<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
------------------------------------------------------
OR
[ ] 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 0-13716
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North Pittsburgh Systems, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1485389
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4008 Gibsonia Road, Gibsonia, Pennsylvania 15044-9311
- ------------------------------------------ -----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 412/443-9600
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock NASDAQ
(Cover page continued on next page)
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
(Title of Class)
SECTION 13 OR 15(d) FILING REQUIREMENTS
---------------------------------------
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.
YES X NO
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES
-------------------------------------------------------------
Based on the average of the bid and asked prices on March 14, 1997, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant is $319,600,000. (Includes 1,716,184 shares beneficially owned by
Directors and Officers as a group.)
OUTSTANDING SHARES OF EACH CLASS OF REGISTRANT'S COMMON STOCK
-------------------------------------------------------------
Class Outstanding at March 14, 1997
----- -----------------------------
Common Stock, Par Value $.15625 per share 15,040,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The information for Item 10, Directors and Executive Officers of the Registrant;
Item 11, Executive Compensation; Item 12, Security Ownership of Certain
Beneficial Owners and Management; and Item 13, Certain Relationships and Related
Transactions, has been incorporated into Part III of this Form 10-K by reference
to Registrant's Definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days after December 31, 1996.
(End of cover page)
<PAGE>
PART I
Item 1. Description of Business
- ------ -----------------------
(a) General Development of Business:
-------------------------------
North Pittsburgh Systems, Inc. (the Registrant), organized May 31, 1985, is a
holding company and has no operating function. Its predecessor, North
Pittsburgh Telephone Company (North Pittsburgh or NPTC), a telephone public
utility incorporated in 1906, became a wholly-owned subsidiary of the Registrant
on May 31, 1985. Penn Telecom, Inc. (Penn Telecom) became a wholly-owned
subsidiary of the Registrant on January 30, 1988. Prior to this date, Penn
Telecom was a wholly-owned subsidiary of North Pittsburgh. The principal
business activities of Penn Telecom consist of the sale, rental and servicing of
telecommunication equipment to end users, the resale of bulk billed message toll
services and high capacity intercity facilities. Management Consulting
Solutions, Inc. (MCSI) and Pinnatech, Inc. (Pinnatech), wholly-owned
subsidiaries of the Registrant, were formed in 1995. MCSI provides consulting
and computer outsourcing services to healthcare and other industries, and
Pinnatech provides Internet access services. The Registrant, NPTC, Penn
Telecom, MCSI and Pinnatech operate under the provisions of the Pennsylvania
Business Corporation Law. No significant changes in the mode of conducting
business by the Registrant or its subsidiaries have occurred since the beginning
of the fiscal year ended December 31, 1996.
(b) Financial Information About Industry Segments:
---------------------------------------------
This paragraph is not applicable. The Registrant, through North Pittsburgh
and Penn Telecom, is engaged in the business of providing telecommunication
services and equipment which is not considered separable into industry segments.
The business activities of MCSI and Pinnatech, to date, are not considered
significant and are not reportable as industry segments of the Registrant.
(c) Narrative Description of Business:
---------------------------------
(1) Business Done and Intended To Be Done:
-------------------------------------
(i) Principal Services Rendered. The Registrant, through North
---------------------------
Pittsburgh and Penn Telecom, is engaged in providing the following
telecommunication services and equipment to customers generally located in
Western Pennsylvania:
Local Network Services. North Pittsburgh furnishes wireline
-----------------------
telecommunication services in all or parts of Allegheny, Armstrong, Butler and
Westmoreland Counties subject to the jurisdiction of the Pennsylvania Public
Utility Commission (PA PUC) under the provisions of the Pennsylvania Public
Utility Code which confers upon that Commission broad powers of supervision and
regulation over public utilities with respect to service and facilities, rates
and charges, securities, the encumbering or disposition of public utility
properties, accounting and various other matters. At January 31, 1997, North
Pittsburgh served approximately 61,500 customers through nine digital fiber-
linked central offices (eight exchanges) in its franchised area.
1
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The Telecommunications Act of 1996 (the 1996 Act) prohibits state legislative
or regulatory restrictions or barriers to entry regarding the provision of local
telephone service. It also requires most incumbent local exchange carriers to
interconnect with the networks of other telecommunications carriers, unbundle
their services into network elements, offer their telecommunications services at
wholesale rates to allow the resale of such services and allow other
telecommunications carriers to locate equipment on their premises. Local
exchange telephone carriers are also required to compensate each other for the
transport and termination of calls.
North Pittsburgh's wireline operations are considered Rural under the 1996
Act and are exempt from certain of the foregoing obligations unless, in response
to a bona fide request for interconnection, the PA PUC removes that exemption.
North Pittsburgh recently joined with 17 other rural companies in Pennsylvania
to file a Petition with the PA PUC requesting a temporary suspension for a two-
year period of the interconnection requirements outlined in the Federal
Communications Commission (FCC) Order described in the following paragraph. The
Petition was filed February 20, 1997 and the PA PUC is expected to act on such
Petition by August 19, 1997. (See Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations).
Previously, on August 8, 1996, the FCC issued its Order promulgating rules to
implement certain aspects of the 1996 Act. The rules, among other matters,
attempted to impose pricing guidelines to be used by state commissions in
implementing the 1996 Act, defined the network elements of services to be
unbundled and separately priced, required that existing interconnection
agreements among incumbent local exchange carriers be filed and approved by
state commissions and that local exchange telephone companies begin to
compensate wireless communications providers for transporting and terminating
calls on such wireless networks. Numerous local exchange telephone companies
and state regulatory agencies have requested that the FCC stay and/or reconsider
the above mentioned Order, and a number of parties have filed petitions with
various Federal courts. On September 27, 1996 and October 15, 1996, the Eighth
Circuit Court stayed certain aspects of such rules including the pricing
guidelines and the rule allowing carriers to pick and choose among the most
favorable terms of interconnection agreed to by an incumbent and another
telecommunications carrier.
North Pittsburgh is currently under rate base rate-of-return (ROR) regulation
within the intrastate jurisdiction. However, under PA PUC Chapter 30 rules,
North Pittsburgh is required to develop and file a Network Modernization Plan
prior to July 8, 1998 that commits North Pittsburgh to providing broadband
service capability throughout its service area or be subject to a showcause
order for failure to do so. North Pittsburgh, as part of this filing, may seek
approval of an alternative form of regulation from the PA PUC, such as price cap
regulation.
Historically, North Pittsburgh's wireline operations have not experienced
significant competition in its franchised service area. As a result of the
passage of the 1996 Act, North Pittsburgh's local wireline operations may
experience increased competition from various sources, including, but not
limited to, resellers of their local exchange services, large end users
installing their own networks, Interexchange Carriers (IXCs), satellite
transmission services, cellular communications providers, cable television
companies, radio-based personal communications companies, Competitive Access
Providers (CAPs) and other systems capable of completely or partially bypassing
local telephone facilities. North Pittsburgh cannot predict
2
<PAGE>
the specific effects of competition on its local telephone business, but is
intent on taking advantage of the various opportunities that competition should
provide. North Pittsburgh is currently addressing potential competition by
focusing on improved customer satisfaction, reducing costs, increasing
efficiency, restructuring rates and examining new product offerings and new
markets for entry.
Long Distance and Access Services. Telephone service by North
----------------------------------
Pittsburgh to locations outside of its franchised telephone service territory
but within the Local Access Transport Area (LATA) (currently identified as the
412 Numbering Plan Area [NPA]) is furnished through switched and special access
connections with Bell Atlantic - Pennsylvania, Inc., (BAPA), other independent
telephone companies and, in some instances, IXCs, CAPs or resellers.
North Pittsburgh bills toll calls within the LATA to its customers using toll
rates contained in a Pennsylvania Telephone Association (PTA) tariff on file
with the PA PUC. North Pittsburgh retains the revenues for such calls and pays
network access charges to BAPA and other telephone companies for terminating
this toll traffic. Conversely, North Pittsburgh receives network access charge
revenues for terminating the traffic of others.
North Pittsburgh is a participating Issuing Carrier in the National Exchange
Carrier Association (NECA) tariffs which are on file with the FCC in respect to
the provision of network access to IXCs and others for interstate telephone
service to areas beyond the LATA. Such tariffs contain the rates chargeable for
interstate switched and special access to and from North Pittsburgh's telephone
facilities. North Pittsburgh is also a participating Issuing Carrier under the
authority of a PTA tariff on file with the PA PUC which contains the rates
chargeable for intrastate switched and special access from North Pittsburgh's
telephone facilities to Pennsylvania locations beyond the LATA and to North
Pittsburgh's facilities from such locations. Penn Telecom, as an IXC, markets
intrastate and interstate toll services by reselling bulk billed message toll
services. North Pittsburgh also provides facilities for special circuits
(alarms, data transmission, etc.).
Access charges concerning interstate services are regulated by the FCC. On
December 24, 1996, the FCC released a Notice of Proposed Rulemaking regarding
access charge reform. The proposed rules, in most significant aspects, are not
applicable to North Pittsburgh's wireline operation as they apply predominantly
to price cap regulated companies. The FCC has indicated it will issue another
proposed rulemaking with respect to ROR companies which may affect North
Pittsburgh.
Toll telecommunications services beyond North Pittsburgh's franchised
telephone service area and within the LATA, hereinafter referred to as
intraLATA, or service within the 412 NPA, are presently provided through
interconnections with BAPA and other telephone companies. The PA PUC has
approved intraLATA Presubscription (also known as equal access) under which a
customer will be able to choose his or her intraLATA toll carrier similar to the
choice currently made for an interLATA toll carrier. IntraLATA Presubscription
is required by December 31, 1997; however, North Pittsburgh has filed a Motion
with the PA PUC to implement presubscription no later than August 8, 1997. It
is not possible to determine the ultimate impact of intraLATA Presubscription,
but it is expected that it may result in some reduction of revenues.
3
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North Pittsburgh's 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 it 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.
Directory Advertising, Billing and Other Services. North
--------------------------------------------------
Pittsburgh receives revenues from the sale of advertising space in telephone
directories and from billing and collection activities. Directory Advertising is
subject to competition from a number of sources and, to date, efforts to meet
such competition have been successful. Billing and collection services are
provided to various IXCs, including Penn Telecom.
Telecommunication Equipment. Penn Telecom sells, rents and
----------------------------
services telecommunication equipment to customers generally in the Western
Pennsylvania area. Penn Telecom has been able to sustain its business activities
in a strong, competitive market. Penn Telecom is certified by the PA PUC to
offer toll resale services and has a tariff on file with the FCC to provide
interstate toll services. As a reseller of both interstate and intrastate toll
services, Penn Telecom is in direct competition with other IXCs.
Other. North Pittsburgh and Alltel Mobile Communications, Inc.
------
are Limited Partners with a partnership interest of 3.6 percent each and Bell
Atlantic Mobile Systems of Pittsburgh, Inc. is both a General and a Limited
Partner with partnership interests of 40.0 and 52.8 percent, respectively, in
the Pittsburgh SMSA Limited Partnership which provides cellular radio service
(Cellular Service) in and around the Pittsburgh Standard Metropolitan
Statistical Area (SMSA) as authorized by the FCC.
North Pittsburgh, Centennial Cellular Telephone Company of Lawrence
(Centennial) and Venus Cellular Telephone Company, Inc. (Venus) are Limited
Partners, each with a partnership interest of 14.29 percent, and United
Telephone Company of Pennsylvania is the General Partner with a partnership
interest of 57.13 percent in Pennsylvania RSA 6(I) Limited Partnership, d.b.a.
360/o/ Communications Company, which provides Cellular Service in a Rural
Service Area (RSA) consisting of Clarion and Lawrence Counties and the Northern
portions of Armstrong and Butler Counties.
North Pittsburgh, Centennial and Venus are Limited Partners with partnership
interests of 20.29, 14.29 and 14.29 percent, respectively, and Bell Atlantic
Mobile Systems of Pennsylvania RSA 6(II), Inc. is the General Partner with a
partnership interest of 51.13 percent in Pennsylvania RSA 6(II) Limited
Partnership which provides Cellular Service in a RSA consisting of the Southern
portions of Armstrong and Butler Counties.
Operating Revenues. The respective amounts of operating revenues
-------------------
contributed by local network services, long distance and access services,
telecommunication equipment sales, directory advertising and billing and
collection services during each of the last three fiscal years are set forth in
the Financial Statements and Schedules provided in response to Item 8 and are
incorporated herein by reference.
4
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(ii) Status of New Products. This paragraph is not applicable. The
----------------------
Registrant and its subsidiaries have not made public any information concerning
new products or services that would require the investment of a material amount
of the assets of the Registrant or that otherwise would be material.
(iii) Equipment Availability. The Registrant and its subsidiaries
----------------------
have not encountered, nor do they anticipate, any difficulty in obtaining a
ready supply of telecommunication equipment from manufacturer suppliers.
Although certain individual suppliers may each supply more than 10 percent of
their equipment requirements, the Registrant and its subsidiaries are not
primarily dependent upon any one supplier with alternative suppliers of
telecommunication equipment being readily available.
(iv) Certificates, Franchises, Etc. and Licenses. North Pittsburgh
-------------------------------------------
holds valid, continuing and subsisting rights, certificates, franchises,
licenses (other than those mentioned in the following paragraph) and renewable
permits adequate for the conduct of its business in the territory it serves,
none of which contain any burdensome restrictions. However, see Local Network
Services under paragraph (c)(1)(i).
North Pittsburgh has an FCC license to operate a private operational
telephone maintenance radio service station (WIK 838 expiring on March 20,
2001). In addition, North Pittsburgh has an FCC license to operate an Improved
Mobile Telephone System (IMTS) (call sign KGH-862 expiring on July 1, 1998).
Renewal license applications were filed on December 27, 1990 with the FCC for
the continued operation by North Pittsburgh of two point-to-point microwave
systems (call signs KG0-21 and KGN-88). The FCC acknowledged such renewal
applications in a Public Notice dated March 21, 1991 indicating an expiration
date of February 1, 2001. North Pittsburgh also holds a non-commercial private
license (call sign WPCD 845 expiring on April 29, 1998) for its own maintenance
radio service and other purposes. North Pittsburgh has not encountered in the
past, nor does it anticipate in the future, any difficulty in renewing these FCC
licenses.
(v) Seasonality of Business. None of the business activities of the
-----------------------
Registrant or its subsidiaries are seasonal.
(vi) Practices Relating to Working Capital. This paragraph is not
-------------------------------------
applicable. No special practices relating to working capital have been adopted
by the Registrant or its subsidiaries. (See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
(vii) Customers. No material part of the overall business of
---------
the Registrant or it subsidiaries is dependent upon a single customer or a few
customers, the loss of any one or more of whom would have a materially adverse
effect on its business.
(viii) Backlog of Orders. The Registrant and its subsidiaries
-----------------
do not have a significant backlog of service and installation orders.
Improvements and expansion of their facilities are, to the extent possible, made
in anticipation of demands for service and a reasonable and adequate inventory
is maintained to meet the requirements of customers.
5
<PAGE>
(ix) Renegotiation of Profits or Termination of Contracts. The
----------------------------------------------------
Registrant and its subsidiaries do not have a material portion of their business
subject to renegotiation of profits or termination of contracts or subcontracts
at the election of the Government.
(x) Competition. The competitive environment faced by the Registrant
------------
in respect to the services provided by it or by its subsidiaries is fully
discussed under paragraph (c)(1)(i) of this Item 1.
(xi) Research Activities. The Registrant and its subsidiaries do not
-------------------
engage in any research activities relating to the development of new products or
services or the improvement of existing products or services and no amounts have
been expended in the past three years for such activities.
(xii) Environmental Matters. Compliance with federal, state and
---------------------
local provisions which have been adopted regulating the discharge of materials
into the environment or otherwise relating to the protection of the environment
have not materially affected the capital expenditures, earnings and competitive
position of the Registrant and its subsidiaries.
(xiii) Employees. At December 31, 1996, the Registrant, through
---------
all of its subsidiaries, employed 336 persons.
(d) Financial Information About Foreign and Domestic Operations and Export
----------------------------------------------------------------------
Sales. This paragraph is not applicable. The Registrant and its subsidiaries do
- -----
not engage in any operations in foreign countries.
Item 2. Properties
- ------ ----------
The Registrant owns in fee, an office/warehouse building which houses the
operations of Penn Telecom and consulting services of MCSI. Also, MCSI owns in
fee a building which houses its computer outsourcing operation.
The materially important physical properties of North Pittsburgh, all owned
in fee (except some rights-of-way) and most of which are held subject to certain
mortgage and security agreements executed in connection with loans through the
Rural Utilities Service, consist principally of land, buildings, central office
equipment, long distance switching facilities, transmission facilities, pole
lines, aerial cable, underground cable, aerial wire, buried cable, buried wire,
distribution wire, underground conduit, furniture, office and computer
equipment, garage facilities, vehicles and work equipment and generally any and
all property required to operate a modern telecommunications network. Such
facilities are fully utilized except that improvement and expansion of those
facilities are, to the extent possible, made in anticipation of the demand for
service. All of the foregoing properties are located within Allegheny,
Armstrong, Butler and Westmoreland Counties in Western Pennsylvania.
6
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From January 1, 1992 to December 31, 1996, North Pittsburgh made gross
property additions of approximately $56,049,000 (which is about 46.5% of the
original cost of the present telephone plant) and property retirements of
approximately $19,253,000. North Pittsburgh's 1997 construction program, subject
to adjustment for economic conditions, postponements of housing developments,
etc. is projected to be in the $23 million to $26 million range which includes
central office equipment additions, distribution lines, etc. to permit expansion
or improvement of North Pittsburgh's telecommunications services.
Item 3. Legal Proceedings
- ------ -----------------
As of the date hereof, except for regulatory matters before the PA PUC,
including matters which could result in the expansion of competition, there were
no material pending legal or governmental proceedings directly involving the
Registrant or its subsidiaries, other than ordinary routine litigation or
ordinary routine utility matters incidental to the business and matters as to
which the Registrant and its subsidiaries are insured.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996.
ADDITIONAL ITEM FOR PART I. - Executive Officers of the Registrant
------------------------------------------------------------------
Information regarding the Registrant's Executive Officers is provided below.
In addition to the positions and business experience related to the Registrant,
additional information related to North Pittsburgh Telephone Company, the
Registrant's predecessor and principal subsidiary, is also presented.
7
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Executive Officers of the Registrant:
- -------------------------------------
Positions and Offices
---------------------
Name and Business Experience Age with Registrant (1)
- ---------------------------- --- -------------------
Charles E. Thomas, Sr. 83 Chairman, Board of
Registrant: Chairman of the Board of Directors
Directors since incorporation in 1985;
Partner in the law firm of Thomas,
Thomas, Armstrong & Niesen,
Harrisburg, PA, since the formation in
1991 of this firm which is retained as
general counsel to the Registrant;
Partner in the law firm of Thomas &
Thomas from 1977 to 1990. North
Pittsburgh Telephone Company:
Chairman of the Board of Directors
since 1968; Director since 1957.
Mr. Thomas is also a Director of D & E
Communications, Inc., Ephrata, PA.
Gerald A. Gorman 67 Director and President
Registrant: Director since
incorporation in 1985; President since
May, 1994; Executive Vice President
from 1992 to 1994; Vice President -
Finance from 1985 to 1992; Secretary
from 1985 to 1993. North Pittsburgh
Telephone Company: Director since
1979; President since 1993; General
Manager since 1992; Executive Vice
President from 1992 to 1993; Vice
President - Finance from 1972 to
1992; Assistant General Manager from
1986 to 1992; Secretary from 1968 to
1993.
8
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Executive Officers of the Registrant:
- -------------------------------------
Positions and Offices
---------------------
Name and Business Experience Age with Registrant (1)
- ---------------------------- --- -------------------
Harry R. Brown 60 Director and Vice
Registrant: Director since 1989; Vice President
President since 1992. North
Pittsburgh Telephone Company:
Director since 1989; Vice President -
Operations since 1987; Assistant Vice
President - Operations from 1986 to
1987; Network Engineering Manager
from 1984 to 1986; Equipment
Supervisor from 1975 to 1984.
Allen P. Kimble 50 Vice President, Secretary
Registrant: Vice President since and Treasurer
1989; Treasurer since incorporation
in 1985; Secretary since 1993. North
Pittsburgh Telephone Company:
Vice President since 1989; Treasurer
since 1979; Secretary since 1993;
Assistant Vice President from 1987 to
1989; Assistant Secretary from 1977 to
1993.
N. William Barthlow 42 Vice President and
Registrant: Vice President since May, Assistant Secretary
1994; Assistant Secretary since 1993;
Assistant Vice President from 1990 to
1994. North Pittsburgh Telephone
Company: Vice President - Marketing
and Revenues since 1994; Assistant
Secretary since 1993; Assistant Vice
President - Revenue Requirements
from 1989 to 1994; Revenue
Requirements Manager from 1987 to
1989.
9
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(1) Directors. Messrs. Thomas, Gorman and Brown were elected as Directors at
---------
the 1996 Annual Meeting of Shareholders held May 17, 1996 to serve until
the 1997 Annual Meeting of Shareholders. All of these current Directors
will be nominees for reelection as Directors at the Annual Meeting of
Shareholders to be held May 16, 1997.
(2) Officers. Messrs. Thomas, Gorman, Brown, Kimble and Barthlow were elected
--------
to their respective offices at a Board of Directors' Organizational Meeting
which followed the May 17, 1996 Annual Meeting of Shareholders. All
officers will hold their offices until the first meeting of the Board
following the 1997 Annual Meeting of Shareholders.
(3) Arrangements. There are no arrangements or understandings between any of
------------
the above executive officers and any other person pursuant to which they
were elected as an officer.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------ ---------------------------------------------------------------------
(a) Principal Markets and Market Price:
----------------------------------
The Registrant's Common Stock is registered with the Securities and
Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of
1934 and, effective January 10, 1997, the Company's stock commenced trading on
the Nasdaq National Market tier of the Nasdaq Stock Market under the Symbol
'NPSI'. Prior thereto, the stock was not listed on any Stock Exchange and was
considered as being traded on the OTC (Over-the-Counter) market. In the last
quarter of 1995 and in 1996, a brokerage firm in Pittsburgh made an effort to
establish a market for the Registrant's Common Stock. The market price range on
the OTC market in 1995 was $35.00 to $56.00 per share. The market price range
on the same market in 1996 was, as far as can be determined, $56.00 to $72.00
per share prior to a 2 for 1 stock split-up on May 22, 1996 and $23.00 to $53.00
per share thereafter. The above price ranges include the market-maker
activities of the brokerage firm discussed above. The Nasdaq High and Low
market prices for the Registrant's Common Stock for January and February, 1997
were as follows:
<TABLE>
<CAPTION>
1997 High Low
---- ------ ------
<S> <C> <C>
January $24.75 $18.50
February 23.00 20.50
</TABLE>
10
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(b) Approximate Number of Holders of Common Stock:
---------------------------------------------
Calculated on the basis of the number of shareholder accounts, the
Registrant had approximately 3,146 common shareholders on March 14, 1997.
(c) Common Stock Dividends:
----------------------
Cash dividends declared per share by the Registrant on the outstanding
shares of Common Stock in 1996 and 1995 (adjusted for a 2 for 1 stock split-up
effective May 22, 1996) were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
First Quarter $ .13 $.12
Second Quarter .13 .12
Third Quarter .13 .12
Fourth Quarter .13 .12
----- ----
$ .52 $.48
===== ====
</TABLE>
Item 6. Selected Financial Data (Amounts in Thousands Except Per Share Data)
-------------------------------------------------------------------
The following summary of Selected Financial Data for the years 1996-1992
(adjusted for a 2 for 1 stock split-up effective May 22, 1996) should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this report.
11
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues $59,933 $ 52,757 $ 49,188 $ 44,241 $ 41,993
Operating expenses 40,479 33,748 31,728 28,367 28,004
------- -------- -------- -------- --------
Net operating revenues 19,454 19,009 17,460 15,874 13,989
Interest expense 1,549 1,596 1,645 1,573 1,605
Interest income 1,105 1,066 772 878 967
Sundry expense (income), net (629) 738 (202) 558 (23)
------- -------- -------- -------- --------
Earnings before income taxes,
cumulative effect of change in
accounting method and
minority interest 19,639 17,741 16,789 14,621 13,374
Income tax expense 7,909 7,054 6,885 5,906 5,292
------- -------- -------- -------- --------
Earnings before cumulative
effect of change in accounting
method and minority interest 11,730 10,687 9,904 8,715 8,082
Minority interest ---- ---- ---- ---- 18
Cumulative effect of change in
accounting method ---- ---- ---- 450 ----
------- -------- -------- -------- --------
Net earnings $11,730 $ 10,687 $ 9,904 $ 9,165 $ 8,064
======= ======== ======== ======== ========
Average common shares
outstanding 15,040 15,040* 15,040* 15,040* 15,040*
======= ======== ======== ======== ========
Earnings per share before
cumulative effect of change in
accounting method $ .78 $ .71* $ .66* $ .58* $ .54*
======= ======== ======== ======== ========
Earnings per share of Common
Stock $ .78 $ .71* $ .66* $ .61* $ .54*
======= ======== ======== ======== ========
Dividends declared per share of
Common Stock $ .52 $ .48* $ .44* $ .40* $ .36*
======= ======== ======== ======== ========
Total assets $99,523 $ 96,156 $ 91,578 $ 88,771 $ 84,574
======= ======== ======== ======== ========
Long-term debt $20,937 $ 21,694 $ 23,396 $ 23,058 $ 23,683
======= ======== ======== ======== ========
</TABLE>
*Adjusted for a 2 for 1 stock split-up effective May 22, 1996
12
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Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations (Amounts in Thousands)
--------------------------------------------
Results of Operations
---------------------
Net earnings for 1996 were $11,730, an increase of $1,043 (9.8%) over 1995
net earnings of $10,687. The 1995 net earnings represented an increase of $783
(7.9%) as compared to 1994. These fluctuations were attributable to the
following factors:
Total operating revenues increased $7,176 (13.6%) during 1996. This change
was principally due to increases in long distance and access services of $2,983
(7.7%), local network services of $1,160 (15.4%) and other operating revenues of
$2,582 (131.3%). 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,
growth in second lines and expanded penetration of enhanced services. Other
operating revenues increased due to growth of Pinnatech's Internet access
customers, MCSI's consulting customers and the introduction of MCSI's data
processing outsourcing services.
Total operating revenues increased $3,569 (7.3%) during 1995. This change was
principally due to increases in long distance and access services of $2,663
(7.3%), local network services of $650 (9.5%) and, to a lesser extent,
advertising and other of $153 (7.7%), offset by a decrease in telecommunication
equipment sales of $668 (23.1%). 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 decrease in telecommunication equipment sales reflects a
decrease in the number of systems sold in 1995 as compared to 1994. Other
operating revenues increased $771 (64.4%) as the direct result of start-up
business activities of MCSI and Pinnatech.
Total operating expenses for 1996 increased $6,731 (19.9%) over the preceding
year. That change was principally the result of increases in network and other
operating expenses of $5,061 (24.0%) and depreciation and amortization expenses
of $1,163 (14.0%). Approximately $4,000 of the $5,061 increase in network and
other operating expenses was directly associated with the increase in other
operating revenues of $2,582 discussed above. The growth in depreciation and
amortization expenses is the direct result of the growth in fixed assets to
serve current and future customer needs. The increase in total operating
revenues of $7,176 discussed above coupled with the increase in total operating
expenses of $6,731 resulted in a modest 2% increase in net operating revenues in
1996 as compared to 1995.
Total operating expenses increased $2,020 (6.4%) during 1995. That change was
principally the result of an increase in depreciation and amortization of $818
(10.9%) and network and other operating expenses of $1,832 (9.5%), offset by a
decrease in telecommunication equipment expenses of $828 (29.2%). Approximately
$593 of the increase in depreciation and amortization resulted from a reduction
in useful lives of certain telecommunication equipment and approximately $1,000
of the increase in network and other operating expenses was attributable to the
activities of start-up businesses mentioned previously. The remainder of the
increase was the result of expanded operations to serve customer growth as noted
above. The decrease in telecommunication equipment expenses is related to the
decrease in equipment sales discussed above. The increase in total operating
13
<PAGE>
revenues discussed above coupled with the increase in total operating expenses
resulted in an 8.9% increase in net operating revenues in 1995 as compared to
1994.
Interest income fluctuations have resulted from fluctuating interest rates
available on both temporary investments and marketable securities and differing
levels of investment in these instruments. Interest income is expected to
decrease in 1997 as the Registrant and its subsidiaries utilize temporary
investments to meet current cash obligations.
The composition and amounts of sundry expense (income), net, differ each
year. Approximately $509 more of cellular partnership income was recorded in
1996 than 1995. Included in 1995 is approximately $567 of non-recurring charges
related to costs of start-up businesses.
Management does not believe that the Registrant has any significant
regulatory assets or liabilities under Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
Historically, the Registrant has monitored closely the economic lives of plant
in service and has adjusted depreciable lives as necessary to conform to
generally accepted accounting principles.
North Pittsburgh, under Chapter 30 of the Pennsylvania Public Utility Code,
must, prior to July 8, 1998, file a petition with the PA PUC for approval of an
alternative form of regulation to replace traditional rate base/rate of return
regulation or be subject to a showcause proceeding. The petition must include a
proposed network modernization plan. Although North Pittsburgh has not
determined the form and content of its petition, the ultimate filing of such
petition is expected to be of some significance to North Pittsburgh. However, it
is not possible at this time to determine the PA PUC's disposition of any
petition filed or the effect on North Pittsburgh's financial position or results
of operations.
The Federal Communications Commission (FCC) continues to work on Rulemakings
that will spell out the specifics of the Telecommunications Act of 1996 (the
1996 Act) and the PA PUC must then finalize its 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 services 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 Company recently joined with 17
other rural companies in Pennsylvania to file a Petition with the PA PUC
requesting a temporary suspension of the interconnection requirements of Section
251 of the 1996 Act for a two-year period following resolution of the FCC's
Universal Service and Access Reform Orders. The Petition was filed February 20,
1997 and the PA PUC is expected to act on such Petition by August 19, 1997.
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-
14
<PAGE>
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.
Liquidity and Capital Resources
-------------------------------
In 1987, North Pittsburgh exhausted the remaining unborrowed funds which had
first become available from the Rural Telephone Bank in 1977. Information
relating to long-term debt is included in Note 2 to the Consolidated Financial
Statements. The Registrant and its subsidiaries have financed capital
expenditures, debt service and dividend payments from internal sources since
1987.
In 1996, North Pittsburgh applied for and was granted approval for a loan
from the Federal Financing Bank guaranteed by the Rural Utilities Service in the
maximum principal amount of $75 million. The maximum principal amount will be
advanced periodically over a five-year period beginning January 2, 1997 to
furnish or improve telephone service in rural areas. No funds had been requested
or advanced as of March 14, 1997. Actual interest rates and maturity dates will
be specified at the time of each advance based upon a predetermined interest
calculation formula and a choice of predetermined payment options not to extend
beyond a maximum repayment period of sixteen years.
North Pittsburgh established a line of credit in 1994 in the amount of $10
million with the Rural Telephone Finance Cooperative that is available for
general business purposes. No borrowings have taken place against the line of
credit.
Capital expenditure commitments for the purchase and installation of new
equipment at December 31, 1996 amounted to approximately $1,280, with such
amount being part of a 1997 construction program of $23 million to $26 million.
Management expects cash flows provided by operating activities and cash reserves
in 1997 to service long-term debt, to pay dividends and to finance approximately
25% of capital additions. The balance of capital additions will be financed from
new borrowings. It is anticipated that future payments for long-term debt
service will be made from the same sources of internally generated funds.
Capital additions beyond 1997 are anticipated to be 20% internally financed.
Temporary excess funds are invested in short-term cash equivalents with
maturity dates scheduled to coincide with tax payment due dates, debt principal
payments, etc. Management expects to continue the investment of such excess
funds in 1997 which will satisfactorily meet all short-term obligations.
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
Financial statements meeting the requirements of Regulation S-X and the
supplementary financial information specified by Item 302 of Regulation S-K are
attached to this document.
15
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure
--------------------
This paragraph is not applicable. There has not been a change of accountants
in the past 24 months nor has any disagreement on any matter of accounting
principles or practices been reported on Form 8-K during the same time period.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
and
Item 11. Executive Compensation
- ------- ----------------------
and
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
and
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Information in respect to executive officers of the Registrant is included
herein as a separate Additional Item for Part I under the caption "Executive
Officers of the Registrant" and follows Item 4. The other information required
by Items 10, 11, 12 and 13 has been omitted from this report since the
Registrant expects to file a Definitive Proxy Statement pursuant to Regulation
14A involving, inter alia, the election of Directors not later than 120 days
----- ----
after the end of the fiscal year covered by this report.
16
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ---------------------------------------------------------------
(a) The following documents of the Registrant and its subsidiaries are
filed as part of this report:
1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Earnings for each of the years in the
three-year period ended December 31, 1996
Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
-----------------------------
Condensed Financial Information of Registrant for each of the years
in the three-year period ended December 31, 1996
All schedules other than those listed above have been omitted because the
information is either not required or is set forth in the financial statements
or notes thereto.
3. Exhibits. The Exhibit Index for Annual Reports on Form 10-K and
--------
applicable Exhibits are reported in this report under the caption OTHER
INFORMATION.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
-------------------
quarter ended December 31, 1996.
(c) Exhibits Required by Item 601 of Regulation S-K. See (a)(3) above.
-----------------------------------------------
(d) Financial Statement Schedules. The financial statement schedules
-----------------------------
listed in Item 14(a)(2) are hereby filed as part of this Form 10-K.
17
<PAGE>
OTHER INFORMATION
Exhibit Index for Annual Reports on Form 10-K
---------------------------------------------
<TABLE>
<CAPTION>
Exhibit No. Subject Applicability
----------- ------- -------------
<S> <C> <C>
(2) Plan of acquisition, re- Not Applicable
organization, arrangement,
liquidation or succession
(3) (i) Articles of incorporation Provided in 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 Provided in Registration of
of security holders, including Securities of Certain Successor
indentures Issuers on Form 8-B filed on June
25, 1985 and Incorporated Herein
by Reference.
(9) Voting trust agreement Not Applicable
(10) Material contracts Not Applicable
(11) Statement re computation of per Attached Hereto
share earnings
(12) Statement re computation of ratios Not Applicable
(13) Annual report to security holders, Not Applicable
Form 10-Q or quarterly report to
security holders
(16) Letter re change in certifying Not Applicable
accountant
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Subject Applicability
----------- ------- -------------
<S> <C> <C>
(18) Letter re change in accounting Not Applicable
principles
(21) Subsidiaries of the Registrant Attached Hereto
(22) Published report regarding matters Not Applicable
submitted to vote of security
holders
(23) Consent of experts and counsel Not Applicable
(24) Power of attorney Not Applicable
(27) Financial data schedule Attached Hereto
(99) Additional Exhibits Not Applicable
</TABLE>
19
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
and Schedule (Form 10-K)
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
December 31, 1996, 1995 and 1994
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule:
I. Condensed Financial Information of Registrant for the
Years Ended December 31, 1996, 1995 and 1994
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
North Pittsburgh Systems, Inc.:
We have audited the consolidated financial statements of North Pittsburgh
Systems, Inc. and subsidiaries (the Company) as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of North Pittsburgh
Systems, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
February 28, 1997
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Assets
------
Current assets:
Cash and temporary investments $ 11,313 9,359
Marketable securities available for
sale (note 8) 329 1,593
Marketable securities held to
maturity (note 8) 451 6,569
Accounts receivable:
Customers 4,090 3,725
Access service settlements and
other 5,270 5,120
Prepaid expenses 163 -
Inventories of construction and
operating materials and supplies 3,169 2,381
-------- -------
Total current assets 24,785 28,747
Property, plant and equipment (note 2):
Land 357 461
Buildings 11,834 8,943
Equipment 108,878 97,382
-------- -------
121,069 106,786
Less accumulated depreciation
and amortization 60,333 52,675
-------- -------
60,736 54,111
Construction in progress 4,858 4,505
-------- -------
Total property, plant and
equipment, net 65,594 58,616
Investments (note 7) 5,763 3,876
Deferred financing cost 1,055 1,159
Prepaid pension cost (note 4) 622 689
Other assets 1,704 3,069
-------- -------
$ 99,523 96,156
======== =======
</TABLE>
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt
(note 2) $ 753 702
Obligations under capital lease
(note 3) 191 -
Accounts payable 4,702 6,337
Accrued interest 119 124
Dividend payable 1,955 1,805
Taxes other than income taxes 657 610
Accrued vacation 705 672
Other liabilities 632 404
Federal and state income taxes
(note 6) 670 291
Total current liabilities ------- ------
10,384 10,945
Long-term debt (note 2) 20,937 21,694
Obligations under capital lease (note 3) 374 -
Unamortized investment tax credits
(note 6) 369 470
Deferred income taxes (note 6) 5,969 5,670
Postretirement benefits (note 5) 4,497 4,250
Other liabilities 1,687 1,600
Shareholders' equity:
Capital stock - common stock, par
value $.15625; authorized 50,000
shares; issued and outstanding
15,040 shares (note 9) 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings (note 2) 50,724 46,814
Unrealized gain on available for
sale securities, net (notes 6
and 8) 17 148
------- ------
Total shareholders' equity 55,306 51,527
------- ------
$99,523 96,156
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Years Ended December 31, 1996, 1995 and 1994
(Amounts in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Operating revenues:
Local network services $ 8,684 7,524 6,874
Long distance and access services 41,880 38,897 36,234
Directory advertising, billing
and other services 2,181 2,139 1,986
Telecommunication equipment sales 2,639 2,230 2,898
Other operating revenues 4,549 1,967 1,196
------- ------ ------
59,933 52,757 49,188
Operating expenses:
Network and other operating expenses 26,196 21,135 19,303
Depreciation and amortization
(note 1) 9,508 8,345 7,527
State and local taxes 2,364 2,267 2,069
Telecommunication equipment expenses 2,411 2,001 2,829
------- ------ ------
40,479 33,748 31,728
------- ------ ------
Net operating revenues 19,454 19,009 17,460
Other expense (income), net:
Interest expense 1,549 1,596 1,645
Interest income (1,105) (1,066) (772)
Sundry expense (income), net (629) 738 (202)
------- ------ ------
(185) 1,268 671
------- ------ ------
Earnings before income taxes 19,639 17,741 16,789
Provision for income taxes (note 6) 7,909 7,054 6,885
------- ------ ------
Net earnings $11,730 10,687 9,904
======= ====== ======
Average common shares outstanding
(note 9) 15,040 15,040 15,040
======= ====== ======
Earnings per share of common stock
(note 9) $.78 .71 .66
======= ====== ======
Dividends per share of common stock
(note 9) $.52 .48 .44
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Capital stock - common stock:
Amount at beginning and end of year $ 2,350 2,350 2,350
======= ====== ======
Capital in excess of par value:
Amount at beginning and end of year $ 2,215 2,215 2,215
======= ====== ======
Retained earnings:
Amount at beginning of year 46,814 43,346 40,059
Net earnings for year 11,730 10,687 9,904
------- ------ ------
58,544 54,033 49,963
Dividends on common stock 7,820 7,219 6,617
------- ------ ------
Amount at end of year $50,724 46,814 43,346
======= ====== ======
Unrealized gain on available for sale
securities:
Amount at beginning of year 148 - -
Change during year (131) 148 -
------- ------ ------
Amount at end of year $ 17 148 -
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Cash from operating activities:
Net earnings $11,730 10,687 9,904
Adjustments to reconcile net earnings
to net cash from operating
activities:
Depreciation and amortization 9,508 8,345 7,527
Gain on sale of marketable
securities (128) - -
Equity income of affiliated
companies (989) (474) (107)
Provision for postretirement
benefits other than
pensions 247 185 223
Investment tax credit
amortization (101) (151) (173)
Deferred income taxes 389 (85) (42)
Changes in assets and
liabilities:
Accounts receivable (515) (1,381) (600)
Inventories of
construction and
operating materials
and supplies (788) (270) 404
Deferred financing costs,
prepaid pension costs and
other assets 1,536 131 115
Accounts payable (1,635) 1,163 994
Taxes other than income
taxes 47 (10) (28)
Other liabilities,
accrued interest and
accrued vacation 343 224 444
Federal and state income
taxes 379 43 (1,277)
Other, net (163) 20 19
------- ------ ------
Total adjustments 8,130 7,740 7,499
------- ------ ------
Net cash from
operating
activities 19,860 18,427 17,403
</TABLE>
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash used for investing activities:
Expenditures for property and
equipment $(16,303) (15,818) (10,943)
Net (cost of removal) salvage on
retirements 382 (148) 48
-------- ------- -------
Net capital additions (15,921) (15,966) (10,895)
Purchase of marketable securities
held to maturity (454) (7,381) (6,514)
Proceeds from redemption of
marketable securities held to maturity 6,519 6,376 4,476
Purchase of marketable securities
available for sale (433) (908) (1,053)
Proceeds from sale of marketable
securities available for sale 1,657 1,683 1,245
Investments in affiliated entities (898) (282) (1,691)
Distributions from affiliated
entities - 361 -
-------- ------- -------
Net cash used for investing
activities (9,530) (16,117) (14,432)
Cash used for financing activities:
Cash dividends (7,670) (7,068) (6,617)
Retirement of debt (706) (661) (620)
-------- ------- -------
Net cash used for financing
activities (8,376) (7,729) (7,237)
-------- ------- -------
Net increase (decrease) in cash and
temporary investments 1,954 (5,419) (4,266)
Cash and temporary investments at
beginning of year 9,359 14,778 19,044
-------- ------- -------
Cash and temporary investments at end
of year $ 11,313 9,359 14,778
======== ======= =======
Supplemental disclosure of cash flow
information:
Interest paid $ 1,450 1,492 1,538
======== ======= =======
Income taxes paid $ 7,241 6,994 7,277
======== ======= =======
Fixed assets acquired under capital
leases $ 565 - -
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(Amounts in Thousands Except Per Share Data)
(1) Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation and Consolidation
---------------------------------------
The consolidated financial statements include the accounts of North
Pittsburgh Systems, Inc. (the Company) and its subsidiaries, North
Pittsburgh Telephone Company (NPTC), Penn Telecom, Inc. (PTI),
Pinnatech, Inc. and Management Consulting Solutions, Inc. (MCSI). The
Company, through NPTC and PTI, is primarily engaged in providing
telecommunications equipment and services to its customers generally
located in western Pennsylvania. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and disclosure of contingent
assets and liabilities. The estimates and assumptions used in the
accompanying consolidated financial statements are based upon
management's evaluation of the relevant facts and circumstances as of
the date of the financial statements. Actual results may differ from
the estimates and assumptions used in preparing the accompanying
consolidated financial statements.
Revenue Recognition
-------------------
Revenues are recognized when earned. Local service and intralata long
distance revenues are subject to the jurisdiction of the Pennsylvania
Public Utilities Commission (PUC). The Company participates in
interstate pooling arrangements with other telephone companies. Such
pools are funded by access service charges regulated by the Federal
Communications Commission. Revenue earned through pooling is initially
recorded based on estimates. The Company has settled substantially all
access service arrangements through 1995.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Marketable Securities
---------------------
All marketable equity securities are considered available for sale, and
debt securities are classified either as available for sale or held to
maturity. Marketable securities available for sale are recorded at fair
value, based on quoted market prices. Significant changes in value of
available for sale securities are included as a separate component of
shareholders' equity. Marketable securities held to maturity are
recorded at amortized cost. A decline in the fair value of any
marketable investment security below cost, that is deemed other than
temporary, is charged to earnings resulting in a new cost basis for the
security. Costs of investments sold are determined on the basis of
specific identification.
Investments
-----------
The Company's investments in three cellular limited partnerships are
carried at cost plus equity in accumulated net profits or losses. Other
investments in nonmarketable securities are carried either at cost or
at equity as the circumstances warrant.
Property, Plant and Equipment
-----------------------------
Telephone plant in service is recorded at cost. Retirements relating to
replacements of telephone plant and equipment are accounted for in
accordance with applicable regulations of the PUC. Accordingly, the
original costs of facilities retired, plus costs of removal, net of
salvage or other credits, are charged to accumulated depreciation.
Depreciation on telephone plant in service is provided on a straight-line
basis over estimated useful lives of 10 to 30 years for buildings and 5
to 20 years for equipment. In 1995, the Company reduced estimated
useful lives of cable and central office equipment due to technological
and competitive changes in the telecommunications industry, resulting
in a 1995 charge of $593 ($357 after income taxes, $.02 per share).
Depreciation as a percentage of average depreciable plant in service
amounted to 8.2%, 8.2% and 8.0% in 1996, 1995 and 1994, respectively.
The average remaining life of plant in service as of December 31, 1996,
is approximately 6.4 years.
Included in 1994 depreciation expense is a charge of approximately $586
($335 after income taxes, $.02 per share) to recognize the reduction in
useful lives of various central office telecommunications equipment to
coincide with the Company's planned replacement of such equipment
completed in 1995.
On construction projects lasting twelve months or more, interest costs
incurred on the related funds expended during the construction period
are capitalized as part of the project cost in accordance with
regulatory requirements. No interest was capitalized during 1996, 1995
or 1994.
Expenditures for maintenance, repairs and renewals are charged to
operations as incurred.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Inventories
-----------
Inventories consist of telecommunication equipment and parts to provide
service to, or to make sales to, the Company's customers. Inventories
are valued at the lower of cost (using the moving average method) or
market.
Accounts Receivable
-------------------
The Company provides telecommunication services to customers (business and
residential) located in western Pennsylvania and access connectivity to
interexchange carriers. Access service settlements and other,
represent, for the most part, amounts due from interexchange carriers.
The Company employs the direct write-off method for bad debts. Uncollected
accounts receivable are expensed approximately ninety days after
telephone service to such customer has been disconnected.
Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Investment tax credits applicable to assets acquired or committed for by
January 1, 1986, are being amortized over the average useful lives of
the assets to which they relate.
The Company and its subsidiaries file a consolidated federal income tax
return.
Cash Equivalents
----------------
For purposes of the consolidated statements of cash flows, the Company
considers all temporary investments with a maturity of three months or
less to be cash equivalents.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Postretirement Benefits
-----------------------
The Company provides pension and other postretirement benefits to
substantially all of its employees and eligible retirees. Benefits
provided by these plans are expensed over the estimated working lives
of employees.
(2) Long-Term Debt
--------------
Long-term debt as of December 31, 1996 and 1995, was as follows:
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
6-1/2% notes payable to Rural Telephone
Bank, maturing in 2019 $21,690 22,396
Less current portion of long-term
debt 753 702
------- ------
Long-term debt $20,937 21,694
======= ======
</TABLE>
Principal payments required over the next five years calculated on the
outstanding indebtedness at December 31, 1996, are $753 in 1997, $803
in 1998, $856 in 1999, $913 in 2000 and $974 in 2001.
The notes are secured by a supplemental Mortgage Agreement executed by
NPTC which provides that substantially all of the property, plant and
equipment of NPTC are subject to a lien or a security interest. Such
agreement contains restrictions regarding dividends and other
distributions. Under these restrictions, unless certain working capital
and net worth levels are maintained, NPTC is not permitted to pay
dividends on its capital stock (other than in shares of capital stock),
or to make any other distributions to its shareholder, or purchase,
redeem or retire any of its capital stock or make any investment in
affiliated companies. As of December 31, 1996, consolidated retained
earnings of the Company of approximately $17,235 were available for
dividends and other distributions.
Based on borrowing rates currently available to the Company for loans
with similar terms and maturities, the estimated fair value of long-
term debt as of December 31, 1996, is $21,801.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In 1996, NPTC applied for and was granted approval for a loan from the
Federal Financing Bank guaranteed by the Rural Utilities Service in the
maximum principal amount of $75 million. The maximum principal amount
will be advanced periodically over a five-year period beginning January
2, 1997, to furnish or improve telephone service in rural areas. No
funds have been requested or advanced as of December 31, 1996. Actual
interest rates and maturity dates will be specified at the time of each
advance based upon a predetermined interest calculation formula and a
choice of predetermined payment options not to extend beyond a maximum
repayment period of sixteen years.
NPTC also has a $10 million line of credit at a rate of prime plus 1-1/2%
with the Rural Telephone Finance Cooperative. The line of credit was
not used in 1996 or 1995.
(3) Capital and Operating Lease Arrangements
----------------------------------------
In 1996, the Company entered into capital leases to acquire computer
equipment totaling $565. The following schedule sets forth future
minimum lease payments under the capital leases together with the
present value of the net minimum lease payments as of December 31,
1996:
<TABLE>
<S> <C>
1997 $250
1998 250
1999 169
Thereafter -
----
Total minimum lease payments 669
Less amount representing interest 104
----
Present value of net minimum
lease payments 565
Less amounts due within one year 191
----
$374
====
</TABLE>
In addition, the Company has entered into certain noncancelable operating
leases. Total rental expense on all operating leases amounted to $564
for the year ended December 31, 1996. The future minimum lease payments
required under these operating leases consist of the following as of
December 31, 1996:
<TABLE>
<S> <C>
1997 $ 509
1998 494
1999 113
2000 11
2001 7
Thereafter -
------
$1,134
======
</TABLE>
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Retirement Plan
---------------
Substantially all employees of the Company are covered by a
noncontributory, defined benefit retirement plan. The benefits are
based on each employee's years of service and compensation. The
Company's funding policy is to contribute an amount annually that
satisfies at least the minimum funding required under the Employee
Retirement Income Security Act of 1974. The assets of the plan are held
in a trust and are invested in a variety of equity and fixed income
securities.
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
Service cost $ 836 779 708
Interest cost on projected
benefit obligation 1,595 1,491 1,309
Return on assets (2,539) (1,975) (653)
Net amortization and deferral 1,012 655 (718)
------- ------ -----
Net periodic pension
cost $ 904 950 646
======= ====== =====
</TABLE>
Assumptions used in the calculation of net periodic pension cost are:
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- ----
<S> <C> <C> <C>
Discount rate % 7.00 7.00 7.00
Salary increases 6.00 6.00 6.00
Expected long-term rate of return 7.50 7.50 7.50
</TABLE>
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $(17,069) (15,627)
======== =======
Accumulated benefit obligation $(17,788) (16,339)
======== =======
Projected benefit obligation (25,026) (23,178)
Plan assets at fair value 23,482 20,844
-------- -------
Plan assets less than
projected benefit obligation (1,544) (2,334)
Unrecognized net asset at transition (1,376) (1,529)
Unrecognized prior service cost 1,738 1,924
Unrecognized net loss 1,804 2,628
-------- -------
Prepaid pension cost $ 622 689
======== =======
Assumptions used in the calculation of
the actuarial present value of benefit
obligations:
Discount rate % 7.00 7.00
Salary increases 6.00 6.00
</TABLE>
(5) Other Postretirement Benefit Plans
----------------------------------
Eligible retirees are provided healthcare and life insurance benefits until
the retiree reaches 65 years of age under an unfunded plan.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheets at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $1,004 813
Fully eligible active plan participants 1,240 1,228
Other active plan participants 2,132 1,942
------ -----
Accumulated postretirement
benefit obligation 4,376 3,983
Unrecognized prior service cost 111 -
Unrecognized net gain 10 267
------ -----
Accrued postretirement benefit cost $4,497 4,250
====== =====
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ -----
<S> <C> <C> <C>
Service cost $ 144 151 145
Interest cost 272 267 255
----- ------ -----
Net periodic postretirement
benefit cost $ 416 418 400
===== ====== =====
</TABLE>
For measurement purposes, the annual rate of increase in the per capita
cost of covered benefits (i.e., healthcare cost trend rate) for 1996
was 10.9 percent for participants whose coverage included Major Medical
insurance and Point-of-Service Plan and 9.3 percent for participants
who have Blue Cross/Blue Shield coverage only; the rates were assumed
to decrease gradually to 5 percent by the year 2007 and remain at that
level thereafter. The healthcare cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed healthcare cost trend rates by one percentage point in each
year would increase the accumulated postretirement benefit obligation
as of December 31, 1996, by $460 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost
for the year ended December 31, 1996, by $54.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7 percent at December 31, 1996
and 1995. Salaries were assumed to increase at a rate of 6 percent per
year for current active employees for life insurance benefit
projections.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Income Taxes
------------
The components of income tax expense are:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Current:
Federal $5,603 5,446 5,135
State 2,018 1,844 1,965
------ ----- -----
7,621 7,290 7,100
Deferred:
Federal 291 (85) (38)
State 98 - (4)
------ ----- -----
389 (85) (42)
Deferred investment tax credit (101) (151) (173)
------ ----- -----
$7,909 7,054 6,885
====== ===== =====
</TABLE>
The Company's income tax expense differs from income tax expense computed
at the federal statutory rate of 35 percent due to the following
factors:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Statutory federal income tax $6,874 6,209 5,876
State taxes on income (net of
federal income tax benefit) 1,275 1,152 1,323
Federal benefit of phase-in of 1%
surtax - (30) (100)
Change in beginning of year
valuation allowance 99 57 107
Investment tax credit (101) (151) (173)
Tax-exempt interest (88) (143) (204)
Other (150) (40) 56
------ ----- -----
Income tax expense $7,909 7,054 6,885
====== ===== =====
</TABLE>
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The significant components of deferred income tax expense attributable to
income from operations are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Deferred tax expense (exclusive of the
effects of the other components
below) $ 290 (142) (149)
Increase in beginning of year valuation
allowance 99 57 107
----- ---- ----
$ 389 (85) (42)
===== ==== ====
</TABLE>
Additional deferred tax charges of $12 and $102 for the years ended
December 31, 1996 and 1995, respectively, were included in
shareholders' equity in relation to an unrealized gain on marketable
securities classified as available for sale (note 8).
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are presented below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits $(1,837) (1,737)
Deferred compensation (428) (405)
Compensated absences, principally due
to accrual for financial
reporting purposes (228) (218)
Capital loss carryforward (699) (697)
Goodwill (206) (216)
Other (607) (502)
------- ------
Total gross deferred tax
assets (4,005) (3,775)
Less valuation allowance 1,287 1,188
------- ------
Net deferred tax assets (2,718) (2,587)
</TABLE>
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation $7,642 7,217
Pension 608 639
Amortization of deferred financing
costs 219 -
Net unrealized gain on available for
sale securities 12 102
Other 206 299
------ -----
Total gross deferred tax
liability 8,687 8,257
------ -----
Net deferred tax liability $5,969 5,670
====== =====
Unamortized ITC $ 369 470
====== =====
</TABLE>
The valuation allowance for deferred tax assets relates to capital loss
carryforwards, state loss carryforwards of subsidiaries and impairment
write-downs. The valuation allowance for deferred tax assets as of
January 1, 1996 and 1995, was $1,188 and $1,131, respectively. The net
change in the total valuation allowance for the years ended
December 31, 1996 and 1995, was an increase of $99 and an increase of
$57, respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets
are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 1996. The amount
of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At December 31, 1996, the Company has net operating loss carryforwards for
state income tax purposes of $3,352 which are available to offset
future federal taxable income, if any, through 1999. In addition, the
Company has federal capital loss carryforwards of approximately $1,500
which are available to reduce future federal capital gains, if any,
through 1997.
(7) Investments
-----------
The Company's investments at December 31, 1996 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Investments at equity:
Investments in cellular limited
partnerships $5,062 3,328
Conquest Telecommunication
Services Corp. 701 548
------ -----
Total investments $5,763 3,876
====== =====
</TABLE>
In 1996 and 1995, the Company had capital calls amounting to $898 and $282,
respectively, to maintain its ownership percentages in its cellular
limited partnership investments.
(8) Marketable Securities
---------------------
Information about marketable investment securities at December 31, 1996 and
1995, is as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------
Amortized Unrealized Unrealized Market
cost gains losses value
--------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Available for sale:
Equity securities $300 41 (12) 329
==== == === ===
Held to maturity:
Debt securities of states and
their political subdivisions $451 1 - 452
==== == === ===
</TABLE>
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1995
-------------------------------------------------
Amortized Unrealized Unrealized Market
cost gains losses value
--------- ---------- ----------- ------
<S> <C> <C> <C> <C>
Available for sale:
Equity securities $ 843 254 (4) 1,093
Municipal bond mutual
fund 500 - - 500
------ --- ----- -----
Total available for
sale securities $1,343 254 (4) 1,593
====== === ===== =====
Held to maturity:
Debt securities of
states and their
political subdivisions $6,569 11 (1) 6,579
====== === ===== =====
</TABLE>
The carrying values of debt securities at December 31, 1996 and 1995, by
contractual maturity, are shown below:
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Due in one year or less $451 6,569
==== =====
</TABLE>
Realized gains and losses in each of the three years ended December 31,
1996, were not significant.
(9) Shareholders' Equity
--------------------
As approved by the shareholders, the Company's common stock was split 2 for
1 effective May 22, 1996. All per share data presented herein reflects
retroactive application of the stock split. In addition, the Company
increased its authorized shares of common stock from 10,000 shares to
50,000 shares.
(Continued)
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Unaudited Quarterly Financial Data for 1996 and 1995
----------------------------------------------------
The following are summaries of quarterly financial data for the years ended
December 31, 1996 and 1995, as reported by the Company:
<TABLE>
<CAPTION>
Unaudited (in thousands except per share data)
----------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996:
Operating revenues $14,865 14,710 15,252 15,106
Net operating revenues 5,257 4,568 4,750 4,879
Net earnings 3,056 2,620 2,879 3,175
Earnings per common share:
Net earnings .20 .17 .19 .21
1995:
Operating revenues $12,474 13,071 13,443 13,769
Net operating revenues 4,572 4,932 4,700 4,805
Net earnings 2,685 2,825 2,603 2,574
Earnings per common share:
Net earnings .18 .19 .17 .17
</TABLE>
The 1995 fourth quarter reflects the $593 effect of changes in useful lives
of cable and central office equipment described in note 1.
<PAGE>
Schedule I
----------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31, 1996 and 1995
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Assets
------
Current assets:
Cash and temporary investments $ 5,609 1,436
Marketable securities held to
maturity 451 1,025
Dividend receivable from subsidiary 1,955 4,000
Accounts receivable - other 22 172
------- ------
Total current assets 8,037 6,633
Property, plant and equipment:
Land 150 150
Buildings 1,208 414
------- ------
1,358 564
Less accumulated depreciation
and amortization 32 8
------- ------
1,326 556
Other assets 1,529 1,487
Investment in subsidiaries 40,328 42,618
Investments - other 701 548
Notes and accounts receivable -
subsidiaries 5,488 1,673
------- ------
$57,409 53,515
======= ======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Dividend payable 1,955 1,805
Taxes other than income taxes 16 11
Other liabilities 132 172
------- ------
Total current liabilities 2,103 1,988
Shareholders' equity:
Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 50,741 46,962
------- ------
55,306 51,527
------- ------
$57,409 53,515
======= ======
</TABLE>
(Continued)
<PAGE>
Schedule I, Continued
---------------------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- ------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiaries $13,821 9,415 6,768
Interest income 459 288 89
Nonoperating income 156 112 -
Investment losses (14) (8) (30)
------- ------ -----
14,422 9,807 6,827
------- ------ -----
Expenses:
General office salaries and expenses 387 292 117
State taxes 82 65 69
------- ------ -----
469 357 186
------- ------ -----
Earnings before income taxes and equity
earnings 13,953 9,450 6,641
Income taxes (benefit) 16 (23) (88)
------- ------ -----
Earnings before equity earnings 13,937 9,473 6,729
Equity in undistributed net earnings of
subsidiaries (2,207) 1,214 3,175
------- ------ -----
Net earnings $11,730 10,687 9,904
======= ====== =====
</TABLE>
(Continued)
<PAGE>
Schedule I, Continued
---------------------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash from operating activities:
Net earnings $11,730 10,687 9,904
Adjustments to reconcile net earnings
to net cash from operating
activities:
Depreciation 24 8 -
Equity in undistributed
earnings of affiliates 2,207 (1,214) (3,175)
(Increase) decrease in cash
surrender value of life
insurance policy (42) (37) 104
Loss on sale of investments 14 11 -
Equity in earnings of investee (153) (148) -
Changes in assets and
liabilities:
Receivables 150 (149) (19)
Dividend receivable 2,045 (2,346) (151)
Taxes other than income
taxes 5 (1) 9
Other liabilities (88) 152 (73)
------- ------ ------
Total adjustments 4,162 (3,724) (3,305)
------- ------ ------
Net cash provided by
operating activities 15,892 6,963 6,599
------- ------ ------
Cash (used for) provided by investing
activities:
Expenditures for property and
equipment (794) (564) -
Investment in affiliates - (40) -
Proceeds from sales of available for
sale securities - - 366
Purchase of marketable securities
held to maturity (454) (1,237) (1,063)
Proceeds from maturity of marketable
securities held to maturity 1,014 1,144 1,244
Notes receivable - subsidiaries (3,815) (1,673) -
------- ------ ------
Net cash (used for)
provided by investing
activities (4,049) (2,370) 547
------- ------ ------
</TABLE>
(Continued)
<PAGE>
Schedule I, Continued
---------------------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows, Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Cash used for financing activities:
Cash dividends $(7,670) (7,068) (6,617)
------- ------ ------
Net cash used for
financing activities (7,670) (7,068) (6,617)
======= ====== ======
Net increase (decrease) in cash and
temporary investments 4,173 (2,475) 529
Cash and temporary investments at
beginning of year 1,436 3,911 3,382
------- ------ ------
Cash and temporary investments at end
of year $ 5,609 1,436 3,911
======= ====== ======
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ G. A. Gorman By /s/ C. E. Thomas, Sr.
-------------------------- --------------------------
G. A. Gorman C. E. Thomas, Sr.
President and Director Chairman of the Board
Date March 27, 1997 Date March 27, 1997
------------------------ ------------------------
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ A. P. Kimble
--------------------------
A. P. Kimble
Vice President, Secretary and Treasurer
Date March 27, 1997
------------------------
Directors:
By /s/ F. D. Reese By /s/ B. B. Williams
-------------------------- --------------------------
F. D. Reese B. B. Williams
Date March 27, 1997 Date March 27, 1997
------------------------ ------------------------
By /s/ C. E. Cole
--------------------------
C. E. Cole
Date March 27, 1997
------------------------
<PAGE>
Exhibit 11
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Statement re computation of per share earnings
Statement of Computations of Earnings per Share
<TABLE>
<CAPTION>
For the Year
Ended December 31
---------------------------
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Net Earnings $11,730 $10,687 $ 9,904
======= ======= =======
Average common shares
outstanding
15,040 15,040* 15,040*
======= ======= =======
Earnings per share of
common stock
$ .78 $ .71* $ .66*
======= ======= =======
</TABLE>
*Adjusted for a 2 for 1 stock split-up effective May 22, 1996
<PAGE>
Exhibit 21
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Subsidiaries of Registrant
North Pittsburgh Telephone Company, Penn Telecom, Inc., Pinnatech, Inc., and
Management Consulting Solutions, Inc. are wholly-owned subsidiaries of the
Registrant. Subsidiaries of the Registrant are incorporated in the Commonwealth
of Pennsylvania and do business only under their respective names.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1996 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,313
<SECURITIES> 780
<RECEIVABLES> 9,360
<ALLOWANCES> 0
<INVENTORY> 3,169
<CURRENT-ASSETS> 24,785
<PP&E> 125,927
<DEPRECIATION> 60,333
<TOTAL-ASSETS> 99,523
<CURRENT-LIABILITIES> 10,384
<BONDS> 20,937
<COMMON> 2,350
0
0
<OTHER-SE> 52,956
<TOTAL-LIABILITY-AND-EQUITY> 99,523
<SALES> 2,639
<TOTAL-REVENUES> 59,933
<CGS> 2,411
<TOTAL-COSTS> 40,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,549
<INCOME-PRETAX> 19,639
<INCOME-TAX> 7,909
<INCOME-CONTINUING> 11,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,730
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
</TABLE>
