 2003, and will be funded internally through operations and
temporary investments.
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 55 President and
Director
Dean Schettler 51 Vice-President
and Director
Larry Daniel 61 Secretary and
Director
Dave Grabner 55 Treasurer and
Director
Rick Anthofer 47 Director
29
John Wenck 64 Director
Charles Thatcher 52 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 is 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.
Larry Daniel has been a director of Breda since April, 1995, and the Secretary
since May, 1996. He has also been a director of each of Breda's subsidiaries
since April, 1995, and the Secretary of each of the subsidiaries since May,
1996. Mr. Daniel has been a self-employed farmer for approximately 39 years. Mr.
Daniel's term as a director of Breda will end at the 2004 annual meeting of the
shareholders. He has served three consecutive terms as a director, and under
Breda's policies Mr. Daniel must be off the board of directors for at least one
year. Mr. Daniel is therefore not a nominee for election as a director at the
2004 annual meeting of the shareholders.
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 meeting of Breda's shareholders which will be held in 2005. He has
also served as a director of each of Breda's subsidiaries since April, 1999, and
as the Treasurer of each of Breda's subsidiaries since June, 2001. Mr. Grabner
has been self employed as an electrician for approximately 33 years. He was also
previously self-employed as a farmer.
Roger Nieland, one of Breda's directors, passed away unexpectedly on July 8,
2003. Mr. Nieland had been a director of Breda since May, 2000, and he had been
elected to serve another three year term as a director at the May 20, 2003
annual meeting of the shareholders of Breda. Breda's board of directors has the
authority to fill any vacancy occurring on the board of directors through death
by the affirmative vote of a majority of the remaining directors, but a director
elected by the board of directors to fill a vacancy can only serve as a director
until the next election of directors by the shareholders, at which time the
shareholders must elect a director to serve for the remainder of the three year
term of the vacant directorship. The board of directors exercised that authority
at its August 12, 2003 meeting by electing Rick Anthofer to fill the vacancy
created by Mr. Nieland's death until the 2004 annual meeting of the shareholders
of Breda.
30
As indicated, Mr. Anthofer has been a director of Breda since August 12, 2003,
when he was elected as a director to fill the vacancy created by the death of
Roger Nieland. He has also been a director of each of Breda's subsidiaries since
August 12, 2003. 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.
John Wenck has been a director of Breda since April, 1997. His current term as a
director of Breda will end at the annual meeting of Breda's shareholders which
is held in 2006. He has also served as a director of each of Breda's
subsidiaries since April, 1997. Mr. Wenck has been self employed as a farmer for
approximately 29 years. He was also previously employed by the United Parcel
Service as a delivery driver.
Charles (Chuck) Thatcher has been a director of Breda since May, 2001. His
current term as a director will end at the 2004 annual meeting of Breda's
shareholders. 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 19 years. Midwest Wholesale
Building Products is a wholesaler/retailer of lumber, building products and
materials.
The number of directors for Breda is currently fixed at seven. Each of Breda's
directors is elected to a three year term and until his or her successor is
elected 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.
The officers of Breda are elected annually by the board of directors at its
annual organizational meeting, and hold office until the next annual 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. 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:
31
Name Age Position
---- --- --------
Robert J. Boeckman 42 Chief Operations
Officer
Jane A. Morlok 50 Chief Financial
Officer
Mr. Boeckman has been employed by Breda in various capacities since May, 1982.
Prior to January, 1995, he was Breda's assistant manager. He was the manager of
Breda from January, 1995 to March, 1998, at which time he was given the title
chief operating officer. His current titles are chief operations officer and
co-chief executive officer.
Ms. Morlok became the chief financial officer of Breda on March 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 31,694
shares of its common stock issued and outstanding as of December 31, 2003. Those
shares were held by approximately 569 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 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
32
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 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. 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-
33
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.
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
34
determining the new issuance price and redemption price discussed above, Prairie
Telephone's basis in its 3,000 shares of common stock of Central Iowa Cellular,
Inc. of approximately $206,770 was deducted from the after-tax amount of
$3,147,676. As indicated, the board of directors believed this was a material
event which made it appropriate to make a new determination of the issuance
price and redemption price for shares of Breda's common stock.
The board of directors returned to Breda's historical practices at its meeting
on March 12, 2001, at which meeting the board of directors adopted a resolution
fixing the issuance price and redemption price for Breda's shares of common
stock to be $258 per share. The $258 per share amount was determined based upon
Breda's 2000 audited financial statements. The $258 per share price was
announced and became effective at the May 16, 2001 annual meeting of the
shareholders.
The board of directors continued to follow Breda's historical practices on this
issue at its meeting on April 8, 2002, at which meeting the board of directors
adopted a resolution fixing the issuance price and redemption price for Breda's
share of common stock to be $280 per share. The $280 per share amount was
determined based upon Breda's 2001 audited financial statements. The $280 per
share price was announced and became effective at the May 21, 2002 annual
meeting of the shareholders.
The board again followed Breda's historical practices on this issue by
announcing a new issuance price and redemption price of $303.00 per share at the
May 20, 2003 annual meeting of the shareholders. The $303.00 per share amount
was based upon Breda's 2002 audited financial statements, after net book value
was adjusted for undistributed earnings of the equity investments, as discussed
in the following paragraph.
The board of directors determined in its review of the financial statements of
Breda for the year ended December 31, 2002, that the valuation of Breda's and
its subsidiaries' outside investments should remain on the cost basis for
purposes of determining and establishing the issuance price and the redemption
price for Breda's shares of common stock. Breda changed to the equity method of
accounting for certain outside investments in 2002 due to changes in certain
accounting standards. Under the equity method Breda reports its proportionate
share of the earnings of the outside investments, but only a portion of those
earnings are usually distributed to Breda. Breda believes that refiguring the
value of the outside investments on the cost basis before determining the
issuance price and redemption price of Breda's shares of common stock is
appropriate because it reflects actual cash distributions from the outside
investments and is consistent with Breda's historical practices for establishing
the issuance price and redemption price for Breda's shares of common stock.
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, except that the board of directors may determine to depart
from those historical practices again in the future in the event of the
occurrence of what the board of directors believes are material or significant
events. The board of directors will, accordingly, establish a new issuance price
and redemption price effective at the 2004 annual meeting of the shareholders,
and that the price will be set at approximately 75% of the book value of Breda
as of December 31, 2003, but adjusted as described in the preceding paragraph.
Breda estimates that the issuance price and redemption price that will be set at
the 2004 annual meeting of the shareholders will be approximately $326.00.
35
The issuance and redemption price as determined by the board of directors has
increased from $27 per share in 1995 (based on the 1994 year-end audited
financial statements of Breda) to the current $303 per share amount which was
established at the May 20, 2003 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 to
arrange any other auctions in the future. Breda also maintains a list of
shareholders desiring to sell their shares, and of other shareholders desiring
to purchase those shares, as discussed below.
In any of the circumstances where Breda has the right to redeem a shareholder's
shares, a shareholder may, with the consent of Breda's board of directors,
transfer the shareholder's shares to another person who is eligible to be a
shareholder by reason of the fact that the person is receiving services from
Breda and is residing in the Breda or Lidderdale telephone exchange areas served
by Breda.
No shareholder can sell or transfer any of his or her shares of Breda to any
person who is not eligible to be a shareholder in Breda by reason of the fact
that the person is receiving services from Breda and is residing in the Breda or
Lidderdale telephone exchange areas served by Breda, with one exception. The
exception is that a person who was a shareholder on July 20, 1995, may make a
one time transfer of the shares held by the person on that date to a family
member of the shareholder (which means a spouse, natural born or adopted child,
grandchild, parent, grandparent, or sibling), even if the family member is not
receiving services from Breda and is not residing in the Breda or Lidderdale
telephone exchange areas served by Breda. These transfers are not subject to
Breda's right of first refusal described in the following paragraph. Any family
member receiving shares by this process does not have the same right, however,
and can only sell or transfer the shares in accordance with the Amended and
Restated Articles of Incorporation of Breda.
36
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.
Over the period of January 1, 1996 through June 24, 1996, Breda repurchased four
hundred and twenty-four shares of its common stock from two shareholders, at a
purchase price of $27 per share. Over the period of June 25, 1996 through
February 20, 1997, Breda repurchased seven hundred and eighty-nine shares from
nine different shareholders, at a purchase price of $31 per share. Over the
period of February 21, 1997 through March 1, 1998, Breda repurchased one
thousand nine hundred and ninety-six shares of its common stock from fourteen
different shareholders, at a purchase price of $41 per share. Over the period of
March 2, 1998 through December 31, 1998, Breda repurchased three hundred and
fifty-eight shares of its common stock from five different shareholders, at a
purchase price of $64 per share.
No shares were repurchased by Breda during the period of December 31, 1998
through December 31, 1999, except that in November, 1999, Breda did effectuate a
repurchase of forty shares by depositing the purchase price for those forty
shares with the appropriate Iowa authorities under Iowa's escheat laws. The
forty shares were held of record by 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.
Over the period of January 1, 2000 through December 31, 2000, Breda repurchased
four hundred forty-one shares of its common stock from fourteen different
shareholders, at a purchase price of $235 per share.
Over the period of January 1, 2001 through June 30, 2001, Breda repurchased 220
shares of its common stock from two different shareholders, at a purchase price
of $235 per share. During the quarter ended June 30, 2001, Breda repurchased
1,104 shares of its common stock from five different shareholders, at a purchase
price of $258 per share. Over the period of July 1, 2001 through December 31,
2001, Breda repurchased 892 shares of its common stock from nineteen different
shareholders, at a purchase price of $258 per share.
37
During the period of January 1, 2002 through March 31, 2002, Breda repurchased
244 shares of its common stock from six different shareholders, at a purchase
price of $258 per share. During the period of April 1, 2002 through June 30,
2002, Breda repurchased 43 shares of its common stock from one shareholder at a
purchase price of $258 per share, and 720 shares of its common stock from ten
different shareholders, at a purchase price of $280 per share. During the period
of July 1, 2002 through December 31, 2002, Breda repurchased 1,018 shares of its
common stock from 15 different shareholders, at a purchase price of $280 per
share.
During the period of January 1, 2003 through March 31, 2003, Breda repurchased
188 shares of its common stock from six different shareholders, at a purchase
price of $280 per share. During the period of April 1, 2003 through December 31,
2003, Breda repurchased 1,118 shares of its common stock from 16 different
shareholders at a purchase price of $303 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 section.
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.
38
As of December 31, 2003, there were 22 shareholders with multiple voting rights
arising from their prior ownership of Class A stock, and they have one vote for
each share of the former Class A stock previously held by them. Those 22
shareholders previously had a total of 61 shares of Class A stock.
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
39
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.
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.
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 and paid six dividends to its shareholders since Breda was
incorporated in 1964. The dividends were declared on, respectively, March 15,
1999, March 13, 2000, March 12, 2001, April 8, 2002, March 10, 2003, and March
16, 2004. Each of those dividends was in the amount of $3.00 per share. The
aggregate dividend paid was, respectively, $113,166, $113,046, $111,087,
$104,214, $98,436 and $94,479.
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 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.
40
No shares of stock were issued by Breda in 2003. 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Breda has not had any change in its accountants during Breda's two most recent
fiscal years, or any disagreements with its accountants during that period which
are of the type required to be disclosed under this section.
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, 2003. 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.
FINANCIAL STATEMENTS
The following pages are certain financial statements of Breda with respect
to the years ended December 31, 2002 and December 31, 2003.
[The remainder of this page is intentionally left blank.]
41
BREDA TELEPHONE CORPORATION
AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003 and 2002
42
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
Contents
Page
----
Independent Auditors' Report 44
Consolidated Financial Statements:
Consolidated Balance Sheets 45 - 46
Consolidated Statements of Income 47
Consolidated Statements of Stockholders' Equity 48
Consolidated Statements of Cash Flows 49 - 50
Notes to Consolidated Financial Statements 51 - 67
43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Breda Telephone Corporation and Subsidiaries
Breda, Iowa
We have audited the accompanying consolidated balance sheets of Breda Telephone
Corporation (an Iowa corporation) and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of RSA No. 9 L.P. limited
partnership, the investment in which, as discussed in Note Four to the
consolidated financial statements, is accounted for by the equity method of
accounting. The investment in this limited partnership was $704,737 and $860,493
as of December 31, 2003 and 2002, respectively, and the equity in its net income
was $185,918 and $374,110 for the years ended December 31, 2003 and 2002,
respectively. The financial statements of RSA No. 9 L.P. were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for RSA No. 9. L.P., is based solely on the
report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as, evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, 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, 2003 and 2002, 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 30, 2004
44
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,205,550 $ 1,032,734
Temporary investments 361,543 459,059
Accounts receivable 563,542 835,667
Interest receivable 52,742 68,053
Current portion of notes receivable 144,000 116,000
Inventory, at average cost 108,007 91,114
Other 25,407 86,581
----------- -----------
2,460,791 2,689,208
----------- -----------
OTHER NONCURRENT ASSETS
Marketable securities 3,928,354 3,136,576
Investments in unconsolidated affiliates at equity 3,942,275 3,454,159
Other investments at cost 857,147 807,564
Goodwill 896,812 896,812
Notes receivable, less current portion 291,134 512,792
----------- -----------
9,915,722 8,807,903
----------- -----------
PROPERTY, PLANT AND EQUIPMENT 5,141,009 5,190,176
----------- -----------
TOTAL ASSETS $17,517,522 $16,687,287
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
45
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 144,183 $ 134,981
Accounts payable 233,802 262,879
Accrued taxes 106,592 166,744
Other 137,042 174,534
----------- -----------
621,619 739,138
----------- -----------
LONG-TERM DEBT, less current portion 1,633,461 1,777,644
----------- -----------
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES 497,795 105,534
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - no par value, 5,000,000 shares authorized, 31,694
and 33,000 shares issued and outstanding at $303 and $280
stated values, respectively 9,603,282 9,240,000
Retained earnings 5,161,365 4,824,971
----------- -----------
14,764,647 14,064,971
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,517,522 $16,687,287
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
46
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
OPERATING REVENUES $ 6,197,297 $ 5,988,405
----------- -----------
OPERATING EXPENSES
Cost of services 2,604,184 2,325,632
Depreciation and amortization 1,057,290 1,070,569
Selling, general, and administrative 1,821,600 1,772,184
----------- -----------
5,483,074 5,168,385
----------- -----------
OPERATING INCOME 714,223 820,020
----------- -----------
OTHER INCOME (EXPENSES)
Interest and dividend income 277,690 299,276
Interest expense (136,909) (146,571)
Income from equity investments 1,039,402 918,511
Other, net 5,288 90,213
----------- -----------
1,185,471 1,161,429
----------- -----------
INCOME BEFORE INCOME TAXES 1,899,694 1,981,449
----------- -----------
INCOME TAXES 710,188 692,260
----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,189,506 1,289,189
----------- -----------
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX -- (70,768)
----------- -----------
NET INCOME $ 1,189,506 $ 1,218,421
=========== ===========
NET INCOME PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 36.89 $ 37.95
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX -- (2.08)
----------- -----------
NET INCOME PER COMMON SHARE $ 36.89 $ 35.87
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
47
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
December 31, 2003 and 2002
Common Stock
----------------------- Retained
Shares Amount Earnings Total
------ ----------- ----------- ------------
Balance at December 31, 2001 35,025 $ 9,036,450 $ 4,475,000 $ 13,511,450
Comprehensive income:
Net income 1,218,421 1,218,421
Dividends paid (104,214) (104,214)
Common stock redeemed, net (2,025) (560,686) (560,686)
Stated value stock adjustment 764,236 (764,236)
------ ----------- ----------- ------------
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
====== =========== =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
48
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,189,506 $ 1,218,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,057,290 1,070,569
Deferred income taxes 349,694 739
Amortization of investment tax credits (9,769) (9,769)
Equity income in unconsolidated affiliates, net of distributions
received of $676,786 and $197,264 in 2003 and 2002,
respectively (362,616) (721,247)
Note receivable discount (14,342) (17,290)
Gain on sale of building -- 102,611
Cumulative effect of accounting change -- 119,945
Changes in assets and liabilities:
(Increase) Decrease in:
Receivables 287,437 (292,284)
Prepayments 61,174 66,520
Inventory (16,893) 1,914
Increase (Decrease) in:
Accounts payable (29,077) 67,869
Accrued taxes (60,152) 25,640
Other (37,492) 16,743
----------- -----------
Net cash provided by operating activities 2,414,760 1,650,381
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,008,124) (754,895)
Purchase of investments (1,747,160) (1,464,892)
Purchase of other investments - at equity (125,500) (248,273)
Purchase of other investments - at cost (3,566) (3,400)
Issuance of notes receivable -- (160,000)
Proceeds from the sale of investments 1,052,898 999,499
Proceeds from the sale of other investments - at cost 6,319 7,333
Repayment of notes receivable 208,000 --
Cost of removing plant, net of salvage -- 831
----------- -----------
Net cash used in investing activities (1,617,133) (1,623,797)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long term debt (134,981) (126,365)
Common stock redeemed, net (391,394) (560,686)
Dividends paid (98,436) (104,214)
----------- -----------
Net cash used in financing activities $ (624,811) $ (791,265)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
49
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 and 2002
2003 2002
---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents $ 172,816 $ (764,681)
Cash and Cash Equivalents at Beginning of Year 1,032,734 1,797,415
---------- -----------
Cash and Cash Equivalents at End of Year $1,205,550 $ 1,032,734
========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
50
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
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 company 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,
Tele-Services, Ltd., and Westside Independent Telephone Company,
(herein referred to as "the Company"). All material intercompany
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or
less at the time of purchase are considered cash equivalents.
Investments
Certificates of deposit bought and held by the Company until
maturity are carried at cost, which approximates market.
Debt and marketable equity securities bought and held principally
for selling in the near future are classified as trading securities
and carried at fair value. Unrealized holding gains and losses on
trading securities are reported in earnings. Debt and marketable
equity securities classified as available-for-sale are carried at
fair value with unrealized holding gains and losses recorded as a
separate component of stockholders' equity.
51
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 1. SUMMARY OF SIGNIFICANT 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 and employee benefits.
The Company provides for depreciation for financial reporting
purposes on the straight-line method by the application of rates
based on the estimated service lives of the various classes of
depreciable property. These estimates are subject to change in the
near term.
Renewals and betterments of units of property are charged to
telephone and cable television plant in service. When plant is
retired, its cost is removed from the asset account and charged
against accumulated depreciation together with removal cost less any
salvage realized. No gains or losses are recognized in connection
with routine retirements of depreciable property. Repairs and
renewals of minor items of property are included in plant specific
operations expense.
Repairs of other property, as well as renewals of minor items of
property are included in plant specific operations expense. A gain
or loss is recognized when other property is sold or retired.
52
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
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 property and equipment,
partnership interests 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 tariffed and contracted rates.
53
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
The Company uses the reserve method to recognize uncollectible
customer accounts.
Reclassifications
Certain reclassifications have been made to the 2002 consolidated
financial statements to conform with the 2003 presentation.
NOTE 2. TEMPORARY INVESTMENTS AND MARKETABLE SECURITIES
The amortized cost and fair value of certificates of deposits and
investments classified as held-to-maturity are as follows:
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 2. TEMPORARY INVESTMENTS AND MARKETABLE SECURITIES (Continued)
Certificates of deposit and investments classified as
held-to-maturity at December 31, 2003 are summarized below by
contractual maturity date:
Amortized
Cost Fair Value
------------ ------------
Due in one year or less $ 361,543 $ 364,441
Due after one year through three years 815,953 858,441
Due after three years through five years 954,994 990,420
Due after five years 2,157,407 2,165,868
------------ ------------
$ 4,289,897 $ 4,379,170
============ ============
The note with Desktop Media, L.L.C., has an original balance of
$500,000, matures in 2006 and reflects interest at 13%. The note is
shown net of unamortized discounts of $16,866 and $31,208 at
December 31, 2003 and 2002, 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 Media, L.L.C. to defer principal payments due
in the months of September through December 2003.
During September 2001, the Company entered into a contract with
Toyne, Inc. to sell its corporate building for $200,000. The Company
received a cash deposit of $20,000 and the contract established
payment terms. On October 15, 2002, the Company received a
promissory note for the $180,000 at a rate of 7%. The transaction
resulted in a before tax gain of $102,611 in 2002. The note was paid
in full during 2003.
55
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
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:
The Company continues to have a 17.42% ownership interest in Alpine
Communications, L.C. (Alpine). The Alpine group operates several
telephone exchanges in eastern Iowa.
The Company's percentage ownership interests in RSA #1, Ltd., RSA
#7, Ltd., RSA #8, Ltd. and RSA #9, Ltd. are 9.1%, 7.1%, 11.7% and
16.7%, respectively, at December 31, 2003.
Additionally, Westside Independent Telephone Company, a wholly-owned
subsidiary of Breda Telephone Corporation, has a 33.33% ownership
interest in Quad County Communications (Quad County). This entity
owns and operates a fiber optic network.
The Company's percentage interests in Carroll County Wireless,
L.L.C. and Guthrie Group, L.L.C. are 33.33% and 25%, respectively.
Both companies have purchased the licenses to provide personal
communication services (PCS); however, neither company has begun
providing PCS services as of December 31, 2003. The operations of
these entities are immaterial to the consolidated financial
statements.
Investments with less than a 20% ownership are carried at equity due
to the level of influence the Company has with respect to each
investment.
56
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 4. OTHER INVESTMENTS (Continued)
Condensed consolidated financial data for the twelve months ended
September 30, 2003 and 2002 for Alpine, RSA #1, RSA #7, RSA #8, RSA
#9, and Quad County is as follows:
2003 2002
------------ ------------
Revenues $ 42,408,080 $ 41,987,013
Expenses 30,407,082 30,542,190
------------ ------------
Net Income $ 12,000,998 $ 11,444,823
============ ============
Current assets $ 13,948,541 $ 13,208,958
Non-current assets 35,863,771 35,823,617
Current liabilities 4,417,295 4,753,174
Non-current liabilities 14,693,369 16,845,194
LONG-TERM INVESTMENTS AT COST
Long-term investments at cost include nonmarketable equity
securities and certificates as follows:
The NRTC declares and Breda Telephone Corporation receives a yearly
patronage dividend based on the NRTC's profitability. Of the total
dividend, 30% is received in cash and 70% is distributed in the form
of NRTC patronage capital certificates, which will be redeemed in
cash at a future date at the discretion of the NRTC. The Company has
recorded an asset and an offsetting deferred income liability for
the noncash portion of the patronage dividend. The deferred income
is recognized as revenue when cash distributions are declared by the
NRTC. Deferred revenue included in other liabilities was $52,336 at
December 31, 2003.
57
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 5. GOODWILL
Goodwill consists of the following:
2003 2002
----------- -----------
Balance, Beginning of Year $ 896,812 $ 1,016,757
Goodwill acquired -- --
Goodwill impairment -- (119,945)
----------- -----------
Balance, End of Year $ 896,812 $ 896,812
=========== ===========
In accordance with SFAS 142, the Company annually assesses its
recorded balances of goodwill. The Company determined an impairment
of $119,945, related to goodwill, existed on January 1, 2002. It was
determined that the goodwill related to the purchase price of
Westside Communications, Inc., which is a component of the broadcast
segment, was impaired. Fair value was determined using a discounted
cash flow method. The impairment loss of $70,768, net of tax, is
presented in the income statement as a cumulative effect of an
accounting change.
58
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
2003 2002
----------- -----------
Telephone plant in service:
Land $ 41,508 $ 41,508
Buildings 1,580,697 1,210,087
Other general support assets 1,571,269 1,465,661
Central office assets 2,618,151 2,256,252
Cable and wire facilities 4,452,624 4,448,036
Other plant and equipment 838,091 788,148
----------- -----------
11,102,340 10,209,692
----------- -----------
Cable television plant in service:
Land 6,086 6,086
Buildings 127,937 127,938
Other plant and equipment 180,098 177,445
Towers, antennas and head end equipment 1,516,105 1,509,394
Cable and wire facilities 1,573,524 1,573,524
Franchises 32,992 32,992
----------- -----------
3,436,742 3,427,379
----------- -----------
Total property, plant and equipment 14,539,082 13,637,071
Less accumulated depreciation 9,468,930 8,468,035
----------- -----------
5,070,152 5,169,036
Plant under construction 70,857 21,140
----------- -----------
$ 5,141,009 $ 5,190,176
=========== ===========
Telephone cable and wire facilities of approximately $675,000 and
cable television head end equipment of approximately $525,000 was
fully depreciated in 2003. Depreciation on depreciable property
resulted in composite rates of 7.5% and 8.1% for 2003 and 2002,
respectively.
59
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 7. INCOME TAXES
Income taxes reflected in the Consolidated Statements of Income
consist of the following:
2003 2002
----------- -----------
Federal income taxes:
Current tax expense $ 238,562 $ 503,880
Deferred tax expense (benefit) 264,048 (531)
Amortization of investment tax credits (9,769) (9,769)
State income taxes:
Current tax expense 131,701 198,888
Deferred tax expense (benefit) 85,646 (208)
----------- -----------
Total income tax expense $ 710,188 $ 692,260
=========== ===========
Deferred federal and state tax liabilities and assets reflected in
the Consolidated Balance Sheets are summarized as follows:
2003 2002
----------- -----------
Deferred Tax Liabilities
Federal $ 426,338 $ 269,312
State 139,907 79,530
----------- -----------
Total Deferred Tax Liabilities 566,245 348,842
----------- -----------
Deferred Tax Assets
Federal 90,324 197,347
State 44,934 70,202
----------- -----------
Total Deferred Tax Assets 135,258 267,549
----------- -----------
Net Deferred Tax Liability $ 430,987 $ 81,293
=========== ===========
Current Portion $ -- $ --
Long-term Portion 430,987 81,293
----------- -----------
Net Deferred Tax Liability $ 430,987 $ 81,293
=========== ===========
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 2003 and
2002 totaled $425,260 and $566,317, respectively.
60
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
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:
2003 2002
------ ------
Statutory federal income tax rate 34.0% 34.0%
State income taxes, net of federal benefit 10.1% 9.6%
Amortization of investment tax credits (0.1)% (0.1)%
Dividends received deduction (1.4)% (1.5)%
Tax exempt interest (3.7)% (3.9)%
Other (1.5)% (3.2)%
------ ------
Effective income tax rate 37.4% 34.9%
====== ======
The Company files consolidated tax returns including their
subsidiaries, Prairie Telephone Company, Inc., Westside Independent
Telephone Company and Tele-Services, Ltd.
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.
61
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
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 4.65% at December 31, 2003. No funds were advanced under the
line at December 31, 2003.
In addition, Prairie Telephone Company, Inc. a wholly-owned
subsidiary of Breda Telephone Corporation, has a line of credit with
the RTFC for $500,000. This approved line of credit is available
until November 30, 2005 at a rate of 4.65% at December 31, 2003. No
funds were advanced under the line at December 31, 2003.
Cash paid for interest net of amounts capitalized for 2003 and 2002
totaled $136,909 and $146,571, 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.
62
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
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
2003 Carrier Broadcast Provider Other Total
----------- ----------- ----------- -------- -----------
Revenues and sales $ 4,661,184 $ 909,292 $ 626,821 $ -- $ 6,197,297
Intersegment income and sales -- -- -- -- --
Interest income 273,486 4,052 152 -- 277,690
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
2002
Revenues and sales $ 4,287,041 $ 975,336 $ 726,028 $ -- $ 5,988,405
Intersegment income and sales -- -- -- -- --
Interest income 291,951 7,321 4 -- 299,276
Interest expense 146,571 -- -- -- 146,571
Depreciation and amortization 667,403 310,214 92,952 -- 1,070,569
Income tax expense (benefit) 810,014 (29,439) (86,273) (2,042) 692,260
Segment profit (loss) 1,384,318 (114,925) (47,807) (3,165) 1,218,421
Segment assets 14,345,956 1,463,418 828,015 49,898 16,687,287
Expenditures for segment assets 596,549 14,136 144,210 -- 754,895
63
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 9. OPERATING SEGMENTS INFORMATION (Continued)
Reconciliation of Segment Information 2003 2002
----------- ------------
REVENUES:
Total revenues for reportable segments $ 6,197,297 $ 5,988,405
Other revenues -- --
----------- ------------
Consolidated Revenues $ 6,197,297 $ 5,988,405
=========== ============
PROFIT:
Total Profit for reportable segments $ 1,189,506 $ 1,221,586
Other profit (loss) -- (3,165)
----------- ------------
Net Income $ 1,189,506 $ 1,218,421
=========== ============
ASSETS:
Total assets for reportable segments $17,517,522 $ 16,637,389
Other assets -- 49,898
Elimination of intercompany receivables -- --
----------- ------------
Consolidated Assets $17,517,522 $ 16,687,287
=========== ============
NOTE 10. NET INCOME PER COMMON SHARE
Net income per common share for 2003 and 2002 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,
2003 and 2002 were 32,241 and 33,968, respectively.
NOTE 11. STOCK VALUE ADJUSTMENT
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.
During May 2002, the board of directors authorized a $22 increase in
the stated value of each share of common stock from $258 to $280.
There were 34,738 shares outstanding at the time of the value
adjustment, which reduced earnings by $764,236.
64
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 12. STOCK RESTRICTIONS
The Company as 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 adopted for its employees who have met certain
eligibility requirements, a defined benefit retirement and security
program sponsored by the National Telephone Cooperative Association
(NTCA). The plan calls for the Company to contribute 8.6 % of each
enrolled employees' annual gross salary. As a condition of
participation, each participating employee must also contribute a
minimum 3% of their annual gross salary. Contributions made by the
Company totaled $92,016 and $88,860 for the years ended December 31,
2003 and 2002, respectively.
65
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 14. ASSET RETIREMENT OBLIGATION
SFAS No. 143, "Accounting for Asset Retirement Obligations," was
issued in June 2001, and became effective for the Company beginning
January 1, 2003. SFAS No. 143 requires entities to record the fair
value of a liability for legal obligations associated with as 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 adopted SFAS No. 143 effective January 1, 2003. The
Company has determined it does not have a material legal obligation
to remove long-lived assets as described by SFAS No. 143, and
accordingly, adoption of SFAS No. 143 did not have a material impact
on the Company's financial statements for the year ended December
31, 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,
2003 and 2002 were approximately $1,018,000 and $778,500,
respectively. At December 31, 2003 and 2002, $102,754 and $111,755
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 franchised service area, broadcast customers,
internet customers and telecommunications intrastate and interstate
long distance carriers.
The Company received 39% of its 2003 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.
66
BREDA TELEPHONE CORPORATION AND SUBSIDIARIES
BREDA, IOWA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 17. WIRELESS TERMINATING ACCESS REVENUE
The Iowa Utilities Board issued an order on November 26, 2001, which
stated that Qwest Corporation would not be required to pay access
charges for calls placed by a wireless customer to a wireline
customer carried by Qwest. Sufficient information related to the
calling party is not being provided to the Company by Qwest on the
toll records. Accordingly, the Company is not able to ascertain
whether the caller is a wireline or wireless customer and whether
access charges are or are not due to the Company. As a result, the
Company continues to bill Qwest access for all terminating minutes
and has had to rely on Qwest to provide adjustments for their
estimate of the wireless minutes. Qwest issued a bill to the Company
asking for refunds of amounts paid to the Company during the period
April 1999 through February 2002 that Qwest contends were mistakenly
overpaid to the Company for access charges during that period. The
Company has accrued this bill for $22,600 which is in accounts
payable at December 31, 2003. During the years ended December 31,
2003 and 2002, the Company has reduced its revenues approximately
$169,000 and $72,000, respectively, related to Qwest estimated
wireless terminating access that the Company has billed but to which
Qwest has not paid.
NOTE 18. CONTINGENCY
Qwest Communications initiated an inquiry of twenty Iowa local
exchange carriers. As a result of the inquiry, the Company found in
October 2003 that Qwest had been inappropriately routing cellular
phone traffic through the Company's toll facilities. Upon discovery
of this, Qwest rerouted this cellular traffic so that it no longer
goes through the Company's facilities. The Company has taken the
position that this traffic was routed over its network and the
access that Qwest has paid to them was appropriately billed.
Accordingly, the Company believes that this issue will not effect
prior periods. The Company has estimated that network access
revenues will decrease by approximately $200,000 in 2004.
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