<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-13716
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NORTH PITTSBURGH SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1485389
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4008 Gibsonia Road, Gibsonia, Pennsylvania 15044-9311
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
412 443-9600
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(Registrant's telephone number, including area code)
No Change
- --------------------------------------------------------------------------------
(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, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- -----------
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding
------------------------
At October 29, 1996, the Registrant had 15,040,000 shares of common stock
outstanding, par value $.15625 per share, the only class of such stock issued.
<PAGE>
PART I
ITEM 1
FINANCIAL STATEMENTS
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Thousands - Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 2,184 $ 1,866 $ 6,360 $ 5,533
Long distance and access services 10,370 9,964 31,143 29,123
Directory advertising, billing & other services 561 531 1,647 1,586
Telecommunication equipment sales 750 592 2,194 1,550
Other operating revenues 1,387 490 3,482 1,197
-------- -------- -------- ------------
Total Operating Revenues 15,252 13,443 44,826 38,989
-------- -------- -------- ------------
Operating expenses:
Depreciation and amortization 2,385 2,137 7,032 5,991
Network and other operating expenses 6,888 5,575 19,412 15,752
State and local taxes 613 535 1,898 1,671
Telecommunication equipment expenses 616 496 1,910 1,370
-------- -------- -------- ------------
Total Operating Expenses 10,502 8,743 30,252 24,784
-------- -------- -------- ------------
Net Operating Revenues 4,750 4,700 14,574 14,205
Other expense (income), net:
Interest expense 386 399 1,166 1,200
Interest income (186) (225) (581) (800)
Sundry expense (income), net (302) 72 (214) 150
-------- -------- -------- ------------
(102) 246 371 550
-------- -------- -------- ------------
Earnings before income taxes 4,852 4,454 14,203 13,655
Income taxes:
Current 1,973 1,851 5,648 5,542
Deferred - - - -
-------- -------- -------- ------------
1,973 1,851 5,648 5,542
-------- -------- -------- ------------
Net earnings $ 2,879 $ 2,603 $ 8,555 $ 8,113
======== ======== ======== ============
Average common shares outstanding 15,040 15,040* 15,040 15,040*
======== ======== ======== ============
Earnings per share of common stock $.19 $.17* $.57 $.54*
======== ======== ======== ============
Dividends per share of common stock $.13 $.12* $.39 $.36*
======== ======== ======== ============
</TABLE>
*Adjusted for a two-for-one stock split effective May 22, 1996.
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS Sept. 30 Dec. 31
------ 1996 1995
-------- --------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 12,040 $ 9,359
Marketable securities available for sale 894 1,593
Marketable securities held to maturity 2,046 6,569
Accounts receivable:
Customers 4,175 3,725
Access service settlements and other 6,085 5,120
Inventories of construction and operating materials and
supplies 3,122 2,381
Prepaid taxes 87 -
-------- --------
Total current assets 28,449 28,747
-------- --------
Property, plant and equipment:
Telephone plant in service:
Land 511 461
Buildings 11,251 8,943
Equipment 103,428 97,334
Miscellaneous physical property 70 48
-------- --------
115,260 106,786
Less accumulated depreciation and amortization 58,376 52,675
-------- --------
56,884 54,111
Construction in progress 6,181 4,505
-------- --------
Total property, plant and equipment, net 63,065 58,616
Investments 4,688 3,876
Deferred financing costs 850 1,159
Prepaid pension cost 1,081 689
Other assets 1,234 3,069
-------- --------
$ 99,367 $ 96,156
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 744 $ 702
Accounts payable 5,500 6,337
Accrued interest 117 123
Dividend payable 1,955 1,805
Taxes other than income taxes 507 610
Accrued vacation 673 673
Other liabilities 1,857 404
Federal and state income taxes 689 291
-------- --------
Total current liabilities 12,042 10,945
-------- --------
Long-term debt 21,129 21,694
Unamortized investment tax credits 394 470
Deferred income taxes 5,579 5,670
Postretirement benefits 4,433 4,250
Other liabilities 1,705 1,600
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 49,503 46,814
Unrealized gain (loss) on available for sale securities, net 17 148
-------- --------
Total shareholders' equity 54,085 51,527
-------- --------
$ 99,367 $ 96,156
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
-------------------
1996 1995
-------- --------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 8,555 $ 8,113
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 7,045 5,786
Equity (income) losses of affiliated companies (274) (41)
Provision for postretirement benefits other than pensions 183 146
Investment tax credit amortization (76) (113)
Deferred income taxes - -
Changes in assets and liabilities:
Accounts receivable (1,415) (1,985)
Inventories of construction and operating materials &
supplies (742) (65)
Prepaid federal and state taxes (87) (130)
Accounts payable (837) 1,184
Taxes other than income taxes (103) (276)
Other liabilities and accrued interest 1,552 33
Federal and state income taxes 398 344
Deferred financing costs, prepaid pension costs
and other assets 1,752 (112)
Other, net (106) 26
-------- --------
Total adjustments 7,290 4,797
-------- --------
Net cash from operating activities 15,845 12,910
-------- --------
Cash used for investing activities:
Expenditures for property and equipment (11,785) (12,348)
Net salvage on retirements 277 87
-------- --------
Net capital additions (11,508) (12,261)
-------- --------
Purchase of marketable securities held to maturity (454) (5,211)
Proceeds from redemption of marketable securites held to maturity 4,927 4,376
Purchase of marketable securities available for sale (322) (732)
Proceeds from sale of marketable securities available for sale 970 1,245
Investments in affiliated entities (538) 235
-------- --------
Net cash used for investing activities (6,925) (12,348)
-------- --------
Cash used for financing activities:
Cash dividends (5,716) (5,264)
Retirement of debt (523) (491)
-------- --------
Net cash used for financing activities (6,239) (5,755)
-------- --------
Net (decrease) increase in cash and temporary investments 2,681 (5,193)
Cash and temporary investments at beginning of period 9,359 14,779
-------- --------
Cash and temporary investments at end of period $ 12,040 $ 9,586
======== ========
Interest paid $ 1,094 $ 1,150
======== ========
Income taxes paid $ 5,340 $ 5,813
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
-------
The condensed consolidated financial statements included herein have
been prepared by the Registrant, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Consolidated
herein are the financial results of the Registrant's wholly-owned
subsidiaries, North Pittsburgh Telephone Company (North Pittsburgh),
Penn Telecom, Inc., Pinnatech, Inc. (Pinnatech) and Management
Consulting Solutions, Inc. (MCSI). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
Nevertheless, the Registrant believes that its disclosures herein are
adequate to make the information presented not misleading and, in the
opinion of management, all adjustments (which consisted only of normal
recurring accruals) necessary to present fairly the results of
operations for the interim periods have been reflected. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included
in the Registrant's latest annual report to the Securities and Exchange
Commission on Form 10-K.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Financial Condition
-------------------
(a) General
-------
There were no material changes in the Registrant's consolidated general
financial condition from the end of its preceding fiscal year on
December 31, 1995 to September 30, 1996, the end of the nine-month
period reported herein.
(b) Liquidity and Capital Resources
-------------------------------
Consolidated capital expenditure commitments for the purchase and
installation of communications and other equipment at September 30, 1996
amounted to approximately $2,889,932 with such amount being part of the
1996 Construction Program. Funds for financing construction expenditures
in the nine-month period ended September 30, 1996 were generated from
internal sources. Based on its 1996 construction budget, preliminary
construction budget for 1997 and projected cash flows, North Pittsburgh
anticipates financing all of its telephone plant construction in 1996
from cash reserves and internally generated funds. Beginning in the
second quarter of 1997, a portion of the funds used for construction are
expected to be obtained from new debt financing from the Rural Utilities
Service. Terms and conditions of the new loan are expected to be
finalized late in the fourth quarter of 1996. At September 30, 1996,
construction work in progress was $6,180,974. An additional $8,006,366
will be expended to complete these projects.
The Registrant and its subsidiaries have not experienced any difficulty
in the past meeting either long-term or short-term cash commitments.
Cash flow generated through regular operations has been adequate to not
only finance a significant portion of the capital requirements of the
Registrant as discussed in the previous paragraph but also to meet
principal and interest payments on long-term debt and all working
capital requirements. It is anticipated that future long-term interest
and principal payments will be made from the same source of internally
generated funds.
4
<PAGE>
(c) Regulatory/Competition
----------------------
The Federal Communications Commission (FCC) continues to work on
Rulemakings that will spell out the specifics of the Telecommunications
Act of 1996 (1996 Act) and the Pennsylvania Public Utility Commission
(PA PUC) must then choose a course of action to fully implement the 1996
Act, or to the extent possible and permissible, change the manner in
which such regulations are implemented in Pennsylvania before the impact
on North Pittsburgh, a Rural Telephone Company under the 1996 Act, can
be fully understood and measured. However, the clear intent of the 1996
Act is to open up the local exchange market to competition. This appears
to mandate, among other items, that North Pittsburgh, at some point in
time, permit the resale of its service at wholesale rates, provide
number portability if feasible, provide dialing parity, provide
interconnection to any requesting carrier for the transmission and
routing of telephone exchange service and exchange access and provide
access to network elements.
The 1996 Act, FCC and PA PUC regulatory proceedings and the thrust
towards a fully competitive marketplace have created some uncertainty in
respect to the levels of North Pittsburgh's revenue growth in the
future. However, its unique location in a growing commercial/residential
suburban traffic corridor to the north of the City of Pittsburgh, its
state-of-the-art switching transmission and transport facilities and its
extensive fiber network place North Pittsburgh in a solid position to
meet competition and minimize any loss of revenues. In addition, North
Pittsburgh continues to make its network flexible and responsive to the
needs of its customers to meet competitive threats. New services, access
line growth and anticipated usage growth will lessen or offset any
reductions in North Pittsburgh's revenue sources.
2. Results of Operations
---------------------
Total operating revenues increased $5,837,000 (15.0%) in the nine-month
period ended September 30, 1996 over the comparable period in 1995. This
change was due to increases in long distance and access services of
$2,020,000 (6.9%), local network services of $827,000 (15.0%),
telecommunication equipment sales of $644,000 (41.6%) and other
operating revenues of $2,285,000 (190.9%). Higher long distance and
access service revenues were generally the result of an increase in the
number of customers and in minutes of use. Increased local network
service revenues were attributable to customer growth. The increase in
telecommunication equipment sales reflects an increase in the number of
systems sold in 1996 as compared to 1995. The increase in other
operating revenues is the direct result of start-up business activities
of Pinnatech and MCSI.
Total operating expenses for the nine-month period ended September 30,
1996, increased $5,468,000 (22.1%) over the preceding year. That change
is principally the result of an increase in network and other operating
expenses of $3,660,000 (23.2%), an increase in depreciation and
amortization of $1,041,000 (17.4%), and an increase in telecommunication
equipment expenses of $540,000 (39.4%). Approximately 96% of the
increase in network and other operating expenses is the direct result of
start-up activities of Pinnatech and MCSI. The increase in depreciation
and amortization is due to a change in the lives of equipment and asset
growth. The increase in telecommunication equipment expenses is related
to the increase in equipment sales discussed above. The increase in
total operating revenues discussed above coupled with the increase in
total operating expenses resulted in a 2.6% increase in net operating
revenues in 1996 as compared to the same period in 1995.
Interest income decreased $219,000 primarily due to decreased levels of
investment in such instruments. The net increase in Sundry income (non-
operating) of $364,000 is due to a one-time increase in realized gains
on the sale of securities of $129,000 and increases in cellular
partnership income of $232,000 in 1996 as compared to 1995.
5
<PAGE>
The increase in net operating revenues for the nine-month period ended
September 30, 1996, in conjunction with the increase in Sundry income,
net, resulted in an increase of $548,000 (4.0%) in earnings before
income taxes.
Fluctuations in the revenues and expenses for the three-month period
ended September 30, 1996 as compared to the same quarterly period in
1995 are generally attributable to the same reasons above in the year-
to-date comparisons.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits - Exhibit Index for Quarterly Reports on Form 10-Q.
--------
<TABLE>
<CAPTION>
Exhibit
Number Subject Applicability
- ---------- ------- -------------
<S> <C> <C>
(2) Plan of acquisition, reorganization, Not Applicable
arrangement, liquidation or
succession
(3) (i) Articles of Provided in
Incorporation Quarterly Report
on Form 10-Q for the
quarter ended June 30, 1996
and Incorporated Herein
by Reference.
(3) (ii) By-Laws Provided in
Quarterly Report
on Form 10-Q for the
quarter ended
June 30, 1996
and Incorporated Herein
by Reference.
(4) Instruments defining the rights of Provided in Registration of
security holders including indentures Securities of Certain
Successor Issuers on Form 8-B
filed on June 25, 1985 and
Incorporated Herein by
Reference.
(10) Material Contracts Not Applicable
(11) Statement re computation of per Attached Hereto
share earnings
(15) Letter re unaudited interim financial Not Applicable
information
(18) Letter re change in accounting Not Applicable
principles
(19) Report furnished to security holders Not Applicable
(22) Published report regarding matters Not Applicable
submitted to a vote of security holders
(23) Consents of experts and counsel Not Applicable
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(24) Power of attorney Not Applicable
(27) Financial Data Schedule Attached Hereto
(99) Additional exhibits Not Applicable
</TABLE>
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
-------------------
quarter ended September 30, 1996.
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.
NORTH PITTSBURGH SYSTEMS, INC.
------------------------------
(Registrant)
Date November 1, 1996 /s/ G. A. Gorman
-------------------- -------------------------------------
G. A. Gorman, President
Date November 1, 1996 /s/ A. P. Kimble
-------------------- -------------------------------------
A. P. Kimble, Vice President,
Secretary & Treasurer
7
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Exhibit No. (11) - Statement - computation of per share earnings
Statement of Computations of Earnings per Share
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Earnings $ 2,879,000 $ 2,603,000 $ 8,555,000 $ 8,113,000
=========== =========== =========== ===========
Average common shares outstanding 15,040,000 15,040,000* 15,040,000 15,040,000*
=========== =========== =========== ===========
Earnings per share of common stock $ .19 $ .17* $ .57 $ .54*
=========== =========== =========== ===========
</TABLE>
*Adjusted for a two-for-one stock split effective May 22, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1996 QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,040
<SECURITIES> 2,940
<RECEIVABLES> 10,260
<ALLOWANCES> 0
<INVENTORY> 3,122
<CURRENT-ASSETS> 28,449
<PP&E> 121,441
<DEPRECIATION> 58,376
<TOTAL-ASSETS> 99,367
<CURRENT-LIABILITIES> 12,042
<BONDS> 21,129
<COMMON> 2,350
0
0
<OTHER-SE> 51,735
<TOTAL-LIABILITY-AND-EQUITY> 99,367
<SALES> 2,194
<TOTAL-REVENUES> 44,826
<CGS> 1,910
<TOTAL-COSTS> 30,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,166
<INCOME-PRETAX> 14,203
<INCOME-TAX> 5,648
<INCOME-CONTINUING> 8,555
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,555
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
