UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


________________





FORM 10-Q


________________


(Mark One)





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2010


or


o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ______________________ to _______________________





Commission File Number: 0-26525


____________________





BREDA TELEPHONE CORP.


(Exact name of registrant as specified in its charter)


_____________________




Iowa
42-0895882(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)112 E. Main, P.O. Box 190, Breda, Iowa
51436(Address of principal executive offices)
(Zip Code)





712-673-2311


(Registrant's telephone number, including area code)





N/A


(Former name, former address and former fiscal year, if changed since last report)


______________________





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes    o No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes    o No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.





Large accelerated filer  o

Accelerated filer  oNon-accelerated filer  o

Smaller reporting company  þ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes    þ No





Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  24,947  shares of Class A common stock and 5,498 shares of Class B common stock, no par value, at November 1, 2010.










BREDA TELEPHONE CORP.


FORM 10-Q


For the Quarter Ended September 30, 2010





INDEX





PagePart I.   Financial InformationItem 1.
Unaudited Financial Statements
1a)
Balance Sheets
2b)
Statements of Income
3c)
Statements of Stockholders’ Equity
4d)
Statements of Cash Flows
5e)
Notes to Unaudited Financial Statements
6Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
12Item 3.
Quantitative and Qualitative Disclosures About Market Risk
52Item 4.
Controls and Procedures
53Part II.   Other InformationItem 1.
Legal Proceedings
53Item 1A.
Risk Factors
54Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
54Item 3.
Defaults Upon Senior Securities
55Item 5.
Other Information
55Item 6.
Exhibits
56Signatures
58Exhibits Filed With This ReportRule 13a-14(a) Certification of Chief Executive Officer
E-1Rule 13a-14(a) Certification of Chief Financial Officer
E-3Section 1350 Certification of Chief Executive Officer
E-5Section 1350 Certification of Chief Financial Officer
E-6


Index


PART I - FINANCIAL INFORMATION





Item 1.
Unaudited Financial Statements.








Breda Telephone Corp.


And Subsidiaries


Breda, IA








Condensed Consolidated Financial Statements


For the Periods


Ended September 30, 2010 and 2009


And the Year Ended December 31, 2009


1
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIESBREDA, IOWACONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)September 30, 2010 and December 31, 2009September 30,


December 31,2010


2009ASSETSCURRENT ASSETSCash and cash equivalents

$
4,195,456


$
4,987,960Marketable securities


632,600



490,724Accounts receivable, net of allowances of $186,101 and $159,831 in 2010 and 2009, respectively


2,329,293



1,928,483Interest receivable


69,788



62,693Inventory, at average cost


268,643



297,678Prepaid income taxes


982,930



1,310,951Other


230,069



291,977Deferred income taxes


84,465



58,8628,793,244



9,429,328OTHER NONCURRENT ASSETSMarketable securities


4,854,964



5,223,501Investments in unconsolidated affiliates at equity


8,892,598



8,537,047Other investments at cost


602,387



655,542Goodwill


918,715



918,71515,268,664



15,334,805PROPERTY, PLANT AND EQUIPMENT


10,509,375



8,102,372TOTAL ASSETS

$
34,571,283


$
32,866,505LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESCurrent portion of long-term debt

$
74,503


$
14,144Accounts payable


1,970,504



2,091,609Accrued taxes


137,877



157,740Other


165,031



136,7222,347,915



2,400,215LONG-TERM DEBT, less current portion


1,974,179



1,548,575OTHER NONCURRENT LIABILITIES


2,706,479



2,468,101STOCKHOLDERS' EQUITYCommon stock, Class A - no par value, 5,000,000 shares authorized, 25,444 and 26,109 shares issued and outstanding at $587 and $547 stated values, respectively


14,935,628



14,281,623Common stock, Class B - no par value, 5,000,000 shares authorized, 5,001 and 4,742 shares issued and outstanding at $587 and $547 stated values, respectively


2,935,587



2,593,874Retained earnings


9,604,832



9,508,416Noncontrolling interest


66,663



65,70127,542,710



26,449,614TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
34,571,283


$
32,866,505The accompanying notes are an integral part of these condensed consolidated financial statements.




2
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIESBREDA, IOWACONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)For the Three and Nine Months Ended September 30, 2010 and 2009For the Three Months Ended


For the Nine Months Ended2010


2009


2010


2009OPERATING REVENUES

$
1,896,622


$
2,035,986


$
7,166,658


$
6,484,517OPERATING EXPENSESCost of services


1,154,436



1,152,852



3,591,197



3,210,538Depreciation and amortization


289,064



253,087



817,268



780,945Selling, general, and administrative


606,967



548,706



1,810,615



1,859,5052,050,467



1,954,645



6,219,080



5,850,988OPERATING INCOME


(153,845
)


81,341



947,578



633,529OTHER INCOME (EXPENSES)Interest and dividend income


58,467



59,563



299,325



331,212Gain on sale of investments


1,413



524



1,975



1,358Gain or (Loss) on disposal of assets


4,707



(65,530
)


95,715



(71,883
)Interest expense


(16,549
)


(129
)


(48,077
)


(26,086
)Allowance for funds used during construction


16,407



-



47,859



-Income from equity investments


388,628



80,704



1,318,227



1,376,076Gain on reversal of note receivable impairment


-



445,252



-



445,252Other, net


799



(2,597
)


(8,875
)


(22,655
)453,872



517,787



1,706,149



2,033,274INCOME BEFORE INCOME TAXES


300,027



599,128



2,653,727



2,666,803INCOME TAXES


198,204



233,267



1,075,501



846,870NET INCOME BEFORE NONCONTROLLING INTEREST


101,823



365,861



1,578,226



1,819,933NONCONTROLLING INTEREST


(1,103
)


134



(962
)


2,509NET INCOME

$
100,720


$
365,995


$
1,577,264


$
1,822,442NET INCOME PER COMMON SHARE

$
3.31


$
11.86


$
51.34


$
59.07DIVIDENDS PER COMMON SHARE

$
8.00


$
8.00


$
8.00


$
8.00The accompanying notes are an integral part of these condensed consolidated financial statements.


3
 Index





BREDA TELEPHONE CORP. AND SUBSIDIARIESBREDA, IOWACONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)Common Stock,

A and B Class


Noncontrolling


RetainedShares


Amount


Interest


Earnings


TotalBalance at December 31, 2008 (Restated)


30,851


$
15,703,159


$
136,194


$
8,421,630


$
24,260,983Comprehensive income:Net Income










(2,398
)


2,505,932



2,503,534Purchase of controlling interest










(68,095
)






(68,095
)Dividends paid














(246,808
)


(246,808
)Stated value stock adjustment






1,172,338







(1,172,338
)Balance at December 31, 2009


30,851



16,875,497



65,701



9,508,416



26,449,614Comprehensive income:Net Income










962



1,577,264



1,578,226Dividends paid


4030.00











(246,808
)


(246,808
)Common stock redeemed, net


(406
)


(238,322
)










(238,322
)Stated value stock adjustment






1,234,040







(1,234,040
)Balance at September 30, 2010


30,445


$
17,871,215


$
66,663


$
9,604,832


$
27,542,710The accompanying notes are an integral part of these condensed consolidated financial statements.




4
 Index





BREDA TELEPHONE CORP. AND SUBSIDIARIESBREDA, IOWACONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)For the Nine Months Ended September 30, 2010 and 20092010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
1,577,264


$
1,822,442Adjustments to reconcile net income to cash provided by operating activities:Depreciation and amortization


817,268



780,945Noncontrolling interest


962



(2,509
)Deferred income taxes


212,775



573,929Amortization of investment premium/discount - net


31,198



27,368Equity income in unconsolidated affiliates, net of distributions received of $1,046,254 and $1,045,268 in 2010 and 2009, respectively


(271,973
)


(330,808
)(Gain) or Loss on disposal of property


(95,715
)


71,883Gain on reversal of note receivable impairment


-



(445,252
)Gain on sale of marketable securities


(1,975
)


(1,358
)Changes in assets and liabilities:Decrease in assets


11,059



1,265,076Decrease in liabilities


(671,669
)


(65,999
)Net cash provided by operating activities

$
1,609,194


$
3,695,717CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures


(2,664,900
)


(1,278,570
)Proceeds from the sale of assets


95,354



79,594Purchase of marketable securities


(342,622
)


(451,885
)Purchase of equity investments


(83,578
)


(10,000
)Purchase of other investments - at cost


(2,786
)


(2,956
)Purchase of investment in a subsidiary


-



(68,095
)Proceeds from the sale of marketable securities


540,060



495,826Proceeds from the sale of other investments - at cost


55,941



23,861Proceeds from the receipt of principal on note receivable


-



519,011Net cash used in investing activities

$
(2,402,531
)

$
(693,214
)CASH FLOWS FROM FINANCING ACTIVITIESRepayment of long term debt


(14,037
)


(951,495
)Proceeds from the issuance of long term debt


500,000



-Common stock redeemed, net


(238,322
)


-Dividends paid


(246,808
)


(246,808
)Net cash provided by (used in) financing activities

$
833


$
(1,198,303
)Net Increase (Decrease) in Cash and Cash Equivalents

$
(792,504
)

$
1,804,200Cash and Cash Equivalents at Beginning of Period


4,987,960



1,317,462Cash and Cash Equivalents at End of Period

$
4,195,456


$
3,121,662Supplemental Disclosures of Cash Flow InformationCash paid during the period for:Interest

$
48,077


$
26,086Income taxes

$
534,750


$
722,128The accompanying notes are an integral part of these condensed consolidated financial statements.




5
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIES


BREDA, IOWA





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 2010 and December 31, 2009 and the results of operations and changes in cash flows for the nine months ended September 30, 2010 and 2009.





Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2009 financial statements.  The results of operations for the three and nine month period ended September 30, 2010 are not necessarily indicative of the operating results of the entire year.






NOTE 2.NONCASH INVESTING ACTIVITIES





Noncash investing activities included $559,010 and $1,340 during the nine months ended September 30, 2010 and September 30, 2009, respectively, relating to plant and equipment additions under construction during the period, which are reflected in accounts payable at September 30, 2010 and September 30, 2009.






NOTE 3.OPERATING SEGMENTS





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 provided services to customers in Nebraska through June 30, 2009.  The Beaver Lake, NE cable TV system was sold as of July 1, 2009.  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.


6
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIES


BREDA, IOWA





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3.OPERATING SEGMENTS (continued)





The segment’s accounting policies are the same as those described in the summary of significant accounting policies.





Local





InternetExchange





ServiceNine Months EndedSeptember 30, 2010

Carrier


Broadcast


Provider


TotalRevenues

$
6,392,527


$
153,946


$
620,185


$
7,166,658Segment profit (loss)


1,874,313



(68,783
)


(228,266
)


1,577,264Local






InternetExchange






ServiceNine Months EndedSeptember 30, 2009

Carrier


Broadcast


Provider


TotalRevenues

$
5,577,682


$
333,746


$
573,089


$
6,484,517Segment profit (loss)


2,160,929



(142,999
)


(195,488
)


1,822,442##

Local






InternetExchange






ServiceThree Months EndedSeptember 30, 2010

Carrier


Broadcast


Provider


TotalRevenues

$
1,631,772


$
53,100


$
211,750


$
1,896,622Segment profit (loss)


113,210



(21,851
)


9,361



100,720Local






InternetExchange






ServiceThree Months EndedSeptember 30, 2009

Carrier


Broadcast


Provider


TotalRevenues

$
1,794,518


$
48,074


$
193,394


$
2,035,986Segment profit (loss)


455,048



(26,071
)


(62,982
)


365,995


NOTE 4.     NET INCOME PER COMMON SHARE





Net income per common share for September 30, 2010 and 2009 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 three and nine months ended September 30, 2010 and 2009 were 30,470 and 30,851, and 30,724 and 30,851 respectively.






NOTE 5.     STOCK VALUE ADJUSTMENT





During March 2010, the board of directors authorized a $40 increase in the stated value of each share of common stock from $547 to $587.  There were 30,851 shares outstanding at the time of the value adjustment, which reduced retained earnings by $1,234,040.





During April 2009, the board of directors authorized a $38 increase in the stated value of each share of common stock from $509 to $547.  There were 30,851 shares outstanding at the time of the value adjustment, which reduced retained earnings by $1,172,338.


7
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIES


BREDA, IOWA





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 6.     PURCHASE COMMITMENTS





As of September 30, 2010, purchase commitments for the construction of the fiber-to-the-home project in Breda’s CLEC in Carroll, Iowa totaled $7,660,285.16.  Breda is financing the project with a $10,000,000 broadband loan from Rural Utilities Services.  Construction commenced on the fiber project in September 2009, and it is anticipated that it will be a two-year project.  On October 2, 2009, Breda received the first loan proceeds in the amount of $1,000,000, and this loan advance carries a fixed interest rate of 3.918%.  BTC Inc.’s second loan advance in the amount of $564,329 was received on December 11, 2009, and carries a fixed interest rate of 4.315%. BTC Inc.’s third loan advance in the amount of $500,000 was received on September 20, 2010, and carries a fixed interest rate of 3.481%.








NOTE 7.     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:




2010


2009Alpine Communications, L.C.

$
3,490,056


$
3,389,504West Iowa Cellular, Inc.


2,000,162



1,547,040RSA #1, Ltd.


1,636,299



1,660,481RSA #7, Ltd.


646,115



594,949RSA #9, Ltd.


906,356



1,011,261Quad County Communications


22,486



14,955Guthrie Group, L.L.C.


20,508



25,529Hilbert Communications, L.L.C.


170,616



293,328$
8,892,598


$
8,537,047





The Company has a 22.27% ownership interest in Alpine Communications, L.C. (Alpine) at September 30, 2010.  Alpine owns and operates several wireline telephone exchanges in northeastern Iowa, and also provides Internet and cable television services in and around its wireline service territory.


8
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIES


BREDA, IOWA





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 7.     OTHER INVESTMENTS (Continued)





The following is a summary of condensed financial information pertaining to the company described above as of September 30, 2010.




2010Alpine Communications, L.C.Assets

$
24,196,908Liabilities


11,758,049Equity

$
12,438,859Revenues

$
5,616,429Expenses


4,924,426Net Income

$
692,003





The Company’s percentage ownership interests in partnerships providing cellular telephone services within their respective service areas at September 30, 2010 are as follows:





West Iowa Cellular, Inc.,


25.0
%RSA #1, Ltd.


10.3
%RSA #7, Ltd.


7.1
%RSA #9, Ltd.


16.7
%





The following is a summary of condensed financial information pertaining to the remaining companies described above as of September 30, 2010.





2010RSA #7


RSA #9Assets

$
11,995,247


$
7,614,977Liabilities


2,964,703



2,108,047Equity

$
9,030,544


$
5,506,930Revenues

$
18,639,804


$
11,822,225Expenses


13,142,923



8,890,639Net Income

$
5,496,881


$
2,931,586





Third quarter 2010 financial statements were unavailable for West Iowa Cellular, Inc. as of the date of this report.  Estimates of Breda’s third quarter income from West Iowa Cellular, Inc. in the amount of $151,040 were included in Breda’s financial statements for the nine-month period ending September 30, 2010.


9
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIES


BREDA, IOWA





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 7.     OTHER INVESTMENTS (Continued)




Third quarter 2010 financial statements were unavailable for RSA #1, Ltd. as of the date of this report.  Estimates of Breda’s third quarter income from RSA #1, Ltd. in the amount of $46,599 were included in Breda’s financial statements for the nine-month period ending September 30, 2010.




The Company has a 33.33% ownership interest in Quad County Communications (Quad County) at September 30, 2010.  This entity owns and operates a fiber optic network.





The following is a summary of condensed financial information pertaining to the company described above as of September 30, 2010.




2010Quad County CommunicationsAssets

$
74,200Liabilities


6,743Equity

$
67,457Revenues

$
21,879Expenses


45,983Net Income

$
(24,105
)





The Company has a 33.33% interest in Guthrie Group, L.L.C. at September 30, 2010.  The following is a summary of condensed financial information pertaining to the company described above as of September 30, 2010.




2010GuthrieGroup, L.L.C.Assets

$
61,523Liabilities


-Equity

$
61,523Revenues

$
2,216Expenses


35,280Net Income

$
(33,064
)




10
 Index


BREDA TELEPHONE CORP. AND SUBSIDIARIES


BREDA, IOWA





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 7.     OTHER INVESTMENTS (Continued)




The Company had a 6.47% ownership interest in Hilbert Communications, LLC (Hilbert) at September 30, 2010.  Hilbert provides fiber optic transport services in Wisconsin, Illinois and Minnesota; provides roaming services to cellular carriers on their wireless network in Wisconsin; provides cellular services to retail customers in Wisconsin; provides wireless industry consulting services to carriers at any location; and provides all services as previously provided by the wholly-owned subsidiaries.





Third quarter 2010 financial statements were unavailable for Hilbert Communications, LLC as of the date of this report.  Estimates of Breda’s third quarter income from Hilbert Communications, LLC in the amount of $69,553 were included in Breda’s financial statements for the nine-month period ending September 30, 2010.





Partnershipinvestments above with less than a 20% ownership are carried at equity due to the level of influence the Company has with respect to each investment.  Investments in limited liability companies are on the equity method if ownership is more than 3-5%.




11
 Index


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.





Cautionary Statement on Forward Looking Statements and Industry and Market Data





Various discussions and statements in this Item and other sections of this quarterly report are or contain forward-looking statements that express Breda's current beliefs, forecasts, projections and predictions about future events.  All statements other than statements of historical fact are forward looking statements, and include statements with respect to financial results and condition; anticipated trends in business, revenues, net income, net profits or net losses; projections concerning operations, capital needs and cash flow; investment, business, growth, expansion, acquisition and divestiture opportunities and strategies; management's plans or intentions for the future; competitive position or circumstances; and other forecasts, projections and statements of expectation.  Words such as "expects," "estimates," "plans," "anticipates," "forecasts," "prospects," "predicts," "projects," "believes," "seeks," "should," "could," "may," "contemplates," "thinks," "future," "strategy," "potential," "possible," "intends," "hopes," "objectives," and other similar expressions or variations of those words or those types of words help identify forward looking statements.





Forward looking statements involve and are subject to various material risks, uncertainties and assumptions.  Forward looking statements are necessarily subjective and 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 guaranties of future results or performance.  Forecasts and projections are also in all events likely to be inaccurate, at least to some degree, and especially over long periods of time, and in particular in a continually and rapidly changing industry such as the communications industry.  Forecasts and projections are also currently difficult to make with any degree of reliability or certainty given the uncertain regulatory environment for Breda and its subsidiaries and the difficult and uncertain credit, market and other economic circumstances in existence at the time of the preparation of this quarterly report.  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.  Breda cannot guarantee Breda's future results, performance or business conditions, and strong or undue reliance must not be placed on any forward-looking statements.





Actual future performance, outcomes and results may differ materially from those suggested by or 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 many of which are beyond the control of Breda and Breda's management.  It is not possible to predict or identify all of those factors, risks and uncertainties, but they include inaccurate assumptions or predictions by management, the accuracy and completeness of the publicly available information upon which part of Breda's business strategy is based and the various factors, risks and uncertainties set forth in this quarterly report and in the "Cautionary Statement on Forward Looking Statements and Industry and Market Data", "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of Breda's Annual Report on Form 10-K for the year ended December 31, 2009.




12
 Index


Breda may have obtained industry, market, competitive position and other data used in this quarterly report or in Breda's general business plan from Breda's own research or internal surveys, studies conducted by other persons and/or trade or industry associations or general publications and other publicly available information.  Breda attempts to utilize third party sources of information which Breda believes to be materially complete, accurate, balanced and reliable, but there is no assurance of the accuracy, completeness or reliability of any third party information.  For example, a trade or industry association for an industry may present information in a manner that is more favorable to that industry than would be presented by an independent source.  Industry publications and surveys and other publicly available information also generally state that they have obtained information from third party sources believed to be accurate and reliable, but do not guarantee the accuracy, completeness or reliability of any information.





Overview





General





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., Westside Independent Telephone Company and BTC, Inc.  A total of eight Iowa towns currently receive telephone services from Breda, Prairie Telephone, Westside Independent or BTC, Inc.  The towns are Breda, Lidderdale, Macedonia, Farragut, Pacific Junction, Yale, Westside and Carroll.  All of the towns are located in central and southern Iowa.  Telephone services are also provided in the rural areas within approximately a 10 to 15 mile radius of the towns, except for Carroll.  No rural customers are served outside the city limits of Carroll.





Breda and its telephone subsidiaries operate seven of their telephone exchanges as the historical or incumbent local exchange carrier.  BTC, Inc. offers its telephone services in Carroll, Iowa as a competitive local exchange carrier.  Qwest is the incumbent local exchange carrier for the Carroll, Iowa area.





BTC, Inc. also provides Internet access services in its Carroll, Iowa market area and to the customers of Breda, Prairie Telephone and Westside Independent who subscribe for Internet services.


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 Index


Breda also owns approximately 66.67% of the outstanding membership units of Carroll County Wireless, L.L.C., and the results of operations of Carroll County Wireless, L.L.C. are included in Breda's consolidated financial statements.  Carroll County Wireless, L.L.C. holds the PCS spectrum for most of Carroll County, Iowa.  PCS spectrum is bandwidth allocated by the Federal Communications Commission which can be used in the transmission of voice, data and television communications.  Carroll County Wireless, L.L.C.'s revenues are derived from fees paid to it under roaming agreements through i wireless agreements with other wireless carriers.  Breda is not actively marketing i wireless services to customers in Breda's telephone exchanges.





Breda and some of its subsidiaries also have investments in other entities which provide various communications related services in Iowa and, in some cases, certain surrounding states.





Tele-Services, Ltd. is also a wholly-owned subsidiary of Breda.  Tele-Services provides cable television services to six smaller Iowa towns.





Breda and its subsidiaries all conduct business under the names "W.I.N." or "Western Iowa Networks".





The telecommunication services provided by Breda or its subsidiaries include long distance services, dial-up and high-speed Internet services, sales of cell phone packages and related services, satellite Internet services, cable TV services, and various related goods and services.





BTC, Inc. began a construction project in Carroll, Iowa in September, 2009.  The project includes bringing fiber to the home and will allow BTC, Inc. to provide telephone services without leasing any lines from Qwest and also certain video services.  Breda anticipates that the project will be a two-year construction project, with an estimated total cost of $11,000,000.  The project is being financed primarily from a $10,000,000 broadband loan from the Rural Utilities Services.





Operating Segments





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.





Local Exchange Carrier Services.This segment provides local and long distance telephone services, data services, and other services to customers in the local exchanges served by Breda and its telephone subsidiaries.  This segment also includes the revenue generated by Carroll County Wireless, L.L.C. through its i wireless agreements with other wireless carriers.


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 Index


Broadcast Services.This segment provided cable television services to customers in a total of twelve towns in Iowa and one town in Nebraska from January 1, 2009 through June 30, 2009.  Tele-Services sold seven of its southern Iowa cable TV systems and its cable system for Beaver Lake, Nebraska on July 1, 2009, and Tele-Services bought the cable television system in Breda's Macedonia, Iowa telephone exchange effective August 1, 2009. Tele-Services was therefore providing cable television services to six Iowa communities as of the date of this quarterly report.





Internet Services.This segment provides Internet access to customers in the local exchanges and the surrounding areas and in the Carroll, Iowa market area.  The Internet services are provided through BTC, Inc.





The segments in which Breda and its subsidiaries operate are as follows:





Local Exchange Carrier


Breda


Prairie Telephone Co., Inc.


Westside Independent Telephone Company


BTC, Inc.


Carroll County Wireless, L.L.C.





Broadcast Services


Tele-Services, Ltd.





Internet Service Provider


BTC, Inc.





Factors Affecting Breda's Operating Performance





Breda believes that a number of industry and company-specific factors are affecting and will continue to affect Breda's results of operations.  These factors include the following:





·
The effect on Breda's revenues of declining numbers of access lines caused by customer migration to cell phone usage only; technology advances allowing the provisioning of Internet services on the same access line as voice service; technology advances provisioning residential and business voice services over data circuits (VOIP); and the declining population base in the rural areas served by Breda.





Breda's strategic response to these trends includes efforts to introduce and provide enhanced local services and additional services like voice mail, dial-up and DSL Internet access, long distance services, and to provide cellular services through its agency agreement with U.S. Cellular.  Breda also seeks to maximize its telecom industry offerings by partnering with surrounding telephone companies in wireless service ventures and through investment in cellular partnerships within the state of Iowa and surrounding states.  Breda has also undertaken to compete with Qwest for voice, long distance, and Internet service customers in Carroll, Iowa.




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 Index


·
The effect on Breda's revenues from recent and potential future changes in access rate regulation at both the state and the federal level.





·
The effect on Breda's revenues from rate and pricing structures caused by the competition of multiple providers in the Carroll, Iowa market.  The incumbent local exchange carrier (Qwest), the local cable TV provider (Mediacom) and additional outside competitors in that market have all partnered with telecommunication providers that can bring additional service components to complete a bundled service offering to the customer in what is known in the industry as the "triple play".  Customers receive local phone service, blocks of long distance service minutes, Internet services, and broadcast services (cable TV or satellite TV) for a competitive price.





Breda has switching capabilities for the Carroll, Iowa market that allows Breda to offer another type of high-speed Internet services, in addition to its voice, long distance and present Internet services.  The switching capabilities also allow Breda to be able to bring fiber to the home, which would be an overbuild of the Carroll market, and would allow Breda to be self-reliant in providing communication services to that community because Breda would then no longer need to lease access lines from Qwest to provide services.  BTC, Inc. obtained a $10,000,000 broadband loan from the Rural Utilities Services in April, 2009 for purposes of constructing fiber to the home in Carroll, Iowa.  BTC, Inc. began the approximately two-year project in September 2009, and presently has nearly all of the main line fiber placed in the ground.





Breda continues to evaluate modifying its package offerings and adjusting its pricing structures in order to attempt to remain competitive.





·
The effect on Breda's revenues from decreased customer counts for dial-up Internet and for cable TV services.  Competition and bundled services, declining population bases in Breda's rural service areas, and cost of technology upgrades play a role in the competition for, and retention of, customers.  Tele-Services has consolidated its cable TV programming transmission equipment in the communities where it is geographically feasible, in order to reduce system and service costs which are incurred to provide cable TV services.  Tele-Services sold seven of its southern Iowa cable TV systems and its one Nebraska cable TV system on July 1, 2009.  Tele-Services purchased the cable system in Macedonia, Iowa on August 1, 2009.


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 Index


·
The effect on Breda's revenues from decreased access revenue caused by a decrease in the number of long distance calls originating from, or terminating to, an access line in one of Breda's telephone exchanges.  The proliferation of wireless phone usage, and the designation of new technology by the Federal Communication Commission as data services, instead of voice services, have both decreased the "minutes of use" on Breda's networks, which results in less access revenue, and caused the access payment structure to be renegotiated by the new technology providers and wireless providers.





Some of the above factors are discussed in more detail in the following discussion.





Revenues





The following table reflects, on a consolidated basis for Breda and its subsidiaries, the approximate percentage of Breda's and its subsidiaries' aggregate revenue which was derived from the three segments described above and from investments for the three-month periods ended September 30, 2010, and September 30, 2009, respectively:





% of Total RevenuesThree Months Ended


for the Three Months EndedSeptember 30,


Ended September 30,2010


2009


2010


2009OPERATING REVENUESLocal exchange carrier services

$
1,631,772


$
1,794,518



86.0
%


88.1
%Broadcast services


53,100



48,074



2.8
%


2.4
%Internet services


211,750



193,394



11.2
%


9.5
%$
1,896,622


$
2,035,986



100.0
%


100.0
%





Local Exchange Carrier Services.Breda's revenue in this segment comes from the following sources:





1.
Local Network Services.  These revenues include monthly subscription charges for basic service and enhanced calling features, such as voice mail and caller ID, which are billed to residential and business customers.


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 Index


2.
Network Access Services.  These revenues are generated from charges established to compensate Breda for the origination, transport and termination of calls generated by the customers of long distance carriers and for calls transported and terminated to the customers of wireless carriers.  These revenues are received from carriers such as AT&T, Verizon, MCI, and Sprint.  Breda also receives federally administered universal service support as a result of the interstate switched access support provisions put into place by the Federal Communications Commission.  The Universal Service Fund was started as a mechanism to promote phone service accessibility for everyone at affordable rates and comparable service.  The access charges for long distance services within Iowa are based on rates approved by the Iowa Utilities Board.  Switched and special access charges for interstate and international services are based on rates approved by the Federal Communications Commission.  The transport and termination charges paid by wireless carriers are specified in interconnection agreements negotiated with each individual wireless carrier.





3.
Long Distance Services.  Breda generates revenues for providing long distance services to its customers.  This revenue category also includes fees related to the provision of directory assistance and operator assistance services.





4.
Cellular Services.  Breda is an agent for the U.S. Cellular service area in Iowa, and Breda generates commission revenue from the sale of the wireless calling plans offered by U.S. Cellular to Breda's customers.  Breda also generates revenue from the sale of phones and accessories needed to receive wireless phone service.





5.
Billing and Collection Services.  Breda receives revenue for performing billing and collection services for long distance carriers.  Breda receives a minimal percentage of the long distance call dollars that Breda receives and processes through its customer billing system.  The customer receives one bill, which includes both local and long distance charges, instead of receiving a separate bill from their long distance carrier.





6.
Miscellaneous. Phone-related services generated by Breda include revenues from directory publishing, directory advertising, inside line care, the sale and maintenance of customer premise equipment, the sale and maintenance of phone systems, and the sale of pager services.  A significant revenue source is the rental of Breda's fiber optic toll trunks to other telecommunication providers.  Breda receives roaming revenue from Carroll County Wireless, L.L.C.'s roaming agreements with other wireless carriers.


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 Index


Broadcast Services.Revenues are generated in this segment from the monthly fees charged to customers for basic and premium cable TV services.





Internet Services.The bulk of this segment's revenue is generated from monthly dial-up and high-speed Internet access services fees which are billed to residential and business customers.  Revenues are also generated from the sale of Internet equipment modems and routers, and from customer trouble-shooting and maintenance support fees.  The revenue that is generated through the offering of a satellite-based Internet service and a wireless Internet service are also included in Internet Services revenues.





Operating Expenses





Operating Expense Categories.





Breda's operating expenses are categorized as cost of services; depreciation and amortization; and selling, general and administrative.





Cost of Services.This category includes expense for salaries and wages relating to plant operation and maintenance; network access costs; long distance provisioning costs; conference bridge provisioning costs; salary, wage, equipment, training, and advertising costs for cellular and retail services; postage; utilities; Internet service provisioning costs, and wireless roaming provisioning costs.





Depreciation and amortization.This category of costs includes depreciation of the telecommunication equipment and network; Internet services equipment; cable TV programming equipment and transmission equipment; buildings; wireless tower and equipment, and amortization of intangible assets.





Selling, General and Administrative.This category includes expenses for legal and accounting services; wages and benefits; contract service payments; travel, meals and lodging; investment fees; board of director fees and expense reimbursements; insurance premiums; supplies; advertising and promotion costs; dues and subscriptions; property taxes; and all customer service operations, marketing and sales operations, and administrative operations costs.





Results of Operations





The following table sets forth certain items reflected in Breda's consolidated statements of operations for the periods indicated, expressed as a percentage of total revenues:


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 Index


Three Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Operating revenues


100
%


100
%


100
%


100
%Cost of services


61
%


57
%


50
%


49
%Depreciation and amortization


15
%


12
%


12
%


12
%Selling, general and administrative


32
%


27
%


25
%


29
%Operating income


-8
%


4
%


13
%


10
%Other income (expenses)


23
%


25
%


24
%


31
%Income taxes


10
%


11
%


15
%


13
%Net income


5
%


18
%


22
%


28
%


Three Months Ended September 30, 2010 and 2009





The table below sets forth the components of Breda's revenues for the three months ended September 30, 2010, compared to the same period in 2009.





Three Months EndedSeptember 30,


Change2010


2009


Amount


PercentOPERATING REVENUESLocal Exchange CarrierLocal network services

$
316,351


$
254,311


$
62,040



24.4
%Network access services


815,910



1,119,591



(303,681
)


-27.1
%Long distance services


62,270



59,205



3,065



5.2
%Cellular services


381,600



316,852



64,748



20.4
%Uncollectibles


(9,487
)


(21,695
)


12,208



-56.3
%Miscellaneous


65,128



66,254



(1,126
)


-1.7
%$
1,631,772


$
1,794,518


$
(162,746
)


-9.1
%Broadcast Services

$
53,100


$
48,074


$
5,026



10.5
%Internet services

$
211,750


$
193,394


$
18,356



9.5
%$
1,896,622


$
2,035,986


$
(139,364
)


-6.8
%





There was a decrease in total operating revenues for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009, of $139,364, or 6.8%.





Local Exchange Carrier Services – ($162,746)





Local exchange carrier services revenues accounted for 86.0% of all operating revenue in the three-month period ended September 30, 2010.  There was a $162,746, or 9.1%, decrease in local exchange carrier services revenues for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.


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 Index


Local network services revenues increased $62,040, or 24.4%, for the three months ended September 30, 2010, as compared to the same period in 2009, because of the increased number of customers taking phone service from BTC, Inc. in Carroll, Iowa, and because of rate increases on some of Breda’s ILEC customers beginning in 2009.  While the CLEC operation shows growth in its subscriber base, Breda is experiencing declines in the subscriber bases of its rural ILEC exchanges.  Breda implemented a $3.50 per month rate increase for its customers in its Breda, Lidderdale and Westside exchanges who subscribe to local phone service.  The rate increase became effective on February 1, 2009, and the increase affected approximately 1,145 customers.  Breda also implemented a $4.00 per month rate increase for its business customers and a $3.50 per month rate increase for its residential customers in its Carroll exchange who subscribe to local phone service.  The rate increase became effective on May 1, 2010, and the increase affected approximately 693 customers.





Breda's long distance services revenue increased $3,065, or 5.2%, for the three months ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  This increase in revenue resulted from both a 6.5% increase in the number of long distance subscribers and a 9.0% increase in long distance minutes of use for the three months ended September 30, 2010, when compared to the same three-month period in 2009.  The three month period ended September 30, 2010 was unusual because overall, Breda has experienced the industry-wide trend decrease in minutes of use whereby subscribers are utilizing their package of minutes on their cell phone plans to make more of their long distance calls instead of using their long distance service through their local telephone provider such as Breda.





Network access services decreased $303,681, or 27.1%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  Approximately $203,000 of the decrease resulted from the non-payment of network access minutes when BTC and XO Communications signed an agreement on June 15, 2010 to settle their conference bridge minutes dispute.   Breda also experienced decreased intrastate access revenue caused by the Iowa Utilities Board’s 3.1 cent per minute reduction for switching revenue and the common carrier line rate elements which became effective on February 9, 2009, as well as the almost 50% reduction in high cost loop funding from the universal service fund which went into effect January 1, 2009.  Breda’s incumbent local exchange carrier companies experienced a 12.5% decrease in overall originating and terminating minutes of use on their networks during the three month period ended September 30, 2010 when compared to the three month period ended September 30, 2009.  The main cause of this decrease as noted previously is due to the industry-wide trend whereby subscribers are utilizing their package of minutes on their cell phone plans to make more of their long distance calls instead of using their long distance service through their local telephone provider such as Breda.


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 Index


Breda has contracted with a conference bridge vendor for the transport of long distance calls over Breda’s networks.  Breda initially began billing for these services in September 2006, and began billing for additional conference bridge services in March 2007.  Breda's provider of the conference bridge minutes decreased its use of the bridges in Breda’s location during 2009 while negotiations were being conducted with carriers for the payment of access revenue on this traffic, and until a new agreement was reached between Breda and its conference bridge vendor.  The initial conference bridge vendor agreement terminated on December 31, 2009.  The renegotiated agreement became effective January 1, 2010, and Breda has seen an increase of approximately 24,630,078 conference bridge minutes for the three-month period ended September 30, 2010 when compared to the three-month period ended September 30, 2009.  Breda has negotiated settlement agreements with its main carriers such as AT&T and Verizon, and the access rates included in the access revenue for its conference bridge traffic for the three months ended September 30, 2010, reflect discounted rates based on volume, instead of Breda’s normal access tariff rates.  The settlement rates reflect an approximate 75% discount from Breda’s tariffed rates.





Breda, along with all other Iowa carriers subject to the Iowa Utilities Board’s ruling that became effective on February 9, 2009, experienced a 3.1 cent per minute reduction in its intrastate access rate received on all intrastate access minutes.  Breda estimates that this reduction in intrastate access rates resulted in a $27,229 reduction for the three months ended September 30, 2010, when compared to the three-months ended September 30, 2009.





Breda also experienced a decrease in 2009 for its high cost loop support payment.  The National Exchange Carriers Association filed its 2009 Modification of the Average Schedule Universal Service High Cost Loop Support Formula with the FCC on August 29, 2008.  In this filing, which the FCC accepted and became effective on January 1, 2009, there were modifications to the formula used to calculate interstate universal service fund high cost loop expense adjustments for average schedule companies.  Breda estimates that the reduction in this universal service fund payment during the three months ended September 30, 2010 was approximately $2,220.  This decrease was offset by an increase in Interstate Common Line Support of $13,197, and an increase of $20,560 in the Safety Net Additive.  Breda estimates that the total universal service fund payments increase of $28,203, combined with the NECA settlement payments increase, totaled approximately a $51,326 increase in payments when comparing the two three-month periods.  The remaining overall decrease in access revenue was caused by an overall decrease in the long distance minutes of use generated by customers using Breda’s network to originate or terminate long distance calls.


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 Index


Breda continues to add customers to its Carroll, Iowa, CLEC customer base, and therefore also to its long distance services customer base.  These customers generate access revenue when they use Breda's networks to make long distance calls.  However, as noted previously, more customers are using their wireless plans to make long distance calls, so Breda’s overall toll minutes on which access revenue is generated continues to decrease.





Cellular services increased $64,748, or 20.4%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  The overall number of customers served between the two three-month periods increased 7.7%, and there was a decrease in the amount of cellular commission chargebacks for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.





Uncollectibles decreased $12,208, or 56.3%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  The uncollectibles are related to customer accounts, and the difference in the three months periods is related to the timing of bankruptcy filings or factors affecting the payment of customer invoices.




Miscellaneous revenue decreased $1,126, or 1.7%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  Roaming revenue for wireless minutes of service increased $6,757, or 73.2%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009, with the increase resulting from an increase in data usage minutes.  Other nonregulated services revenue decreased $2,220, or 17.0%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009, and is mainly attributable to the decrease in the number of phone systems sold.  Directory listing revenue decreased $10,085 when comparing the respective three month periods, but traffic aggregation revenue increased $4,832 during the three month period ended September 30, 2010 when compared to the three month period ended September 30, 2009.





Billing and collection revenue, which is included in miscellaneous revenue, decreased $113, or 4.3%, for the three month period ended September 30, 2010, when compared to the same three month period in 2009.  Billing and collection revenue is generated when Breda receives revenue for billing the long distance services of other carriers and placing those amounts on Breda’s customer invoices so that the customers receive only one invoice for all services.


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 Index


Broadcast Services – $5,026





Broadcast services revenue increased $5,026, or 10.5%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009. Tele-Services sold seven of its southern Iowa cable television systems and its Beaver Lake, Nebraska cable television system on July 1, 2009.  The latter sales affected approximately 1,146 customers.  On August 1, 2009, Tele-Services purchased the cable television system for Macedonia, Iowa.  This purchase added approximately 68 customers to Tele-Services’ customer base.  Most of those cable television customers already received telephone service from Breda.  Tele-Services was providing cable TV service to 588 subscribers as of September 30, 2010, compared to 628 customers on September 30, 2009.  The increase in revenue for the three-month period ended September 30, 2010 was caused by cable service rate increases implemented in all of Tele-Services’ cable service communities on June 1, 2010.  A $4.05 basic service rate increase was implemented on June 1, 2010 in five of the communities, and a $6.00 basic service rate increase was implemented on June 1, 2010 in the Macedonia community.





Internet Services – $18,356





Internet services revenue increased $18,356, or 9.5%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  Breda experienced a 14.2% increase in its high-speed Internet customer base when comparing the two periods, which has helped offset the decrease in Breda’s dialup Internet customer base.  The decrease in dialup Internet customers is the result of the migration of customers to high-speed Internet because of an overall decrease in the price for high-speed Internet.  Breda is gaining high-speed Internet customers in the Carroll, Iowa area because BTC, Inc. is offering bundled services packages that include Internet services, as well as local telephone and other communication services.  In July 2009, Breda added bandwidth options between 3MB and 10 MB for its customers in Breda, Iowa.  On November 1, 2009, Breda began offering 3MB and 5MB high-speed Internet options in its ILEC communities of Macedonia, Farragut, Lidderdale, Pacific Junction and Westside, Iowa.


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 Index


OPERATING EXPENSES





The table below sets forth the components of Breda's operating costs for the three months ended September 30, 2010, compared to the same period in 2009.




Three Months EndedSeptember 30,


Change2010


2009


Amount


PercentOPERATING EXPENSESCost of servicesPlant specific operations

$
584,553


$
560,734


$
23,819



4.2
%Plant nonspecific operations


114,490



125,081



(10,591
)


-8.5
%Cost of long distance


47,215



49,013



(1,798
)


-3.7
%Cost of cellular


292,712



300,707



(7,995
)


-2.7
%Cost of internet


64,745



71,155



(6,410
)


-9.0
%Cost of programming


50,721



46,162



4,559



9.9
%Total cost of services

$
1,154,436


$
1,152,852


$
1,584



0.1
%Depreciation and amortization

$
289,064


$
253,087


$
35,977



14.2
%Selling, general and administrativeCustomer operations

$
142,923


$
183,822


$
(40,899
)


-22.2
%Corporate operations


391,977



376,614



15,363



4.1
%General taxes


72,067



(11,730
)


83,797



-714.4
%Total selling, general and administrative

$
606,967


$
548,706


$
58,261



10.6
%$
2,050,467


$
1,954,645


$
95,822



4.9
%





Cost of Services – $1,584





Cost of services increased $1,584, or 0.1%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  Plant specific operations increased $23,819, or 4.2%.  The plant specific expenditures increased $24,160 for non-regulated services, which was almost all attributable to BTC, Inc.’s fiber to the home project in Carroll, Iowa.  These expenditures were incurred for inside wiring expense when businesses and residential homes were wired for fiber to the home services.  Most all other plant specific expenditures such as central office equipment, outside plant expense, land and building expense, distribution system expense, buried cable expense and vehicle expense were relatively unchanged when comparing the three month period ended September 30, 2010 with the three month period ended September 30, 2009.   Conference bridge provisioning increased $515 when comparing the three-month period ended September 30, 2010 with the three-month period ended September 30, 2009, and was relatively unchanged between those three month periods because the minutes of use available for payment were similar during those three month periods.  Conference bridge marketing fees are included in conference bridge provisioning and are dependent on both the volume of minutes and the revenue received for the minutes.  As noted previously, Breda has finalized settlement agreements with some of the carriers for discounted rates.


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 Index


Plant nonspecific operations decreased $10,591, or 8.5%, during the three month period ended September 30, 2010 when compared to the three month period ended September 30, 2009 because, while USF contributions are being coded to plant nonspecific operations for the three month period ended September 30, 2010, and for which there were no corresponding amounts for the three month period ended September 30, 2009, they were offset by decreases in provisioning expenses and testing expenses during the three month period ended September 30, 2010.





Long distance provisioning costs decreased $1,798, or 3.7%, and reflects the timing difference caused by the cutoff date used for minutes billed to Breda versus the cutoff date used by Breda to record minutes of use to bill its customers.  Breda had shown an increase in minutes of use when comparing the three month period ended September 30, 2010 to the three month period ended September 30, 2009.





Cellular provisioning costs decreased $7,995, or 2.7%, and reflects the decreased cost of equipment and accessories, and labor, to serve the 7.7% increase in the cellular customers base during the three months ended September 30, 2010, when compared to the three-month period ended September 30, 2009.





Internet provisioning costs decreased $6,410, or 9.0%, for the three month period ended September 30, 2010 when compared to the three month period ended September 30, 2009.  Some of Breda’s Internet provisioning costs have decreased because of Breda’s upgrade of its network and its ability to provision its Internet services over Ethernet, which not only allows Breda to provision at a lower cost, but because of its increased bandwidth capabilities, Breda can also provision more customers on these facilities without having to expand its capacity.





Cost of video programming fees increased $4,559, or 9.9%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  Even though Tele-Services is a member of an industry programming purchasing group, Tele-Services continues to see significant increases in the programming rates paid by Tele-Services in order to offer its cable TV offerings.  BTC, Inc. has begun to incur IPTV programming costs in preparation for launching its IPTV system over its fiber to the home network in Carroll, Iowa in January 2011.  Those fees are included in the programming fees for the three-month period ended September 30, 2010, and for which there were no corresponding fees in the three-month period ended September 30, 2009.


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 Index


Depreciation and Amortization –$35,977





Depreciation and amortization expense increased $35,977, or 14.2%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  Breda is depreciating an OC-192 fiber optic ring and five meta-switches, which all became operational in the latter part of 2008 and in 2009. Breda is also starting to depreciate over $3,000,000 in new plant assets for a switch and fiber optic plant in its CLEC operations.  Many of Breda’s assets, especially its cable televisions systems and equipment, have, however, begun to reach the end of their depreciable life, so depreciation expense is somewhat offset by the depreciation that is no longer available for those older systems and equipment.   Also, with the sale of eight of Tele-Services' cable TV properties on July 1, 2009, those assets are no longer generating depreciation expense.  Some of Breda’s new capital expenditures, such as its fiber overbuild project, are accounted for as Plant under Construction, and will not generate depreciation expense until they become operational.





Selling, General and Administrative –$58,261





Selling, general and administrative expenses increased $58,261, or 10.6%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  Customer operations decreased $40,899, or 22.2%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009, and mainly resulted from a decrease in advertising expenses as well as decreased wages and benefits when a full time position was not replaced when it became vacant.





Corporate operations increased $15,363, or 4.1%, during the three-month period ended September 30, 2010, when compared to the same period in 2009, and was mainly attributable to increased computer and IT maintenance costs.  In 2009, Breda hired outside consultants to facilitate the risk assessment, documentation, testing, and implementation of its SEC-mandated internal control program for both financial controls and information technology controls.  There were no corresponding internal control consulting costs for the quarter ended September 30, 2010.  This decrease in consulting costs was offset by a larger increase in wages and benefits due to the addition of a corporate officer in June 2009 and a full-time IT staff member in September 2009.





Property and general taxes expense increased $83,797, or 714.4 %, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009, and is a function of the assessed valuation and tax rate each year.


27
 Index


OTHER INCOME (EXPENSE)





The table below sets forth the components of other income (expense) for the three-month period ended September 30, 2010, compared to the same period in 2009.





Three Months EndedSeptember 30,


Change2010


2009


Amount


PercentOTHER INCOME (EXPENSE)Interest and dividend income

$
58,467


$
59,563


$
(1,096
)


-1.8
%Gain on sale of investments


1,413



524



889



169.7
%Gain or (Loss) on disposal of assets


4,707



(65,530
)


70,237



107.2
%Interest expense


(16,549
)


(129
)


(16,420
)


-12,728.7
%Allowance for funds used during construction


16,407



-



16,407



100.0
%Income from equity investments


388,628



80,704



307,924



381.5
%Gain on reversal of note receivable impairment


-



445,252



(445,252
)


100.0
%Other, net


799



(2,597
)


3,396



130.8
%$
453,872


$
517,787


$
(63,915
)


-12.3
%





Interest and Dividend Income.Interest and dividend income decreased $1,096, or 1.8%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  This decrease in interest and dividend income was due to decreased interest rates on Breda’s temporary investments and marketable securities when comparing the respective three-month periods, and from the decrease in held temporary investments when they were liquidated at the time of maturity for use in operations.




Gain or (loss) on sale of investments.Both the $1,413 gain on sale of investments for the three-month period ended September 30, 2010, and the $524 gain on sale of investments for the three-month period ended September 30, 2009, represents the gain on the redemption of temporary investments.





Gain or (loss) on disposal of assets.The $4,707 gain on disposal of assets for the three-month period ended September 30, 2010, was a combination of the $441 loss on the retirement of computers, $5,043 gain on the disposal of equipment in Lidderdale damaged by lightning, and the $105 gain from the sale of cabinets.  The $65,530 loss on the disposal of assets for the three-month period ended September 30, 2009 resulted from the net gains and losses on the retirement of service vehicles and work equipment, and the $57,349 loss on the sale of cable TV properties.





Interest Expense.The $16,420, or 12,728.7%, increase in interest expense for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009, is the net result of the reduction to zero of the Rural Telephone Finance Cooperative loan balance on which interest was paid because of the final prepayment of all remaining principal on April 30, 2009, and from the additional interest expense generated from BTC, Inc.'s loans with the Rural Utilities Services for the Carroll overbuild project. As noted previously, Breda’s subsidiary, BTC, Inc. is financing its fiber to the home overbuild of Carroll, Iowa with a $10,000,000 broadband loan from Rural Utilities Services.  Interest payments totaling $16,407 on the $2,064,329 in loan advances from the RUS have been capitalized as project costs during the three-month period ended September 30, 2010.


28
 Index


Allowance for funds used during construction.The $16,407 allowance for funds used during construction for the three-month period ended September 30, 2010 represents the interest on the RUS broadband loan that was capitalized, and for which there was no comparable entry for three-month period ended September 30, 2009.





Income from Equity Investments.Income from equity investments increased $307,924, or 381.5%, for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009.  The equity investments income shown 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 income from equity investments reported on Breda's income statement for the three-month period ended September 30, 2010 is a reflection of the net increases and decreases in the net income of Breda's equity investments.  Most of Breda's equity investments are in cellular partnerships.  Some of these cellular investments now receive universal service funding, which has increased their overall operating revenue.  An additional source of income from equity investments arises from Breda’s ownership interest in Alpine Communications, L.C., an operating telephone company in northeastern Iowa, and in Hilbert Communications, LLC, a telecommunications and information technology services company operating mainly in Wisconsin.





Gain on reversal of note receivable impairment.The $445,252 gain on reversal of note receivable impairment for the three-month period ended September 30, 2009, has no comparable entry for the three-month period ended September 30, 2010.





Other, net.The $3,396, or 130.8%, increase in other net income for the three-month period ended September 30, 2010, when compared to the three-month period ended September 30, 2009, is mainly attributable to the change in partnership-related costs.




Income Tax Expense.Income taxes decreased $35,063, or 15.0%, for the three-month period ended September 30, 2010, when compared to the same period in 2009.  The effective tax rate in 2010 is 66.06%, compared to a 38.93% tax rate in 2009.  The effective tax rate differs from the U.S. statutory rate due to state income taxes, and the proportion of income from investments which are exempt from income tax.





Net Income.Net income decreased $265,275, or 72.5%, for the three-month period ended September 30, 2010, when compared to the same period in 2009.


29
 Index


Nine Months Ended September 30, 2010 and 2009





The following table sets forth the components of Breda's revenues for the nine months ended September 30, 2010, compared to the same period in 2009.





Nine Months EndedSeptember 30,


Change2010


2009


Amount


PercentOPERATING REVENUESLocal Exchange CarrierLocal network services

$
920,661


$
739,061


$
181,600



24.6
%Network access services


3,898,570



3,326,269



572,301



17.2
%Long distance services


191,677



187,510



4,167



2.2
%Cellular services


1,209,915



1,188,419



21,496



1.8
%Uncollectibles


(13,013
)


(22,275
)


9,262



-41.6
%Miscellaneous


184,717



158,698



26,019



16.4
%$
6,392,527


$
5,577,682


$
814,845



14.6
%Broadcast Services

$
153,946


$
333,746


$
(179,800
)


-53.9
%Internet services

$
620,185


$
573,089


$
47,096



8.2
%$
7,166,658


$
6,484,517


$
682,141



10.5
%




There was an increase in total operating revenues for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009, of $682,141, or 10.5%.





Local Exchange Carrier Services – $814,845





Local exchange carrier services revenues accounted for 89.2% of all operating revenues in the nine-month period ended September 30, 2010.  There was a $814,845, or 14.6%, increase in local exchange carrier services revenues for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.





Local network services revenues increased $181,600, or 24.6%, for the nine months ended September 30, 2010, as compared to the same period in 2009, primarily because of the increased number of customers taking phone service from BTC, Inc. in Carroll, Iowa.  While the CLEC operation has shown growth in its subscriber base, Breda is experiencing declines in the subscriber bases of its rural ILEC exchanges.  Breda also implemented a $3.50 per month rate increase for its customers in its Breda, Lidderdale and Westside exchanges who subscribe to local phone service.  The rate increase became effective on February 1, 2009, and the increase affected approximately 1,145 customers.  Breda also implemented a $4.00 per month rate increase for its business customers and a $3.50 per month rate increase for its residential customers in its Carroll exchange who subscribe to local phone service.  The rate increase became effective on May 1, 2010, and the increase affected approximately 693 customers.


30
 Index


Network access services increased $572,301, or 17.2%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  This increase mainly resulted from the increase in terminating access minutes generated from traffic delivered to Breda’s conference bridge in Carroll, Iowa.  Prior to the negotiation of agreements with carriers, these minutes were recorded at BTC’s access rates in the network access services accounts with an estimated allowance recorded in the uncollectibles accounts. Breda has contracted with a conference bridge vendor for the transport of long distance calls over Breda's networks.  Breda initially began billing for these services in September 2006, and began billing for additional conference bridge services in March 2007.  Breda’s conference bridge services, net of the XO Communications adjustment of approximately $203,000, generated approximately $2,253,524 of access revenue for the nine-month period ended September 30, 2010, compared to approximately $1,643,343 for the nine-month period ended September 30, 2009.  Breda’s conference bridge revenue also somewhat decreased during the nine month period ended September 10, 2010 when compared to the nine month period ended September 30, 2009, because additional carriers are disputing high volume access charges, for which BTC is estimating an allowance for uncollectible accounts.  These estimates are included in the network access revenue services.   The conference bridge services minutes of use increased by approximately 69,093,711 minutes when comparing the nine-month period ended September 30, 2010, with the nine-month period ended September 30, 2009.  Breda’s provider of conference bridge minutes decreased the volume of traffic it was sending to the conference bridges in Breda’s location while negotiations were underway with interexchange carriers on the payment of access revenue for this traffic. Breda has negotiated settlement agreements with its main carriers such as AT&T and Verizon, and the access rates included in the access revenue for its conference bridge traffic for the nine months ended September 30, 2010, reflects discounted rates based on volume, instead of Breda’s normal access tariff rates.  The settlement rates reflect an approximate 75% discount from Breda’s tariffed rates.





Breda's access revenue has also been adversely affected by the Iowa Utilities Board’s ruling which became effective on February 9, 2009, and which decreased the intrastate access rate on all intrastate minutes by 3.1 cents per minute.  Breda estimates that this reduction in intrastate access rates resulted in an approximate $85,438 decrease in network access revenue for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.


31
 Index


Breda also experienced a decrease in 2010 for its high cost loop support payment.  The National Exchange Carriers Association filed its 2009 Modification of the Average Schedule Universal Service High Cost Loop Support Formula with the FCC on August 29, 2008, which was accepted by the FCC, and became effective on January 1, 2009.  The filing resulted in modifications to the formula used to calculate interstate universal service fund high cost loop expense adjustments for average schedule companies.  Breda estimates that the reduction in this universal service fund payment during the nine months ended September 30, 2010 was approximately $66,729.  This decrease was offset by an increase in Interstate Common Line Support of $26,961, and an increase of $60,566 in Safety Net Additive payments.  Breda estimates that the $66,729 universal service fund payments increase, combined with the NECA settlement payments increase, totaled approximately a $93,343 increase in payments when comparing the two nine-month periods.  The remaining overall decrease in access revenue was caused by an overall decrease in the long distance minutes of use generated by customers using Breda’s network to originate or terminate long distance calls.





Breda continues to add customers to its Carroll, Iowa, CLEC customer base, and therefore also to its long distance services customer base.  These customers generate access revenue when they use Breda’s networks to make long distance calls.  However, as noted previously, more customers are using their wireless plans to make long distance calls, so Breda’s overall toll minutes on which access revenue is generated continues to decrease.





Breda's long distance services revenue increased $4,167, or 2.2%, for the nine months ended September 30, 2010, when compared to the nine-month period ended September 30, 2009. Breda experienced a 7.3% increase in its long distance customer base when comparing the two periods, and the increase has helped offset a general decrease in the average minutes used by each customer on a monthly basis.  Breda’s long distance minutes of use decreased 1.2% when comparing the two nine-month periods.  Breda has received a good response to its package offerings that include local and long distance service from both residential and business customers.  Breda believes that the decrease in the average minutes used by customers arises from the industry wide trend of subscriber's using their cell phones rather than using their local telephone provider to make long distance calls.





Cellular services increased $21,496, or 1.8%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009. Breda’s cellular customer activations increased 0.9% during the nine-month period ended September 30, 2010 when compared to the nine-month period ended September 30, 2009. The reason for the increased revenue when comparing the two nine-month periods is the increase in the transaction fees from smart phones and other higher priced data plans.


32
 Index


Uncollectibles decreased $9,262, or 41.6%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  These uncollectibles are related to customer accounts, and the decrease when comparing the two nine month periods is a function of the timing of circumstances causing the write-off of unpaid accounts.





Miscellaneous revenues increased $26,019, or 16.4%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009. Other nonregulated services revenue decreased $1,761, or 4.9%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009, and is mainly attributable to the overall decrease in customer premise equipment rental and services.  Roaming revenue for wireless minutes of service increased $17,359, or 79.8%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009, and is the result of additional minutes from other wireless carriers negotiated on roaming agreements for Breda’s subsidiary, Carroll County Wireless, LLC.  The remaining increase in miscellaneous revenue is mainly attributable to increased traffic aggregation revenue for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009. Miscellaneous revenues also increased from billing and collection services revenue when comparing the two, nine month periods.





Broadcast Services – ($179,800)





Broadcast services revenue decreased $179,800, or 53.9%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  The broadcast services revenue decrease is attributable to the decrease in the number of cable TV subscribers between the those nine-month periods.  Tele-Services sold seven of its southern Iowa cable television systems and its Beaver Lake, Nebraska cable television system on July 1, 2009.  The latter sale affected approximately 1,146 customers.  On August 1, 2009, Tele-Services purchased the cable television system for Macedonia, Iowa.  This purchase added approximately 68 customers to Tele-Services’ customer base.  Most of those cable television customers already received telephone service from Breda.  Breda was providing cable TV service to 588 subscribers as of September 30, 2010, compared to 628 customers on September 30, 2009.   A $4.05 basic service rate increase was implemented on June 1, 2010 in five of Tele-Services’ cable service communities, and a $6.00 basic service rate increase was implemented on June 1, 2010 in the Macedonia community.





Internet Services – $47,096





Internet services revenue increased $47,096, or 8.2%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  Breda experienced a decrease of 34.9% in its dial-up customer base and a 13.4% increase in its high-speed Internet customer base when comparing the those nine-month periods.  The decrease in dialup Internet customers is the result of the migration of customers to high speed Internet because of an overall decrease in the price for high speed Internet.  Breda is gaining high-speed Internet customers in the Carroll, Iowa area because BTC, Inc. is offering bundled services packages that include Internet services, as well as local telephone and other communication services.  On November 1, 2008, Breda implemented both lowered rates and increased bandwidth for its residential customers in Carroll, Iowa.  All current customers receiving 256K on that date began receiving 1 MB of bandwidth, and all customers receiving 1 MB of bandwidth began receiving 3 MB of bandwidth on that date. On November 1, 2008, residential pricing for 1 MB of service dropped from $47.99 per month to $29.99 per month.  In July 2009, Breda added bandwidth options between 3MB and 10 MB for its customers in Breda, Iowa.  On November 1, 2009, Breda began offering 3MB and 5MB high-speed Internet options in its ILEC communities of Macedonia, Farragut, Lidderdale, Pacific Junction and Westside, Iowa.


33
 Index


OPERATING EXPENSES





The table below sets forth the components of Breda's operating costs for the nine months ended September 30, 2010, compared to the same period in 2009.




Nine Months EndedSeptember 30,


Change2010


2009


Amount


PercentOPERATING EXPENSESCost of servicesPlant specific operations

$
1,850,542


$
1,382,015


$
468,527



33.9
%Plant nonspecific operations


357,793



329,216



28,577



8.7
%Cost of long distance


141,140



150,690



(9,550
)


-6.3
%Cost of cellular


905,728



883,732



21,996



2.5
%Cost of internet


191,184



202,039



(10,855
)


-5.4
%Cost of programming


144,810



262,846



(118,036
)


-44.9
%Total cost of services

$
3,591,197


$
3,210,538


$
380,659



11.9
%Depreciation and amortization

$
817,268


$
780,945


$
36,323



4.7
%Selling, general and administrativeCustomer operations

$
448,440


$
629,623


$
(181,183
)


-28.8
%Corporate operations


1,211,352



1,163,292



48,060



4.1
%General taxes


150,823



66,590



84,233



126.5
%Total selling, general and administrative

$
1,810,615


$
1,859,505


$
(48,890
)


-2.6
%$
6,219,080


$
5,850,988


$
368,092



6.3
%




34
 Index


Cost of Services – $380,659





Cost of services increased $380,659, or 11.9%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  Plant specific operations increased $468,527, or 33.9%, with $474,859 of the increase mainly attributable to an increase in the marketing and provisioning costs to provide conference bridge services.  Marketing fees are dependent on both the volume of the minutes and the revenue received for the minutes.  As noted previously, Breda has finalized settlement agreements with some of the carriers for discounted rates.  Other plant specific costs that decreased when comparing the two nine-month periods ended September 30, 2010, and September 30, 2009, were costs for customer premise equipment, outside plant maintenance and repairs, central office repairs and maintenance, land and building expense, distribution system power and expense.





Plant nonspecific operations increased $28,577, or 8.7%, due mainly to increased USF contribution expense and testing expense offset by a decrease in provisioning expense. Testing expense increased $20,629 when comparing the nine-month periods ended September 30, 2010, and September 30, 2009, and resulted from increased labor costs associated with preparatory work for Breda’s fiber-to-the-home roll-out after construction is completed in late 2010 or early 2011.





Long distance provisioning costs decreased $9,550, or 6.3%, and reflects the decrease in overall minutes even though the rate per minute costs that Breda must pay to its brokers to provide long distance services to its customers continues to increase. Breda had a 7.3% increase in customers subscribing to Breda’s long distance services for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009, but its long distance minutes of use per customer decreased 7.9% when comparing those two nine-month periods.





Cellular provisioning costs, which includes the purchase of phones and accessories, and labor costs, increased $21,996, or 2.5%, and reflects the increased cost of equipment and accessories to serve the 0.9% increase in the cellular customers for the nine-month period ended September 30, 2010 when compared to the nine-month period ended September 30, 2009.





Internet provisioning costs decreased $10,855, or 5.4%, during the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  This decrease resulted from Breda’s upgrade of its network and its ability to provision its Internet services over Ethernet, which not only allows Breda to provision at a lower cost, but because of its increased bandwidth capabilities, Breda can also provision many more customers on these facilities without having to expand its capacity.


35
 Index


As noted previously, Tele-Services sold eight of its remaining cable TV communities on July 1, 2009. The decrease in the number of cable TV customers due to those actions is reflected in the programming fees which decreased $118,036, or 44.9%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  Even though Tele-Services is a member of an industry programming purchasing group, Tele-Services continues to see significant increases in the programming rates paid by Tele-Services in order to offer its cable TV offerings.  Tele-Services also began paying retransmission agreement fees on January 1, 2009, for local broadcast stations.





Depreciation and Amortization – $36,323





Depreciation and amortization expense increased $36,323, or 4.7%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  Breda had significant capital investments in outside plant equipment, switches and in new financial and provisioning software during 2009 and 2010.  The depreciation on some of these items is reflected in the nine-month period ended September 30, 2010, but was not applicable to the nine-month period ended September 30, 2009.  Some of the capital investments in Breda’s fiber project in Carroll, Iowa, are presently classified as Plant Under Construction and are not being depreciated.  Those assets will be depreciated when they are placed into service.





Selling, General and Administrative – ($48,890)





Selling, general and administrative expenses decreased $48,890, or 2.6%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  Customer operations decreased $181,183, or 28.8%, for the nine-month period ended September 30, 2010 when compared to the nine-month period ended September 30, 2009, and mainly resulted from decreased wages and benefits when a full time position was not replaced when it became vacant, and also from a decrease in advertising and promotion expenditures.  Beginning in 2010, cellular services advertising and promotion expenses are reported under cellular services provisioning instead of corporate advertising expenses.  The advertising expenses coded to cellular provisioning for the nine-month period ended September 30, 2010 totaled $7,380.





Corporate operations increased $48,060, or 4.1%, when comparing the nine-month periods. In 2009 Breda hired outside consultants to facilitate the risk assessment, documentation, testing, and implementation of its SEC-mandated internal control program for both financial controls and information technology controls.  In 2009 Breda also had legal and consulting fees associated with strategic planning opportunities regarding its investment in Alpine Communications, L.C., Hilbert Communications, LLC, the 700 MHz auction, fiber to the home project in Carroll, as well as strategic planning for Breda's own operations.  While there was a $108,378 decrease in consulting services for the nine-month period ended September 30, 2010, there were increases in legal, accounting, insurance, labor, and benefit costs when comparing the respective nine-month periods.  The decrease in consulting costs was offset by a larger increase in wages and benefits due to the addition of a corporate officer in June 2009 and a full-time IT staff member in September 2009.


36
 Index


Property and general taxes expense increased $84,233, or 126.5%, when comparing the nine-month period ended September 30, 2010 to the nine-month period ended September 30, 2009.  Any increase or decrease in property tax expense is based on the annual valuation assessments received each year from the county assessors.





OTHER INCOME (EXPENSE)





The table below sets forth the components of other income (expense) for the nine-month period ended September 30, 2010, compared to the same period in 2009.





Nine Months EndedSeptember 30,


Change2010


2009


Amount


PercentOTHER INCOME (EXPENSE)Interest and dividend income

$
299,325


$
331,212


$
(31,887
)


-9.6
%Gain on sale of investments


1,975



1,358



617



45.4
%Gain or (Loss) on disposal of assets


95,715



(71,883
)


167,598



233.2
%Interest expense


(48,077
)


(26,086
)


(21,991
)


-84.3
%Allowance for funds used during construction


47,859



-



47,859



100.0
%Income from equity investments


1,318,227



1,376,076



(57,849
)


-4.2
%Gain on reversal of note receivable impairment


-



445,252



(445,252
)


100.0
%Other, net


(8,875
)


(22,655
)


13,780



60.8
%$
1,706,149


$
2,033,274


$
(327,125
)


-16.1
%




Interest and Dividend Income.Interest and dividend income decreased $31,887, or 9.6%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  This decrease in interest and dividend income was due mainly to decreased interest rates on both temporary investments and marketable securities on which Breda generates interest income.  Breda redeemed investments as they matured in 2010, which also resulted in less interest income being generated. Two of Breda’s subsidiaries, Prairie Telephone and Westside Independent, received dividends totaling $93,856 from their investment in Iowa Network Services during the nine-month period ending September 30, 2010, and for which the corresponding income during the nine-month period ended September 30, 2009 was also $93,856.  Overall dividend income increased $6,451 when comparing those nine-month periods.


37
 Index


Gain or (loss) on sale of investments.Both the $1,975 gain on sale of investments for the nine-month period ended September 30, 2010, and the $1,358 gain on sale of investments for the nine-month period ended September 30, 2009, represent the gain on the redemption of temporary investments.





Gain or (loss) on disposal of assets.The $95,715 gain on disposal of assets for the nine-month period ended September 30, 2010, was a combination of the $95,000 gain resulting from the sale of Yale customers to Panora Telephone Cooperative, and the net gains and losses on the sale of cabinets, cubicle walls, computers, and the disposal of equipment in Lidderdale damaged by lightning.  The $71,883 loss on the disposal of assets for the nine-month period ended September 30, 2009, resulted from the net gains and losses on the retirement of service vehicles and work equipment, and includes the $57,349 loss on the sale of cable TV properties.





Interest Expense.The $21,991, or 84.3%, increase in interest expense for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009, is the net result of the reduction of the Rural Telephone Finance Cooperative loan balance on which interest is calculated because of the payment of the scheduled principal payments on the loan, and the final prepayment of all remaining principal on April 30, 2009, and from the additional interest expense generated by Breda’s loans with the Rural Utilities Service for Breda’s fiber to the home project in Carroll, Iowa.





Allowance for funds used during construction.The $47,859 allowance for funds used during construction for the nine-month period ended September 30, 2010, represents the interest on the RUS broadband loan that was capitalized, and for which there was no comparable entry for the nine-month period ended September 30, 2009.





Income from Equity Investments.Income from equity investments decreased $57,849, or 4.2%, for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009.  The equity investments income shown 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 decrease in income from equity investments reported on Breda's income statement for the nine-month period ended September 30, 2010 is a reflection of the net increases and decreases in the net income of Breda's equity investments.  Most of Breda's equity investments are in cellular partnerships.  Some of these cellular investments now receive universal service funding, which has increased their overall operating revenue.  An additional source of income from equity investments arises from Breda’s ownership interest in Alpine Communications, L.C., an operating telephone company in northeastern Iowa, and in Hilbert Communications, LLC, a telecommunications and information technology services company operating in Wisconsin and Illinois.  Hilbert Communications, LLC includes the operations of Bug Tussel, LLC, a wireless cell site provider, and of Spiralight Network, LLC, a fiber optic network provider in rural areas of Wisconsin and Illinois.  Prairie Telephone and all unit holders in Spiralight Network, L.L.C. and in Bug Tussel Wireless, L.L.C., in addition to all of the unit holders in various other telecommunications entities, executed an Exchange Agreement with Hilbert Communications, LLC, whereby Prairie Telephone and the other investors received newly issued units in Hilbert Communications, LLC in exchange for the units they owned in the various related telecommunications entities.  The transaction with Hilbert Communications, LLC was effective as of January 15, 2009.  Prairie Telephone owned 8.5% of Hilbert Communications, LLC until July 1, 2009.  On that date, additional investors were issued units in Hilbert Communications, LLC, which reduced Prairie Telephone's ownership interest in Hilbert Communications, LLC from 8.5% to 6.87%.  Additional investors were issued units in Hilbert Communications, LLC on July 10, 2009, and again on December 31 2009, which reduced Prairie Telephone’s ownership interest in Hilbert Communications, LLC to 6.32% on December 31 2009.  Investor transactions on March 31, 2010, and again on May 13, 2010, resulted in Prairie Telephone owning a 6.47% interest in Hilbert Communications, LLC on September 30, 2010.


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 Index


Gain on reversal of note receivable impairment.The $445,252 gain on reversal of note receivable impairment for the nine-month period ended September 30, 2009, has no comparable entry for the nine-month period ended September 30, 2010.





Other, net.The $13,780, or 60.8%, increase in other net income for the nine-month period ended September 30, 2010, when compared to the nine-month period ended September 30, 2009, is mainly attributable to the change in partnership-related costs.





Income Tax Expense.Income taxes increased $228,631, or 27.0%, for the nine-month period ended September 30, 2010, when compared to the same period in 2009.  The effective tax rate in 2010 is 40.53%, compared to a 31.76% tax rate in 2009.  The effective tax rate differs from the U.S. statutory rate due to state income taxes, and the proportion of income from investments which are exempt from income tax.





Net Income.Net income decreased $245,178, or 13.5%, for the nine-month period ended September 30, 2010, when compared to the same period in 2009.





Liquidity and Capital Resources





Breda's short-term and long-term liquidity requirements arise primarily from the following:  operations and working capital requirements; capital expenditures; interest payments on any bank or other financing; dividend payments on Breda's common stock; redemption of Breda's common stock; and potential industry-related acquisitions or investments.





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 Index





Breda intends to fund the operations, working capital requirements, capital expenditures, interest payments, dividend payments, and stock redemptions from cash from operations.  Breda also intends to fund any smaller industry-related acquisitions or investments from cash from operations. For the nine months ended September 30, 2010 and September 30, 2009, cash provided by operating activities was $1,609,194 and $3,695,717, respectively.


To fund any significant future acquisitions or investments, Breda would consider the redemption of its short-term and long-term marketable securities investments; the use of its revolving lines of credit with the Rural Telephone Finance Cooperative; or the addition of long-term debt from industry lenders.  Breda presently has an unused line of credit with the Rural Telephone Finance Cooperative of $1,500,000 which matures on November 15, 2010, and Prairie Telephone has an unused line of credit with the Rural Telephone Finance Cooperative of $500,000 which matures on November 7, 2010.  Breda believes that its present revenues would be able to sustain the costs of additional debt if the need arose.  All potential acquisitions or investments will, however, be evaluated on their own merits for, among other things, potential cash and revenue production, and if the potential return on investment will be sufficient to incur the additional debt.  As noted previously, BTC, Inc. began a fiber overbuild of the Carroll, Iowa non-rural market in September 2009.  BTC, Inc. is financing that project with a $10,000,000 broadband loan from Rural Utilities Services.





Breda has historically funded its operations and capital expenditure requirements primarily from cash from operations.  The following table summarizes Breda's short-term liquidity as of September 30, 2010, and December 31, 2009.





As ofSeptember 30,


December 31,2010


2009Short-Term LiquidityCurrent Assets

$
8,793,244


$
9,429,328Current Liabilities


2,347,915



2,400,215Net Working Capital

$
6,445,329


$
7,029,113Cash and Cash Equivalents

$
4,195,456


$
4,987,960Short Term Marketable Securities

$
632,600


$
490,724Available on Line of Credit

$
2,000,000


$
2,000,000





Current assets decreased $636,084, or 6.7%, for the nine-month period ended September 30, 2010, when compared to the year ended December 31, 2009.  There was a $650,628 decrease in cash, cash equivalents, and marketable securities, which resulted mainly from Breda’s redemption of matured marketable securities, and the subsequent use of these proceeds in payment of Carroll, Iowa project invoices.  There was an increase of $400,810 in accounts receivable, which was due to increased revenues generated from conference bridge services.  There was a $328,021 decrease in prepaid income taxes.


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 Index


Current liabilities decreased $52,300, or 2.2%, for the nine-month period ended September 30, 2010, when compared to the year ended December 31, 2009.  Accounts payable decreased $121,105, or 5.8%, when comparing the two periods.  Accrued taxes decreased $19,863, or 12.6%, for the nine-month period ended September 30, 2010, when compared to the year ended December 31, 2009.  The decrease in accrued taxes was primarily the result of the decrease in federal and state income taxes payable due to the ongoing decreased revenue per minute received pursuant to the conference bridge settlement agreements.  There was also an increase in other accrued liabilities of $28,309, or 20.7%, for the nine-month period ended September 30, 2010, when compared to other current liabilities for the period ended December 31, 2009.  The increase in other accrued liabilities is mainly attributable to an increase in accrued payroll and labor benefits for the nine-month period ended September 30, 2010, when compared with the year ended December 31, 2009.





The following table summarizes Breda's sources and uses of cash for the nine months ended September 30, 2010 and 2009.





For The Nine Months EndedSeptember 30,2010


2009Net Cash Provided (Used)Operating Activities

$
1,609,194


$
3,695,717Investing Activities


(2,402,531
)


(693,214
)Financing Activities


833



(1,198,303
)





For the nine months ended September 30, 2010 and 2009, cash provided by operating activities was $1,609,194 and $3,695,717, respectively.





Cash used in investing activities was $2,402,531 for the nine-month period ended September 30, 2010, as compared to $693,214 for the nine-month period ended September 30, 2009.  Capital expenditures for the nine-month period ended September 30, 2010 were $2,664,900, and were $1,278,570 for the same period in 2009.  The increased capital expenditures were mainly related to Breda’s fiber project in Carroll, Iowa.  The purchase of marketable securities was $342,622 for the nine-month period ended September 30, 2010, and was $451,885 for the nine-month period ended September 30, 2009.  Proceeds from the sale of marketable securities was $540,060 in the nine-month period ended September 30, 2010, and was $495,826 in the nine-month period ended September 30, 2009.





Cash provided by financing activities was $833 for the nine-month period ended September 30, 2010, as compared to the use in financing activities of $1,198,303 for the nine-month period ended September 30, 2009.  Breda's outstanding RTFC loan was paid in full on April 30, 2009.  BTC, Inc. received a $500,000 advance on its $10,000,000 Rural Utilities Services loan during the nine month period ended September 30, 2010, for use in its fiber to the home project in Carroll, Iowa.  During the nine-month period ended September 30, 2010, cash was used to repay $14,037 of long-term debt with Rural Utilities Services.  Cash used to pay dividends to shareholders was $246,808 for both of the nine-month periods ended September 30, 2010 and September 30, 2009.  Dividends paid were $8 per share in 2010 and $8 per share in 2009.  Breda redeemed 406 shares of its common stock during the nine month period ended September 30, 2010 totaling $238,322.


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 Index


Long Term Debt





As of September 30, 2010, BTC, Inc. had outstanding $2,048,682 of long-term debt with Rural Utilities Service.  Each advance on this $10,000,000 rural broadband access loan carries its own interest rate for the term of the individual loan advance.  BTC, Inc. received its first loan advance in the amount of $1,000,000 on October 2, 2009, and this loan advance carries a fixed interest rate of 3.918%.  BTC, Inc.’s second loan advance in the amount of $564,329 was received on December 11, 2009, and carries a fixed interest rate of 4.315%.  BTC, Inc.’s third loan advance in the amount of $500,000 was received on September 20, 2010, and this loan advance carries a fixed interest rate of 3.481%.  The Rural Utilities Service advances are to be paid in monthly installments covering principal and interest beginning twelve months from the date of receipt of the first loan advance.  The principal and interest will be paid in full on all advances on April 28, 2029.  During the first twelve months after the receipt of the first loan advance, monthly payments of interest only are required.





The security and loan agreements underlying the Rural Utilities Service notes contain certain restrictions on distributions to stockholders, investment in or loans to others, payment of management fees or issuance of any new or preferred stock.  BTC, Inc. is restricted from making any distributions, except as might be specifically authorized in writing in advance by the Rural Utilities Service note holders.  BTC, Inc. may make a distribution after 75% of the loan funds have been expended as approved if after such distribution, BTC, Inc.'s net worth is equal to at least twenty percent (20%) of its total assets and the amount of all such distributions during the calendar year does not exceed twenty-five percent (25%) of BTC, Inc.'s net income or net margins for the prior calendar year.





Breda previously had long term debt with the Rural Telephone Finance Cooperative, but Breda prepaid in full its remaining long-term debt with the Rural Telephone Finance Cooperative on April 30, 2009.


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 Index


Obligations and Commitments





Breda's ongoing capital commitments include capital expenditures and any debt service requirements.  For the nine months ended September 30, 2010, capital expenditures were $2,664,900.  As of September 30, 2010, purchase commitments for the construction of the fiber to the home project in Carroll, Iowa totaled $7,660,285.  Breda’s subsidiary, BTC, Inc., is financing the project with a $10,000,000 broadband loan from Rural Utilities Services.  Construction commenced on the fiber project in September 2009, and it is anticipated that it will be a two-year project.  The advancements of principal under that loan as of September 30, 2010 totaled $2,064,329, of which $2,048,682 was outstanding as of September 30, 2010.





Breda's contractual obligations as of September 30, 2010 are:





2011

$
74,5032012


79,5372013


82,9192014


86,2242015


89,6612016 and After


1,635,838


Breda believes that cash provided by operations and current cash balances will be adequate to meet Breda's foreseeable operational, capital expenditure, and debt service requirements.  However, Breda's actual cash needs and the availability of required funding may differ from Breda's expectations and estimates, and those differences could be material.  Future capital requirements will depend on many factors, including, among others, the demand for Breda's services in Breda's existing markets and regulatory, technological and competitive developments.





Off-Balance Sheet Risk and Concentration of Credit Risk; Investment Policy





Breda has no off-balance sheet exposure or risk.





Breda has certain financial instruments which could potentially subject Breda to concentrations of credit risk.  These financial instruments consist primarily of trade receivables and cash and temporary cash investments.





Breda adheres to an investment policy with respect to marketable securities which allows investments in the following:





·
Securities issued or guaranteed by the U.S. government or its agencies.


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 Index


·
Corporate or municipal bonds rated "A" or better by a major rating service.





·
Money market funds investing in U.S. government, U.S. agency or highly rated municipal securities.




Other Activities and Issues





The National Exchange Carrier Association (NECA) has been delegated some authority by the FCC regarding the regulation of interstate access charge rates.





The 2009 Modifications of the Average Schedule USAC High Cost Loop (HCL) support formula for companies that had less than 700 access lines per exchange were effective on January 1, 2009.  These revisions are made each year, but the 2009 impacts were much greater than previous years and had more of a negative effect on average schedule companies, such as Breda.   During each year the capped National Average Cost Per Loop (NACPL) adjusts upward because of quarterly data submissions by cost companies.  Because of this upward adjustment in the NACPL, which serves as a base to determine the HCL for average schedule companies such as Breda, the payments to average schedule companies for all months of the year are reduced.  Although cost per loop values for most of the average schedule companies were projected to increase, the payments to average schedule companies were reduced, due to the cap on payments.  The estimated HCL support paid to rural companies in 2009 was expected to decrease by $13.3 million.  Breda experienced a decrease in its HCL support payments for 2009 of approximately $225,042, or 52.04%.  Breda also experienced a decrease in its local switching support payments for 2009 of at least $17,305, or 8.16%.





While there were no significant formula revisions made effective on January 1, 2010 for the Average Schedule USAC High Cost Loop support, Breda is experiencing decreased high cost loop support in 2010 of approximately 1.9% because of the capped National Average Cost Per Loop upward adjustment.




New traffic sensitive switched access rates became effective on July 1, 2009 and again on July 1, 2010 per the NECA Tariff F.C.C. No. 5.   On July 1, 2009, it was determined that rates paid to rural companies in the traffic sensitive switched access category would increase on average by 5.8%, and rates in the traffic sensitive special access category would increase on average by 6.3%.  Breda experienced a $160,082 decrease in its traffic sensitive settlements, or 15.5%, during the twelve-month period ended December 31, 2009.


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 Index


Beginning July 1, 2010, it is anticipated that the traffic sensitive switched access rate category will increase on average 9.4% and the traffic sensitive special access category will decrease on average by 4.4%.





Breda and its subsidiaries are also subject to risk regarding changes in intrastate access charge rates because concerns have been raised by the Iowa legislature and the IUB regarding intrastate rates, and whether alternative intrastate intercarrier compensation mechanisms should be investigated.





The Iowa Telephone Association Access Service Tariff No. 1 (ITA Tariff) mirrors the NECA tariff in many respects for intrastate traffic.  Breda concurs in this tariff and is therefore subject to the rates outlined in the ITA tariff.





Prior to July 1, 2009, the intrastate rates that mirrored the NECA interstate rates that went into effect on July 1, 2007 were still being used by Breda and the other Iowa companies that concurred in the ITA tariff because, while the ITA filed the September 1, 2007 tariff which was allowed to go into effect, it was later challenged by Sprint, Verizon and AT&T, and the intrastate rate changes were put on hold, and reverted back to the July 1, 2007 rates.  After various hearings, the ITA received approval from the IUB on May 31, 2009, to allow the intrastate access rates in the ITA tariff, and which mirror the NECA tariff, to be effective on the same date as the interstate rates in the NECA tariff. Therefore, effective July 1, 2009, the intrastate access rates mirrored the interstate access rates, except for the 3-cent common carrier line charges.  On September 4, 2009, the IUB denied Sprint’s request to start a rulemaking docket for the purpose of eliminating the 3-cent, carrier common line charge.  The IUB noted that it would consider CCL in its docket on Universal Service.  The IUB also noted that it was not concluding that CCL should necessarily be related to a possible universal service fund, only that the issues ought to be considered together.   The decrease in intrastate access rates decreased Breda’s network access revenues by approximately $128,425 in 2009.





In 2009 the ITA modified the ITA Access Tariff so that it automatically and concurrently mirrors the NECA’s changes unless the ITA specifically files an exception to one or more proposed NECA tariff changes.  Because of this change, the intrastate charges which mirror the interstate access rates, except for the 3-cent common carrier line charge, also became effective on July 1, 2010.





Breda believes that further changes in access charges will likely occur, and that if any of the plans known today are adopted, as currently proposed, there will be substantial reductions in access revenues.  Since access charge revenues constitute a substantial portion of Breda's total consolidated revenues, this is an area of material risk to Breda and its subsidiaries.


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 Index


Universal service funding is also an important part of Breda's consolidated revenues, and the regulation of universal service funding by the FCC is another area of material risk to Breda and its subsidiaries.  On May 1, 2008, the FCC voted in favor of an interim cap on payments to competitive eligible telecommunications carriers under the USF High Cost funding program.  Most CETC recipients are wireless carriers, and the FCC is attempting to slow the growth of payments to CETC’s. On July 2, 2008, the Federal Register published the FCC order adopting an interim cap on USF payments to CETCs.  The order became effective on August 1, 2008, and is still in place as of the date of this quarterly report.  BTC, Inc. does not receive USF high cost funding.  Since BTC, Inc. is a competitive local exchange carrier in the Carroll, Iowa market, it is only eligible to receive high cost universal service funds if the incumbent local exchange carrier receives those funds.  The incumbent local exchange carrier is Qwest, and Qwest does not receive universal service funding for the Carroll, Iowa market.





Breda believes that federal universal service fund criteria will continue to change, but Breda is unable to determine estimated time frames or estimated financial ramifications of all of the provisions as of the date of this quarterly report.  The decrease in intrastate access rates implemented by the IUB on February 7, 2009, and the changes being implemented on the federal level with the federal universal service fund, have caused Breda and its representative industry members to study the feasibility of a state universal service fund.  Given the preliminary nature of these studies and discussions, however, Breda is not able to estimate what financial ramifications, if any, could come from such a fund.





Breda believes it is likely that the discussion of a state universal service fund will need to be coordinated with emerging FCC developments.  The FCC has begun issuing additional guidance on its plans for the universal service fund since its release of its National Broadband Plan in March 2010.





The FCC distributed a summary paper within its department on March 4, 2010 which noted some proposed changes to the current universal service and intercarrier compensation regimes that would redirect investment towards broadband.  Some of the proposals that would be included in the National Broadband Plan would:





a.
Over time, transform the current high-cost USF program into a new Connect America Fund (with at most one recipient) and a new Mobility Fund, and at the end of a transition period, the fund for the current high cost fund would be eliminated,


b.
Eliminate inefficient spending in the current high cost fund to free up resources for the new funds, which would include phasing down CETC support,


c.
Reduce intrastate access levels to interstate rates over time, and consider the lost access revenues in calculating the Connect America Fund,


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 Index


d.
Expand Low Income universal service support to broadband, and


e.
Broaden the USF contribution.





The FCC delivered the National Broadband Plan to Congress on March 17, 2010, and the plan sets forth broadband goals for the nation, and reports on the current state of broadband deployment and adoption.  For the recommendations that are addressed to the FCC, as opposed to Congress or state or local governments, the FCC has published an implementation schedule and will begin or complete rulemakings, subject to normal FCC procedures.  The FCC lays out a three-stage transition away from high cost USF funding to the new Connect American Fund (“CAF”) and Mobility Fund (“MF”).  In Stage 1, from 2010 to 2011, the proposal calls for a series of rulemakings and comment proceedings that would allow the FCC to a) begin phasing out CETC funding over a five-year period, b) freeze Interstate Common Line Support (ICLS), and c) retarget some of the existing Interstate Access Support fund (IAS) provided to price cap companies towards broadband.





In Stage 2, the FCC would begin full implementation of the transition by phasing down CETC funding and freezing legacy support levels and begin to provide funds from the CAF.  The least-challenging high-cost areas unserved by broadband would be targeted first.  Stage 2 would take place between 2012 and 2016.





In Stage 3, the remaining legacy programs would phase out and the CAF and MF would be the sole high-cost mechanisms.  Funding for voice-only networks would end.  Stage 3 would take place from 2017 to 2020.





Under the broadband plan, the FCC also proposes to overhaul intercarrier compensation, by phasing all access rates down to zero over three stages.  In Stage 1, the FCC would complete rulemakings to design a plan to reduce intrastate rates to interstate levels in equal increments over a period of time.  The FCC would also adopt and implement rules to address phantom traffic and access stimulation.  Stage 1 would occur from 2010 to 2011.





In Stage 2, intrastate access charges would be reduced down to interstate access levels.  Stage 2 would occur from 2012 to 2016.





In Stage 3, all per-minute access rates would be eliminated.  Carriers would exchange traffic based on negotiated rates, such as the peering arrangements used today in the IP environment.  Carriers could still negotiate flat rates among themselves.  Stage 3 would occur from 2017 to 2020.





Breda along with 357 rural LEC’s is participating in a national coalition, which is focusing on advocacy and outreach efforts to change the National Broadband Plan (NBP).  Most of the national and state telecommunication organizations have joined together in an unprecedented, unified coalition to present a unified message to the FCC and Congress regarding the future outcomes of the NBP as drafted, and to present workable alternatives.  Their initial joint comments were filed on July 12, 2010.  Universal service legislation has also been introduced by representatives from Virginia and Nebraska, and would give the FCC the authority to convert the USF from voice to one focused on broadband.  While some of the proposed legislation raise additional concerns for the telecommunication industry, it does address other intercarrier compensation issues regarding phantom traffic, traffic pumping and universal service phase-out in competitive markets.


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 Index


At its October 14, 2010 monthly meeting to address universal service fund reform, the FCC issued a notice of proposed rulemaking (NPRM) with the goal of creating the broadband mobility fund proposed in the NBP.  The FCC is seeking comments on the proposal to use between $100 million and $300 million in recently reserved universal service funds to create a Mobility Fund to support private investment in current 3G and next-generation mobile services in areas where consumers currently lack such services.  Breda and many other industry members are concerned with this proposal because it subsidizes wireless carriers based on landline carrier costs and does not require the wireless carrier to cover the landline carrier’s entire serving area.





On October 15, 2010, local industry associations, of which Breda is a member, also filed comments with the Iowa Utilities Board relating to the NBP and state broadband planning.  While the Associations support the goal of ubiquitous and robust broadband service to all, the Associations’ comments outlined how the NBP would decimate Iowa’s rural providers, and instead detailed a number of actions that the IUB could take to assist Iowa customers in response to the NBP.





As noted previously, Breda believes these proposed adjustments will affect the intercarrier compensation and universal service regimes and could have a significant negative effect on Breda’s future revenue streams.





BTC, Inc. filed a collection actions suit on October 29, 2009 against Sprint regarding payment of access revenue for conference bridging services.  On July 28, 2010, BTC, Inc. received notice from its legal counsel that per a filed Notice, the federal Court has indicated that cases such as BTC, Inc.’s case against Sprint, involving access charge issues pending in Iowa’s federal Court system would be moving forward.  On August 2, 2010, BTC, Inc. received notification that its attorney had accepted Sprint’s subpoena on BTC, Inc.’s behalf to produce and allow inspection of various documents.  The discovery process continues with the Court’s Scheduling Order and Discovery Plan calling for completion of discovery by May 20, 2011, and a trial ready date of October 10, 2011.





BTC, Inc. continues to individually attempt to negotiate settlement agreements with carriers disputing the volume of minutes and the interstate and intrastate switched access charges billed to them by BTC, Inc.  BTC, Inc. is working with legal counsel for assistance in its collection actions against the various carriers that are withholding network access service revenues.


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 Index


In an order released November 23, 2009, the FCC reversed its earlier ruling in a dispute between Qwest and Farmers of Wayland.  The October 2, 2007 FCC Order had stated that the conference calling companies were end users, and that Farmers could charge access rates.  The FCC ruled November 23, 2009 that new evidence produced in this proceeding indicated that conference calling companies never subscribed to the services offered under the tariff, and therefore were neither customers nor end users within the meaning of the tariff, and the telephone company could not charge switched access charges under the terms of their tariff.





On September 18, 2009, the IUB filed an Order Initiating a Rule Making to consider proposed amendments to its rules to address High Volume Access Service (HVAS) and the effect HVAS can have on a telco’s revenues from intrastate switched access services.  The IUB concluded that HVAS calls cannot be billed for access services pursuant to an association tariff, such as the ITA tariff in which Breda concurs, because of their fact-sensitive and individualized nature.  The IUB was looking to require telcos providing HVAS to file an individual tariff for that service.  The telcos would continue to concur in an association tariff for all other access services.  The IUB outlined various other provisions regarding HVAS and requested comments by October 27, 2009.  Oral presentation on the proposed rules were held on December 8, 2009, and at that proceeding, the IUB allowed for additional comments to be filed by January 29, 2010.





On June 7, 2010, the IUB issued an Order Adopting Rules in the High Volume Access Service docket which went beyond the scope of conference calling, and applies to increases in traffic caused by help desks, calling centers, or any other activity that results in an increase in total billings for intrastate exchange access for a local exchange carrier, such as Breda, in excess of 100 percent in less than six months.  The rules fail to create an exception for non-conference bridging volume growth, expansion of a LEC’s service area, or for differences in traffic patterns between similar LEC’s.   The rules:





a)
Allow an interexchange carrier to file a complaint even when a LEC’s activity does not meet the “100% increase in less than six months” threshold so long as the IXC believes the LEC is engaged in activity that raises HVAS issues.





b)
Require a LEC to provide notice to IXC’s, wireless carriers, VoIP providers or any other carrier with whom the LEC exchanged traffic in the preceding 12 months whenever adding a new HVAS customer or otherwise expecting or experiencing an HVAS situation such as gaining a new customer that will significantly increase the telco’s call volume.  The rules require the LEC to notify the relevant IXC’s of the telephone numbers involved and, for new customers, the expected date the HVAS service will be initiated.


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 Index


c)
After notice is given, the carriers have a 60-day good faith requirement to engage in good faith negotiations for tariffed, intrastate HVAS access rates, followed by an ability to file a request with the IUB for arbitration.





d)
Establish that HVAS access rates will be based on the incremental cost of providing the service, not including any marketing or other payments made to the HVAS customer.





e)
Require a LEC to file a separate tariff for HVAS traffic, and IUB approval of HVAS tariff provisions.





f)
Require ITA to modify its Intrastate Access Tariff prohibiting the application of association access service rates to HVAS traffic.





g)
Disallow any compensation for HVAS traffic until negotiations are completed, or a tariff is approved.





h)
Allow the IUB to initiate a proceeding to revoke a LEC’s certificate for failure to follow the new HVAS rules.





Breda is continuing to monitor its traffic in relation to these new HVAS rules which became effective on August 4, 2010.  Breda does not expect significant fluctuations in its intrastate traffic other than what may occur in its fiber to the home project in Carroll, Iowa.





The Deficit Reduction Omnibus Reconciliation Act of 2005 included the digital television transition legislation.  The Act established February 17, 2009 as the deadline for broadcasters to transition from analog to digital spectrum, but in February 2009, a bill was passed that postponed the DTV transition until June 12, 2009.  All of Tele-Services' cable service systems are analog systems.  Tele-Services has installed the equipment in each of its cable TV communities to receive and convert the digital signal to an analog signal, and is in compliance with all requirements of the Deficit Reduction Omnibus Reconciliation Act of 2005.  If Tele-Services were to provide total digital transmission of all programming, it would require significant upgrades to Tele-Services' plant, equipment, and cables.





BTC, Inc. utilized the Statewide Cable Franchise Bill by filing an Application for Certificate of Franchise Authority with the IUB on March 19, 2009.  BTC, Inc. received IUB approval on April 8, 2009 to provide video services to the city of Carroll, Iowa as part of its fiber-to-the-home project.  The construction phase of the fiber to the home overbuild project in Carroll, Iowa, began in early September 2009.  It is anticipated that the project will be completed within two years.


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 Index


The American Recovery and Reinvestment Act (ARRA) of 2009 was signed into law by President Obama on February 17, 2009, which included the Broadband Technology Opportunities Program (BTOP) and the Broadband Initiatives Program (BIP). The National Telecommunications and Information Administration (NTIA) and the United States Department of Agriculture’s (USDA) Rural Utilities Service (RUS) jointly issued a Notice of Funds Availability (NOFA) and solicitation of applications on July 1, 2009, describing the availability of funds and application requirements for the broadband initiatives contained in the ARRA.  The BTOP was funded at $4.7 billion and provides grants to support the deployment of broadband infrastructure in unserved and underserved areas, to enhance broadband capacity at public computer centers, and to encourage sustainable adoption of broadband service.  The intent is for these projects to then spur job creation and stimulate long-term economic growth and opportunity per the ARRA objectives.





The requirements to determine eligibility for applications for unserved areas and underserved areas (last mile projects and middle mile projects) involved specific data for contiguous census blocks where minimum percentages of households in the proposed funded service area lacked access to minimum broadband speeds.  One of the other requirements, that there be a sustainable business plan for the proposed project, was a major obstacle for Breda as it evaluated its options under these programs.  Breda subsequently determined to stop its application processes for these funds.





On September 9, 2009, when the NTIA launched its initial, searchable database of the broadband applications, it was determined that already roughly 40 applications were filed whose project descriptions referenced Iowa or whose application listed Iowa as the applicant’s home-state address, and whose applications covered hundreds of Iowa communities, many of which are already served by telephone companies such as Breda.  Breda, along with other Iowa telcos, subsequently reviewed each application with Iowa references, to exercise their right to object to applications that were seeking funding in their existing service areas.  These objections were especially important when those applications contained misstatements or errors about whether or not broadband service was available.





Changes were made to both the NTIA and RUS programs before the rules were announced for the second round of broadband stimulus applications due March 26, 2010.  The RUS determined to concentrate on last mile projects and removed the “underserved area” definition.  NTIA determined to focus on “middle-mile” projects.  Breda subsequently completed and filed its application for a combination grant and broadband loan request for its Breda and Lidderdale exchanges.   On July 15, 2010, Breda was notified that the Rural Utilities Service (RUS) had approved Breda for a loan/grant combination under the Broadband Initiatives Program.  Breda was offered a grant in the amount of $1,838,337 and a loan in the amount of $783,572.  Total project costs are estimated to be $5.2 million.  Breda accepted the award letter on July 23, 2010, and on August 16, 2010 received loan/grant documents from RUS for further documentation and execution.  Completed and executed documents were returned to the RUS on October 8, 2010.  Construction must commence within 180 days of the award.  Breda has continued its planning for this project, and it is estimated that staking for this project could begin as early as November 2010.


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 Index


The Patient Protection and Affordability Care Act (“PPACA”) signed into law on March 23, 2010 will take eight years to be fully implemented.  The law requires all individuals to have health insurance coverage by 2014.  Those who choose not to have insurance would pay a $95 penalty in the first year, but $750 or 2% of income (whichever is higher) in 2016.





Breda has fewer than 50 employees, so Breda would not be subject to the $2,000 annual tax per full-time worker if Breda did not provide health insurance benefits to its employees.  As a small-business employer, Breda would be eligible for small-business tax credits of up to 35% to help pay for affordable employer-provided insurance.  The small business tax credits take effect in 2010, but Breda’s scenarios to date have not met the criteria to take advantage of these small business tax credits.  Breda provides health insurance benefits to its employees through the National Cooperative Telephone Association (“NCTC”), and is working with its provider to implement the changes required in 2010.  Some of the changes affecting Breda’s provision of health care services in 2010 and 2011 would include a) caps on employee contributions to health-related flexible spending accounts (“FSAs”) at $2,500 per year in 2011 and beyond, and employees would no longer be able to use FSA funds to pay for over-the-counter medications, and b) all health plans must maintain dependent coverage for insured employees’ children until they turn age 26.  This rule took effect in September 2010 if the company was on a fiscal year plan, or in Breda’s case, on January 1, 2011 because it has a calendar year plan.





Also beginning in 2010, new rules limit how and for whom insurance companies can deny coverage.  The health care reform law prohibits insurers from denying coverage to children based on pre-existing conditions, putting lifetime dollar limits on coverage, and cancelling coverage retroactively except in cases of fraud.





Breda continues to study the provisions of the PPACA for 2010 and beyond, but believes it will have minimal effect on Breda for the years 2010 and 2011.





Item 3.
Quantitative and Qualitative Disclosures About Market Risk.





This Item is not applicable to smaller reporting companies such as Breda.


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 Index


Item 4.
Controls and Procedures.





Evaluation of Disclosure Controls and Procedures





The principal executive officer and the principal financial officer of Breda have evaluated the effectiveness of Breda's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2010, and they have concluded that the disclosure controls and procedures are effective.  Breda believes, however, that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.





No Changes in Internal Control Over Financial Reporting





No change in Breda's internal control over financial reporting occurred during the period of July 1, 2010 through September 30, 2010 that has materially affected, or is reasonably likely to materially affect, Breda's internal control over financial reporting.






PART II - OTHER INFORMATION





Item 1.
Legal Proceedings.





Except as noted in the following paragraph, as of the date of this quarterly report, Breda was not aware of any material pending legal proceeding to which Breda or any of its subsidiaries was a party or of which any of Breda's or any of its subsidiaries' respective property was the subject, other than ordinary routine litigation, if any, that was incidental to Breda's or the subsidiaries' respective business.  As of the date of this quarterly report, Breda was not aware that any governmental authority was contemplating any material proceeding against Breda or any of its subsidiaries or any of their respective property.





As discussed in Breda's Form 10-Q for the quarter ended September 30, 2009, BTC, Inc. filed a collection action suit against Sprint Communications Company L.P. on October 29, 2009 in the United States District Court, Northern District of Iowa, Central Division.  The suit was filed against Sprint because Sprint has not paid BTC, Inc. the carrier switched access charges billed to Sprint since October 1, 2007. On July 28, 2010, BTC, Inc. received notice from its legal counsel that per a filed Notice, the Court has indicated that cases such as BTC, Inc.’s case against Sprint, involving access charge issues pending in Iowa’s federal Court system will be moving forward.  On August 2, 2010, BTC, Inc. received notification that its attorney had accepted Sprint’s subpoena on BTC, Inc.’s behalf to produce and allow inspection of various documents.  The discovery process continues with the Court’s Scheduling Order and Discovery Plan calling for completion of discovery by May 20, 2011, and a trial ready date of October 10, 2011.


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 Index


The amount of unpaid Sprint access charges totaled approximately $3,021,440 as of September 30, 2010.





Item 1A.
Risk Factors.





This Item is not applicable to smaller reporting companies such as Breda.





Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.





Breda did not sell any shares of its common stock during the period of July 1, 2010 through September 30, 2010.





The following table provides information regarding Breda's purchases of its common stock from shareholders during the period of July 1, 2010 through September 30, 2010.








ISSUER PURCHASES OF EQUITY SECURITIESPeriod
Total

Number of

Shares

Purchased1
Average

Price Paid

per Share2
Total Number

of Shares

Purchased as

Part of

Publicly

Announced

Plans or

Programs1
Maximum

Number (or

Approximate

Dollar Value)

of Shares that

May Yet Be

Purchased

Under the

Plans or

Programs1Month #1

(July 1, 2010-

July 31, 2010)
332
$587
-0-
-0-Month #2

(August 1, 2010-

August 31, 2010)
74
$587
-0-
-0-Month #3

(September 1, 2010-

September 30, 2010)
-0-
N/A
-0-
-0-Total
406
$587
-0-
-0-


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 Index


1
All of the shares of common stock were purchased by Breda from three shareholders pursuant to the redemption right or the right of first refusal granted to Breda in its Articles of Restatement, which rights are discussed in Breda’s most recent Annual Report on Form 10-K filed on March 31, 2010, or pursuant to the unsolicited request of the shareholder in question.  Breda does not have any publicly announced plans or programs with respect to purchases of its common stock.





2
All of the shares of common stock were purchased by Breda at the $587 per share redemption price that was established by the board of directors and which became effective on March 18, 2010.





There were transfers of 69 shares of Breda's common stock by six different shareholders during the period of July 1, 2010 through September 30, 2010 with respect to which Breda did not exercise Breda's right of first refusal to purchase the shares.  Twenty nine of those 69 shares were sold for $587 per share.  Two of those 69 shares were sold for $590 per share.  The remaining 38 shares were transferred without the payment of any purchase price or other consideration.  The latter transfers were to, for example, family members or trusts.





Item 3.
Defaults Upon Senior Securities.





There has been no material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within thirty days, with respect to any indebtedness of Breda or any of its subsidiaries exceeding five percent of the total assets of Breda and its consolidated subsidiaries.





No material arrearage in the payment of dividends or any other material delinquency not cured within thirty days has occurred with respect to any class of preferred stock of Breda or any of its subsidiaries which is registered or which ranks prior to Breda's common stock.





Item 5.
Other Information.





There was no information required to be disclosed in a report on Form 8-K during the period of July 1, 2010 through September 30, 2010 which has not been reported on a Form 8-K.





There were no material changes during the period of July 1, 2010 through September 30, 2010 to the procedures by which the shareholders of Breda may recommend nominees to Breda’s board of directors.


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 Index


Item 6.
Exhibits.





The following exhibits are filed as part of this quarterly report.  Exhibits previously filed are incorporated by reference, as noted.





Incorporated by ReferenceExhibit


Filed Herewith;

Period

FilingNumber
Exhibit Description

Page Number
Form
Ending
Exhibit
Date3.1
Articles of Restatement


10-QSB
3/31/07
3.1
5/14/073.2
Second Amended and Restated Bylaws


8-K

3.2
4/4/0710.1
Employment Agreement dated August 11, 2009

with Jane Morlok


10-K
12/31/09
10.1
3/31/1010.3
Employment Agreement dated August 11, 2009

with Charles Deisbeck


10-K
12/31/09
10.3
3/31/1031
Rule 13a-14(a) Certifications31.1Certification of Chief Executive Officer
E-131.2Certification of Chief Financial Officer
E-3


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 Index





32
Section 1350 Certifications32.1    Certification of Chief Executive Officer
E-532.2    Certification of Chief Financial Officer
E-6




[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]


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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








BREDA TELEPHONE CORP.November 12, 2010
By:
/s/  Charles DeisbeckName:
Charles DeisbeckTitle:
Chief Executive OfficerNovember 12, 2010
By:
/s/  Jane MorlokName:
Jane MorlokTitle:
Chief Financial Officer


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 Index


EXHIBIT INDEX





Exhibits Filed With Form 10-Q


of Breda Telephone Corp.


For the Quarter Ended September 30, 2010





Description of Exhibit.
Page31.
Rule 13a-14(a) Certifications31.1
Rule 13a-14(a) Certification of Chief Executive Officer
E-131.2
Rule 13a-14(a) Certification of Chief Financial Officer
E-332.
Section 1350 Certifications32.1
Section 1350 Certification of Chief Executive Officer
E-532.2
Section 1350 Certification of Chief Financial Officer
E-6




59